Section 314
DIRECTORS,
ETC., NOT TO HOLD OFFICE OR PLACE OF PROFIT
[1959]
29 COMP. CAS. 162 (Punj&Har)
HIGH COURT OF PUNJAB
V.
Akal Transport Co.
(P.) Ltd.
FALSHAW
AND DULAT, JJ.
AUGUST
6, 1958
FALSHAW, J.
- This is an appeal by the State
against the order of the Additional District Magistrate, Jullundur, acquitting
the accused, the Akal Transport Company Private Limited, which was summoned
through its manager, Kishori Lal, in a complaint filed by the Register of Joint
Stock Companies, Punjab, under section 303(2) of the Companies Act, 1956.
The
allegations in the complaint are that in spite of the fact that no special
resolution has been adopted by the company under section 314(I) of the
Companies Act, nine directors of the company named in the margin were either
holding offices of profit under the company, or else relations of theirs were
employed in the company, and, therefore, the said directors must be deemed to
have vacated their offices as directors with effect from the 1st of April,
1956, when the Act came into force, and no return in the prescribed form
showing the changes in the board of directors had been filed in the office of
the Registrar within fourteen days of the change, or in fact apparently up to
the time when the complaint was filed in June, 1957. It was further mentioned
that special resolution for confirmation of the appointment of the relatives of
the directors concerned had twice been rejected by the shareholders of the
company in meeting held on the 21st of May, 1956, and the 27th of March, 1957.
Two
preliminary objections were raised on behalf of the accused company, the first
being that the complaint was liable to be dismissed under section 247 of the
Criminal Procedure Code because the Registrar who was the complainant was not
attending the court in person on each hearing and secondly because the
directors of the company, who were in office when the Act came into force on
the 1st of April, 1956, were saved by the provisions of section 652 of the Act.
The first of
these objections was overruled by the learned Magistrate on the ground that
section 247 gave him a discretion to dispense with the personal attendance of
the complainant and he ordered that the personal attendance was not necessary
in a case of this kind, but he accepted the second objection and acquitted the
accused.
The relevant
provisions of the Companies Act are as follows :
"314.
(I) Except with the
previous consent of the company accorded by a special resolution, no director
of a company, 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, except that of managing director, managing agent, secretaries
and treasurer's, manager, legal or technical adviser, banker, or trustee for
the holders of debentures of the company, -
(a) under the company; or
(b) under any subsidiary of
the company, unless the remuneration received from such subsidiary in respect
of such office or place is paid over to the company or its holding company.
(2) If any office or place
of profit under the company or a subsidiary thereof is held in contravention of
the provisions of sub-section (I), the director concerned shall be deemed to
have vacated his office as director with effect from the first day on which the
contravention occurs; and shall also be liable to refund to the company any
remuneration received, or the monetary equivalent of any perquisites or
advantage enjoyed by him, in respect of such office or place of profit."
"303.
(I) Every company shall
keep at its registered office a register of its directors, managing director,
managing agent, secretaries and treasurers, manager and secretary, containing
with respect to each of them the following particulars, that is to say :-
.........
(2) The company shall,
within the periods respectively mentioned in this sub-section, send to the
Registrar a return in the prescribed form containing the particulars specified
in the said register and a notification in the prescribed form of any change
among its directors, managing directors, managing agents, secretaries and
treasurers, managers or secretaries or in any of the particulars contained in
the register, specifying the date of the change.
The period
within which the said return is to be sent shall be a period of twenty-eight
days from the appointment of the first directors of the company and the period
within which the said notification of a change is to be sent shall be
twenty-eight days from the happening thereof.
(3) If default is made in
complying with sub-section (1) or (2), the company, and every officer of the
company who is in default, shall be punishable with fine which may extend to
fifty rupees for every day during which the default continues."
Section 652
which was held by the learned Magistrate to save the defendant company reads :
"652. Any person appointed
to any office under or by virtue of any previous companies law shall be deemed
to have been appointed to that office under or by virtue of this Act."
The question
is therefore whether in the case of a company which was already in existence on
the 1st of April, 1956, when the old Act of 1913, was superseded by the new
Companies Act, and in which offices of profit in or under the company were held
by directors themselves or by relations of theirs, section 652 will dispense
with the necessity for having the holding of these offices of profit by
directors or their relations approved by a statutory majority of the members of
the company by means of a special resolution as provided in section 314,
immediately or as soon as possible after the coming into force of the new Act.
It would seem
that before the new Act came into force there was nothing illegal in the
holding of offices of profit in the company by directors themselves or their
relations and the obvious intention of the new provisions contained in section
314 of the Act was to stamp out this practice, which quite evidently is liable
to abuse, and no doubt has been abused in the past, and may well produce a
state of affairs not in the best interest of the members of the company as a whole.
I do not think that it could possibly have been the intention of the
Legislature to allow this state of affairs to continue where it existed in
companies already working when the new Act came into force. In the
circumstances I consider that the only effect of section 652 is that it is not
generally necessary for companies which were functioning before the new Act
came into force to re-elect their board of directors of other officials and
that the existing directors and officials could ordinarily continue in office
as before, but on the coming into force of the new Act it immediately became
necessary for those companies in which offices of profit were held by directors
or their relations to have this state of affairs ratified by the acceptance of
a special resolution by a meeting of the company. I thus consider that the
accused company in the present case was wrongly acquitted in the preliminary
stages on the strength of the provisions of section 652 of the Act and,
therefore, the appeal of the State must be accepted and the order of acquittal
set aside.
This is not,
however, to be taken as expressing any opinion as to whether any offence has or
has not been committed by the accused company in this case, in which the true
facts still remain to be established by evidence, and the law applicable to the
facts as found still remains to be determined. I would accordingly accept the
appeal and order that the trial of the accused company should proceed according
to law.
DULAT, J. - I
agree.
Appeal
allowed.
allahabad
high court
companies act
[2005] 58 scl 97 (all.)
HIGH COURT OF ALLAHABAD
v.
Principal Officer C/o Arkay Wires (P.) Ltd.
R.K. Agrawal and
Prakash Krishna, JJ.
IT Reference No. 175 of
1981
October 29, 2004
Selling and buying agents receiving commission and/ or
salary are also hit by provisions of section 314(1) of Companies Act, 1956
Section 314, read with section 294, of the
Companies Act, 1956 - Directors - Not to hold office or place of profit -
Whether words ‘office or place of profit’ in section 314(1) include selling and
buying agents receiving commission and/or salary - Held, yes - Company entered
into agreements with two firms for sale of its products in a particular State -
However, they had not been given exclusive right to sell all products of
company and, further, Central Government had not declared any one of them as
sole selling agent of company under section 294(6) - Whether, therefore, their
appointment did not come within purview of section 294(2) - Held, yes - Whether
however, since some of partners of two firms were related to directors of
company, their appointment even as selling agents amounted to holding an office
of profit and was hit by section 314 - Held, yes
Words and phrases : ‘Office or place of profit’
as occurring in section 314(1) of the Companies Act, 1956
Facts
The respondent-company entered into a selling
agency agreement with a firm T.S. corporation (T.S.) whereby the said firm got the
selling agency right for sale of products manufactured by the company for the
State of Uttar Pradesh. The said firm was to canvass and secure orders for the
products manufactured by the company. Later on, the company also started
manufacturing other products and for promoting the sales of those products, it
entered into another agreement with K.W. appointing the latter as its selling
agent for the State. Both the aforesaid agreements provided that said agents
would be paid by the company & commission of 1 per cent on all sales
effected by the company of the goods manufactured by it either to market
parties or to the Government departments. However, none of the selling agency
agreements was put up by the company for approval in its first annual general body
meeting held immediately after the execution of the agreement. During the
assessment proceedings, the Assessing Officer disallowed deduction of the
selling agency commission.
