Sections 299 and 300

Procedure, etc., where directors are interested

[1981] 51 COMP. CAS. 743 (SC)

SUPREME COURT OF INDIA

Needle Industries (India) Ltd.

v.

Needle Industries Newey (India) Holding Ltd.

Y.V. CHANDRACHUD, C.J.

P.N. BHAGWATI AND E.S. VENKATARAMIAH, JJ.

Civil Appeal Nos. 2139, 2483 & 2484 of 1978.

MAY 7, 1981

F.S. Nariman, A.K. Sen, Dalip Singh, K.J. John, Ravinder Narain, O.C. Mathur, T.A. Devagnanam, Dr. Y.S. Chitale, A.G. Menzes, S.N. Kackar, R. Narain, for the Appellants.

H.M. Seervai, Anil B. Divan, A.R. Wadia, S.N. Talwar, I.N. Shroff, H.S. Parihar and D.N. Gupta for the Respondents.

JUDGMENT

Chandrachud, C.J.—These three appeals by special leave arise out of a judgment of a Division Bench of the High Court of Madras dated October 6, 1978, allowing an appeal against the judgment of a learned single judge, dated May 17, 1978, in Company Petition No. 39 of 1977. The main contending parties in these appeals are: (i) the Needle Industries (India) Ltd., and (ii) the Needle Industries Newey (Indian Holdings) Ltd. These two companies have often been referred to in the proceedings as the Indian company and the English company, respectively, but it would be convenient for us to refer to the former as "NIIL" and to the latter as "the Holding Company". The Holding Company has been referred to in a part of the proceedings as "NINIH".

In Civil Appeal No. 2139 of 1978, which was argued as the main appeal, NIIL is appellant No. 1, while, one T.A. Devagnanam is appellant No. 2. The latter figures very prominently in these proceedings and is indeed one of the moving spirits of this acrimonious litigation. He was appointed as a director of NIIL in 1956, and as its managing director in 1961. He is referred to in the correspondence as "TAD" or "Theo", but we prefer to call him "Devagnanam". The Holding Company is respondent No. 1 to the main appeal, the other respondents being some of the directors and shareholders of NIIL. Civil Appeal No.2483 of 1978 is filed by some of the shareholders of NIIL while Civil Appeal No. 2484 of 1978 is filed by some of its directors and officers. The Holding Company is the contesting respondent to these two appeals. We will deal with the main appeal and our judgment therein will dispose of all the three appeals.

The NIIL was incorporated as a private company under the Indian Companies Act, 1913, on July 20, 1949, with its registered office at Madras. Its factory is situated at Ketty, Nilgiris. At the time of its incorporation, NIIL was a wholly owned subsidiary of Needle Industries (India) Ltd., Studley, England (hereinafter called "NI-Studley"). The authorised capital of NIIL was Rs. 50,00,000 divided into 50,000 equity shares of Rs. 100 each. Its issued and paid up capital prior to 1961 was Rs. 6,75,600 divided into 6,756 equity shares of Rs. 100 each. The issued and paid up capital was increased to Rs. 11, 09,000 in 1961. In that year, NI-Studley entered into an agreement with Newey Bros. Ltd., Birmingham, England (hereinafter called "NEWEY"), under which NEWEY agreed to participate in the equity capital of NIIL to the extent of Rs. 4,33,400 consisting of 4,334 equity shares of Rs. 100 each. Thus, in 1961, the position of the shareholding in NIIL was that Nl-Studley held approximately 60.86% of the issued capital and NEWEY held the balance of 39.14%. In 1963, NIIL increased its share capital by issuing 2,450 additional shares to NI-Studley, as a result of which the latter became the holder of about 68% shares in NIIL, the rest of the 32% belonging to NEWEY. Later in the same year, NI-Studley and NEWEY combined to form the Holding Company, of which the full official name, as stated earlier, is the Needle Industries-Newey (India) Holding Ltd. The Holding Company was incorporated in the United Kingdom under the English Companies Act, 1948, with its registsred office at Birmingham, England. The entire share capital of NIIL, held by NI-Studley and NEWEY, was transferred to the Holding Company in which NI-Studley and NEWEY became equal sharers. As a result of this arrangement, the Holding Company came to acquire 99.95% of the issued and paid up capital of NIIL. The balance of 0.05%, which consisted of 6 shares being the original nominal shares, was held by Devagnanam.

The NIIL, it shall have been noticed, was incorporated about two years after India attained independence. As a result of an undertaking given by it to the Govt. of India at the time of its incorporation, and pursuant to the subsequent directives given by the said Government, for achieving Indianisation of the share capital of foreign companies, three issues of shares were made by NIIL in the years 1968, 1969 and 1971, all at par. There was also an issue of bonus shares in 1971. As a result of these issues, about 40% of the share capital of NIIL came to be held by the Indian employees of the company and their relatives while the balance of about 60% remained in the hands of the Holding Company. In terms of the number of shares, by 1971-72, the Holding Company owned 18,990 shares and the Indian shareholders owned 13,010 shares. Out of the latter block of shares, Devagnanam and his relatives held 9,140 shares while the remaining 3,870 shares were held by other employees and their relatives, amongst whom were N. Manoharan and his group who held 900 shares and D.P. Kingsley and his group who held 530 shares. The total share capital of NIIL thus came to consist of 32,000 equity shares of Rs. 100 each.

In or about 1972, a company called Coats Paton Ltd., Glasgow, U.K. (hereinafter called "Coats") became an almost 100% owner of NI-Studley. The position at the beginning of the year 1973 thus was that 60% (to be exact 59.3%) of the share capital of NIIL came to be owned half and half by Coats and NEWEY, the remaining 40% being in the hands of the Indian group. The bulk of this 40% block of shares was held by Devagnanam's group, which came to about 28.5% of the total number of shares.

Though NIIL was at one time wholly owned by NI-Studley and later, by NI-Studley and NEWEY, the affairs of NIIL were managed ever since 1956 by an entirely Indian management, with Devagnanam as its chief executive and managing director with effect from the year 1961. The Holding Company which was formed in 1963, had only one representative on the board of directors of NIIL. He was N. T. Sanders. He resided in England and hardly ever attended the board meetings. The Holding Company reposed great confidence in the Indian management which was under the direction and control of Devagnanam.

But the acquisition of NI-Studley by Coats in 1972 and their consequent entry in NIIL created in its wake a sense of uneasy quiet between Coats on one hand, which came to own half of the 60% share capital held by the Holding Company, that is to say, 30% of the total share capital of NIIL, and the Devagnanam group on the other hand, which owned 28.5% of that share capital. By the mere size of their almost equal holding in NIIL, Coats and Devagnanam developed competing interests in the affairs of NIIL. Coats were in the same line of business as NIIL, namely, manufacture and sale of needles for various uses, fish-hooks, etc., and they had established trading centres far and wide, all over the world. It is plain business, involving no moral turpitude as far as business ethics go, that Coats could not have welcomed competition from NIIL with their world interests. Devagnanam was a man of considerable ability and foresight and in NIIL he saw an opportunity of controlling and dominating an industrial enterprise of enormous potential in a rapidly growing market. The turnover of NIIL had increased from Rs. 2.80 lakhs in 1953 to Rs. 149.93 lakhs in 1972 and the profits ran as high as 19.4% of the turnover. Implicit confidence in the Indian management which was the order of the day almost till 1974 gradually gave way to an atmosphere of suspicion and distrust between Coats and Devagnanam. NEWEY apparently kept away from the differences which were gradually mounting up between the two, but, evidently, they nursed a preference for Devagnanam. Coats are a giant multi-national organization. NEWEY, comparatively, are small fish, though they too had their own independent business interests to protect and foster.

NEWEY owned a nourishing business in Malaysia, Hong Kong, Taiwan, Japan and Australia and from 1972 onwards they drew Devagnanam increasingly into the orbit of their Far Eastern interests. In July, 1972, he was offered the office of managing director of a group of four companies in Hong Kong and Taiwan on a five year contract, with an annual salary of six thousand pounds. He had already been appointed to the board of the NEWEY joint venture company in Osaka, Japan, and acted as the liaison director for that company. He had also been asked to co-ordinate sales with NEWEY Brothers, Australia. Willing to accept these manifold responsibilities, Devagnanam became strenuously involved therein. He and his wife began to reside in Hong Kong and he cogitated over resigning from his position in NIIL. Coats, on their part, were clear that Devagnanam should relinquish his responsibilities in NIIL, in view of the time his role in NEWEY's Far Eastern interests was consuming. The question of appointing his successor as managing director in NIIL then began to be discussed, the Holding Company wanting to have Manoharan as a substitute. Devagnanam carried the feeling that he was already persona non grata with Coats, because of certain incidents which had taken place some years ago.

The Foreign Exchange Regulation Act ("FERA"), 46 of 1973, which came into force on January 1, 1974, provided to Coats and Devagnanam a legal matrix for fighting out their differences. The provisions of the FERA, which was passed, inter alia, for the conservation of foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country, are stringent beyond words. Putting it broadly and briefly, s. 29(1) of the FERA prohibits non-residents, non-citizens and non-banking companies not incorporated under any Indian law or in which the non-resident interest is more than 40%, from carrying on any activity in India of a trading, commercial or industrial nature except with the general or special permission of the Reserve Bank of India. By s. 29(2)(a), if such a person or company is engaged in any such activity at the commencement of the Act, he or it has to apply to the Reserve Bank of India, for permission to carry on that activity, within six months of the commencement of the Act or such further period as the Reserve Bank may allow. Since the Holding Company is a non-resident and its interest in NIIL exceeded 40%, NIIL had to apply for the permission of the Reserve Bank for continuing to carry on its business. Section 29(4)(a) imposes a similar restriction on such person or company from holding shares in India of any company referred to in cl. (b) of s. 29(1), without the permission of the Reserve Bank. Therefore, the Holding Company also had to apply for the permission of the Reserve Bank for continuing to hold its shares in NIIL. The time for making an application for the requisite permission under s. 29 was extended by the Reserve Bank by two months generally, that is to say, until August 31, 1974. The need to comply with the provisions of s. 29 of the FERA is the pivot round which the whole case revolves.

NIIL applied to the Reserve Bank for the necessary permission through its director and secretary, D. P. Kingsley, on September 3, 1974. By its letter dated May 11, 1976, the Reserve Bank allowed that application on certain conditions. NIIL's application was late by three days but the delay was evidently ignored or condoned. One of the conditions imposed by the Reserve Bank on NIIL was that it must bring down the non-resident interest from 60% to 40% within one year of the receipt of its letter. That letter having been received by NIIL on May 17, 1976, the dead-line for reducing the non-resident interest to 40% was May 17, 1977.

The Holding Company applied to the Reserve Bank for a "holding licence" under s. 29(4)(a) of the FERA, on September 18, 1974. That application which was late by 18 days is, we are informed, still pending with the Reserve Bank. Perhaps, it will be disposed of after the non-resident interest in NIIL is reduced to 40% in terms of s. 29(1) of the FERA.

Devagnanam was residing in Hong Kong to fulfil his commitment to NEWEY's Far Eastern business interests. The FERA had its implications for him too, especially since he could be regarded as a non-resident and did consider himself as such. He obtained a holding licence dated March 4, 1975, from the Reserve Bank in respect of his shares in NIIL. But, his interest in the affairs of NIIL began to flag for one reason or another and he started looking out for a purchaser who would buy his shares on convenient and attractive terms. In a note dated April 29, 1975, which he prepared on "further Indianisation—Needle Industries (India) Ltd"., he pointed out that Indianisation should be considered on the footing that the non-resident interest should be reduced to 40% and that, as between the two feasible methods of Indianisation, namely, (1) going to public, and (2) placement of shares, the latter was preferable. He said:

"There can be no question of my becoming in any way involved with Ketty and its future as I am committed to NEWEY. There appears to be no possibility of returning to India in what is left of my working life. I, therefore, have little choice but to sell my shares".

("Ketty" in Nilgiris, is the place where NIIL's factory is situated and is treated as synonymous with NIIL). Devagnanam referred in his note to an inquiry from Mr. Khaitan, the head of a powerful group with diverse interests and investment in industry, who was already involved in the manufacture of products allied to NIIL's. Coats were alarmed that Devagnanam was negotiating the sale of his shares "to a Marwari, one Khaitan of Shalimar, a sewing needle competitor to Ketty". In a letter dated August 6, 1975, addressed to Doraiswamy, a partner in a Madras firm of solicitors called "King and Partridge" who was a director of NIIL, Sanders, a director of the Holding Company on NIIL's board, expressed his grave concern at the proposed deal thus:

"No doubt Mr. Khaitan would pay the earth to acquire NIIL and judging by what Theo (Devagnanam) had said about him in the past, he may be prepared to arrange or facilitate payment abroad, a most attractive possibility from Theo's point of view, since he has said clearly that he intends leaving India for good, finally settling in Australia".

Sanders added that the deal was so dangerous from the point of view of NIIL that the Holding Company "would feel obliged to prevent it by whatever means were open" to it. By his reply dated August 12, 1975, Doraiswamy said that the news of the proposed sale came as no surprise to him and that he had heard that Silverston, a former solicitor-partner of his, was acting as a "go-between" in Devagnanam's deal with Khaitan.

On September 16, 1975, Devagnanam wrote to M.M.C. Newey of NEWEY, Birmingham, pointing out the advantages that would accrue by the sale of the shares to Khaitan. Devagnanam reiterated his total identification with NEWEY's Far Eastern interests and expressed his anxiety to free himself from all commitments to or involvement with NIIL, as early as possible.

On October 22, 1975, an important meeting was held in which Alan Mackrael, a director of the Holding Company, made it clear on behalf of Coats that neither Khaitan nor any other single purchaser would be acceptable to the Holding Company if that meant the acquisition of a 30% share holding. The notes of the meeting record that Devagnanam had confirmed that the offer which he had received from Khaitan was at Rs. 360 per share, out of which a substantial proportion (perhaps 50%) would be payable outside India. Mackrael stated at the meeting that the price in rupees could be matched but not the method of payment which was illegal and reiterated that the Holding Company would prevent any attempt by Devagnanam to sell his holding to Khaitan. The notes of the meeting were signed by Mackrael on October 30, 1975. On the date, Sanders wrote a letter to Manoharan stating that the Holding Company was not prepared for that 30% of the share capital should get into the hands of any one person, bearing in mind the problems that had arisen in allowing Devagnanam to acquire a holding of nearly that proportion. On November 7, 1975, M.M.C. Newey wrote to Devagnanam making it clear beyond the manner of any doubt that Coats will not accept Khaitan and that, accord-ing to Bannatyne of Coats, they were put to considerable trouble in finding Indian residents who would match Khaitan's offer of 3.6 times par. Newey made it clear that in any event, the sale price would have to be paid in India and that they would not be a party to any illicit currency deal. Finding that Coats were determined not to allow him to sell his shares to Khaitan, Devagnanam changed his mind and decided against disposing of his holding in NIIL. On November 13, 1975, he wrote to Newey saying:

"I do not think any of us want to see Coats dominate Ketty. Hence there can be no question of selling any part of my shares to their nominee. As they in turn will not approve of anyone we choose, there is no way of solving the problem...The best thing to do, therefore, is for me to revert to the original basis and they should have no cause to complain. This will of course include effectively managing the Indian company. Let me however assure you that it will not be at the expense of Newey".

And so did Devagnanam remain in NIIL, with the stage set for a battle between him and Coats for the acquisition of control over the affairs of NIIL.

Yet another statutory provision which has an important bearing on the issues arising in these appeals is the one contained in s. 43A of the Companies Act, 1956, which was introduced in 1961 by Act 65 of 1960. NIIL was incorporated as a private company in 1949 under the Indian Companies Act, 1913. It was a private company as defined in s. 3(1)(iii) of that Act, since by its articles of association it restricted the right to transfer its shares, limited the number of its members to fifty and prohibited any invitation to the public to subscribe to any of its shares or debentures. By s. 43A, it became a public company, since not less than twenty-five per cent. of its paid-up share capital was held by a body corporate, namely, the Holding Company. But, under the first proviso to s. 43A(1), it had the option to retain its articles relating to matters specified in s. 3(1)(iii) of the Companies Act. NIIL did not alter the relevant provisions of its articles after it became a public company within the meaning of s. 43A. One of the points in controversy between the parties is whether, in the absence of any positive step taken by NIIL for exercising the option to retain its articles relating to matters specified in s. 3(1)(iii) of the Companies Act, it can be held that NIIL had in fact exercised the option, which was available to it under the first proviso to s. 43A, to include provisions relating to those matters in its articles.

To resume the thread of events, on receipt of the letter of the Reserve Bank dated May 11, 1976, Kingsley, as NIIL's secretary, sent a reply on May 18, 1976, to the bank confirming the acceptance of the various conditions under which permission was granted to NIIL to continue its business. On August 11, 1976, the term of Devagnanam's appointment as the managing director of NIIL came to an end but in the meeting dated October 1, 1976, of NILL's board of directors, that appointment was renewed for a further period of five years. On being informed of the renewal of Devagnanam's appointment, NEWEY's Chairman, C. Raeburn, who used to attend to the affairs of the Holding Company, did not object as such to the board's decision ("It may well be that the reappointment in itself is right"), but he demurred to the modality by which the decision was taken since, according to him, questions relating to appointments to senior positions in the company ought to be decided in consultation with the U. K. shareholders so that they could have an opportunity to express their views. Sanders, it may be mentioned, had received the notice of the meeting duly. On October 20 and 21, 1976, a meeting took place at Ketty between the U. K. shareholders and the Indian shareholders of NIIL. The former were represented by Alan Mackrael, the managing director of the Holding Company, and C. Raeburn, the Chairman of NEWEY, the latter by Devagnanam and Kingsley. One Martin Henry, the managing director of "Madura Coats", an Indian company in which the Holding Company had substantial interest, also attended that meeting and took part in its deliberations. Silverston, an Englishman who was practising in India as a solicitor, attended the meeting as an adviser to the Indian shareholders. C. Raeburn chaired the meeting. Para. 2 of the note prepared by him of the discussions held at the meeting says that it was agreed that Indianisation should be brought about by May, 1977, as requested by the Government, so as to achieve a 40% U.K. and 60% Indian shareholding. But the meeting virtually ended in a stalemate because, whereas the Holding Company wanted a substantial part of the share capital held by it in excess of 40% to be transferred to Madura Coats as an Indian shareholder, Devagnanam insisted that the existing Indian shareholders of NIIL alone had the right, under its articles of association, to take up the shares Which the Holding Company was no longer in a position to hold because, of the directives issued by the Reserve Bank pursuant to the FERA. Thus, the difference between the two groups, who were fast falling out, was not, as it could not be, whether the Holding Company had to reduce its share holding NIIL from 60% to 40%, but as regards the mode by which that reduction was to be brought about. The bone of contention was as to which Indian party should take up the excess of 20%—the existing Indian shareholders of NIIL or an outside Indian company, the Madura Coats. Raeburn played the role of a mediator but did not succeed. On the conclusion of the Ketty meeting, Silverston wrote a letter to Kingsley conveying his appreciation of the efforts made by Raeburn to bring the parties together and his distress at the attitude of Coats which, according to Silverston, showed that they were trying to circumvent the provisions of the FERA. Raeburn too wrote a letter on October 23, 1976 to Devagnanam saying that Coats were not really interested in any independent Indians taking their excess shareholding. On December 11, 1976, Devagnanam wrote to Raeburn expressing the resentment of himself and his group at the attempts made by Coats to maintain their control over NIIL by indirect means. On December 14, Devagnanam offered a package deal under which the existing Indian shareholders would augment their holding to 60%. Mackrael and Raeburn would be on the board of directors but not Martin Henry, and even B.T. Lee, a senior executive of NI-Studley, could be appointed as a wholetime director of NIIL to be in charge of its export programme. On January 20, 1977, the Reserve Bank sent a reminder to NIIL asking it to submit at an early date the progress report regarding the dilution of the nonresident interest. By its reply dated February 21, 1977, NIIL confirmed its commitment to achieve the desired Indianisation by the stipulated date, viz., May 17, 1977. On March 9, 1977, Raeburn wrote to Devagnanam, saying that after a discussion with Mackrael and three other high-ranking persons of Coats, it was clear that Coats were not agreeable to allowing the present Indian shareholders to acquire 60% of the equity capital of NIIL, since such a course carried in the long run too great a risk to their world trade. Raeburn made certain fresh proposals by his letter in the hope that they would be acceptable to Coats and invited Devagnanam to come to Birmingham for negotiations.

On March 18, 1977, a notice was issued by NIIL's secretary, D. P. Kingsley, intimating that a meeting of the board of directors will be held on April 6, 1977. One of the items on the agenda of the meeting was shown as "policy—Indianisation". Sanders received the notice of the meeting duly but did not attend the meeting.

Devagnanam went to Birmingham in the last week of March 1977. Between 29th and 31st March, he held discussions with four out of the six directors of the Holding Company, namely Newey, Jackson, Whitehouse and Kaeburn. The other two directors, Mackrael and Sanders, did not take any part in those discussions. During his visit to Birmingham, Devagnanam expended considerable time in discussing various matters with NEWEY, pertaining to their Far Eastern business.

On April 4, 1977, NIIL received a reminder letter dated March 30, 1977, from the Reserve Bank which pointed out that the company had not yet submitted any concrete proposal for the reduction of the non-resident interest and asked it to submit its proposal in that behalf without any further delay. The letter warned the company that if it failed to comply with the directive regarding the dilution of the foreign equity within the stipulated period, the Bank would be constrained to view the mattter seriously.

Raeburn had written a letter to Devagnanam on 4th April on the question of the compromise formula and Devagnanam too had written a letter to Raeburn on the 5th, saying that he would place the formula before his colleagues. These letters evidently crossed each other. The 6th April was then just at hand.

The meeting of NIIL's board of directors was held on April 6, 1977, as scheduled. Seven directors were present at the meeting, with Devagnanam in the chair at the commencement of the proceedings. C. Doraiswamy, solicitor-partner of "King and Partridge", was one of the directors present at the meeting. He had no interest in the proposal of "Indianisation" which the meeting was to discuss and was, therefore, considered to be an independent director. In order to complete the quorum of two independent directors, the other directors apart from C. Doraiswamy being interested in the business of the meeting, Silverston, an ex-partner of C. Doraiswamy's firm of solicitors, was appointed to the board as an additional director under art. 97 of the articles of association. Silverston chaired the meeting after his appointment as an additional director. The meeting resolved that the issued capital of NIIL be increased to Rs. 48.00,000 by a new issue of 16,000 equity shares of Rs. 100 each, to be offered as rights shares to the existing shareholders in proportion to the shares held by them. The offer was to be made by a notice specifying the number of shares which each shareholder was entitled to, and in case the offer was not accepted within 16 days from the date on which it was made, it was to be deemed to have been declined by the concerned shareholder. The minutes of the meeting recorded that as a matter of abundant caution, the directors who were holding shares in NIIL did not take part either in the discussions which took place in the meeting or in the voting on the resolution.

After the aforesaid meeting of the board dated April 6, 1977, Devagnanam wrote a letter bearing the date April 12, to Raeburn, explaining that every alternative proposal was discussed in the meeting and setting out the compelling circumstances arising out of the requirements of the FERA which led to the passing of the particular resolution. It was stated in the letter that a copy of the Reserve Bank's letter of March 30, 1977, to NIIL was enclosed therewith, but in fact it was not so enclosed. The letter of offer dated April 14, 1977, was prepared pursuant to the resolution passed in the meeting of 6th April. The envelope containing Devagnanam's letter dated April 12 (without the copy of the letter of the Reserve Bank dated March 30, 1977), and the letter of offer dated April 14 were received by Raeburn on May 2, 1977, in an envelope bearing the Indian postal mark of April 27, 1977. The letter of offer which was sent to one of the Indian shareholders, Manoharan, was posted in an envelope which also bore the postal mark of 27th April. The next meeting of the board was due to be held on May 2, 1977, and it is on that date that Reaburn received the letter of offer dated April 14, which, evidently, was posted at Madras on April 27, 1977. The Holding Company was thereby denied an opportunity to exercise its option whether or not to accept the offer of rights shares, assuming that any such option was open to it. Whether such an option was open to it and whether, if it could not or did not want to take the rights shares, it could transfer its rights, under NIIL's letter offering the rights shares, to a person of its choice depends upon the provisions of the FERA, the necessity to comply with the directives of the Reserve Bank, the terms of NIIL's articles of association and the provisions of the Indian Companies Act.

On April 19, 1977, a notice was issued by NIIL's secretary intimating that a meeting of the board of directors will be held on May 2, 1977. One of the items of agenda mentioned in the notice was "policy—(a) Indianisation, (b) Allotment of shares". The notice of the meeting was sent to the Holding Company in an envelope which also bore the Indian postal mark of April 27, 1977. The notice was received by Sanders in England on May 2, 1977, i.e., on the date when the meeting was due to be held in India. Even the fastest and the most modern means of transport could not have enabled Sanders to attend the meeting.

In between, on April 26, 1977, Raeburn had written a letter to Devagnanam at Malacca, following a telex message which said:

"HAD HELPFUL DISCUSSIONS COATS YESTERDAY PLEASE MAKE NO DECISIONS RE INDIANISATION PENDING LETTER".

By his letter of 26th April, which is said to have been received by Devagnanam on May 4, 1977, Raeburn stated that Coats were still unwilling to grant majority shareholding control to the existing Indian shareholders, but that they were equally not keen to do anything which would be regarded as circumventing the proposal for Indianisation or the law bearing on the subject, since that would undermine the position of the Indian shareholders.

A meeting of the board of directors was held on May 2, 1977, as scheduled. The minutes of that meeting show that Kingsley, the secretary of NHL, pointed out in the meeting that applications for allotment of the rights shares offered as also the amounts payable along with the acceptance of the offer had been received from all the shareholders except the U.K. shareholders and the Manoharan group. The offer to Manoharan was sent at Virudhunagar but Silverston pointed out to the meeting that Manoharan was working in Jaipur and that, therefore, he should be given further time to participate in the rights issue. The Manoharan group was accordingly allowed twenty days' time from the date of the allotment letter for payment of the allotment amount. In the meeting of 2nd May the whole of the new issue consisting of 16,000 rights shares was allotted to the Indian shareholders, including members of the Manoharan group. Out of these, the Devagnanam group was allotted 11,734 shares. A dividend of 30%, subject to tax, amounting to Rs. 9,60,000 was recommended by the board, and it was resolved that the annual general meeting of the company be held on 4th June, 1977. Silverston was appointed as an additional director of the company and his election as such at the annual general meeting was recommended by the board. Further, it was resolved that deposits be invited from the public. On the same day, i.e., 2nd May, Devagnanam wrote a letter to Raeburn intimating to him that in a meeting held that morning the formalities relating to allotment of shares were completed, bringing the company under the control of the Indian shareholders. Devagnanam reiterated by his, letter the hope of a closer association with the NEWEY group.

Raeburn reacted sharply to Devagnanam's letter of April 12, and to the letter of offer dated April 14. As stated earlier, he had received both of these on May 2, in an envelope which bears the postal mark of Madras dated April 27. Raeburn sent a telex message to Devagnanam on 2nd May, and another to Kingsley on 3rd May. By the first telex, he complained about the inadequacy of the notice of the meeting and by the second, he conveyed that there was considerable doubt on the question whether the necessary disinterested quorum was available at the meeting of the directors held on April 6. On receipt of the telex message, Devagnanam wrote a letter to Raeburn on May 4, explaining the pressure of circumstances which compelled the board to take the decision which it did in the meeting of May 2, 1977. Raeburn followed up his telex messages by a letter to Devagnanam on May 3. While expressing his distress and displeasure at the manner in which the decision regarding the issue of rights shares was taken and the allotment of the shares was made, Raeburn stated in his letter that the rights issue at par, which was considerably less than the fair value of the shares, was most unfair to the shareholders who could not take up the rights issue.

After making the allotment of shares in the meeting of May 2, NIIL sent a letter to the Reserve Bank reporting compliance with the requirements of the FERA by the issue of 16,000 rights shares and the allotment thereof to the Indian shareholders which resulted in the reduction of the foreign holding to approximately 40% and increased that of the Indian shareholders to almost 60%. Reference was made in the letter to the fact that the allotment money of Rs. 1,10,700 had yet to be received, which was obviously in reference to the amount due on the 1,107 rights shares which were allotted to the Manoharan group in the meeting of 2nd May. The Manoharan group did not evince any interest even later in taking up those shares. Manoharan. it may be stated, who was a director and general manager of NHL, had resigned his post in April, 1976, after serving the company for nearly 17 years.

Between the 2nd and 9th May, there was an exchange of cables between Mackrael and Doraiswamy which led to the latter writing a letter on the 9th to the former. Doraiswamy stated in that letter that he had thoroughly investigated the position by perusing all available records placed before him by Devagnanam and Kingsley and that he was of the opinion that, in the meeting of the 6th April, there was the required quorum of two disinterested directors consisting of Silverston and himself and, therefore, there could be no doubt whatsoever about the legality of the resolution passed in that meeting. He admitted that although the time-limit fixed by the Reserve Bank had expired on 17th May, 1977, "it may have been possible for the company to get further time from the Reserve Bank of India". As regards the decision to issue the additional shares at par, he explained that if the issue had been made at a premium, it would have necessitated an approach to the Controller of Capital Issues, a process which was time-consuming and complicated. He pointed out that the authorities would not have allowed the company to issue the rights shares at a premium and that even if they were to allow such a course, the premium permissible would have been only nominal. He asserted that the delay caused in the offer of new shares being received by the U. K. shareholders was of little consequence because they would not have been able to take up the shares in any event. He expressed the hope that Mackrael would agree that the decision regarding the issue of rights shares taken at the board meeting on April 6, 1977, was bona fide and in the best interests of the company. He concluded his letter by an assurance that as regards the late despatch of the notice of the board meeting of 2nd May, further enquiries were being made.

On May 11, Devagnanam wrote to Raeburn apologising for the manner in which the foreign shareholding had been reduced and, for good measure, he projected the various advantages which the NEWEY group would enjoy under the new Indian management and control of NIIL. As if to illustrate that it was better late than never, he enclosed with his letter a copy of the Reserve Bank's letter dated 30th March, 1977, which was to have been sent along with the letter dated April 12 but was in fact not so sent.

On May 17, 1977 Mackrael, acting on behalf of the Holding Company, filed a company petition in the Madras High Court under ss. 397 and 398 of the Companies Act, 1956, out of which the present appeals arise.

It is alleged in the petition that the Indian directors abused their fiduciary position in the company by deciding in the meeting of April 6, to issue the rights shares at par and by allotting them exclusively to the Indian shareholders in the meeting of 2nd May, 1977. In so doing, they acted mala fide and in order to gain an illegal advantage for themselves. The Indian directors, according to the company petition, either knew or ought to have known that the fair value of the shares of the company was about Rs. 204 per share. By deciding.to issue the rights shares at par, they conferred a tremendous and illegitimate advantage on the Indian shareholders. Devagnanam delayed deliberately the intimation of the proceedings of the 6th April to the Holding Company. By that means and by the late giving of the notice of the meeting of the 2nd May, the Devagnanam group presented a fait accompli to the Holding Company in order to prevent it from exercising its lawful rights. Thus, according to the petition, the conduct of the Indian directors lacked in probity and fair dealing which the Holding Company was entitled to expect. By the petition, the Holding Company asked for the following reliefs:—

(a) That the board of directors of the company be superseded and one or more administrators be appointed to administer the affairs of the company or, in the alternative, the board of directors be reconstit-uted so as to ensure that the Holding Company had adequate representation on it.

(b) That the proceedings of the meeting of the board of directors held on April 6 and May 2, 1977, be declared illegal, void and inoperative.

(c) That Silverston's appointment as an additional director of the company be declared as void and inoperative and he be restrained from functioning as a director of the company.

(d) That the purported allotment of 16,000 shares pursuant to the impugned resolution of the board of May 2, 1977 be declared void.

(e) That the Indian group of shareholders to whom the rights shares were allotted be restrained from exercising any voting rights in regard to any part of those shares.

(f) That the company be restrained from giving effect to the allotment of the 16,000 rights shares and from making any payment of dividend on those shares.

(g) That the articles of association of the company be amended so as to permit the transfer of the shares to persons other than the existing members of the company in order to enable the Holding Company to comply with the requirement of disinvestment without prejudice to its interest as a shareholder. And

(h) That a special majority for decisions of the board be prescribed in regard to all important matters and provision be made for the appointment of directors by proportional representation.

The learned Acting Chief Justice who tried the company petition, found several defects and infirmities in the board's meeting dated May 2, 1977, and concluded that appropriate relief should be granted to the Holding Company under s. 398 of the Companies Act. The learned judge was of the view that the average market value of the rights shares was about Rs. 190 per share on the crucial date and that, since the rights share were issued at par, the Holding Company was deprived unjustly of a sum of Rs. 8,54,550 at the rate of Rs. 90 per share on the 9,495 rights shares to which it was entitled. Exercising the power under s. 398(2) of the Companies Act, the learned judge directed NII to make good that loss which, according to him, could have been avoided by it "by adopting a fairer process of communication" with the Holding Company and "a consequential dialogue" with them, in the matter of the issue of rights shares at a premium. The learned judge directed NIIL to pay to the Holding Company the aforesaid sum of Rs. 8,54,550 as a "solatium" in order to meet the ends of justice.

Being aggrieved by the aforesaid judgment, the Holding Company filed O.S. Appeal No. 64 of 1978 while NIIL filed cross-objections to the decree. The appeal and cross-objections were argued before the Division Bench of the High Court on the basis of affidavits, the correspondence that had passed between the parties and certain additional documents which were filed before the appellate court by the consent of parties. Though the company petition was filed under s. 397 as also under s. 398 of the Companies Act and though the trial court had granted partial relief to the Holding Company under s. 398, it was stated in the appellate court on its behalf that its entire case was based on s. 397 and that it did not want to invoke the provisions of s. 398. A similar statement was made before us also.

On a consideration of the matters and material before it, the Division Bench formulated its view in the form of 18 conclusions on various aspects of the case. They may be summed up thus:

(a) As soon as Devagnanam became involved in the Far Eastern ventures of NEWEY, he decided to sell his shareholding in NIIL to an Indian concern or party from which he expected to receive at least a part of the con sideration in a foreign country.

(b) Seeing that Coats were opposed to his receiving any part of the consideration for the sale of his shares in a foreign country, Devagnanam decided not to part with his shares but to obtain the control of the company.

(c) The directives of the Reserve Bank of India on the question of Indianisation were exploited by Devagnanam for compelling the Holding Company to part with its shares in favour of the Indian shareholders.

(d) Coats were willing to carry out the directives of the Reserve Bank but they did not want to transfer their shares to the existing Indian share-holders because thereby, the latter would have acquired a controlling interest in NIIL which Coats wanted to prevent. Coats were willing to part with their excess shares in favour of other Indian residents.

(e) Though Coats originally contemplated the transfer of 15% of their excess 20% shares to Madura Coats, or the incorporation of a company to take over their excess 20% shares, they were ultimately agreeable that the existing Indian shareholders should get 9% out of that 20% so as to have a 49% holding in the share capital of NIIL and that 11% should go to new, independent, Indian institutional shareholders. The object of Coats was that any one group of shareholders should not have a dominating position in the affairs of NIIL.

(f) At the Ketty meeting held on October 20 and 21, 1976, the issue of rights shares was considered as an viable development plan which required additional funds which the existing cash flow of NIIL could not meet, and two, that the value of the U.K. equity interest required to be transferred would be no less favourable than what would be achieved by a direct sale of that interest.

(g) Though by his letters of December 11 and 14, 1976, Devagnanam had informed Raeburn of the decision of the Indian shareholders to acquire 60% shares for themselves, he did not ever say one word about the issue of rights shares in any of the numerous communications which he sent to Raeburn. No reference was made to the issue of rights shares even in the memorandum of discussions which took place during the visit of Devagnanam to U.K. from March 29-31, 1977. Thus, the issue of rights shares was sprung as a surprise on the U.K. shareholders.

(h) The notice dated March 18, 1977, for the meeting of the board of directors held on April 6, 1977, referred to the main item on the agenda in ambiguous terms as: "policy Indianisation". In the context of the discussions which had taken place until then between the parties, N.T. Sanders who represented the Holding Company on the board had no means or opportunity of knowing that the particular item on the agenda involved the question of the issue of rights shares.

(i) Since every major decision was taken by the board of directors in consultation with the Holding Company and since there was no agenda for the appointment of an additional director under art. 97 of the articles of association of NIIL, the decision taken by the board in its meeting of April 6 on the issue of rights shares and the appointment of Silverston as an additional director constituted a departure from established practice and showed want of good faith and lack of fair play on the part of the board of directors of NIIL.

(j) The letter dated April 12, the letter of offer dated April 14 and the notice for the meeting of the board of directors to be held on May 2, were all got posted by Devagnanam as late as on April 27, 1977, at Madras, so as to ensure that these important documents should not reach the Holding Company in time to enable it to participate in the all important meeting of the 2nd. Devagnanam wanted to present a fait accompli to the Holding Company so as to prevent it from taking any pre-emptive action.

(k) Whenever NIIL wrote to the Reserve Bank alleging that the Holding Company was not willing to carry out the directives of the Bank or to comply with the provisions of the FERA, its object was to prejudice the bank against the Holding Company by drawing a red-herring across the track.

(1) The directives of the Reserve Bank of India and the provisions of the FERA were not concerned with who should be the Indian shareholders of NIIL. All that they were concerned with was that 60% of the shareholding must be with the Indian residents. For the purpose of achieving that result, three courses were available to NIIL: (1) Disinvestment by foreign shareholders in favour of Indian shareholders. (2) Issue of rights shares pursuant to s. 81 of the Companies Act. and (3) Action under s. 81(1A) of the Companies Act for issuing additional shares to Indian residents other than the existing Indian shareholders by passing an appropriate special resolution, or if no special resolution was passed, then, by a majority of the shareholders approving such a course with the consent of the Central Govt. The first course was ruled out since Coats had taken a definite stand that they will not allow the existing Indian shareholders to obtain the excess shares. As far as the second, alternative was concerned, the Holding Company had the right to renounce shares offered to it in favour of any other person under s. 81(1)(c) of the Companies Act, which right was denied to it because, the letter of offer dated April 14 did not contain a statement regarding renunciation of the right to take shares and also because the letter was not posted in time. As regards the third course, if the Holding Company were given adequate notice of the proposal to issue rights shares, it might have taken appropriate action under s. 81(1A) of the Companies Act.

(m) The object of the directors of NIIL in deciding upon the issue of rights shares, and that too in the manner in which they did so, was clearly to obtain control of the company and to eschew and eliminate any controling power which the Holding Company had over NIIL. The conversion of the existing minority of the Indian shareholders into a majority, far from being a matter of statutory compulsion, was an act of self-aggrandisement on the part of the existing Indian shareholders.

(n) The action taken by the Indian shareholders was against the interest of the Company itself because the rights shares were issued at par which was far below their market price.

(o) The true motivation of the various steps taken by the Devagnanam—NEWEY Combination was the furtherence of the interest of NEWEY's Far Eastern enterprises, coupled with the personal interest of Devagnanam himself. Devagnanam was receiving Rs. 96,000 per annum in addition to substantial fringe benefits as the managing director of NIIL. He was also getting a large salary from NEWEY which was £10,000 in 1975, £11,000 in 1976 and £12,000 for the year ending July 31, 1977.

(p) The fact that NIIL informed the Holding Company on May 21, 1977, which was after the company petition was filed, that the Holding Company could not exercise and will not be allowed to exercise any rights in respect of the whole of Rs. 18,990 shares held by it since its application under s. 29(4) of the FERA was not granted by the Reserve Bank, shows that the object of the board of directors in taking the impugned decision was to exclude the Holding Company from all control over NIIL. That is why NIIL advised the Reserve Bank of India by its letter dated May 24, 1977, that no application for holding any shares by a non-resident should be allowed by the bank without the knowledge and consent of NIIL. That also is the reason why NIIL conveyed to the Reserve Bank by its letter of September 20, 1977, that until such time as the company petition was finally disposed of, no licence should be issued to the non-resident shareholders and no remittance of dividend out of India should be permitted without the non-resident shareholders reducing their holding in NIIL to less than 40%.

The two other conclusions are comprehended within the 16 set out above.

On the basis of the aforesaid formulations, the Division Bench concluded that the affairs of NIIL were being conducted in a manner oppressive, that is to say, burdensome, harsh and wrongful to the Holding Company. After referring to certain passages from Palmer's Company Law and Gore-Browne on Companies, and the decisions of the House of Lords, the Privy Council, and our own courts including the Supreme Court, the Division Bench held that since the action of the board of directors of NIIL was not in the interest of the company but was taken merely for the purpose of welding the company into NEWEY's Far Eastern complex, it was just and equitable to wind up the company.

NIIL had filed cross-objections in the High Court appeal contending that, in any event, the learned Acting Chief Justice was in error in directing it to pay the sum of Rs. 8,54,550 to the Holding Company. While dealing with the cross-objections, the Division Bench held that the injury suffered by the Holding Company on account of the oppression practised by the board of directors of NIIL could not be remedied by the award of compensation and, therefore, the action of the board of directors in issuing the rights shares had to be quashed. Having found that the Holding Company was entitled to relief under s. 397 of the Companies Act and the award of solatium made by the trial court was not the appropriate relief to grant, the Division Bench allowed the appeal filed by the Holding Company, dismissed the cross-objections in substance and adjourned the appeal for a fortnight for hearing further arguments on the nature of the relief to be granted in the case.

Eventually, by its order dated October 26, 1978, the Division Bench granted the following reliefs:

(a) Devagnanam was removed forthwith both as the managing director and director of NIIL and was asked to vacate the bungalow occupied by him, by November 1, 1978. He was paid one year's remuneration as compensation for the termination of his appointment as the managing director.

(b) The board of directors was superseded and an interim board con-sisting of nine directors proposed by the Holding Company was constituted with Shri M. M. Sabharwal as an independent chairman.

(c) Harry Bridges, an executive of Coats, was appointed as the managing director for a period of four months.

(d) The rights issue made on 6th April, 1977, and the allotment of shares made on 2nd May, 1977, at the board meetings were set aside and the interim board was directed to make a fresh issue of shares at a pre-mium to the existing shareholders, including the Holding Company which was to have a right of renunciation. The new board was directed to apply to the Controller of Capital Issues for determining the amount of premium.

(e) The articles of association were to be altered by appropriate additions and deletions in order to provide for the election of directors by proportional representation, and

(f) Devagnanam was asked to pay to the Holding company, the costs of the appeal and cross-objections quantified at Rs. 25,000. He was also asked personally to reimburse the expenses incurred by NIIL in the appeal and cross-objections.

These appeals were heard in the first instance by Justice Untwalia and Justice Pathak. In view of the importance of the questions arising therein, on some of which our learned brothers, it seems, were unable to agree, they devised that the appeals be heard by a larger Bench. That is how the appeals are now before us.

The petition of the Holding Company, out of which these appeals arise, sought relief under ss. 397 and 398 of the Companies Act, 1956. The case under s. 398 not having been pressed except before the learned trial judge, we are only concerned with the question whether the Holding Company is entitled to relief under s. 397 which reads thus:

"397. (1) any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the court for an order under this section, provided such members have a right so to apply in virtue of section 399.

(2) If, on any application under sub-section (1), the court is of the opinion—

(a) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members; and

(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up;

the court may, with a view- to bringing to an end the matters complained of, make such order as it thinks fit".

Section 398 provides for relief in cases of mismanagement. Section 399(1) restricts the right to apply under ss. 397 and 398 to persons mentioned in cls. (a) and (b) of sub-s. (1).

It is necessary to refer briefly to the relevant part of the pleadings before examining the charge of oppression made by the Holding Company against a group of the minority shareholders of NIIL. After tracing the history of formation and composition of NIIL, the company petition states that the management of NIIL was in the hands of the board of directors in which the Indian group had a large majority. The Holding Company had implicit trust in them and was content to leave the management in their hands. After referring to the impact of s. 43A of the Companies Act, 1956, the company petition says that in the wake of the FERA, discussions and negotiations were held between the representatives of the Holding Company and the management of NIIL, amongst themselves, as well as with the Reserve Bank of India, in order to enable NIIL to obtain the requisite permission for carrying on its business. Paragraph 13 of the company petition states that the Reserve Bank of India by its letter dated May 11, 1976, granted to NIIL the necessary permission subject to the condition, inter alia, that it reduce its non-resident shareholding to 40 per cent. on or before May 17, 1977. The case of the Holding Company in regard to its own attitude is stated succinctly in para. 14 of the company petition which may with advantage be reproduced:

"Discussions were thereafter held on a number of occasions between the petitioner and the management of the company to effectuate the aforesaid condition imposed by the Reserve Bank of India which the petitioner was at all times ready and willing to comply with. The petitioner did not, however, desire to dilute its holding of shares in the company by a further issue of capital and preferred to effectuate the said intention by disinvesting or selling 20% of its holding in the company. The Reserve Bank of India was agreeable to such dilution taking place by the petitioner selling a part of its holding to an Indian resident or Indian residents. The Reserve Bank had indicated that they would be willing for such dilution taking place by a further issue of shares provided that additional capital was required for purposes of expansion. The petitioner was not willing to sell a part of its holding to the Indian group as such a sale would result in the Indian group acquiring an absolute majority interest. Further more under the articles of association of the company the consent of the existing shareholders would be required (apart from the approval of the Reserve Bank) before the petitioner sold any of its shares to an Indian party, other than to a member".

According to the Holding Company, the various steps which culminated in the allotment of rights shares to the existing Indian shareholders were vitiated by mala fides, their dominant object being to convert an existing minority into a majority. The decision taken in the meeting of the board on April 6, 1077, was taken deliberately in haste and hurry in order to pre-empt any action by the Holding Company to restrain the board from taking the desired decision. The Reserve Bank, according to the company petition, would not have been so unreasonable as not to extend the time for complying with its directive, especially since the Holding Company had agreed in principle to dilute its holding and the only difference between the parties was as regards the method by which such dilution was to be effected. In para. 27 of the company petition it is stated that the Devagnanam group decided to issue the rights shares with a view to securing an illegal and unjust advantage for itself, for improving its own position in the company and in order to deprive the Holding Company of its lawful rights as majority shareholders. In this behalf, reliance is placed on the following facts and circumstances, inter alia:

(a) The Holding Company was never informed of any specific proposal to make the rights issue.

(b) The notice of the board meeting of April 6, 1977, did not refer to the said proposal.

(c) The notice offering rights shares to the Holding Company was not prepared till April 14, 1977, and was not posted till April 27, 1977. By the time the notice was received by the Holding Company, the board of NIIL had met to allot the rights: shares.

(d) The time given in the notice was much less than was customary.

(e) The notice did not contain a statement relating to the right of the shareholders to renounce the rights shares.

(f) The notice of the board meeting of May 2, 1977, although dated 19th April, 1977, was posted to Sanders on 27-4-1977, thereby ensuring that it would reach him only after the date of the meeting.

(g) By issuing shares at par, though their value was much higher than Rs. 100 per share, the existing Indian shareholders were enabled to acquire the shares at a gross undervalue and the company was put to a heavy loss.

(h) The Reserve Bank of India had indicated that dilution of the foreign holding by a rights issue could be considered if the company required further capital for expansion. At the discussions and negotiations held between the Holding Company and the Indian group it was, inter alia, agreed that the rights issue would be made only if there was a viable development plan requiring further funds. The rights issue was made even though no such need for expansion or development existed or was referred to.

(i) Though the Reserve Bank had, inter alia, stipulated that the said dilution should be effectuated on or before 17th May, 1977, the time schedule is never strictly insisted upon. There have been numerous instances when the Reserve Bank has granted reasonable extension of time to comply with such conditions. The board of NIIL never requested the Reserve Bank to grant further time. C. Doraiswamy, the 8th respondent, stated in his letter dated 9-5-1977 to Mackrael, a director of the Holding Company, that it would have been possible for the company to get further time from the Reserve Bank of India.

The Holding Company contends further that M. J. Silverston was not a disinterested person, that his vote on the resolution for the issue of rights shares had, therefore, to be ignored, in which case there was no quorum of two disinterested directors and that his appointment as an additional director was not valid since the notice for the meeting of the board of directors to be held on 6-4-1977 did not contain in the agenda any subject regarding appointment of an additional director under art. 97 of the company's articles of association.

In answer to these contentions, Devagnanam filed an elaborate counter-affidavit on his behalf as well as on behalf of NIIL. In that counter-affidavit, every one of the material contentions put forward by the Holding Company has been denied or disputed. Devagnanam contends that it was the Holding Company which wanted to retain its control over NIIL contrary to the directive of the Reserve Bank of India, the national policy of the Central Govt. and the provisions of the FERA. According to Devagnanam, every action taken in the board meetings of April 6, 1977, and May 2, 1977, was in accordance with law, that Sanders never used to attend the meetings of the board, being a non-resident he was not entitled to have notice of the board meetings, that there was no violation of s. 81 of the Companies Act at all, that s. 81(c) of the Companies Act did not apply to the present case and that, in view of the attitude adopted by Coats, NIIL, in order to comply with the restrictions imposed by the Reserve Bank and to carry out its directive, had no option but to decide upon the issue of rights shares to bring about the reduction in the non-resident shareholding. Devagnanam repudiates emphatically the charge of mala fides or of conduct in breach of the fiduciary duty of NIIL's board of directors.

Having regard to these pleadings, the main question for consideration is whether the decisions taken in the meetings of the board of directors of NIIL on April 6, and May 2, 1977, constitute acts of oppression within the meaning of s. 397 of the Companies Act, 1956. The High Court has answered this question in the affirmative and has issued consequential directions in regard to the management of NIIL's affairs. The findings recorded by the High Court in appeal have been challenged before us with vehemence and ability in an equal measure, matched equally in both respects on either side. Learned counsel who led the arguments on the rival sides, Shri F.S. Nariman for the appellants and Shri H. M. Seervai for the respondents have drawn our attention in copious details to the correspondence that transpired between the parties, the correspondence with the Reserve Bank of India, the discussions at Ketty and Birmingham which preceded the impugned decisions, the conduct of Devagnanam as a man and a managing director, the attitude of Coats stated to arise out of their world-wide business interests and the predicament of NEWEY which was willing to strike but was afraid to wound its partner Coats. We have also been taken through several decisions and texts bearing particularly on:

(a) The meaning of "oppression" of the members of a company within the terms of s. 397 and the circumstances in which a company can be wound up under the just and equitable clause under s. 433(f) of the Companies Act, 1956.

(b) The approach which the court should adopt in cases wherein mala fides and abuse of power on the part of directors are alleged but no oral evidence is led.

(c) The fiduciary powers of directors in issuing shares.

(d) The impact of the provisions of the Foreign Exchange Regulation Act, 1973, with particular reference to s. 2(p), (q) and (u) and s. 29.

(e) The question as to whether it is necessary to issue a prospectus under s. 81(1)(c) of the Companies Act.

(f) The constraints on public and private companies under the Companies Act, and their duties and obligations, with particular reference to ss. 2(35), 2(37), 3(1)(iii) and (iv) and ss. 43A and 81 of the Companies Act.

(g) The relationship of partnership between the Indian shareholders, Coats and Newey who owned respectively 40%, 30% and 30% of the shareholding in NIIL.

(h) The question whether Silverston was an "interested" director within the meaning of s. 300 of the Companies Act, and

(i) Whether Silverston's appointment as an additional director in the meeting of the board held on April 6, 1977, was, in the circumstances, valid.

Coming to the law as to the concept of "oppression", s. 397 of our Companies Act follows closely the language of s. 210 of the English Companies Act of 1948. Since the decisions on s. 210 have been followed by our court, the English decisions may be considered first. The leading case on "oppression" under s. 210 is the decision of the House of Lords in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] AC 324; 29 Comp Cas 1 (HL). Taking the dictionary meaning of the word "oppression", Viscount Simonds said at page 342 that the appellant-society could justly be described as having behaved towards the minority shareholders in an "oppressive" manner, that is to say, in a manner "burdensome, harsh and wrongful". The learned law Lord adopted, as difficult of being bettered, the words of Lord President Cooper at the first hearing of the case to the effect that s. 210 "warrants the court in looking at the business realities of the situation and does not confine them to a narrow legalistic view". Dealing with the true character of the company, Lord Keith said at page 361 that the company was in substance, though not in law, a partnership consisting of the society, Dr. Meyer and Mr. Lucas and whatever may be the other different legal consequences following on one or other of these forms of combination, one result followed from the method adopted, "which is common to partnership, that there should be the utmost good faith between the constituent members". Finally, it was held that the court ought not to allow technical pleas to defeat the beneficent provisions of s. 210 (p. 344 per Lord Keith; pp. 368-369 per Lord Denning).

In Meyer [1959] AC 324; 29 Comp Cas 1(HL) above referred to, the House of Lords was dealing with a case in which the appellant-company was accused of having committed acts of oppression against its subsidiary. In that context, it was held that the parent company must, if it is engaged in the same class of business, accept, as a result of having formed such a subsidiary, an obligation so to conduct, what are in a sense its own affairs, as to deal fairly with its subsidiary. In Re Associated Tool Industries Ltd. [1964] Argus L R 73, of which judgment a photographic copy was supplied to us, Joske J. held that the rule in Meyer [1959] 29 Comp Cas 1 (HL) involved the consequence that the subsidiary companies must also exercise good faith to the holding company and not merely that the latter should so act to the former.

In an application under s. 210 of the English Companies Act, as under s. 397 of our Companies Act, before granting relief the court has to satisfy itself that to wind up the company will unfairly prejudice the members complaining of oppression, but that otherwise the facts will justify the making of a winding-up order on the ground that it is just and equitable that the company should be wound up. The rule as regards the duty of utmost good faith, on which stress was laid by Lord Keith in Meyer [1959] 29 Comp Cas 1, received further and closer consideration in Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360 (HL), wherein Lord Wilberforce considered the scope, nature and extent of the "just and equitable" principle as a ground for winding up a company. The business of the respondent-company was a very profitable one and profits used to be distributed among the directors in the shape of fees, no dividends being declared. On being removed as a director by the votes of two other directors, the appellant petitioned for an order under s. 210. Allowing an appeal from the judgment of the Court of Appeal, it was held by the House of Lords that the words "just and equitable" which occur in s. 222(f) of the English Act, corresponding to our s. 433(f), were not to be construed ejusdem generis with cls. (a) to (e) of s. 222 corresponding to our cls. (a) to (e) of s. 433. Lord Wilberforce observed that the words "just and equitable" are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own; and that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure (p. 379 of [1973] AC 360):

"The 'just and equitable' provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way".

Observing that the description of companies as "quasi-partnerships" or "in substance partnerships" is confusing, though convenient, Lord Wilberforce said (Ibid p. 380):

"A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in".

Finally, it was held that it was wrong to confine the application of the just and equitable clause to proved cases of mala fides, because to do so would be to negative the generality of the words. As observed by the learned law lord in the same judgment, though in another context (Ibid p. 374):

"Illustrations may be used, but general words should remain general and not be reduced to the sum of particular instances".

In his judgment in Westbourne Galleries, In re [1973] AC 360 (HL), Lord Wilberforce has referred at two places to the decision in Blisset v. Daniel [1853] 68 ER 1022; [1853] 10 Hare 493, which is recognised as the leading authority in the Law of Partnership on the duty of utmost good faith which partners owe to one another. Lindley on Partnership (14th Edn., pp. 194-95) cites Blisset v. Daniel as an authority for the proposition that:

"The utmost good faith is due from every member of a partnership towards every other member; and if any dispute arise between partners touching any transaction by which one seeks to benefit himself at the expense of the firm, he will be required to show, not only that he has the law on his side, but that his conduct will bear to be tried by the highest standard of honour".

The fact that the company is prosperous and makes substantial profits is no obstacle to its being wound up if it is just and equitable to do so. This position was accepted in the decision of the Court of Appeal in Yenidje Tobacco Co., In re [1916] 2 Ch 426 and of the Privy Council in Loch v. John Blackwood Ltd. [1924] AC 783.

The question sometimes arises as to whether an action in contravention of law is per se oppressive. It is said, as was done by one of us, Bhagwati J., in a decision of the Gujarat High Court in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton & Jute Mills Co. [1964] 34 Comp Cas 777, 830-31, that "a resolution passed by the directors may be perfectly legal and yet oppressive, and conversely a resolution which is in contravention of the law may be in the interests of the shareholders and the company. On this question, Lord President Cooper observed in Elder v. Elder & Watson [1952] SC 49, 55:

"The decisions indicate that conduct which is technically legal and correct may nevertheless be such as to justify the application of the 'just and equitable' jurisdiction, and, conversely, that conduct involving illegality and contravention of the Act may not suffice to warrant the remedy of winding-up, especially where alternative remedies are available. Where the 'just and equitable' jurisdiction has been applied in cases of this type, the circumstances have always, I think, been such as to warrant the inference that there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy".

Neither the judgment of Bhagwati J. nor the observations in Elder [1952] SC 49, are capable of the construction that every illegality is per se oppressive or that the illegality of an action does not bear upon its oppressiveness. In Elder a complaint was made that Elder had not received the notice of the board meeting. It was held that since it was not shown that any prejudice was occasioned thereby or that Elder could have bought the shares had he been present, no complaint of oppression could be entertained merely on the ground that the failure to give notice of the board meeting was an act of illegality. The true position is that an isolated act, which is contrary to law, may not necessarily and by itself support the inference that the law was violated with a mala fide intention or that such violation was burdensome, harsh and wrongful. But a series of illegal acts following upon one another can, in the context, lead justifiably to the conclusion that they are a part of the same transaction, of which the object is to cause or commit the oppression of persons against whom those acts are directed. This may usefully be illustrated by reference to a familiar jurisdiction in which a litigant asks for the transfer of his case from one judge to another. An isolated order passed by a judge which is contrary to law will not normally support the inference that he is biassed; but a series of wrong or illegal orders to the prejudice of a party are generally accepted as supporting the inference of a reasonable apprehension that the judge is biassed and that the party complaining of the orders will not get justice at his hands.

In England, after the decision of the House of Lords in Meyer [1959] 29 Comp Cas 1 (HL) a restricted interpretation has been given to s. 210 by the Court of Appeal in Jermyn Street Turkish Baths Ltd., In re [1971] 3 All ER 184; 41 Comp Cas 999 which has been adversely criticised by writers on company law (see Palmer's Company Law, 22nd Edn., p. 613, paras. 57-06, 57-07. Gore-Browne on Companies, 43rd Edn., para. 28-12). In India, this restrictive development has no place, for, in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 2 SCR 720, 737; AIR 1965 SC 1535; 35 Comp Cas 351, 366, 367. Wanchoo J. accepted the broad and liberal interpretation given to the court's powers in Meyer.

In Kalinga Tubes, Wanchoo J. referred to certain decisions under s. 210 of the English Companies Act including Meyer and observed (p. 366):

"These observations from the four cases referred to above apply to section 397 also which is almost in the same words as section 210 of the English Act, and the question in each case is whether the conduct of the affairs of a company by the majority shareholders was oppressive to the minority shareholders and that depends upon the facts proved in a particular case. As has already been indicated, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in (the matter of his proprietary rights as a shareholder. It is in the light of these principles that we have to consider the facts......with reference to section 397".

At pages 734-735 of the judgment in Kalinga Tubes [1965] 2 SCR 720; 35 Comp Cas 351, 365, Wanchoo J. has reproduced from the judgment in Meyer [1959] 29 Comp Cas 1 (HL), the five points which were stressed in Elder [1952] SC 49. The fifth point reads thus:

"The power conferred on the court to grant a remedy in an appropriate case appears to envisage a reasonably wide discretion vested in the court in relation to the order sought by a complainer as the appropriate equitable alternative to a winding-up order".

It is clear from these various decisions that on a true construction of s. 397, an unwise, inefficient or careless conduct of a director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder. It may be mentioned that the Jenkins Committee on Company Law Reform had suggested the substitution of the word "oppression" in s. 210 of the English Act by the words "unfairly prejudicial" in order to make it clear that it is not necessary to show that the act complained of is illegal or that it constitutes an invasion of legal rights (see Gower's Company Law, 4th Edn., p. 668). But that recommendation was not accepted and the English law remains the same as in Meyer [1959] 29 Comp Cas 1 (HL) and in H. R. Harmer Ltd., In re [1959] 1 WLR 62; 29 Comp Cas 305 (CA) as modified in Re Jermyn St. Turkish Baths [1971] 3 All ER 184; 41 Comp Cas 999. We have not adopted that modification in India.

Having seen the legal position which obtains in cases where a member or members of a company complain under s. 397 of the Companies Act that the affairs of the company are being conducted in a manner oppressive to him or them, we can proceed to consider the catena of facts and circumstances on which reliance is placed by the Holding Company in support of its case that the conduct of the board of directors of NIIL constitutes an act of oppression against it. There is, however, one matter which has to be dealt with before adverting to facts, namely, the provisions of the FERA, their impact on the working of NIIL and on the right of the Holding Company to continue to hold its shares in NIIL. This we consider necessary to discuss before an appraisal of the factual situation, since without a proper understanding of the working of the FERA, it would be impossible to appreciate the turn of intertwined events. It is in the setting of the FERA that the significance of the various happenings can properly be seen.

The Foreign Exchange Regulation Act, 46 of 1973, is "An Act to consolidate and amend the law regulating certain payments, dealings in foreign exchange and securities, transactions indirectly affecting foreign exchange and the import and export of currency and bullion, for the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interests of the economic development of the country". It repealed the earlier Act, namely, the Foreign Exchange Regulation Act, 1947, and came into force on January 1, 1974.

"Person resident in India" is defined in cl. (p) of s. 2 to mean:

"(i) A citizen of India, who has, at any time after the 25th day of March, 1947, been staying in India, but does not include a citizen of India who has gone out of, or stays outside, India, in either case—

(a) for or on taking up employment outside India, or

(b) for carrying on outside India a business or vocation outside India, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

(ii) a citizen of India, who having ceased by virtue of paragraph (a) or paragraph (b) or paragraph (c) of sub-clause (i) to be resident in India, returns to or stays in India, in either case—

(a) for or on taking up employment in India, or

(b) for carrying on in India a business or vocation in India, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period".

"Person resident outside India" according to cl. (q) means "a person who is not resident in India". Under cl. (u) "security" means "shares, stocks, bonds", etc.

Section 19(1) provides:

"Notwithstanding anything contained in section 81 of the Companies Act, 1956, no person shall, except with the general or special permission of the Reserve Bank,—

(a) take or send any security to any place outside India;

(b) transfer any security, or create or transfer any interest in a security, to or in favour of a person resident outside India;......

(d) issue, whether in India or elsewhere, any security which is registered or to be registered in India, to a person resident outside India;."..

Section 29, which is directly relevant for our purpose, reads thus:

"29. (1) Without prejudice to the provisions of section 28 and section 47 and notwithstanding anything contained in any other provision of this Act or the provisions of the Companies Act, 1956, a person resident outside India (whether a citizen of India or not) or a person who is not a citizen of India but is resident in India, or a company (other than a banking company) which is not incorporated under any law in force in India or in which the non-resident interest is more than forty per cent. or any branch of such company, shall not, except with the general or special permission of the Reserve Bank,—

(a) carry on in India, or establish in India a branch, office or other place of business for carrying on any activity of a trading, commercial or industrial nature, other than an activity for the carrying on of which permission of the Reserve Bank has been obtained under section 28, or......

(2) (a) Where any person or company (including its branch) referred to in sub-section (1) carries on any activity referred to in clause (a) of that sub-section at the commencement of this Act or has established a branch, office or other place of business for the carrying on of such activity at such commencement, then, such person or company (including its branch) may make an application to the Reserve Bank within a period of six months from such commencement or such further period as the Reserve Bank may allow in this behalf for permission to continue to carry on such activity or to continue the establishment of the branch, office or other place of business for the carrying on of such activity, as the case may be.

(b) Every application made under clause (a) shall be in such form and contain such particulars as may be specified by the Reserve Bank.

(c) Where any application has been made under clause (a), the Reserve Bank may, after making such inquiry as it may deem fit, either allow the application subject to such conditions, if any, as the Reserve Bank may think fit to impose or reject the application......

(4)(a) Where at the commencement of this Act any person or company (including its branch) referred to in sub-section (1) holds any shares in India of any company referred to in clause (b) of that subsection, then, such person or company (including its branch) shall not be entitled to continue to hold such shares unless before the expiry of a period of six months from such commencement or such further period as the Reserve Bank may allow in this behalf such person or company (including its branch) has made an application to the Reserve Bank in such form and containing such particulars as may be specified by the Reserve Bank for permission to continue to hold such shares.

(b) where an application has been made under clause (a), the Reserve Bank may, after making such inquiry as it may deem fit, either allow the application subject to such conditions, if any, as the Reserve Bank may think fit to impose or reject the application...."..

It is clear from these provisions that NIIL, being a company in which the non-resident interest of the Holding Company was more than 40%, could not carry on its business in India except with the permission of the Reserve Bank of India. An application for permission to continue to carry on such business had to be filed within a period of six months from the commencement of the Act or such further period as the Reserve Bank may allow. The time for filing the application was extended in all cases by two months and, therefore, it could be filed by August 31, 1974. NIIL filed its application three days late on September 3, 1974, and the application was granted by the Reserve Bank on certain conditions, by its letter dated May 10, 1976. Under the terms and conditions imposed by the Reserve Bank, the non-resident interest of the Holding Company, which came to about 60%, had to be brought down to 40% within one year of the receipt of the letter dated May 10, 1976, that is to say, before May 17, 1977.

By reason of s. 29(4) of the FERA, the Holding Company too had to apply for permission to hold its shares in NIIL. It applied to the Reserve Bank for a holding licence on September 18, 1974. The application which was filed late by 18 days is still pending with the Reserve Bank and is likely to be disposed of after the non-resident interest of the Holding Company in NIIL is reduced to 40%.

There is a sharp controversy between the parties on the question as to whether May 17, 1977, was a rigid deadline by which the reduction of the non-resident interest had to be achieved or whether NIIL could have applied to the Reserve Bank before that date for extension of time to comply with the bank's directive, in which case, it is urged, no penal consequences would have flowed. We will deal later with this aspect of the matter, including the question of business prudence involved in applying to the Reserve Bank for such an extension of time.

Shri Nariman raised at the outset an objection to a finding of mala fides or abuse of the fiduciary position of directors being recorded on the basis merely of affidavits and the correspondence, against the NIIL's board of directors or against Devagnanam and his group. He contends: Under the company court rules framed by this court, petitions, including petitions under s. 397, are to be heard in the open court (rr. 11(12) and 12(1)), and the practice and procedure of the court and of the Civil Procedure Code are applicable to such petitions (r. 6). Under O. XIX, r. 2 of the Code, it is open to a party to request the court that the deponent of an affidavit should be asked to submit to cross-examination. No such request was made in the trial court for the cross-examination of Devagnanam who, amongst all those who filed their affidavits, was the only person having personal knowledge of everything that happened at every stage. Why he did or did not do certain things and what was his attitute of mind on crucial issues ought to have been elicited in cross-examination. It is not permissible to rely argumentatively on inferences said to arise from statements made in the correspondence, unless such inferences arise irresistibly from admitted or virtually admitted facts. The verification clause of Mackrael's affidavit shows that he had no personal knowledge on most of the material points. Raeburn. who, according to Mackrael, was the chief negotiator on behalf of the Holding Company in the Birmingham meeting did not file any affidavit at all. Whitehouse, the secretary of the Holding Company, and N.T. Sanders, who was the sole representative of the Holding Company on NIIL's board of directors, did file affidavits but they are restricted to the question of the late receipt of the letter of offer of shares and the notice for the board meeting of May 2, 1977. Their affidavits being studiously silent on all other important points and the affidavit filed on behalf of the Holding Company being utterly inadequate to support the charge of mala fides or abuse of the directors' fiduciary powers, it was absolutely essential for the Holding Company to adduce oral evidence in support of its case or at least to ask that Devagnanam should submit himself for cross-examination. This, according to Shri Nariman, is a fundamental infirmity from which the case of the Holding Company suffers and, therefore, this court ought not to record a finding of mala fides or of abuse of powers, especially when such findings are likely to involve grave consequences, moral and material, to Devagnanam and jeopardise the very functioning of NIIL itself.

In support of his submission, Shri Nariman has relied upon many a case to show that issues of mala fides and abuse of fiduciary powers are almost always decided not on the basis of affidavits but on oral evidence. Some of the cases relied upon in this connection are: In re Smith S Fawcett Ltd. [1942] 1 All ER 542, 545 (CA), Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] SCR 391, 394; 20 Comp Cas 179, Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch 77 (Ch D), Hogg v. Cramhorn Ltd. [1967] 1 Ch 254, 260; 37 Comp Cas 157 (Ch D), Mills v. Mills [1938] 60 CLR 150, 160, Harlowe's Nominees [1968] 121 CLR 483, 485 and Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821, 831 (PC).

We appreciate that it is generally unsatisfactory to record a finding involving grave consequences to a person on the basis of affidavits and documents without asking that person to submit to cross-examination. It is true that men may lie but documents will not and often, documents speak louder than words. But a total reliance on the written word, when probity and fairness of conduct are in issue, involves the risk that the person accused of wrongful conduct is denied an opportunity to controvert the inferences said to arise from the documents. But then, Shri Nariman's objection seems to us a belated attempt to avoid an inquiry into the conduct and motives of Devagnanam. The company petition was argued both in the trial court and in the appellate court on the basis of affidavits filed by the parties, the correspondence and the documents. The learned appellate judges of the High Court have observed in their judgment that it was admitted that before the learned trial judge both sides had agreed to proceed with the matter on the basis of affidavits and correspondence only and neither party asked for a trial in the sense of examination of witnesses.

In these circumstances, the High Court was right in holding that, having taken up the particular attitude, it was not open to Devagnanam and his group to contend that the allegation of mala fides could not be examined on the basis of affidavits and the correspondence only. There is ample material on the record of this case in the form of affidavits, correspondence and other documents, on the basis of which proper and necessary inferences can safely and legitimately be drawn.

Besides, the cases on which counsel relies do not all support his submission that from mere affidavits or correspondence, mala fides or breach of fiduciary power ought not to be inferred. In In re Smith & Fawcett Ltd. [1942] 1 All ER 542 (CA), Lord Greene, after stating that he strongly disliked being asked on affidavit evidence alone to draw up inferences as to the bona fides or mala fides of the actors, added that this did not mean that it is illegitimate in a proper case to draw inferences as to bona fides or mala fides in cases where there is on the face of the affidavits sufficient justification for doing so. In Nanalal Zaver [1950] SCR 391 at page 394; 20 Comp Cas 179, the judgment of Kania C.J. contains a statement that "considerable evidence was led in the trial court on the question of bona fides" but it is not clear what kind of evidence was so led and, besides, the fact that oral evidence was led in some cases does not mean that it must be led in all cases or that without it, the matters in issue cannot be found upon. We may mention that in Punt v. Symons & Co. [1903] 2 Ch 506 (Ch D), Fraser v. Whalley [1864] 71 ER 361 and Hogg v. Cramphorn Ltd. [1967] 1 Ch 254; 37 Comp Cas 157 (Ch D), the breach of fiduciary duty was inferred from affidavit evidence.

We have, therefore, no hesitation in rejecting the submission that we ought not to record a finding of mala fides or abuse of fiduciary power on the basis of the affidavits, correspondence and the other documents which are on the record of the case. May it be said that these are on the record by consent of parties. Not merely that, but more and mare documents were placed on the record, mostly by consent of parties, as the case progressed from stage to stage. A very important document, namely, Devag-nanam's telex to Raeburn dated May 25, 1977, was put on the record for the first time before us since Shri Nariman himself desired it to be produced, waiving the protection of the caveat "without prejudice". That shows that the parties adopted willingly a mode of trial which they found to be most convenient and satisfactory.

That takes us to the question as to whether, on the basis of the material which is on the record of the case, it can be said that the decision taken by NIIL's board of directors in their meetings of April 6, and May 2, 1977, constitute acts of oppression as against the Holding Company. The case of the Holding Company as put forward by Shri Seervai is like this:

(i) Devagnanam kept Raeburn and Coats under the impression that negotiations were still going on and were not to be treated as concluded while, in reality, he had made up his mind to treat the matter as at an end.

(ii) He kept the Holding Company in total ignorance of the steps which he was taking on behalf of the issuance and allotment of the rights shares. The copy of the letter of the Reserve Bank dated March 30, 1977, which is said to have spurred the decision taken in the meetings of April 6, was not sent to the Holding Company though Devagnanam had stated in his letter dated April 12 to Raeburn that the said copy was being enclosed along with that letter. Deliberately and designedly, the letter of offer dated April 14, 1977, meant for the Holding Company in England was not posted until April 27. Similarly, the notice calling a meeting of the board on May 2 was not posted till April 27. The notice to Manoharan too was posted as late as on April 27, since he was believed to be siding with Coats. The letter of offer and the notice of meeting of May 2, which were posted at Madras on April 27, were received by the Holding Company on May 2, after the board's meeting for the allotment of rights shares was held.

(iii) The Reserve Bank of India was not informed of the proposal to issue rights shares to the existing shareholders although it was the most obvious thing to do, in response to its letter dated March 30, 1977, calling upon NIIL to submit its proposal for reducing its non-resident interest without delay.

(iv) No application was made to the Controller of Capital Issues for fixing the premium on rights shares, notwithstanding that the Reserve Bank had informed NIIL that, if necessary, an application to that effect may be made to the Controller of Capital Issues.

(v) The whole idea was to cut off all sources of information from Raeburn and Coats and to confront them with the fait accompli of the allotment of rights shares to the Indian shareholders, including the shares formally offered to the Holding Company which were not allotted to it on the ground of its non-compliance with the letter of offer.

(vi) The agenda of the meetings of April 6 and May 2, 1977, was purposely expressed in vague terms: "Policy—Indianisation", in order that the Holding Company should not know that the reduction of the nonresident interest was proposed to be effected by the issue of rights shares. By suppressing from the knowledge of the Holding Company what was its right to know, and what was the duty of the board's secretary to convey to it, Devagnanam succeeded in achieving his purpose on the sly and preempted any action by the Holding Company to restrain the holding of the meeting, the issue of rights shares and the allotment thereof exclusively to the existing shareholders (barring Manoharan).

(vii) Silverston was appointed as an additional director in the meeting of April 6, to make up the quorum of two "disinterested" directors even though he was in the true sense not a disinterested person in the decision taken in that meeting. The appointment of additional directors was not even an item on the agenda of the meeting.

(viii) Devagnanam was emboldened to take this course because he believed that no matter how wrongful his conduct, he could count upon the support of NEWEY to see that he was not brought to book in a court of justice for his wrongful conduct. He even attempted to thwart the company petition and render it infructuous by persuading NEWEY to withdraw the power-of-attorney executed by them, authorizing the filing of the petition.

(ix) In these machinations, Devagnanam was actuated by the sole desire to acquire the control of NIIL for his personal benefit, by ousting the Holding Company from its control over the affairs of NIIL.

(x) In fact, the rights shares were issued at par, though their market value was far greater, as a measure of personal aggrandisement in the supposition and forethought that such shares will inevitably go to Devagnanam and his group. This was blantantly in breach of the fiduciary obligation of the directors.

(xi) By these means and methods, which totally lacked in probity, Devagnanam succeeded in converting the existing majority into a minority and the minority into a majority, a conduct which is burdensome, harsh and unlawful, qua the existing majority.

According to Shri Seervai, the question before the court is not whether the issue of rights shares to the existing Indian shareholders only amounted to oppression but whether, the offer of rights shares to all existing shareholders of NIIL but the issue of rights shares to existing Indian shareholders only constituted oppression of the Holding Company on the facts and circumstances disclosed in the case. This argument raises questions regarding the interpretation of ss. 43A and 81 of the Companies Act, 1956.

These contentions of the Holding Company have been controverted by Shri Nariman, according to whom, the appellate court has taken a one-sided view of the matter which is against the weight of evidence on the record. Counsel contends that Devagnanam had done all that lay in his power to persuade the Holding Company to disinvest so as to reduce its holding in NIIL to 40%, that the directors of NIIL were left with no option save to decide upon the issue of rights shares, since disinvestment was a matter of the Holding Company's volition, that the wording of the agenda of the meetings of April 6 and May 2 conveyed all that there was to say on the subject since, in the background of the negotiations which had taken place between the parties, it was clear that what was meant by "policy—Indianization" and "allotment of shares" was the allotment of rights shares in order to effectuate the policy of the Reserve Bank that the Indianization of the company should be achieved by the reduction of the non-resident holding to 40%, that Coats refused persistently, both actively and passively, either to disinvest or to consider the only other alternative of the issue of rights shares, and that the impugned decisions were taken by the board of directors objectively in the larger interests of the company. According to Shri Nariman, Coats left no doubt by their attitude that their real interest lay in their worldwide business and that they wanted to bring the working of NIIL to a grinding halt with a view to eliminating an established competitor from their business. It is denied by counsel that important facts or circumstances were deliberately suppressed from the Holding Company or that the letter of offer and the notice of the board's meeting of May 2 were deliberately posted late on April 27. It is contended that neither by the issue of rights shares nor by the failure to give the right of renunciation to the Holding Company was any injury caused to its proprietary rights as a shareholder in NIIL. As a result of the operation of the FERA, the directives issued by the Reserve Bank thereunder and because of the fact that NIIL had retained its old articles after becoming a public company under s. 43A of the Companies Act, the Holding Company could neither have participated in the issue of rights shares nor could it have renounced the rights shares offered to it in favour of an outsider, not even in favour of a resident Indian company like Madura Coats. It is denied that Silverston was not a disinterested director or that his appointment as an additional director was otherwise invalid. Counsel sums up his argument by saying that the board of directors of NIIL had in no manner abused its fiduciary position and that far from their conduct being burdensome, harsh and wrongful, it was the attitude of Coats which was unfair, unjust and obstructive. Coats having come into an equitable jurisdiction with unclean hands, contends Shri Nariman, no relief should be granted to them assuming for the sake of argument that Devagnanam is guilty of any lapse. The reliefs awarded by the appeal court, particularly the removal of Devagnanam from the position of managing director, are characterised by counsel as wholly uncalled for, transcending the exigencies of the situation.

It seems to us unquestionable that Devagnanam played a key role in the negotiations with the Holding Company and ultimately masterminded the issue of rights shares. He occupied a pivotal position in NIIL, having been its director for over twenty years and a managing director for over fifteen years, in which capacity he held an undisputed sway over the affairs of NIIL. The Holding Company had nominated only one director on the board of NIIL, namely, N. T. Sanders, who resided in England and hardly ever attended the board's meetings. Devagnanam was thus a little monarch of all that he surveyed in Ketty. He had a large personal stake in NIIL's future since he and his group held nearly 30% shares in it, the other Indian shareholders owning a mere 10%. In the 60% share capital owned by the Holding Company, Coats and NEWEY were equal sharers with the result that Coats, NEWEY and Devagnanam each held an approximately 30% share capital in NIIL. This equal holding created tensions and rivalries between Coats and Devagnanam, NEWEY preferring to side with the latter in a silent, unspoken banner. Eventually, after the filing of the company petition, Coats bought over NEWEY's interest in NIIL sometime in July, 1977.

The picture which Devagnanam has drawn of himself as a person deeply committed to Ketty, and as having built up the business with scrupulous regard to the observance of foreign exchange regulations and Indian laws in contradistinction to Coats who, he alleged, wanted to contravene the foreign exchange regulations of our country is not borne out by the correspondence. In fact, the letter which he wrote to Shread of Newey-Goodman Ltd. on August 11, 1973, (which was filed by consent in the appeal court) shows that he wanted to dispose of his shares at a large premium by officially receiving the par value in rupees in India and obtaining the balance in foreign currency outside India. Nevertheless, he stated on oath in para. 13 of his rejoinder affidavit that "it is not true that in selling my shares, I wanted a part of the consideration in foreign exchange". The said letter discloses that over and above proposing to make a large profit in contravention of the foreign exchange regulations and the tax laws of India by receiving money outside India, Devagnanam proposed to take away from Ketty its "select key personnel and technicians" to Malacca and to manufacture competitively, products which were then manufactured by Needle Industries, U. K. The footnote to the letter to Shread asked him to keep these matters secret from Coats till the shares had been sold, and till the deed had been done.

There is another aspect of Devagnanam's conduct to which reference must be made. The statement made by him in para. 15 of his reply affidavit, denying that he was a non-resident, is not entirely true because at least between August 26, 1974, and June 9, 1976, he was a non-resident within the meaning of s. 2 (p)(i)(a) of the FERA. By his letter dated August 26, 1974, to the Reserve Bank, he asked, though out of abundant caution, for permission under s. 29(4) of the FERA to hold his shares in NIIL. He referred in that letter to his contract with Newey and Taylor under which he was to be a full-time managing director of that company for five years from August 1, 1974, to July 31, 1979, and asked the Reserve Bank to determine his status. On September 3, 1975, he wrote to the Reserve Bank contending that he was a "resident", referring this, time not to his contract with Newey-Taylor but to the agreement between NIIL and Newey Goodman Ltd., a company about to be formed, under which he was to be on deputation with it as an employee of NIIL.

Devagnanam's letter dated August 11, 1973, to Shread of Newey-Goodman, the gloss which he put on his status as a resident in his letters to the Reserve Bank dated August 26, 1974, and September 3, 1975, and the clever manner in which he had his status determined as a resident, cast a cloud on his conduct and credibility. And though, as contended by Shri Seervai, we do not propose to apply to Devagnanam's affidavit-evidence the rule of "corroboration in material particulars", which is generally applied in criminal law to accomplice evidence, we shall have to submit Devagnanam's conduct to the closest scrutiny and statements made by him, from time to time, to the most careful examination. We shall have to look to something beyond his own assertion in order to accept his claim or contention.

Shri Nariman attacked the conduct of Coats almost as plausibly as Shri Seervai attacked that of Devagnanam, though in terms of a saying in a local language we may say that "a brick is softer than a stone", Coats being the brick. Coats, as will presently appear, are not to be outdone by Devagnanam in the matter of lack of business ethics. But that is no wonder, because when the dominant motivation is to acquire control of a company, the sparring groups of shareholders try to grab the maximum benefit for themselves. If one decides to stay on in a company, one must capture its control. If one decides to quit, one must obtain the best price for one's holding, under and over the table, partly in rupees and partly in foreign exchange. Then, the tax laws and the foreign exchange regulations look on helplessly, because law cannot operate in a vacuum and it is notorious that in such cases evidence is not easy to obtain.

Alan Mackrael says in para. 20 of his reply affidavit in the company petition that it was made clear to Devagnanam that neither Coats nor the Needle Industries (U. K.) would ever be a party to any transaction which was illegal under the Indian law. In a letter dated May 24, 1976, to Devagnanam, A. D. Jackson of NEWEY has this to say:

"In broad terms the proposition is that Alan Mackrael, Martin Henry and myself should meet with you in Malacca during September to discuss arrangements whereby an Indian gentleman known to Coats would purchase both your shares and our own share of the NINH holding in the manner which I outlined to you on the telephone. In order to provide a base for the calculations, Kingsley is to be asked to obtain the government approved price but, of course, the basis of our discussions has been that the actual payment will be higher than this".

In the same letter, Jackson, after warning that Coats/Needle Industries (U. K.) are "certainly not going to relinquish control of Ketty without a major struggle", proceeds to describe the helpless condition of NEWEY by saying that in the financial position in which they found themselves, they were "in no state to do battle with this particular giant". Leaving aside the determination of Coats to engage in a major struggle with NIIL's board of directors, Jackson's letter leaves no doubt that Coats were willing to be a party to the arrangement whereby the shares of Devagnanam and NEWEY would be sold to an "Indian gentleman", under which the actual payment would be higher than the Government approved price ascertained by Kingsley, the secretary of NIIL. This is doubtful ethics which justifies Shri Nariman's argument that he who comes into equity must come with clean hands; if he does not, he cannot ask for relief on the ground that the other man's hands are unclean. The "Notes on further Indianization" made by Devagnanam on April 29, 1975, at a time when the relations between the parties were not under a strain, show that N. T. Sanders who was nominated by the Holding Company as a director of NIIL was "aware of an inquiry from a Mr. Khaitan". This shows that Devagnanam was not trying to dispose of his shares secretly to Khaitan and Coats were aware of that move.

In para. 20 of his reply affidavit, Alan Mackrael says that none of the proposals put forward by the Holding Company for achieving Indianization to comply with the requirements of the FERA would have given the control of NIIL to the Holding Company. This is falsified by Raeburn's letter dated October 25, 1976, to Devagnanam, in which he says that the idea of an outside independent party holding 15% of the share capital of NIIL was raised, but this did not appear to be acceptable to Coats since "they want to achieve not only that the present Indian shareholders hold a minority but that they (Coats) hold and influence a substantial block, thereby hoping to influence NEWEY, to their views". Thus, there is a wide difference between what Coats practised earlier and pleaded later. Towards the end of para. 21, Mackrael asserts that the shareholders of the Holding Company, namely, Coats and NEWEY, were unanimous in the filing of the company petition and the prosecution of the proceedings following upon it, which is said to be clear from the fact that two powers of attorney were attested by the directors of the Holding Company, both of whom were directors of NEWEY also. The fact that Coats and NEWEY were not of one mind is writ large on the face of these proceedings and, in fact, the charge against NEWEY is that because of their Far-Eastern interests in which Devagnanam was a great asset to them, they were supporting Devagnanam. We may in this connection draw attention to a letter dated June 8, 1977, by Raeburn to Mackrael, saying that the insistence of Coats ("Glasgow") to hold on to the 60% shareholding in NIIL or at least to ensure that 60% did not get into the hands of the Indian shareholders will involve a long and costly legal battle. Raeburn proceeds to say:

"We, as Neweys, have neither the will nor the means to participate in that battle, nor do we think it right to do so bearing in mind the legal position regarding Indianisation, the provision in the articles and the fact that substantially the modern business of N.I.I.L. has been built up by the efforts of the present Indian shareholders".

In para. 5 of the aforesaid; letter, Raeburn clarifies the attitude of NEWEY by saying that if Coats were unable to agree to the arrangement suggested by NEWEY, then, NEWEY will be compelled to notify to those concerned in India that they can no longer be parties to the power-of-attorney granted by the Holding Company to Mackrael or to any other proceedings in the Indian courts. In spite of this letter of Raeburn (dated June 8, 1977), Mackrael had the temerity in his reply affidavit dated July 8, 1977, to say that Coats and NEWEY were unanimous in the prosecution of the proceedings consequent upon the filing of the company petition. There was no agreement between Coats and NEWEY either in regard to Indianisation of NIIL or in regard to the legal proceedings instituted to challenge the issue of rights shares.

There are many other contradictions on material points between the actual state of affairs and what Coats represented them to be, but we consider it unnecessary to cover the whole of that field. We will refer to one of these only, in order to show how difficult it is to choose between Coats and Devagnanam. In para. 19 of the company petition, which is sworn to by Mackrael, it is stated that Devagnanam was in U.K. some time towards the end of March, 1977, and that he held several discussions with the representatives of the Holding Company. In para 40 of his reply affidavit, Mackrael says that as to the contents of para. 19 of the company petition, he himself was not present at such meeting, since it was a meeting between Devagnanam and the officials of NEWEY for the purpose of discussing matters concerning NEWEY's Far-Eastern interests. The verification clause of Mackrael's affidavit in support of the company petition shows that the contents of para. 19 are based on information which he believed to be true. A clearer contradiction between the parent petition and the reply affidavit is difficult to imagine. It would appear that it was not until quite late that Coats realised that they had to plead all ignorance of the discussions which were held in U.K. towards the end of March, 1977, between Devagnanam and the representatives of the Holding Company.

We will now shift our attention to another scene in order to show how unethical the Coats are. Coats' subsidiary called the Central Agency Ltd., who were sole selling agents of NIIL's products in various markets in the world, ceased to be so after NIIL put an end to the agreement with them. The Central Agency never applied during the time that they were sole selling agents of NIIL's products, for the registration of the Indian company's trade-marks as a protective measure. The learned trial judge, Ratnaprasada Rao, Acting C.J., delivered the judgment in the company's petition on May 17, 1978. Immediately, thereafter, Application No. 34991 of 1978 was filed by the Japanese trade-marks agents of Needle Industries, U.K., for registration of the trade-marks "Pony" and "Rathna", which were the registered Indian trade-marks of NIIL. That application was made under the authority of a power-of-attorney signed by Alan Mackrael. In June, 1978, Application No. 102987 was filed in Thailand on behalf of the Needle Industries, U.K. as owners of the trade-mark "Pony" which is clear from the trade-mark attorney's letter dated January 22, 1979. In October, 1978, Coats Patons, Hong Kong, got the Indian company's trademark "Pony" registered. In November, 1978, the trade-mark agents and solicitors of NIIL in Hong Kong had to give a notice to Coats Patons, Hong Kong, that the latter had registered the "Pony" trade-mark in Hong Kong with the full knowledge that NIIL was the legal owner of that trademark and threatening legal action. As a result of that notice, the Indian company's trade-mark "Pony" which was registered by Coats Patons in Hong Kong as their own trade-mark, was assigned to the Indian company on December 21, 1978, for a nominal sum of 10 dollars. Items 7 and 8 of the minutes dated March 28, 1979, of the meeting of the interim board of directors of NIIL refer to the registration in Hong Kong by Coats Patons of the Indian trade-mark of NIIL and the subsequent assignment thereof to NIIL when legal action was threatened. Harry Bridges, who was appointed as a temporary managing director by the High Court, has stated in his counter-affidavit dated March 27, 1980, that the application for registration of the "Pony" trade-mark was made in Hong Kong and other places in order to protect that trade-mark from its improper use by other traders. This is a lame explanation of an act of near piracy. Were this explanation true, the application for registration of the trade-mark would have mentioned that it was being filed on behalf of NIIL, and that "Pony" was in fact the trade-mark of NIIL. It is quite amazing that anyone should claim that the registration of the trade-mark was being sought as a protective measure when a battle royal was raging between the Holding Company and NIIL and after the trial court had delivered its judgment. We may mention that by a letter dated June 15, 1977, Mackrael had informed Devagnanam that he was removed from the board of directors of the Holding Company and M.D.P. Whiteford was appointed in the vacancy. The fact that Needle Industries, U.K., had surreptitiously made an application for the registration of NIIL's trade-mark "Pony" came to light fortuitously in January, 1979, when NIIL applied for the registration of the "Pony" trade-mark in Thailand and Japan. NIIL's trade-mark agents there found, on inspection of the registers, that certain applications made by Needle Industries, U.K., claiming the same mark as their own, were pending consideration.

The decision, in appeal, of the High Court appointing Harry Bridges as a managing director for 4 months was pronounced on October 26, 1978. As a managing director appointed by the court, Bridges called a board meeting of the other members of the board appointed by the appellate court, for November 2, 1978. Bridges took away many files, documents and statements from the NIIL's factory at Ketty on October 28, 1978, his explanation being that he wanted to carry these documents to Madras where the board meeting was to be held. A little before Bridges left Ketty for Madras, he was informed that this court had passed an interim order on November 1, 1978. Consequently, the meeting of the 2nd November did not take place. Bridges says that when it became clear that he was no longer required to act as a managing director of NIIL, he took the earliest opportunity of returning the documents which he had taken from the office of the factory at Ketty.

It is understandable that Bridges wanted to take with him certain documents to help him perform his functions as a managing director in the meeting of November 2, 1978. But it is surprising that, in addition to the documents which Bridges returned on November 8, he had taken with him several other documents which he returned when pressed to do so. He took away with him, (1) design drawing, (2) statistical returns, (3) the master budget summary, 1978, (4) cash forecast for 1978-79, (5) detailed project report with cash flow forecast, (6) details of project investment, and (7) note on activity up to October, 1978, and one or two other documents. These were eventually returned by the Holding Company's advocate, Shri Raghavan. When NIIL wrote on November 21, 1978, to Shri Raghavan asking him to call upon Bridges to confirm that he had not retained copies of any of the documents which he had removed from Ketty, Bridges replied by his letter dated November 29, 1978, that he had taken copies of such documents which he considered relevant and that he proposed to retain such copies since "as director of the company, I am entitled to peruse and take copies of whatever records I choose". This is a wee bit high and mighty. The design drawing is not the drawing of a bungalow (with a swimming pool) which was being built for Devagnanam but it is a "ring spring fastener tool design". The other documents which Bridges had taken away and of which he got copies made in assertion of his directorial right, contain important matters like details of production, sales and exports of NIIL's products, orders outstanding and sales, the proposed additional turnover and the working capital requirements, etc. The fact of Harry Bridge's taking away these documents and making copies thereof for his own use leaves not the slightest doubt that the motivation of Coats at all times was to advance their own world interests at the expense of NIIL. In the background of such conduct, it becomes difficult to appreciate the Holding Company's contention, so strongly pressed upon us, that Coats, NEWEY and Devagnanam being in the position of partners, the greatest good faith and probity were expected to be displayed by them. The contention, as a bald proposition of law, is sound. The snag is: who should harp upon it? Not Devagnanam, we agree. But, not Coats either, we think.

We have said, while discussing the conduct of Devagnanam, that it would be difficult to accept his word unless there is support forthcoming to it from other circumstances on the record. We feel the same about Coats. It would be equally unsafe to accept their word unless it finds support from the other facts and circumstances on the record of the case. It is true that in saying this, we have partly taken into account facts which came into existence after the company petition was filed. But those facts do not reflect a new trend or a new thinking on the part of Coats, generated by success in the litigation. Finding that they had succeeded in the High Court, Coats took courage to pursue relentlessly their old attitude with the added vigour which success brings.

On the question of oppression, there is a large mass of correspondence and other documentary evidence on the record before us. We shall have to concentrate on the essentials by separating the chaff from the grain. In the earlier part of this judgment we have already referred to the course of events generally, which culminated in the meetings of NIIL's board of directors, held on April 6, and May 2, 1977. We propose now to refer to these events selectively.

The FERA having come into force on January 1, 1974, D. P. Kingsley, the secretary-director of NIIL, applied on September 3, 1974, to the Reserve Bank for the necessary permission under s. 29(2) of that Act. The Reserve Bank intimated to NIIL by its letter dated November 5, 1975, that permission would be accorded to NIIL under s. 29(2)(a) read with s. 29(2)(c) of the FERA to carry on its activities in India subject to the conditions enumerated in para. 2 of the letter. One of the conditions mentioned in the aforesaid paragraph was that the non-resident interest in the equity capital must be reduced to a level not exceeding 40%, within a period of one year from the date of receipt of the letter. The Reserve Bank asked NIIL to submit a scheme within a period of three months, showing how it proposed to achieve the required reduction in the non-resident interest; "(a) whether by disinvestment by non-resident shareholders, or (b) whether by issue of additional equity capital to Indian residents to the extent necessary to finance any scheme of expansion/diversification, or (c) by both". Kingsley wrote a letter to Mackrael on November 19, 1975, enclosing therewith a copy of the letter of the Reserve Bank dated November 5. On February 4, 1976, Kingsley wrote to the Reserve Bank that NIIL was prepared to agree to reduce the non-resident interest in the equity capital to a level not exceeding 40% and that the company was proposing to bring this about by disinvestment though, depending upon future developments, the company reserved its right to reduce the nonresident interest by issue of additional equity capital to Indian shareholders. Kingsley requested the bank to extend the stipulated time of one year in case NIIL was not able to comply with the bank's directive by reason of circumstances beyond its control. A copy of this letter dated February 4, 1976, was sent by Kingsley to Whitehouse, the secretary of the Holding Company. It is significant that there was no response as such to this communication, from the Holding Company. On May 11, 1976, the Reserve Bank of India sent a letter to NIIL granting permission to it under the FERA to carry on its business on certainconditions, one of them being that the non-resident interest in the equity capital had to be reduced to a level not exceeding 40% within a period of one year from the date of receipt of the letter. The Reserve Bank stated in the aforesaid letter that until such time as the non-resident interest was not reduced to 40%, the manufacturing activity of the company shall not exceed such capacity as was validly approved or recognised by the appropriate authority on December 31, 1973, and that the company shall not expand its manufacturing activities beyond the level so approved or recognised. It is clear from this letter that all developmental activities of NIIL stood frozen as of the date December 31, 1973, until the non-resident interest was reduced to 40%. The Reserve Bank stated further in the letter that NIIL should submit quarterly reports to it indicating the progress made in implementing the reduction of the non-resident interest and that the transfer of shares from non-residents to Indian residents would be required to be confirmed by the Reserve Bank under s. 19(5) of the FERA. The letter of the Reserve Bank was received by NIIL on May 17, 1976, which meant that the reduction of the non-resident interest had to be achieved by May 17, 1977.

It shall have been seen that by the time the permission was granted by the Reserve Bank to NIIL in May 1976, the FERA had been in force for a period of about 2½ years. A period of one year and eight months had gone by since the filing by NIIL of the application for dilution of the non-resident interest. Over and above that, the Reserve Bank had granted a long period of one year for bringing about the dilution of the non-resident interest. It is true that public authorities are hot generally averse, in the proper exercise of their discretion, to extending the time limit fixed by them, as and when necessary. But an elementary sense of business prudence would dictate that the time schedule fixed by the Reserve Bank had to be complied with. The firm tone of the Reserve Bank's letter conveyed that it would not be easy to obtain an extension of time for complying with its directive, while the stringent conditions imposed by it, particularly in regard to future developmental activities, dictated an early compliance with the directive.

Kingsley sent a letter to the Reserve Bank on May 18, 1976, confirming the acceptance of the various conditions under which permission was granted to NIIL to carry on its business. Kingsley pointed out a difficulty in implementing one of the conditions regarding the sale of petroleum products, but the Reserve Bank by its letter dated May 29, 1976, informed him that after a careful consideration of the request, the bank regretted its inability to enhance the ceiling on the turnover from the company's trading activity, as stipulated in the letter dated May 11, 1976.

In the meeting of the board held on October 1, 1976, Devagnanam's appointment as managing director was renewed for a further period of five years. Raeburn, Chairman of NEWEY, who was looking after the affairs of the Holding Company, wrote to Devagnanam on October 4, 1976, complaining that it was necessary that the Holding Company should be kept informed in ample time of the board's meetings on important organisational matters.

Raeburn and Mackrael came to India to discuss the question of dilution of the non-resident holding in NIIL. A meeting was held at Ketty on October 20 and 21, 1976, in which the U.K. shareholders were represented by Mackrael and Raeburn and the Indian shareholders by Devagnanam and Kingsley. Silverston took part in the meeting as an adviser to the Indian shareholders. Martin Henry, the managing director of Madura Coats which is an Indian company in which the Needle Industries (U.K.) and Coats have substantial interest, attended the meeting and took part in the discussions. A note of the discussions which took place at Ketty on October 20 and 21 was prepared by Raeburn and forwarded along with a letter dated November 10, 1976, to Devagnanam, with copies to Mackrael, Newey, Jackson and Whitehouse. Paragraph 2 of this note, which is important, says:

"It was agreed that Indianization should be brought about by May, 1977, as requested by Government, so as to achieve a 40% U.K. and 60% Indian shareholding".

The main features of the discussions which took place in the Ketty meeting are these:

(1) Mackrael and Martin Henry suggested acceptability of Madura Coats as holding part of the 60% of the equity to be held by Indian share-holders. The latter "saw no reason to give up the right which the Indianization legislation, combined with the company's articles, conferred upon them and, therefore, they insisted on taking up the whole of their entitlement to 60% of the equity". Silverston, who. was an Englishman by nationality and a solicitor by profession in India and was acting as an adviser to the Indian shareholders in the Ketty meeting, plainly and rightly pointed out that the Government's approval of a holding by Madura Coats of 15% of NIIL shares would be unlikely, because by that method Coats would, indirectly and effectively with NEWEY, hold over 40%, approximately 46%, share in NIIL. It is apparent that this would have been a clear violation of the FERA.

(2) To allay the concern of U.K. shareholders when they became in minority, by the Indian shareholders coming to hold 60%, some safe guards were suggested which, amongst others, were: (i) the articles of the company could be altered only by a special resolution which requires a 75% majority of the members voting in person or by proxy. Thus, either group of the shareholders could prevent the sale of shares to any one not approved; (ii) the board could be reconstructed as mentioned in para. 4.3 of the note to give the U.K. shareholders sufficient safeguards and hand in the management of the Indian company.

(3) The preferred method of transferring 20% of the equity to Indian shareholders was thought to be by sale by U.K. members of the appropriate number of shares at the price to be determined by the Government and the advice to be taken from Price Waterhouse in this regard. As an alternative it was suggested that a rights issue, with the Indian share holders taking up the U.K. members' rights would also be considered, provided it was demonstrated by Ketty that there was a viable development plan requiring funds that the expected NIIL cash flow could not meet. The value of the U.K. equity interest thus transferred was not to be less favourable than by a direct sale of shares.

(4) Approval was given in principle to the renewal of the contract of Devagnanam as managing director of NIIL. Devagnanam agreed to devote adequate time to the affairs of Ketty and was authorised to continue to supervise the NEWEY affairs in Hong Kong and Malacca.

At the resumed discussion on October 21, 1976, both sides stuck to their stand. Devagnanam was insistent that he will "not accept on behalf of the Indian shareholders anything less than the full entitlement of 60% of the shares", while Mackrael, equally insistent, "could not accept on behalf of NI/Coats that the full 60% be held by the present Indian shareholders, even with the safeguards and assurances discussed previously".

The Ketty meeting thus ended in stalemate, both sides insisting on what they considered to be their right and entitlement. Raeburn attempted to play the role of a mediator but failed. In this situation, the parties decided to give further consideration to the matter and to adhere to the following time-table:

"Mid-December

TAD (Devagnanam) to submit to the U.K. shareholders the decision reached by the Indian shareholders both as regards the 60% and the case, if any, for a rights issue.

Mid-January

U.K. shareholders to decide on their reaction to the Indian shareholders' decision".

Silverston conveyed to Kingsley his regret that the Ketty meeting could produce no outcome because of the attitude of Coats who wanted to put pressure on the directors of NIIL by giving 15% of the shareholding to Madura Coats and thereby avoiding the provisions of the FERA. This reaction of Silverston finds support in the reaction of Raeburn himself, which he described in his letter dated October 23, 1976, to Devagnanam. Raeburn says in that letter that he had learnt from Martin Henry that Coats were keen to introduce Prym technology in India in their Madura Coats factory. It may be mentioned that the Prym technology when introduced in Madura Coats would have created a direct competition between it and NIIL. It would also appear from Devagnanam's letter of October 21, 1976, to Jackson that Coats were intending to start an Engineering Division at Bangalore for the manufacture of Dynecast and Prym products with an investment to the tune of Rs. 3,00,00,000 (rupees three crores). Compared with that, the interest of Coats in NIIL was just about Rs. 10 lakhs even if the shares of NIIL were to be valued at Rs. 190 per share.

Devagnanam wrote a letter dated December 11, 1976, to Raeburn, informing him that they had just closed the board's meeting in which the principal subject of discussion was "Indianization". Devagnanam expressed resentment of himself and his colleagues that after they had faithfully served the Holding Company for almost the whole of their working lives, the Holding Company should be unwilling to accept them as partners, especially when they were legally entitled to be so considered. Devag-nanam made it clear in this letter that any attempt by Coats to retain an indirect control in the management of NIIL will not be acceptable to the Indian shareholders.

Then comes the important letter of December 14, 1976, which was written by Devagnanam to Raeburn. Devagnanam informed Raeburn by that letter that he had further discussions with his colleagues and was able to persuade them to agree to a kind of package deal. The terms of the deal so suggested were: "(1) Indianization should take place with the existing Indian shareholders acquiring 60% of the stock; (2) Mackrael and Raeburn should be taken on NIIL's board as directors, but in no event Martin Henry who was connected with Madura Coats which had a powerful plan of development of Prym technology; (3) the Indian shareholders were prepared to take B. T. Lee, a senior executive of Needle' Industries/ Coats, Studley, as a permanent wholetime director of NIIL to be put specifically in charge of exports". Some other suggestions were made by Devagnanam to show the bona fides of the Indian shareholders and to alleviate the apprehensions in the minds of the U.K. shareholders. Devagnanam asked Raeburn to convey his reactions in the matter. This letter has been gravely commented upon by the Holding Company on the ground that it did not comtemplate the issue of rights shares. We are unable to see the validity of this criticism. There is not the slightest doubt that the Indian shareholders were insisting all along that they should become the owners of 60% of the equity capital of NIIL. A simple method of bringing this about was thetransfer by the Holding Company of 20% of its shareholding to the existing Indian shareholders. It was only when this plain method of bringing about a reduction in the equity holding failed and the deadline fixed by the Reserve Bank was drawing nearer, that the Board of NIIL decided upon the issue of rights shares, which was the only other alternative that could be conceived of for reducing the non-resident interest. The issuance of rights shares, after all, was not like a bolt from the blue. In any event, it was mentioned in the Ketty meeting.

On December 20, 1976, Silverston wrote a letter to Raeburn saying that he would be proceeding to the U.K. early in January in connection with his personal matters and that he would then visit Raeburn also. Silverston stated candidly in the letter that the situation which was developing between the U.K. and the Indian shareholders, if allowed to continue, could do much damage to the British interest and "as one who is still concerned with the interests of British industry, I feel I cannot sit by and allow matters to deteriorate to their detriment, without making some attempt towards bringing the issues between the parties to a fair conclusion". Raeburn wrote to Kingsley on January 14, 1977, stating that he had a discussion with Silverston a couple of days back, during which Silverston had stated clearly the legal position and given his advice upon it. In the last para, of this letter, Raeburn said:

"We have now put our views quite clearly to Mr. Mackrael and we are awaiting the reaction of Needle Industries and Coats. Therefore, I am hoping, but I cannot be sure of this, to be able to let you know fairly soon what the formal decision of the U.K. shareholders is".

It needs to be emphasised, especially since its importance was not fully appreciated by the appellate bench of the High Court, that the Indian point of view was communicated with the greatest clarity to Raeburn in Devagnanam's letter dated December 14, 1976, which was within the time schedule which was agreed to be adhered to in the Ketty meeting. The views of the U.K. shareholders were most certainly not communicated to the Indian shareholders by the middle of January, 1977, as was clearly agreed upon in the Ketty meeting. In fact, they were never communicated.

On January 20, 1977, the Reserve Bank sent a reminder to NIIL. After referring to the letter of May 11, 1976, the Reserve Bank asked NIIL to submit at an early date the progress report regarding dilution of the non-resident interest. In reply, a letter dated February 21, 1977, was sent by NIIL to the bank, stating:

"We confirm that we are following up the matter regarding dilution of non-resident interest and we confirm our commitment to achieve the desired Indianisation by the stipulated date, i. e., 17th May, 1977".

It is very important to note that a copy of this letter was forwarded both to Whitehouse and Sanders. They must at least be assumed to know that not only was Indianisation to be achieved by May 17, 1977, but that NIIL had committed itself to do so by that date.

It is contended by Shri Seervai that the negotiations with Coats had in fact not come to an end and that Coats were never told that the compromise talks will be regarded as having failed. It is urged that Coats were all along labouring under the impression, and rightly, that the compromise proposals which were discussed with Raeburn in the meeting of March 29-31, 1977 in U.K., would be placed by Devagnanam before the Indian shareholders, and the U.K. shareholders apprised whether or not the proposals were acceptable.

Shri Seervai relies strongly on a letter dated March 9, 1977, written by Raeburn to Devagnanam. After saying that on the Friday preceding the 9th March, he had discussions with Mackrael and three high-ranking personnel of Coats, Raeburn says in that letter that Coats had refused to agree that the Indian shareholders should acquire a 60% shareholding in NIIL, that this had created a new situation and that he was appending to the letter an outline of what he believed, but could not be sure, would be agreeable to Coats/Needle Industries. Raeburn stated further in that letter:

"I know that all this will be difficult for you and your fellow Indian shareholders, but I urge you to support this view and get their acceptance, and to come here to be able to negotiate. If these or similar principles can be agreed during your visit, I have no doubt that the detailed method can be quickly arranged".

Raeburn stated that the proposal annexed to the letter had not been agreed with Coats but he, on his own part, believed that Coats could be persuaded to agree to it. Stated briefly, the proposal annexed by Raeburn to his letter aforesaid involved: (i) the existing Indian shareholders holding 49% of the shares, (ii) new Indian independent institutional shareholders holding 11% of the shares, and (iii) the existing U.K. shareholders either directly or indirectly, holding 40% of the shares. The proposed board of directors was to consist of representatives of the shareholders appointed by them thus:

"Existing Indian shareholders 3, New independent Indian shareholders 1, existing U.K. shareholders 2, and an independent Indian Chairman acceptable to all parties".

It is contended by Shri Seervai that these proposals are crucial for more than one reason, since, in the first place the proposal to increase the holding of the existing Indian shareholders to 49% and the offer of 11% to new Indian independent institutional shareholders was inconsistent with the charge that Coats wanted to retain control over NIIL, directly or indirectly. The second reason, why it is said that the proposal is crucial is that Raeburn's letter of March 9, must have been received by Devagnanam before March 14 since it was replied to on the 14th. Therefore, contends Shri Seervai, the negotiations between the parties were still not at an end. Counsel says that it was open to Devagnanam to refuse to negotiate on the terms suggested and insist that the Indian shareholders must have 60% of the shares. Instead of conveying his reactions to the proposal Devagnanam, it is contended, went to the United Kingdom to discuss the question. The minutes of the discussions which took place in U.K., Mackrael and Sanders not taking any part therein, show that NEWEY continued to plead that the Indian shareholders and Coats should consider the compromise formula and that Devagnanam undertook to put to the Indian shareholders further proposals for compromise and to consider what other proposals or safeguards they might suggest. Reliance is also placed by counsel on a letter which Devagnanam wrote to Raeburn on April 5, in support of the submission that the negotiations were still not at an end. The last but one para of that letter reads thus:

"As undertaken, I shall place the compromise formula, very kindly suggested by you, before my colleagues later today. We shall discuss it fully at the board meeting tomorrow and I shall communicate the outcome to you shortly thereafter".

We are unable to agree that the proposal annexed to Raeburn's letter of March 9, 1977, was either a proposal by or on behalf of Coats or one made with their knowledge and approval. Were it so, it is difficult to understand how Raeburn could write to Mackrael on June 8, 1977, that Coats were still insistent on the entire 20% of the excess equity holding not going to the existing Indian shareholders. There is also no explanation as to why, if the proposal annexed to Raeburn's letter of March 9, was a proposal by or on behalf of Coats, Raeburn said at the U.K. meeting of March 29-31, 1977, that it was better to "let Coats declare their hand". It is indeed impossible to understand why Coats, on their own part, did not at any time communicate any compromise proposal of theirs to the Indian shareholders directly. They now seem to take shelter behind the proposal made by Raeburn in his letter of March 9, adopting it as their own. Even in the letter which Crawford Bayley & Co., wrote on June 21, 1977, on behalf of Sanders to the Reserve Bank of India, no reference was at all made to any proposal by or on behalf of Coats to the Indian shareholders. The vague statement made in that letter is that "certain proposals" were being considered and would be submitted "shortly" before the authorities. No such proposals were ever made by the solicitors or their client to anyone.

These letters and events leave no doubt in our mind that the negotiations between the parties were at an end and that there were no concrete proposals by or on behalf of Coats which remained outstanding, to be discussed by the Indian shareholders. To repeat, Devagnanam declared his hand in his letter of December 14, 1976, by reiterating beyond any manner of doubt, that nothing less than 60% share in the equity capital of NIIL would be acceptable to the Indian shareholders. Coats never replied to that letter nor indeed did they convey their reaction to it in any other form or manner at any time. In fact, it would be more true to say that Coats themselves treated the matter as at an end, since, they were wholly opposed to the stand of the Indian shareholders that they (the Indian share holders) must have 60% share in equity capital of NIIL. What happened in the meeting of April 6, 1977, has to be approached in the light of the finding that the negotiations between the parties had fallen through, that Coats had refused to declare their hand and that all that could be inferred from their attitude with a fair amount of certainty was that they were unwilling to disinvest.

On March 18, 1977, NIIL's secretary gave a notice of the board meeting for April 6, 1977. The notice was admittedly received by Sanders in U.K., well in time but he did not attend the meeting. The explanation for his failure to attend the meeting is said to be that the item on the agenda of the meeting, "policy—Indianisation" was vague and did not convey that any matter of importance was going to be discussed in the meeting, like for example, the issue of rights shares. We find it quite difficult to accept this explanation. Just as a notice to quit in landlord-tenant matters cannot be allowed to be split on a straw, notices of board meetings of companies have to be construed reasonably, by considering what they mean to those to whom they are given. To a stranger, "policy—Indianisation" may not convey much but to Sanders and the U.K. shareholders it would speak volumes. By the time that Sanders received the notice, the warrings camps were clearly drawn on the two sides of the battle-line, the Indian group insisting that they will have nothing less than a 60% share in the equity capital of NIIL and the U.K. shareholders insisting with equal determination that they will not allow the existing Indian shareholders to have anything more than 49%. In pursuance of a resolution passed by the board, a letter had already been written to the Reserve Bank confirming the commitment of NIIL to achieve the required Indianisation by May 17, 1977. A copy of NIIL's letter to the Reserve Bank was sent to Sanders and Whitehouse. In view of the fact that to the common knowledge of the two sides there were only two methods by which the desired Indianisation could be achieved, namely, either disinvestment by the Holding Company in favour of the existing Indian shareholders or a rights issue, the particular item on the agenda should have left no doubt in the mind of the U.K. shareholders as to what the board was likely to discuss and decide in the meeting of the 6th. Disinvestment stood ruled out of consideration, a fact which was within the special knowledge of the Holding Company, since whether to disinvest or not was a matter of their volition.

After the despatch of the notice dated March 18, 1977, two important events happened. Firstly, Devagnanam went to Birmingham, where discussions were held from March 29-31, 1977, in which Indianisation of NIIL was discussed, as shown by the minutes of that discussion. NEWEY were willing to accept Indianisation, by the existing Indian shareholders acquiring a 60% interest in the share capital of NIIL while "COATS were adamantly opposed" to that view. It is surprising that during the time that Devagnanam was in Birmingham, Sanders did not meet him to seek an explanation of what the particular item on the agenda of the meeting of April 6 meant. Sanders had received the notice of March 18, before the Birmingham discussions took place, and significantly, he has made no affi-davit at all on the question as to why he did not meet Devagnanam in Birmingham, or why he did not attend the meeting of April 6, or what the particular item on the agenda meant to him.

The second important event which happened after the notice of March 18, was issued was that on April 4, 1977, NIIL received a letter dated March 30, 1977, from the Reserve Bank. The letter which was in the nature of a stern reminder left no option to NIIL's board except to honour the commitment which it had made to the Reserve Bank. By the letter the Reserve Bank warned NIIL: "Please note that if you fail to comply with our directive regarding dilution of foreign equity within the stipulated period, we shall be constrained to view the matter seriously".

We do not see any substance in the contention of the Holding Company that despite the commitment which NIIL had made to the Reserve Bank, the long time which had elapsed in the meanwhile and the virtual freezing of its developmental activities as of December 31, 1973, NIIL should have asked for an extention of time from the Reserve Bank. In the first place, it could not be assumed or predicated that the bank would grant extension; and, secondly, it was not in the interest of NIIL to ask for such an extension.

The board meeting was held as scheduled on April 6, 1977. The minutes of the meeting show that two directors, Sanders and M. S. P. Rajes, asked for leave of absence which was granted to them. Sanders, as representing the U.K. shareholders on NIIL's board, did not make a request for the adjournment of the meeting on the ground that negotiations for a compromise had not yet come to an end or that the Indian shareholders had not yet conveyed their response to the "Coats' compromise formula". Nor did he communicate to the Board his views on "policy— Indianisation", whatever it may have meant to him. Seven directors were present in the meeting, with Devagnanam in the chair at the commencement of the meeting. C. Doraiswamy, a solicitor by profession and, admittedly, an independent director, was amongst the seven. In order to complete the quorum of two "independent" directors, other directors being interested in the issue of the rights shares, Silverston was appointed to the board as an additional director under art. 97 of NIIL's articles of association. Silverston then chaired the meeting, which resolved that the issued capital of the company be increased to Rs. 48,00,000 by the issue of 16,000 equity shares of Rs. 100 each to be offered as rights shares to the existing shareholders in proportion to the shares held by them. The offer was decided to be made by a notice specifying the number of shares which each shareholder was entitled to, and in case, the offer was not accepted within 16 days from the date of the offer, it was to be deemed to have been declined by the shareholder concerned.

The aforesaid resolution of the board raises three important questions, inter alia, which have been pressed upon us by Shri Seervai on behalf of the Holding Company: (1) Whether the directors of NIIL, in issuing the rights shares, abused the fiduciary power which they possessed as directors to issue shares; (2) Whether Silverston was a "disinterested director"; and (3) Whether Silverston's appointment was otherwise invalid, since there was no item on the agenda of the meeting for the appointment of an additional director. If Silverston's appointment as an additional director is bad, either because he was not a distinterested director or because there was no item on the agenda under which his appointment could be made, the resolution for the issue of rights shares which was passed in the board's, meeting of April 6 must fall because then, the necessary quorum of two disinterested directors would be lacking.

On the first of these three questions, it is contended by Shri Seervai that notwithstanding that the issue of shares is intra vires the directors, the directors' power is a fiduciary power, and although an exercise of such power may be formally valid, it may be attacked on the ground that it was not exercised for the purpose for which it was granted. It is urged that the issue of shares by the directors which is directed to affect the right of the majority of the shareholders or to defeat that majority and convert it into a minority is unconstitutional, void and in breach of the fiduciary duty of directors, though in certain situations it may be ratified by the company in the general meeting. Any reference by the company to a general meeting in the present case, it is said, would have been futile since, without the impugned issue of rights shares, the majority was against the issue. It was finally argued that good faith and honest belief that in fact the course proposed by the directors was for the benefit of the shareholders or was bona fide believed to be for their benefit is irrelevant because, it is for the majority of the shareholders to decide as to what is for their benefit, so long as the majority does not act oppressively or illegally. Counsel relies in support of these and allied contentions on the decision of the Privy Council in Howard Smith Ltd. [1974] AC 821 (PC) and of the English courts in Fraser [1864] 71 ER 361, Punt [1903] 2 Ch 506 (Ch D), Piercy [1920] 1 Ch 77 (Ch D) and Hogg [l967] 1 Ch 254; 37 Comp Cas 157 (Ch D).

In Punt v. Symons [1903] 2 Ch 506 (Ch D), which applied the principle of Fraser v. Whalley, it was held that:

"Where shares had been issued by the directors, not for the general benefit of the company, but for the purpose of controlling the holders of the greater number of shares by obtaining a majority of voting power they ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used".

But Byrne J. stated:

"There may be occasions when directors may fairly and properly issue shares in the case of a company constituted like the present for other reasons. For instance it would not be at all an unreasonable thing to create a sufficient number of shareholders to enable statutory powers to be exercised".

In the instant case, the issue of rights shares was made by the directors for the purpose of complying with the requirements of the FERA and the directives issued by the Reserve Bank under that Act. The Reserve Bank had fixed a deadline and NIIL had committed itself to complying with the bank's directive before that deadline.

Peterson J. applied the principle enunciated in Fraser [1864] 71 ER 361 and in Punt [1903] 2 Ch 506 (Ch D) in the case of Piercy v. S. Mills & Company Ltd. [1920] 1 Ch 77 (Ch D). The learned judge observed at page 84:

"The basis of both cases is, as I understand, that directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs 6f the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders".

The fact that by the issue of shares the directors succeed, also or incidentally, in maintaining their control over the company or in newly acquiring it, does not amount to an abuse of their fiduciary power. What is considered objectionable is the use of such powers merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company.

In Hogg v. Cramphorn Ltd. [1967] 37 Comp Cas 157 (Ch D), it was held that if the power to issue shares was exercised from an improper motive, the issue was liable to be set aside and it was immaterial that the issue was made in a bona fide belief that it was in the interest of the company. Buckley J. reiterated the principle in Punt [1903] 2 Ch 506 (Ch D) and in Piercy [1920] 1 Ch 77 (Ch D) and observed (p. 167 of 37 Comp Cas):

"Unless a majority in a company is acting oppressively towards the minority, this court should not and will not itself interfere with the exercise by the majority of its constitutional rights or embark upon an inquiry into the respective merits of the views held or policies favoured by the majority and the minority. Nor will this court permit directors to exercise powers, which have been delegated to them by the company in circumstances which put the directors in a fiduciary position when exercising those powers, in such a way as to interfere with the exercise by the majority of its constitutional rights; and in a case of this kind also, in my judgment, the court should not investigate the rival merits of the views or policies of the parties". (p. 268)

Applying this principle, it seems to as difficult to hold that by the issue of rights shares the directors of NIIL interfered in any manner with the legal rights of the majority. The majority had to disinvest or else to submit to the issue of rights shares in order to comply with the statutory requirements of the FERA and the Reserve Bank's directives. Having chosen not to disinvest, an option which was open to them, they did not any longer possess the legal right to insist that the directors shall not issue the rights shares. What the directors did was clearly in the larger interests of the company and in obedience to their duty to comply with the law of the land. The fact that while discharging that duty they incidentally trenched upon the interests of the majority cannot invalidate their action. The conversion of the existing majority into a minority was a consequence of what the directors were obliged lawfully to do. Such conversion was not the motive force of their action.

Before we advert to the decision of the Privy Council in Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821 (PC), we would like to refer to the decision of the High Court of Australia in Harlowe's Nominees Pvt. Ltd. v. Woodside (Lakes Entrance) Oil Company No Liability [1968] 121 CLR 483 and to the Canadian decision of Berger J. of the Supreme Court of British Columbia, in the case of Teck Corporation Ltd. v. Millar [1972] 33 DLR (3d) 288, both of which were considered by Lord Wilber-force in Howard Smith [1974] AC 821 (PC). On a consideration of the English decisions, including those in Punt [1903] 2 Ch 506 (Ch D) and Piercy [1920] 1 Ch 77 (Ch D), Barwick C. J. said in Harlowe's Nominees (p. 493 of 121 CLR):

"The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fairly and properly issue shares for other reasons, so rang as those reasons relate to a purpose of benefiting the company as a whole, as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their friends. An inquiry as to whether additional capital was presently required is often most relevant to the ultimate question upon which the validity or the invalidity of the issue depends; but that ultimate question must always be whether in truth the issue was made honestly in the interests of the company".

We agree with the principle so stated by the Australian High Court and, in our opinion, it applies with great force to the situation in the present case. In Teck Corporation [1972] 33 DLR (3d) 288, the court examined several decisions of the English courts and of other courts, including the one in Hogg. [1967] 37 Comp Cas 157 (Ch D). The headnote of the last report (33 DLR (3d) 288) at page 289 reads thus:

"Where directors of a company seek, by entering into an agreement to issue new shares, to prevent a majority shareholder from exercising control of the company, they will not be held to have failed in their fiduciary duty to the company if they act in good faith in what they believe, on reasonable grounds, to be the interests of the company. If the directors' primary purpose is to act in the interests of the company, they are acting in good faith even though they also benefit as a result".

In Howard Smith [1974] AC 821 (PC), no new principle was evolved by Lord Wilberforce who, distinguishing the decisions in Teck Corporation [1972] 33 DLR (3rd) 288 and Harlowe's Nominees (121 CLR 483) said (p. 837 of [1974] AC):

"By contrast to the cases of Harlowe and Teck, the present case, on the evidence, does not, on the findings of the trial judge, involve any consideration of management, within the proper sphere of the directors. The purpose found by the judge is simply and solely to dilute the majority voting power held by Ampol and Bulkships so as to enable a then minority of shareholders to sell their shares more advantageously. So far as authority goes, an issue of shares purely for the purpose of creating voting power has repeatedly been condemned".

The dictum of Byrne J. in Punt [1903] 2 Ch 506 (Ch D) that "there may be reasons other than to raise capital for which shares may be issued" was approved at p. 836 and it was observed at p. 837:

"Just as it is established that directors, within their management powers, may take decisions against the wishes of the majority of shareholders, and indeed that the majority of shareholders cannot control them in the exercise of these powers while they remain in office (Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuningham [1906] 2 Ch 34 (CA)), so it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with that element of the company's constitution which is separate from and set against their powers. If there is added, moreover, to this immediate purpose, an ulterior purpose to enable an offer for shares to proceed, which the existing majority was in a position to block, the departure from the legitimate use of the fiduciary power becomes hot less, but all the greater. The right to dispose of shares at a given price is essentially an individual right to be exercised on individual decision and on which a majority, in the absence of oppression or similar impropriety, is entitled to prevail".

