9911796707
TMI Blog1958 (3) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... more than 90 per cent. of the ordinary shares. The plaintiff was also the largest holder of preference shares. Under the articles, only the ordinary shares had voting rights. To become a director, one need not hold any share at all. The plaintiff was the managing director for life under the articles and under an agreement entered into between the company and the plaintiff pursuant to the articles. At the beginning the company used to deal with imported medicines. In 1939 the plaintiff conceived the idea of manufacturing medicine and with that object the plaintiff appointed Dr. Mukherjee, a very able chemist and put him in charge of the manufacturing side. Dr. Mukherjee was given full scope and every facility to manufacture medicine. Dr. Mukherjee in his turn proved his worth. Dr. Mukherjee's services to the company were recognised and he was made a director of the company in July, 1940. In a formal resolution passed in a meeting of the board of directors held on May 4, 1943, the plaintiff as managing director recorded that the success achieved by the company was chiefly due to the quality products prepared by Dr. Mukherjee. The phenomenal success of the company will appear from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the share capital by the issue of 60,000 additional ordinary shares. There is a minute of the company to this effect. The plaintiff contends that it is a false minute. Be that as it may, it is clear that there was open hostility between the plaintiff on one side and Dr. Mukherjee, with whom Dr. Neogy sided, on the other. Events began to move rapidly thereafter. A meeting of the board of directors was alleged to have been held at 4 p.m. in the office in which Drs. Mukherjee and Neogy were alleged to have been present. No notice of the meeting was given to the plaintiff because Dr. Mukherjee was proceeding on the basis that the plaintiff had ipso facto vacated his office as director. In this meeting a number of important resolutions were passed. Services of seven employees who, apparently, were loyal to the plaintiff were terminated. The plaintiff was deprived of the power of operating on company's account. Messrs. Mukherjee and Biswas were appointed solicitor of the company and lastly the company was declared to have a lien on all the shares registered in the name of the plaintiff for the sum of Rs. 4,00,887-14-8 alleged to be a debt due by the plaintiff to the company on the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointed by P.B. Mukherjea J. against which an appeal was preferred. This is Appeal No. 56 of 1955. An injunction was issued on the plaintiff's application in Suit No. 3112 of 1954 restraining the sale of the same shares, as in the instant suit. Ultimately the suits were settled and withdrawn, and on January 24, 1956, the receiver made over possession of the company to Dr. Mukherjee pursuant to the order of the appeal court in Appeal No. 56 of 1956. On the same date the shares in suit were sold to the defendant, Ramapada Gupta for Rs. 2,67,520. The defendant Ramapada Gupta is alleged to have paid Rs. 1,30,000 on account of price and the balance to be paid after delivery of the relevant share certificates. Ramapada's name was immediately entered in the share register as the owner of the said shares in place of the plaintiff. This will appear from the letter written by the company to Ramapada Gupta bearing date 24/25th January, 1956. By a letter dated February 1, 1956, the plaintiff was informed by the company that in enforcement of the lien the entire bunch of ordinary shares of the plaintiff had been sold "and the purchaser's name had been entered in the register of members as the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to act as such, that the plaintiff was liable to pay to the company the sum referred to in the letter dated September 24, 1954, that the same was presently payable and that the company had a lien on the shares of the plaintiff for the said sum, that the sale was properly effected in enforcement of the lien. It is alleged that the plaintiff is not entitled to challenge Ramapada's title as purchaser. It is denied that the sale was fraudulent or fictitious as alleged in the plaint. In paragraph 22 the point is taken that the suit is bad for non-joinder of necessary parties. In paragraph 23 it is pleaded that the suit is barred by the provisions of Order II rule 2 and Order XXIII rule 1(3) of the Code of Civil Procedure by reason of the withdrawal of suits Nos. 3112 and 3117 of 1954 without permission to institute a fresh suit. The defendant Ramapada Gupta in his written statement made out substantially the same defence. In paragraph 1 of the written statement he sets out the informations he had when he purchased the shares. The only information he had was that the shares belonged to the plaintiff, that the plaintiff was indebted to the company for Rs. 4,00,887-14-8 for which the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entering the name of defendant No. 1 in the share register of the company? 7.Is the plaintiff entitled to rectification of the share register? 8.Did the plaintiff continue to be the owner of the shares in suit after the date of alleged sale? 9.Did Dr. S.L. Mukherjee or Dr. Neogy vacate their office of directors or cease to be directors of the company as alleged in paragraph 9 read with paragraphs 7 and 8 of the plaint? 10.Is the suit bad for non-joinder of Dr. S.L. Mukherjee and Dr. Neogy? 11To what relief or reliefs, if any, is the plaintiff entitled?" In support of his case the plaintiff tendered his own evidence. The defendant company tendered the evidence of Dr. S.L. Mukherjee, its present managing director, Sri Bimal Mitra, the accountant in 1954, and a number of other employees of the company and one Dr. Das Gupta. Defendant Ratnapada Gupta did not tender his own evidence nor call any witness to tender evidence on his behalf. Over and above this oral evidence, a large mass of documentary evidence has been tendered. To prove the plaintiff's liability, entries in the ledger books of the company for various years, a number of statements compiled by the officers of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ods sold and delivered. The nature of the claim against the Great Britain company is not very clear. The original indebtedness is alleged to have arisen in 1948, when the defendant company is alleged to have advanced a considerable sum of money to the British company. This sum represents the price of goods sent by the British company to the defendant company. Gradually as the goods were sold by the defendant company the sale proceeds were credited to the Great Britain company and the debit entry being the amount advanced have been decreased. According to the plaintiff, a considerable amount of the said consignment sent by the Great Britain company is there still. The transaction according to the entries in the book