On appeal, the AAC held that though the
selling agency firms were rendering services to the respondent-company, the
payments in question were not allowable deductions under section 37 of the
Income-tax Act, 1961 because the said selling agents were, in fact, sole
selling agents and the agreements entered into with them were violative of the
provisions of sections 294(2) and 314(1)(b). On further appeal, the Tribunal
held that the agreements in question were not sole selling agency agreements
and, thus, provisions of section 294(2) had not been violated. Further they
were also not violative of section 314.
On reference:
Held
From the provisions of
sections 294 and 314, it is clear that a company cannot appoint a sole selling
agent for any area for a term exceeding five years at a time and the agreement
for appointment of sole selling agent has to be got ratified/approved by the
company in its first general meeting held after the date on which the
appointment is made, failing which it shall cease to be valid within the date
of the first general meeting and further, a director or any of his relative
where such director or the relative is partner in the firm cannot hold any
office or place of profit except with the consent of the company accorded by a
special resolution. The phrase ‘sole selling agent’ has not been defined under
the Act. In common parlance and in ordinary sense, it would mean the exclusive
and sole right to sell all the products of the principal to the exclusion of
all others. In the instant case, two companies under the separate agreements
had been described as selling agents and not sole selling agents. Further, they
had not been given exclusive right to sell all the products. Specific mention
of the word ‘for any area’ and omission to mention ‘any goods’ makes it
abundantly clear that there can be only one sole selling agent in an area in
respect of all the goods dealt with by the company. Further, the Central
Government had not declared under section 294(6) any one of the selling agents
as the sole selling agent of the company. Thus, they could not be treated as
sole selling agents. [Para 9]
Under the agreements T.S. as
well as K.W. had not been appointed sole selling agents and were only
distributors/selling agents in respect of the specified goods. Their
appointment did not come within the purview of section 294(2). Even otherwise,
as held by the Bombay High Court in the case of Arantee Mfg. Corpn. [1967] 2
CLJ 54, as the agreement did not contain a clause that the agreement would
cease to be valid if it was not approved by the company in general meeting held
after the date on which the appointment was made, it was void ab initio. [Para
11]
The words ‘office or place of
profit’ occurring in section 314(1) does include selling and buying agents
receiving commission and/or salary. As in the instant case, the two firms which
had been appointed as the selling agents consisted of either the directors or
the relatives as their partners, a special resolution was required to be passed
by the company for their appointment in the absence of which they could not
have been appointed. [Para 12]
As there was no dispute that
some of the partners of the two firms were related to the directors of the
company, the appointment even as selling agents amounted to holding an office
of profit and was hit by section 314. [Para 16]
Cases
referred to
Arantee Manufacturing Corpn. v. Bright Bolts
(P.) Ltd. [1967] 2 Comp. L.J. 54 (para 4), Godavari Sugar Mills Ltd. v. CIT
[1963] 49 ITR 206 (Bom.) (para 5), Arantee Mfg. Corpn. v. Bright Bolts (P.)
Ltd. AIR 1967 Bom. 440 (para 5), Nawabganj Sugar Mills Co. Ltd. v. CIT [1972]
86 ITR 44 (SC) (para 6), Lachminarayan Madan Lal v. CIT [1972] 86 ITR 439 (SC)
(para 5), Shalagram Jhajharia v. National Co. Ltd. [1965] 35 Comp. Cas. 706
(Cal.) (para 10), Kerala Chlorates & Chemicals Ltd. v. Registrar of
Companies [1988] 63 Comp. Cas. 175 (Ker.) (para 10), Globe Motors Ltd. v. Mehta
Teja Singh & Co. (Agencies) [1984] 55 Comp. Cas. 445 (Delhi) (para 10), and
Firestone Tyre & Rubber Co. v. Synthetic & Chemicals Ltd. [1971] 41
Comp. Cas. 377 (Bom.) (para 12).
Dhananjay Awasthi for the Applicant. S. Chatterjee for
the Respondent.
Judgment
R.K Agrawal, J. - The Income Tax Appellate Tribunal,
Allahabad has referred the following two questions of law under section 256(1)
of the Income-tax Act, 1961, hereinafter referred to as the Act, for opinion to
this Court.
“1. Whether on the facts and in the
circumstances of the case, the Income-tax Appellate Tribunal was legally
justified in its opinion that the firms M/s. Techno Sales Corporation and M/s.
Kumar Wire and Conductors were not sole selling agents of the company and,
therefore, the provisions of section 294(2) were not attracted?
2. Whether on the facts and circumstances of
the case, the Tribunal was legally correct in holding that the provisions of
section 314(1)(b) of the Companies Act, 1956 were not applicable?”
2. Briefly stated the facts giving rise to the
present reference are as follows:
The assessment year involved is 1973-74. The
respondent-assessee is a Private Limited Company, hereinafter referred to as
the Company. Its previous year for the assessment year 1973-74 commenced on 1st
July, 1971 and ended on 30th June, 1972. It paid selling agency commission to
its selling agents as follows:—
1. M/s. Techno Sales Corporation Rs. 1,02,361
2. M/s. Kumar Wires & Conductors Rs. 16,992
The Company has been manufacturing galvanized
iron wire, mild steel wire on barbed wire from the previous year corresponding
to assessment year 1968-69. On 9th August, 1968, it entered into a selling
agency agreement with a firm styled as M/s. Techno Sales Corporation, Swarup
Nagar, Kanpur whereby the said firm got the selling agency right for sale of
mild steel wires, galvanized wires and other wire products manufactured by the
Company for the State of Uttar Pradesh. The said firm was to convass and secure
orders for the products manufactured by the Company to the best of its ability
and experience and for rendering these services, the firm was to be paid a
commission of 1 per cent on all sales effected by the company of the goods
manufactured by them either to market parties or to Government departments.