In our judgment, the decision of the Privy Council in Howard Smith [1974] AC 821 (PC), instead of helping the Holding Company, goes a long way in favour of the appellants. The directors in the instant case did not exercise their fiduciary powers over the shares merely or solely for the purpose of destroying an existing majority or for creating a new majority which did not previously exist. The expressions "merely", "purely", "simply" and "solely" virtually lie strewn all over (p. 837 of the report in Howard Smith). The directors here exercised their power for the purpose of preventing the affairs of the company from being brought to a grinding halt, a consummation devoutly wished for by Coats in the interest of their extensive world-wide business.

In Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] SCR 391; 20 Comp Cas 179, Das J., in his separate but concurring judgment deduced the following principle on the basis of the English decisions (p. 203 of 20 Comp Cas):

"It is well established that directors of a company are in a fiduciary position vis-a-vis the company and must exercise their power for the benefit of the company. If the power to issue further shares is exercised by the directors not for the benefit of the company but simply and solely for their personal aggrandisement and to the detriment of the company, the court will interfere and prevent the directors from doing so. The very basis of the court's interference in such a case is the existence of the relationship of a trustee and of cestui que trust as between the directors and the company". (pp. 419-420 of [1950] SCR)).

It is true that Das J. held that the Singhanias were complete strangers to the company and, consequently, the directors owed no duty, much less a fiduciary duty, to them. But we are unable to agree with the contention that the observations extracted above from the judgment of Das J. are obiter. The learned judge has set forth the plaintiffs' contentions under three sub-heads at p. 415 of 1950 SCR. At the bottom of p. 419, he finished the discussion of the 2nd sub-head and said:

"This leads me to a consideration of the third sub-head on the assumption that...the additional motive was a bad motive".

The question was thus argued before the court and was squarely dealt with. Before we leave this topic, we would like to mention that the mere circumstance that the directors derive benefit as shareholders by reason of the exercise of their fiduciary power to issue shares, will not vitiate the exercise of that power. As observed by Gower in Principles of Modern Company Law, 4th Edn., p. 578 :

"As it was happily put in an Australian case they are 'not required by the law to live in an unreal region of detached altruism and to act in a vague mood of ideal abstraction from obvious facts which must be present to the mind of any honest and intelligent man when he exercises his powers as a director'".

The Australian case referred to above by the learned author is Mills v. Mills [1938] 60 CLR 150, which was specifically approved by Lord Wilber-force in Howard Smith [1974] AC 821 (PC). In Nanalal Zaver [1950] SCR 391 20 Comp Cas 179 too, Das J. stated at p. 425, that the true principle was laid down by the Judicial Committee of the Privy Council in Hirsche v. Sims [1894] AC 654, 660-661 thus (p. 207 of 20 Comp Cas):

" 'If the true effect of the whole evidence is, that the defendants truly and reasonably believed at the time that what they did was for the interest of the company, they are not chargeable with dolus malus or breach of trust merely because in promoting the interest of the company they were also promoting their own, or because they afterwards sold shares at prices which gave them large profits' ".

Whether one looks at the matter from the point of view expressed by this court in Nanalal Zaver [1950] 20 Comp Cas 179 (SC), or from the point of view expressed by the Privy Council in Howard Smith [1974] AC 821, the test is the same, namely, whether the issue of shares is simply or solely for the benefit of the directors. If the shares are issued in the larger interest of the company, the decision to issue the shares cannot be struck down on the ground that it has incidentally benefited the directors in their capacity as shareholders. We must, therefore, reject Shri Seervai's argument that, in the instant case, the board of directors abused its fiduciary power in deciding upon the issue of rights shares.

The second of the three questions arising out of the proceedings of the board's meeting dated April 6, 1977, concerns the validity of the appointment of Silverston as an additional director. Under s. 287(2) of the Companies Act, 1956, the quorum for the said meeting of the board of directors was two. There can be no doubt that a quorum of two directors means a quorum of two directors who are competent to transact and vote on the business before the Board. (See Greymouth Point Elizabeth-Railway & Coal Co. Ltd., In re [1904] 1 Ch 32 (Ch D) and Palmer's Company Precedents, 17th Edn., p. 579, f.n. 3). The contention of the Holding Company is that Silverston was a director "directly or indirectly concerned or interested" in the arrangement or contract arising from the resolutions to offer and allot rights shares and, consequently, the resolutions were invalid: firstly, on the ground, that they were passed by a vote of an interested director without which there would be no quorum and, secondly, because, Silvers-ton's appointment as an additional director was for the purpose of enabling the said resolution to be passed for the benefit of the interested directors. Relying upon a decision of the Bombay High Court in Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd. [1971] 41 Comp Cas 377, Shri Seervai contends that s. 300 of the Companies Act embodies the general rule of equity that no person who has to discharge duties on behalf of a corporate body shall be allowed to enter into engagements in which he has a personal interest conflicting, or which may possibly conflict, with the interests of those whom he is bound to protect.

The reason why it is said that Silverston was interested in or concerned with the allotment of the rights shares to the existing shareholders is, firstly, because at the Ketty meeting held in October, 1976, he had acted as an "adviser to the Indian shareholders", and, secondly, because on October 25, 1976, he had written a letter to Kingsley purporting to convey his advice to the board of directors. That letter contains allegations against the directors of Needle Industries, U.K. and of Coats. In other words, it is contended, Silverston was hostile to Needle Industries, U.K., and to Coats, and no person in his position could possibly bring to bear an unbiassed or disinterested judgment on the question which arose between the Holding Company and the Indian shareholders as regards the issue of rights shares. It is also said that certain other aspects of Silverston's conduct, including his attitude in the meeting of the 6th April, show that he was an interested director.

We are unable to accept the contention that Silverston is an "interested" director within the meaning of s. 300 of the Companies Act. In the first place, it is wrong to attribute any bias to Silverston for having acted as an adviser to the Indian shareholders in the Ketty meeting. Silverston is by profession a solicitor and we suppose that legal advisers do not necessarily have a biassed attitude to questions on which their advice is sought or tendered. The fact that Silverston was received cordially in U.K. both by Raeburn and Mackrael when he went there in January, 1977, shows that even after he had acted as an adviser to the Indian shareholders it was not thought that he was in any sense biassed in their favour. Silverston's alleged personal hostility to Coats cannot, within the meaning of s. 300(1) of the Companies Act, make him a person "directly or indirectly, concerned or interested in the contract or arrangement" in the discussion of which he had to participate or upon which he had to vote. Section 300(1) disqualifies a director from taking part in the discussion of or voting on any contract or arrangement entered into or to be entered into by or on behalf of the company, if he is in any way concerned or interested in that contract or arrangement. Under s. 299(1) of the Companies Act:

"Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a metting of the board of directors".

The concern or interest of the director which has to be disclosed at the board meeting must be in relation to the contract or arrangement entered into or to be entered into by or on behalf of the company. The interest or concern spoken of by ss. 299(1) and 300(1) cannot be a merely sentimental interest of ideological concern. Therefore, a relationship of friendliness with the directors who are interested in the contract or arrangement or even the mere fact of a lawyer-client relationship with such directors will not disqualify a person from acting as a director on the ground of his being, under s. 300(1), an "interested" director. Thus, howsoever, one may stretch the language of s. 300(1) in the interest of purity of company administration, it is next to impossible to bring Silverston's appointment within the framework of that provision. In the Firestone [1971] 41 Comp Cas 377 (Bom), the solicitor-director was held to be concerned or interested in the agreement for the appointment of Kilachands as selling agents as he had a substantial shareholding in a private limited company of Kilachands. Besides, he was also a shareholder-director in various other concerns of Kilachands.

We must, accordingly, reject the argument that Silverston was an interested director, that, therefore, his appointment as an additional director was invalid and that, consequently, the resolution for the issue of rights shares was passed without the necessary quorum of two disinterested directors. We have already held that the resolution was not passed for the benefit of the directors. There is, therefore, no question of Silverston's appointment having been made for the purpose of enabling such a resolution to be passed.

The third contention, arising out of the proceedings of the meeting of 6th April, to the effect that Silverston's appointment as an additional director was invalid since there was no item on the agenda of the meeting for the appointment of an additional director is equally without substance. Section 260 of the Companies Act preserves the power of the board of directors to appoint additional directors if such a power is conferred on the board by the articles of association of the company. We are not concerned with the other conditions laid down in the section, to which the appointment is subject. It is sufficient to state that art. 97 of NIIL's articles of association confers the requisite power on the Board to appoint additional directors.

We do not see how the appointment of an additional director could have been foreseen before the 6th April, on which date the meeting of the board was due to be held. The occasion to appoint Silverston as an additional director arose when the board met on 6th April, with Devagnanam in the chair. Sanders was absent and no communication was received from or on behalf of the Holding Company that they had decided finally not to disinvest. They always had the right to such a locus poenitentiae. Were they to intimate that they were ready to disinvest, there would have been no occasion to appoint an additional director. That occasion arose only when the picture emerged clearly that the board would have to consider the only other alternative for reduction of the non-resident holding, namely, the issue of rights shares. It is for this reason that the subject of appointment of an additional director could not have, in the then state of facts, formed a part of the agenda. Silverston's appointment is, therefore, not open to challenge on the ground of want of agenda on that subject.

It is necessary to clear a misunderstanding in regard to the power of directors to issue shares. It is not the law that the power to issue shares can be used only if there is need to raise additional capital. It is true that the power to issue shares is given primarily to enable capital to be raised when it is required for the purposes of the company but that power is not conditioned by such need. That power can be used for other reasons as, for example, to create a sufficient number of shareholders to enable the company to exercise statutory powers [See Punt v. Symons & Co. [1903] 2 Ch 506 (Ch.D), or to enable it to comply with legal requirements as in the instant case. In Hogg v. Cramphorn [1967] 37 Comp Cas 157 (Ch D), Buckley J. (p. 267) agreed with the statement of law by Byrne J. in Punt. And so did Lord Wilberforce (p. 835) in Howard Smith [1974] AC 821 (PC) where he said s

"...it is, in their Lordships' opinion, too narrow an approach to say that the only valid purpose for which shares may be issued is to raise capital for the company. The discretion is not in terms limited in this way: the law should not impose such a limitation on directors' powers. To define in advance exact limits beyond which directors must not pass is, in their Lordships' view, impossible. This clearly cannot be done by enumeration, since the variety of situations facing directors of different types of company in different situations cannot be anticipated".

The Australian decision in Harlowe Nominees [1968] 121 CLR 483, 493 took the same view of the directors' power to issue shares. It was said therein:

"The principle is that although primarily the power is given to enable capital to be raised when required for the purposes of the company, there may be occasions when the directors may fairly and properly issue shares for other reasons, so long as those reasons relate to a purpose of benefiting the company as a whole, as distinguished from a purpose, for example, of maintaining control of the company in the hands of the directors themselves or their friends".

We have already expressed our view that the rights shares were issued in the instant case in order to comply with the legal requirements, which, apart from being obligatory as the only viable course open to the directors, was for the benefit of the company since, otherwise, its developmental activities would have stood frozen as of December 31, 1973. The shares were not issued as a part of a take-over war between the rival groups of shareholders.

The decision to issue rights shares was assailed on the ground also that the company did not, as required by the, Reserve Bank's letter dated May 11, 1975, submit any scheme indicating whether the reduction in the non-resident interest was proposed to be brought about by issue of additional equity capital to Indian residents to the extent necessary to finance any scheme of expansion or diversification. It is true that by the aforesaid letter, the Reserve Bank had asked NIIL to report to it as to how the company proposed to reduce the non-resident interest: whether by disinvestment by non-resident shareholders, or by issue of additional equity capital to Indian residents to the extent necessary to finance any scheme of expansion/diversification, or by both. We are, however, unable to read the bank's letter as requiring or asking the company not to issue the additional capital unless it was necessary to do so for financing a scheme of expansion or diversification. The Reserve Bank could not have intended to impose any such condition by way of a general direction in the face of the legal position, which we have set out above, that the power of the directors to issue shares is not conditioned by the need for additional capital. We are not suggesting that the Reserve Bank, in the exercise of its statutory functions, cannot ever impose such conditions as it deems appropriate, subject to which alone a new issue may be made. But, neither the wording of the bank's letter nor the true legal position justifies the stand of the Holding Company. The minutes of the Ketty meeting of October 20-21, 1976, saying that it was agreed that the rights issue, with the Indian shareholders taking up the U.K. members' rights, would be considered provided it was demonstrated by NIIL that "there is a viable development plan requiring funds that the expected NIIL cash flow cannot meet", cannot also justify the argument that the power of the company to issue rights shares was, by agreement, conditioned by the need to raise additional capital for a development plan. In fact, the occasion for consideration by the Holding Company of NIIL's proposal to issue rights shares did not arise, since the Holding Company virtually boycotted the meeting of April 6. Assuming for the sake of argument that there was any such understanding between the parties, the minutes of the meeting of April 6 show that the company needed additional capital for its expansion. The minutes say:

"As per the final budget for the year 1977, the working capital requirements amounted to nearly Rs. 100 lakhs and even after tapping the facilities that we will be entitled to obtain from the banking sector, we will be left with a gap of about Rs. 25 lakhs which can be met by only increasing equity capital and attracting deposits from public".

There is no reason to believe that this statement does not accord with the economic realities of the situation as assessed by the directors of the company.

Finally, it is also not true to say, as a statement of law, that the directors have no power to issue shares at par, if their market price is above par. These are primarily matters of policy for the directors to decide in the exercise of their discretion and no hard and fast rule can be, laid down to fetter that discretion. As observed by Lord Davey in Hilder v. Dexter [1902] AC 474, 480 (HL):

"I am not aware of any law which obliges a company to issue its shares above par because they are saleable at a premium in the market. It depends on the circumstances of each case whether it will be prudent or even possible to do so, and it is a question for the directors to decide".

What is necessary to bear in mind is that such discretionary powers in company administration are in the nature of fiduciary powers and must, for that reason, be exercised in good faith. Mala fides vitiate the exercise of such discretion. We may mention that, in the past, whenever the need for additional capital was felt, or for other reasons, NIIL issued shares to its members at par.

We are, therefore, of the opinion that Devagnanam and his group acted in the best interests of NIIL in the matter of the issue of rights shares and, indeed, the board of directors followed in the meeting of the 6th April a course which they had no option but to adopt and in doing which, they were solely actuated by the consideration as to what was in the interest of the company. The shareholder-directors who were interested in the issue of rights shares neither participated in the discussion of that question nor voted upon it. The two directors who, forming the requisite quorum, resolved upon the issue of rights shares were Silverston who, in our opinion, was a disinterested director and Doraiswamy, who unquestionably was a disinterested director. The latter has been referred to in the company petition, Mackrael's reply affidavit and in the Holding Company's memorandum of appeal in the High Court as "uninterested", "disinterested" and "independent". At a crucial time, when Devagnanam was proposing to dispose of his shares to Khaitan, Sanders asked for Doraiswamy's advice by his letter dated August 6, 1975, in which he expressed "complete confidence" in Doraiswamy in the knowledge that the Holding Company could count on his guidance. Disinvestment by the Holding Company, as one of the two courses which could be adopted for reducing the non-resident interest in NIIL to 40% stood ruled out, on account of the rigid attitude of Coats who, during the period between the Ketty meeting of October 20-21, 1976, and the Birmingham discussions of March 29-31, 1977, clung to their self-interest, regardless of the pressure of the FERA, the directive of the Reserve Bank of India and their transparent impact on the future of NIIL. Devagnanam and the disinterested directors, having acted out of legal compulsion precipitated by the obstructive attitude of Coats and their action being in the larger interest of the company, it is impossible to hold that the resolution passed in the meeting of April 6 for the issue of rights shares at par to the existing shareholders of the NIIL constituted an act of oppression against the Holding Company. That cannot, however, mark the end of the case because 2nd May has still to come and Shri Seervai's argument is that the true question before the court is whether the offer of rights shares to all existing shareholders of NIIL but the issue of rights shares to existing Indian shareholders only, constitutes oppression of the Holding Company.

That takes us to the significant, and if we may so call them, sordid happenings between April 6 and May 2, 1977. Devagnanam wrote a letter to Raeburn on April 12, 1977, stating that a copy of the Reserve Bank's letter dated March 30, 1977, was enclosed therewith. It was in fact not enclosed. Pursuant to the decision taken in the board's meeting of April 6, a letter of offer dated April 14 was prepared by NIIL. Devagnanam's letter to Raeburn dated April 12, (without a copy of the Reserve Bank's letter dated March 30) and the letter of offer dated April 14, were received by Raeburn on May 2, 1977, in an envelope bearing the postal mark of Madras dated April 27, 1977. The letter of offer which was posted to the Holding Company also bore the postal mark of Madras dated April 27, 1977, and that too was received in Birmingham on May 2, 1977. The letter of offer which was posted to one of the Indian shareholders, Manoharan, who was siding with Coats, was also posted in an envelope which bore the postal mark of Madras dated April 27, 1977. On April 19, 1977, a notice of the board's meeting for May 2, 1977, was prepared. One of the items of the agenda of the meeting was stated in the notice as "policy—(a) Indianisation, (b) Allotment of shares". The notice dated April 19, of the board's meeting for May 2, was posted to Sanders in an envelope which bore the postal mark of Madras dated April 27, 1977, and was received by him in Birmingham on May 2, 1977, after the board's meeting fixed for that date had already taken place.

It puts a severe strain on one's credulity to believe that the letters of offer dated April 14 to the Holding Company, to Raeburn and to Manoharan were posted on the 14th itself but that somehow they rotted in the post office until the 27th, on which date they took off simultaneously for their respective destinations. The affidavit of Selvaraj, NIIL's senior clerk in the despatch department, and the relevant entry in the outward register are quite difficult to accept on this point since they do not accord with the ordinary course of human affairs. Not only the three letters of offer abovesaid, but even the notice dated April 19, of the board meeting for May 2, was received by Sanders at Birmingham in an envelope bearing the Madras postal mark of April 27. Selvaraj's affidavit, apparently, supported by an entry in the outward register, that the envelope addressed to Sanders containing the notice of 19th April was posted on the 22nd is also difficult to accept. It takes all kinds to make the world and we do not know whether the NIIL's staff was advised astrologically that 27th April was an auspicious date for posting letters. But if only they had sought a little legal advice which, at least from Doraiswamy and Silverston, was readily available to them, they would have seen the folly of indulging in such behaviour. Add to that the circumstance that Devagna-n'am's letter to Raeburn dated April 12 was put in the same envelope in which the letter of offer dated April 14 was enclosed and the envelope containing these two important documents bore the postal mark of Madras dated 27th April. These coincidences are too tell-tale to admit of any doubt that someone or the other, not necessarily Devagnanam, unduly solicitous of the interest of NIIL and of the Indian shareholders manipulated to delay the posting of the letters of offer and the notice of the board meeting for 2nd May, until the 27th April. What is naively sought to be explained as a mere coincidence reminds one of the "Brides in the Bath Tub" case: The death of the first bride in the bath tub may pass off as an accident and of the second as suicide but when, in identical circumstances, the third bride dies of asphyxia in the bath tub, the conclusion becomes compelling, even applying the rule of circumstantial evidence, that she died a homicidal death.

The purpose behind the planned delay in posting the letters of offer to Raeburn and to the Holding Company, and in posting the notice of the board's meeting for May 2 to Sanders, was palpably to ensure that no legal proceeding was taken to injunct the holding of the meeting. The object of withholding these important documents, until it was quite late to act upon them, was to present to the Holding Company a fait accompli in the shape of the board's decision for the allotment of rights shares to the existing Indian shareholders.

We are, however, unable to share the view expressed in the "12th conclusion" in the appellate judgment of the High Court, that Devagnanam and "his colleagues in the board of directors" arranged to ensure the late posting of the letters of offer and the notice of the meeting. We do not accept Shri Nariman's argument that Devagnanam must be exonerated from all responsibility in. this behalf because he was away in Malacca from April 13 to 26. In the first place, to be in a place on two dates is not necessarily to be there all along between those dates and, therefore, we cannot infer that Devagnanam was in Malacca from 13th to 26th, since he was there on the 13th and the 26th. Besides, it was easy for a man of Devagnanam's importance and ability to pull the strings from a distance and his physical presence was not necessary to achieve the desired result. That is how puppets are moved. But there is no evidence, at least not enough, to justify the categorical finding recorded by the appellate Bench of the High Court. The fact that Devagnanam stood to gain by the machination is a relevant factor to be taken into account but even that is not the whole truth: NIIL, not Devagnanam was the real beneficiary, a thesis which we have expounded over the last many pages. And the involvement of the other directors by calling them Devagnanam's colleagues is less than just to them. There is not a shred of evidence to justify the grave charge that they were willing tools in Devagnanam's hands and lent their help to concoct evidence. We clear their conduct, expressly and categorically.

In so far as Devagnanam himself is concerned, there is room enough to suspect that he was the part-author of the late postings of important documents, especially since he was the prime actor in the play of NIIL's Indianisation. But even in regard to him, it is difficult to carry the case beyond the realm of suspicion and "room enough" is not the same thing as "reason enough". Section 15 of the Evidence Act which carries the famous illustration of a person obtaining insurance money on his houses which caught fire successively, the question being whether the fire was accidental or intentional or whether the act was done with a particular knowledge or intention, will not help to fasten the blame on Devagnanam because it is not shown that he was instrumental or concerned in any of the late postings complained of. Were his complicity shown in any of these, it would have been easy to implicate him in all of them.

On the contrary, there is an admitted act, described as a lapse, on Devagnanam's part which shows that he failed to do what was to his advantage to do. It may be recalled that in his letter dated April 12 to Raeburn, Devagnanam had stated that he was enclosing therewith a copy of the Reserve Bank's letter dated March 30, 1977, but that copy was not enclosed. Nothing was to be gained by suppressing the Reserve Bank's letter from Raeburn who was always sympathetic to the Indian shareholders. If anything, there was something to gain by apprising Raeburn of the urgency of the matter in view of the Reserve Bank's letter. The strongest point in favour of the Indian shareholders was the last para. of the Reserve Bank's letter which they would have liked the U.K. shareholders to know. Raeburn's response of 2nd May to Devagnanam's letter of 12th April and the letter of offer was without the knowledge of the Reserve Bank's letter of March 30. When the bank's letter was sent to Raeburn along with Devagnanam's letter of May 11, Raeburn categorically supported the stand of the Indian shareholders, as is clear from para. 4 of the letter dated June 8, 1977, by Raeburn to Mackrael, a copy of which was sent by Raeburn to Devagnanam along with his letter dated June 17, 1977.

The inferences arising from the late posting of the letter of offer to the Holding Company as also of the notice of meeting for May 2 to Sanders and the impact of those inferences on the conduct and intentions of Devagnanam are one thing; we have already dealt with that aspect of the matter. Their impact on the legality of the offer and the validity of the meeting of May 2, is quite another matter, which we propose now to examine. In doing this, we will keep out of consideration all questions relating to the personal involvement of Devagnanam and his group in the delay caused in sending the letters of offer and the notice of meeting for May 2.

First, as to the letter of offer: The letter of offer dated April 14, 1977, sent to the Holding Company at Birmingham, like all other letters of offer, mentions, inter alia, that it was resolved in the meeting of April 6, to increase the issued capital of the company from 32,000 shares of Rs. 100 each to 48,000 shares of Rs. 100 each by issuing rights shares to the existing shareholders on the five conditions mentioned in the letter. The second condition reads thus: "If the offer is not accepted within 16 days from the date of offer, it shall be deemed to have been declined by the shareholder". The Holding Company was informed by the last para. of the letter of offer that in respect of its holding of 18,990 shares, it was entitled to 9,495 rights shares and that its acceptance of the offer together with the application money (at Rs. 50 per share) should be forwarded so as to reach the registered office of NIIL on or before April 30, 1977. A postal communication by air between the U.K. and Madras, which is the normal mode of communication, generally takes five days to reach its destination. If the letter of offer were to be posted on the 14th itself in Madras, it would have reached the Holding Company in Birmingham, say, on the 19th. Even assuming that the 16 days' period allowed for communicating the acceptance of offer is to be counted from the 14th and not from the 19th, it would expire on 30th April. To that has to be added the period of five days which the Holding Company's letter would take to reach Madras. That means that the Holding Company would be within its rights if its acceptance reached NIIL on or before May 5, 1977. The board of directors had, however, met in Madras three days before that and had allotted the entire issue of the rights shares to the Indian shareholders, on the ground that the Holding Company had not applied for the allotment of the shares due to it. In these circumstances, it is quite clear that the rights shares offerred to the Holding company could not have been allotted to any one in the meeting of May 2, for the supposed failure of the Holding Company to communicate its acceptance before April 30. The meeting of May 2, of which the main purpose was to consider "allotment" of the rights shares must, therefore, be held to be abortive which could produce no tangible result. The matter would be worse if April 27 and much worse if May 2 were to be taken as the starting point for counting the period of 16 days. Except for circumstances hereinafter appearing, the allotment to Indian shareholders of the rights shares which were offered to the Holding Company would have been difficult to accept and act upon.

The objection arising out of the late posting of the notice dated April 19 for the meeting of 2nd May goes to the very root of the matter. That notice is alleged to have been posted to N. T. Sanders, Studley, Warwickshire, U.K., on April 22. But we have already held that in view of the fact that the envelope in which the notice was sent bears the postal mark of Madras dated April 27, 1977, this latter date must be taken to be the date on which the notice was posted. The notice was received by Sanders on May 2, on which date the Board's meeting for the allotment of rights shares was due to be held and was, in fact, held. The utter inadequacy of the notice to Sanders in terms of time stares in the face and needs no further argument to justify the finding that the holding of the meeting was illegal, at least in so far as the Holding Company is concerned. It is self-evident that Sanders could not possibly have attended the meeting. There is, therefore, no alternative save to hold that the decision taken in the meeting of May 2 cannot, in the normal circumstances, affect the legal rights of the Holding Company or create any legal obligations against it.

The next question, and a very important one at that, on which there is a sharp controversy between the parties, is as to what is the consequence of the finding, which we have recorded, that the objection arising out of the late posting of the notice of the meeting for 2nd May goes to the root of the matter. The answer to this question depends upon whether the Holding Company could have accepted the offer of rights shares and if, either for reasons of volition or of legal compulsion, it could not have accepted the offer, whether it could have at least renounced its right under the offer to a resident Indian, other than the existing Indian shareholders. The decision of this question depends upon the true construction of the provisions of the FERA and of ss. 43A and 81 of the Companies Act, 1956.

We have already reproduced the relevant provisions of the FERA, namely, s. 2(p). (q) and (u); s. 19(1)(a), (b) and (d); s. 29(1)(a);s. 29(2)(a), (b) and (c); and s. 29(4)(a) and (b). Section 29(1) provides thus:

"...notwithstanding anything contained the provisions of the Companies Act, 1956 .a company which is not incorporated under any law in force in India or in which the non-resident interest is more than forty per cent shall not, except with the general or special permission of the Reserve Bank carry on in India any trading, commercial or industrial...other than an activity for the carrying on of which permission of the Reserve Bank has been obtained under section 28;."..

The other provisions are of an ancillary and consequential nature, following upon the main provision summarised above.

NIIL had applied for the necessary permission, since the non-resident interest therein was more than 40%, the Holding Company owning nearly 60% of its share capital. That permission was accorded by the Reserve Bank on certain conditions which, inter alia, stipulated that the reduction in the non-resident holding must be brought down to 40% within one year of the receipt of its letter, that is, before May 17, 1977, and that until then, the manufacturing and business activities of the company shall not be extended beyond the approved level as of December 31, 1973.

It is contended by Shri Seervai that non-compliance with the condition regarding the dilution of non-resident interest within the stipulated period could not have resulted in the RBI directing NIIL to close down its business or not to carry on its business. It is also argued that non-compliance with the conditions imposed for permission to carry on its business would not have exposed the Indian directors to any penalties or liabilities and that, in the absence of a power to revoke the permission already granted (as in other sections like ss. 6 and 32), the RBI had no power to revoke the permission granted to NIIL even if the conditions subject to which the permission was granted were breached. According to the counsel, closing down a business which the RBI had allowed to be continued by granting permission would have such grave consequences—public and private—that the power to direct the business to be discontinued was advisably not conferred, even if the conditions are breached. Section 29(4)(c), it is urged, which enables the RBI to direct non-residents to sell their shares or cause them to be sold where an application under s. 29(4)(a), for permission to continue to hold shares, was rejected, is the only power given to the Reserve Bank where a condition imposed under s. 29(2) is breached.

We are unable to accept these contentions. The Reserve Bank granted permission to NIIL to carry on its business, "subject to the conditions" mentioned in the letter of May 11, 1976. It may be that each of those conditions is not of the same rigour or importance as, e. g., the condition regarding the submission of quarterly reports indicating the progress made in implementing the other conditions, which could reasonably be relaxed by condonation of the late filing of any particular quarterly report. But the dilution of the non-resident interest in the equity capital of the company to a level not exceeding 40% "within a period of 1 (one) year from the date of the receipt of" the letter was of the very essence of the matter. A permission granted subject to the condition that such dilution shall be effected would cease automatically on the non-compliance with the condition at the end of the stipulated period or the extended period, as the case may be. The argument of the Holding Company would make the granting of a conditional permission an empty ritual since, whether or not the company performs the conditions, it would be free to carry on its business, the only sanction available to the bank being, as argued, that it can compel or cause the sale of the excess non-resident interest in the equity holding of the company, under s. 29(4)(c) of the FERA. This particular provision, in our opinion, is not a sanction for the enforcement of conditions imposed on a company under cl. (c) of s. 29(2). Section 29(4)(c) provides for a situation in which an application for holding shares in a company is not made or is rejected. The sanction for the enforcement of a conditional permission to carry on business, where the conditions are breached, is the cessation, ipso facto, of the permission itself on the non-performance of the conditions at the time appointed or agreed. This involves no element of surprise or of unjustness because permission is granted, as was done here, only after the applicant agrees to perform the conditions within the stipulated period. When NIIL wrote to the bank on February 4, 1976, binding itself to the performance of certain conditions, it could not be heard to say that the permission will remain in force despite its non-performance of the conditions. Having regard to the provisions of s. 29 read with ss. 49, 56(1) and (3) and s. 68 of the FERA, the continuance of business after May 17, 1977, by NIIL would have been illegal, unless the condition of dilution of nonresident equity was duly complied with. It is needless, once again, to dwell upon the impracticability of NIIL applying for extension of the period of one year allowed to it by the bank. Coats could be optimistic about such an extension being granted especially since thereby they could postpone the evil day. For NIIL, the wise thing to do, and the only course open to it, was to comply with the obligation imposed upon it by law, without delay or demur.

It seems to us quite clear that by reason of the provisions of s. 29(1) and (2) of the FERA and the conditional permission granted by the RBI by its letter dated May 11, 1976, the offer of rights shares made by NIIL to the Holding Company could not possibly have been accepted by it. The object of s. 29, inter alia, is to ensure that a company (other than a banking company) in which the non-resident interest is more than 40% must reduce it to a level not exceeding 40%. The RBI allowed NIIL to carry on its business subject to the express condition that it shall reduce its nonresident holding to a level not exceeding 40%. The offer of rights shares was made to the existing shareholders, including the Holding Company, in proportion to the shares held by them. Since the issued capital of the company which consisted of 32,000 shares was increased by the issue of 16,000 rights shares, the Holding Company which held 18,990 shares, was offered 9,495 shares. The acceptance of the offer of rights shares by the Holding Company would have resulted in a violation of the provisions of the FERA and the directive of the Reserve Bank. Were the Holding Company to accept the offer of rights shares, it would have continued to hold 60% share capital in NIIL and the Indian shareholders would have continued to hold their 40% share capital in the company. It would indeed be ironical that the measure which was taken by NIIL's board of directors for the purpose of reducing the non-resident holding to a level not exceeding 40%, should itself become an instrument of perpetuating the ownership by the Holding Company of 60% of the equity capital pf NIIL. We are not suggesting that the offer of rights shares need not have been made to the Holding Company at all. But the question is, whether the offer, when made, could have been accepted by it. Since the answer to this question has to be in the negative, no grievance can be made by the Holding Company that, since it did not receive the offer in time, it was deprived of an opportunity to accept it.

We see no substance in Shri Nariman's contention that the letter of offer could not have been sent to the Holding Company without first obtaining the RBI's approval under s. 19 of the FERA. Counsel contends that under s. 19(1)(b), notwithstanding anything contained in s. 81 of the Companies Act, no person can, except with the general or special permission of the Reserve Bank, create "any interest in a security" in favour of a person resident outside India. The word "security" is defined by s. 2(u) to mean shares, stocks, bonds, etc. We are unable to appreciate how an offer of shares by itself creates any interest in the shares in favour of the person to whom the offer is made. An offer of shares undoubtedly creates "fresh rights" as said by this court in Mathalone v. Bombay Life Assurance Co. Ltd. [1954] SCR 117; 24 Comp Cas 1, but the right which it creates is either to accept the offer or to renounce it; it does not create any interest in the shares in respect of which the offer is made.

But though it could not have been possible for the Holding Company to accept the offer of rights shares made to it, the question still remains whether it had the right to renounce the offer in favour of any resident Indian person or company of its choice, be it an existing shareholder like Manoharan or an outsider like Madura Coats. The answer to this question depends on the effect of ss. 43A and 81 of the Companies Act, 1956.

We will first notice the relevant parts of ss. 3, 43A and 81 of the Companies Act. Section 3(1)(iii) defines a "private company" thus:

" 'Private company ' means a company which, by its articles,—

(a) restricts the right to transfer its shares, if any;

(b) limits the number of its members to fifty...and

(c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company".

Clause (iv) of s. 3(1) defines a "public company" to mean a company which is not a private company.

Section 43A of the Companies Act, which was inserted by Act 65 of 1960, reads thus:

"43A. (1) Save as otherwise provided in this section, where not less than twenty-five per cent. of the paid-up share capital of a private company having a share capital, is held by one or more bodies corporate the private company shall......become by virtue of this section a public company:

Provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of section 3 and the number of its members may be, or may at any time be reduced, below seven:...

(2) Within three months from the date on which a private company becomes a public company by virtue of this section, the company shall inform the Registrar that it has become a public company as aforesaid, and thereupon the Registrar shall delete the word 'private' before the word 'Limited' in the name of the company upon the register and shall also make the necessary alterations in the certificate of incorporation issued to the company and in its memorandum of association......

(4) A private company which has become a public company by virtue of this section shall continue to be a public company until it has, with the approval of the Central Government and in accordance with the provisions of this Act, again become a private company.

Section 81 of the Companies Act reads thus:

"81. (1) Where......it is proposed to increase the subscribed capital of the company by allotment of further shares, then,—

(a) such further shares, shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date;

(b) the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer, if not accepted, will be deemed to have been declined;

(c) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (b) shall contain a statement of this right;

(d) after the expiry of the time specified in the notice aforesaid or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the board of directors may dispose of them in such manner as they think most beneficial to the company.......

(1A) Notwithstanding anything contained in sub-section (1), the further shares aforesaid may be offered to any persons (whether or not those persons include the persons referred to in clause (a) of sub-section (1)) in any manner whatsoever—

(a) if a special resolution to that effect is passed by the company in general meeting, or

(b) where no such special resolution is passed if the votes cast..... in favour of the proposal.........exceed the votes, if any, cast against the proposal.........and the Central Government is satisfied on an application made by the board of directors in this behalf, that the proposal is most beneficial to the company. ......

(3) Nothing in this section shall apply—

(a) to a private company....."..

While interpreting these and allied provisions of the Companies Act, it would be necessary to have regard to the relevant articles of association of NIIL, especially since s. 81(1)(c) of that Act, which is extracted above, is subject to the qualification: "Unless the articles of the company otherwise provide". The relevant articles are arts. 11, 32, 38 and 50 and they read thus:

Article 11

"In order that the company may be a private company within the meaning of the Indian Companies Act, 1913, the following provisions shall have effect, namely:—

(i) No invitation shall be issued to the public to subscribe for any shares, debentures, or debenture stock of the company.

(ii) The number of the members of the company (exclusive of persons in the employment of the company) shall be limited to fifty, provided that for the purposes of this article where two or more persons hold one or more shares in the company jointly, they shall be treated as a single member.

(iii) The right to transfer shares of the company is restricted in the manner hereinafter provided.

(iv) If there shall be any inconsistency between the provisions of this article and the provisions of any other article the provisions of this article shall prevail".

Article 32

"A share may, subject to article 38, be transferred by a member or other person entitled to transfer to any member selected by the transferor; but, save as aforesaid, no share shall be transferred to a person who is not a member so long as any member is willing to purchase the same at the fair value. Such value to be ascertained in manner hereinafter mentioned".

Article 38

"The directors may refuse to register any transfer of a share, (a) where the company has a lien on the share, or (b) in case of shares not fully paid-up, where it is not proved to their satisfaction that the proposed transferee is a responsible person, or (c) where the directors are of opinion that the proposed transferee (not being already a member) is not a desirable person to admit to membership, or (d) where the result of such registration would be to make the number of members exceed the above-mentioned limit. But clauses (b) and (c) of this article shall not apply where the proposed transferee is already a member".

Article 50

"When the directors decide to increase the capital of the company by the issue of new shares such shares shall be offered to the shareholders in proportion to the existing shares to which they are entitled. The offer shall be made by notice specifying the number of shares offered and limiting a time within which the offer, if not accepted, will be deemed to be declined and after the expiration of such time, or on the receipt of an intimation from the person to whom the offer is made that he declines to accept the shares offered, the directors may dispose of the same in such manner as they think most beneficial to the company. The directors may likewise so dispose of any new shares which (by reason of the ratio which the new shares bear to the shares held by persons entitled to an offer of new shares) cannot, in the opinion of the directors, be conveniently offered under this article".

It is contended by Shri Nariman that by reason of the articles of the company and on a true interpretation of s. 81, the right of renunciation of the shares offered by NIIL was not available to the Holding Company since NIIL was not a full-fledged public company in the sense of being incorporated as a public company but had become a public company under s. 43A(1) and had, under the first proviso to that section, retained its articles relating to matters specified in s. 3(1)(iii). According to Shri Nariman, s. 81(1A) can have no application to a "section 43A(1) proviso company" (for short, the "proviso company") because, it contemplates issue of shares to the public and to persons other than members of the company, which cannot be done in the case of a company which falls under the proviso to s. 43A(1). Section 81(1A), it is urged, is complementary to s. 81 and since the latter cannot apply to the "proviso company", the former too cannot apply to it. In any event, according to counsel, s. 81(1)(c) cannot apply in the instant case, since the articles of NIIL provide by necessary implication at any rate, that the members of the company shall have no right to renounce the shares in favour of "any" other person, because such a right would include the right to renounce in favour of persons who are not members of the company, and NIIL had retained its articles under which shares could not be transferred or renounced in favour of outsiders.

Shri Seervai has refuted these contentions, his main argument being that the definitions of "public company" and "private company" are mutually exclusive and, between them, are exhaustive of all categories of companies. There is, according to the learned counsel, no third category of companies recognised by the Companies Act, like the "proviso company". Shri Seervai further contends:

(a) The right of renunciation is not a "transfer" and, therefore, the directors' power to refuse to register the shares under the articles does not extend to a renunciation.

(b) Before considering s. 43A, which was inserted for the first time in the Act of 1956 by the Amending Act of 1960, it should be noted that s. 81 as enacted in the Act of 1956 contained three sub-ss. (1), (2) and (3), and sub-s. (3) provided that "nothing in this section shall apply to a private company". The opening words of s. 81, as they now stand, were substituted by the Amending Act of 1960, and sub-s. (1A) was inserted by the said Amendment Act, and sub-s. (3) was substituted by the Amendment Act of 1963. But sub-s. 3(a) reproduced sub-s. (3) of the Act of 1956, namely, "nothing in this section shall apply to a private company". It is clear, therefore, that the rights conferred by s. 81(1) and (2) do not apply to a private company, and this provision in the Act of 1956 was not connected with the insertion of s. 43A for the first time in 1960.

(c) The provisos to s. 43A(1), (1A) and (1B) are very important in connection with s. 81 of the Act 1 of 1956. Just as the crucial words in s. 27(3) are "shall contain", the crucial words in the provisos are "may include" (or may retain). The words "shall contain" are mandatory and go to the constitution of a private company. The words "may include" are permissive and they do not go to the constitution of a company which has become a public company by virtue of s. 43A because whether the articles include (or retain) those requirements, or do not include those requirements the constitution of the company as a public company remains unaffected.

(d) No statutory consequence follows, as to the company being a public company, on the retention of the three requirements or one or more of them, or in not complying with those requirements. But in the case of a private company which does not comply with the requirements of s. 3(1)(iii) serious consequences follow under s. 43, and in the case of a private company altering its articles so as not to include all the matters referred to in s. 3(1)(iii) serious consequences follow under s. 44. In short, the inclusion, or retention, of all the matters referred to in s. 3(1)(iii) has a radically different part or function in a private company which becomes a public company by virtue of s. 43A from that which it has in a private company. More particularly the non-compliance with the three requirements of s. 3(1)(iii) included, or retained, in the articles of a private company which has become a public company by virtue of s. 43A, involves no statutory consequences or disabilities, since such a company is a public company and s. 43 is not attracted.

(e) It is wrong to contend that the whole of s. 81(1) does not apply to a "proviso company" because it is a private company entitled to the pro-tection of sub-s. 3(a). Section 81(3)(a) applies to a private company; a "proviso company" is one which has become, and continues to remain a public company.

(f) Section 81(1)(c) applies to all companies other than private com-panies. The articles of a public company may include all of the matters referred to in s. 3(1)(iii), or may include one or two of the matters referred to therein without ceasing to be a public company. A public company which has become such by virtue of section 43A can delete all the matters referred to in s. 3(1)(iii) or may delete one or two of them or may include (or retain) all the three matters referred to in s. 3(1)(iii). The retention of the three matters mentioned in s. 3(1)(iii) does not in any way affect the constitution of the company because it has become and continues to be a public company.

(g) Section 81 when enacted in 1956 consisted of 3 sub-sections. The need to exempt private companies arose from s. 81(1)(c), for the right to renounce in favour of any person might (not must), conflict with the limitation on the number of members to 50 and since that was one of the matters which went to the constitution of a company as a private company, private companies were expressly exempted. No such exemption was necessary in the case of a "proviso company" which retains in its articles all the three matters referred to in s. 3(1)(iii), because an increase in the number of its members above 50 will not affect the constitution of the company which remains that of a public company.

(h) Section 81, as enacted in 1956, did not contain sub-s. (1A) which was inserted for the first time by the Amending Act of 1960, which Amending Act also inserted s. 43A. After the insertion of sub-s. (1A) the effect of the exemption of private companies from the operation of s. 81 became even more necessary, for, the provisions of sub-s. (1A)(a) and (b) override the whole of s. 81(1) and shares need not be offered to existing shareholders. Section 81(1A) also overrides art. 50 of NIIL.

(i) The articles of NIIL provide for the transfer of shares, and art. 38 sets out the circumstances under which the directors may refuse to transfer the shares. However, since a renunciation of shares is not a transfer, the restriction in art. 11(iii) is not violated by an existing member of NIIL renouncing his share in favour of any other person.

(j) The opening words of s. 81(1)(c) are "unless the articles of the company otherwise provide". Section 81(1)(c) contains no reference to "expressly provide" or "expressly or by necessary implication provide". According to the plain meaning of the words "otherwise provide", there must be a provision in the articles which says that an offer of shares to the existing members does not entitle them to renounce the shares in favour of any person. Article 11 of NIIL merely states the matters necessary to constitute a company, a private company. Such companies are exempt from s. 81 and so, the question of "otherwise providing" does not arise. Article 50 refers to the rights shares but it makes no other provision with regard to the right of renunciation than is made in s. 81(1)(c). Unless such other provision is made, the opening words of s. 81(1)(c) are not attracted. Secondly, s. 81(1)(c) provides that unless the articles otherwise provide "the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any person". The right conferred by the deeming clause can be taken away only by making a provision in the articles to prevent the deeming provision from taking effect. The deeming provision cannot be avoided by implication; and

(k) The Holding Company could have renounced the rights shares offered to it at least in favour of the Manoharan group and the fact that after the shares were allotted, the Manoharan group stated that they were not interested in subscribing to the shares offered does not affect the question of the legal right. Besides, it was one thing to refuse to subscribe to the shares offered; it was another thing to accept the renunciation of merely 6,190 shares which would have given the Manoharans a substantial stake in the affairs of the company.

Shri Seervai relies upon many a text and authority in support of the proposition that the classification of companies into private and public is mutually exclusive and collectively exhaustive. He relies upon a decision in Park v. Royalty Syndicates Ltd. [1912] 1 KB 330 (KB) in which Hamilton J. (Later Lord Sumner) observed that a public company is simply one which is not a private company and that there is no "intermediate state or tertium quid". In support of the proposition that the right to renunciation of shares is not a transfer, counsel relies upon a decision in Pool Shipping Co. Ltd., In re [1920] 1 Ch 251 (Ch D). Reliance is also placed in this behalf on the statement of law in Halsbury (Vol. 7, 4th Edn., p. 218), Palmer's Company Law (Vol. 1, 22nd Edn., p. 393), Palmer's Company Precedents (Part 1, 17th Edn., p. 688), Gore-Brown on Companies (43rd Edn., para. 16.3) and Buckley on Compnies Act (13th Edn,, p. 815). While indicating his own reasons as to why the Legislature enacted identical provisos to sub-ss. (1), (1A) and (1B) of s. 43A, counsel mentioned that no light is thrown for enacting these provisos, either by the Shastri Committee Report which led to the Companies (Amendment) Act, 1960 or by the Notes on Clauses, or by the Report of the Joint Select Committee. In regard to the opening words of s. 81(1)(c): "unless the articles of the company otherwise provide", counsel cited the Collins English Dictionary, the Random House Dictionary and the Oxford English Dictionary. An interesting instance of the use of the word "provide" is to be found in the Random House Dictionary, 1967, p. 1157, to this effect: "The Mayor's wife of the city provided in her will that she would be buried without any pomp or noise'".

It shall have been noticed that the entire superstructure of Shri Seer-vai's argument rests on the foundation that the definitions of "public company" and "private company" are mutually exclusive and collectively exhaustive of all categories of companies, that is to say, that there is no third kind of company recognised by the Companies Act, 1956. The argument merits close examination since it finds support, to an appreciable extent, from the very text of the Companies Act. The definition of "private company" and the manner in which a "public company" is defined ("public company means a company which is not a private company") bear out the argument that these two categories of companies are mutually exclusive. If it is this, it cannot be that and if it is that it cannot be this. But, it is not true to say that between them, they exhaust the universe of companies. A private company which has become a public company by reason of s. 43A may include, that is to say, may continue to retain in its articles, matters which are specified in s. 3(1)(ii), and the number of its members may be or may at any time be reduced below 7. This provision itself highlights the basic distinction between, on one hand, a company which is incorporated as a public company or a private company which is converted into a public company under s. 44, and on the other hand, a private company which has become a public company by reason of the operation of s. 43A.

In the first place, a s. 43A-company may include in its articles, as part of its structure, provisions relating to restrictions on transfer of shares, limiting the number of its members to 50, and prohibiting an invitation to the public to subscribe for shares, which are the typical characteristics of a private company. A public company cannot possibly do so because, by the very definition, it is that which is not a private company, that is to say, which is not a company which by its articles contains the restrictions mentioned in s. 3(1)(iii). Therefore, the expression "public company" in s. 3(1)(iv) cannot be equated with a "private company which has become a public company by virtue of section 43A".

Secondly, the number of members of a public company cannot fall below 7 without attracting the serious consequences provided for by s. 45 (personal liability of members for the company's debts) an s. 433(d) (winding up in case the number of its members falls below 7). A s. 43A-company can still maintain its separate corporate identity qua debts even if the number of its members is reduced below seven and is not liable to be wound up for that reason.

Thirdly, a s. 43A-company can never be incorporated and registered as such under the Companies Act. It is registered as a private company and becomes, by operation of law, a public company.

Fourthly, the three contingencies in which a private company becomes a public company by virtue of s. 43A (mentioned in sub-ss. (1), (1A) and (1B) read with the provisions of sub-s. (4) of that section) show that it becomes and continues to be a public company so long as the conditions in sub-ss. (1), (1A) or (1B) are applicable. The provisos to each of these sub-sections clarify the legislative intent that such companies may retain their registered corporate shell of a private company but will be subjected to the discipline of public companies. When the necessary conditions do not obtain, the legislative device in s. 43A is to permit them to go back into their corporate shell and function once again as private companies, with all the privileges and exemptions applicable to private companies. The proviso to each of the sub-sections of s. 43A clearly indicates that although the private company has become a public company by virtue of that section, it is permitted to retain the structural characteristics of its origin, its birth marks, so to say. Any provision of the Companies Act which would endanger the corporate shell of a "proviso company" cannot be applied to it because, that would constitute an infraction of one or more of the characteristics of the "proviso company" which are statutorily allowed to be preserved and retained under each of the three provisos to the three sub-sections of s. 43A A right of renunciation in favour of any other person, as a statutory term of an offer of rights shares, would be repugnant to the integrity of the company and the continued retention by it of the basic characteristics under s. 3(1)(iii).

Fifthly, s. 43A, when introduced by Act 65 of 1960, did not adopt the language either of s. 43 or of s. 44. Under s. 43 where default is made in complying with the provisions of s. (3)(1)(iii), a private company "shall cease to be entitled to the privileges and exemptions conferred on private companies by or under this Act, and this Act shall apply to the company as if it were not a private company". Under s. 44 of the Act, where a private company alters its articles in such a manner that they no longer include the provisions, which under s. 3(1)(iii), are required to be included in the articles in order to constitute it a private company, the company "shall as on the date of the alteration cease to be a private company". Neither of the expressions, namely. "This Act shall apply to the company as if it were not a private company" (s. 43) or that the company "shall......cease to be a private company" (s. 44) is used in section 43A. If a s. 43A-company were to be equated in all respects with a public company, that is a company which does not have the characteristics of a private company, Parliament would have used language similar to the one in s. 43 or s. 44, between which two sections, s. 43A was inserted. If the intention was that the rest of the Act was to apply to a s.43A-company "as if it were not a private company", nothing would have been easier than to adopt that language in s. 43A, and if the intention was that a s.43A-company would for all purposes "cease to be a private company", nothing would have been easier than to adopt that language in s. 43A.

Sixthly, the fact that a private company which becomes a public company by virtue of s. 43A does not cease to be for all purposes a "private company" becomes clear when one compares and contrasts the provisions of s. 43A with s. 44: when the articles of a private company no longer include matters under s. 3(1)(iii), such a company shall on the date of the alteration cease to be a private company (s. 44(1)(a)). It has then to file with the Registrar a prospectus or a statement in lieu of the prospectus under s. 44(2). A private company which becomes 1 public company by virtue of s. 43A is not required to file a prospectus or a statement in lieu of a prospectus.

These considerations show that, after the Amending Act 65 of 1960, three distinct types of companies occupy a distinct place in the scheme of our Companies Act: (1) private companies, (2) public companies, and (3) private companies which have become public companies by virtue of s. 43A, but which continue to include or retain the three characteristics of a private company. Sections 174 and 252 of the Companies Act which deal respectively with quorum for meetings and minimum number of directors, recognise expressly, by their paranthetical clauses, the separate existence of public companies which have become such by virtue of s. 43A. We may also mention that while making an amendment in sub-cl. (ix) of r. 2 of the Companies (Acceptance of Deposits) Rules, 1975, the Amendment Rules, 1978, added the expression:

"Any amount received by a private company which has become a public company under section 43A of the Act and continues to include in its articles of association provisions relating to the matters specified in clause (iii) of sub-section (1) of section 3 of the Act", in order to bring deposits received by such companies within the Rules.

The various points discussed above will facilitate a clearer perception of the position that under the Companies Act, there are three kinds of companies whose rights and obligations fall for consideration, namely, private companies, public companies and private companies which have become public companies under s. 43A(1) but which retain, under the first proviso to that section, the three characteristics of private companies mentioned in s. 3(1)(iii) of the Act. Private companies enjoy certain exemptions and privileges which are peculiar to their constitution and nature. Public companies are subjected severely to the discipline of the Act. Companies of the third kind like NIIL, which become public companies but which continue to include in their articles the three matters mentioned in clauses (a) to (c) of s. 3(1)(iii) are also, broadly and generally, subjected to the rigorous discipline of the Act. They cannot claim the privileges and exemptions to which private companies which are outside s. 43A are entitled. And yet, there are certain provisions of the Act which would apply to public companies but not to s. 43A-companies. Is s. 81 of the Companies Act one such provision? and if so, does the whole of it not apply to a s. 43A company or only to some particular part of it? These are the questions which we have now to consider.

On these two questions, both the learned counsel have taken up extreme positions which, if accepted, may create confusion and avoidable inconvenience in the administration of s. 43A-companies like NIIL. Shri Nariman contends that a s. 43A-company becomes a public company qua the outside world, as, e.g., in matters of remuneration of directors, disclosure, commencement of business, information to be supplied but it remains a private company qua its own shareholders. Therefore, says counsel, no provision of the Companies Act can apply to such companies, which is inconsistent with or destructive of the retention of the three essential features of private companies as mentioned in s. 3(1)(iii). Section 81, it is said, is one such provision and in so far as private companies go, it can apply only to, (a) such companies which become public companies under s. 43A but which do not retain the three essential features, and to (b) private companies which are duly converted into public companies. It is urged that even assuming that the expression "private company" occurring in the various provisions of the Companies Act (including s. 81(3)(a)) does not include a s. 43A-proviso-company, that does not mean that s. 81 would be applicable to a s. 43A-proviso-company, because: (a) The proviso to s. 43A(1) and s. 81 are both substantive provisions and neither is subordinate to the other; in fact s. 43 A was introduced later in 1960. and (b) An offer of rights shares to a member in a s. 43A-proviso-company cannot include a right to renounce the shares in favour of any other person, because such a right would be inconsistent with the article of the company limiting the number of its members to 50 and with the article prohibiting invitation to the public to subscribe for shares in the company. The fact that the statute overrides the articles is not a sufficient ground for rendering the provisions of s. 81 applicable to a s.43A(1) proviso company since the right to continue to include provisions in its articles specified in s. 3(1)(iii) is itself a statutory right. Counsel says that in these circumstances—and this is without taking the assistance of the words "unless the articles of the company otherwise provide" in s. 81(1)(c)—the provision regarding the right of renunciation cannot apply to a s. 43A-proviso-company.

The answer of Shri Seervai to this contention flows from what truly is the sheet anchor of his argument, namely, that the definitions of "public company" and "private company" are mutually exclusive and between them, they are exhaustive of all categories of companies. Counsel contends that s. 81(1A) overrides s. 81(1); that by reason of sub-s. (3) of s. 81, s. 81 is not applicable to a "private company" but NIIL is not a "private company" since it became a public company by virtue of s. 43A; and that, therefore, the offer of rights shares made by NIIL can be renounced by the offerees in favour of any other person.

Neither of the two extreme positions for which the counsel contend commends itself to us. The acceptance of Shri Nariman's argument involves tinkering with cl. (a) of s. 81(3), which shall have to be read as saying that "Nothing in section 81 shall apply to a 'private company' and to a company which becomes a public company by virtue of s. 43A and whose articles of association include provisions relating to the matters specified in cl. (iii) of sub-s. (1) of s. 3". Section 81(1) does not contain a non obstante clause. But, if Shri Nariman is right, there would be no alternative save to exclude the applicability of all of its provisions to a company like NIIL, by reading into it an overriding provision which alone can achieve such a result. On the other hand, to accept wholesale the argument of Shri Seervai would render the first proviso to s. 43A(1) nugatory. The right to retain in the articles the provision regarding the restriction on the right to transfer shares, the limitation on the number of members to fifty and the prohibition of any invitation to the public to subscribe for the shares or debentures of the company will then be washed off. The truth seems to us to lie in between the extreme stands of the learned counsel for the two sides.

There is no difficulty in giving full effect to cls. (a) and (b) of s. 81(1) in the case of a company like NIIL, even after it becomes a public company under s. 43A. Clause (a) requires that further shares must be offered to the holders of equity shares of the company in proportion, as nearly as circumstances admit, to the capital paid up on those shares, while cl. (b) requires that the offer of further shares must be made by a notice specifying the number of shares offered and limiting the time, not being less than fifteen days from the date of the offer, within which the offer, if not accepted, will be deemed to have been declined. The real difficulty arises when one reaches cl. (c) according to which, the offer shall be deemed to include the right of renunciation of shares or any of of them in favour of any other person. We will keep aside for the time being the opening words of cl. (c): "unless the articles of the company otherwise provide". Clause (c) further requires that the notice referred to in cl. (b) must contain a statement as to the right of renunciation provided for by cl. (c). Having given to the matter our most anxious consideration, we are of the opinion that cl. (c) of s. 81(1) cannot apply to the erstwhile private companies which have become public companies under section 43A and which include, that is to say which retain or continue to include, in their articles of association the matters specified in s. 3(1)(iii) of the Act, as specified in the first proviso to s. 43A. If cl. (c) were to apply to the s. 43A-proviso-companies, it would be open to the offerees to renounce the shares offered to them in favour of any other person or persons. That may result directly in the infringement of the article relating to the matter specified in s. 3(1)(iii)(b) because, under cl. (c) of s. 81(1), the offeree is entitled to split the offer and renounce the shares in favour of as many persons as he chooses, depending partly on the number of shares offered by the company to him. The right to renounce the shares in favour of any other person is also bound to result in the infringement of the article relating to the matter specified in s. 3(1)(iii)(c), because an offer which gives to the offeree the right to renounce the shares in favour of a non-member is, in truth and substance, an invitation to the public to subscribe for the shares in the company. As stated in Palmer's Company Law (22nd Edn., Vol. I, para. 21-18, p. 182):

"Where the company issues renounceable letters of allotment the circle of original allottees can easily be broken by renunciation of those rights and complete strangers may become the allottees; here the offer will normally be held to be made to the public".

There is a statement to the same effect in Gower's Company Law (4th Edn., p. 351):

"It is therefore, clear that an invitation by or on behalf of a private company to a few of the promoter's friends and relations will not be deemed to be an offer to the public. Nor, generally, will an offer which can only be accepted by the shareholders of a particular company. On the other hand it is equally clear that an offer of securities in a public company even to a handful of people may be an offer to the public if it is calculated (which presumably means 'likely' rather than 'intended') to lead to the securities being subscribed (i.e., applied for on original allotment) or purchased (i.e., bought after original allotment) by persons other than those receiving the initial offer. In particular, if securities are to be issued under renounceable allotment letter or letters of right the invitation to take them up must be deemed to be made to the public, since these securities are obviously liable to be subscribed or purchased by others".

The learned author says at page 430 that in the case of a private placing—an issue by a private company—allotment letters will probably be dispensed with, "in any case they cannot be freely renounceable". In footnote (22) the author points out that the real danger is that if renounceable allotment letters are issued, the company may be regarded as having made an offer to the public. We cannot construe the provision contained in cl. (c) in a manner which will lead to the negation of the option exercised by the company to retain in its articles the three matters referred to in s. 3(1)(iii). Both these are statutory provisions and they are contained in the same statute. We must harmonise them, unless the words of the statute are so plain and unambiguous and the policy of statute so clear that to harmonise will be doing violence to those words and to that policy. Words of the statute, we have dealt with. Its policy, if anything, points in the direction that the integrity and structure of the s. 43A-proviso-com-panies should, as far as possible, not be broken up.

The exemption in favour of private companies would appear to have been inserted in s. 81(3)(a) because of the right of renunciation conferred by s. 81(1)(c). Section 105C of the Indian Companies Act, 1913, which contained substantially all the provisions that are to be found in s. 81(1)(a), (b) and (d) applied to all companies. The right of renunciation in favour of any other person was conferred for the first time by the Act of 1956. That led to the insertion of the exception in favour of private companies since, a right of renunciation in favour of other persons is wholly inconsistent with the structure of a private company, which has to contain the three characteristics mentioned in s. 3(1)(iii). When s. 43A was introduced by Act 65 of 1960, the Legislature apparently overlooked the need to exempt companies falling under it, read with its first proviso, from the operation of cl. (c) of s. 81(1). That the Legislature has overlooked such a need in regard to other matters, in respect of which there can be no controversy, is clear from the provisions of ss. 45 and 433(d) of the Companies Act. Under s. 45, if at any time the number of members of a company is reduced, in the case of a public company below seven, or in the case of a private company below two, every member of the company becomes severally liable, under the stated circumstances, for the payment of the whole debt of the company and can be severally sued therefor. No exception has yet been provided for in s. 45 in favour of the s. 43A-proviso-companies, with the result that a private company having say, three members which becomes a public company under s. 43A and continues to function with the same number of members, will attract the rigour of s. 45. Similarly, under s. 433(d), such a company would automatically incur the liability of being wound up for the same reason. If and when these provisions fall for consideration, due regard may have to be given to the principle of harmonious construction, in order to exclude the s. 43A-proviso-companies from the application of those provisions. We hope that before such an occasion arises, the Legislature will make appropriate amendments in the relevant provisions of the Companies Act. Such amendments have been made in s. 174(1), cl. (iii) of the second proviso to sub-s. (1) of s. 220 and s. 252(1) in order to accord separate treatement to private companies which become public companies by virtue of s. 43A, as distinguished from public companies of the general kind.

In coming to the conclusion that cl. (c) of s. 81(1) cannot apply to s. 41A-proviso-companies, we have not taken into consideration the impact of the opening words of cl. (c): "Unless the articles of the company otherwise provide". The effect of these words is to subordinate the provisions of cl. (c) to the provisions of the articles of association of the company. In other words, the provision that the offer of further shares shall be deemed to include the right of renunciation in favour of any other person will not apply if the articles of the company "otherwise provide". Similarly, the requirement that the notice of offer must contain a statement of the right of renunciation will not apply if the articles of the company otherwise provide. The question which we have to consider under this head is whether the articles of association of NIIL provide otherwise than what is provided by cl. (c) of s. 81(1). We have already extracted the relevant articles, namely, arts. 11, 32, 38 and 50. To recapitulate, art. 11, which has an important bearing on the subject now under discussion, provides that in order that the company may be a private company, (i) no invitation shall be issued to the public to subscribe for any shares, debentures, etc; (ii) the number of members of the company shall be limited to 50; and (iii) the right to transfer shares of the company will be restricted in the manner provided in the articles. By art. 32, a share may be transferred, subject to art. 38, by a member to any member selected by the transferor but no share shall otherwise be transferred to a person who is not a member so long as any member is willing to purchase the same at a fair value. Article 38 confers upon the directors the power to refuse to register the transfer of a share for four reasons, the last of which is that the transfer will make the number of members exceed the limit of 50. Article 50, which also is important, provides that the offer of new shares shall be made by a notice specifying the number of shares offered and limiting the time within which the offer, if not accepted, will be deemed to have been declined. If the offer is declined or is not accepted before the expiration of the time fixed for its acceptance, the directors have the power to dispose of the shares in such manner as they think most beneficial to the company.

It is urged by Shri Seervai that none of the articles of the company provides otherwise than what is provided in cl. (c) of s. 81(1) and, therefore, cl. (c) must have its full play in the case of NIIL. On the other hand, it is contended by Shri Nariman that the opening words of cl. (c) do not require or postulate that the articles of the company must contain an "express" provision, contrary to what is contained in cl. (c). The contention, in other words, is that if the articles of a company contain a provision which, by necessary implication, is otherwise than what is provided in cl. (c), that clause can have no application. In view of our finding that keeping aside the opening words of cl. (c), the provisions of that clause cannot apply to s. 43A-proviso-companies, it is academic to consider whether the word "provide" in the opening part of cl. (c) postulates an express provision on the subject of renunciation or whether it is sufficient compliance with the opening words, if the articles contain by necessary implication a provision which is otherwise than what is provided in cl. (c). We would, however, like to express our considered conclusion on this point since the point has been argued fully by both the counsel and needs to be examined, as it is likely to arise in other cases.

In the first place, while construing the opening words of s. 81(1)(c), it has to be remembered that s. 43A-companies are entitled under the proviso to that section to include provisions in their articles relating to matters specified in s. 3(1)(iii). The right of renunciation in favour of any other person is wholly inconsistent with the articles of a private company. If a private company becomes a public company by virtue of s. 43A and retains or continues to include in its articles matters referred to in s. 3(1)(iii), it is difficult to say that the articles do not provide something which is otherwise than what is provided in cl. (c). The right of renunciation in favour of any other person is of the essence of cl. (c). On the other hand, the absence of that right is of the essence of the structure of a private company. It must follow, that in all cases in which erstwhile private companies become public companies by virtue of s. 43A and retain their old articles, there would of necessity be a provision in their articles which is otherwise than what is contained in cl. (c). Considered from this point of view, the argument as to whether the word "provide" in the opening words of cl. (c) means "provide expressly" loses its significance.

On the question whether the word "provide" means "provide expressly", we are unable to accept Shri Seervai's submission that the articles must contain a provision which is expressly otherwise than what is provided in cl. (c). In the context, in which a private company becomes a public company under s. 43A and by reason of the option available to it under the proviso, the word "provide" must be understood to mean "provide expressly or by necessary implication". The necessary implication of a provision has the same effect and relevance in law as an express provision has, unless the relevance of what is necessarily implied is excluded by the use of clear words. Considering the matter from all reasonable points of view, particularly the genesis of s. 43A-proviso-companies, we are of the opinion that in order to attract the opening words of cl. (c) of s. 81(1), it is not necessary that the articles of the company must contain an express provision otherwise than what is contained in cl. (c).

We do not think it necessary to consider the decision of the Privy Council in Shanmugham v. Commissioner for Registration [1962] AC 515 (PC), cited by Shri Nariman, which says that to be an "express provision" with regard to something it is not necessary that the thing should be specially mentioned; it is sufficient that it is directly covered by the language, however broad the language may be which covers it, so long as the applicability arises directly from the language used and not by inference therefrom. We may only mention that though the articles of NIIL do not contain an express provision that there shall be no right of renunciation, that right is wholly inconsistent with the articles. We have already stated above that the right of renunciation is tantamount to an invitation to the public to subscribe for the shares in the company and can violate the provision in regard to the limitation on the number of members. Article 11, by reason of its cl. (iv), prevails over the provisions of all other articles if there is inconsistency between it and any other article.

For these reasons, we are of the opinion that cl. (c) of s. 81(1) of the Companies Act, apart from the consideration arising out of the opening words of that clause, can have no application to private companies which have become public companies by virtue of s. 43A and which retain in their articles the three matters referred to in s. 3(1)(iii) of the Act. In so far as the opening words of cl. (c) are concerned, we are of the opinion that they do not require an express provision in the articles of the company which is otherwise than what is provided for in cl. (c). It is enough, in order to comply with the opening words of cl. (c), that the articles of the company contain by necessary implication a provision which is otherwise than what is provided in cl. (c). Articles 11 and 50 of NIIL's articles of association negate the right of renunciation.

The question immediately arises, which is of great practical importance in this case, as to whether the members of a s. 43A-proviso-company have a limited right of renunciation, under which they can renounce the shares offered to them in favour of any other member or members of the company. Consistently with the view which we have taken of cl. (c) of s. 81(1), our answer to this question has to be in the negative. The right to renounce shares in favour of any other person, which is conferred by cl. (c) has no application to a company like NIIL and, therefore, its members cannot claim the right to renounce shares offered to them in favour of any other member or members. The articles of a company may well provide for a right of transfer of shares by one member to another, but that right is very much different from the right of renunciation, properly so called. In fact, learned counsel for the Holding Company has cited the decision in Re Pool Skipping Co. Ltd. [1920] 1 Ch 251 (Ch D), in which it was held that the right of renunciation is not the same as the right of transfer of shares.

Coming to sub-s. (1A) of s. 81, it provides, stated briefly, that notwithstanding anything contained in sub-s. (1), the further shares may be offered to any persons in any manner whatsoever, whether or not those persons include a person referred to in cl. (a) of sub-s. (1). That can be done under cl. (a) of sub-s. (1A) by passing a special resolution in the general meeting of the company or under cl. (b), where no such special resolution is passed, if the votes cast in favour of the proposal exceed the votes cast against it and the Central Govt. is satisfied that the proposal is most beneficial to the company. For reasons similar to those for which we have come to the conclusion that cl. (c) of s. 81 cannot apply to a s. 43A-proviso-company, we must hold that sub-s. (1A) can also have no application to such companies. To permit the further shares to be offered to the persons who are not members of the company will be clearly contrary to the articles of association of a s. 43A-proviso-company, in regard to the three matters which bear on the structure of such companies. At the highest, the method provided for in cls. (a) and (b) of sub-s. (1A) may be resorted to by a s. 43A-proviso-com-pany for the limited purpose of offering the new shares to its members otherwise than in proportion to the capital paid up on the equity shares of the company. That course may be open for the reason that sub-s. (1A) permits the further shares to be offered "in any manner whatsoever". A change in the pro rata method of offer of new shares is not necessarily violative of the basic characteristics of a private company which becomes a public company by virtue of s. 43A. To this limited extent only, but not beyond it, the provisions of sub-s. (1A) of s. 81 can apply to such companies.

The following propositions emerge out of the discussion of the provisions of the FERA, ss. 43A and 81 of the Companies Act and of the articles of association of NIIL:

(1) The Holding Company had to part with 20% out of the 60% equity capital held by it in NIIL.

(2) The offer of rights shares made to the Holding Company as a result of the decision taken by the board of directors in their meeting of April 6, 1977, could not have been accepted by the Holding Company.

(3) The Holding Company had no right to renounce the rights shares ffered to it in favour of any other person, member or non-member, and

(4) Since the offer of rights shares could not have been either accepted or renounced by the Holding Company, the former for one reason and the latter for another, the shares offered to it could, under art. 50 of the articles of association, be disposed of by the directors, consistently with the articles of NIIL, particularly art. 11, in such manner as they thought most beneficial to the company.

These propositions afford a complete answer to Shri Seervai's contention that what truly constitutes oppression of the Holding Company is not the issue of rights shares to the existing Indian shareholders only but the offer of rights shares to all the existing shareholders and the issue thereof to the existing Indian shareholders only.

The meeting of 2nd May, 1977, was unquestionably illegal for reasons already stated. It must follow that the decision taken by the board of directors in that meeting could not, in the normal circumstances, create mutual rights and obligations between the parties. But we will not treat that decision as non est because a point of preponderating importance is that the issue of rights shares to existing Indian shareholders only and the non-allotment thereof to the Holding Company did not cause any injury to the proprietary rights of the Holding Company as shareholders, for the simple reason that they could not have possibly accepted the offer of rights shares because of the provisions of the FERA and the conditions imposed by the Reserve Bank in its letter dated May 11, 1976, nor indeed could they have renounced the shares offered to them in favour of any other person at all because s. 81(1)(c) has no application to companies like NIIL which were once private companies but which become public companies by virtue of s. 43A and retain in their articles the three matters referred to in s. 3(1)(iii) of the Act.

It was neither fair nor proper on the part of the NIIL's officers not to ensure the timely posting of the notice of the meeting for 2nd May so as to enable Sanders to attend that meeting. But, there the matter rests. Even if Sanders were to attend the meeting, he could not have asked either that the Holding Company should be allotted the rights shares or alternatively, that it should be allowed to "renounce" the shares in favour of any other person, including the Manoharan group. The charge of oppression arising out of the central accusation of non-allotment of the rights shares to the Holding Company must, therefore, fail.

We must mention that we have rejected the charge of oppression after applying to the conduct of Devagnanam and his group the standard of probity and fairplay which is expected of partners in a business venture. And this we have done without being influenced by the consideration pressed upon us by Shri Nariman that Coats and NEWEY, who were two of the three main partners, were not of one mind and that NEWEY never complained of oppression. They may or they may not. That is beside the point. Such technicalities cannot be permitted to defeat the exercise of the equitable jurisdiction conferred by s. 397 of the Companies Act. Shri Seervai drew our attention to the decision in Blissett v. Daniel [1853] 68 ER 1022, 10 Hare 493, the facts of which, as they appear at pp. 1036-37, bear, according to him, great resemblance to the facts before us. The following observations in that case are of striking relevance (at p. 1040 of 68 ER; 536 of 10 Hare):

"As has been well observed during the course of the argument, the view taken by this court with regard to morality of conduct amongst all parties—most especially amongst those who are bound by the ties of partnership—is one of the highest degree. The standard by which parties are tried here, either as trustees or as co-partners, or in various other relations which may be suggested, is a standard, I am thankful to say so, far higher than the standard of the world; and, tried by that standard, I hold it to be impossible to sanction the removal of this gentleman under these circumstances".

Not only is the law on the side of Devagnanam but his conduct cannot be characterised as lacking in probity, considering the extremely rigid attitude adopted by Coats. They drove him into a tight corner from which the only escape was to allow the law to have its full play.

Even though, the company petition fails and the appeals succeed on the finding that the Holding Company has failed to make out a case of oppression, the court is not powerless to do substantial justice between the parties and place them, as nearly as it may, in the same position in which they would have been, if the meeting of 2nd May were held in accordance with law. The notice of the meeting was received by Sanders in U.K. on the 2nd May, when everything was over, bar the post-meeting recriminations which eventually led to this expensive litigation. If the notice of the meeting had reached the Holding Company in time, it is reasonable to suppose that they would have attended the meeting, since one of the items on the agenda was "Policy—(a) Indianisation, (b) allotment of shares". Devagnanam and his group were always ready and willing to buy the excess shares of the Holding Company at a fair price, as is clear from the correspondence to which our attention has been drawn. In the affidavit dated May 25, 1977, Devagnanam stated categorically that the Indian shareholders were always ready and willing to purchase one-third of the shareholding of the non-resident shareholders, at a price to be fixed in accordance with the articles of association by the Reserve Bank of India. On May 27, he sent a cable, though 'without prejudice', offering to pay premium if the Holding Company were to adopt disinvestment as a method of dilution of their interest. In the trial court, counsel for the Indian shareholders to whom the rights shares were allotted offered to pay premium on the 16,000 rights shares. The cable and the offer were mentioned before us by Shri Nariman and were not disputed by Shri Seervai. There is no reason why we should not call upon the Indian shareholders to do what they were always willing to do, namely, to pay to the Holding Company a fair premium on the shares which were offered to it, which it could neither take nor renounce and which were taken up by the Indian shareholders in the enforced absence of the Holding Company. The willingness of the Indian shareholders to pay a premium on the excess holding or the rights shares is a factor which, to some extent, has gone in their favour on the question of oppression. Having had the benefit of that stance, they must now make it good. Besides, it is only meet and just that the Indian shareholders, who took the rights shares at par, when the value of those shares was much above par, should be asked to pay the difference in order to nullify their unjust and unjustifiable enrichment at the cost of the Holding Company. We must make it clear that we are not asking the Indian shareholders to pay the premium as a price of oppression. We have rejected the plea of oppression and the course which we are now adopting is intended primarily to set right the course of justice, in so far as we may.

The question then is as to what should be taken to be the reasonable value of the shares which were offered to the Holding Company but taken over by the bulk of the Indian shareholders. In his letter dated December 17, 1975, to M.M.C. Newey, D. P. Kingsley, the secretary of NIIL, had assessed the value of NIIL's shares at Rs. 175 per share. That value was arrived at by averaging the break-up value, the yield value and the average market price in the case of quoted shares. Citing a paragraph from a book on the Foreign Exchange Regulation Act, Kingsley says in his letter that the method which was adopted by him for valuing the shares was also followed by the Controller of Capital Issues. Copies of Kingsley's letter were sent to Alan Mackrael and Devagnanam. On June 9, 1976, Price Waterhouse, Peat & Co., Chartered Accountants, Calcutta, wrote a letter to Mackrael in response to the letter's cable, valuing the shares of NIIL at Rs. 204 per share. That letter shows that while valuing the shares, they had taken into account various factors including "the average of the net asset value and the earnings basis", which, according to them, are considered as relevant factors by the Controller of Capital Issues while valuing the shares of companies. The chartered accountants applied "the CCI formula" and after making necessary adjustments to the fixed assets, the proposed dividend and the gratuity liabilities for 1975, they valued NIIL's business, on a net asset basis, at Rs. 50 lakhs. On an earnings basis, the valuation of the company based on the past three years' net profits, capitalized at 15%, was Rs. 80 lakhs. That gives an average valuation of Rs. 65 lakhs for the business or Rs. 204 per share. The purported offer to Devagnanam by Khaitan "a sewing needle competitor to Ketti", at 3.6 times par, cannot afford any criterion for valuing NIIL's shares. Khaitan, purportedly, had competitive business interests and was, therefore, prepared to "pay the earth to acquire NIIL".

According to the learned trial judge, one thing which appeared to be certain was that the market value of the shares of NIIL at or about the time when disputes arose between the parties, and particularly during the period when the controversial meetings of the board of directors were held, ranged between Rs. 175 and Rs. 204. We agree with the learned judge and hold that it would be just and reasonable to take the average market value of the rights shares on the crucial date at Rs. 190 per share. The learned trial judge awarded a sum of Rs. 90 per share on 9,495 shares to the Holding Company by way of "solatium", which, with respect, is not an accurate description of the award and is likely to confuse the basis and reasons for directing the payment to be made. Since, the average market price of NIIL's shares in April-May 1977, can be taken to be Rs. 190 per share, the Holding Company which was offered 9,495 rights shares, will be entitled to receive from the Indian shareholders an amount equivalent to that by which they unjustifiably enriched themselves, namely, Rs. 90 X 9,495 which comes to Rs. 8,54,550. We direct that Devagnanam, his group and the other Indian shareholders, who took the rights shares offered to the Holding Company, shall pay, pro rata, the sum of Rs. 8,54,550 to the Holding Company. The amount shall be paid by them to the Holding Company from their own funds and not from the funds or assets of NIIL.

As a further measure of neutralisation of the benefit which the Indian shareholders received in the meeting of 2nd May, 1977, we direct that the 16,000 rights shares which were allotted in that meeting to the Indian shareholders will be treated as not qualifying for the payment of dividend for a period of one year commencing from January 1, 1977, the company's year being the calendar year. The interim dividend or any further dividend received by the Indian shareholders on the 16,000 rights shares for the year ending December 31, 1977, shall be repaid by them to NIIL, which shall distribute the same as if the issue and allotment of the rights shares was not made until after December 31, 1977. This direction will not be deemed to affect or ever to have affected the exercise of any other rights by the Indian shareholders in respect of the 16,000 rights shares allotted to them.

We have not considered the possibility of Manoharans taking up the rights shares offered to them because, by a letter dated May 11, 1977, to NIIL's secretary, N. Manoharan had declined the offer on the ground that he was "not in a position to take those shares".

Finally, in order to ensure the smooth functioning of NIIL and with a view to ensuring that our directions are complied with expeditiously, we direct that Shri M. M. Sabharwal, who was appointed as a director and chairman of the board of directors under the orders of this court dated November 6,1978, will continue to function as such until December 31, 1982.

The company will take all effective steps to obtain the sanction or permission of the Reserve Bank of India or the Controller of Capital Issues, as the case may be, if it is necessary to obtain such sanction or permission for giving effect to the directions given by us in this judgment.

In the result, the appeals are allowed with the directions above mentioned and the judgments of the learned single judge and of the Division Bench of the High Court are set aside. We make no order as to costs since both the sides are, more or less, equally to blame, one for creating an impasse and the other for its unjust enrichment. All parties shall bear their own costs throughout.

The interim orders passed by this court are vacated.

Further directions

The amount of Rs. 8,54,550 which the Indian shareholders have been directed to pay to the Holding Company shall be paid in two instalments, the first of which shall be paid before August 31, 1981, and the second before November 30, 1981.

The interim board of directors shall forthwith hand over charge to the board which was superseded, but with Shri M. M. Sabharwal as a director and chairman of the board of directors. After taking charge from the interim board, the board of directors will take expeditious steps for convening an annual general meeting for the year 1976-77, and the years thereafter for the purpose of passing the accounts, declaring dividends, electing all directors and for dealing; with other necessary or incidental matters.

[1950] 20 Comp Cas 225 (NAGPUR)

High Court of Nagpur

Kashinath

v.

New Akot Ginning and Pressing Co. Ltd.

Vivian Bose, C.J.,

and Mangalmurti, J.

Appeal No. 91 of 1945

August 25, 1949

J.R. Chandurkar with T.B. Pendharkar, N.B. Chandurkar, and G.R. Mudholkar, for the appellant.

R.S. Dabir, V.L. Oke with Y.V. Jakatdar, for the respondent.

JUDGMENT

Bose, C.J.—This is a plaintiff's appeal in a suit for recovery of Rs. 1,03,988 being Rs. 79,519-12-9 principal and Rs. 24,463-4-0 interest on a deposit which the plaintiff made with the defendant.

The defendant is a ginning and pressing factory. According to the plaintiff the company was obliged to finance cotton traders who sent their cotton to the factory for ginning and pressing, otherwise it was not possible to get their custom. In order to do this the company had to borrow money. This money was borrowed from the plaintiff, among others, and the plaintiff sues for the amount which he says is due to him. The plaintiff asserts that the company had the authority to borrow for the purpose aforesaid. The borrowing was made under the following circumstances.

The plaintiff acted as the company's banker and lent the company money from time to time. The money so lent was placed by the company in a current account and latter transferred to a fixed deposit account. These deposits were cashed in or renewed from time to time. The latest, on which the suit is based, was for the sum set out above and was made on the 15th January, 1940. It is evidenced by a fixed deposit receipt Exhibit P-1.

We find this difficult to follow. If the plaintiff was the company's banker then either the plaintiff would lend money to the company as and when desired or, he would keep the company's money with him in his bank for the convenience of the company. If it was a case of the company keeping its money with the plaintiff then the deposit would be by the company and not the plaintiff, and the person entitled to sue for its return would be the company. If the deposit was made with money borrowed by the company from the plaintiff then the plaintiff's right would be to recover his loan. On the other hand if the plaintiff were depositing money with the company normally the company would be in the position of banker, and not the plaintiff. It is not easy to see how the plaintiff was placing money with the company in fixed deposit in his capacity as the banker. The plaintiff might be described as the defendant's financier but hardly as its banker.

It is evident from P.W.1 Thombre that the moneys lent by the plaintiff from time to time actually passed hands and were kept with the defendant and not with the plaintiff. He says he sometimes accompanied the secretary of the company when he went to the plaintiff for taking the money borrowed by him and tells us, "The secretary used to agree with the plaintiff when borrowing money from him to pay back the amount on demand. The amounts borrowed from the plaintiff used to be credited either into the current accounts or in the deposit account…….. With respect to the amounts deposited in the 'deposit accounts' the plaintiff had to make a demand after the general meeting and then if the funds were available he used to be paid off and if they were not available a fresh deposit receipt used to be passed to him by the company." The plaintiff also admits as P.W. 3 that "All the loans given by me to the company were advanced in cash by me."

In the circumstances we find it difficult to see where the relation of banker and customer comes in if the plaintiff was the banker, as he says he was in his plaint. We feel the plaintiff has taken up this position to try to bring his case within Article 60 of the Limitation Act. However, even if the plaintiff was not a banker that would not necessarily preclude him from being a depositee within the meaning of Article 60 of the Limitation Act if the transaction was really of that nature.

Exhibit P-1 purports to be a deposit receipt and if the parties deliberately chose to consider the transaction a deposit and not a loan then we would find it difficult to hold that it was not intended to be a deposit. It is true that "the mere use of the term deposit cannot alter the substance of the transaction" (U.N. Mitra's Laws of Limitation and Prescription, 6th edition. Volume II, page 1202), but as the dividing line between a deposit and a loan is so fine, and as the difference must to a large extent depend upon the intention of the parties, the fact that they agree to regard their act as a deposit is of importance. However, that in itself would not necessarily attract Article 60.

The main ground of attack is that the borrowing was ultra vires. The defendant company admits that the plaintiff and others did make certain advances to the company but it says that these have all been repaid. But that apart, the defendant contends that the borrowing was ultra vires. To determine this it will be necessary to look to the Memorandum and Articles of Association.

The objects of the company are there set out to be to gin and press cotton. In order to achieve these objects the company is given power either to purchase ginned or unginned cotton [clause 3 (e)] or "to give money for the purchase of goods… or other articles required for all or any of the above works of the company or to give money as advance for the said goods." [Clause 3 (i)]. And in order to be able to give the money for this purpose the company is authorised "to borrow money on……receipts passed for deposits or by opening a current account in the creditors's shop……or in any other way". [clause 3 (h)].

We hold on this that the company was authorised to borrow money for the purpose of advancing it to traders.

The next question is whether it could borrow from one of its own directors. It is admitted that the plaintiff was the managing director at the date of the deposit in suit. The law as to this is set out in Ghosh's Indian Company Law (7th edition), pages 223 and 224.

The main rule is that "a director is precluded from dealing on behalf of the company with himself and from entering into engagements in which he has a personal interest conflicting or which may possibly conflict with the interest of those whom he is bound by fiduciary duty to protect." (Page 267 Ibid).

But despite, this, if the contract is for the benefit of the company it would be upheld. But most of that is beside the point because, as Ghosh says at page 268, "Modern articles usually authorise directors to make contracts in which they are personally interested, on disclosing their interest to their fellow directors……but the terms must be strictly complied with."

We think such a provision is unnecessary in India because Section 91-A (1) of the Companies Act contemplates a position in which directors are interested in contracts made with the company, and all that is required is that three should be a full and frank disclosure of the nature of their interest. We hold therefore that a company is entitled to borrow money from one of its own directors. But that is subject to the fundamental position that the director, even though disclosing his interest, does not take undue advantage of his position because, fundamentally, the position of a director is very like that of a trustee. He occupies a fiduciary position and so the transaction must be fair and proper.

* * *

We come next to the question of limitation. As we said at the beginning of this judgment, the fact that the parties choose to call the transaction a deposit and not a loan has importance. But before Article 60 can apply not only must the transaction be a deposit but there must be in addition, "an agreement that it shall be payable on demand.” Exhibit P-1 negatives such an agreement for it is not payable on demand. It is payable on a fixed date 12 months hence. The whole point of the deposit, according to the plaintiff, was to save the company the inconvenience of having to pay out large sums of money on demand. That being so, Article 60 cannot apply for, as U.N. Mitra tells us in his Law of Limitation and Prescription (6th edition), Volume II, page 1201, on the authority of Bank of Upper India v. Arif Husain. "Fixed deposits in banks, not being payable on demand, are not governed by this article. Article 115 may apply to such deposits where on expiry of the term the amount would become payable as money lent." We hold therefore that the limitation was three years commencing from the 31st July, 1940. As the suit was filed on the 16th June, 1944, it is prima facie barred by time.

The plaint relies on the following matters for saving limitation:—

(1) an acknowledgment contained in Exhibit P-42, a resolution of the Board of Directors dated the 20th May, 1941;

(2) the company's balance sheets for 1940-41 and 1941-42 and 1942-43;

(3) an application by the plaintiff for liquidation made under Section 162 of the Indian Companies Act. The plaintiff contends that section 14 of the Limitation Act is called in to play and saves limitation.

The fourth ground set out in the plaint was abandoned before use.

Considering Exhibit P-42 first. That does not save limitation for two reasons. The first is that it is not an acknowledgment of liability. One Pandurang Hadole informed the Board of Directors that a sum of Rs. 67,939 was due to the plaintiff in July, 1936, and that the directors had offered to settle the debt for Rs. 65,000. The plaintiff was again told to make a choice so that the matter could be placed before the general body of shareholders. This is not an acknowledgment of liability. It merely asks the plaintiff to determine his attitude so that the matter can be placed before another body which would decide the question.

In the second place, even if it is an acknowledgment, it refers to the debt of Rs. 67,939 due in July, 1936. As Exhibit P-42 is dated 1941 it is beyond time because, before an acknowledgment can operate to save limitation it must be made before the limitation expires.

Turning next to the balance sheets. The mere signing of a balance sheet by a director does not operate to save limitation because the director in drawing up a balance sheet does not do so with the intention of acknowledging liability but under a duty where he is bound to set out, among other things, the claims made on the company. It is then for the directors, and later for the company, to pass on these claims and either accept them or reject them [See Ghosh's Company Law, 7th edition, page 392. See also Kandasami Reddi v. Suppamntal].

Actually no balance sheets were filed till 1945 though they were expressly relied on in the plaint. Then on the 28th April, 1945, the plaintiff applied to file the balance sheet of 1940-41. He expressly stated that he did not want to adduce any oral evidence to prove it. In view of that he was allowed to file it. But it transpired later that a balance sheet does not prove itself, therefore the plaintiff made another application on the nth July, 1945, for permission to file a copy from the Registrar and contended that this proved itself. This document was rejected as filed too late. Both have been refiled here.

Section 13(3) of the Indian Companies Act requires a copy of the balance sheet to be sent to every member at least 14 days before the meeting and Section 134(1) requires another copy to be sent to the Registrar after the general meeting of the shareholders. It is evident from the Act itself that these are copies and not originals and there is nothing in the Act which makes these copies admissible in evidence. On the contrary Section 131(2) enacts that the original shall be open to inspection by any member of the company. Therefore we are relegated to the ordinary law of evidence.

Section 65 of the Evidence Act sets out the cases in which secondary evidence is admissible. It was argued that this falls under clause (e)—"when the original is a public document within the meaning of Section 74" because Section 74 states that the following are public documents, namely, "(2) public records kept in British India of private documents."

The argument is not well founded. Section 65 applies Section 74 only when the original is a public document. It would, for example be absurd to contend that a private sale deed or mortgage can be proved by the production of a certified copy obtained from the Sub-Registrar's office and nothing more.

We suspect these copies were produced at a late stage of the case on purpose and consider that the objection to the admissibility of these copies is not a mere technicality.

It will be recollected that a directors' meeting was called for the 27th April, 1941, (Exhibit D-88), and that all that was done on that day was to accept the plaintiff's resignation as Chairman and appoint another in his place. Thereupon a second meeting was called for the 17th May, 1941, (Exhibit D-89), and had to be adjourned for want of a quorum. The adjourned meeting was held on the 20th May, 1941, (Exhibit P-42) but no balance sheet was passed. Thereupon a general meeting of the shareholders was called for the 16th November, 1941, to pass the balance sheet. This also had to be adjourned to the following day for want of a quorum (Exhibit D-90). At the adjourned meeting the shareholders then present refused to pass the accounts (Exhibit D-91). It was not till some five weeks later, namely on the 30th December, 1941, that the rival faction met and passed the accounts (Exhibit P-63). But this meeting, as has already been pointed out, purports to be a continuation of the meeting of the 16th November, 1941, which had to be adjourned for want of a quorum. It does not purport to be a fresh meeting freshly convened after due notice etc.

Now under Article 58 of the Articles of Association a meeting which is adjourned for want of a quorum has to meet on the following day. It cannot meet on any other date. The reason for this is simple. If there is no quorum there can be no valid meeting, therefore the persons present cannot transact any business and cannot even adjourn their own meeting Unless their Articles provide otherwise the only way in which they can validly meet again is by convening a fresh meeting after due issue of a fresh set of notices. Therefore, if the Articles provide that the adjourned meeting shall be held on the following day it must be the following day or nothing. As Exhibit P-63 purports to be a record of the adjourned meeting it is prima facie valueless because the meeting was held five weeks later and not on the following day. We cannot presume that the meeting was validly called afresh because on the face of it the document describes the meeting as the adjourned meeting. In the circumstances the impugned balance sheets were rightly rejected. They do no prove themselves, and, so far as the record goes, it would appear that they were validly rejected by the shareholders on the 17th November, 1941, (Exhibit D-91), and have never been validly passed since. For these reasons we hold that these balance sheets do not operate as acknowledgments within the meaning of Section 19 of the Limitation Act. The other balance sheets of 1941-42 and 1942-43 have not been filed. We hold therefore that the claim is barred by limitation.

A point of estoppel was argued. But there can be no estoppel here because the plaintiff knew all the facts and himself brought about most of the transactions by being present at the meetings, and in many cases acting as Chairman.

* * * *

As regards the question of limitation, we omitted by a slip to give a decision on the arguments advanced regarding Section 14 of the Limitation Act. The contention was that the plaintiff made an application to the Court under the Indian Companies Act for liquidation on the 16th June, 1941. This was dismissed on the 16th June, 1944. He contends that that proceeding was founded upon the same cause of action. With that we do not agree.

In the first place the liquidation proceedings have not been filed. We have neither the application nor the order before us. All we have is an admission of the defendants when called upon to admit facts that an application for liquidation was made on the 16th June, 1944, and that the defendants in the liquidation proceedings as well as here are the same. There is no admission that the cause of action is the same. They were called upon to admit that fact but did not do so. It was therefore incumbent on the plaintiff to prove it if he wished to rely on that for bringing his claim within limitation.

The grounds on which a company can be wound up are set out in Section 162 of the Indian Companies Act. There are a number of them. Even if it be assumed that the application was under Section 162(v), namely that the company was unable to pay its debts. Section 162(1) shows that the expression "unable to pay its debts" embraces three distinct concepts. There is nothing to show that the application was confined to this particular debt. But even if it was, the cause of action in winding up proceedings under Section 163(1) is the inability of the company to pay its debts and not, as here, the recovery of the debt. The question of recovery does not arise until the winding up order has been made and a liquidator appointed. It is at that stage that the claims against the company are enquired into and decided. Therefore the cause of action in those proceedings and the cause of action here were not the same. It follows that Section 14 is not attracted.

The appeal fails and is dismissed with costs. The cross-objection was not pressed and is also dismissed with costs.

[1971] 41 COMP. CAS. 377(BOM)

HIGH COURT OF BOMBAY

Firestone Tyre and Rubber Co.,

v.

Synthetics and Chemicals Ltd.

MADON J.

SUIT NO. 522 OF 1969 AND SUIT NO. 681 OF 1969

NOVEMBER 7, 1969

Notices of motion in both the suits.

F.S. Nariman with A. B. Diwan and A. M. Setalvad for the Plaintiffs.

A.K. Sen with Mrs. Sen, M. H. Shah and I.M. Chagla for defendant No. 1

C.K. Daphtary with J. I. Mehta and R.N. Banerjee for defendant No. 2.

R.B. Bhatt with N.G. Thakkar for defendants Nos. 3 and 4.

M.R. Modi with P.P. Khambatta and R.J. Joshi for defendant No. 5.

JUDGMENT

As these two notices of motion were heard together, it will be convenient to dispose of them by one judgment. Both the above suits arise out of the appointment for a further term of Kilachand Devchand and Co. Private Ltd., the second defendants in Suit No. 522 of 1969 and the fifth defendants in Suit No. 681 of 1969, as the sole selling agents of Synthetics and Chemicals Ltd., the first defendants in both the suits. It will be convenient to refer to these two companies hereinafter as "the private company" and "the company", respectively.

These notices of motion were argued elaborately and at great length and as if their hearing were a dress rehearsal for the hearing of the suits. I propose to set out first the material facts necessary for understanding the matters in controversy between the parties and deal with the other facts while considering the rival contentions under each head of controversy raised before me. The company was incorporated on January 20, 1960, as a result of collaboration between the plaintiffs, The Firestone Tyre and Rubber Company, a company incorporated under the laws of the State of Ohio in the United States of America and Tulsidas Kilachand and others to whom, for the sake of convenience, I will hereinafter refer as "the Kilachand group". The Kilachand group consists of Tulsidas and his three brothers, Ramdas, Ambala and Chinubhai, and their relatives and other concerns and companies owned or controlled by the Kilachand family. The main object of the company is to manufacture and deal in synthetic rubber and it is the only company in India which manufactures synthetic rubber. The authorised share capital of the company is Rs. 15,00,00,000 divided into 15,00,000 shares of Rs. 100 each. The issued and subscribed share capital of the company is Rs. 5,75,00,000 divided into 5,75,000 equity shares of Rs. 100 each, its paid up share capital being Rs. 5,74,42,545. The plaintiffs have invested large amounts both by way of loans and share capital in the company. The amount of their loan investment as on December 31, 1968, including unpaid interest was about Rs. 3,46,16,124. There is also a sum of about Rs. 83,71,875, for the balance due to the plaintiffs on account of continuing know-how and technical services rendered by the plaintiffs under an agreement dated March 25, 1960, between the plaintiffs, the company and the private company. The plaintiffs are the holders of 1,43,650 fully paid-up equity shares of the face value of Rs. 100 each; in the company. Fifty shares are held by F.J Reighley, 50 shares by G.T. Warner and 4 shares by V.N. Karode, these three being the finance director, the sales director and the secretary and director of Firestone Tyre and Rubber Company (India) Private Ltd., a wholly owned subsidiary company of the plaintiffs. These shareholdings are admitted. The aggregate of these shareholdings in the company is thus a little over 25 per cent. So far as the Kilachand group is concerned, I am informed by learned counsel for the company that the Kilachand group holds or controls voting rights in respect of shares of a little over 27 per cent, of the total paid-up share capital of the company. Tulsidas, who is not a defendant in Suit No. 522 of 1969 but is the second defendant in Suit No. 681 of 1969, and his brother, Ramdas, were at all times and still are directors of the company, Tulsidas at all times being also the chairman of the board of directors of the company.

The private company is a subsidiary of another private company, Kesar Corporation Private Ltd. The majority of shares of the private company are held by Kesar Corporation Private Ltd. and the remaining shares by Tulsidas and his brothers. The Kilachand group controls Kesar Corporation Private Ltd. and holds most of its shares. Tulsidas and Ramdas were at all material times and are directors of both the private company and Kesar Corporation Private Ltd.

At the meeting of the board of directors of the company held on July 17, 1963, it was decided to appoint the private company as the sole selling agents of the company. In pursuance of such decision the following two c-49 resolutions were passed at the annual general meeting of the company held on September 23, 1963, the first of such resolutions as a special resolution and the second as an ordinary resolution :

"Resolved that pursuant to section 314 and other applicable provisions of the Companies Act consent be and is hereby given to the appointment as the sole selling agents of the company for all the territories comprised within the Republic of India, Nepal, Bhutan and Sikkim, of Messrs. Kilachand Devchand and Company Private Ltd., a company in which Mr. Tulsidas Kilachand and Mr. Ramdas Kilachand, directors of this company, are interested as directors and members".

Resolved that pursuant to section 294 and other applicable provisions of the Companies Act, Messrs. Kilachand Devchand and Co. Pvt. Ltd. be and they are hereby appointed the sole selling agents of the company for all the territories comprised within the Republic of India, Nepal, Bhutan and Sikkim for a period of five years commencing on the 1st October, 1963, and that the terms and conditions as to remuneration and otherwise contained in an agreement, the draft thereof has been placed before the meeting and for the purpose of identification initialled by the chairman of this meeting be and the same are hereby approved.

"Resolved that the board of directors be and they are hereby authorised to cause the said agreement when engrossed to be executed on behalf of the company".

It appears that the fifth defendant company was claiming to have incurred expenditure for setting up a sales organisation for the company prior to the aforesaid board meeting. Accordingly, in the said annual general meeting the following resolution was also passed as a special resolution:

"Resolved that Messrs. Kilachand Devchand and Co. Private Ltd., a company in which Mr. Tulsidas Kilachand and Mr. Ramdas Kilachand, directors of this company, are interested as directors and members, be paid a sum equal to 2% of the net sale price of the company's products sold up to the date of this meeting in reimbursement of the expenses incurred by them in setting up a sales organization".

In pursuance of the said resolutions, by an agreement dated September 24, 1963, the private company was appointed the sole selling agents of the company for all: territories comprised within India, Nepal, Bhutan and Sikkim for a period of five years commencing from October 1, 1963. Under the said agreement, each party had the right to terminate the agreement prior to the expiry of its term by giving four calendar months' notice to the other side. The private company had to set up and maintain at its own cost an adequate organisation for sale of the company's products within the said territories and to bear and pay all expenses relating to such organisation. The private company had to procure orders for the purchase of products at the prices and on the terms and conditions of sale determined by the board of directors of the company and forward them to the company's office for acceptance and the same were to be binding on the company only when and to the extent confirmed by the company. The private company undertook full responsibility for the collection of price and all other amounts due from the buyers and to make immediate payment to the company whether the amounts were actually collected from the buyers or not, on the same being demanded by the company. The private company was to be paid a commission at the rate of 2 per cent, on the net selling price exclusive of Government excise duty and sales tax or other like charges of the products sold by or through the selling agents within the said territories during the period of the said agreement. On products sold directly by the company the private company was to be paid such commission as the board of directors might decide, not exceeding the said rate of 2 per cent, on the net selling price. The account of commission was to be made up at the end of each quarter in each financial year. The said agreement further provided that if and when any goods manufactured by the company were sold outside the said territories during the period of the said agreement, the board of directors of the company and the private company would decide mutually whether any commission on such sales should be paid by the company to the private company and the rate of such commission, if any. Clause 13 of the said agreement provided as follows :

"The terms of this agreement may be modified by mutual agreement of the board of directors of the company and the selling agent except that the rate of commission payable to the selling agents as provided in clause 12 hereof shall not be so modified".

It appears that the plaintiffs were not happy at the idea of granting a sole selling agency and had protested against the same. The plaintiffs, however, did not oppose the passing of the said resolutions.

The company started commercial production of synthetic rubber in about May, 1963. It will be interesting at this stage to know the working of the company during all these years. In no year has the company declared any dividends. For the year ending December 31, 1963, the company's balance-sheet and profit and loss account showed a loss of Rs. 29,25,604 without providing for depreciation for that year amounting to Rs. 1,03,57,132. The previous year's- loss was Rs. 9,38,858 and after making certain adjustments on account of tax, the aggregate amount of loss for these two years came to Rs. 38,87,990 which was carried forward to the next year. During this period the commission paid to the private company under the agreement dated September 24, 1963, including reimbursement of expenses said to be incurred by the fifth defendant, prior to their appointment, was Rs. 1,71,291. For the year ending December 31, 1964, the company's balance-sheet and profit and loss account showed a profit of Rs. 16,49,410 without providing for any depreciation for that year amounting to Rs. 1,04,42,634. Thus the total arrears of depreciation for the years 1963-64, not provided for, aggregated to Rs. 2,10,03,222. This resulted in the balance of loss aggregating to Rs. 23,05,929 being carried forward. The selling agency commission paid to the private company in that year was Rs. 8,68,117. For the year ending December 31, 1965, the net loss was Rs. 19,34,186 after providing for depreciation for that year. For the year ending. December 31, 1966, the company earned a profit of Rs. 1,00,64,823 which included a sum of Rs. 84,39,325 for claims recovered against loss of profit policy and Rs. 5,03,220 being the amount received against insurance claims. After providing for depreciation for that year and for 1963 and adjusting the depreciation for the year 1965 and the loss carried forward, the total loss carried forward was Rs. 43,86,461. For the year ending December 31, 1967, the company earned a net profit of Rs. 41,62,635. After providing for depreciation for that year and the previous year's loss carried forward, the total loss was about Rs. 2,23,826 carried forward to the next year. For the year ending December 31, 1968, the net loss suffered by the company, after providing for depreciation for the years 1964 and 1968, was Rs. 26,52,335. For the years 1965, 1966, 1967 and 1968 the selling agency commission paid to the private company was Rs. 14,88,318, Rs. 16,86,971, Rs. 19,86,250 and Rs. 22,50,440, respectively. Thus, the total amount of commission paid to the company for the period of the said agreement dated September 24, 1963, aggregated to Rs. 84,63,849.

It appears that in 1965 some correspondence took place between the Company Law Board and the company. Ultimately, by its letter dated July 28, 1965, the Company Law Board intimated to the company that after careful consideration of the information furnished by the company it appeared to the Company Law Board that the terms of appointment of the company's sole selling agents were prejudicial to the interest of the company and the company was required to show cause why the Company Law Board should not, in exercise of the powers conferred upon it under section 294(5)(c) of the Companies Act, 1956, read with the Government of India, Ministry of Finance, Department of Revenue, Notification No. G.S.R. 178, dated February 1, 1964, vary the terms and conditions of appointment of the private company as sole selling agents. The variations proposed by the Company Law Board were to make the private company liable to pay to the company the amount of price and other amounts due from the buyers, whether actually collected from the buyers or not, within 60 days from the date of the sale and not when demanded as provided in the said agreement; that no commission should be payable to the private company in respect of sales made by the company to those consumers borne on the register of the Director-General, Technical Department, Government of India, who had been required by the Government of India to furnish confirmation letters that they would purchase indigenous synthetic rubber from the company to the extent allocated to them by the Government, and that the commission on sales outside the agency territories should not exceed 2½ per cent, on the net selling price. This show-cause notice from the Company Law Board was considered by the board of directors. The attitude adopted by those directors who represented the plaintiffs' viewpoint was that the sole selling agency should be terminated as it was working detrimentally to the interest of the company. The board of directors also set up a sub-committee to consider the position brought about by the said show-cause notice. This sub-committee resolved that the secretary of the company should be authorised to send a suitable letter requesting for extension of time from the Company Law Board up to October 15, 1965, for submitting a representation. The plaintiffs, however, continued to insist that the sole selling agency should be terminated. I do not consider it necessary to set out the details relating thereto. Suffice it to say that an extension was granted by the Company Law Board. It is not clear from the record whether any written representation was in fact submitted on behalf of the company, but from the letter of June 15, 1966, from the Company Law Board it appears that a personal hearing was given on May 26, 1966. By the said letter the company was informed that having regard to the circumstances of the case the Company Law Board had "decided not to take any further action in the matter under section 294(5) of the Act at this stage ". It was further stated in the said letter that:

"The Board would suggest, however, that at the time of the renewal of the agreement with the sole selling agents in 1968, your company should bear in mind the views of the Board which were communicated to you (that is, the company) in their letter of even number dated the 28th July, 1965, read with their letter of even number dated the 18th September, 1965 ".

The letter of September 18, 1965, merely corrects some typographical errors in the earlier letter of July 28, 1965.

By a letter dated April 4, 1968, the private company intimated to the company that the company had suffered a considerable increase in their expenses due to the high price of imported alcohol and that the company had made very strenuous efforts with the Government of India to be allowed an increase in the selling price in order to offset the increased cost, but the selling price fixed by the Government of India with effect from April 1, 1968, did not offset such increased cost. It was further stated in the said letter that, in the interest of the company and in order to tide over the difficult situation of the company and in the mutual interest of both the parties and as a matter of commercial expediency, the private company was prepared to continue to charge selling agency commission as from April I, 1968, at the rate of 2 per cent, on the net selling price of the company's products as prevailing on November 5, 1967, exclusive of Government excise duty, sales tax or other like charges sold by or through the private company. The letter concluded by saying : "You will kindly appreciate that this is an ad hoc arrangement". By its letter dated August 31, 1968, the private company pointed out to the company that the sole selling agency agreement was valid up to September 30, 1968, and requested the company to renew the said agreement "on the same terms and conditions as stipulated in the earlier agreement" for a further period of five years, that is, from September 30, 1968, to September 30, 1973. This letter was placed before and considered by the board of directors of the company at its meeting held on November 14, 1968. At that meeting Warner was in the chair, the other directors present being Reighley, Tulsidas, Ramdas, S.L. Kirloskar, R.R. Ruia and Mr. B.K. Daphtary, a solicitor and partner in the firm of solicitors, Messrs. Daphtary, Ferreira and Diwan, who were and are the solicitors for the company as also the private company. I will hereinafter refer to Mr. B.K. Daphtary as "the solicitor-director". At the said meeting Reighley and Warner opposed the further appointment of the private company. Ultimately, the solicitor-director moved the following resolution which was seconded by the said Kirloskar:

"Resolved that Messrs. Kilachand Devchand and Co. Pvt. Ltd. be and are hereby appointed, but subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after today, the sole selling agents of the products of the company for a period of five years commencing on 1st October, 1968, upon the terms and conditions contained in the agreement dated 24th September, 1963, as clarified by the selling agents in their letter dated 4th April, 1968, and that the acts and deeds of Messrs. Kilachand Devchand and Co. Pvt. Ltd. done on or after the 1st October, 1968, be and the same are hereby ratified and confirmed and that for such services, they be paid commission as provided in the said agreement dated 24th September, 1963, clarified as aforesaid.

Further Resolved that an agreement with Kilachand Devchand and Co. Pvt. Ltd., the selling agents of the company, be prepared on the same terms and conditions as are contained in the said agreement, dated 24th September, 1963, and that the seal of the company be affixed on the engrossment in token of execution by the company, in the presence of any two directors of the company and the secretary of the company, Mr. K.B. Dabke, who do sign the same but before such execution a clarification be endorsed or attached to such agreement duly signed by or on behalf of the selling agents in terms of their letter dated 4th April, 1968".

The solicitor-director, Kirloskar and Ruia voted in favour of the resolution, while Reighley and Warner voted against it. Tulsidas and Ramdas, being interested in the said resolution, abstained from voting. I may mention at this stage that all through there has been a dispute between the parties as to whether the minutes of the board of directors of the company have been correctly recorded. It is not necessary for the purpose of these motions to go into the details of this controversy. All that is necessary to set out is that at the meeting of the board of directors held on February 3, 1969, the minutes of the board meeting held on November 14, 1968, were confirmed and Reighley read out a statement on behalf of Warner and himself requesting that it should be made a part of the minutes. By his letter dated February 4, 1969, Reighley has reproduced the text of that memorandum. According to that memorandum, at the said meeting Warner and Reighley submitted that the resolution for further appointment of the private company was not valid inasmuch as the vote of the solicitor-director could not be considered as at all material times he was and continued to be an interested director, being a solicitor for the private company and there were therefore two valid votes for and two valid votes against the resolution, the resolution was not carried. On February 18, 1969, an agreement was executed between the company and the private company appointing the private company as the sole selling agents of the company for the aforesaid territories for a period of five years commencing from October 1, 1968. All the other terms of this agreement are the same as in the said agreement dated September 24, 1963, except that there is a new clause in this agreement, namely, that the appointment of the private company was subject to the condition that it should not be valid if it was not approved by the company in the first general meeting held after the date on which the appointment was made. To this agreement was attached a letter dated February 18, 1969, from the private company to the company recording that it had executed the said sole selling agency agreement and confirming that the clarification contained in the said letter dated April 4, 1968, from the private company to the company would continue to remain in force and that the letter of February 18, 1969, should be attached to and form part of the agreement. The contents of the said letter of April 4, 1968, were reproduced in the said letter of February 18, 1969. By his letter dated February 24, 1969, Warner called upon Tulsidas to amend the minutes of the said meeting of the board held on November 14, 1968, so as to provide that the aforesaid resolution was not carried. It appears that no reply was. sent to the said letter.

Thereafter, by their letter dated March 17, 1969, addressed to the company and its directors, the plaintiffs required them to convene an extraordinary general meeting of the company for the purpose of passing the following resolution as an ordinary resolution, namely :

"Resolved that the appointment of Kilachand Devchand & Co. Private Ltd. as the sole selling agents of the company's products for a period of five years commencing on 1st October, 1968, for the territories comprised within the Republic of India and Nepal, Bhutan and Sikkim made by the board of directors of the company by a resolution passed at their meeting on 14th November, 1968, be and the same is hereby not approved".

The plaintiffs also set out the statement which they desired to have included in the explanatory statement to be annexed to the notice convening the said meeting. This letter came up for the consideration of the board at its meeting held on March 21, 1969, when it was resolved that the matter should be placed for the consideration of the board at the next meeting thereof to be held on March 27, 1969. At the meeting of the board held on March 27, 1969, the following resolution was passed by a majority, Reighley and Warner voting against the same. That resolution is as follows:

"Resolved that pursuant to the provisions of section 294 and other applicable provisions of the Companies Act, if any, the company hereby approve the appointment of M/s. Kilachand Devchand and Co. Private Ltd. as the sole selling agents of the products of the company for all the territories comprised within the Republic of India, Nepal, Bhutan and Sikkim for a period of 5 years commencing on 1st October, 1968, upon the terms and conditions as to the remuneration and otherwise contained in the agreement, dated 18th February, 1969, as clarified by the selling agents in their letter, dated 18th February, 1969, annexed to the said agreement, which agreement with letter annexed is placed before the meeting".

Prior thereto, Reighley moved and Warner seconded the proposition that the meeting requisitioned by the plaintiffs should be called first. This proposition failed and thereafter another resolution was passed by a majority, namely, that the extraordinary general meeting to be convened by the company should be held on April 28, 1969, at 4 p.m. at Patkar Hall of S.N.D.T. University and that the extraordinary general meeting requisitioned by the plaintiffs should be held on April 29, 1969, at 4 p.m. at the same place. It was also resolved that the secretary of the company should send out notices of the said meeting together with the explanatory statements in consultation with the solicitors of the company. In pursuance of these resolutions two notices, both dated March 27, 1969, were sent out to the shareholders, the one calling the extraordinary general meeting convened by the company and the other calling the extraordinary general meeting requisitioned by the plaintiffs. The convening of these two meetings resulted in a regular proxy-battle between the plaintiffs and the Kilachand group. A large number of proxies were lodged by both sides as also a large number of letters revoking the proxies given in favour of the other group. Circulars and statements to the shareholders in the form of advertisements in newspapers were issued by both sides. The meetings were held in a "pandal" put up in the open space adjacent to the said Patkar Hall. At both the said meetings Tulsidas took the chair. According to the plaintiffs, there were protests and objections to Tulsidas presiding at the said meetings. It is admitted that there were such protests and objections so far as the first meeting was concerned. At both the said meetings a poll was demanded and it was ordered by Tulsidas as chairman of the said meetings to be taken immediately and accordingly a poll was so taken. In respect of the poll taken at both the said meetings, defendant Nos. 3 and 4 in Suit No. 681 of 1969 were appointed as scrutineers. Both these defendants are chartered accountants. The third defendant is a partner in the firm of chartered accountants who are the company's auditors, while the fourth defendant is a partner in Messrs. Ford, Rhodes, Parks and Company, chartered accountants, who are the auditors of the said Firestone Tyre and Rubber Company of India Private Ltd. After the poll was taken at the meeting of April 28, 1969, Tulsidas announced that the result of the poll would be declared by May 26, 1969, by an announcement in newspapers. Similarly, after the poll was taken at the meeting held on April 29, 1969, Tulsidas announced that the result of the poll would be declared 15 days after the result of the poll taken at the meeting held on April 28, 1969. Thereafter, by an announcement in newspapers, the announcement of the result of the poll of the meeting of the 28th April was postponed to the end of June, 1969.

On June 3, 1969, the plaintiffs filed Suit No. 522 of 1969. In this suit the plaintiffs have challenged the validity of both the initial appointment of the private company as the sole selling agents of the company as also their appointment as such sole selling agents for a further term. The plaintiffs have also challenged the validity of the resolution of the board passed on November 14, 1968. They have further contended that a special resolution was necessary for approving the appointment of the private company and that as the meeting of the 28th April was convened only for passing the resolution as an ordinary resolution, the private company had vacated their office as sole selling agents as from April 29, 1969. They have also prayed for a refund by the private company to the company of all amounts of commission received by it, and for an injunction restraining the company and the private company from either acting upon the said resolution of the board of November 14, 1968, or on the said agreement of February 18, 1969, read with the said letter dated February 18, 1969, and restraining the company from paying to the private company and the private company from receiving from the company any remuneration as and by way of sole selling agency commission or otherwise in the future. In Suit No. 522 of 1969, the plaintiffs took out a notice of motion on June 11, 1969, in which they have prayed for an interim injunction for restraining the company from making any payment to the private company by way of commission or otherwise under the said resolution of the board dated November 14, 1968, or the said agreement dated February 18, 1969, read with the said letter dated February 18, 1969, or from implementing in any manner or acting upon the said resolution or the said agreement. On June 30, 1969, the result of the poll of the meeting held on April 28, 1969, was announced in newspapers. According to the said announcement, the votes cast in favour of the resolution were 2,47,480 and the votes cast against the said resolution were 2,27,309. Accordingly, by the said announcement, Tulsidas as the chairman declared that the said resolution was carried.

Several important events took place between the date of the issue of the said notices convening the meetings and the aforesaid announcement. Correspondence also took place between the parties both before and after the announcement of the result. Some of these facts are disputed, but some and particularly those which are necessary for forming an opinion on the order to be made on these motions are admitted. I will deal with these facts in detail while considering the arguments advanced with respect to the validity of the result of the poll.

On July 16, 1969, the plaintiffs filed Suit No. 681 of 1969. In this suit they have challenged the validity of the said notices convening the meetings, the conduct of the said meetings, the manner in which the result of the poll taken at the meeting of the 28th April was arrived at and the result of such poll. In the said suit the plaintiffs have prayed for a declaration that the said meeting held on the 28th April and the declaration of the result of the poll taken thereat were illegal and void and that the said meeting was not properly held as required by law. In the alternative they have prayed that the court should give directions for scrutinising the votes, proxies and letters of revocations in respect of the said two extraordinary general meetings and should appoint a fit and proper person to scrutinise them and to determine and decide the result of the said meetings and should remove Tulsidas and defendants Nos. 3 and 4 as the chairman and scrutineers respectively of the said meeting of the 29th April. In the said Suit No. 681 of 1969 the plaintiffs took out a notice of motion on July 17, 1969. In the said motion they have prayed for an interim order and injunction restraining Tulsidas and the scrutineers from exercising any power as chairman or scrutineers of the said general meeting of the 29th April in connection with the scrutiny of proxies, letters of revocations or votes cast thereat, as also for restraining the company, Tulsidas and the private company from in any manner implementing or acting upon the footing that the resolution proposed at the said meeting of the 28th April was passed, and restraining the company from making any payment to the private company and the private company from receiving from the company any payment, whether by way of commission or otherwise, under the said resolution of the board of directors passed on November 14, 1968, or under the said agreement of February 18, 1969, read together with the said letter dated February 18, 1969, and restraining the company, Tulsidas, the private company and the scrutineers from disposing of or otherwise dealing with the papers and documents in connection with the polls taken at the said two extraordinary general meetings including certain documents specified in exhibit "Z-9" to the plaint, and for an order permitting the plaintiffs to inspect the said papers and documents. Before issuing the said notice of motion the plaintiffs, after giving notice to the defendants in the said suit, made an application to me on July 16, 1969, for ad interim reliefs, and after hearing counsel on behalf of the parties, I issued an ad interim injunction restraining the defendants to the said suit, namely, the company, Tulsidas, the scrutineers and the private company, and each of them and their servants and agents from disposing of or in any manner dealing with the papers and documents in connection with the polls taken at the said two extraordinary general meetings including those mentioned in exhibit "Z-9" to the plaint or from opening the packets in which the papers may have been kept.

Though a large number of grounds have been taken in both these suits at the hearing: of these notices of motion Mr. Nariman, learned counsel for the plaintiffs, has confined himself to arguing certain points only. This he has done only for the purposes of these motions and without in any mariner giving up the right to argue the said points at the hearing of the suits; for instance, though in the said Suit No. 522 of 1969 the validity of the initial appointment of the private company as sole selling agents of the company made in September, 1963, has been challenged, Mr. Nariman for the purposes of these notices of motion did not argue this point at the hearing of these motions. I may also mention that all parties before me are agreed and further applied to me that it would be in the interest of the parties if the hearing of both these suits were expedited, a view which I too am inclined to take. It was also not disputed by any of the defendants that an interim injunction may be granted restraining Tulsidas and the scrutineers in terms of prayer (a) of the said notice of motion in Suit No. 681 of 1969, namely, restraining Tulsidas and the scrutineers from proceeding further with exercising any power as chairman or scrutineers at the said extraordinary general meeting of the company held on April 29, 1969, in connection with the scrutiny or examination of the proxies, revocations of votes cast thereat in connection with the declaration of the result of the poll taken thereat. The reason for this is obvious. Either the company had validly approved the further appointment of the private company at the meeting held on April 28, 1969, and the resolution moved thereat was duly passed, assuming an ordinary resolution only was required, or it had not. In either event, the passing or rejecting of the resolution moved at the requisitioned meeting held on April 29, 1969, would be immaterial. If the further appointment was approved at the meeting of the 28th April its disapproval at the meeting of the 29th April would not have any effect. If the said further appointment was not approved at the meeting of the 28th April, its express disapproval at the meeting of the 29th April would be redundant. The parties are also agreed that the papers and documents in connection with the polls taken at the said two meetings should be kept in safe custody and that the parties should be permitted forthwith to take inspection thereof under proper safeguards without waiting for formal discovery, so that the hearing of the suits and particularly of Suit No. 681 of 1969 may be expedited. Though at one stage the parties agreed as to the person who should have the custody of these papers and documents and give inspection thereof, as the parties could not agree upon the form of the consent order in that behalf, no order by consent can, however, be passed with respect thereto.

I will now deal with the various points argued at the hearing of these notices of motion in the order in which they arise. Chronologically, therefore, I will first take up plaintiffs' objections to the said resolution passed at the meeting of the board of directors of the company held on November 14, 1968. The contentions in that behalf are taken in Suit No. 522 of 1969. It is contended that the solicitor-director was prohibited by section 300 of the Companies Act, 1956, from taking any part in the discussion of, or vote on, the said appointment for a further term of the private company and that, since he took part in the discussion and voted, his vote is void and therefore as there were two votes in favour of the proposition that the private company should be appointed for a further term and two votes against the said proposition, the resolution was not duly passed. On behalf of the contesting defendants, namely, the company, Tulsidas and the private company, it is contended that the solicitor-director had no such concern or interest in the matter of the further appointment of the private: company as sole selling agents as required by section 300 of the Companies Act, 1956, and that assuming he had any such interest or concern, the plaintiffs all throughout knew about the same and did not raise any objection to the solicitor director taking part in the discussion or voting at the said meeting of the board held on November 14, 1968, and the plaintiffs are, therefore, estopped from taking up this contention. The relevant provisions of law are to be found in sub-sections (1) and (4) of section 299 and sub-sections (1), (3) and (4) of section 300 of the Companies Act, 1956. These provisions are as follows:

"299. Disclosure of interests by director.—(1) Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the board of directors...

(4) Every director who fails to comply with sub-section (1) or (2) shall be punishable with fine which may extend to five thousand rupees".

"300. Interested director not to participate or vote in board's proceedings.—(1) No director of a company shall, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement; nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote ; and if he does vote, his vote shall be void………

(3)In the case of a public company or a private company which is a subsidiary of a public company, if the Central Government is of opinion that having regard to the desirability of establishing or promoting any industry, business or trade, it would not be in the public interest to apply all or any of the prohibitions contained in sub-section (1) to the company, the Central Government may, by notification in the official gazette, direct that the sub-section shall not apply to such company, or shall apply thereto subject to such exceptions, modifications and conditions as may be specified in the notification.

(4)Every director who knowingly contravenes the provisions of this section shall be punishable with fine which may extend to five thousand rupees".

Sections 299 and 300 reproduce the provisions of sections 91A and 9IB of the Indian Companies Act, 1913, with certain changes. I have indicated by means of underlining the material difference between the old sections and the new sections. The material provisions of sections 91A and 91B of the old Companies Act were as follows:—

"91A. Disclosure of interest by director.—(1) Every director who is directly or indirectly concerned or 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...

(4) Every officer of the company who knowingly and wilfully acts in contravention of the provisions of sub-section (3) shall be liable to a fine not exceeding five hundred rupees".

"9IB. Prohibition of voting by interested director.—(1) No director shall, as a director, vote on any contract or arrangement in which he is either directly or indirectly concerned or interested nor shall his presence count for the purpose of forming a quorum at the time of any such vote ; and if he does so vote, his vote shall not be counted :…………

(2) Every director who contravenes the provisions of sub-section (1) shall be liable to a fine not exceeding one thousand rupees".

In addition to the penal consequences provided for by section 299(4), a director who acts in contravention of section 299 vacates his office as such director under section 283(1)(i) of the Companies Act, 1956. It may be mentioned that article 184B(1) of the articles of the company reproduces the provisions of section 300(1).

