TMI Blog2002 (10) TMI 682X X X X Extracts X X X X X X X X Extracts X X X X ..... st respondent; and ( iii )An injunction restraining the first respondent, from acting upon the resolution dated 6th September 2002 of the board of directors purporting to pass the annual accounts of the first respondent. 3. A subscription-cum-shareholders agreement was entered into on 25th March 2000 by and between the petitioners, the first respondent which is a company incorporated under the Companies Act, 1956 and the second respondent amongst other parties. Under the terms of the agreement, the petitioners agreed to subscribe to 59,25,926 Optionally Convertible Pref- erence Shares (OCPS) of the first respondent of the face value of Rs. 13.50 each at and for an aggregate value of Rs. 8 crores. By the Subscription-cum-Shareholders agreement, the petitioners under article 7.10-2 were permitted to seek redemption from the company of a part or of the entire holding at any time after four years from the date of investment. The clause provided that the redemption premium paid by the company shall result in a minimum of 18 per cent annual yield to the OCPS holder calculated from the date of investment. Under clause 7.10-3 the petitioners were entitled to exercise a "Put Option" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers in article 3.10 of the subscription agreement is only in so far as continuance of the second respondent on the board is concerned. Ex- facie , there is no assurance in so far as either the third or the fourth respondents are concerned. But, the more fundamental defence of the respondents which in my view, has to be sustained is that the provision contained in the subscription agreement to the effect that the second respondent would not resign from the board "till the validity of this agreement" was not translated into an amendment of the articles of association of the company. The fact that the company is a party to the subscription agreement makes no difference to this position because the position in law is well settled. The provisions in an agreement such as the one in the present case, cannot be given effect to insofar as the management of the affairs of the company is concerned, unless those provisions have been incorporated into the articles of association. This point is no longer res integra but, is covered by the decision of the Supreme Court in V.B. Rangaraj v. V.B. Gopalakrishnan AIR 1992 SC 453. The Supreme Court has held that a restriction which is not specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econd, third and fourth respondents cannot be granted. Counsel for the fourth respondent stated before the court that the fourth respondent had resigned as far back as on 4th April 2002 and that an intimation has been furnished to the Registrar of Companies on 14th September 2002. Besides, neither the third nor the fourth respondents are parties to the arbitration agreement. The prayers for relief in terms of prayer clauses ( a ), b ( i ) and b ( ii ) are rejected. 8. The Second relief that has been prayed is in regard to the appointment of the fifth and sixth respondents on the board of directors of the first respondent. Their appointment took place on 20th August 2002. The minutes of the meeting of the board of directors held on 20th August 2002 would show that at that meeting there were two directors of the first respondent present viz. , Shri U.S. Sethia and Shri Arun T. Korati. The articles of association of the company provide in article 126 that subject to the provisions of sections 255 and 256 of the Companies Act, 1956 unless otherwise determined by the company in the General Meeting and subject to section 252 of the Act, the number of directors shall not be less t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .K. Joshi. The nominee Director of the petitioners objected to the appointment of these persons on the ground that it would be desirable to induct persons with foundry experience on the Board and he accordingly suggested that the profile of certain additional candidates may be considered at the next meeting. The nominee director of the petitioners suggested that one director each of the petitioners and of the promoters, can be inducted after discussion. However, this was opposed by Mr. Sethia, the Director representing promoters group who suggested that the petitioners could appoint their nominee or nominees at the next Board meeting. The resolution was carried purportedly with the casting vote of the Chairman and the minutes recorded that the nominee director of the petitioners was against it. 10. Now, ex facie , the induction of the two directors on 20th August 2002 was contrary to the provisions of the Articles of association. As already noted earlier, article 159B( xxix ) stipulates that the affirmative vote of the nominee director of the petitioners would be required for any proposal to include or remove members on the board. Counsel for the respondents sought to urge th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of directors is or is not a shareholder and their affirmative vote would be necessary in either of the situations. That would be the plain meaning which can be ascribed to clause ( xxix ). 11. Consequently, in the absence of the affirmative vote of the petitioners to the induction of the fifth and sixth respondents on the board of directors, their appointments were ultra vires the articles of the company. 