This agreement was to remain in force for a period of five years from 9th
August, 1968 and during this period the firm was not to convass for or act as
selling agent for goods of the same kind for any other manufacturer. During the
accounting period under consideration i.e., 1-7-1971 to 30-6-1972, the
constitution of the selling agency firm was as follows:—
|
|
1. |
Shri Santosh Kumar
s/o Shri Kishan Sarraf |
15% |
|
|
2. |
Smt. Harmukhi Devi
w/o Shri Kishan Sarraf |
15% |
|
|
3. |
Shri Sudershan Kumar
s/o Shri R.K. Agarwal |
15% |
|
|
4. |
Smt. Shushila Sarraf
w/o Shri Vijay Kumar |
15% |
|
|
5. |
Smt. Shashikanta
Bansal w/o Shri M.C. Bansal |
10% |
|
|
6. |
Master Jitender Mohan
s/o Shri H.K. Sarraf |
15% |
Many of the partners in the aforesaid firm
were related to the directors of the respondent as is clear from the following
list of the directors during the relevant previous year:—
1. Shri R.K. Agarwal s/o Shri Mohan Lal.
2. Shri H.K. Sarraf s/o Shri Kishan Sarraf.
3. Smt. Sushila Devi w/o Shri R.K. Agarwal.
4. Shri M.C. Bansal s/o Shri Pritam Chand.
3. It appears
that the selling agency agreement was not put up by the company before the
general meeting of its shareholders which was held immediately after the
execution of the said agreement or even thereafter till the Income-tax Officer
completed the assessment for the year under consideration. It was put up before
the general body meeting only thereafter on 28th June, 1975, when resolution
was passed confirming the appointment of M/s. Techno Sales Corporation as the
selling agency of the respondent company. However, the proposal of the
appointment of the aforesaid firm as selling agent was passed in the meeting of
the Board of Directors of the Company held on 10th January, 1969. It may be
mentioned here that the payment of commission of the aforesaid selling agency,
namely, M/s. Techno Sales Corporation by the Company in the previous years
corresponding to assessment years 1970-71, 1971-72 and 1972-73 was not objected
to by the Income-tax Officer during the course of the said assessment
proceeding. However, he raised the objection to the payment of commission in
the course of assessment proceedings under consideration. During the previous
year relevant to the assessment year in question, the Company also started
manufacturing aluminium conductors styled AAC & ACSR. For promoting the
sales of the aforesaid goods it appointed M/s. Kumar Wires and Conductors as
its selling agent for the state of Uttar Pradesh on 1st April, 1972 pursuant to
an agreement. For the services rendered by the said agent, Company was to pay a
commission at the rate of 1 per cent on all sales of aluminium conductors either
to market parties or to the Government Departments. Even this selling agency
agreement was not put up by the Company for the approval of its 1st Annual
General Body Meeting held immediately after the execution of the said contract
or even thereafter till the assessment for the year was completed by the
Income-tax Officer. It was placed before the General Body Meeting for its
approval in its meeting held on 28th June, 1975. The Board of Directors had,
however confirmed the appointment of the said agency vide resolution dated 25th
January 1972. The following persons were the partners of M/s. Kumar Wires and
Conductors:—
1. Shri H.K. Sarraf.
2. Smt. Sushila Devi Agarwal
3. Shri Vijai Kumar
4. Saroj
5. Shri Sudershan Kumar
6. Smt. Harmukhi Devi
3.1 It may be
mentioned here that M/s. Techno Sales Corporation were doing business of
selling agents not only for Company but others also. In fact, they had been
doing business since assessment year 1965-66 onwards for almost three years
prior to their agreement with Company. From the various documents and
correspondence placed on record by the respondent company it transpired that
M/s. Techno Sales Corporation were attending to opening of tenders on behalf of
the Company, obtaining the statements of prices, terms and conditions of
various tenders etc. and furnishing such information to Company. They were also
following up the collection for and on behalf of the Company from the various
Government Departments. The firm of Kumar Wires & Conductors, Kanpur were apart
from the commission received from Company had income from wire standing
operations, which it was doing for and on behalf of the Company. During the
course of the assessment proceedings, the Income Tax Officer examined the
question of the deductibility of the selling agency commission while computing
the total income of the Company and came to the conclusion that the payments in
question could not be allowed as legitimate business deductions for the
following reasons:—
1. That the selling agency firms did not render
any services to the assessee-company to justify the aforesaid payments.
2. That the agreement with M/s. Techno Sales
Corporation was a sole selling agency agreement and inasmuch as this agreement
was not ratified in the first Annual General Body Meeting of the company held
after the execution of the said contract, it was void ab initio in terms of
sub-section (2) of section 294 of the Companies Act, 1956.
3. That the agreement was also hit by the
provisions of section 314(1)(b) of the Companies Act, and
4. That, therefore, the payments to the selling
agents were not allowable as business expenditure under section 37 of the
Income-tax Act, 1961.
4. The Company
feeling aggrieved preferred an appeal before the Appellate Assistant
Commissioner, who after examining the evidence on record, gave the finding that
the selling agency firms were rendering services to the respondent company, but
nevertheless he held that the payments in question were not allowable
deductions because the said selling agents were, in fact, sole selling agents
and inasmuch as the agreement entered into with them were violative of the
provisions of sub-section (2) of section 294 and sub-section (1)(b) of section
314 of the Companies Act, 1956, the payments made to them could not be allowed
as legitimate business expenditure under section 37 of the Act.
Feeling aggrieved by the said order, the
Revenue as well as the assessee preferred separate appeals before the Tribunal.
Before the Tribunal the two Members differed in their opinion and, therefore,
the matter was referred to the Third Member, who after going to the various
clauses of the agreement had held that the selling agency agreement in question
was not a sole selling agency agreement. According to the third member the provisions
of sub-section (2) of section 294 of the Companies Act had not been violated by
the Company and they were also not violative of section 314 of the Companies
Act, 1956. Apart from the fact that the Third Member had held that the
agreement in question was not sole selling agency agreement nor was violative
of section 314 of the Companies Act, he was of the opinion, that if the
agreements were held to be sole selling agency agreements they would be void
and of no effect following the decision of the Bombay High Court in the case of
Arantee Mfg. Corpn. v. Bright Bolts (P.) Ltd. [1967] 2 Comp. L.J. 54. The
Tribunal in conformity with the opinion expressed by the Third Member allowed
the appeal filed by the respondent.
5. We
have heard Sri Dhananjay Awasthi, learned Standing Counsel appearing for the
Revenue and Sri S. Chatterjee learned counsel for the Company.
Learned counsel for the Revenue submitted that
the agreements in question are sole selling agency agreements and reiterated
the submissions made by the Department before the Tribunal, which are in
following terms:—
“1. That mention of the phrase “sole selling
agent” in the agreement of selling agency was not necessary to determine as to
whether or not a selling agent was a sole selling agent; all the facts and
attendant circumstances had to be looked into for determining the true nature
of the selling agent.
2. That M/s. Techno Sales Corporation
received commission with regard to all the sales of steel wire products in the
State of Uttar Pradesh and that went to show that they were sole selling
agents. Similarly Kumar Wires & Conductors were sole selling agents of the
assessee in U.P. with regard to aluminium conductors.
3. That it was wrong to say that the sole
selling agency agreement had to be exclusive only with reference to territory;
it could be with reference to the different types of products also giving
exclusive rights to sell the specified products in a given territory.
4. That the products marketed through M/s. Techno
Sales Corporation and M/s. Kumar Wires & Conductors were not similar; they
were altogether different products; one of steel wire simpliciter, the other
being aluminium conductors. They were not only made of different metal; their
use and nature were also different.