The facts which are said to make the solicitor-director an interested director within the meaning of section 300 may now be stated. These facts are all admitted by the defendants. The solicitor-director is a partner in the firm of solicitors, Messrs. Daphtary, Ferreira and Diwan. He and his firm have for several years been acting as general solicitors for the Kilachand family and in particular for Tulsidas and Ramdas and for all Kilachand concerns. They were and are solicitors for the said Kesar Corporation Private Ltd., which is the holding company of the private company, the solicitor-director being himself a subscriber to the memorandum and articles of association of the said Kesar Corporation Private Ltd. and at one time a shareholder thereof. They are also solicitors for the company and the private company right from the respective dates of their respective incorporation and the solicitor-director is a subscriber to the memorandum and articles of association of the company along with Tulsidas, Ramdas, their brother, Ambalal, Suresh, the son of Tulsidas, and Rajnikant, the son of Ambalal. At the time of the incorporation of the private company on or about January 6, 1960, another partner of the firm of Messrs. Daphtary, Ferreira and Diwan filed with the Registrar of Companies, Bombay, a declaration of compliance with the provisions of the Indian Companies Act, 1913. Further, the solicitor-director has been a director of Track Private Ltd. since 1951 and holds more than 20 per cent, of the shares in Track Private Ltd. The said Track Private Ltd. has its registered office at the same address as the registered office of the company and the private company. The said Track Private Ltd. is the company owned and controlled by the Kilachand group in which Tulsidas, his three brothers and his son, Suresh, Ambalal's son the said Rajnikant, and Tonil, the son of Ramdas, are shareholders, the word "Track" being a coined word representing the first letters in the personal names of Tulsidas, Ramdas, Ambalal, Chinubhai and the family name, Kilachand. The solicitor-director is also a director and shareholder of Polychem Ltd. in which the Kilachand brothers and their relatives hold considerable financial interest. The sole selling agents of the said Polychem Ltd. are Indian Commercial Company Private Ltd. of which almost all except two shares are held by the Kilachand family and the said Kesar Corporation Private Ltd. The solicitor-director was also a subscriber to the memorandum and articles of association of the said Indian Commercial Company Private Ltd. and the said firm of Messrs. Daphtary, Ferreira and Diwan have been and are the solicitors of the said company. The legal work of the Kilachand family and the Kilachand concerns and companies is personally attended to by the solicitor-director, including their tax matters and contentious and non-contentious matters. The proxies for the meetings of the 28th and the 29th April which Tulsidas obtained were in favour of Tulsidas or failing him the solicitor-director or failing the solicitor-director the said Ruia or failing the said Ruia the said Kirloskar. Along with the said Ruia and the said Kirloskar the solicitor-director issued to the shareholders of the company a printed circular asking them to vote in favour of the resolutions to be moved at the said extraordinary general meeting of the 28th April. It is contended by the plaintiffs that the said firm of Messrs. Daphtary, Ferreira and Diwan and the solicitor-director as a partner in that firm have earned and are earning large sums of money as solicitors from the Kilachand family and the Kilachand concerns and companies and that as a result of his long association with the Kilachand family the solicitor-director is a family solicitor and also a close friend and a person in the confidence of the Kilachand family. It is, accordingly, submitted by the plaintiffs that the solicitor director was concerned or interested, if not directly, at least indirectly, in the further appointment of the private company and that by reason of his long association and professional relationship and close friendship with the Kilachand family and particularly with Tulsidas, he was interested in safeguarding and promoting the interests of the Kilachand family and the Kilachand concerns and, naturally, therefore, was interested and .concerned in seeing that the highly remunerative sole selling agency was granted to the private company for a further maximum period of five years. It is further submitted that there was thus a conflict between his interest in the Kilachand family and Tulsidas and the private company and his duty as a director of the company.

Section 300 of the Companies Act, 1956, embodies, just as section 91B of the Indian Companies Act, 1913, did, the general rule of equity (see Pratt (T. R.) (Bombay) Ltd. v. M. T. Ltd. The clearest exposition of this rule is to be found in Aberdeen Rly. Co. v. Elaikie. In that case, Lord Cranworth said :

"A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the interest of the cestui que trust, which it was possible to obtain. It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interests of those for whom he is a trustee, have been as good as could have been obtained from any other person, they may even at the time have been better. But still so inflexible is the rule that no inquiry on that subject is permitted".

Though this was a case from Scotland, the rule of English law is the same, for, as observed by Swinfen Eady L.J., in Transvaal Lands Company v. New Belgium (Transvaal) Land and Development Company, the doctrine rests on such obvious principles of good sense that it is difficult to suppose that there could be any system of law in which it would not be found. In Transvaal Land Company's case it was held at page 503 that:

"Where a director of a company has an interest as shareholder in another company or is in a fiduciary position towards, and owes a duty to, another company which is proposing to enter into engagements with the company of which he is a director, he is in our opinion within this rule. He has a personal interest within this rule or owes a duty which conflicts with his duty to the company of which he is a director. It is immaterial whether this conflicting interest belongs to him beneficially or as trustee for others"

This rule was characterised by Lord Cairns L.C. in Parker v. McKenna as not a technical or arbitrary rule but a rule founded upon the highest and truest principles of morality. Thus, this rule applies not only where there is a conflict of interest or conflict of interest and duty but also where there is a conflict of two duties. It is immaterial whether the interest is a personal interest or arises out of a fiduciary capacity or whether the duty which is owed is in a fiduciary capacity. Actual conflict is also not necessary. A possibility of conflict is enough to bring the case within the ambit of this rule nor does the application this rule depend upon the extent of the adverse interest. Directors stand towards] the company in a fiduciary position. In India this fiduciary character has received statutory recognition in section 88 of the Indian Trusts Act, 1882. The reason underlying this rule is that the company has a right to the unbiassed voice, advice and collective wisdom of its directors. (See Benson v. Heathorn Imperial Mercantile Credit Association v.Coleman and Victors Ltd. v. Lingard).

The section itself makes it clear that the interest or concern need not be direct. It may be indirect. Further, the words used in the section are "concerned or interested". The phrase "concerned in a contract" has been the subject-matter of judicial interpretation in England. In Nutton v. Wilson , the Court of Appeal had to consider rule 64 of Schedule II to the Public Health Act, 1875, under which a member of a local board who "in any manner "was "concerned in any bargain or contract" entered into by such board ceased (except in certain cases) to be such member and his office was thereupon to become vacant. By rule 70 of the said Schedule a penalty was imposed upon a person who acted as such member when disabled from acting by any provision of the Act. The defendant, a member of a local board, was employed by persons with whom the board had contracted for the performance of certain works on the premises of the board, to do the portion of the work so contracted. The trial court held against the defendant and an appeal against the said decision was dismissed. In the Court of Appeal Lindley L.J. observed at page 748 :

"There does not seem to be any question here of participating in the profits of a contract; but the question is whether the defendant can be said to have been concerned in any bargain or contract entered into by the board. The expression ' in any manner concerned ' is a somewhat lax one. Cases may be put in which a person might perhaps be said in one sense to be concerned in a contract entered into by the board, and yet it might be tolerably obvious that he was not ' concerned in the contract' in the sense in which the Act uses the words. To interpret words of this kind, which have no very definite meaning, and which perhaps were purposely employed for that very reason, we must look at the object to be attained. The object obviously was to prevent the conflict between interest and duty that might otherwise inevitably arise".

In Barnacle v. Clark the respondent was a member of a school board. He sold sand and gravel to a builder who had entered into a contract with the board for the building of a school. At the time of the sale the respondent was aware that the sand and gravel were intended to be used, as they were in fact used, in the building of the school. The respondent was prosecuted under section 34 of the Elementary Education Act, 1870, under which a member of a school board who, inter alia, "shall in any way share or be concerned in the profits of any bargain or contract with or any work done under the authority of such school board "was liable to a penalty and his office became vacant. The justices for the county of Northampton holding that the respondent was not guilty of any offence dismissed the in formation. Upon a case being stated to the court it was held that the respondent was guilty. Ridley J. referred to Nutton v. Wilson and observed that, though that was not a precise authority in favour of the appellant's contention, it showed the lines upon which similar statutory enactments had been construed. The court came to the conclusion that, having regard to the object of the Act, it should be carefully and strictly construed and, although the respondent had unwittingly offended against the provisions of the section and although there was no suggestion that what he did was done with a corrupt purpose or from a corrupt motive and although no blame attached to him, he ought to have been convicted. The test laid down in Nutton v. Wilson was accepted by the Court of Appeal in England v. Inglis and followed by Astbury J. in Holden v. Southwark Corporation. The word "interest" occurring in section 12(1) of the Municipal Corporations Act, 1882, of England, came up for consideration of the Court of Appeal in England v. Inglis^. In that case, the defendant, who was a member of a municipal corporation, carried on business as a jeweller and optician. The optical department was managed by his son who was not a partner but was a paid employee. A contract was made between the son in his own name and the municipal corporation for the supply of spectacles to the children of the schools controlled by the corporation's education committee. The contract was carried out by the son, the spectacles were paid for by him with his own cheque and he received moneys in his own name from the corporation and paid the amounts so received into his own banking account. The spectacles were supplied in cases bearing the son's name but the defendant's business address, some of the cases being taken at the expense of the defendant out of his stock, but the shop was provided and the establishment expenses paid by the defendant and the fact that the spectacle cases bore the defendant's address helped to advertise his business with the consequent probability of increasing his custom. Salter J. held that "interest" in a contract within the meaning of section 12(1) of the Municipal Corporations Act, 1882, must be something more than a sentimental interest, such as arises from the natural love and affection of a man for his son ; it must be a pecuniary or, at least, a material interest; but it need not be a pecuniary advantage. On the facts of the case the Court of Appeal held that the defendant had a pecuniary interest of an adverse kind in the contract and that it could properly be held that the defendant had a pecuniary advantage, or a reasonable expectation of a pecuniary advantage, from the contract, for in any event this helped to advertise his business. In K.F. Narintan v. Municipal Corporation of Bombay, Mulla J. had to construe clause (p) of section 36 of the City of Bombay Municipal Act, 1888, as that Act was then entitled. That clause provided:

"A Councillor shall not vote or take part in the discussion of any matter before a meeting in which he has, directly or indirectly, by himself or by his partner, any share or interest such as is described in clauses (g) to (1) both inclusive of section 16, or in which he is professionally interested on behalf of a client, principal or other partner".

After referring to England v. Inglis , Mulla J. said that it therefore followed that, where there is a pecuniary advantage, or a reasonable expectation of a pecuniary advantage, it must be regarded as an "interest" within the meaning of that section. If the interest in a contract was pecuniary, it was immaterial that the amount involved was trifling. If the interest was not pecuniary, it must at least be a material interest. Mulla J. also referred with approval to the test laid down in Nutton v. Wilson and accepted in later cases mentioned above.

In the present case the solicitor-director held, vis-a-vis the company, a dual fiduciary character. He was both a director of the company as also the solicitor for the company. He was also the solicitor for the private company, for the Kilachand family and all the Kilachand concerns and companies. The position of a solicitor who acts for two clients came up for consideration before the Court of Appeal in Moody v. Cox and Hatt . In that case the plaintiff had contracted to purchase from Hatt, who was a solicitor, and Cox, his managing clerk, who were trustees, a portion of their trust property. Throughout the transaction Hatt acted through Cox as solicitor both for vendors and purchaser. Cox failed to disclose to the plaintiff certain valuations previously obtained showing that the property was not worth the price which the plaintiff agreed to pay. The plaintiff knew that the vendors were trustees. In the course of the negotiations the plaintiff offered and Cox accepted a bribe. Thereafter the plaintiff filed an action for rescission of the contract. The defendants counter-claimed for specific performance. Younger J., in the trial court, held that the plaintiff was entitled to succeed on the ground that Hatt had failed to fulfil his obligation as solicitor for the plaintiff to disclose to him all material facts in his knowledge relating to the matter. As to the giving of the bribes, he held that the defendant Hatt, by affirming the contract, which he might have repudiated, had removed the blot upon it and placed the parties in the position in which they would have been if no bribes had been given and the plaintiff was not, therefore, deprived of his equitable right to rescission. The defendants filed an appeal which was dismissed. In the Court of Appeal Scrutton L.J. said

"Two questions will arise in cases of solicitor and client—first, as to the relation which will create this obligation, and, secondly, as to the nature of the obligation created. Where the relation of solicitor and client occurs in the very transaction attacked it will, in my view, be almost, if not quite impossible to avoid the obligation, and an independent solicitor should be employed by the client. It is called ' putting him at arm's length'. It might perhaps also be effected by a clear declaration of the position by the vendor, such as this : ' Mind, I am going to get the highest price I can; be on your guard;' but the position would have to be made very clear in order to relieve the solicitor of obligations far exceeding those of an ordinary vendor, and is a position to be avoided. More difficult questions arise when the employment as solicitor has been In other matters more or less numerous or recent, and the transaction in question is a separate transaction in which the solicitor does not act as such. It is a question of degree in every case......The relation may then be an actual relation of solicitor and client in the transaction impugned, or such an antecedent relation as gives rise to the influence by the solicitor and confidence by the client the effect of which has not ceased at the time of the transaction impugned………But it is said that he could not disclose that information consistently with his duty to his other clients, the cestuis que trust. It may be that a solicitor who tries to act for both parties puts himself in such a position that he must be liable to one or the other, whatever he does. The case has been put of a solicitor acting for vendor and purchaser who knows of a flaw in the title by .reason of his acting for the vendor, and who, if he discloses that flaw in the title which he knows as acting for the vendor, may be liable to an action by his vendor, and who, if he does not disclose the flaw in the title, may be liable to an action by the purchaser for not doing his duty as solicitor for him. It will be his fault for mixing himself up with a transaction in which he has two entirely inconsistent interests, and solicitors who try to act for both vendors and purchasers must appreciate that they run a very serious risk of liability to one. or the other owing to the duties and obligations which such curious relation puts upon them".

Lord Cozens-Hardy M.R. described the defendants' case as almost unarguable. He said at page 81:

"A man may have a duty on one side and an interest on another. A solicitor who puts himself in that position takes upon himself a grievous responsibility. A solicitor may have a duty on one side and a duty on the other, namely, a duty to his client as solicitor on the one side and a duty to his beneficiaries on the other ; but if he chooses to put himself in that position it does not lie in his mouth to say to the client 'I have not discharged that which the law says is my duty towards you, my client, because I owe a duty to the beneficiaries on the other side'. The answer is that if a solicitor involves himself in that dilemma it is his own fault"

The principles laid down in Moody v. Cox and Halt were followed in Goody v. Baring.

On behalf of the contesting defendants it was submitted that sections 299 and 300 provide for penal consequences and that not only there was a liability to be prosecuted under these sections and fined, but under section 283(1)(i) a director who acted in contravention of section 299 vacated his office and these sections should, therefore, receive a strict construction. It was further submitted that the Companies Act was a complete code and no disqualification would be imported into sections 299 and 300 unless such disqualification could be found in the sections themselves and the scope of the sections cannot be enlarged on any equitable principles which may have applied prior to the enactment of the sections. It was further submitted that an interest in the contract or arrangement which the sections require must be a pecuniary or a material interest. It must relate to the contract or arrangement itself and must be such as creates a conflict between the interest of the director concerned as a director of the company and his own interest in the contract and not any one else's. Before considering these arguments I may mention that in the present case assuming the solicitor-director had a concern or an interest in the appointment for a further term of the private company, he had not at any time made a disclosure thereof under section 299.

In my opinion, it is not strictly correct to say that section 300 is a disqualifying section. It is a prohibitory section. What section 300 does is to prohibit a director of a company holding a particular character from doing certain acts, namely, from taking any part in the discussion of, or voting on, any contract or arrangement entered into, of to be entered into, by or on behalf of the company, if he is, in, any way, whether directly or indirectly, concerned or interested in the contract or arrangement. After prescribing these prohibitions the section lays down the consequences of infringing them. That section 300(1) contains prohibitions is also made clear by sub-section (3) of section 300 which confers upon the Central Government the power in certain circumstances where it is of the opinion that "it would not be in the public interest to apply all or any of the prohibitions contained in sub-section (1) to a company", to direct that that sub-section shall not apply to such company or will apply with such exceptions, modifications and conditions as may be specified. It may also be pointed out that the criminal liability imposed both by sections 299 and 300 is not an absolute one. It is only in respect of 'a director who knowingly contravenes the provisions of these sections. Thus, knowledge is the gist of the offence under both these sections. It is true that the sections must be strictly construed but not in favour of the directors as contended. They must be construed, as pointed out by Lindley L.J. in Nutton v. Wilson, looking at the object to be attained by the enactment of the sections. Both under the Companies Act as in the statutes which were considered in Nutton v. Wilson, Barnacle v. Clark and England v. Inglis the object intended to be attained by the enactment of such prohibitions was to prevent the conflict between interest and duty which might otherwise inevitably arise. In enacting sections 299 and 300, the legislature wisely did not attempt to define "concern "or" interest". Since these sections were enacted in the interest of the shareholders, so that they may have the benefit of the independent, unbiassed and collective judgment, opinion and wisdom of their board of directors, the words used in the sections have been purposely used in as general a sense as possible. To have laid down any confining limits to the operation of these sections may have resulted in defeating the very object for which these sections were enacted. As pointed out by the Privy Council in T.R. Pratt (Bombay) Ltd. v. M.T. Ltd and by the Supreme Court in Narayandas Sreeram Somani v. Sangli Bank Ltd.. with reference to the old sections 91A and 9IB, the sections contain concise statement of the general rule of equity fully considered and accepted by the Court of Appeal in Transvaal Lands Company v. New Belgium (Transvaal) Land and Development Company As pointed out by Upjohn L.J., while sitting in the Court of Appeal in Boulting v. Association of Cinematograph, Television and Allied Technicians

"The principle is one of the most firmly established in our law of equity and it has been repeatedly recognised and applied by the Lord Chancellors and by the House of Lords……………The rule is not directed at corrupt or fraudulent bargains (though, of course, it brings them within its umbrella) The rule is one of principle which depends not at all on any corrupt mens rea in the mind of the person holding the conflicting capacity …….. This rule extends to all manner of relationships and the reports are full of examples of its application to many different circumstances. Like all rules of equity, it is flexible in the sense that it develops to meet the changing situations and conditions of the time………….".

The sections must, therefore, be construed bearing in my mind the old long established rule of equity which they enact and having regard to the object intended to be attained.

In support of the other submissions of the contesting defendants, Mr. Sen, learned counsel for the company, placed reliance upon K.F. Nariman v. Municipal Corporation of Bombay. Now, in order to understand what precisely was laid down by Mulla J. in that case, it is necessary to look somewhat more closely at the facts of that case and the points which there arose for the court's decision. At a meeting of the Bombay Municipal Corporation a proposition was moved that the report "regarding the revision of the present scale of tramway fares be approved and adopted ". To the above proposition an amendment was moved that the further consideration of the report be adjourned till a particular date when a new corporation would have been formed. On a poll being taken, there were equal number of votes in favour of and against the amendment, and the chairman exercised his additional or casting vote against the amendment and declared that the amendment was lost. The plaintiff's allegation was that 6 out of the 17 councillors who had voted against the amendment were disqualified from voting having regard to the provisions of clause (p) of section 36 of the City of Bombay Municipal Act, 1888, now entitled the Bombay Municipal Corporations Act, 1888. While denying this the defendants contended that two councillors who voted for the amendment were disqualified from voting. Under clause (p) a councillor is prohibited from voting or taking part in the discussion of any matter before a meeting in which he has, directly or indirectly, by himself or by his partner, any share or interest such as is described in clauses (g) to (1), both inclusive, of section 16, or in which he has a professional interest on behalf of a client, principal or other person. Now, it is obvious that clause (p) is in terms materially, different from section 300(1). Under clause (p) the share or interest must be such as is described in clauses (g) to (1) of section 16. Further, the matter before the meeting must be one in which his interest on behalf of another person is a professional interest. The concern or interest described in section 300(1) is not subject to any such restriction. In that case with respect to certain councillors it was alleged that they were shareholders of the Bombay Electric Supply and Tramways Company Ltd. which owned and conducted tramways in the city of Bombay. Mulla J. held that if a councillor was also a shareholder of the said company and had a beneficial interest in the shares, he was disqualified from voting. He, however, held that where the shares stood in the name of a councillor who had no beneficial interest in them but was a mere trustee for another, he was not disqualified from voting, because though he was under an obligation to his cestui que trust to vote at meetings of the said company in a manner beneficial to the interest of the beneficiaries, as he did not owe the membership of the corporation to his being a shareholder of the said company, it was no part of his duty to vote at any meeting of the corporation as his beneficiary would have him to do. If, therefore, no such duty was imposed upon him by law, it could not be said to be a case of conflict between two duties or between interest and duty, his duty or his interest in the beneficiary being no higher than what a father has in the prosperity of his son. While considering how far this decision applies it should be borne in mind that in the course of his judgment Mulla J. cited with approval and without qualification Nutton v. Wilson and England v, Inglis and the other English authorities referred to above. In Nutton v. Wilson the word "concerned" was given a very wide meaning. Mulla J. pointed out that, though in most of those cases the question before the court was whether a councillor had an interest in contracts with the local board, while the question in the case before him was whether the said councillors had a share or interest in the said company, the principle laid down in those cases afforded a fairly good guide to the determination of the points before him. Mulla J. was, however, dealing only with the case of a "share or interest" under section 36(p) of the City of Bombay Municipal Act and not of a "concern "in the matter in question. The share or interest which clause (p) describes is the interest of a councillor by himself or by his partner only, or a professional interest. But the more important point of distinction is that the decision in Transvaal Lands Company v. New Belgium (Transvaal) Land and Development Company was not cited before Mulla J. This is important because in Transvaal Lands Company's case fiduciary capacity was expressly held to be such an interest as would give rise to a conflict. The Privy Council in T.R. Pratt (Bombay) Ltd. v. M. T. Ltd and the Supreme Court in Narayandas Sreeram Somani v. Sangli Bank Ltd. unequivocally approved and accepted the principles laid down in Transvaal Lands Company's case and pointed out that section 91B of the 1913 Act (corresponding to the present section 300) contained a concise statement of the general rule of equity explained in that case. K.F. Nariman's case was, of course, decided before the privy Council and the Supreme Court decisions. The point, however, is now concluded by this pronouncement of the highest courts. It should also be noted that section 300(1) does not merely use the word "interest" but speaks both of "concern" or"interest", whether direct or indirect, and in this connection reference may again be made to the observations of Lindley L.J. in Nutton v. Wilson of Darling J., in Barnacle v. Clark and of Romer J., in Victors Ltd. v. Lingard referred to above.

It was next submitted that the interest of the solicitor-director in the private company was at the highest a sentimental interest as, for example, that of a father in his son or of a man in a relative of his and that he was under no legal duty to protect or advance the interest of the private company and cannot therefore amount to an "interest" under section 300 and in support of this, reliance was placed upon the judgment of a learned single judge of the Rajasthan High Court in Ramji Lal Baisiwala v. Baiton Cables Ltd . In that case it was held that concern or interest in a contract did not include the concern or interest of a relative. Of course, there is no question of the solicitor-director being a relative of any of the Kilachands, but what was said was that, if a man has no higher than a sentimental interest in the welfare of his relative, he cannot have a higher interest in the welfare of his friend and accordingly the friendship between the solicitor-director and Tulsidas and the other members of Tulsidas' family cannot constitute an interest. Two Division Bench judgments of this High Court have, however, taken a different view with respect to interest arising out of relationship. In Special Civil Application No. 1807 of 1955, decided by Chagla C. J. and Dixit J., on December 7, 1955, it was held:

"In our opinion, the interest here is not the interest which a man may have in the prosperity of his friend. There the interest is clearly sentimental or emotional. When you have a person living jointly with his father, it seems to be inarguable that the son's interest in the prosperity of his father is purely sentimental or emotional. If the father earns more, he has more to spend on the family. His prosperity must affect the position of the son and the interest that the son has in the prosperity of his father is clearly a material or a substantial interest".

This case was followed in Dattatraya Awadaji Shinde v. S.V. Bhave by the Division Bench consisting of Dixit and Badkas JJ. Both these were cases under the Bombay Provincial Municipal Corporation Act, 1949, and in Dattatraya Awadaji Shinde v. Bhave the Division Bench pointed out that unless cases of conflict between interest and duty arising out of the relationship of husband and wife or father and children were avoided, purity in municipal administration would be impossible to achieve. Further, the argument of the contesting defendants overlooks the fact that the plaintiffs' case is not based merely upon the friendly relations between the solicitor-director and the Kilachands. It is based upon the fiduciary character which the solicitor-director holds, vis-a-vis, Tulsidas, the Kilachand family and the Kilachand concerns and companies, by reason of the fact that his firm and he on behalf of his firm have for all this long period of years been their general solicitor and that his confidential relationship has deepened by reason of the close personal relationship which has sprung up between them.

It was next submitted that there was nothing to show that the solicitor-director or his firm would be acting as solicitors for the private company in the matter of its appointment as sole selling agents for a further period, and in this connection reliance was placed upon Mohan Lal v. Grain Chambers Ltd., which was affirmed in appeal by the Supreme Court in Selh Mohan Lal v. Grain Chambers Ltd. In that case the board of directors of the Grain Chambers Ltd. an association of grain merchants, passed a resolution containing the terms upon which an entry of transactions in future in gur were to be effected. This resolution was passed in pursuance of the general policy of the company in carrying on its business and functions. It provided how future transactions in gur were to take place. The question whether directors of that company were interested within the meaning of the old section 91B arose for consideration of the court in petitions filed for winding up of that company. It was held that the word "arrangement" in section 91B did not cover a general scheme of the type under which at the time when the scheme was approved by the board of directors, no rights or liabilities accrued or were incurred by the members of the company, the directors or the company itself; the word "arrangement "as used in the section being intended to cover such transactions in which a director at once becomes interested, so that he either acquires some rights or incurs some liabilities as a result of it. On appeal to the Supreme Court it was held that by passing that resolution, all that was resolved at the directors ' meeting was that the company should commence business in future in gur according to the rules set forth in the resolution and, therefore, the directors were not voting on a contract or arrangement in which they were directly or indirectly concerned or interested. Now, I do not see what application this case has to the facts before me. That was a case of an association framing rules for the future transaction of its own business. That case is wholly distinguishable on facts. What is apposite in this connection are the following observations of Scrutton L. J. in Moody v. Cox and Halt :

"The relation may then be an actual relation of solicitor and client in the transaction impugned, or such an antecedent relation as gives rise to the influence by the solicitor and confidence by the client the effect of which has not ceased at the time of the transaction impugned"

Moody v. Cox and Halt was sought to be distinguished on the ground that its ratio applied only to the case of a solicitor acting as common solicitor for both vendor and purchaser and had no application to other transactions. In my opinion, this is not a correct reading of that authority. Moody v. Cox and Hatt was decided as much on the general principle of equity already sufficiently referred to above in the other cases. One must bear in mind, as Upjohn L.J. pointed out in Boulting v. Association of Cinematograph, Television and Allied Techniciansa that this rule of equity is a flexible one and it develops to meet the changing situations and conditions of the time. What is important and should never be lost sight of are the words of Lord Cairns L.C. in Parker v. Mckenna that "this is a rule founded upon the highest and truest principles of morality ". If so heavy and onerous a duty lies upon a solicitor who acts as common solicitor in just one transaction, it would be absurd to say that the duty of that solicitor would be less or would be non-existent where that solicitor has been for a long period of time the general solicitor of one of the parties in all matters.

It must again be emphasised that section 300(1) refers not only to an "interest "but also to a "concern". Here reference may usefully be made to Baits Combe Quarry Ltd. v. Ford relied upon by Mr. Nariman, learned counsel for the plaintiffs. In that case the vendors of the Batts Combe Quarry covenanted with the purchasers "that they would not within ten years either solely or jointly with or as agent, officer, manager, servant, director or shareholder of any other person or company, directly or indirectly, carry on or assist in carrying on or be engaged, concerned, interested or employed in the business of a quarry within 75 miles as the crow flies of Batts Combe Quarry". One of the vendors within ten years provided a sum of money to enable his three sons to purchase the Chelms Combe Quarry in the immediate neighbourhood of the Batts Combe Quarry and for working capital. He also took part on his sons' behalf in preliminary negotiations for the purchase of machinery and equipment for the Chelms Combe Quarry. He was not a partner in the sons' business nor in any way financially interested in it and he took no part in its management. The Appeal Court held that the father had committed a breach of the covenant. Lord Greene M.R. said:

"Quite apart, however, from the words 'assist in carrying on' there are other words here which appear to me to cover this case. In my view, in doing what he did, the father was 'concerned in' the sons business. The word 'concerned' is of quite general import. Clearly it cannot be limited to 'concerned' in the sense of financial interest or of being an employee of the business. Again, I can see no more effective way of being concerned in a business than by providing the capital necessary to establish it, and the word 'concerned' seems also to cover the assistance given by the father in the course of the negotiations".

In the light of these authorities I am at this stage inclined to take the prima facie view that the solicitor-director was directly, and if not so, at least indirectly, concerned or interested in the contract of appointment of the private company for a further term as the sole selling agents of the company and, therefore, the vote cast by him was void and there being no majority in favour of the resolution, no valid resolution was passed at the meeting of the board held on November 14, 1968.

It was, however, submitted on behalf of the contesting defendants that the plaintiffs are estopped from contending that the solicitor-director was an interested or a concerned director. In this connection, the contesting-defendants have relied upon various statements made by the plaintiffs in the plaint in Suit No. 522 of 1969 to show that the plaintiffs and Warner and Reighley were aware that the solicitor-director was solicitor for the private company. They have further placed reliance upon statements made in the correspondence by the plaintiffs, to show that Warner and Reighley represented the interest of the plaintiffs on the board of directors of the company. It was, therefore, contended that the knowledge of Warner and Reighley must be taken to be the knowledge of the plaintiffs and the presence of Warner and Reighley at the meeting of the board held on November 14, 1968, must be taken to be for and on behalf of the plaintiffs and that Warner and Reighley not having protested at the said meeting against the solicitor-director taking part in the discussion or voting, the plaintiffs must equally be taken as having acquiesced therein. Now, it cannot be denied that there are statements in the plaint and on the record as stated by the contesting defendants. The effect of these statements now falls to be considered. On behalf of the contesting defendents reliance was placed on T.R. Pratt (Bombay) Ltd. v. M.T. Ltd., Narayandas Sreeram Somani v. Sangli Bank Ltd. and Ramji Lal Baisiwala v. Baiton Cables Ltd. In T.R. Pratt (Bombay) Ltd. v. M. T. Ltd. it was held that the old section 91 B did not operate to deprive of the benefit of his contract with the company a third party who had no notice of the defect in the directors' authority, for to so hold would be contrary to principle and, therefore, such a person was entitled to assume that the internal mangement of the company had been properly conducted. The question before the Judicial Committee was the interest of directors in the execution of a deed of equitable mortgage by Pratts Ltd. and by M.T. Ltd., of their property in favour of E.D. Sassoon and Co. Ltd. to secure loans advanced by that company to Pratts Ltd. through M.T. Ltd. The question arose in the liquidation of Pratts Ltd. when E.D. Sassoon and Co. claimed to be the secured creditors of Pratts Ltd. and M. T. Ltd. and in the alternative to be the unsecured creditors for the amounts secured by the deed of mortgage. The directors of Pratts Ltd. were all directors and shareholders of M.T. Ltd., and one of the directors of Pratts Ltd. was the managing director of Sassoons Ltd. and was invested with all the powers of the directors of that company. On these facts the Judicial Committee held that it was impossible to regard E.D. Sassoon and Co. Ltd. as being ignorant that in any question between Pratts Ltd. and M.T. Ltd., the former had no independent board and indeed no single director who was not interested on behalf of M. T. Ltd. and that, therefore, E. D. Sassoon and Co. Ltd. could not disclaim knowledge of the interest of the directors of Pratts Ltd. and were not entitled to assume that the provisions of section 91B had been complied with. I do not see how this authority supports the contesting defendant's case. Here also Tulsidas and Ramdas who by themselves and through concerns and companies controlled by them owned all the shares in the private company were the directors of both the company and the private company. They of course knew that the solicitor-director was the solicitor of the private company, their own personal solicitor and the personal solicitor of their other family members and their other concerns and companies and a shareholder and director in some of their concerns. Both of them were present at the said meeting of the board held on November 14, 1968. Though they did not participate in the discussion and abstained from voting, being present they certainly heard what was being said and saw what was happening and if the solicitor-director had an interest or concern in the matter of this appointment for a further term, Tulsidas and Ramdas had full knowledge of that fact and the private company, therefore, can hardly be said to be "a third party who had no notice of the defect"in the directors' authority. In Narayandas Sreeram Somani v. Sangli Bank Ltd.. the question arose under somewhat peculiar circumstances. Narayandas was one of the directors of the company. Ramnath was his brother. Ramnath became indebted to the company in large amounts. In order to comply with the requirements of the Reserve Bank to re-call the loan to Ramnath, Ramnath repaid the entire balance of Rs. 1,04,198-8-0 due by him. Out of this a sum of Rs. 1,00,000 was paid on behalf of Ramnath by Narayandas who on the same date obtained a loan of Rs. 1,00,000 from the company by executing a promissory note in the said sum as collateral security along with a letter of pledge in respect of cloth, saris, etc., valued at Rs. 1,50,000. Narayandas failed to repay the loan. Further, in order to comply with the requirements of section 277, the directors of the company including Narayandas decided that they or their nominees would subscribe for a large number of shares and accordingly Narayandas decided to subscribe for 2,000 shares in the names of his wife and mother and the wife of Ramnath, and shares were accordingly allotted to these three ladies. The allotment moneys were not paid in cash but by hundis drawn in favour of the company. In suits filed against Narayandas and Ramnath for recovery of the various amounts it was contended that the allotment of the said 2,000 shares was illegal inasmuch as Narayandas was present at the board meeting at which the said shares were allotted and had voted for the allotment. The Supreme Court held that under section 91B, if a director was an interested director, his vote was not to be counted and his presence also would not count, towards the quorum, that is to say, the minimum number fixed for the transaction of business by a board meeting, for a quorum must be a disinterested quorum and it must comprise of directors who are entitled to vote on the particular matter before the meeting. Their Lordships further pointed out that if an interested director voted and without his vote being counted there was no quorum, the meeting was irregular and the contract sanctioned at the meeting was voidable at the instance of the company against the director and any other contracting party having notice of the irregularity and since section 91B is meant for the protection of the company, the company may, if it chooses, waive the irregularity and affirm the contract. Their Lordships, therefore, held that the company having chosen to affirm the contract of allotment of shares by filing a suit, the allotment was valid and binding on the allottees. Their Lordships further held that Narayandas could not be heard to say that there was no valid allotment of the shares, since he was a director of the company and a party to the impugned resolution and had dealt with the shares on the footing that the allottees were the holders of the shares with a clear knowledge of the circumstances on which he might have founded his present objection. Now, the distinguishing feature of the Supreme Court decision is that it was the interested director who after having taken the benefit of the contract was seeking to repudiate it and thereby his liabilities and obligations thereunder by setting up the defect in his own authority of which he naturally had knowledge. This, according to their Lordships of the Supreme Caurt, he was estopped from doing. This case rests, therefore, on a wholly different footing from the case before me. In the present case it is not the interested director who is challenging the contract or the resolution sanctioning it on the ground of his own defect or want of authority. It is a shareholder who considers himself aggrieved by this contract who is challenging it. In the present case the question of the company affirming the contract also does not arise. One of the main disputes in Suit No. 681 of 1969 is whether the resolutions approving the appointment of the private company for a further term was in fact passed. Even the result of the poll as declared by Tulsidas shows that nearly 48 per cent, of the shareholders have voted against the resolution. A large number of proxies obtained by the plaintiffs have been rejected by Tulsidas as being invalid. Similarly, a large number of proxies in favour of Tulsidas, in respect of which letters of revocation were obtained by the plaintiffs and filed with the company, have been held to be not validly revoked and treated as valid by Tulsidas. If, as mentioned in the latter part of the judgment while dealing with the extraordinary general meeting of April 28, 1969, some of the decisions given by Tulsidas on the validity of proxies and revocations are contrary to law and in respect of some others there is strong reason to believe that they were not given bona fide, it can hardly be said that the company has affirmed the contract. In any event, in Narayandas case the company affirmed the contract with full knowledge of the fact that Narayandas was an interested director. In the present case the shareholders were never made aware that the solicitor-director had an interest or concern in the contract of appointment of the private company for a further term or that, but for his vote, the resolution would not have been passed at the board meeting or that his vote was void. The company acting through its board of directors did not at any time place these facts before the shareholders. It is true that in the circulars which were issued by both sides the plaintiffs had mentioned that the solicitor-director was an interested director, but in the circulars issued by Ruia, Kirloskar and the solicitor-director the contrary position was taken up or in any event suggested. Thus, the shareholders had no clear indication whether the solicitor-director had any interest or concern as alleged by the plaintiffs and they could not be said to have voted in favour of the resolution approving the appointment for a further term with knowledge of the interest or concern of the solicitor director and its consequent effect on the resolution of the board. There can be no ratification except with full knowledge of the facts and the shareholders were never asked to ratify the said resolution after the aforesaid facts were made known to them. In Spackman v. Evans, Lord Chelmsford observed :

"To render valid an act of the directors of a company which is ultra vires, the acquiescence of the shareholders must be of the same extent as the consent which would have given validity from the first, viz., the acquiescence of each and every member of the company. Of course, this acquiescence cannot be presumed unless knowledge of the transaction can be brought home to every one of the remaining shareholders".

While referring to this case the Privy Council in Premila Devi v. Peoples Bank of Northern India Ltd. pointed out that by knowledge of the transaction Lord Chelmsford clearly meant knowledge of the invalidity of the transaction. In the Privy Council case it was held that there can be no ratification without an intention to. ratify, and there can be no intention to ratify an illegal act without knowledge of the illegality. In Ratnji Lal Baisiwala v. Baiton Cables Ltd., it was held that if without the vote of the interested director, the contract would still have been carried through, it is not affected. But if without the vote of the interested director, the contract would not be carried through or without him there would be no quorum, then the contract was voidable at the option of the company. On facts, however, it was held that two directors formed a quorum, and out of the three directors of the company, the two who voted had no concern or interest. In the present case, without the vote of the solicitor-director the board's resolution of November 14, 1968, would not have been passed as there would have been no majority and the question of the company affirming it, as pointed out above, cannot arise, assuming the contract is voidable. It is true that today, at the hearing", the company is supporting this resolution, but then the persons fighting the litigation on behalf of the company are its board of directors or rather the majority of the board of directors which is controlled by Tulsidas and they cannot be said to represent or reflect the opinion of the company acting through its shareholders.

It is also pertinent to note that section 300(1) makes a significant departure from the language used in the old section 91B. While section 91B provides "and if he does so vote, his vote shall not be counted ", section 300(1) enacts "and if he does vote, his vote shall be void". It was submitted that this was not a material change and did not alter the position, and in support of this, reliance was again placed upon the observations, at page 192, in Ramji Lal Baisiwala v. Baiton Cables Ltd. to the effect that the substitution of the expression "his vote shall be void" in place of "his vote shall not be counted" does not make any difference, for if a vote was not to be counted, that vote was a nullity, that is, void. With respect to the learned single judge who decided this case I am unable to subscribe to this view. The Companies Act, 1956, is as its long title shows "An Act to consolidate and amend the law relating to" companies……"While re-enacting section 91 B as 300(1) the legislature has made a departure in the language used. The difference in the language is in a very material part of the section inasmuch as that part enacts one of the consequences of contravening the prohibition laid down in that section. Such change of language must, therefore, be taken to have been made deliberately and with the intention of preventing the object underlying the section from being defeat ed. When something is declared by a statute to be void, it cannot be validated on the theory of acquiescence or, ratification. There can be no estoppel against a statute. The word "void" cannot be equated with the word "voidable". To my mind the object of providing that the "vote shall be void" was to make the vote a nullity and incapable of affirmance or ratification. If, therefore, without the vote in question being counted, a resolution could not have been passed, then the resolution must be taken not to have been passed.

It was next submitted that Warner was in the chair and that he having declared the resolution as having been passed, he should be taken to have given his second or casting vote in favour of the resolution. The short answer to this is that a casting vote has to be given and is not a matter of presumption. On the facts, it would also be illogical to draw any such presumption. Admittedly, Warner voted against the resolution. He, therefore, cannot, consistently With this, cast his second vote in favour of the resolution, unless the whole matter were to be treated as a farce. Further, even assuming that the acts of Warner and Reighley are to be taken as the acts of the plaintiffs, the facts on the record do not make out a case of estoppel apart from the position that there cannot be an estoppel against a statute. When the draft minutes of the meeting held on November 14, 1968,were circulated to the directors, Reighley altered the said draft minutes. The minutes then came up for approval before the meeting of the board of directors held on February 3, 1969. At that meeting Reighley read out a memorandum on behalf of himself and Warner and requested that the said memorandum should be made a part of the minutes. Reighley and Warner voted against confirmation of the said minutes as written in the minutes book. The solicitor-director, Ruias and Kirloskar voted for confirming the said minutes and the minutes as written in the minutes book and approved by the majority of the directors were confirmed and signed, Tulsidas and Ramdas were also present at this meeting but abstained from voting. This is shown by the minutes of the meeting held on February 3, 1969. On the next day, by his letter dated February 4, 1969, Reighley reproduced the said memorandum which clearly states that the vote of the solicitor-director could not be considered as he was at all material times and continued to be an interested director and as there were two valid votes for and two valid votes against the resolution, the resolution was not carried. The said memorandum further states that unless this was properly recorded in the minutes of the meeting of November 14, 1968, the minutes should not be considered as having been approved. Thus, before the minutes were confirmed, Warner and Reighley have recorded their objection. The sole selling agency agreement was executed thereafter on February 18, 1969, with full knowledge of this objection. I, therefore, do not find it possible at this stage to hold that by any act of theirs Warner and Reighley have induced the company or the private company to believe that the said resolution was validly passed and to act upon such belief and thereby alter its position to its prejudice.

It is also difficult to accept the proposition that because certain directors represent the interests of a shareholder, they are in their capacity as directors or agents of that shareholder. Warner and Reighley are shareholders in their own right and have been elected as directors by the shareholders of the company. Mr. Nariman, learned counsel for the plaintiffs, has in this connection relied upon a decision of the Court of Appeal in Gramophone and Typewriter Ltd. v. Stanley. The question arose whether an English company was liable to income-tax upon the full amount of the profits made by a German company. It was held that the fact that the English company held all the shares in the German company by itself did not make the business of the German company the business of the English company and the English company was only liable to pay income-tax upon such profits of the German company as had been received in England. This case is, however, not relevant. In view of the mandatory prohibition contained in section 300(1) and of the deliberate departure made in the language of that section from the language used in section 91B, I am at this stage inclined to hold that the vote of the solicitor-director cannot be validated but is void- and that the resolution was not duly passed. I am also not inclined at this stage to accept the contention that the plaintiffs are estopped from taking up this ground.

There can be no estoppel against a statute nor can a person waive any right or benefit conferred by a statute unless it is of a personal and private nature. There is a clear distinction between a contractual or a statutory right created in favour of a person for his own benefit and a right which is created on the ground of public interest and policy. The rule of waiver cannot apply to a prohibition based on public policy (see Post Master-General, Bombay v. Gangaram Babaji Chavan). The prohibitions contained in section 300(1) are prescribed in public interest and policy to safeguard the interests of the shareholders. It was, however, urged on behalf of the contesting defendants that the proposition that there is no estoppel against a statute is too wide and that principle has not been accepted in several cases. In support of this submission reliance was, however, sought to be placed upon only one case, namely, Towers v. African Tug Company. That case arose under peculiar circumstances. The secre tary and manager of a company who was a party to the payment of an interim dividend out of capital had received dividend on shares held by him. He and another shareholder who had also received dividend on the shares held by him filed a suit on behalf of themselves and all other shareholders of the company, other than those who were defendants, for an order to compel the directors to make good to the company the amount distributed as such dividend. The Court of Appeal negatived the claim. Vaughan Williams L.J. held that the fact that capital had been distributed in the payment of this dividend was recognised by the company and the shareholders and that this was an interim dividend and they were minded to replace this capital and had further prospects of completely replacing it out of the profits of .that very year and, therefore, the action was wholly unnecessary. He further stated that the court is not bound when it sees that an ultra vires act is in the course of being put right to give relief to a plaintiff who has acquiesced in the wrong and who has himself part of the proceeds of the wrong in his pocket. Stirling L.J. expressly starts his judgment by saying that he desired to rest his decision on the particular facts of that case and held that the action ought to have been dismissed on the ground that the personal conduct of the plaintiffs was such as to preclude them from obtaining relief. The company had also filed a counter-claim to recover from the plaintiffs the very dividends which they had in their pockets. This counter-claim was allowed. This case was distinguished in a later court of appeal case, namely, Mosely v. Koffyfontein Mines Ltd. on the. ground that the plaintiff in that case did not seek an injunction or anything with reference to the future but a personal order upon the directors to refund to the assets of the company the amount which had been wrongfully abstracted from the capital. Towers v. African Tug Company turned upon its facts, and I fail to see how it bears out the proposition canvassed by the contesting defendants.

The next point for consideration is whether a special resolution was necessary for the appointment for a, further term of the private company as sole selling agents of the company either under the provisions of section 314 of the Companies Act, 1936, or article 183 of the articles of association of the company. When the private company was appointed the sole selling agents in 1963, the resolution appointing it was passed as a special resolution. This was done as it was then considered that by reason of the fact that Tulsidas and Ramdas were directors and members of the private company, section 314 applied to the appointment of the private company as sole selling agents. Under section 189(2) of the Companies Act, 1956, a resolution is a special resolution when, inter alia, the intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the members of the resolution and the votes cast in favour of the resolution (whether on a show of hands, or on a poll, as the case may be) by members who, being entitled so to do, Vote in person, or where proxies are allowed, by proxy, are not less than three times the number of the votes, if any, cast against' the resolution by members so entitled to vote; The notice convening the extraordinary general meeting of April 28, 1969, however, specifies the intention to propose the resolution in question as an ordinary resolution nor are the votes cast in favour of the requisite majority required by section 189(2), the votes in favour of the resolution as declared by Tulsidas being a little over 52 per cent, of the votes cast both in person and by proxy. Since the plaintiffs who opposed the appointment for a further term of the private company hold more than 25 per cent, of the shares in the company, it is obvious that if a special resolution were required, it could never be passed.

To understand the plaintiff's submissions based on section 314 of the Companies Act, it is necessary to see the relevant provisions of sections 204, 294 and 314 of the Companies Act, 1956.

"204. Restriction on appointment of firm or body corporate to office or place of profit under a company.—(1) Save as provided in sub-section (2), no company shall, after the commencement of this Act, appoint or. employ any firm or body corporate to or in any office or place of profit under the company, other than the office of managing agent, secretaries and treasurers or trustee for the holders of debentures of the company, for a term exceeding five years at a time:……..

(4) Nothing contained in sub-section (1) shall be deemed to prohibit the re-appointment, re-employment, or extension of the term of office, of any firm or body corporate by further periods not exceeding five years on each occasion:

Provided that any such re-appointment, re-employment or extension shall not be sanctioned earlier than two years from the date on which it is to come into force.

(5)Any office or place in a company shall be deemed to be an office or place of profit under the company, within the meaning of this section, if the person holding it obtains from the company anything by way of remuneration, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise….".

"294. Appointment of sole selling agents to require approval of company in general meeting.—(1) No company shall, after the commencement of the Companies (Amendment) Act, 1960, appoint a sole selling agent for any area for a term exceeding five years at a time:…….

Provided that nothing in this sub-section shall be deemed to prohibit the re-appointment, or the extension of the term of office, of any sole selling agent by further periods not exceeding five years on each occasion.

(2) After the commencement of the Companies (Amendment) Act, 1960, the board of directors of a company shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made.

(2A) If the company in general meeting as aforesaid disapproves the appointment, it shall cease to be valid with effect from the date of that general meeting…….".

"314. Director, etc., not to hold office or place of profit.—(1) Except with the consent of the company accorded by a special resolution,—

(a) no director of a company shall hold any office or place of profit, and

(b) no partner or relative of such a director, no firm in which such a director or relative is a partner, no private company of which such a director is a director or member, and no director; managing agent, secretaries and treasurers, or manager of such a private company shall hold any office or place of profit carrying a total monthly remuneration of five hundred rupees or more, except that of managing director, managing agent, secretaries and treasurers, manager, legal or technical adviser, banker or trustee for the holders of debentures of the company,—

(i) under the company; or

(ii) under any subsidiary of the company, unless the remuneration received from such subsidiary in respect of such office or place of profit is paid over to the company or its holding company:

Provided that it shall be sufficient if the special resolution according the consent of the company is passed at the general meeting of the company held for the first time after the holding of such office or place of profit…...

Explanation.—For the purpose of this sub-section, a special resolution according consent shall be necessary Sot every appointment in the first in stance to an office or place of profit and to every subsequent appointment to such office or place of profit on a higher remuneration not covered by the special resolution, except where an appointment on a time scale has already been approved by the special resolution……….

(2) If any office or place of profit is held in contravention of the provisions of sub-section (1), the director, partner, relative, firm, private company, managing agent, secretaries and treasurers or the manager, concerned, shall be deemed to .have vacated his or its office as such on and from the date next following the date of the general meeting of the company referred to in the first proviso or, as the case may be, the date of the expiry of the period of three months referred to in the second proviso to that sub-section, and shall also be liable to refund to the company any remuneration received or the monetary equivalent of any perquisite or advantage enjoyed by him or it for the period immediately preceding the date aforesaid in respect of such office or place of profit……..

(3) Any office or place shall be deemed to be an office or place of profit under the company within the meaning of sub-section (1),—...

(b) in case, the office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise".

Sub-section (1) of section 314 formerly required the previous consent of the company accorded by a special resolution in cases where the provisions of that sub-section were applicable. By the Companies (Amendment) Act, 1965 (31 of 1965), in order to obviate the difficulties which might arise from this stringent restriction, the word "previous "was deleted and the first proviso was inserted so as to now provide for the passing of the special resolution according consent at the first general meeting held after the appointment. The Explanation was added to sub-section (1) by the Companies (Amendment) Act, 1960. It is the plaintiffs' case that a sole selling agency is an office or place of profit and that, since Tulsidas and Ramdas were and are members and directors of the private company, the provisions of section 314 were attracted by reason of the Explanation to sub-section (i) and as the consent of the company was not accorded by a special resolution, the private company vacated its office from April 29, 1969, and is also liable to refund to the company any commission received. by it for the period October 1, 1968, to April 28, 1969, in respect of such sole selling agency. In support of this contention Mr. Nariman, learned counsel for the plaintiffs, has relied upon Shalagram Jhajharia v. National Company Ltd. in which A.N.Ray J. of the Calcutta High Court held that a sole selling agency is an office of profit for the purposes of section 314. On behalf of the contesting defendants it was urged that section 314 had no application to the sole selling agencies because section 314 is a general section, while section 294 contains special provisions dealing with sole selling agencies and that these specific and special provisions exclude the general provisions of section 314 and, therefore, what applied to the present case were only the provisions of section 294 which require only an ordinary resolution. It was further submitted that in Shalagram Jhajharia's case this aspect was not urged and, therefore, not considered by the court.

If we examine the scheme underlying sections 204, 294 and 314, it will be seen that section 204 places restrictions on the appointment of firms and bodies corporate to any office or place of profit under the company other than certain offices specified in the said section. In substance the restriction is as to the term for which such appointment can be made. Section 201 deals generally with all offices and places of profit. Section 294 deals with the specific case of appointment of sole selling agents. In addition to the restriction on the term for which such appointment can be made, section 294 also provides for the approval of the company to such appointment. It also confers powers upon the Central Government to exercise supervision and control over such appointments by entitling it in the prescribed manner to vary the terms and conditions of the agency so as to make them no longer prejudicial to the interests of the company. The case of sole selling agents is dealt with separately as it is a highly lucrative appointment and for this reason the restrictions imposed are more elaborate than in the case of other office or places of profit. The object underlying section 314 is, however, different. The mischief which section 314 seeks to remedy is the holding by a director either personally or indirectly through other persons mentioned in clause (b) of sub-section (1) of section 314 of an office or place of profit under the company or its subsidiary. The object is to prevent directors from taking advantage of their position to earn profitts from the company in addition to their remuneration as directors. Thus, section 314 deals with a wholly different problem from that dealt with under sections 204 and 294 and there is, therefore, no question of the provisions of section 294 excluding those of section 314.

On behalf of the contesting defendants it was further submitted that a sole selling agency was not an office or place, and, assuming it was an office or place, it was in any event not an office or place under the company. It was submitted that in ordinary parlance the word "office "means a particular place or position with duties attached to it and the words "office or place "used in conjunction with the word "under "implies subordination and, consequently, a relationship of employer and employee. It was further submitted that under the agreement dated February 18, 1969, as also under the earlier agreement dated September 24, 1963, the private company as sole selling agents was not a subordinate or employee of the company but had independent functions to perform and that the said agreements were as between principal to principal and under them the private company was an independent contractor. In support of these submissions reliance was placed on Guru Gobinda Basu v. Sankari Prasad Ghosal. The question which arose in the case was whether the appellant was disqualified from being chosen as, and from being a member of the House of the People under article 102(1)(a) of the Constitution. The Election Tribunal held that the appellant was a partner in a firm of chartered accountants who were auditors for several Government companies and, therefore, was a holder of offices of profit both under the Government of India and the Government of West Bengal and was, accordingly disqualified from standing in the election under article 102(1)(a) of the Constitution. It was not contended by the appellant before the Supreme Court that this was not an office of profit, but what was contended was that the office was not held under the Government of India or the Government of any State. The Supreme Court held that for holding an office of profit under the Government, one need not be in the service of the Government and there need be no relationship of master and servant. The decisive test is the test of appointment. The Supreme Court did not accept the submission advanced on behalf of the appellant that the several factors which entered into the determination of this question—namely, the appointing authority, the authority vested with power to terminate the appointment, the authority which determined the remuneration, the source from which the remuneration is paid, and the authority vested with power to control the manner in which the duties of the office are discharged and to give directions in that behalf-must all co-exist and each must show subordination to Government and that it must necessarily follow that if one of the elements is absent, the test of a person holding an office under the Government is not satisfied. Their Lordships observed that in the cases referred to and approved by them, it was pointed out that the circumstances that the source from which the remuneration was paid was not from public revenue was held to be-a neutral factor, not decisive of the question. Their Lordships held that whether stress is to be laid on. one factor or the other will depend on the facts of each case. Relying upon this authority it was submitted that in the present case the sole selling agency agreements satisfied none of the tests laid down therein. This authority, however, is expressly against this submission. What was held in Guru Govinda Basu v. Sankari Prasad Ghosal was that whether stress is to be laid on one factor or the other would depend on the facts of each particular case and the contention that all the factors enumerated should co-exist was expressly rejected. Further, this submission is not even justified by the terms of the agreement. By clause (1) of the agreement dated February 18,1969, as also of the earlier agreement dated September 24, 1963, the company expressly appointed the private company as its sole selling agents. It is thus an appointment which was made by these agreements. Section 294 of the Companies Act also speaks of appointment of sole selling agents by a company. Thus, the test laid down by the Supreme Court to be the decisive test is satisfied in the present case. The other clauses of the agreements also show that the company is to exercise control over the private company in respect of the working of the sole selling agency. It is the board of directors of the company which is to fix from time to time the selling price of the company's products and the terms and conditions of sale. The private company is to obtain orders for purchases at the prices and on the terms and conditions thus determined and forward them to the company's office for acceptance. Such orders are to be binding on the company for execution only when and to the extent confirmed by the company and are to be subject to such other terms and conditions as the board of directors of the company may from time to time determine. The private company is expressly prohibited from accepting any order on its own authority. The board of directors of the company has the power from time to time to prescribe forms for orders, contracts, etc. Further, the company is conferred the power to terminate the agreement at any time by notice in the event of the private company committing a breach of the agreement. The private company receives a commission from the company. Clause 12 of both the agreements, which is the relevant clause, provides as follows :

"In consideration for the foregoing services to be rendered by the selling agents, the company shall pay to the selling agents a commission…………"

Thus, as the words underlined by me show, the parties have expressly agreed that under the said agreements the private company has to render services to the company.

The complete answer to this contention is, however, to be found in sub-section (3) of section 314. Sub-section (3) as originally enacted prescribed when an office or place in a company should be deemed to be an office or place of profit under the company within the meaning of sub-section (1). By the Companies (Amendment) Act, 1960, the words "in a company "were omitted and the sub-section as amended provides as follows :

"Any office ok place shall be deemed to be an office or place of profit under the company within the meaning of sub-section (1)…………"

Sub-section (3) is a deeming provision and by the operation of the legal fiction created by sub-section (3), inter alia, in case a private company (in which a director of the company is a director or member) holding a place or office obtains from the company anything by way of commission, it is to be deemed to be an office or place of profit under the company. Such an office or place need not be in fact in the company or under the company in the sense canvassed by the contesting defendants. In the present case, the private company is to receive commission under the sole selling agency agreements, the commission is to be obtained by it for services to be rendered by it and, as pointed out above, the company controls the manner in which the sole selling agency is to be performed.

It is also pertinent to note that sub-section (1) expressly excludes some, of the offices and places of profit which would not be office or place of profit if the contention of the contesting defendants were correct. Amongst the offices and places so excluded are those of banker and trustee for the holder of debentures. In Astley v. New Tivoli Ltd., the articles of association of the defendant-company provided that the office of a director would be vacated if he accepted or held any other office or place of profit under the company, except that of a managing director. The plaintiff, a director-of the defendant-company, was by resolution of the board of directors appointed one of the trustees for the holders of debentures issued by the company. Under the trust deed the trustees were to receive annually a sum of money as remuneration. The question which arose for determination was whether the plaintiff, by reason of his being a trustee of the trust deed relating to debentures issued by the company, had vacated his office by reason of the aforesaid article. It was held that the trusteeship was a place of profit under the company though there may be difficulty in saying that it was an office under the company. The object underlying the relevant article was thus stated by North J. at pages 155-156

"I think that the meaning really is to prevent the directors, who are acting as the agents of the company, doing anything by which a director can continue as director, and yet accept or hold an additional office or place of profit under the company. It is intended to prevent the directors having power to accumulate in themselves various places of profit. A director is not to be a master and servant at the same time…….I think a man who has been selected by the company—by the directors—to fill the position of trustee of a covering deed on the terms of receiving from the company, out of the coffers of the company, regular payment of so much a year during the time that he continues to fill that office, in addition to his payment as director, is occupying a place of profit".

The object underlying section 314 is the same as stated by North J. It is to prevent a director, or his partner or relative, or any firm in which a director or his relative is a partner, or a private company of which such a director or member, and director, managing agent, secretaries and treasurers, or manager of a private company in which such a director is a director or member, from holding any office or place of profit carrying a total monthly remuneration of five hundred rupees or more under the company and thereby put in his pocket, directly or indirectly, additional profit above the remuneration to which he is entitled as such director, unless three-fourths of the members of the company, voting either in person or by proxies, agree to this being done at a meeting called to pass such a resolution. To hold that a sole selling agency is not an office or even a place of profit and that the appointment as sole selling agent of. persons mentioned .in section 314 can be made by an ordinary resolution requiring only a bare majority for it to be passed, while in respect of the holding by such persons of other offices and places of profit a special resolution is required, would be to exclude from the restrictive effect of section 314 highly lucrative place or office of profit while bringing within its fold other offices and places of profit not so lucrative. Section 294A also expressly refers to a sole selling agency as an office. I am, therefore, of the opinion that the private company was appointed to an office or place of profit under the company and that since two of the directors of the company, namely, Tulsidas and Ramdas, were both directors and members of the private company, it would be an office or place of profit under the company within the meaning of section 314.

The question still remains as to whether in the case of appointment as sole selling agents of the private company for a further term, a special resolution was necessary. The answer to this question depends upon the true construction to be placed upon the Explanation to sub-section (1). This Explanation was introduced by the Amendment Act of 1960. Under that Explanation, a special resolution would be required for every appointment in the first instance to an office ot place of profit. It is also required in the case of "every subsequent appointment to such office or place of profit on a higher remuneration not covered by the special resolution, except where an appointment on a time scale has already been approved by the special resolution ". On behalf of the plaintiffs it was submitted that the only "subsequent appointment" contemplated by the latter part of the Explanation was where the special resolution according consent to the appointment in the first instance provided for a -subsequent appointment on the same terms as to remuneration or for a subsequent appointment on a higher remuneration, and if there was no provision in the original appointment for a subsequent appointment or for a subsequent appointment on a higher remuneration, then the subsequent appointment would require a special resolution. In reply it was submitted that what the original special resolution was required to cover was not a subsequent appointment on the same remuneration or lower remuneration but a subsequent appointment on a higher remuneration only and that if a subsequent appointment was made on the same remuneration or on a lower remuneration, then even though the original agreement or the special resolution in the first instance did not contemplate a further appointment, none-the-less such appointment would be made and the consent of the company accorded to it by an ordinary resolution.

Now, bearing in mind the object sought to be attained by the enactment of section 314, the better construction appears to me to be the one advanced by the plaintiffs. To accept the contention of the contesting defendants would be to hold that where once an appointment to an office or place of profit is made with the consent of the company by a special resolution for the initial maximum period of five years, such appointment could be renewed indefinitely by repeated subsequent appointments for the same maximum period by merely a bare majority without such appointments being contemplated at the time of the original appointment. Such a construction would militate against the object underlying section 314. As mentioned before, the object is to prevent directors from putting into their pocket, either directly or indirectly, more remuneration, whether by way of salaries, fees, commission, perquisites, etc., other than the remuneration to which they are entitled as such directors. Where three-fourths of the members of the company have agreed to a director so obtaining profit from the company, for a period of five years only, it cannot be that they should be deemed to have given their consent to the directors doing so for all times by repeated subsequent appointments consented to by merely a bare majority of the members. The ordinary rule of construction is that the one which harmonises best with the intention of the legislature and the object sought to be attained by the enactment should be adopted, and applying these principles of construction the view which I am inclined to take today is that unless the appointment in the first instance, to which the consent of the company has been accorded by a special resolution, provides for a subsequent appointment, the subsequent appointment would also require the consent of the company to be accorded by a special resolution irrespective of the fact whether the remuneration to be received is the same or lower (sic higher).

So far as the present case is concerned, the appointment in the first instance under the agreement, dated September 24, 1963, to which the previous consent of the company was obtained by a special resolution passed at the general meeting held on September 23, 1963, did not contain any provision for a renewal, reappointment or continuance of the term of the sole selling agency and therefore an the construction I am inclined to adopt the consent of the company required to be accorded to the further appointment was by a special resolution. The resolution passed at the extraordinary general meeting on April 28, 1969, was an ordinary resolution. Even the number of votes required for passing the resolution as a special resolution were not cast in favour of the resolution. After this meeting, not taking into account the extraordinary general meeting held on April 29, 1969, the annual general meeting of the company was held on August 28, 1969. Under section 294(2), an appointment is to be approved by the company in the first general meeting held after the date on which the appointment was made. If the meeting of April 28, 1969, were held to be invalid as contended for by the plaintiffs and not even taking into account the requisitioned meeting held on April 29, 1969, the meeting at which such special resolution was required to be passed would be the annual general meeting held on August 28, 1969, which not having been done, the appointment ceased to be valid.

It was next submitted on behalf of the plaintiffs that, even assuming that in the case of a subsequent appointment a special resolution was required only if such appointment were on a higher remuneration, not covered by the special resolution according consent to the appointment in the first instance, in the present case the further appointment was in fact on a higher remuneration. In support of this submission reliance was placed upon the said letter dated February 18, 1969, from the private company to the company stating that the clarification contained in its letter dated April 4, 1968, would continue to remain in force. Under the letter of April 4, 1968, the private company agreed to accept as from 1st April, 1968, commission at the rate of 2 per cent, on the net selling price of the company's products as prevailing on November 5, 1967. According to the plaintiffs, even though the intention at the date when the letter of April 4, 1968, was written or even on February 18, 1969, may have been that the private company should receive commission at a lower rate than what it would otherwise have been entitled to, the possibility of the private company receiving higher remuneration cannot be ruled out, for there is always the possibility of the selling prices in the future being lower than those prevailing on November 5, 1967. It is said that in fact such a situation has already arisen. It is alleged by the plaintiffs in their affidavit in rejoinder to the company's affidavit in reply in the notice of motion in Suit No. 522 of 1969 that in June 1969 the Government of India fixed prices of synthetic rubber at rates lower than those prevailing on November 5, 1967. In support of these allegations a copy of a letter dated June 4, 1969, addressed by the Government of India to the company is annexed to the said affidavit. In that letter it is stated that with effect from June 8, 1969, the plaintiffs should market their products at the prices not exceeding those specified in the said letter. The prices so specified are lower than those prevailing on November 5, 1967. The reason for the revision as stated in the said letter is that the selling prices fixed on April 2, 1968, were on the assumption that 25 per cent, of the company's requirements of alcohol would be met from domestic soui.:es, while the balance of 75 per cent, would have to be met from imports, but it was found that the actual proportion of indigenous alcohol to imported alcohol used by the plaintiffs worked out to 40 per cent, for indigenous alcohol and 60 per cent, for imported alcohol and that for the next 12 months the proportion would be 70 per cent, for indigenous alcohol and 30 per cent, for imported alcohol. The answer to this is to be found in paragraph 12 of the affidavit dated July 15, 1969, of J.B. Shukla, the secretary of the private company. In that affidavit he has not admitted that the Government of India is proposing a reduction in the selling prices. He has further stated that:

"Assuming while denying that there is a possibility of the prices of synthetic rubber being reduced by Govt. below those prevailing on 5th November, 1967, I deny that the 2nd defendants could not claim commission at the rate of 2% on the basis of the prices prevailing as alleged".

After making this denial he sets out to state that the intention of the private company was that it would forgo commission on the excess if the price was higher than that prevailing on November 5, 1967, and to claim commission at the rate of 2 per cent, of the price actually prevailing on the date of sale or on the price prevailing prior to November 5, 1967, whichever is lower. It is somewhat difficult to understand these contradictory averments. By these averments the private company is in any event denying that it cannot claim commission at the rate of 2 per cent, on the basis of the prices prevailing on November 5, 1967. If, therefore, the contention of the private company is that it is in any event entitled to commission on the prices prevailing on November 5, 1967, its intention becomes irrelevant. If the intention was as alleged in the said affidavit of Shukla, there was nothing simpler than "to have had an express provision to that effect either in the agreement dated February 18, 1969, or in the said letter dated February 18, 1969. It was, however, contended that this intention was shown by the use in the said letter of the words "clarification" and "ad-hoc arrangement". I do not find it possible to construe these words as meaning that the private company would be entitled to commission at the rate of 2 per cent, on the prices actually prevailing at the date of the sale or those prevailing on November 5, 1967, whichever is lower. It is obvious that the prices of the company's products vary from time to time. These prices are fixed by the Government and they have varied in the past and they may well vary in the future. There is no binding obligation on the private company either under the said agreement dated February 18, 1969, or under the said letter of the same date to accept commission on the basis of the prices prevailing on the date of sale or on November 5, 1967, whichever are lower. In fact, under clause 13 of the agreement the terms of the agreements with respect to the rate of commission provided in clause 12 cannot be modified by mutual agreement of the board of directors of the company and the private company though other terms can be. Any revision in the rate of commission will, therefore, require the mutual consent of the company at a general meeting and the private company. To accept the submission of the contesting defendants that the words "higher remuneration" in the Explanation to section 314(1) cannot cover the case of the possibility of a higher remuneration would be to defeat the object of the section. If there is possibility in the variation of the amount of remuneration receivable by the holder of the office or place of profit under which such holder could receive a higher remuneration than what was provided at the time of the appointment in the first instance, it cannot be said that the subsequent appointment was on the same terms as to remuneration or on lower remuneration. In this view of the matter also the consent of the company to the appointment of the private company for a further term was required to be accorded by a special resolution.

It was then submitted on behalf of the plaintiffs that this was not a subsequent appointment within the meaning of the Explanation to section 314(1), as this was an appointment made with retrospective effect. The first appointment of the private company expired on September 30,1968. In fact, the private company by its letter dated August 31, 1968, pointed this out to the company and requested it to renew the agreement on the same terms and conditions for a further period of five years. Nothing was done thereafter until the question of the further appointment was brought before the board of directors on November 14, 1968. Realising that between October 1, 1968, and November 14, 1968, the private company was acting as sole selling agents without having been appointed as such, the resolution of the board passed at that meeting expressly provided "that the acts and deeds of Messrs, Kilachand Devchand and Co. P. Ltd. done on or after the 1st October, 1968, be and the same are hereby ratified and confirmed and that for such services, they be paid commission as provided in the said agreement dated 24th September, 1963, clarified as aforesaid". Now, I have not been shown any power in the board of directors of the company to make an appointment with retrospective effect. Sub-section (2) of section 294 which speaks of the appointment of a sole selling agent by a board of directors of a company does not provide for any such appointment to be made with retrospective effect. It was submitted that even if the directors had such powers, the words "subsequent appointment" in the Explanation to section 314(1) imply continuity. It was not disputed by the contesting defendants that, if between the original appointment and the further appointment the appointment of another person had intervened, it would not have been a "subsequent appointment". The question is whether an appointment made after the expiry of the period of the first appointment is a subsequent appointment. The dictionary meaning of the word "subsequent "as given in the Shorter Oxford English Dictionary, volume II, page 2062(1), is "following in order or succession; coming or placed after, esp., immediately after; following or succeeding in time; existing or occurring after, esp., immediately after something expressed or implied…….". It was argued that such a construction would entail great hardship, for a board may not be able to meet by reason of the circumstances beyond its control, such as illness of directors. I am not able' to see any such hardship as; envisaged. I fail to see why a subsequent appointment should be deferred till the last moment. Even in the present case the private company asked for further appointment to be made one month before the expiry of the original term. The board could have met within that month and passed the necessary resolution. Section 204(4) expressly makes it permissible for re-appointment, re-employment or extension of the term of office or place of profit within two years preceding the date on which it is to come into force" Even otherwise, the only "hardship" is that a special resolution would be required, in my opinion, bearing in mind the object for which the section was enacted. The word "subsequent "implies a continuity without a break, and an appointment for a further term not made before or on the expiry of the earlier appointment but thereafter would not be a "subsequent appointment". I also fail to see how the board of directors of the company acquired the power to make this appointment and that too with retrospective effect. The Companies Act does not confer any power upon the board of directors to appoint sole selling agents. The effect of section 294(2) is to lay restrictions on the power of the board to make appointments of sole selling agents provided they have such power under the articles. Assuming the board of directors of the company had the power to appoint sole selling agents, under article 183 of the articles of association of the company no director or other persons mentioned in section 314 is, without the previous consent of the company accorded by a special resolution, to hold an office or place of profit under the company or any of its subsidiaries except as provided in the said section. Thus, except in cases where section 314 does not require a special resolution, the board of directors of the company would have no power to make the appointment but the appointment would have to be made by the company itself and that too by a special resolution. Though the requirement as to previous consent of the company under section 314(1) was deleted by the Companies (Amendment) Act, 1965, a corresponding amendment has not been made in article 183 though several other articles in the articles of association of the company were amended in view of the amendments made by the Amending Act of 1965. Thus, in cases where a special resolution would be required under article 183 the board would have no power to make the appointment.

The next question to be considered is, assuming the board of directors has the power to make this appointment and that too with retrospective effect whether this action of the board has been approved or ratified by the general meeting held on April 28, 1969. The notice convening the meeting and the resolution set out therein which was required to be passed does not set out that part of the resolution of the board under which the acts and deeds of the private company done on or after October 1, 1968, were ratified and confirmed and it was further resolved to pay them commission in respect of services rendered for the said period as provided in the said agreement of September 24, 1963, clarified by the said letter of April 4, 1968. The shareholders were never informed that for this intervening period the sole selling agents had acted without any authority and that they were not entitled to any commission unless the same was provided for expressly. The explanatory statement to the notice convening the extraordinary general meeting for April 28, 1969, also does not point this fact out to the shareholders. In these circumstances, I am doubtful whether it can be said that any appointment with retrospective effect was ratified or approved by the shareholders. It was conceded that an appointment for five years from October 1, 1968, cannot be read as an appointment for five years from the date of the resolution of the board or as an appointment for a period from November 14, 1968, to September 30, 1973. Under section 294(2) the approval of the company must be of an appointment made by the board. The appointment made by the board included ratification of the acts and deeds of the private company for the period October 1, 1968, to November 14, 1968. If this was not approved, then I very much doubt whether it can be said that there was an approval under section 294(2) to the further appointment of the private company.

The next point relates to the validity of the two notices dated March 27, 1969, convening the extraordinary general meetings on April 28, 1969, and April 29, 1969. The arguments here are based on the provisions of section 173(2) of the Companies Act, 1956. The relevant provisions of that sub-section are:

"Where any items of business to be transacted at the meeting are deemed to be special as aforesaid, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business, including in particular the nature of the concern or interest, if any, therein, of every director, the managing agent, if any, the secretaries and treasurers, if any, and the manager, if any"

According to the plaintiffs the said notices ought to have set out the nature of the concern or interest of the solicitor-director in the matter of the appointment of the private company for a further term as the sole selling agents of the company and the correspondence which took place between the company and the Company Law Board during 1965 and 1966, particularly the said letter dated July 28, 1965, and June 15, 1966, from the Company Law Board to the company. It was submitted that these were material facts concerning the item of business to be transacted at the said meetings and the non-disclosure, therefore, in the explanatory statement to the said notices invalidates the said notices. That the item of business to be transacted at the said meetings was special business is not disputed. The questions to be considered are whether the above facts were material facts and if either of them was a material fact, the consequence of the non-disclosure thereof in the explanatory statement. If the solicitor-director was an interested or a concerned director, the nature of his concern or interest in the further appointment of the sole selling agents was a material fact which was required to be disclosed in the explanatory statement, and this position is not disputed. The contention of the contesting defendants, however, is that the solicitor-director was not a concerned or an interested director. This point has already been considered by me in connection with the resolution of the board of directors at its meeting on November 14, 1968, and I have already expressed the prima facie conclusion reached by me that he had a concern or an interest in this matter. The only question, therefore, which remains to be considered in this connection is the consequence of such non-disclosure. First, however, I will deal with the question whether the correspondence with the Company Law Board can be said to be a material fact concerning the business to be transacted at the said meetings. Now, the first meeting was for approving the private company's appointment as sole selling agents for a further term. The second meeting, namely, the meeting requisitioned by the plaintiffs, was for not approving the said appointment. Any fact which would have a relevance or bearing upon the approval or a non-approval of the said appointment would, in my opinion, be a material fact concerning the said items of business. The facts relating to this correspondence may be briefly recapitulated from this angle. The said letter dated July 28, 1965, was a show cause notice issued by the Company Law Board under section 294(5) on the ground that it appeared to the Company Law Board that the terms of appointment of the private company were prejudicial to the interests of the company. By this letter the company was required to show cause why under section 295(5)(c) the terms and conditions of the appointment of the private company should not be varied. This matter was at that time considered so important that a sub-committee of the directors was formed to consider it. Ultimately, by its said letter dated June 15, 1966, the Company Law Board decided not to take any further action in the matter at that stage. The said communication, however, expressly stated that:

"The Board would suggest, however, that at the time of the renewal of the agreement with the sole selling agents in 1968, your company should bear in mind the views of the Board which were communicated to you in their letter of even number dated the 28th July, 1965, read with their letter of even number dated the 18th September, 1965".

It was submitted by the contesting defendants that this was merely a suggestion and not a directive or an order and that the proceedings commenced by the show-cause notice under section 294(5) having terminated, there was no obligation to disclose this correspondence in the explanatory statement. This argument cannot be accepted. Under section 294(5) the Central Government has the power to require such information regarding the terms and conditions of the appointment of the sole selling agent as it considers necessary for the purpose of determining whether or not such terms and conditions are prejudicial to the interests of the company. There after, if it is of the opinion that they are prejudicial to the interests of the company, it has the power to make such variations in those terms and conditions as would in its opinion make them no longer prejudicial to the interests of the company. If a company refuses to furnish such information, the Central Government has the power to appoint a suitable person to investigate and report on the terms and conditions of the appointment of the sole selling agents. Thus, the Central Government is conferred wide and extensive statutory powers of control over the sole selling agencies of companies and is constituted the statutory authority to determine whether the terms and conditions of a sole selling agency are prejudicial to the interests of the company or not. Under section 10E these powers of the Central Government have been delegated to the Company Law Board. Where, therefore, a statutory authority empowered to decide whether the terms and conditions of the appointment of a sole selling agent are prejudicial to the interests of the company or not, had already opined that certain provisions of the said agreement dated September 24, 1963, were prejudicial to the interests of the company and had expressly required the company to bear its views in mind at the time of the renewal of the agency, it cannot be said that the disclosure of the views of the Company Law Board to the shareholders at the time of further appointment on terms which contained the very features objected to by the Company Law Board was not material. The object underlying section 1 73(2) is that the shareholders may have before them all facts which are material to enable them to form a judgment on the business before them.

Any fact which would, influence them in making up their minds, one way or the other, would be a material fact under section 173(2) and had to be set out in the explanatory statement to the notice of the meeting. The views expressed by the Company Law Board would have certainly played a part, and perhaps an important part, in enabling the company's shareholders to make up their minds whether to vote for approval of the further appointment or not.

The contention that the matter was closed by the said letter dated June 15, 1966, is too naive and is belied by subsequent events. By its letter dated April 9, 1969, headed "Sole selling agents ; terms and conditions of appointment under section 294(5) of the Companies Act, 1956", the Company Law Board called upon the company to clarify how the renewed agreement was proposed for approval of the shareholders without reference to the views of the Board communicated to the company earlier. The concluding paragraph of that letter stated:

"From the perusal of the renewed agreement, it appears, prima facie, that the terms are prejudicial to the interests of your company and this Board will have to examine to what extent the terms and conditions require modification or abrogation. You are, therefore, hereby informed that if any such variation is ultimately made by the Company Law Board, the terms of the said agreement would be effective from 1st October, 1968".

There was further correspondence pursuant to this letter to which I will refer later.

In Shelh Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. it was held that section 173 enacted a provision which was mandatory and not directory. Bhagwati J., as he then was, observed in that case:

"The object of enacting section 173 is to secure that all facts which have a bearing on the question on which the shareholders have to form their judgment are brought to the notice of the shareholders so that the shareholders can exercise an intelligent judgment. The provision is enacted in the interests of the shareholders so that the material facts concerning the item of business to be transacted at the meeting are before the shareholders and they also know what is the nature of the concern or interest of the management in such item of business, the idea being that the shareholders may not be duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all material facts and apprised of the interest of the management in any particular action being taken. Having regard to the whole purpose and scope of the provision enacted in section 173, I am of the opinion that it is mandatory and not directory and that any disobedience to its requirements must lead to nullification of the action taken. If, therefore, there was any contravention of the provisions of section 173, the meeting of the company held on 5th September, 1961, would be invalid and so also would the resolution passed at that meeting be invalid".

The same view was taken by a Division Bench of the Calcutta High Court in Shalagram Jhajharia v. National Co. Ltd That was a case of a resolution to approve under section 294 the appointment of sole selling agents. In that case Mitter J. observed :

"It is well known that if a company can sell its products without the employment of agents its profits would be substantially higher than in case where the selling was done through agents. On the other hand it cannot be ignored that selling is best done through an organization of experts and specially when sales have to be made to overseas customers the employment of an overseas agent is almost a necessity. As the legislature has thought it fit to provide that shareholders must approve of the appointment of selling agents the opportunity given to the shareholders must be full and complete and there must be a full and frank disclosure of the salient features of the agency agreement before the shareholders can be asked to give their sanction. The provision for inspection of the agreement at the registered office of the company is not enough. Few shareholders have either the time or the inclination to go to the registered office to find out what the company is about to do. Moreover, such an opportunity is illusory in the case of shareholders who do not live in Calcutta when the registered office is situated here".

Section 71 of the Companies Clauses Consolidation Act, 1845, required every notice of an extraordinary meeting or of an ordinary meeting to specify the purpose for which the meeting was called. In Kaye v. Croydon Tramways Company the defendant company entered into an agreement to sell its undertaking to another company under which the purchasing company agreed to pay, in addition to the sum payable to the selling company, a substantial sum to the directors of the selling company as compensation for loss of office, and the agreement was made conditional upon its adoption by the shareholders of the selling company. The resolution approving the agreement was passed by a large majority notwithstanding the plaintiff's opposition. Thereupon the plaintiff commenced an action and served a notice of motion for an injunction to restrain the selling company from carrying the agreement into effect. The notice calling the meeting stated that the meeting was convened for the purpose of considering the agreement for the sale of the undertaking of the selling company to the purchasing company. It further stated that the directors and the secretary had agreed to retire on being paid a lump sum as compensation for their loss of office. The Court of Appeal held that the notice had been "most artfully framed to mislead the shareholders "since a very considerable portion of that, which was part of the consideration for the purchase, was not to be paid to the vendors but was to be paid to the directors and officers of the selling company. Lindley M.R. said at pages 369-370 :

"It is a tricky notice, and it is to my mind playing with words to tell shareholders that they are convened for the purpose of considering a contract for the sale of their undertaking, and to conceal from them that a large portion of that purchase-money is not to be paid to the vendors who sell that undertaking………….. I do not think that this notice discloses the purpose for which the meeting is convened. It is not a notice disclosing that purpose fairly, and in a sense not to mislead those to whom it is addressed".

The Court of Appeal, accordingly, granted the injunction prayed for subject to this that it left the selling company free upon a proper notice to sanction the agreement. It is pertinent to note that section 71 of the Companies Clauses Consolidation Act was similar to section 172(1) of the Companies Act, 1956, which requires every notice of a company to contain, inter alia, a statement of the business to be transacted thereat and that there was no provision in the Companies Clauses Consolidation Act similar to the mandatory provision of section 173(2).

It is alleged in the affidavits in reply filed on behalf of the company and Tulsidas that the explanatory statements to the notices of the meeting held on April 28, 1968, and April 29, 1968, respectively, were placed and generally approved at the board meeting held on March 27, 1969, at which Reighley was also present, the suggestion being that Reighley and through him the plaintiffs had approved both the said explanatory statements. It was submitted that even in their requisition dated March 17, 1969, for calling an extraordinary meeting, in the explanatory statement which the plaintiffs required to be included in the notice convening such meeting, they had not required the fact either of the interest or concern of the solicitor-director or the said correspondence with the Company Law Board to be set out. Now, when one turns to the minutes of the board meeting held on March 27, 1969, it is apparent that the only discussion about the explanatory statements was with respect to the requisitionists' meeting, when the solicitor-director pointed out that the statement of facts set out in the requisition should be sent to the shareholders with the notice of the requisitioned meeting and, as the said statement was silent regarding the directors' interests in the resolution, the same should be added. There is no mention in the minutes of the explanatory statement in respect of both the said meetings being placed before or generally approved by the board as alleged. Further, by their said requisition dated March 17, 1969, the plaintiffs did not set out the whole of the explanatory statement to be incorporated in the notice. What they did was to make a request that in the explanatory statement which would be annexed to the notice the statement set out by them should be included. They were thus anxious that certain facts should be included and not that they did not want other material or relevant facts to be excluded. It is the duty of the company acting through its board to incorporate in the explanatory statement all material facts concerning the item of special business to be transacted at a meeting. At the said board meeting held on March 27, 1969, one of the resolutions passed was that the secretary of the company should send out notices of the said two meetings together with the explanatory statements in consultation with the solicitors of the company. This shows that neither the explanatory statements nor their drafts thereof were placed before the board meeting, much less approved.

It was next sought to be contended that the plaintiffs had knowledge of the correspondence and of the interest and concern of the solicitor-director and, therefore, they could not. complain about the same and that it is only a shareholder who was ignorant of these facts who could make such a complaint. In support of this contention reliance was placed first upon Parashuram Detaram Shamdasani v. Tata Industrial Bank Ltd. In that case the Tata Industrial Bank decided to amalgamate with the Central Bank of India Ltd. and an agreement of amalgamation was entered into. A meeting of the shareholders was called for approving the scheme. The plaintiff who had in the past adopted a hostile attitude towards the bank, which attitude was known to the shareholders, opposed the scheme. On a poll being demanded, there were 5,25,249 votes in favour of the resolution, while only 369 votes were cast against, and out of these 369 votes 100 votes being of the plaintiff and 10 of his brother. The plaintiff and his brother filed a suit challenging the resolution. The plaintiff's suit and appeal were dismissed and he filed an appeal to the Privy Council which too failed. The Privy Council observed that the fact that the action was personal to the appellant was unfortunate for him as he knew before the first meeting everything about the scheme that was to be known and that he had written open letters to the shareholders and no possible complaint of the notice or circular on the ground of insufficiency was, therefore, open to him. On a perusal of the notice their Lordships came to the conclusion that it was in no way questionable. Another of the plaintiff's complaint was that he was denied a hearing at the general meeting. The court held that on the evidence it appeared that "there was no organised opposition ; there was a very clearly expressed indication by the shareholders that they did not desire further to hear the appellant, and what really happened was that the appellant desisted from any further effort to make himself heard because even he realised that no further speech from him would be of any avail ". Reliance was also placed upon Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. in which the Privy Council decision in Shamdasani's case was followed, and upon Kalinga Tubes Ltd. v. Shanti Prasad Jain, which was affirmed by the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. Relying upon these authorities it was sought to be contended that the plaintiffs, having full knowledge of the facts which according to them were not disclosed in the explanatory statements, had no right to challenge the validity of the notices on this ground and were estopped from doing so. There is, however, no such plea in any of the affidavits in reply, and this question really does not arise for my consideration, but as this question was argued at some length and as the contesting defendants insisted that they could spell out such a plea from their affidavit in reply—which they have not been able to do—I will shortly deal with the same. In my opinion, none of these authorities support the contesting defendants. Each turns upon its own facts. The Privy Council decision in Shutndasani's case was under the Indian Companies Act, 1913, which did not contain any section corresponding to section 173(2) of the 1956 Act. Regulation 49 of Table A of Schedule 1 of the 1913 Act, intel alia, required that, in case of special business, the general nature of that business should be set out in the notice. This regulation corresponds to section 172(1) of the 1956 Act which requires every notice of a meeting to contain a statement of the business to be transacted thereat. The Privy Council did not have to decide the question of a mandatory statutory provision, non-compliance with which would invalidate the notice. The Privy Council held that there was nothing questionable about the notice. The plaintiff who had a long history of dispute with the bank was in a hopeless minority. The shareholders did not appear to have put any faith in any statement made by him. They did not even desire to hear him further. The action, therefore, was, on the face of it, personal only to him and his brother, who held between them 110 out of 5,25,618 votes, but of which 5,25,249 votes were cast in favour of the resolution. The Calcutta case was of an application under section 397 of the 1956 Act, and what was contended was that failure to comply with section 173(2) made it a case of oppression in conducting the affairs of the company. The court held that it could not be oppression because breach of section 173(2) could make the meeting called invalid and no more, and if such a meeting was invalid, the Companies Act provided procedure for calling valid or regular meetings or for regularising irregular proceedings, a right which was open to every shareholder. The case of Kalinga Tubes Ltd. v. Shanti Prasad Jain was also a case under sections 397 and 398 of the Companies Act. There was no plea as to the invalidity of the notice taken in the petition or in the affidavits, but at a late stage of the case oral submissions were made challenging the validity of the notice on the ground of non-compliance with section 173(2). As the High Court expressly pointed out, no question arose about the disclosure of any interest of, any director and the only contention on this aspect of the case was that the notice was invalid for want of necessary particulars in the explanatory statement. On examining the explanatory statement the High Court came to the conclusion that it was comprehensive enough and was in compliance with the statutory requirements. The court further pointed out that had any objection been taken in the petition at the earliest instance, the appellant company could have shown that no such material fact was relevant or could have been given. The court observed at page 215 :

"In particular cases, the omission to state the material facts may invalidate the notice and consequently may hit the relative resolution passed in a meeting of the shareholders who might be completely misled by the terms of the notice".

In this case also the plaintiff was in a hopeless minority, and the court held that in that view of the matter, any amount of elucidation in the explanatory statement would not have been of any avail. The court also observed that, assuming only material facts had been omitted from the notice, the mere omission of such facts would not per se invalidate the notice and the resolution passed in the meeting. It further held that what are material facts and what is the nature and extent of interest under section 173(2) are questions of fact depending on the facts of each case and the party who knew the real nature of the transaction could not complain of the insufficiency of the notice. The court held that, in the facts of that particular case, they were not concerned to look to the interest of absentee shareholders. Before the Supreme Court, however, the appellant, Shanti Prasad Jain, was not allowed to urge this point inasmuch as the objection was not taken in the petition, and as the point was a mixed question of fact and law, the court further added:

"We may add that, though the objection was not taken in the petition, it seems to have been urged before the appeal court. Das J. has dealt with it at length and we would have agreed with him if we had permitted the question to be raised. This attack on the validity of what happened on March 29, 1958, must thus fail"

Now, what Das J. in the High Court really held was that the explanatory statement was comprehensive and that there was no non-compliance with section 173(2) and that what are material facts including the nature or concern of a director were questions of fact depending on the facts and circumstances of each case. The rest of what Das J. observed was really in the nature of an obiter. Even, on the facts, the present case stands on a wholly different footing. There is no question of the plaintiffs being in a hopeless minority. They have secured, even as declared by Tulsidas himself, about 48 per cent, of the votes cast. Admittedly, the Life Insurance Corporation of India which, along with its subsidiaries held about 13,000 shares, had voted against the resolution. Looking to the slight difference between the respective shareholdings of the plaintiffs and the Kilachand group, in this case what really counted were the votes of the independent shareholders. It is with reference to the effect on them and the consequent result of the plaintiffs not being able to secure their votes that the case must be considered. It was urged that in the statements issued by the plaintiffs, both by way of circulars to the shareholders and by advertisements in the newspapers asking for support, they had not only pointed out that the solicitor-director was interested and concerned but had also referred to the letter of the Company Law Board of July 28, 1965, read with the letter of September 18, 1965, and the letter of June 15, 1966, and, therefore, the shareholders had a correct picture before them and could not be said to be misled by any omission in the explanatory statements. This is not correct and the argument does not present a true picture. The various circulars and advertisements have been put in by consent as exhibits. Exhibit A is a statement issued by Ruia, Kirloskar and the solicitor-director, while exhibit B is an advertisement containing the statement of the private company. All the three directors in their statements have asserted that they were the only independent directors. If the correct position with respect to the solicitor-director is as I have opined above, this was itself a misleading statement. The circulars and advertisements of the plaintiffs were in reply to the statements of the directors, and the advertisement given by the private company followed upon this. In the private company's statement it is stated that:

"The Company Law Board had gone into this appointment in 1965, and, after a careful examination, overruled the objections raised by Firestone in a full-fledged memorandum and cleared the terms. The Company Law Board had, however, remarked that ' at the time of the renewal of the agreement with the sole selling agents in 1968……..', thus visualising the renewal of the agreement in 1968".

This again is a misleading statement, for the relevant and important words in the Company Law Board's communication, namely, that "your company should bear in mind the views of the Board which were communicated to you in their letter of even number dated 28th July, 1965, read with their letter of even number dated 28th September, 1965", were omitted and substituted by dots, thus suggesting that the Company Law Board had no objection to the renewal of the agreement in the same form in 1968. In my opinion, this omission is deliberate and made with the intention to mislead, particularly in view of the letter dated April 9, 1969, from the Company Law Board to which I have already referred above, which letter was certainly known to Tulsidas but most certainly not known to the other shareholders of the company. This statement of the private company appeared in the newspaper "Indian Express" of April 15, 1969, and in the newspaper "Financial Express" of April 16, 1969, that is, after the receipt of the said letter of April 9, 1969. Secondly, in the light of what was stated in the said communication from the Company Law Board of June 15, 1966, the statement that the Company Law Board had cleared the terms of the sole selling agency was hardly a fair or a true statement. All that the Company Law Board did was to say that it had decided not to take any further action under section 294(5) at that stage but had clearly indicated that unless the objections raised by the Company Law Board were taken into account at the time of the renewal of the agreement, further action would be taken. The shareholders had thus before them a conflicting picture and at least with respect to the relevant facts a misleading picture as presented by the Kilachand group and those supporting it. The plaintiffs' objection to the validity of the notice, therefore, cannot be dismissed so lightly on the ground of their own knowledge of its infirmity as contended by the contesting defendants. On the contrary, in my opinion, the plaintiffs' objections are well-founded and, consequently, the said notices and meetings, particularly the notice for the meeting of the 28th April and the meeting held on that day, and the resolution passed at that meeting are invalid. Closely connected with this point is the objection of the plaintiffs with reference to the non-disclosure of the Company Law Board's said letter of April 9, 1969, to the shareholders at the meeting of the 28th April. Tulsidas as the chairman of the board of directors took the chair at the said meeting of the 28th April. It was submitted on behalf of the plaintiffs that, since Tulsidas was vitally interested in the said resolution, he deliberately suppressed from the shareholders the receipt of the said letter so as to keep back from them the knowledge that the Company Law Board was objecting to the said further appointment. Tulsidas's answer is to be found in paragraph 15 of his affidavit-in-reply affirmed on August 14, 1969. The relevant portion is:

"I say that by the said letter, the Company Law Board only sought clarification from the 1st defendant company which was given by the 1st defendant company by its letter dated 22nd April, 1969. I say that there was no necessity for the said letter dated the 9th April, 1969, being circulated to the board of directors of the 1st defendant company as the same had been adequately dealt with and, as no further communication had been received from the Company Law Board, the said letter dated the 9th April, 1969, was dealt with in the ordinary course after consulting the solicitors of the 1st defendant company. I deny that the said letters dated the 9th April, 1969, and 22nd April, 1969, were wrongfully or with mala fide intention suppressed as alleged. I say that the said letter and the reply was placed at the first board meeting of the 1st defendant company held thereafter".

Very much the same statements are made in the affidavit-in-reply filed by Dabke, the secretary of the company, on behalf of the company. The board meeting referred to in Tulsidas's affidavit was held on June 25, 1969. At least one thing is obvious on Tulsidas's own statement, that it was necessary to place the said letter before the board. Bearing this in mind let us examine the bona fides of Tulsidas. By his letters of April 9, 1969, and April 22, 1969, Reighley called upon Tulsidas as the chairman of the company to call a meeting of the board of directors immediately. Copies of these letters were sent to all the directors. It appears that these letters were written as Reighley desired that the procedure to be followed at the said extraordinary general meetings should be discussed and agreed upon at a board meeting. No meeting was, however, called until June 25, 1969. Now, if any such board meeting were called, obviously Tulsidas would have had to place this letter from the Company Law Board before the board of directors and Reighley would have come to know about it. Reighley learnt about this letter only when in the newspaper of April 30, 1969, it was reported that Mr. Fakhruddin Ali Ahmed, the Minister for Industrial Development and Company Affairs, had stated in the Lok Sabha on April 29, 1969, that the Company Law Board had recently asked the company for an explanation as to why the recommendations of the Company Law Board were not included in the agreement of February 18, 1969. Thereupon, Reighly by his letter dated April 30, 1969, called upon the secretary of the company to immediately let him have a copy of the said communication and any correspondence relating thereto and further stated that no reply should be sent thereafter unless he had an opportunity of seeing the draft thereof. Thereafter, Reighley was given inspection of the said letter dated April 9, 1969, and the company's reply dated April 22, 1969. The reply of April 22, 1969, is signed by Dabke. The astonishing thing about this reply is that according to the affidavits-in-reply of Tulsidas and Dabke, Tulsidas by himself dealt with the letter "in the ordinary course "after consulting the solicitors of the company, namely, the firm of Messrs. Daphtary, Ferreira and Diwan. Now, was Tulsidas a proper party to deal with this letter and keep the knowledge of both the letter and the reply to himself until the fact that there was such a communication came out by reason of the statement made by the Minister in the Lok Sabha ? Tulsidas was the person vitally interested in the further appointment of the private company as sole selling agents. As will be shown later, while dealing with another aspect of the case, but for the sole selling agency commission received by the private company its actual working for the year ended September 30, 1968, would have shown a loss. On the previous occasion when communication was received from the Company Law Board, that is, in 1965, the matter was considered so important that a sub-committee of directors was appointed to deal with it. Why were the objections of the Company La Board to the further appointment dealt with in this fashion by Tulsidas alone ? Tulsidas's explanation that it was not necessary to circulate the letter as no further communication had been received from the Company Law Board after the company's reply of April 22, 1969, is untenable on the face of it. What was required to be circulated to the directors was the letter of the Company Law Board before any reply was sent thereto. According to Tulsidas, the matter was important enough to require consultation with the solicitors of the company but not important enough to place before the board of directors. The plaintiffs' contention that a board meeting was not called in April, 1969, though repeatedly requested by Reighley because, otherwise, this correspondence would have come to the knowledge of Reighley and through him to the knowledge of the shareholders appears, therefore, to be well founded. No one can be naive enough to believe, as Tulsidas expects it to be believed, that because no further communication had been received to the company's reply dated April 22, 1969, between April 22, 1969, and April 28, 1969, the Company Law Board had dropped the matter and it was, therefore; not necessary to apprise the shareholders about this correspondence. The contention in the affidavits-in-reply of Dabke and Tulsidas that it was for this reason that the said correspondence was not disclosed at the said extraordinary general meeting does not reflect credit upon them, and in this connection what transpired subsequently is instructive. By the letter dated August 29, 1969, a copy of which is put in by consent and marked as exhibit No. 1, the Company Law Board called upon the company under section 294(5)(a) of the Companies Act to furnish certain information regarding the terms and conditions of appointment of the private company as selling agents of the company for a further term. There are in all 16 items in respect of which such information is required to be furnished. The margin of difference between the votes for and against the impugned resolution was very narrow, and, in my opinion, this correspondence may have well influenced the necessary number of shareholders to vote against the resolution even assuming the result of the poll as declared by Tulsidas was correct.

It was also submitted on behalf of the contesting defendants that the Company Law Board's letter of April 9, 1969, showed non-application of mind, that it was addressed by some under-secretary and the facts on which it was based were not existing facts, and for the said reason also it was not required to be communicated to the shareholders. It is not necessary to go into the rival contentions as to the validity or otherwise of the objections raised by the Company Law Board and whether some of the facts which existed at the time of the Company Law Board's objections in 1965 continued to exist in 1969, for one thing is clear that Tulsidas, the person most vitally interested and concerned, cannot be the sole judge of this. It was his duty to place these letters before the meeting of the shareholders. Whatever had to be pointed out to the shareholders could have been mentioned by Tulsidas at the meeting and it would have been then for the shareholders to consider the Company Law Board's objections and Tulsidas's explanation thereto. The submission that the letter was signed by Some under-secretary is hardly worthy of mention. It is true that the letter is signed by the under-secretary to the Company Law Board in the same way as the earlier communications from the Board, but it is clear from the letter itself that it is a communication from the Company Law Board. In fact, the said letters dated July 28, 1965, and September 18, 1965, were also signed by the under-secretary to the Company Law Board. These were, however, not treated as letters from some under-secretary and not from the Company Law Board. This letter of April 9, 1969, and the company's reply remained in the exclusive knowledge of Tulsidas, Dabke and the company's solicitors and were, in my opinion, deliberately kept back from the knowledge of all other shareholders and directors with a view to see that the said resolution of further appointment of the private company as sole selling agents should be got passed. In Tiessen v. Henderson Kekewich J. pointed out that:

"………..the vote of the majority at a general meeting, as it binds both dissentient and absent shareholders, must be a vote given with the utmost fairness—that not only must the matter be fairly put before the meeting, but the meeting itself must be conducted in the fairest possible manner".

To repeat the words of Mitter J. in Shalagram Jhajharia v. National Co. Ltd.:

"As the legislature has though it fit to provide that shareholders must approve of the appointment of selling agents the opportunity given to the shareholders must be full and complete and there must be a full and frank disclosure of the salient features of the agency agreement before the shareholders can be asked to give their sanction".

In the present case it cannot be held that the shareholders were given a full and complete opportunity or that there was a full, and frank disclosure, and I am inclined to accept the plaintiffs' case that the resolution, said to be passed at the meeting of April 28, 1969, falls in the well-known category of resolutions obtained by trick.

I will now deal with the other objections of the plaintiffs to the meeting of April 28, 1969. The main amongst these are that Tulsidas was not entitled to take the chair at the said extraordinary general meeting, that he had ho right to give any decision as to the validity of any proxy or letter of revocation after the votes were cast and that the decisions he has given with respect to such objections are bad in law and are prompted by a mala fide motive of invalidating as many votes in favour of the plaintiffs as possible in order to secure a majority for the resolution approving the appointment of the private company for a further term. It was submitted on behalf of the contesting defendants that under article 92 of the articles of association of the company the chairman of the directors, if present and willing to take the chair at -any general meeting, whether annual or Extraordinary, was entitled to do so. It was further submitted that, in order to show his fairness, Tulsidas had expressed his willingness to vacate the chair in favour of any person who was unanimously agreed upon to take the chair in his place and had even suggested the name of another director of the company, Pratap Bhogilal, but Reighley had objected thereto and so Tulsidas continued to act as chairman. This gesture was to my mind a meaningless one, because from the nature of things no one could have expected at the said meeting any agreement, upon any subject at the said meeting. It was further stated that since article 92 authorises the chairman of the directors to take the chair at a general meeting and as the articles of association of a company form a contract between the company and the members and between the members inter se, the members had agreed to an interested person being the chairman of every general meeting inasmuch as the majority of the business which comes up before a general meeting relates to the acts of directors. This argument does not appear to me to have any relevance. What was before the meeting was not the act of Tulsidas as a director in which he was concerned or interested as a director to see that the same should be upheld by the meeting. What was before the meeting was the approval of an agreement entered into between the company and the private company controlled by Tulsidas under which the private company and, therefore, indirectly, Tulsidas, were to receive considerable amounts by way of remuneration and profit. In this matter Tulsidas, in his capacity as a director, had not taken any part in the resolution of the board passed at its meeting held on November 14, 1968. His interest in the item of business before the meeting was, therefore, not in his capacity as director of the company but in his capacity as director and member of the private company and as the person controlling the private company, and it was his personal interest which would be vitally affected if the resolution was not passed. I was referred to certain authorities in this connection, but I do not propose to discuss them or to go further into this question inasmuch as for the purposes of these notices of motion, I am prepared to assume that Tulsidas was entitled to take the chair. Nonetheless, I am of the opinion that any presumption of bona fides which may attach to the acts of an independent chairman cannot be applicable to Tulsidas's acts, in the present case. Similarly, I do not propose to consider the elaborate arguments advanced and the number of authorities and passages from text books cited before me as to when a poll is said to be completed. I will also assume for the purposes of the present notices of motion that Tulsidas was entitled to give his decision on the validity of the proxies and of the letters of revocation at the time when he did. So far as the question of directions or decisions given by Tulsidas on the validity of the proxies and letters of revocation is concerned, it was submitted on behalf of the contesting defendants that the defendants would fail if such directions or decisions were bad in law. It was further submitted that short of fraud in the conduct of the meeting or in the declaration of results or manifest error of law in the directions and decisions given upon questions of validity of proxies and revocations, the decisions and directions of the chairman cannot be challenged. For the purposes of these notices of motion I will accept this proposition without going into the authorities and the rival submissions in that behalf. Even then, in my opinion, the result as regards these notices of motion must be the same. Even assuming that any presumption of bona fides would attach to the action of Tulsidas as the chairman of the meeting, such presumption is rebutted by the conduct of Tulsidas in deliberately suppressing from the meeting the said letter of April 9, 1969, from the Company Law Board to the company and the company's reply dated April 22, 1969, thereto as also the other circumstances to which I will presently refer. Further, as will be pointed out, several decisions or directions given by Tulsidas cannot be supported in law nor was any attempt made to justify them as being correct in law. If so, the result declared by Tulsidas cannot be said to be the true result of the meeting. I may also point out that while article 97(2) of the articles of association of the company makes the declaration of the chairman, whether on a show of hands a resolution has or has not been carried, or has or has not been carried either unanimously or by a particular majority, conclusive evidence of that fact, without proof of the number or proportion of the votes cast in favour of or against such resolution, there is no such provision with respect to the declaration of the result of a poll. Under article 98(6) it is only the decision of the chairman on any difference between the scrutineers appointed by the chairman to scrutinise the votes given on the poll and report to him which is made conclusive and not his declaration of the result of the poll.

Before I deal with the decisions or directions given by Tulsidas, a few further facts which are important on this aspect of the case require to be set out. In the plaint in Suit No. 681 of 1969 the plaintiffs have made a grievance that the company through its secretary got some data fed into the computers maintained by the Tata Consultancy Services, Bombay, and that the proxies lodged at the registered office of the company were wrongfully caused to be removed to the Tata Consultancy Services on April 26, 1969, and thereafter and that when such data was fed, neither the scrutineers nor the plaintiffs were on the scene and the fact that on that date the scrutineers were not even appointed and the data was fed into the computers was known only to Tulsidas and Dabke and that till today no one else knows the nature of such data or the accuracy or sufficiency thereof or the sufficiency or accuracy with which answers or results were obtained from the computers. The plaintiffs have submitted that for this reason the result, purported to be declared from the alleged result obtained from the said computers, is not valid and binding. Now, the position with respect to the appointment of Tata Consultancy Services is as astonishing as that relating to the Company Law Board's said letter of April 9, 1969. Just as in the latter case Tulsidas on his own purported to deal with the said letter and to reply thereto, so here Dabke, the secretary of the company, on his own, without consulting the board of directors and without any authority from the board of directors, engaged the services of the Tata Consultancy Services. The services to be performed by the Tata Consultancy Services are set out in their letter of April 15, 1969. They agreed to transcribe the names of shareholders and joint shareholders along with their holdings into cards and transfer them on to a magnetic tape provided this data was supplied to them by April 19, 1969. This master tape was then to be sorted in dictionary order in order to produce alphabetical index which would be used by the company's share department to identify the shareholders giving the proxies. Further, information regarding proxies and the revocations was to be punched into cards and a proxy register was to be printed showing separately for the Kilachand group and for the plaintiffs the following particulars, namely, (a) name of the shareholder, (b) the total number of shares held, (c) proxy number, (d) the date of proxy, (e) number of shares against the proxy, (f) date of revocation, if any, (g) revocation number, and (h) number of shares against the revocation. After the polling had taken place, information from the polling papers were to be picked up and a fresh register showing the latest position of the polled proxies was to be prepared. The register would flag those cases where the proxies could be disputed, helping to avoid, as stated in the said letter, "unnecessary screening of valid proxies". It appears that the Tata Consultancy Services were paid a sum of Rs. 20,000 for this work. There is no resolution of the board meeting authorising the engagement of the Tata Consultancy Services or the payment of such amount to them, except that the fact that such payment had been made was intimated to the board of directors at its meeting held on June 25, 1969. In justification of his action Dabke sought to rely in his affidavit-in-reply upon a previous instance when similar assistance was taken from the International Business Machines Corporation. According to him, in 1960, when the company's shares were oversubscribed to about 60 times the face value of the shares offered to the public, assistance of the International Business Machines Corporation was similarly taken for processing allotment letters and refund orders, etc., and at that time also no resolution of the board of directors was passed sanctioning such procedure, and it was the secretary and the office staff who attended thereto. Now, I fail to see what analogy there is between the two cases. Processing of allotment letters and refund orders was not a contested matter, while here there was a hotly disputed question on which the directors and shareholders were sharply divided. It is also alleged that Dabke had informed the directors of the company, including Reighley, about this arrangement. That Reighley gave his consent to it does not seem to be borne out by the record. Why this was not put before and resolved upon at a meeting of the board of directors, even though the plaintiffs were insisting that such a meeting should be called, is a question which has not been answered in the affidavits-in-reply. According to the affidavit-in-reply made by Dabke, he got prepared a list of shareholders on the register of the company together with the folio number, number of shares held by them, the names of the joint holders, if any, and their adresses and sent it to the Tata Consultancy Services for preparing the master tape. This appears to have been done prior to April 26, 1969. On the basis of this data the master tape was prepared by the Tata Consultancy Services and ari alphabetical index in the dictionary order was made and submitted by them to the company. After receipt of the proxies, a rubber stamp was put on each proxy indicating by means of the letters 'F', ' K' and ' G ' whether such proxy was in favour of the plaintiffs or the Kilachand group or was' in favour of an independent party, the letters 'F', 'K' and 'G' standing respectively for "Firestone", "Kilachand" and "General". To these proxies was given a register folio number, serially numbered. Different serial numbers were given to the proxies lodged in favour of Reighley and Tulsidas. The proxies which were serially numbered were grouped according to the letters of the English alphabet and folio numbers were put thereon with the help of the staff of the company. It is alleged that at the said time many of the proxies in favour of Reighley and two others did not state the name of the shareholder but merely stated "I, the undersigned "and bore at the bottom the signature "purporting to be that of the shareholder "and that in many of such cases it was not possible to decipher the name of the shareholder from the signature or to relate the name of the purported shareholder "as appearing on the proxy register of members" in spite of diligent efforts by the staff of the company. Folio numbers were, therefore, not given to such proxies and such proxies are referred to as "untraceable "in the affidavit-in-reply. After the remaining proxies were arranged as aforesaid and numbered and stamped with the relevant letter, they were sent under armed escort to the Tata Consultancy Services in the company of two representatives of the plaintiffs, two of the private company and two of the company for preparation of proxy analysis which accordingly was done by them. It is alleged that the said arrangement of taking and bringing back proxies to and from the Tata Consultancy Services was arrived at on April 26, 1969, in consultation with Ramdas, Reighley, Warner and their solicitor and the solicitor-director. The said proxies were removed on 26th and 27th April, 1969, from the' company's office to the office of the Tata Consultancy Services. It is alleged that the plaintiffs had deputed their own representatives to accompany the said proxies as well as deputed their representatives to supervise the return of the said proxies. It is said that there could be no question of consulting the scrutineers when data was fed into the computers prior to April 28, 1969, since on that date no scrutineers were appointed. Prior to the date of the said meeting held on April 28, 1969, after the master tape had been so prepared from the data supplied as aforesaid, the data with respect to the proxies was fed into the computers for processing on the 26th and 27th April, 1969. After the date of the said meeting the data relating to the revocation letters received was further fed into the computers "in order that the 1st defendant company and/or the scrutineers may have a complete picture and/or a register of the proxies and revocation letters lodged with the 1st defendant company". It is further alleged that the scrutineers were present at the time the data relating to revocation letters was fed into the computers. Paragraph 42 of the said affidavit further alleges :

"As a result of the feeding of this data the scrutineers and the 1st defendant company had before them a register showing the names of shareholders, number of shares held by them, the proxies and the revocations, if any, given by them. The validity of the proxies and the revocations was thereafter subsequently determined by the chairman and/or under his directions in accordance with his decisions and directions given in his letter dated 26th June, 1969, to me. As the scrutineers were not concerned and/or were not entitled to determine the validity or invalidity of the proxies they were not informed of the further data regarding the validity of the proxies which was fed to the computers subsequent to the said letter……..I say that even the 2nd defendant was not aware of the actual data fed into the computers at the time the same was fed into the computers. I further say that the scrutineers had themselves checked the register of proxies obtained from the Tata Consultancy Services on 14th May, 1969, as also the work done by the office of the 1st defendant company."

In his affidavit-in-reply Tulsidas has supported what Dabke has alleged, stating that Dabke informed him about the said facts. Certain averments made by Tulsidas in paragraph 20 of the said affidavit-in-reply are important and require to be quoted :

"I say that I was not aware of the actual data which was fed into the computers at the time the same was fed into the computers. I say that necessary data was fed into the computer by the secretary of the 1st defendant company in consultation with the Tata Consultancy Services. I say that the further data that was fed into the said computer after 26th June, 1969, was based upon my decisions on the validity or otherwise of various proxies and letters of revocations…….I say that, as explained above, the scrutineers know the nature of the data fed except the data which was fed after I had given my decisions aforesaid." The plaintiffs have denied any prior knowledge, consent or approval of Reighley, Warner or the plaintiffs to what was done. Even according to the contesting defendants, there was no prior knowledge or approval or consent of either Reighley, Warner or the plaintiffs. It also seems consistent with the other facts to believe that Reighley protested against the proxies being removed as he alleges, and that the plaintiffs' representatives accompanied the said proxies along with others "to supervise the return of the said proxies as stated and alleged by Dabke himself in his affidavit-in-reply". In any event, it is not the case of the contesting defendants that anybody except Dabke knew what the complete data was which was fed into the computers.

At the hearing three registers were produced. Two of them were proxy registers, one prepared before and the other prepared after June 26, 1969. These were referred to at the hearing as the old proxy register and the new proxy register. The old proxy register was produced by the company, while the new proxy register was forwarded by the company to the scrutineers and produced by them. The third was a printed register consisting of sheets headed "Register of defective proxies and/or revocations". Admittedly, however, it is a register relating to proxies only prepared or got prepared by Dabke in the company's office. Each sheet has several columns headed "(1) Reference folio number, (2) Number of shares held, (3) Serial number, this being the serial number given to the proxy, (4) Duplicate, (5) Without date or signature, (6) Date or signature filled by rubber stamp or typed, (7) Differs from specimen signature, (8) Sig. or P/A or B/Reso. not Regd., that is, signature of power-of-attorney or board resolution not registered with the company, (9) Without the common seal of the company, (10) Stamps not cancelled, (11) Stamps adjudicated, (12) Party out of Maharashtra and stamp of Maharashtra, (13) Without date of meeting, (14) With dates of two meetings and (15) Unsigned ". This register was forwarded by the company to the scrutineers and was produced by the scrutineers.

One of the charges levelled by the plaintiffs is that Tulsidas deliberately deferred giving his decisions or directions on the objections raised to the proxies and revocations until a complete picture of proxies was before him, so that he may know how any decision given by him would affect the voting, and give his decisions from that point of view, not fairly and honestly but with the mala fide object of invalidating the proxies in favour of Reighley, so that the resolution could be got passed. The first objection relates to the late lodging of proxies. Under article 110 of the articles of association of the company, no instrument of proxy is to be treated as valid and no person is to be allowed to vote or act as proxy under an instrument of proxy unless such instrument of proxy has been deposited at the registered office of the company at least 48 hours before the time appointed for holding the meeting. This is in conformity with the provisions of section 176(3) of the Companies Act, 1956. Thus, the last minute for lodging proxies at the registered office of the company was by 4 p.m. of April 26, 1969. According to the plaintiffs, 1017 proxies in favour of Tulsidas and three others were deposited by Shukla, the secretary of the private company, after 4 p.m. on April 26, 1969, and after the bell announcing the expiration of time allowed for depositing proxies had been rung. At that time Reighley, Karode, one P.K. Nambia, also a shareholder of the company, and the third defendant were present. Karode and Reighley objected to such proxies being deposited. Such objection was recorded by Karode on the same day and confirmed by Reighley and the letter of objection was signed by Karode and Reighley in the presence of the third defendant who has attested their signature. These 1017 proxies were in 12 unopened packets. These packets were opened and numbered and a note has been put on the said letter of Objection to the effect that "after numbering as above, receipt has been given to Kilachand Devchand and Company Private Ltd. by Synthetics and Chemicals Ltd. at 5-55 p.m. on 26-4-69". According to the affidavits-in-reply, at about 12-30 p.m. on the 26th April, the company received from the private company several packets containing all the proxies in favour of Tulsidas and three others, each packet containing several files of proxies. For the purposes of facilitating the passing of receipts after the counting of proxies by the company's staff the private company had attached to each file a typed list in duplicate showing the names of shareholders purporting to have issued proxies in favour of Tulsidas and others with the folio number and the number of shares held by each shareholder. All the said packets were brought by Shukla, the secretary of the private company, along with two or three other representatives of the private company and deposited with the company. The physical counting of the said proxies took a considerable time and receipts were granted in respect of the proxies contained in each file after the proxies in each file were counted as of the time when the packets were received. Arrangements had been made to receive the proxies in the open landing space opposite the lift. After counting the proxies, they were removed inside the office of the company. Exactly at 4 p.m. Dabke asked the staff of the company to stop counting the proxies lodged by the private company on the landing and to remove the uncounted proxies contained in the packets inside the office of the company for the purpose of counting and issuing receipts. It is further stated that the proxies lodged by the plaintiffs which were pinned together in lots of 100 each generally (that is, not classified in the manner in which proxies lodged by the private company) were lodged between 2-30 p.m. and 3-30 p.m. and the counting of such proxies finished by 4 p.m. It is further alleged that it was pointed out to Karode and others that the said packets brought by the private company had been deposited at 12-30 p m. Now, whether these 1017 proxies were lodged at 12-30 p.m. as alleged by the contesting defendants or after 4 p.m. as alleged by the plaintiffs is a question of fact which will fall to be decided at the hearing, but one or two circumstances are significant. The total number of proxies in favour of Reighley and others was about 11,732. These were on Dabke's own showing in lots of 100 each generally and not classified as proxies lodged by the private company were. These could, however, be counted within a period of about one hour on Dabke's own admission. The total number of proxies lodged on behalf of the Kilachand group was about 7,789 including the 1,017 disputed proxies. It is thus difficult to understand why, when these 7,789 proxies were lodged at 12-30 p.m., they could not have been counted till 2-30 p.m. or till 5-55 p.m. It is also difficult to understand why a receipt was not given in respect of the said packets to the effect that so many packets said to contain so many proxies were received. In fact, on April 28, 1969, Reighley had deposited approximately 11,730 revocations contained in two trunks and in respect of these trunks receipts were issued showing that trunk of a particular colour said to contain revocation letters was received at the registered office of the company on April 28, 1969, at 2-50 p.m. It is also significant that, prior to the affidavits in-reply, the story now set up about all these proxies being brought at 12-30 p.m. has not been set up in the correspondence.

At the said meeting of April 28,1969, written objections were raised by a shareholder, Kishore K. Koticha, to several proxies in favour of Reighley and others. It appears that a similar letter of objection was written by Koticha with respect to the proxies lodged for the meeting of April 29, 1969. By his letter of April 30, 1969, Koticha stated that the objections which he had. raised about the proxies in his letters of 28th and 29th April would also apply to the letters of revocation lodged by the plaintiffs. Copies of the letters of April 28, 1989, and April 30, 1969, have been exhibited by consent and the copy of the letter of April 30, 1969, bears an endorsement that three letters were received by the company on May 2, 1969. By their attorney's letter of June 10, 1969, the plaintiffs raised several objections to the proxies in favour of Tulsidas and three others. A reminder was written on June 23, 1969. The reply to this letter was only given by Tulsidas on July 2, 1969, after he declared the result of the meeting held on April 28, 1969. It is contended by the contesting defendants that the plaintiffs' attorney's letter cannot be treated as objections raised by a shareholder to the said proxies. It is not necessary to decide this question also as, on Tulsidas's own showing, whatever objections were raised were equally applied to proxies both in favour of Reighley and in favour of himself. Apart from that, when we come to consider these objections it will be obvious that some of them are of such a nature that whether actually taken or not, the proxies to which they applied could never have been treated as valid. It is, however, alleged in paragraph 66 of Dabke's affidavit-in-reply that, as the only objections were to the proxies in favour of Reighley, tabulations were made, that is, the register of defective proxies was prepared only with respect to such proxies and not with respect to the proxies in favour of Tulsidas. This again is not true. The register of defective proxies produced in court includes two sheets, on which in the left hand corner at the top is written in ink "Kilachand P.", that is, the proxies in favour of Tulsidas. These two sheets are in respect of shareholders in ledger folio "N". From this an inference must arise that similar sheets must have been prepared with respect to other shareholders who gave or purported to give proxies in favour of Tulsidas but the same have not been produced. In the register of defective proxies, in the case of Reighley and others as also in those two sheets the entries in the columns are in ink but the totals of the columns are in pencil arid on several sheets there is an analysis of the different types of proxies worked out at the back. This is more than sufficient to convey to any one what the effect on the voting "would be if a particular class of proxies were held to be valid or invalid. It is difficult to believe that a similar analysis was not done in respect of proxies in favour of Tulsidas, if a register in respect thereof was prepared. At the hearing various statements were sought to be handed over to me and facts and figures were given to me of the various heads under which the proxies in favour of both parties would fall. I was also handed over by learned counsel for the company a specimen page, said to be a copy of one of the sheets in one of the proxy registers. I have returned this document and not kept it on the file. Based on the contents of the said specimen copy, detailed arguments were advanced to me by the contesting defendants. When this specimen copy was compared with the original sheet, of which it purported to be a copy, it was found that not only the headings of the columns differed but what was filled in under the columns had no relation to the original sheet. I may mention in fairness to the attorneys of the company that this specimen copy was prepared not in their office but in the office of the company. There were also other statements made under instructions from those representing the company present in court which also did not turn out to be correct. For this reason I have refused to accept or attach any weight to any statement made from the bar which does not find a place on the record.

On the sixth day of the hearing, in order to answer the plaintiffs' charge that the giving of directions by Tulsidas was deliberately delayed until he could see for himself a complete picture of the proxies and revocations so as to bring about a result favourable to himself, Mr. C.K. Daphtary, learned counsel for Tulsidas, applied in Suit No. 681 of 1969 for leave to put in a further affidavit explaining why the directions were not given by Tulsidas in writing till June 26, 1969, and to show that they were given orally on June 19, 1969. The plaintiffs objected to any such further affidavit being filed at this late stage and I rejected the said application for several reasons. There is no warrant whatsoever for saying that any directions as to the objections were given by Tulsidas prior to June 26, 1969. The passages from the affidavits-in-reply of Dabke and Tulsidas which I have set out above make this amply clear. These passages further make it amply clear that Tulsidas gave his directions only after a complete picture was presented to him. It is also abundantly clear from the said affidavits that the validity of the proxies and revocations was determined by Tulsidas and/or in accordance with his directions given in his letter of June 26, 1969. For this reason as also for the reason that this application was made at too late a stage, I rejected the said application. Immediately thereafter Mr. Sen, learned counsel for the company, called upon Mr. Daphtary to produce the opinion of counsel obtained by Tulsidas on the objections to proxies for the meeting of April 28, 1969, and to the letters of revocation This was also objected to by Mr, Nariman on behalf of the plaintiffs. I upheld the objection because nowhere is there any suggestion in any of the affidavits-in-reply that any opinion of counsel was taken. In fact, Tulsidas expressly avers that these various registers were got prepared, so that he may have a complete picture before him, and it was thereafter that he gave his decisions and directions which are contained in his said letter of June 26, 1969. Secondly, whatever counsel may have opined as to the validity in law of any objection is immaterial. The matter is to be decided by the court itself and not in accordance with the opinion given by counsel. For these reasons I did not permit Mr. Daphtary to produce any such opinion.

I will now examine the validity of the objections to the proxies. Though the plaintiffs are challenging the validity of most of these decisions, at the hearing of these notices of motion Mr. Nariman, learned counsel for the plaintiffs, has confined himself to only some of them. The decisions or directions of Tulsidas are contained in his said letter of June 26, 1969. That letter is addressed to Dabke and begins this way:

"Now that the papers relating to the extraordinary general meeting held on 28th April, 1969, have been tabulated I am giving the following directions."

The opening words of this letter also make it abundantly clear that these directions have been given after the papers relating to proxies, etc., had been tabulated and on the basis of such tabulations, that is, after Tulsidas had before him a clear picture as to the proxies to which a particular infirmity applied. The first decision objected to at the hearing of these notices of motion is that contained in direction 1(c) under which a proxy by a company not bearing the company's seal was to be rejected. Under section 176(5)(b) of the Companies Act, 1956, an instrument of a proxy where the appointer is a body corporate, is to be under its seal or is to be signed by an officer or an attorney duly authorised by it. Article 109 of the articles of association of the company contains a similar provision. This direction is, therefore, contrary to law. It was submitted on behalf of the contesting defendants that the result of a wrong direction is a mixed question of fact and law and such direction cannot be held to be wholly bad. I am unable to follow this submission. Rejection, therefore, of proxies given by a company not under its seal but signed by one of its officers or an attorney duly authorised by it would be a wrongful rejection contrary to law and such proxies must be held to be valid.

The third group of directions relates to stamps on proxies. Direction 3(a) provides that a proxy which bears no revenue stamp should be rejected. There is no direction as to what is to be done if a proxy bears a revenue stamp which has not been cancelled. Admittedly, there were proxies in favour of Reighley as also Tulsidas on which the stamps remained uncancelled. In paragraph 40 of the affidavit-in-reply of Dabke and paragraph 18 of the affidavit-in-reply of Tulsidas it is stated that the proxies, the stamps on which were not cancelled were not rejected, whether the same were in favour of one group or the other. This direction cannot be supported in law. Under section 10 of the Indian Stamp Act, 1899, read with rule 13(f) of the Indian Stamp Rules, 1935, a proxy is to bear an adhesive stamp. Section 12 of the Indian Stamp Act provides as follows;

"12. Cancellation of adhesive stamps.—(1)(a) Whoever affixes any adhesive stamp to any instrument chargeable with duty which has been executed by any person shall, when affixing such stamp, cancel the same so that it cannot be used again ;

(b) whoever executes any instrument on any paper bearing an adhesive stamp shall, at the time of execution, unless such stamp has been already cancelled in manner aforesaid, cancel the same so that it cannot be used again.

(2)Any instrument bearing an adhesive stamp which has not been cancelled so that it cannot be used again, shall, so far as such stamp is concerned, be deemed to be unstamped.

