WHETHER THE CONTENTION THAT THE MANAGING DIRECTOR HAS NO AUTHORITY TO FILE A SUIT ON BEHALF OF THE COMPANY IS TENABLE?

[Mr. M. GOVINDARAJAN]

     Sec. 2(26) of the Companies Act, 1956 defines a Managing Director as a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or by virtue of its memorandum or articles of association is entrusted with substantial powers of management which would not otherwise be exercisable by him and includes a director occupying the position of a Managing Director, by whatever name called.

     The words 'substantial powers of management' were inserted by the Companies (Amendment) Act, 2000 w.e.f. 13.12.2000.   The first proviso to Sec. 2(26) was also inserted by the said amendment.   The first proviso provides that the power to do administrative act of a routine nature when so authorized by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on account of the company in any bank or to draw or endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share shall not be deemed to be included within substantial powers of management.

     A Managing Director of a company shall exercise his powers subject to superintendence, control and direction of its Board of Directors.

     The question raised in the topic is answered in the case law 'Wasva Tyres V. Printers (Mysore) Ltd., - (2008) 86 CLA 455 (Kar).  The facts of the case run as follows:

      The respondent/plaintiff, a private limited company, filed the suit against the appellant tenants for possession and sought damages/mesne profits for the period after termination of the tenancy.   The plaintiff before filing the suit terminated the tenancy by issuing notice under Sec. 106 of the Transfer of Properties Act.   The trial court allowed the suit and granted decree directing the tenants to vacate and deliver vacant possession of the tenanted premises.   The court also directed payment of damages at the rate varying between Rs. 5 to Rs.8 per square foot payable by each of the tenant for use and occupation of the premises from the date of termination of tenancy.   The trial court further granted interest at the rate of 12% on the damages if paid within certain time and in default to pay enhanced interest at the rate of 18%.

     The appellant filed application to produce additional documents or prove that the turn over of the plaintiff's company exceeded Rs.1 crore.  The appellant contended that the plaintiff's company had become a public limited company by legal fiction in view of the provision contained in Sec. 43A of the Companies Act.   The court considered the documentary material produced by the appellant is genuine and authentic material and received the documents as additional evidence with the consent of the respondent.   The additional evidence clinchingly established that the plaintiff company had become a public limited company.

     The contention of the appellant that the suit should fail since the company has become public limited company.   The court held that the consequences of plaintiff's company becoming a public limited company is of no consequence insofar as the rights and obligations of the company nor render any defective legal proceedings by or against it by virtue of the provisions in Sec. 23(3) of the Companies Act.   The court therefore rejected the contention of the appellant in this aspect.

     The argument strenuously put forth by the appellant is that the Managing Director who has filed suit has no proper authorization from the Board of Directors.   The provisions of order 29 of the Code of Civil Procedure, 1908 enables the Secretary, any of the directors or the principal officer of the corporation who is able to depose to the facts is competent to verify and sign the pleadings.   In the absence of proper authorization the suit filed on behalf of the company is bad in law.   The appellant relied on the ruling of the Calcutta High Court in 'Al-Amin Seatrans Ltd., V. Owners & Party interested in Vessel MV 'Loyal Bird'' (1995) 17  CLA 204 (Cal).  In this case the court held that a suit filed by Managing Director seeking various reliefs was not competent since there was no authorization from the Board of Directors.  The court analyzed the facts of the case relied on by the appellant.   In this case there was a dispute between the two groups of Board of Directors.   One group headed by the Managing Director had led the suit based on the articles of the association of the company.   In view of the dispute between the two rival groups of directors it was held that Managing Director has no complete representation capacity to file a suit on behalf of the company.

     The court observed that in this case the facts stood on a different footing.   There is no material to show that there is disagreement between directors for filing of the suit in question.   The court considered that the suit is obviously filed for the benefit of the company.

     The court analyzed the provisions of Sec. 2(26) of the Companies Act.   The words 'substantial powers of management' specifically excludes certain act from its purview.   Therefore, except the excluded acts, the Managing Director has power and privilege of conducting of business of the company in accordance with the memorandum and articles of the association of the company.   The institution of the suit on behalf of the company by the Managing Director is deemed to be within the meaning of 'substantial powers of management' since such a power is necessary and incidental for managing the day-to-day affairs and business of the company.   Therefore the court held that by virtue of Sec. 2(26) the suit instituted by the Managing Director is deemed to be within his power and authority.   The suit is obviously for the benefit of the company.   Therefore the contention raised by the appellant that the Managing Director had no authority to file a suit is untenable and the same is rejected.  The damages awarded is confirmed and fixed at Rs.5 per square foot and shall be payable within five months from the date of suit till the delivery of the vacant possession and also the appellant shall pay the monthly damages regularly on or before 10^th of every month.