does not appear to be a case of sale by the British company. Entries are more consistent with agency, the defendant company having acted as the agent of the Great Britain company and advanced the value of the goods to the principal. But assuming as I do that there are debts due by these foreign companies to the defendant company, I do not understand how they become the liability of the plaintiff. Regarding the claim made on account of the unusual discount alleged to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t contracts for sale, purchase or supply of goods between the defendant company and the other companies were effected by the plaintiff without the consent of the other directors of the defendant company. If there is no proof of any one of the above facts, the section would not apply. It is proved from the plaintiff's admission contained in his letter to the company dated July 7, 1954, that he was interested as a member and/or director of the three companies though there is no evidence as to when the plaintiff became interested so as to enable the court to ascertain whether at the time of each contract for sale or purchase the plaintiff was interested as such. There is no evidence that the Pakistan company and the Great Britain company are private companies, though the plaintiff stated in his cross-examination that Ceylon company was a private company. Each of these companies is a foreign company, and Mr. Choudhury is entitled to argue, as he did, that the "private company" referred to in section 86F must be a private company as defined by the Indian Companies Act, which does not include a foreign company. Thirdly, no contract for sale has been proved to enable the court to ascertai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be liable for the balance of price due and payable by the foreign companies. Mr. Das further argued that even assuming that section 86F does not cover the case, the plaintiff is, nevertheless, liable on general principles. The plaintiff as a director was occupying a fiduciary position vis-a-vis the company. Occupying as he did a fiduciary position the plaintiff as a director of the defendant company could not in law enter into any dealings with the Great Britain, Pakistan and Ceylon companies in which the plaintiff had interest. This is not permissible on the broad ground that there was a possibility of conflict of duty and interest, that is, duty as a director of the defendant company and interest of the plaintiff in the three above companies. The court of equity in such cases strikes down a contract and refuses to enforce it. In the instant case, the plaintiff as managing director of the defendant company did deal with Great Britain, Pakistan and Ceylon companies, in which admittedly the plaintiff had interest. All these contracts the court of equity would refuse to enforce. Therefore they are illegal contracts under section 23 of the Indian Contract Act. If the contracts resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the entire law of trust and the whole body of rules enunciated by the court of equity defining the rights and liabilities of the trustees, to determine the rights and liabilities of a director. The conduct of the directors is to be measured with reference to the character of the undertaking which they are appointed to manage and conduct. In the case of an ordinary commercial company, a director does not commit a breach of trust when he, in the usual course of business, sells or purchases goods from another company in which the director had interest. He is only liable for breach of trust when he misapplies the fund and misappropriates any assets. In the instant case, the plaintiff as managing director has neither misappropriated the funds or the assets of the company nor is he alleged to have committed any breach of bye-laws. How then can the plaintiff be held liable? I do not understand the argument of Mr. Das that section 23 of the Indian Contract Act applies to the case of a contract entered into by the managing director of a public company with another private company in which the said director has interest. Mr. Das has cited certain cases in which the court of equity refused ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular letter dated August 16, 1954, is binding on him. On the basis of entries in the general ledger book, the plaintiff's liability to the company as on October 31, 1953, must be held to be Rs. 57,797. Subsequent liability has to be strictly proved. I am not satisfied that the entries in the general ledger from November 1, 1953, to September 10,1954, were made before the plaintiff was ejected from office on September 10, 1954. Nor am I satisfied with the entries made in the control ledger. The probabilities are that these entries were made after the plaintiff was ejected and made under the direction of Dr. S.L. Mukherjee, who was ruling over the destinies of this company since then. Dr. Mukherjee was over-anxious to build up as much liability of the plaintiff as possible. The entries in the general ledger and control ledger cannot be taken as sufficient to make the plaintiff liable. The other evidence is the vouchers. To the extent the vouchers are signed by the plaintiff and such of the vouchers as have been proved to represent payment made to the bank on account of the plaintiff's relations or plaintiff's such relations as wife and daughter, they will constitute the liability of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff to the company as much as possible, so as to give them a pretext to sell the entire ordinary shares of the plaintiff. Dr. Mukherjee and Dr. Neogy knew that so long as the plaintiff had this large block of ordinary shares which carried the voting right, their position in the company was extremely insecure. The shares in suit were sold in exercise of the power of sale given to the directors by the articles of the company to enforce the lien. It has been argued that in the instant case there was no power of sale and in any event, the resolutions imposing lien and enforcing the lien by sale were passed by men who were not directors of the company. This leads us to consider the articles under which the sale took place. The relevant articles are articles 16, 17, 18, and 19, and are set out below: "16. The company shall have a first, and paramount lien and charge available at law and in equity upon all shares (whether fully paid or not) registered in the name of any member either alone or jointly with any other persons for his debts, liabilities and engagements whether solely or jointly with any other person to or with the company whether the period for the payment, fulfilment or dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any such lien" and does not mention "any charge." Mr. Chaudhuri contended that on construction of these two articles it must be held that though for the debts and liabilities due to it the company shall have under article 16 a lien at law and charge in equity, yet