(3)The person required by sub-section (1) to cancel an adhesive stamp may cancel it by writing on or across the stamp his name or initials or the name or initials of his firm with the true date of his so writing, or in any other effectual manner. "

Thus, under section 12(2) any proxy on which the stamp is not cancelled must be treated as an unstamped proxy and ought to have been rejected. In In re Tata Iron and Steel Co. Ltd Crump J. has also held that the proxies which are unstamped or upon which the stamps have not been cancelled must be excluded and any votes recorded on the authority of such proxies should equally be excluded. No attempt has been made to support the legal validity of this direction but it was suggested that this was a favour to the plaintiffs inasmuch as several proxies in their favour bore stamps which were not cancelled. This overlooks the fact that on the admission of both Dabke and Tulsidas, there were proxies also in favour of Tulsidas on which the stamps were not cancelled.

Direction 3(b) requires proxies against which objections have been raised and which are signed by shareholders described as residing outside Maharashtra State and which do not bear the stamp of the State where the shareholder is said to reside to be rejected. This direction again cannot be supported in law. Under section 2(11) of the Indian Stamp Act, an instrument is said to be duly stamped when it bears an adhesive or impressed stamp of not less than the proper amount and when such stamp has been affixed or used in accordance with the law for the time being in force in India. Under section 10(1), all duties with which any instruments are chargeable are to be paid and such payment is indicated on such instruments by means of stamps, (a) according to the provisions contained in the said section, or (b) when no such provision is applicable thereto as the State Government may by rule direct. There is no provision in the Indian Stamp Act with respect to an instrument executed in one State which is required to be used in another State. Rule 3(1) (i) of the Bombay Stamp. Rules, 1939, made in exercise of the powers conferred, inter alia, by section 10, provides that all duties with which any instrument is chargeable shall be paid, and such payment shall be indicated on such instruments, by means of stamps issued by the Provincial Government for the purposes of the Act. Under rule 18, except as otherwise provided by the said rules, adhesive stamps used to denote duty are to be the requisite number of stamps bearing, inter alia, the words "India Revenue" or "Bombay Revenue" The words "Provincial Government" and "Bombay Government" are now to be read as the "State Government" and the "Maharashtra Government". Proxies, therefore, executed by shareholders in another State and bearing the stamps of the Maharashtra State could not have been validly rejected and ought to have been treated as valid. I may mention that no attempt was made to support the validity of this direction.

Direction 3(c) requires that proxies by shareholders described as residing outside Maharashtra State which bear a certificate of the stamp office to be shown to Tulsidas. This again is surprising. Section 32 of the Indian Stamp Act provides for a certificate to be granted by the Collector by endorsement on the instrument in question to the effect that the full duty with which it is chargeable has been paid. Under sub-section (3) of section 32, any instrument upon which an endorsement has been made under section 32 is to be deemed to be duly stamped and, if chargeable with duty, is to be receivable in evidence or otherwise, and may be acted upon and registered as if it had been originally duly stamped. There was, therefore, no question of Tulsidas or anybody sitting in judgment upon the certificate of the stamp officer. All such proxies, therefore, ought to have been held to be valid. Here again no attempt was made to justify the validity of this direction.

Direction 5 requires that where there is a difference between the specimen signature of the shareholder giving the proxy and the signature on the proxy, the proxy should not be rejected by Dabke but the proxy and the specimen signature should be shown to Tulsidas for his decision. It nowhere appears that any such signatures were ever shown to Tulsidas. None of the affidavits-in-reply mention that any such signature was ever shown to Tulsidas. On the contrary, the affidavits-in-reply show that this work was done by the staff of the company. This is also clear from the correspondence with the scrutineers. In their letter of June 27, 1969, the scrutineers have stated that they had deleted from the proxy registers those proxies on which specimen signatures differed from that on the records of the company and all the duplicate proxies on the basis of tabulations prepared by the company and test checked by them. Further, in paragraph 50 of the affidavit-in-reply of Dabke and paragraph 31 of the affidavit-in-reply of Tulsidas there is an express admission that the signatures were verified by the staff of the company and test checked by the scrutineers. There is, therefore, no question of any such signature being shown to Tulsidas. It is the case of the contesting defendants that on a proper construction of the relevant articles in the articles of association of the company and a proper demarcation of the respective functions of the chairman of the meeting and the scrutineers, Tulsidas as the chairman of the meeting had to decide upon all questions of validity of proxies. If this submission is correct, then it was for Tulsidas alone to have compared the signatures in question. Whether the signature on a proxy differs from the specimen signature or not was not a ministerial matter but a matter involving judgment, which matter could not have been delegated either to the secretary or the staff of the company.

Direction 6 provides that where the name of the shareholder cannot be ascertained either from the information given on the proxy or the signature the proxy must be rejected. As appears from paragraph 42 of the affidavit-in-reply of Dabke, a large number of proxies in favour of Reighley, namely, those referred to as "untraceable", were rejected and no folio number given thereto on the ground that it was not possible from the signature to decipher the name of the shareholder or to relate the name of the purported shareholder with any name appearing on the register of member's and that this was done immediately .after April 26, 1969, or thereabouts. No identification letters were given to these proxies arid they did not feature in any of the proxy registers and were, therefore, not taken into account. It certainly was not for the company's staff to reject such proxies. Tulsidas admittedly never had a look at any one of these proxies. By their letter of May 21, 1969, the scrutineers stated that there were approximately 5,000 revocations and 1,000 proxies in favour of Reighley, which were reported "untraceable", and that similarly about 700 revocations in favour of Tulsidas and others were also reported "untraceable". It appears that such proxies and revocations lodged by the plaintiffs, bore on the reverse certain reference numbers. By the said letter the scrutineers requested that the company's office should be instructed to trace the said proxies and revocations with the help of reference on the back of the documents and suggested that the assistance of the respective parties may be taken for that purpose. In the progress report which the scrutineers made on May 22, 1969, they have referred to their letter of May 21, 1969, and requested that the same should be attended to. By their attorneys' said letter of June 10,1969, addressed to Tulsidas, the plaintiffs pointed out that the staff of the company had not mentioned folio numbers on approximately 1,450 proxies and 5,000 odd revocations in favour of Reighley, while they had given folio numbers to all proxies and revocations in favour of Tulsidas. They have further recorded that on May 5, 1969, Reighley and Karode were in the office of the company and had offered to assist in putting the folio numbers by a reference to the plaintiffs' internal records, but this offer was not availed of. By the said letter they requested that the assistance of Reighley and Tulsidas in placing the correct folio numbers on the said proxies and revocations should be taken. The plaintiffs by their attorneys' letter of June 23, 1969, sent a reminder to Tulsidas. By their attorneys' another letter of the same date the plaintiffs pointed out these facts to the scrutineers and requested them to do the needful. A copy of this letter was forwarded by the scrutineers to Tulsidas. The plaintiffs sent a reminder to the scrutineers by their attorneys' letter of June 27, 1969. It appears that Reighley also handed over to the scrutineers in the presence of Dabke four files containing the information which would be useful for processing the proxies and letters of revocation in question. Along with their another letter dated June 27, 1969, addressed to Tulsidas the scrutineers enclosed a copy of the said letter dated June 27, 1969, addressed by the plaintiffs' attorneys to the scrutineers and also recorded the fact that the said four files had been handed over to them by Reighley in the presence of Dabke. They also pointed out that they had so far not received any reply from Tulsidas to their letter of June 23, 1969. By his letter of June 28, 1969, Tulsidas stated that it was no part of their duty as scrutineers to have accepted papers from Reighley and that he had given to the secretary the directions relating to the work of the secretary and as soon as" the secretary finished his work, the scrutineers would take in hand the scrutiny of the voting papers and counting of the votes and report to him. It is thus clear that a large number of proxies and revocation letters in favour of Reighley were not taken into account merely on the ground that the company's office could not make out from the signature or the other information contained in the proxies the name of the shareholder giving the proxies. This work was left to Tulsidas who claiming to be the sole judge of the validity of proxies and revocation letters to be done by the secretary and the staff of the company and even when assistance was offered on the basis of information appearing on the proxies and revocation letters themselves, namely, the reference numbers on the back thereof, to help the company's staff "trace these proxies and revocations", such offer was rejected. This attitude on the part of Tulsidas militates against his claim of bona fides, fairness and impartiality.

Direction 7 requires that wherever there is a difference between the specimen signature and the signature on the revocation letter, the revocation letter should be shown to Tulsidas for decision. As is clear from what is stated with respect to direction 6, no such revocation letter was ever shown to Tulsidas, but such revocation letters were dealt with only by Dabke and the office staff.

Direction 8(a) requires undated revocation letters to be ignored. The plaintiffs had lodged about 11,000 revocation letters obtained by them. The position appears to be that a large number of revocation letters in favour of Rgjghley and others were undated, while those in favour of Tulsidas were dated. In In re Tata Iron and Steel Co Ltd., Crump J. said that such an objection with respect to proxies hardly required discussion. He observed:

"The proxy was lodged within the time allowed and before the date of the meeting. I can understand that an omission to state the date of the meeting may be a serious defect, but as for the date of execution 1 can only say de minimis. No authority has been cited for questioning a proxy on such grounds."

I fail to see why the same principle should not apply to revocation letters. Under article 113 of the articles of association of the company, a vote given in pursuance of a proxy is to be valid notwithstanding, inter alia, the revocation of the proxy provided no intimation in writing of such revocation has been received at the registered office of the company before the vote is given. All that is, therefore, required to revoke a proxy validly lodged is the receipt of a revocation letter before the vote is given; No form of revocation letter is prescribed and this insistence on date appears to be incapable of explanation except that a larger number of undated revocation letters were those of proxies in favour of Tulsidas and others. Actually in the proxy register prepared by the Tata Consultancy Services most revocation letters have been bearing the date April 28, 1969. It was said at the hearing that this date is a mistake and as appears on the record, a large number of the revocation letters in favour of Reighley were undated. There is no mention in the affidavit-in-reply that such a mistake was made or as to who made this mistake or how such a mistake came to be made. It was said at the hearing that this direction applied only where there were cross revocation letters in favour of both parties, one of which' was dated and the other undated. There is no warrant for this statement either in the said letter of June 26, 1969, or in any of the affidavits in reply and this statement, therefore, cannot be accepted. The direction unequivocally applies to all undated revocation letters and, in fact, as the record shows, all undated revocation letters, whether they were cross revocation letters or otherwise, have not been taken into account. This direction, therefore, does not appear to have been given bona fide.

Direction 8(b) states that the letters of revocation filed by Firestone and Kilachand in the form annexed to the said letter of June 26, 1969, were not revocation letters and should be ignored. The form of revocations filed by the plaintiffs and objected to, show that such revocation letters are addressed to the company, signed by the shareholders and headed "Extraordinary General Meeting on 28th April, 1969, and 29th April 1969 "and are in these terms:

"I have signed forms of proxy and forms of revocation in favour of Mr. Tulsidas Kilachand and others. I have subsequently revoked the said forms of proxy and revocation and executed fresh forms of proxy and revocation in favour of Mr. F.J. Reighley and others. Kindly note the aforesaid position in your register and acknowledge receipt of this letter."

Now, I fail to see what can be objected to in this form. All that was said was that this form referred to revocation as having been done earlier and did not by itself revoke the proxies. The form of letter of revocation in favour of Tulsidas is more elaborate and it states that the executant had executed the final proxies in favour of Tulsidas and others and had on that day revoked all proxies executed in favour of Reighley and others. Now, I fail to see why either of these two forms of revocation should be rejected. A proxy holder is merely an agent of a shareholder to vote at a particular meeting. Under section 203 of the Indian Contract Act, 1872, except where an agent has an interest in the subject-matter of the agency, the principal may revoke the authority given to his agent at any time before the authority has been exercised so as to bind the principal, and under section 207, revocation may either be expressed or implied, and under section 208, so far as regards third persons, termination of the authority takes effect when it becomes known to them. No particular form of revocation is provided for by the articles. Article 113 only requires an intimation in writing of revocation to be received at the registered office of the company before the vote is given. In the forms of revocation rejected by Tulsidas it is made expressly clear that the proxies given by the shareholder in favour of a particular individual have been revoked by him and they ought, therefore, to have been held to be valid.

Direction 8(c) says that where the name of the shareholder cannot be ascertained either from the information given on the revocation letter or the signature, the revocation letter should be rejected. A large number of revocation letters obtained by Reighley and others have been rejected on this ground. Here the position is the same as in the case of "untraceable "proxies and what I have said with regard thereto while considering direction 6 must also apply to direction 8(c).

Direction 8(d) provides that if there are two or more revocation letters given by the same shareholder in favour of different parties and they all bear the same date, they will cancel out. This direction is wholly untenable in law. I fail to see why the revocation letters would cancel each other out. They would on the contrary cancel the proxies in respect of which they have been lodged. The effect of this direction would be that if proxies were given by a shareholder in favour of both the parties and one bears a later date than the other, the cancelling out of the cross letters of revocation in respect thereof would make valid or revive the proxy of the later date. I am unable to see on what principle of law this can be. The effect of such revocation letters must be taken as cancelling the proxies in respect of which these letters have been lodged.

Direction 9(a) states that a proxy given by a shareholder will revoke an earlier proxy given by him, whether in favour of the same persons or other persons unless the later proxy is validly revoked, in which case the earlier proxy will stand. The later proxy would of course revoke an earlier proxy, but I fail to see how, when a later proxy which has revoked an earlier proxy is itself revoked, the earlier proxy can be resuscitated. The result of a later proxy being revoked would be that the later proxy would also fall and not that the earlier proxy would revive. This direction too must, therefore, be said to be bad in law.

Direction 9(c), inter alia, provides that where a shareholder has given proxies in favour of both Reighley and others as also Tulsidas and others, than if both the proxies are undated or both bears the same date, they will be treated as cancelling each other unless one of the proxies is validly revoked. Here also to my mind the result would be that two cross proxies bearing the same date or both undated would cancel each other out irrespective of whether one of them is thereafter revoked or not because revocation of one of such proxies cannot lead to the revival of the other proxy. This direction also, therefore, does not seem to me to be justified in law.

So far as the bona fides of Tulsidas are concerned, it may also be mentioned that after the result was declared, Reighley, in his capacity as director, repeatedly requested Tulsidas as well as Dabke as the secretary of the company to give him inspection of various papers. Copies of that correspondence are annexed to the plaint in Suit No. 681 of 1969. It is not necessary to refer to that correspondence in any great detail, but it cannot be disputed that several of the documents, of which Reighley required inspection in his capacity as director, were those of which he was entitled to inspection under section 209(4)(a) of the Companies Act, 1956. Nonetheless inspection was denied to him. It was said at the hearing that it was obvious that the plaintiffs were contemplating filing suits and this inspection was asked for by Reighley for the purposes of such suits. If a director is entitled to take inspection, his motive in doing so is irrelevant. In fact, among the documents, of which inspection was not given to Reighley, was the said letter of June 26, 1969, which came to the knowledge of the plaintiffs and Reighley for the first time when a copy of it was annexed to the affidavit-in-reply of Dabke as also of Tulsidas. This fact also militates against the claim of bona fides put forward by Tulsidas.

Thus several directions given by Tulsidas are bad in law and some others are not given. Apart from this, admittedly the results prepared by the Tata Consultancy Services contain several mistakes. The result was communicated by the Tata Consultancy Services to the company by their letter of June 30, 1969, signed by one Y.P. Sahni. Along with that letter a new proxy register was forwarded to the company together with a list of what is referred to as "additional changes which were not incorporated in the main register as they had been missed by the company". It further appears from the said letter that due to two punching errors, the total shares shown against the plaintiff group from page No. 347 onwards of the register had to be amended, which was to be done by ignoring the lakh position, and as a result thereof, the total shares shown on the last page No. 465 was required to be read at 70,698 and not 8,70,698. A mistake of eight lakhs in the total and in the punching of figures can hardly be said to be a negligible error. The letter farther states that due to changes which were pointed out to the Tata Consultancy Services by the company, the final figures had to be further amended as set out in the said letter. These corrections are as follows:

	Firestone				Kilachand
	Proxies		Shares		Proxies		Shares
Total number of proxies received and the number of shares against these proxies (as shown in the register and rectified as mentioned in)		......		......		......
(1) ..	6,798		70,698		6,396		2,54,642
Minus : deletions as per list 'A' attached.	182		2,972		53		8,171
	6,616		67,726		6,283		2,46,471
Plus: as per additions mentioned in list 'B'…. attached…	1		6		3		161
	6,617		67,732		6,286		2,46,632

Along with the said letter the Tata Consultancy Services also returned the old proxy register in which the said changes were marked. This letter was sent to the company in duplicate and was delivered by hand. One signed original was retained by the company and the other sent to the scrutineers. In both the original letters, after the portion reproduced above, further corrections have been made in ink under the heading "Firestone" in the first three columns. These corrections are :

'"Delete (see Statement 'A') .. ...

Thus, the total proxies in favour of Reighley and the number of shares which such proxies represent are reduced by 1 proxy and 6 shares respectively. I am informed by Mr. Sen, learned counsel for the company, that the initials "D.V" are the initials of the man from the Tata Consultancy Services who delivered these letters to the company and that these corrections were made by him when these further mistakes were pointed out to him by the company when the said letters of June 30, 1969, were delivered to it. Both the signed originals of the said letters have been exhibited by consent.

From this, it is obvious that no reliance can be placed even upon the accuracy of the result obtained through the services of the punching cards and the computer. Thus, the result obtained was based on decisions erroneous in law, not given bona fide and containing, for aught one knows, further arithmetical errors as yet undetected. The decision so arrived at cannot be said to be valid and cannot stand. It was submitted on behalf of the contesting defendants that on this position what the court should do would be to give correct directions and direct a fresh count on the basis thereof, and that in fact the plaintiffs have made an alternative prayer to this effect in Suit No. 681 of 1969. I do not propose to decide at this stage what the effect of these wrong decisions and arithmetical mistake is, whether it renders invalid the said meeting and the resolution passed thereat or whether the court has the power in such a case to give proper directions and direct a re-count. This will have to be decided at the hearing of the suit, but one thing cannot be disputed. Today there is no resolution of the company approving the appointment of the private company for a further term, and in view of the large number of proxies and revocation letters in favour of Tulsidas and others which appear to have been rejected and proxies and revocation letters in favour of Tulsidas and others which appear to have been treated as valid by reason of these erroneous decisions, and bearing in mind that the majority in favour of the resolutions as shown in the result of the poll declared by Tulsidas is only of 20,171 votes, and having regard to the fact that the one proxy in favour of Reighley and others averages about 10 votes or more, while that in favour of Tulsidas and others averages about 13 to 14 votes, it may well be that if a recount as submitted were ordered, the resolution would be lost.

There are a number of objections taken by the plaintiffs in connection with this aspect of the case. In view of the conclusion which I have already reached, I do not consider it necessary to deal with these objections and they may well be decided at the hearing of the suit.

The question that remains is what order to make in this case. It was submitted by Mr. Nariman, learned counsel for the plaintiffs, that since the conclusions I have arrived at are that the resolution passed at the meeting of the board held on November 14, 1968, and the notice convening the said meeting of April 28, 1969, and what was transacted at the said meeting are all invalid, the court must restrain the continuance of an ultra vires and an illegal act and grant an injunction as prayed for. On the other hand, the contesting defendants submitted that the conclusions to which I have arrived at on these notices of motion can only be prima facie and on such prima facie conclusions the court ought not to grant an injunction. I have at this stage held in favour of the plaintiffs on almost all points. Even though the conclusions I may have reached are prima facie and not final conclusions, I would have been inclined to grant an injunction as prayed for, but for the fact that all parties are agreed that the hearing of both these suits should be expedited and they should be heard and disposed of as early as possible, a view which in the interests of the parties, I am also inclined to take. I accordingly do not think it necessary at this stage to disturb the status quo ante. But what is the status quo ante? Admittedly, right from October 1, 1968, the private company has voluntarily not taken any amount for its commission. It may have done this either because the private company may have apprehended that the opposition of the plaintiffs to this appointment for a further term may prove successful or because it may have feared action by the Company Law Board. In fact, in its letter of April 9, 1969, the Company Law Board had made it expressly clear that any action taken by it would be effective as from October 1, 1968. If, therefore, the private company is to allow to continue to function as it has been doing, it can only be upon terms. It was submitted that the financial condition of the private company is so sound that no condition need be imposed and no security taken as the private company is solvent enough to refund any moneys which it may receive. In support of this submission a copy of the balance-sheet of the private company for the year ending September 30, 1968, has been put in by consent and marked exhibit No. 8. This balance-sheet, however, does not quite bear out this claim, for certain items shown on the assets side cannot be taken at the value shown therein. In the summary of investments, out of a total investment of Rs. 1,23,39,296, investments of the value of Rs. 59,65,133 are in shares of subsidiary companies which are, however, not quoted on the market, and investment of the value of Rs. 13,19,532 in shares of subsidiary companies quoted on the market. Further, on the assets side are shown two sums of Rs. 2,31,130 and of Rs. 27,25,818 aggregating to Rs. 29,56,948 due from the Digvijay Spinning and Weaving Company Ltd., which are stated as "considered good ". The Digvijay Spinning and Weaving Company Ltd. is a company under the same management as the private company and it is interesting to know its fate. By a notification No. BRU 21690-LAB. I, dated July 9, 1969, of the Government of Maharashtra, Industries and Labour Department, published in Part I-L of the Maharashtra Government Gazette, Extraordinary, of July 9, 1969, the Government of Maharashtra in exercise of the powers conferred by section 3 and clause (a)(iv) of sub-section (1) of section 4 of the Bombay Relief Undertakings (Special Provisions) Act, 1958, declared that the said Digvijay Spinning and Weaving Company Ltd. should be conducted for a period of one year commencing on July 9, 1969, and ending on July 9, 1970, to serve as a measure of unemployment relief, and has further directed that during the said period any right, privilege, obligation or liability accrued or incurred before July 9, 1969, and any remedy for the enforcement thereof should be suspended. A copy of the relevant gazette has been put in by consent and marked exhibit C. Thus, this debt is today not recoverable, assuming that a company which had to be declared as a relief undertaking is capable of meeting its debts. Further, the auditors' notes appended to the said balance-sheet show that the sales tax assessments of the company have been finalised up to March 31, 1967, only and that there are pending assessments in respect of which the private company does not expect any liability to be imposed. How far this expectation is true can only be known when the assessments are finalised, but we should bear in mind that the expectation of the private company in respect of the debts due from the Digvijay Spinning and Weaving Company Ltd. was certainly not justified. The auditors' notes also show that the bonus is paid and accounted for on cash basis and, therefore, no provision has been made in respect thereof during the year and that no depreciation is provided on land and godown and on building other than the portion used for business which aggregated to Rs. 87,827, under section 205 of the Companies Act, 1956. Further, on the assets side is shown a sum of Rs. 39,76,604 for advances and other income-tax payments and the note to it runs, "completed assessments up to Asstt. Year 1963-64, but under appeals; not adjusted therefrom". Note (B) of the company auditors' report to the shareholders states that the auditors could not, in the absence of availability of tax assessment records, ascertain the adequacy or otherwise of the liability for taxation and provision thereof. This provision is in the sum of Rs. 22,82,770. The secured loans aggregate to Rs. 82,01,245, while the unsecured loans aggregate to Rs. 16,09,817. As the profit and loss account shows, the actual working of the company has resulted in a profit of Rs. 3,76,429, though the final figure of profit shown in the profit and loss account which is taken to the balance-sheet is Rs. 7,32,273 arrived at by taking into account certain other items, such as balance as per last balance-sheet and income-tax refunds of previous years. In the affidavit-in-reply of J.B. Shukla, the secretary of the private company, commission in the sum of Rs. 21,03,300 is stated to have been earned from the sole selling agency for the year ending September 30, 1968. According to the said affidavit, the private company incurred expenses in respect of the sole selling agency in the sum of Rs. 17,11,300. Thus, according to the said affidavit, the profits earned from the sole selling agency are Rs. 3,92,000. If, therefore, the profits from the sole selling agency were not there, then for the year ending September 30, 1968, the actual working of the private company would have shown a loss. The financial position of the private company cannot, therefore, be said to be so sound as to justify dispensing with security.

It was then submitted by the contesting defendants that in respect of the working of the sole selling agency, the private company has to incur expenses which, under the terms of the agreement, are to be borne by it and, therefore, at least the amount of such expenses should be allowed to be received unconditionally by it. In the said affidavit-in-reply of Shukla it is said that the expenses incurred for the year ending September 30, 1968, were in the sum of Rs. 17,11,300 and a summary of such expenses is annexed as exhibit A to the said affidavit. After this affidavit was filed, the plaintiffs by their attorneys' letter of September 8, 1969, called upon the private company to give them inspection of documents from which the correctness of such expenses could be ascertained as also inspection of the balance-sheet for the year ending September 30, 1968, and the documents required by law to be annexed or attached thereto, including the profit and loss account and the auditors' and the directors' report, which balance-sheet was referred to in the said affidavit. By its attorneys' letter of September 9, 1969, the private company refused to give inspection. The plaintiffs have denied that the expenses could be in the sum alleged by the private company. No supporting material is placed before me to show how the figures in the summary of expenses annexed to the said affidavit have been arrived at. In view of several incorrect statements made in the affidavits-in-reply, not much reliance can be placed on these figures unsupported by any other material. It is also alleged in the said affidavit that the cost of the company of setting up a separate sales organisation would be over Rs. 25,00,000 and a statement thereof is annexed as exhibit B to the said affidavit of Shukla. This exhibit B refers to an estimate as contemplated by an expert committee sent by the plaintiffs in 1965. After this affidavit was filed, by their letter dated September 10, 1969, the plaintiffs asked for inspection of the report of such estimate. No such inspection was given to the plaintiffs nor has any such report been produced before me and it is not possible at this stage to place reliance upon this estimate without a detailed picture thereof being presented. The plaintiffs in their affidavit-in-reply have pointed out that 85 per cent, of the synthetic rubber produced by the company is bought by the 7 tyre companies and about 50 consumers borne on the list of the Director-General of Technical Development and that no particular sales organization or special sales effort is necessary for selling the company's products in view of this fact and the fact that the company is the only company in India which makes synthetic rubber. There appears to be considerable force in this. In any event, no sufficient cause has been made out why in this case the normal rule as to taking of security should be departed from. It was also submitted that, as in order to set up its sales organisation the company would have to incur expenses, in the interest of the company, therefore, instead of making the company incur such expenses the court should permit the private company to continue as sole selling agents pending the suits and direct a certain amount to be paid to it towards expenses, and not by way of commission to be retained by it irrespective of the result of the suits. In view of the provisions of the Companies Act, this is an astonishing submission to make. Under the sole selling agency agreement the private company has to set up and maintain at its own expense an adequate organisation for sale of the company's products within the agency territories and is to bear and pay all expenses relating to such organisation. Such expenses are, therefore, to be met by the private company out of the amount of commission received by it. Under section 294(2A), if the appointment of a sole selling agent is disapproved by the company in general meeting, it ceases to be valid with effect from the date of the general meeting, and section 294A(l)(a) provides that

"A company shall not pay or be liable to pay to its sole selling agent any compensation for the loss of his office in the following cases :—

(a) where the appointment of the sole selling agent ceases to be valid by virtue of sub-section (2A) of section 294."

Under sub-section (2) of section 314, if any office or place of profit is held in contravention of the provisions of sub-section (1), not only is such office or place vacated on and from the date next following the date of the general meeting of the company at which a special resolution according the consent was required to be passed, but the holder of such office or place also becomes liable to refund to the company any remuneration received by him for the period immediately preceding such date in respect of such office or place of profit. Thus, in law, if the plaintiffs were to succeed, the private company would not only be not entitled to receive any commission but would also be bound to refund moneys, if any, received by it by way of commission. The submission of the contesting defendants, therefore, amounts to asking the court to ignore and circumvent the mandatory provisions of the Companies Act enacted in public interest and to seek to perpetuate an illegal payment by means of a court order. This the court consistently with the law ought not to do. Since the private company has rested content with not taking any commission for a period over eight months prior to the filing of the first suit, there is no reason why it should be permitted to take any amount for the period preceding the hearing of these notices of motion. At the highest it can only be permitted to take a reasonable amount towards expenses from October 1, 1968, upon giving security and upon condition of repayment or refund and the necessary direction in that behalf will be given in the order which I will pass.

So far as the other prayers in the notice of motion in Suit No. 681 of 1969, are concerned, as mentioned before, the contesting defendants do not oppose the granting of an injunction to restrain Tulsidas and the scrutineers from acting as such in respect of the said extraordinary general meeting held on April 29, 1969. The parties had also agreed upon proper custody of all the papers and documents in connection with polls taken at the meeting held on the 28th and the 29th April, 1969. They are also agreed that inspection may be taken under proper safeguard of all such papers forthwith without waiting for formal discovery.

As mentioned before, the parties wanted to take a consent order with respect to this prayer, but no consent order can be passed inasmuch as the form of the order was not agreed to. This was because the plaintiffs have prayed for a receiver of all the papers and documents in connection with both the meetings including those set out in exhibit 29 to the plaint.

According to the company, some of the documents mentioned in exhibit 29 do not exist. I am not today determining which document exists and which does not. An ad interim injunction was given by me, as mentioned before, restraining each of the defendants from disposing of or in any manner dealing with any of the said papers and documents including those mentioned in exhibit 29. In spite of this, in none of the affidavits-in-reply is the existence of any of these documents denied. Since for whatever reason a consent order cannot be passed, it is not possible to appoint any private individual to be the custodian of these papers and the normal rule must prevail.

All parties are agreed that the hearing of both these suits should be expedited, but according to the contesting defendants, Suit No. 522 of 1969 ought to be heard first and Suit No. 681 of 1969 to be heard one month thereafter. It was submitted that Suit No. 522 of 1969 was filed as a short cause, the pleadings in that suit are complete and when the suit came on board for directions as a short cause, it has been ordered to be tried as a contested short cause on December 1, 1969, while Suit No. 681 of 1969 is filed as a long cause and written statements have not yet been filed therein. The last date for filing written statements in Suit No. 681 of 1969 was August 23, 1969. If the defendants have chosen not to file their written statements, the blame for this lies only on them. The date for hearing which is given in respect of Suit No. 522 of 1969, is however, not a peremptory date and experience shows that the suit is not likely to come on board on December 1, 1969, or for a considerable time thereafter. These notices of motion have been argued as if the hearing thereof were the hearing of the suits, and apart from formal discovery in both suits and the written statements in Suit No. 681 of 1969, substantially what remains to be done is only inspection of the papers and documents in connection with the polls. Thereis also neither convenience nor merit in hearing Suit No. 681 of 1969 one month after Suit No. 522 of 1969. On the contrary, it is in public interest for saving public time as also in the interest of the parties that these suits should be heard one after the other and by the same judge.

Accordingly, I grant, pending the hearing and final disposal of both Suit No. 522 of 1969 and Suit No. 681 of 1969, an injunction restraining the Synthetics and Chemicals Ltd., the first defendants in both the suits, and its officers, servants and agents from paying to Kilachand Devchand and Company Private Ltd., the second defendants in Suit No. 522 of 1969 and the fifth defendants in Suit No. 681 of 1969, any payment by way of commission or otherwise in pursuance of the said resolution dated November 14, 1968, of the board of directors of Synthetics and Chemicals Ltd. or under the said agreement dated February 18, 1969, and/or the said letter dated February 18, 1969, as also restraining Kilachand Devchand and Company Private Ltd., its officers, servants and agents from receiving from Synthetics and Chemicals Ltd. any amount by way of such commission or otherwise in pursuance of the said resolution or the said agreement and/or the said letter. I further order and direct that, pending the hearing and final disposal of both the said suits, Synthetics and Chemicals Ltd. shall deposit in court for the period commencing from October 1, 1969, the amount which would have been payable by it as commission to Kilachand Devchand and Company Private Ltd. under the said agreement dated February 18, 1969, read with the said letter dated February 18, 1969, were the said sole selling agency agreement held to be valid. The amount for the month of October, 1969, shall be deposited on or before November 30, 1969, and the amounts for the subsequent months on or before the thirtieth day of each succeeding month.

Kilachand Devachand and Company Private Ltd. will be at liberty to withdraw one-half of the amount of each such deposit upon furnishing a bank guarantee or security to the satisfaction of the prothonotary and senior master of this court and on condition that in the event of the plaintiffs succeeding in either of the said two suits, Kilachand Devchand and Company Private Ltd. will forthwith deposit into the court the amounts so withdrawn by it for the purpose of being refunded .to Synthetics and Chemical Ltd.

I also grant, pending the hearing and final disposal of this suit, an iujunction restraining Tulsidas Kilachand, the second defendant in Suit No. 681 of 1969, from in any manner exercising any power or function as chairman of the extraordinary general meeting of Synthetics and Chemicals Ltd. held on April 29, 1969, as also restraining defendants Nos. 3 and 4 in Suit No. 681 of 1969 and each of them from exercising any power or function as scrutineers appointed at the said extraordinary general meeting.

I also appoint, pending the hearing and final disposal of this suit, the court receiver to be the receiver of all the papers and documents in connection with the polls taken at the extraordinary general meetings of Synthetics and Chemicals Ltd. held on April 28, 1969, and April 29, 1969, respectively, including the papers and documents specified in exhibit 29 to the plaint in Suit No. 681 of 1969, except such of them as may have been marked as exhibits at the hearing of these notices of motion, but including the registers produced in court at the said hearing. The registers produced in court will be tied up in packets; sealed by the office of the prothonotary and senior master of this court and forwarded to the court receiver. The court receiver will take charge of all the other papers and documents in the presence of the attorneys of the plaintiffs and of the defendants in Suit No. 681 of 1969. Defendants Nos. 1 to 5 or defendants Nos. 1, 2, and 5 in Suit No. 681 of 1969 will be at liberty to nominate the attorneys or anyone of them to attend on their behalf for this purpose. All the papers and documents taken charge of by the court receiver will be tied up in packets and sealed with the seal of the court receiver and of the attorneys of the plaintiffs and of ;the attorneys of the defendants in Suit No. 681 of 1969. The defendants Nos. 1 to 5 or defendants Nos. 1, 2 and 5 in Suit No. 681 of 1969 will be at liberty to nominate the attorneys of any one of them to affix the seal on their behalf. The parties will be entitled forthwith to take inspection of all the papers and documents of which receiver has been appointed, in the court receiver's office during office hours every working day. Such inspection will be taken in the presence of a responsible representative of the attorneys of the plaintiffs and of the attorneys of the defendants in Suit No. 681 of 1969. The defendants Nos. 1 to 5 or defendants Nos. 1, 2 and 5 in Suit No. 681 of 1969 will be at liberty to nominate the representative of the attorneys or any one of them to attend on their behalf for this purpose. The seal of the packets will be opened only in the presence of such representatives of attorneys and after inspection is over on each day, the papers and documents will be again tied up in packets and sealed as aforesaid by the court receiver and such representatives of attorneys. The attorneys of the parties will be at liberty to initial all such papers and documents.

I direct the defendants in Suit No. 681 of 1969 to file their written statement on or before November 30, 1969.

The affidavits of documents in each of the said suits shall be made on or before December 15, 1969, and inspection of the documents disclosed therein shall be given forthwith after such discovery is made.

I direct that Suit No. 522 of 1969 shall be placed peremptorily on board for hearing and final disposal, subject to a part-heard matter, on February 2, 1970, and that Suit No. 681 of 1969 be placed on board for hearing and final disposal on the same date immediately after Suit No. 522 of 1969.

So far as the costs of these notices of motion arc concerned, the hearing has lasted nearly 63 hours. Looking to the length of the hearing, the heavy record, the elaborate preparation and arguments and the complexity and importance of the question involved and the fact that each side is represented by three, and in some cases more than three, counsel, except defendants Nos. 3 and 4, who are represented by two counsel only, I direct that the costs of these notices of motion be taxed on the long cause scale with two counsel being allowed and shall be costs in the cause.

[1938] 8 Comp. Cas. 176 (CAL.)

High Court of Calcutta

Rabindra Nath Mitra

v.

Emperor

Jack and Patterson, JJ.

FEBRUARY 4, 1938  

S.C. Talukdar, Anil Kumar Das Gupta, Biswa Nath Dhar and Satyendra Nath Banerjee (in 826), N.K. Basu and Purnendu Kumar Batabyal (in 1031 and 1032)—for Petitioner.

Probodh Chandra Chatterjee—for the Crown.

Bireswar Chatterjee—for Complainant.

Revision No. 1032 of 1937

JUDGMENT

Jack, J.—This is an application under S. 435, Criminal P.C., in connexion with case No. C/1423 of 1926 under S. 91-A, Companies Act, in the Court of D.J. Cohen Esq., Presidency Magistrate, Calcutta. A rule was issued calling upon the Chief Presidency Magistrate of Calcutta to show cause why the conviction of the petitioner Pramatha Nath Bose and the sentence of fine imposed upon him should not be set aside on the ground that the facts proved do not bring the case within the provisions of S. 91-A (2), Companies Act, that the findings arrived at by the learned Magistrate do not warrant a conviction, and that the learned Magistrate has entirely misconceived the scope and intention of the section. The only point argued before us in this rule is as to the construction of the section. It has been strenuously argued on behalf of the petitioner that the only contracts referred to in the section are contracts entered into at a meeting of the directors and therefore it did not refer to the contracts in question. The section runs as follows:

"Every director who is directly or indirectly concerned or 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".

There is no such limitation in the section itself; but in connexion with the disclosing of the director's interest, the clause "shall disclose the nature of his interest at the meeting of the directors at which the contract or arrangement is determined," on no doubt refers only to contracts entered into at a meeting of the company, but the first portion of the section refers to contracts not only entered into by the company, but contracts entered into on behalf of the company. Further we find at the end of this paragraph the words

"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".

If the interpretation sought to be put upon it on behalf of the petitioners is correct then the words "or the making of the contract or arrangement" would be superfluous. Moreover, once it is admitted that the contracts referred to are contracts not only made by the company at a meeting of its directors, but contracts made on behalf of the company, it stands to reason that the same principle would be applicable to contracts entered into on behalf of the company, and these would not be entered into at a meeting of the directors. So that the words "in any other case" must refer not only to cases in which the interest of the director does not exist at the time of the meeting but must refer also to cases in which contracts were not made at a meeting of the directors. We think, therefore, that the plea of the petitioner as regards the interpretation of the section cannot be accepted and this being the only point raised in this Rule, the Rule must be discharged.

Revision No. 826 of 1937.

This Rule was issued upon the Chief Presidency Magistrate of Calcutta to show cause why the conviction of and the sentence passed on the petitioner should not be set aside. The conviction is one under Section 91-A (2), Companies Act (Act VII of 1913) and the sentence is a fine of Rs. 20 or in default one week's simple imprisonment. The case for the prosecution was that the accused as managing director of the Kamala Book Depot Ltd. entered into a contract or arrangement for the purchase of books worth Rs. 3-15-0 from Jogendra Publishing House, a firm in which the accused had an interest and which he did not disclose at the time he entered into the contract or at the next subsequent meeting. Secondly, that on or about 23rd July, 1936, as managing director he purchased books worth Rs. 55 from Jogendra Publishing House without disclosing the fact that he was directly or indirectly interested in this publishing house and therefore committed an offence under the Companies Act.

The points urged in connexion with this Rule are: (1) that in each case there was no proof of a contract; (2) that there was no proof that the petitioner was aware of any contract; (3) that at the first meeting after these transactions, notice was given by the petitioner of his interest in this firm; and (4) that there was no express finding in the terms of Section 91-A. It has been definitely found that the accused, as managing; director, had purchased books worth Rs. 3-15-0 on one occasion and books worth Rs. 55 on another occasion, from the Jogendra Publishing House after he had been appointed a managing director of the Kamala Book Depot Ltd. on behalf of the company and therefore under the terms of Section 91-A, in so far as these transactions were concerned, he was bound to disclose his interest in this firm at the next meeting of the company. In view of the findings arrived at by the learned Magistrate, it cannot be said that he was unaware of these transactions.

Then it is argued that these are not contracts or arrangements within the meaning of Section 91-A. There can be no doubt that these transactions or purchases were contracts. A reference is made to Clause (3) of the section to suggest that such contracts as these were never intended as they were too petty to be entered in the register. But, such transactions are obviously covered by the proviso which provides that where a director is a director or member of any specified company or firm, a general notice shall, as regards any such transaction, be sufficient disclosure within the meaning of the section and it shall not be necessary to give any special notice regarding any particular transaction. Clearly, this proviso was intended to cover such cases as the present. There is therefore no substance in either of these grounds. The third ground is that in fact the petitioner did give notice at the first subsequent meeting. In support of this ground the learned advocate for the petitioner has produced in this Court a copy of a letter addressed by the petitioner to the Chairman of the Board of Directors of the Kamala Book Depot Ltd., dated 3rd October 1936, and noted over the signature B.C. Roy on 6th October 1936 as Chairman. We find that although this letter may have been included in one of the director's files of correspondence exhibited before the Magistrate, there is no reference to it in the Magistrate's judgment nor in the evidence of the witnesses. The finding on this point is that the petitioner's connexion with the firm was not disclosed in any meeting of the directors. The Magistrate states:

"The prosecution has put in minutes of proceedings of the meeting of the directors of the Kamala Book Depot Ltd., showing absence of any minute stating that any disclosure has been made by the accused as managing director of Kamala Book Depot Ltd., at the time of each of the transactions with the Jogendra Publishing House or at the next subsequent meeting."

Further on the Magistrate says:

"If the defence desire to argue that he did disclose informally to the directors outside the meetings, I consider the onus is shifted on to him to prove his assertion which is within his special knowledge.”

The finding is therefore that such disclosure was not proved. Even if proved, it would not have complied with the terms of the section. Had the letter referred to been produced at the time of the trial before the Magistrate or referred to in the evidence, we would have expected to find some reference to it in the judgment. It is not referred to and, in itself, it does not prove that this disclosure was made at any meeting of the directors. The Chairman has merely signed it as noted. The transactions were in July; there were meetings on 3rd August, 3rd September, 3rd October and on 6th October. But apparently this was not referred to in the minutes of any of these meetings.

Then as regards the absence of an express finding that these transactions are such transactions as are referred to in the section, the finding is that the transactions referred to were not disclosed at a meeting of the directors. It follows, therefore, that these transactions were treated throughout as contracts or arrangements within the meaning of the section. That fact does not appear to have been disputed at the time of the trial and it is obvious from the proviso in the section that it applies to such transactions and that the law required that the petitioner's connexion with the firm should be disclosed. There appears to be no substance in this point. The fact that the fine is only Rs. 20 shows that the Magistrate treated it as a more or less technical offence and this is what it appears to have been in the present case. This rule is accordingly discharged.

Revision No. 1031 of 1937

In this case a rule was issued on the Chief Presidency Magistrate to show cause why the conviction of the petitioner under Section 91-A (2), Companies Act, and the sentence of fine of Rs. 50 should not be set aside on the same ground as in Revision Case No. 1032 of 1937. The prosecution case is that the accused, a partner of the printing business known as Sripati Press, without disclosing his interest in that business to the directors of the Kamala Book Depot Ltd. accepted large orders from that company. The charge is confined to the year 1934-1935. The accused was a director of the Kamala Book Depot Ltd. and as director he was bound to disclose the fact that he was entering into transactions with a firm in which he had an interest. There is no dispute as to the facts of this case. But it is urged that the section does not refer to transactions of this kind and the same argument has been used as in the connected case, that the Section only refers to transactions entered into by the directors at a meeting of the company.

We see no reason to limit the provisions of the section to such transactions only. We think therefore that this rule also must be discharged.

Patterson, J.—I agree.

[1988] 64 COMP. CAS. 762 (P&H)

HIGH COURT OF PUNJAB AND HARYANA

Amritsar Rayon and Silk Mills Ltd.

v.

Amin Chand Sajdeh

S. P. GOYAL, J.

CIVIL REVISION NO. 181 OF 1987

MAY 27, 1987

H. L. Sibal, with S. C. Sibal for the Petitioner.

Bhagirath Dass, with Ramesh Kumar for the Respondent.

JUDGMENT

S.P. Goyal, J.—The respondent filed a suit giving rise to this revision under Order 37 of the Code of Civil Procedure for the recovery of Rs. 1,09,279.40 besides interest at the rate of 2 per cent. per month alleged to be due from the defendant on account of the nylon filament yarn supply during March 16 to June 14, 1982. On the service of summons for judgment, the petitioner-defendant put in appearance and sought leave to defend the suit under rule 3(5) of Order 37 mainly on the ground that the contract was hit by the provisions of section 299 of the Companies Act 1956, inasmuch as the plaintiff, a director of the defendant-company, never, disclosed his interest in the contract for supply of the yarn. As the correctness of the amount due had been already certified by the defendant, vide letter dated September 19, 1984, the trial court granted leave to defend on the deposit of this amount and furnishing security in the amount of Rs. 68,720.60 for due performance of the decree. Dissatisfied therewith, the defendant has come up in this revision.

The principles applicable to cases covered by Order 37 of the Code of Civil Procedure, as approved by the Supreme Court in Mechalec Engineers and Manufacturers v. Basic Equipment Corporation, AIR 1977 SC 577, were stated by Das J. in Smt. Kiranmoyee Dassi v. Dr. J. Chatterjee [1945] 49 CWN 246 as under (at page 580):

"(a) If the defendant satisfies the court that he has a good defence to the claim on its merits, the plaintiff is not entitled to leave to sign judgment and the defendant is entitled to unconditional leave to defend;

(b) If the defendant raises a triable issue indicating that he has a fair or bona fide or reasonable defence although not a positively good defence, the plaintiff is not entitled to sign judgment and the defendant is entitled to unconditional leave to defend;

(c) If the defendant discloses such facts as may be deemed sufficient to entitle him to defend, that is to say, although the affidavit does not positively and immediately make it clear that he had a defence, yet, shews such a state of facts as leads to the inference that at the trial of the action, he may be able to establish a defence to the plaintiff's claim, the plaintiff is not entitled to judgment and the defendant is entitled to leave to defend but in such a case the court may, in its discretion, impose conditions as to the time or mode of trial but not as to payment into court or furnishing security;

(d) If the defendant has no defence or the defence set up is illusory or sham or practically moonshine, then ordinarily, the plaintiff is entitled to leave to sign judgment and the defendant is not entitled to leave to defend; and

(e) If the defendant has no defence or the defence is illusory or sham or practically moonshine, then although ordinarily the plaintiff is entitled to leave to sign judgment, the court may protect the plaintiff by only allowing the defence to proceed if the amount claimed is paid into court or otherwise secured and give leave to the defendant on such condition, and thereby show mercy to the defendant by enabling him to try to prove a defence".

The trial court is alleged to have acted illegally in the exercise of its jurisdiction on the ground that unless it was a case of no defence, as stated in proposition (e), the condition of deposit of the principal amount claimed and of furnishing security could not be imposed. According to learned counsel, the present case would be covered by either of the first three propositions because the contract was void and unenforceable, having been entered into in violation of the provisions of section 299 of the Companies Act. Reliance for this proposition was placed on Kaye v. Croydon Tramways Co. [1898] 1 Ch 358. I regret my inability to subscribe to this view.

Sub-section (1) of section 299 provides that every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the board of directors. Sub-section (2) provides the mode and time when the director is to make the said disclosure. Every director who fails to comply with sub-section (1) or (2) is punishable with fine extending up to five thousand rupees by virtue of sub-section (4). Sub-section (5) further lays down that nothing in this section shall be taken to prejudice the operation of any rule of law restricting a director of a company from having any concern or interest in any contract or arrangement with the company. It is evident from a combined reading of all these provisions that nothing contained in section 299 either bars the entering into of a contract by a director with the company in his individual capacity or renders the contract illegal or unenforceable against the company. If that was so, there was no need to enact sub-section (5) which saves the operation of any rule of law restricting a director of a company from having any concern or interest in any contract or arrangement with the company. Instead, the only consequence of the failure on the part of the director to disclose the nature of his concern or interest is that he becomes liable to be punished with fine extending up to five thousand rupees. Learned counsel for the petitioner, however, urged that the director being in a fiduciary relationship with the company, a duty has been cast upon him to disclose the nature of his interest in such dealings. If a contract is entered into without conforming to that provision, it would be hit by the provisions of section 23 of the Indian Contract Act, being opposed to public policy and forbidden by the provisions of the said section 299. Reliance on the provisions of section 23 of the Indian Contract Act, in my view, is wholly misplaced. The consideration or object of the present contract can, by no stretch of reasoning, be said to be opposed to any public policy or forbidden by law because the provisions of section 299 neither forbid the entering into nor render such a contract void.

Now, let us examine how far the decision in Kaye's case [1898] 1 Ch 358, relied upon by learned counsel for the petitioner, supports his contention. In that case, the British Electric Traction Co. entered into an agreement to purchase the Croydon Tramways Co. and one of the terms of the agreement was that the purchaser company shall pay a sum of 500 l. to each of the present directors of the Tramways Co. The contract was stated to be void and unenforceable because of the provisions of section 85 of the Companies Clauses Consolidation Act, 1845, which provides that "no director shall be capable of accepting any other office or place of trust or profit under the company, or of being interested in any contract with the company, during the time he shall be a director". Relying on the said provision, it was contended that the directors were interested in the contract with the company and as they were not capable of being interested in a contract with the company, the contract itself must be held to be beyond the powers of the company to enter into. The contention was repelled with the following observations (at p. 368):

"That is putting upon section 85 a construction which has never been put upon it for the last fifty years, and it appears to me inadmissible. The real truth is that the consequences of a director being interested in a contract with the company are as follows: First, there is the statutory consequence that he ceases to hold office; and secondly, there is what I may call the general legal consequence, that he cannot enforce, as against the company, any contract which he has entered into with that personal interest. But to say that a contract between two companies is to be treated as invalid and beyond the power of one of the companies because one of the directors is interested in it, is a proposition which I have never heard advanced before, and which appears to me to be entirely unsound".

The argument of learned counsel was that even though the challenge to the competence of the two companies to enter into the impugned contract was repelled, yet it was held that the directors were not competent to enforce the contract against the company which necessarily means that such a contract was against law or public policy. The fallacy in the argument is quite obvious. The provisions of section 85 debarred the director from having any interest in any contract with the company and because of the same, a contract entered into with the company was held to be unenforceable by such a director. The Companies Act applicable in India, on the other hand, does not contain any provision prohibiting a director from being interested in any contract with the company. The only duty cast upon him by the provisions of section 299 is to disclose the nature of his interest in the proposed contract at a meeting of the board of directors. The failure on his part to make such a disclosure, though it has been made punishable, does not have the effect of rendering the contract void or unenforceable. So, the impugned contract cannot be said to be void and unenforceable on the basis of any observation made in Kaye's case [1898] 1 Ch 358. No case, consequently, has been made out for interference with the order of the trial court and this petition is accordingly dismissed leaving the parties to bear their own costs.

Delhi High Court

SICA

[1998] 17 SCL 51 (DELHI)

HIGH COURT OF DELHI

Industrial Credit & Investment Corpn. of India Ltd.

v.

Parasrampuria Synthetics Ltd.

VUENDER JAIN, J.

IA NO. 10025 OF 1997 IN SUIT NO. 2332 OF 1997

JANUARY 15, 1998

Section 26, read with section 15, of the Sick Industrial Companies (Special Provisions) Act 1981 - Bar of jurisdiction - Whether seeking declaration of resolution passed by company to make reference to BIFR under section 15, is a subject-matter on which provisions of section 26 would have applicability -Held, no - Whether if in a given facts and circumstances of case, a resolution is bad in law, Court has jurisdiction to grant injunction restraining company from making reference to BIFR - Held, yes - Whether financial institutions contributing major finance to company have locus standi to question resolution to make reference under section 15 even if such financial institutions are neither shareholders nor directors of company - Held, yes - Company passed resolution to make reference to BIFR under section 15 - ICICI, one of major financiers filed suit seeking injunction restraining company from making reference on grounds that company by changing accounting method showed as if company's net worth eroded and resolution was mala fide - Facts revealed ICICI itself was aware of bad financial position and in fact took steps to recover its dues and ICICI was informed of all developments - Whether, on facts of case it could be said that resolution passed by company was mala fide and bad in law so as to restrain it from making reference to BIFR - Held, no

Section 299 of the Companies Act, 1958 - Director - Disclosure of interest by -Whether if disclosure at beginning of each financial year in terms of section 299 has been made, it can deemed to be sufficient disclosure under section 299 - Held, yes

Section 33 of the Companies Act, 1958 - Articles of association • Doctrine of Indore management • Whether mechanical and automatic application of Foss v. Horbottle Rule to Indian corporate realities would be improper and misleading - Held, yes

FACTS

The company passed resolution to make a reference under section 15 of SICA to BIFR. The plaintiff, ICICI, one of the major financial institutions which had advanced considerable amount to the company, filed suit seeking relief to restrain the company from making a reference on the allegations that in fact the company's net worth had not eroded and the company changed its method of accounting for depreciation and also for lease rentals resulting in loss of Rs. 95.13 crores and pre-operative expenses of Rs. 33 crores incurred in a project which was previously capitalized was treated as the revenue expenditure and debited in profit and loss account. Further debit entry of Rs. 55.60 crores consisted of credit notes issued to customers with whom the accounts had been reconciled during the year relating to the rate differences, claims, incidental and carrying charges and brokerages against rates pertaining to earlier years related to business associates of company whose 5 directors were also directors in those business associates (RPL/PSL). It was contended that thus by changing method of accounting it showed that the net worth of the company eroded. ICICI sought the resolution to be declared as invalid on the ground that the resolution was mala fide, proper notice was not given to the directors of the board, and some of the directors who had interest in passing the resolution had not declared their interestedness in accordance with section 299. Earlier ICICI filed suit in the Bombay High Court against the company for recovery of its dues and for appointment of receiver, wherein also stay of operation of resolution was sought for but rejected. The company contended, inter alia, that the resolution was bona fide, the Court had no jurisdiction to grant the relief of restraining company from making a reference, ICICI had no locus standi to file the suit and further the company having filed a suit in another High Court which was rejected as not maintainable on ground of territorial jurisdiction, the suit itself was barred by res judicata.

HELD

REGARDING COURT'S JURISDICTION TO RESTRAIN COMPANY FROM MAKING REFERENCE:

From the plain reading of section 26 what is specifically barred for Civil Court to exercise its jurisdiction is in respect of any matter which the appellate authority or Board is empowered The section further postulates that no injunction shall be granted by any Court in respect of any action taken by the, authorities under SICA under the said Act. First question is whether seeking declaration of resolution passed by the defendant company on 20-9-1997 was a subject-matter on which the provisions of SICA would have applicability ? The answer is in the negative. If in given facts and circumstances of case if the resolution is bad in law then certainly this Court has jurisdiction to grant injunction; in such an eventuality it is the inherent jurisdiction of the Court to entertain such suit and grant injunction while acting as a Civil Court under section 9 of the Code of Civil Procedure.

If the Court comes to a prima facie opinion that reference or invocation of provisions of SICA is to frustrate realisation of public money then judicial attitude towards avoidance of a Civil Court would not provide escape on account of section 26. The Courts are now concerning themselves not merely with the genuineness of a transaction but with the intended effect of it for fiscal purpose and no one could get away with the Civil Court with the mere statement that the Court has no jurisdiction. The Court would not hesitate if it finds that the resolution of the Board was an attempt to create a stratagem, a device or a fraud to achieve some ulterior motives.

REGARDING DISCLOSURE UNDER SECTION 299:

Although the rationale and purpose of provisions of section 299 read with sections 300 and 283 is to prohibit direct or indirect interest so as it should not conflict the duties and arrangements between the directors of one company and other companies. Therefore, the directors should not have any direct or indirect interest. From the bare perusal of the minutes of the Board meeting dated 20-9-1997, it was to be held that there was no such item on the Agenda, which required disclosure under sections 299 and 300 by promoter directors. The items on the Agenda were 'Leave of Absence' 'Confirmation of Minutes' 'Confirmation of Share Transfer' Register of contracts', approval of annual accounts as at 30-6-1997 'Holding of Annual General Meeting 'Authority to Operate Bank Account 'Reference to BIFR' 'Appointment of Cost Auditor "Authority to Shri Rajeev Mahajan "Opening of Bank Account' and Statutory Compliance'. The contention was that under the head" Approval of annual account as at 30-61997' the explanation of the management was that the loss was mainly on account of change in depreciation policy (Rs. 83.87 crores), lease rental policy (Rs. 11.27 crores) and write off of pre-operative expenses (Rs. 33.01 crores) had not shown Rs. 55 crores worth credit note issued to the customers with whom the accounts have been reconciled during the year relating to rate difference, claims, incidental and carrying charges and brokerages against sales pertaining to earlier years on account of the fact that managing director of the defendant company, was Chairman of 'RPL and other four out of five directors of 'RPL' were the directors of 'PSL 'and they were the directors in both the companies. The stand of the defendant was that they were the business associates of the company and they were having dealings with these companies since their inception and it was the defendant who pursued them for subscribing the right issues of CCPs in August 1994 and in this regard 'ASP' and 'SWL' required loans and they approached I-sec (a financial company of the plaintiff) and I-sec sanctioned loans and in order to secure its loans I-sec wanted to have the personal guarantees of the promoter directors of the defendant company.

Transaction regarding these two companies, TIL 'and 'RPL' were reported to the Board of Directors from time to time and in all the business transactions, no interested directors voted for the resolution and also proper disclosures were made at the beginning of each year in terms of section 299. If a disclosure at the beginning of each financial year in terms of section 299 has been made, that is deemed to be sufficient disclosure in terms of the section 299. According to the defendant, out of said Rs. 55 crores, Rs. 46 crores credit note pertained to the year before 31-3-1997 and Rs.9 crores before 30-6-1997 as the debit notes worth Rs. 94 crores were issued for the last four years by charging interest at the rate of 31 per cent per annum and on account of market conditions at the time when realisation of the debt was negotiated with the debtors, it was mutually agreed to charge a lower rate of interest of 15 per cent per annum; that is how these credit notes were issued This kind of arrangement is normally done in the modern day business to save the money by reducing the rate of interest. In view of the material placed on record, it could not be said that the directors of the defendant company suffered disqualification in terms of sections 299 and 300.

REGARDING APPLICA TION OF FOSS V. HARBOTTLE R ULE:

A mechanical and automatic application of Foss v. Harbottle rule to the Indian situations, Indian conditions and Indian corporate realities would be improper and misleading. The principles, in the countries of its origin, owes its genesis to the established factual foundation of shareholder power and majority shareholder power centering around private individual enterprise and involving a large number of small shareholder, is vastly different than the ground realities in our country. Here the modern Indian corporate entity is not the multiple contribution of small individual investors but a predominantly and indeed overwhelmingly State supported funding structure at all stage by receiving substantial funding up to 80% or more from financial institutions which are entirely State controlled or represent substantial State interest and, thus, their shareholding may be small but it is these financial institutions which provide entire funds for the continuous existence and corporate activities. If the Foss v. Harbottle Rule is applied mechanically it would amount to giving weight age to that majority of the shareholding having notionally holding more percentage of shares, than to the financial institutions which may own a small percentage of shares though contributed 80% or more in terms of the finances to such companies. It is these financial institutions which have really provided the finance for the company's existence and, therefore, to exclude them or to render them voiceless on an application of the principles of Foss v. Harbottle Rule would be unjust and impracticable. Therefore, the principle of Foss v. Harbottle Rule cannot be applied mechanically taking into consideration the ground realities of the corporate sector in India.

REGARDING JUSTIFICATION FOR PASSING RESOLUTION TO MAKE A REFERENCE UNDER SECTION 15(1) :

Even prior to finalization of the accounts at an AGM, fact remained that plaintiff itself had information regarding the impending sickness of the defendant company; that is, why plaintiff filed a suit in the Court at Bombay for recovery of its money. What was happening in the defendant company was in the knowledge of the plaintiff and other financial institutions as they were represented in the Board through their officers. Plaintiff had also issued a letter of recall on 16-7-1997. Even the proposal dated 21-7-1997 was submitted for restructuring the defendant company to the plaintiff-ICICI. There was force in the arguments of defendants that from the letters dated 28-5-1997,3-6-1997, 9-1-1997, 27-12-1996 and 4-12-1996 it would be clear that constant interaction on the sickness of company was exchanged with the plaintiff. Therefore, this showed an application of mind and same was sufficient and no further sufficient reasons were required to be gone into for reference to BIFR. After consideration of the audited accounts of the defendant company dated 30-6-1997, the Board of Directors of the defendant company had sufficient reasons to conclude that the process of erosion of net worth could not be reversed until and unless a duly considered rehabilitation package took place. In the letter dated 21st July, 1997 addressed to the plaintiff it had already been indicated that the defendant had incurred loss of Rs. 212 crores till 31-7-1997 and, therefore, erosion of net worth on 30-6-1997 was not a surprise. Conscious of this fact the plaintiff chose to file suit for recovery of its dues in the High Court of Bombay. Now, plaintiff could not turn around and say that the resolution passed at the Board meeting on 20-9-1997 was without sufficient reasons. Therefore, the argument of plaintiff that sufficient reasons were not there for the defendant for adopting the resolution of 20-9-1997 lacked credence. As a matter of fact, the plaintiff had ignored the aspect of rehabilitation of the defendant company and had been concerned about the recovery of money lended by the plaintiff to the defendant company. There was some force in the arguments of the defendants that (i) the reference to BIFR was in order to save the assets by legitimate means by having interest and other outstanding to be lowered and by going for rehabilitation and restructuring process through the agency of BIFR and (ii) that accounting policy changes were legitimate recourse permissible to corporates under the laws of land

Nothing had been shown by the plaintiff that change in the accounting policy had to be ratified by a resolution of the General Body or by the Board of Directors. In India on account of changes in the fiscal policy, and on account of deductions permitted on account of such changes, the companies take recourse to such changes. In any event of the matter, a change in the accounting policy whether has generated the sickness of the company or has been beneficial to the financial structure of the company would not be the subject-matter which could be gone into by the Court at this stage.

REGARDING THE ISSUE AS TO WHETHER THE BOARD MEETING COULD BE CHALLENGED IN THE PRESENT SUIT WHICH WAS NOT RAISED EARLIER IN BOMBAY HIGH COURT:

The suit which was filed at Bombay for recovery of money on 12-9-1997, was filed before the Board meeting of defendant company dated 20-9-1997; therefore, the said Board meeting could not have been challenged by the plaintiff at Bombay. As a matter of fact, the stay granted against the defendants from going to BIFR, may be, was on account of interim application for appointment of a receiver, which was moved by the plaintiff; therefore, the filing of the suit at Bombay and order of the Bombay High Court restraining the defendants from going to BIFR would not amount to res judicata as the meeting of the Board of Directors of the defendant company was distinct and different than the suit for recovery of money. Both were distinct and separate cause of actions. The principles of res judicata are based on the need of giving finality to judicial decision when a matter, whether on a question of fact or question of law, has been decided between the two parties and the decision is final, neither party will be allowed in a future suit for proceedings between the same parties to canvass the matter again. The issue whether the Board meeting of 20-9-1997 was legal and valid and pursuant thereto defendant could be restrained from invoking the jurisdiction of BIFR was not an issue before the Courts at Bombay. Therefore, prima facie the filing of the suit at Bombay High Court and order for appointment of receiver and order restraining the defendants from invoking the jurisdiction of BIFR would not amount to res judicata in the present proceedings.

AS TO WHETHER PLAINTIFF ICICI HAD NO LOCUS STANDI TO FILE THE PRESENT SUIT AS ICICI WAS NEITHER A SHAREHOLDER NOR A DIRECTOR IN THE DEFENDANT COMPANY:

Unlike in United Kingdom and United States of America, where vast majority of shareholders have got stakes in the company by virtue of their shareholding and investments, in India it is often seen that 80% or more financial capital is provided by financial institutions and banks and hardly 5 to 10% equity by the promoters of the company and rest, may be, by the general public. Given this scenario, the management still remains in the hands of promoters, who have only contributed 5 to 10% of the equity and taking into consideration these ground realities, could one say that financial institutions, which have provided 80% or more of finances to sustain the financial structure of the company should have no say in the matter? The answer would be in the negative. Therefore, ICICI could legitimately bring an action on the ground that the action of the defendant company in passing the impugned resolution was detrimental to the interests of the financial institutions.

Prima facie the plaintiff had not been in a position to show on the basis of the documents filed on record that any fraud had been perpetrated by the defendants in passing the resolution dated 20-9-1997. In the instance case, prima facie there was no merit in the submissions of the plaintiff that any fraud or a device to achieve a result with some ulterior motive had been practiced by the defendants on the plaintiff.

The BIFR would be the right forum where the industrial sickness of the defendant company would have to be determined Therefore, injunction as prayed for by the plaintiff could not be granted Even the balance of convenience was also in not granting the injunction. The defendant had got a statutory right file a reference under section 15. Defendant had already filed a reference on 6-11-1997 before BIFR under section 15. It would be for BIFR to determine under section 16 of SICA the factum of industrial sickness of the defendant company.

CASES REFERRED TO

N.R. Murty v. Industrial Development Corpn. of Orissa Ltd 1977 Tax LR 2268 (Ori.), S.L. Kapoorv. Jagmohan [1980] 4 SCC 379 Mcdowell's [1985] 3 SCC 230, ShriJ. Alexanders. BIFR [C.W.P. No. 4207 of 1996], Charles Forte Investments Ltd v. Amanda [1963] 2 All ER 940, Brayanston Finance Ltd v. de Veries [1976] 1 All ER 25, Circle Restaurant Castigillone Co. v. Lavery (1881 CD 555, Challapali Sugar Co. v. CIT [1975] 3 SCC 572, Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd [1971] 41 Camp. Cas. 377 (Bom.), Rydah Venkatachalapathiv. Guntur Cotton Jute & Paper Mills Co. Ltd AIR 1929 Mad. 353, Guntur Cotton Jute & Paper Mills Co. Ltd v. Venkatachalapati AIR 1932 PC 244, Madras Tube Co. Ltd v. Hari Kishon Somani [1985]/CLJ 195, Transvaal Lands Co. v. New Belgium (Transvaal) Land & Development Co. Ltd [1914-15] All ER 987, TR Pratt (Bombay) Ltd. v. M.T. Ltd AIR 1938 PC 159, Public Prosecutor v. T.P. Khaitan AIR 1957 Mad. 4, Hind Overseas P. Ltd v. Raghunath Prasad Jhunjhunwala [1976] 3 SCC 259, American Home Products Corpn. v. Max Laboratories P. Ltd [1986] 1 SCC 465, Baburao Vithalrao Sulunke v. Kadarappa Prasappa Dabbannavar AIR 1974 Mys. 63, Lakshmi Devi v. Rajendra Prasad Sao AIR 1990 Pat. 210, West Mercia Safety wear Ltd v. Dodd 1988 BCLC 250, Maharashtra Tubes Ltd v. State Industrial & Investment Corpn. of Maharashtra Ltd [1993] 2 SCC 144, S.P. Chengalvaraya Naidu v. Jagannath AIR 1994 SC 853, Seemax Construction (P.) Ltd v. State Bank of India AIR 1992 Delhi 197, Udai Chandv. Shankarlal [1978] 2 SCC 209, G. Nara-yanaswamy Reddy v. Government of Karnataka AIR 1991 SC 1726, Anil Kumar Khurana v. MCD [1996] 36 DRJ 558, A.K. Sanyal v. Dr. Chitta Ranjan Basistha AIR 1982 Cal. 412. Canara Bank v. Nuclear Power Corpn. of India Ltd 1995 Suppl. (3) SCC 81, Cotton Corpn. of India Ltd v. United Industrial Bank Ltd AIR 1983 SC 1272, Anwar v. First Additional District Judge [1986] 24J 718 (SC), Advocate General, State of Bihar v. Madhya Pradesh Khair Industries AIR 1980 SC 946, Calico Dyeing & Printing Works v. CIT [1958] 34 ITR 265(Bom.), CIT v. Alembic Glass Industries Ltd[\976] 103ITR 715 (Guj.), CIT v. Produce Exchange Corpn. Ltd [1963] 77ITR 39 (SC), CIT v. Prithvi Insurance [1967] 63 ITR 632 (SC), Needle Industries (India) Ltd v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp. Cas. 743 (SC). Satyadhyan Ghosal v. Smt. Deorajin Debi AIR 1960 SC 941, Smt. Sukhrani v. Hari Shankar AIR 1979 SC 1436, United Provinces Electric Supply Co. Ltd v. T.N. Chatterjee AIR 1972 SC 1201, Arjun Singh v. Mohindra Kumar MR 1964 SC 993 and United Australia Ltd v. Barclays Bank Ltd [1940] 4 All ER 20.

F.S. Nariman, A.M. Singhvi, Sumant Batra, S. Ganesh, Ms. Deepa Rathore, Ms. Ritu Makker and Ms. Pooja Mehra for the Applicant Mukul Rohtagi, Ashish Aggarwal and Saurabh Kirpal, Arun Jaitley and Vipin Sanghi for the Respondent.

JUDGMENT

This suit has been brought by Industrial Credit & Investment Corpn. of India Ltd. (1CICI') Defendant No. 1 is Parasrampuria Synthetics Ltd. ('PSL') Defendant Nos. 2 to 4 are the promoters and directors of defendant No.1 defendant Nos. 5 to 8 are nominee directors of financial institutions on the Board of 'PSL'. Defendant Nos. 9 and 10 are Chairman and director of defendant No. 1. Defendant Nos. 11 to 22 are various financial institutions and Banks, who have extended financial assistance to defendant No. 1 and defendant No. 23 is the Board for Industrial & Financial Reconstruction ('BIFR') constituted under Sick Industrial Companies (Special Provisions) Act ('SICA').

By this suit the plaintiff wants a declaration declaring the provisions of the meeting of the Board of the defendant No. 1 -'PSL' held on 20-9-1997 as null and void. Another declaration sought for in the suit is declaring the profit and loss account and balance sheet of the defendant No. 1-'PSL' for 15 months' period ended 30-6-1997 and adoption thereof at the Board meeting held on 20-9-1997 to be bad in law and null and void. Yet another prayer is made for declaring that 'PSL' was not a sick industrial company in the meaning of SICA. Next prayer of the plaintiff is for perpetual injunction against defendant Nos. 1 to 4, 9 and 10 restraining them from making a reference to the BIFR on the basis of accounts for the period ending 30-6-1997 or on the basis of the resolution of the Board of 'PSL' dated 20-9-1997.

The suit was filed on 6-11-1997. Along with this suit, an application (IA No. 10025 of 1997) under order 39 rules 1 and 2 read with section 151 of the Code of Civil Procedure was also filed with the prayer following prayers:—

(a) pass an ex parte ad interim injunction order restraining the defendant Nos. 1 to 4 and 9 and 10 through themselves or through their agents, servants, employees, etc., from acting in pursuance to the decisions taken and the resolutions passed in the Board meeting of the Parasrampuria Synthetics Ltd. held on 20-9-1997 till the pendency of accompanying suit;

(b) pass an ex parte ad interim injunction order restraining the defendant Nos. 1 to 4,9 and 10 through themselves or through their agents, servants, employees, etc. from filing a reference under section 15 of the SICA before the BIFR on the basis of the account of the 'PSL' held on 20-9-1997 for the period of 15 months ended 30-6-1997 adopted in the said Board meeting till the pendency of the accompanying suit and further restrain defendant No. 23 from entertaining the reference, if already filed;……

On 6-11-1997 the counsel appearing for defendant Nos. 1 to 4 made a statement that defendant No. 1-'PSL' has filed an application under section 15 of the SICA before BIFR on 6-11-1997 itself. That being so, the prayer of the plaintiff has become infructuous on that date. However, Mr. F.S. Nariman, the learned counsel appearing for the plaintiff, contended that the plaintiff is challenging the resolution of the Board of 'PSL' passed on 20-9-1997 as bad in law and null and void and, therefore, if this Court stays the resolution of the Board of 'PSL' passed on 20-9-1997 then no reference could be entertained by BIFR.

Present suit has been contested at this stage by defendant Nos. 1 and 2.

Prior to the institution of this suit, ICICI filed a suit bearing No. 3287 of 1997 on 12-9-1997 in the High Court of Bombay for recovery of Rs. 107,22,31,407 due as on 15-8-1997 from the defendant Nos. 1 to 4. In the said suit, ICICI, inter alia, prayed ex parte ad interim relief including appointment of receiver in respect of all the immovable and movable properties of defendant No. 1-TSL'. On 17-9-1997 at the instance of the plaintiff, the learned single judge of the Bombay High Court passed the following orders:

2. "The learned counsel for the defendants are seeking time on the ground that no sufficient notice was given to them. The learned counsel for the plaintiffs insist that the learned counsel for the defendant Nos. 1 to 4 make a statement that till the next date defendant No. 1 to 4 will not resort to BIFR under the SICA. The learned counsel for defendant Nos. 1 to 4 gives necessary undertaking in that regard, the same is accepted...."

Thereafter on 29-9-1997 as the 'PSL' failed to extend the undertaking granted earlier, the learned single judge of the Bombay High Court appointed receiver in respect of three properties and granted ad interim injunction by which 'PSL' and defendant Nos. 1 to 4 were directed not to make reference to BIFR till 7-10-1997. Plaintiff and defendant No. 1 filed separate appeals before the Division Bench against the order dated 29-9-1997. ICICI was aggrieved for non-appointment of receiver for rest of the properties and 'PSL' was aggrieved by appointment of receiver for their three properties. On 7-10-1997 the appeal of ICICI was placed before the Division Bench of the Bombay High Court and the Bombay High Court made the following orders :

"By way of ad-interim relief, despite strong objection by Shri Aney, the learned counsel for the Respondents, the respondent Nos. 1 to 4 (original defendant Nos. 1 to 4) not to proceed under BIFR till 21-10-1997.

2. Appeal to be placed on board along with appeal lodging No.953 of 1997 on 21st October, 1997 to be first on board.

3. We are making it clear that we were constrained to pass this order inasmuch as the reasoned order of the learned single Judge is not available as yet and we think that for dealing with both these appeals, the same is absolutely necessary."

On 22-10-1997 learned single judge revoked the leave granted under clause XII of the letters patent and directed the plaint to be returned to ICICI for presentation to the proper Court with the direction that if the plaint was presented in a competent Court at Delhi, the contesting defendants will not raise any objection regarding jurisdiction and ad interim orders were ordered to be continued for six weeks. ICICI filed an appeal against the said order. The Division Bench, however, continued the restraint order against the respondents from going to BIFR, which was vacated on 5-11-1997 and on the basis of the said vacation, the counsel for the defendant has vehemently argue before me that there was suppression of facts by the plaintiff as the plaintiff has not mentioned about the vacation of the stay order passed by the Division Bench of the Bombay High Court. Lengthy arguments were addressed by the learned counsel appearing for both the parties on this aspect which I will deal later:

At the outset, Mr. Nariman has contended that the notice of meeting of the Board for 20-9-1997 was too short. He has contended that notice dated 17-9-1997 was received by the nominee Director of ICICI, Smt. Hema Chand, on 18-9-1997; by the nominee Director of General Insurance Company ('GIC'), ShriB, G Vazirani at Bombay at approximately 3.30P.M. on 19-9-1997; nominee Director of Industrial Development Bank of India (IDBI') Shri P. G. Lele, on the evening of 18-9-1997; and the Nominee Director of Industrial Finance Corpn. of India (IFCI), Shri V.P. Sawhney, who was admitted in Hospital, was received by him after he returned from Hospital on 23-9-1997. Mr. Nariman has contended that Nominee Directors of ICICI, IDBI and GIC informed the Company Director of 'PSL' on 19-9-1997 itself that time was too short for holding the Board meeting. Even a letter was written by Shri P.G. Lele, Nominee Director of IDBI on 21-9-1997, inter alia, bringing to the notice of the Chairman the points of significance which were to be discussed at the meeting which required sufficient long notice and an application of mind. Mr. Nariman has contended that there is no hard and fast rule which governs a period of notice for such meeting but members of the Board are entitled to reasonable notice and in the facts of this case, notice for the meeting cannot be said to be reasonable on account of shortness of time. In support of his contentions, he has relied upon N.R. Murty v. Industrial Development Corporation of Orissa 1977 Tax L R 2268 (Ori.) and on that ground has contended that meeting of the Board of 'PSL' dated 20-9-1997 and resolution adopted at the said meeting be declared to be null and void. He has further contended that taking into account the detailed proposal on 23-5-1997 and the proposal on 3-6-1997 would show that none of the issues as raised by ICICI in the plaint viz., non-capitalisation of project expenses; issues of credit notes in respect of large debts outstanding to the 'PSL'; change in the method of depreciation calculation; issue of lease rentals were not elaborated, discussed or mentioned in the said two proposals.

Second ground on which Mr. Nariman has challenged to the validity of Board meeting held on 20-9-1997 is that there is no application of mind. Mr. Nariman has contended that section 15 provides for reference to BIFR. He says that in terms of section 15 of SICA, the Board of Directors of the company shall within 60 days from the date of finalization of the duly audited accounts of the company for the financial year at the end of which the company has become a sick industrial company, may make a reference to the BIFR for determination of the measures which shall be adopted with respect to the company. According to the learned counsel for the plaintiff, the date of finalization of duly audited account as defined in section 3(d)(a) of SICA is the date on which the audited account of the company are adopted at the Annual General Meeting ('AGM') of the company. On the basis of this standard, he has contended that the inexorable rule of reference under section 15(1) must be preceded by an application of mind to the audited accounts of the company at an AGM and section 171 of the Companies Act specifically provides for a minimum notice of 21 days for holding an AGM.

Mr. Nariman has further argued that specific mandate of sections 15(1), 3(d)(a) and section 3(2)(a) read with section 171 of the Companies Act is the proviso to section 15(1) which permits the Board to make a reference even prior to the finalization of the accounts at an AGM but according to Mr. Nariman that is only possible as the language of the proviso postulates 'sufficient reasons' even before such finalization to form the opinion that company had become a sick industrial company.

What has been contended by Mr. Nariman is that all the provisos are in the nature of an exception and in derogation of the general rule and the very fact that the rule that an AGM may have to be given a go by is provided for in the proviso shows that it is to be applied only as an exception and not as a general rule and no reason was advanced by the defendants as to why and for what reasons the members of the board present on 20-9-1997 were animated by an extreme urgency so as to warrant a departure from the normal rule of finalizing account before the AGM, though on the agenda item for Board meeting also provide for a date to hold the AGM. Elaborating his arguments, Mr. Nariman has argued that 'sufficient reasons' in the proviso of section 15(1) would comprise of two parts, firstly, it would necessarily pre-suppose the application of mind to the existence or non-existence of reasons and, secondly, and only thereafter would involve an examination into the sufficiency of those reasons and in the present case there appears no application of mind whatsoever on these issues.

Controverting the arguments advanced by the counsel for the defendants that in any event of the matter those who passed the Resolution on 20-9-1997 constituted a majority on the board and net result would have been the same even if meeting was adjourned, the learned counsel for the plaintiff has contended that the stipulation of a requisite period of notice whether specifically provided in the articles or as mandated by the common law is a procedural safeguard in the nature of and analogous to natural justice in the domain of public law and does not in any manner whatsoever depend on the final outcome of a result which it is supposed to precede. In support of his contentions, he has cited the case of S.L. Kapoor v. Jagmohan [1980] 4 SCC 379.

He further contended that this Court has got the jurisdiction to entertain the suit and grant injunction as only this Court is acting as a Civil Court under section 9 of the Code of Civil Procedure to injunct any situation which attempts to create a stratagem, device or a fraud on the statutory power to achieve a result with an ulterior motives. The learned counsel for plaintiff has contended that principle of intervention of Courts to injunct or stop the creation of devices and stratagem is no long res integra as Constitution Bench of Supreme Court in Mcdowell's case [1985] 3 SCC 230 held that even where a series of multiple transactions, each of them individually and separately being wholly legal, valid and innocent, comprise a holistic change in which the end result achieve a stratagem or a device to evade duty, Court would have power to intervene and to strike down such a stratagem. He has also cited another judgment of this Court in Shri I Alexander v. BIFR [C.W.P. No. 4207 of 1996]. He further cited Halsbury Law of England (H.L.E.) (4th Edition), XXIV, paras 1033-1039; Charles Forte Investments Ltd v. Amanda [l963] 2 All ER 940; Brayanston Finance Ltd v. de Veries [1976] 1 All ER 25 and Circle Restaurant Castigilionev. Lavery (1881 CD 555).

Much emphasis was laid by Mr. Nariman on the fact that net worth of the company, which was Rs. 244 crores as on 31-3-1996 became a negative figure by 30-6-1997 by making it little about Rs.19 crores and in order to achieve this result, defendant No. 1-'PSL' had shown debits and losses of a staggering amount of about Rs. 265 crores during the period of 15 months ended 30-6-1997. According to the plaintiff, same was done by adopting a change of method of accounting for depreciating and also for lease rentals resulting in an impact of debit/loss of Rs. 95.13 crores and this was contrary to accounting practice, secondly by treating the pre-operative expenses incurred on a project, which previously had been capitalized as revenue expenditure and debiting the same to profit and loss account which by itself had a debit impact of loss of Rs. 33 crores. He further contended that said account had a debit entry of an amount of about Rs. 55.60 crores which consisted of credit notes issued by 'PSL' to its customers, viz., said four related concern who accounted for almost 90 per cent of the total amount of its debtors. The learned counsel for the plaintiff contended that each of the abovementioned items is of an amount which was in excess of Rs. 20 crores and the total of these three debits came to about Rs. 185 crores and if this method of accounting would not have been changed, the real operating loss of the 'PSL' during the period ended 30-6-1997 would only have been about Rs. 80 crores, ie., less than one-third of its net worth as on 31 -3-1996. He has contended that this method of changing was never placed before the Board at any time nor the consent of the Board to the said basic changes were obtained. He has contended that the settled method of accounting in respect of expenses incurred on a project before the project become operational was that such expenditure constitutes capital expenditure because it was a part of cost of the project and in this connection cited Challapali Sugar Co. v. CIT [1975] 3 SCC 572.

Mr. Nariman further contended that all the four companies to which the funds were directed were the sister concerns of defendant No. 1-'PSL' and in this regard the Chartered Accountant of the defendants, S.B. Billimoria & Co. ('SBB'), who was appointed a concurrent auditors for reviewing the receipt and utilisation of the public issue proceeds and also of selected debtors account, gave its interim report in November 1996 and reported that the promoter's contributions had not been deposited in the designated bank accounts for the public issue proceeds and approximately 86% of the total debtors outstanding were accounted for by the four related companies, i.e., Rajasthan Polyster Ltd. ('RPL').

Parasrampuria Industries Ltd. ('PIL'), Snow White Intra Ltd. ('SWL') and ASP Investments Ltd. ('ASP') and in spite of the said M/s S.B. Billimoria and company requesting for detailed information concerning the shareholders and directors of all the four companies, no information was provided in relation to two companies.

Mr. Nariman further contended that the cumulative effect of section 299 read with sections 300 and 283(1)(i) of the Companies Act would be that the proceedings and decision taken at the Board meeting on 20-9-1997 cannot be taken into consideration as the promoter directors incurred disqualification in terms of the aforesaid sections of the Companies Act. He has contended that interest of defendant No. 1-'PSL' in Snow White Intra Ltd. and ASP Investments Ltd. were the same as four out of five directors of Rajasthan Polyster Ltd. were the same or closely related to the two major promoter director and three other directors including the managing director of defendant No. 1-'PSL' and on account of this relationship between the directors of these companies, they clearly violate not only the letter but the spirit of sections 299,300 and 283(1)(i). What has been contended by Mr. Nariman is that they were interested directors and disqualify themselves to take part in the meeting of the Board dated 20-9-1997 and in support of his contentions he has cited Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd. [1971] 41 Com. Cas. 377 (Bom.) Pydah Venkatachalapathi v. Guntur Cotton Jute & Paper Mills Co. Ltd. AIR 1929 Mad. 353 at 358 Col. 1 and 368 Col.1 and 2 affirmed by the Privy Council in Guntur Cotton Jute & Paper Mills Co. Ltd v. Venkatchalapati AIR 1932 PC at 244; Madras Tube Co. Ltd v. Hart Kishon Somani[ 1985] 1 CLJ 195; Transvaal Lands Co. v. New Belgium Transvaal Land & Development Co. Ltd [1914-15] All ER 987, which was approved by the Privy Council in T.R. Pratt (Bombay) Ltd. v. M.T Ltd AIR 1938 PC 159 and Public Prosecutor v. T.P. Khaitan AIR 1957 Mad. 4.

He has further contended that 90 per cent of the total amount of the sundry debtors consisted of the said four group companies and the write off of Rs. 55 crores of the amount due by these four companies in the final accounts constituted an item in which the four Parasrampuria group directors were directly and personally interested under section 283 of the Companies Act and they were interested directors and could not have participated and nor could they have voted on the said resolution and the vote cast by the Parasrampuria group directors of Rs. 55 crores itself is illegal and bad in law and they stand disqualified under section 283.

The learned counsel for the plaintiff repelling the contentions of Mr. Mukul Rohtagi, the learned counsel appearing for defendant No. 1, stated that there are exceptions to the rule laid down in Foss v. Harbottle. He argued while quoting Pennington's Company Law (6th Edition), defendant No. 1-'PSL' has not dealt with the exceptions which are relevant for the present case. He contended that fraud, manipulation, device and stratagem would clearly fall within the exception to the said rule and secondly, the breach of judiciary duties is another well-established exception to the rule and lastly negligence is also well-established head of exception to the Foss v. Harbottle rule. Arguing that the decision of the promoter directors at the Board meeting were not actuated by mala fide or motivation in any event would be at the very minimum grossly negligent both in respect of non-disclosure, conflict of duty and interest and an inordinately short notice of the Board meeting, he has further contended that a mechanical or automatic application of Foss v. Harbottle rule to Indian situations, Indian conditions and Indian corporate realities would be both inapposite, improper and indeed misleading. Therefore, principle of Foss v. Harbottle would be unreal, unjust and impracticable in the Indian context as a general rule. In support of his contentions, he has referred to Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwala [1976] 3 SCC 259 and American Home Products Corpn. v. MAX Laboratories P. Ltd [1986] 1 SCC 465 and on the basis of aforesaid judgments, Mr. Nariman has contended that applying foreign situation and foreign precedents and foreign judgments should be done with extreme care and caution since they may represent the application of principles not germane to the Indian ground realities.

Mr. Nariman has further contended that Bombay Proceedings and orders passed by the learned Single Bench as well as of the Division Bench of the Bombay High Court are no bar to the maintainability of the present suit and grant of interim relief as same would not operate res judicata under sections 10 and 11 of the Code of Civil Procedure and, therefore, prayer for interim relief at this stage cannot be rejected by this Court. In support of his contentions, he has cited Baburao Vithalrao Sulunke v. Kadarappa Prasappa Dabbannvar AIR 1974 Mys. 63 and Lakshmi Devi v. Rajendra Prasad Sao AIR 1990 Pat. 210.

Mr. Nariman has further contended that as the order of Division Bench of the Bombay High Court dated 5-11-1997 was not available on 6-11-1997 and the plaintiff was not aware of the details, contents, language or nature of the order passed and, therefore, plaintiff did not plead that order in the pleadings and there was no deliberate attempt on the part of the plaintiff in suppressing the order as there was no intention or rational for doing so. Mr. Nariman has further contended that neither section 16 nor section 26 of the SICA are attracted in the present case as challenge is to the legality of Board meeting and nothing in suit seeks to adjudicate on issues which are under the jurisdiction and domain of SICA. He has further contended that the issues raises in the suit cannot be decided by BIFR. He has contended that section 26 of the SICA falls in the realm of ouster clause and no ouster clause would bar the jurisdiction of Civil Court when allegation of manipulation, fraud, doctoring, deliberated mala fide, lack of notice, creation of devices and stratagem are involved or alleged.

Mr. Mukul Rohtagi, the learned counsel appearing for defendant No. 1, has contended that the jurisdiction of this Court to entertain a suit at the instance of a creditor challenging the Board meeting on the ground of an essential procedural irregularity will not give a cause of action to such a creditor. At best creditor merely steps into the shoes of the shareholders as the plaintiff is neither the director nor the shareholder and in support of his arguments he has cited West Mercia Safety wear Ltd v. Dodd 1988 BCLC 250. Relying upon the rule in Foss v. Harbottle, he has contended that in case of such an irregularity a creditor cannot bring a suit against the company. The rule in Foss v. Harbottle simply says that:—

"the proper plaintiff in an action to redress an alleged wrong to a company on the part of anyone, whether a director, member or outsider, or to recovery money or damages alleged to be due to it, is prima facie the company and, where the alleged wrong is an irregularity which might be made binding on the company by a simple majority of members, no individual member can bring an action in respect of it."

"On the basis of the aforesaid rule, defendant No. 1 has contended that suit is not maintainable at the instance of a creditor as an action of an alleged irregularity in convening the meeting can be ratified by another meeting, either of the shareholders or even of just the directors. Rebutting the arguments advanced by the counsel for the plaintiff, defendant No. 1 has taken the stand that it is not open for a creditor to say that the concerned director was merely a nominee director and, therefore, the suit has not been brought by the proper plaintiff and has quoted from Pennington "If directors exercise their powers in a way which involves a breach of duty to the company, creditors of the company cannot complain."

Much stress was laid by Mr. Rohtagi that given the composition of the present Board of Directors, it is apparent that even if the four nominee directors of the various financial institutions did attend the Board meeting, the outcome of the meeting would have been no different as five out of nine directors of the company, who were present at the meeting held on 20-9-1997 voted in favour of the accounts being passed and even if this Court hold this meeting to be void, another meeting could be held and again the same resolution would be passed by giving proper notice and, therefore, whole action in this regard is futile. He has in support of his contentions, also relied on S.L. Kapoor's case, (supra).

The next contention of the learned counsel for defendant No. 1 was that section 286 does not give any indication as to what should be the time frame for the notice. He has contended that at best inadequate length of notice would entitle the directors to come to Court only with the limited purpose of asking for an alternative meeting but not for holding the meeting to be bad.

The learned counsel for the defendant No. 1 further argued that several remedies are open for the plaintiff under the Companies Act and this suit is misconceived. The plaintiff, who is creditor, could have availed the remedy of winding-up under section 433 of the companies act and could have moved under section 234(7) of the Companies Act before the Registrar that the business of the company is being carried out to the fraud of the creditors and thereafter Central Government can order investigation into the affairs of the company and errant directors can be prosecuted and the creditors interest protected. Alternatively, the creditor, who also happened to be shareholders, can requisition a general meeting of the shareholders and remove the directors who are not acting in interest of the company.

Controverting the arguments of the plaintiff that a large sum of public money is involved in the present case, Mr. Rohtagi has contended that the interest of the present creditors have already been secured as they are secured creditors with the first change on the properties of the company, and secondly, by going to the BIFR, it is the interests not only of the company that will be protected but also the interest of the creditors as the company is likely to be rehabilitated. Taking substance from Maharashtra Tubes Ltd. v. State Industrial & Investment Corpn. of Maharashtra Ltd [1993] 2 SCC 144, Mr. Rohtagi has contended that practice of treating banks and other financial institutions on a higher pedestal than other creditors should be deprecated. Mr. Rohtagi has further contended that the plaintiff has not come to this Court with clean hands, though the plaintiff placed before this Court the orders of the Bombay High Court whereby defendants were injuncted from approaching the BIFR, yet the order passed on 5-11-1997 a day before the filing of the present suit when the interim injunction was vacated, has not been mentioned in the suit.

He contended that it is a case of misconduct on the part of the plaintiff and in support of his contentions has cited S.P. Chengalvaraya Naidu v. Jagannath AIR 1994 SC 853, Seemax Construction (P.) Ltd v. State Bank of India AIR 1992 Delhi 197, Udai Chandv. Shankar Lal [1978] 2 SCC 209, G. Narayanaswamy Reddy v. Government of Karnataka AIR 1991 SC 1726, Anil Kumar Khurana v. MCD [1996] 36 DRJ 558 and A.K. Sanyal v. Dr. Chitta Ranjan Basistha AIR 1982 Cal. 412.

The next contention of the learned counsel for the defendant No. 1 was that the present suit which seeks an injunction restraining the defendants from going to Courts not subordinate to this Court is contrary to section 41(b) on the Specific Relief Act 1963. Drawing the analogy that the BIFR is a Court as has been held in the case of Company Law Board in Canara Bank v. Nuclear Power Corporation of lndia Ltd 1995 Supp(3) SCC 81 and, therefore, this Court has no jurisdiction to restrain the defendants from approaching the BIFR and has cited Cotton Corpn. of India Ltd v. United Industrial Bank Ltd AIR 1983 SC 1272. The Apex Court in Cotton Corpn. of India Ltd's case (supra) held :—

"...The Legislature manifestly expressed its mind by enacting section 41 (b) in such clear and unambiguous language the an injunction cannot be granted to restrain any person, the language takes care of injunction acting in personum, from instituting or prosecuting any proceeding in a Court not subordinate to that from which injunction is sought. Section 41 (b) denies to the Court the jurisdiction to grant an injunction restraining any person from instituting or prosecuting any proceeding in a Court which is not subordinate to the Court from which the injunction is sought. In other words, the Court can still grant an injunction restraining a person from instituting or prosecuting any proceeding in a Court which is subordinate to the Court from which the injunction is sought. As a necessary corollary, it would follow that the Court is precluded from granting an injunction restraining any person from instituting or prosecuting any proceeding in a Court of co-ordinate or superior jurisdiction. This change in language deliberately adopted by the Legislature after taking note of judicial vacillation has to be given full effect.

...We find it very difficult to appreciate this approach of the Court because the Court has not rejected even at the stage of the consideration of prima facie case or on balance of convenience that the claim of the Corporation is frivolous or untenable or not prima facie substantiated. On the contrary the Court leaves open to the corporation to file a suit if it is so advised. The High Court only restrains the corporation from presenting a winging up petition. We again see no justification for this dichotomy introduced by the Court in respect of various proceedings which were open to the corporation to be taken against the Bank leaving some open and some restrained by injunction. Neither in statute law nor in equality. We find any justification for this dichotomy." (pp. 1276-1281)

Next contention of Mr. Rohtagi was that there is a implied bar of jurisdiction and this Court has no jurisdiction to deal with the issues raised in the present case. The provisions of SICA create an implied as well as express bar on the Civil Courts. Mr. Rohtagi has contended that it is a settled proposition of law that where an Act creates a special Court or forum to adjudicate upon issues and further directs that the orders passed by the same shall be final, it impliedly bars the jurisdiction of the Civil Courts to deal with the same and has cited Anwar v. 1st Additional District Judge [1986] 2 UJ (SC) 718. He has further contended that no injunction can be granted when the effect of the same is to render the act illegal and contrary to law. He has also contended that as a matter of fact the plaintiff is guilty of contempt of this Court as they have played a game by resorting to acts of judicial adventurism and having failed to gain, favourable orders from the High Court at Bombay, the plaintiff has approached this Court and, therefore, they are guilty of contempt's and has cited in support his contentions - Advocate General State of Bihar v. Madhya Pradesh Khair Industries AIR 1980 SC 946.

Mr. Arun Jaitley, the learned counsel for appearing for defendant No. 2, has contended that the validity and propriety of the Board meeting held on 20-9-1997 is beyond question as prior notice was duly issued and was admittedly received. Replying to the arguments of Mr. Nariman Mr. Jaitley has contended that the events leading up to the meeting were significant but it did not begin on 12-9-1997 when ICICI filed a suit in Bombay High Court but even prior to that when ICICI along with other financial institutions caused sickness to a health company by withdrawing/diluting their commitments to the public/right issues leading to the failure of the issues and, thus, collapsing of a large expansion/diversification project of Rs. 535 crores in which nearly half the amount was spent by that time. It has been contended by him that in recessionary Polyester market conditions as well as depressed primary market, ICICI and IFCI, jeopardized the efforts to mobilise funds through the public issues by withdrawing/ diluting their commitments in anticipation of the problems for the company in future and it was a callous approach to a crucial component of the financial structure, which caused the whole problem and this action of ICICI of abandonment of the projects in which nearly Rs. 250 crores had been invested and on account of recessionary market and pressure on margins, defendant No.1 company was made to carry additional burden by way of interest on loans deployed on the unproductive assets of the abandoned projects, which has precipitated the setting in of sickness in the company. He has further contended that ICICI's approach was not followed by other fellow institutions, ie., IDBI and IFCI as they did not join ICICI in filing the civil suit at Bombay initially. He contended that company submitted three reconstructing proposal to the ICICI with the last being submitted on the 21-7-1997, however, ICICI without responding to any of these, chose to issue recall notice to the company on 16-7-1997. Mr. Jaitley vehemently contended that ICICI stratagem stemmed out of their only objective or recovering their dues when a major part of it was not even due, notwithstanding the fact that functioning assets of substantial value giving direct employment to more than 2,500 workers were available. He has also controverted that the intention of the nominee directors of the financial institutions was to somehow create conditions which can be exploited to divest the company from taking its legitimate protection under SICA.

Controverting the arguments of Mr. Nariman that total money involved of the financial institutions and banks as on 15-8-1997 was approximately Rs. 650 crores, Mr. Jaitley has contended that the total amount of the financial institutions was approximately Rs. 400 crores but the financial institutions have done nothing to save their stake in time through constructive and positive approach and have watched, indifferently the steady decay of the assets which ought to have been their first concerned. He has contended that though reconstructing proposal dated 21-7-1997 the company had already indicated a loss of Rs. 212 crores till 31-7-1997 as such eventual position of the company which emerged on 30-6-1997 was not in any way a total surprise for which the nominee directors had to have a longer notice. It is in this background Mr. Jaitley has contended that Board of Directors of the defendant company had no other option but to comply with the statutory requirements of SICA for making a reference to BIFR. In terms of SICA in the interest of company and its stake holders, it was essential and sufficiently reasonable for the Board to make a reference to BIFR to ensure the feasibility of reviving the company which ICICI failed to do for more than one year. He has also contended that the company with an assets of Rs. 750 crores employing 2,500 workers having operating plants need to be saved and ICICI miserably failed to revive the company, which had been paying to the National Exchequer in terms of various dues a sum of Rs. 800 crores, the whole approach of the ICICI was negative and destructive, though the defendant had paid to the employees its wages amounting to Rs. 42 crores between September 1996 to August 1997.

Repelling the contention of Mr. Nariman that in this case Court has to intervene to stop creation of devices and stratagems on the basis of Mcdowell's case (supra), Mr. Jaitley has contended that as a matter of fact, it is the ICICI which has been guilty of callous indifference in complying with their duty to save the interest of the company and its shareholders/other stake holders and the ratio of Mcdowell's case (supra) does not apply to the present case at all and, as a matter of fact, ICICI as a premier financial institution should have full confidence in the working and competence of BIFR.

Regarding the relationship with aforesaid four companies, Mr. Jaitley has contended that 'SWL' is an independent listed corporate entity and was free to take investment and other corporate decisions subject to the concurrence of its shareholders through its independent Board of Directors. It was not defendant's concern or interest to interfere in such matters of 'SWL'. He has further contended SWL has been dealing with defendant No.1 - 'PSL' since 1986-87 and was one of the main dealers and that is why the 'SWL' invested in the stock of defendant and such investment do not in any way establish any nexus. 'SWL's balance sheet was available to ICICI and ICICI was all along financing the company as well as had appraised/funded a massive expansion project of Rs. 535 crores as late as in November 1995. He has further contended that if the promoter director have given their personal guarantee for arranging subscription for long standing dealers to the defendant's right issue of CCPs in 1994 does not amount to 'SWL' becoming a group company of the defendant. He has argued that all the transactions were genuine business transactions, which are not unusual in the case of business relationship of long standing and substantive nature.

Repelling the contentions of the plaintiff that net worth of the defendant company came down from Rs. 244 crores as on 31-3-1996 became a negative figure by 30-5-1997 by about Rs.19 crores, Mr. Jaitley has contended that the accounting policy changes are legitimate recourses permissible to corporates under the laws of the land as such cannot be questioned. The accounts incorporating these changes have already been gone into details by the statutory auditors and have been approved and in any case the changes in account policy can be gone into in relevant details by BIFR. He has contended that change of accounting policy on depreciation is allowed under the Companies Act and on account of recent changes in the provisions of sections 115J and 155JA introduced during 1996-97 the company has changed its method of depreciation. Regarding the change in the lease rentals, he has contended that same is permissible by law as the same method of lease was accounted till 1992-93, however, in 1993 there was change in the lease accounting policy to match the requirements of international accounting standards as the defendant company was preparing for the GDR issue but did not come up with GDR issue and the Board decided to change to the earlier method as most of the Indian companies are following this method and this is more realistic in Indian law environment.

Dealing with the pre-operative expenses as revenue expenses, Mr. Jaitley has contended that as per the accepted account policy and guidelines of Institute of Chartered Accountants of India vide its Accounting Standard-7, expenses during the construction period of the project should be capitalized but these accounting policies are applicable only when the projects are ongoing but in the present case when project is abandoned, there is no sense of capitalizing the expenditure and the same is also permissible under Income-tax Act and has cited Calico Dyeing & Printing Works v. CIT [1958] 34ITR 265 (Bom.), CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj.), CIT v. Produce Exchange Corpn. Ltd [1963] 77 ITR 39 (SC) and CIT v. Prithvi Insurance Co. Ltd [1967] 63 ITR 632 (SC). He has further contended that change of method of accounting does not require approval of Board of Directors.

Regarding the issue of interested directors, Mr. Jaitley has contended that there was no business/transaction in the Board meeting dated 20-9-1997 which required disclosures under section 299 read with section 300 of the Companies Act by promoter directors. He has contended that 'SWL', 'ASP', 'RPL' were business associates of the defendants and they were dealing with the defendants right from its inception and defendant legitimately pursued them for subscription in the right issue of CCPs in August 1994 and for this purpose 'ASP' and 'SWL' required loans and accordingly they approached I-Sec. (a subsidiary of ICICI) and I-Sec. was fully aware that these companies were the long standing trusted dealers of defendant No.1 'PSL' and accordingly the loans were sanctioned by them, however, in order to secure themselves, I-Sec. asked for the personal guarantees of promoter directors and in the interest of company the promoter directors acceded to the request of I-Sec, such arrangements are quite common in the course of funds mobilisation efforts by corporates. He has also contended that 'ASP' and 'SWL' are not group companies but were the business associates of defendant No.1-'PSL'. 'PIL' and 'RPL' were the companies connected to the defendant No. 1 and all the transactions of material regarding these twp companies have been reported to the Board of Directors from time to time as per the requirements of the Companies Act and in all those business transactions, no interested directors voted for the resolution and also the proper disclosures by the interested directors were made at the beginning of each financial year in terms of section 299(3) and, therefore, no violation of sections 299, 300, 301 and 283(1)(i) has been committed by the defendant No. 1 company. It was also contended by Mr. Jaitley that the relationships of friendliness with directors are not hit by section 299 of the Companies Act and has cited, in support of his contentions, Needle Industries (India) Ltd v. Needle Industries Newey (India) Holding Ltd [1981] 51 Comp. Cas. 743. Therefore, he has contended that the business association with 'ASP' and 'SWL' are not covered under the indirect relation in the purview of section 299 and consequently, there is no violation of sections 299,300 and 283(1)(7). He has further contended that there was no interest of directors in the resolution for adoption of accounts and, therefore, there was no question of disinterested quorum and whatever business has been transacted by the Board of Directors was good in law and had proper quorum. Mr. Jaitley has further contended that discretionary relief of injunction on account of its conduct where the plaintiff has tried its luck at Bombay to secured the same relief and upon its failure has filed a suit in this Court shows complete mala fide on the part of the plaintiff to invoke the jurisdiction of this Court. As a matter of fact, the present suit is barred by principles of res judicata since the same issue pertaining to interim injunction in respect of defendant's right to file a reference before BIFR have been litigated before the Bombay High Court in the suit as well as the appellate stage. He has contended that principles of res judicata also applies for interlocutory application and has cited Satyadhyan Ghosal v. Smt. Deorajin Debi AIR 1960 SC 941, Smt. Sukhrani v. Hari Shanker AIR 1979 SC 1436, United Provinces Electric Supply Co. Ltd v. T.N. Chatterjee AIR 1972 SC 1201 and Arjun Singh v. Mohindra Kumar AIR 1964 SC 993. Mr. Jaitley has also contended that the plaintiff is only concerned with its own financial interests and is having no concern for the future of the defendant No. 1 company-'PSL' and the industry as a whole. He has contended that SICA constitutes a high accomplished and informed Board of experts in the industrial and economic field and it empowers the Board to make and consider schemes for revival of sick industrial companies and the plaintiff is seeking to avoid said remedy by filing the present suit as the plaintiff is not interested in rehabilitation of the defendant company and the plaintiff is fighting shy of going before the BIFR, which may evolve a rehabilitation scheme. Mr. Jaitley has further contended that, as a matter of fact, the plaintiff will not suffer any injury if industrial sickness of the defendant company is examined by the BIFR as it is open for the plaintiff to argue before the BIFR that the defendant company has not become sick and accounts have been doctored or manipulated. He has also contended that proceedings under sections 15 and 16 are certainly proceedings meant to adjudicate the sickness or otherwise of the concerned company. Mr. Jaitley in the last has contended that application is devoid of any merit and be dismissed.

Let me first deal with the arguments advanced by the counsel for the defendant Nos. 1 and 2 that in view of section 26 of SICA, this Court has no jurisdiction to grant the injunction prayed for by the plaintiff/applicant. Section 26 is reproduced below :—

"Bar of jurisdiction.—No order passed or proposal made under this Act shall be appealable except as provided therein and no Civil Court shall have jurisdiction in respect of any matter which the Appellate Authority or the board is empowered by or under this Act to determine and no injunction shall be granted by any Court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act."

From the plain reading of the aforesaid section what is specifically barred for Civil Court to exercise its jurisdiction in respect of any matter which the appellate authority or the board is empowered. The section further postulates that no injunction shall be granted by any Court in respect of any action taken by the authorities under SICA under the said Act. First question is whether seeking declaration of resolution passed by the defendant company on 20-9-1997 is a subject-matter on which the provisions of SICA would have applicability ? The answer is in the negative. If in given facts and circumstances of case the resolution is bad in law then certainly this Court has jurisdiction to grant injunction, in such an eventuality it is the inherent jurisdiction of this Court to entertain such suit and grant injunction while acting as a Civil Court under section 9. In such a case, it is perhaps worth recalling the warning given, albeit in another context by Lord Atkin, who himself dissented in the Duke of Westminster case, in United Australia Ltd v. Barclays Bank Ltd [1940] 4 All ER 20 :—

"When these ghosts of the past stand in the path of justice, clanking their mediaeval chains, the proper course for the judge is to pass through them undeterred."

If the Court come to a prima facie opinion in a case with the allegation that reference or invocation of provisions of the SICA is to frustrate realisation of a public money then judicial attitude towards avoidance of a Civil Court will not provide escape on account of section 26 of SICA. The Courts are now concerning themselves not merely with the genuineness of a transaction but with the intended effect of it for fiscal purpose ad no one can get away with the Civil Court with the mere statement that the Court has no jurisdiction. The Court will not hesitate if it finds that the resolution of the Board was an attempt to create a stratagem, a device or a fraud to achieve some ulterior motives. Lengthy arguments were addressed by the counsel for both the parties in order to show whether the impugned resolution passed was activated by fraud or to achieve some ulterior motive or was passed in the normal course of business by the defendants. At the outset, it would shock any reasonable person that net worth of the company from Rs. 244 crores on 31 -3-1996 it came to a negative figure by 30-6-1997 to minus Rs. 19 crores. Therefore, in my opinion, applying the principles of Mcdowell's case (supra) this Court has jurisdiction in cases where Court is of prima facie opinion that fraud or mischief has been played by the defendant to grant injunction.

Another arguments, which was advanced before me by the plaintiff was that the cumulative effect of section 299 read with sections 300 and 283(1)(i) of the Companies Act would make the decision taken at the Board meeting on 20-9-1997 void as the promoter directors incurred disqualification in terms of the aforesaid sections. Although the rationale and purpose of these provisions is to prohibit direct or indirect interest so as it should not conflict the duties and arrangements between the directors of one company and other companies. Therefore, the directors should not have any direct or indirect interest. I have to examine whether any business/transaction in the Board meeting on 20-9-1997 required disclosure under section 299 read with section 300 of the Companies Act. From the bare perusal of the minutes of the Board meeting dated 20-9-1997,1 am inclined to hold that there was no such item on the Agenda, which required disclosure under sections 299 and 300 Companies Act by promoter directors. The items on the Agenda were 'Leave of Absence' 'Confirmation of minutes', 'Confirmation of share transfer' 'Register of Contracts' 'Approval of annual accounts as at 30-6-1997'. 'Holding of annual general meeting' 'Authority to operate Bank account'. Reference to BIFR 'Appointment of Cost Auditor' 'Authority to Shri Rajeev Mahajan' Opening of Bank account and 'Statutory Compliance'. Although Mr. Nariman has contended that under the head 'Approval of annual accounts as at 30-6-1997, the explanation of the management was that the loss was mainly on account of change in depreciation policy (Rs. 83.87 crores), lease rental policy (Rs. 11.27 crores) and write off of pre-operative expenses (Rs. 33.01 crores) has not shown Rs. 55 crores worth credit note issued to the customers with whom the accounts have been reconciled during the year relating to rate difference, claims, incidental and carrying charges and brokerages against sales pertaining to earlier years on account of the fact that managing director of the defendant company, Mr. Ratan Lal Parasrampuria, was Chairman of 'RPL' and other four out five directors of 'RPL' were the directors of 'PSL' and they were the directors in both the companies. It has to be borne in mind that the stand of the defendant has been that they were the business associates of the defendant No. 1-'PSL' and they were having dealings with these companies since their inception and it was the defendant who pursued them for subscribing the right issues of CCPs in August 1994 and in this regard 'ASP' and 'SWL' required loans and they approached I-sec. (a financial company of the plaintiff) and I-sec. sanctioned loans and in order to secure its loans I-sec wanted to have the personal guarantees of the promoter directors of the defendant company. It was stated at the bar by Mr. Jaitley that transaction regarding these two companies, 'PIL' and 'RPL', were reported to the Board of Directors from time to time and in all the business transactions, no interested directors voted for the resolution and also proper disclosures were made at the beginning of each year in terms of section 299. If a disclosure at the beginning of each financial year in terms of section 299 of the Companies Act has been made, that is deemed to be sufficient disclosure in terms of the section 299. According to the defendant, out of said Rs. 55 crores, Rs. 46 crores credit note pertained to the year before 31-3-1997 and Rs. 9 crores before 30-6-1997.1 find some force in the arguments of the counsel for the defendant that as the debit notes worth Rs. 94 crores were issued for the last four years by charging interest at the rate of 31 percent per annum and on account of market conditions at the time when realisation of the debt was negotiated with the debtors,

it was mutually agreed to charge a lower rate of interest of 15 per cent per annum that is how these credit notes were issued. This kind of arrangement is normally done in the modern day business to save the money by reducing the rate of interest. In view of the material placed on record, I do not find much substance that the directors of the defendant company suffered disqualification in terms of sections 299 and 300. The Supreme Court in the case of Needle Industries (India) Ltd's (supra) has held that :—

"The concern or interest of a director which has to be disclosed at the Board meetings must be in relation to the contract or arrangement, entered into or to be entered into, by or on behalf, the company. The interest or concern of a director spoken of by sections 299(1) and 300(1) cannot be merely a sentimental interest or ideological concern. Therefore, a relationship of friendliness with the directors who are interested in the contract or arrangement or even the mere fact of a lawyer-client relationship with such directors will not disqualify a person from acting as a director on the ground of his being under section 300(1) an 'interested' director." (p. 746)

For the purpose of adoption of accounts, prima facie I do not see that directors were disqualified on account of disinterested quorum. I would now deal with the arguments advanced by the defendant that the issues challenged by the plaintiff fall within the domain of internal management, rule of the company and disentitle the plaintiff-ICICI from claiming the relief on the basis of Foss v. Harbottle rule. I need not go into the exceptions to these rules, which include fraud, manipulation, stratagem and device which would fall within the exceptions to the rule, breach of judiciary duties is another well-established exception to the rule apart from negligence which is also well-established head of exception to the Rule. A mechanical and automatic application of Foss v. Harbottle Rule to the Indian situations, Indian conditions and Indian corporate realities would be improper and misleading. The principles, in the countries of its origin, owes its genesis to the established factual foundation of shareholder power and majority shareholder power centering around private individual enterprise and involving a large number of small shareholder, is vastly different than the ground realities in our country. Here the modern Indian corporate entity is not the multiple contribution of small individual investors but a predominantly and indeed overwhelmingly state supported funding structure at all stage by receiving substantial funding up to 80% or more from financial institutions which are entirely state controlled or represent substantial state interest and, thus, their shareholding may be small but it is these financial institutions which provide entire funds for the continuous existence and corporate activities. If we apply mechanically the Foss v. Harbottle rule, it would amount to giving weightage to that majority of the shareholding having notionally holding more percentage of shares and the financial institutions which may own a small percentage of shares though contributed 80 per cent or more in terms of the finances to such companies. It is these financial institutions which have really provided the finance for the company's existence and, therefore, to exclude them or to render them voiceless on an application of the principles of Foss v. Harbottle would be unjust and impracticable. In American Home Products Corpn. 's case (supra), it has been held by the Apex Court:—

"...As pointed out by this Court in Forasol v. Oil and Natural Gas Commission [1984] 1 SCR 526, in the absence of any binding authority of an Indian Court on a particular point of law, English decisions in which judgments were delivered by judges held in high repute can be referred to as they are decisions of Courts of a country from which Indian jurisprudence and a large part of our law is derived, for they are authorities of high persuasive value to which the Court may legitimately turn for assistance; but whether the rule laid down in any of these cases can be applied by our Courts must, however, be judged in the context of our own laws and legal procedure and the practical realities of litigation in our country."

Therefore, the principle of Foss v. Harbottle cannot be applied mechanically taking into consideration the ground realities of the corporate sector in India.

Let me now deal with the submissions of the learned counsel for the parties with regard to content, meaning and effect of proviso to section 15(1) which permits the Board to make a reference even prior to finalization of the accounts at an AGM. Mr. Nariman, the learned counsel for the plaintiff, has contended that this proviso deals with situation where board has found that sufficient reasons exist even before such finalization of duly audited accounts of the company and the company has become a sick industrial company, the company can make a reference under section 15 of SICA. Mr. Nariman took great pain in arguing that the very fact that the AGM may be given a go by as provided in the proviso, shows that is to be applied only as an exception and not as a general rule. According to the learned counsel for the plaintiff phrase 'sufficient reasons' in the proviso of section 15(1) would comprise of two parts, firstly, it would necessarily pre-suppose the application of mind to the existence or non-existence of reasons and secondly and only thereafter would involve an examination into the sufficiency of those reasons. According to him there was no application of mind whatsoever and, therefore, reference under section 15(1) would ex facie be bad. Fact remains that plaintiff itself had information regarding the impending sickness of the defendant company that is why plaintiff filed a suit in the Court at Bombay for recovery of its money. What was happening in the defendant company was in the knowledge of the plaintiff and other financial institutions as they were represented in the board through their officers. Plaintiff has also issued a letter of recall on 16-7-1997. Even the proposal dated 21-7-1997 was submitted for restructuring the defendant company to the plaintiff-ICICI. There is force in the arguments of defendants that from the letters dated 28-5-1997, 3-6-1997, 9-1-1997, 27-12-1996 and 4-12-1996 it would be clear that constant interaction on the sickness of company was exchanged with the plaintiff. Therefore, this shows application of mind and same was sufficient and no further 'sufficient reasons' were required to be gone into for reference to BIFR. After consideration of the audited accounts of the defendant company dated 30-6-1997, the Board of Directors of the defendant company had sufficient reasons to conclude that the process of erosion of net worth could not be reversed until and unless a duly considered rehabilitation package takes place. The argument of the plaintiff could be of greater force, had the letter dated 21-7-1997 was not addressed to the plaintiff. In the said proposal it had already been indicated that the defendant had incurred loss of Rs. 212 crores till 31-7-1997 and erosion of net worth on 30-6-1997 was not a surprise. Conscious of this fact the plaintiff chose to file suit for recovery of its dues in the Bombay High Court. Now, plaintiff cannot turn around and says that the resolution passed at the Board meeting on 20-9-1997 was without sufficient reasons. Therefore, the argument of plaintiff that sufficient reasons were not there for the defendant for adopting the resolution of 20-9-1997 lacks credence. As a matter of fact, the plaintiff has ignored the aspect of rehabilitation of the defendant company and has been concerned about the recovery of money lended by the plaintiff to the defendant company. There is some force in the arguments of the learned counsel for the defendants that the reference to BIFR was in order to save the assets by legitimate means by having interest and other outstanding to be lowered and by going for rehabilitation and restructuring process through the agency of BIFR.

Next argument, which was canvassed before me, was that net worth of Rs. 244 crores as on 31-3-1996 became a negative figure by 30-6-1997 by about Rs. 19 crores and in order to achieve this result, defendant No. 1-'PSL' had to show debits and losses of a staggering amount of about Rs. 265 crores during the period of 15 months' ended 30-6-1997 and this was achieved by changing method of accounting for depreciation and also for lease rentals resulting in an impact of debit/loss of Rs. 95.13 crores and this was contrary to the accounting practice and secondly, by treating the pre-operative expenses incurred on a project of about Rs. 33 crores, which previously had been capitalized as revenue expenditure, and debiting the same to the profit and loss account which by itself had a debit impact of loss of Rs. 33 crores and lastly, the said account also had a debit entry of an amount of about Rs. 55.60 crores which consisted of credit notes issued by 'PSL' to its customers. Accounting policy changes were legitimate recourse permissible to corporates under the laws of land. It has also been contended before me that change of method of accounting does not require approval of the Board of Directors and this is well within the power of the managing director. It has further been argued that as the plaintiff had stopped disbursal of term loan after January 1996 and also caused failure of the public issue meant for the expansion projects, there was no way that the defendant company could have carried on with the implementation of the projects and abandoning these was the only inevitable outcome of ICICI's actions and all these were known to the Board of Directors of the defendant company and these developments were also reported at the Board meeting held on 25-3-1997 and the nominee directors of the financial institutions were also present at the meeting of the Board of Directors of the defendant company. It has also been contended that at the Board meeting held on 25-3-1997 a decision was taken for the sale of units of the defendant company and the said decision was taken as the projects were abandoned. In relation to treating the pre-operative expenses as revenue expenses, the learned counsel for the defendant has cited Calico Dyeing & Printing Works' case (supra), Alembic Glass Industries Ltd's (supra), Produce Exchange Corpn. Ltd's case (supra) and Prithvi Insurance's case (supra). Nothing has been shown by the plaintiff that change in the accounting policy has to be ratified by a resolution of the general body or by the Board of Directors. In India on account of changes in the fiscal policy and on account of deductions permitted on account of such changes, the companies take recourse to such changes. In any event of the matter a change in the accounting policy whether has generated the sickness of the company or has been beneficial to the financial structure of the company would not be the subject-matter which could be gone into by this Court at this stage.

Dealing with the arguments of the defendant that present suit is barred as the plaintiff could have and ought to have raised all such allegations, as are raised in the present suit, in the Bombay suit by amending the plaint and the present suit is barred under order 2 rule 2 of the Code of Civil Procedure. Alternatively, defendants have also contended that as no challenge to the Board meeting of 20-9-1997 was made by the plaintiff -ICICI in the Bombay suit, although they repeatedly sought relief of injunction against the defendant to restrain the defendant from making a reference to BIFR on the same set of allegations, which have been made in the present suit. The suit, which was filed at Bombay for recovery of money on 12-9-1997, was filed before the Board meeting of defendant company dated 20-9-1997, therefore, the said Board meeting could not have been challenged by the plaintiff at Bombay. As a matter of fact, the stay granted against the defendants from going to BIFR, may be, was on account of interim application for appointment of a Receiver, which was moved by the plaintiff, therefore, I do not think that filing of the suit at Bombay and order of the Bombay High Court restraining the defendants from going to BIFR would amount to res judicata as the meeting of the Board of Directors of the defendant company was distinct and different than the suit for recovery of money. Both are distinct and separate cause of actions. The principles of res judicata are based on the need of giving finality to judicial decision when a matter, whether on a question of fact or question of law, has been decided between the two parties and the decision is final, neither party will be allowed in a future suit or proceedings between the same parties to canvass the matter again. In my opinion, the issue whether the Board meeting of 20-9-1997 was legal and valid and pursuant thereto defendant could be restrained from invoking the jurisdiction of BIFR was not an issue before the Courts at Bombay. Therefore, prima facie I am of the view that the filing of the suit at Bombay High Court and order for appointment of receiver and order restraining the defendants from invoking the jurisdiction of BIFR would not amount to res judicata in the present proceedings.

Dealing with the other contention of the learned counsel for the plaintiff that there was no reasonable notice of the meeting of the Board of Directors. Reasonableness of time will depend on the facts and circumstances of each case, in the present case, notice dated 17-9-1997 was received by the Nominee Director of plaintiff-ICICI, Smt. Hema Chand, on 18-9-1997. Even though the defendant has taken the objection that if the notice was inadequate, cause of action, lies to Smt. Hema Chand and not to ICICI. It has also been contended before me by the defendants that, as a matter of fact, plaintiff-ICICI has no locus standi to file the present suit as 'ICICI' is neither a shareholder nor a Director in the defendant company. As I have discussed in detail in the preceding paragraphs that in India unlike United Kingdom and United States of America, where vast majority of shareholders have got stakes in the company by virtue of their shareholding and investments, in India it is often seen that 80 per cent or more financial capital is provided by financial institutions and banks and hardly 5 to 10 per cent equity by the promoters of the company and rest, may be, by the general public. Given this scenario, the management still remains in the hands of promoters, who have only contributed 5 to 10 per cent of the equity and taking into consideration these ground realities, can we say that financial institutions, which have provided 80 percent or more of finances to sustain the financial structure of the company should have no say in the matter? The answer is in the negative. Therefore, I hold that TCICI' can legitimately bring an action on the ground that the action of the defendant company in passing the impugned resolution is detrimental to the interests of the financial institutions.

Adverting back to the arguments advanced by the plaintiff that the notice was not sufficient, I have stated earlier, Smt. Hema Chand, the Nominee Director of the plaintiff - 'ICICI' who was in Delhi on 20-9-1997 having received the notice dated 17-9-1997 on 18-9-1997 she did not participate in the meeting, therefore, at her instance the meeting of the Board, which held on 20-9-1997, cannot be held to be without reasonable notice. The best course for her would have been to attend the meeting and raise her objection regarding the reasonableness of the notice. Even otherwise on account of net worth of the company became eroded, proposal for restructuring the company, the plaintiff company had the notice of the same since 1996, to say that the notice for the Board's meeting was not reasonable or sufficient, is devoid of any force. More particularly, in view of the letter which was sent by Smt. Hema Chand dated 4-12-1996 to the defendant in which certain objections were taken for issuance of cheques of the value of Rs. 37 crores to 'ASP', 'SWL' and TIL' and the letter of defendant dated 27-12-1996 in which it was mentioned :—

"at times there are on account payments and receipts but since the company has very long association with these companies. Normally, every year these transactions would be appearing, but since August 1996 onwards we have stopped such transactions and there is no further on account payment to these companies."

Smt. Hema Chand wrote another letter dated 9-1 -1997 commenting on the concurrent audit report dated 28-11-1996. Even the letter recalling loan dated 16-7-1996 for bank guarantee was also written by Smt. Hema Chand dated 13-8-1997, therefore, it cannot be said that the meeting of the board was a surprise and she had no notice of the happening in the defendant in view of the correspondence placed on record by the parties.

Having discussed in detail various submissions in the present proceedings, prima facie the plaintiff/applicant has not been in a position to make out a case for grant of injunction, whether the apprehension of the plaintiff that if the defendants are not restrained from invoking the jurisdiction of SIC A they will suffer an irreparable injury is merely a presumption on the part of the plaintiff or there is some substance in it? Section 16 in particular sub-section (4) of section 16 makes it manifestly clear that in the event of Board deeming if fit to enquire in relation to the industrial company one or more persons can be appointed as special directors for safeguarding the financial and other interests of the company and by virtue of amendment of 1994 even in the public interest one or more persons can be appointed as special directors. Therefore, the argument of the plaintiff that in the event of company going to the BIFR the assets of the company may not be safeguarded is without any force. The receiver who has been appointed by the Bombay High Court in the event of BIFR forming an opinion that company is sick pursuant to a reference under section 15 may take appropriate steps under sub-section (4) of section 16 to safeguard the assets of the company and may issue necessary orders in this regard. Even otherwise, if orders are not made by the BIFR the plaintiff has got a remedy to file an appeal before the appellate authority of BIFR and thereafter can approach High Court by way of a writ petition against the order of AIFR. Therefore, to say that BIFR is without any power in an appropriate case where the case is made out that certain orders are required to safeguard the assets of the company is not tenable. Keeping in view the serious contentions and apprehension of the plaintiff, BIFR may pass appropriate orders in this regard. The apprehension of the plaintiff is misconceived.