12. After the meeting of the board of directors on 20th August 2002, the next meeting took place on 29th August 2002. The minutes of the meeting of 29th August 2002 provide, as is normal in such cases, that the minutes of the previous meeting were read, confirmed and signed by the Chairman. However, the confirmation of the previous minutes of 20th August 2002 cannot be read as amounting to an acceptance by the petitioners that the decision which was taken to induct the fifth and sixth respondents on the board of directors at the previous meeting was lawful. All that the confirmation meant was that the minutes of the meeting dated 20th August 2002 correctly recorded what had transpired at that meeting. 13. At the meeting which took place on 29th August 2002, two dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company that the articles of association of the company did not permit the Chairman of the meeting to have a casting vote. This recording letter would be sufficient to reject the submission that there was an acceptance or the part of the petitioners of the appointment of the fifth and sixth respondents at the meeting which was held on 29th August 2002. 14. The next point which has been urged for the consideration of the court in defence to the appointment of the fifth and sixth respondents is that under section 290 of the Companies Act, 1956 acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defects or disqualification or had terminated by virtue of any provision contained in the act or in the articles. However, the proviso to section 290 lays down that nothing in the section shall be deemed to give validity to acts done by a director after his appointment has been shown to the company to be invalid or to have terminated. The submission that was urged was that if the minutes of the meeting held on 20th August 2002 are considered, it cannot be stated that the appointme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appointment of the fifth and sixth respondent. Consequently, the benefit of the substantive part of section 290 of the Companies Act, 1956 would not in any event be available after 30th August 2002. The learned counsel appearing on behalf of the petitioners has sought to urge that the benefit of section 290 can normally be taken by a third person and not by the directors or their close relations. In support of this proposition, reliance was sought to be placed on the judgment of the Punjab and Haryana High Court in Col. K.S. Dhillon v. Paragaon Utility Financers [1988] 64 Comp. Cas. 19. It is not necessary for this Court to express any opinion on that aspect since, I am of the view that with effect from 30th August 2002, the invalidity of the appointment of the fifth and sixth respondents had been shown to the Company. Any Act done after the appointment of the fifth and sixth respondents was shown to be invalid will not be protected by section 290. 16. In the circumstances, I am of the view that the petitioners are entitled to the grant of interim relief in terms of prayer clause ( b )( iii ) of the arbitration petition. 17. The last and final aspect of the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have a special study of the accounts and certain further information. In view of these objections, it was decided that "the next meeting can be held with initialled accounts along with the Auditors Report" which would be considered by the Board for adoption and approval of the accounts. 19. On 29th August 2002, which was the date on which the next board meeting was held, it was recorded that since the accounts along with the report of the auditors initialled by the Auditors did not reach the meeting in time, it was decided that the issue may be discussed in the next meeting to be held on 6th September 2002. On 30th August 2002, the petitioners in a letter addressed to the Managing Director stated that they had strong objection to the manner in which the agenda papers were presented to the Board and about the fact that some papers were provided to the petitioners "just few minutes before the meeting". 20. The agenda for the next board meeting was sent to the petitioners on 30th August 2002 and the notice convening the meeting stated that the meeting would be held at 4.30 p.m. on 6th September 2002. The agenda for the meeting included the approval of the audited final re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the venue". The fifth respondent was directed to personally ensure that the nominee directors of the petitioners should be informed that the meeting had been adjourned to 5.30 p.m. with a view to convince them to attend the adjourned meeting. The grievance of the petitioners is that they were not informed of the holding of the adjourned meeting on 6th September 2002. In fact, their contention is that until the reply of the respondents was filed to the arbitration petition, the petitioners were not informed that the meeting was held. The learned counsel appearing on behalf of the respondents has fairly stated before the court on taking instructions that since no meeting was held subsequent to the meeting of 6th September 2002, the minutes of the meeting of 6th September 2002 were not communicated to the petitioners. In the rejoinder which has been filed before this court, the