9911796707
TMI Blog1971 (7) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellants as additional directors of respondent No. 3-company. The board of directors consisted at that time of 8 members excluding those additionally appointed directors. The plaintiffs have referred to the 8 directors as functioning directors and that may be to distinguish them from the appellants who are appointed additional directors. Thereafter notices dated l0th April, 1969, were received by respondent No. 3-company proposing the appellants as directors at the next annual general meeting. On June 11, 1969, the 22nd annual general meeting of the respondent No. 3-company was convened. At the general meeting two directors, Kasturbhai Lalbhai and Naval H. Tata, retired by rotation and were again re-elected as directors. At the same meeting by two separate resolutions, the appellants were appointed directors. The two resolutions are referred to in the plaint as resolutions Nos. 5 and 6. The plaintiffs by the suit challenged the legality of the appointment of the appellants on certain grounds. According to the plaintiffs the number of directors on the board can be increased by the company under section 258 of the Indian Companies Act by passing a resolution. No such resolution was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4(1) of the Act before their appointment as directors at the meeting. Without prejudice to this defence it is also pleaded that they did file the letters of consent on 9th April, 1969, with respondent No. 3-company. They argued that, as additional directors, they were persons to whom section 264(1) of the Act did not apply. Assuming that there was any such requirement, it is asserted that it was a mere irregularity and that did not disable them from acting or functioning as directors. The made it clear that it was implicit in the two resolutions appointing them as directors that the number of directors was, if necessary, being increased. According to them no separate resolution under section 258 or article 169 of the articles of association of the company was necessary for increasing the number of directors from 8 to 10. At any rate, the absence of any separate resolution will not affect the validity of the resolution appointing them as directors of respondent No. 3-company. They denied that it is mandatory under section 258 of the Companies Act or under article 169 of the articles of association of the company that before the number of directors is increased, a resolution increasi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with Mr. G. K. Munshi, instructed by M/s. Bhaishankar Kanga and Girdharilal, appears for respondent No. 3-company. It must be stated at the outset that respondents Nos. 1 and 2 have purported to file cross-objections against the finding recorded by the learned judge about the consent letters under section 264(1) of the Act. Mr. Thakkar conceded that the cross-objections are misconceived but mentioned that he had the right, as an advocate appearing for the respondents, to assail the decree under appeal on any of the grounds decided against him. Therefore, the points for determination in this appeal are : (1)Whether the board of directors of the company before and after the annual' general meeting consisted of ten members or whether at the annual general meeting the strengh of the board of directors was increased from 8 to 10. (2)Whether the company can increase the strength of the board of directors only by passing a separate and distinct resolution before proceeding to appoint directors by filling the additional sanctioned posts. (3)Has the board of directors contravened the mandatory provisions of section 173 of the Act by not furnishing any information about the proposed spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company. Section 262 deals with the filling of casual vacancies amongst directors. Under section 263(1) ordinarily there will be only one resolution for the appointment of one director at the annual general meeting of the company. A single resolution is permitted under certain special circumstances for appointing more than one director. Section 263(2) provides that a resolution moved in contravention of sub-section (1) shall be void, whether or not objection was taken at the time to its being so moved. Section 264(1) under certain circumstances requires that the candidate for directorship should file his written consent with the company before his appointment as director at the meeting. Section 264(2) requires that a person appointed as a director shall not act as a director unless he has within the prescribed time signed and filed his consent with the Registrar to act as such director. Apart from the group of these sections, there are two more sections which assume importance while deciding the points which arise in this appeal. Section 172 requires that every notice of a meeting of a company shall contain certain relevant particulars. Leaving the other details, I must only m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iffs in the plaint. He said that there is no warrant for any such distinction. Whether the directors are appointed at the meeting or by the board of directors, they all together constitute the board. The directors in that capacity have the same rights, privileges and obligations under the provisions of the Act. He referred to the definition of "director" as