That brings me to the last question as to whether in the present case the defendants be restrained from invoking the jurisdiction of the BIFR on the basis of the resolution of the Board of Directors passed on 20-9-1997. I am of the considered opinion that in cases where the resolution of the Board is a result of fraud, stratagem of mala fide, that is to achieve some ulterior objects, Court will not hesitate in granting injunction, but can in the present case it could not be said that the resolution dated 20-9-1997 is a resolution resulting from a fraud or has been passed with ulterior motives? The answer is in negative on account of the fact that correspondences were exchanged between Smt. Hema Chand and defendants dated 4-12-1996, 27-12-1996, 28-5-1997, 3-6-1997 and restructuring proposal dated 21-7-1997, which have been placed on record by the parties. The letter placed on record is at page 335 of the documents. A letter was written by the defendant dated 28-5-1997 addressed to Mrs. Lalitha Gupta, Deputy Managing Director of the plaintiff. Even in the said letter it was inter alia, mentioned by the defendant that they still make presentation on restructuring proposal. Paragraph-2 of the said letter reads :—

"We had also assured you to make a presentation on restructuring proposal. We have initially prepared a proposal and we are enclosing a draft of the same for your kind perusal. However, we do realise that we do not have adequate skills within the organization to prepare a complete plan of restructuring in a manner that protects the full interest of Financial Institutions, Banks and Shareholders. We, therefore, would like to appoint a professional consultant who could prepare a detailed restructuring plan and help the Company in presenting it to the Financial Institutions. We would also be grateful if you could provide some assistance in this regard."

Then again even prior to the said letter, another letter was written by the defendant on 3-2-1997 to the plaintiff stating some of the proposals they had in view of the deteriorating financial health of the defendant. The last paragraph of the letter reads as under :—

"We are submitting the enclosed application for the consideration of ICICI, for their broad concurrence to our plan of action in which we have consciously strived not to increase the institutions/Banks exposure beyond their presently committed levels. Subject to their approval, we shall submit a detailed application for their consideration subsequently."

In view of the correspondence placed on record, it cannot be said that the resolution which was passed by the Board on 20-9-1997 was a surprise to the plaintiff. It seems as a financial institution the plaintiff was kept informed about the impending sickness of the defendant. It is too late in the day for the plaintiff to claim otherwise. As a matter of fact, instead of rushing to realise the loan amount, the plaintiff forgot that the creation of plaintiff was to generate industrial growth so as to make India industrially and economically strong nation. It was all the more important to realise that the money of the plaintiff was more safe by having the defendant company rehabilitated by restructuring the financial structure of the defendant company. Therefore, prima facie I am of the view that the resolution dated 20-9-1997 was not an act of fraud or creating stratagem to enable this Court to exercise its jurisdiction and grant injunction. In any event of the matter the financial health of the company, its sickness and the reasons for the sickness, whether the sickness is doctored or on account of change in accounting policy and whether the net worth of the company has come down on account of giving certain concessions to the sister's concern of the plaintiff all these questions can be agitated before the BIFR.

From the plain reading of section 16 it is clear that after the reference has been made to the Board by a sick company it is the Board who will make enquiry and determine whether the company has become a sick industrial company and for that purpose under sub-section (2) of section 16, the BIFR may also appoint any operating agency including the plaintiff to enquire into and make a report in relation to such sickness. Therefore, the questions which have been raised before this Court in relation to the doctoring of accounts, changing of accounting policy, etc., all can be gone into in detail by the BIFR. One has not to lose sight that the SICA has been enacted taking into consideration the contemporary industrial climate of this country. Industries are financed by financial institutions, which are specifically created for providing assistance for industrial growth and whole idea of enactment of SICA is to save the country from impending industrial sickness by devising methods of rehabilitation by evolving scheme of revival and rehabilitation and that is why BIFR is to consider remedial measures to rehabilitate such industry. This is what the Apex Court held in Maharashtra Tubes Ltd's case (supra) that:—

"... The purpose and object of this provision is clearly to await the outcome of the reference made to the BIFR for the revival and rehabilitation of the sick industrial company. The words 'or the like' which follow the words 'execution' and 'distress' are clearly intended to convey that the properties of the sick industrial company shall not be made the subject-matter of coercive action of similar quality and characteristic till the BIFR finally dispose of the reference made under section 15 of the said enactment. The Legislature has advisedly used an omnibus expression 'the like' as it could not have conceived of all possible coercive measures that may be taken against a sick undertaking….." "Now we come to the impugned decision. The High Court was considerably influenced by the fact that the appellant-company owed crores of rupees to banks and felt that so far as such creditors are concerned, different considerations may come into play but the High Court with respect failed to appreciate that the 1985 Act was enacted primarily to assist sick industrial undertakings which, inter alia, failed to meet their financial obligation. It is, therefore, difficult to accept the view of the High Court that where the creditors of a sick industrial concern happen to be banks or State Financial Corporations different considerations would come into play. It must be realised that in the modern industrial environment large industries are generally financed by banks and statutory corporations created specially for that purpose and if they are permitted to resort to independent action in total disregard of the pending inquiry under sections 15 to 19 of the 1985 Act the entire exercise under the said provisions would be rendered nugatory by the time the BIFR is able to evolve a scheme of revival or rehabilitation of the sick industrial concern by the simple device of the Financial Corporation resorting to section 29 of the 1951 Act. We are, therefore, of the opinion that where an inquiry is pending under section 16/17 or an appeal is pending under section 25 of the 1985 Act there should be cessation of the coercive activities of the type mentioned in section 22(1) to permit the BIFR to consider what remedial measures it should take with respect to the sick industrial company. The expression 'proceedings' in section 22(1), therefore, cannot be confined to legal proceedings understood in the narrow sense of proceedings in a Court of law or a legal Tribunal for attachment and sale of the debtor's property."

Prima facie the plaintiff has not been in a position to show on the basis of the documents filed on record that any fraud has been perpetrated by the defendants in passing the resolution dated 20-9-1997, in the case before me, prima facie, I do not find any merit in the submissions of the plaintiff that any fraud or a device to achieve a result with some ulterior motive has been practised by the defendants of the plaintiff. I am of the considered view that BIFR will be the right forum where the industrial sickness of the defendant company is to be determined, I decline to grant injunction as prayed for by the plaintiff. Even the balance of convenience is also in not granting the injunction. The defendant has got a statutory right to file a reference under section 15. Defendant has already filed a reference on 6-11 -1997 before BIFR under section 15. It is for BIFR to determine under section 16 the factum of industrial sickness of the defendant company.

Nothing said earlier would be an expression of opinion on the merits of this case.

For the reasons stated above I dismiss the application of the plaintiff with no orders as to costs.

Suit No. 2332 of 1997

Suit is adjourned sine die with liberty to the parties to move this Court for revival of the suit, if so advised.

Kerala High Court

COMPANIES ACT

[1995] 6 SCL 135 (KER.)

HIGH COURT OF KERALA

Mukkattukara Catholic Co. Ltd.

v.

M.V. Thomas

B.M. THULASIDAS, J.

CM. A. NO. 252 OF 1994

AUGUST 23, 1995

Section 283, read with sections 299 and 300 of Companies Act, 1956 - Directors - Vacation of office - Case of plaintiff before sub-court and respondents in the instant appeal was that Chairman and other two directors of company (appellants) had vacated their offices in view of section 283 for non-disclosure of their interest under section 299 in matter of registration of transfer of shares which was decided in board's meeting held on 9-6-1994, and by participating in proceedings held on 9-6-1994 - It was further alleged that at said board's meeting, only 4 out of 7 members attended which did not constitute required quorum and, therefore, decisions taken in said meeting were invalid - Allegations were denied by company and it was contended that decisions taken were of usual nature and that no contract or arrangement had been entered into by or on behalf of company - Whether, assuming that in matter of registration of transfer of shares, Chairman and two directors were in some manner interested which they did not disclose, it could not be said that they had incurred a disqualification and must be held to have vacated their office as directors - Held, yes - Whether, therefore, appellants could not be restrained from taking steps to implement decisions taken at board's meeting held on 9-6-1994-Held, yes

Words and phrases - 'Interest' occurring in sections 299 and 300 of the Companies Act, 1956

FACTS

The first appellant was a public limited company, and the second appellant was the Chairman and the other three were members of the board of directors. The respondents/plaintiffs filed the suit in the sub-court (a) to declare that the meetings of the board of the company held on 9-6-1994, 26-6-1994 and subsequently till 26-7-1994 were illegal and invalid and the decisions taken at those meetings were ultra vires, void and non est in the eye of law, and (b) to declare that the appellants 2 to 4 had vacated their office as directors by force of section 283 and to injunct them and the Company from taking any measures for the implementation of the decisions taken at the above meetings and for other consequential reliefs. It was alleged that at the meeting held on 9-6-1994 only 4 out of 7 members attended which did not constitute the required quorum and, therefore, the decisions taken at the meeting were invalid. It was further alleged that in the notice relating to the said meeting, no reference to the subject of allotment of shares to the close relations of the chairman and other two directors was made and they had also not disclosed their interest in the matter. In the notice for meeting held on 26-7-1994 also no reference was made to the subject of holding the meeting. It was, therefore, urged that the appellants 2 to 4 (chairman and members of the board) had automatically vacated their offices in view of the provisions under section 283, read with sections 299 and 300, for non-disclosure of their interest in the share transaction and by participating in the proceedings held on 9-6-1994. The allegations were denied by the company and it was contended that decisions taken were of usual nature that pertained to registration of transfer of shares, which was a statutory obligation of the company under section 111 and that no contract or arrangement had been entered into by or on behalf of the company. It was further stated that the directors were not interested in the transfer of shares and no disqualification as alleged had been incurred. But the Sub-Court overruled the contentions and passed the impugned order restraining the appellants from taking steps to implement the decisions taken at the said board meetings.

On appeal:

HELD

Indeed the allegations as to the purchase/allotment of shares was not entirely warranted in view of 'the schedule of the resolution for registering transfer of shares' considered at the board meeting held on 9-6-1994. It would show that only in respect of items 1 to 5 the 4th appellant was interested. But he did not participate in the deliberations. In respect of the other transactions discussed at the meeting, the directors had no interest and this had been duly recorded. Thus, the general allegation that the shares were transferred in the names of close relations of the appellants, who were 'interested directors prima facie was unjustified.

Assuming that in the matter of registration of the transfer of shares, appellants 2 to 4 were in some manner or sense involved or interested which they did not disclose, could it be said that they had incurred a disqualification and must be held to have vacated their office as directors, was the question that had to be considered. No doubt, the office of a director would become vacant if he has acted in contravention of section 299. The word 'interest' occurring in sections 299 and 300 means personal interest and not official or other interest. But it is not limited to financial interest only and may include interest arising out of fiduciary duties or closeness of relationship. In other words, the interest should be an 'interest' conflicting with duty as director. There may be conflict of interests or of duties, where a director has some interest in a contract or arrangement entered into by the company or on its behalf. He cannot at the same time protect his interest as also of the company. Section 300 does not cover a case of registration of transfer of shares where the company only performs its statutory function and is limited to contract or arrangements by or on its behalf. Under section 110, an application for registration of transfer of shares or other interest of a member of a company may be made.

Remedies are provided against the refusal under the sub-clauses of that section but in that exercise by the company, no element of contract or arrangement within the meaning of section 300 is involved, with respect to which there can be an 'interested director' in the sense in which the expression can be understood under the Act. In this context, section 301 is relevant and sub-section (2) thereof provides that particulars of such contract or arrangement to which section 297 or, as the case may be, section 299(2) applies, shall be entered in the relevant register. Under sub-section (3) the register aforesaid shall also specify, in relation to each director of the company, the names of the firms and bodies corporate of which notice has been given by him under section 299(3).

Following the decision in Shailesh Harilal Shah v. Madhushree Textiles Ltd. AIR 1994 Bom. 20, in the instant case, it was to be held that the decision taken to accord sanction for the transfer of shares in the names of relations of the fourth appellant did not attract the mischief of section 299 to result in either his disqualification or that of appellants 2 and 3. The contentions raised in that behalf were, therefore, untenable. Indeed, there was the required quorum of 3 directors when the impugned decision was taken. The court below had gone wrong in its conclusions. Accordingly, the impugned order was to be set aside.

CASES REFERRED TO

Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd. [1971] 41 Comp. Cas. 377 (Bom.), Avanthi Explosives P. Ltd. v. Principal Sub Ordinate Judge [1987] 62 Comp. Cas. 301 (AP), Narayandas Shreeram Somani v. Sangli Bank Ltd. AIR 1966 SC 170, Shailesh Harilal Shah v. Madhushree Textiles Ltd. AIR 1994 Bom. 20 and Public Prosecutor v. T.P. Khaitan AIR 1957 Mad. 4.

C.N. Ramachandran Nair and Antony Dominic for the Applicant. George Cherian and Jacob Mathew K. for the Respondent.

JUDGMENT

1. Defendants 1 to 5 in O.S. No. 952 of 1994, who are also respondents 1 to 5 in LA. No. 4552 of 1994 of the Sub-Court, Trissur, are the appellants. The first appellant is a public limited company, the second appellant is the Chairman and the others are members of the Board of Directors. The respondents/plaintiffs filed the suit (a) to declare that the meetings of the Board of Directors of the first defendant company held on 9-6-1994, 26-6-1994 and subsequently till 26-7-1994 are illegal and invalid and the decisions taken at those meetings are ultra vires, void and non est in the eye of law, and (b) to declare that the appellants 2 to 4 have vacated their office as directors by force of section 283 of the Companies Act, 1956 ('the Act') and to injunct them and the 5th appellant from taking any measures for the implementation of the decisions taken at the above meetings and for other consequential reliefs. By the above LA. they sought to restrain the appellants from taking steps on the basis of the proceedings and in pursuance of the decisions taken at the Board meetings held on 9-6-1994 and 26-6-1994, including the convening of the general body meeting of the company stated to be held on 27-8-1994. It was alleged that at the meeting of the Board of Directors held on 9-6-1994, only 4 out of 7 members attended, which did not constitute the required quorum and, therefore, the decisions taken at the meetings are invalid. In particular, it was alleged that in the notice relating to the Board meeting for 9-6-1994 no reference to the subject of allotment of shares to the close relations of the Chairman and two other Directors was made, that they had also not disclosed their interest in the matter, which was clandestinely arranged with ulterior motives and against the larger interest of the company. In the notice for the meeting held on 26-7-1994 no reference was also made to the subject of holding the annual general meeting, about which they came to know only from the advertisement that appeared in the 'Deepika'. It was urged that appellants 2 to 4 had automatically vacated their office in view of the provisions under section 283 read with sections 299 and 300 of the Act for non-disclosure of their interest in the share transactions and by participating in the proceedings held on 9-6-1994.

2. The allegations were denied in the counter-affidavit filed on behalf of the first defendant, where it was contended that the meeting held on 9-6-1994 was attended by all the 7 members, that the respondents, who are members of the Board declined to sign the minutes and the same had been recorded, that the decisions taken were of usual nature that pertained to registration of transfer of shares, which is a statutory obligation of the company under section 111 of the Act. No contract or arrangement had been entered into by or on behalf of the company. It was further stated that the Directors are not interested in the transfer of shares and no disqualification as alleged had been incurred. It was submitted that the suit and the petition are misconceived. But then the court below overruled the contentions and passed the impugned order by which the appellants have been restrained from taking steps to implement the decisions taken at the Board meetings held on 9-6-1994 and 26-6-1994 and were also further interdicted from convening the annual general meeting pending disposal of the suit. It was submitted that the order is illegal and deserves to be set aside.

3. Heard.

4. Indeed, against the 5th appellant nothing had been said. He was not involved in the transactions impugned by the respondents, whose complaint is only against appellants 2 to 4. Indeed, the allegations as to the purchase/allotment of shares is not entirely warranted in view of Annexure A, which is a copy of the schedule of the resolution for registering transfer of shares considered at the Board meeting held on 9-6-1994. It would show that only in respect of items 1 to 5 the 4th appellant was interested. But he did not participate in the deliberations. In respect of the other transactions discussed at the meeting, the Directors had no interest and this had been duly recorded. The general allegation that the shares held by Alukka Jose and others were transferred in the names of close relations of the appellants, who were 'interested directors' prima facie seems to be unjustified.

5. Assuming that in the matter of registration of the transfer of shares held by Alukka Jose, appellants 2 to 4 were in some manner or sense involved or interested which they did not disclose, could it be said that they had incurred a disqualification and must be held to have vacated its office as Directors, is the question that has now to be considered. No doubt, the office of a Director would become vacant if he has acted in contravention of section 299 under which:

"299. Disclosure of interest by director.—(1) Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of Directors."

Under section 300 of the Act,—

"Interested director not to participate or vote in Board's proceedings.—No director of a company shall, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement; nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote; and if he does vote, his vote shall be void."

The word 'interest' means personal interest and not official or other interest. But it is "not limited to financial interest only and may include interest arising out of fiduciary duties or closeness of relationship". In other words, the 'interest' shall be an 'interest' conflicting with duty as a director.

6. As held in Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd. [1971] 41 Comp. Cas. 377 (Bom.):

"This is not a technical or arbitrary rule but a rule founded upon the highest and truest participles of morality. This rule applies not only when there is a conflict of interest or conflict of interest and duty but also where there is a conflict of two duties. It is immaterial whether the interest is a personal interest or arises out of a fiduciary capacity or whether the duty which is owed is in a fiduciary capacity. Actual conflict is also not necessary. A possibility of conflict is enough. Nor does the application of the rule depend upon the extent of the adverse interest. The interest or concern need not be direct; it may be indirect. Section 300(1) is not a disqualifying section; it is a prohibitory section. The object intended to be attained by the enactment of such prohibition is to prevent the conflict between interest and duty which might otherwise inevitably arise. The rule is one of principle which depends not at all on any corrupt mens rea in the mind of the person holding the conflicting capacities. The rule extends to all manner of relationships.

... The prohibitions contained in section 300(1) of the Companies Act, 1956, are prescribed in public interest and policy to safeguard the interest of the shareholders." (p. 377)

In Avanthi Explosives (P.) Ltd. v. Principal Subordinate Judge [1987] 62 Comp. Cas. 301 (AP), it was held:

"The obligation of a director to disclose his interest in a contract entered into or to be entered into is an obligation similar to that of a trustee. The directors are in the position of trustees according to common law and they have a fiduciary relation towards the shareholders. It is well known that the trustees will become disqualified if they have any interest adverse to that of the beneficiaries and that they have to account for any secret profit made by them. The provisions of section 283(1)(i) of the Companies Act, 1956, are, therefore, mainly a re-enactment of the obligations of a trustee arising out of common law." (p. 302)

In Narayandas Shreeram Somani v. Sangli Bank Ltd. AIR 1966 SC 170, it was held:

"A director of a company stands in a fiduciary position towards the company and is bound to protect its interest. He must not place himself in a position in which his personal interest conflicts with his duty. He must not vote as a director or any contract or arrangement in which he is directly or indirectly interested, unless authorised by the company's articles. Standard articles give effect to this rule of equity. In case he votes in such a case, his vote would not be counted. His presence would not count towards the quorum, that is to say, the minimum number fixed for the transaction of business by a Board meeting. A quorum must be a disinterested quorum……." (p. 170)

7. There may be conflict of interests or of duties, where a director has some interest in a contract or arrangement entered into by the company or on its behalf. He cannot at the same time protect his interest as also of the company. As I understand, section 300 does not cover a case of registration of transfer of shares where the company only performs its statutory function, and is limited to contract or arrangements by or on its behalf. Under section 110 an application for registration of transfer of shares or other interest of a member of a company may be made.

Under sub-section (2),—

"(2) Where the application is made by the transferor and relates to partly paid shares, the transfer shall not be registered, unless the company gives notice of the application to the transferee and the transferee makes no objection to the transfer within two weeks from the receipt of the notice."

Under section 111,—

"111. Power to refuse registration and appeal against refusal—(1) If a company refuses, whether in pursuance of any power of the company under its articles or otherwise, to register the transfer of, or the transmission by operation of law of the right to, any shares or interest of a member in, or debentures of, the company, it shall, within two months from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferee and the transferor or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal."

Remedies are provided against the refusal under the other sub-clauses of that section, with which we are not concerned. What is important is that in that exercise by the company, no element of contract or arrangement within the meaning of section 300 is involved, with respect to which there can be an 'interested director' in the sense in which the expression can be understood under the Act. In this context section 301 of the Act is relevant, and it provides:

"301. Register of contracts, companies and firms in which Directors are interested—(1) Every company shall keep one or more registers in which shall be entered separately particulars of all contracts or arrangements to which section 297 or section 299 applies, including the following particulars to the extent they are applicable in each case, namely:—

(a) the date of the contract or arrangement;

(b) the names of the parties thereto;

(c) the principal terms and conditions thereof;

(d) in the case of a contract to which section 297 applies or in the case of a contract or arrangement to which sub-section (2) of section 299 applies, the date on which it was placed before the Board;

(e) the names of the directors voting for and against the contract or arrangement and the names of those remaining neutral."

By sub-section (2) particulars of such contracts or arrangements to which section 297 or, as the case may be, sub-section (2) of section 299 applies, shall be entered in the relevant register. Under sub-section (3) the register aforesaid shall also specify, in relation to each director of the company, the names of the firms and bodies corporate of which notice has been given by him under sub-section (3) of section 299. Sub-section (3A) provides, that—

"Nothing in sub-sections (1), (2) and (3) shall apply—

(a) to any contract or arrangement for the sale, purchase or supply of any goods, materials or services if the value of such goods and materials or the cost of such services does not exceed one thousand rupees in the aggregate in any year; or

(b) to any contract or arrangement (to which section 297 or, as the case may be, section 299 applies) by banking company for the collection of bills in the ordinary course of its business or to any transaction referred to in clause (c) of sub-section (2) of section 297."

Sub-section (4) provides for the consequence of default.

8. The facts in Shailesh Harilal Shah v. Madhushree Textiles Ltd. AIR 1994 Bom. 20, are these:

"2. The plaintiffs complained that the 8th annual general meeting convened on September 30, 1991 was proposed to be held beyond the statutory period contemplated under section 166 of the Act and, therefore, the company is not entitled to call meeting unless appropriate orders are obtained from appropriate forum seeking extension of time. The plaintiffs further claimed that notice dated September 2, 1991 and which was deemed to have been served on September 9, 1991 for convening the meeting on September 30, 1991 does not comply with the requirement of section 171 of the Act as the duration of notice is less than 21 clear days. The plaintiffs further claimed that defendant No. 2 Santoshkumar Poddar ceased to be the Director of the Company as from January 1, 1991 and his appointment as Additional Director pursuant to the resolution of the Board of Directors was bad in law. The plaintiffs claimed that on retirement of defendant No. 2, the Board was not properly constituted as the minimum number of Directors required is 3 in number. The plaintiffs further claimed that the quorum required was two and defendant Nos. 2 and 3 being real brothers and closely related, it was not open for defendant No. 3 to participate in the meeting for appointment of defendant No. 2. The plaintiffs claimed that the resolution appointing defendant No. 2 as additional Director was vitiated as there was no quorum required by the Act. The plaintiffs further claimed that if the appointment of defendant No. 2 was illegal and bad, the notice convening annual general meeting signed by defendant No. 2 is bad in law and inoperative. The plaintiffs further claimed that the company had deliberately circulated an abridged balance sheet so as to cover up the acts of misconduct, misfeasance and malfeasance indulged by defendants Nos. 2 to 4. The plaintiffs claimed that the perusal of the Auditor's report and Notes on accounts makes it very clear that the substratum of defendant No. 1 has disappeared and defendants Nos. 2 to 4 are mismanaging the company." (p. 22)

Another suit was also instituted in respect of the 9th annual general meeting, on grounds set out in the earlier suit. The contentions were considered in detail in the light of the relevant legal precedents and the learned Judges has held:

"... The Director is treated as an agent or a trustee by operation of law and not because the company or shareholders have entered into contractual relationship with the person proposed to be appointed as a Director. We arc in agreement with the view expressed by the learned single Judge of Madras High Court that the appointment of additional Director does not amount to a contract as contemplated by section 300(1) of the Act...." (p. 27)

They agreed with Rajagopala Ayyangar, J. in Public Prosecutor v. T.P. Khaitan AIR 1957 Mad. 4, and observed:

"... that the arrangement within the meaning of section must receive the interpretation that it must be of such a nature as would arise in the case of personal pecuniary nature in the context of the company is accurate and the expression 'arrangement' must bear the meaning of it as in sections 209 and 301 of the Act. Section 301 demands that every company shall keep one or more registers in which shall be entered separately particulars of all contracts or arrangements and the particulars to be entered are the date of the contract or arrangement, the names of the parties thereto, the principal terms and conditions thereof, etc. It is impossible to accept that the appointment of the director amounts to an arrangement and it is required to be entered in the Register maintained by the company under section 301 of the Act...." (p. 27)

It was further held:

"... what section 300(1) prescribes is a contractual arrangement entered into by or on behalf of the company and it is impossible to suggest that the appointment of additional Director is by and on behalf of the company. The section postulates that the contract or arrangement is by the company or on behalf of the company and that means that the company is one of the contracting party or party to the arrangement. The company is not a party for making appointment of a person as director, nor the appointment is on behalf of company. To accept the submission that the appointment of Additional Director amounts to contract or arrangement, it would be necessary to conclude that such a contract or arrangement is by or on behalf of the company, and it is not possible to do so. In our judgment, the contention that defendant No. 3 could not have participated in discussion or vote on the resolution to appoint defendant No. 2 as additional Director in view of prohibition of section 300(1), therefore, cannot be accepted." (p. 27)

9. In my view, the statement of law is unexceptionable and I am in respectful agreement with the same. The decision taken to accord sanction for the transfer of shares in the names of relations of the fourth appellant did not attract the mischief of section 299 to result in either his disqualification or of appellants 2 and 3. The contentions raised in this behalf in my view are untenable. Indeed, there was the required quorum of 3 directors when the impugned decision was taken. The court below has gone wrong in its conclusions. I am unable to sustain the impugned order and it is accordingly set aside. LA. No. 4552 of 1994 shall stand dismissed.

The civil miscellaneous appeal is allowed.

[1957] 27 COMP. CAS. 77 (MAD.)

HIGH COURT OF MADRAS

Public Prosecutor

V.

T. P. Khaitan

RAJAGOPALA AYYANGAR, J.

Criminal Appeal Nos. 307 to 309 of 1956

AUGUST 22, 1956

RAJAGOPALA AYYANGAR, J. - These three appeals by the Public Prosecutor raise consideration the proper interpretation of section 91(B) (1) of the Indian Companies Act, 1913. The Magistrate before whom the accused in the several appeal were charged has held that there was no contravention of the provisions of this section and has by his judgment dated 30th January, 1956, acquitted the accused. It is from this order of acquittal that these appeals have been preferred. The learned Advocate-General appearing for the appellant urged that he desired to have a considered decision on the construction of the provision I have mentioned above, but as I was clearly of the opinion that the decision of the learned Magistrate was correct, I did not think it necessary to issue notice to the accused under section 422 of the Criminal Procedure Code.

The facts which have given rise to these proceedings are as follows : Messrs. Oakley Bowden and Co. (Madras) Ltd., is a public company registered under the Indian Companies Act. It is managed by a board of three directors and under the articles of the company the board acts either at meetings or by resolutions passed by circulation.

On 2nd June, 1953, the board of directors which then consisted of T. P. Khaitan, V. S. Krishnaswami and V. S. Bhasin passed by circulation the following resolution :

"Resolved that the Chartered Bank of India, Australia and China, Madras, the Imperial Bank of India, Madras, the National Bank Ltd., Madras, the Indian Bank Ltd., Madras, and the Eastern Bank Ltd., Madras and Bombay, be and are hereby empowered, whether the company's account is in credit or overdrawn, to honor cheques, bills of exchange, and promissory notes, drawn, accepted or made on behalf of the company, by any one of the two gentlemen : 1. Sri T. P. Khaitan 2. Sri V. S. Krishnaswami and act on any instructions and accept any receipts or other documents relating to the account transactions or affairs of the company, if so signed on behalf of the company."

All the three directors including the two named in the resolution signed in the minutes in token of the resolution being passed. On 22nd February, 1954, this resolution dated 2nd June, 1953, was cancelled and instead of the two directors named in the earlier resolution, one A. M. Khaitan, who was appointed to act on behalf of the company and on behalf of its managing agents, was directed to operate on these accounts. By another resolution passed by circulation on 22nd February, 1954, V. S. Krishnaswami was instructed to communicate A. M. Khaitain's appointment to the respective banks. I need only mention that the resolution of 22nd February, 1954, which was also passed by circulation was signed by T. P. Khaitan and V. S. Krishnaswami.

The Registrar of Joint Stock Companies filed the prosecutions C. C. Nos. 11913 to 11915 of 1955 complaining that the resolution dated 2nd June, 1953, and the two resolutions dated 22^nd. February, 1954, were in contravention of section 91(B)(1) of the Indian Companies Act, bringing the concerned directors, T. P. Khaitan and V. S. Krishnaswami within the mischief of section 91 B(2). The resolution dated 2nd June, 1953, was the subject of complaint in C. C. No. 11913 of 1955 from which Criminal Appeal No. 307 of 1956 has been filed, while the resolution dated 22nd February, 1954, canceling the resolution dated 2nd June, 1953, formed the basis of the complaint in C. C. Bo. 11914 from which the Criminal Appeal No. 308 of 1956 arises and the resolution authorising V. S. Krishnaswami to communicate the resolution dated 22nd February, 1954, to the banks was the subject of complaint in C.C. No. 11915 of 1955 which has led to Criminal Appeal No. 309 of 1956. T.P.Khaitan and Krishnaswami are the accused in C. C. Nos. 11913 and 11915 of 1955 while V. S. Krishnaswami who was instructed to communicate the resolution dated 22nd February, 1954 to the banks is the sole accused in C.C.No.11914 of 1955.

Section 91B which is said to have been contravened by the accused in the present case runs:

"91B(I) No director shall, as a director, vote on any contract or arrangement in which he is either directly or indirectly concerned or interested nor shall his presence count for the purpose of forming a quorum at the time of any such vote; and if he does so vote, his vote shall not be counted:

Provided that the directors or any of them may vote on any contract of indemnity against any loss which they or any one or more of them may suffer by reason of becoming or being sureties or surety for the company.

(2) Every director who contravenes the provisions of sub-section (1) shall be liable to a fine not exceeding one thousand rupees.

(3) This section shall not apply to a private company :

Provided that where a private company is a subsidiary company of a public company, this section shall apply to all contracts or arrangements made on behalf of the subsidiary company with any person other than the holding company."

The basis of the prosecution was that the accused as directors voted on a contract or arrangement in which he or they was or were either directly or indirectly concerned or interested and that they had thereby contravened the provisions of sub-section (1) so as to bring them within the penal consequence enacted by sub-section (2). Before dealing with the meaning of the expression "contract or arrangement in which he is either directly or indirectly concerned or interested" in sub-section (1), it might be useful to refer to the terms of section 91A, which also refers to "an interest on the part of the directors in a contract or arrangement with the company."

"91A, (a) Every director who is directly or indirectly concerned or 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 :

Provided that a general notice that a director is a director or a member of any specified company or is a member of any specified firm, and is to be regarded as interested in any subsequent transaction with such firm or company, shall as regards any such transaction be sufficient disclosure within the meaning of this sub-section and after such general notice, it shall not be necessary to give any special notice relating to any particular transaction which such firm or company.

(2) Every director who contravenes the provisions of sub-section (1) shall be liable to a fine not exceeding one thousand rupees.

(3) A register shall be kept by the company in which shall be entered particulars of all contracts or arrangements to which sub-section (1) applies, and which shall be open to inspection by any member of the company at the registered office of the company during business hours.

(4) Every officer of the company who knowingly and wilfully acts in contravention of the provisions of sub-section (3) shall be liable to a fine not exceeding five hundred rupees."

It must be clear from the collocation of the two sections that the contract or arrangement dealt with in the two provisions must be identical. While section 91A enjoins an obligation on the director who is interested in a contract or arrangement entered into by the company to disclose his interest to the other directors and imposes penalties for not disclosing his interests, section 91B is designed to prevent such interested director from voting on these resolutions.

Thus the nature of the contract or arrangement as well as the nature of the concern or interest of the director dealt with in section 91B must both be obviously of the same nature as that envisaged by the identical words in section 91A. So far as the latter section is concerned, it does not need much argument to establish that it is designed to ensure that a director who is in a fiduciary position to the company does not make any secret profit on account of the transactions or business of the company while acting on its behalf. As was stated in Northwest Transportation Co. v. Beatty a director is precluded from dealing on behalf of the company with himself entering into engagements in which he has a personal interest conflicting or which possibly makes conflicts with the interests of those whom he is bound by fiduciary duties to protect and this rule is as applicable to the case of one of several directors as to a managing or a sole director." The object of the statutory provision in section 91A was to secure that there shall be no conflict between the personal interest of each of the directors and their duty towards the company without the nature of that interest being disclosed to the directors and the shareholders. When there is a possibility of such a conflict, by a director having personal interest in any contract or arrangement entered into by the company, section 91A provides for its disclosure to the other directors so that the company would have the advantage of the unbiased and informed judgments of the other directors as to whether in the interests of the company such a transaction need be entered into or not. Sub-section (3) of section 91A, which was introduced by the Companies Amendments Act, 1936, makes provision for this information becoming available to shareholders by requiring this matter to be entered in a register, so that even they might be kept informed of the personal interest of the directors in any contract entered into on behalf of the company. Thus the general rule of law that directors shall not make a profit out of the contracts by the company without the knowledge of the co-directors and the shareholders is statutorily enforced and if there is a violation besides the common law obligation to account to the company for these profits, there is a penalty super-imposed by section 91A(2).

In the case of the resolutions now said to be contraventions of section 91B(I) it is not the case of the prosecution that these resolutions involved any contract in which the accused-directors were directly or indirectly concerned or interested but their case was that they involved an arrangement in which there was such concern or interest. I am clearly of the opinion that the prosecution was misconceived and that the resolutions do not fall under section 91B(I) at all are merely acts of delegation in the normal course of the management of the company.

The main provisions of sections 91A and 91B which were introduced by an Amending Act, XI of 1914, have had a previous history. By section 29 of the Companies Clauses Act (7 and 8 Vic.,C. IIO) directors of the companies included in that enactment were precluded from voting or acting as directors on the subject of any contract proposed to be made by or on behalf of the company in which they were interested and any contract with certain exceptions in which any director was interested was of no effect until confirmed by the shareholders at the next or general meeting. The decisions rendered on section 29 of the Companies Clauses Act, 1845, are collected by Lindley in his treatise on "Companies", 6th Edition, Volume I, at page 450, note (y). An examination of these would show that the arrangement hit at by the provision was one in which the director had a personal interest conflicting with his duties towards the company and not one which merely provided for his management of the company.

There was no statutory provision corresponding to this section 29 in the English Companies Act of 1862. In equity, however, the same principle namely that a transaction in which a director purporting to act on behalf of the company has in fact been dealing with himself as an individual could not stand if his interest conflicted with that of the company has in fact been dealing with himself as an individual could not stand if his interest conflicted with that of the company applied to the cases of companies incorporated under the English Companies Act, 1862. The same principle was, however, not recognised at law. But this ceased to be of any consequence after the Judicature Act, 1875. The principle of this statutory provision was, though somewhat inadequately, sought to be achieved by provisions in the articles of the several of the companies registered under the earlier English Companies Act; particularly as the rules of the Stock Exchange, London, required that in the case of company requiring a quotation, the articles must provide that a director shall not vote on any contract in which he is interested and that if he does so, his vote shall not be counted. In the English Companies Act, 1948, section 199, which re-enacted section I49 of the Companies Act, 1929, provides : "It shall be the duty of a director of a company who is in any way directly or indirectly interested in a contract or a proposed contract with the company to declare the nature of his interest at a meeting of the directors of the company" and the directors who failed to comply with the provisions of the section were made liable to a fine of not exceeding $100. In line with this article 84 of Table A provides: "A director who is in any way directly or indirectly interested in a contract or a proposed contract to the company shall declare the nature of his interest at a meeting of the directors in accordance with section 199. (2) A director shall not vote in respect of any contract or arrangement in which he is interested and if he shall do so, his vote shall not be counted; nor shall he be counted in the quorum present at the meeting but neither of these prohibition shall apply to..." (then follows the description of the arrangements not relevant to the present context)

These provisions have to be read in the light of the fundamental principle of company law that the directors are the body entrusted with the task of carrying on the business of the company. This is provided for by article 71 of the Indian Companies Act, which is deemed to be part of the articles of every company under section 17(2) of the Act. Though the directors as a body are responsible to the shareholders for the conduct of the company's business, it is undoubted law that they could delegate their power to one or more of themselves for the purpose of carrying it on more conveniently. Thus in the present case if the resolutions which are now charged as offences were not speed, the result would only be that the bank account would have to be opened in the names of all the directors and to be operated by all of them. If this had been done by a resolution it could not be said that by opening the account in the bank in their names the directors had violated either section 91A or section 91B for if this constituted a violation of section 91A or 91B, it would be apparent that the company cannot open a banking account at all, which would show the absurdity of that position. If a resolution of the board of directors authorising that body to open a banking account and each one of the directors to operate on the account so opened is not a contravention of section 91A or 91B, it will be so because the directors are not personally interested in the management as distinct from their interest in it as directors of the company. If the interests of the directors as such were to be hit at by the sections, the management of companies by the board of directors would become impossible and the work of every company would be at a standstill. If it is borne in mind that the purpose of the sections it the avoidance of conflicts between duty and interest it would be apparent that the carrying on of the business of the company for which the directors are appointed cannot give rise to that conflict. PETERSON J. had to consider a similar question in Foster v. Foster1. Article 93 of a company provided that a director might contract with the company but prohibited a director from voting in respect of any contract in which he was interested and under article 99 the directors "may from time to time appoint any one or more of their body to be managing director or directors, for such period, at such remuneration, and upon such terms as the directors think fit." One Mrs. Foster who was one of the board of directors was appointed as chairman and joint managing director of the company without remuneration. The resolution appointing her to this office was passed at a remuneration. The resolution appointing her to this office was passed at a meeting of the board at which she was present and in which she voted and the validity of those appointments were challenged on the ground of contravention of article 93. PETERSON J. rejected this contention by saying :

"the appointment by the directors of one of their body as chairman, or the appointment by the directors of one of their number as a managing director, without more, is not a contract within article 93, but is merely a delegation of their powers and is very similar to the power which they posses to appoint committees of themselves and delegate their powers to those committees. In my judgment, therefore, the appointments in question were not contracts within article 93, and therefore Mrs. Foster was not disabled from voting in support of the resolution."

Illustrations of a similar construction of statutes designed for like purpose as sections 91A and 91B of the Indian Companies Act are numerous and I would refer only to two of them. Nutton v. Wilson was concerned with the construction of rule 64, Schedule II of the Public Health Act, I875, which provided that a member of a local board who was in any manner concerned in any bargain or contract entered into by such board shall cease to be such member and his office as such shall thereupon become vacant and rule 70 imposed a penalty on a person "who acts as such member when disabled from acting by any provision of the Act." A. L. SMITH J. imposed on a defendant who was a member of a local board penalties under rule 70 for being concerned in a contract with another person whose contract with the board had been accepted on a resolution moved by the defendant. The Court of Appeal dismissed the defendant's appeal and LINDLEY L.J. after pointing out that the expression "in any manner concerned" was of fairly wide import said : "To interpret words of this kind, which have no very definite meaning and which perhaps were purposely employed for that very reason, we must look at the object to be attained. The object obviously was to prevent the conflict between interest and duty that might otherwise inevitably arise."

LOPES J. said : "It seems to me that if we held the contrary, it would be letting in the very mischief which the Act intended to prevent, and subjecting the members of local boards to the class of temptations which it was intended to remove."

Barnacle v. Clark 2 arose under section 34 of the Elementary Education Act, 1870, which provided that a member of a school board who "shall in any way share or be concerned in the profits of any bargain or contract with or any work done under the authority of such school board" was liable to a penalty and his office became vacant. The respondent, a member of a school board, sold sand and gravel to a builder who had entered into a contract with the board for the building of a school knowing at the time of his sale that these materials were intended to be used in the building of the school. RIDLEY and DARLING JJ. held that the respondent had contravened the provisions. The learned judges referred to Nutton v. Wilson 1, and stated that these provisions were intended to ensure that members of public bodies "shall be free from any suspicion of deriving profit, directly or indirectly, by reason of the position they hold."

If this was the object of the enactment, it follows that the mere carrying out the duties of a director would not amount to "being concerned in any contract or arrangement" within section 91A or 91B of the Indian Companies Act. In this connection I will only repeat that the expression "interest in an arrangement", though somewhat elastic, must in the context receive the interpretation that it must be of such a nature as to involve a conflict between interest and duty of the same type as would arise in the case of personal interest in the contracts of the company. In both these situation, what is aimed at is the avoidance of a director who has a personal interest in a transaction of the company from getting the board of directors to agree to it without informing the co-directors of his interest and by taking part in the voting.

It is this conflict between the personal or self interest of the director and his duty to the company to render independent and unbiased advice, that is the mischief, which these provisions are intended to remedy. Viewed thus it would be clear that in the present case the resolutions of the board constitute but a delegation of the power of the board to certain of their members and there is no element of personal interest involved in it so as to give room for any conflict between interest and duty; and therefore no violation of section 91B.

The order of the Magistrate acquitting the accused in these three prosecutions are therefore correct and the appeals are rejected under section 421 of the Criminal Procedure Code.

Appeals dismissed.

[1970] 40 COMP. CAS. 1131 (KER)

HIGH COURT OF KERALA

M. O. Varghese

v.

Thomas Stephen & Co. Ltd.

M. U. ISAAC, J.

COMPANY PETITION NO. 18 OF 1969

JUNE 29, 1970

G. Viswanatha Iyer for the petitioner.

P. K. Kurien, K. A. Nayar, V. Desikan, P. Raman Menon for the respondent.

S. Subramania Iyer for the managing director of the company.

T. N. Subramania Iyer and S. Narayanan Poti for a director of the company.

JUDGMENT

ISAAC, J.—The petitioner is a director of Thomas Stephen & Co. Ltd., which is a public company governed by the Companies Act, 1956. He has been a director of this company continuously for the past more than 18 years, by virtue of re-election from time to time. He was last elected as director in August, 1968. The petitioner's father, Shri P. Oommen, was carrying on a business under the style of P. Oommen & Sons. In the course of that business Shri Oommen was buying goods from the company. There was an arrangement between them, under which the company had allowed sales on credit to Shri Oommen. He died in 1960 ; and his business devolved on his wife and sons, including the petitioner, as co-owners. The business has been continued ; and it is being carried on by the elder brother of the petitioner. The arrangement with the company for supply of goods on credit has also been continued ; and it is still in existence. The company was inspected in March, 1969, by the Inspection Directorate of the Company Law Board. The Registrar of Companies, by his letter, exhibit P-1, dated September 3, 1969, wrote to the company bringing to its notice certain irregularities discovered during the said inspection, and instructing it to take necessary steps to rectify them. Exhibit P-1 stated, among other things, that the petitioner had not disclosed to the board of directors of the company as required by section 299 of the Act his interest in a firm with which the company was having transaction, and that the petitioner had consequently ceased to be a director under section 283(1)(i) from the date of occurrence of the contravention. Exhibit P-1 also required the company to notify immediately the cessation of directorship of the petitioner and to recover from him all remuneration drawn by him since the date of contravention. The company was further asked to take similar action against other directors who had contravened section 299 of the Act. The petitioner apprehended that proceedings would be taken against him pursuant to the directions contained in exhibit P-1 ; and he has filed this petition under section 633(2) of the Act, (a) for a declaration that he has not contravened the provisions of section 299 and (b) to relieve him from the liabilities that may arise consequent on such contravention, if the declaration sought for cannot be granted.

The petitioner states that the arrangement that his father had with the company in respect of the business, P. Oommen & Sons, and his interest therein as co-owner after his father's death are well-known to all the directors of the company, that the petitioner was not attending to the said business, that the fact that he has such an interest therein has been recorded in the minutes of the board of directors dated August 31, 1968, and April 7, 1969, that these disclosures would satisfy the requirements of section 299 of the Act, and that he has not intentionally failed to disclose about any transaction with the company.

The company has filed a counter-affidavit which does not support or oppose the petitioner. It states, among other things, that the vacation of office of directorship by the petitioner and other directors for contravention of section 299(1) of the Companies Act has been notified to the Registrar of Companies under section 303(2) as required in the Registrar's letter, exhibit P-1. The Registrar of Companies has joined issue with the petitioner. He has filed an affidavit stating that the first meeting of the board of directors during the financial year ending December 31, 1969, was held on January 9, 1969, that the petitioner should have disclosed his interest in the business of P. Oommen & Sons at that meeting, that the alleged disclosure at the meeting of the board held on April 7, 1969, does not comply with the requirements of section 299, that the petitioner cannot escape the statutory consequence of ceasing to be a director on account of the said default, and that, on the facts and circumstances of the case, the petitioner does not deserve to be excused in respect of the said default, or relieved wholly or partly from the liabilities arising therefrom.

This case raises some interesting questions. The first is whether the petitioner is entitled under section 633 of the Companies Act to the declaration prayed for by him, namely, that he has not contravened the provisions of section 299(1). I shall read section 633 :

"633. (1) If in any proceeding for negligence, default, breach of duty, misfeasance or breach of trust against an officer of a company, it appears to the court hearing the case that he is or may be liable in respect of the negligence, default, breach of duty, misfeasance or breach of trust, but that he has acted honestly ard reasonably, and that having regard to all the circumstances of the case, including those connected with his appointment, he ought fairly to be excused, the court may relieve him, either wholly or partly, from his liability on such terms as it may think fit:

Provided that in a criminal proceeding under this sub-section, the court shall have no power to grant relief from any civil liability which may attach to an officer in respect of such negligence, default, breach of duty, misfeasance or breach of trust.

(2) Where any such officer has reason to apprehend that any proceeding will or might be brought against him in respect of any negligence, default, breach of duty, misfeasance or breach of trust, he may apply to the High Court for relief and the High Court on such application shall have the same power to relieve him as it would have had if it had been a court before which a proceeding against that officer for negligence, default, breach of duty, misfeasance or breach of trust had been brought under sub-section (1).

(3) No court shall grant any relief to any officer under sub-section (1) or sub-section (2) unless it has, by notice served in the manner specified by it, required the Registrar and such other person, if any, as it thinks necessary, to show cause why such relief should not be granted."

I have no doubt that the above provision does not contemplate the granting of any declaration. The petitioner is not entitled to the declaration sought for by him.

The next question is whether the petition is maintainable in respect of the other reliefs. The contention is that a person seeking to be relieved from his liability arising on account of any negligence, default, breach of duty, misfeasance or breach of trust must confess or admit his guilt, and then make out a case for being excused therefrom. In other words, a person, who contends that he has not committed any of the above things, cannot call on the court to decide whether he is guilty or not, and to relieve from the liability, in case he is found to be guilty. This controversy has to be resolved on a true construction of the section. Sub-section (1) of section 633 deals with the powers of the court in which any proceeding for negligence, default, breach of duty, misfeasance or breach of trust against an officer of a company is pending. Sub-section (2) enables any such officer apprehending that any such proceeding will or might be brought against him to apply to the High Court for relief; and the High Court's power on such application is the same as it would have, if it were a court before which a proceeding under sub-section (1) had been brought. Under sub-section (1) in order to grant relief to a person against whom a proceeding is pending, it is not necessary that he should confess or admit his guilt, or that the court must find him guilty. It is sufficient that it appears to the court "that he is or may be liable". In other words, the court can relieve him of the liability in a case in which it appears to the court that he may be liable. The same is the scope of the power of the High Court under sub-section (2). It is not necessary in an application under sub-section (2) that the applicant should confess or admit that he is guilty of any negligence, default, breach of duty, misfeasance or breach of trust, or that the court must find that he is. guilty of any of those things, before relief can be granted to him. Any officer of a company, who has reason to apprehend that any proceeding will or might be brought against him in respect of any such matter, may apply to the High Court under this sub-section for relief. All that is necessary is a reasonable apprehension of such a proceeding. In this case, the Registrar of Companies held that the petitioner has contravened section 299 of the Act, and directed the company to take steps to recover from the petitioner all remuneration drawn by him as director, since the date of the contravention. Hence the petitioner has reason to apprehend that proceedings may be taken against him in respect of his liabilities arising from the said contravention. The objection raised to the maintainability of this petition cannot, therefore, be sustained.

The next question for consideration is what are the reliefs that the petitioner can be given in this case. The consequences of contravention of section 299(1) of the Companies Act are :

(1) liability to be prosecuted under section 299(4);

(2) cessation of the office of directorship under section 283 (1) (i).

(3) liability to be prosecuted under section 283(2A); and

(4) liability to refund to the company all remuneration received by the petitioner as director, after the cessation of his directorship.

There is no dispute that the petitioner can be relieved from consequences (1), (3) and (4) under section 633(2) of the Act. The controversy is only whether he can be relieved from consequence (2), namely, the cessation of his office of directorship occurring under section 283(1) (i). Counsel for the petitioner submitted that cessation of directorship is also a liability arising from the contravention of section 299(1) of the Act, and that the petitioner can be relieved under section 633(2) from the said liability. I am unable to agree. By ceasing to be a director, he does not incur any liability, whether civil or criminal. He only loses an office ; and it is the consequence of a statutory mandate. There is no provision in the Act to restore to him that office under any circumstance. All that section 633(2) provides is to empower the High Court to relieve a person, who may be liable in a proceeding that might be taken against him in any court for negligence, default, breach of duty, misfeasance or breach of trust, from his liability, subject to the conditions mentioned in the said section. Speaking of the scope of this provision, Raman Nayar J. in Pothen v. Registrar of Companies , stated :

"What this court can do under sub-section (2) of section 633 is to relieve the officer in the same manner and to the same extent as a court) before which a proceeding in respect of the default has been initiated, could do under sub-section (1). Therefore it follows that relief can be granted under sub-section (2) only in respect of a matter for which a proceeding could be brought in a court. And that, only to the extent to which the court before which it could be brought could itself grant. Now, the liability in respect of which a court can grant relief under sub-section (1) of section 633 can only be a liability which that court itself could enforce ; the court cannot give the defaulter complete absolution in respect of all liability arising from his default."

If I may say so, with respect, the above statement contains a very lucid exposition of the true scope of sub-section (2) of section 633.

Reference may also be made to the following passage in the judgment of Shelat J. in In re Tolaram Jalan (Filmistan Private Ltd., In re):

"Section 633 under which the relief is sought is identical with section 372 of the English Companies Act of 1929. Sub-section (1) of section 633 contemplates proceedings for negligence, default, breach of duty, misfeasance Dr. breach of trust against an officer of a company and gives power to the court hearing the case in certain circumstances to grant relief. Sub-section (2) gives power, on the other hand, to the High Court to grant relief against a prospective liability in respect of a claim that an officer of a company apprehends might be made against him in regard to negligence, default, breach of duty, misfeasance or breach of trust. Now, it is clear that whereas sub-section (1) refers to proceedings already commenced, subsection (2) contemplates a claim which is anticipated as one which might be made in future. Under sub-section (1) the important words are ' the court hearing the case ' which obviously mean the court before which a proceeding is pending. These words, therefore, mean that it would not be this court which can grant relief under sub-section (1) but the court before whom the proceeding has commenced and is pending. Sub-section (2) on the other hand creates a fiction and provides that in respect of an apprehended claim this court shall have the same power to grant relief as it would have had under this section if it had been the court before which proceedings for negligence, default, breach of duty, misfeasance or breach of trust had been brought."

The same view has been taken by P.B. Mukharji J. in In re Coal Marketing Co. In the above case, the petitioners applied under section 633(2) of the Act for being relieved from their liabilities for not holding annual general meetings and for not filing balance sheets and profit and loss accounts within the prescribed periods. Dealing with the scope of section 633 of the Act, the learned judge stated :

"The power under section 633 is a power to relieve from liability. The expression ' relieve from liability ' appears in sub-section (1) and the word ' relieve ' in sub-section (2) must be read in that context, specially when it refers to the court before which a proceeding for such negligence, default, breach of duty, misfeasance or breach of trust could be brought under sub-section (1). Relief from liability in this context means relief from the consequences, namely, fines and penalties, that follow under section 168 of the Act from the negligence, default, breach of duty, misfeasance or breach of trust. Relief from liability cannot mean power to suspend operation of the Companies Act, directing holding of annual general meetings or filing annual returns, balance-sheets and profit and loss accounts."

I respectfully agree with the above statement of law ; and I hold that section 633(2) of the Act does not empower the High Court to relieve a director of a company from the statutory consequence of his vacating the office of directorships for contravention of section 299(1).

It now remains for me to consider whether the petitioner deserves to be relieved from liability in respect of proceedings which may be taken against him for the above contravention. Before I do so, I shall deal with a contention strenuously pressed by the petitioner's counsel that, on the facts of this case, the petitioner has not contravened section 299(1) of the Act. In order to appreciate the above contention, it is necessary to read sub-sections (1) and (2):

"299. (1) Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the board of directors.

(2) (a) In the case of a proposed contract or arrangement, the disclosure required to be made by a director under sub-section (1) shall be made at the meeting of the board at which the question of entering into the contract or arrangement is first taken into consideration, or if the director was not, at the date of that meeting, concerned or interested in the proposed contract or arrangement, at the first meeting of the board held after he becomes so concerned or interested;

(b) In the case of any other contract or arrangement, the required disclosure shall be made at the first meeting of the board held after the director becomes concerned or interested in the contract or arrangement."

Clause (a) of sub-section (2) deals with a proposed contract or arrangement, and not with an existing one. That clause has obviously no application to the instant case. Clause (b) deals with any other contract or arrangement; and the petitioner's case must fall under this clause. His counsel, however, submits that this clause does not apply in the case of a contract or arrangement, which had existed before a person became a director, but only in the case of a contract or arrangement entered into after he becomes a director. According to him, the expression "after the director becomes concerned or interested in the contract or arrangement" means after a person becomes a director and then becomes concerned or interested in the contract or arrangement. I am unable to accept this contention. I do not think that a grammatical construction of the above clause necessarily yields to such a meaning. In my view clause (b) applies to a case of a contract or arrangement in which a person was concerned or interested before he becomes a director, and also to a case of a contract or arrangement, in which he becomes concerned or interested after he becomes a director. In both cases he must disclose the nature of his concern or interest at the first meeting of the board, after he becomes concerned or interested in it. The words "becomes concerned or interested" denote a present state of things. In the case of a person who was already concerned or interested in the contract or arrangement, the liability for disclosure arises the moment he accepts office as director; and in the case of a person who gets concerned or interested in any contract or arrangement entered into with the company after he becomes a director, the said liability arises the moment he becomes so concerned or interested. In both cases, the time for discharging the said liability is the first meeting of the board held after the said person, holding the office of a director, becomes concerned or interested in the contract or arrangement. The construction sought to be put by the petitioner's counsel would defeat the obvious object of the section and would lead to a ridiculous result. On the facts of the case, there is no room for doubt that, by virtue of his ownership in the business of "P. Oommen & Sons", the petitioner is interested in an arrangement with the company. Clause (b) of sub-section (2) applies to him ; and he should have disclosed his interest in that arrangement at the first meeting of the board after he became a director, which was held on January 9, 1969. The petitioner has got a case that he has disclosed his interest in the said arrangement at the meetings of the board held on January 31, 1968, and April 7, 1969. The petitioner was re-elected as director in August, 1968; and, therefore, the alleged disclosure on January 31, 1968, is of no avail to him. The Registrar of Companies has stated in his affidavit that the disclosure said to have been made on April 7, 1969, does not satisfy the requirements of section 299. It is sufficient for me to say that this disclosure is also of no avail to the petitioner, as he suffered all the consequences of the contravention of section 299(1), when he failed to disclose his interest at the first meeting of the board held on January 9, 1969.

On the facts of the case, I am satisfied that the petitioner acted honestly and reasonably, and that, having regard to all the circumstances, he ought to be fairly excused. The arrangement which P. Oommen & Sons had with the company was a very old one, which the petitioner's father entered into several years ago. He became a co-owner of that business by succession on his father's death. It is not disputed that he has not been taking any direct interest in the said business, which was being managed by one of his brothers. There is also no case that the petitioner took any unfair advantage in respect of the continuance of that arrangement by virtue of his position as director. The continuance of the arrangement was also to the advantage of the company. It is not also disputed that the interest that the petitioner had in the said arrangement as a co-owner of the above business was well-known at all times to all the directors. In these circumstances, I relieve the petitioner of all liabilities in any proceeding that might be taken against him in any court for the contravention of section 299(1) of the Act.

This petition is allowed to the above extent, and dismissed in other respects. In the circumstances of the case, I make no order as to costs.

[1968] 38 Comp.Cas.228 (CA)

[1967] 3 W.L.R. 1408

IN THE COURT OF APPEAL

Hely-Hutchinson

v.

Brayhead Ltd.

LORD DENNING M. R., LORD WILBERFORCE AND LORD PEARSON, JJ.

JUNE 20, 21, 22, 1967

Lord Denning M.R.: In opening this appeal Mr. Wheeler paid tribute to the judgment of Roskill J. He said it was a tour de force. I agree. It was delivered straight way after a five day hearing at the end of the term. His finding of fact having been accepted by both parties before us. The discussion has been on the correct legal principles to be applied. I need myself only summaries the salient facts.

Lord Suirdale, the plaintiff, was to may years chairman and managing director of a public company dealing in electronics called Perdio Electronics Ltd. (Perdio). He held a great number of its shares and had guaranteed a loan to it from merchant bankers called Guinness Mahon & Co. for £50,000. Mr. Richards, a professional accountant, was the chairman of another public company called Brayhead Ltd. (Brayhead). It also dealt in electronics. Towards the end of 1964 Perdio was sustaining losses. It needed financial assistance. Bray head was ready to help. Its intention was eventually to get control of Perdio. At the end of 1964 Lord Suirdale sold 750,000 shares in Perdio to Brayhead at 3s. ed. A share, a deal involving over £159,000 into Perdio. On January 14, 1965, Lord Suirdale became a director of Brayhead. He did not attend a board meeting of Brayhead until May 19, 1965. At that meeting many matters were discussed and recorded in the minutes. But after the board meeti9ng, in an office outside, there was a discussion between the directors. Agreements were then reached between Mr. Richards on behalf of Brayhead, he being the chairman, and Lord Suirdale. The upshot of it was that Lord Suirdale agreed to put more money into Perdio. But he was not prepared to do so unless he position was secured by Brayhead Ltd. That was done by two letters. They form the subject-matter of these proceedings. "

One letter with is called the indemnity is on the paper of Brayhead Ltd. dated May 19, 1965, addressed to Viscount Suirdale. It reads:

"Re Perdio Electronics Ltd. Acceptance Credits.

Dear Lord Suirdale

This letter may be taken as undertaking to indemnify you against any loss which may occur by you having to fulfil your personal guarantee to Guinness Mahon & Co. Ltd. for a figure not to exceed £50,000. It is agreed that the consideration for this indemnity will be a personal loan by you to Perdio Electronics Ltd. in a sum not exceeding £10,000.

Yours sincerely,

A. J. Richards,

Chairman."

Then there is a letter called the; guarantee also dated May 1965, likewise on the paper of Brayhead and likewise addressed to Viscount Suirdale:

"Re Perdio Electronics Ltd. Loan.

Dear Lord Suirdale,

It is hereby agreed that Brayhead Ltd. will guarantee repayment of any moneys loaned by you personally to Perdio Electronics Ltd. It is condition of this guarantee that at least six months' notice will be given by you to Brayhead Ltd. should the guarantee have to be implemented.

Yours sincerely,

A.J. Richards,

Chairman."

On the same occasion two other letters were signed for connected transactions.

In reliance on those letters Lord Suirdale advanced further sums to Perdio: in all a sum of £45,000. Brayhead also lent Perdio large sums. Unfortunately their efforts were unavailing to save Perdio. It went into liquidation. On September 27, 1965, Lord Suirdale resigned from the board of Brayhead. He had been a director for some nine months.

The merchant bankers, Guinness Mahon, called on Lord Suirdale to honour his guarantee. He paid them £50,000 and then claimed that sum from Brayhead under the letter of indemnity of May 19, 1965.He also wanted repayment of the £45,00 which he had lent Perdio. He claimed this cum under the letter of guarantee of May 19,1965, and gave the requisite notice to Brayhead to repay. On November 27, 1965, he issued a writ against Brayhead.

The defence of Brayhead is twofold: First, they say that the letter of indemnity and the letter of guarantee are not binding on the company, because Richards had no authority, actual or ostensible, to write those Lord Suirdale, being himself a director of Brayhead, had no authority, actual or ostensible, to write those letters: and that Lord Suirdale, Being himself a director of Brayhead, had notice of that want to authority. So there was no contract by the company Second, they say that if there was a contract by the company, it is unenforceable by Lord Suirdale because he was a director and had an interest which he did not disclose at any board meeting. Lord Suirdale challenges those defences. But he says if they are available to a company he can come down on Mr. Richards personally as upon a warranty of authority.

I need not consider at length the law, on the authority of an agent, actual, apparent, or ostensible. That has been done in the judgments of this court in Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Ltd. it is there shown that actual authority may be express or implied. It is express when it is given by express words, such as when a board of directors pass a resolution which authorizes two of their number to sign cheques. It is implied when it is inferred from the conduct of the parties and the circumstances of the case, such as when the board of directors appoint one of their number to be managing directors. They thereby impliedly authorize him to do all such things as fall within the usual scope of that office. Actual authority, express or implied, is binding as between the company and the agent, and also as between the company and others, whether they are within the company or outside it.

Ostensible or apparent authority is the authority of an agent as it appears to others. It often coincides with actual authority. Thus, when the board appoint one of their number to be managing director, they invest him not only with implied authority, but also with ostensible authority to do all such things as fall within the usual scope of that office. Other people who see him acting as managing director are entitled to assume that he had the usually authority of a managing director. But sometimes ostensible authority exceeds actual authority. For instance, when the board appoint the managing direct, they may expressly limit his authority by saying he is not to order goods worth more than £500 limitation, but his ostensible authority includes all the usual authority of a managing director. The company is bound by his ostensible authority in his dealings with those who do not know of the limitation. He may himself do the "holding-out." Thus, if he orders goods word £1,000 and sings himself "Managing Director for and on behalf of the company," the company is bound to the other party who does not know of the £500 limitation, see British Thomson-Houston Co., Ltd. v. Federated European Bank Ltd., which was quoted for this purpose by Pearson L. J. in Freeman & Lockyer¹. Even if the other party happens himself to be a director of the company, nevertheless the company may be bound by the ostensible authority. Suppose the managing director orders £1,000 worth of goods from a new director who has just joined the company and does not know of the £500 limitation, not having studied the minute book, the company may yet be bound. Lord Simonds in Morris V. Kanssen envisaged that sort of case, which was considered by Roskill J. in the present case.

Apply these principles here. It is plain that Mr. Richards had no express authority to enter into these two contracts on behalf of the company: nor had he any such authority implied from the nature of his office. He had been duly appointed chairman of the company but that office in itself did not carry with it authority to enter into these contracts without the sanction of the board. But I think he had authority implied from the conduct of the parties and the circumstances of the case. The Judge did not rest his decision on implied authority, but I think his findings necessarily carry that consequence. The judge finds that Mr. Richards acted as de facto managing director of Brayhead. He was the chief executive who made the final decision on any matter concerning finance. He often committed Brayhead to contracts without the knowledge of the board and reported the matter afterwards. The judge said:

"I have not doubt that Mr. Richards was, by virtue of his position as de facto managing director of Brayhead or, as perhaps one might more compendiously put it, as Brayhead's chief executive, the man who had, in Diplock L.J.'s words, 'actual authority of manage", and he was acting as such when he signed those two documents."

And later he said:

"the board of Brayhead knew of the and acquiesced in Mr. Richards acting as de facto managing director of Brayhead."

The judge held that Mr. Richards had ostensible or apparent authority make the contract, but I think his findings carry with it the necessary inference that he had also actual authority, such authority being implied from the circumstance that the board by their conduct over many months had acquiesced in his acting as their chief executive and committing Brayhead Ltd. to contracts without the necessity of sanction from the board.

This findings makes it unnecessary for me to go into the question of ostensible authority; or into the rule in Royal British Bank V. Turquand; or into the question whether a director had constructive notice. It do not say that the judge was in error in what he said on these subjects. All I say is that I do not find it necessary to express any opinion on it.

Accepting that Mr. Richards had actual authority to make these contracts, there still remains the second point: Lord Suirdale was a director of Brayhead. He had an interest in these contracts and did not disclose it. He failed to comply with section 199 of the Companies Act, 1948, and with article 99 of the articles of association. He did not disclose the nature of his interest to any board meeting as he should have done. His failure is a criminal offence. It renders him liable to a fine not exceeding £100. But how does it affect the contract? It was urged before us, quoting the words of Lord Lindley in Kaye v. Croyd on Tramways, that "he cannot enforce, as against the company, any contract which he had entered into with that personal interest."

It seems to me that when a director fails to disclose his interest, the effect is the same as non-disclosure in contracts uberrimae fidei, or non-disclosure by a promoter who sells to the company property in which he is interested: see Re Cape Breton Co.; Burland v. Early. Non-disclosure does not render the contract void or a nullity. It renders the contract voidable at the instance of the company any makes the director accountable for any secret profit which he has made.

At first sight article 99 does present difficulties. It says that:

"A director may contract with and be interested in nay contact or proposed contract with the company either as vendor, purchaser or otherwise, and shall not be liable to account for any profit made by him by reason of any such contract or proposed contract with and be interested in any contract or proposed contract with the company either as vender, purchaser or otherwise, and shall not be liable to account for any profit made by him by reason of any such contract or proposed contract, provided that the nature of the interest of the director in such contract or proposed contract be declared at a meeting of the directors as required by and subject to the provisions of section 199 of the act."

On the wording it might be suggested that there is no contract unless the director discloses his interest. In other words, that disclosure is a condition precedent to the formation of a contact. But I do not think that is correct. All that article 99 does is to validate every contact when the director makes proper disclosure. If he discloses his interest, the contract is not voidable, nor is he accountable for profits. But if he does not disclose his interest, the effect of the non-disclosure is as before: the contract is voidable and he is accountable for secret profits.

In this case, therefore, the effect of the non-disclosure by Lord Suirdale was not to make the contract void or unenforceable. It only made the contract is not voidable, Once that is held, everyone agrees that it is far too late to avoid it. It is impossible to put the parties back in the same position, or anything like it. The contracts are, therefore, valid and, I would add, enforceable. So Lord Suirdale can sue upon them.

I need only add one word about warranty of authority. If Lord Suirdale had failed in his action because of a failure by him to disclose his interest, it would be his own fault and he could not claim on a warranty of authority; or if he failed because he knew that Mr. Richards had no authority, he could not claim on any implied warranty. But if he failed because, unbeknown to him, Mr. Richards had no authority, actual or ostensible, I think that Mr. Richards would have been liable for breach of an implied warranty of authority. But that question des not arise, seeing that Mr. Richards had actual authority.

I would, therefore, dismiss the appeal.

Lord Wilberforce. I take the benefit of the summary of the relevant facts which Lord Denning M.R. has given and of the fuller findings accepted by both sides which are to be found in the judgment of Roskill J.

I consider first the question of Mr. Richards' authority. I agree, of course (as there is not dispute about this), that Mr. Richards had no actual express authority to enter into the two agreements of May 19, 1965, on which this action is brought. But the question remains whether he had implied authority to do so. Now, when one is considering whether he had implied authority, one asks first: From what is the implication to be drawn? The suggestion was made that his authority might be implied from the mere fact of his holding the office of director and chairman of Brayhead at the relevant time. The judge dealt with that and held that, merely by virtue of his position as chairman, he would not have the necessary authority to enter into these agreements. I agree with that; but the question as to implication does not stop there. I quote some words in this connection from Diplock L,J.'s judgment in Freeman & Lockyer v. Buckurst Park Properties (Mangal) Ltd. He says:

"An 'actual' authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. Its scope is to be ascertained by t applying ordinary principles of construction of contracts, including any proper implications from the express words used, the usages of the trade of the course of business between the parties."

I think, therefore, that it is legitimate to go on and consider, over and above the powers he had as chairman, what the actual circumstances of he relationship between him and the board of directors may show. Looking at it in that way, it seems to me clear from the findings of the judge that Mr. Richards in fact impliedly had authority to do what he did by these two agreements. I take that in two ways. First, quite generally, the judge deals1 with the nature of Brayhead's business and the nature of the responsibility of Mr. Richards, in particular, as against the other directors of the board. I shall not bread the passage at length. He points out that the set-up of this company was unusual in that the directors were in the main working directors looking after various subsidiaries and that Mr. Richards took and was allowed to take authority to deal with general, financial and policy questions, acting in the role of chief executive, without having to consult on each occasion the other members of the board. Brayhead, and Mr. Richards as directing Brayhead, were at this time and for some time back has been engaged in an empire-building operation involving the acquisition and take-over of various companies and it seems clear that operations of that kind were entrusted to Mr. Richards to carry out. I need not refer in detail to the numerous passages, to some of which Lord Denning M.R. has already referred, which show that Mr. Richards, with the consent and acquiescence of the board, was allowed to act as chief executive and to make decisions relating to these financial questions.

Those are the general considerations, but one can carry them further in relation to the particular company, Perdio. There had been contact between Brayhead and Perdio since January, 1964, and the question of their closer association had been under consideration, at any rate at the end of 1964 and the beginning of 1965. On January 1, 1965, there were heads of agreement entered into between Lord Suirdale on behalf of Perdio and Mr. Richards on behalf of Brayhead with the object of obtaining for Brayhead a substantial holding in Perdio. Mr. Richards entered into them on behalf of Brayhead with the object of obtaining for Brayhead a substantial holding in Perdio. Mr. Richards entered into them on behalf of Brayhead There is no dispute that that part of the arrangement was authorized by the board of directors of Brayhead. I would regard the subsequent transactions as flowing from that initial step and as covered by the authority, which Mr. Richards to my mind had on the judges finding, to enter into that transaction. As the judge points out, a number of subsequent arrangements were made Mr. Richards on his own responsibility. Between January 1, 1965, and May 19, 1965, he agreed on behalf of Brayhead to advance £150,000 to Perdio: he agreed to take over certain acceptance credits provided by Klenwort Benson, and on February 5, 1965, he entered into and signed on behalf of Brayhead an agreement varying the agreement of January 1, 1965.

That leads one to the conclusion, which I think follows directly from the judge's analysis, that on May 19, 1965, Mr. Richards, when he made the further agreement with the object of holstering up the finances of Perdio, was doing so under the authority which he had to enter into such arrangement on behalf of Brayhead. I add this significant fact, that after the board meeting which was held on May 19, 1965, and Mr. Richards and Lord Suirdale adjourned to another room to enter into the documents in question, there were two other transactions entered into which were evidenced by documents C.25 and C.24, some of them in the presence of other Brayhead directors, as to which it is not disputed that they were valid and binding on Brayhead. It seems to me, therefore, to follow that Mr. Richards is to be taken to have had authority from the board to carry through to a conclusion those arrangements for the supports of Perdio which had been started on January 1, 1965.

I, therefore, reach the conclusion, both on Mr. Richard's general position with regard to the financial conduct and management of Brayhead and in relation to the particular transactions with Perdio, that he had implied authority from the board to enter into the two documents in question.

That makes it unnecessary to consider the question of ostensible authority, which, as Lord Denning M.R. has pointed out, may in some cases coincide with, and in most cases will overlap, the question of implied authority. I do not find it necessary, since actual authority exists, to consider whether it was necessary or possible for Lord Suirdale to rely on ostensible authority.

That then validates the transaction at the Brayhead end of it, and I now proceed to the second point, which requires consideration of the other end of the transaction, that is at Lord Suirdale's end. The transaction is attacked at that end on the ground that Lord Suirdale did not disclose, as in fact he did not, his interest in these transactions to the board of directors of Brayhead, and it is said that that circumstances disabled Lord Suirdale from suing on those contracts. That does raise a question of some general importance in relation to the duty to disclose, and I therefore add a few words on it, although I find myself in agreement with what the judge has said and also with what has fallen from Lord Denning, M.R.

Mr. Wheeler gave us an interesting historical account of the origin of the present legislation with regard to the disclosure of directors' interests.

For a great many years he showed us that this particular matter was usually dealt with those articles of association derived from the Companies Clauses Consolidation Act, 1845, under which a director was disqualified and had to vacate office if he did not make proper disclosure. But in 1929 for the first time the legislature intervened by introducing a section similar to section 199 in the Companies Act, 1948, which imposed a duty on directors to disclose their interest. I shall not read the section, but it is clear to my mind that what it does is to impose a statutory duty on directors of companies to disclose their interest in contracts or proposed contracts under sanction of a monetary penalty and that it says nothing directly as to the effect upon a contract or proposed contact of failure to do so. It does contain, however, in sub-section (5) a statement that nothing in the section shall be taken to prejudice the operation of any rule of law restricting directors of a company form having any interest in contracts with the company.

If the matter rested there, it would be plain that the civil law relations between a director and his company with regard to a contact or proposed contract would be governed by normal principles of law and equity relating to contracts made by persons in a fiduciary position, such principles as govern the position of such persons as trustees or solicitors or anyone else in a similar position. The normal consequences which follow from a contact made by a person in such a fiduciary position are that the contract may be voidable at the instance of, in this case, the company and that in certain cases a director may be called upon to account for profits which he has made out of the transaction. The application of this doctrine of equity to companies is very clearly brought out in the case of Transvaal Lands Co. v. New Belgium (Transvaal) Land and Development Co., a strong case because the contract was between two companies, in one of which a director had an interest Astbury J. at first instance and the Court of Appeal went into the general principles of law which relate to these matters in some detail, both of them quoting the well known passage, which I shall not repeat, from Lord Cranworth's speech in Abredeen Railway Co. v. Blaikie Borthers. Astbury J. pointed out that in certain circumstances the appropriate remedy might be to deprive the director of the profits which he had made, but in relation to that particular type of contract, both Astbury J. and the Court of Appeal came to the conclusion that the contract was voidable.

With that in mind, one can see what the meaning of article 99 of the company's articles of association is, an article which otherwise might appear to be rather obscure in its drafting. It is couched in a clear permissive form. It says first that a director may take an interest in a contract, and then says he shall not be liable for the profits provided he has made the statutory disclosure. It seems to me what that means is this, that if the statutory disclosure is made, then a director's contracts with a company are exempted from the normal consequences which would follow under the general law where one person who is in a fiduciary position enters into a contact with a person to whom he owes the fiduciary duty; and there is also the second consequences, that the person in the fiduciary position does not have to account for any profit. There is nothing in this article which positively attaches any consequences to a failure to disclose. All that it does is to relieve a contacting director from the consequences which would attach under the general law, and those consequences as regards the validity of a contract are in my opinion that the contract is voidable at the option of the company.

Mr. Wheeler, in seeking to contend that a further consequence follows, namely, non-enforceability by the director, was not able to point to any decision either relating to companies or otherwise to persons holding a fiduciary position which went so far. He relied on two cases. The first was Flanagan v. Great Western Railway Co., where specific performance was sought of an agreement to grant a lease over the refreshment rooms on the down platform at Reading station. That, however, does not seem to me to support the proposition for which he is contending, for I would regard a refusal to grant specific performance really as the counterpart on the director's side of avoidance of the contact or the side of the company. It seems to me a very different thing to say that a contract if not fully implemented need not be specifically performed and to say that when it is too late to avoid a contact, the other side has no right to enforce it.

The other authority on which he relied was Kaya v. Craydon Tramways, to which my Lord has referred. Thee is nothing in the decision which supports his argument. There is only a passage in the judgment of Lord Lindley M.R., where he says that the director cannot enforce as against the company any contact. Now anything, of course, which falls from Lord Lindley in this context commands considerable respect but I do not think that in that passage he can have intended to introduce a new category of remedy or defence to be available to a company when a director has failed to disclose his contract. The case itself had nothing to do directly with the enforcement by directors of a contact. It was a case between two companies and he is dealing there with the argument that as the director has failed to disclose and as there was an article saying that a director should not be capable of being interested, that made the contract ultra vires the company. That of course is not an argument which we are concerned with here. The words in question are contained in a short passage in which in very general terms he describes the legal consequences of a failure to disclose and should not, I think, be read as a definition of the circumstances in which a contact may or may not be binding on a company or as in any way a statement of the remedy, certainly not of a new remedy, which a company may possess. I cannot read it as supporting the proposition that non-enforceability of a contract which it is too late to avoid is a consequence of a failure to disclose.

I, therefore, come to the conclusion, which is substantially that reached by the judge, that the failure to disclose merely rendered the contract voidable and, it being conceded that avoidance is not now possible, both contracts are enforceable by Lord Suirdale against the company.

That is sufficient to dispose of the appeal and I would only add, as has Lord Denning M.R., that had the question of warranty of authority arisen decision, I would agree both with him and the judge that really no answer could be shown to Lord Suirdale's claim to recover damages against Mr. Richards for breach of warranty of authority.

Lord Pearson. Mr. Richards on May 19, 1965, signed a contact of guarantee and a contact of indemnity in favour of Lord Suirdale in connection with the affairs of the Perdio company in which they were both concerned. Mr. Richards purported to enter into these contacts on behalf of the Brayhead company. Lord Suirdale, who was a director of Brayhead, ought to have disclosed his interests in the contact at a meeting of the directors of Brayhead, but he failed to do so. Now Lord Suirdale is in substance suing Brayhead for sums due under these two contacts.

There are broadly two main questions arising: (1) Did Mr. Richards have actual or ostensible authority to contract on behalf of Brayhead, or is Lord Suirdale entitled to succeed in reliance on the principle of Royal British Bank v. Turquand? (2) How, if at all, are the contacts affected by Lord Suirdale's failure to disclose his interest to the board of directors of Brayhead?

On the first question I agree that on the judge's findings of fact, which are not disputed, there is proof that Mr. Richards had actual authority to make the contracts on behalf of Brayhead. The points to which I attach most importance in coming to this conclusion are these. First, Mr. Richards, while acting as de facto managing director and chief executive and entering into large transactions on behalf of the company, would sometimes merely report the transactions and not seek prior authority or subsequent confirmation by the board, and the board acquiesced in this course of dealing. Secondly, these two contacts, though they seem large and hazarrdons, were within the scope of Brayhead's business. Brayhead were a holding company and their business involved taking over companies and operating them as subsidiaries. In the present case Brayhead were taking over the Perdio Company with a view to operating it as a subsidiary and they were pouring in money for the purpose of keeping it alive, though they failed to do so. These contacts were intended to assist in keeping the Perdio Company alive.

The difference and the relationship between actual authority and ostensible authority were explained by Diplock L.J. in Freeman & Lockyer v. Buckhurst Park Properties (Mangal) Co. Ltd. There is, however, an awkward question arising in such cases as to how the representation which creates the ostensible authority is made by the principal to the outside contactor. There is this difficulty. I agree entirely with what Diplock L.J. said that such representation has to be made by a person or persons having actual authority to manage the business. Be it supposed for convenience that such persons are the board of directors. Now there is not usually any direct communication in such cases between the board of directors and the outside contractor. The actual communication is made immediately and directly, whether it be express or implied, by the agent to the outside contactor. It is, therefore, necessary in order to make a case of ostensible authority to show in some way that such communication which is made directly by the agent is made ultimately by the responsible parties, the board of directors. That may be shown by inference from the conduct of the board of directors in the particular case by, for instance, placing the agent in a position where he can hold himself out as their agent and acquiescing in his activities, so that it can be said they have in effect caused the representation to be made. They are responsible for it and, in the contemplation of law. They are to be taken to have made the representation to the outside contactor.

For the present purpose it is important to note that actual authority and ostensible authority are not mutually exclusive, and indeed, as Diplock J.J. pointed out, they generally co-exist and coincide. Therefore, the decision of the judge in the present case that there was ostensible authority does not preclude or stand in the way of a decision by this court on the facts found that there was actual authority, and for the reasons which have been given, which I need not seek to repeat, I would hold that there was proof of actual authority in this case.

I will, however, add this. If the question arises between the principal and the agent—either of them claiming against the other—actual authority must be proved. There is no question of ostensible authority as between those two parties, the principal and the agent. If the contactor is claiming against the principal on a contact made by the agent professedly on behalf of the principal, the contractor can succeed by proving actual or ostensible authority, but usually it is easier for him to prove ostensible authority and that is what he chooses to do. The peculiarity of the present case is that the proof of ostensible authority, which otherwise would have been easy, is complicated by the existence of a doubt whether, generally or on the facts of this particular case, a director can rely on ostensible authority or on the principle of Turquand's case when he is suing on a contact professedly made on behalf of the company of which he is a director. It can be suggested that a director has by virtue of his office the means of knowing the true facts about the alleged authority and that therefore he is not entitled to rely on the representation of authority. That may not be right. I am not expressing any opinion as to how that doubt should be resolved. There is ample proof of actual authority in the present case, and that is a sufficient ground for deciding the first main question in favour of Lord Suirdale.

The second main question is : How, if at all, are the contacts affected by Lord Suirdale's failure to disclose his interests? Section 199 of the Companies Act, 1948, and article 99 of Brayhead's articles of association contain the provisions relied on by Brayhead. It is not contended that section 199 in itself affects the contact. The section merely creates a statutory duty of disclosure and imposes a fine for non-compliance. But it has to be read in conjunction with article 99. The first sentence of that article is obscure. If a director makes or is interested in a contact with the company, but fails duly to declare his interest, what happens to the contact? Is it void, or is it voidable at the option of the company, is it still binding on both parties, or what? The article supplies no answer to these questions. I think the answer must be supplied by the general law, and the answer is that the contract is voidable at the option of the company, so that the company has a choice whether to affirm or avoid the contact, but the contact must be either totally affirmed or such events occur as to prevent rescission of the contract: Great Luxembourg Railway Co. v. Magnay; In re Cape Breton Co. Kaye v. Croydon Tamways Co.; Transwaal Lands Co. v. New Belgium (Transvaal) Land and Development Co.; and Cook v. Deeks.

An argument was based on the language used by Lord Lindely M.R., in Kaye v. Croydon Tamways Co. 3 where he stated the consequences of a director being interested in a contact with the company. He said6:

"secondly, there is what I may call the generally legal consequence, that he cannot enforce, as against the company, any contact which he has entered into with that personal interest.

It was contended that a contract which unenforceable by the director is radically different from a contract which is voidable by the company. But I am not able to agree. The contact, though unenforceable by the director, is enforceable by the company. If the company chooses to enforce it, they must affirm the whole contact, performing their part of it as well as requiring performance by the director of his part of it. If the company chooses not to enforce it, the contract is of no effect. The consequences are the same as if the contract were voidable by the company, and indeed I do not think there is more than a verbal difference between saying that the contract is unenforceable by the director and saying that it is voidable by the company.

In this case, therefore, the two contacts were only voidable, and on the facts it is conceded that rescission became impossible and so Brayhead have lost their right to avoid the contacts.

Therefore, the second main question also must be decided in favour of Lord Suirdale.

On the further question relating to breach of warranty of authority, which would only arise if a different view be taken on the earlier question, I agree with what has been said and have nothing to add.

Appeal dismissed with costs.

[1984] 55 COMP. CAS. 445 (DELHI)

HIGH COURT OF DELHI

Globe Motors Ltd.

v.

Mehta Teja Singh and Co. (Agencies)

RAJINDER SACHAR AND D.R. KHANNA JJ.

F.A.O. (O.S.) NO. 53 OF 1982

JULY 5, 1983

Mohinder Narain and V.V. Sastri for the appellant.

R.L. Gulati, for the respondents.

JUDGMENT

Sachar J.—This is an appeal filed against the order of the learned single judge (Mehta Teja Singh and Co. (Agencies) v. Globe Motors Ltd. [1983] 54 Comp Cas 883 (Delhi)) by which he allowed the application under s. 20 of the Arbitration Act filed by the respondents.

The respondent's case was that an agreement had been entered into with the appellant company which is now under liquidation by means of an agreement dated June 1, 1967, on the terms mentioned therein. In the said agreement it was also stated that any dispute or difference arising in regard to any of the terms contained in the agreement, shall be settled in accordance with the provisions of the Arbitration Act. The application under s. 20 of the Arbitration Act was filed in November, 1973.

It may be noted that an application for winding up of M/s. Globe Motors Ltd. was moved in March, 1968. Globe Motors was having one of its industrial units manufacturing steel under the name of Globe Steels. The agreement purports to appoint the respondents as distributors for the sale and marketing 1/6th of the company's steel products. Objection was taken by the official liquidator on various grounds. Broadly, the grounds raised were: (i) whether the application filed under s. 20 of the Arbitration Act was barred by limitation; (ii) whether the agreement dated June 1, 1967, was valid; and (iii) the next question related to whether the agreement was vitiated on the grounds of fraud and being against the interest of the company. The learned single judge found all the pleas against the appellant and in favour of the respondents, and has, therefore, directed the matter to be referred to the arbitration. Hence the appeal by the official liquidator.

The first contention raised by Mr. Andley, the learned counsel for the appellant, is that as the agreement was entered into on June 1, 1967, the application filed under s. 20 in November, 1973, is barred by time. It is common case that art. 137 of the Schedule to the Limitation Act, 1963, which provides for a period of three years is applicable to application filed under s. 20 of the Arbitration Act. Mr. Andley urges that the right to apply accrued when the first default took place in payment of the monthly payment of Rs. 10,000 in terms of art. IV(b) of the agreement and as admittedly the company made no payment, limitation would start from August, 1967, and application had become barred by 1970. The learned single judge, however, has held that the firm's claim was repudiated only on April 29, 1971, therefore, the period of three years is to calculated from that date, and if that is done the application filed in November, 1973, was within time. We deem it unnecessary to examine whether the right to apply accrued from the date of repudiation, namely, April 29, 1971, because even accepting the argument of Mr. Andley that the period was to be calculated and the right to apply accrued when the company defaulted in making payment of Rs. 10,000 monthly, it is evident that limitation would start from each default when it was committed. Thus, for defaults committed for non-payment of monthly payments from October, 1970, would have to be treated within time as the application was moved in November, 1973. The application for arbitration on the ground of limitation, therefore, could not be thrown out for the right to apply accrued for part of the claim only from October, 1970, onwards, which was within time. Of course, it may have been open to the appellant to urge before the arbitrator that the claim of the respondents for a period prior to October, 1970, was barred by time. (We decide nothing on this point because once it was held that the matter had to be referred to arbitration the other question, namely, whether any particular part of the claim is time barred or not, would evidently be a matter for the arbitrator to decide. We, therefore, agree with the learned single judge that the application was not time barred.

The next contention of the appellant was that the agreement had not been put to the general body of the shareholders, and, therefore, it was not valid. The learned single judge has, in our view, rightly rejected this contention. It is true that Metha Harnam Singh, with whom the agreement was entered into, was a director of the board of the company. Section 299 of the Companies Act provides that every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the board of directors. Reference to the agreement and the resolution dated June 15, 1967, which was passed by the board of directors shows that when the board approved the resolution in favour of the respondents, it was specifically noted that some of the directors, mentioned therein, of the company indicated their interest in the above arrangement and took part neither in this discussion nor on the resolution. Amongst these, the name of Harnam Singh is included. Mr. Andley, of course, seriously doubts whether any interest was disclosed and also castigates the manner inasmuch as the five directors continued sitting in the meeting when the decision was taken. Be that as it may, the fact remains that interest in the agreement was disclosed by the director. It is not, therefore, possible to accept the argument that there was any violation of s. 299 of the Companies Act. The board having thus approved the agreement, the same is not in any way invalid because there is no requirement of law to place this agreement before the general body of the company. It has not been shown that the exercise of power by the board of directors in approving this agreement was in any way beyond the powers given to them under the articles of association.

It was then sought to be contended that the agreement should have been put before the general body of shareholders, and attempt was made to invoke s. 294 which lays down that no company shall, after the commencement of the Companies (Amendment) Act, 1960, appoint a sole selling agent for any area for a term exceeding five years at a time, and to sub-s. (2) which provides that the board of directors shall not appoint a sole-selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which that appointment is made. This argument, however, assumes that the arrangement which was approved by the board on June 15, 1967, and which is recorded in the agreement of June 1, 1967, was that of a sole selling agent. We, however, cannot so read the said agreement. The agreement is a straight forward appointment of the respondents as their distributors for the sale and marketing of the company's steel products to the extent of 1/6th of the total proceeds of the sale of products. No specific area is earmarked for the respondents in which the respondents could be shown to be the sole selling agents. The learned judge was, therefore, right in his conclusion that the agreement did not have to be put to the general body meeting for its confirmation. The more serious objection raised by Mr. Andley, counsel for the appellant, is to the finding of the learned single judge by which he rejected the argument that the agreement was vitiated because of the fraud or act of the directors acting in a manner so patently against the benefit of the company. Now, it is not disputed and in fact the learned single judge accepts that the directors have a fiduciary duty to the company-The position of directors in their relationship to the company is no longer in doubt. Directors are not only the agents but they are in some sense and to some extent trustees or in the position of trustees. It is impossible now to dispute the position that they are in some sense trustees, that position having been established by a long series of cases (Vide Palmer's Company Precedents, 16th edition, part I, pages 561 to 564).

The courts have been very jealous in seeing that the fiduciary relationship of the directors with the company is not abused. The directors have been held to be trustees of the assets of the company and courts have directed them to reimburse the loss to the company where it was found that directors had applied the company's money in payment of an improper commission. The strictness with which the courts view the responsibility and the sacredness of the trust reposed in the directors was emphasised long time back in Imperial Mercantile Credit Association v. Coleman [1873] LR 6 HL Cas 189. In that case, one Coleman, broker and a director of a financial company, had contracted to place a large amount of railway debentures for a commission of 5 per cent. He proposed that his company should undertake to place them for a commission of 1½per cent. to the company. He was held liable to account for 3½ per cent. In so deciding Malins V.C. made the following observations, which were later on upheld by the House of Lords:

"It is of the highest importance that it should be distinctly understood that it is the duty of directors of companies to use their best exertions for the benefit of those whose interests are committed to their charge, and that they are bound to disregard their own private interests whenever a regard to them conflicts with the proper discharge of such duty".

These observations were reiterated with approval in Regal (Hastings) Ltd. v. Gulliver [1942] 1 All ER 378 (HL). In that case, an action was brought by the company against the defendants (directors) to recover from them the sums of money which were alleged to have been profits made by them improperly and against the interest of company. Viscount Sankey, one of the law Lords, accepted that the directors were in a fiduciary position and their liability to account does not depend upon proof of mala fide. In holding that the directors were liable to account for the company, the court observed (p. 383 F): "at all material times they were directors and in a fiduciary position, and they used and acted upon their exclusive knowledge acquired as such directors. They framed resolutions by which they made a profit for themselves. They sought no authority from the company to do so, and by reason of their position and actions they made large profits for which, in my view, they are liable to account to the company. The courts in Scotland have treated directors as standing in a fiduciary relationship towards their company and, applying the equitable principle have made them accountable for profits accruing to them in the course and by reason of their directorship. It will be sufficient to refer to Henderson v. Huntington Copper and Sulphur Co. [1877] 5 R (Ct. of Sess) 1 (HL) in which the Lord President cites with approval the following passage from the judgment of the Lord Ordinary:

"Whenever it can be shown that the trustee has so arranged matters as to obtain an advantage whether in money or money's worth to himself personally through the execution of his trust, he will not be permitted to retain, but be compelled to make it over to his constituent". (p. 389A)

Thus, it cannot be disputed that the fiduciary duties of directors are basically the same as those of other trustees and they are expected to display the utmost good faith towards the company whether their dealings are with the company or on behalf of the company. They should not use the company's money or other property or information or other matters in their possession in their capacity of directors, in order to gain any advantage to themselves at the expense of the company, and if they make any profit for themselves or cause any damage to the company, they will be liable to make good the same to the company. Similar observations were made in the report of the High-Powered Expert Committee on Companies and MRTP Acts [1978] which succinctly expresses the legal position of the directors as follows (para. 5.14 at p. 42):

"Directors are appointed to act in the interests of the company and an important area of their legal responsibility stems from the law of trusts—they have a fiduciary relationship with the company. The duties arising from this relationship are well defined, viz., to exercise their powers for the benefit of the company, to avoid a conflict of interests, and a duty not to restrict their right (by contract or otherwise) to freely and fully exercise their duties and powers. In addition to their fiduciary duties, directors also owe a duty of care to the company not to act negligently in the management of its affairs—the standard being that of a reasonable man in looking after his own affairs".

The learned judge in dealing with the aspect whether the company now represented by the official liquidator was entitled to avoid the agreement of June 1, 1967, has proceeded on the basis that the same could only be done if fraud in execution of this agreement was proved and further that the way this fraud is to be proved was in the same manner and by the same test as in a civil suit. It is for this reason that the learned judge seems to have placed over-emphasis on the enumeration of particulars if plea of fraud was to be established. Apart from the fact that this position is not factually correct (as we shall show later) this approach underestimates the importance of the relationship of the directors with the company which being fiduciary has to be judged by the tests broadly laid down for judging the conduct of a trustee. In holding the director liable for misfeasance or having worked against the interest of the company it is not necessary that fraud in the strictest term has to be proved. 'Thus, a director may be shown to be so placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of the business of the company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the company even superficially. If he does so he could be held liable for dereliction of duties undertaken by him and compelled to make good the losses incurred by the company due to his neglect even if he is not shown to be guilty of participating in the commission of fraud (emphasis supplied). It is enough if his negligence is of such a character as to enable frauds to be committed and losses thereby incurred by the company". (Vide Official Liquidator v. P.A. Tendolkar [1973] 43 Comp Cas 382 at p. 384).

A derivative action can be brought against directors who are in control of the company to compel such directors to account to the company for profits made by appropriating for themselves a business opportunity which the company would otherwise have enjoyed. (Vide Pennington's Company Law, 4th Edition, page 596);

Gower in Company Law, 3rd edition, page 526, has noticed that because of the trustee-like position of the directors a contract between the company with another firm of partnership of which one of the directors was a partner have been avoided at the instance of the company notwithstanding that its terms were perfectly fair and that in the words of Lord Cranworth L.C. "so strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into........".

Thus the contract will be voidable at the instance of a company and any profits made by the directors personally will be recoverable by the company (page 527 of Gower).

Various remedies could be resorted to by the company in case of a breach of duties by the directors. Thus, one of the remedies provided to the company is rescission of a contract, another is accounting for profits. The liability of the director may arise out of a contract made between a director and a company. In such a case accounting is a remedy additional to avoidance of contract and is normally available whether or not is there rescission. (page 556 of Gower).

A resume of the law would thus clearly show that no doubt the Companies Act does not forbid a contract being entered into by the company with a firm in which one of the directors is a partner, it is also true that the respondent director disclosed his interest in the agreement when the same was approved by the board of directors at its meeting held on June 15, 1967. But this fact by itself does not automatically prove that the arrangement which had been entered into by the company was not of such a nature which keeping in view the fiduciary relationship of Mehta Harnam Singh, a director of the company, should not have been so entered into, thus giving a right to the company to avoid the contract and to ask for the recovery of the profits made by the director. The test to be applied in the present case is—had the company been a going concern and had some payments in pursuance of this very agreement been made to the respondents could the company have asked for rescission of the contract or in case any payments had been made to the respondents Harnam Singh and others, for the return of the same to the company. If the answer is in the affirmative, the claim of the appellant must succeed.

We must now turn to the examination of the agreement to find out whether its terms were such, which in the words of the Supreme Court, would show that circumstances were such that there could be no other conclusion than that the same was arrived at because of the peculiar position, which the respondent, as director, enjoyed in the company.

The first most important thing to notice is that when the board met on June 15, 1967, at which it approved this arrangement, it also approved two other agreements in which some other directors were partners. All the three agreements were of more or less identical nature.

Resolution No. 22 approved the appointment of M/s. Parvinder Finance Corporation as the distributors of l/6th of the products of Globe Steels. Narinder Singh Kohli, one of the directors of the company, was a partner in M/s. Parvinder Finance Corporation and was present at the said meeting.

Resolution No. 30 approved the appointment of M/s. S.N.G. Agencies as distributors of 1/16th of the products of Globe Steels. M/s. S.N.G. Agencies was a partnership-firm in which Mr. C.L. Gulati, Mr. H.S. Saluja, Mr. K.R. Saluja, Mr. S.L. Saluja and Mr. Narinder Singh Kohli were partners. All of them were present at that time in the board meeting.

Resolution No. 21 deals with the present case in which it approved the appointment of M/s. Teja Singh and Co. as distributors for 1/6th of the products of M/s. Globe Steels. The partnership consisted of Mehta Harnam Singh and his two sons. Mehta Harnam Singh was a director of the company and was present at the said board meeting.

It will thus be seen that out of 13 directors who attended the board meeting on June 15, 1967, 6 of them were interested in three agreements which were approved by the board on that day. Technically we may accept what is recorded in the minutes of the board that the directors had disclosed their interest in the agreement which was being approved and also did not take part in the discussion or vote on the resolution. Though, therefore, there may not be any technical objection to these resolutions, yet we cannot overlook the patent incongruity of accepting that unbiased mind was brought to bear on the merits of these agreements when almost half of the board was interested in one or the other agreement. In such a case, the criticism that this was nothing but mutual backslapping to enrich themselves does not sound improbable. As Gower on Company Law, in commenting on such kind of disclosures says—'in marked contrast with the basic equitable principle, the disclosure required is not to the general meeting but to the board. It hardly seems over-cynical to suggest that disclosure to one's cronies is a less effective restraint on self-seeking than disclosures to those for whom one is a fiduciary. (page 530).

The learned single judge was persuaded to accept the genuineness of the agreement by holding that the respondent firm had injected Rs. 5 lakhs in the company at the time the contract was entered into, apparently suggesting that this was consideration for this agreement. A reference to the statement of Mr. Satinder Kohli, chief accountant of the company, however, will show that this amount of Rs. 5 lakhs was in lieu of the transfer of shares from Parvinder Kohli to Mehta Harnam Singh and his sons. According to statement of this witness, out of the shares standing in the name of Parvinder Singh Kohli, 1,250 shares were transferred to Metha Harnam Singh and another 1,250 shares were transferred to Mr. Ravi Mehta, s/o Mehta Harnam Singh, and still another 2,500 shares were transferred to Mr. Vijay Mehta, another son of Harnam Singh. These shares were transferred in the month of February and March, 1967. This Rs. 5 lakhs, therefore, represented amount for transfer of these shares. They had no relevancy to this agreement which was executed in June, 1967. This money was not invested or loaned to the company, but was the price paid for purchase of shares. Though the attorney appearing for the respondents sought to suggest that these shares were transferred against the consent of the respondents and they had not even asked for it, he had to soon resile and admit that not only Mehta Harnam Singh and his sons had accepted these shares and treated themselves as owners of these shares but had actually sold them to Mr. Mundra during the pendency of the winding up petition for about Rs. 3 lakhs. The attorney, however, made a grievance that these Rs. 5 lakhs worth of shares were sold for Rs. 3 lakhs but soon had to admit that the other shareholders had to part with their shares at 20% and 25% of the face value whereas Mehta Harnam Singh, etc.'s shares had been sold for over 60% of the face value. Considering the penury condition of the company it cannot be said that the respondent did badly at this price. Finding by the learned single judge, that there was a consideration of Rs. 5 lakhs for this agreement, is not supported by the record.

The learned single judge has not accepted that the contract was without consideration. The learned judge holds that it was a service contract for the purpose of employment to boost sales and because of this service there was a good consideration even to paying Rs. 1 lakh and 20 thousand per annum as a minimum fee. Normally, if a party undertakes to boost sales and use his expertise for this purpose on some minimum fee it is possible to say that there was a proper consideration for the contract. But it was the official liquidator's case in reply to the application for arbitration that none of these agencies including the respondents had ever dealt with steel products or had any experience in the line and that this device was fraudulently and collusively adopted to siphon away the company's funds for the individual and personal benefits of the said directors, at a time when the company to their full knowledge was passing through a financial crisis beginning with July, 1966. It was also stated that they had not rendered any service and the agreement had never been acted upon. In fact Shri B.K. Bedi, the chairman of the company, who had negotiated the sales originally was unable to contradict that the plaintiff firm did not secure any business for the company. He also admitted that the firm was not associated with any other steel unit or any other manufacturing unit. He did not know that they had any experience as manufacturer. The control and the influence that these persons could exercise on the whole board is apparent from his admission that directors, Kirpa Ram Saluja, Narinder Singh Kohli and a few other directors, were even on the finance committee of the company and this committee had favoured the grant of selling agency to the respondent. Thus, it is crystal clear that it is a case where the board of 13 approved of these agreements, which granted the distribution rights of the company's steel products to 6 of themselves, of course, after complying with the formality of disclosing their interest. Had the presence of directors been the only objection but the terms on which the agreement was entered into showed some kind of fairness and business arrangement normally expected of an ordinary business man, it might have been still possible to uphold the agreement. But the terms incorporated in the agreement leave no manner of doubt that the only interest that was kept in view was the personal benefit and profit of these directors and that too at great cost and to the gross detriment of the interest of the company.

Now, the agreement by which the respondents were appointed distributors was for a period of five years. Under art. 2 of the agreement distributors were obliged to provide for the company the services of a selling organisation whose duties included to promote the sale of products and to submit at regular intervals reports. Clause 4 of article II is important and is reproduced:

'to reimburse the Company for the sale promotion expenses incurred by it on behalf of the Distributors in the promotion of the products of Globe Steels. The amount of such expenses shall be certified by the governing director and chairman of the Company Shri B.K. Bedi and shall be subject to the maximum of two per cent. of the one-sixth of the sales proceeds of the products of Globe Steels.'

Prima facie, art. 2 read by itself may appear to show that some duties had been cast on the distributors under which some services were to be performed by them, they were even expected to bear some expenses and even reimburse the company for the sale promotion expenses incurred by it on behalf of distributors. But this impression is a deliberate illusion created to fog the whole issue; a reference to art. 4 of the agreement would immediately dispel it. Under art. 4 allegedly in consideration of the services defined in art. 2, the company was obligated to pay to the distributor a fee at the rate of 4.8% of 1/6th of total proceeds of sale of products of Globe Steels through distributors or directly by the company, but if sale proceeds fell below 1.50 crores in any financial year, a sum of Rs. 1.20 lakhs will be paid as a minimum fee in any financial year. Not only that the agreement is so heavily weighed one way in favour of the respondents that cl. (b) of art. 4 lays down that the minimum fee of Rs. 1 lakh and 20 thousand shall be paid and allowed to the distributors in equal monthly instalments of Rs. 10,000 each irrespective of the sales of each month. Here, we thus have a situation where the company has agreed to pay Rs. 1 lakh and 20 thousand as minimum fee irrespective of sale of even a rupee worth of product. What can be the possible justification for entering into such an unfair and one-sided agreement. Apparently, one may assume that it is for expenses incurred by the distributors under the agreement for sale promotion and running of offices, etc. But this impression would be without taking into account the ingenuity of the director respondent, as is to be found in terms incorporated in art. 4 of the agreement. By by cl. (2) of art. 4 the company is obligated to reimburse the distributors for all expenses incurred in the rendering of the services defined in art. II including those mentioned in cl. 4, art. II. It will be appreciated that art. 2 was the one which obliged the distributors to incur certain expenses, but by cl. (2) of art. 4 all this is washed off; the company is made liable to pay to the distributors for those expenses which it had undertaken to do by art. II. In short, the effect of cl. (2) of art. IV is the open unembarrassed taking over by the company of all the expenses which were to be incurred by the distributors. Nothing at all was to be spent by the distributors. There was thus nothing that the distributors were to spend for which they were not immediately to be reimbursed by the company. Though under the agreement the distributors were to promote the sale of products and were expected to reimburse the company for sale promotion expenses, this clause is nullified by art. 4, cl. II, which required the company to reimburse the distributors for all expenses including the expenses for sale promotion of the products. Not only that, the company was to provide a free furnished office accommodation to the distributors with a telephone connection. By cl. III the company was also to make or cause to be made requisite advertisement for the promotion of the business. In all these clauses of the agreement one looks in vain for any service that was to be done by the distributors. Advertisement, office, sales promotion expenses are all to be borne by the company. In that context, we fail to see as to what conceivable service was to be performed by the distributors for which such a heavy minimum amount of fee of Rs. 1.2 lakh per annum was being given to the respondents simply because six of these directors present had interest in similar arrangements to their advantage. In that view, to expect any of them to have considered the benefit of the company, is to ignore the obvious. The Board on June 15, 1967, did nothing but conveniently divide the assets of the company for the benefit of some of the directors. The company was not only not a penny gainer, but, was on the other hand, to be a loser in all respects. It is not even a case where the respondents were professionally qualified people who were expected to give their knowledge or experience of the trade to the company. Bedi. the chairman of the company, admitted that the respondents had no experience of manufacture in this line, nor had they done anything in furtherance of the sale of the products. In these circumstances the learned single judge was, and we say so with respect, in error in holding that the directors acted bona fide and the agreement was for the benefit of the company and the transaction was in good faith. The learned judge seems to have assumed that because directors disclosed their interest and did not vote for the resolution that was the end of the matter. But this is not so. Disclosure of interest and not voting on the resolution is only a formal aspect of the compliance with the statutory provision. The basic question is as to the conduct of directors and whether it satisfies the test considering their fiduciary relationship to the company.

We cannot but hold that the terms of the agreement dated June 1,1967, as approved by the board, were anything but to the detriment of the company. This was an arrangement which was made simply to siphon off Rs. 1 lakh and 20 thousand per annum as a minimum fee to the directors without doing a single patch of work for the benefit of the company. This the directors were able to do because of their close association and control over the board of directors. This was not a case in which only one of the directors was favoured by such arrangement. Six of the directors out of 13 who attended the meeting were the beneficiaries of the arrangement which was also agreed to by the 7th member who was the chairman of the company. This was a case of such blatant unfairness against the company that, as the Supreme Court, said that it would be obvious to any one who examines the affairs of the company even superficially that there was not one single redeeming feature in the agreement. In that view the company would have been justified, had any benefit been taken by the respondents, to ask for the account and the restoration of the amount. In the present case the respondents chose to claim to have the matter referred to the arbitrator. It is interesting to note that in the statement of claim filed before the arbitrator the respondents have prayed for a payment of Rs. 6 lakhs which is 'worked out at the rate of Rs. 10,000 per month for five years, no suggestion of having done any work is even mentioned. This also would show the untenable nature of the arrangement so far as the company was concerned. This agreement is patently against the interest and benefit of the company.

We would, therefore, hold that this agreement was vitiated and void and the official liquidator representing the company is entitled to ask for its rescission. As we are satisfied that this agreement of June 1, 1967, which was approved by the board of directors on June 15, 1967, was not in the interest and benefit of the company, the same is, therefore, liable to be avoided by the official liquidator. In that view of the matter as the agreement is held not to be subsisting, being void, and as the arbitration clause forms a part of the agreement will naturally not survive. The effect would be that there is no existing arbitration agreement and the respondents cannot ask for the matter to be referred to arbitration.

As a result, we would, in the circumstances, allow the appeal, set aside the judgment of the learned single judge and dismiss the application of the respondents filed under s. 20 of the Arbitration Act. The parties will bear their costs throughout.

We may note that the learned single judge, while appointing an arbitrator had fixed his fee at Rs. 4,000 to be paid in equal shares by the official liquidator and the respondents. We are given to understand by the official liquidator that the said amount has been paid equally by both the parties to the arbitration. Though we are dismissing the application filed by the respondents, we, however, make it clear that the fee which has already been paid to the arbitrator will not be sought to be refunded or claimed back. The arbitrator is entitled to retain the fee of Rs. 4,000 paid to him. We are doing this because the matter has remained with the arbitrator for a long time and he has had a number of hearings and it is only proper that he should have been compensated though inadequately for the work that he has done. The appeal is allowed as above.

Khanna J.—I have perused the judgment delivered by my learned brother, and am in entire agreement with the same. The fiduciary chracter of directors to the company has been succinctly brought out. Normally, the guiding factor in the appointment of distributing agent is to relieve the principal of the labour and expense of substantial establishment for augmenting sale. At the same time, services of established concerns and persons who specialise in the technique and market conditions of distribution and sale are availed of. Certain percentage of commission is allowed to them by the principal resulting in substantial saving, in turn, to him of the expenses otherwise inherent in the work of distribution and sale. Another consideration which prevails in the appointment of such agents is the assurance and better opening for larger sales and facility to reach the market.

Now, the facts of the present case bring out that the respondent-firm itself was created on the day when the distribution agency was conferred. It had no experience or specialisation in the field of sale of steel. One of the directors of the appellant company and his family members were the partners therein. The company itself was passing through difficult financial times, and not long thereafter came under liquidation. In spite of that, it was agreed to pay rupees 1.2 lakhs as minimum commission to the respondents. Normally, as an incentive for larger sales, agents are conferred benefits which may be in the form of higher commissions. The peculiar feature, in the present case, however, was that if the sales fell below a particular limit, and that could primarily be attributed to the agents not adequately obtaining sale market for the goods, the agents, instead of being put to detriment in the form of not being allowed commission at the agreed rate, were assured in any case of minimum commission of rupees 12 lakhs. Thus, even if the sales were nil the company was saddled with the liability for that payment. By no stretch, this could be treated as an act for the benefit of or in the interest of the company. It has been rightly termed by the liquidator as fraud played upon the company, and a sort of bounty extended to respondents to the detriment of the company's interest.

The appellant has asserted before us that no sales whatsoever were got effected by the respondents, and even before the learned arbitrator they have simply put up a claim at the rate of rupees 1.2 lakhs per year. The respondents when enquired if they, in fact, effected any sales, were entirely vague and stated that they must be recorded in the company's books which are said to be with the police. They had not kept any documents or accounts of the sales with themselves. This was highly unusual as the firm which was entirely constituted for carrying on the distribution agency, and was to conduct sales worth lakhs, if not crores, did not choose to maintain any documents and accounts. This in a way reflects the figurehead status of the respondents. One of the clauses in the agreement specifically provided that the respondents would submit at regular intervals, reports on market conditions and prepare estimates of demand for the products of "Globe Steels". The respondents do not possess any documents or copies thereof showing the submission of any such reports or estimates of demand.

Another startling feature in the present case has been that what the agency agreement in its earlier part attempted to assign to the respondents was in the latter part entirely converted as the liability of the company. Thus, arts. II(4) and IV(2) read as under :—

"II(4): to reimburse the company for the sale promotion expenses incurred by it on behalf of the distributors in the promotion of the products of ' Globe Steels '. The amount of such expenses shall be certified by the governing director and chairman of the company, Shri B. K. Bedi, and shall be subject to the maximum of two per cent. of the one-sixth of the sales proceeds of the products of Globe Steels".

"IV(2): to reimburse the distributors for all expenses incurred in the rendering of the services defined in article II including those mentioned in clause 4, article II".

These thus show that what the distributors were to reimburse to the company was, in turn, to be reimbursed by the company to the distributors. In other words, there were hardly any expenses which the distributors were to incur, and the liability in that regard was entirely that of the company. Not only that, one of the clauses further mentioned that the company was to provide free furnished office accommodation to the distributors with a telephone connection. These circumstances amply bring out that this so-called distribution agency agreement was a sham one collusively arrived at to injure in the interest of the company and the share-holders, and ultimately, claim share in the distribution of the assets of the company amongst its creditors. Such an agreement being fraud upon the company has to be struck down as not sustainable in law under ss. 23 and 24 of the Indian Contract Act. In its sweep, therefore, the arbitration clause forming part of the agreement must as well fall.

So far as the investment of rupees live lakhs in the purchase of shares was concerned, the same took place a number of months before the entering into agreement appointing the respondents as distributors. There is no mention at all in the agreement that the said purchase constituted as part of consideration for appointment of the respondents as distributors. Secondly, the amount so paid was for the purchase of shares which itself was an independent deal, and the concerned respondent did get those shares. Subsequently, they were sold for valuable consideration. It was immaterial whether they fetched the same price, as profit and loss are basically an incident of any transaction of purchase and sale of shares. With due deference to the learned single judge, there is nothing in the testimony of Mr. Satinder Kholi, chief accountant of the company which links the injection of rupees five lakhs in the company by the firm with the contract in dispute.

Appeal allowed.

[1971] 41 COMP. CAS. 377(BOM)

HIGH COURT OF BOMBAY

Firestone Tyre and Rubber Co.,

v.

Synthetics and Chemicals Ltd.

MADON J.

SUIT NO. 522 OF 1969 AND SUIT NO. 681 OF 1969

NOVEMBER 7, 1969

Notices of motion in both the suits.

F.S. Nariman with A. B. Diwan and A. M. Setalvad for the Plaintiffs.

A.K. Sen with Mrs. Sen, M. H. Shah and I.M. Chagla for defendant No. 1

C.K. Daphtary with J. I. Mehta and R.N. Banerjee for defendant No. 2.

R.B. Bhatt with N.G. Thakkar for defendants Nos. 3 and 4.

M.R. Modi with P.P. Khambatta and R.J. Joshi for defendant No. 5.

JUDGMENT

As these two notices of motion were heard together, it will be convenient to dispose of them by one judgment. Both the above suits arise out of the appointment for a further term of Kilachand Devchand and Co. Private Ltd., the second defendants in Suit No. 522 of 1969 and the fifth defendants in Suit No. 681 of 1969, as the sole selling agents of Synthetics and Chemicals Ltd., the first defendants in both the suits. It will be convenient to refer to these two companies hereinafter as "the private company" and "the company", respectively.

These notices of motion were argued elaborately and at great length and as if their hearing were a dress rehearsal for the hearing of the suits. I propose to set out first the material facts necessary for understanding the matters in controversy between the parties and deal with the other facts while considering the rival contentions under each head of controversy raised before me. The company was incorporated on January 20, 1960, as a result of collaboration between the plaintiffs, The Firestone Tyre and Rubber Company, a company incorporated under the laws of the State of Ohio in the United States of America and Tulsidas Kilachand and others to whom, for the sake of convenience, I will hereinafter refer as "the Kilachand group". The Kilachand group consists of Tulsidas and his three brothers, Ramdas, Ambala and Chinubhai, and their relatives and other concerns and companies owned or controlled by the Kilachand family. The main object of the company is to manufacture and deal in synthetic rubber and it is the only company in India which manufactures synthetic rubber. The authorised share capital of the company is Rs. 15,00,00,000 divided into 15,00,000 shares of Rs. 100 each. The issued and subscribed share capital of the company is Rs. 5,75,00,000 divided into 5,75,000 equity shares of Rs. 100 each, its paid up share capital being Rs. 5,74,42,545. The plaintiffs have invested large amounts both by way of loans and share capital in the company. The amount of their loan investment as on December 31, 1968, including unpaid interest was about Rs. 3,46,16,124. There is also a sum of about Rs. 83,71,875, for the balance due to the plaintiffs on account of continuing know-how and technical services rendered by the plaintiffs under an agreement dated March 25, 1960, between the plaintiffs, the company and the private company. The plaintiffs are the holders of 1,43,650 fully paid-up equity shares of the face value of Rs. 100 each; in the company. Fifty shares are held by F.J Reighley, 50 shares by G.T. Warner and 4 shares by V.N. Karode, these three being the finance director, the sales director and the secretary and director of Firestone Tyre and Rubber Company (India) Private Ltd., a wholly owned subsidiary company of the plaintiffs. These shareholdings are admitted. The aggregate of these shareholdings in the company is thus a little over 25 per cent. So far as the Kilachand group is concerned, I am informed by learned counsel for the company that the Kilachand group holds or controls voting rights in respect of shares of a little over 27 per cent, of the total paid-up share capital of the company. Tulsidas, who is not a defendant in Suit No. 522 of 1969 but is the second defendant in Suit No. 681 of 1969, and his brother, Ramdas, were at all times and still are directors of the company, Tulsidas at all times being also the chairman of the board of directors of the company.

The private company is a subsidiary of another private company, Kesar Corporation Private Ltd. The majority of shares of the private company are held by Kesar Corporation Private Ltd. and the remaining shares by Tulsidas and his brothers. The Kilachand group controls Kesar Corporation Private Ltd. and holds most of its shares. Tulsidas and Ramdas were at all material times and are directors of both the private company and Kesar Corporation Private Ltd.

At the meeting of the board of directors of the company held on July 17, 1963, it was decided to appoint the private company as the sole selling agents of the company. In pursuance of such decision the following two c-49 resolutions were passed at the annual general meeting of the company held on September 23, 1963, the first of such resolutions as a special resolution and the second as an ordinary resolution :

"Resolved that pursuant to section 314 and other applicable provisions of the Companies Act consent be and is hereby given to the appointment as the sole selling agents of the company for all the territories comprised within the Republic of India, Nepal, Bhutan and Sikkim, of Messrs. Kilachand Devchand and Company Private Ltd., a company in which Mr. Tulsidas Kilachand and Mr. Ramdas Kilachand, directors of this company, are interested as directors and members".

Resolved that pursuant to section 294 and other applicable provisions of the Companies Act, Messrs. Kilachand Devchand and Co. Pvt. Ltd. be and they are hereby appointed the sole selling agents of the company for all the territories comprised within the Republic of India, Nepal, Bhutan and Sikkim for a period of five years commencing on the 1st October, 1963, and that the terms and conditions as to remuneration and otherwise contained in an agreement, the draft thereof has been placed before the meeting and for the purpose of identification initialled by the chairman of this meeting be and the same are hereby approved.

"Resolved that the board of directors be and they are hereby authorised to cause the said agreement when engrossed to be executed on behalf of the company".

It appears that the fifth defendant company was claiming to have incurred expenditure for setting up a sales organisation for the company prior to the aforesaid board meeting. Accordingly, in the said annual general meeting the following resolution was also passed as a special resolution:

"Resolved that Messrs. Kilachand Devchand and Co. Private Ltd., a company in which Mr. Tulsidas Kilachand and Mr. Ramdas Kilachand, directors of this company, are interested as directors and members, be paid a sum equal to 2% of the net sale price of the company's products sold up to the date of this meeting in reimbursement of the expenses incurred by them in setting up a sales organization".

In pursuance of the said resolutions, by an agreement dated September 24, 1963, the private company was appointed the sole selling agents of the company for all: territories comprised within India, Nepal, Bhutan and Sikkim for a period of five years commencing from October 1, 1963. Under the said agreement, each party had the right to terminate the agreement prior to the expiry of its term by giving four calendar months' notice to the other side. The private company had to set up and maintain at its own cost an adequate organisation for sale of the company's products within the said territories and to bear and pay all expenses relating to such organisation. The private company had to procure orders for the purchase of products at the prices and on the terms and conditions of sale determined by the board of directors of the company and forward them to the company's office for acceptance and the same were to be binding on the company only when and to the extent confirmed by the company. The private company undertook full responsibility for the collection of price and all other amounts due from the buyers and to make immediate payment to the company whether the amounts were actually collected from the buyers or not, on the same being demanded by the company. The private company was to be paid a commission at the rate of 2 per cent, on the net selling price exclusive of Government excise duty and sales tax or other like charges of the products sold by or through the selling agents within the said territories during the period of the said agreement. On products sold directly by the company the private company was to be paid such commission as the board of directors might decide, not exceeding the said rate of 2 per cent, on the net selling price. The account of commission was to be made up at the end of each quarter in each financial year. The said agreement further provided that if and when any goods manufactured by the company were sold outside the said territories during the period of the said agreement, the board of directors of the company and the private company would decide mutually whether any commission on such sales should be paid by the company to the private company and the rate of such commission, if any. Clause 13 of the said agreement provided as follows :

"The terms of this agreement may be modified by mutual agreement of the board of directors of the company and the selling agent except that the rate of commission payable to the selling agents as provided in clause 12 hereof shall not be so modified".

It appears that the plaintiffs were not happy at the idea of granting a sole selling agency and had protested against the same. The plaintiffs, however, did not oppose the passing of the said resolutions.

The company started commercial production of synthetic rubber in about May, 1963. It will be interesting at this stage to know the working of the company during all these years. In no year has the company declared any dividends. For the year ending December 31, 1963, the company's balance-sheet and profit and loss account showed a loss of Rs. 29,25,604 without providing for depreciation for that year amounting to Rs. 1,03,57,132. The previous year's- loss was Rs. 9,38,858 and after making certain adjustments on account of tax, the aggregate amount of loss for these two years came to Rs. 38,87,990 which was carried forward to the next year. During this period the commission paid to the private company under the agreement dated September 24, 1963, including reimbursement of expenses said to be incurred by the fifth defendant, prior to their appointment, was Rs. 1,71,291. For the year ending December 31, 1964, the company's balance-sheet and profit and loss account showed a profit of Rs. 16,49,410 without providing for any depreciation for that year amounting to Rs. 1,04,42,634. Thus the total arrears of depreciation for the years 1963-64, not provided for, aggregated to Rs. 2,10,03,222. This resulted in the balance of loss aggregating to Rs. 23,05,929 being carried forward. The selling agency commission paid to the private company in that year was Rs. 8,68,117. For the year ending December 31, 1965, the net loss was Rs. 19,34,186 after providing for depreciation for that year. For the year ending. December 31, 1966, the company earned a profit of Rs. 1,00,64,823 which included a sum of Rs. 84,39,325 for claims recovered against loss of profit policy and Rs. 5,03,220 being the amount received against insurance claims. After providing for depreciation for that year and for 1963 and adjusting the depreciation for the year 1965 and the loss carried forward, the total loss carried forward was Rs. 43,86,461. For the year ending December 31, 1967, the company earned a net profit of Rs. 41,62,635. After providing for depreciation for that year and the previous year's loss carried forward, the total loss was about Rs. 2,23,826 carried forward to the next year. For the year ending December 31, 1968, the net loss suffered by the company, after providing for depreciation for the years 1964 and 1968, was Rs. 26,52,335. For the years 1965, 1966, 1967 and 1968 the selling agency commission paid to the private company was Rs. 14,88,318, Rs. 16,86,971, Rs. 19,86,250 and Rs. 22,50,440, respectively. Thus, the total amount of commission paid to the company for the period of the said agreement dated September 24, 1963, aggregated to Rs. 84,63,849.

It appears that in 1965 some correspondence took place between the Company Law Board and the company. Ultimately, by its letter dated July 28, 1965, the Company Law Board intimated to the company that after careful consideration of the information furnished by the company it appeared to the Company Law Board that the terms of appointment of the company's sole selling agents were prejudicial to the interest of the company and the company was required to show cause why the Company Law Board should not, in exercise of the powers conferred upon it under section 294(5)(c) of the Companies Act, 1956, read with the Government of India, Ministry of Finance, Department of Revenue, Notification No. G.S.R. 178, dated February 1, 1964, vary the terms and conditions of appointment of the private company as sole selling agents. The variations proposed by the Company Law Board were to make the private company liable to pay to the company the amount of price and other amounts due from the buyers, whether actually collected from the buyers or not, within 60 days from the date of the sale and not when demanded as provided in the said agreement; that no commission should be payable to the private company in respect of sales made by the company to those consumers borne on the register of the Director-General, Technical Department, Government of India, who had been required by the Government of India to furnish confirmation letters that they would purchase indigenous synthetic rubber from the company to the extent allocated to them by the Government, and that the commission on sales outside the agency territories should not exceed 2½ per cent, on the net selling price. This show-cause notice from the Company Law Board was considered by the board of directors. The attitude adopted by those directors who represented the plaintiffs' viewpoint was that the sole selling agency should be terminated as it was working detrimentally to the interest of the company. The board of directors also set up a sub-committee to consider the position brought about by the said show-cause notice. This sub-committee resolved that the secretary of the company should be authorised to send a suitable letter requesting for extension of time from the Company Law Board up to October 15, 1965, for submitting a representation. The plaintiffs, however, continued to insist that the sole selling agency should be terminated. I do not consider it necessary to set out the details relating thereto. Suffice it to say that an extension was granted by the Company Law Board. It is not clear from the record whether any written representation was in fact submitted on behalf of the company, but from the letter of June 15, 1966, from the Company Law Board it appears that a personal hearing was given on May 26, 1966. By the said letter the company was informed that having regard to the circumstances of the case the Company Law Board had "decided not to take any further action in the matter under section 294(5) of the Act at this stage ". It was further stated in the said letter that:

"The Board would suggest, however, that at the time of the renewal of the agreement with the sole selling agents in 1968, your company should bear in mind the views of the Board which were communicated to you (that is, the company) in their letter of even number dated the 28th July, 1965, read with their letter of even number dated the 18th September, 1965 ".

