TMI Blog1982 (5) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication No. 482 of 1981, The Central Govt. has not made any representations in pursuance of notice under section 400. The company was formed with the object of establishing hospitals and clinics. The City Hospital at Ernakulam belongs to it. Dr. V. K. Thomas, Dr. T. M. Paul, Dr. Roselin Sebastian and managing director, Mr. Albert, were associated with the company from the very beginning. Dr. Paul left for the U.S.A. in 1980; and shorn of details, this petition is the result of a fight between two groups for control over the company. The first petitioner is the husband of Dr. Roselin Sebastian. The second petitioner is a brother of Dr. Paul. The third petitioner is his brother-in-law and the fourth his wife. The rival group, which now controls a majority in the board of directors, is led by Dr. V. K. Thomas, the chairman, and Sri Albert. The allegations in the petition are briefly the following i ( i )After the departure of Dr. Paul to the U.S.A. in July, 1980, the chairman and the managing director began to misappropriate and misapply the funds of the company in collusion with some of the other directors. One method adopted was to debit substantial amounts as salary paid t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the second respondent's presiding over the meeting, as one of the matters to be considered was a motion of no confidence against him. But the chairman ruled out the objection. A poll was demanded but that also was rejected; ( x )Another objection taken at the meeting regarding the adoption of the balance-sheet and profit and loss account was also similarly overruled and a demand for poll was also rejected; and ( xi )The chairman also refused permission for moving the resolutions regarding want of confidence in respondents Nos. 2 to 7. All the respondents have filed counter-affidavits. Respondents Nos. 1 to 7 not only deny the allegations regarding the misappropriation, falsification of accounts and the like, but allege that it was Dr. Paul, as superintendent of the hospital till 1980, who was misappropriating the company's funds and falsifying its records. The circumstances relating to the removal of M. V. Poulose, the cancellation of the appointment of Dr. Susheel Cleitus, diversion of the cement quota, etc ., are all explained in detail. As for the notices issued by petitioners Nos. 1 to 3 on March 7, 1981, the stand is that they were not in accordance with law. The de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... state of affairs as mismanagement. The business of a company may be running smoothly in a commercial sense and there may be nothing wrong with the day to day management of its affairs in a business sense; but still there may be cases which attract section 398 because "the affairs of the company" and the manner in which they are conducted need not necessarily be confined to its day to day business management. Turning to the specific complaints, the first relates to diversion or misappropriation of the company's funds by the chairman and the managing director by the method of debiting substantial amounts in the names of their relatives as salary for supervision. Exhibit B-9 shows that attempts to divert profits in such a manner had started from May, 1979, and that persons belonging to the petitioners' group were also beneficiaries. R.W. 1 would say that Ex. B-9 was prepared by M. V. Poulose and Dr. T. M. Paul and that the first page of Ex. B-9 is in the handwriting of Poulose and the second in the handwriting of Dr. Paul. At any rate, it is undisputed that members belonging to the petitioners' group had also siphoned off substantial amounts like those in the opposite group under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g for himself, came forward to lend 100 bags. This was returned when the hospital got its allotment. The answers given, by P.W. 1 during the course of cross-examination indicate that he had no definite personal information about the matter. All the other complaints can be dealt, with together, as they are connected with the annual general body meeting held on March 28, 1981. Complaint No. ( vi ) is about the refusal of the company to circulate the no confidence motions tendered by petitioners Nos. 1 to 3 and the answer furnished is that their sponsors had not the requisite voting strength prescribed by section 188 read with regln. 