it is only in those cases where the company has a lien at law that the directors were authorised to sell under article 17. The directors have no authority to sell shares with respect to which the company had no lien at law, but merely an equitable charge. There would be lien only in those cases where the company had the share-scrips in its possession, that is, the word "lien" has been used in the sense of "possessory lien" of share scrips. With respect to the shares, the scrips of which are not in possession of the company but of the members, there would be equitable charge and shares subject to such equitable charge were not intended by the parties to be sold by the company under article 17. The only way in which such equitable charge could be enforced is by way of a regular suit in a civil court. It has been argued, on the other hand, by the learned counsel for the defendants that the word "lien" has a more comprehensi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equitable charge. What then can the "lien at law" mean except the possessory lien on the share scrips recognised by the law in this country and understood by all? Again, the share scrips may not be documents of title. But under the Sale of Goods Act the shares are marketable property and goods as defined in the Sale of Goods Act. When the Sale of Goods Act defines "goods" to mean "every kind of movable property... and includes...shares" it must have meant the share scrips which can be dealt with in the bazar as "movable property." It is true no shareholder can be in possession of the share register which must be kept in the registered office of the company under the Companies Act, but the share scrips representing the shares are themselves goods and can be delivered to the shareholders. The company like any other person can have possessory lien with respect to these share scrips. It has been contended that under the Companies Act the company cannot retain the share scrips beyond a certain period, but this does not mean that under a collateral agreement under the articles the company is debarred from retaining possession of the share scrips in exercise of its possessory lien. Here i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is case the resolutions declaring lien and to sell the shares in enforcement of the lien were passed by two directors-Dr. Mukherjee and Dr. Neogy. So also the resolution to sell the shares to the defendant Ramapada was passed by the same Dr. Mukherjee and Dr. Neogy. It is argued by Mr. Chaudhury that all steps to enforce the lien by sale must be held by directors properly and lawfully appointed, and if at the material time Dr. Mukherjee and Dr. Neogy were not directors then there has been a non-compliance with the articles and the sale must be held to be invalid. The Companies Act and the articles provide for the appointment of directors by election in the general meetings and by co-option. Except the plaintiff, who is the ex officio managing director, every other director must either be elected in general meeting of the shareholders or appointed in a board meeting. Dr. Mukherjee and Dr. Neogy purported to act, at all material times, as elected directors. It is very strongly urged that there has been no proper meetings of the company and no proper appointment of directors. Dr. Mukherjee and Dr. Neogy were not directors of the company at all. They were mere usurpers. Such usurpers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir office fifteen months after that date, within which the next annual general meeting should have been held. Hence all the acts of these directors including the act of convening the annual general meeting of 1953, holding the meeting, re-electing directors without proper nomination as provided by the articles are invalid. Again, assuming that these directors appointed by the general meeting held on April 6, 1953. could act as such, they in their turn continued to be directors for fifteen months, and if no general meeting is held thereafter, they vacated their office on July 6, 1954. After that date, the company had no directors entitled to act as such. Thereafter, these directors whose office had expired, cannot act as the board of directors of the company. Such a board cannot give any order for convening any meeting of the company, recommend for re-election of directors whose office long expired and secure their re-election as. directors without proper nomination by members as required by the articles. On these grounds, it was strongly urged by Mr. Chaudhuri that the 12th, 13th, 14th and 15th annual general meetings held on December 30,1954, and adjourned and held on January 6, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after the expiry of the period when the meeting was required to be convened, that is, 15 months after the last meeting, all acts and transactions of the company would be illegal and void and the position would be intolerable. Surely this could not have been the intention of the Legislature. It is not correct to say that once the period stated in section 76 of the Act is over, no annual general meeting can be convened without the order of the court. Section 76(3) is an enabling section. But apart from it, there is no reason why the requisite number of shareholders under section 78 or 79(2) would not be entitled to convene an annual general meeting, which is overdue and which the directors have defaulted in convening within the prescribed period. If certain technicalities stand in the way, those technicalities should be brushed aside and provided proper notice is given to all entitled to notice, the court should uphold such a meeting and recognise as valid all acts done in that meeting, including the appointment of directors and passing of the accounts, even though the meeting is held without an order of the court. Even if the meeting was not properly convened, it is nothing more th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... management of the company and could not be and was not aware that anything irregular had taken place. The learned Lord Justice upheld the claim under the policy with the following observation: "The company is bound by what takes place in the usual course of business with a third party where the third party deals bona fide with persons who may be termed de facto directors, and who might, so far as he could tell, have been directors de jure." It is to be noticed that this case is one of defective or irregular appointment. The original directors named in the articles having refused to act, the managing director co-opted directors in their place. In the case of Mahony v. East Holyford Mining Co. Ltd. [1875] LR 7 H.L. Cas. 869, the official liquidator of a company in liquidation sought to recover from the banker the amount paid on cheques drawn by the directors who were not directors properly appointed. In this case also the court held that an outsider was not expected to know the indoor management of a company so as to ascertain