The letter of September 18, 1965, merely corrects some typographical errors in the earlier letter of July 28, 1965.

By a letter dated April 4, 1968, the private company intimated to the company that the company had suffered a considerable increase in their expenses due to the high price of imported alcohol and that the company had made very strenuous efforts with the Government of India to be allowed an increase in the selling price in order to offset the increased cost, but the selling price fixed by the Government of India with effect from April 1, 1968, did not offset such increased cost. It was further stated in the said letter that, in the interest of the company and in order to tide over the difficult situation of the company and in the mutual interest of both the parties and as a matter of commercial expediency, the private company was prepared to continue to charge selling agency commission as from April I, 1968, at the rate of 2 per cent, on the net selling price of the company's products as prevailing on November 5, 1967, exclusive of Government excise duty, sales tax or other like charges sold by or through the private company. The letter concluded by saying : "You will kindly appreciate that this is an ad hoc arrangement". By its letter dated August 31, 1968, the private company pointed out to the company that the sole selling agency agreement was valid up to September 30, 1968, and requested the company to renew the said agreement "on the same terms and conditions as stipulated in the earlier agreement" for a further period of five years, that is, from September 30, 1968, to September 30, 1973. This letter was placed before and considered by the board of directors of the company at its meeting held on November 14, 1968. At that meeting Warner was in the chair, the other directors present being Reighley, Tulsidas, Ramdas, S.L. Kirloskar, R.R. Ruia and Mr. B.K. Daphtary, a solicitor and partner in the firm of solicitors, Messrs. Daphtary, Ferreira and Diwan, who were and are the solicitors for the company as also the private company. I will hereinafter refer to Mr. B.K. Daphtary as "the solicitor-director". At the said meeting Reighley and Warner opposed the further appointment of the private company. Ultimately, the solicitor-director moved the following resolution which was seconded by the said Kirloskar:

"Resolved that Messrs. Kilachand Devchand and Co. Pvt. Ltd. be and are hereby appointed, but subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after today, the sole selling agents of the products of the company for a period of five years commencing on 1st October, 1968, upon the terms and conditions contained in the agreement dated 24th September, 1963, as clarified by the selling agents in their letter dated 4th April, 1968, and that the acts and deeds of Messrs. Kilachand Devchand and Co. Pvt. Ltd. done on or after the 1st October, 1968, be and the same are hereby ratified and confirmed and that for such services, they be paid commission as provided in the said agreement dated 24th September, 1963, clarified as aforesaid.

Further Resolved that an agreement with Kilachand Devchand and Co. Pvt. Ltd., the selling agents of the company, be prepared on the same terms and conditions as are contained in the said agreement, dated 24th September, 1963, and that the seal of the company be affixed on the engrossment in token of execution by the company, in the presence of any two directors of the company and the secretary of the company, Mr. K.B. Dabke, who do sign the same but before such execution a clarification be endorsed or attached to such agreement duly signed by or on behalf of the selling agents in terms of their letter dated 4th April, 1968".

The solicitor-director, Kirloskar and Ruia voted in favour of the resolution, while Reighley and Warner voted against it. Tulsidas and Ramdas, being interested in the said resolution, abstained from voting. I may mention at this stage that all through there has been a dispute between the parties as to whether the minutes of the board of directors of the company have been correctly recorded. It is not necessary for the purpose of these motions to go into the details of this controversy. All that is necessary to set out is that at the meeting of the board of directors held on February 3, 1969, the minutes of the board meeting held on November 14, 1968, were confirmed and Reighley read out a statement on behalf of Warner and himself requesting that it should be made a part of the minutes. By his letter dated February 4, 1969, Reighley has reproduced the text of that memorandum. According to that memorandum, at the said meeting Warner and Reighley submitted that the resolution for further appointment of the private company was not valid inasmuch as the vote of the solicitor-director could not be considered as at all material times he was and continued to be an interested director, being a solicitor for the private company and there were therefore two valid votes for and two valid votes against the resolution, the resolution was not carried. On February 18, 1969, an agreement was executed between the company and the private company appointing the private company as the sole selling agents of the company for the aforesaid territories for a period of five years commencing from October 1, 1968. All the other terms of this agreement are the same as in the said agreement dated September 24, 1963, except that there is a new clause in this agreement, namely, that the appointment of the private company was subject to the condition that it should not be valid if it was not approved by the company in the first general meeting held after the date on which the appointment was made. To this agreement was attached a letter dated February 18, 1969, from the private company to the company recording that it had executed the said sole selling agency agreement and confirming that the clarification contained in the said letter dated April 4, 1968, from the private company to the company would continue to remain in force and that the letter of February 18, 1969, should be attached to and form part of the agreement. The contents of the said letter of April 4, 1968, were reproduced in the said letter of February 18, 1969. By his letter dated February 24, 1969, Warner called upon Tulsidas to amend the minutes of the said meeting of the board held on November 14, 1968, so as to provide that the aforesaid resolution was not carried. It appears that no reply was. sent to the said letter.

Thereafter, by their letter dated March 17, 1969, addressed to the company and its directors, the plaintiffs required them to convene an extraordinary general meeting of the company for the purpose of passing the following resolution as an ordinary resolution, namely :

"Resolved that the appointment of Kilachand Devchand & Co. Private Ltd. as the sole selling agents of the company's products for a period of five years commencing on 1st October, 1968, for the territories comprised within the Republic of India and Nepal, Bhutan and Sikkim made by the board of directors of the company by a resolution passed at their meeting on 14th November, 1968, be and the same is hereby not approved".

The plaintiffs also set out the statement which they desired to have included in the explanatory statement to be annexed to the notice convening the said meeting. This letter came up for the consideration of the board at its meeting held on March 21, 1969, when it was resolved that the matter should be placed for the consideration of the board at the next meeting thereof to be held on March 27, 1969. At the meeting of the board held on March 27, 1969, the following resolution was passed by a majority, Reighley and Warner voting against the same. That resolution is as follows:

"Resolved that pursuant to the provisions of section 294 and other applicable provisions of the Companies Act, if any, the company hereby approve the appointment of M/s. Kilachand Devchand and Co. Private Ltd. as the sole selling agents of the products of the company for all the territories comprised within the Republic of India, Nepal, Bhutan and Sikkim for a period of 5 years commencing on 1st October, 1968, upon the terms and conditions as to the remuneration and otherwise contained in the agreement, dated 18th February, 1969, as clarified by the selling agents in their letter, dated 18th February, 1969, annexed to the said agreement, which agreement with letter annexed is placed before the meeting".

Prior thereto, Reighley moved and Warner seconded the proposition that the meeting requisitioned by the plaintiffs should be called first. This proposition failed and thereafter another resolution was passed by a majority, namely, that the extraordinary general meeting to be convened by the company should be held on April 28, 1969, at 4 p.m. at Patkar Hall of S.N.D.T. University and that the extraordinary general meeting requisitioned by the plaintiffs should be held on April 29, 1969, at 4 p.m. at the same place. It was also resolved that the secretary of the company should send out notices of the said meeting together with the explanatory statements in consultation with the solicitors of the company. In pursuance of these resolutions two notices, both dated March 27, 1969, were sent out to the shareholders, the one calling the extraordinary general meeting convened by the company and the other calling the extraordinary general meeting requisitioned by the plaintiffs. The convening of these two meetings resulted in a regular proxy-battle between the plaintiffs and the Kilachand group. A large number of proxies were lodged by both sides as also a large number of letters revoking the proxies given in favour of the other group. Circulars and statements to the shareholders in the form of advertisements in newspapers were issued by both sides. The meetings were held in a "pandal" put up in the open space adjacent to the said Patkar Hall. At both the said meetings Tulsidas took the chair. According to the plaintiffs, there were protests and objections to Tulsidas presiding at the said meetings. It is admitted that there were such protests and objections so far as the first meeting was concerned. At both the said meetings a poll was demanded and it was ordered by Tulsidas as chairman of the said meetings to be taken immediately and accordingly a poll was so taken. In respect of the poll taken at both the said meetings, defendant Nos. 3 and 4 in Suit No. 681 of 1969 were appointed as scrutineers. Both these defendants are chartered accountants. The third defendant is a partner in the firm of chartered accountants who are the company's auditors, while the fourth defendant is a partner in Messrs. Ford, Rhodes, Parks and Company, chartered accountants, who are the auditors of the said Firestone Tyre and Rubber Company of India Private Ltd. After the poll was taken at the meeting of April 28, 1969, Tulsidas announced that the result of the poll would be declared by May 26, 1969, by an announcement in newspapers. Similarly, after the poll was taken at the meeting held on April 29, 1969, Tulsidas announced that the result of the poll would be declared 15 days after the result of the poll taken at the meeting held on April 28, 1969. Thereafter, by an announcement in newspapers, the announcement of the result of the poll of the meeting of the 28th April was postponed to the end of June, 1969.

On June 3, 1969, the plaintiffs filed Suit No. 522 of 1969. In this suit the plaintiffs have challenged the validity of both the initial appointment of the private company as the sole selling agents of the company as also their appointment as such sole selling agents for a further term. The plaintiffs have also challenged the validity of the resolution of the board passed on November 14, 1968. They have further contended that a special resolution was necessary for approving the appointment of the private company and that as the meeting of the 28th April was convened only for passing the resolution as an ordinary resolution, the private company had vacated their office as sole selling agents as from April 29, 1969. They have also prayed for a refund by the private company to the company of all amounts of commission received by it, and for an injunction restraining the company and the private company from either acting upon the said resolution of the board of November 14, 1968, or on the said agreement of February 18, 1969, read with the said letter dated February 18, 1969, and restraining the company from paying to the private company and the private company from receiving from the company any remuneration as and by way of sole selling agency commission or otherwise in the future. In Suit No. 522 of 1969, the plaintiffs took out a notice of motion on June 11, 1969, in which they have prayed for an interim injunction for restraining the company from making any payment to the private company by way of commission or otherwise under the said resolution of the board dated November 14, 1968, or the said agreement dated February 18, 1969, read with the said letter dated February 18, 1969, or from implementing in any manner or acting upon the said resolution or the said agreement. On June 30, 1969, the result of the poll of the meeting held on April 28, 1969, was announced in newspapers. According to the said announcement, the votes cast in favour of the resolution were 2,47,480 and the votes cast against the said resolution were 2,27,309. Accordingly, by the said announcement, Tulsidas as the chairman declared that the said resolution was carried.

Several important events took place between the date of the issue of the said notices convening the meetings and the aforesaid announcement. Correspondence also took place between the parties both before and after the announcement of the result. Some of these facts are disputed, but some and particularly those which are necessary for forming an opinion on the order to be made on these motions are admitted. I will deal with these facts in detail while considering the arguments advanced with respect to the validity of the result of the poll.

On July 16, 1969, the plaintiffs filed Suit No. 681 of 1969. In this suit they have challenged the validity of the said notices convening the meetings, the conduct of the said meetings, the manner in which the result of the poll taken at the meeting of the 28th April was arrived at and the result of such poll. In the said suit the plaintiffs have prayed for a declaration that the said meeting held on the 28th April and the declaration of the result of the poll taken thereat were illegal and void and that the said meeting was not properly held as required by law. In the alternative they have prayed that the court should give directions for scrutinising the votes, proxies and letters of revocations in respect of the said two extraordinary general meetings and should appoint a fit and proper person to scrutinise them and to determine and decide the result of the said meetings and should remove Tulsidas and defendants Nos. 3 and 4 as the chairman and scrutineers respectively of the said meeting of the 29th April. In the said Suit No. 681 of 1969 the plaintiffs took out a notice of motion on July 17, 1969. In the said motion they have prayed for an interim order and injunction restraining Tulsidas and the scrutineers from exercising any power as chairman or scrutineers of the said general meeting of the 29th April in connection with the scrutiny of proxies, letters of revocations or votes cast thereat, as also for restraining the company, Tulsidas and the private company from in any manner implementing or acting upon the footing that the resolution proposed at the said meeting of the 28th April was passed, and restraining the company from making any payment to the private company and the private company from receiving from the company any payment, whether by way of commission or otherwise, under the said resolution of the board of directors passed on November 14, 1968, or under the said agreement of February 18, 1969, read together with the said letter dated February 18, 1969, and restraining the company, Tulsidas, the private company and the scrutineers from disposing of or otherwise dealing with the papers and documents in connection with the polls taken at the said two extraordinary general meetings including certain documents specified in exhibit "Z-9" to the plaint, and for an order permitting the plaintiffs to inspect the said papers and documents. Before issuing the said notice of motion the plaintiffs, after giving notice to the defendants in the said suit, made an application to me on July 16, 1969, for ad interim reliefs, and after hearing counsel on behalf of the parties, I issued an ad interim injunction restraining the defendants to the said suit, namely, the company, Tulsidas, the scrutineers and the private company, and each of them and their servants and agents from disposing of or in any manner dealing with the papers and documents in connection with the polls taken at the said two extraordinary general meetings including those mentioned in exhibit "Z-9" to the plaint or from opening the packets in which the papers may have been kept.

Though a large number of grounds have been taken in both these suits at the hearing: of these notices of motion Mr. Nariman, learned counsel for the plaintiffs, has confined himself to arguing certain points only. This he has done only for the purposes of these motions and without in any mariner giving up the right to argue the said points at the hearing of the suits; for instance, though in the said Suit No. 522 of 1969 the validity of the initial appointment of the private company as sole selling agents of the company made in September, 1963, has been challenged, Mr. Nariman for the purposes of these notices of motion did not argue this point at the hearing of these motions. I may also mention that all parties before me are agreed and further applied to me that it would be in the interest of the parties if the hearing of both these suits were expedited, a view which I too am inclined to take. It was also not disputed by any of the defendants that an interim injunction may be granted restraining Tulsidas and the scrutineers in terms of prayer (a) of the said notice of motion in Suit No. 681 of 1969, namely, restraining Tulsidas and the scrutineers from proceeding further with exercising any power as chairman or scrutineers at the said extraordinary general meeting of the company held on April 29, 1969, in connection with the scrutiny or examination of the proxies, revocations of votes cast thereat in connection with the declaration of the result of the poll taken thereat. The reason for this is obvious. Either the company had validly approved the further appointment of the private company at the meeting held on April 28, 1969, and the resolution moved thereat was duly passed, assuming an ordinary resolution only was required, or it had not. In either event, the passing or rejecting of the resolution moved at the requisitioned meeting held on April 29, 1969, would be immaterial. If the further appointment was approved at the meeting of the 28th April its disapproval at the meeting of the 29th April would not have any effect. If the said further appointment was not approved at the meeting of the 28th April, its express disapproval at the meeting of the 29th April would be redundant. The parties are also agreed that the papers and documents in connection with the polls taken at the said two meetings should be kept in safe custody and that the parties should be permitted forthwith to take inspection thereof under proper safeguards without waiting for formal discovery, so that the hearing of the suits and particularly of Suit No. 681 of 1969 may be expedited. Though at one stage the parties agreed as to the person who should have the custody of these papers and documents and give inspection thereof, as the parties could not agree upon the form of the consent order in that behalf, no order by consent can, however, be passed with respect thereto.

I will now deal with the various points argued at the hearing of these notices of motion in the order in which they arise. Chronologically, therefore, I will first take up plaintiffs' objections to the said resolution passed at the meeting of the board of directors of the company held on November 14, 1968. The contentions in that behalf are taken in Suit No. 522 of 1969. It is contended that the solicitor-director was prohibited by section 300 of the Companies Act, 1956, from taking any part in the discussion of, or vote on, the said appointment for a further term of the private company and that, since he took part in the discussion and voted, his vote is void and therefore as there were two votes in favour of the proposition that the private company should be appointed for a further term and two votes against the said proposition, the resolution was not duly passed. On behalf of the contesting defendants, namely, the company, Tulsidas and the private company, it is contended that the solicitor-director had no such concern or interest in the matter of the further appointment of the private: company as sole selling agents as required by section 300 of the Companies Act, 1956, and that assuming he had any such interest or concern, the plaintiffs all throughout knew about the same and did not raise any objection to the solicitor director taking part in the discussion or voting at the said meeting of the board held on November 14, 1968, and the plaintiffs are, therefore, estopped from taking up this contention. The relevant provisions of law are to be found in sub-sections (1) and (4) of section 299 and sub-sections (1), (3) and (4) of section 300 of the Companies Act, 1956. These provisions are as follows:

"299. Disclosure of interests by director.—(1) Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the board of directors...

(4) Every director who fails to comply with sub-section (1) or (2) shall be punishable with fine which may extend to five thousand rupees".

"300.Interested director not to participate or vote in board's proceedings.—(1) No director of a company shall, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement; nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote ; and if he does vote, his vote shall be void………

(3) In the case of a public company or a private company which is a subsidiary of a public company, if the Central Government is of opinion that having regard to the desirability of establishing or promoting any industry, business or trade, it would not be in the public interest to apply all or any of the prohibitions contained in sub-section (1) to the company, the Central Government may, by notification in the official gazette, direct that the sub-section shall not apply to such company, or shall apply thereto subject to such exceptions, modifications and conditions as may be specified in the notification.

(4) Every director who knowingly contravenes the provisions of this section shall be punishable with fine which may extend to five thousand rupees".

Sections 299 and 300 reproduce the provisions of sections 91A and 9IB of the Indian Companies Act, 1913, with certain changes. I have indicated by means of underlining the material difference between the old sections and the new sections. The material provisions of sections 91A and 91B of the old Companies Act were as follows:—

"91A. Disclosure of interest by director.—(1) Every director who is directly or indirectly concerned or 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...

(4) Every officer of the company who knowingly and wilfully acts in contravention of the provisions of sub-section (3) shall be liable to a fine not exceeding five hundred rupees".

"9IB.Prohibition of voting by interested director.—(1) No director shall, as a director, vote on any contract or arrangement in which he is either directly or indirectly concerned or interested nor shall his presence count for the purpose of forming a quorum at the time of any such vote ; and if he does so vote, his vote shall not be counted :…………

(2) Every director who contravenes the provisions of sub-section (1) shall be liable to a fine not exceeding one thousand rupees".

In addition to the penal consequences provided for by section 299(4), a director who acts in contravention of section 299 vacates his office as such director under section 283(1)(i) of the Companies Act, 1956. It may be mentioned that article 184B(1) of the articles of the company reproduces the provisions of section 300(1).

The facts which are said to make the solicitor-director an interested director within the meaning of section 300 may now be stated. These facts are all admitted by the defendants. The solicitor-director is a partner in the firm of solicitors, Messrs. Daphtary, Ferreira and Diwan. He and his firm have for several years been acting as general solicitors for the Kilachand family and in particular for Tulsidas and Ramdas and for all Kilachand concerns. They were and are solicitors for the said Kesar Corporation Private Ltd., which is the holding company of the private company, the solicitor-director being himself a subscriber to the memorandum and articles of association of the said Kesar Corporation Private Ltd. and at one time a shareholder thereof. They are also solicitors for the company and the private company right from the respective dates of their respective incorporation and the solicitor-director is a subscriber to the memorandum and articles of association of the company along with Tulsidas, Ramdas, their brother, Ambalal, Suresh, the son of Tulsidas, and Rajnikant, the son of Ambalal. At the time of the incorporation of the private company on or about January 6, 1960, another partner of the firm of Messrs. Daphtary, Ferreira and Diwan filed with the Registrar of Companies, Bombay, a declaration of compliance with the provisions of the Indian Companies Act, 1913. Further, the solicitor-director has been a director of Track Private Ltd. since 1951 and holds more than 20 per cent, of the shares in Track Private Ltd. The said Track Private Ltd. has its registered office at the same address as the registered office of the company and the private company. The said Track Private Ltd. is the company owned and controlled by the Kilachand group in which Tulsidas, his three brothers and his son, Suresh, Ambalal's son the said Rajnikant, and Tonil, the son of Ramdas, are shareholders, the word "Track" being a coined word representing the first letters in the personal names of Tulsidas, Ramdas, Ambalal, Chinubhai and the family name, Kilachand. The solicitor-director is also a director and shareholder of Polychem Ltd. in which the Kilachand brothers and their relatives hold considerable financial interest. The sole selling agents of the said Polychem Ltd. are Indian Commercial Company Private Ltd. of which almost all except two shares are held by the Kilachand family and the said Kesar Corporation Private Ltd. The solicitor-director was also a subscriber to the memorandum and articles of association of the said Indian Commercial Company Private Ltd. and the said firm of Messrs. Daphtary, Ferreira and Diwan have been and are the solicitors of the said company. The legal work of the Kilachand family and the Kilachand concerns and companies is personally attended to by the solicitor-director, including their tax matters and contentious and non-contentious matters. The proxies for the meetings of the 28th and the 29th April which Tulsidas obtained were in favour of Tulsidas or failing him the solicitor-director or failing the solicitor-director the said Ruia or failing the said Ruia the said Kirloskar. Along with the said Ruia and the said Kirloskar the solicitor-director issued to the shareholders of the company a printed circular asking them to vote in favour of the resolutions to be moved at the said extraordinary general meeting of the 28th April. It is contended by the plaintiffs that the said firm of Messrs. Daphtary, Ferreira and Diwan and the solicitor-director as a partner in that firm have earned and are earning large sums of money as solicitors from the Kilachand family and the Kilachand concerns and companies and that as a result of his long association with the Kilachand family the solicitor-director is a family solicitor and also a close friend and a person in the confidence of the Kilachand family. It is, accordingly, submitted by the plaintiffs that the solicitor director was concerned or interested, if not directly, at least indirectly, in the further appointment of the private company and that by reason of his long association and professional relationship and close friendship with the Kilachand family and particularly with Tulsidas, he was interested in safeguarding and promoting the interests of the Kilachand family and the Kilachand concerns and, naturally, therefore, was interested and .concerned in seeing that the highly remunerative sole selling agency was granted to the private company for a further maximum period of five years. It is further submitted that there was thus a conflict between his interest in the Kilachand family and Tulsidas and the private company and his duty as a director of the company.

Section 300 of the Companies Act, 1956, embodies, just as section 91B of the Indian Companies Act, 1913, did, the general rule of equity (see Pratt (T. R.) (Bombay) Ltd. v. M. T. Ltd. The clearest exposition of this rule is to be found in Aberdeen Rly. Co. v. Elaikie. In that case, Lord Cranworth said :

"A corporate body can only act by agents, and it is of course the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect. So strictly is this principle adhered to, that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. It obviously is, or may be, impossible to demonstrate how far in any particular case the terms of such a contract have been the best for the interest of the cestui que trust, which it was possible to obtain. It may sometimes happen that the terms on which a trustee has dealt or attempted to deal with the estate or interests of those for whom he is a trustee, have been as good as could have been obtained from any other person, they may even at the time have been better. But still so inflexible is the rule that no inquiry on that subject is permitted".

Though this was a case from Scotland, the rule of English law is the same, for, as observed by Swinfen Eady L.J., in Transvaal Lands Company v. New Belgium (Transvaal) Land and Development Company, the doctrine rests on such obvious principles of good sense that it is difficult to suppose that there could be any system of law in which it would not be found. In Transvaal Land Company's case it was held at page 503 that:

"Where a director of a company has an interest as shareholder in another company or is in a fiduciary position towards, and owes a duty to, another company which is proposing to enter into engagements with the company of which he is a director, he is in our opinion within this rule. He has a personal interest within this rule or owes a duty which conflicts with his duty to the company of which he is a director. It is immaterial whether this conflicting interest belongs to him beneficially or as trustee for others"

This rule was characterised by Lord Cairns L.C. in Parker v. McKenna as not a technical or arbitrary rule but a rule founded upon the highest and truest principles of morality. Thus, this rule applies not only where there is a conflict of interest or conflict of interest and duty but also where there is a conflict of two duties. It is immaterial whether the interest is a personal interest or arises out of a fiduciary capacity or whether the duty which is owed is in a fiduciary capacity. Actual conflict is also not necessary. A possibility of conflict is enough to bring the case within the ambit of this rule nor does the application this rule depend upon the extent of the adverse interest. Directors stand towards] the company in a fiduciary position. In India this fiduciary character has received statutory recognition in section 88 of the Indian Trusts Act, 1882. The reason underlying this rule is that the company has a right to the unbiassed voice, advice and collective wisdom of its directors. (See Benson v. Heathorn Imperial Mercantile Credit Association v.Coleman and Victors Ltd. v. Lingard).

The section itself makes it clear that the interest or concern need not be direct. It may be indirect. Further, the words used in the section are "concerned or interested". The phrase "concerned in a contract" has been the subject-matter of judicial interpretation in England. In Nutton v. Wilson , the Court of Appeal had to consider rule 64 of Schedule II to the Public Health Act, 1875, under which a member of a local board who "in any manner "was "concerned in any bargain or contract" entered into by such board ceased (except in certain cases) to be such member and his office was thereupon to become vacant. By rule 70 of the said Schedule a penalty was imposed upon a person who acted as such member when disabled from acting by any provision of the Act. The defendant, a member of a local board, was employed by persons with whom the board had contracted for the performance of certain works on the premises of the board, to do the portion of the work so contracted. The trial court held against the defendant and an appeal against the said decision was dismissed. In the Court of Appeal Lindley L.J. observed at page 748 :

"There does not seem to be any question here of participating in the profits of a contract; but the question is whether the defendant can be said to have been concerned in any bargain or contract entered into by the board. The expression ' in any manner concerned ' is a somewhat lax one. Cases may be put in which a person might perhaps be said in one sense to be concerned in a contract entered into by the board, and yet it might be tolerably obvious that he was not ' concerned in the contract' in the sense in which the Act uses the words. To interpret words of this kind, which have no very definite meaning, and which perhaps were purposely employed for that very reason, we must look at the object to be attained. The object obviously was to prevent the conflict between interest and duty that might otherwise inevitably arise".

In Barnacle v. Clark the respondent was a member of a school board. He sold sand and gravel to a builder who had entered into a contract with the board for the building of a school. At the time of the sale the respondent was aware that the sand and gravel were intended to be used, as they were in fact used, in the building of the school. The respondent was prosecuted under section 34 of the Elementary Education Act, 1870, under which a member of a school board who, inter alia, "shall in any way share or be concerned in the profits of any bargain or contract with or any work done under the authority of such school board "was liable to a penalty and his office became vacant. The justices for the county of Northampton holding that the respondent was not guilty of any offence dismissed the in formation. Upon a case being stated to the court it was held that the respondent was guilty. Ridley J. referred to Nutton v. Wilson and observed that, though that was not a precise authority in favour of the appellant's contention, it showed the lines upon which similar statutory enactments had been construed. The court came to the conclusion that, having regard to the object of the Act, it should be carefully and strictly construed and, although the respondent had unwittingly offended against the provisions of the section and although there was no suggestion that what he did was done with a corrupt purpose or from a corrupt motive and although no blame attached to him, he ought to have been convicted. The test laid down in Nutton v. Wilson was accepted by the Court of Appeal in England v. Inglis and followed by Astbury J. in Holden v. Southwark Corporation. The word "interest" occurring in section 12(1) of the Municipal Corporations Act, 1882, of England, came up for consideration of the Court of Appeal in England v. Inglis^. In that case, the defendant, who was a member of a municipal corporation, carried on business as a jeweller and optician. The optical department was managed by his son who was not a partner but was a paid employee. A contract was made between the son in his own name and the municipal corporation for the supply of spectacles to the children of the schools controlled by the corporation's education committee. The contract was carried out by the son, the spectacles were paid for by him with his own cheque and he received moneys in his own name from the corporation and paid the amounts so received into his own banking account. The spectacles were supplied in cases bearing the son's name but the defendant's business address, some of the cases being taken at the expense of the defendant out of his stock, but the shop was provided and the establishment expenses paid by the defendant and the fact that the spectacle cases bore the defendant's address helped to advertise his business with the consequent probability of increasing his custom. Salter J. held that "interest" in a contract within the meaning of section 12(1) of the Municipal Corporations Act, 1882, must be something more than a sentimental interest, such as arises from the natural love and affection of a man for his son ; it must be a pecuniary or, at least, a material interest; but it need not be a pecuniary advantage. On the facts of the case the Court of Appeal held that the defendant had a pecuniary interest of an adverse kind in the contract and that it could properly be held that the defendant had a pecuniary advantage, or a reasonable expectation of a pecuniary advantage, from the contract, for in any event this helped to advertise his business. In K.F. Narintan v. Municipal Corporation of Bombay, Mulla J. had to construe clause (p) of section 36 of the City of Bombay Municipal Act, 1888, as that Act was then entitled. That clause provided:

"A Councillor shall not vote or take part in the discussion of any matter before a meeting in which he has, directly or indirectly, by himself or by his partner, any share or interest such as is described in clauses (g) to (1) both inclusive of section 16, or in which he is professionally interested on behalf of a client, principal or other partner".

After referring to England v. Inglis , Mulla J. said that it therefore followed that, where there is a pecuniary advantage, or a reasonable expectation of a pecuniary advantage, it must be regarded as an "interest" within the meaning of that section. If the interest in a contract was pecuniary, it was immaterial that the amount involved was trifling. If the interest was not pecuniary, it must at least be a material interest. Mulla J. also referred with approval to the test laid down in Nutton v. Wilson and accepted in later cases mentioned above.

In the present case the solicitor-director held, vis-a-vis the company, a dual fiduciary character. He was both a director of the company as also the solicitor for the company. He was also the solicitor for the private company, for the Kilachand family and all the Kilachand concerns and companies. The position of a solicitor who acts for two clients came up for consideration before the Court of Appeal in Moody v. Cox and Hatt . In that case the plaintiff had contracted to purchase from Hatt, who was a solicitor, and Cox, his managing clerk, who were trustees, a portion of their trust property. Throughout the transaction Hatt acted through Cox as solicitor both for vendors and purchaser. Cox failed to disclose to the plaintiff certain valuations previously obtained showing that the property was not worth the price which the plaintiff agreed to pay. The plaintiff knew that the vendors were trustees. In the course of the negotiations the plaintiff offered and Cox accepted a bribe. Thereafter the plaintiff filed an action for rescission of the contract. The defendants counter-claimed for specific performance. Younger J., in the trial court, held that the plaintiff was entitled to succeed on the ground that Hatt had failed to fulfil his obligation as solicitor for the plaintiff to disclose to him all material facts in his knowledge relating to the matter. As to the giving of the bribes, he held that the defendant Hatt, by affirming the contract, which he might have repudiated, had removed the blot upon it and placed the parties in the position in which they would have been if no bribes had been given and the plaintiff was not, therefore, deprived of his equitable right to rescission. The defendants filed an appeal which was dismissed. In the Court of Appeal Scrutton L.J. said

"Two questions will arise in cases of solicitor and client—first, as to the relation which will create this obligation, and, secondly, as to the nature of the obligation created. Where the relation of solicitor and client occurs in the very transaction attacked it will, in my view, be almost, if not quite impossible to avoid the obligation, and an independent solicitor should be employed by the client. It is called ' putting him at arm's length'. It might perhaps also be effected by a clear declaration of the position by the vendor, such as this : ' Mind, I am going to get the highest price I can; be on your guard;' but the position would have to be made very clear in order to relieve the solicitor of obligations far exceeding those of an ordinary vendor, and is a position to be avoided. More difficult questions arise when the employment as solicitor has been In other matters more or less numerous or recent, and the transaction in question is a separate transaction in which the solicitor does not act as such. It is a question of degree in every case......The relation may then be an actual relation of solicitor and client in the transaction impugned, or such an antecedent relation as gives rise to the influence by the solicitor and confidence by the client the effect of which has not ceased at the time of the transaction impugned………But it is said that he could not disclose that information consistently with his duty to his other clients, the cestuis que trust. It may be that a solicitor who tries to act for both parties puts himself in such a position that he must be liable to one or the other, whatever he does. The case has been put of a solicitor acting for vendor and purchaser who knows of a flaw in the title by .reason of his acting for the vendor, and who, if he discloses that flaw in the title which he knows as acting for the vendor, may be liable to an action by his vendor, and who, if he does not disclose the flaw in the title, may be liable to an action by the purchaser for not doing his duty as solicitor for him. It will be his fault for mixing himself up with a transaction in which he has two entirely inconsistent interests, and solicitors who try to act for both vendors and purchasers must appreciate that they run a very serious risk of liability to one. or the other owing to the duties and obligations which such curious relation puts upon them".

Lord Cozens-Hardy M.R. described the defendants' case as almost unarguable. He said at page 81:

"A man may have a duty on one side and an interest on another. A solicitor who puts himself in that position takes upon himself a grievous responsibility. A solicitor may have a duty on one side and a duty on the other, namely, a duty to his client as solicitor on the one side and a duty to his beneficiaries on the other ; but if he chooses to put himself in that position it does not lie in his mouth to say to the client 'I have not discharged that which the law says is my duty towards you, my client, because I owe a duty to the beneficiaries on the other side'. The answer is that if a solicitor involves himself in that dilemma it is his own fault"

The principles laid down in Moody v. Cox and Halt were followed in Goody v. Baring.

On behalf of the contesting defendants it was submitted that sections 299 and 300 provide for penal consequences and that not only there was a liability to be prosecuted under these sections and fined, but under section 283(1)(i) a director who acted in contravention of section 299 vacated his office and these sections should, therefore, receive a strict construction. It was further submitted that the Companies Act was a complete code and no disqualification would be imported into sections 299 and 300 unless such disqualification could be found in the sections themselves and the scope of the sections cannot be enlarged on any equitable principles which may have applied prior to the enactment of the sections. It was further submitted that an interest in the contract or arrangement which the sections require must be a pecuniary or a material interest. It must relate to the contract or arrangement itself and must be such as creates a conflict between the interest of the director concerned as a director of the company and his own interest in the contract and not any one else's. Before considering these arguments I may mention that in the present case assuming the solicitor-director had a concern or an interest in the appointment for a further term of the private company, he had not at any time made a disclosure thereof under section 299.

In my opinion, it is not strictly correct to say that section 300 is a disqualifying section. It is a prohibitory section. What section 300 does is to prohibit a director of a company holding a particular character from doing certain acts, namely, from taking any part in the discussion of, or voting on, any contract or arrangement entered into, of to be entered into, by or on behalf of the company, if he is, in, any way, whether directly or indirectly, concerned or interested in the contract or arrangement. After prescribing these prohibitions the section lays down the consequences of infringing them. That section 300(1) contains prohibitions is also made clear by sub-section (3) of section 300 which confers upon the Central Government the power in certain circumstances where it is of the opinion that "it would not be in the public interest to apply all or any of the prohibitions contained in sub-section (1) to a company", to direct that that sub-section shall not apply to such company or will apply with such exceptions, modifications and conditions as may be specified. It may also be pointed out that the criminal liability imposed both by sections 299 and 300 is not an absolute one. It is only in respect of 'a director who knowingly contravenes the provisions of these sections. Thus, knowledge is the gist of the offence under both these sections. It is true that the sections must be strictly construed but not in favour of the directors as contended. They must be construed, as pointed out by Lindley L.J. in Nutton v. Wilson, looking at the object to be attained by the enactment of the sections. Both under the Companies Act as in the statutes which were considered in Nutton v. Wilson, Barnacle v. Clark and England v. Inglis the object intended to be attained by the enactment of such prohibitions was to prevent the conflict between interest and duty which might otherwise inevitably arise. In enacting sections 299 and 300, the legislature wisely did not attempt to define "concern "or" interest". Since these sections were enacted in the interest of the shareholders, so that they may have the benefit of the independent, unbiassed and collective judgment, opinion and wisdom of their board of directors, the words used in the sections have been purposely used in as general a sense as possible. To have laid down any confining limits to the operation of these sections may have resulted in defeating the very object for which these sections were enacted. As pointed out by the Privy Council in T.R. Pratt (Bombay) Ltd. v. M.T. Ltd and by the Supreme Court in Narayandas Sreeram Somani v. Sangli Bank Ltd.. with reference to the old sections 91A and 9IB, the sections contain concise statement of the general rule of equity fully considered and accepted by the Court of Appeal in Transvaal Lands Company v. New Belgium (Transvaal) Land and Development Company As pointed out by Upjohn L.J., while sitting in the Court of Appeal in Boulting v. Association of Cinematograph, Television and Allied Technicians

"The principle is one of the most firmly established in our law of equity and it has been repeatedly recognised and applied by the Lord Chancellors and by the House of Lords……………The rule is not directed at corrupt or fraudulent bargains (though, of course, it brings them within its umbrella) The rule is one of principle which depends not at all on any corrupt mens rea in the mind of the person holding the conflicting capacity …….. This rule extends to all manner of relationships and the reports are full of examples of its application to many different circumstances. Like all rules of equity, it is flexible in the sense that it develops to meet the changing situations and conditions of the time………….".

The sections must, therefore, be construed bearing in my mind the old long established rule of equity which they enact and having regard to the object intended to be attained.

In support of the other submissions of the contesting defendants, Mr. Sen, learned counsel for the company, placed reliance upon K.F. Nariman v. Municipal Corporation of Bombay. Now, in order to understand what precisely was laid down by Mulla J. in that case, it is necessary to look somewhat more closely at the facts of that case and the points which there arose for the court's decision. At a meeting of the Bombay Municipal Corporation a proposition was moved that the report "regarding the revision of the present scale of tramway fares be approved and adopted ". To the above proposition an amendment was moved that the further consideration of the report be adjourned till a particular date when a new corporation would have been formed. On a poll being taken, there were equal number of votes in favour of and against the amendment, and the chairman exercised his additional or casting vote against the amendment and declared that the amendment was lost. The plaintiff's allegation was that 6 out of the 17 councillors who had voted against the amendment were disqualified from voting having regard to the provisions of clause (p) of section 36 of the City of Bombay Municipal Act, 1888, now entitled the Bombay Municipal Corporations Act, 1888. While denying this the defendants contended that two councillors who voted for the amendment were disqualified from voting. Under clause (p) a councillor is prohibited from voting or taking part in the discussion of any matter before a meeting in which he has, directly or indirectly, by himself or by his partner, any share or interest such as is described in clauses (g) to (1), both inclusive, of section 16, or in which he has a professional interest on behalf of a client, principal or other person. Now, it is obvious that clause (p) is in terms materially, different from section 300(1). Under clause (p) the share or interest must be such as is described in clauses (g) to (1) of section 16. Further, the matter before the meeting must be one in which his interest on behalf of another person is a professional interest. The concern or interest described in section 300(1) is not subject to any such restriction. In that case with respect to certain councillors it was alleged that they were shareholders of the Bombay Electric Supply and Tramways Company Ltd. which owned and conducted tramways in the city of Bombay. Mulla J. held that if a councillor was also a shareholder of the said company and had a beneficial interest in the shares, he was disqualified from voting. He, however, held that where the shares stood in the name of a councillor who had no beneficial interest in them but was a mere trustee for another, he was not disqualified from voting, because though he was under an obligation to his cestui que trust to vote at meetings of the said company in a manner beneficial to the interest of the beneficiaries, as he did not owe the membership of the corporation to his being a shareholder of the said company, it was no part of his duty to vote at any meeting of the corporation as his beneficiary would have him to do. If, therefore, no such duty was imposed upon him by law, it could not be said to be a case of conflict between two duties or between interest and duty, his duty or his interest in the beneficiary being no higher than what a father has in the prosperity of his son. While considering how far this decision applies it should be borne in mind that in the course of his judgment Mulla J. cited with approval and without qualification Nutton v. Wilson and England v, Inglis and the other English authorities referred to above. In Nutton v. Wilson the word "concerned" was given a very wide meaning. Mulla J. pointed out that, though in most of those cases the question before the court was whether a councillor had an interest in contracts with the local board, while the question in the case before him was whether the said councillors had a share or interest in the said company, the principle laid down in those cases afforded a fairly good guide to the determination of the points before him. Mulla J. was, however, dealing only with the case of a "share or interest" under section 36(p) of the City of Bombay Municipal Act and not of a "concern "in the matter in question. The share or interest which clause (p) describes is the interest of a councillor by himself or by his partner only, or a professional interest. But the more important point of distinction is that the decision in Transvaal Lands Company v. New Belgium (Transvaal) Land and Development Company was not cited before Mulla J. This is important because in Transvaal Lands Company's case fiduciary capacity was expressly held to be such an interest as would give rise to a conflict. The Privy Council in T.R. Pratt (Bombay) Ltd. v. M. T. Ltd and the Supreme Court in Narayandas Sreeram Somani v. Sangli Bank Ltd. unequivocally approved and accepted the principles laid down in Transvaal Lands Company's case and pointed out that section 91B of the 1913 Act (corresponding to the present section 300) contained a concise statement of the general rule of equity explained in that case. K.F. Nariman's case was, of course, decided before the privy Council and the Supreme Court decisions. The point, however, is now concluded by this pronouncement of the highest courts. It should also be noted that section 300(1) does not merely use the word "interest" but speaks both of "concern" or"interest", whether direct or indirect, and in this connection reference may again be made to the observations of Lindley L.J. in Nutton v. Wilson of Darling J., in Barnacle v. Clark and of Romer J., in Victors Ltd. v. Lingard referred to above.

It was next submitted that the interest of the solicitor-director in the private company was at the highest a sentimental interest as, for example, that of a father in his son or of a man in a relative of his and that he was under no legal duty to protect or advance the interest of the private company and cannot therefore amount to an "interest" under section 300 and in support of this, reliance was placed upon the judgment of a learned single judge of the Rajasthan High Court in Ramji Lal Baisiwala v. Baiton Cables Ltd . In that case it was held that concern or interest in a contract did not include the concern or interest of a relative. Of course, there is no question of the solicitor-director being a relative of any of the Kilachands, but what was said was that, if a man has no higher than a sentimental interest in the welfare of his relative, he cannot have a higher interest in the welfare of his friend and accordingly the friendship between the solicitor-director and Tulsidas and the other members of Tulsidas' family cannot constitute an interest. Two Division Bench judgments of this High Court have, however, taken a different view with respect to interest arising out of relationship. In Special Civil Application No. 1807 of 1955, decided by Chagla C. J. and Dixit J., on December 7, 1955, it was held:

"In our opinion, the interest here is not the interest which a man may have in the prosperity of his friend. There the interest is clearly sentimental or emotional. When you have a person living jointly with his father, it seems to be inarguable that the son's interest in the prosperity of his father is purely sentimental or emotional. If the father earns more, he has more to spend on the family. His prosperity must affect the position of the son and the interest that the son has in the prosperity of his father is clearly a material or a substantial interest".

This case was followed in Dattatraya Awadaji Shinde v. S.V. Bhave by the Division Bench consisting of Dixit and Badkas JJ. Both these were cases under the Bombay Provincial Municipal Corporation Act, 1949, and in Dattatraya Awadaji Shinde v. Bhave the Division Bench pointed out that unless cases of conflict between interest and duty arising out of the relationship of husband and wife or father and children were avoided, purity in municipal administration would be impossible to achieve. Further, the argument of the contesting defendants overlooks the fact that the plaintiffs' case is not based merely upon the friendly relations between the solicitor-director and the Kilachands. It is based upon the fiduciary character which the solicitor-director holds, vis-a-vis, Tulsidas, the Kilachand family and the Kilachand concerns and companies, by reason of the fact that his firm and he on behalf of his firm have for all this long period of years been their general solicitor and that his confidential relationship has deepened by reason of the close personal relationship which has sprung up between them.

It was next submitted that there was nothing to show that the solicitor-director or his firm would be acting as solicitors for the private company in the matter of its appointment as sole selling agents for a further period, and in this connection reliance was placed upon Mohan Lal v. Grain Chambers Ltd., which was affirmed in appeal by the Supreme Court in Selh Mohan Lal v. Grain Chambers Ltd. In that case the board of directors of the Grain Chambers Ltd. an association of grain merchants, passed a resolution containing the terms upon which an entry of transactions in future in gur were to be effected. This resolution was passed in pursuance of the general policy of the company in carrying on its business and functions. It provided how future transactions in gur were to take place. The question whether directors of that company were interested within the meaning of the old section 91B arose for consideration of the court in petitions filed for winding up of that company. It was held that the word "arrangement" in section 91B did not cover a general scheme of the type under which at the time when the scheme was approved by the board of directors, no rights or liabilities accrued or were incurred by the members of the company, the directors or the company itself; the word "arrangement "as used in the section being intended to cover such transactions in which a director at once becomes interested, so that he either acquires some rights or incurs some liabilities as a result of it. On appeal to the Supreme Court it was held that by passing that resolution, all that was resolved at the directors ' meeting was that the company should commence business in future in gur according to the rules set forth in the resolution and, therefore, the directors were not voting on a contract or arrangement in which they were directly or indirectly concerned or interested. Now, I do not see what application this case has to the facts before me. That was a case of an association framing rules for the future transaction of its own business. That case is wholly distinguishable on facts. What is apposite in this connection are the following observations of Scrutton L. J. in Moody v. Cox and Halt :

"The relation may then be an actual relation of solicitor and client in the transaction impugned, or such an antecedent relation as gives rise to the influence by the solicitor and confidence by the client the effect of which has not ceased at the time of the transaction impugned"

Moody v. Cox and Halt was sought to be distinguished on the ground that its ratio applied only to the case of a solicitor acting as common solicitor for both vendor and purchaser and had no application to other transactions. In my opinion, this is not a correct reading of that authority. Moody v. Cox and Hatt was decided as much on the general principle of equity already sufficiently referred to above in the other cases. One must bear in mind, as Upjohn L.J. pointed out in Boulting v. Association of Cinematograph, Television and Allied Techniciansa that this rule of equity is a flexible one and it develops to meet the changing situations and conditions of the time. What is important and should never be lost sight of are the words of Lord Cairns L.C. in Parker v. Mckenna that "this is a rule founded upon the highest and truest principles of morality ". If so heavy and onerous a duty lies upon a solicitor who acts as common solicitor in just one transaction, it would be absurd to say that the duty of that solicitor would be less or would be non-existent where that solicitor has been for a long period of time the general solicitor of one of the parties in all matters.

It must again be emphasised that section 300(1) refers not only to an "interest "but also to a "concern". Here reference may usefully be made to Baits Combe Quarry Ltd. v. Ford relied upon by Mr. Nariman, learned counsel for the plaintiffs. In that case the vendors of the Batts Combe Quarry covenanted with the purchasers "that they would not within ten years either solely or jointly with or as agent, officer, manager, servant, director or shareholder of any other person or company, directly or indirectly, carry on or assist in carrying on or be engaged, concerned, interested or employed in the business of a quarry within 75 miles as the crow flies of Batts Combe Quarry". One of the vendors within ten years provided a sum of money to enable his three sons to purchase the Chelms Combe Quarry in the immediate neighbourhood of the Batts Combe Quarry and for working capital. He also took part on his sons' behalf in preliminary negotiations for the purchase of machinery and equipment for the Chelms Combe Quarry. He was not a partner in the sons' business nor in any way financially interested in it and he took no part in its management. The Appeal Court held that the father had committed a breach of the covenant. Lord Greene M.R. said:

"Quite apart, however, from the words 'assist in carrying on' there are other words here which appear to me to cover this case. In my view, in doing what he did, the father was 'concerned in' the sons business. The word 'concerned' is of quite general import. Clearly it cannot be limited to 'concerned' in the sense of financial interest or of being an employee of the business. Again, I can see no more effective way of being concerned in a business than by providing the capital necessary to establish it, and the word 'concerned' seems also to cover the assistance given by the father in the course of the negotiations".

In the light of these authorities I am at this stage inclined to take the prima facie view that the solicitor-director was directly, and if not so, at least indirectly, concerned or interested in the contract of appointment of the private company for a further term as the sole selling agents of the company and, therefore, the vote cast by him was void and there being no majority in favour of the resolution, no valid resolution was passed at the meeting of the board held on November 14, 1968.

It was, however, submitted on behalf of the contesting defendants that the plaintiffs are estopped from contending that the solicitor-director was an interested or a concerned director. In this connection, the contesting-defendants have relied upon various statements made by the plaintiffs in the plaint in Suit No. 522 of 1969 to show that the plaintiffs and Warner and Reighley were aware that the solicitor-director was solicitor for the private company. They have further placed reliance upon statements made in the correspondence by the plaintiffs, to show that Warner and Reighley represented the interest of the plaintiffs on the board of directors of the company. It was, therefore, contended that the knowledge of Warner and Reighley must be taken to be the knowledge of the plaintiffs and the presence of Warner and Reighley at the meeting of the board held on November 14, 1968, must be taken to be for and on behalf of the plaintiffs and that Warner and Reighley not having protested at the said meeting against the solicitor-director taking part in the discussion or voting, the plaintiffs must equally be taken as having acquiesced therein. Now, it cannot be denied that there are statements in the plaint and on the record as stated by the contesting defendants. The effect of these statements now falls to be considered. On behalf of the contesting defendents reliance was placed on T.R. Pratt (Bombay) Ltd. v. M.T. Ltd., Narayandas Sreeram Somani v. Sangli Bank Ltd. and Ramji Lal Baisiwala v. Baiton Cables Ltd. In T.R. Pratt (Bombay) Ltd. v. M. T. Ltd. it was held that the old section 91 B did not operate to deprive of the benefit of his contract with the company a third party who had no notice of the defect in the directors' authority, for to so hold would be contrary to principle and, therefore, such a person was entitled to assume that the internal mangement of the company had been properly conducted. The question before the Judicial Committee was the interest of directors in the execution of a deed of equitable mortgage by Pratts Ltd. and by M.T. Ltd., of their property in favour of E.D. Sassoon and Co. Ltd. to secure loans advanced by that company to Pratts Ltd. through M.T. Ltd. The question arose in the liquidation of Pratts Ltd. when E.D. Sassoon and Co. claimed to be the secured creditors of Pratts Ltd. and M. T. Ltd. and in the alternative to be the unsecured creditors for the amounts secured by the deed of mortgage. The directors of Pratts Ltd. were all directors and shareholders of M.T. Ltd., and one of the directors of Pratts Ltd. was the managing director of Sassoons Ltd. and was invested with all the powers of the directors of that company. On these facts the Judicial Committee held that it was impossible to regard E.D. Sassoon and Co. Ltd. as being ignorant that in any question between Pratts Ltd. and M.T. Ltd., the former had no independent board and indeed no single director who was not interested on behalf of M. T. Ltd. and that, therefore, E. D. Sassoon and Co. Ltd. could not disclaim knowledge of the interest of the directors of Pratts Ltd. and were not entitled to assume that the provisions of section 91B had been complied with. I do not see how this authority supports the contesting defendant's case. Here also Tulsidas and Ramdas who by themselves and through concerns and companies controlled by them owned all the shares in the private company were the directors of both the company and the private company. They of course knew that the solicitor-director was the solicitor of the private company, their own personal solicitor and the personal solicitor of their other family members and their other concerns and companies and a shareholder and director in some of their concerns. Both of them were present at the said meeting of the board held on November 14, 1968. Though they did not participate in the discussion and abstained from voting, being present they certainly heard what was being said and saw what was happening and if the solicitor-director had an interest or concern in the matter of this appointment for a further term, Tulsidas and Ramdas had full knowledge of that fact and the private company, therefore, can hardly be said to be "a third party who had no notice of the defect"in the directors' authority. In Narayandas Sreeram Somani v. Sangli Bank Ltd.. the question arose under somewhat peculiar circumstances. Narayandas was one of the directors of the company. Ramnath was his brother. Ramnath became indebted to the company in large amounts. In order to comply with the requirements of the Reserve Bank to re-call the loan to Ramnath, Ramnath repaid the entire balance of Rs. 1,04,198-8-0 due by him. Out of this a sum of Rs. 1,00,000 was paid on behalf of Ramnath by Narayandas who on the same date obtained a loan of Rs. 1,00,000 from the company by executing a promissory note in the said sum as collateral security along with a letter of pledge in respect of cloth, saris, etc., valued at Rs. 1,50,000. Narayandas failed to repay the loan. Further, in order to comply with the requirements of section 277, the directors of the company including Narayandas decided that they or their nominees would subscribe for a large number of shares and accordingly Narayandas decided to subscribe for 2,000 shares in the names of his wife and mother and the wife of Ramnath, and shares were accordingly allotted to these three ladies. The allotment moneys were not paid in cash but by hundis drawn in favour of the company. In suits filed against Narayandas and Ramnath for recovery of the various amounts it was contended that the allotment of the said 2,000 shares was illegal inasmuch as Narayandas was present at the board meeting at which the said shares were allotted and had voted for the allotment. The Supreme Court held that under section 91B, if a director was an interested director, his vote was not to be counted and his presence also would not count, towards the quorum, that is to say, the minimum number fixed for the transaction of business by a board meeting, for a quorum must be a disinterested quorum and it must comprise of directors who are entitled to vote on the particular matter before the meeting. Their Lordships further pointed out that if an interested director voted and without his vote being counted there was no quorum, the meeting was irregular and the contract sanctioned at the meeting was voidable at the instance of the company against the director and any other contracting party having notice of the irregularity and since section 91B is meant for the protection of the company, the company may, if it chooses, waive the irregularity and affirm the contract. Their Lordships, therefore, held that the company having chosen to affirm the contract of allotment of shares by filing a suit, the allotment was valid and binding on the allottees. Their Lordships further held that Narayandas could not be heard to say that there was no valid allotment of the shares, since he was a director of the company and a party to the impugned resolution and had dealt with the shares on the footing that the allottees were the holders of the shares with a clear knowledge of the circumstances on which he might have founded his present objection. Now, the distinguishing feature of the Supreme Court decision is that it was the interested director who after having taken the benefit of the contract was seeking to repudiate it and thereby his liabilities and obligations thereunder by setting up the defect in his own authority of which he naturally had knowledge. This, according to their Lordships of the Supreme Caurt, he was estopped from doing. This case rests, therefore, on a wholly different footing from the case before me. In the present case it is not the interested director who is challenging the contract or the resolution sanctioning it on the ground of his own defect or want of authority. It is a shareholder who considers himself aggrieved by this contract who is challenging it. In the present case the question of the company affirming the contract also does not arise. One of the main disputes in Suit No. 681 of 1969 is whether the resolutions approving the appointment of the private company for a further term was in fact passed. Even the result of the poll as declared by Tulsidas shows that nearly 48 per cent, of the shareholders have voted against the resolution. A large number of proxies obtained by the plaintiffs have been rejected by Tulsidas as being invalid. Similarly, a large number of proxies in favour of Tulsidas, in respect of which letters of revocation were obtained by the plaintiffs and filed with the company, have been held to be not validly revoked and treated as valid by Tulsidas. If, as mentioned in the latter part of the judgment while dealing with the extraordinary general meeting of April 28, 1969, some of the decisions given by Tulsidas on the validity of proxies and revocations are contrary to law and in respect of some others there is strong reason to believe that they were not given bona fide, it can hardly be said that the company has affirmed the contract. In any event, in Narayandas case the company affirmed the contract with full knowledge of the fact that Narayandas was an interested director. In the present case the shareholders were never made aware that the solicitor-director had an interest or concern in the contract of appointment of the private company for a further term or that, but for his vote, the resolution would not have been passed at the board meeting or that his vote was void. The company acting through its board of directors did not at any time place these facts before the shareholders. It is true that in the circulars which were issued by both sides the plaintiffs had mentioned that the solicitor-director was an interested director, but in the circulars issued by Ruia, Kirloskar and the solicitor-director the contrary position was taken up or in any event suggested. Thus, the shareholders had no clear indication whether the solicitor-director had any interest or concern as alleged by the plaintiffs and they could not be said to have voted in favour of the resolution approving the appointment for a further term with knowledge of the interest or concern of the solicitor director and its consequent effect on the resolution of the board. There can be no ratification except with full knowledge of the facts and the shareholders were never asked to ratify the said resolution after the aforesaid facts were made known to them. In Spackman v. Evans, Lord Chelmsford observed :

"To render valid an act of the directors of a company which is ultra vires, the acquiescence of the shareholders must be of the same extent as the consent which would have given validity from the first, viz., the acquiescence of each and every member of the company. Of course, this acquiescence cannot be presumed unless knowledge of the transaction can be brought home to every one of the remaining shareholders".

While referring to this case the Privy Council in Premila Devi v. Peoples Bank of Northern India Ltd. pointed out that by knowledge of the transaction Lord Chelmsford clearly meant knowledge of the invalidity of the transaction. In the Privy Council case it was held that there can be no ratification without an intention to. ratify, and there can be no intention to ratify an illegal act without knowledge of the illegality. In Ratnji Lal Baisiwala v. Baiton Cables Ltd., it was held that if without the vote of the interested director, the contract would still have been carried through, it is not affected. But if without the vote of the interested director, the contract would not be carried through or without him there would be no quorum, then the contract was voidable at the option of the company. On facts, however, it was held that two directors formed a quorum, and out of the three directors of the company, the two who voted had no concern or interest. In the present case, without the vote of the solicitor-director the board's resolution of November 14, 1968, would not have been passed as there would have been no majority and the question of the company affirming it, as pointed out above, cannot arise, assuming the contract is voidable. It is true that today, at the hearing", the company is supporting this resolution, but then the persons fighting the litigation on behalf of the company are its board of directors or rather the majority of the board of directors which is controlled by Tulsidas and they cannot be said to represent or reflect the opinion of the company acting through its shareholders.

It is also pertinent to note that section 300(1) makes a significant departure from the language used in the old section 91B. While section 91B provides "and if he does so vote, his vote shall not be counted ", section 300(1) enacts "and if he does vote, his vote shall be void". It was submitted that this was not a material change and did not alter the position, and in support of this, reliance was again placed upon the observations, at page 192, in Ramji Lal Baisiwala v. Baiton Cables Ltd. to the effect that the substitution of the expression "his vote shall be void" in place of "his vote shall not be counted" does not make any difference, for if a vote was not to be counted, that vote was a nullity, that is, void. With respect to the learned single judge who decided this case I am unable to subscribe to this view. The Companies Act, 1956, is as its long title shows "An Act to consolidate and amend the law relating to" companies……"While re-enacting section 91 B as 300(1) the legislature has made a departure in the language used. The difference in the language is in a very material part of the section inasmuch as that part enacts one of the consequences of contravening the prohibition laid down in that section. Such change of language must, therefore, be taken to have been made deliberately and with the intention of preventing the object underlying the section from being defeat ed. When something is declared by a statute to be void, it cannot be validated on the theory of acquiescence or, ratification. There can be no estoppel against a statute. The word "void" cannot be equated with the word "voidable". To my mind the object of providing that the "vote shall be void" was to make the vote a nullity and incapable of affirmance or ratification. If, therefore, without the vote in question being counted, a resolution could not have been passed, then the resolution must be taken not to have been passed.

It was next submitted that Warner was in the chair and that he having declared the resolution as having been passed, he should be taken to have given his second or casting vote in favour of the resolution. The short answer to this is that a casting vote has to be given and is not a matter of presumption. On the facts, it would also be illogical to draw any such presumption. Admittedly, Warner voted against the resolution. He, therefore, cannot, consistently With this, cast his second vote in favour of the resolution, unless the whole matter were to be treated as a farce. Further, even assuming that the acts of Warner and Reighley are to be taken as the acts of the plaintiffs, the facts on the record do not make out a case of estoppel apart from the position that there cannot be an estoppel against a statute. When the draft minutes of the meeting held on November 14, 1968,were circulated to the directors, Reighley altered the said draft minutes. The minutes then came up for approval before the meeting of the board of directors held on February 3, 1969. At that meeting Reighley read out a memorandum on behalf of himself and Warner and requested that the said memorandum should be made a part of the minutes. Reighley and Warner voted against confirmation of the said minutes as written in the minutes book. The solicitor-director, Ruias and Kirloskar voted for confirming the said minutes and the minutes as written in the minutes book and approved by the majority of the directors were confirmed and signed, Tulsidas and Ramdas were also present at this meeting but abstained from voting. This is shown by the minutes of the meeting held on February 3, 1969. On the next day, by his letter dated February 4, 1969, Reighley reproduced the said memorandum which clearly states that the vote of the solicitor-director could not be considered as he was at all material times and continued to be an interested director and as there were two valid votes for and two valid votes against the resolution, the resolution was not carried. The said memorandum further states that unless this was properly recorded in the minutes of the meeting of November 14, 1968, the minutes should not be considered as having been approved. Thus, before the minutes were confirmed, Warner and Reighley have recorded their objection. The sole selling agency agreement was executed thereafter on February 18, 1969, with full knowledge of this objection. I, therefore, do not find it possible at this stage to hold that by any act of theirs Warner and Reighley have induced the company or the private company to believe that the said resolution was validly passed and to act upon such belief and thereby alter its position to its prejudice.

It is also difficult to accept the proposition that because certain directors represent the interests of a shareholder, they are in their capacity as directors or agents of that shareholder. Warner and Reighley are shareholders in their own right and have been elected as directors by the shareholders of the company. Mr. Nariman, learned counsel for the plaintiffs, has in this connection relied upon a decision of the Court of Appeal in Gramophone and Typewriter Ltd. v. Stanley. The question arose whether an English company was liable to income-tax upon the full amount of the profits made by a German company. It was held that the fact that the English company held all the shares in the German company by itself did not make the business of the German company the business of the English company and the English company was only liable to pay income-tax upon such profits of the German company as had been received in England. This case is, however, not relevant. In view of the mandatory prohibition contained in section 300(1) and of the deliberate departure made in the language of that section from the language used in section 91B, I am at this stage inclined to hold that the vote of the solicitor-director cannot be validated but is void- and that the resolution was not duly passed. I am also not inclined at this stage to accept the contention that the plaintiffs are estopped from taking up this ground.

There can be no estoppel against a statute nor can a person waive any right or benefit conferred by a statute unless it is of a personal and private nature. There is a clear distinction between a contractual or a statutory right created in favour of a person for his own benefit and a right which is created on the ground of public interest and policy. The rule of waiver cannot apply to a prohibition based on public policy (see Post Master-General, Bombay v. Gangaram Babaji Chavan). The prohibitions contained in section 300(1) are prescribed in public interest and policy to safeguard the interests of the shareholders. It was, however, urged on behalf of the contesting defendants that the proposition that there is no estoppel against a statute is too wide and that principle has not been accepted in several cases. In support of this submission reliance was, however, sought to be placed upon only one case, namely, Towers v. African Tug Company. That case arose under peculiar circumstances. The secre tary and manager of a company who was a party to the payment of an interim dividend out of capital had received dividend on shares held by him. He and another shareholder who had also received dividend on the shares held by him filed a suit on behalf of themselves and all other shareholders of the company, other than those who were defendants, for an order to compel the directors to make good to the company the amount distributed as such dividend. The Court of Appeal negatived the claim. Vaughan Williams L.J. held that the fact that capital had been distributed in the payment of this dividend was recognised by the company and the shareholders and that this was an interim dividend and they were minded to replace this capital and had further prospects of completely replacing it out of the profits of .that very year and, therefore, the action was wholly unnecessary. He further stated that the court is not bound when it sees that an ultra vires act is in the course of being put right to give relief to a plaintiff who has acquiesced in the wrong and who has himself part of the proceeds of the wrong in his pocket. Stirling L.J. expressly starts his judgment by saying that he desired to rest his decision on the particular facts of that case and held that the action ought to have been dismissed on the ground that the personal conduct of the plaintiffs was such as to preclude them from obtaining relief. The company had also filed a counter-claim to recover from the plaintiffs the very dividends which they had in their pockets. This counter-claim was allowed. This case was distinguished in a later court of appeal case, namely, Mosely v. Koffyfontein Mines Ltd. on the. ground that the plaintiff in that case did not seek an injunction or anything with reference to the future but a personal order upon the directors to refund to the assets of the company the amount which had been wrongfully abstracted from the capital. Towers v. African Tug Company turned upon its facts, and I fail to see how it bears out the proposition canvassed by the contesting defendants.

The next point for consideration is whether a special resolution was necessary for the appointment for a, further term of the private company as sole selling agents of the company either under the provisions of section 314 of the Companies Act, 1936, or article 183 of the articles of association of the company. When the private company was appointed the sole selling agents in 1963, the resolution appointing it was passed as a special resolution. This was done as it was then considered that by reason of the fact that Tulsidas and Ramdas were directors and members of the private company, section 314 applied to the appointment of the private company as sole selling agents. Under section 189(2) of the Companies Act, 1956, a resolution is a special resolution when, inter alia, the intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the members of the resolution and the votes cast in favour of the resolution (whether on a show of hands, or on a poll, as the case may be) by members who, being entitled so to do, Vote in person, or where proxies are allowed, by proxy, are not less than three times the number of the votes, if any, cast against' the resolution by members so entitled to vote; The notice convening the extraordinary general meeting of April 28, 1969, however, specifies the intention to propose the resolution in question as an ordinary resolution nor are the votes cast in favour of the requisite majority required by section 189(2), the votes in favour of the resolution as declared by Tulsidas being a little over 52 per cent, of the votes cast both in person and by proxy. Since the plaintiffs who opposed the appointment for a further term of the private company hold more than 25 per cent, of the shares in the company, it is obvious that if a special resolution were required, it could never be passed.

To understand the plaintiff's submissions based on section 314 of the Companies Act, it is necessary to see the relevant provisions of sections 204, 294 and 314 of the Companies Act, 1956.

"204.Restriction on appointment of firm or body corporate to office or place of profit under a company.—(1) Save as provided in sub-section (2), no company shall, after the commencement of this Act, appoint or. employ any firm or body corporate to or in any office or place of profit under the company, other than the office of managing agent, secretaries and treasurers or trustee for the holders of debentures of the company, for a term exceeding five years at a time:……..

(4) Nothing contained in sub-section (1) shall be deemed to prohibit the re-appointment, re-employment, or extension of the term of office, of any firm or body corporate by further periods not exceeding five years on each occasion:

Provided that any such re-appointment, re-employment or extension shall not be sanctioned earlier than two years from the date on which it is to come into force.

(5) Any office or place in a company shall be deemed to be an office or place of profit under the company, within the meaning of this section, if the person holding it obtains from the company anything by way of remuneration, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise….".

"294.Appointment of sole selling agents to require approval of company in general meeting.—(1) No company shall, after the commencement of the Companies (Amendment) Act, 1960, appoint a sole selling agent for any area for a term exceeding five years at a time:…….

Provided that nothing in this sub-section shall be deemed to prohibit the re-appointment, or the extension of the term of office, of any sole selling agent by further periods not exceeding five years on each occasion.

(2) After the commencement of the Companies (Amendment) Act, 1960, the board of directors of a company shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made.

(2A)If the company in general meeting as aforesaid disapproves the appointment, it shall cease to be valid with effect from the date of that general meeting…….".

"314. Director, etc., not to hold office or place of profit.—(1) Except with the consent of the company accorded by a special resolution,—

(a) no director of a company shall hold any office or place of profit, and

(b) no partner or relative of such a director, no firm in which such a director or relative is a partner, no private company of which such a director is a director or member, and no director; managing agent, secretaries and treasurers, or manager of such a private company shall hold any office or place of profit carrying a total monthly remuneration of five hundred rupees or more, except that of managing director, managing agent, secretaries and treasurers, manager, legal or technical adviser, banker or trustee for the holders of debentures of the company,—

(i) under the company; or

(ii) under any subsidiary of the company, unless the remuneration received from such subsidiary in respect of such office or place of profit is paid over to the company or its holding company:

Provided that it shall be sufficient if the special resolution according the consent of the company is passed at the general meeting of the company held for the first time after the holding of such office or place of profit…...

Explanation.—For the purpose of this sub-section, a special resolution according consent shall be necessary Sot every appointment in the first in stance to an office or place of profit and to every subsequent appointment to such office or place of profit on a higher remuneration not covered by the special resolution, except where an appointment on a time scale has already been approved by the special resolution……….

(2) If any office or place of profit is held in contravention of the provisions of sub-section (1), the director, partner, relative, firm, private company, managing agent, secretaries and treasurers or the manager, concerned, shall be deemed to .have vacated his or its office as such on and from the date next following the date of the general meeting of the company referred to in the first proviso or, as the case may be, the date of the expiry of the period of three months referred to in the second proviso to that sub-section, and shall also be liable to refund to the company any remuneration received or the monetary equivalent of any perquisite or advantage enjoyed by him or it for the period immediately preceding the date aforesaid in respect of such office or place of profit……..

(3) Any office or place shall be deemed to be an office or place of profit under the company within the meaning of sub-section (1),—...

(b) in case, the office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm, private company or body corporate holding it obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise".

Sub-section (1) of section 314 formerly required the previous consent of the company accorded by a special resolution in cases where the provisions of that sub-section were applicable. By the Companies (Amendment) Act, 1965 (31 of 1965), in order to obviate the difficulties which might arise from this stringent restriction, the word "previous "was deleted and the first proviso was inserted so as to now provide for the passing of the special resolution according consent at the first general meeting held after the appointment. The Explanation was added to sub-section (1) by the Companies (Amendment) Act, 1960. It is the plaintiffs' case that a sole selling agency is an office or place of profit and that, since Tulsidas and Ramdas were and are members and directors of the private company, the provisions of section 314 were attracted by reason of the Explanation to sub-section (i) and as the consent of the company was not accorded by a special resolution, the private company vacated its office from April 29, 1969, and is also liable to refund to the company any commission received. by it for the period October 1, 1968, to April 28, 1969, in respect of such sole selling agency. In support of this contention Mr. Nariman, learned counsel for the plaintiffs, has relied upon Shalagram Jhajharia v. National Company Ltd. in which A.N.Ray J. of the Calcutta High Court held that a sole selling agency is an office of profit for the purposes of section 314. On behalf of the contesting defendants it was urged that section 314 had no application to the sole selling agencies because section 314 is a general section, while section 294 contains special provisions dealing with sole selling agencies and that these specific and special provisions exclude the general provisions of section 314 and, therefore, what applied to the present case were only the provisions of section 294 which require only an ordinary resolution. It was further submitted that in Shalagram Jhajharia's case this aspect was not urged and, therefore, not considered by the court.

If we examine the scheme underlying sections 204, 294 and 314, it will be seen that section 204 places restrictions on the appointment of firms and bodies corporate to any office or place of profit under the company other than certain offices specified in the said section. In substance the restriction is as to the term for which such appointment can be made. Section 201 deals generally with all offices and places of profit. Section 294 deals with the specific case of appointment of sole selling agents. In addition to the restriction on the term for which such appointment can be made, section 294 also provides for the approval of the company to such appointment. It also confers powers upon the Central Government to exercise supervision and control over such appointments by entitling it in the prescribed manner to vary the terms and conditions of the agency so as to make them no longer prejudicial to the interests of the company. The case of sole selling agents is dealt with separately as it is a highly lucrative appointment and for this reason the restrictions imposed are more elaborate than in the case of other office or places of profit. The object underlying section 314 is, however, different. The mischief which section 314 seeks to remedy is the holding by a director either personally or indirectly through other persons mentioned in clause (b) of sub-section (1) of section 314 of an office or place of profit under the company or its subsidiary. The object is to prevent directors from taking advantage of their position to earn profitts from the company in addition to their remuneration as directors. Thus, section 314 deals with a wholly different problem from that dealt with under sections 204 and 294 and there is, therefore, no question of the provisions of section 294 excluding those of section 314.

On behalf of the contesting defendants it was further submitted that a sole selling agency was not an office or place, and, assuming it was an office or place, it was in any event not an office or place under the company. It was submitted that in ordinary parlance the word "office "means a particular place or position with duties attached to it and the words "office or place "used in conjunction with the word "under "implies subordination and, consequently, a relationship of employer and employee. It was further submitted that under the agreement dated February 18, 1969, as also under the earlier agreement dated September 24, 1963, the private company as sole selling agents was not a subordinate or employee of the company but had independent functions to perform and that the said agreements were as between principal to principal and under them the private company was an independent contractor. In support of these submissions reliance was placed on Guru Gobinda Basu v. Sankari Prasad Ghosal. The question which arose in the case was whether the appellant was disqualified from being chosen as, and from being a member of the House of the People under article 102(1)(a) of the Constitution. The Election Tribunal held that the appellant was a partner in a firm of chartered accountants who were auditors for several Government companies and, therefore, was a holder of offices of profit both under the Government of India and the Government of West Bengal and was, accordingly disqualified from standing in the election under article 102(1)(a) of the Constitution. It was not contended by the appellant before the Supreme Court that this was not an office of profit, but what was contended was that the office was not held under the Government of India or the Government of any State. The Supreme Court held that for holding an office of profit under the Government, one need not be in the service of the Government and there need be no relationship of master and servant. The decisive test is the test of appointment. The Supreme Court did not accept the submission advanced on behalf of the appellant that the several factors which entered into the determination of this question—namely, the appointing authority, the authority vested with power to terminate the appointment, the authority which determined the remuneration, the source from which the remuneration is paid, and the authority vested with power to control the manner in which the duties of the office are discharged and to give directions in that behalf-must all co-exist and each must show subordination to Government and that it must necessarily follow that if one of the elements is absent, the test of a person holding an office under the Government is not satisfied. Their Lordships observed that in the cases referred to and approved by them, it was pointed out that the circumstances that the source from which the remuneration was paid was not from public revenue was held to be-a neutral factor, not decisive of the question. Their Lordships held that whether stress is to be laid on. one factor or the other will depend on the facts of each case. Relying upon this authority it was submitted that in the present case the sole selling agency agreements satisfied none of the tests laid down therein. This authority, however, is expressly against this submission. What was held in Guru Govinda Basu v. Sankari Prasad Ghosal was that whether stress is to be laid on one factor or the other would depend on the facts of each particular case and the contention that all the factors enumerated should co-exist was expressly rejected. Further, this submission is not even justified by the terms of the agreement. By clause (1) of the agreement dated February 18,1969, as also of the earlier agreement dated September 24, 1963, the company expressly appointed the private company as its sole selling agents. It is thus an appointment which was made by these agreements. Section 294 of the Companies Act also speaks of appointment of sole selling agents by a company. Thus, the test laid down by the Supreme Court to be the decisive test is satisfied in the present case. The other clauses of the agreements also show that the company is to exercise control over the private company in respect of the working of the sole selling agency. It is the board of directors of the company which is to fix from time to time the selling price of the company's products and the terms and conditions of sale. The private company is to obtain orders for purchases at the prices and on the terms and conditions thus determined and forward them to the company's office for acceptance. Such orders are to be binding on the company for execution only when and to the extent confirmed by the company and are to be subject to such other terms and conditions as the board of directors of the company may from time to time determine. The private company is expressly prohibited from accepting any order on its own authority. The board of directors of the company has the power from time to time to prescribe forms for orders, contracts, etc. Further, the company is conferred the power to terminate the agreement at any time by notice in the event of the private company committing a breach of the agreement. The private company receives a commission from the company. Clause 12 of both the agreements, which is the relevant clause, provides as follows :

"In consideration for the foregoing services to be rendered by the selling agents, the company shall pay to the selling agents a commission…………"

Thus, as the words underlined by me show, the parties have expressly agreed that under the said agreements the private company has to render services to the company.

The complete answer to this contention is, however, to be found in sub-section (3) of section 314. Sub-section (3) as originally enacted prescribed when an office or place in a company should be deemed to be an office or place of profit under the company within the meaning of sub-section (1). By the Companies (Amendment) Act, 1960, the words "in a company "were omitted and the sub-section as amended provides as follows :

"Any office ok place shall be deemed to be an office or place of profit under the company within the meaning of sub-section (1)…………"

Sub-section (3) is a deeming provision and by the operation of the legal fiction created by sub-section (3), inter alia, in case a private company (in which a director of the company is a director or member) holding a place or office obtains from the company anything by way of commission, it is to be deemed to be an office or place of profit under the company. Such an office or place need not be in fact in the company or under the company in the sense canvassed by the contesting defendants. In the present case, the private company is to receive commission under the sole selling agency agreements, the commission is to be obtained by it for services to be rendered by it and, as pointed out above, the company controls the manner in which the sole selling agency is to be performed.

It is also pertinent to note that sub-section (1) expressly excludes some, of the offices and places of profit which would not be office or place of profit if the contention of the contesting defendants were correct. Amongst the offices and places so excluded are those of banker and trustee for the holder of debentures. In Astley v. New Tivoli Ltd., the articles of association of the defendant-company provided that the office of a director would be vacated if he accepted or held any other office or place of profit under the company, except that of a managing director. The plaintiff, a director-of the defendant-company, was by resolution of the board of directors appointed one of the trustees for the holders of debentures issued by the company. Under the trust deed the trustees were to receive annually a sum of money as remuneration. The question which arose for determination was whether the plaintiff, by reason of his being a trustee of the trust deed relating to debentures issued by the company, had vacated his office by reason of the aforesaid article. It was held that the trusteeship was a place of profit under the company though there may be difficulty in saying that it was an office under the company. The object underlying the relevant article was thus stated by North J. at pages 155-156

"I think that the meaning really is to prevent the directors, who are acting as the agents of the company, doing anything by which a director can continue as director, and yet accept or hold an additional office or place of profit under the company. It is intended to prevent the directors having power to accumulate in themselves various places of profit. A director is not to be a master and servant at the same time…….I think a man who has been selected by the company—by the directors—to fill the position of trustee of a covering deed on the terms of receiving from the company, out of the coffers of the company, regular payment of so much a year during the time that he continues to fill that office, in addition to his payment as director, is occupying a place of profit".

The object underlying section 314 is the same as stated by North J. It is to prevent a director, or his partner or relative, or any firm in which a director or his relative is a partner, or a private company of which such a director or member, and director, managing agent, secretaries and treasurers, or manager of a private company in which such a director is a director or member, from holding any office or place of profit carrying a total monthly remuneration of five hundred rupees or more under the company and thereby put in his pocket, directly or indirectly, additional profit above the remuneration to which he is entitled as such director, unless three-fourths of the members of the company, voting either in person or by proxies, agree to this being done at a meeting called to pass such a resolution. To hold that a sole selling agency is not an office or even a place of profit and that the appointment as sole selling agent of. persons mentioned .in section 314 can be made by an ordinary resolution requiring only a bare majority for it to be passed, while in respect of the holding by such persons of other offices and places of profit a special resolution is required, would be to exclude from the restrictive effect of section 314 highly lucrative place or office of profit while bringing within its fold other offices and places of profit not so lucrative. Section 294A also expressly refers to a sole selling agency as an office. I am, therefore, of the opinion that the private company was appointed to an office or place of profit under the company and that since two of the directors of the company, namely, Tulsidas and Ramdas, were both directors and members of the private company, it would be an office or place of profit under the company within the meaning of section 314.

The question still remains as to whether in the case of appointment as sole selling agents of the private company for a further term, a special resolution was necessary. The answer to this question depends upon the true construction to be placed upon the Explanation to sub-section (1). This Explanation was introduced by the Amendment Act of 1960. Under that Explanation, a special resolution would be required for every appointment in the first instance to an office ot place of profit. It is also required in the case of "every subsequent appointment to such office or place of profit on a higher remuneration not covered by the special resolution, except where an appointment on a time scale has already been approved by the special resolution ". On behalf of the plaintiffs it was submitted that the only "subsequent appointment" contemplated by the latter part of the Explanation was where the special resolution according consent to the appointment in the first instance provided for a -subsequent appointment on the same terms as to remuneration or for a subsequent appointment on a higher remuneration, and if there was no provision in the original appointment for a subsequent appointment or for a subsequent appointment on a higher remuneration, then the subsequent appointment would require a special resolution. In reply it was submitted that what the original special resolution was required to cover was not a subsequent appointment on the same remuneration or lower remuneration but a subsequent appointment on a higher remuneration only and that if a subsequent appointment was made on the same remuneration or on a lower remuneration, then even though the original agreement or the special resolution in the first instance did not contemplate a further appointment, none-the-less such appointment would be made and the consent of the company accorded to it by an ordinary resolution.

Now, bearing in mind the object sought to be attained by the enactment of section 314, the better construction appears to me to be the one advanced by the plaintiffs. To accept the contention of the contesting defendants would be to hold that where once an appointment to an office or place of profit is made with the consent of the company by a special resolution for the initial maximum period of five years, such appointment could be renewed indefinitely by repeated subsequent appointments for the same maximum period by merely a bare majority without such appointments being contemplated at the time of the original appointment. Such a construction would militate against the object underlying section 314. As mentioned before, the object is to prevent directors from putting into their pocket, either directly or indirectly, more remuneration, whether by way of salaries, fees, commission, perquisites, etc., other than the remuneration to which they are entitled as such directors. Where three-fourths of the members of the company have agreed to a director so obtaining profit from the company, for a period of five years only, it cannot be that they should be deemed to have given their consent to the directors doing so for all times by repeated subsequent appointments consented to by merely a bare majority of the members. The ordinary rule of construction is that the one which harmonises best with the intention of the legislature and the object sought to be attained by the enactment should be adopted, and applying these principles of construction the view which I am inclined to take today is that unless the appointment in the first instance, to which the consent of the company has been accorded by a special resolution, provides for a subsequent appointment, the subsequent appointment would also require the consent of the company to be accorded by a special resolution irrespective of the fact whether the remuneration to be received is the same or lower (sic higher).

So far as the present case is concerned, the appointment in the first instance under the agreement, dated September 24, 1963, to which the previous consent of the company was obtained by a special resolution passed at the general meeting held on September 23, 1963, did not contain any provision for a renewal, reappointment or continuance of the term of the sole selling agency and therefore an the construction I am inclined to adopt the consent of the company required to be accorded to the further appointment was by a special resolution. The resolution passed at the extraordinary general meeting on April 28, 1969, was an ordinary resolution. Even the number of votes required for passing the resolution as a special resolution were not cast in favour of the resolution. After this meeting, not taking into account the extraordinary general meeting held on April 29, 1969, the annual general meeting of the company was held on August 28, 1969. Under section 294(2), an appointment is to be approved by the company in the first general meeting held after the date on which the appointment was made. If the meeting of April 28, 1969, were held to be invalid as contended for by the plaintiffs and not even taking into account the requisitioned meeting held on April 29, 1969, the meeting at which such special resolution was required to be passed would be the annual general meeting held on August 28, 1969, which not having been done, the appointment ceased to be valid.

It was next submitted on behalf of the plaintiffs that, even assuming that in the case of a subsequent appointment a special resolution was required only if such appointment were on a higher remuneration, not covered by the special resolution according consent to the appointment in the first instance, in the present case the further appointment was in fact on a higher remuneration. In support of this submission reliance was placed upon the said letter dated February 18, 1969, from the private company to the company stating that the clarification contained in its letter dated April 4, 1968, would continue to remain in force. Under the letter of April 4, 1968, the private company agreed to accept as from 1st April, 1968, commission at the rate of 2 per cent, on the net selling price of the company's products as prevailing on November 5, 1967. According to the plaintiffs, even though the intention at the date when the letter of April 4, 1968, was written or even on February 18, 1969, may have been that the private company should receive commission at a lower rate than what it would otherwise have been entitled to, the possibility of the private company receiving higher remuneration cannot be ruled out, for there is always the possibility of the selling prices in the future being lower than those prevailing on November 5, 1967. It is said that in fact such a situation has already arisen. It is alleged by the plaintiffs in their affidavit in rejoinder to the company's affidavit in reply in the notice of motion in Suit No. 522 of 1969 that in June 1969 the Government of India fixed prices of synthetic rubber at rates lower than those prevailing on November 5, 1967. In support of these allegations a copy of a letter dated June 4, 1969, addressed by the Government of India to the company is annexed to the said affidavit. In that letter it is stated that with effect from June 8, 1969, the plaintiffs should market their products at the prices not exceeding those specified in the said letter. The prices so specified are lower than those prevailing on November 5, 1967. The reason for the revision as stated in the said letter is that the selling prices fixed on April 2, 1968, were on the assumption that 25 per cent, of the company's requirements of alcohol would be met from domestic soui.:es, while the balance of 75 per cent, would have to be met from imports, but it was found that the actual proportion of indigenous alcohol to imported alcohol used by the plaintiffs worked out to 40 per cent, for indigenous alcohol and 60 per cent, for imported alcohol and that for the next 12 months the proportion would be 70 per cent, for indigenous alcohol and 30 per cent, for imported alcohol. The answer to this is to be found in paragraph 12 of the affidavit dated July 15, 1969, of J.B. Shukla, the secretary of the private company. In that affidavit he has not admitted that the Government of India is proposing a reduction in the selling prices. He has further stated that:

"Assuming while denying that there is a possibility of the prices of synthetic rubber being reduced by Govt. below those prevailing on 5th November, 1967, I deny that the 2nd defendants could not claim commission at the rate of 2% on the basis of the prices prevailing as alleged".

After making this denial he sets out to state that the intention of the private company was that it would forgo commission on the excess if the price was higher than that prevailing on November 5, 1967, and to claim commission at the rate of 2 per cent, of the price actually prevailing on the date of sale or on the price prevailing prior to November 5, 1967, whichever is lower. It is somewhat difficult to understand these contradictory averments. By these averments the private company is in any event denying that it cannot claim commission at the rate of 2 per cent, on the basis of the prices prevailing on November 5, 1967. If, therefore, the contention of the private company is that it is in any event entitled to commission on the prices prevailing on November 5, 1967, its intention becomes irrelevant. If the intention was as alleged in the said affidavit of Shukla, there was nothing simpler than "to have had an express provision to that effect either in the agreement dated February 18, 1969, or in the said letter dated February 18, 1969. It was, however, contended that this intention was shown by the use in the said letter of the words "clarification" and "ad-hoc arrangement". I do not find it possible to construe these words as meaning that the private company would be entitled to commission at the rate of 2 per cent, on the prices actually prevailing at the date of the sale or those prevailing on November 5, 1967, whichever is lower. It is obvious that the prices of the company's products vary from time to time. These prices are fixed by the Government and they have varied in the past and they may well vary in the future. There is no binding obligation on the private company either under the said agreement dated February 18, 1969, or under the said letter of the same date to accept commission on the basis of the prices prevailing on the date of sale or on November 5, 1967, whichever are lower. In fact, under clause 13 of the agreement the terms of the agreements with respect to the rate of commission provided in clause 12 cannot be modified by mutual agreement of the board of directors of the company and the private company though other terms can be. Any revision in the rate of commission will, therefore, require the mutual consent of the company at a general meeting and the private company. To accept the submission of the contesting defendants that the words "higher remuneration" in the Explanation to section 314(1) cannot cover the case of the possibility of a higher remuneration would be to defeat the object of the section. If there is possibility in the variation of the amount of remuneration receivable by the holder of the office or place of profit under which such holder could receive a higher remuneration than what was provided at the time of the appointment in the first instance, it cannot be said that the subsequent appointment was on the same terms as to remuneration or on lower remuneration. In this view of the matter also the consent of the company to the appointment of the private company for a further term was required to be accorded by a special resolution.

It was then submitted on behalf of the plaintiffs that this was not a subsequent appointment within the meaning of the Explanation to section 314(1), as this was an appointment made with retrospective effect. The first appointment of the private company expired on September 30,1968. In fact, the private company by its letter dated August 31, 1968, pointed this out to the company and requested it to renew the agreement on the same terms and conditions for a further period of five years. Nothing was done thereafter until the question of the further appointment was brought before the board of directors on November 14, 1968. Realising that between October 1, 1968, and November 14, 1968, the private company was acting as sole selling agents without having been appointed as such, the resolution of the board passed at that meeting expressly provided "that the acts and deeds of Messrs, Kilachand Devchand and Co. P. Ltd. done on or after the 1st October, 1968, be and the same are hereby ratified and confirmed and that for such services, they be paid commission as provided in the said agreement dated 24th September, 1963, clarified as aforesaid". Now, I have not been shown any power in the board of directors of the company to make an appointment with retrospective effect. Sub-section (2) of section 294 which speaks of the appointment of a sole selling agent by a board of directors of a company does not provide for any such appointment to be made with retrospective effect. It was submitted that even if the directors had such powers, the words "subsequent appointment" in the Explanation to section 314(1) imply continuity. It was not disputed by the contesting defendants that, if between the original appointment and the further appointment the appointment of another person had intervened, it would not have been a "subsequent appointment". The question is whether an appointment made after the expiry of the period of the first appointment is a subsequent appointment. The dictionary meaning of the word "subsequent "as given in the Shorter Oxford English Dictionary, volume II, page 2062(1), is "following in order or succession; coming or placed after, esp., immediately after; following or succeeding in time; existing or occurring after, esp., immediately after something expressed or implied…….". It was argued that such a construction would entail great hardship, for a board may not be able to meet by reason of the circumstances beyond its control, such as illness of directors. I am not able' to see any such hardship as; envisaged. I fail to see why a subsequent appointment should be deferred till the last moment. Even in the present case the private company asked for further appointment to be made one month before the expiry of the original term. The board could have met within that month and passed the necessary resolution. Section 204(4) expressly makes it permissible for re-appointment, re-employment or extension of the term of office or place of profit within two years preceding the date on which it is to come into force" Even otherwise, the only "hardship" is that a special resolution would be required, in my opinion, bearing in mind the object for which the section was enacted. The word "subsequent "implies a continuity without a break, and an appointment for a further term not made before or on the expiry of the earlier appointment but thereafter would not be a "subsequent appointment". I also fail to see how the board of directors of the company acquired the power to make this appointment and that too with retrospective effect. The Companies Act does not confer any power upon the board of directors to appoint sole selling agents. The effect of section 294(2) is to lay restrictions on the power of the board to make appointments of sole selling agents provided they have such power under the articles. Assuming the board of directors of the company had the power to appoint sole selling agents, under article 183 of the articles of association of the company no director or other persons mentioned in section 314 is, without the previous consent of the company accorded by a special resolution, to hold an office or place of profit under the company or any of its subsidiaries except as provided in the said section. Thus, except in cases where section 314 does not require a special resolution, the board of directors of the company would have no power to make the appointment but the appointment would have to be made by the company itself and that too by a special resolution. Though the requirement as to previous consent of the company under section 314(1) was deleted by the Companies (Amendment) Act, 1965, a corresponding amendment has not been made in article 183 though several other articles in the articles of association of the company were amended in view of the amendments made by the Amending Act of 1965. Thus, in cases where a special resolution would be required under article 183 the board would have no power to make the appointment.

The next question to be considered is, assuming the board of directors has the power to make this appointment and that too with retrospective effect whether this action of the board has been approved or ratified by the general meeting held on April 28, 1969. The notice convening the meeting and the resolution set out therein which was required to be passed does not set out that part of the resolution of the board under which the acts and deeds of the private company done on or after October 1, 1968, were ratified and confirmed and it was further resolved to pay them commission in respect of services rendered for the said period as provided in the said agreement of September 24, 1963, clarified by the said letter of April 4, 1968. The shareholders were never informed that for this intervening period the sole selling agents had acted without any authority and that they were not entitled to any commission unless the same was provided for expressly. The explanatory statement to the notice convening the extraordinary general meeting for April 28, 1969, also does not point this fact out to the shareholders. In these circumstances, I am doubtful whether it can be said that any appointment with retrospective effect was ratified or approved by the shareholders. It was conceded that an appointment for five years from October 1, 1968, cannot be read as an appointment for five years from the date of the resolution of the board or as an appointment for a period from November 14, 1968, to September 30, 1973. Under section 294(2) the approval of the company must be of an appointment made by the board. The appointment made by the board included ratification of the acts and deeds of the private company for the period October 1, 1968, to November 14, 1968. If this was not approved, then I very much doubt whether it can be said that there was an approval under section 294(2) to the further appointment of the private company.

The next point relates to the validity of the two notices dated March 27, 1969, convening the extraordinary general meetings on April 28, 1969, and April 29, 1969. The arguments here are based on the provisions of section 173(2) of the Companies Act, 1956. The relevant provisions of that sub-section are:

"Where any items of business to be transacted at the meeting are deemed to be special as aforesaid, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business, including in particular the nature of the concern or interest, if any, therein, of every director, the managing agent, if any, the secretaries and treasurers, if any, and the manager, if any"

According to the plaintiffs the said notices ought to have set out the nature of the concern or interest of the solicitor-director in the matter of the appointment of the private company for a further term as the sole selling agents of the company and the correspondence which took place between the company and the Company Law Board during 1965 and 1966, particularly the said letter dated July 28, 1965, and June 15, 1966, from the Company Law Board to the company. It was submitted that these were material facts concerning the item of business to be transacted at the said meetings and the non-disclosure, therefore, in the explanatory statement to the said notices invalidates the said notices. That the item of business to be transacted at the said meetings was special business is not disputed. The questions to be considered are whether the above facts were material facts and if either of them was a material fact, the consequence of the non-disclosure thereof in the explanatory statement. If the solicitor-director was an interested or a concerned director, the nature of his concern or interest in the further appointment of the sole selling agents was a material fact which was required to be disclosed in the explanatory statement, and this position is not disputed. The contention of the contesting defendants, however, is that the solicitor-director was not a concerned or an interested director. This point has already been considered by me in connection with the resolution of the board of directors at its meeting on November 14, 1968, and I have already expressed the prima facie conclusion reached by me that he had a concern or an interest in this matter. The only question, therefore, which remains to be considered in this connection is the consequence of such non-disclosure. First, however, I will deal with the question whether the correspondence with the Company Law Board can be said to be a material fact concerning the business to be transacted at the said meetings. Now, the first meeting was for approving the private company's appointment as sole selling agents for a further term. The second meeting, namely, the meeting requisitioned by the plaintiffs, was for not approving the said appointment. Any fact which would have a relevance or bearing upon the approval or a non-approval of the said appointment would, in my opinion, be a material fact concerning the said items of business. The facts relating to this correspondence may be briefly recapitulated from this angle. The said letter dated July 28, 1965, was a show cause notice issued by the Company Law Board under section 294(5) on the ground that it appeared to the Company Law Board that the terms of appointment of the private company were prejudicial to the interests of the company. By this letter the company was required to show cause why under section 295(5)(c) the terms and conditions of the appointment of the private company should not be varied. This matter was at that time considered so important that a sub-committee of the directors was formed to consider it. Ultimately, by its said letter dated June 15, 1966, the Company Law Board decided not to take any further action in the matter at that stage. The said communication, however, expressly stated that:

"The Board would suggest, however, that at the time of the renewal of the agreement with the sole selling agents in 1968, your company should bear in mind the views of the Board which were communicated to you in their letter of even number dated the 28th July, 1965, read with their letter of even number dated the 18th September, 1965".

It was submitted by the contesting defendants that this was merely a suggestion and not a directive or an order and that the proceedings commenced by the show-cause notice under section 294(5) having terminated, there was no obligation to disclose this correspondence in the explanatory statement. This argument cannot be accepted. Under section 294(5) the Central Government has the power to require such information regarding the terms and conditions of the appointment of the sole selling agent as it considers necessary for the purpose of determining whether or not such terms and conditions are prejudicial to the interests of the company. There after, if it is of the opinion that they are prejudicial to the interests of the company, it has the power to make such variations in those terms and conditions as would in its opinion make them no longer prejudicial to the interests of the company. If a company refuses to furnish such information, the Central Government has the power to appoint a suitable person to investigate and report on the terms and conditions of the appointment of the sole selling agents. Thus, the Central Government is conferred wide and extensive statutory powers of control over the sole selling agencies of companies and is constituted the statutory authority to determine whether the terms and conditions of a sole selling agency are prejudicial to the interests of the company or not. Under section 10E these powers of the Central Government have been delegated to the Company Law Board. Where, therefore, a statutory authority empowered to decide whether the terms and conditions of the appointment of a sole selling agent are prejudicial to the interests of the company or not, had already opined that certain provisions of the said agreement dated September 24, 1963, were prejudicial to the interests of the company and had expressly required the company to bear its views in mind at the time of the renewal of the agency, it cannot be said that the disclosure of the views of the Company Law Board to the shareholders at the time of further appointment on terms which contained the very features objected to by the Company Law Board was not material. The object underlying section 1 73(2) is that the shareholders may have before them all facts which are material to enable them to form a judgment on the business before them.

Any fact which would, influence them in making up their minds, one way or the other, would be a material fact under section 173(2) and had to be set out in the explanatory statement to the notice of the meeting. The views expressed by the Company Law Board would have certainly played a part, and perhaps an important part, in enabling the company's shareholders to make up their minds whether to vote for approval of the further appointment or not.

The contention that the matter was closed by the said letter dated June 15, 1966, is too naive and is belied by subsequent events. By its letter dated April 9, 1969, headed "Sole selling agents ; terms and conditions of appointment under section 294(5) of the Companies Act, 1956", the Company Law Board called upon the company to clarify how the renewed agreement was proposed for approval of the shareholders without reference to the views of the Board communicated to the company earlier. The concluding paragraph of that letter stated:

"From the perusal of the renewed agreement, it appears, prima facie, that the terms are prejudicial to the interests of your company and this Board will have to examine to what extent the terms and conditions require modification or abrogation. You are, therefore, hereby informed that if any such variation is ultimately made by the Company Law Board, the terms of the said agreement would be effective from 1st October, 1968".

There was further correspondence pursuant to this letter to which I will refer later.

In Shelh Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. it was held that section 173 enacted a provision which was mandatory and not directory. Bhagwati J., as he then was, observed in that case:

"The object of enacting section 173 is to secure that all facts which have a bearing on the question on which the shareholders have to form their judgment are brought to the notice of the shareholders so that the shareholders can exercise an intelligent judgment. The provision is enacted in the interests of the shareholders so that the material facts concerning the item of business to be transacted at the meeting are before the shareholders and they also know what is the nature of the concern or interest of the management in such item of business, the idea being that the shareholders may not be duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all material facts and apprised of the interest of the management in any particular action being taken. Having regard to the whole purpose and scope of the provision enacted in section 173, I am of the opinion that it is mandatory and not directory and that any disobedience to its requirements must lead to nullification of the action taken. If, therefore, there was any contravention of the provisions of section 173, the meeting of the company held on 5th September, 1961, would be invalid and so also would the resolution passed at that meeting be invalid".

The same view was taken by a Division Bench of the Calcutta High Court in Shalagram Jhajharia v. National Co. Ltd That was a case of a resolution to approve under section 294 the appointment of sole selling agents. In that case Mitter J. observed :

"It is well known that if a company can sell its products without the employment of agents its profits would be substantially higher than in case where the selling was done through agents. On the other hand it cannot be ignored that selling is best done through an organization of experts and specially when sales have to be made to overseas customers the employment of an overseas agent is almost a necessity. As the legislature has thought it fit to provide that shareholders must approve of the appointment of selling agents the opportunity given to the shareholders must be full and complete and there must be a full and frank disclosure of the salient features of the agency agreement before the shareholders can be asked to give their sanction. The provision for inspection of the agreement at the registered office of the company is not enough. Few shareholders have either the time or the inclination to go to the registered office to find out what the company is about to do. Moreover, such an opportunity is illusory in the case of shareholders who do not live in Calcutta when the registered office is situated here".

Section 71 of the Companies Clauses Consolidation Act, 1845, required every notice of an extraordinary meeting or of an ordinary meeting to specify the purpose for which the meeting was called. In Kaye v. Croydon Tramways Company the defendant company entered into an agreement to sell its undertaking to another company under which the purchasing company agreed to pay, in addition to the sum payable to the selling company, a substantial sum to the directors of the selling company as compensation for loss of office, and the agreement was made conditional upon its adoption by the shareholders of the selling company. The resolution approving the agreement was passed by a large majority notwithstanding the plaintiff's opposition. Thereupon the plaintiff commenced an action and served a notice of motion for an injunction to restrain the selling company from carrying the agreement into effect. The notice calling the meeting stated that the meeting was convened for the purpose of considering the agreement for the sale of the undertaking of the selling company to the purchasing company. It further stated that the directors and the secretary had agreed to retire on being paid a lump sum as compensation for their loss of office. The Court of Appeal held that the notice had been "most artfully framed to mislead the shareholders "since a very considerable portion of that, which was part of the consideration for the purchase, was not to be paid to the vendors but was to be paid to the directors and officers of the selling company. Lindley M.R. said at pages 369-370 :

"It is a tricky notice, and it is to my mind playing with words to tell shareholders that they are convened for the purpose of considering a contract for the sale of their undertaking, and to conceal from them that a large portion of that purchase-money is not to be paid to the vendors who sell that undertaking………….. I do not think that this notice discloses the purpose for which the meeting is convened. It is not a notice disclosing that purpose fairly, and in a sense not to mislead those to whom it is addressed".

The Court of Appeal, accordingly, granted the injunction prayed for subject to this that it left the selling company free upon a proper notice to sanction the agreement. It is pertinent to note that section 71 of the Companies Clauses Consolidation Act was similar to section 172(1) of the Companies Act, 1956, which requires every notice of a company to contain, inter alia, a statement of the business to be transacted thereat and that there was no provision in the Companies Clauses Consolidation Act similar to the mandatory provision of section 173(2).

It is alleged in the affidavits in reply filed on behalf of the company and Tulsidas that the explanatory statements to the notices of the meeting held on April 28, 1968, and April 29, 1968, respectively, were placed and generally approved at the board meeting held on March 27, 1969, at which Reighley was also present, the suggestion being that Reighley and through him the plaintiffs had approved both the said explanatory statements. It was submitted that even in their requisition dated March 17, 1969, for calling an extraordinary meeting, in the explanatory statement which the plaintiffs required to be included in the notice convening such meeting, they had not required the fact either of the interest or concern of the solicitor-director or the said correspondence with the Company Law Board to be set out. Now, when one turns to the minutes of the board meeting held on March 27, 1969, it is apparent that the only discussion about the explanatory statements was with respect to the requisitionists' meeting, when the solicitor-director pointed out that the statement of facts set out in the requisition should be sent to the shareholders with the notice of the requisitioned meeting and, as the said statement was silent regarding the directors' interests in the resolution, the same should be added. There is no mention in the minutes of the explanatory statement in respect of both the said meetings being placed before or generally approved by the board as alleged. Further, by their said requisition dated March 17, 1969, the plaintiffs did not set out the whole of the explanatory statement to be incorporated in the notice. What they did was to make a request that in the explanatory statement which would be annexed to the notice the statement set out by them should be included. They were thus anxious that certain facts should be included and not that they did not want other material or relevant facts to be excluded. It is the duty of the company acting through its board to incorporate in the explanatory statement all material facts concerning the item of special business to be transacted at a meeting. At the said board meeting held on March 27, 1969, one of the resolutions passed was that the secretary of the company should send out notices of the said two meetings together with the explanatory statements in consultation with the solicitors of the company. This shows that neither the explanatory statements nor their drafts thereof were placed before the board meeting, much less approved.

It was next sought to be contended that the plaintiffs had knowledge of the correspondence and of the interest and concern of the solicitor-director and, therefore, they could not. complain about the same and that it is only a shareholder who was ignorant of these facts who could make such a complaint. In support of this contention reliance was placed first upon Parashuram Detaram Shamdasani v. Tata Industrial Bank Ltd. In that case the Tata Industrial Bank decided to amalgamate with the Central Bank of India Ltd. and an agreement of amalgamation was entered into. A meeting of the shareholders was called for approving the scheme. The plaintiff who had in the past adopted a hostile attitude towards the bank, which attitude was known to the shareholders, opposed the scheme. On a poll being demanded, there were 5,25,249 votes in favour of the resolution, while only 369 votes were cast against, and out of these 369 votes 100 votes being of the plaintiff and 10 of his brother. The plaintiff and his brother filed a suit challenging the resolution. The plaintiff's suit and appeal were dismissed and he filed an appeal to the Privy Council which too failed. The Privy Council observed that the fact that the action was personal to the appellant was unfortunate for him as he knew before the first meeting everything about the scheme that was to be known and that he had written open letters to the shareholders and no possible complaint of the notice or circular on the ground of insufficiency was, therefore, open to him. On a perusal of the notice their Lordships came to the conclusion that it was in no way questionable. Another of the plaintiff's complaint was that he was denied a hearing at the general meeting. The court held that on the evidence it appeared that "there was no organised opposition ; there was a very clearly expressed indication by the shareholders that they did not desire further to hear the appellant, and what really happened was that the appellant desisted from any further effort to make himself heard because even he realised that no further speech from him would be of any avail ". Reliance was also placed upon Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. in which the Privy Council decision in Shamdasani's case was followed, and upon Kalinga Tubes Ltd. v. Shanti Prasad Jain, which was affirmed by the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. Relying upon these authorities it was sought to be contended that the plaintiffs, having full knowledge of the facts which according to them were not disclosed in the explanatory statements, had no right to challenge the validity of the notices on this ground and were estopped from doing so. There is, however, no such plea in any of the affidavits in reply, and this question really does not arise for my consideration, but as this question was argued at some length and as the contesting defendants insisted that they could spell out such a plea from their affidavit in reply—which they have not been able to do—I will shortly deal with the same. In my opinion, none of these authorities support the contesting defendants. Each turns upon its own facts. The Privy Council decision in Shutndasani's case was under the Indian Companies Act, 1913, which did not contain any section corresponding to section 173(2) of the 1956 Act. Regulation 49 of Table A of Schedule 1 of the 1913 Act, intel alia, required that, in case of special business, the general nature of that business should be set out in the notice. This regulation corresponds to section 172(1) of the 1956 Act which requires every notice of a meeting to contain a statement of the business to be transacted thereat. The Privy Council did not have to decide the question of a mandatory statutory provision, non-compliance with which would invalidate the notice. The Privy Council held that there was nothing questionable about the notice. The plaintiff who had a long history of dispute with the bank was in a hopeless minority. The shareholders did not appear to have put any faith in any statement made by him. They did not even desire to hear him further. The action, therefore, was, on the face of it, personal only to him and his brother, who held between them 110 out of 5,25,618 votes, but of which 5,25,249 votes were cast in favour of the resolution. The Calcutta case was of an application under section 397 of the 1956 Act, and what was contended was that failure to comply with section 173(2) made it a case of oppression in conducting the affairs of the company. The court held that it could not be oppression because breach of section 173(2) could make the meeting called invalid and no more, and if such a meeting was invalid, the Companies Act provided procedure for calling valid or regular meetings or for regularising irregular proceedings, a right which was open to every shareholder. The case of Kalinga Tubes Ltd. v. Shanti Prasad Jain was also a case under sections 397 and 398 of the Companies Act. There was no plea as to the invalidity of the notice taken in the petition or in the affidavits, but at a late stage of the case oral submissions were made challenging the validity of the notice on the ground of non-compliance with section 173(2). As the High Court expressly pointed out, no question arose about the disclosure of any interest of, any director and the only contention on this aspect of the case was that the notice was invalid for want of necessary particulars in the explanatory statement. On examining the explanatory statement the High Court came to the conclusion that it was comprehensive enough and was in compliance with the statutory requirements. The court further pointed out that had any objection been taken in the petition at the earliest instance, the appellant company could have shown that no such material fact was relevant or could have been given. The court observed at page 215 :

"In particular cases, the omission to state the material facts may invalidate the notice and consequently may hit the relative resolution passed in a meeting of the shareholders who might be completely misled by the terms of the notice".

In this case also the plaintiff was in a hopeless minority, and the court held that in that view of the matter, any amount of elucidation in the explanatory statement would not have been of any avail. The court also observed that, assuming only material facts had been omitted from the notice, the mere omission of such facts would not per se invalidate the notice and the resolution passed in the meeting. It further held that what are material facts and what is the nature and extent of interest under section 173(2) are questions of fact depending on the facts of each case and the party who knew the real nature of the transaction could not complain of the insufficiency of the notice. The court held that, in the facts of that particular case, they were not concerned to look to the interest of absentee shareholders. Before the Supreme Court, however, the appellant, Shanti Prasad Jain, was not allowed to urge this point inasmuch as the objection was not taken in the petition, and as the point was a mixed question of fact and law, the court further added:

"We may add that, though the objection was not taken in the petition, it seems to have been urged before the appeal court. Das J. has dealt with it at length and we would have agreed with him if we had permitted the question to be raised. This attack on the validity of what happened on March 29, 1958, must thus fail"

Now, what Das J. in the High Court really held was that the explanatory statement was comprehensive and that there was no non-compliance with section 173(2) and that what are material facts including the nature or concern of a director were questions of fact depending on the facts and circumstances of each case. The rest of what Das J. observed was really in the nature of an obiter. Even, on the facts, the present case stands on a wholly different footing. There is no question of the plaintiffs being in a hopeless minority. They have secured, even as declared by Tulsidas himself, about 48 per cent, of the votes cast. Admittedly, the Life Insurance Corporation of India which, along with its subsidiaries held about 13,000 shares, had voted against the resolution. Looking to the slight difference between the respective shareholdings of the plaintiffs and the Kilachand group, in this case what really counted were the votes of the independent shareholders. It is with reference to the effect on them and the consequent result of the plaintiffs not being able to secure their votes that the case must be considered. It was urged that in the statements issued by the plaintiffs, both by way of circulars to the shareholders and by advertisements in the newspapers asking for support, they had not only pointed out that the solicitor-director was interested and concerned but had also referred to the letter of the Company Law Board of July 28, 1965, read with the letter of September 18, 1965, and the letter of June 15, 1966, and, therefore, the shareholders had a correct picture before them and could not be said to be misled by any omission in the explanatory statements. This is not correct and the argument does not present a true picture. The various circulars and advertisements have been put in by consent as exhibits. Exhibit A is a statement issued by Ruia, Kirloskar and the solicitor-director, while exhibit B is an advertisement containing the statement of the private company. All the three directors in their statements have asserted that they were the only independent directors. If the correct position with respect to the solicitor-director is as I have opined above, this was itself a misleading statement. The circulars and advertisements of the plaintiffs were in reply to the statements of the directors, and the advertisement given by the private company followed upon this. In the private company's statement it is stated that:

"The Company Law Board had gone into this appointment in 1965, and, after a careful examination, overruled the objections raised by Firestone in a full-fledged memorandum and cleared the terms. The Company Law Board had, however, remarked that ' at the time of the renewal of the agreement with the sole selling agents in 1968……..', thus visualising the renewal of the agreement in 1968".

This again is a misleading statement, for the relevant and important words in the Company Law Board's communication, namely, that "your company should bear in mind the views of the Board which were communicated to you in their letter of even number dated 28th July, 1965, read with their letter of even number dated 28th September, 1965", were omitted and substituted by dots, thus suggesting that the Company Law Board had no objection to the renewal of the agreement in the same form in 1968. In my opinion, this omission is deliberate and made with the intention to mislead, particularly in view of the letter dated April 9, 1969, from the Company Law Board to which I have already referred above, which letter was certainly known to Tulsidas but most certainly not known to the other shareholders of the company. This statement of the private company appeared in the newspaper "Indian Express" of April 15, 1969, and in the newspaper "Financial Express" of April 16, 1969, that is, after the receipt of the said letter of April 9, 1969. Secondly, in the light of what was stated in the said communication from the Company Law Board of June 15, 1966, the statement that the Company Law Board had cleared the terms of the sole selling agency was hardly a fair or a true statement. All that the Company Law Board did was to say that it had decided not to take any further action under section 294(5) at that stage but had clearly indicated that unless the objections raised by the Company Law Board were taken into account at the time of the renewal of the agreement, further action would be taken. The shareholders had thus before them a conflicting picture and at least with respect to the relevant facts a misleading picture as presented by the Kilachand group and those supporting it. The plaintiffs' objection to the validity of the notice, therefore, cannot be dismissed so lightly on the ground of their own knowledge of its infirmity as contended by the contesting defendants. On the contrary, in my opinion, the plaintiffs' objections are well-founded and, consequently, the said notices and meetings, particularly the notice for the meeting of the 28th April and the meeting held on that day, and the resolution passed at that meeting are invalid. Closely connected with this point is the objection of the plaintiffs with reference to the non-disclosure of the Company Law Board's said letter of April 9, 1969, to the shareholders at the meeting of the 28th April. Tulsidas as the chairman of the board of directors took the chair at the said meeting of the 28th April. It was submitted on behalf of the plaintiffs that, since Tulsidas was vitally interested in the said resolution, he deliberately suppressed from the shareholders the receipt of the said letter so as to keep back from them the knowledge that the Company Law Board was objecting to the said further appointment. Tulsidas's answer is to be found in paragraph 15 of his affidavit-in-reply affirmed on August 14, 1969. The relevant portion is:

"I say that by the said letter, the Company Law Board only sought clarification from the 1st defendant company which was given by the 1st defendant company by its letter dated 22nd April, 1969. I say that there was no necessity for the said letter dated the 9th April, 1969, being circulated to the board of directors of the 1st defendant company as the same had been adequately dealt with and, as no further communication had been received from the Company Law Board, the said letter dated the 9th April, 1969, was dealt with in the ordinary course after consulting the solicitors of the 1st defendant company. I deny that the said letters dated the 9th April, 1969, and 22nd April, 1969, were wrongfully or with mala fide intention suppressed as alleged. I say that the said letter and the reply was placed at the first board meeting of the 1st defendant company held thereafter".

Very much the same statements are made in the affidavit-in-reply filed by Dabke, the secretary of the company, on behalf of the company. The board meeting referred to in Tulsidas's affidavit was held on June 25, 1969. At least one thing is obvious on Tulsidas's own statement, that it was necessary to place the said letter before the board. Bearing this in mind let us examine the bona fides of Tulsidas. By his letters of April 9, 1969, and April 22, 1969, Reighley called upon Tulsidas as the chairman of the company to call a meeting of the board of directors immediately. Copies of these letters were sent to all the directors. It appears that these letters were written as Reighley desired that the procedure to be followed at the said extraordinary general meetings should be discussed and agreed upon at a board meeting. No meeting was, however, called until June 25, 1969. Now, if any such board meeting were called, obviously Tulsidas would have had to place this letter from the Company Law Board before the board of directors and Reighley would have come to know about it. Reighley learnt about this letter only when in the newspaper of April 30, 1969, it was reported that Mr. Fakhruddin Ali Ahmed, the Minister for Industrial Development and Company Affairs, had stated in the Lok Sabha on April 29, 1969, that the Company Law Board had recently asked the company for an explanation as to why the recommendations of the Company Law Board were not included in the agreement of February 18, 1969. Thereupon, Reighly by his letter dated April 30, 1969, called upon the secretary of the company to immediately let him have a copy of the said communication and any correspondence relating thereto and further stated that no reply should be sent thereafter unless he had an opportunity of seeing the draft thereof. Thereafter, Reighley was given inspection of the said letter dated April 9, 1969, and the company's reply dated April 22, 1969. The reply of April 22, 1969, is signed by Dabke. The astonishing thing about this reply is that according to the affidavits-in-reply of Tulsidas and Dabke, Tulsidas by himself dealt with the letter "in the ordinary course "after consulting the solicitors of the company, namely, the firm of Messrs. Daphtary, Ferreira and Diwan. Now, was Tulsidas a proper party to deal with this letter and keep the knowledge of both the letter and the reply to himself until the fact that there was such a communication came out by reason of the statement made by the Minister in the Lok Sabha ? Tulsidas was the person vitally interested in the further appointment of the private company as sole selling agents. As will be shown later, while dealing with another aspect of the case, but for the sole selling agency commission received by the private company its actual working for the year ended September 30, 1968, would have shown a loss. On the previous occasion when communication was received from the Company Law Board, that is, in 1965, the matter was considered so important that a sub-committee of directors was appointed to deal with it. Why were the objections of the Company La Board to the further appointment dealt with in this fashion by Tulsidas alone ? Tulsidas's explanation that it was not necessary to circulate the letter as no further communication had been received from the Company Law Board after the company's reply of April 22, 1969, is untenable on the face of it. What was required to be circulated to the directors was the letter of the Company Law Board before any reply was sent thereto. According to Tulsidas, the matter was important enough to require consultation with the solicitors of the company but not important enough to place before the board of directors. The plaintiffs' contention that a board meeting was not called in April, 1969, though repeatedly requested by Reighley because, otherwise, this correspondence would have come to the knowledge of Reighley and through him to the knowledge of the shareholders appears, therefore, to be well founded. No one can be naive enough to believe, as Tulsidas expects it to be believed, that because no further communication had been received to the company's reply dated April 22, 1969, between April 22, 1969, and April 28, 1969, the Company Law Board had dropped the matter and it was, therefore; not necessary to apprise the shareholders about this correspondence. The contention in the affidavits-in-reply of Dabke and Tulsidas that it was for this reason that the said correspondence was not disclosed at the said extraordinary general meeting does not reflect credit upon them, and in this connection what transpired subsequently is instructive. By the letter dated August 29, 1969, a copy of which is put in by consent and marked as exhibit No. 1, the Company Law Board called upon the company under section 294(5)(a) of the Companies Act to furnish certain information regarding the terms and conditions of appointment of the private company as selling agents of the company for a further term. There are in all 16 items in respect of which such information is required to be furnished. The margin of difference between the votes for and against the impugned resolution was very narrow, and, in my opinion, this correspondence may have well influenced the necessary number of shareholders to vote against the resolution even assuming the result of the poll as declared by Tulsidas was correct.

It was also submitted on behalf of the contesting defendants that the Company Law Board's letter of April 9, 1969, showed non-application of mind, that it was addressed by some under-secretary and the facts on which it was based were not existing facts, and for the said reason also it was not required to be communicated to the shareholders. It is not necessary to go into the rival contentions as to the validity or otherwise of the objections raised by the Company Law Board and whether some of the facts which existed at the time of the Company Law Board's objections in 1965 continued to exist in 1969, for one thing is clear that Tulsidas, the person most vitally interested and concerned, cannot be the sole judge of this. It was his duty to place these letters before the meeting of the shareholders. Whatever had to be pointed out to the shareholders could have been mentioned by Tulsidas at the meeting and it would have been then for the shareholders to consider the Company Law Board's objections and Tulsidas's explanation thereto. The submission that the letter was signed by Some under-secretary is hardly worthy of mention. It is true that the letter is signed by the under-secretary to the Company Law Board in the same way as the earlier communications from the Board, but it is clear from the letter itself that it is a communication from the Company Law Board. In fact, the said letters dated July 28, 1965, and September 18, 1965, were also signed by the under-secretary to the Company Law Board. These were, however, not treated as letters from some under-secretary and not from the Company Law Board. This letter of April 9, 1969, and the company's reply remained in the exclusive knowledge of Tulsidas, Dabke and the company's solicitors and were, in my opinion, deliberately kept back from the knowledge of all other shareholders and directors with a view to see that the said resolution of further appointment of the private company as sole selling agents should be got passed. In Tiessen v. Henderson Kekewich J. pointed out that:

"………..the vote of the majority at a general meeting, as it binds both dissentient and absent shareholders, must be a vote given with the utmost fairness—that not only must the matter be fairly put before the meeting, but the meeting itself must be conducted in the fairest possible manner".

To repeat the words of Mitter J. in Shalagram Jhajharia v. National Co. Ltd.:

"As the legislature has though it fit to provide that shareholders must approve of the appointment of selling agents the opportunity given to the shareholders must be full and complete and there must be a full and frank disclosure of the salient features of the agency agreement before the shareholders can be asked to give their sanction".

In the present case it cannot be held that the shareholders were given a full and complete opportunity or that there was a full, and frank disclosure, and I am inclined to accept the plaintiffs' case that the resolution, said to be passed at the meeting of April 28, 1969, falls in the well-known category of resolutions obtained by trick.

I will now deal with the other objections of the plaintiffs to the meeting of April 28, 1969. The main amongst these are that Tulsidas was not entitled to take the chair at the said extraordinary general meeting, that he had ho right to give any decision as to the validity of any proxy or letter of revocation after the votes were cast and that the decisions he has given with respect to such objections are bad in law and are prompted by a mala fide motive of invalidating as many votes in favour of the plaintiffs as possible in order to secure a majority for the resolution approving the appointment of the private company for a further term. It was submitted on behalf of the contesting defendants that under article 92 of the articles of association of the company the chairman of the directors, if present and willing to take the chair at -any general meeting, whether annual or Extraordinary, was entitled to do so. It was further submitted that, in order to show his fairness, Tulsidas had expressed his willingness to vacate the chair in favour of any person who was unanimously agreed upon to take the chair in his place and had even suggested the name of another director of the company, Pratap Bhogilal, but Reighley had objected thereto and so Tulsidas continued to act as chairman. This gesture was to my mind a meaningless one, because from the nature of things no one could have expected at the said meeting any agreement, upon any subject at the said meeting. It was further stated that since article 92 authorises the chairman of the directors to take the chair at a general meeting and as the articles of association of a company form a contract between the company and the members and between the members inter se, the members had agreed to an interested person being the chairman of every general meeting inasmuch as the majority of the business which comes up before a general meeting relates to the acts of directors. This argument does not appear to me to have any relevance. What was before the meeting was not the act of Tulsidas as a director in which he was concerned or interested as a director to see that the same should be upheld by the meeting. What was before the meeting was the approval of an agreement entered into between the company and the private company controlled by Tulsidas under which the private company and, therefore, indirectly, Tulsidas, were to receive considerable amounts by way of remuneration and profit. In this matter Tulsidas, in his capacity as a director, had not taken any part in the resolution of the board passed at its meeting held on November 14, 1968. His interest in the item of business before the meeting was, therefore, not in his capacity as director of the company but in his capacity as director and member of the private company and as the person controlling the private company, and it was his personal interest which would be vitally affected if the resolution was not passed. I was referred to certain authorities in this connection, but I do not propose to discuss them or to go further into this question inasmuch as for the purposes of these notices of motion, I am prepared to assume that Tulsidas was entitled to take the chair. Nonetheless, I am of the opinion that any presumption of bona fides which may attach to the acts of an independent chairman cannot be applicable to Tulsidas's acts, in the present case. Similarly, I do not propose to consider the elaborate arguments advanced and the number of authorities and passages from text books cited before me as to when a poll is said to be completed. I will also assume for the purposes of the present notices of motion that Tulsidas was entitled to give his decision on the validity of the proxies and of the letters of revocation at the time when he did. So far as the question of directions or decisions given by Tulsidas on the validity of the proxies and letters of revocation is concerned, it was submitted on behalf of the contesting defendants that the defendants would fail if such directions or decisions were bad in law. It was further submitted that short of fraud in the conduct of the meeting or in the declaration of results or manifest error of law in the directions and decisions given upon questions of validity of proxies and revocations, the decisions and directions of the chairman cannot be challenged. For the purposes of these notices of motion I will accept this proposition without going into the authorities and the rival submissions in that behalf. Even then, in my opinion, the result as regards these notices of motion must be the same. Even assuming that any presumption of bona fides would attach to the action of Tulsidas as the chairman of the meeting, such presumption is rebutted by the conduct of Tulsidas in deliberately suppressing from the meeting the said letter of April 9, 1969, from the Company Law Board to the company and the company's reply dated April 22, 1969, thereto as also the other circumstances to which I will presently refer. Further, as will be pointed out, several decisions or directions given by Tulsidas cannot be supported in law nor was any attempt made to justify them as being correct in law. If so, the result declared by Tulsidas cannot be said to be the true result of the meeting. I may also point out that while article 97(2) of the articles of association of the company makes the declaration of the chairman, whether on a show of hands a resolution has or has not been carried, or has or has not been carried either unanimously or by a particular majority, conclusive evidence of that fact, without proof of the number or proportion of the votes cast in favour of or against such resolution, there is no such provision with respect to the declaration of the result of a poll. Under article 98(6) it is only the decision of the chairman on any difference between the scrutineers appointed by the chairman to scrutinise the votes given on the poll and report to him which is made conclusive and not his declaration of the result of the poll.