contained in section 2(13) of the Companies Act. In all other places in the Act the board of directors was mentioned as such and he says that the distinction sought to be made by the plaintiffs is without any legal significance. It appears to me that the plaintiffs have used the different expressions only for a better understanding of their case. The appellants were, in the first instance, appointed as additional directors and later on they were reappointed as directors. But, apart from this fine distinction in phraseology, the point of substance made by Mr. Nariman is that the company had not increased the number of directors from 8 to 10 at the annual general meeting by the reappointment of the appellants. When the board of directors in exercise of their power under section 260 of the Act co-opted the appellants, the number of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccording to Mr. Nariman all that section 258 requires is that the company, subject to the other restrictions imposed on it, must resolve to increase or reduce the number of directors in the general meeting. The section itself has not prescribed any other formality for effecting the increase or decrease in the number of directors. Mr. Nariman points out that under the Companies Act, wherever separate resolutions were found necessary, provisions were made in that behalf. He referred to section 263 of the Act. I have already mentioned above the substance of that section. Ordinarily, there will be a separate resolution for appointing a person as a director at the annual general meeting of the company. Mr. Nariman says that the company can exercise the power vested in it under section 258 by passing one or more resolutions and as no form is prescribed, one will have to look at the substance. When there are 8 members on the board of directors, the company can by simply appointing two members in addition increase the number and this can be done without passing a separate resolution. He says that it is implicit in the act of appointing. The company has exercised the power to increase the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escribe the maximum number of directors who may be appointed, appointments in excess of the maximum are void. Usually, however, the members are empowered to increase or reduce the maximum number of directors by ordinary resolution, and then an appointment of a director in excess of the former maximum is taken to be an exercise of the power to increase the number of directors, and is valid". While making the last-mentioned observation, the learned author in the foot-note has referred to the above-mentioned case. So Mr. Nariman argued that section 258 was an enabling section which authorised the company to increase or decrease the number of directors just by an ordinary resolution. As singular includes plural, one has to look at the result and not the number of resolutions to find out whether the company has exercised the power vested in it. Mr. Thakkar, with equal force, stressed the word "resolution" and said that it was a condition precedent to the valid appointment of directors resulting in the increase of the number of directors. Any other construction, he says, will render section 258 nugatory or meaningless. Mr. Thakkar tried to distinguish the said decision on certain grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions of section 258 when it chooses to appoint within the permitted limit additional directors so as to increase the strength of its present board. The learned judge was in error in coming to the conclusion that in the absence of a separate resolution the appointment of the appellants as directors of respondent No. 3-compauy was null and void. The legality of the resolutions Nos. 5 and 6 cannot be challenged on the ground that there was any contravention of the provisions of section 258 of the Act. Then I propose to consider points Nos. 3 and 4 together as the discussion of law is likely to be overlapping. Point No. 3 will involve the consideration of the provisions of sections 172 and 173 of the Act and point No. 4 is about the sufficiency or otherwise of the pleadings. I have already set out above the relevant provisions of section 173 of the Act. Section 173 will have to be read with section 172(1) of the Act. Under section 172(1) every notice of a meeting of a company, among other things, must contain a statement of the business to be transacted at the meeting. Section 173(1) contains classification of the business and indicates when the business shall be treated as s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as a director. It is recommended that he be appointed as a director". Explanatory statement accompanying Item No. 8 is identical with the difference that it is in respect of the other additional director, Shri Nimjibhai Chhangalal Kapadia. Relying on the contents of the notice in general and the explanatory notes in particular, Mr. Nariman submits that there is compliance with the requirement of section 173 of the Act. Mr. Nariman points out that under article 164 of the articles of association of the company, at every annual general meeting of the company, one-third of such of the directors for the time being as are liable to retire by rotation or if their number is not three or a multiple of three, the number nearest to one-third are to retire from office. The strength of the board