whether the directors who signed the cheques in the usual way were properly appointed directors or not. The Lord Chancellor in his speech observed as follows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o title to it, in their office at 12 Grafton Street, the place where the office of the company was described in the prospectus as being-if the allowed persons who were not entitled to do it to carry on all the business of the company there-to act as directors and as secretary there; especially if they allowed them to perform the most important business of drawing cheques (for they must have known their own deed which says that that can only be done by a draft of three directors, and they must have known that money must be had for the purposes of the company), if there is a fault on the one side or the other, it is on the side of those who allowed all those transactions to take place, when they were not conducted by persons legitimately appointed on the part of the company. On the other hand, on the part of the bankers, I see no possible mode by which they might have pursued their inquiries in the manner contended for at the Bar without requiring all the minute books of the company to be produced to them, and without conducting a detailed investigation into all the transactions of the company as to the appointment of directors and the like-a duty they were not called upon to perfor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard should not be less than three. The articles provided that the board of directors shall regulate their meetings and determine the quorum necessary for transaction of business. There was an article like section 86 of the Indian Companies Act. The defendant, after being elected director took part in the meetings wherein shares were allotted to different applicants. The defendant joined the other two directors in writing a letter to the bank manager as to what cheques were to be signed and honoured. After doing all these acts, the defendant withdrew his application for shares. The company instituted a suit to recover the share money on the footing that the defendant was a shareholder and was liable for the share money. It was held that the defendant was liable. Lord Coleridge C.J. based his decision on three points-The directors were entitled under the articles to act by a majority. "If there were three directors the two acted as the majority of the board. If there were two directors only; the two were acting in a casual vacancy. The board does not come to an end because a casual vacancy occurs...........until Fry's resignation was accepted the board did act by a majority and did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endered valid by rule 9." The argument of Cozens-Hardy referred to by Lindley L.J., is to be found in page 357: "The cases under the Companies Act, 1862, section 67, furnish an analogy; they shew that an outsider who knows nothing of the irregularity is safe in dealing with a board of directors however irregularly appointed but that the case is different where the irregularly elected board seeks to impose a liability on others, as, e.g., by forfeiting shares. So here a contractor would have a good claim against the board, but the case of seeking to impose a liability on outsiders apart from contract is quite another matter." Bowen L.J. the third member of the board took the same view as the other two. In Dawson v. African Consolidated Land and Trading Co. [1898] 1 Ch. 6 , a shareholder resisted the claim of the company to recover share money on the ground that there were defects and irregularities in the appointment of directors, i.e., the directors were not de jure directors. One of the most important irregularities alleged against a director was that he parted with all his shares and in consequence under the articles he was not qualified to be a director. This director, howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion shares. It was held that the irregular allotment was done by de facto directors which validated by the Companies Act as the directors acted bona fide which was not disputed. It was held that the provisions of section 99 of the Companies Act should be construed broadly as between the company and its members as well as between the company and outsiders. Reliance was placed on the observations made at page 515 and set out below. These observations were made after pointing out that the appointed persons were not at the moment of their appointment qualified and a slip was made. Nevertheless acting in good faith they accepted the shares and acted and continued to act as directors. "The question is whether their acts as de facto directors are protected by section 99 of the Companies Clauses Act, 1845. It has been said that in substance the law is stated in a very short passage in Buckley on the Companies Acts, 9th Ed., p. 169, where it is summed up in these words : it is the note to section 74 of the new Act : 'Endangering accuracy for the sake of brevity, it may be said that the effect of this section is that, as between the company and persons having no notice to the contrary, dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Consolidated Nickel Mines Ltd. [1914] 1 Ch. 883, the question was whether a director who continued to act as such after the expiry of office was entitled to remuneration as director. The court held that the directors vacated their office on the last day on which the general meeting for the year could have been held and were not entitled to any remuneration for the subsequent period. At page 888 Sargant J. makes the following observation : "A director on his appointment does not ordinarily step into an office which is perpetual unless terminated by some act, but into an office the holding of which is limited by the terms of the articles..........The duty of the directors was to call a meeting in 1906 and 1907, and they cannot take advantage of their own default in that respect and say that they still remained directors." In the case of Morris v. Kanssen [1946] 16 Comp. Cas. 186 decided by the House of Lords, it was held that section 143 of the Companies Act and Table A, article 88 (the same as section 86 of the Indian statute) applied only to acts done by persons acting as directors whose appointment or qualification was afterwards found to be defective. They did not cover a ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion provided that the directors should be elected annually at a general meeting. It follows, therefore, that so long as the general meeting is not held in which the directors are to be elected the directors elected at the previous general meeting would continue in office. It is contended by the learned advocate for the respondent that according to the true interpretation of the articles the directors would hold office only for one year from the date of their appointment, and if no general meeting is held at the lapse of one year the directors would automatically vacate their