Before I deal with the decisions or directions given by Tulsidas, a few further facts which are important on this aspect of the case require to be set out. In the plaint in Suit No. 681 of 1969 the plaintiffs have made a grievance that the company through its secretary got some data fed into the computers maintained by the Tata Consultancy Services, Bombay, and that the proxies lodged at the registered office of the company were wrongfully caused to be removed to the Tata Consultancy Services on April 26, 1969, and thereafter and that when such data was fed, neither the scrutineers nor the plaintiffs were on the scene and the fact that on that date the scrutineers were not even appointed and the data was fed into the computers was known only to Tulsidas and Dabke and that till today no one else knows the nature of such data or the accuracy or sufficiency thereof or the sufficiency or accuracy with which answers or results were obtained from the computers. The plaintiffs have submitted that for this reason the result, purported to be declared from the alleged result obtained from the said computers, is not valid and binding. Now, the position with respect to the appointment of Tata Consultancy Services is as astonishing as that relating to the Company Law Board's said letter of April 9, 1969. Just as in the latter case Tulsidas on his own purported to deal with the said letter and to reply thereto, so here Dabke, the secretary of the company, on his own, without consulting the board of directors and without any authority from the board of directors, engaged the services of the Tata Consultancy Services. The services to be performed by the Tata Consultancy Services are set out in their letter of April 15, 1969. They agreed to transcribe the names of shareholders and joint shareholders along with their holdings into cards and transfer them on to a magnetic tape provided this data was supplied to them by April 19, 1969. This master tape was then to be sorted in dictionary order in order to produce alphabetical index which would be used by the company's share department to identify the shareholders giving the proxies. Further, information regarding proxies and the revocations was to be punched into cards and a proxy register was to be printed showing separately for the Kilachand group and for the plaintiffs the following particulars, namely, (a) name of the shareholder, (b) the total number of shares held, (c) proxy number, (d) the date of proxy, (e) number of shares against the proxy, (f) date of revocation, if any, (g) revocation number, and (h) number of shares against the revocation. After the polling had taken place, information from the polling papers were to be picked up and a fresh register showing the latest position of the polled proxies was to be prepared. The register would flag those cases where the proxies could be disputed, helping to avoid, as stated in the said letter, "unnecessary screening of valid proxies". It appears that the Tata Consultancy Services were paid a sum of Rs. 20,000 for this work. There is no resolution of the board meeting authorising the engagement of the Tata Consultancy Services or the payment of such amount to them, except that the fact that such payment had been made was intimated to the board of directors at its meeting held on June 25, 1969. In justification of his action Dabke sought to rely in his affidavit-in-reply upon a previous instance when similar assistance was taken from the International Business Machines Corporation. According to him, in 1960, when the company's shares were oversubscribed to about 60 times the face value of the shares offered to the public, assistance of the International Business Machines Corporation was similarly taken for processing allotment letters and refund orders, etc., and at that time also no resolution of the board of directors was passed sanctioning such procedure, and it was the secretary and the office staff who attended thereto. Now, I fail to see what analogy there is between the two cases. Processing of allotment letters and refund orders was not a contested matter, while here there was a hotly disputed question on which the directors and shareholders were sharply divided. It is also alleged that Dabke had informed the directors of the company, including Reighley, about this arrangement. That Reighley gave his consent to it does not seem to be borne out by the record. Why this was not put before and resolved upon at a meeting of the board of directors, even though the plaintiffs were insisting that such a meeting should be called, is a question which has not been answered in the affidavits-in-reply. According to the affidavit-in-reply made by Dabke, he got prepared a list of shareholders on the register of the company together with the folio number, number of shares held by them, the names of the joint holders, if any, and their adresses and sent it to the Tata Consultancy Services for preparing the master tape. This appears to have been done prior to April 26, 1969. On the basis of this data the master tape was prepared by the Tata Consultancy Services and ari alphabetical index in the dictionary order was made and submitted by them to the company. After receipt of the proxies, a rubber stamp was put on each proxy indicating by means of the letters 'F', ' K' and ' G ' whether such proxy was in favour of the plaintiffs or the Kilachand group or was' in favour of an independent party, the letters 'F', 'K' and 'G' standing respectively for "Firestone", "Kilachand" and "General". To these proxies was given a register folio number, serially numbered. Different serial numbers were given to the proxies lodged in favour of Reighley and Tulsidas. The proxies which were serially numbered were grouped according to the letters of the English alphabet and folio numbers were put thereon with the help of the staff of the company. It is alleged that at the said time many of the proxies in favour of Reighley and two others did not state the name of the shareholder but merely stated "I, the undersigned "and bore at the bottom the signature "purporting to be that of the shareholder "and that in many of such cases it was not possible to decipher the name of the shareholder from the signature or to relate the name of the purported shareholder "as appearing on the proxy register of members" in spite of diligent efforts by the staff of the company. Folio numbers were, therefore, not given to such proxies and such proxies are referred to as "untraceable "in the affidavit-in-reply. After the remaining proxies were arranged as aforesaid and numbered and stamped with the relevant letter, they were sent under armed escort to the Tata Consultancy Services in the company of two representatives of the plaintiffs, two of the private company and two of the company for preparation of proxy analysis which accordingly was done by them. It is alleged that the said arrangement of taking and bringing back proxies to and from the Tata Consultancy Services was arrived at on April 26, 1969, in consultation with Ramdas, Reighley, Warner and their solicitor and the solicitor-director. The said proxies were removed on 26th and 27th April, 1969, from the' company's office to the office of the Tata Consultancy Services. It is alleged that the plaintiffs had deputed their own representatives to accompany the said proxies as well as deputed their representatives to supervise the return of the said proxies. It is said that there could be no question of consulting the scrutineers when data was fed into the computers prior to April 28, 1969, since on that date no scrutineers were appointed. Prior to the date of the said meeting held on April 28, 1969, after the master tape had been so prepared from the data supplied as aforesaid, the data with respect to the proxies was fed into the computers for processing on the 26th and 27th April, 1969. After the date of the said meeting the data relating to the revocation letters received was further fed into the computers "in order that the 1st defendant company and/or the scrutineers may have a complete picture and/or a register of the proxies and revocation letters lodged with the 1st defendant company". It is further alleged that the scrutineers were present at the time the data relating to revocation letters was fed into the computers. Paragraph 42 of the said affidavit further alleges :

"As a result of the feeding of this data the scrutineers and the 1st defendant company had before them a register showing the names of shareholders, number of shares held by them, the proxies and the revocations, if any, given by them. The validity of the proxies and the revocations was thereafter subsequently determined by the chairman and/or under his directions in accordance with his decisions and directions given in his letter dated 26th June, 1969, to me. As the scrutineers were not concerned and/or were not entitled to determine the validity or invalidity of the proxies they were not informed of the further data regarding the validity of the proxies which was fed to the computers subsequent to the said letter……..I say that even the 2nd defendant was not aware of the actual data fed into the computers at the time the same was fed into the computers. I further say that the scrutineers had themselves checked the register of proxies obtained from the Tata Consultancy Services on 14th May, 1969, as also the work done by the office of the 1st defendant company."

In his affidavit-in-reply Tulsidas has supported what Dabke has alleged, stating that Dabke informed him about the said facts. Certain averments made by Tulsidas in paragraph 20 of the said affidavit-in-reply are important and require to be quoted :

"I say that I was not aware of the actual data which was fed into the computers at the time the same was fed into the computers. I say that necessary data was fed into the computer by the secretary of the 1st defendant company in consultation with the Tata Consultancy Services. I say that the further data that was fed into the said computer after 26th June, 1969, was based upon my decisions on the validity or otherwise of various proxies and letters of revocations…….I say that, as explained above, the scrutineers know the nature of the data fed except the data which was fed after I had given my decisions aforesaid." The plaintiffs have denied any prior knowledge, consent or approval of Reighley, Warner or the plaintiffs to what was done. Even according to the contesting defendants, there was no prior knowledge or approval or consent of either Reighley, Warner or the plaintiffs. It also seems consistent with the other facts to believe that Reighley protested against the proxies being removed as he alleges, and that the plaintiffs' representatives accompanied the said proxies along with others "to supervise the return of the said proxies as stated and alleged by Dabke himself in his affidavit-in-reply". In any event, it is not the case of the contesting defendants that anybody except Dabke knew what the complete data was which was fed into the computers.

At the hearing three registers were produced. Two of them were proxy registers, one prepared before and the other prepared after June 26, 1969. These were referred to at the hearing as the old proxy register and the new proxy register. The old proxy register was produced by the company, while the new proxy register was forwarded by the company to the scrutineers and produced by them. The third was a printed register consisting of sheets headed "Register of defective proxies and/or revocations". Admittedly, however, it is a register relating to proxies only prepared or got prepared by Dabke in the company's office. Each sheet has several columns headed "(1) Reference folio number, (2) Number of shares held, (3) Serial number, this being the serial number given to the proxy, (4) Duplicate, (5) Without date or signature, (6) Date or signature filled by rubber stamp or typed, (7) Differs from specimen signature, (8) Sig. or P/A or B/Reso. not Regd., that is, signature of power-of-attorney or board resolution not registered with the company, (9) Without the common seal of the company, (10) Stamps not cancelled, (11) Stamps adjudicated, (12) Party out of Maharashtra and stamp of Maharashtra, (13) Without date of meeting, (14) With dates of two meetings and (15) Unsigned ". This register was forwarded by the company to the scrutineers and was produced by the scrutineers.

One of the charges levelled by the plaintiffs is that Tulsidas deliberately deferred giving his decisions or directions on the objections raised to the proxies and revocations until a complete picture of proxies was before him, so that he may know how any decision given by him would affect the voting, and give his decisions from that point of view, not fairly and honestly but with the mala fide object of invalidating the proxies in favour of Reighley, so that the resolution could be got passed. The first objection relates to the late lodging of proxies. Under article 110 of the articles of association of the company, no instrument of proxy is to be treated as valid and no person is to be allowed to vote or act as proxy under an instrument of proxy unless such instrument of proxy has been deposited at the registered office of the company at least 48 hours before the time appointed for holding the meeting. This is in conformity with the provisions of section 176(3) of the Companies Act, 1956. Thus, the last minute for lodging proxies at the registered office of the company was by 4 p.m. of April 26, 1969. According to the plaintiffs, 1017 proxies in favour of Tulsidas and three others were deposited by Shukla, the secretary of the private company, after 4 p.m. on April 26, 1969, and after the bell announcing the expiration of time allowed for depositing proxies had been rung. At that time Reighley, Karode, one P.K. Nambia, also a shareholder of the company, and the third defendant were present. Karode and Reighley objected to such proxies being deposited. Such objection was recorded by Karode on the same day and confirmed by Reighley and the letter of objection was signed by Karode and Reighley in the presence of the third defendant who has attested their signature. These 1017 proxies were in 12 unopened packets. These packets were opened and numbered and a note has been put on the said letter of Objection to the effect that "after numbering as above, receipt has been given to Kilachand Devchand and Company Private Ltd. by Synthetics and Chemicals Ltd. at 5-55 p.m. on 26-4-69". According to the affidavits-in-reply, at about 12-30 p.m. on the 26th April, the company received from the private company several packets containing all the proxies in favour of Tulsidas and three others, each packet containing several files of proxies. For the purposes of facilitating the passing of receipts after the counting of proxies by the company's staff the private company had attached to each file a typed list in duplicate showing the names of shareholders purporting to have issued proxies in favour of Tulsidas and others with the folio number and the number of shares held by each shareholder. All the said packets were brought by Shukla, the secretary of the private company, along with two or three other representatives of the private company and deposited with the company. The physical counting of the said proxies took a considerable time and receipts were granted in respect of the proxies contained in each file after the proxies in each file were counted as of the time when the packets were received. Arrangements had been made to receive the proxies in the open landing space opposite the lift. After counting the proxies, they were removed inside the office of the company. Exactly at 4 p.m. Dabke asked the staff of the company to stop counting the proxies lodged by the private company on the landing and to remove the uncounted proxies contained in the packets inside the office of the company for the purpose of counting and issuing receipts. It is further stated that the proxies lodged by the plaintiffs which were pinned together in lots of 100 each generally (that is, not classified in the manner in which proxies lodged by the private company) were lodged between 2-30 p.m. and 3-30 p.m. and the counting of such proxies finished by 4 p.m. It is further alleged that it was pointed out to Karode and others that the said packets brought by the private company had been deposited at 12-30 p m. Now, whether these 1017 proxies were lodged at 12-30 p.m. as alleged by the contesting defendants or after 4 p.m. as alleged by the plaintiffs is a question of fact which will fall to be decided at the hearing, but one or two circumstances are significant. The total number of proxies in favour of Reighley and others was about 11,732. These were on Dabke's own showing in lots of 100 each generally and not classified as proxies lodged by the private company were. These could, however, be counted within a period of about one hour on Dabke's own admission. The total number of proxies lodged on behalf of the Kilachand group was about 7,789 including the 1,017 disputed proxies. It is thus difficult to understand why, when these 7,789 proxies were lodged at 12-30 p.m., they could not have been counted till 2-30 p.m. or till 5-55 p.m. It is also difficult to understand why a receipt was not given in respect of the said packets to the effect that so many packets said to contain so many proxies were received. In fact, on April 28, 1969, Reighley had deposited approximately 11,730 revocations contained in two trunks and in respect of these trunks receipts were issued showing that trunk of a particular colour said to contain revocation letters was received at the registered office of the company on April 28, 1969, at 2-50 p.m. It is also significant that, prior to the affidavits in-reply, the story now set up about all these proxies being brought at 12-30 p.m. has not been set up in the correspondence.

At the said meeting of April 28,1969, written objections were raised by a shareholder, Kishore K. Koticha, to several proxies in favour of Reighley and others. It appears that a similar letter of objection was written by Koticha with respect to the proxies lodged for the meeting of April 29, 1969. By his letter of April 30, 1969, Koticha stated that the objections which he had. raised about the proxies in his letters of 28th and 29th April would also apply to the letters of revocation lodged by the plaintiffs. Copies of the letters of April 28, 1989, and April 30, 1969, have been exhibited by consent and the copy of the letter of April 30, 1969, bears an endorsement that three letters were received by the company on May 2, 1969. By their attorney's letter of June 10, 1969, the plaintiffs raised several objections to the proxies in favour of Tulsidas and three others. A reminder was written on June 23, 1969. The reply to this letter was only given by Tulsidas on July 2, 1969, after he declared the result of the meeting held on April 28, 1969. It is contended by the contesting defendants that the plaintiffs' attorney's letter cannot be treated as objections raised by a shareholder to the said proxies. It is not necessary to decide this question also as, on Tulsidas's own showing, whatever objections were raised were equally applied to proxies both in favour of Reighley and in favour of himself. Apart from that, when we come to consider these objections it will be obvious that some of them are of such a nature that whether actually taken or not, the proxies to which they applied could never have been treated as valid. It is, however, alleged in paragraph 66 of Dabke's affidavit-in-reply that, as the only objections were to the proxies in favour of Reighley, tabulations were made, that is, the register of defective proxies was prepared only with respect to such proxies and not with respect to the proxies in favour of Tulsidas. This again is not true. The register of defective proxies produced in court includes two sheets, on which in the left hand corner at the top is written in ink "Kilachand P.", that is, the proxies in favour of Tulsidas. These two sheets are in respect of shareholders in ledger folio "N". From this an inference must arise that similar sheets must have been prepared with respect to other shareholders who gave or purported to give proxies in favour of Tulsidas but the same have not been produced. In the register of defective proxies, in the case of Reighley and others as also in those two sheets the entries in the columns are in ink but the totals of the columns are in pencil arid on several sheets there is an analysis of the different types of proxies worked out at the back. This is more than sufficient to convey to any one what the effect on the voting "would be if a particular class of proxies were held to be valid or invalid. It is difficult to believe that a similar analysis was not done in respect of proxies in favour of Tulsidas, if a register in respect thereof was prepared. At the hearing various statements were sought to be handed over to me and facts and figures were given to me of the various heads under which the proxies in favour of both parties would fall. I was also handed over by learned counsel for the company a specimen page, said to be a copy of one of the sheets in one of the proxy registers. I have returned this document and not kept it on the file. Based on the contents of the said specimen copy, detailed arguments were advanced to me by the contesting defendants. When this specimen copy was compared with the original sheet, of which it purported to be a copy, it was found that not only the headings of the columns differed but what was filled in under the columns had no relation to the original sheet. I may mention in fairness to the attorneys of the company that this specimen copy was prepared not in their office but in the office of the company. There were also other statements made under instructions from those representing the company present in court which also did not turn out to be correct. For this reason I have refused to accept or attach any weight to any statement made from the bar which does not find a place on the record.

On the sixth day of the hearing, in order to answer the plaintiffs' charge that the giving of directions by Tulsidas was deliberately delayed until he could see for himself a complete picture of the proxies and revocations so as to bring about a result favourable to himself, Mr. C.K. Daphtary, learned counsel for Tulsidas, applied in Suit No. 681 of 1969 for leave to put in a further affidavit explaining why the directions were not given by Tulsidas in writing till June 26, 1969, and to show that they were given orally on June 19, 1969. The plaintiffs objected to any such further affidavit being filed at this late stage and I rejected the said application for several reasons. There is no warrant whatsoever for saying that any directions as to the objections were given by Tulsidas prior to June 26, 1969. The passages from the affidavits-in-reply of Dabke and Tulsidas which I have set out above make this amply clear. These passages further make it amply clear that Tulsidas gave his directions only after a complete picture was presented to him. It is also abundantly clear from the said affidavits that the validity of the proxies and revocations was determined by Tulsidas and/or in accordance with his directions given in his letter of June 26, 1969. For this reason as also for the reason that this application was made at too late a stage, I rejected the said application. Immediately thereafter Mr. Sen, learned counsel for the company, called upon Mr. Daphtary to produce the opinion of counsel obtained by Tulsidas on the objections to proxies for the meeting of April 28, 1969, and to the letters of revocation This was also objected to by Mr, Nariman on behalf of the plaintiffs. I upheld the objection because nowhere is there any suggestion in any of the affidavits-in-reply that any opinion of counsel was taken. In fact, Tulsidas expressly avers that these various registers were got prepared, so that he may have a complete picture before him, and it was thereafter that he gave his decisions and directions which are contained in his said letter of June 26, 1969. Secondly, whatever counsel may have opined as to the validity in law of any objection is immaterial. The matter is to be decided by the court itself and not in accordance with the opinion given by counsel. For these reasons I did not permit Mr. Daphtary to produce any such opinion.

I will now examine the validity of the objections to the proxies. Though the plaintiffs are challenging the validity of most of these decisions, at the hearing of these notices of motion Mr. Nariman, learned counsel for the plaintiffs, has confined himself to only some of them. The decisions or directions of Tulsidas are contained in his said letter of June 26, 1969. That letter is addressed to Dabke and begins this way:

"Now that the papers relating to the extraordinary general meeting held on 28th April, 1969, have been tabulated I am giving the following directions."

The opening words of this letter also make it abundantly clear that these directions have been given after the papers relating to proxies, etc., had been tabulated and on the basis of such tabulations, that is, after Tulsidas had before him a clear picture as to the proxies to which a particular infirmity applied. The first decision objected to at the hearing of these notices of motion is that contained in direction 1(c) under which a proxy by a company not bearing the company's seal was to be rejected. Under section 176(5)(b) of the Companies Act, 1956, an instrument of a proxy where the appointer is a body corporate, is to be under its seal or is to be signed by an officer or an attorney duly authorised by it. Article 109 of the articles of association of the company contains a similar provision. This direction is, therefore, contrary to law. It was submitted on behalf of the contesting defendants that the result of a wrong direction is a mixed question of fact and law and such direction cannot be held to be wholly bad. I am unable to follow this submission. Rejection, therefore, of proxies given by a company not under its seal but signed by one of its officers or an attorney duly authorised by it would be a wrongful rejection contrary to law and such proxies must be held to be valid.

The third group of directions relates to stamps on proxies. Direction 3(a) provides that a proxy which bears no revenue stamp should be rejected. There is no direction as to what is to be done if a proxy bears a revenue stamp which has not been cancelled. Admittedly, there were proxies in favour of Reighley as also Tulsidas on which the stamps remained uncancelled. In paragraph 40 of the affidavit-in-reply of Dabke and paragraph 18 of the affidavit-in-reply of Tulsidas it is stated that the proxies, the stamps on which were not cancelled were not rejected, whether the same were in favour of one group or the other. This direction cannot be supported in law. Under section 10 of the Indian Stamp Act, 1899, read with rule 13(f) of the Indian Stamp Rules, 1935, a proxy is to bear an adhesive stamp. Section 12 of the Indian Stamp Act provides as follows;

"12. Cancellation of adhesive stamps.—(1)(a) Whoever affixes any adhesive stamp to any instrument chargeable with duty which has been executed by any person shall, when affixing such stamp, cancel the same so that it cannot be used again ;

(b) whoever executes any instrument on any paper bearing an adhesive stamp shall, at the time of execution, unless such stamp has been already cancelled in manner aforesaid, cancel the same so that it cannot be used again.

(2)Any instrument bearing an adhesive stamp which has not been cancelled so that it cannot be used again, shall, so far as such stamp is concerned, be deemed to be unstamped.

(3)The person required by sub-section (1) to cancel an adhesive stamp may cancel it by writing on or across the stamp his name or initials or the name or initials of his firm with the true date of his so writing, or in any other effectual manner. "

Thus, under section 12(2) any proxy on which the stamp is not cancelled must be treated as an unstamped proxy and ought to have been rejected. In In re Tata Iron and Steel Co. Ltd Crump J. has also held that the proxies which are unstamped or upon which the stamps have not been cancelled must be excluded and any votes recorded on the authority of such proxies should equally be excluded. No attempt has been made to support the legal validity of this direction but it was suggested that this was a favour to the plaintiffs inasmuch as several proxies in their favour bore stamps which were not cancelled. This overlooks the fact that on the admission of both Dabke and Tulsidas, there were proxies also in favour of Tulsidas on which the stamps were not cancelled.

Direction 3(b) requires proxies against which objections have been raised and which are signed by shareholders described as residing outside Maharashtra State and which do not bear the stamp of the State where the shareholder is said to reside to be rejected. This direction again cannot be supported in law. Under section 2(11) of the Indian Stamp Act, an instrument is said to be duly stamped when it bears an adhesive or impressed stamp of not less than the proper amount and when such stamp has been affixed or used in accordance with the law for the time being in force in India. Under section 10(1), all duties with which any instruments are chargeable are to be paid and such payment is indicated on such instruments by means of stamps, (a) according to the provisions contained in the said section, or (b) when no such provision is applicable thereto as the State Government may by rule direct. There is no provision in the Indian Stamp Act with respect to an instrument executed in one State which is required to be used in another State. Rule 3(1) (i) of the Bombay Stamp. Rules, 1939, made in exercise of the powers conferred, inter alia, by section 10, provides that all duties with which any instrument is chargeable shall be paid, and such payment shall be indicated on such instruments, by means of stamps issued by the Provincial Government for the purposes of the Act. Under rule 18, except as otherwise provided by the said rules, adhesive stamps used to denote duty are to be the requisite number of stamps bearing, inter alia, the words "India Revenue" or "Bombay Revenue" The words "Provincial Government" and "Bombay Government" are now to be read as the "State Government" and the "Maharashtra Government". Proxies, therefore, executed by shareholders in another State and bearing the stamps of the Maharashtra State could not have been validly rejected and ought to have been treated as valid. I may mention that no attempt was made to support the validity of this direction.

Direction 3(c) requires that proxies by shareholders described as residing outside Maharashtra State which bear a certificate of the stamp office to be shown to Tulsidas. This again is surprising. Section 32 of the Indian Stamp Act provides for a certificate to be granted by the Collector by endorsement on the instrument in question to the effect that the full duty with which it is chargeable has been paid. Under sub-section (3) of section 32, any instrument upon which an endorsement has been made under section 32 is to be deemed to be duly stamped and, if chargeable with duty, is to be receivable in evidence or otherwise, and may be acted upon and registered as if it had been originally duly stamped. There was, therefore, no question of Tulsidas or anybody sitting in judgment upon the certificate of the stamp officer. All such proxies, therefore, ought to have been held to be valid. Here again no attempt was made to justify the validity of this direction.

Direction 5 requires that where there is a difference between the specimen signature of the shareholder giving the proxy and the signature on the proxy, the proxy should not be rejected by Dabke but the proxy and the specimen signature should be shown to Tulsidas for his decision. It nowhere appears that any such signatures were ever shown to Tulsidas. None of the affidavits-in-reply mention that any such signature was ever shown to Tulsidas. On the contrary, the affidavits-in-reply show that this work was done by the staff of the company. This is also clear from the correspondence with the scrutineers. In their letter of June 27, 1969, the scrutineers have stated that they had deleted from the proxy registers those proxies on which specimen signatures differed from that on the records of the company and all the duplicate proxies on the basis of tabulations prepared by the company and test checked by them. Further, in paragraph 50 of the affidavit-in-reply of Dabke and paragraph 31 of the affidavit-in-reply of Tulsidas there is an express admission that the signatures were verified by the staff of the company and test checked by the scrutineers. There is, therefore, no question of any such signature being shown to Tulsidas. It is the case of the contesting defendants that on a proper construction of the relevant articles in the articles of association of the company and a proper demarcation of the respective functions of the chairman of the meeting and the scrutineers, Tulsidas as the chairman of the meeting had to decide upon all questions of validity of proxies. If this submission is correct, then it was for Tulsidas alone to have compared the signatures in question. Whether the signature on a proxy differs from the specimen signature or not was not a ministerial matter but a matter involving judgment, which matter could not have been delegated either to the secretary or the staff of the company.

Direction 6 provides that where the name of the shareholder cannot be ascertained either from the information given on the proxy or the signature the proxy must be rejected. As appears from paragraph 42 of the affidavit-in-reply of Dabke, a large number of proxies in favour of Reighley, namely, those referred to as "untraceable", were rejected and no folio number given thereto on the ground that it was not possible from the signature to decipher the name of the shareholder or to relate the name of the purported shareholder with any name appearing on the register of member's and that this was done immediately .after April 26, 1969, or thereabouts. No identification letters were given to these proxies arid they did not feature in any of the proxy registers and were, therefore, not taken into account. It certainly was not for the company's staff to reject such proxies. Tulsidas admittedly never had a look at any one of these proxies. By their letter of May 21, 1969, the scrutineers stated that there were approximately 5,000 revocations and 1,000 proxies in favour of Reighley, which were reported "untraceable", and that similarly about 700 revocations in favour of Tulsidas and others were also reported "untraceable". It appears that such proxies and revocations lodged by the plaintiffs, bore on the reverse certain reference numbers. By the said letter the scrutineers requested that the company's office should be instructed to trace the said proxies and revocations with the help of reference on the back of the documents and suggested that the assistance of the respective parties may be taken for that purpose. In the progress report which the scrutineers made on May 22, 1969, they have referred to their letter of May 21, 1969, and requested that the same should be attended to. By their attorneys' said letter of June 10,1969, addressed to Tulsidas, the plaintiffs pointed out that the staff of the company had not mentioned folio numbers on approximately 1,450 proxies and 5,000 odd revocations in favour of Reighley, while they had given folio numbers to all proxies and revocations in favour of Tulsidas. They have further recorded that on May 5, 1969, Reighley and Karode were in the office of the company and had offered to assist in putting the folio numbers by a reference to the plaintiffs' internal records, but this offer was not availed of. By the said letter they requested that the assistance of Reighley and Tulsidas in placing the correct folio numbers on the said proxies and revocations should be taken. The plaintiffs by their attorneys' letter of June 23, 1969, sent a reminder to Tulsidas. By their attorneys' another letter of the same date the plaintiffs pointed out these facts to the scrutineers and requested them to do the needful. A copy of this letter was forwarded by the scrutineers to Tulsidas. The plaintiffs sent a reminder to the scrutineers by their attorneys' letter of June 27, 1969. It appears that Reighley also handed over to the scrutineers in the presence of Dabke four files containing the information which would be useful for processing the proxies and letters of revocation in question. Along with their another letter dated June 27, 1969, addressed to Tulsidas the scrutineers enclosed a copy of the said letter dated June 27, 1969, addressed by the plaintiffs' attorneys to the scrutineers and also recorded the fact that the said four files had been handed over to them by Reighley in the presence of Dabke. They also pointed out that they had so far not received any reply from Tulsidas to their letter of June 23, 1969. By his letter of June 28, 1969, Tulsidas stated that it was no part of their duty as scrutineers to have accepted papers from Reighley and that he had given to the secretary the directions relating to the work of the secretary and as soon as" the secretary finished his work, the scrutineers would take in hand the scrutiny of the voting papers and counting of the votes and report to him. It is thus clear that a large number of proxies and revocation letters in favour of Reighley were not taken into account merely on the ground that the company's office could not make out from the signature or the other information contained in the proxies the name of the shareholder giving the proxies. This work was left to Tulsidas who claiming to be the sole judge of the validity of proxies and revocation letters to be done by the secretary and the staff of the company and even when assistance was offered on the basis of information appearing on the proxies and revocation letters themselves, namely, the reference numbers on the back thereof, to help the company's staff "trace these proxies and revocations", such offer was rejected. This attitude on the part of Tulsidas militates against his claim of bona fides, fairness and impartiality.

Direction 7 requires that wherever there is a difference between the specimen signature and the signature on the revocation letter, the revocation letter should be shown to Tulsidas for decision. As is clear from what is stated with respect to direction 6, no such revocation letter was ever shown to Tulsidas, but such revocation letters were dealt with only by Dabke and the office staff.

Direction 8(a) requires undated revocation letters to be ignored. The plaintiffs had lodged about 11,000 revocation letters obtained by them. The position appears to be that a large number of revocation letters in favour of Rgjghley and others were undated, while those in favour of Tulsidas were dated. In In re Tata Iron and Steel Co Ltd., Crump J. said that such an objection with respect to proxies hardly required discussion. He observed:

"The proxy was lodged within the time allowed and before the date of the meeting. I can understand that an omission to state the date of the meeting may be a serious defect, but as for the date of execution 1 can only say de minimis. No authority has been cited for questioning a proxy on such grounds."

I fail to see why the same principle should not apply to revocation letters. Under article 113 of the articles of association of the company, a vote given in pursuance of a proxy is to be valid notwithstanding, inter alia, the revocation of the proxy provided no intimation in writing of such revocation has been received at the registered office of the company before the vote is given. All that is, therefore, required to revoke a proxy validly lodged is the receipt of a revocation letter before the vote is given; No form of revocation letter is prescribed and this insistence on date appears to be incapable of explanation except that a larger number of undated revocation letters were those of proxies in favour of Tulsidas and others. Actually in the proxy register prepared by the Tata Consultancy Services most revocation letters have been bearing the date April 28, 1969. It was said at the hearing that this date is a mistake and as appears on the record, a large number of the revocation letters in favour of Reighley were undated. There is no mention in the affidavit-in-reply that such a mistake was made or as to who made this mistake or how such a mistake came to be made. It was said at the hearing that this direction applied only where there were cross revocation letters in favour of both parties, one of which' was dated and the other undated. There is no warrant for this statement either in the said letter of June 26, 1969, or in any of the affidavits in reply and this statement, therefore, cannot be accepted. The direction unequivocally applies to all undated revocation letters and, in fact, as the record shows, all undated revocation letters, whether they were cross revocation letters or otherwise, have not been taken into account. This direction, therefore, does not appear to have been given bona fide.

Direction 8(b) states that the letters of revocation filed by Firestone and Kilachand in the form annexed to the said letter of June 26, 1969, were not revocation letters and should be ignored. The form of revocations filed by the plaintiffs and objected to, show that such revocation letters are addressed to the company, signed by the shareholders and headed "Extraordinary General Meeting on 28th April, 1969, and 29th April 1969 "and are in these terms:

"I have signed forms of proxy and forms of revocation in favour of Mr. Tulsidas Kilachand and others. I have subsequently revoked the said forms of proxy and revocation and executed fresh forms of proxy and revocation in favour of Mr. F.J. Reighley and others. Kindly note the aforesaid position in your register and acknowledge receipt of this letter."

Now, I fail to see what can be objected to in this form. All that was said was that this form referred to revocation as having been done earlier and did not by itself revoke the proxies. The form of letter of revocation in favour of Tulsidas is more elaborate and it states that the executant had executed the final proxies in favour of Tulsidas and others and had on that day revoked all proxies executed in favour of Reighley and others. Now, I fail to see why either of these two forms of revocation should be rejected. A proxy holder is merely an agent of a shareholder to vote at a particular meeting. Under section 203 of the Indian Contract Act, 1872, except where an agent has an interest in the subject-matter of the agency, the principal may revoke the authority given to his agent at any time before the authority has been exercised so as to bind the principal, and under section 207, revocation may either be expressed or implied, and under section 208, so far as regards third persons, termination of the authority takes effect when it becomes known to them. No particular form of revocation is provided for by the articles. Article 113 only requires an intimation in writing of revocation to be received at the registered office of the company before the vote is given. In the forms of revocation rejected by Tulsidas it is made expressly clear that the proxies given by the shareholder in favour of a particular individual have been revoked by him and they ought, therefore, to have been held to be valid.

Direction 8(c) says that where the name of the shareholder cannot be ascertained either from the information given on the revocation letter or the signature, the revocation letter should be rejected. A large number of revocation letters obtained by Reighley and others have been rejected on this ground. Here the position is the same as in the case of "untraceable "proxies and what I have said with regard thereto while considering direction 6 must also apply to direction 8(c).

Direction 8(d) provides that if there are two or more revocation letters given by the same shareholder in favour of different parties and they all bear the same date, they will cancel out. This direction is wholly untenable in law. I fail to see why the revocation letters would cancel each other out. They would on the contrary cancel the proxies in respect of which they have been lodged. The effect of this direction would be that if proxies were given by a shareholder in favour of both the parties and one bears a later date than the other, the cancelling out of the cross letters of revocation in respect thereof would make valid or revive the proxy of the later date. I am unable to see on what principle of law this can be. The effect of such revocation letters must be taken as cancelling the proxies in respect of which these letters have been lodged.

Direction 9(a) states that a proxy given by a shareholder will revoke an earlier proxy given by him, whether in favour of the same persons or other persons unless the later proxy is validly revoked, in which case the earlier proxy will stand. The later proxy would of course revoke an earlier proxy, but I fail to see how, when a later proxy which has revoked an earlier proxy is itself revoked, the earlier proxy can be resuscitated. The result of a later proxy being revoked would be that the later proxy would also fall and not that the earlier proxy would revive. This direction too must, therefore, be said to be bad in law.

Direction 9(c), inter alia, provides that where a shareholder has given proxies in favour of both Reighley and others as also Tulsidas and others, than if both the proxies are undated or both bears the same date, they will be treated as cancelling each other unless one of the proxies is validly revoked. Here also to my mind the result would be that two cross proxies bearing the same date or both undated would cancel each other out irrespective of whether one of them is thereafter revoked or not because revocation of one of such proxies cannot lead to the revival of the other proxy. This direction also, therefore, does not seem to me to be justified in law.

So far as the bona fides of Tulsidas are concerned, it may also be mentioned that after the result was declared, Reighley, in his capacity as director, repeatedly requested Tulsidas as well as Dabke as the secretary of the company to give him inspection of various papers. Copies of that correspondence are annexed to the plaint in Suit No. 681 of 1969. It is not necessary to refer to that correspondence in any great detail, but it cannot be disputed that several of the documents, of which Reighley required inspection in his capacity as director, were those of which he was entitled to inspection under section 209(4)(a) of the Companies Act, 1956. Nonetheless inspection was denied to him. It was said at the hearing that it was obvious that the plaintiffs were contemplating filing suits and this inspection was asked for by Reighley for the purposes of such suits. If a director is entitled to take inspection, his motive in doing so is irrelevant. In fact, among the documents, of which inspection was not given to Reighley, was the said letter of June 26, 1969, which came to the knowledge of the plaintiffs and Reighley for the first time when a copy of it was annexed to the affidavit-in-reply of Dabke as also of Tulsidas. This fact also militates against the claim of bona fides put forward by Tulsidas.

Thus several directions given by Tulsidas are bad in law and some others are not given. Apart from this, admittedly the results prepared by the Tata Consultancy Services contain several mistakes. The result was communicated by the Tata Consultancy Services to the company by their letter of June 30, 1969, signed by one Y.P. Sahni. Along with that letter a new proxy register was forwarded to the company together with a list of what is referred to as "additional changes which were not incorporated in the main register as they had been missed by the company". It further appears from the said letter that due to two punching errors, the total shares shown against the plaintiff group from page No. 347 onwards of the register had to be amended, which was to be done by ignoring the lakh position, and as a result thereof, the total shares shown on the last page No. 465 was required to be read at 70,698 and not 8,70,698. A mistake of eight lakhs in the total and in the punching of figures can hardly be said to be a negligible error. The letter farther states that due to changes which were pointed out to the Tata Consultancy Services by the company, the final figures had to be further amended as set out in the said letter. These corrections are as follows:

	Firestone				Kilachand
	Proxies		Shares		Proxies		Shares
Total number of proxies received and the number of shares against these proxies (as shown in the register and rectified as mentioned in)		......		......		......
(1) ..	6,798		70,698		6,396		2,54,642
Minus : deletions as per list 'A' attached.	182		2,972		53		8,171
	6,616		67,726		6,283		2,46,471
Plus: as per additions mentioned in list 'B'…. attached…	1		6		3		161
	6,617		67,732		6,286		2,46,632

Along with the said letter the Tata Consultancy Services also returned the old proxy register in which the said changes were marked. This letter was sent to the company in duplicate and was delivered by hand. One signed original was retained by the company and the other sent to the scrutineers. In both the original letters, after the portion reproduced above, further corrections have been made in ink under the heading "Firestone" in the first three columns. These corrections are :

'"Delete (see Statement 'A') .. ...

Thus, the total proxies in favour of Reighley and the number of shares which such proxies represent are reduced by 1 proxy and 6 shares respectively. I am informed by Mr. Sen, learned counsel for the company, that the initials "D.V" are the initials of the man from the Tata Consultancy Services who delivered these letters to the company and that these corrections were made by him when these further mistakes were pointed out to him by the company when the said letters of June 30, 1969, were delivered to it. Both the signed originals of the said letters have been exhibited by consent.

From this, it is obvious that no reliance can be placed even upon the accuracy of the result obtained through the services of the punching cards and the computer. Thus, the result obtained was based on decisions erroneous in law, not given bona fide and containing, for aught one knows, further arithmetical errors as yet undetected. The decision so arrived at cannot be said to be valid and cannot stand. It was submitted on behalf of the contesting defendants that on this position what the court should do would be to give correct directions and direct a fresh count on the basis thereof, and that in fact the plaintiffs have made an alternative prayer to this effect in Suit No. 681 of 1969. I do not propose to decide at this stage what the effect of these wrong decisions and arithmetical mistake is, whether it renders invalid the said meeting and the resolution passed thereat or whether the court has the power in such a case to give proper directions and direct a re-count. This will have to be decided at the hearing of the suit, but one thing cannot be disputed. Today there is no resolution of the company approving the appointment of the private company for a further term, and in view of the large number of proxies and revocation letters in favour of Tulsidas and others which appear to have been rejected and proxies and revocation letters in favour of Tulsidas and others which appear to have been treated as valid by reason of these erroneous decisions, and bearing in mind that the majority in favour of the resolutions as shown in the result of the poll declared by Tulsidas is only of 20,171 votes, and having regard to the fact that the one proxy in favour of Reighley and others averages about 10 votes or more, while that in favour of Tulsidas and others averages about 13 to 14 votes, it may well be that if a recount as submitted were ordered, the resolution would be lost.

There are a number of objections taken by the plaintiffs in connection with this aspect of the case. In view of the conclusion which I have already reached, I do not consider it necessary to deal with these objections and they may well be decided at the hearing of the suit.

The question that remains is what order to make in this case. It was submitted by Mr. Nariman, learned counsel for the plaintiffs, that since the conclusions I have arrived at are that the resolution passed at the meeting of the board held on November 14, 1968, and the notice convening the said meeting of April 28, 1969, and what was transacted at the said meeting are all invalid, the court must restrain the continuance of an ultra vires and an illegal act and grant an injunction as prayed for. On the other hand, the contesting defendants submitted that the conclusions to which I have arrived at on these notices of motion can only be prima facie and on such prima facie conclusions the court ought not to grant an injunction. I have at this stage held in favour of the plaintiffs on almost all points. Even though the conclusions I may have reached are prima facie and not final conclusions, I would have been inclined to grant an injunction as prayed for, but for the fact that all parties are agreed that the hearing of both these suits should be expedited and they should be heard and disposed of as early as possible, a view which in the interests of the parties, I am also inclined to take. I accordingly do not think it necessary at this stage to disturb the status quo ante. But what is the status quo ante? Admittedly, right from October 1, 1968, the private company has voluntarily not taken any amount for its commission. It may have done this either because the private company may have apprehended that the opposition of the plaintiffs to this appointment for a further term may prove successful or because it may have feared action by the Company Law Board. In fact, in its letter of April 9, 1969, the Company Law Board had made it expressly clear that any action taken by it would be effective as from October 1, 1968. If, therefore, the private company is to allow to continue to function as it has been doing, it can only be upon terms. It was submitted that the financial condition of the private company is so sound that no condition need be imposed and no security taken as the private company is solvent enough to refund any moneys which it may receive. In support of this submission a copy of the balance-sheet of the private company for the year ending September 30, 1968, has been put in by consent and marked exhibit No. 8. This balance-sheet, however, does not quite bear out this claim, for certain items shown on the assets side cannot be taken at the value shown therein. In the summary of investments, out of a total investment of Rs. 1,23,39,296, investments of the value of Rs. 59,65,133 are in shares of subsidiary companies which are, however, not quoted on the market, and investment of the value of Rs. 13,19,532 in shares of subsidiary companies quoted on the market. Further, on the assets side are shown two sums of Rs. 2,31,130 and of Rs. 27,25,818 aggregating to Rs. 29,56,948 due from the Digvijay Spinning and Weaving Company Ltd., which are stated as "considered good ". The Digvijay Spinning and Weaving Company Ltd. is a company under the same management as the private company and it is interesting to know its fate. By a notification No. BRU 21690-LAB. I, dated July 9, 1969, of the Government of Maharashtra, Industries and Labour Department, published in Part I-L of the Maharashtra Government Gazette, Extraordinary, of July 9, 1969, the Government of Maharashtra in exercise of the powers conferred by section 3 and clause (a)(iv) of sub-section (1) of section 4 of the Bombay Relief Undertakings (Special Provisions) Act, 1958, declared that the said Digvijay Spinning and Weaving Company Ltd. should be conducted for a period of one year commencing on July 9, 1969, and ending on July 9, 1970, to serve as a measure of unemployment relief, and has further directed that during the said period any right, privilege, obligation or liability accrued or incurred before July 9, 1969, and any remedy for the enforcement thereof should be suspended. A copy of the relevant gazette has been put in by consent and marked exhibit C. Thus, this debt is today not recoverable, assuming that a company which had to be declared as a relief undertaking is capable of meeting its debts. Further, the auditors' notes appended to the said balance-sheet show that the sales tax assessments of the company have been finalised up to March 31, 1967, only and that there are pending assessments in respect of which the private company does not expect any liability to be imposed. How far this expectation is true can only be known when the assessments are finalised, but we should bear in mind that the expectation of the private company in respect of the debts due from the Digvijay Spinning and Weaving Company Ltd. was certainly not justified. The auditors' notes also show that the bonus is paid and accounted for on cash basis and, therefore, no provision has been made in respect thereof during the year and that no depreciation is provided on land and godown and on building other than the portion used for business which aggregated to Rs. 87,827, under section 205 of the Companies Act, 1956. Further, on the assets side is shown a sum of Rs. 39,76,604 for advances and other income-tax payments and the note to it runs, "completed assessments up to Asstt. Year 1963-64, but under appeals; not adjusted therefrom". Note (B) of the company auditors' report to the shareholders states that the auditors could not, in the absence of availability of tax assessment records, ascertain the adequacy or otherwise of the liability for taxation and provision thereof. This provision is in the sum of Rs. 22,82,770. The secured loans aggregate to Rs. 82,01,245, while the unsecured loans aggregate to Rs. 16,09,817. As the profit and loss account shows, the actual working of the company has resulted in a profit of Rs. 3,76,429, though the final figure of profit shown in the profit and loss account which is taken to the balance-sheet is Rs. 7,32,273 arrived at by taking into account certain other items, such as balance as per last balance-sheet and income-tax refunds of previous years. In the affidavit-in-reply of J.B. Shukla, the secretary of the private company, commission in the sum of Rs. 21,03,300 is stated to have been earned from the sole selling agency for the year ending September 30, 1968. According to the said affidavit, the private company incurred expenses in respect of the sole selling agency in the sum of Rs. 17,11,300. Thus, according to the said affidavit, the profits earned from the sole selling agency are Rs. 3,92,000. If, therefore, the profits from the sole selling agency were not there, then for the year ending September 30, 1968, the actual working of the private company would have shown a loss. The financial position of the private company cannot, therefore, be said to be so sound as to justify dispensing with security.

It was then submitted by the contesting defendants that in respect of the working of the sole selling agency, the private company has to incur expenses which, under the terms of the agreement, are to be borne by it and, therefore, at least the amount of such expenses should be allowed to be received unconditionally by it. In the said affidavit-in-reply of Shukla it is said that the expenses incurred for the year ending September 30, 1968, were in the sum of Rs. 17,11,300 and a summary of such expenses is annexed as exhibit A to the said affidavit. After this affidavit was filed, the plaintiffs by their attorneys' letter of September 8, 1969, called upon the private company to give them inspection of documents from which the correctness of such expenses could be ascertained as also inspection of the balance-sheet for the year ending September 30, 1968, and the documents required by law to be annexed or attached thereto, including the profit and loss account and the auditors' and the directors' report, which balance-sheet was referred to in the said affidavit. By its attorneys' letter of September 9, 1969, the private company refused to give inspection. The plaintiffs have denied that the expenses could be in the sum alleged by the private company. No supporting material is placed before me to show how the figures in the summary of expenses annexed to the said affidavit have been arrived at. In view of several incorrect statements made in the affidavits-in-reply, not much reliance can be placed on these figures unsupported by any other material. It is also alleged in the said affidavit that the cost of the company of setting up a separate sales organisation would be over Rs. 25,00,000 and a statement thereof is annexed as exhibit B to the said affidavit of Shukla. This exhibit B refers to an estimate as contemplated by an expert committee sent by the plaintiffs in 1965. After this affidavit was filed, by their letter dated September 10, 1969, the plaintiffs asked for inspection of the report of such estimate. No such inspection was given to the plaintiffs nor has any such report been produced before me and it is not possible at this stage to place reliance upon this estimate without a detailed picture thereof being presented. The plaintiffs in their affidavit-in-reply have pointed out that 85 per cent, of the synthetic rubber produced by the company is bought by the 7 tyre companies and about 50 consumers borne on the list of the Director-General of Technical Development and that no particular sales organization or special sales effort is necessary for selling the company's products in view of this fact and the fact that the company is the only company in India which makes synthetic rubber. There appears to be considerable force in this. In any event, no sufficient cause has been made out why in this case the normal rule as to taking of security should be departed from. It was also submitted that, as in order to set up its sales organisation the company would have to incur expenses, in the interest of the company, therefore, instead of making the company incur such expenses the court should permit the private company to continue as sole selling agents pending the suits and direct a certain amount to be paid to it towards expenses, and not by way of commission to be retained by it irrespective of the result of the suits. In view of the provisions of the Companies Act, this is an astonishing submission to make. Under the sole selling agency agreement the private company has to set up and maintain at its own expense an adequate organisation for sale of the company's products within the agency territories and is to bear and pay all expenses relating to such organisation. Such expenses are, therefore, to be met by the private company out of the amount of commission received by it. Under section 294(2A), if the appointment of a sole selling agent is disapproved by the company in general meeting, it ceases to be valid with effect from the date of the general meeting, and section 294A(l)(a) provides that

"A company shall not pay or be liable to pay to its sole selling agent any compensation for the loss of his office in the following cases :—

(a) where the appointment of the sole selling agent ceases to be valid by virtue of sub-section (2A) of section 294."

Under sub-section (2) of section 314, if any office or place of profit is held in contravention of the provisions of sub-section (1), not only is such office or place vacated on and from the date next following the date of the general meeting of the company at which a special resolution according the consent was required to be passed, but the holder of such office or place also becomes liable to refund to the company any remuneration received by him for the period immediately preceding such date in respect of such office or place of profit. Thus, in law, if the plaintiffs were to succeed, the private company would not only be not entitled to receive any commission but would also be bound to refund moneys, if any, received by it by way of commission. The submission of the contesting defendants, therefore, amounts to asking the court to ignore and circumvent the mandatory provisions of the Companies Act enacted in public interest and to seek to perpetuate an illegal payment by means of a court order. This the court consistently with the law ought not to do. Since the private company has rested content with not taking any commission for a period over eight months prior to the filing of the first suit, there is no reason why it should be permitted to take any amount for the period preceding the hearing of these notices of motion. At the highest it can only be permitted to take a reasonable amount towards expenses from October 1, 1968, upon giving security and upon condition of repayment or refund and the necessary direction in that behalf will be given in the order which I will pass.

So far as the other prayers in the notice of motion in Suit No. 681 of 1969, are concerned, as mentioned before, the contesting defendants do not oppose the granting of an injunction to restrain Tulsidas and the scrutineers from acting as such in respect of the said extraordinary general meeting held on April 29, 1969. The parties had also agreed upon proper custody of all the papers and documents in connection with polls taken at the meeting held on the 28th and the 29th April, 1969. They are also agreed that inspection may be taken under proper safeguard of all such papers forthwith without waiting for formal discovery.

As mentioned before, the parties wanted to take a consent order with respect to this prayer, but no consent order can be passed inasmuch as the form of the order was not agreed to. This was because the plaintiffs have prayed for a receiver of all the papers and documents in connection with both the meetings including those set out in exhibit 29 to the plaint.

According to the company, some of the documents mentioned in exhibit 29 do not exist. I am not today determining which document exists and which does not. An ad interim injunction was given by me, as mentioned before, restraining each of the defendants from disposing of or in any manner dealing with any of the said papers and documents including those mentioned in exhibit 29. In spite of this, in none of the affidavits-in-reply is the existence of any of these documents denied. Since for whatever reason a consent order cannot be passed, it is not possible to appoint any private individual to be the custodian of these papers and the normal rule must prevail.

All parties are agreed that the hearing of both these suits should be expedited, but according to the contesting defendants, Suit No. 522 of 1969 ought to be heard first and Suit No. 681 of 1969 to be heard one month thereafter. It was submitted that Suit No. 522 of 1969 was filed as a short cause, the pleadings in that suit are complete and when the suit came on board for directions as a short cause, it has been ordered to be tried as a contested short cause on December 1, 1969, while Suit No. 681 of 1969 is filed as a long cause and written statements have not yet been filed therein. The last date for filing written statements in Suit No. 681 of 1969 was August 23, 1969. If the defendants have chosen not to file their written statements, the blame for this lies only on them. The date for hearing which is given in respect of Suit No. 522 of 1969, is however, not a peremptory date and experience shows that the suit is not likely to come on board on December 1, 1969, or for a considerable time thereafter. These notices of motion have been argued as if the hearing thereof were the hearing of the suits, and apart from formal discovery in both suits and the written statements in Suit No. 681 of 1969, substantially what remains to be done is only inspection of the papers and documents in connection with the polls. Thereis also neither convenience nor merit in hearing Suit No. 681 of 1969 one month after Suit No. 522 of 1969. On the contrary, it is in public interest for saving public time as also in the interest of the parties that these suits should be heard one after the other and by the same judge.

Accordingly, I grant, pending the hearing and final disposal of both Suit No. 522 of 1969 and Suit No. 681 of 1969, an injunction restraining the Synthetics and Chemicals Ltd., the first defendants in both the suits, and its officers, servants and agents from paying to Kilachand Devchand and Company Private Ltd., the second defendants in Suit No. 522 of 1969 and the fifth defendants in Suit No. 681 of 1969, any payment by way of commission or otherwise in pursuance of the said resolution dated November 14, 1968, of the board of directors of Synthetics and Chemicals Ltd. or under the said agreement dated February 18, 1969, and/or the said letter dated February 18, 1969, as also restraining Kilachand Devchand and Company Private Ltd., its officers, servants and agents from receiving from Synthetics and Chemicals Ltd. any amount by way of such commission or otherwise in pursuance of the said resolution or the said agreement and/or the said letter. I further order and direct that, pending the hearing and final disposal of both the said suits, Synthetics and Chemicals Ltd. shall deposit in court for the period commencing from October 1, 1969, the amount which would have been payable by it as commission to Kilachand Devchand and Company Private Ltd. under the said agreement dated February 18, 1969, read with the said letter dated February 18, 1969, were the said sole selling agency agreement held to be valid. The amount for the month of October, 1969, shall be deposited on or before November 30, 1969, and the amounts for the subsequent months on or before the thirtieth day of each succeeding month.

Kilachand Devachand and Company Private Ltd. will be at liberty to withdraw one-half of the amount of each such deposit upon furnishing a bank guarantee or security to the satisfaction of the prothonotary and senior master of this court and on condition that in the event of the plaintiffs succeeding in either of the said two suits, Kilachand Devchand and Company Private Ltd. will forthwith deposit into the court the amounts so withdrawn by it for the purpose of being refunded .to Synthetics and Chemical Ltd.

I also grant, pending the hearing and final disposal of this suit, an iujunction restraining Tulsidas Kilachand, the second defendant in Suit No. 681 of 1969, from in any manner exercising any power or function as chairman of the extraordinary general meeting of Synthetics and Chemicals Ltd. held on April 29, 1969, as also restraining defendants Nos. 3 and 4 in Suit No. 681 of 1969 and each of them from exercising any power or function as scrutineers appointed at the said extraordinary general meeting.

I also appoint, pending the hearing and final disposal of this suit, the court receiver to be the receiver of all the papers and documents in connection with the polls taken at the extraordinary general meetings of Synthetics and Chemicals Ltd. held on April 28, 1969, and April 29, 1969, respectively, including the papers and documents specified in exhibit 29 to the plaint in Suit No. 681 of 1969, except such of them as may have been marked as exhibits at the hearing of these notices of motion, but including the registers produced in court at the said hearing. The registers produced in court will be tied up in packets; sealed by the office of the prothonotary and senior master of this court and forwarded to the court receiver. The court receiver will take charge of all the other papers and documents in the presence of the attorneys of the plaintiffs and of the defendants in Suit No. 681 of 1969. Defendants Nos. 1 to 5 or defendants Nos. 1, 2, and 5 in Suit No. 681 of 1969 will be at liberty to nominate the attorneys or anyone of them to attend on their behalf for this purpose. All the papers and documents taken charge of by the court receiver will be tied up in packets and sealed with the seal of the court receiver and of the attorneys of the plaintiffs and of ;the attorneys of the defendants in Suit No. 681 of 1969. The defendants Nos. 1 to 5 or defendants Nos. 1, 2 and 5 in Suit No. 681 of 1969 will be at liberty to nominate the attorneys of any one of them to affix the seal on their behalf. The parties will be entitled forthwith to take inspection of all the papers and documents of which receiver has been appointed, in the court receiver's office during office hours every working day. Such inspection will be taken in the presence of a responsible representative of the attorneys of the plaintiffs and of the attorneys of the defendants in Suit No. 681 of 1969. The defendants Nos. 1 to 5 or defendants Nos. 1, 2 and 5 in Suit No. 681 of 1969 will be at liberty to nominate the representative of the attorneys or any one of them to attend on their behalf for this purpose. The seal of the packets will be opened only in the presence of such representatives of attorneys and after inspection is over on each day, the papers and documents will be again tied up in packets and sealed as aforesaid by the court receiver and such representatives of attorneys. The attorneys of the parties will be at liberty to initial all such papers and documents.

I direct the defendants in Suit No. 681 of 1969 to file their written statement on or before November 30, 1969.

The affidavits of documents in each of the said suits shall be made on or before December 15, 1969, and inspection of the documents disclosed therein shall be given forthwith after such discovery is made.

I direct that Suit No. 522 of 1969 shall be placed peremptorily on board for hearing and final disposal, subject to a part-heard matter, on February 2, 1970, and that Suit No. 681 of 1969 be placed on board for hearing and final disposal on the same date immediately after Suit No. 522 of 1969.

So far as the costs of these notices of motion arc concerned, the hearing has lasted nearly 63 hours. Looking to the length of the hearing, the heavy record, the elaborate preparation and arguments and the complexity and importance of the question involved and the fact that each side is represented by three, and in some cases more than three, counsel, except defendants Nos. 3 and 4, who are represented by two counsel only, I direct that the costs of these notices of motion be taxed on the long cause scale with two counsel being allowed and shall be costs in the cause.

[1968] 38 Comp. Cas. 543 (SC)

Supreme Court of India

Seth Mohan Lal

v.

Grain Chambers Ltd.

J.C. SHAH AND S. M. SIKRI, JJ.

CIVIL APPEAL NOS. 114 AND 115 OF 1965

NOVEMBER 15, 1967

N.D. Karkhanis, (J.P. Aggarwal,) for the Appellants.

Shanti Bhushan and B.P. Maheswari for the Respondent.

JUDGMENT

Shah, J.—The Grain Chamber Ltd., Muzaffarnagar, a company registered under the Indian Companies Act, 1913, with a share capital of Rs. 1,00,000 divided into 1,000 shares of Rs. 100 each, was formed for the purpose of carrying on business of an exchange in grains, cotton, sugar, gur, pulses and other commodities. By article 5 of its articles of association no person or firm could remain a member of the company who was found not to be doing any transaction or business through the company for a continuous period of six months. By article 46 it was provided that a member of the company who owned 10 shares of the company in his own name or in the name of the firm of which he was a proprietor or partner may be elected a director of the company. By article 51, until otherwise fixed, the quorum in the meetings of directors was to be four.

In the years 1949 and 1950 the company was carrying on business principally in "futures" in gur. The method of carrying on business in "futures" was explained as follows, by the parties to the dispute in an agreed statement submitted before the Company Judge: The transactions for sale and purchase of gur have to be in the units called 'Bijaks' of 100 maunds. The buyer and the seller who are members of the company negotiate transactions of sale and purchase in gur through their respective brokers and then approach the company. The company enters into two independent contracts whereby the company is the puchaser from one and is the seller to the other at rates agreed upon between the seller and the buyer. The seller has therefore to sell to the company a specified quantity and the buyer agrees to purchase the same quantity from the company under an independent contract. For the due performance of their contracts, the buyer and the seller deposit with the company rupee one per maund as Sai and annas eight per maund as Chook—"margin". If there is a rise in the price, the company calls upon the seller to pay the difference, and if he fails to deposit the difference demanded, the company enters into a reverse transaction with a purchaser at the current rate of the day and squares up the transaction of sale. The purchaser is also entitled to withdraw from the company the profits he has made consequent on the rise in price. If the seller is adjudged an insolvent or for any other reason is incapable of performing his obligations, the buyer remains unaffected. Even if the company is unable to recover anything from the seller, it has still to pay to the buyer the profits earned by him. Similarly if there is a fall in the price, the buyer has to make good the difference. If on the day fixed for delivery of goods the parties intend to settle the transaction by paying and receiving the difference, the company fixes the rate at which the transaction is to be settled and the transaction is to settled at the rate fixed by the company. Both the buyer and the seller send bills known as "dailies" setting out the amounts paid and received according to the rates fixed.

On March 14, 1949, the board of directors of the company passed a resolution sanctioning transaction of business in "futures" in gur for Phagun Sudi 15 Samvat 2006 (March 4, 1950) settlement. On August 9, 1949, Seth Mohanlal and company purchased one share of the company and qualified for membership. They commenced dealing with the company in "futures" in gur. By December, 1949, Seth Mohan Lal and company—who will hereinafter be called "the appellants"—had entered into transactions with the company which aggregated to 1,136 Bijaks of sale of gur for Paush Sudi 15, 2006, delivery. The appellants also claimed that they had entered into sals transactions in 2,137 Bijaks in the benami names of five other members. In January, 1950, there were large fluctuations in the prices of gur, and in order to stabilise the prices, the directors of the company passed a resolution in a meeting held on January 7, 1950, declaring that the company will not accept any settlement of transaction in excess of Rs. 17-8-0 per maund. The sellers were required to deposit margin money between the prices prevailing on that date and the maximum rate fixed by the company. The appellants deposited in respect of their transactions Rs. 5,26,996-14-0 as margin money. They claimed also to have deposited amounts totalling Rs. 7 lakhs odd in respect of their benami transactions.

In exercise of the powers conferred by section 3 of the Essential Supplies (Temporary Powers) Act, 1946 (24 of 1946), the Government of India issued a notification on February 15, 1950, amending the Sugar (Futures & Options) Prohibition Order, 1949, and made it applicable to “futures” and options in gur. By that Order entry into transactions in “futures“ after the appointed day was prohibited. On the same day the board of directors of the company held a meeting and resolved that the rates of gur which prevailed at the close of the market on February 14, 1950, viz., Rs. 17-6-0 per maund, be fixed for settlement of the contracts of Phagun delivery. It was recited in the resolution that five persons including Lala Mohan Lal, partner of the appellants, were present at the meeting on special invitation. In clause 2 of the resolution it was recited that as the Government had banned all forward contracts in gur it was resolved to take the prevailing market rate on the closing day of February 14, 1950, which was Rs. 17-6-0 per maund for Pha-gun delivery, and to have all outstanding transactions of Phagun delivery settled at that rate.

Entries were posted in the books of account of the company on the footing that all outstanding transactions in futures in gur were settled on February 15, 1950. In the account of Mohanlal & Company an amount of Rs. 5,26,996-14-0 stood to the credit of the appellants. Against that amount Rs. 5,15,769-5-0 were debited as "loss adjusted", and on February 15, 1950, an amount of Rs. 11,227-9-0 stood to their credit. Similar entries were posted in the accounts of other persons who had outstanding transactions in gur.

On February 22, 1950, the appellants and their partner, Mohan Lal, filed a petition in the High Court of Judicature at Allahabad for an order winding up of the company. Diverse grounds were set up in the petition. The principal grounds were that the company was unable to pay its debts, that it was just and equitable to wind up the company, because the directors and the officers of the company were guilty of fraudulent acts resulting in misappropriation of large funds, and that the substratum of the company had disappeared, the business of the company having been completely destroyed.

On February 23, 1951, another petition was filed by the appellants and their partner, Mohan Lal, for an order winding up the company. It purported to raise certain grounds which, it was submitted, had not been raised in the first petition and which had arisen since the first petition was instituted. In the second petition it was averred that by virtue of the notification issued by the Government, the forward contracts in gur had become void and the appellants were entitled to be repaid all the amounts deposited by them, that the outstanding contracts stood rescinded, and the company having paid out large sums to its directors and other shareholders was not in a position to meet its liability to the appellants.

Brij Mohan Lal J. held that the company was not unable to pay its debts and that it was not just and equitable to wind up the company on the grounds set out in the petition. Orders passed by Brij Mohan Lal J. dismissing the petitions were confirmed by the High Court of Allahabad in its appellate jurisdiction. With certificates granted by the High Court, these two appeals have been preferred by the appellants and their partner, Mohan Lal.

The High Court held that by the notification dated February 15, 1950, the outstanding transactions of “futures“ in gur did not become void; that in fixing the rate of settlement by resolution dated February 15, 1950, and settling the transactions with the other contracting parties at that rate the directors acted prudently and in the interests of the company and of the shareholders, and in making payments to the parties on the basis of a settlement at that rate the directors did not commit any fraudulent act or misapply the funds of the company; that the case of the appellants that apart from the transactions entered into by them in their firm name, they had entered into other transactions benami in the names of other firms, and that the company had mala fide settled those transactions with those other firms was not proved ; and that the board of directors was and remained properly constituted at all material times and no provision of the Companies Act was violated by the directors trading with the company.

Counsel for the appellants contended (a) that by virtue of the notification issued by the Central Government on February 15, 1950, all outstanding “futures“ in gur became void; (b) that the resolution dated March 14, 1949, was void because there was no quorum at the meeting of the company; (c) that the resolution dated February 15, 1950, by the board of directors was not passed in the interest of the company but to serve private interests of the directors; (d) that the company having repudiated the outstanding contracts, it was bound to refund the deposits received from the members; and (e) that in any event, the substratum of the company ceased to exist, and the company could not after the Government notification carry on business in gur.

In support of his contention that by the order issued by the Central Government on February 15, 1950, the outstanding transactions in futures in gur became void, counsel for the appellants relied upon a press note issued by the Government of India relating to the amendments made in the Sugar (Futures and Options) Prohibition Order, 1949. In the press note apparantly it was stated that all transactions in "futures" in sugar, gur, gurshakkar and rab made before the commencement of the order or remaining to be fulfilled shall be void and not enforceable by law. The interpretation of the Order depends not upon how the draftsman of the press note understood the notification, but upon the words used therein. The relevant clauses of the Order, after the amendment, read as follows:

"2 (d) 'Futures in sugar and gur' mean any agreement relating to the purchuse or sale of sugar or gur on a forward basis and providing for delivery at some future date and payment of margin on such date or dates, as may be expressly or impliedly agreed upon by the parties.

2 (e) 'margin' means the difference between the price specified in an agreement relating to the purchase of or sale of sugar and gur and the prevailing market price for the same quality and quantity of sugar or gur on a particular day.

2 (f) 'Option in sugar or gur' means an agreement for the purchase or sale of a right to buy or a right to sell or a right to buy and sell, any sugar or gur in future and includes a teji-mandi and teji-mandi in any sugar.

3. On or after the appointed day no person shall—

(a) save with the permission of the Central Government in this behalf or of an officer authorised by the Central Government in this behalf, enter into any futures in sugar or gur, or pay or receive or agree to pay or receive any margin in connection with any such futures;

(b) enter into any option in sugar or gur ;

4. Any option in sugar or gur entered into before the tappointed day and remaining to be performed whether wholly or in part shall be void within the meaning of the Indian Contract Act, 1872, and shall not be enforceable by law".

By clause 3(a) all persons are prohibited, save with the permission of the Central Government in that behalf from entering into futures in sugar or gur: the clause also prohibits receipt or payment of, or agreement to pay or receive any margin in connection with any such futures. The clause in terms operates prospectively. Clause 3(b) prohibits options in gur and sugar, and clause 4 expressly invalidates options in sugar and gur entered into before the appointed day and remaining to be performed whether wholly or in part. The contrast between the provisions relating to ”futures” and "options" is striking. While imposing a prohibition on options, the Central Government has also expressly provided that all outstanding options shall be void. No such provision is made in respect of outstanding “futures“. Counsel for the appellants however contended that when the Central Government imposed a prohibition against payment or receipt, or agreement to pay or receive, any margin in connection with the outstanding “futures”, the “futures“ were also prohibited. But the prohibition imposed against payment or receipt, or agreement to pay or receive, margin is made in connection with such futures, and the expression "such futures" means “futures“ of the like or similar kind previously mentioned, i.e., transactions in “futures“ to be entered into on or after February 15, 1950. If it was intended by the Central Government to declare void outstanding transactions in “futures“, the Central Government would specifically have imposed a prohibition against payment or receipt of, or agreement to pay or receive, margin in connection with all "futures". A transaction in "future" in gur may be settled by payment of margin or by actual delivery, and the Order does not prohibit the settlement of the transaction by specific delivery of goods. If the plea for the appellants be accepted, the Central Government may be attributed a somewhat singular intention of permitting outstanding futures in gur to be carried out by giving and taking actual delivery of goods contracted for, but not by payment and receipt of margin. If it was intended to invalidate transactions in futures which were outstanding on February 15, 1950, an express provision to that effect could have been made. No such provision has been made, and there are clear indications in the terms of the notification which show a contrary intention. Prohibition against payment or receipt of margin money under transactions entered into after February 15, 1950, is not redundant: it was enacted presumably with a view to maintain control over the transactions made with the sanction of the Central Government.

But, said counsel for the appellants, the resolution dated March 14, 1949, which permitted the company to enter into transactions in "futures" in gur was invalid, because the directors who took part in the meeting were disqualified under sections 86-I(1)(h) and 91B of the Indian Companies Act, 1913, and the company could not retain money paid in pursuance of unauthorised transactions. It was resolved unanimously in the meeting of the board of directors convened on March 14, 1949, that forward transactions in gur for Phagun Sudi 15, Samvat 2006, i.e., March 4, 1950, "may be started according to the rules" laid down therein. It was said that the resolution which authorised transactions of “futures“ in gur in the manner in which the company was carrying on its business entailed disqualification of the directors and as the directors were disqualified there was no quorum and no proper resolution and therefore all transactions entered into and any payments made pursuant to that resolution were invalid and the company was bound to refund the amounts paid by the appellants from time to time. The company had 11 directors : out of these 9 directors were carrying on business with the company. It appears that at the meeting dated March 14, 1949, all the directors present were those who carried on business in "futures" in gur with the company, and did after March 14, 1949, carry on that business. Under the Indian Companies Act, 1913, as originally enacted, there was no prohibition against a director entering into transactions with the company, and on that footing the scheme of the company's business was devised. Under the articles of association no person could remain a member of the company who was found not to be doing any transaction or business through the company continuously for six months, and a person could be elected a director if he held 10 shares in his own name or in the name of the firm of which he was a proprietor or a partner. A director of the company had therefore to hold ten shares and had to carry on business with the company. If he ceased to do business for a period of six months he ceased to be a member of the company, and on that account ceased also to be a director of the company. The articles of association prescribed diverse contingencies in which a director was to vacate his office, but carrying on business with the company was not made a ground of disqualification.

The company had started business in the year 1931. In 1936, several important amendments were made in the Indian Companies Act, 1913. By section 86F which was incorporated by Act 22 of 1936, it was provided:

"Except with the consent of the directors, a director of the company, or the firm of which he is a partner or any partner of such firm, or the private company of which he is a member or director, shall not enter into any contracts for the sale, purchase or supply of goods and materials with the company,..".

Section 86-I enumerated the conditions or situations in which the office of director was vacated. In so far as the section is material, it provides :

"(1) The office of a director shall be vacated if—...

(h) he acts in contravention of section 86F..".

Section 91B which was inserted by Act 11 of 1914 as modified by Act 22 of 1936 by the first sub-section provided:

"No director shall, as a director, vote on any contract or arrangement in which he is either directly or indirectly concerned or interested nor shall his presence count for the purpose of forming a quorum at the time of any such vote; and if he does so vote, his vote shall not be counted:"

After the amendment of the Indian Companies Act by Act 22 of 1936, the rules of the company were not modified and the company apparently carried on business in the same manner in which it was originally carrying on its business. It appears that the directors were oblivious of the requirements of section 86F and of the provisions of section 86-I and section 91B, and the modus operandi of the business continued to remain the same as it was previously. On the terms of section 86F (1) all directors of the company were prohibited, unless the directors consented thereto, from entering into contracts for the sale, purchase or supply of goods and materials with the company. On behalf of the company it was urged that by the resolution dated March 14, 1949, the directors resolved generally to sanction all transactions of the directors for the sale and purchase in commodities in which the company carried on business, and on that account, notwithstanding the prohibition contained in section 86F, the directors did not vacate their office. Counsel for the appellants urged that the consent of the directors contemplated by section 86F is consent in respect of each specific contract to be entered into and no general consent can be given by the directors authorising a director or directors of the company to sell, purchase or supply goods and materials to the company. Such a general resolution without considering the merits of each individual contract would, it was urged, amount to repealing the provisions of section 86F. Strong reliance was placed upon the judgment of the Bombay High Court in Walchandnagar Industries Ltd. v. Ratanchand Khimchand Motishaw.

It is not necessary for the purpose of this case to decide whether in any given set of circumstances a general consent may be given by the board of directors, to a director or directors to enter into contracts for sale or purchase or supply of goods and materials with the company so as to avoid the prohibition contained in section 86F of the Indian Companies Act, for, in our view, the resolution dated March 14, 1949, cannot be challenged in view of regulation 94 of Table A which for reasons to be presently mentioned must be deemed to be incorporated in the articles of association of the company.

Regulation 94 of Table A in the First Schedule is not one of the obligatory regulations which is to be deemed by section 17(2) of the Indian Companies Act, 1913, to be incorporated in the articles of association. Section 18 provides:

"In the case of a company limited by shares and registered after the commencement of this Act, if articles are not registered, or, if articles are registered, in so far as the articles do not exclude or modify the regulations in Table A, in the First Schedule those regulations shall, so far as applicable, be the regulations of the company in the same manner and to the same extent as if they were contained in duly registered articles".

The respondent company is limited by shares and was registered after the commencement of the Indian Companies Act, 1913: the company has adopted special articles of association, but there is no article which excludes or modifies regulation 94 of Table A, and by the operation of section 18 of the Act that regulation must be deemed to apply in the same manner and to the same extent as if it was contained in the registered articles of the company. We are unable to hold that; because the company has not incorporated regulation 94 of Table A in its articles of association, an intention to exclude the applicability of the regulation to the company may be inferred. Regulation 94 of Table A is not expressly excluded by the articles of the company: that is common ground. It is not excluded by implication: for it is not inconsistent with any other express provision in the memorandum or the articles of association. It, therefore, follows that regulation 94 must be deemed to be incorporated in the articles of association of the company. That regulation provided:

"All acts done by any meeting of the directors or of a committee of directors, or by any person acting as a director, shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such directors or persons acting as aforesaid or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director".

There is no evidence that the directors were aware of the disqualification which would be incurred by entering into contracts of sale or purchase or supply of goods with the company without the express sanction of the directors. By the subsequent discovery that they had incurred disqualification, because they had entered into contract with the company for sale or purchase or supply of goods, the resolution passed by them is not rendered invalid. It is, in the view we have taken, unnecessary to decide whether section 86 of the Indian Companies Act, 1913, also grants protection to the acts done by directors who are subsequently discovered to be disqualified.

Section 91B imposes a prohibition against a director voting on any contract or arrangement in which he is either directly or indirectly concerned or interested. But the directors of the company are not shown to have voted on any existing contract or arrangement. At the meeting dated March 14, 1949, they resolved that the company shall commence business in "futures" in gur according to the rules set forth in the resolution. Thereby the directors were not voting on a contract or arrangement in which they were directly or indirectly concerned or interested.

It must then be considered whether the resolution of February 15, 1950, was passed by the board of directors with a view dishonestly to make profit for themselves and for others who were purchasers, and to cause loss to the appellants. In the light of the situation prevailing on February 15, 1950, in our judgment, the board of directors acted, in passing the resolution, as prudent businessmen for the protection of the interests of the company and the members. Since the promulgation of the Sugar and Gur (Futures and Options) Prohibition Order, 1949, if any member of the company failed to pay the margin, the company could not enter into a reverse transaction. That was prohibited. Whereas the outstanding transactions were valid, a very important sanction which the company could impose against the member who failed to pay the margin became ineffective. It was therefore necessary in the interest of the company to devise an effective scheme for settlement of those transactions. Again in view of the imposition of severe restrictions by the Government on transport of gur by rail or by mechanised transport, it was well-nigh impossible for the members to give or take delivery of gur. It was therefore resolved that all outstanding contracts shall be settled at the rate prevailing on the evening of February 14, 1950. It may be recalled that on January 7, 1950, the board of directors had resolved, because the prices of gur were spiralling that all outstanding transactions in gur will be settled at the rate of Rs. 17-8-0 per maund whatever may be the price ruling at the date of settlement. The appellants had sold 1,123 Bijaks of gur at an average rate of Rs. 12-13-9 per maund, and those transactions in “futures“ were not invalidated by the notification issued by the Government. But since no reverse transaction to protect the company against loss, if a member failed to pay margin, was possible, the only practical way out was to provide for settling the outstanding transactions. This the board of directors did by taking the rate which was prevailing in the evening of February 14, 1950, as the rate of settlement of all the outstanding transactions. The resolution, however, did not put an end to the outstanding contracts as on February 15, 1950: the resolution merely fixed the rate at which the transactions were to be settled on the due date, the possibility of any fresh transactions in futures so long as the Order remained in force being completely ruled out. It may be noticed that the appellants' representative was present at the meeting, and he was apparently heard. Whether or not he agreed to the passing of the resolution is immaterial. But we are unable to hold that the resolution was passed with a view to benefit the directors: it appears that the resolution was passed with a view to protect the interests of the company and its members.

But it was urged that simultaneously large amounts were intended to be paid to the members who had purchased contracts outstanding, and for that purpose it was resolved to borrow money from the Allahabad Bank and the Central Bank of India Ltd. This, it was urged, disclosed anxiety on the part of the directors to appropriate to themselves the liquid funds and to deprive the appellants of the benefit of any fall in the prices after February 15, 1950. It is true that in the books of account of the company the transactions were shown to have been settled as on February 14, 1950. But we agree with the High Court that the entries in the books of account of the company were not in accordance with the resolution, and no intimation was given to any of the members of the company that the transactions were so closed. There is no clear evidence about the dates on which payments were made to the purchasers in respect of their outstanding transactions. But that in our judgment is not material. It appears from the agreed statement filed before the company judge that if the seller made a deposit to cover the rise in prices, the purchaser was entitled to withdraw from the company the profit which he had made under his cross transaction, even before the date of settlement. It was clearly contemplated that when a seller deposited the difference between the price at which he had agreed to sell gur for future delivery, the ruling rate being higher than the rate at which he had agreed to sell, it was open to the purchaser to approach the company and to call upon it to pay him the profit. Whether or not this right was strictly enforced is irrelevant. It appears from exhibit D-10 that as many as 133 persons having sale transactions had made deposits of diverse amounts with the company aggregating to Rs. 36,38,932-2-9. The purchasers under the corresponding transactions were entitled to withdraw the profits earned by them out of the deposits so made. By allowing the purchasers to withdraw the amounts which they were entitled to under the business rules of the company after the contracts were frozen, the directors of the company acted according to the rules and not contrary thereto.

The attitude of the appellants in respect of the outstanding contracts since February 15, 1950, has also an important bearing. On February 23, 1950, the management of the company addressed a letter informing the appellants that in the interests and for the benefit of the trade, the board of directors has passed a resolution on February 15, 1950, to settle the outstanding transactions at the rate prevailing in the market on February 14, 1950. That resolution, it was stated, was for the benefit of the appellants, but if the appellants wanted to deliver the goods, they should intimate the date and place on which they were prepared to give delivery of goods according to the outstanding contracts on Phagun Sudi 15, Samwat 2006, in terms of the rules and bye-laws of the company. The appellants denied having received this letter. But we are unable to accept that denial. On March 1, 1950, the appellants wrote a letter stating that because of the notification issued by the Central Government the performance of the contracts had become impossible, and that the company was liable to refund all the amounts deposited with interest thereon, and that the illegal settlement dated February 15, 1950, amounted to repudiation of the contracts by the company and those contracts stood rescinded. The appellants apparently insisted that the transactions became impossible of performance in view of the prohibition contained in the notification published by the Central Government, and contended that the resolution amounted to repudiation of the contracts by the company. But by the resolution, in our judgment, there was no repudiation of the contracts by the company. The contracts, if they were to be settled by payment of differences, could be settled on the due date at the rates fixed : it was however open to the appellants to deliver goods under the contracts if they desired to do so.

The plea that there was frustration of the contracts, and on that account the company was liable to refund all the amounts which it had received, has no substance. As we have already held, the outstanding contracts were not at all affected by the Government Order. Imposition by the Central Government of a prohibition by its notification dated March 1, 1950, restraining persons from offering and the Railway administration from accepting for transportation by rail any gur, except with the permit of the Central Government from any station outside the State of Uttar Pradesh which was situated within a radius of thirty miles from the border of Uttar Pradesh does not lead to frustration of the contracts. Fresh contracts were prohibited: but settlement of the outstanding contracts by payment of differences was not prohibited, nor was delivery of gur in pursuance of the contract and acceptance thereof at the due date by the company prohibited. The difficulty arising by the Government orders in transporting the goods needed to meet the contract was not an impossibility contemplated by section 56 of the Contract Act leading to frustration of the contracts.

Finally, it was urged that by reason of the notification issued by the Central Government, the substratum of the company was destroyed and no business could be carried on by the company thereafter. It was said that all the liquid assets of the company were disposed of and there was no reasonable prospect of the company commencing or carrying on business thereafter.

The company was carrying on extensive business in "futures" in gur, but the company was formed not with the object of carrying on business in “futures“ in gur alone, but in several other commodities as well. The company had immovable property and liquid assets of the total value of Rs. 2,54,000. There is no evidence that the company was unable to pay its debts. Under section 162 of the Indian Companies Act, the court may make an order for winding up a company if the court is of the opinion that it is just and equitable that the company be wound up. In making an order for winding up on the ground that it is just and equitable that a company should be wound up, the court will consider the interests of the shareholders as well as of the creditors. Substratum of the company is said to have disappeared when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. In the present case the object for which the company was incorporated has not substantially failed, and it cannot be said that the company could not carry on its business except at a loss, nor that its assets were insufficient to meet its liabilities. On the view we have taken, there were no creditors to whom debts were payable by the company. The appellants had, it is true, filed suits against the company in respect of certain gur transactions on the footing that they had entered into transactions in the names of other persons. But those suits were dismissed. The business organisation of the company cannot be said to have been destroyed, merely because the brokers who were acting as mediators in carrying out the business between the members had been discharged and their accounts settled. The services of the brokers could again be secured. The company could always restart the business with the assets it possessed, and prosecute the objects for which it was incorporated. It is true that because of this long drawn out litigation, the company's business has come to a standstill. But we cannot on that ground direct that the company be wound up. Primarily, the circumstances existing as at the date of the petition must be taken into consideration for determining whether a case is made out for holding that it is just and equitable that the company should be wound up, and we agree with the High Court that no such case is made out.

The appeals fail and are dismissed with costs. One hearing fee.

Appeals dismissed.

[1967] 37 COMP. CAS. 463 (MAD)

HIGH COURT OF MADRAS

C Sundararaja Pillai

V.

Sakthi Talkies (Dindigul) Ltd.

M ANANTANARAYANAN, OFFG.C.J.

AND RAMAKRISHNAN, JJ.

APPEAL NO,367 OF 1960

JANUARY 6, 1966

JUDGMENT

M. ANANTANARAYANAN, OFFG. C. J. - The appellant is the plaintiff in a suit for recovery of an amount of Rs. 24,865.59 from the first defendant, Sakthi Talkies Limited, Dindigul, alleged to be due on a promissory note executed by the eight directors of the first defendant company in favour of the plaintiff in 1953. The simple facts of the action, as stated in the plaint, were that the properties of the plaint schedule belonged to the plaintiff and the second defendant, and that the plaintiff sold the land to the first defendant firm for the construction of a cinema theatre for an amount of Rs. 37, 500. Out of this amount, an amount of Rs. 20, 093-0-6 was due, and the eight directors of the first defendant firm jointly executed the suit negotiable instrument in favour of the plaintiff for that sum.

The action could be viewed as a suit simpliciter upon a promissory note, and also as one to enforce the vendor's lien in respect of the unpaid purchase money, for the plaintiff specifically prayed for a charge on the property, and for the sale of the site in realisation of the claim, under section 55(4) of the Transfer of Property Act. The second defendant was impleaded as a party entitled, along with the plaintiff, to a moiety of the amount.

We are now concerned with the defences on which this claim was resisted by the first defendant firm, particularly in the additional written statement of that firm. These defences could be tersely set forth as follows. The plaintiff and second defendant were partners of a firm of managing agents of the first defendant company and the plaintiff was also one of the directors of the firm. There was mismanagement by the managing agents and the plaintiff was in the advantageous position of the possession of the account books, without a proper audit having been accomplished. It is conceded that the directors were anxious to purchase the site for the construction of the theatre, and there are resolutions both of the general body and the board of directors, approving that proposal.

It was then found that, according to the plaintiff, he had taken a sum of Rs. 17,406-15-6 from the funds; it is alleged that several directors felt that much larger sums might have been taken by the plaintiff, and might be due from him. But this sum of Rs. 17,406 odd was tentatively accepted, as the amount due from the plaintiff and the promissory note for the balance was executed as alleged in the plaint in the wake of the sale deed. The defence is that the consideration of Rs. 20,093-0-6 on the promissory note was not a figure arrived at, on a proper settlement of accounts between the parties, and that, unless such a settlement is made, the plaintiff cannot enforce the claim. There are also certain other technical defences, which we shall note a little later.

The learned subordinate judge, after referring to the evidence at some length, has dismissed the suit with costs of the first defendant. His reasons are (1) that the managing agents (Plaintiff and second defendant ) had played a fraud upon the company, and that the suit promissory note was not enforceable for that reason. The proper remedy of the plaintiff was to file a suit for rendition of accounts. (2) The plaintiff cannot claim a charge under section 55 of the Transfer of Property Act, because his claim is really of the character of a book debt and not one for unpaid purchase money. (3) The promissory note has not been executed with the seal of the company affixed, and the directors were not duly authorised by the company to enter into the agreement; hence, it is within the mischief of section 90 of the Indian Companies Act. (4) In any event, the plaintiff was one of the directors, and he could not have been a valid party to the resolutions which led to the purchase under section 91B of the Companies Act.

Learned counsel for the appellant (Sri Thyagarajan) has stressed before as the simple argument that, upon none of the grounds adverted to by the learned subordinate judge, could the claim possibly have been dismissed. Learned counsel points out, and rightly, in our view, that such a claim, viewed as an action to enforce the unpaid purchase money with a charge on the property, cannot be raised on the mere ground that there were other transactions inter se, which might necessarily involve a proceeding for rendition of accounts, for further final elucidation. Even a suit on a negotiable instrument, viewing this action as much, cannot be resisted on any of these grounds. It is not as if the first defendant came forward with a counterclaim, in this very suit, or denied either the execution of the promissory note, or the consideration as shown thereunder. Learned counsel for the first defendant (Sri Desikan) is conscious that the reasoning of the learned judge on this aspect of the matter may not be sustainable. He has therefore sought to argue that the pleadings and the evidence ought to be interpreted in a different way, viz., as affording a basis for bringing the defence within the third proviso to section 92 of the Indian Evidence Act. In other words, we must spell out some antecedent agreement between the parties, not directly repugnant to the terms of the sale deed or of the promissory note, to the effect that the claim for the unpaid purchase money, or the claim in the promissory not in which it is embodied, will not be enforceable until accounts are finally rendered between the parties.

Unfortunately for the first defendant, we are quite unable to find any basis for such a point of view, either in the pleadings, or in the evidence of D.W.I, the director, who has given evidence on behalf of the first defendant company. All that the evidence of D.W.I amounts to, at the highest, is that accounts were not finally looked into, when the suit transaction occurred and that there was some understanding that accounts should be ultimately settled between the parties. There was also a general impression, apparently in the minds of the other directors excluding the plaintiff, that the managing agents (plaintiff and second defendant) had mismanaged the affairs, and that some acts of misfeasance could be attributable to the plaintiff. All this is very wide of the mark, when we are considering the existence of any specific evidence based on the third proviso to section 92. As learned counsel for the appellant points out, the mere execution of a promissory note by a purchaser does not extinguish the statutory vendor's lien available to a seller, and does not estop him from an action on such lien. The relevant authorities were noticed by Kailasam J. in Dhanikachala Pillai v. Raghava Reddiar A.I.R. 1962 Mad. 423. and the learned judge has cited and followed the earlier decisions of this court to the same effect in Krishnaswami Mudaliar v. Vijayaraghava Pillai A.I.R. 1939 Mad. 590. Somu Achari v. Singara Achari A.I.R. 1954 Mad. 407. as well as in Karuppiah Pillai v. Hari Rao 4. (4) (1910) 21 M.L.J. 849; 11 I.C. 890.

The technical arguments based upon certain sections of the Companies Act, VII of 1913, appear to be totally without foundation. Actually, the learned judge appears to have misconceived the scope of section 90 of that Act, which has nothing to do with the execution of a promissory note by the directors of a company for any sum representing unpaid purchase money upon a transaction of sale in favour of the company. The relevant provision would be section 89 of the same Act, and it is indisputable that all the other directors except the plaintiff were parties to the document. The seal of the company was not required, and that does not invalidate the transaction. Again, section 91B has no application to the present facts. Even if the plaintiff, as a director, had voted in the passing of the resolution, which is denied, the only legal consequence of that would be that his vote has to be excluded from consideration: vide Narayandas Shreeram Somani v. Sangli Bank Ltd. [1965] 35 Comp. Cas. 596 (S.C.). Under section 91B(2) he may be liable to penal action for infringement of the company law, but that has nothing whatever to do with the validity of the resolutions themselves. We must add that there is absolutely nothing, either in the promissory note or in the sale deed, to show that ex facie the amount for which the promissory note was executed was not due to the plaintiff as unpaid purchase money. Actually, even such a plea in defence would be in direct contradiction of the principle of section 92 of the Indian Evidence Act.

For these reasons, we are of the view that the dismissal of the suit by the learned subordinate judge was quite unjustified and that, on the merits, the suit has to be decreed in favour of the plaintiff (appellant). But, in consideration of the background of facts, as appearing in evidence and accepted by the learned judge, we think that, in equity, a direction should issue that our present decree on the suit claim will not be enforceable in execution for a period of three months from this date. It is open to the first defendant company to resort to any appropriate legal action as deemed fit, subject to the law of limitation to enforce the liability of the plaintiff, as claimed in the additional written statement, to render proper accounts, in respect of a much larger some said to be due from the plaintiff. If such proceedings are instituted, the first defendant company may certainly seek all such interlocutory reliefs therein as advised. But, subject to this direction, the appeal has clearly to be allowed, and the suit to be decreed, and we reverse the decree of the learned subordinate judge, and give judgment accordingly, with costs throughout.

[1936] 6 COMP. CAS. 90 (BOM.)

HIGH COURT OF BOMBAY

T.R. Pratt (Bombay) Ltd.

v.

E.D. Sassoon & Co. Ltd

BEAUMONT, C.J.

AND WADIA, J.

SEPTEMBER 18, 1935

JUDGMENT

Kania, J.—The first question which arises is as to the power of the company and its directors to borrow the money from M.T. Ltd. From the memorandum of association of the company it is clear that there is no limit to the borrowing power of the company as such for its business. The terms of Clause 3 (f) further authorize the company to mortgage any property or to secure the re-payment of any money borrowed by it in any manner as the company should think fit. As to the power of the directors to borrow money the matter has become complicated because certain articles of association were drawn up when the company was formed and under which the directors were given very wide and general powers, but these articles were not filed with the Registrar, with the result that the articles of association contained in the schedule to the Indian Companies Act govern the company. Article 73 is the relevant article to be considered on this point. That article runs as follows :

"The amount for the time being remaining undischarged of moneys borrowed or raised by the directors for the purposes of the company (otherwise than by the issue of share capital) shall not at any time exceed the issued share capital of the company without the sanction of the company in general meeting."

The question for consideration is what is the proper construction of this article. It is contended on behalf of Sassoons that the words "for the time being" mean "when the claim is made." It is contended that whatever be the initial borrowing by the directors that is not a matter to be inquired into by the Court. I do not think the terms of the article justify such a narrow construction. The article in terms fixes the limit at any time and although the validity of the claim may have to be considered in respect of the amount claimed on the date of liquidation I am unable to consider that the article in terms refers only to that point of time and no other.

On behalf of the claimants it is contended that the article authorizes the directors to borrow money and the company as such has unlimited power of borrowing. Therefore, when the directors borrow money in excess of the amount of the issued capital the lender is entitled to presume that the necessary formalities authorizing the directors to borrow money have been gone through, and the question of going through such formalities is a matter of internal management of the company. In this connection strong reliance is placed on the decision of Royal British Bank v. Turquand. In that case the plaintiff claimed against the defendants, a joint stock company, on a bond signed by two directors under the seal of the company whereby the company acknowledged themselves to be bound to the plaintiff, in £ 2,000. The plea set out the condition which appeared to be for securing to the plaintiff, who was a banker, such sum as the company should to the amount of £1,000 owe to the plaintiff on the balance of the account current, from time to time and for indemnifying plaintiff to that amount from losses incurred by reason of the account between plaintiff and defendants. The plea further set out clauses of the registered deed of settlement, by which it appeared that the directors were authorized, under certain circumstances, to give bills, notes, bonds or mortgages; and one clause provided that the directors might borrow on bonds such sums as should, from time to time, by a general resolution of the company, be authorized to be borrowed. The plea averred that there had been no such resolution authorizing the making of the bond, and that it was given without the authority of the share-holders. The replication set out the deed of settlement further, by which it appeared that the company was formed for the purpose of carrying on mining operations and forming a railway. On demurrers to the plea and replication the plaintiff was held entitled to judgment, the oblige having, on the facts alleged, a right to presume that there had been a resolution at a general meeting, authorizing the borrowing of the money on bond. The facts set out in the judgment show that at a general meeting of the company it was resolved that the directors of the company should be and they were thereby authorized to borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and the Act of Parliament; and the said resolution had remained unrescinded. In the judgment Jervis, C. J., observed as follows (p. 331):

"My impression is………….that the resolution set forth in the replication goes far enough to satisfy the requisites of the deed of settlement. The deed allows the directors to borrow on bond such sum or sums of money as shall from time to time, by a resolution passed at a general meeting of the company, be authorized to be borrowed: and the replication shows a resolution, passed at a general meeting, authorizing the directors to borrow on bond such sums for such periods and at such rates of interest as they might deem expedient, in accordance with the deed of settlement and the Act of Parliament; but the resolution does not otherwise define the amount to be borrowed. That seems to me enough. If that be so, the other question does not arise. But whether it be so or not we need not decide; for it seems to us that the plea, whether we consider it as a confession and avoidance or a special non est factum, does not raise any objection to this advance as against the company. We may now take for granted that the dealings with these companies are not like dealings with other partnerships, and that the parties dealing with them are bound to read the statute and the deed of settlement. But they are not bound to do more. And the party here, on reading the deed of settlement, would find not a prohibition from borrowing, but a permission to do so on certain conditions. Finding that the authority might be made complete, by a resolution, he would have a right to infer the fact of a resolution authorizing that which on the face of the document appeared to be legitimately done."

The facts thus show that the directors could borrow on bonds such sums, as from time to time by a general resolution of the company they may be authorized, and a resolution having been passed, the lender was not called upon to make any other inquiry, but would be entitled to rely on what appeared to be done on the face of the document as legitimately done. The judgment, however, makes clear the distinction between a case where the directors are permitted to borrow on certain conditions as contrasted with the case of a prohibition from borrowing contained in the article. In other words, if the article authorizing the directors to borrow is so worded as to give them authority or permission to borrow on certain conditions, and ostensibly those conditions were fulfilled, the lender would be entitled to act on the footing that the necessary steps were taken, and the way in which the authority is given is a matter of the internal management of the company. On the other hand, as the judgment points out, when there is an express prohibition to borrow beyond a certain limit contained in the article itself, the lender cannot rely on the principle of this ease but has to satisfy himself that in accordance with the terms of the article the prohibition does not stand in the way of the directors borrowing the money.

This distinction is made clear and accepted by the decision in Irvine v. Union Bank of Australia. In that case by Article 50 of the articles of association it was provided that the directors' power of borrowing sums on the credit of the company "should not exceed in the aggregate, as an existing debt, at the same time, one-half of the then actually paid up capital." The articles contained no restriction upon the company's power of borrowing and the directors' power to borrow was capable of being extended under Article 31, by one half of the votes of all the share-holders given at a general meeting. In construing the terms of this article their Lordships of the Privy Council held that it was very clearly beyond the authority of the directors to borrow, upon the credit of the company, and sum exceeding one-half of the actually paid up capital of the company. There is no doubt that the authority of the directors, limited as it was by the article, was capable of being extended under the provisions of Article 31. But by that article one-half of the votes of the shareholders given at a general meeting called for the purpose was necessary. It was not contended that the authority of the directors to borrow was ever extended at a general meeting of the share-holders held for the purpose and therefore the lender was not entitled to presume that the directors had any authority to borrow beyond the prescribed limits. In the course of the judgment their Lordships considered the applicability of Royal British Bank v. Turquand and observed as follows:

"The case of Royal British Bank v. Turquand was decided with reference to a company registered under 7 and 8 Viet., C. 110, and Jervis, C. J., remarked that the lender, finding that the authority might have been made complete by a resolution would have had a right to infer the fact of a resolution authorizing that which on the face of the document appeared to be legitimately done. In the present case, however, the bank would have found that, by the articles of association the directors were expressly restricted from borrowing beyond a certain amount, and they must have known that if the general powers vested in the directors by Article 50 had been extended or enlarged by a resolution of a general meeting of the share-holders under the provisions of Section 31, a copy of that resolution ought, in regular course, to have been forwarded to the Registrar of Joint Stock Companies, in pursuance of Section 53 of the Companies Act, and would have been found amongst his records. Their Lordships are of opinion that the learned Recorder was correct in holding that this case is different from that of Royal British Bank v. Turquand:

Article 73 of the articles of association contained in Table A is similar in terms to the article in Irvine v. Union Bank of Australia and supports the contention that when there is a prohibition against borrowing contained in the article, it is not a case of internal management as decided in Royal British Bank v. Turquand. Under the circumstances, and it being common ground that no resolution at any general meeting of the company was passed, the directors were not authorized to borrow money beyond the amount of the issued share capital of the company. As the original dealings giving rise to the debt were between M.T. Ltd. and the company, it would be convenient to consider the claim of M.T. Ltd. first. Their claim is a money claim. Relying on Irvine v. Union Batik of Australia, the liquidator contends that if the borrowing is ultra vires the directors, no debt binding on the company is created except when the company ratifies it. It is urged that there is no valid ratification of the borrowing because the attention of the shareholders was never expressly drawn to the fact that the directors having no authority to borrow in excess, had so borrowed and at the meeting they were called upon to confirm that unauthorized borrowing of the directors. In this connection also the liquidator relies on the observations in Irvine v. Union Bank of Australia to the effect that Royal British Bank v. Turquand does not apply. The liquidator further relies on the decision in Sinclair v. Brougham in which it was held that if a company is not authorized to borrow any money and if money in fact is borrowed, no claim can be maintained by the lender against the company on the footing either of debt or of money had and received. In that case, Viscount Haldane, L.C., while considering an unauthorized borrowing by a company which was a statutory society and had no power to borrow, observed as follows:

"If it be outside the power of a statutory society to enter into the relation of debtor and creditor in a particular transaction, the only possible remedy for the person who has paid the money would, on principle, appear to be one in rent and not in personam, a claim to follow and recover specifically any money which could be earmarked as never having ceased to be his property. To hold that a remedy will lie in personam against a statutory society, which by hypothesis cannot in the case in question have become a debtor or entered into a contract for repayment, is to strike at the root of the doctrine of ultra vires as established in the jurisprudence of this country. That doctrine belongs to substantive law and is the outcome of statute, and cannot be made different by any choice of form in procedure.''

The Lord Chancellor, after examining in detail how actions for money had and received came into existence, held that none of the underlying principles could be invoked as an authority for the proposition that an action for money had and received would have lain in a case of borrowing ultra vires the company. The other Law Lords expressed concurrent opinions on this point. On behalf of M.T. Ltd., on the other hand, it is contended that the whole argument of the liquidator was fallacious and was based on a misconception of the situation. The principles laid down and the opinions pronounced in Sinclair v. Brougham are all based on the central fact that the borrowing by the society itself was ultra vires. In my opinion the contention of the liquidator in this connection is wrong. According to the general principles of law when an agent borrows money for a principal, without the authority of the principal, but if the principal takes the benefit of the money so borrowed or when the money so borrowed has gone into the coffers of the principal, the law implies a promise to repay. The lender has not advanced the money as a gift but has given them as a loan, and the principal having received the benefit of the money, the law implies a promise to re-pay. This view is supported by the decisions in Reid v. Rigby & Co. and Bannatyne v. MacIver. There appears to be nothing in law which makes this principle inapplicable to the case of a joint stock company when the borrowing power of the company itself is unlimited. The position, in my opinion, would be that the principal (the company) through its agents (the directors or the managing agents) had borrowed money which the principal had not authorized the agents to borrow. However, the money having been borrowed and used for the benefit of the principal, either in paying its debts or for its legitimate business, I do not think the company can repudiate its liability to repay on the ground that the agents had no authority from the company to borrow. In my opinion, when these facts are established, a claim on the footing of money had and received would be maintainable. The decision in Sinclair v. Brougham is clearly based on the fundamental fact that the society was prohibited by statute from borrowing any money and therefore any borrowing by the company, i.e,, the principal itself would be ultra vires. The observations of Lord Haldane, L.C., apply, in my opinion, to that set of facts alone.

I am further supported in this view by the decision in Troup's case, where it was held that when the directors of a company have no power to borrow, a person lending money to the company cannot enforce payment of it against the company unless it had been bona fide applied to the purposes of the company. In that case the directors having no borrowing powers, being pressed for money by their contractor, obtained for him, on credit, £2,000 at a banker's upon their guarantee. The contractor afterwards agreed to abandon the plant, etc., to the company, on receiving £600 and being indemnified against the banker's claim. Subsequently to this, the secretary of the company, with the sanction of the directors, borrowed £500 in his own name for the company, which was applied in paying the bankers and a judgment debt of the company. The company had the benefit of the plant, etc. It was held that the secretary could recover the amount from the company with interest. The principle of that case was accepted and followed in Hoare's Case. There a sum of money had been borrowed from the lender by H, the secretary of a company, and for which three of its directors had become sureties. The directors had no borrowing powers, but it was admitted that the money had been applied for the benefit of the company. Judgment had been signed against H for the debt, and he applied to prove the amount against the company which was being wound up. It was held that money borrowed for the company and bona fide applied for its benefit could be recovered from the company although the directors had no borrowing powers.

In British and American Telegraph Co. v. Albion Bank, the plaintiffs, a telegraph company, invited applications for shares, received some in the ordinary way and allotted some on which deposits were paid. The number allotted was, however, insufficient to procure a settling day on the stock exchange, and some of the directors of the company, S the promoter, and C the defendants' manager, agreed, in order that the defendants might certify to the committee of the stock exchange the requisite amount of shares to have been subscribed, that an account should be opened in S's name with the defendants, and another account in the plaintiff's name; that the plaintiffs should guarantee to the defendants the payment of any money drawn by S, and charge with such repayment any balance in their favour; that the defendants should have a bonus of £ 600, and C, £ 1,000; that S should get persons to apply for shares, which would be duly allotted, and should draw on his account for, and pay into the plaintiffs' account the requisite deposits, taking blank transfers for the pretended allottees. This plan was carried out. Accounts were opened, that in the plaintiff's name with £ 1,500 really paid in ; that in 5's name with a loan of £ 1,500 from the defendants. Same applications were obtained by S and shares allotted to them. S thereupon drew on his account, and with the proceeds paid the requisite deposits into the plaintiffs' account. The pretended allottees, immediately after the shares were allotted, handed blank transfers to S. Finally the plaintiffs' account with the defendant stood with a credit of £ 24,505 and odd, made up of £1,500 really paid in and the pretended deposits. 5's account stood with a debit of £24,506 and odd made up of the sums he had drawn and the £1,500 loan. No settling day was ever granted and the plaintiffs' company afterwards went into liquidation under a winding-up order. A suit was filed to recover the whole amount to the credit of the plaintiffs. The defendants paid the bonus of £ 600 into Court, and denied liability as to the residue. It is apparent on the facts that the directors and parties were not authorized to do the acts for the company and the same were not therefore binding on the company. It was, however, held that the plaintiffs were entitled to the re-payment of £ 1,500 actually paid by them to the defendants but to no more. This case, in my opinion, is a clear authority for the proposition that money actually received by the company and used for its business can be recovered by the claimants. In Halsbury's Laws of England (Edn. 2,) Vol. 5, at p. 314, this case is relied upon for the following proposition:

"Apart from ratification, the company will be answerable for any property which has come into its possession through the unauthorized acts of the directors."

It is argued on behalf of the liquidator that Irvine v. Union Bank of Australia decides to the contrary. On a closer examination of the judgment in that case, however, I am unable to agree with this contention. There, on December 23, 1867, the directors of the O.R. Company obtained from the bank a letter of credit, No. 150, for £ 10,000, and on September 11, 1868, a letter No, 141 for £ 5,000, and stated those facts in their report of October 29, 1868, which was ratified at the half yearly meeting of that date. Letter No. 150 expired on March 29,1869, but was renewed. On September 9, 1869, the directors obtained another letter of credit, No. 153, for £ 5,000, but this act was never assented to or ratified by the shareholders. In a suit by the respondent bank to enforce against the appellant, as the assignee of the right, title and interest of the O.R. Company, an equitable mortgage which had been granted by the company to secure advances made by the bank, which, with interest, amounted to £15,296 it appeared that half of the actually paid up capital was never more than £8,550; that at the end of 1870 the balance due to the bank was £8; and that the sums claimed in this suit had been advanced in February, 1871, viz., £10,000 under letter No. 150, and £ 5,000 under letter No. 153. The trial Court passed a decree declaring a charge for £14,984-16-8, in favour of the bank and directed a sale in default. The property; which originally belonged to O.R. Company, was purchased by the appellant on May 31, 1872, at a sale by auction in execution of three decrees obtained by the Bank of Bengal and others against O.R. Company. At the date of the auction sale the title deeds of the property were held by the respondent bank as equitable mortgagees by deposit. The question raised in the appeal was : " What is the sum for which the respondent bank is entitled to a charge upon the property? " The bank contended that it was entitled to a charge for the whole amount owing to it by the O.R. Company. It was contended by the appellant that the charge was limited to half the amount of the actually paid-up capital of the company, because Article 50 of the articles of association prohibited the directors from borrowing more than half the amount of paid-up capital of the company. The whole judgment shows that the question of the liability of O.R. Company, for the balance of the debt, which was disallowed as a charge against the property, was not the point in issue before the Privy Council. Towards the end of the judgment it is specifically pointed out that—

"for the above reasons their Lordships are of the opinion that the plaintiffs are not entitled, as against the defendant, to a charge on the property beyond the amount of one half of £17,100 the paid-up capital of the company."

The form of the order finally made also makes this clear. It was as allows

"Their Lordships will, therefore, further advise Her Majesty that it be ordered that the costs of the suit in the lower Court, both of the plaintiffs and of the defendant respectively, as taxed by the lower Court, be paid to the said parties respectively out of the proceeds of the sale of the property which are now in Court, and that out of the balance of such proceeds there be paid to the plaintiffs a sum of rupees equivalent, at the rate of exchange current between Rangoon and England at the time of filing of the suit, to the principal sum of £8,550, with interest thereon, at the rate of 8 per cent, from October 5, 1872 to the date of the sale of the property, together with a proportionate part of the accumulations, if any, of the proceeds of the sale and that the residue of the proceeds and of the accumulations thereon, if any, be paid to the defendant appellant."

The O.R. Company, who were parties to the original suit had not appeared before the Privy Council at all. The question of directing an inquiry as to what portion was bona fide used for the benefit of the company is not considered, nor is the question of a tracting order discussed. I am, therefore, unable to consider this decision as overriding the general principle of law under which a principal is liable for what he actually receives, when his own powers of borrowing or receiving are not limited. In the present case the balance sheets and the accounts put in show that the amount borrowed by the company from M.T. Ltd. was utilized for the business of company and the results of the dealings were submitted every year to the share holders. It is not suggested on behalf of the liquidator that any business done by his company was ultra vires the company. Therefore the money received by the company from M.T. Ltd., through the directors and managing agents was bona fide utilized for the business of the company and the company has received the benefit thereof. I, therefore, hold that for the reasons mentioned above M.T. Ltd. are entitled to claim from the company the balance of the amount advanced by them. It is further urged on behalf of M.T. Ltd., that in any event the company is liable because, however unauthorized the directors' borrowings be, the share holders of the company were aware of this and have ratified the same by their acquiescence. In this connection M.T. Ltd., rely on the balance-sheets prepared by the directors and passed by the share-holders, year after year, at their annual general meetings from 1921 onwards. As I have pointed out, these balance sheets clearly show the amount due by the company to M.T. Ltd., from year to year, and it is not disputed that those balance-sheets were duly passed by the share-holders.

In In re The Magdalena Steam Navigation Co. by the deed of settlement of a joint stock company power was given to a meeting of two-thirds in number and value of the share-holders, to authorize the directors to borrow money upon debentures; and at a meeting of shareholding less than two-thirds of the shares it was resolved that the directors should be authorized to borrow money on debentures. The directors accordingly borrowed on debentures diverse sums of money, which were applied in discharging the debts and liabilities of the company. The debenture debts regularly appeared in the reports of the directors which were confirmed at the annual general meeting of the share-holders, and interest was regularly paid, with the consent of share-holders, until the winding up of the company, a period of 2 years. It was held that though the debentures were clearly improperly issued, yet as the money had been raised and applied for the benefit of the company, and the share-holders had acquiesced for two years, it was too late to dispute their validity. The report shows that the holders of the debentures themselves were present at the meeting of the shareholders, which passed the resolution, and were therefore, conscious of the irregularity of the meeting. It is" urged that this case distinctly supports the contention of M.T. Ltd., because the balance-sheets showed the amount from time to time due by the company to M.T. Ltd., and also showed the amounts from time to time paid by way of interest to M.T. Ltd. in respect of these borrowings. It is pointed out that at no time before the liquidation any shareholder had contended that the borrowings were not binding on the company. On behalf of the liquidator reliance is placed on the decision in Houghton & Co. v. Nolhard, Lowe and Wills where it was held that although a person who contracts with an individual director or servant of a company, knowing that the board of directors had powers to delegate its authority to such an individual, may under certain circumstances assume that that power of delegation had been exercised and that he may safely deal with the individual in question as representing the company, he cannot rely on the supposed exercise of such power if he did not know of the existence of the power at the time he made the contract. It was also held that the doctrine of constructive notice operates adversely to a person who neglects to inquire; it does not entitle such a person to claim for his own advantage to be treated as having knowledge of the facts which an inquiry would have disclosed. In my opinion the contention of M.T. Ltd. in this connection is unsound. In order to establish a case of ratification it appears to be essential that the party ratifying should be conscious that an act beyond the authority of the agent had been done, and further after notice of that fact the party consciously by an overt act agreed to be bound by it or by acquiescence in the situation arising thereafter allowed the business to continue. It either event it appears that consciousness of the act done by the agent without authority must be proved, and, secondly, it should be proved that, after notice of such unauthorized act, the principal adopted the transaction.

The question of adopting the transaction by the shareholders passing the balance-sheets has been considered in some English cases. In Houldsworth v. Evans the question indirectly came to be considered and Lord Cairns, L. C, in considering this point held that the share-holders who had agreed to the scheme had no knowledge that the scheme which they were adopting was the scheme originally put forward. In other words that case shows that in order to establish a case of ratification it was essential to prove in the first instance that the alleged assent was given on proof of consciousness of the act having been done without authority or after full knowledge of the transaction which was being assented to. Even in the dissenting judgment of Lord Cranworih, who held that when the directors bad exceeded their legal powers and the share-holders took no steps in the matter but allowed the things done to remain unimpeached for years they must be taken to have retrospectively sanctioned what had been done, the fact that the share-holders were aware that the directors had been exceeding their legal powers was emphasized. In In re Railway and General Light Improvement Co., Matzetti's Case the question again came to be considered. In that case a certain item of expenditure was included in a larger item in the balance-sheet and that balance-sheet was passed by the share-holders at their meeting. The item included was shown to be unauthorized expenditure. Brett, L. J., in considering the question of ratification observed as follows:

"But it cannot be said that the company ratified the payment by passing it unquestioned on the balance-sheet, unless it appeared there in such a way as to attract the attention of persons of ordinary care. There must have been direct notice, or notice sufficient to put a person of ordinary care upon inquiry as to the item. The mere statements on the balance-sheet in this case would not have put such a person upon inquiry so as to lead him to the facts. Therefore, I think there is no evidence of ratification."

In In re Republic of Bolivia Exploration Syndicate, Ltd. the question of waiver in respect of an ultra vires payment, by receiving and adopting the balance-sheet, came to be considered and it was observed as follows :

"After they learned at the share-holders' meeting of December 14, 1908, that the legality of these payments was questioned, the meeting was adjourned for the purpose inter alia of inquiries being made into the matter, and the balance-sheet and accounts were subsequently approved by the share-holders at the adjourned meeting….."

These observations also show that in order to establish a case of ratification it is essential to prove knowledge of the fact that the act was unauthorized in the first instance and that after clear notice either by acquiescence or an overt act the shareholders of the company adopted the transaction. Irvine v. Union Bank of Australia makes the point still more clear. Their Lordships observed as follows:

''Their Lordships think that it would be competent for a majority of the share-holders present (though not a majority of the share-holders of the company), at an extra-ordinary meeting convened for that object, and of which object due notice had been given, to ratify an act previously done by the directors in excess of their authority; and they are not prepared to say that if a report had been circulated before a half-yearly meeting distinctly giving notice that the directors had done an act in excess of their authority, and that the meeting would be asked by confirming the report to ratify the act, this might not be sufficient notice to bring the ratification within the competency of the majority of the share-holders present at the half yearly meeting.

The case of In re The Magdalena Steam Navigation Co. decided nothing to the contrary. In that case also the shareholders who passed the resolution with insufficient majority are shown to be conscious of the deed of settlement which provided the requisite majority of two-thirds in numbers and value of the share-holders present at the meeting. It is not a case of the directors exceeding their authority, but a case where a company by an irregular resolution authorized the directors to do a thing. Having regard to these considerations, in my opinion, the contention of M.T. Ltd., that the company by adopting the balance-sheets had ratified the borrowings, cannot be accepted.

It is next contended on behalf of the liquidator, that the claim now made by M.T. Ltd., wholly represents the balance of unauthorized borrowings. This contention is based on the argument that in considering the account of borrowings and repayments the rule in Clayton's case does not apply. In this connection reliance is placed on the decisions in Blackburn and District Benefit Building Society v. Cunliffe, Brooks & Co. Cunliffe Brooks & Co. v. Blackburn and District Benefit Building Society, Blackburn and District Benefit Building Society v. Cunliffe Brooks & Co. and Sinclair v. Brougham. Having regard to the view I have taken, it is not necessary to decide this. As, however, an elaborate argument was addressed to me, I think I should shortly express my opinion on the point. I do not think the liquidator's contention in this connection is correct. The first three authorities relied upon by the liquidator do not help him. In those cases an attempt was made by the claimant to show that the money advanced had been applied towards the payment of debts and liabilities of the society properly payable by it and it was held that in making the inquiry as to what amount had been properly applied in paying the debts of the company the claimant could not rely on the rule in Clayton's case. In my opinion when out of the total sum advanced by the party if a portion is authorized and the rest unauthorized according to the principles discussed in Sinclair v. Brougham, the excess, if it is ultra vires the company, would never cease to be the property of the lender, and, if traced, must be returned by the borrower. The rule of law would, therefore, be that when the directors have borrowed without any authority and then repaid money, they should be deemed to have done the right thing, viz., return what never belonged to the company. Viscount Haldane, L.C. has put the proposition very succinctly in the following words: "The Society ought in my opinion, to have been regarded, in the absence of evidence to this effect, as having simply returned to the bankers the latter's own money."

According to the Lord Chancellor, therefore, in the absence of evidence to the contrary, when repayments are made by the company, they should be treated simply as returning to the lender his own money, and which in law, having regard to the incapacity of the company to borrow had never become the property of the company. These observations, therefore, instead of supporting the contention of the liquidator, support the contention of M.T. Ltd. Applying that principle to the account it should be held that the first five lacs of rupees, borrowed by the company from M.T. Ltd., were the authorized borrowing and the excess was unauthorized so far as the directors are concerned. Thereafter when in the subsequent years or the same year there are repayments, the same should be treated as repayments of the unauthorized borrowings, i.e., return to M.T. Ltd., of their own money. Looking at the account in that way and having regard to the fact that the balance now claimed is only Es. 4,91,284-0-8, it is evident that, according to the principles laid down by Viscount Haldane, L.C, the whole of the balance now claimed by M.T. Ltd., represents the authorized borrowing, the unauthorized borrowing having been repaid during the interval by the directors. This contention of the liquidator, therefore, if necessary to be considered, must also fail.

The observations and principles contained in Sinclair v. Brougham, with regard to making a tracing order, were fully argued. Having regard to my finding the question does not arise, and, therefore, I do not propose to examine the cases cited on the point. It was lastly contended on behalf of the liquidator that no further call on the shareholders should be made. That contention is based on Sinclair v. Brougham. I do not think that case stands in the way of M.T. Ltd. The principles there discussed were for finding how the assets which were the outcome of a wholly ultra vires business were to be divided between the creditors of the ultra vires business and the share-holders of the same ultra vires business. In the present case, M.T. Ltd., claim a sum of money payable from the company in liquidation, and if the claim is allowed, all the liabilities of the shareholders to satisfy the claim of a person who is entitled to the payment of a specified sum of money must follow. I shall consider next the claim of Sassoons. It is contended on behalf of the liquidator that the agreement of February 28, 1928, is not valid and binding on the company because it is a suretyship transaction. It is pointed out that in the deed itself the company is called surety. It is common ground that at the time of the execution of the deed no money was paid and the company had borrowed no money from Sassoons.

It is further pointed out that in spite of the deed, and all the recitals contained therein, M.T. Ltd. continued to be the creditors of the company, and Sassoons to be the creditors of M.T. Ltd., for the whole amount, as before. In the books of Sassoons the company is not shown to be their debtor nor in the books of the company are Sassoons shown to be their creditor. The result is that the legal relations subsisting between the parties till then were not altered and the company and Sassoons do not assume the relationship of debtor and creditor. The right of Sassoons is only under the deed of mortgage and there are no other relations on which the claim put forward by Sassoons could be sustained. As regards the clause by which the company and M.T. Ltd. jointly and severally promised to pay the Sassoons Rs. 4,50,000, it is contended that this provision cannot override the legal relations established by the description given to the company in the deed itself. In any event it is pointed out that, as the liability of the surety is co-extensive, the two clauses can be reconciled and the deed is only a deed of suretyship. It is further contended that if the two clauses cannot be reconciled, the first must prevail on the general principle that in construing a deed the first clause prevails. The liquidator contends that such a transaction of suretyship is ultra vires the directors and also the company.

In this connection reliance is placed on the decision in Crenver etc., Mining Co., Ltd. v. Willyams. In that case a company, which was a mining company, after its incorporation entered into a written contract with G, an engineer, for the construction of certain work and erection of plants, machinery, etc., and agreed to pay £8,500 to him. The payments under the contract to G were to be made every month on a certificate of the engineer of the company less twenty per cent. Considerable sums of money were advanced by bankers to G to go on with the erection, and in January 1865, he owed to the bankers upwards of £14,000 for moneys advanced to him. The company also owed the bankers £1,272 and was liable for £5,000 on bills discounted by the bankers and which formed part of the £14,000 due from the contractor. In this state of things an indenture of mortgage was executed by G of the first part, the company of the second part and the bankers of the third part, which recited the contract with G and that he had since erected diverse building and machinery in pursuance of the contract. It further recited that G had received £19,578 from the company in part-payment and that a large sum still remained due to him from the company under the contract; that G was possessed of machinery and that he was indebted to the bankers for money advanced for the purposes of the contract; that the company was indebted to the bankers in £l,272 and that G had applied to the bankers to make him further advances to enable him to carry out the work which the bankers had agreed to do on having the re-payment of the sum of £14,289, the balance which was due by G to the bankers, and £1,272 which was due by the company to the bankers, and any other sum advanced by them to G secured as mentioned in the deed.

By the indenture, G and the company covenanted to pay to the bankers £14,239 and £1,272 with all further sums advanced to G with interest and G assigned to the bankers all moneys due or to become due under the contract and all engines, etc., and the company assigned to the bankers all tin, copper, etc., to be raised out of the mines. In a suit by the bankers to enforce the mortgage, the trial Court refused to recognise the validity of the mortgage and dismissed the suit with costs. The matter went in appeal and the decision is reported in Crewer & Wheal Abraham United Mining Co., Ltd. v. Willyams. The Court upheld the contention of the company in part and gave a declaration that the mortgage was invalid so far as it made the property of the company a security for the debts due by G to the bankers. So far it secured the moneys due by the company, and so far it was a mortgage by the contractor of his property to the bankers, it was not interfered with. It is contended by the liquidator that the position in the present case is the same. It is further urged by the liquidator that the question of acquiescence and ratification does not come in because in the balance-sheets of the company it is nowhere mentioned that Sassoons were given the security. On the other hand the balance-sheets of the company after 1927 show that M.T. Ltd. were secured creditors. On this ground it is contended that as the transaction is ultra vires the company and the directors, the deed is a nullity and no claim could be created thereunder. In the alternative it is contended that if the transaction is put forth as a new contract made between the parties on February 28, 1928, it must fail because there was no fresh consideration.

It is therefore necessary to look to the provisions of the deed itself. After describing M.T. Ltd., as the mortgagors, the company as sureties and Sassoons as the mortgagees, the deed recites as follows:

" And whereas the surety required money for the purpose of and in connection with its business and requested the mortgagor to lend and advance to it the money so required, and whereas the mortgagor requested the mortgagee to lend and advance to it a sum of Rs. 9,00,000 (nine lacs) in order to enable it to lend and advance to the surety the amount required by the surety and to use the remaining portions for its own business, and whereas the mortgagee agreed to lend and advance to the mortgagor the said sum of Rs. 9,00,000 (nine lacs) on the mortgagor agreeing to repay the said sum with interest thereon, and to secure re-payment of the moiety thereof by the mortgagor depositing the title-deeds relating to………belonging to the mortgagor and to secure re payment of the other moiety by the surety depositing with the mortgagee by way of equitable security the title deeds relating to the said properties………..particularly described in the first and second schedules hereunder written, and whereas the mortgagee hath already paid ' to the mortgagor the said sum of Rs. 9,00,000 (nine lacs) as the mortgagor doth hereby admit and acknowledge out of which the mortgagor hath paid to the surety a sum of over Rs. 4,50,000 (four lacs and fifty thousand) as the surety doth hereby admit and acknowledge………And whereas the surety also hath deposited with the mortgagee the title-deeds of the said lands……………belonging to it and whereas the mortgagee hath called upon the mortgagor and the surety to execute these presents evidencing the said deposit of title deeds as such security now this indenture witnesseth that in consideration of the amount lent and advanced to it by the mortgagor out of the said sum of Rs. 9,00,000 (nine lacs) lent and advanced to the mortgagor by the mortgagee (the receipt of which the surety and the mortgagor do hereby respectively admit and acknowledge) the surety hath already deposited with the mortgagee the title-deeds mentioned in the schedule hereunder written relating to lands belonging to the surety to the intent that the said lands may be equitably charged with the re-payment to the mortgagee of the sum of Rs. 4,50,000 out of the said sum of Rs. 9,00,000 lent and advanced to the mortgagor by the mortgagee with interest on the same from July 1, 1926, at the rate of 6 per cent……..and the mortgagor and the surety do hereby jointly and severally agree to re-pay to the mortgagee on October 31, 1931, the said sum of Rs. 4,50,000 with interest thereon at the rate aforesaid and do hereby undertake that the surety shall execute at its own costs, when called upon a proper legal mortgage of the said lands...to secure the said sum of Rs. 4,50,000 with interest."

I am unable to accept the first argument urged on behalf of the liquidator that because in the deed the company is described as a surety they must be treated as sureties. While taking into consideration that description used in the deed to arrive at a correct conclusion, it is necessary to look to the whole deed and consider the nature of the transaction between the parties. In my opinion the principle that the first statement in the deed should prevail is not relevant to be considered in this connection, because what the Court is called upon in this case is not to determine the question of grant of property, in which case that principle is held to be applicable, but to determine the true effect of the document. The liquidator does not dispute the correctness of the recitals in the deed and no evidence is led to challenge the truthfulness of the statements contained therein. There is, of course, no proof of the statements being wrong. Looking to the whole deed, the following facts appear to be established :— (1) that on July 1, 1926, a sum of Rs. 9,00,000 had been advanced by Sassoons to M.T. Ltd.; (2) that out of that Rs. 4,50,000 were admitted to be advanced by M.T. Ltd. to the Company; (3) that M.T. Ltd., had requested Sassoons to lend the said sum of Rs. 9,00,000, to them in order to enable them to lend and advance to the company the amount required by the company; (4) that at the time the said sum of Rs. 9,00,000 was advanced, M.T. Ltd., had agreed to give by way of security its own property and the company's property; (5) that the company had already deposited with Sassoons the title-deeds of their property; (6) that Sassoons had called upon M.T. Ltd., and the company to execute the document evidencing the deposit of the said title-deeds as security; (7) that in consideration of the amount lent and advanced M.T. Ltd., had already deposited the title-deeds of their property by way of equitable mortgage for the repayment to Sassoons of the sum of Rs. 4,50,000 out of the said sum of Rs. 9,00,000; (8) that by the document M.T. Ltd., and the company did jointly and severally agree to repay to Sassoons on October 31,1931, the said sum of Rs. 4,50,000 with interest; and (9) that the company agreed to execute at its own costs, when called upon, a proper legal mortgage in favour of Sassoons of the said lands and building to secure the said sum of Rs. 4,50,000, acknowledged to be received by the company out of the said Rs. 9,00,000.