5. That the selling agency agreements were
covered by the extended definition of “office or place of profit” as given in
sub-section (3) of section 314 of the Companies Act. In support of the above
proposition, reliance was placed on the following observations at page 577 of
2nd edition of Dutta’s Company Law:—
“The appointment of Managing Director
or a Director of company or its relative as sole selling agent is to be
regarded as office of profit under the company within the meaning of section
314 of the Act and requires a special resolution according consent of the
company for such appointment.”
6. That in view of the above position, M/s.
Techno Sales Corporation and M/s. Kumar Wires and Conductors have to be deemed
to have vacated their offices of sole selling agents under section 314 on the
dates next to the date of the first General Meeting held after the dates of the
respective agreements as their appointments were not approved therein, and that
later ratification of the agreements by the General Body Meeting on 28th June,
1975 was of no avail for what was void ab initio could not be validated by a
subsequent act of ratification.
7. That for determining the total income of
the Company, the Income-tax Officer could enquire whether certain payments
contravened the provisions of the Companies Act and whether or not they were
expenses in fact, incurred by the company and whether the same were incurred as
a trader or otherwise, and while doing so, the Income-tax Officer was not bound
to consult the Registrar, Joint Stock Companies or any other authority under
the Companies Act, for it was the sole prerogative of the Income-tax Officer to
determine the assessee’s total income.”
In support of his submissions he relied upon
the following decisions:—
1. Godavari Sugar Mills Ltd. v. CIT [1963] 49 ITR
206 (Bom.).
2. Arantee Mfg. Corpn. v. Bright Bolts (P.) Ltd.
AIR 1967 Bom. 440.
3. Nawabganj Sugar Mills Co. Ltd. v. CIT [1972] 86
ITR 44 (SC)
4. Lachminarayan Madan Lal v. CIT [1972] 86 ITR
439 (SC)
6. Sri S. Chatterjee, learned
counsel for the respondent, however, submitted as follows:
1. That M/s. Techno Sales Corporation and
M/s. Kumar Wires and Conductors were not sole selling agents of the Company and
that, therefore, the provisions of sub-section (2) of section 294 and of
sub-section (1)(b) of section 314 of the Companies Act did not apply to the
contracts entered into by the Company with them.
2. That the agreements entered into with the
said parties were bona fide and were made in the interest of business and,
therefore, the payments in question were allowable under section 37 of the Act,
as having been laid out or expended wholly and exclusively for the purpose of
the assessee’s business.
3. That while determining the total income
of the Company, the Income-tax Officer could not travel beyond the terms of the
Act and that, if he came to the conclusion that the services were, in fact,
rendered, the expenditure will have to be allowed to the assessee as a
legitimate business deduction in terms of section 37 of the Act.
4. That the General Body of the shareholders
had passed a special resolution on 28-6-1975 ratifying the aforesaid two
agreements right from the very beginning and, therefore, whatever lacuna, if
any, was there had been made good and there could be no justification to uphold
the disallowance of the commission paid to by the Income-tax Officer merely on
the ground that the agreements in question had not been ratified by the General
Body Meeting earlier.
5. That section 314 of the Companies Act,
1956 did not cover the case of a selling agent did not derive a monthly
remuneration nor did it hold any office or place of profit under the company.
Reference was made to a circular issued by the Company Law Board. In view of
the above instructions of the Company Law Board, it was urged that it would be
wrong to apply section 314 to the selling agency agreements.
6. That the Income-tax Officer could not
exercise any powers under the Companies Act, 1956 and, therefore, could not
hold that the company had violated any of the provisions of the Companies Act.
This could be done only by the Company Law Board under section 10C of the
Companies Act or by the competent courts under section 10 of the said Act.
7. That the principle of quantum merit worked
against the Company and it could not recover the payments made to the selling
agents even if it was held that the said contracts were invalid for it had
accepted the services rendered by the agents and had made payments therefor.
7. Having
heard the learned counsel for the parties, we find that in the agreement
entered by the Company with M/s. Techno Sales Corporation on 9th August, 1968,
M/s. Techno Sales Corporation has been appointed as its selling agent for the
sale of mild steel wire, galvanized iron wire and other wire products in the
state of Uttar Pradesh. One of the terms and conditions of the agreement was
that the said agency shall be paid by the Company a commission of 1 per cent on
all sales effected by the Company of the goods manufactured by them either to
market parties or to the Government Department. The relevant clauses (1) and
(5) of the said agreement are reproduced below:—
“(1) The
Principal hereby appoint the Agent to be its Selling Agent for the Sale of Mild
Steel Wires, Galvanized Wires and other Wire Products manufactured by the
Principal, for the State of U.P. and the agent hereby agrees to act as such
selling agent on the terms and conditions mentioned herein.
(5) The
agent shall be paid by the Principal a commission of 1 per cent on all sales
effected by the Principals of the goods manufactured by them, either market
parties or to Government Departments.”
8. In respect of
the agreement entered by the Company with M/s. Kumar Wires & Conductors on
21st March, 1972, the terms and conditions except product difference is the
same. Clauses (1) and (5) of the said agreement are reproduced below:—
“1. The Principal hereby appoint the Agent to
be selling Agent for the sale of AAC, ACSR Conductors & Other Aluminium
conductors manufactured by the Principal and the Agent hereby agrees to act as
such selling agent on the terms and conditions mentioned herein.
2. The Agents shall be paid by the Principal
a commission of 1 per cent on all sales effected by the Principals of the Goods
viz. AAC, ACSR and other conductors manufactured by them, either market parties
or to Government departments. The said commission shall be payable at the end
of each accounting year of the Principal.”
From the reading of the aforesaid clauses of
the two agreements we are of the considered opinion that the two parties have
been appointed as their selling agents to the exclusion of others in respect of
different products manufactured by the Company for the entire State of U.P. and
the said agents were entitled for payment of commission at the rate of 1 per
cent of sales of all such products within the State of U.P. either effected by
the agents or by the Company.
Section 294 of the Companies Act, 1956
prohibits the appointment of sole selling agent for any area for a term
exceeding five years at a time. Sub-section (2) provides that the appointment
of the sole selling agents for any area shall cease to be valid if it is not
approved by the Company in its first general meeting held after the date on
which the appointment is made. Section 294 of the Companies Act, 1956, insofar
as it is relevant for the purposes of the present reference is reproduced
below:—
“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.”
9. Section
314 of the Companies Act, 1956 provides that except with the consent of the company
accorded by a special resolution a director shall not hold any office or place
of profit. Section 314(1) of the Companies Act, 1956 is reproduced below for
ready reference:—
“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 director,
no firm in which such director, or a relative of such director, is a partner,
no private company of which such director is a director or member, and no
director, or manager of such a private company, shall hold any office or place
of profit carrying a total monthly remuneration of such sum as may be
prescribed.
Except that of managing director or manager,
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:
Provided
further that where a relative of a director or a firm
in which such relative is a partner, is appointed to an office or place of
profit under the company or a subsidiary thereof without the knowledge of the
director, the company or a subsidiary thereof without the knowledge of the
director, the consent of the company may be obtained either in the general
meeting aforesaid or within three months from the date of the appointment,
whichever is later.