office and the company would go on without any directors at all. I am unable to accept this contention of the learned advocate as it seems to me that it would be unreasonable to hold that this is the true meaning of the articles of association." In the case of Ananthalakshmi Ammal v. Indian Trades and, Investments Ltd. [1952] 22 Comp. Cas. 324 , decided by a Division Bench of the Madras High Court it has been held that "the directors who were due to retire at the annual meeting next to that held on the previous occasion should be held to have vacated office on the last date on which the annual meeting should h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... done by an agent without authority will become binding on the principal after ratification. It has nothing to do and cannot affect the party other than the principal on whose behalf the agent purported to act without authority. In the instant case by retrospective appointment of Dr. Mukherjee and Dr. Neogy as directors, the company might be deemed to have ratified all the acts of Dr. Mukherjee and Dr. Neogy leading up to the sale of the plaintiff's shares and as such the sale may be binding on the company. Before retrospective appointments the acts of Dr. Mukherjee and Dr. Neogy were unauthorised and hence not binding on the company. But after appointment retrospectively those acts may become binding on the company. But does it become binding on the plaintiff ? Does this ratification take away the right of the plaintiff to repudiate the sale which was effected by unauthorised persons ? The plaintiff only gave authority to the directors to sell after taking necessary steps as provided in the articles and if the sale was effected not by directors but by some unauthorised persons the plaintiff's right to repudiate cannot be affected by the company's ratifying the unauthorised acts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that all acts of such a de facto director whether appointed or not should be upheld by the court. If such be the policy of law why enact section 86 of the Companies Act giving only qualified validity to some acts not of all de facto directors but of those only who have been appointed but whose appointment is found to be defective ? It is to be noted that in all cases in which the court upheld the act of a "de facto director" in which the outsider has dealt with such "de facto director" bona fide the court did not uphold the act because it was valid. They were held to be invalid, but the company was precluded from raising the question of the invalidity of the acts, on principles akin to estoppel and holding out, only to protect the bona fide third party. I have kept out of consideration for the present, the acts of a "de facto director" with whom an innocent third party deals bona fide. This aspect of the question will be considered later. In the instant case I hold that on 20th and 24th September, 1954, Dr. Mukherjee and Dr. Neogy had vacated their office as directors as fifteen months had expired after the last annual general meeting held on April 6, 1953. The resolution determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the meaning of the Companies Act and the articles, because he acts as such even though he does it without any lawful authority. Assuming again that the 12th, 13th, 14th and 15th meetings were valid and good, the resolution appointing directors for periods passed restrospectively cannot be anything more than the ratification of acts done by those who purported to act as directors, provided those acts can be ratified. In my judgment Dr. Mukherjee and Dr. Neogy were not directors at any event from July, 1954, onward having vacated their office, and they had no authority under article 17 to declare and/or impose and/or enforce the lien on shares and/or sell them. These are wholly unauthorised acts and ratification of such unauthorised acts by the company cannot take away the right of the shareholder to repudiate such unauthorised acts. It is next contended by Mr. Chaudhury that assuming Dr. Mukherjee and Dr. Neogy were directors, they as directors had no authority to sell the shares because the conditions for the exercise of that power are lacking in the instant case. The conditions precedent to the exercise of the powers are: (1) money must be presently payable (2) until a demand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Dr. Mukherjee had occupied the saddle after ousting the plaintiff and selling the shares with the greatest possible expedition. The motive behind these acts on the part of Dr. Mukherjee and Dr. Neogy is clear and palpable. Mr. Chaudhury has argued that when the motive of the directors is not to benefit the company but to promote their own interest by driving away the plaintiff from the company such acts of the directors would not be upheld the court. In support of this argument Mr. Chaudhury has cited the case of Nanalal v. Bombay Life Insurance Co. [1950] 20 Comp. Cas. 179 , decided by the Supreme Court. In this case the directors increased the share capital of the company with two objects in view : (1) company needed additional capital, (2) to prevent cornering of shares by one group, a group of outsiders, namely, the Singhania group. This act of the directors in passing a resolution to issue additional shares was challenged on the ground that the directors did it to protect their own position. The court upheld the action of the directors. There was a concurrent finding of fact by the courts below that the resolution was passed because the company needed additional funds and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shares. However improper the motive of the directors might be, the legal right of the company to sell the shares to enforce the lien cannot be affected and the motive of the directors has no bearing on the question. The company had a legal right and the company enforced it. The court has no power to question the right of the company to exercise its legal right to sell the shares in exercise of lien for a debt due from the plaintiff as shareholder. The second point urged on behalf of the defendant is that the motive of sale immediately on getting possession of the company on January 24, 1956, was that the directors needed cash money to meet heavy disbursements in the first week of the following month. Possession was given to Dr. Mukherjee on January 24, 1950, and the company needed cash money to the extent of about Rs. 1 lakh to meet heavy expenses in the first week of February next. It is in evidence that at the time when possession was made over to Dr. Mukherjee by the official receiver, Dr. Mukherjee got Rs. 10,000 in cash on the same date and the company had over Rs. 7 lakhs lying in the bank in the account of the official receiver. Dr. Mukherjee explained that he apprehende ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision would be of assistance to Mr. Chaudhury. No doubt, the directors were acting in a fiduciary capacity and they must