In order to decide whether the transaction is ultra vires the company or not, it is necessary to have regard to these facts read along with Cl. 3 (f) of the memorandum of association of the company. Under that clause the company could give a promissory note to M.T. Ltd., for the amount borrowed by the company from M.T. Ltd., It is similarly permissible for M. T. Ltd., to ask the company to join them in passing a promissory note to borrow money, and for the company to join accordingly. Therefore, a promissory note signed by M.T. Ltd., and the company, making them jointly and severally liable thereunder, is not void under Class 3(f) of the memorandum of association. As the company is empowered to secure the repayment in such manner as it may deem expedient, it appears to be equally clear that to secure repayment of the amount covered by the promissory note the company could have given an equitable mortgage on its property. It is not disputed that the company, as such, apart from the question of directors' authority, could have secured the repayment of the money borrowed by it by the deposit of title deeds with M.T. Ltd., or entered into an agreement of equitable mortgage in favour of M.T. Ltd. It is further not disputed that if such mortgage was given, M.T. Ltd. could either assign the equitable mortgage in favour of the Sassoons or could in their turn enter into another agreement of equitable mortgage in respect of the same property in favour of the Sassoons. If so, is the transaction as contained in the deed of February 28, 1928, ultra vires? . In my opinion, having regard to the terms of the deed of mortgage, it is not a document of suretyship. A contract of guarantee, which is the same as a contract of suretyship, is defined in Section 126, Contract Act, as "a contract to perform the promise, or discharge the liability, of a third person in case of his default." The person who gives the guarantee is called the "surety," the person in respect of whose default the guarantee is given is called the "principal debtor," and the person to whom the guarantee is given is called the "creditor." Section 128 provides that the liability of the surety is co-extensive with that of the principal debtor. In the present case the terms of the deed of mortgage do not provide that in default of the payment of money by M.T. Ltd., to Sassoons the company would make good the amount. It is also not a case of admitting or becoming liable when no money is received, but a case where the liability is admitted and security given for that portion which has admittedly gone into the possession and coffers of the company. It is a case where both M.T. Ltd., and the company jointly promise to pay the Sassoons the sum of Rs. 4,50,000 because at the initial stage M.T. Ltd. borrowed Rs. 9,00,000 from Sassoons and the company admitted that out of that sum a sum of Rs. 4,50,000 was actually received by them and which they were liable to make good to M.T. Ltd. when called upon.

The difference between the position of a surety and a joint debtor is made clear and recognized so far back as 1866 in Buck v. Hurst and Bailey. In that case the plaintiff lent money to A upon B's promise to become surety for its repayment, and after the money was advanced A and B signed and delivered to the plaintiff the following memorandum: "We jointly and severally owe you £60." It was held that this was evidence for the jury of "an account stated by A and B jointly." In Guild & Co. v. Conrad, the defendant orally promised the plaintiff that if he (the plaintiff) would accept certain bills for a firm in which the defendant's son was a partner, he (the defendant) would provide the plaintiff with funds to meet the bills. It was held that this was not a contract of guarantee but a case where the defendant promised to be liable on the ground of indemnity. In other words the liability of the defendant did not arise in the event of the firm failing to pay the bills, but, apart from that consideration, the defendant had promised to discharge the bills if the plaintiff for the time being accommodated the party. In the same way in the present case, as in the event of Sassoons demanding from M.T. Ltd. payment of Rs. 4,50,000 the company could have been called upon to pay the amount forthwith by M.T. Ltd., the company agreed to indemnity Sassoons for the amount and gave the security mentioned in the deed of mortgage. In my opinion, therefore, the transaction contained in the deed of mortgage is not a suretyship transaction as argued on behalf of the liquidator. If the joint liability is admitted, no question of reduction of debt of M.T. Ltd. arises. Similarly no question of making entries in the books of any of the three companies arises. The legal effect of the deed of mortgage cannot be controlled in any event by the presence or absence of entries the parties may make or omit to make in their books.

The case of Crenver etc. Mining Co. Ltd. v. Willyams, is quite distinct. In that case the company had purported to mortgage its own property for the debt due by the contractor to the banker. It was not shown that any portion of the money borrowed by the contractor from the banker was admitted to be paid by the contractor to the company. Merely because in respect of the work done and materials supplied by the contractor to the company, the contractor had an independent claim against the company, the company cannot mortgage to the banker its property for the payment of the whole debt of the contractor and also further moneys to be borrowed by the contractor for his contract. Therefore, that decision does not help the liquidator.

In my opinion it is not open to the liquidator to contend that Sassoons' money had not gone to pay the creditors of the company because Sassoons paid the money to M.T. Ltd. and that money was advanced by M.T. Ltd. to the company, as admitted in the deed of mortgage, and bona fide utilized for the business of the company as shown by its books and balance sheets. Under the circumstances, even in the absence of any extension of the directors powers and in the absence of acquiescence or ratification, having regard to the terms of Article 73 of the articles of association in Table A read with Clause 3(f) of the memorandum of association, the directors had power to give security in respect of a sum not exceeding Rs. 5,00,000. As under the deed of mortgage Rs. 4,50,000 are shown on the face of the document to be borrowed by the company and for which Sassoons received a security, the transaction appears to be within the competence of the directors and is binding on the company. The borrowing in excess by the directors from M.T. Ltd. does not touch the validity of the deed of mortgage or the rights of Sassoons thereunder, because if the security is treated as given for Rs. 4,50,000, out of Rs 9,00,000 it does not follow that the security is given for the unauthorized portion of the borrowing. This is on the ground that when a man has the power to do the right thing and does a thing which is capable of being taken either as the right thing or in excess of his power to do this right thing, it should be presumed the he had done the right thing, especially when the rights of third parties would be adversely affected on the other construction. In my opinion equity demands that it should be held that the security so given was given in respect of the borrowing which the directors were empowered to borrow under Article. 73. In respect of the excess, the claim of the claimants must stand or fall on, its own merits.

The balance-sheets of the company do not show the name of Sassoons as secured or unsecured creditors. Nor is it shown that at any stage the attention of all the share-holders, viz., M.T. Ltd., the ten directors and Mr. F. E. Dinshaw was drawn to the fact that the directors were doing something which under the articles they were not authorized to do. Under the circumstances, as I have pointed out before, no question of ratification by acquiescence arises. On behalf of Sassoons it is contended that as M.T. Ltd. could have obtained the deed of mortgage from the company and could in their turn have either assigned it or executed another document of mortgage in favour of Sassoons, it is only a question of form and not of substance, and the transaction, under the circumstances, should be held to be binding on the company. For this contention reliance is placed on the decision in Seligman v. Prince & Co. In that case P assigned his business to the company and the company agreed to indemnify him against the debts of his old business. To satisfy these debts the company issued debentures and gave them to certain creditors of the old business of P. It was held that the debentures were issued not for the purpose of paying the debts of third parties but having regard to the agreement to indemnify P., the debentures were binding on the company and the debenture-holders were entitled to enforce their rights against the company. It is contended by the liquidator that no such case of indemnity is proved here. In my opinion, having regard to the express terms of the indemnity contained in that case, that decision is not helpful to Sassoons. On the evidence on record and the recitals in the deed of mortgage, it is difficult to find support for the contention that an agreement of indemnity, as contemplated in that case, was entered into.

The contention of the liquidator, that if this is a fresh agreement there was no fresh consideration and therefore it must fail, is untenable. The recitals in the document coupled with the admission that the sum of Rs. 45,000 out of the sum of Rs. 9,00,000 borrowed by M.T. Ltd. from Sassoons was utilized by the company shows the consideration which moved the company to execute this document in favour of Sassoons. It should be remembered that under the Contract Act if Sassoons give time to M.T. Ltd. to pay their debt to Sassoons, that would be sufficient consideration in law to sustain the promise by the company to pay to Sassoons Rs. 4,50,000 out of the sum of Rs. 9,00,000 under the circumstances mentioned in the deed. It is next contended that the resolution of the directors authorizing the execution of the document is bad, and in this connection reliance is placed on Article 77 of Table A and Section 91-B, Companies Act. It is pointed out that Mr. A. J. Raymond was a party to the resolution and was the managing director of Sassoons and had the full powers of the board of directors. It is further pointed out that Sassoons is a private limited company and all the directors of M.T. Ltd. were parties, to this resolution. It is argued that the deed of mortgage is a tripartite agreement in which all the three companies and directors were interested and therefore there was no independent person to vote at the meeting of the directors held on February, 1928. Under these circumstances it is contended that the whole voting is bad and the resolution is void. It is pointed out that the interest of a person as a share-holder is sufficient to disqualify him for the voting under Section 91-B, and that the transaction is of such a nature that the Court should very minutely scrutinise the voting at the meeting.

The contention that Sassoons is a private limited company or that Mr. Raymond as the managing director had all the powers is quite irrelevant. As held in Salomon v. Salomon & Co. under the law, a joint stock company is a distinct entity; and although all the shares may be practically controlled by one person, in law a company is a distinct entity and it is not permissible or relevant to inquire whether the directors belonged to the same family or whether it is, as compendiously described, a "one man company." The law having recognized joint stock companies as distinct entities, these inquiries and suggestions are quite irrelevant to the present contention. In my opinion the transaction is not at all unusual, because it is conceded that if two different documents, one from the company to M.T. Ltd. and another from M.T. Ltd. to Sassoons had been passed, it would have been a perfect business transaction with no unusual character. A9 pointed out in the correspondence, the attempt on the part of the three parties was to save costs of the two documents being prepared, and merely because the effect and result of the two documents is entered in one document, I am unable to hold that the transaction became an unusual one. It is not a case of one person giving security for the debt of another, because it is admitted by the deed of mortgage that the company gave the security only in respect of the sum of Rs. 4,50,000 admitted to be received by it out of the sum which originally came from Sassoons.

It is contended on behalf of Sassoons and M.T. Ltd. that the liquidator's contention in respect of the voting at the directors' meeting is untenable because the transaction contained in the deed of mortgage is not-of the kind suggested by the liquidator. It is a transaction between M.T. Ltd. and the company on the one side and Sassoons on the other side, but it is not a contract between the company and M.T. Ltd. Under the circumstances the directors of Sassoons alone would be disqualified to vote, but not the directors of M.T. Ltd. As against this, it is argued by the liquidator that without there being contract between M.T. Ltd., and the company, how can a contract, as contained in the deed of mortgage, come into existence? In my opinion this last argument is futile. Because the contract contained in the deed of mortgage exists between the company and M.T. Ltd. on the one hand and Sassoons on the other hand, it is not necessary that the arrangement or contract between M.T. Ltd, and the company must be contained in the same document. It is further contended against the liquidator that the interest mentioned in Article 77 and Section 91-B, Companies Act, is some personal interest which is not in common with the other share holders. For that purpose reliance is placed on the decision in Seligman v. Prince 6- Co., and the remarks at p. 629 where it is pointed out that the interest should be one not in common with the others. Reliance is also placed on behalf of the claimants on the terms of Section 91-B.

In my opinion there is considerable force in the contentions urged on behalf of the claimants. I do not think, however, that it is necessary to go into this part of the argument. It is common ground that a resolution at a meeting of the board of directors of the company was passed and the execution of the deed was sanctioned. The correspondence further shows that Sassoons were informed of the board meeting having been held. Under the circumstances the contention urged on behalf of the liquidator is a contention in respect of the internal management of the affairs of the company and must fail. In In re Hampshire Land Co., where there was a common officer of the company who was present when the resolution which was sought to be challenged as irregular was passed, this principle came to be considered. Vaughan Williams, J., in delivering judgment observed as follows:

"They (the share-holders) had no authority in the absence of a properly passed resolution to borrow this money. But in that state of things, the money having been lent by the society and received by the company, the question which I have stated (viz., who is to bear the loss?) arises. It is not disputed that the authority of Royal British Bank v. Tarquand is such that the society had a right to assume in a case like this that all these essentials of internal management had been carried out by the borrowing company, and that it is only in case the law imputes to the society knowledge of these irregularities that the society is not to rank……as a creditor for the amount lent."

On the facts of the case, the learned Judge held that the knowledge of the common officer could not be imputed to the society. Apart from the fact of Mr. Raymond being a director of Sassoons the point is completely covered by the remarks of Lord Hatherley in Mahony v. East Holyford Mining Co., as follows:

"On the one hand, it is settled by a series of decisions, of which Earnest v. Nicholls is one and Royal British Bank v. Tarquand a later one, that those who deal with joint stock companies are bound to take notice of that which I may call the external position of the company. Every joint stock company has its memorandum and articles of association; every joint stock company, or nearly every one, I imagine (unless it adopts the forms provided by the statute, and that comes to the same thing) has its partnership deed under which it acts. Those articles of association and that partnership deed are open to all who are minded to have any dealings whatsoever with the company, and those who so deal with them must be affected with notice of all that is contained in those two documents".

"After that, the company entering, upon its business and dealing with persons external to it, is supposed on its part to have all those powers and authorities which, by its articles of association and by its deed, it appears to possess; and all that the directors do with reference to what I may call the indoor management of their own concern, is a thing known to them and known to them only; subject to this observation, that no person dealing with them has a right to suppose that anything has been or can be done that is not permitted by the articles of association or by the deed."

It is, therefore, not permissible in a case like this to inquire whether there was a proper quorum for holding a meeting or whether the meeting of the directors authorizing the execution of the deed of mortgage was properly convened. These are matters of the internal management of the company, and under the principles contained in Royal British Bank v. Tarquand the company is bound by the resolution, so far as outsiders are concerned. No irregularity in the internal management would therefore vitiate the transaction so far as an outsider creditor is concerned. In this transaction there appears to be no such irregularity as it was the duty of Mr. Raymond to convey to Sassoons and there is nothing by which Sassoons could be held to be aware of any irregularity. In my opinion, therefore, this contention of the liquidator must fail. On these grounds, the deed of February 28, 1928, when executed, was valid, and Sassoons have a right to recover the amount mentioned therein, according to the terms of that deed. The result, therefore, will be that their claim as secured creditors under the deed of February 28, 1928 should be allowed."

F.J. Collman and M.L. Manekshaw, for the Appellant.

K.M. Munshi and M.C. Setdlvad, for the Respondents.

Beaumont, C. J.—This is an appeal from an order of Kania, J., made in the liquidation of T.R. Pratt (Bombay) Ltd. The claims in question were made by E. D. Sassoon & Co., Ltd. and M.T. Ltd. For simplicity I will refer to the three companies as Pratts, M.T. s, and Sassoons respectively. The learned Judge held that the claim of Sassoons was proved, as also was the claim of M. T, s.; admittedly, they were not additional but alternative claims, and it is really not necessary to consider the claim of M.T. s if the claim of Sassoons is allowed. The facts are not, I think, substantially in dispute. Pratts was incorporated in the year 1919 with a capital of rupees five lacs, divided into preference and ordinary shares. The memorandum of association contained power to borrow and give security for the money borrowed, but there was no power to give security for a debt of third parties. Originally articles of association were prepared, but by some error they were not registered, so the company was regulated by Table A; and under Article 73 of Table A the directors' power of borrowing is limited, the article providing that the amount for the time being remaining undischarged of moneys borrowed by the directors shall not exceed rupees five lacs, i.e., the capital. M.T.s was incorporated in 1920. It was formed by Messrs. Mehta & Co., who were the managing agents of Pratts, and by persons interested in Sassoons; and the principal object of the company was to finance Pratts, the view being that Pratts' capital was insufficient for the business which they were capable of doing. M.T. s acquired practically the whole of the ordinary share capital of Pratts, but the preference shares were held by outside parties. At the date of the liquidation of Pratts, which was June 22, 1932, a sum of approximately Rs. 4,92,000 was due by Pratts to M.T.s. Sassoons were in the habit of financing M.T. s., and in the years 1926 to 1928 there was a sum of approximately Rs. 9,00,000 due by M.T. s to Sassoons. It appears from the correspondence that in the year 1926 Sassoons commenced to press M.T.s for security for the debt. M.T.s had an immovable property known as the Collins Building, which was a part of the building in which Pratts carried on business and Pratts had two immovable properties; and the correspondence shows that Sassoons wanted to get a mortgage upon all those properties both of M.T.s and Pratts, as security for the money due to Sassoons. Originally it was proposed that there should be two documents—one between M.T.s and Pratts and the other between M.T.s and Sassoons' but, in order to avoid expense it was arranged to have one. Accordingly, on February 23, 1928, resolutions were passed by the boards, both of Pratts and of M.T.s., for execution by the respective companies of a security deed in favour of Sassoons, and on February 28, 1928 the security deed in question was executed.

That document, which is Exhibit J, was made between M.T.s (thereinafter called the mortgagor of the first part), Pratts (thereinafter called the surety of the second part) and Sassoons (thereinafter called the mortgage of the third part). It recites the title to the properties which were to be mortgaged, and then it recites that Pratts required money for the purpose of their business and requested M.T.s to lend them money, and that M.T.s, requested Sassoons to lend them rupees nine lacs, in order to enable them to lend money to Pratts. Then it recites that Sassoons had already paid to M.T.s rupees nine lacs, out of which M.T.s had paid to Pratts rupees four and a half lacs. It is argued that in fact there is no evidence on the record that that recital is true, namely, that the money borrowed by M.T.s from Sassoons had to any extent gone to Pratts; but I see no reason why we should not accept that recital as correct. There is no evidence that it is untrue, and being an admission made by Pratts under their seal and by the other parties, I think we can accept it as true. Then the document recites deposits of the title deeds of the immovable properties both of M.T.s and Pratts with Sassoons, and then the witnessing part states that Pratts have already deposited with Sassoons the title deeds of the properties therein mentioned with intent that the properties may be equitably charged with the repayment to Sassoons of the sum of rupees four-and-a-half lacs out of the sum of rupees nine lacs advanced to M.T.s by Sassoons with interest. Then M.T.s and Pratts jointly and severally covenant with Sassoons to pay the said sum of rupees four-and-a-half lacs with interest on October 31, 1931.

Now, we had a long and elaborate argument from Mr. Coltman on behalf of the liquidator of the Pratts to the effect that assuming that document was validly executed by Pratts, it was not binding upon them. The argument is that Pratts by that document in effect became surety for M.T.s and deposited their deed as security for M.T.s debt, and that under the memorandum of association they had no power to do that. It is also argued that there was no consideration in the deed in favour of Pratts. It seems tome that the argument ignores the essential fact that as between these three companies Pratts were primarily liable to pay at least rupees four-and-a-half lacs, and Sassoons were entitled to receive four-and-a-half lacs. It seems to me clear that the transaction could have been carried out, as originally suggested by two documents. Pratts could have mortgaged their properties to M.T.s for four-and-a-half lacs, part of the moneys owing, and M.T.s could have assigned either absolutely by way of sale, or by way of security, that mortgage to Sassoons and the actual result brought about by this document could have been brought about in that way by two documents and no question could have been raised. To hold that an arrangement which could have been carried out by two documents cannot be carried out by one document to which all the parties interested are parties, would be to sacrifice substance to form. I think that the case of Seligman v. Prince & Co. is an authority for that proposition. I agree with Mr. Coltman that that case is not on all fours with the present case. It would be on all fours if Pratts had agreed to indemnity M.T.s against their debt to Sassoons, but it seems to me that that distinction is not an essential one. The essence of this case is that as between the three parties to the deed Pratts were primarily liable to pay and Sassoons were ultimately entitled to receive the money; and that was the position also in Seligman v. Prince & Co. It is quite true that in the document there is no consideration expressed in favour of Pratts. The transaction is, I think, of the nature of a novation, that is to say a substitution of the liability of Pratts to Sassoons for the liability of Pratts to M.T.s and M.T.s to Sassoons; but it is not a complete novation, because there is no release of Pratts' liability to M. T's and the subsequent books of the companies show that Pratts were treated as debtors of M.T.s after this document had been executed, and not as debtors of Sassoons.

But it seems to me that you cannot give effect to this document without holding that there was an implied obligation on M.T.s part not to sue for the amount of four-and-a-half lacs for which Pratts had given security to Sassoons as long as this mortgage stood. It seems to me plain that if M.T.s had claimed the money from Pratts, this mortgage, to which M.T.s were a party, would have been a defence. I think that there was sufficient consideration in favour of Pratts, in the implied covenant not to sue on the part of M.T.s coupled with the fact that time was actually given. I agree, therefore, with the learned Judge in thinking that if this document was properly executed on behalf of Pratts, it was a valid contract. It is not in my opinion, a document of suretyship at all. There is no ground suggested for that, except the mere definition of Pratts as surety which amounts to very little. Then the second point argued by Mr. Coltman on behalf of the liquidator of Pratts as against Sassoons, though logically it comes first, is that this document was never executed in such a way as to be binding upon Pratts. The objection arises in this way: Section 91-A Indian Companies Act, provides that a director who is directly or indirectly concerned or interested in any contract or arrangement entered into by or on behalf of the company shall disclose the nature of his interest: and Section 91-B provides that no director shall, as a director, vote on any contract or arrangement in which he is either directly or indirectly concerned or interested; and if he does so vote, his vote shall not be counted.

Section 91-B is not taken from the English Act. The subject-matter of Section 91-A was for the first time included in the English Companies Act by the Act of 1929; but there is no statutory provision in England corresponding to Section 91-B though the subject-matter of that section, namely the right of directors to enter into contracts on behalf of the company in which they have some personal interest is frequently dealt, with in the articles of association. Now, the position with regard to the directors of Pratts is this. There were always a certain number of directors common to Pratts and M.T.s and from 1922 until 1931, that is to say, during the whole of the material period, the boards of the two companies were common. There were in all seven directors of the two companies. One of those directors was Mr. A. J. Raymond, and another Capt. E. V. Sassoon, both of whom were directors of Sassoons. But Mr. Raymond was more than a director. He was the Managing Director of Sassoons, and, under a power in their articles Sassoons had delegated to him all the powers of the directors. The resolution to that effect is Exhibit 9. Now it is alleged that in 1928, when this mortgage was arranged and executed, all the directors of Pratts were concerned or interested in the matter individually, that is to say, apart from their position as directors of Pratts, because they were directors of M.T.s and also shareholders in that company. The qualification for directors of M.T.s was the holding of one hundred shares, so that all the directors of Pratts were not only directors but also shareholders in M.T.s; and I think that the argument that they were individually concerned or interested in this mortgage is sound. The object of Section 91-B was clearly to ensure that a company shall have the benefit of the judgment of an entirely independent Board; and I do not think that the Board of Pratts was independent of M.T.s in the matter of this contract, or that the interests of the two companies were identical.

It was vital to M.T.s that they should get for Sassoons the security which Sassoons were asking for, which involved a mortgage of Pratts' property. No doubt, Pratts were in a difficulty in resisting any claim by M.T.s because they owed M.T.s money. But an independent Board theoretically might have taken the view that it would be better that Pratts should be wound up rather than give security for the debt, although experience shows that directors do not usually take such a pessimistic view of the prospects of their company. But there is practical force in the suggestion that an independent Board of Pratts would not have agreed to a contract in the exact terms of the contract of February 28, 1928. An independent Board might very well have said that if Pratts were to give their property in security to Sassoons, at any rate they must have an out-and-out release from M.T.s of a corresponding part of their debt, and that Pratts should not be left to rely on an implied covenant not to sue on the part of M.T.s. It seems to me impossible to say that there was no conflict of interest in the matter of that mortgage between M.T.s and Pratts, although to a certain extent their interests were common. In my opinion therefore, by virtue of Section 91-B, none of the directors of Pratts was competent to vote for the resolution to execute this mortgage in favour of Sassoons.

Two further questions then arise: first, is it necessary to show that Sassoons had notice of the disability arising under Section 91-B? Secondly, if so, had Sassoons such notice? Now, it is very well settled law in the case of English joint stock companies that people dealing with such a company are fixed with notice of any limitations on the power of the company contained in the statute under which it is incorporated or in the memorandum or articles of association; but that if it is shown that a particular act was ostensibly authorized by the statute and the memorandum or articles of association, persons dealing with the company are not concerned to see that the company has put itself into a position to exercise its power properly. That is the rule recognized in Royal British Bank v. Tarquand and a great many other cases. It is generally expressed by saying that outside parties are not concerned with the internal management of the company. They are not, for instance, concerned to see that there was proper quorum of directors present, or that persons who were apparently directors of the company had in fact been validly appointed. Those are matters of internal management: and I have no doubt if the disability of a director to vote upon a contract in which he was personally interested were imposed by the articles of association, the question whether he was personally interested in, and entitled to vote upon, a particular contract would be regarded as a matter of internal management, with which persons dealing with the company would not be concerned.

It is argued, however, that that position does not apply in India, because the restriction against voting is a statutory disability, and non-compliance with a public statute can never be a matter of internal management. At first sight there is, I think, force in that contention; but on consideration, I agree with the argument of Mr. Munshi, that the principle of the English cases as to internal management ought to be applied to a case of disability of directors arising under Section 91-B. It is clear that the ^reason for the rule applies as strongly in India as in England. The reason for the rule, I take it, is that it would be disastrous in a business community if contracts made with companies could be impeached on account of matters known to the company but not to the other contracting party. Moreover, I think that the distinction between the position in England, where the disability arises under the articles, and in India, where it arises directly under the statute, is really more apparent than real, because under Section 8, Companies Act, 1929, and the corresponding sections in earlier Acts, the articles of association are made the regulations of the company, so that they bind the company by virtue of the statute, and the only real distinction between the position in England and in India (apart, of course, from the fact that the articles can be altered by the company whilst the statute cannot) is that in the one case the disability of directors arises indirectly from the statute, whilst in the other it arises directly from the statute. In my judgment, therefore, we ought to hold that if Sassoons had no notice of the facts giving rise to the disability of the directors of Pratts to vote on this contract, then the contract ought not to be impeachable by reason of Section 91-B.

The question then arises whether Sassoons had notice. It is, of course, clear that they had notice of the terms of the contract to which they were parties, and, therefore, they had notice that there was a conflict of interest in relation to that contract between Pratts and M.T.s; and the only real question, is, whether they had notice that the Board of the two companies were common, and that, therefore, all the directors of Pratts were personally concerned or interested in the contract.

Mr. Coltman has relied on Section 87, Companies Act, which requires a list of directors to be filed with the Registrar, and he says that Sassoons, therefore, had notice of who the directors of Pratts and M.T.s were; but it has never been held, as far as I know, in the English cases that people dealing with companies have notice of the contents of all documents on the file of a particular company; and this Court in Pudumjee & Co. v. Moos has expressed an opinion against that view. I therefore do not rely on Section 87. Apart from this the first point argued in favour of the view that Sassoons had notice of the common directorship is that they had such notice through Mr. Raymond. Mr. Munshi on behalf of Sassoons has referred us to a good many cases which undoubtedly show that where you have a director common to two companies you cannot impute to both those companies all matters within the private knowledge of the director, The cases referred to are In re Marseilles Extension Railway Co., Exparte Credit Fonder and Mobilier of England ; In re Hampshire Land Co. and Duck v. Tower Galvanizing Co. I may take the general rule as stated in In re Hampshire Land Co. There the headnote, which I think accurately represents the decision says:

"Where one person is an officer of two companies his personal knowledge is not necessarily the knowledge of both the companies. The knowledge which he has acquired as officer of one company will not be imputed to the other company unless he has some duty imposed on him to communicate his knowledge to the company sought to be affected by the notice, and some duty imposed on him by that company to receive the notice; and if the common officer has been guilty of fraud, or even irregularity, the Court will not draw the inference that he has fulfilled these duties."

That case was followed, as to the last portion of it, where the common director had been guilty of fraud or irregularity, by the House of Lords in J.C. Houghton & Co. v. Nothard Lowe and Wills and none of the learned Lords in that case expressed any dissent from the earlier portion of the decision, so that I think one may take that case as good law. I am unable to say in this case that Mr. A. J. Raymond had no duty imposed upon him to communicate to Sassoons matters within his knowledge as a director of Pratts or M.T.s. He was more than a director of Sassoons, he was, as I have said, the managing director with all the powers of the directors; and having regard to the relations between the three companies, I think it is a fair inference that he was placed on the boards of M.T.s and Pratts largely in order that he might protect their interests, and I have not the slightest doubt that it was his duty to communicate to Sassoons any material fact which came to his knowledge as director of either of those companies. Whether he ever did communicate to Sassoons, the fact that the boards of directors of the two companies were common, I do not know. I should think probably he did. But if he omitted to do so, it was not, I feel sure, because he considered that he owed no duty to Sassoons to make the communication, but because he did not realize the importance of the fact.

Moreover, apart from the notice which Sassoons acquired through Mr. Raymond, I think they also had notice in another way. The attestation clause to the mortgage deed of February 1928, shows that the common seals of M.T.s and of Pratts respectively were fixed pursuant to resolutions of the respective boards of directors passed at meetings held on February 23,1928. Sassoons were concerned to see that those resolutions were in order, because they were the foundation of their title, and if they had taken the trouble to look at the resolutions, they would have seen that they were resolutions passed by the same persons as directors of Pratts and also as directors of M.T.s. So that Sassoons knew in that way that all the directors of Pratts who voted in favour of the execution of the document of February 28, 1928, were also directors, and therefore share-holders of M.T.s, and in that way had an interest conflicting with that of the company, and that their votes therefore could not be counted under Section 91-B. It seems to me, in the circumstances of this case, impossible to hold otherwise than that Sassoons had notice that the votes of the directors of Pratts in favour of the execution of this document, under which they claim, ought not to have been counted by reason of the provisions of Section 91-B. If that is so, the resolution of the directors of Pratts of February 23, 1928 is void, and the execution of the mortgage in favour of Sassoons must also be void: see In re Greymouth Point Elizabeth Railway and Coal Co., Ltd.

It was further argued by Mr. Munshi that even if the document was void, it had been ratified by all the shareholders of Pratts. So far as the holders of ordinary shares were concerned, there may have been a ratification, because all the ordinary shares were held either by M.T.s or by their directors, but the preference shares were held by outside parties, one of whom was Mr. F.E. Dinshaw, who alone is suggested to have had notice. It is said that Mr. F.E. Dinshaw was informed that Pratts had mortgaged their property to Sassoons and that he knew that the boards of Pratts and M.T.s were common ; but not only was he not told that there was any question as to the validity of the mortgage, but he was not told, as far as I can see, the fact that the mortgage was not made directly to secure a debt due by Pratts to Sassoons, but to secure a debt due by M.T.s to Sassoons. That is to say, he was not told anything to suggest that there was any conflict of interest between Pratts and M.T.s, Or any reason why the execution of the mortgage should be impeached under Section 91-B. That being so, I am clearly of pinion that the view of the learned Judge was right as to this, and there is no force in the contention that the document has been ratified by the share-holders. In the result, therefore, the claim of Sassoons fails. As they had no debt apart from the mortgage-deed, they have no equity to retain the documents of title of Pratts which were deposited with them. These will have to be returned to the liquidator.

Then the question arises as to the claim of M.T.s. As I have Said, the power of the directors to borrow was limited by Article 73 under which the amount borrowed by the directors for the time being remaining undischarged must not exceed rupees five lacs, the capital of the company. I have also mentioned that at the time of the liquidation the amount due to M.T.s was less than five lacs. Therefore, prima facie, there seems to be no reason for challenging the claim of M.T.s on the ground that the incurring of the debt was ultra vires. But it appears from the accounts put in by M.T.s that in previous years the borrowing did go beyond five iacs and reached, in the year 1922, thirteen lacs, and it was gradually reduced, but remained over five lacs down to the year 1928. It was argued by Mr. Coltman that by the application of some of the many equities discussed in Sinclair v. Brougham we ought to hold that the amounts repaid were the authorized borrowing and not the unauthorized borrowing, and we ought, therefore, to come to the conclusion that the whole amount due at the date of the liquidation was the unauthorized borrowing. Why we should apply any equity in favour of his clients who borrowed the money they do not wish to re-pay, I do not know. It is quite clear that the rule in Clayton's case has no application where the question is between moneys borrowed inira vires, and moneys borrowed ultra vires in respect of which the relationship of debtor and creditor never arises. It is clear also that Pratts had the benefit of all these moneys, and as soon as the amount due came to below five lacs, the borrowing was authorized under Article 73.1 entirely agree with the learned Judge that, insofar as it is necessary to rely on any presumption, the presumption would be that the moneys repaid represented in the first place moneys borrowed ultra vires, which never became the property of the company, but remained the property of the lenders. I am not sure that in this case it is necessary to rely on any presumption, because at the material date, namely the commencement of the liquidation, Article 73 had no application, because the debt was under the limit. I agree also with the argument of Mr. Setalvad on behalf of M.T.s that in a case where the borrowing is ultra vires the directors, and not ultra vires the company, the money could be recovered in an action for money had and received. As pointed out by the Lord Chancellor in Sinclair v. Brougham where the borrowing was ultra vires the company, no action for money had and received lies in such a case, because the action is based on the fiction of a promise to pay, and you cannot have a fictional promise to pay where the promisor is not competent to give an actual promise. But that reasoning does not apply where the borrowing is only ultra vires the directors, so that the company can ratify the borrowing and give a. valid promise to pay.

It has further been argued by Mr. Coltman in this Court, though the point does not appear to have been taken in the Court below, nor is it directly taken in the memorandum of appeal, that a part of the moneys due at the date of the liquidation to M.T.s represents interest on moneys borrowed ultra vires. There is, I think, some force in the contention that Pratts could not be charged with interest on moneys which for the time being had not been properly borrowed, nor I think could such interest be recovered in an action for moneys had and received. If that point were to prevail, I think that the liquidato of Pratts would be entitled to an account of the moneys due to M.T.s with a declaration that nothing was to be allowed in respect of interest on moneys borrowed which were for the time being in excess of five lacs. But, in my opinion, we ought not to direct such an account in this case. The point, as I have said, was not taken in the Court below, nor has it been directly taken in the memorandum of appeal; and in the lower Court Counsel for Sassoons tendered an account of pratts in that ledgers of M.T.s, and Counsel for Pratts admitted the correctness of the account and no point was raised that any particular issue in the account was wrong. No doubt it was said that the whole amount due on the account was not properly payable because it all represented moneys borrowed ultra vires. But no question was raised that a part of the moneys due at the date of liquidation to M.T.s represented interest on moneys borrowed ultra vires. I think, in view of the admission in the Court below as to the correctness of the account, and the fact that this question as to interest was not argued in the Court below nor taken in the memorandum of appeal, we ought not to direct an account now.

In the result, I agree with all the conclusions of the learned Judge in the Court below except the conclusion that Sassoons were not fixed with notice of the disability of the directors of Pratts to vote on the resolution for the execution of the contract in suit. That being so, the appeal against Sassoons will be allowed, and the appeal against M.T.s dismissed. Declared that M.T. s are entitled to a certificate under Rule 702, as unsecured creditors for the amount of their claim. The appeal against M.T. s is dismissed with costs, and the liquidator of Pratts will have liberty to pay the costs out of the assets. The appeal is allowed against Sassoons ; but having regard to the fact that they have succeeded on certain issues in the lower Court and in this Court, they ought not to pay the whole of the costs in both the Courts. Instead of apportioning costs, we propose not to vary the order of the lower Court that the costs of respondent No. 1 should come out of the assets, but we direct respondent No. 1 to pay the whole costs of the appeal against respondent No. 1 to the appellant.

B.J. Wadia, J.—I have come to the same conclusion. The question for decision so far as the claim of the Sassoons is concerned, centers round the transaction contained in the deed on mortgage, dated February 28, 1928, made between M.T.s. the Pratts and the Sassoons. The claim of the Sassoons is based on this deed, and on the deed of 1931 between the same parties which was, however, only by way of confirmation. The claim was rejected by the liquidator, but the grounds far rejection have not been clearly stated in his affidavit made in these proceedings on July 13, 1933. His Counsel, however, contended before us that the transaction was not binding on the company and the liquidator on the grounds, (1) that the recitals in the deed were not accurate and did not correctly represent the actual state of the dealings and business between the parties: (2) that the transaction was really a transaction of suretyship under which Pratts stood surety for payment of a debt due to the Sassoons, not by themselves, but by M.T. s, and the giving of such guarantee was ultra vires the company; (3) that the covenant under which the Pratts and M.T.s jointly and severally promised to repay four and a half lacs to the Sassoons and the security for the repayment of the same were without consideration; that the deeds were executed in pursuance of resolutions which were not valid and binding, and that therefore the deeds were void and of no effect.

With regard to the recitals in the deed of 1928 it was argued that the figures of nine lacs and four and a half lacs were entirely imaginary, that there was no evidence of a direct specific loan of four and-a-half lacs from the Sassoons to the Pratts, that there was no connection between the account subsisting between Pratts and M.T.s on the one hand and the account between M.T.s and the Sassoons on the other, and that therefore no relationship of creditor and debtor had been established to justify the covenant to repay the four and a half lacs and the security for repayment of the sum. It is common ground that there is no account of the Sassoons in the books of Pratts showing the Sassoons as creditors, nor any account of Pratts in the books of the Sassoons showing Pratts as debtors. But the relationship of creditor and debtor in respect of the four and a half lacs is created by the deed itself, which has been formally signed and executed by all the three companies. In that document M.T.s have acknowledged receipt of nine lacs from the Sassoons, and Pratts acknowledged receipt of four and a half lacs out of the nine lacs advanced by Sassoons to M. Ts. The recitals may not be literally correct in the sense that there is nothing on the record of the companies corresponding with what is stated in them, but they are not false in substance. To hold otherwise would be, in my opinion, to sacrifice substance to form. There is also a plain recital that Pratts required four and a half lacs for the purpose of their business, that these four and a half lacs were advanced for such purpose, and there is no evidence before us that the money which were within the authorized limit were not used and applied bona fide for the purposes of the company. When moneys borrowed or acknowledged to be due are within the authorized limit, there is no obligation upon the lending company to inquire how the moneys are about to be used nor how in fact they have been used. In my opinion, therefore, all the parties would be bound by this transaction, if it was otherwise valid.

I agree with the learned Judge in the Court below that this is not a suretyship transaction. The fact of Pratts having been described as "surety" is not conclusive as to the nature of the transaction, any more than the stamp on the document is conclusive as to what the document really is. Our attention was drawn to certain correspondence that passed before the deed was executed. But all previous correspondence was in the nature of negotiations. The negotiations became merged in the deed which after execution was the sole repository of the terms of the transaction. Under this deed the Pratts have not guaranteed the payment of the moneys due by M. Ts. to the Sassoons. They have acknowledged their own liability to the Sassoons for four-and a-half lacs, and secured repayment of that sum by deposit of title-deeds of their property. It cannot, therefore, be said that Pratts have made their own property security for somebody-else's debt when they have themselves acknowledged that they are debtors to the extent of four-and-a-half lacs, and the ruling in Crewer & Wheal Abram United Mining Co., Ltd, v. Willyams, on which Counsel for the liquidator relies, therefore, does not apply. It was also argued that there was no novatio as to the four-and-a half lacs, because M.T.s have not released Pratts of their liability for that amount, nor have the Sassoons released M.T.s. It is true that there is no express covenant in the deed that M.T.s will not sue Pratts for four-and-a-half lacs, but such a covenant is implied in the deed, for as a result of the deed M.T.s could not have sued Pratts for four-and-a half lacs, at least not for three years.

The Sassoons gave time to M.T.s to pay their debt, and an implied forbearnce to sue M.T.s is sufficient consideration in law to sustain the promise by Pratts to pay four-and-a-half lacs, to Sassoons which is a part of the nine lacs advanced by the_; Sassoons to M.T.s. There is a tripartite arrangement in the nature of a novatio, and it cannot be said that an arrangement of this kind is ultra vires the company. This brings me to the resolution of February 23, 1928. The alleged invalidity of the resolution seems to be the only ground which has been forcibly urged by the liquidator in his affidavit. But it is a question which really goes to the root of the whole matter. Counsel for the liquidator relied on Section 91 B and the proviso to Article 77 of Table A, Companies Act. Sections 91-A, 91-B, 91-C and 19-D have all been added by Act 11 of 1914. Section 14 of the English Companies Act, which was added in the Act of 1929, corresponds in effect to Section 91-A of our Act. There is no section in the English Act corresponding to Section 91-B. Section 91-B provides that where a director is concerned or interested directly or indirectly in a contract or arrangement with the company; he cannot vote on that contractor arrangement; and the proviso to Article 77 in Table A says in effect the same thing, except that the words in the section are "contract or arrangement" and the words in the article are 'contract or work.'

It is clear that the interest of the director in the transaction must be personal, and either pecuniary or material. It may be direct or indirect, but it must be adverse to the company of which he is a director. The principle on which it is based has' been well recognized, and it is so direct and inflexible that even the fairness or unfairness of the transaction is immaterial. For instance, directors have been held to be incopmetent to vote on giving a debenture security to two of themselves in consideration! of a large sum of money owing to them : In re Greymouth Point Elizabeth Railway and Coal Co., Ltd. They cannot vote on an issue of debenture to secure an overdraft account with the bank which was guaranteed by themselves personally : Victors, Ltd. v. Linggard. A director cannot vote on an allotment of shares to himself: In Re Hormusji A. Wadia. The reason in all these cases is that the company is entitled to the unbiased judgment of its directors on matters affecting the interests of the company. As pointed out by the Vice-Chancellor in Benson v. Heathorn, the company has a right to the entire services of its directors, a right to the voice of every director, and a right to his advice in giving his opinion on matters which are brought before the Board for consideration. Section 91-B, Companies Act, enforces a statutory prohibition which is somewhat stringent and it was pointed out in argument in Guntur Cotton Jute and Paper Mills Co., Ltd. v. Venkatachalapati at p. 128 that the case to which it should be applied must fall strictly within its purview.

The liquidator contends that the resolution of February 23, 1928, is invalid because the directors of Pratts were not competent to vote on a resolution for executing the deed, having regard to their common interest in M.T.s and that the Sassoons had notice, actual or constructive, of the facts going to invalidate the resolution. The five directors of Pratts, who were present at the meeting of February 23, and voted on the resolution of 5 p.m., passed exactly the same resolution as directors of M.T.s in the same building at 5-15 p. m. Moreover, the directors of Pratts were interested in M.T.s. either as share-holders or as directors of M.T.s. One of the directors of Pratts was Mr. A. J. Raymond, who was also the managing director of the Sassoons. Under resolution of the Sassoons of February 3,1921, he was empowered to exercise the full powers of the entire Board of Directors of the Sassoons, and according to the evidence given in these proceedings by the head accountant of the Sassoons, he was in charge of the business of the Sassoons as managing director from its inception. There was no doubt a common Board between M.T.s and Pratts, also a common secretary and a common management. It was argued on behalf of the liquidator that there was no independent person present to vote on the resolution giving the security of Pratt's property to the Sassoons, and that all the directors, were, therefore, disqualified to vote. There was no quorum competent to transact business, and therefore, the resolution was invalid, and the deed executed in pursuance thereof was a nullity.

On the other hand Counsel for the Sassoons argued that the question of the disqualification of the directors of Pratts, the question whether the meeting was properly called, the question whether there was a proper and competent quorum qualified to vote on the resolution, are all matters of internal or in door management of the company, and do not affect the validity of the contract or transaction so far as outsiders are concerned, under the ruling in Royal British Bank v. Tarquand and a company is bound by its own resolution. A person dealing with limited liability companies is deemed to have notice of its memorandum and articles of association, but he is not bound to inquire into the internal management, and will not be affected by any irregularity of which he has had no notice. He has a right to assume that nothing has been done or permitted to be done which is not permitted by the memorandum and articles of association or by the statute incorporating the company itself. But actual or constructive notice of any irregularity prevents a third person contracting with the company from obtaining the protection of the rule in Royal British Bank v. Tarquand namely, that all matters of internal or in-door management must be deemed by outsiders to have been duly and properly complied with. Such notice, as I have said, may be actual or constructive. If the outside party is put on inquiry by reason of the circumstances under which the transaction was put through, or by the nature of the transaction itself, or by any other surrounding circumstances, and disregards the facts which put him on inquiry as to the irregularity, he cannot get the benefit of the rule.

The question, therefore, in this case is whether the Sassoons had notice of the irregularity, that is, notice of the disqualification of the directors of Pratts to vote on the resolution, under the terms of Section 91-Bof the Act. Mr. A.J. Raymond was a common director of all the three companies but it was said that he was present at the meeting of February 23, 1928, in his capacity as director of Pratts only, and that he was not bound to communicate his knowledge of any irregularity derived in that capacity to the Sassoons. It has been laid down in numerous cases that the knowledge of the common officer of two companies is not necessarily the knowledge of both the companies, and Counsel contended that it did not follow that the Sassoons therefore had notice of every fact that happened to be known to Mr. A.J. Raymond : In re Hampshire Land Co. In re Marseilles Extension Railway Co. Ex parte Credit Foncier and Mobilier of England. But in J.C. Houghton & Co. v. Nothard Lowe and Wills, Viscount Dunedin points out at p. 14 that it may be assumed that the knowledge of directors is in ordinary circumstances the knowledge of the company, and Viscount Sumner points out in the same case at p. 19 that what a director knows or ought in the course of his duty to know may be the knowledge or the company, for it may be deemed to have been duly used so as to lead to the action, which a fully informed corporation would proceed to take on the strength of it. The position of Mr. A. J. Raymond when he sat as a director of Pratts on February 23, 1928, is of importance in this connection. The Sassoons were vitally concerned in the equitable mortgage which Pratts were to give to them. There was previous correspondence between the companies about it. Mr. Raymond was not merely a common director, but he was also present there as manager of the business of the Sassoons, and this certainly was a business transaction, not of Mr. A. J. Raymond, personally, but of the Sassoons. He knew or must be presumed to have known that there was a common board of Pratts and M.T.s., though he may not have appreciated the legal significance of that fact nor thought it his duty to communicate to the Sassoons. There were other circumstances surrounding the transaction which were sufficient to suggest further inquiry.

The two resolutions passed on the same day are mentioned under the seals of M.T.s and Pratts which were affixed to the deed itself. The learned Judge in the Court below has stated that if this transaction could have been put through by two documents, it might as well have been put through by one, and there was nothing unusual in its nature as a business transaction. The form may not be unusual, but the question is not one merely of form. A transaction which may be effected by two documents may well be effected by one, but the doubt as to the validity of the transaction as embodied either in one document or two documents will still remain under the circumstances which I have referred to before. In my opinion it was Mr. Raymond's duty as manager of Sassoons for all business purposes to act not merely for the purposes of receiving information but also for the purpose of communicating it. It is really difficult to believe that there was a situation on February 23, when it could be said that Mr. Raymond had notice only as a director of Pratts and had no notice as managing director of the Sassoons and as manager of their business. The Sassoons also were bound to inquire into the title to their mortgage, and the title to the mortgage was based upon the validity of the resolution. There was no independent board, and no meeting of the shareholders was called to ratify the transaction. Therefore, under all the circumstances, the Court can impute knowledge of the irregularity to Sassoons. Counsel for the liquidator also relied on Section 87, Companies Act, under which the list of directors filed with the Registrar is open to inspection, but it was pointed out in Pudumjee & Co. v. Moos that notwithstanding Section 87 the appointment of directors was still a matter of the internal management of the company, and an outsider could not be expected also to search the register for the list of directors.

I do not agree with counsel for the Sassoons that the transaction was ratified by all the shareholders of Pratts by acquiescence. There can be a ratification either with full knowledge of the transaction or with the intention to adopt the transaction under any circumstances. It cannot be said that Mr. F.E. Dinshaw, and two others who were joint holders of preference shares on behalf of the Gwalior State had full knowledge of all the circumstances attending the transaction or were put upon inquiry. It was argued that if he had not the knowledge, he had the means of knowledge. But a person can only be put on inquiry if there are facts communicated to him which may lead to a further inquiry. He was not put on inquiry merely as a shareholder. Reference was made to two letters of February 28, and March 3, 1928, written to him by H.M. Mehta & Co., the managing agents, on behalf of Pratts. There was no reply to either of them; but from that it cannot be inferred that he manifested an intention to adopt the transaction. In my opinion the letters are not sufficient evidence on which any Court can base a finding of standing by or acquiescence on the part of Mr. F. E. Dinshaw.

The claim of the Sassoons is based on the deeds. The deeds not being valid and binding for the reasons above stated, they cannot have any claim either as secured or unsecured creditors, for the debts as well as the security are created by the deed of 1928. This brings me to the claim of M.T.s which is really an alternative claim. It is stated in para. 7 of the affidavit of Mr. J.M. Taleyarkhan, dated July 7, 1933, that in the event of the claim of Messrs. E.D. Sassoon & Co., Ltd., being admitted, M.T.s will not claim the amount over again. Article 73 of Table A has already been referred to and I need not recite it again. It fixes the directors' limit of borrowing at five lacs. It was, however, argued that borrowings by Pratts were far in excess of the limit of five lacs, but in my opinion there is no ground for assuming that the claim now made, which is below the limit, represents the balance of unauthorized borrowings. It was further argued that the Pratts should not, in any event, be charged with interest on that portion of the claim, which may represent interest on their unauthorized borrowings. That contention, however, was never put forward in the Court below. It has not been mentioned in the judgment. It is not taken in the memorandum of appeal. Even in the affidavit of the liquidator himself of July 13, all that is stated is as follows :

"The petitioners contend, and I am advised with reason, that as the payments made by the company from time to time to M. T., Ltd., in liquidation of the account would discharge the borrowings from M.T.s Ltd., in order of time, the ultimate balance left unpaid represents that final borrowings, and therefore the balance shown as now due in the account of M.T. Ltd., represents the last borrowings by the management of M. T., Ltd., in excess of the powers of the board of directors to borrow, and therefore represent unauthorized and ultra vires borrowings by which the company is not bound."

The claim of M.T.s was disputed on principle, and not in respect of the quantum, in the course of the hearing, and no one contended in the Court below that an account should be taken of what was due to M.T.s in respect of their claim. The account of the Sassoons in the ledgers of M.T.s and the account of Pratts in the ledgers of M.T.s were put in, and their correctness was admitted. Counsel for the liquidator argued that all that was meant by the admission was that the accounts were not to be formally proved. If that was so, the note taken by the learned Judge would not have been in that form. The accounts would only have been put in by consent without proof. I therefore hold that the liquidator is not now entitled to have any account taken of the sum due to M.T.s in respect of their claim. The claim is within the authorized limit. The moneys were borrowed and used according to the balance sheets of Pratts for their business. There was, therefore, an implied promise by the Pratts to repay all that had gone into their coffers. In my opinion no account should now be ordered, and the account of the claim should be taken as correct. It has been held that an account for money had and received cannot lie in the case of an ultra vires borrowing: Sinclair v. Brougham. But the amount claimed by M.T.s is within the limit, and Pratts are bound to repay the sum. For these reasons I agree with the conclusion that the claim of the Sassoons should be rejected, and the claim of M.T.s allowed. In the result the appeal would be allowed so far as the claim of the Sassoons is concerned, and dismissed so far as the claim of M.T.s is concerned. I agree with the order for costs made by the Chief Justice.

[1938] 8 Comp. Cas. 137 (PC)

In the Privy Council

T.R. Pratt (Bombay) Ltd.

v.

M.T. Ltd.

Lord Wright, Lord Romer, Sir Lancelot Sanderson, Sir Shadi Lal and Sir George Rankin

March 11, 1938

Lionel L. Cohen and S.P. Khambatta for the Appellant.

Denys Buckley, for the Respondent.

judgement

Sir George Rankin. — In this case two appeals have been consolidated. They arise out of proceedings taken in the winding-up of a company called T.R. Pratt (Bombay), Limited (herein called "Pratts") which was registered in 1919 under the Companies Act 1913. On 22nd June 1932, it was ordered by the High Court of Bombay to be wound up. The order appealed from is dated 18th September 1935, and was made by a Division Bench on appeal from Kania J. It dealt with two separate but interrelated claims against Pratts—one preferred by E.D. Sassoon & Company, Limited, and the other by M.T. Limited (in voluntary liquidation). The claim of the former (herein called "the Sassoon Company") was to be a secured creditor of Pratts for Rs. 4,91,284 by virtue of an equitable mortgage evidenced by an indenture dated 28th February 1928, and confirmed by another indenture dated 11th August 1931. The claim of M.T. Limited was intended as an alternative to the claim of the Sassoon Company : it was that if the latter failed to establish its claim, M.T. Limited should be admitted to rank as unsecured creditors in respect of the said sum of Rs. 4,91,284. Kania J., by order dated 11th July 1934, allowed the claim of the Sassoon Company and held that the claim of M.T. Limited was valid in the alternative. The Division Bench (Beaumont, C.J. and Wadia, J.) disallowed the claim of the Sassoon Company and accepted the claim of M.T. Limited. The appellants before the Board are the Sassoon Company which appeals from the rejection of its claim and the Official Liquidator of Pratts, who disputes both claims.

From 1920 until the liquidation in 1932, Pratts was financed by loans from M.T. Limited who in turn were financed by loans from the Sassoon Company. The course of dealing between M.T. Limited and Pratts, as disclosed by their books, was for interest to be charged at 6 per cent. per annum on the half-yearly balances: on that basis the amount for which M.T. Limited claim to prove is correctly calculated. The official Liquidator resists the claim of M.T. Limited on the ground that from 1920 to 1928 the sums advanced were in excess of the borrowing powers of the directors of Pratts under Art. 73 of Table A being more than the amount of Pratts issued share capital which was five lacs of rupees. The consequences of this breach of Art. 73 need not however be considered until the claim of the Sassoon Company has first been examined. There is no dispute as to the execution of the indentures of 1928 and 1931 to both of which all three companies—Pratts, M.T. Limited, and the Sassoon Company—were parties. The main though not the sole objection taken to the Sassoon Company's claim under these instruments is that the directors of Pratts were disqualified under Section 91-B, Companies Act, from entering into them on behalf of Pratts, since they were all directors and share-holders of M.T. Limited. On this question, it is important to enquire whether the Sassoon Company is shown by the evidence to have had notice both in 1928 and in 1931 of the fact that all the directors of Pratts were interested in M.T. Limited. If not, it will be necessary to construe the indenture of 28th February 1928, to determine whether it was intra vires of Pratts and to ascertain the amount due thereunder in the events which have since happened. If however notice must be imputed to the Sassoon Company of the fact that in 1928 and 1931 Pratts' directors were share-holders and directors of M.T. Limited, then the claim of the Sassoon Company fails, and the claim of M.T. Limited must be examined.

Pratts was incorporated in 1919, and by Clause 6 of its memorandum a firm called H.M. Mehta & Co., were appointed its managing agents for 30 years in consideration of their services as promoters. A written agreement dated 5th July 1924, shows the partners of the firm to be H.M. Mehta, Mani H.M. Mehta and F.H. Mehta. Though it was intended to adopt certain draft articles of association, no articles of association were adopted or filed and Table A accordingly applied. The authorized capital consisted of 2000 preference and 3000 ordinary shares of Rs. 100 each making 5 lacs in all. The 2000 preference shares were held by nominees of H.H. the Maharaja, of Gwalior. By 1921, 2990 ordinary shares came to be held by M.T. Limited, and ten by directors of Pratts, who from 1924 onwards also held some 400 shares as nominees of M.T. Limited. The objects of the company were to deal in motor-cars and other vehicles and appliances used therewith but power was taken to hold immovable property to erect buildings and to borrow money. M.T. Limited was registered in 1920. Among the original subscribers to the memorandum appear the names of H.M. Mehta. F.H. Mehta, M.G. Parekh, C.G. Parekh, Sir Victor Sassoon and A.J. Raymond. The promoters were F.H. Mehta & Co., Limited, in which all these gentlemen were share-holders. F.H. Mehta & Co., Limited, were by the memorandum of M.T. Limited, made their permanent managing agents. By clause 3-D of the memorandum one of the objects of M.T. Limited, was to purchase the ordinary shares of Pratts. The authorized capital was twenty lacs of rupees divided into 15,000 ordinary and 5,000 preference shares of Rs. 100 each.

The Sassoon Company is a private company limited by shares. The evidence of its head accountant is that the firm of E.D. Sassoon & Co., became a limited company in 1921. Its first directors were Sir Victor Sassoon, R.E. Sassoon, Albert Raymond and another gentleman of the name of Sassoon. In 1921 Mr. A.J. Raymond was added to the Board. From 1924-28 the Board consisted of Sir Victor Sassoon, Mr. R.E. Sassoon, Mr. A.J. Raymond and Mr. Albert Raymond. In 1928 Captain Derek Fitzgerald was added. According to a return dated 13th November, 1931, Sir Victor Sassoon had ceased to be a director and a Mr. Fred Stones had joined the Board. At the end of 1920 the Sassoon Company was debited in the ledger of M.T. Limited, with the cost of 5,000 shares in the latter company. On 3rd November, 1921, the Board of the Sassoon Company resolved that Mr. A.J. Raymond as managing director be authorized to exercise all the powers that the directors themselves are empowered to exercise as a Board. On 24th April, 1924, Mr. A.J. Raymond joined the Board of Pratts. On 3rd April, 1928, the minute book of the Sassoon Company records that Mr. A.J. Raymond resigned the office of managing director and also that Mr. Albert Raymond was appointed a managing director and invested with ail powers that the directors were empowered to exercise as a Board. On 26th September, 1928, the minute book of Pratts records that Mr. A.J. Raymond was given leave of absence for six months and that Mr. Albert Raymond joined the Board of Pratts.

From 1921 onwards M.T. Limited held the whole of the ordinary shares (save ten) of Pratts and every director of Pratts was a shareholder in M.T. Limited. That the management and control of Pratts was in the hands of M.T. Limited is not in doubt as it was clearly the intention with which M.T. Limited was incorporated. According to the annual balance sheets of M.T. Limited the transactions between the three companies can be tabulated as shown hereunder. The Sassoon Company was not treated as a creditor of Pratts but of M.T. Limited and the finance obtained by Pratts was treated as obtained from M.T. Limited ;

			Due by Pratts to M. T.	Due by M.T.to Sassoons.
			Rs.	Rs.
1921	...	...	12,17,069	6,84,791
1922	...	...	13,04,758	7,99,978
1923	...	...	12,28,514	8,24,330
1924	...	...	10,33,665	8,00,010
1925	...	...	7,95,727	9,30,000
1926	...	...	7,16,200	8,96,796
1927	...	...	6,16,211	8,81,973
1928	...	...	5,48,179	7,17,214
1929	...		4,98,719	6,85,745
1930	...	...	4,94,199	6,93,140
22nd June, 1932		...	4,91,284

In 1926 the Sassoon Company was minded to obtain security from M.T. Limited which owed money to the Calcutta and Rangoon "branches" as well as to the Bombay house—the total being over 13 lacs of rupees. Mr. Albert Raymond and Sir Victor Sassoon having given "very careful consideration" to the points raised by M.T. Limited, the Sassoon Company wrote to M.T. Limited insisting upon obtaining an equitable mortgage of "your Bombay properties" (8th March, 1926), a phrase which by 15th April of that year is found to include a property belonging to Pratts. On 28th April the directors of M.T. Limited not only resolved to grant a mortgage over a property known as Collings Buildings which belonged to M.T. Limited but passed a resolution that by way of security for the nine lacs borrowed from the Sassoon Company and advanced to Pratts an equitable mortgage be created in favour of the Sassoon Company of the property known as 100-B, Hughes Road ("Pratts Building") the property of Pratts. In the end, by way of a fair division between the two properties of the total amount of M.T. Limited's indebtedness to the Sassoon Company, each building was charged for half, viz., 4½ lacs of rupees. On 14th October, 1926, the mortgage of Collings Building was completed. As the leasehold title of Pratts to Pratts Building had to be perfected the deeds were not deposited with the Sassoon Company until November 1927. After much correspondence between the Sassoon Company and M.T. Limited and their agents, F.H. Mehta & Co., Ltd., the form of the agreement was settled, and on 23rd February, 1928, two Board meetings were held, one at 5 p.m., and the other at 5-15 p.m. At the first, the Board of Pratts resolved upon the execution of the deed and authorized two of its members to affix the seal of the company. Five members were present, H.M. Mehta, A.J. Raymond, C.G. Parekh, Mani H.M. Mehta and F.H. Mehta. At the second the same persons as the Board of M.T. Limited did the same on behalf of M.T. Limited. On 28th February the indenture was executed the seal of each company being affixed by the same two directors C.G. Parekh and F.H. Mehta "pursuant to the resolution of the Board of directors". In the case of M.T. Limited, their Secretary, Mr. S.M. Chothia, 'countersigned' as part of the execution of the instrument : in the case of Pratts, the signature of the two directors was witnessed by two persons, Mr. Satgar and Mr. Krishna Rao.

In 1931 it was noticed that the articles of association which had been intended for Pratts had neither been adopted nor filed so that Table A applied to the company. As the Secretary of Pratts had not signed the indenture of 28th February, 1928, it was doubted whether the execution was a sufficient compliance with Article 76 of Table A. The Sassoon Company called for a deed of confirmation. Accordingly H.M. Mehta, Mani H.M. Mehta and F.H. Mehta, on 4th August, 1931, as the Board of Pratts, and on nth August 1931, as the Board of M.T. Limited, passed the resolutions necessary in that behalf and both seals were duly affixed by M.H. Mehta and F.H. Mehta "pursuant to the resolution of the Board of Directors" in each case. Apart from the three gentlemen of the name of Mehta, the Board of Pratts in 1931 included Mr. Albert Raymond who was a member of the Board of M.T. Limited as well as of the Sassoon Company. Mr. M.G. Parekh had died on 6th December, 1930. Mr. C.G. Parekh had been on the Board of Pratts and of M.T. Limited since 1921 he was a share-holder in M.T. Limited and of F.H. Mehta & Co., Ltd. He does not appear to have been a member of either board (Pratts or M.T. Limited) in August 1931, though he was a member of both in the previous year and again in the following year.

It may tend to clearness if the particulars as to the directorates of the three companies concerned are stated in tabular form: the figures of shares held are as at the time of the winding-up of Pratts in 1932. Since 1924 the Board of Pratts and of M.T. Limited had been constituted of the same persons as in February 1928 :

PRATTS		M.T. LTD.		SASSOONS.
Directors Shares	held	Directors Shares	held	Directors.
February 1928	1932	February 1928	1932	February 1928
Mehta, H.M.	52	Mehta, H.M.	897	Sassoon, Sir V.
Mani, H.M.	52	Mani, H.M.	335	R.E.
F.H.	52	F.H.	334	Raymond, A.J.
Parekh, M.G.	51	Parkeh, M.G.	524	Albert
C.G.	51	C.G.	524
Sassoon, Sir V.	50	Sassoon, Sir V.	100
Raymond, A.J.	50	Raymond, A.J.	200
August 1931	1932	August 1931	1932	August 1931
Mehta, H.M.	52	Mehta, H.M.	897	Sassoon, Sir V.
Mani, H.M.	52	Mani, H.M.	335	R.E.
F.H.	52	F.H.	334	Raymond, A.J.
Raymond, Albert	50	Raymond, Albert	100	Albert Fitzgerald, D.

Section 91-B was inserted into the Companies Act (VII of 1913) by Act XI of 1914 and at the time of the transactions now in question it read as follows :

"91-B. (1) No director shall, as a director, vote on any contract or arrangement in which he is either directly or indirectly concerned or interested; and if he does so vote, his vote shall not be counted : Provided that the directors or any of them may vote on any contract of indemnity against any loss which they or any one or more of them may suffer by reason of becoming or being sureties or surety for the company.

(2) Every director who contravenes the provisions of subsection (1) shall be liable to a fine not exceeding one thousand rupees.

(3) This section shall not apply to a private company."

Their Lordships are of opinion that the indentures of 28th February, 1928, and 11th August, 1931, embody a contract or arrangement in which each director of Pratts was concerned or interested within the meaning of the section by reason of his being a director and share-holder in M.T. Limited. The section is a concise statement of the general rule of equity which was fully considered and explained by the Court of Appeal (Cozens-Hardy, M. R., Swinfen Eady, L.J., and Pickford, L.J.) in Transvaal Lands Co. v. New Belgium (Transvaal) Land and Development Co., at page 503:

"Where a director of a company has an interest as shareholder in another company or is in a fiduciary position towards and owes a duty to another company which is proposing to enter into engagements with the company of which he is a director, he is in our opinion within this rule. He has a personal interest within this rule or owes a duty which conflicts with his duty to the company of which he is a director. It is immaterial whether this conflicting interest belongs to him beneficially or as a trustee for others. He is bound to do as well for his cestuique trust as he would do for himself. Again the validity or invalidity of a transaction cannot depend upon the extent of the adverse interest of the fiduciary agent any more than upon how far in any particular case the terms of a contract have been the best obtainable for the interest of the cestuique trust, upon which subject no enquiry is permitted."

Subject to the question whether the Sassoon Company had notice of the facts as to the interest of the directors of Pratts, their Lordships think, therefore, that the indentures of 28th February, 1928, and nth August, 1931, are voidable by the Official Liquidator. They are not of opinion that Section 91-B would operate to deprive of the benefit of his contract with the company a third party who had no notice of the defect in the directors' authority. This would be contrary to principle : such a person would be entitled to assume that the internal management of the company had been properly conducted : Royal British Bank v. Turquand. But on the facts of the present case their Lordships think it impossible to regard the Sassoon Company as ignorant that in any question between Pratts and M.T. Limited the former had no independent Board and indeed no single director who was not interested on behalf of M.T. Limited. The fact that one of the directors taking part in the resolution of 23rd February, 1928, was their own managing director clothed with all the powers of their own Board, is both a striking and important fact but it is not by itself the determining feature of the case. At the meeting of 4th August, 1931, no director of the Sassoon company was present. A careful and able argument was addressed to their Lordships by Mr. Romer and Mr. Russell based upon In re Hampshire Land Co. Ltd.; Ex parte Port sea Island Building Society, In re Fen-wick Stobart & Co. Ltd., and In re Payne & Co. ; Young v. Payne & Co. But the facts which affect the validity of the mortgage here in question cannot be regarded as mere itemes of information which had been acquired by an individual director privately or in his capacity as director of Pratts and which he might or might not be expected to share with his co-directors on the Board of the Sassoon Company.

The Sassoon Company had for seven years been financing Pratts though M.T. Limited, and though the latter was their debtor had determined in 1926 to obtain property of Pratts as security for their debt. Control of Pratts by M.T. Limited had been the basis of their dealings. They were interested as financiers both in the extent and in the method of this control and there had been ample time and opportunity to acquire familiarity with these matters in detail. To what extent Mr. R.E. Sassoon was active as a director is left in doubt upon the evidence but the case of the Sassoon Company would not be improved by assuming that he left the direction of the company's affairs to his co-directors. Up to 1928 Mr. A.J. Raymond and thereafter Mr. Albert Raymond was in primary charge as managing director with full powers. Sir Victor Sassoon may have exercised a less detailed supervision but was certainly an active director. He and Mr. A.J. Raymond were both original subscribers to the memorandum of M.T. Limited and to that of F.H. Mehta & Co., Limited, the manageing agents. Sir Victor himself was one of the first directors of the latter. He had been on the Board of Pratts since 1922 and Mr. A.J. Raymond since 1924. He had been on the Board of M.T. Limited since 1920 and Mr. A.J. Raymond since 1921. He went carefully into the question of security in 1926. It may safely be taken therefore that the Mehtas and the Parekhs and the interests they represented were as well known to the Sassoon directors as the Raymonds and Sassoons were to them. That M.T. Limited, which was putting forward Pratts' property as security, held all save ten of the ordinary shares in Pratts and that the directors of Pratts had for years been directors of M.T. Limited—these are facts which it was the business of the Sassoon Company as financiers to know; and which as their Lordships think the directors came to know in the course of their business. There is no reason to suppose that Sir Victor Sassoon, Mr. Albert Raymond, Mr. A.J. Raymond or Mr. R. E. Sassoon (the directors of the Sassoon company in 1928) would have any difficulty in appreciating them ; or would fail to grasp the obvious facts that the directors of Pratts had no real interests in Pratts save through their interest in M.T. Limited, and that the Gwalior nominees were leaving the control of Pratts to M.T. Limited, the holder of the ordinary share capital. These facts cannot be regarded as extraneous information beyond the cognizance of the Sassoon Company; they are facts which had a direct and important bearing on its dealings throughout. All the information which is material was really public property ascertainable without difficulty by anyone under Section 87 of the Act. In their Lordships' opinion the Sassoon Company cannot on the facts disclaim knowledge of the interest of the directors of Pratts in 1928 or 1931 and were not entitled to assume on either occasion that the provisions of Section 91-B had been complied with. No case of ratification by the preference shareholders of Pratts can be made out, and the result is that the Official Liquidator is entitled to avoid the equitable mortgage which is the Sassoon Company's sole ground of claim in the winding-up of Pratts.

The right of M.T. Limited to prove as unsecured creditors for the balance outstanding at the date of the winding up order was affirmed by both Courts in India. On the ground that from 1921 to 1928 their advances exceeded the limit imposed (by Art. 73 of Table A) upon the powers of the directors of Pratts, the Official Liquidator resists the proof, notwithstanding that at the time of the liquidation (and indeed for three years before) the balance due was within the limit. Their Lordships construe Art. 73 as limiting the directors' authority to borrow. The requirement of the article is that the directors shall so restrict their borrowing that the amount for the time being remaining undischarged shall not exceed the limit specified. The intention of the article is not satisfied by treating it as a direction that beyond the specified limit further borrowings, though not prohibited, are to be expended in reduction of existing loans. Assuming however that the directors from 1921 to 1928 exceeded their authority in so far as the advances obtained from M.T. Limited exceeded five lacs of rupees, the loans were not ultra vires of the company, and there are concurrent findings of the Indian Courts that the money was received by the company and applied for its purposes. In these circumstances it is plain that the Official Liquidator cannot reduce the balance outstanding at the date of liquidation by disputing the liability of Pratts to repay the whole sums advanced. The question of interest on the sums borrowed in excess of the limit of five lacs is however another matter. Before their Lordships, as before the Division Bench of the High Court, it was contended for the Official Liquidator that the whole account since 1920 should be revised and reconstructed so as to eliminate all charges for interest upon advances in excess of five lacs. In the High Court Beaumont, C.J., and Wadia, J., refused to entertain this argument which had not been urged before Kania, J., and was not mentioned in the memorandum of appeal to the Division Bench. They considered that the Official Liquidator was in great difficulty upon this point by reason that his counsel at the trial had stated that he did not dispute the correctness of Pratts' account in the ledgers of M.T. Limited and had consented to this being marked as an exhibit without any proof. In their discretion, they refused to entertain in Liquidator's claim—then for the first time put forward—to have an account directed upon principles which would eliminate a portion of the interest which has been charged from 1921 onwards. Their Lordships desire to take every care than an admission should not be strained. Mr. Lionel Cohen's argument upon this point merited and has received particular attention. But their Lordships do not find that the High Court has erred in this respect, and see no reason for interfering with the discretion which they have exercised. The appeal of the Official Liquidator must accordingly fail and it becomes unnecessary that their Lordships should discuss the arguments forcefully advanced by Mr. Buckley on behalf of M.T. Limited in defence of their right to interest. Their Lordships will humbly advise His Majesty that both appeals should be dismissed. The Sassoon company will pay half of the costs of Pratts in this consolidated appeal and Pratts will pay the costs of M.T. Limited.

[1995] 82 COMP. CAS. 5 (BOM.)

Shailesh Harilal Shah

v.

Matushree Textiles Ltd.

M. L. PENDSE AND A. A. CAZI, JJ.

Appeal Nos. 1001, 1002 and 1082 of 1991

APRIL 19, 20, 1993

M. L. PENDSE, J. - Matushree Textiles Limited is a public limited company incorporated under the Companies Act, 1956 (hereinafter referred to as “the Act”), and the authorised share capital of the company is Rs. 1,50,00,000 only divided into 15,00,000 equity shares of face value of Rs. 10 each. The subscribed capital is Rs. 89,00,000 divided into 8.90 lakhs shares. The shares of the company are listed on the Bombay Stock Exchange and at the relevant time, the value quoted was Rs. 40 per share. The seventh annual general meeting of the company was held on September 30, 1989, for the year ending March 31, 1989, and, consequently, the eighth annual general meeting was statutorily required to be held as per section 166 of the Act latest by December 31, 1990. The meeting was not convened by the company within the stipulated time. The eighth annual general meeting for the year ending March 31, 1990, was convened on September 30, 1991, by notice under September 2, 1991. The notice to the shareholders was sent by post on September 7, 1991, and under section 53(2)(b)(i) the Act, the notice is deemed to have been effected at the expiration of forth-eight hours after the letter is posted and accordingly, the notice is deemed to have been served on September 9, 1991.

The plaintiffs instituted Suit No. 3002 of 1991 on September 21, 1991, for a declaration that defendants Nos. 1 to 4 are not entitled to convene the eighth annual general meeting on September 30, 1991, or any other date as calling of the said meeting is ultra vires and null and void. The plaintiffs sought a declaration that notice dated September 2, 1991, convening the annual general meeting is ultra vires, invalid and illegal. The plaintiffs sought a perpetual injunction restraining the defendants from holding and/or proceeding with the annual general meeting and from in any manner giving effect or acting upon in furtherance of implementation of the resolutions to be passed at the meeting. The plaintiffs are holders of 3110 equity shares and their holding is 0.3 per cent. of the total equity subscribed. Defendant No. 1 is the company, while defendants Nos. 2 to 4 are the directors. The notice of the eighth annual general meeting sets out that the following subjects will be transacted at the meeting :

1. To receive and adopt the audited profit and loss account and the balance-sheet together with reports of directors and auditors thereon;

2. To appoint a director in place of Mr. Vimal Kumar Poddar who retires by rotation and is eligible for reappointment;

3. To appoint auditors and to authorise the board to fix their remuneration;

4. To pass an ordinary resolution appointing Mr. Santosh Kumar Poddar as a director, and

5. To pass in ordinary resolution appointing Rajnikant Mehta as director.

The plaintiffs complained that the eighth annual general meeting convened on September 30, 1991, was proposed to be held beyond the statutory period contemplated under section 166 of the Act and, therefore, the company is not entitled to call the meeting unless appropriate orders are obtained from the appropriate forum seeking extension of time. The plaintiffs further claimed that notice dated September 2, 1991, and which was deemed to have been served on September 9, 1991, for convening the meeting on September 30, 1991, does not comply with the requirement of section 171 of the Act as the duration of notice is less than 21 clear days. The plaintiffs further claimed that defendant No. 2, Santoshkumar Poddar, ceased to be a director of the company as from January 1, 1991, and his appointment as additional director pursuant to the resolution of the board of directors was bad in law. The plaintiffs claimed that on retirement of defendant No. 2, the board was not properly constituted as the minimum number of directors required is three in number. The plaintiffs further claimed that the quorum required was two and defendants Nos. 2 and 3 being real brothers and closely related, it was not open for defendant No. 3 to participate in the meeting for appointment of defendant No. 2. The plaintiffs claimed that the resolution appointing defendant No. 2 as additional director was vitiated as there was no quorum required by the Act. The plaintiffs further claimed that if the appointment of defendant No. 2 was illegal and bad, the notice convening the annual general meeting signed by defendant No. 2 is bad in law and inoperative. The plaintiffs further claimed that the company had deliberately circulated an abridged balance-sheet so as to cover up the acts of misconduct, misfeasance and malfeasance indulged in by defendants Nos. 2 to 4. The plaintiffs claimed that a perusal of the auditor’s report and notes on accounts makes it very clear that the substratum of defendant No. 1 has disappeared and defendants Nos. 2 to 4 are mismanaging the company.

The plaintiffs instituted Suit No. 3003 of 1991 in respect of the ninth annual general meeting for the year ending March 31, 1991, convened on September 30, 1991, by notice dated September 2, 1991. The notices were issued by the company to convene both the eighth and ninth annual general meetings on the same date and both the meetings were also to be held on the same date, i.e., September 30, 1991. Suit No. 3003 of 1991 challenges the right of the company to hold the ninth annual general meeting for identical reasons as set out in companion Suit No. 3002 of 1991. The notice for convening the ninth annual general meeting sets out the following agenda :

1. To receive and adopt the audited profit and loss account for the year ended March 31, 1991;

2. To declare a dividend;

3. To appoint a director in the place of Mr. Rajnikant Mehta, who retires by rotation and being eligible offers himself for reappointment;

4. To appoint auditors and authorise the board to fix their remuneration;

5. To consider whether the authorised share capital of the company be increased from Rs. 1,50,00,000 to Rs. 2,00,00,000 divided into 20,00,000 shares of Rs. 10 each;

6. To issue 8,90,000 rights shares at the face value of Rs. 10 to the existing shareholders, and

7. To authorise the board of directors to make loans to any body corporate from time to time and on such terms and conditions as the directors may deem fit, provided that the aggregate of the loans outstanding at any one time made to the company shall not exceed 30 per cent. of the aggregate of the subscribed share capital of the company.

Suit No. 3139 of 1991 was instituted on September 30, 1991, by Arunkumar Poddar and Rajkumar Bajaj and to whom the plaintiffs in other two suits are closely related and/or are friends. Arunkumar Poddar is the real brother of defendants Nos. 2 and 3, Santoshkumar and Vimalkumar Poddar, respectively. Arunkumar Poddar and Rajkumar Bajaj claimed that initially, they were directors of the company but defendants Nos. 2 to 4 illegally claimed that they had ceased to be directors by virtue of section 283(1)(g) of the Act by operation of law. It was claimed that the contention of defendants Nos. 2 to 4 that Arunkumar Poddar and Rajkumar Bajaj failed to attend the meetings and, therefore, ceased to be directors is not correct. Arunkumar Poddar and Rajkumar Bajaj, apart from seeking a declaration that they continue to be the directors of the company and all meetings of the board of directors held without their presence were illegal and invalid and resolutions non est, sought relief in respect of the eighth and ninth annual general meetings convened on September 30, 1991. The relief in respect of these two meetings was based on the same averments which were made in the two companion suits. It hardly requires to be stated that the dispute between Arunkumar Poddar and his two brothers had led to the institution of the three suits. It is required to be stated at this juncture that at one stage, the dispute between the three brothers was referred to a spiritual leader in whom the brothers had confidence but the decision of the spiritual leader was not accepted by Arunkumar Poddar and the parties decided to fight out the litigation in court.

Two notices of motion being Notice of Motion No. 2131 of 1991 and Notice of Motion No. 2132 of 1991 were taken out by the plaintiffs in Suits Nos. 3002 and 3003 of 1991, respectively, seeking interim relief restraining the company from holding and/or proceeding with the eighth and ninth annual general meetings convened on September 30, 1991. The plaintiffs also sought relief restraining the defendants from implementation of the resolution and business proposed to be transacted at the said annual general meetings. Notice of Motion No. 2158 of 1991 was taken out by Arunkumar Poddar in Suit No. 3139 of 1991 for identical reliefs. The plaintiffs applied for grant of ad interim relief pending of the disposal of the notice of motion, but the learned Trial Judge declined to grant any ad interim relief. The plaintiffs thereupon preferred appeals before the Division Bench of this court and the Division Bench granted ad interim relief only in respect of the prayer restraining the defendants from implementing the resolutions to be passed at the two annual general meetings. As the court declined to restrain the defendants from holding and proceeding with the two annual general meetings, it is not in dispute that the meetings were held on September 30, 1991. Though Arunkumar had lodged proxies prior to the date of the meetings, neither Arunkumar Poddar, nor any of the plaintiffs in the three suits attended the meetings. The resolutions proposed in the meetings were passed unanimously.

The notices of motion were taken up for hearing by the learned single judge after the date of the two meetings and the question which survived for consideration was whether the company should be restrained from implementing the resolutions which were passed. The resolutions providing for increase of share capital and issuance of rights shares and distribution of dividend could not be implemented because of grant of ad interim order. The defendants resisted the relief sought by the plaintiffs in respect of implementation of the resolutions by urging that the contentions urged by the plaintiffs in respect of the validity of the notice convening the two annual general meetings cannot be sustained. The defendants pointed out that though the statutory period contemplated by section 166 of the Companies Act for convening the annual general meeting had expired, still there is no prohibition under the Act to convene the meeting and the company at the most would be liable to a penalty for convening a meeting beyond the statutory period. The company did not seriously dispute that notice under section 171 of the Act was not of 21 clear days but of 20 days only, but urged that the provisions of section 171 of the Act are not mandatory but merely directory and the business transacted at the two meeting should not be struck down unless the plaintiffs establish any prejudice. The defendants pointed out that the plaintiffs have not even pleaded prejudice due to the shorter duration of the notice. The defendants also pointed out that the appointment of defendant No. 2 as additional director could not be invalidated and there is ample power under the Act for the existing members of the board to make the appointment. The contention of the plaintiffs that quorum was not available and, therefore, the appointment of defendant No. 2 is invalid was controverted and it was asserted that even though defendant No. 3 was related to defendant No. 2, there was no prohibition for defendant No. 3 to vote at the meting because the appointment of defendant No. 2 as additional director did not amount to contract or any other arrangement as prescribed by section 300 of the Act. The trial judge, by order dated October 15, 1991, found prima facie merit in the contentions urged to behalf of the defendants and held that the convening of the two annual general meetings did not suffer from any defect and it was not necessary to prevent the company from implementing the resolutions which were unanimously passed at the two annual general meetings. As a result of this finding, the trial judge dismissed the two motions. The third motion taken out by Arunkumar Poddar also ended in dismissal by a separate order dated October 15, 1991. It is required to be stated that in the notice of motion taking out by Arunkumar Poddar only two grounds were urged; one being that the dividend was declared in contravention of provisions of section 205 of the Act, and the second that the directors’ report does not set out the true, fair and correct picture of the company and window dressing is attempted to make a show that the company is making profits, while, in fact, the company is a sick unit. The trial judge did not find favour with the contentions of the plaintiffs.

Appeals Nos. 1001 and 1002 of 1991 are filed by the plaintiffs in Suits Nos. 3003 and 3002 of 1991, respectively, while Appeal No. 1082 of 1991 is filed by Arunkumar Poddar from order passed on Notice of Motion No. 3139 of 1991.

After the appeals were argued for some time, counsel realised that though the appeals are against orders declining to grant interim relief pending the suit, the decision would affect the result of the suit. Counsel thereupon informed that the parties do not wish to lead any evidence in Suits Nos. 3002 and 3003 of 1991 and requested that the decision in the appeals should be treated as binding on the parties as decisions in the suit and the suit should be disposed of accordingly. In Appeal No. 1082 of 1991 counsel stated that the decision in the other two appeals would be conclusive as between the parties in respect of the challenge to the holding of the eighth and ninth annual general meetings and Suit No. 3139 of 1991, will proceed in respect of the other reliefs sought by Arunkumar Poddar. We called upon the parties to file statements in writing duly signed by the parties and accordingly, the parties have filed the statements. The statements in Appeals Nos. 1001 and 1002 of 1991 are taken on record and marked as ‘X’ in the appeals, while the statement in Appeal No. 1082 of 1991 is taken on record and marked ‘X-1’. It is obvious that the parties adopted this course as the contentions raised in the plaint and on the strength of which interim relief was sought, were argued at length and the decision, one way or the other would conclude the parties at the trial and which trial is unlikely to be held within a short time. In accordance with the desire of the parties, we have heard the appeals and the decision would dispose of two suits being Suits Nos. 3002 and 3003 of 1991 while the decision would be conclusive as between the parties in the third suit, viz., Suit No. 3139 of 1991.

Shri Kapadia, learned counsel for the plaintiffs in the two suits and Shri Thakkar, learned counsel appearing for the plaintiffs in the suit instituted by Arunkumar Poddar and Rajkumar Bajaj, raised four or five contentions to urge that the eighth and ninth annual general meetings held by the company were illegal and contrary to law. The first contention urged by learned counsel is that the notice signed by defendant No. 2 as chairman and convening the meeting was illegal as the appointment of defendant No. 2, Santoshkumar, was illegal and consequently, the notice convening the meeting was not valid. It was contended that defendant No. 2 had vacated the office as director on December 31, 1990, in accordance with section 255 of the Act. The section, inter alia, provides that the directors shall retire by rotation unless the articles provide for the retirement of all directors at every annual general meeting. The meeting of the board of directors was held on January 1, 1991, and the minutes of the meetings disclose that defendants Nos. 2 to 4 were present. The fact that Santoshkumar retires on December 31, 1990, by rotation was noticed and the minutes establish that defendant No. 3 who is the real brother of Santoshkumar requested the board that Santoshkumar be appointed as an additional director for reasons set out in the minutes. The resolution appointing Santoshkumar Poddar, defendant No. 2, as additional director was passed unanimously by the two remaining directors being defendants Nos. 3 and 4. Shri Kapadia submitted that defendant No. 2 could not have been appointed as additional director at a meeting in which defendant No. 3 was present and voted because defendant No. 3 was interested in the resolution for appointment of defendant No. 2 and, therefore, was not entitled to participate in accordance with the provisions of section 300 of the Act. It was also contended that if defendant No. 3 is excluded from the meeting in respect of the resolution of appointment of defendant No. 2 as additional director, then the meeting could not have been held for want of quorum. Shri Kapadia further submitted that once defendant No. 2 retired by rotation, then the remaining two directors could not be considered as constituting a valid board of directors, the minimum number to constitute the board being three in accordance with section 252(1) of the Act. It was urged that the meeting held was invalid and the balance-sheets and notices signed by defendant No. 2 were contrary to law and, consequently, the two annual general meetings were not properly convened. Shri Cooper, learned counsel appearing on behalf of the defendants, controverted the submissions by claiming that the challenge to the appointment of defendant No. 2 as additional director is without any merit because the participation of defendant No. 3 was not in contravention of the provisions of section 300 of the Act. It was urged that the appointment of defendant No. 2 as additional director is neither a contract nor an arrangement entered into by or on behalf of the company. Shri Cooper further submitted that the contention that the board was not properly constituted is not correct but even otherwise, it amounts only to an irregularity and the notice convening the annual general meetings or the resolutions passed in those meetings cannot be invalidated in view of the provisions of section 290 of the Act and regulation 85 of Table ‘A’ of Schedule I to the Act. Shri Cooper further submitted that the challenge to the appointment of defendant No. 2 as additional director cannot be entertained at the behest of the plaintiffs and it is only the company who may be able to challenge it in an action instituted by the shareholders on behalf of the company. The suits instituted by individual shareholders cannot nullify the resolutions passed at annual general meetings and the plaintiffs cannot be permitted to defeat the rights of the shareholders for their own grievances against the board of directors.

Section 252 of the Act, inter alia, provides that every public company shall have at least three directors and section 287(2) of the Act sets out that the quorum for a meeting of the board of directors shall be one-third of the total strength or two directors, whichever is higher. Section 300(1) prescribes that no director of a company shall as a director take any part in the discussion of, or vote on, any contract or arrangement entered into by and on behalf of the company if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement. Sub-section (4) of section 300 provides that every director who knowingly contravenes the provisions of sub-section shall be punishable with fine which may extend to five thousand rupees. Shri Kapadia submitted that a director of the company is an agent and consequently, the appointment of the director amounts to a contract, the contract being between the principal and the agent. In support of the submission, reliance is placed on the decision in R. K. Dalmia v. Delhi Administration [1962] 32 Comp. Cas. 699/AIR 1962 SC 1821. In the case before the Supreme Court, Dalmia and another were prosecuted for an offence under section 409 of the Indian Penal Code and it was contended on behalf of the accused that they were not entrusted with dominion over the funds. While examining the contention, the Supreme Court referred to passages from Palmer’s Company Law and observed that directors are not only agents but they are in some sense and to some extent trustees and consequently, the accused were entrusted with dominion over the funds. Reference was also made to the decision of this court in Firestone Tyre and Rubber Co. v. Synthetics & Chemicals Ltd. [1971] 41 Comp. Cas. 377 (Bom) where it was held, while examining the provisions of section 300(1) of the Act, that it is immaterial whether the interest is a personal interest or arises out of a fiduciary capacity and actual conflict is also not necessary and the possibility of conflict is enough. It was further held that the interest or concern need not be direct, but may be indirect as the object intended to be attained by the enactment is to prevent the conflict between interest and duty which might otherwise inevitably arise. Shri Kapadia submitted that even assuming that the appointment of an additional director does not amount to a contract, still there is no escape from the conclusion that it amounts to an arrangement and referred to the decision of the Madras High Court in Hari Kishon Somani [1985] 1 Comp LJ 195. The learned single judge of the Madras High Court referred to the decision in Foster v. Foster [1916] 1 Ch 532 and held that mere appointment as the director on the board does not amount to a contract between the company and the person to be appointed. It was held that the additional director is appointed in exercise of the powers reserved with the board in that behalf in the company’s articles and consequently, the appointment would not make it a contract. The learned single judge then proceeded to examine as to whether the appointment to an arrangement and explained the earlier decision of the Madras High Court in Public Prosecutor v. T. P. Khaitan [1957] 27 Comp. Cas. 77, where Justice Rajagopala Ayyangar, as he then was, held that any interest in an arrangement within the meaning of the section, although elastic in expression, must, in the context, receive the interpretation that it must be of such a nature as to involve a conflict between interest and duty of the same type as would arise in the case of a personal pecuniary interest in the contracts of the company. The learned single judge felt that the arrangement cannot be equated with the contract and the arrangement denotes all kinds of legal relationship which are not covered by a contractual relationship and all kinds of concern or interest arising out of such an arrangement. Shri Kapadia relying upon the observations of the learned judge submitted that the appointment of additional director should be treated as an arrangement falling under section 300 of the Act and, consequently, defendant No. 3, who is the real brother of defendant No. 2, had interest in the appointment of defendant No. 2 and was, therefore, not entitled to discuss or vote on the resolution. It is not possible to accede to the submission of learned counsel. It is undoubtedly true as held by the Supreme Court that the director is an agent of the company but the assumption of the plaintiffs that the relationship of principal and agent can be created only by contract is not accurate. The relationship can be created by operation of law and in such cases, the relationship cannot to be treated as a contract. The director is treated as an agent or a trustee by operation of law and not because the company or shareholders have entered into contractual relationship with the person purposed to be appointed as a director. We are in agreement with the view expressed by the learned single judge of the Madras High Court that the appointment of additional director does not amount to a contract as contemplated by section 300(1) of the Act. It is also not possible to accede to the submission of Shri Kapadia that in any event the appointment of a director amounts to an arrangement under section 300(1). The observation of Justice Rajagopala Ayyangar that the arrangement within the meaning of section must receive the inter-relation that it must be of such a nature as would arise in the case of personal pecuniary nature in the context of the company is accurate and the expression ‘arrangement’ must bear the meaning of it as in sections 209 and 301 of other Act. Section 301 demands that every company shall keep one or more registers in which shall be entered separately particulars of all contracts or arrangements and the particulars to be entered are the date of the contract or arrangement, the names of the parties thereto, the principal terms and conditions thereof, etc. It is impossible to accept that the appointment of the director amounts to an arrangement and it is required to be entered in the register maintained by the company under section 301 of the Act. Shri Cooper pointed out that none of the companies have entered such appointments in the register maintained under section 301 of the Act because the arrangement contemplated under section 300 though directly not a contract must take the colour from the context of contractual relationship contemplated under the section. The arrangement is something skin to a contract though not strictly a contract as contemplated by the Contract Act. There is one more aspect, which cannot be overlooked. What section 300(1) prescribes is a contractual arrangement entered into “by or on behalf of the company” and it is impossible to suggest that appointment of an additional director is by and on behalf of the company. The section postulates that the contract or arrangement is by the company or on behalf of the company and that means that the company is one of the contracting parties or parties to the arrangement. The company is not a party for making an appointment of a person as director; nor is the appointment on behalf of the company. To accept the submission that the appointment of an additional director amounts to a contract or arrangement, it would be necessary to conclude that such a contract or arrangement is by or on behalf of the company, and it is not possible to do so. In our judgment, the contention that defendant No. 3 could not have participated in the discussion or vote on the resolution to appoint defendant No. 2 as additional director in view of the prohibition of section 300(1), therefore, cannot be accepted.

Shri Cooper, in this connection, submitted that in spite of the fact that defendant No. 3 was a relation of defendant No. 2 and even assuming that the appointment of defendant No. 2 as an additional director amounts to a contract or arrangement, still the participation of defendant No. 3 in the appointment can at the most be treated as an irregularity. It was urged that such an irregularity cannot be questioned by an individual shareholder but it is permissible only for the company to challenge the action or acts done in pursuance of such an irregularity. In support of the submission, reliance was placed on the decision in Narayandas Shreeram Somani v. Sangli Bank Ltd. [1965] 35 Comp. Cas. 596/AIR 1966 SC 170. The Supreme Court was examining the scope and object of section 91B of the Indian Companies Act, 1913, which, inter alia, provided that a director shall not vote on any contract or arrangement in which he is directly or indirectly interested, unless authorised by the company’s articles. The Supreme Court held that in case such a director casts his vote, the same should not be counted and his presence would not count towards the quorum. It was further held that if an interested director votes and without his vote being counted, there is not quorum, the meeting would be irregular, and the contract sanctioned at such meeting would be voidable by the company against the director and any other contracting party who has notice of the irregularity, The Supreme Court held that the company may, however, waive the irregularity and affirm the transaction. The Supreme Court then observed (headnote of AIR 1966 SC 170) :

“The contract becomes liable to be avoided by the company against the directors and any other contracting party having notice of the irregularity. The object of section 91B is to protect the company; and the company may, it is chooses, waive the irregularity an affirm the contract.”

Shri Cooper submits and in our judgment, with considerable merit, that the participation of defendant No. 3 and casting of the vote to elect defendant No. 2 as an additional director at the most was an irregularity and that cannot vitiate the appointment of defendant No. 2 or his acting as director and signing the balance sheet and notice convening the annual general meeting. The irregularity cannot to be questioned by an individual shareholder as long as the company does not question the appointment of defendant No. 2.

Shri Cooper then submitted that the acts done by defendant No. 2 as a director in signing the balance-sheet and convening the two annual general meetings are valid in spite of the alleged defect in the appointment of defendant No. 2 and relied upon the provisions of section 290 of the Act and regulation 80. Section 290 of the Act, inter alia, provides that acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification by virtue of any provision contained in the Act or in the articles. Regulation 80, inter alia, prescribes that all acts done by any meeting of the board or by any person acting as a director, shall, notwithstanding that it may afterwards by discovered that there was some defect in the appointment be valid as if such director had been duly appointed. Shri Cooper submits that in view of then provisions of section 290 and regulation 80, even assuming that the contention of the plaintiffs in respect of appointment of defendant No. 2 is correct, still the acts done by defendant No. 2 in convening the two annual general meetings are required to be treated as valid. Reliance was placed on the decision in Boschock Proprietary Co. Ltd. v. Fuke [1906] 1 Ch 148. Article 84 of the company in that case was almost in identical terms with regulation 80. There was a challenge to the resolutions passed convening the annual general meeting on the ground that the meeting was convened by de facto directors. The contention was that there was no duly constituted board which could validly convene the annual general meeting of the company, as the meeting was called by persons who were merely de facto directors. It was held that the resolution for calling the meeting was passed at the board meeting; notice of it was duly sent to every shareholder, and one of the objects of the meeting was to confirm the acts therefore done by persons purporting to act as directors, and in these circumstances, any informality in convening the meeting should be treated as a mere irregularity, and not sufficient to invalidate any resolution passed at the annual general meeting. The decision refers to several earlier decisions In Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp. Cas. 543/AIR 1968 SC 772, the scope of regulation 94 of Table ‘A’ to the First Schedule to the Indian Companies Act, 1913, and which is similar to regulation 80 of Table ‘A’ of Schedule I to the Companies Act, 1956, came up for consideration and it was decided that in the absence of evidence that the directors were aware of the disqualification that would be incurred by entering into contracts of sale or purchase or supply of goods with the company, the resolution passed by the directors in respect of such contracts cannot be invalidated. In our judgment, even assuming that the resolution appointing defendant No. 2 as additional director amounts to a contract or an arrangement as covered by section 300 of the Act, still the appointment of defendant No. 2, the most, would be irregular due to the participation of defendant No. 3, but the acts done by defendant No. 2 and especially in convening the annual general meeting cannot the struck down at the behest of some shareholders.

Shri Kapadia contended that the meeting held on June 1, 1991, by the directors of the company and at which matting, defendant No. 2, Santoshkumar, was appointed as an additional director was illegal and invalid as the board was not properly constituted. It was urged that section 252 of the Act demands that every public company shall have at least three director and on retirement of defendant No. 2 on December 31, 1990, there was no existing board as defendants Nos. 3 and 4 were the only directors left. In the absence of at least three directors, claims Shri Kapadia, there was no validly constituted board and consequently, the meeting held on January 1, 1991, was invalid and so also the resolution passed by the two directors, i.e., defendants Nos. 3 and 4, to appoint defendant No. 2 as an additional director. Shri Kapadia submitted that the trial judge was in error in referring to the provision of regulation 75 of Table ‘A’ of the First Schedule to the Act. Regulation 755 reads as under :

“The continuing directors may act notwithstanding any vacancy in the board; but, if and so long as their numbers are reduced below the quorum fixed by the Act for a meeting of the board, the continuing directors or director may act for other purpose of increasing the number of directors to that fixed for the quorum, or of summoning a general meeting of the company, but for no other purpose.”

It was contended that regulation 75 comes into the picture when the number of continuing directors are reduced below the quorum and the continuing directors can act for the purpose of increasing the number of directors to that fixed for a quorum or of summoning a general meeting Shri Kapadia submitted that on retirement of defendant No. 2, the continuing director were only defendants Nos. 3 and 4 and to constitute a quorum in accordance with section 252(2), there must be at least two directors, but defendants Nos. 3 and 4 could not constitute a quorum because defendant No. 3 was interested in the appointment of defendant No. 2 as additional director and, therefore, not entitled to participate. It was further submitted that regulation 75 can be attracted provided the continuing directors act for the purpose of increasing the number of directors to constitute a quorum or for summoning an annual general meeting and neither of those purposes was in existence on January 1, 1991, and consequently, the meeting held and at which defendant No. 2 was nominated as additional director was illegal. Shri Cooper controverted the submission by urging that notwithstanding the fact that the strength of the continuing directors has fallen to less than the minimum number prescribed by section 252(1) of the Act, it is open to the continuing directors to co-opt more directors. In support of submission, reliance was placed on the case of Sly, Spink and Co., In re [1911] 2 Ch 430. The provisions of article 88 of the articles of association of the company, in that case, enabled the continuing directors to act notwithstanding any vacancy in their body of the purpose of increasing the number of directors for constituting a quorum or of summoning a general meeting of the company but for no other purpose. The question as to whether article 88 was attracted arose for determination. The article of the company provided that the number of directors should not be less than four. The learned judge found that there were never more than three directors and the three directors carried on the business of the company from its inception. Reliance was placed on article 88 to claim that the three continuing directors could summon the meeting. The contention was not accepted by reliance on two earlier decisions where a clear distinction has been made between cases where directors too few in number could and could not act as continuing directors. It was observed (at page 437) :

“In one case you have a board insufficient in number from the first, and notwithstanding the continuing clause it was held that the board could not transact business. In the other case you have a board which was originally competent to transact business but was diminished by retirement to a number less than that provided for by the articles. The continuing clause was held to apply and those directors were held to be competent to transact the business of the company.”

The decision undoubtedly supports the contention of the defendants that the continuing directors, i.e., defendants Nos. 3 and 4, were entitled to nominate defendant No. 2 as additional director and the board was properly constituted. Reference can be usefully made to the decision in (A.) Ananthalakshmi Ammal v. Indian Trades & Investments Ltd. [1952] 22 Comp. Cas. 324/AIR 1953 Mad 467, where Mr. Justice Venkatarama Aiyar, as he then was, held that the power to co-opt a director might be exercised notwithstanding that the strength of the directorate has fallen below the minimum required and below the quorum prescribed by the articles of association. In that case, the contention was that there was only one director, there was no board of directors as required by article 75 and that, therefore, there could be no valid co-option as the power to co-opt could only be exercised by the board. In answer to the contention, reliance was placed on article 81 which provided that the continuing directors may act notwithstanding any vacancy in their body but only to ensure that number does not fall below the minimum an except in emergencies. The learned judge, after considering a large number of English decisions, referred to the decision in Sly, Spink and Co., In re [1911] 2 Ch 430 with approval. We are in respectful agreement with the view taken by the Division Bench of the Madras High Court. An identical view was taken in Fatech Chand Kad v. Hindsons (Patiala) Ltd. [1957] 27 Comp. Cas. 340 (Pepsu). It is, therefore, not possible to accede to the submission of Shri Kapadia that the board of directors was not properly constituted at the meeting held on January 1, 1991, and the continuing directors could not have nominated defendant No. 2 as an additional director.

Shri Kapadia referred to an unreported decision, delivered by a single judge of this court in Ketan Champaklal Bakshi v. Mrs. Sheela Sidhdharth Bakshi (AFO No. 929 of 1990-15-1-1991). The decision has no application because in that case, the board was never validly constituted at any stage. The learned judge held that the principle that acts done by any person acting as director are valid when the appointment was afterwards found to be defective has no application to a case where there has been total absence of appointment or fraudulent usurpation of authority and referred to the decision in Morris v. Kanssen [1946] 1 All ER 586 (HL). The decision of the House of Lords in Morris v. Kanssen [1946] 1 All ER 536 (HL) has no application to the facts of the present case, as it is not the claim of the plaintiffs that the board of directors was not properly constituted prior to January 1, 1991, In our judgment, the meeting held on January 1, 1991, was legal and valid and the action of defendants Nos. 3 and 4 as continuing directors in nominating defendant No. 2 as additional director does not suffer from any infirmity. The contention of the plaintiffs that the signing of the balance sheet and the notices convening the eighth and ninth annual general meetings of the company by defendant No. 2 was vitiated and, therefore, the resolutions passed at the meetings should be struck down cannot be accepted.

The second contention urged by Shri Kapadia is that the notices dated September 2, 1991, issued under section 171 of the Act of convening the eighth and ninth annual general meetings on September 30, 1991, were not of sufficient duration and, therefore, the resolutions passed at the meetings are illegal and inoperative. It is not in dispute that section 171(1) of the Act provides that the general meeting of the company may be called by not less than 21 day’s notice in writing. Sub-section (2) of section 171 provides that the general meeting may be called after giving shorter notice if consent is accorded thereto by all the members entitled to vote thereat. Sub-section (3) of section 171 provides that the accidental omission to give notice to, or the non-receipt of notice by, any member or other person to whom it may be given shall not invalidate the proceedings at the meeting. The two notices convening the two meetings are dated September 2, 1991, but were posted on September 7, 1991, and were received by the plaintiffs on September 12, 1991. In view of the deeming provision under section 52(b)(i) of the Act, the notice is deemed to have been served on the shareholders on September 9, 1991. Shri Kapadia submitted that the notice did not provide for clear 21 days’ period before convening of the annual general meetings on September 30, 1991. Learned counsel urged that although none of the plaintiffs attended the annual general meetings and the resolutions were passed unanimously, the provisions of sub-section (2) enabling the company to give shorter notice is not attracted because consent is not given by all the shareholders entitled to vote and that cannot be construed as only those shareholders who were present at the meeting. Shri Kapadia submitting that the provisions of sub-section (1) of section 171 of the Act are mandatory and non-compliance automatically vitiates the meetings as well meetings as well as the resolutions passed therein. Shri Cooper, on the other hand, submitted that the provisions of section 171(1) of the Act are merely directory in nature an unless and until it is established that the shorter duration of the notice has caused prejudice to substantial number of shareholders, it is not permissible to declare the meeting illegal and strike down the resolutions passed therein. The rule as to whether a particular provision can be regarded as mandatory or directory is set out in a celebrated passage from Maxwell on the Interpretation of Statutes in the following terms (at p. 364 of 11th edition of Maxwell) :

“It has been said that no rule can be laid down for determining whether the command (of his statute) has to be considered as a mere direction or instruction involving no invalidating consequence in its disregard or as imperative with an implied nullification for disobedience, beyond the fundamental one that it depends on the scope and object of the enactment. It may, perhaps, be found generally correct to say that nullification is the natural and usual consequence of disobedience, but the question is in the main governed by consideration of convenience and justices in R. v. Ingall [1876] 2 QB 199 at page 208, per Lush J, and, when that result would involve general inconvenience or injustice to innocent persons or advantage to those guilty of the neglect, without promoting the real aim and object of the enactment, such an intention is not to be attributed to the Legislature. The whole scope and purpose of the statute under consideration must be regarded. The general rule is, that an absolute enactment must be obeyed or fulfilled exactly, but it is sufficient if a directory enactment be obeyed or fulfilled substantially.”

The rule has been applied in several cases in India by the Supreme Court and it is necessary to bear in mind the object, purpose and scope of the provision to determine whether it is mandatory or merely directory. Even if a penalty is prescribed for non-compliance, that itself is not sufficient to treat the provision as mandatory. The Supreme Court in Hari Vishnu Kamath v. Ahmad Ishaque, AIR 1955 SC 233, observed (at page 245) :

“It is well-established that an enactment in from mandatory might in substance be directory, and that the use of the word ‘shall’ does not conclude the matter. This question was examined at length in Julius v. Bishop of Oxford [1880] 5 AC 214, and various rules were laid down for determining when a statute might be construed as mandatory and when as directory. They are well-known and there is no need to repeat them. But they are, all of them, only aids for ascertaining the true intention of the Legislature which is the determining factor, and that must ultimately depend on the context.”

It is, therefore, necessary to examine the object, purpose and scope of section 171 of the Act to determine whether the requirement is mandatory or directory. The recommendations of the Company Law Committee in paragraphs 75(i) and 78 of the report indicates that the period of 21 days was provided instead of 14 days as earlier fixed to enable the shareholders to campaign and canvass the proxies if they so desired. The shareholders required reasonable time to canvass opinion in favour or against the particular resolution proposed to be considered at the meeting of the company. The object, therefore, is obviously to give proper and reasonable opportunity to the shareholders for participating effectively in the meetings. The length of notice, the contents and the manner of service of notice have all been prescribed with this end in view. The fact that sub-section (2) of section 171 of the Act enables the shareholders to consent to a shorter duration of notice is an indication that the Legislature never thought the length of notice sacrosanct. Sub-section (2) of section 171 of the Act indicates that it is for the shareholders to consider and decide whether they have got necessary opportunity of properly participating in a meeting. Sub-section (3) of section 172 of the Act is and indicator that the Legislature never desired that the proceedings of the meeting should be invalidated merely because notice as prescribed under sub-section (1) of section 171 is of insufficient duration. Sub-section (3) of section 172 of the Act provides that the accidental omission to give notice to, or the non-receipt of notice by, any member not invalidate the proceedings and that clearly indicates the anxiety of the Legislature not to invalidate the proceedings, even though no prejudice whatsoever is caused to the interest of the shareholders. To hold that the provisions of section 171(1) of the Act are mandatory would lead to very unusual results making it difficult for large public companies to effectively function. A couple of shareholders cannot be permitted to defeat the interest of a large body of shareholders by raising the contention that the duration of notice was not sufficient and even though such complaints do not indicate any prejudice by service of notice of shorter duration. In our judgment, looking to the object, purpose and scope of provisions of section 171(1) of the Act, the conclusion is inescapable that the provision is merely directory and not mandatory.

Shri Kapadia relied upon some decisions in support of the submission that the provision is mandatory and absolute compliance is necessary and it is wholly irrelevant that any prejudice is caused by non-compliance. The first decision relied upon in Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp. Cas. 185/AIR 1977 SC 536, the Supreme Court examined the question whether the provisions of section 108 of the Act are mandatory or directory. Section 108 deals with transfer of shares or debentures and provides that the company shall not register the transfer unless a proper instrument of transfer duly stamped and executed by the transferor and by the transferee has been delivered to the company along with the certificate relating to the shares or debentures or along with the letter of allotment of the share certificate. The Supreme Court observed that negative, prohibitory and exclusive words are indicative of the legislative intend when the statute is mandatory. The words “shall not register” are mandatory in character and that is strengthened by the negative from of the language. The Supreme Court held that the merely because the non-compliance is not declared as an offence cannot lead to the conclusion that the section is directory. We are unable to appreciate how the decision will advance the case of the plaintiffs in claiming that section 171(1) of the Act is mandatory. The object, scope and intent of the two sections are totally different and distinct. The shares or debentures constitute property and the Legislature was particular that the transfers should not be effected unless the requirements of the section are strictly complied with. The reason is obvious that such holder of the share or debenture certificate should not be deprived of the properly right without the company being satisfied that the transfer is genuine. The decision of the Supreme Court has no application while examining the provisions of section 171(1) of the Act. Shri Kapadia then referred to a decision of a single judge of this court in Balwant Singh Sethi v. Sardar Zorawarsingh Hushnak Singh Anand [1988] 63 Comp. Cas. 310, but the reliance on this decision is not appropriate. In the case before the learned single judge the issue was whether the notice was of sufficient duration and the learned judge, after holding that the notice was not of sufficient duration, proceeded to pass the order. Neither the question as to whether the provision of section 171 of the Act was mandatory or directory nor whether the party complaining has suffered prejudice was either argued or considered and consequently, the decision has no application to the submission that the provisions of section 171 of the Act are mandatory. Such is the case with the decision in Homi Cawasji Bharucha v. Arjun Prasad [1957] 27 Comp. Cas. 6 (Pat.) on which reliance was placed. In the absence of consideration as to whether the provisions are mandatory or directory, the mere fact that the decision proceeded to invalidate the meeting on the ground of duration of notice is not sufficient to infer that the provision was held to be mandatory.

Shri Kapadia also submitted that the trial judge was in error in concluding that the provision was directory by reference to sub-section (3) of section 172 of the Act. It was urged that the sub-section refers only to accidental omission or non-receipt of notice by any member and reference was made to English decisions to urge that the omission should be accidental and not intentional. Reliance was also placed on the decision in Pearce, Duff and Co. Ltd., In re [1960] 3 All ER 222 (Ch D) to urge that all shareholders must consent to the shorter duration of notice. It is not necessary to examine this line of cases as it is not the claim of the defendants that there is an accidental omission in giving notice of shorter duration or that all the shareholders and consented to the notice being of shorter duration.

Shri Kapadia heavily relied upon the decision in N. V. R. Nagappa Chettiar v. Madras Race Club [1949] 19 Comp. Cas. 175; ILR 1949 Mad. 808 and this judgment requirement closer scrutiny. The Madras Race Club is a body corporate registered under the Companies Act of 1913 and the business and the object of the club is to carry on business of the race club and to provide amenities to the members. There were 260 club members of whom 23 were living outside British India. On October 16, 1947, notice was issued to the club members of the extraordinary general meeting convened on November 7, 1947. The Notice was posted at Guindy on October 16, 1947. The meeting held on November 7, 1947, and the resolutions passed therein were challenged by two members of the club by filing a suit for themselves and on behalf of other members of the club after obtaining permission under Order I, rule 8 of the Code of Civil Procedure. A declaration was sought that the meeting was invalid and void and all business transacted thereat was invalid, null and void and one of the contentions in support of the declaration was that the notice of the meeting contravened the provisions of section 81(2) of the Companies Act, 1913, at 21 days were not allowed between the date of the meeting and the receipt of the notice. The Trial Judge concluded that though there was some irregularity at the meeting. there was no illegality in the proceedings of the meeting and the resolutions were validly passed. The plaintiffs carried an appeal and the Division Bench held that the provision was mandatory and the meeting was not legally convened. The contention that the plaintiffs had not remained present at the meeting and, therefore, must be deemed to have waived the objection was turned down on the ground that such a plea was not specifically raised in the written statement, nor was any issue framed. While examining the contention that the shareholders by agreement can dispense with the duration of the notice, it was observed that the agreement must be of all the members of the club and it was not enough that the members present at the meeting either expressly or impliedly consented to or acquiesced in the shortening of the period of notice. According to the Division Bench of the Madras High Court, express consent of all the members to waive the notice must be established and even if the members present at the meeting agreed to waive the defect, that would not cure the defect and the meeting would not be invalid. Shri Kapadia that the decision of the Madras High Court, entirely supports the submission and it should be concluded that the two annual general meetings convened were not valid meetings and the resolutions passed therein are ineffective. With respect. We are unable to share the view of the Madras High Court.

A contrary view has been taken by two Calcutta decisions and to which we will immediately refer. The first decision is in Surajmull Nagarmull v. Shew Bhagwan Jalan [1973] ILR Cal. 207, Mr. Justice A. N. Sen, as he then was, by a detailed judgment examined the ambit and scope of sections 171 and 172 of the Act. The learned judge held that sections 171 to 186 of the Companies Act apply to meetings of the company and have been enacted for the proper holding of the meetings, the object being to ensure that the members of the company get the necessary and proper opportunity of attending and presenting their views effectively at the meetings. Examining the ambit of section 171(2) of the Act, the learned judge held that notice of a short duration in breach of provisions of sub-section (1) of section 171 of the Act does not necessarily lead to the voiding of the meeting and rendering the proceedings illegal, ineffective and void. The learned judge disagreed with the observations of the Madras High Court and held that prior consent of the members would completely render sub-section (2) of section 171 nugatory and seeking such prior consent may make waste of valuable time. The learned judge held that the consent referred to need not necessarily be obtained before calling any meeting and the consent may be obtained before or after the calling of the meeting and also at the meeting. The consent need not be express or in writing and may be implied and inferred from the conduct of the members. The learned judge then examined the provisions of section 171 and held that the provision is clearly directory and not mandatory. It was observed that the provision is not so imperative that the requirement thereof cannot be waived at all and is not mandatory in the sense that any breach thereof will necessarily and invariably invalidate the meetings and the proceedings thereat. The learned judge observed that non-compliance with the statutory requirement of section 171(1) of the Act may render the proceedings voidable an in appropriate cases any such breach may have the effect of invalidating the meeting and the proceedings thereat. We are in entire agreement with the reasoning and the conclusion reached by the learned judge in regard to the ambit of sections 171, 172 and 173(2) of the Act. The decision of the learned judge was considered and followed by the Division Bench of the Calcutta High Court in the case of Calcutta Chemical Co. Ltd. v. Dhiresh Chandra Roy [1985] 58 Comp. Cas. 275. An identical view was also taken by the Delhi High Court in the decision in Maharaja Exports v. Apparels Exports Promotion Council [1986] 60 Comp. Cas. 353. In our judgment, the Calcutta decision lays down the correct law and the view of the Madras High Court is very technical and would lead to very drastic problems in running the affairs or public limited companies. It hardly requires to be stated that public limited companies have large number of shareholders and if a couple of shareholders are permitted to challenge the legality of the proceedings of meetings on the ground of insufficiency of notice, and that too without indicating any prejudice, then it would be impossible to efficiently run the administration of public limited companies. The view taken by the Madras High Court while considering the case of members of the race club, who were few in number, did not consider the serious repercussions which would follow in the case of public limited companies having a large number of shareholders.

Shri Kapadia sounded an apprehension that in case the provisions of section 171(1) of the Act are held to be directory, then every company would hold the annual general meetings by service of notice of any duration and this would defeat the object of service of notice. The submission is not accurate because even if the provision is held to be directory, that does not confer a charter on the company to serve notice of any duration according to their choice. Even if the provision is directory, it does not permit the company to bypass the statutory requirement and in every case where a breach is complained of, the court will have to examine whether the proceedings should be invalidated or otherwise. Learned counsel felt that a company may give notice of four or five days and will try to sustain the validity of the proceedings. It is impossible to assume that the court will close its eyes to the reality and accept the claim that notice of even one day is enough. The court will not proceed to invalidate the proceedings on the ground of insufficient duration of notice only when it is established that defect is not intentional or deliberate and no prejudice whatsoever is caused too a particular case by shorter duration of notice. It would be necessary for a party complaining of insufficient duration of notice to plead prejudice caused and in case such prejudice is established, then even though the provision is directory, the court would grant the relief.

Shri Kapadia then submitted that in the present case, the notice was short by one day it has caused prejudice to the plaintiffs because the plaintiffs did not have sufficient time to canvass. In support of the submission, reference was made to a letter dated September 18, 1991, addressed to the company by attorneys of the plaintiffs. The letter demands supply of balance-sheets and profit and loss accounts. The letter sets out that Santoshkumar was appointed as additional director improperly and copies of the minutes of the meetings were sought for. On September 20, 1991, the company informed the attorneys that in view of ongoing litigation between Arunkumar Poddar and defendants Nos. 2 and 3, the attorneys should forward letters of authority of the clients authorising the attorneys to represent them. On September 25, the demand was reiterated on behalf of the plaintiffs and on September 27, 1991, the company informed the plaintiffs to come and take inspection of all the documents. From this correspondence, it was contended by Shri Kapadia that the company deliberately suppressed the relevant documents from the plaintiffs and that has caused prejudice to the plaintiffs as the plaintiffs did not have sufficient time to canvass against the proposed resolutions to be moved at the annual general meetings. Shri Cooper controverted the submission by pointing out that apart from the fact that none of the plaintiffs remained present at the annual general meetings and raised any objection to the resolutions which were unanimously passed, no complaint of prejudice whatsoever is made in the plaints. The only averment in paragraph 11 of the plaint in Suit No. 3002 of 1991 is that the defendants have deliberately circulated an abridged balance-sheet so as to prevent acts of misconduct, misfeasance of the defendants coming to light. It is further averred that revenue a glance at the auditor’s report and notes on accounts makes it clear that the substratum of the company has disappeared and defendants Nos. 2 to 4 are mismanaging the company and treating the company as their private assets. It is obvious that the plaintiffs never complained of any prejudice suffered because of shorter duration of notice and the contention urged by Shri Kapadia with reference to the correspondence is imaginary. In Parashuram Detaram Shamdasani v. Tata Industrial Bank Ltd., AIR 1928 PC 180, it was held that the shareholders knowing the work to be transacted at the meeting and remaining absent cannot subsequently complain about insufficiency of notice for convening the meeting. In our judgment, the plaintiffs have not suffered any prejudice whatsoever by the notice being of only 20 clear days instead of 21 clear days and it is obvious that the plaintiffs are set up by Arunkumar Poddar who has personal quarrels with defendants Nos. 2 and 3 who are his real brothers. The shareholding of the plaintiff is extremely negligible being 0.3 per cent. and it would be entirely unreasonable to invalidate the business transacted at the annual general meeting at the behest of these few shareholders and to the detriment of a large body of shareholders who had unanimously approved the resolutions moved at the meetings. We enquired from learned counsel as to which resolution passed at the meeting affects the interest of the plaintiffs and the grievance seems to be only about the issuance of right shares after increasing the authorised share capital and conferring power on the board of directors to make loans to any body corporate. The issuance of the right shares to all the existing shareholders can by no stretch of imagination affect the interest of the shareholders, nor would it change the controlling pattern of shareholding of the company. The grievance about conferring power upon the board of directors to make loans to bodies corporate is the apprehension that the directors may give loans to firms and companies in which they have interest. More about it at a later stage, but the prejudice complained of seems to be only of Arunkumar Poddar who has personal complaints against defendants Nos. 2 and 3 and we are not at all impressed by the claim made by learned counsel that service of notice of 20 clear days has caused prejudice.

Shri Kapadia then submitted that the proceedings held at the two annual general meetings should be invalidated because there was no strict compliance with the provisions of sub-section (3) of section 217 of the Act. The sub-section, inter alia, provides that there shall be attached to every balance-sheet laid before a company in general meeting, a report by its board of directors, with respect to the state of the company’s affairs. Sub-section (3) demands that the board shall give the fullest information and explanation in its report on every reservation, qualification or adverse remark contained in the auditor’s report. Referring to the eighth annual report, learned counsel urged that the auditors had made certain remarks and the information supplied by the company was not sufficient and, therefore, it was not possible to pass the accounts at the annual general meeting. We are unable to find any merit in the contention. The directors’ report clearly recites that information as per section 217 of the Act is supplied and notes Nos. 5 to 8 on which counsel laid stress refer to estimated gratuity and liability, sundry debts, and interest on overdue bills and, in our judgment, the information supplied cannot be said to be insufficient so as to make it impossible for the shareholders to pass the accounts.

Shri Kapadia then submitted that section 173 of the Act demands that in the case of an annual general meeting, a statement setting out all material facts connected with each item of the business should be annexed to the notice of the meeting. It was contended that the provisions that the explanatory statement should be annexed to the notice is mandatory as held by the single judge of this court in Laljibhai C. Kapadia v. Lalji B. Desai [1973] 45 Comp. Cas. 17 (Bom.) and the decision in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton & Jute Mills Co. Ltd. [1964] 34 Comp. Cas. 777 (Guj.)/AIR 1965 Guj. 96. Learned counsel urged that item 8 of the ninth annual report sets out a resolution conferring power upon the board of directors to make any loan to any body corporate from time to time on such terms and conditions as the directors may deem fit provided that the aggregate of the loans outstanding at any one time made to the company shall not exceed 30 per cent. of the aggregate of the subscribed share capital. The explanatory note to item No. 8 sets out that in the course of business, the company may have to make loans or deposits, etc., to bodies corporate in excess of the limits and section 370 of the Act provides that no company shall make any loan or loans to any body corporate in excess of the limits fixed by the Central Government unless making of such loans has been previously authorised by a special resolution of the lending company. The explanatory note recites that the company may have surplus funds during off season which the board of directors may utilise for giving loans and it is, therefore, advisable in the interest of the company to obtain the consent of the members by special resolution. Shri Kapadia complains that the explanation is a tricky one because the claim that the company may have surplus funds is totally false. Reference was made to the minutes of the meeting held on January 1, 1991, at which meeting Santoshkumar was appointed as additional director. One of the reasons set out for appointing Santoshkumar was that the business of the company of manufacturing cotton printed sarees and texturised/twisted yarn and P.O.Y. was undergoing recession and the company under the circumstances of the crisis has trying times ahead and Santoshkumar can help the company to come out of the crisis. Shri Kapadia submits that this reason is indicative of the fact that the financial state of the company was not healthy and if that is so, it is impossible to imagine that the company may have surplus funds as set out in the explanatory statement. It was urged that the power was sought by the board of directors only with a view to siphon away the funds of the company to the concerns in which defendants Nos. 2 and 3 have control and interest. Learned counsel urged that the fact that the company did not give a truthful explanation is sufficient to invalidate the resolutions passed at the meetings. It is not possible to find any merit in the contention for more than one reason. In the first instance, the claim that the financial health of the company was not sound cannot be accepted merely because in the meeting held on January 1, 1991, one of the reasons given for nominating Santoshkumar was to overcome the recession in the market and which was due to the Gulf War and money conditions being tight. It is not correct that the financial condition of the company was not sound because one of the resolutions at the ninth annual general meeting was to declare a divided. Shri Kapadia submitted that the company wants to disburse the dividend not out of the profits but out of the assets of the company and declaration of dividend was a ruse to mislead the shareholders. It is not possible to accept the claim made on behalf of the plaintiffs because nothing prevented the plaintiffs from remaining present at the annual general meeting and raising objections or to impress upon other shareholders the claim of mismanagement. Secondly, the assumption of the plaintiffs that the board of directors would siphon off the funds to the concerns of defendants Nos. 2 and 3 is without any foundation. There is not a whisper of complaint in the plaints that defendants Nos. 2 and 3 have previously siphoned away the funds of the company or had given loans to bodies corporate in which these defendants have any interest. Save and except the averment made in paragraph 11 to which reference is made hereinabove, the plaintiffs have not pointed out any act of defendants Nos. 2 and 3 to create suspicion that resolution No. 8 at the ninth annual general meeting was for the purpose of enabling the board of director to grant loans to the own concerns. Thirdly, the explanatory statement also recites that the surplus funds may be available during the off season and the conferring of a power cannot necessarily lead to the inference that the power was to be misused by the board of directors. Again, it is not permissible for the plaintiffs who were fully conscious of the business to be transacted at the annual general meeting to remain absent and thereafter complain of insufficiency of information or tricky explanation. In our judgment, the challenge to the business conducted in the meetings is without any substance and there is no reason to nullify the resolutions passed at the annual general meetings.

It is required to be mentioned that though the plaintiffs had claimed before the trial court that the company had no authority to convene the eighth annual general meeting after December, 1990, the said contention was not pressed by Shri Kapadia the during the arguments. The trial judge negatived the contention by holding that there is no prohibition on holding annual general meeting after the statutory period and the only consequence is of penalty payable by the company. In the absence of any arguments on this aspect, it is not necessary to examine the finding. In our judgment, the plaintiffs have not made out any case for grant of relied and accordingly, the appeals as well as Suits Nos. 3002 and 3003 of 1991 must fail in accordance with the consent statements field by the parties.

Accordingly, Appeals Nos. 1001 1002 and 1082 are dismissed with costs. In view of the consent statement filed by the parties in Suits Nos. 3002 and 3003 of 1991 both the suits are dismissed with costs. The findings recorded by this judgment are binding upon the plaintiffs in Suit No. 3139 of 1991 in view of the consent statement filed by the parties to this suit.

At this stage, Shri Kapadia orally applies for leave to appeal to the Supreme Court. Prayer refused. Shri Kapaida applies for continuation of interim relief on the ground that the interim relief has continued from September, 1991. We are not inclined to continue the interim relief because the complaint about enforcement of the resolutions passed at the two annual general meetings is principally in respect of only two items, viz., (a) issuance of rights shares, and (b) conferring power upon the board of directors to give loans. We do not find that even if these two resolutions are enforced, any prejudice whatsoever will be caused to the plaintiffs. The rights shares are issued to the existing shareholders at par and issuance of such shares is not likely to affect the controlling pattern of the company. The apprehension that the shareholders may transfer the shares and interests of third parties may come in is without any merit. The conferring of power on the board of directors to grant loans to bodies corporate also is not going to affect the interests of the plaintiffs as there are several restrictions prescribed under the Act on the granting of loans. Accordingly, the prayer for continuation of interim relief is rejected.