was 8 and obviously the number of directors retiring by rotation will be two. Items Nos. 3 and 4 in the notice in unmistakable terms give an indication of this factual and legal position. As these items of business were not special there was no explanatory statement in the annexure to the notice. Items Nos. 7 and 8 constituted special business. The contents of these items conveyed to the body of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and contrary to the statute. None of the grounds have been pleaded. For the first time this contention appears to have been advanced in course of argument before Mr. Justice Barman. In none of the affidavits the petitioner swears that the notice was tricky, misleading or insufficient. The question is one of mixed question of fact and law, and it is not permissible to be taken at the stage of hearing for the first time". The learned judge certainly refers later on to section 172(1) and section 173(2) of the Act. At page 214, paragraph 58, Das J. observed as follows : "At the outset, I must say that the plea of invalidity of the notice was not taken either in the plaint which was filed in the court of the subordinate judge or in the petitions and affidavits before the honourable company judge of this court. At a fairly late stage of the case, oral submissions were made challenging the validity of the notice for the extraordinary general meeting of 29-3-1958. On that ground alone, the point could have been left out of consideration". However, it must be stated that the learned judges, despite the insufficiency of the pleadings, considered the merits of the case, and held that the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransacted as if it was a general meeting. The issue of debentures at the meeting W.I.P challenged as not valid. Younger L.J. agreed with Lord Sterndale M.R., who held that the shareholders must be deemed to have acted in the meeting as shareholders and not as directors. What is stated by Younger L.J. at page 471 is to the following effect : "I am of the same opinion. I am content to rest my conclusion upon what was said by Lord Davey in Solomon's case [1897] A.C. 22, 57 that a company is bound in a matter which is intra vires by the unanimous agreement of all the corporators". But, this decision is not of any assistance to us. A syndicate of five persons formed a private company. They were all the directors and also shareholders. They all attended the meeting and transacted business. The objection to the legality of the meeting was rightly overruled. Mr. Nariman then dwelt on the case, In re Oxted Motor Company Ltd [1921] 3 K.B. 32.The court held that it was not open to a creditor to impeach the validity of a resolution to wind up the company as it was competent to the shareholders of the company acting together to waive the formalities required by section 69 of the Companies ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectors shall cease to be valid if it is not approved by the company in the first general meeting held affter the date on which the appointment is made. The court held that the provision was not directory but mandatory. The mere substantial compliance was not enough but there must be a strict compliance. The impugned agreement about the appointment was referred to in the report of the directors and the same was adopted in the subsequent adjourned annual general meeting. But the adoption or approval of the report was treated as ordinary business and not as a special business. In the circumstances, the learned judges allowed the appeal and granted ad-interim injunction against the company and the directors restraining them from getting passed the resolution in the ensuing annual general meeting of the company. At page 124 of the report (Shalagram Jhajharia v. National Co. Ltd. Shalagram Jhajharia v. National Company Ltd. [1965] 35 Comp. Cas. 706 , 725, 740; [1965] 1 Comp. L J. 112 (Cal.)) Bose C.J. has made the following observations after quoting section 173(2) and (3) of the Act: "So it appears that under section 173(2) an explanatory note with regard to the special items of busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay or the other, would be a material fact under section 173(2) and has to be set out in the explanatory statement. This provision is mandatory and not directory and disobedience to its requirements must lead to nullification of the action taken". Then Mr. Thakkar brought to my notice one more decision of the Calcutta High Court in Shalagram Jhajharia v. National Company Ltd. [1967] 1 Comp. L.J. 29 (Cal.) It must be noted that the subject-matter of the litigation in this case was an impugned selling agency agreement which figured in the Calcutta decision cited earlier by Mr. Thakkar. The plaintiff challenged the legality of the notice of the annual general meeting on the ground that the explanatory statement attached to the proposed ordinary resolution was in contravention of section 173 of the Act. On facts it was held that the explanatory statement was misleading in relation to the facts stated and it did not disclose certain other material facts. While concluding that the explanatory statement in that case was bad and in violation of section 173 of the Act A. N. Ray J. indicated the correct principle of law. He says at page 36 : "The further question is whether the explanatory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to