25 of the articles of association of the company. Items ( vii ) and ( viii ) are connected with the two civil suits challenging the allotment of shares Nos. 501 to 1,000, and items ( ix ) to ( xi ) deal with the refusal of the chairman to allow poll at the meeting. The crux of the matter seems to be that the petitioners' group had obtained control over a sizeable section of the shares, after the allotment above referred to. R.W. 1, the managing director, was quite candid when he said : "70% of the additional shares issued on March 28, 1979, were in fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 501 to 1,000 were issued on the strength of lists placed before the board by the then secretary, and the minutes of the concerned board meetings do not even show who the applicants were or how many shares were there in each of the lists approved. But Exs. B-1 and B-7 show that shares Nos. 1 to 500 were also issued in the same fashion, with the result that if allotment of shares Nos. 501 to 1,000 was bad for the reason advanced, the same should be said about all the earlier allotments also. Nothing has been brought to my notice to suggest that the board was bound to notify all existing shareholders before the additional shares were allotted. Besides, many of the respondents and their supporters had also obtained allotments out of additional shares. Respondents Nos. 2 and 3 got 20 shares each and the fifth respondent got 45 shares, the sixth respondent's brother got 8 shares and the brother's son got 24 shares. Dr. Chacko George was allotted 50 shares and Dr. Varghese T. Varghese got 5 shares. R.W. 1 himself admitted: "At no time in its history had the board's resolutions regarding allotment of shares indicated the number of sharers involved or the total amount of allotment or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , correspond to reglns. 47 to 50 and 56 of Table A, and this is another indication that the reference to section 88 in regln. 25( b ) is a mistake for section 87. It may probably be open for the respondents to contend that even if a poll were to be allowed at a general meeting, counting of votes as laid down in section 87(1)( b ) would have become impermissible in view of the mistake; but on the question whether poll is totally excluded by reason of reign. 25 read with section 170(1)( ii ), the answer can only be in the negative. The provisions of section 28(2) also lead to the same result. The circumstances that proxies were sent out for the annual general meeting and that O.S. No, 179 of 1981 was filed on its eve is also significant. The respondents knew that poll would be demanded at the meeting in the light of regln. 25 and they were anxious to avoid such a course. The resulting position is that, while the petitioners' group has sufficient voting strength to control the company, the respondents are continuing in office by taking advantage of the mistake noticed above. Does it, however, mean that the affairs of the company are being conducted in a manner prejudicial to the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company itself; and, therefore, it is the company itself which should sue. But, those against whom the action is to be brought may themselves be the appropriate organ for instigating proceedings in the company's name. Hence, some alternative means of enforcement have been made available in certain circumstances as a result of intervention both by the equity courts and the legislature". Sections 397 and 398 are instances of legislative intervention permitting members to initiate action for enforcing the fiduciary duties the directors owe to the company. It is true that sections 397 and 398 are intended primarily to protect the minority interests. In ordinary cases, the majority will be able to protect itself by controlling the directors at general body meetings. But, where the majority is prevented from doing so, despite the clear indication in the articles that majority rule based on the right to demand poll should operate as a correcting influence, the majority becomes an artificial minority entitled to claim protection under sections 397 and 398. When the directors with the majority backing, oppress the minority and misconduct the affairs of a company, occasion arises for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. This cannot be the case with regard to the memorandum and articles of association of a company, for it is the document in its actual form which is delivered to the registrar and is retained and registered by him, and it is that form, and no other, which constitutes the charter of the company and becomes binding on it and its members. The legal entity only comes into existence as a corporate body distinct from the subscribers to the memorandum and articles registered upon registration". The decision is no authority for the proposition that reliefs, including alteration of the articles, cannot be granted in statutory proceedings of the present nature. That the articles of a company could be amended in proceedings under sections 397 and 398, has been held by the Bombay High Court in Bennet Coleman Co. v. Union of India [1977] 47 Comp. Cas. 92. Apart from the plenitude of power conferred by sections 398 and 402, already noticed, section 404 of the Act also recognises a power in the court to amend the articles in proceedings under Chapter VI. The respondents apprehend that amending regln. 25 and leaving the matter at that will only enable the petitioners' group to gain cont ..... X X X X Extracts X X X X X X X X Extracts X X X X
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