act for the benefit of the company. But the act of recovering a debt due to the company by a director must necessarily be of benefit to the company and in such a case improper motive of the directors would be immaterial and the principles laid down in the Supreme Court case would be hardly applicable. But in this case, the acts were not of directors de jure but only of directors de facto and the acts of the de facto directors are only upheld if the acts are done bona fide in the interest of the company. If, however, the sole motive was not to benefit the company but to promote the private interest of the de facto directors, then the principles in the Supreme Court case would apply and the acts of the de facto directors would not be upheld by the court. Mr. Chaudhury has urged that the sale in the instant case is not merely irregular but illegal. The conditions laid down in article 17 for the exercise of the power of sale not having been fully satisfied, the directors had no power to sell the shares, and the sale was illegal as being beyond the power of the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a wide power has been given by the shareholders to the directors. I am not impressed by the argument that the articles should be construed beneficially in favour of the company and hold that the shareholders have given full authority to the directors to determine the quantum of indebtedness and to sell the share to liquidate the indebtedness. In the absence of a clear covenant to that effect, I will not assume that such wide power has been given to the directors. Neither article 16 nor article 17 contains any covenant whereby it can be said that the shareholders have agreed that for the purpose of sale under article 17, whatever amount the directors choose to decide would be the liability of the shareholder. If the construction called for by the defendants is correct, then it follows that even though the indebtedness of the shareholder is far less than what is determined by the directors the shareholder is powerless to prevent the sale and the court is equally powerless to prevent the sale, oven if the court is satisfied that the indebtedness is far less than what is determined by the directors. If the amount of indebtedness as fixed by the directors cannot be challenged in court, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares in enforcement of a debt summarily was recognised to be very serious from the standpoint of the shareholder. Hence it is provided that no sale shall take place unless there is a demand for payment in writing clearly stating the amount due and giving notice that in default of payment the shares will be sold. That is, full opportunity must be given to the debtor shareholder to pay his debt and it is only on his failure to liquidate his indebtedness that the shares may be sold. It cannot, therefore, be contended that even if no proper notice is given stating correctly the amount of liability, but the demand is for a fantastically large amount the debtor shareholder is bound to comply with that illegal demand and pay or otherwise his shares would be sold. Neither the debtor shareholder nor the creditor company could have entered into such a covenant. Such a construction is manifestly unjust. I am not compelled by the language of the article to construe the article in the manner suggested, on the sole ground that otherwise the company may be prevented from selling the share and the power of sale may prove to be illusory. The points discussed above would have been conclusive if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been argued with rare forensic ability and I may state at once that no litigant got better legal assistance than what the defendant Ramapada Gupta got in this case. I need hardly say that the arguments advanced on behalf of the defendant Ramapada Gupta deserve very careful and serious consideration and to the best of my ability I have tried to appreciate them. Assuming that the transaction resulting in the sale of shares is illegal in the sense that the directors under the articles had no power to sell or that the sale had been effected by directors with defective appointment or that the sale was effected without satisfying the conditions laid down in article 17 or that one important step in the transaction, namely, the determination of the liability and decision to enforce the lien by sale of the shares and giving notice required, was taken by those who at the time had ceased to be directors, then the defendant Ramapada can only protect his title as purchaser at such sale either under section 86 of the Companies Act, or article 19 of the articles or by invoking the rule in Turquand's case (supra). In each of these cases, however, the sale will not be upheld by the court unless ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serious. No shelter has been taken by the learned counsel behind the conventional ground of sudden illness or being called away suddenly on urgent piece of business, often taken and seldom accepted by the court. A very bold stand is taken that Ramapada has been advisedly withheld from the court, because Ramapada has been advised that his evidence is not necessary. The reasons given for taking this attitude have now to be very carefully considered. It is urged, in the first place, that on the plaint Ramapada Gupta has no case to meet. The suit as against Ramapada Gupta must be dismissed in limine. This argument is an argument on pleadings. I have gone through the plaint very carefully. The drafting of the plaint may not be artistic and leaves considerable scope for improvement. But I am unable to hold that the plaint does not disclose a cause of action against the defendant Ramapada, so that I should dismiss the suit in limine as against Ramapada. The plaint does state the various acts leading up to the sale of the shares and the rectification of the share register by substituting the name of Ramapada in place of the plaintiff as the holder of these shares. It is then alleged that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... knowledge prior to the transaction. Without knowledge prior to the sale, there can be no connivance, no collusion and no conspiracy. It cannot, therefore, be held that the plaint does not disclose any cause of action against the defendant Ramapada Gupta and that in consequence the defendant Ramapada Gupta had no case to meet. It is next argued that assuming that the plaint does disclose a cause of action against defendant Ramapada Gupta, nothing has been proved against him in the proceedings. The plaintiff who is the only witness on his behalf stated that he never knew Ramapada nor does he know him now. There being no evidence led by the plaintiff to prove that Ramapada had prior knowledge of the wrongful character of the sale there was no occasion for Ramapada to give rebutting evidence. The argument is that the presumption of law is in favour of the defendant, Ramapada, namely, that he acted in