Explanation.—For
the purpose of this sub-section, a special resolution according consent shall
be necessary for every appointment in the first instance 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.”
From a conjoint reading of the provisions of
sections 294 and 314 of the Companies Act, 1956 it will be seen that a company
cannot appoint a sole selling agent for any area for a term exceeding five
years at a time and the agreement for appointment of sole selling agent has to
be got ratified/approved by the company in its first general meeting held after
the date on which the appointment is made failing which it shall cease to be
valid with the date of first general meeting and further a director or any of
his relative where such director or the relative is partner in the firm cannot
hold any office or place of profit except with the consent of the company
accorded by a special resolution. The phrase ‘sole selling agent’ has not been
defined under the Companies Act, 1956. In common parlance and in ordinary sense
it would mean that the exclusive and sole right to sell all the products of the
Principal to the exclusion of all others. In the present case two things under
the separate agreements have been described as selling agents and not sole
selling agents. Further, they have not been given exclusive right to sell all
the products. Specific mention of the word “for any area” and omission to
mention “any goods” make it abundantly clear that there can be only one sole
selling agent in an area in respect of all the goods dealt with by the company.
It may be mentioned here that under sub-section (6) of section 294 of the
Companies Act, 1956, the Central Government has been empowered to call for
information from the Company where there are more than one selling agents in a
particular area and to declare any one of them to be a sole selling agent of
the Company for such area or any of such areas. There is nothing on record to
show or suggest that the Central Government had declared any one of
aforementioned selling agents as the sole selling agent of the Company. Thus,
they cannot be treated as sole selling agents.
10. In the case
of Arantee Mfg. Corpn. (P.) Ltd. (supra), the Bombay High Court has held that
sub-section (2) of section 294 should be interpreted to mean that it contains a
condition precedent that attaches to the very act of making the appointment of
a sole selling agent by the Board of Directors. Therefore, if any appointment
of a sole selling agent is made by a Board of Directors without such a
condition as mentioned in sub-section (2), the same would be contrary to the
said provisions and would be void ab initio.
Similar view has been taken by the Calcutta
High Court in the case of Shalagram Jhajharia v. National Co. Ltd. [1965] 35
Comp. Cas. 706 and the Kerala High Court in the case of Kerala Chlorates &
Chemicals Ltd. v. Registrar of Companies [1988] 63 Comp. Cas. 175. The contract
in question appears to be grant of contract of appointment as distributor of
the respondent’s products and, therefore, it need not be placed before the
company in general meeting. The Delhi High Court in the case of Globe Motors
Ltd. v. Mehta Teja Singh & Co. (Agencies) [1984] 55 Comp. Cas. 445 has held
that a distributor’s contract is not a contract for appointment of a sole selling
agent and thus it is required to be placed before the company in general
meeting.
11. As
we have come to the conclusion that under the two agreements M/s. Techno Sales
Corporation as well as M/s. Kumar Wires & Conductors have not been
appointed sole selling agents and were only distributors/selling agents in
respect of the specified goods, their appointment does not come within the
purview of section 294(2) of the Companies Act, 1956. Even otherwise, as held
by the Bombay High Court in the case of Arantee Mfg. Corpn. (supra) as the
agreement in question did not contain a clause that the agreement shall cease
to be valid if it is not approved by the Company in general meeting held after
the date on which the appointment is made, it is void ab initio.
12. The
words “office or place of profit” occurring in sub-section (1) of section 314
does include selling and buying agents receiving commission and/or salary. The
sole selling agency has been held to be an office of profit by the Bombay High
Court in the case of Firestone Tyre & Rubber Co. v. Synthetic &
Chemicals Ltd. [1971] 41 Comp. Cas. 377. As in the present case the two firms
which have been appointed as the selling agents consist of either the directors
or the relatives as their partners, a special resolution was required to be
passed by the company for their appointment in the absence of which they would
not have been appointed.
13. In
the case of Godavari Sugar Mills Ltd. (supra) the Bombay High Court has held
that where the amount payable as dividends by the public companies was
restricted by the Public Companies (Limitation of Dividends) Ordinance, 1948,
the company was not able to declare the percentage of dividends as required by
section 23A of the Indian Income-tax Act, 1922. The court has further held that
if a restriction is imposed by any law on a company in respect of declaration
of dividends at a particular point of time, then that restriction would equally
be applicable to the Income-tax Officer, if by his order, he is creating a
legal fiction of notional distribution of dividends at that particular point of
time.
14. In
the case of Nawabganj Sugar Mills Co. Ltd. (supra) the Apex Court has held that
the Appellate Tribunal has to act judicially in the sense that it has to
consider with due care all material facts and evidence in favour of and against
the assessee and record its finding on all the contentions raised by the
assessee and the Commissioner in the light of the evidence and the relevant
law.
15. In
the case of Lachminarayan Madan Lal’s (supra) the Apex Court has held that the
mere existence of an agreement between the assessee and its selling agents or
payment of certain amounts as commission, assuming there was such payment, does
not bind the Income-tax Officer to hold that the payment was made exclusively
and wholly for the purpose of the assessee’s business. Although there might be
such an agreement in existence and the payments might have been made, it is
still open to the Income Tax Officer to consider the relevant facts and determine
for himself whether the commission said to have been paid to the selling agents
or any part thereof is properly deductible under section 37 of the Act. The
decisions relied upon by the learned counsel for the Revenue are not applicable
in the present case as the controversy raised in the present case is entirely
different.
16. As
there is no dispute that some of the partners of the two firms are related to
the directors of the Company, the appointment even selling agents amounts to
holding an office of profit and is hit by section 314 of the Companies Act,
1956.
17. In
view of the aforesaid discussion, we answer the first question referred to us
in the affirmative i.e., in favour of the assessee and against the Revenue and
the second question in negative i.e., in favour of the Revenue and against the
assessee. However, there shall be no order as to costs.
[1985] 57 COMP. CAS. 776 (MAD.)
v.
Madras Purasawalkam Hindu
Janopakara Saswatha Nidhi Ltd.
SHUNMUKHAM, J.
COMPANY APPLICATION NO. 893 OF 1981.
JULY 20, 1982
S.V.K. Thampi
for the Applicant.
T.V.
Ramanathan, H. N. Markandan, K.R. Madhu Babu and R. Harikrishnan for the
Respondent.
Shanmukham, J.—An application by a member of the
first respondent company (incorporated under the Companies Act, 1956) under s.
314 of the Companies Act, 1956 (for brevity, "the Act"), and rule 9
of the Companies (Court) Rules, 1959, to declare that the second respondent, a
director of the said company, and the third respondent, an employee in the said
company had vacated their respective offices at least from December 31, 1979.