year until his place is filled up, unless it shall be determined at any such meeting on due notice to reduce the number of directors in office". The question arose whether the plaintiff, a retiring director, despite his failure to get re-elected, continued in office. His claim was resisted on the ground that the company in effect had at its meeting reduced the number of directors. Cohen L.J. overruled the contention and held that the number of directors in office cannot be reduced unless there was a specific resolution of the company to that effect after a mention of the general nature of such a resolution has been made. The concluding words of article 102 require a specific notice to that effect. Lord Greene M. R., at page 30 of the report, clarifies the legal position in the following words : "In the present case counsel for the company argued that the company had, in effect, determined to reduce the number of directors in office (a) by requiring to reelect the retiring plaintiff, and (b) by not electing anybody to fill that vacancy. I do not accept that argument. It. appears to me that the concluding words of article 102 require a specific resolution, not merely to re-elec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn the real facts. He did not know the real facts ; and, therefore, I think the resolution is not binding upon him". Now, I may sum up what emerges from these various authorities cited by Mr. Thakkar. Bearing in mind the object of the legislature, I must say that section 173 is mandatory and not directory. It is in the interest of the general body of shareholders that the legislature has made provisions in section 173(2) requiring the notice of a meeting to set out a statement containing all material facts concerning each special item of business. A notice of meeting when it contains items of special business within the meaning of section 173(l)(b) must disclose all the material facts. All the shareholders must be in a position to make up their mind in advance whether they will attend the meeting or leave it to the good sense of the majority at the meeting. Any non-compliance with this requirement will nullify the action taken at the meeting. While considering the efficacy of any such notice, a benevolent construction will not be adopted so as to defeat the provisions of the statute. It is also clear that whether or not a particular notice or an explanatory statement in a given ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to Mr. Thakkar, the parties were aware of all the relevant facts and the point about the applicability of section 173 of the Act. In this connection reliance was also placed on the affidavits filed at the interlocutory stage in support of the notice of motion taken out for interim relief. Plaintiffs had in their affidavits referred to the defective explanatory statement and said that there is non-compliance with the requirements of section 173. A reference was also made to the appeal memo. (A.O. No. 436 of 1970) filed by the respondents in this court against the interlocutory order. After considering all these submissions, I am of the opinion that Mr. Thakkar can at best show in this case that there is no explanatory note at all accompanying the item of special business. But, the averments referred to above are certainly insufficient to cover a plea that the explanatory statement appended to the notice of the meeting about the special business is insufficient or misleading. Any such plea about insufficiency of the explanatory statement is very much like the plea of fraud. It is well-settled that the plea of fraud must be substantiated by all relevant particulars disclosed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny other construction on items Nos. 7 and 8, and in my opinion the plaintiffs have failed to make out a case that there is no information at all about the proposed special business accompanied by the required explanatory statement. Then Mr. Thakkar argued that at any rate the court must hold that the information given along with the explanatory note is wholly misleading. Mr. Thakkar pointed out that the board of directors has nowhere indicated in the notice or the explanatory statement as to why it had made a proposal for increasing the number of directors. Mr. Nariman, on the other hand, submitted that the board can only disclose known reasons and it is not in a position to disclose the unknown reasons. I do not find any substance in either of these contentions. In the absence of a pleading in fact, Mr. Thakkar cannot subsequently show that there was no reason contained in the statement about the proposed increase. In my opinion the statement is a comprehensive and compendious statement. The board has in a way indicated the reasons for the increase. It has stated that it was required to appoint two men of their confidence as additional directors. It is implicit in this action an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4(1) of the Act. The appellants have indicated their consent to act as a director of the company if appointed. On April 10, 1969, the board of directors appointed the appellants as additional directors under section 260 of the Act. On April 10, 1969, separate proposals by two members were made in favour of the appointment of the appellants as directors at the ensuing meeting. Defendant No. 1, the company, in its written statement, has stated that after the receipt of the letters of consent dated April 9, 1969, the appellants were appointed as additional directors. Mr. Thakkar referred to Form No. 29, which was submitted on April 26, 1969, that is, long before the annual general meeting of the company. All these facts and circumstances, according to Mr. Thakkar, show that the letters of consent were, in fact, filed by the appellants in connection with their appointment as additional directors. The learned judge has accepted this position. But, Mr. Nariman for the appellants is challenging this finding. I may not consider this controversy at this stage As stated above, it will be necessary to point out the legislative changes before I consider section 264 in its present form. Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is substantially amended and I have to consider the section so amended. The section, in the present form, is as follows ; "264. (1) Every person (other than a director retiring by rotation or otherwise or a person who has left at the office of the company a notice under section 257 signifying his candidature for the office of a director) proposed as a candidate for the office of a director shall sign, and file with the company, his consent in writing to act as a director, if appointed. (2) A person other than- (a)a director reappointed after retirement by rotation or immedi ately on the expiry of his term of office, or (b)an additional or alternate director, or a person filling a casual vacancy in the office of a director under section 262, appointed as a director or reappointed as an additional or alternate director, immediately on the expiry of his term of office, or (c)a person named as a director of the company under its articles as first registered, shall not act as a director of the company unless he has within thirty days of his appointment signed and filed with the Registrar his consent in writing to act as such director. (3) This section shall not apply to a private ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subsequent decision of the Supreme Court in Commissioner of Income-tax v. Smt. Sodra Devi [1957] 32 I.T.R. 615, 621, 628 ; [1958]S.C.R 1 ; A.I.R. 1957 S.C 8.52, where Bhagwati J., at page 835, says : "It is clear that unless there is any such ambiguity it would not be open to the court to depart from the normal rule of construction which is that the intention of the legislature should be primarily gathered from the words which are used. It is only when the words used are ambiguous that they would stand to be examined and construed in the light of surrounding circumstances and constitutional principle and practice". At page 839, a further rule of construction of statute is stated : "Though it is not legitimate to refer to the statement of objects and reasons as an aid to the construction or for ascertaining the meaning of any particular word used in the Act or statute (see Aswini Kumar Ghose v. Arabinda Bose A.I.R. 1952 S.C 369), nevertheless this court in State of West Bengal v. Subodh Gopal Bose [1954] S.C.R. 587, 628 (S C.), referred to the same ' for the limited purpose of ascertaining the conditions prevailing at the time which actuated the sponsor of the Bill to introduce t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d upon a review of the case in that aspect decide whether the matter is what is called imperative or only directory". Viewed in the light of these principles, the section, in my opinion, appears to be directory in so far as the person who desires to be a candidate for the office of a director would be required to file his consent. The object of the legislature is evident when one considers the various amendments made by the legislature before the section was enacted in the present form. Those who have once acted as directors were only seeking reappointment. It was considered throughout that the formal consent on their part was not necessary. It is very clear as to why such a condition was found necessary. It may be that a person who is appointed as a director may refuse to act on the ground that he had never consented to act as a director. When such a flaw is discovered later on and the appointment will have to be ignored as ineffective, the company will have to take again further steps for filling the post of such director. Ordinarily, a person appointed as a director is not likely to refuse to act. In a rare case, he may do so. It is only to avoid the attending inconvenience tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, I must consider each point urged by the counsel separately. That takes me to the interpretation of the key words in section 264(1) "or otherwise". The learned judge while considering these words has relied on the dictionary meaning of the expression "retire". A person retires when he ceases to hold a particular office. There is no difference between retiring by rotation and retiring by ceasing to hold office. The additional directors appointed under section 260 hold office only up to the date of the next annual general meeting. In other words, they cease to hold office before the date of the next annual general meeting. Mr, Thakkar says that the learned judge was not right in reaching this conclusion. According to Mr. Thakkar there is material difference between the two sets of directors. Mr. Thakkar points out that under section 256(1) of the Act certain