good faith in the transaction. That presumption has to be rebutted by the plaintiff in the first place by leading evidence to prove that there was bad faith on the part of Ramapada. The plaintiff has tendered no such evidence to rebut the presumption. Hence the presumption in favour of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve that the defendant Ramapada did not act bona fide in good faith, and this being one of the essential facts to be proved in support of the case of the plaintiff, the observation of Bowen L.J. above referred to applies with full force to the facts of this case. In the instant case the want of bona fides on the part of Ramapada consists in his knowledge that the act of the directors in selling the shares was unauthorised and wrongful. That knowledge can be proved by tendering positive evidence. For instance, it may be proved that Ramapada made an admission that he had knowledge prior to sale that the sale was unauthorised and wrongful. That would be direct evidence on the point, though it must be considered that rarely such evidence of the state of mind is available. In any event, no direct proof of Ramapada's knowledge has been tendered in this case. The evidence is that the plaintiff did not even know the defendant Ramapada. It must be held, therefore, that there is no direct evidence to prove that the defendant Ramapada had knowledge of the wrongful and illegal character of the transaction. The other way of proving knowledge is to establish facts and circumstances from which an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mukherjee. The defendant Ramapada on 10th January came and saw Dr. Mukherjee and intimated his desire to purchase the shares of the plaintiff. Defendant Ramapada was not interested in purchasing other ordinary shares that were clearly available on that date. The defendant Ramapada took away the papers in connection with the litigation and on the following day made an offer in writing to purchase the shares. The letter containing the offer dated January 11, 1956, was not originally disclosed and the genuineness of the letter was questioned by the plaintiff in court. On the 24th, shares were sold to the defendant Ramapada and in the evening a part of the purchase price amounting to Rs. 1,30,000 was paid in cash. The cash money thus paid was never proved to have been deposited in bank. The name of the defendant was immediately entered on the share register as the owner of this big bunch of shares in place of the plaintiff and there was no transfer deed. The defendant Ramapada was appointed a director even before he had paid the price of shares. Dr. Mukherjee has not been cross-examined by Ramapada Gupta and it must be taken that he has accepted this evidence of Dr. Mukherjee. These fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... full knowledge of the entire transaction resulting in the sale of shares and on my finding that the transaction was wrongful I am bound to hold that the defendant Ramapada did not act bona fide in the impugned transaction. This finding negatives the argument made on behalf of Ramapada that his purchase is protected by section 86 of the Companies Act and/or by article 19 of the articles of the company or by the rule in Turquand's case (supra). Let me, nevertheless, consider how far the sale is protected on the basis of this argument. I have held that at the time when the resolution to enforce the lien by sale of the shares was passed on September 23, 1954, and the notice in terms of article 17 was served on the plaintiff pursuant to that resolution on September 24, 1954, the directors who purported to act in the matter, that is, Dr. Mukherjee and Dr. Neogy, were no longer directors, their office having expired in July, 1954, that is, fifteen months after the last annual general meeting held in April, 1953. This resolution and notice sent thereunder is, therefore, not protected by section 86 of the Companies Act, because in law the section validates only the acts of directors with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale and, in the instant case, the conditions have not been fully complied with. I am. in doubt whether this only amounts to "irregularity or invalidity in the proceedings in reference to the sale" within the meaning of article 19. The rule in Turquand's case (supra), as stated in Halsbury's Laws of England, Hailsham Edition, Volume V, page 423 and quoted in Kanssen's case (supra), is in the following terms: "But persons contracting with a company and dealing in good faith may assume that acts within its constitution and powers have been properly and duly performed and are not bound to enquire whether acts of internal management have been regular." This presumption of regularity in the internal management of the company in favour of an outsider dealing with the company is due to the fact that an outsider has no right to look at the indoor management of the company. This rule has been followed in a number of decisions some of which have been already noticed. This rule of indoor management was also applied by a Division Bench of the Bombay High Court in the case of Pudumjee and Co. v. N.H. Moos AIR 1926 Bom. 28, with the following observation: "Persons contracting with the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew. It seems to me that the questions may be put very shortly: Aye or no, were the parties in the transaction acting in good faith? If they were, section 99 ought to be available for all parties including the directors themselves. If there is a lack of good faith, then of course the court will not allow those who are lacking in good faith to take the benefit of it." The test, therefore, is the presence or absence of good faith. The reasons in support of the rule in Turquand's case (supra) have been stated by Lord Simonds in Kanssen's case (supra) : "One of the fundamental maxims of the law is the maxim omnia praesumuntur rite esse acta. It has many applications. In the law of agency it is illustrated by the doctrine of ostensible authority. In the law relating to corporations its application is very similar. The wheels of business will not go smoothly round unless it may be assumed that that is in order which appears to be in order. But the maxim has its proper limits. An ostensible agent cannot bind his principal to that which the principal cannot lawfully do. The directors or acting directors or other officers of a company cannot bind it to a transaction which is ultra vires. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough the dispute has arisen because of the act of the company ? The rule applies in the case of a dispute between an outsider and the company. But the instant dispute is not a dispute between the company and Ramapada, but a dispute between the defendant Ramapada and the plaintiff. The rule in Turquand's case (supra ) may prevent the company from disputing the title of Ramapada to the shares. But can it be invoked by Ramapada to defeat the plaintiff's title to the shares? The question is certainly not free from difficulty. The shareholder in law is distinct from the company and the shares are his property. The articles which create a lien and charge constitute nothing more than covenants between the company and its shareholders. If the shares are sold in breach of the covenants the shareholder may yet covenant, as he has done in the instant case, that the sale will not be set aside, because of any irregularity or invalidity in connection with the sale. This is article 19 of the articles of association of the company. If the shares are wrongly sold, the plaintiff may be debarred from, questioning the purchaser's title by reason of the covenant contained in article 19. But if the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in any event, fixed with the knowledge of article 17. I have held that article 17 gave no power to the directors to sell the shares with respect to which the company had no lien in terms of the articles. From the letter of Ramapada to the company it is clear that Ramapada knew that the shares scrips were not available at that point of time. Hence, even if under the rule in Turquand's case (supra) the defendant Ramapada as a total outsider may be entitled to assume that the directors were properly appointed, that the directors properly determined the liability of the plaintiff, that all steps were taken by the directors properly, that is, the conditions laid down in article 17 have been complied with, he was not entitled to assume that the directors had power to sell. Article 17 of which he must be deemed to have notice, gave no power of sale of shares with respect to which the company had no lien at law but only equitable charge. Hence the rule in Turquand's case (supra) is of no avail to Ramapada. It has been strenuously urged that the defendant Ramapada had no doubt knowledge of the allegations made by the plaintiff in the various suits disputing the right of Dr. S.L. Mukherje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he petition, he could have known the real reason of withdrawal of the suit. Further, in the petition before the appeal court for delivery of the company to the plaintiff's party it was clearly stated that they were the proper party to whom possession was to be made over by the official receiver and not to Dr. Mukherjee and Dr. Neogy. The court, however, held that possession was to be made over to the party from whom possession was taken. This conduct of the plaintiff cannot be construed to mean that he gave up the claim that he had made and has made up till now. In any event, Ramapada, as the intending purchaser, was put upon enquiry and if he refused to make enquiry and deliberately shut his eyes to the true state of affairs, he did it at his own risk; he is not entitled to complain that he did not know the real state of affairs. In the light of these facts the defendant Ramapada Gupta might or might not have been justified in thinking that the fact of withdrawal of the suit amounted to the plaintiff's giving up the charges against Dr. Mukherjee and Dr. Neogy. But the point is, what in fact was the state of mind of Ramapada, what was the knowledge with which he purchased the share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares have not been forfeited and the company was not selling its own shares, in which case no transfer deed would be necessary. The company in the present case was selling the shares of the plaintiff and hence in law a deed of transfer becomes imperative to enable the directors of the company to register Ramapada as the transferee of these shares. This is the argument of Mr. Chaudhury. In answer to this argument it is contended on behalf of the defendants that article 19 provides for registration of shares sold by the company in enforcement of lien even without a deed of transfer. I do not think that article 19 does provide for registration without a deed of transfer. It only provides that upon any such sale as aforesaid, the directors may enter the purchaser's name in the register as the holder of these shares. It does not follow that the article enables registration without a deed of transfer. To hold that it does makes it inconsistent with the provisions of section 34 of the Act. The articles of the company should be so construed as to harmonise and be consistent with the provisions of the Indian Companies Act. That is the proper rule of construction. To construe otherwise, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s purchase in a court sale. It was held that such a suit is maintainable and must succeed. In his judgment Srinivasa Ayyangar J. made the following observation at page 574: "To begin with, it must be pointed out that the expression 'transfer' by itself is not altogether appropriate to indicate a sale in invitum by the court. No doubt the expression 'transfer' has been used in such collocations as 'transfer by operation of law', but at the same time the expression 'transfer' is undoubtedly more appropriate to indicate what is effected or brought about by the will of the person in whom the property is vested, as in the Transfer of Property Act." It is argued from the above observation that the "transfer" in section 34 is to be construed in the sense of voluntary transfer and not transfer under compulsion. In the instant case, the transfer has not been effected voluntarily by the plaintiff, the registered holder, but by the directors against the wishes of the registered holder. Hence it is argued by the learned Additional Solicitor-General that the observation set out above will apply not only to cases of court sale but also to involuntary sale effected by the directors to enforce l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of pledge when the pledge was given and in the case of lien when the shares were purchased. In both cases the sale is effected with the implied consent of the owner-consent having been given before, though at the time of sale the owner of the share has not only given no consent but positively objected to the sale. Indeed unless there is consent though presumed in law on the part of the shareholder, there cannot be any transfer of the property to the purchaser. Such a sale, therefore, cannot be an involuntary sale in the same sense as a court sale. A court sale is entirely 'different from such a sale. There is an express provision in the Code of Civil Procedure, Order XXI, rule 80, to the effect that where execution of a document is required to transfer shares then the execution of that document by the court would be sufficient. In other words, such document will effect the transfer. There being this specific provision in the statute with respect to shares transferred or sold in execution of a decree, the general provision in section 34 of the Companies Act as to transfer of shares is held not be applicable in the case of shares sold in execution. The reason of non-appli ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