The applicant's case is that while the second
respondent was holding the post of a director, his son, the third respondent, was
appointed on probation as a clerk on a starting monthly salary of Rs. 600 in
May, 1979, and, therefore, as per the provisions of s. 314 of the Companies
Act, 1956, no relative of a director shall hold any office or place of profit
carrying a total monthly remuneration of Rs. 500 or more without prior consent
of the company. In this case, as the consent of the company was not obtained
either in the general meeting of the company held for the first time after
holding of such office or place of profit or within three months from the date
of appointment, whichever is later, there is a violation of s. 314 of the Act
and that, therefore, both respondents Nos. 2 and 3 shall be deemed to have
vacated their respective offices by virtue of s. 314(2)(a) of the Act. It is,
therefore, necessary to refer to the relevant part of s. 314:
"(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 director, no firm in which such director, or a relative of such director, is a partner, no private company of which such director is a director or member, and no director 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 or manager, 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:
Provided further that where a relative of a director
or a firm in which such relative is a partner, is appointed to an office or
place of profit under the company or a subsidiary thereof without the knowledge
of the director, the consent of the company may be obtained either in the
general meeting aforesaid or within three months from the date of the
appointment, whichever is later.
Explanation.—For the purpose of this sub-section, a
special resolution according consent shall be necessary for every appointment
in the first instance to an office or place of profit and to every subsequent
appoint ment 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) (a) 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 treasures 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."
A close reading of the above provision will reveal that
it envisages two prohibitions, one in respect of a director, while the other in
respect of a relative of such director. The prohibition is that no director of
a company shall hold any office or place of profit unless 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. The second is that no relative of such director shall hold
any office or place of profit carrying a total monthly remuneration of Rs. 500
or more, unless the consent of the company was obtained either in the general
meeting of the company held for the first time after the holding of such office
or place of profit or within three months from the date of appointment,
whichever is later. It is necessary at this stage to advert to the argument
advanced by Mr. Thampi, learned counsel for the applicant. Pointing out the
second proviso, viz., provided further that where a relative of a director or a
firm in which such relative is a partner, is appointed to an office or place of
profit under the company or a subsidiary thereof without the knowledge of the
director, the consent of the company may be obtained either in the general
meeting aforesaid or within three months from the date of the appointment,
whichever is later, the learned counsel submitted that in so far as the
relative is referred to as a relative of a director and in so far as there is
no emphasis as "such director" in that provision, even if a relative of
any director of the company, he is liable to vacate office as provided in s.
314(2). I find such a contention is hardly acceptable. Under s. 314(1)(a) of
the Act, as already pointed out, no director of a company shall hold any office
or place of profit unless the consent is obtained as stated above ; so too, no
relative of such director shall hold any office or place of profit carrying a
total monthly remuneration of Rs. 500 or more unless the consent is obtained as
indicated already. The relative of such director used in s. 314(1)(b) will
necessarily refer to a director of the company who was holding any office or
place of profit, but not any director; that is the plain grammatical meaning of
s. 314(1)(a) and (b). Further, the first proviso in the order it is set out,
deals with a case of a director holding any office or place of profit, while
the second proviso deals with a relative of such director. I am avoiding
reference to the partner referred to in these provisions as not germane for the
present discussion. Thus, the second proviso has to be read in conjunction with
s. 314(1)(b). If so read, it is amply clear that the prohibition under s.
314(1)(b)is restricted to a relative of such director, meaning thereby the
director holding any office or place of profit referred to in s. 314(1)(a) but
not any ordinary director. The deeming vacation of the office of the director
visualised under s. 314(1)(a) will apply to a director who holds any office or
place of profit without obtaining the consent referred to above. This, in turn,
takes me to the question, when is a director said to hold any office or place
of profit. The answer is found in s. 314(3) and I extract the relevant portion:
"Any office or place shall be deemed to be an
office or place of profit under the company within the meaning of this
section,—
(a) in case
the office or place is held by a director, if the director holding it obtains
from the company anything by way of ...whether as salary, fees, commission,
perquisites, the right to occupy free of rent any premises as a place of
residence, or otherwise."
It is thus clear that a director cannot be said to
hold any office or place of profit if he should receive the remuneration to
which he is entitled as such director. On the other hand, he will be said to
hold any office or place of profit only when besides the remuneration to which
he is entitled as such director, he obtains from the company a remuneration
such as salary, fees, commission, perquisites, etc. It is apposite at this
juncture to refer to ss. 198 and 309(2) of the Act. Section 198 runs thus :
"(1) The
total managerial remuneration payable by a public company or a private company
which is a subsidiary of a public company, to its directors and its managing
agent, secretaries and treasures or manager in respect of any financial year
shall not exceed eleven per cent, of the net profits of that company for that
financial year computed in the manner laid down in sections 349, 350 and 351,
except that the remuneration of the directors shall not be deducted from the
gross profits....
(2) The
percentage aforesaid shall be exclusive of any fees payable to directors under
sub-section (2) of section 309."
According to s. 309(2) of the Act, a director may
receive remuneration by way of a fee for each meeting of the board, or a
committee thereof attended by him. From the above, it is obvious that if a
director were to receive remuneration by way of fee for each meeting of the
board or a committee thereof attended by him, he shall not be deemed to hold any
office or place of profit. Article 39(a) in the articles of association of the
first respondent company prescribes the remuneration that is to be paid to
every director as sitting fee per meeting of the board of directors in addition
to travelling expenses. Unfortunately for the applicant, he has not stated in
his affidavit filed in support of the application that over and above the
remuneration to which the second respondent is entitled as an ordinary director
as provided in art. 39(a), the second respondent is drawing any further
remuneration from the company. There is no whisper either that the second
respondent is holding any office or place of profit within the meaning of s.
314(1)(a) of the Act. It is significant to note that in the counter-affidavit
filed by the first respondent company, it is specifically pointed out that the
second respondent was not a director holding any office or place of profit. The
applicant has not chosen to file any reply/affidavit disputing such statement
made by the secretary of the company on behalf of the company. On the affidavit
evidence, therefore, I cannot but conclude that the applicant has not only
failed to allege, but also failed to prove that the second respondent was a
director holding any office or place of profit. If the second respondent did
not hold any office or place of profit, the applicant is not entitled to
contend that so far as the second respondent is concerned, there is violation
of s. 314(1)(a) of the Act.
Now, turning to the third respondent, I must hold
that here also, the applicant has no case. I have already held that s.
314(1)(a) does not apply to a relative of any ordinary sitting director holding
any office or place of profit carrying even a monthly remuneration of Rs. 500
and more but applies to the relative of a director who holds any office or
place of profit. In this case, the applicant has not succeeded in establishing
that the third respondent was a relative of such director holding any office or
place of profit. It is true that the third respondent is the son of the second
respondent, but then, the second respondent is only an ordinary director, but
not one holding any office or place of profit as defined in s. 314(3) of the
Act. If that is so, there can be no violation of s. 314(1) (b) of the Act.
The result is, the application fails and is dismissed
but without costs.
[1977] 47 COMP. CAS. 318 (MAD)
Madura Hindu Permanent Fund Ltd.
V.
KOSHAL,
J.
SEPTEMBER
2, 1976
JUDGMENT
KOSHAL, J. - The petitioner before me is the Madura
Hindu Permanent Fund Ltd., a limited company carrying on the business of
advancing loans to its shareholders and hereinafter referred to as the company.