petitioners have contended that they had no valid notice of the adjourned meeting which took place at 5.30 p.m. on 6th September 2002. Though the Minutes of the adjourned meeting record that the fifth respondent informed the Board that the nominee directors had been informed of the meeting at 5.30 p.m., this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the general principle that no fresh notice of an adjourned meeting is required would not apply to a case such as the present where the board of directors had, while adjourning the first meeting which took place at 4.30 p.m. required the fifth respondent to personally ensure that this was communicated to the nominee directors of the petitioners with a view to convince them to attend the adjourned meeting. The Board was perhaps conscious of the fact that the affirmative vote of the petitioners was necessary for the adoption of the annual accounts since the attention of the first respondent had been expressly drawn to this position by the petitioners on 5th September 2002. In the circumstances, I am of the view that though the Board of directors had taken a decision to require the fifth respondent to ensure that the nominee directors were informed of the adjourned meeting, there was no notice to the petitioners of the adjourned meeting which took place at 5.30 p.m. At any rate, the respondents have not stated on affidavit in these proceedings that any such notice was in fact, given. 26. But, apart from this consideration, I am of the view that Article 151 of the Articles of associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are submitted to the auditors for their report thereon. It is not possible to accept the submission of the learned counsel appearing on behalf of the first respondent that the provision contained in clause ( xxix ) of article 159 is repugnant to the provisions of the Companies Act, 1956. The provisions of the Articles of association have been agreed upon by the shareholders of the company. Admitedly, the requisite procedures for the amendment of the articles of association, following the subscription-cum-shareholders agreement, have been pursued before the aricles were amended. The shareholders of the company agreed to a particular provision being incorporated in the articles requiring the affirmative assent or vote of the petitioners for the adoption of accounts. There is nothing repugnant in this provision to the Companies Act, 1956. The petitioners had contributed an investment of Rs. 8 crores in the form of opitionally convertible preference shares and it was in that view of the matter, that it was considered appropriate that the petitioners should have some control over the accounts and financial policy of the company by requiring their affirmative vote before the Board of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to by the shareholders of the company. The articles are not repugnant to the Companies Act, 1956. Therefore, the principle of law which is laid down in the judgments referred to by counsel appearing on behalf of the first respondent have no application to the facts here. In any event, I am of the view that at the present stage, it would be impossible for the court to ignore the provisions of the articles of association which have been solemnly agreed upon and accepted. The law is well settled that subject to the provisions of the Companies Act, 1956 the company and its members are bound by the provisions contained in the articles of association. The articles regulate the internal management of the company and define the powers of its officers. The articles also establish a contract between the company and members and between the members inter se . The contract governs the ordinary rights and obligations incidental to the membership in the company. Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. AIR 1971 SC 422. 29. The adoption of accounts by the Board of directors at the adjourned board meeting on 6th September 2002 is thus unlawful. Having regard to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el appearing on behalf of the first respondent states that the meeting will be held at 4 p.m. at the same venue at which the earlier meeting of 6th September 2002 took place. On the request of the learned counsel for the first respondent, it is clarified that in the event of the consent of the petitioners is unreasonably withheld to the finalisation of the accounts, the first respondent would be at liberty to move this court in appropriate proceedings for such directions as they may be advised to seek. 32. Finally, on behalf of the first respondent it has been sought to be submitted that the reliefs which are prayed for in the arbitration petition, cannot be granted under section 9 of the Arbitration and Conciliation Act, 1996 since any relief granted under the aforesaid section has to be in aid of the final relief. In so far as this contention is concerned, it would be necessary to refer to the arbitration clause in the subscription-cum-shareholders agreement which provides in article 16 that any dispute/s arising out of or due to the conditionalities of the agreement shall be settled through arbitration as laid down under the Arbitration and Conciliation Act of 1996. The fir ..... X X X X Extracts X X X X X X X X Extracts X X X X
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