proportion of directors retire by rotation. Under section 256(2) the directors retire by rotation at every annual general meeting, whereas under section 260, first proviso, the additional director holds office only up to the date of the next annual general meeting of the company. In other words, the additional director ceas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... article 90 cease to be directors, the number of directors then must be taken to be five and not seven". Mr. Thakkar relies on this decision for underlining a similar distinction between the directors retiring by rotation at every annual general meeting and the additional directors holding office only up to the date of the next annual general meeting. Mr. Thakkar says that when the legislature has used the expressions like "retiring" and "holding office" up to a particular point of time, the court will have to interpret the different words in a different way. In support of this rule of interpretation he relies on a decision of this court in East and West Insurance Co. Ltd. v. Mrs. Kamala Jayantilal Mehta [1956] 26 Comp. Cas. 313 , 327 ; A.I.R. 1956 Bom. 537. Chief Justice, Chagla, who delivered the judgment of the Bench, says at page 543 : "Now, the normal canon of construction either of a statute or of articles of association is that when different expressions are used they are intended to connote something different" There cannot be any dispute about this rule of interpretation. Giving full effect to the rule it only means that a retiring director ceases to hold office later t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors retire in the manner indicated in section 256(1) of the Act, then they are retiring by rotation. If the articles so provide, all the directors may retire and that retirement certainly will not be covered by the expression "retiring by rotation". On a reference to the Shorter Oxford Dictionary, volume II: N-Z, 3rd edition, revised with addenda, I find that the adverb "otherwise" means in another way or in other ways. Whether the expression "otherwise" would include one or more classes is not clear. At any rate, the expression is somewhat equivocal. In such a case I will be justified in following the dictum laid down by the Supreme Court in Virji Ram Sutaria v. Nathalal Premji Bhanvadia A.I.R. 1970 S.C. 765. The Supreme Court in that case, while interpreting certain articles of the Constitution, relied upon the statement of objects and reasons. The Supreme Court had to decide whether certain provisions were directory or mandatory. As the provisions themselves were not clear, reliance was placed on the statement of objects and reasons for finding out the intention of the legislature. I may reproduce the following passage from the judgment of Mitter J. which appears at page 769, pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors are not required to file any written consent under section 264 of the Act, as a condition precedent for the validity of their re-appointment. Then Mr. Nariman submitted that no such consent under section 264(1) is required for appointment of any person as an additional director under section 260 of the Act. He relies on the wording of section 264(1), viz. : "Every person proposed as a candidate for the office of a director shall sign and file with the company, his consent in writing to act as a director, if appointed". These words, according to Mr. Nariman, indicate that the consent contemplated is referable to the candidature of the person for the office of director. That can only be at the meeting of the company in which directors are appointed by unanimous or majority vote of the shareholders. Mr. Nariman says that section 260 confers power on the board of directors' to appoint additional directors when so permitted by the articles of association of the company. Neither in section 260 nor anywhere in the articles of the company are there provisions requiring the person to file his consent before his appointment as additional director. A closer reading of section 264(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... writing not only to act as additional directors, if appointed, but also to act as directors, if appointed. In my opinion even for this additional reason the appointment of the appellants cannot be challenged. The last point raised in the present appeal is about the maintainability of the suit. Mr. Nariman, consistent with the appellants' stand in the lower court, submits that the plaintiffs have come to the court with certain grievances about the irregularities committed by the company while appointing the appellants as directors. Mr. Nariman relied upon a decision of this court in V. N. Bhajekar v. K. M. Shinkar [1934] 36 Bom. L.R. 483 ; 4 Comp. Cas.434 ; A.I.R. 1944 Bom. 243. It was a suit by the shareholders challenging irregularities committed by the directors. It was held that such a suit was not competent. The headnote indicates that there are certain recognised exceptions to the rule that mere irregularities committed during the course of the management of the internal affairs of the company do not furnish any cause of action to the shareholders. The relevant headnote is to the following effect: "The supremacy of the majority of shareholders is subject to certain exceptio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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