In the year 1970 the company had 12 directors out of whom M. Mariappa Chettiar
was elected to perform the duties of a director-surveyor. He continued to
perform his functions as such up to the 31st July, 1970, and with effect from
the 1st day of August, 1970, another director, viz., Shri C. Bommaiah Naidu,
was elected director-surveyor instead. Both these directors were paid a salary
in lieu of the performance by them of their duties as surveyors. This fact
having come to the knowledge of the Registrar of Companies, Madras (hereinafter
referred to as "the Registrar"), he objected to their appointment as
surveyors on the ground that it had been made in contravention of section 314
of the Companies Act. In order to meet the objection of the Registrar, the
company wrote to him a letter dated the 2nd December, 1971, the relevant
portion of which is extracted below :
"We are
advised to state that the provisions of section 314 of the Companies Act are
not attracted at all and the appointment of the directors to render services as
surveyors was made only in view of the company entertaining the opinion that
the said directors have the qualifications and experience to be appointed as
the technical adviser to the company. The section itself contemplates that if a
person answers the description of a technical adviser such a person is excluded
from the operation of section 314. We state that the appointment of Sri M.
Mariappa Chettiar and Sri D. Bommaiah was made in pursuance of the confidence
which the company had in the directors to act as surveyors of the company. You
have not stated or shown as to how the said directors hold any 'office or place
of profit' as postulated by section 314(1). You would appreciate that the
Companies Act does not prescribe any qualifications for a person to act as a
technical adviser and this would only mean that the object of the framers of
the Act is to leave it to be discretion of the company to appoint its own
directors to act as technical or legal adviser."
This position
was not acceptable to the Registrar, who informed the company, by his letter dated
the 13th January, 1972 :
"An
ordinary director is not entitled to any remuneration other than his sitting
fees. Therefore, if any remuneration for any services rendered by the director
is paid by the company, then he will be holding an office of profit within the
meaning of section 314. The company seems to be confusing the issue with the
appointment of a director under section 309(1) and opinion formed by the
company regarding the ability of the director to render such services under the
proviso to section 309(1). Therefore, the mere fact that the board of directors
is satisfied with regard to the capacity of the director to render service as a
surveyor will not take away the case out of section 314. The requirement of
section 314 is independent of section 309, unless the appointment comes under
any of the exceptions.
Further, it
appears that Shri Bommaiah has been appointed as a surveyor pure and simple and
there is no reference to his appointment as a technical adviser. In this
connection, it may also be stated that persons who are appointed to occupy the
post as technical advisers and legal advisers should, prima facie, have
qualification to discharge the duties as such. A company merely calling any of
those nomenclatures by itself will not take away the case out of the purview of
section 314 of the Companies Act, 1956.
The company
is, therefore, advised to comply with the requirements of section 314(1) as,
otherwise, the consequences of sub-section (2) of section 314 will
automatically follow, apart from exposing the company to prosecution under
section 629A of the Companies Act, 1956."
It is this
stand of the Registrar which the company attacks under article 226 of the
Constitution of India with the prayer that it be quashed by a writ of certiorari.
The relevant
portion of section 314 of the Companies Act is reproduced below :
"314.
(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."
The case propounded
on behalf of the company is that in the performance of his duties all that a
surveyor is called upon to do is to examine buildings and other properties and
to assess the price thereof for the purpose of finding out whether the same
would be adequate security for the loans to be advanced by the company to its
members and that, therefore, his position is nothing but that of a technical
adviser within the meaning of that expression as used in section 314. The
correctness of this proposition is not seriously challenged on behalf of the
Registrar whose learned counsel, however, contends that a technical adviser
must, in the very nature of things, have technical knowledge which qualifies
him for performing his functions, that in the absence of such qualifications a
person appointed to perform a technical job cannot be deemed to be a technical
adviser within the meaning of that expression as used in the section and that
as neither Shri M. Mariappa Chettiar nor Shri D. Bommaiah possessed any
technical qualifications they could not be considered to have been appointed
technical advisers within the meaning of the section. This contention, in my
opinion, is flawless. On behalf of the company it is no doubt stated that both
these gentlemen did have the necessary technical knowledge, but the source of
such knowledge or the qualifications by reason of which they must be deemed to
have acquired it, are not stated. Even at the hearing, learned counsel for the
company could not enlighten me about those qualifications except for saying
that they had been directors in the company for a long period and, therefore,
had acquired the necessary knowledge to equip them with the qualifications for
carrying out surveying work. As it is, however, no reference to such experience
or the length thereof was made at any stage of the correspondence between the
company and the Registrar; nor does the same find a place in the petition and
must, therefore, be regarded as an afterthought. Accordingly, I find that the
two directors in question were appointed surveyors without having any
qualifications for the job and if that be so, they could not be regarded as
technical advisers, for it is not open to a company to give the designation of
technical adviser to any director and appoint him as such and thereby avoid the
consequences of section 314. A technical adviser to be regarded as such within
the meaning of the section has to be a person with technical qualifications for
the job entrusted to him which consists of rendering advice to the company in
matters relating to its business. If an employee of the company does not have
the necessary technical qualifications for a proper performance of the duties
assigned to him or if his job is not restricted to rendering technical advice,
he cannot be considered to be a technical adviser as contemplated by the
section. If this were not so, it would be open to the company to appoint any
person to any job, call him a technical adviser and defeat the provisions of
the section completely. That could not be the intention of the section.
In support of
the petition a contention was raised that a special resolution such as is
envisaged by the proviso above extracted was passed by the company and that,
therefore, the appointment of the two directors concerned as
directors-surveyors was properly ratified. However this contention was not
raised in the petition; nor is there any evidence that a special resolution
according the consent of the company to the appointment of directors-surveyors
at the general meeting of the company held for the first time after such
appointment was passed. A special resolution in that behalf has been produced
at the hearing for my inspection, but that purports to have been passed on the
18th of March, 1972, i.e., more than a year and a half subsequent to the
appointments and for aught we know it was not passed in the first general
meeting held after the appointments were made. For the application of the
proviso it is necessary for the company to show that the meeting in question
was such a first meeting. Having filed to prove that, the company cannot take
any advantage of the proviso.
In the
result, I hold that no fault can be found with the impugned order of the
Registrar. Accordingly, the petition fails and is dismissed, but with no order
as to costs.
[1971] 41 COMP. CAS. 377(BOM)
Firestone Tyre and Rubber Co.,
v.
Synthetics and Chemicals Ltd.
MADON J.
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.
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 2˝ 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.
[1984] 55 COMP. CAS. 742 (DELHI)
v.
Auto Lamps Ltd.
D.R. Khanna J.
OCTOBER 6, 1983
L.C.
Goyle for the Petitioner.
Y.K.
Jain for the Respondent.
Khanna J.—Ravinder Kumar Sangal has been
holding different posts in the respondent company from 1954. Earlier he was
designated as office manager and for some time as commercial manager. From October
1, 1977, he was promoted as marketing manager in the scale of pay Rs.
1,500-150-3,000. He was also entitled to some perquisites, viz., reimbursement
of medical expenses, benefit of employer's contribution to the provident fund,
encashment of unavailed leave, bouns as admissible to other employees of the
company. A resolution to this effect was passed at the extraordinary general
meeting of the members of the respondent company held on October 28, 1974. He
was then described as commercial manager with the same scale of pay and other
perquisites.
From
1977-78 to 1981-82 he was paid the amounts as under :
|
|
|
1977-78 |
1978-79 |
1979-80 |
1980-81 |
1981-82 |
|
(a) |
Salary |
27,000 |
28,000 |
30,000 |
34,500 |
34,453 |
|
(b) |
Reimbursement in |
|
|
|
|
|
|
|
lieu of privilege |
|
|
|
|
|
|
|
leave not availed |
1,950 |
1,200 |
1,275 |
— |
4,400 |
|
(c) |
Annual bonus |
1,500 |
2,500 |
3,500 |
8,000 |
5,000 |
|
(d) |
Employer's contri- |
|
||||
|
|
Fund |
2,316 |
2,400 |
2,874 |
2,460 |
3,108 |
|
(e) |
Reimbursement of |
|
||||
|
|
for self and family |
2,55315 |
2,621.03 |
7,494 |
— |
2,969.95 |
|
|
Total |
35,319.15 |
37,521.03 |
45,743.00 |
44,960.00 |
49,929.95 |
The
auditors of the company have, however raised an objection that since Ravinder
Kumar Sangal was the son-in-law of the managing director and had been receiving
total remuneration in excess of Rs. 36,000 per annum without the prior sanction of the Central Government, he
was liable for consequences enumerated in s. 314(2B) and/or 314(2C).
Mr. Sangal feeling
aggrieved and claiming that his monthly remuneration was not more than Rs.
3,000 has brought the present petition under s. 633(2) of the Companies Act,
1956, read with r. 9 of the Companies (Court) Rules, 1959. He contends that he
should be released from any liability which he may have incurred under s.
314(1B) read with s. 314(2B) and/or s. 314(2C).
The petition is opposed
from the side of the Registrar of Companies on the ground that it is not
maintainable under s. 633 and that his total yearly remuneration in fact
exceeded Rs. 36,000.
Section 314(1B) of the
Companies Act lays down that no relative of a director or manager shall hold
any office or place of profit in the company which carries a total monthly
remuneration of not less than Rs. 3,000 except with the prior sanction of the
company by a special resolution and the approval of the Central Govt.
Section 314(2C) further
provides that if any office of profit is held in contravention of the
provisions of the proviso to sub-s. (1B), the director, relative or manager
concerned shall be liable to refund to the company any remuneration received or
the monetary equivalent of any perquisite enjoyed by him.
The case of the petitioner
has been that he did not know that the company had not taken the approval of
the Central Govt., and that he was throughout under the impression that the
company must have taken due steps for complying with the legal provisions in connection
with his appointment and remuneration. In any case he contends that his salary
did not exceed Rs. 3,000 per month. So far as the medical expenses and
encashment of leave are concerned, they depended upon whether the petitioner
needed medical attention or whether he did not avail of his leave. Similarly,
the bonus depended upon whether the company had made sufficient profits and
whether bonus had been paid to other employees working in the establishment as
well. It is pointed out that during the year 1980-81 the petitioner did not
receive reimbursement of any medical expenses or any payment in lieu of earned
leave.
The first question to be
considered is whether the petition is maintainable under s. 633 of the Companies
Act. The same envisages that if any officer of a company has reason to
apprehend that any proceeding will or might be brought against him in respect
of any negligence, default, or misfeasance, he may apply to the High Court for
relief and the 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 or misfeasance had been brought. The objection of the
Registrar is that the petitioner cannot be treated as an officer of the
company. I, however, do not agree. Section 2(30) of the Companies Act gives an
inclusive definition of the expression "officer", and elaborates that
it includes manager as well. The petitioner as marketing manager can as such be
treated as an officer of the company entitled to seek protection under s. 633.
Section
217 of the Companies Act requires attachment to every balance-sheet laid before
a company in general meeting, a report by its board of directors which shall
include the name of every employee who was in receipt of remuneration in
aggregate of not less that Rs. 36,000. The term "remuneration" here
is assigned the same meaning as given in the Explanation to s. 198. That Expln.
to s. 198 reads as under:
"Explanation.—For
the purposes of this section and sections 309, 310, 311, 348, 352, 381 and 387,
"remuneration" shall include,—
(a) any expenditure incurred by the company in
providing any rent-free accommodation, or any other benefit or amenity in respect
of accommodation free of charge, to any of the persons specified in sub-section
(1);
(b) any expenditure incurred by the company in
providing any other benefit or amenity free of charge or at a concessional rate
to any of the persons aforesaid;
(c) any expenditure incurred by the company in
respect of any obli gation or service which, but for such expenditure by the
company, would have been incurred by any of the persons aforesaid; and
(d) any expenditure incurred by the company to
effect any insurance on the life of, or to provide any pension, annuity or
gratuity for, any of the persons aforesaid or his spouse or child".
This
inclusive definition though extended to a number of sections of the Companies
Act has not been specifically extended to s. 314. The latter section not only
postulates "remuneration" but speaks of "total monthly
remuneration". The expression "monthly", according to the
Webster's Third New International Dictionary, denotes once a month, by the
month, relating to a month, payable every month, based on a month, having a
duration of one month, occurring, appearing or being made, done or acted upon
every month or once a month.
The
wide definition of the term "remuneration" as given in s. 198 has not
been made applicable by the Legislature in its wisdom to s. 314 as well. That
apart, this latter provision is based on the total remuneration which an
officer of a company may get from month to month. The emphasis is thus not on
what he gets on the whole in a year, but on his monthly remuneration. The
reference, therefore, by the Registrar of Companies to the total yearly earnings exceeding Rs. 36,000 is misplaced.
The query has to be directed towards his monthly emoluments. The word
"monthly" necessarily connotes anything taking place once a month,
relating to a month, payable every month, based on a month, having a duration
of one month, occurring, appearing or being made done or acted upon every month
or once a month. No other implication has been stressed. Considered in this
context, the payment of bonus, reimbursement in lieu of privilege leave not
availed, employer's contribution to provident fund, reimbursement of medical
expenses, etc., cannot be treated as events of monthly regularity or
occurrence. They are dependent upon certain events happening during the course
of the entire year, and as and when they take place. Perhaps, with regard to
the employer's contribution to provident fund, it can be said that the same
might be monthly in case any specific amount every month was contributed. In the
three years involved in this petition, the amount of such contributions added
to the salary did not raise that to more than Rs. 36,000 in any year. In the
other two years, the addition was nominal. On the whole it could not be said
that the monthly remuneration of the petitioner which had not even reached the
highest of the pay scale Rs. 1,500-150-3,000 exceeded Rs. 3,000, which should
have required the approval of the Central Govt. There cannot be, therefore, any
occasion for action under s. 314(2C) of the Companies Act. The petition is
accordingly allowed.