9911796707
TMI Blog1973 (5) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... later. It is necessary, to start with, to notice briefly the facts which have led to these petitions. The company was registered in the year 1916 as a public limited company, but is stated to have been controlled by the husband of the petitioner, R. K. Jain (petitioner in C. P. No. 1 of 1973) and some of their family members; Oudhbir Prasad (petitioner in C. P. No. 2 of 1973) who holds 63 ordinary shares of Rs. 10 each, is the son-in-law of the petitioner and was also a senior executive of the company. The petitioner and her husband had no male issue and had, therefore, adopted R. P. Jain, the brother-in-law of Sheel Chandra. Yogesh C. Gupta is said to be a friend of Sheel Chandra and R. P. Jain. There seems to have been considerable animosity between the petitioner and her husband on one side and their adopted son, R. P. Jain, as well as Sheel Chandra and Yogesh C. Gupta on the other. The articles of association of the company (article 96) provide for eight directors, but there were actually three i (1) R. K. Jain, (2) Sheel Chandra, and (3) Yogesh C. Gupta. It is common ground that R. K. Jain had been appointed a managing director of the company for five years under an agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o whether an application for allotting right shares was in fact made and even whether one is necessary to be made in writing; it is, however, asserted for the petitioner that a sum of Rs. 2,12,540 was deposited in the company's bank by the petitioner on December 4, 1972 (3rd December being a Sunday), when she came to know of the issue from Bombay through some other source. The money is said to have been either loaned or arranged by Bk. Shivcharan Singh, learned counsel for the petitioner. According to the contesting respondents, the petitioners knew and were also informed in time about the issue of right shares, but they made no application because they did not raise the money and the money which was paid only on the afternoon of the 4th (after the allotments of the shares on the 4th morning) represents the money which R. K. Jain had secreted from out of the company's funds during his management. Applications Nos. 725 of 1972 and 73 of 1973 were filed for the petitioner, her husband, etc., being cross-examined on the said matters. To complete the narrative it may also be noticed at this stage that S. L. Verma, yet another shareholder, a stranger, holding 3,054 ordinary shares, had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to vote at the meeting,- (a)order a meeting of the company to be called, held and conducted in such manner as the court thinks fit; and (b)give such ancillary or consequential directions as the court thinks expedient, including directions modifying or supplementing in relation to the calling, holding and conducting of the meeting, the operation of the provisions of this Act and of the company's articles. Explanation.-The directions that may be given under this sub-section may include a direction that one member of the company present in person or by proxy shall be deemed to constitute a meeting. (2) Any meeting called, held and conducted in accordance with any such order shall, for all purposes, be deemed to be a meeting of the company duly called, held and conducted". Section 79(3) of the Act of 1913 enabled the court to order even an annual general meeting of the company. The present provision (section 186) only enables the court to call a meeting of the company, other than annual general meeting. The English Companies Act of 1929 provided (section 112(3)) that the court may call a general meeting of the company. But there was an amendment of the English Companies Act as a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eting. The remaining directors in the case of any such company shall, in default of and subject to any regulations in the articles of the company, also be appointed by the company in general meeting. Section 256 deals with ascertainment of rotational retirement of directors at annual general meetings; one-third of the directors of a public limited company retire at every annual general meeting. There is a conflict of judicial opinion on the question whether those directors who have to retire by rotation also vacate their offices by reason of their own failure to call a general meeting. Venkatarama Aiyar J. (as his Lordship then was), speaking for the Division- Bench of the Madras High Court in A. Ananthalakshmi Ammal v. Indian Trades and Investments Ltd. [1952] 22 Comp. Cas. 324 ; A.I.R. 1953 Mad. 467held that they must be deemed to have vacated their offices. That case arose under sections 76 and 79 of the Act of 1913. This view was followed by a Division Bench of the Bombay High Court in Krishna Prasad v. Colaba Land and Mills Co. Ltd. [1959] 29 Comp. Cas. 273 (Bom.) and by a single judge in In re Hindustan Co-operative Insurance Society Ltd. [1961] 31 Comp. Cas. 193; 65 C.W.N. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fulfilling its conditions or not. Reliance was placed on Grundt v. Great Boulder Proprietary Mines Ltd. [1948] Ch. 145 ; 18 Comp. Cas. 236, 239 (C.A.) concerning an article provision somewhat similar to section 256(4)(b)( i). The concerned article provision in that case reads as follows: "If at any general meeting at which an election of directors ought to take place the place of any director retiring by rotation is not filled up, he shall, if willing, continue in office until the ordinary meeting in the next year, and so on from year 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". At the annual general meeting held in July, 1947, Grundt retired by rotation but a resolution for re-electing him was lost by show of hands. There was no resolution, however, to reduce the number of directors. It was held that despite what happened Grundt continued in office in terms of the above-mentioned article provision. Lord Greene M. R. was not led to come to a different result merely on account of the absurdity of deeming Grundt to be re-elected despite his re-election having been lost by show of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther difficult question which may require fuller consideration when it arises. The Indian decisions which hold that a retiring director vacates office if he fails to hold the annual general meeting seem to be based upon the view taken by the English court in In re Consolidated Nickel Mines Ltd. [1914] 1 Ch. 883 (Ch. D.)and the statement in Buckley on the Companies Acts (12th edition, page 882). Probably the decision of the House of Lords in Morris v. Kanssen [1946] A.C. 459 ; 16 Comp. Cas. 186 (H.L.) is also material. In that case the question was whether the allotment of shares by some who purported to act as directors was valid when it was found that there was no appointment at all, the observations were expressly applicable to the case of there being no appointment at all or the original appointment itself being fraudulent. In Consolidated Nickel Mines Ltd. 's case (supra) the question for consideration was whether the two directors were entitled to remuneration in spite of the obligation laid down on them by section 497 of the Act that the directors had to summon a general meeting every year and the articles of association providing that all the directors retire from office at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 (interpretation clause) states that " words importing the plural number also include the singular number". Venkatarama Aiyar J. in A. Ananthalakshmi Ammal 's case (supra) quoted the observations of Swinfen Eady L.J. in Channel Collieries Trust Ltd. v. Dover, St. Margaret's and Martin Mill Light Railway Cd. [1914] 2 Ch. 506 (C.A.) : "I think that the context requires that the word ' remaining directors ' should include the case of a remaining director..........and so long as there is any remaining director he may proceed to fill up the board by appointing persons when casual vacancies occur". Venkatarama Aiyar J. applied those principles and held that the power to co-opt directors can be exercised even though the strength of the directors falls below the minimum and even when there was only one director capable of acting. Where there was at least one director he was capable of co-opting other directors. Pritam Singh and Balbir Singh are stated to have been co-opted on December 4, 1972, by Sheel Chandra and Yogesh C. Gupta. R. K. Jain (husband of the petitioner) retired in 1969, and he was re-elected despite the agreement according to which he was to be a managing director till ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot find a number which is nearer to but does not exceed, one-third". This case was referred to and distinguished by Venkatarama Aiyar J. in B. N. Viswanathan v. Tiffin's Barytes, Asbestos and Paints Ltd. [1953] 23 Comp. Cas. 29; [1953] 1 M.L.J. 346 (Mad.) on the basis of the language employed in David Moseley's case (supra) and the absence of analogous language in Viswanathan17; it was held that even one of two directors should retire at the meeting. The language of article 109 is analogous to that employed in David Moseley's case (supra). Even if this view is not correct, Sheel Chandra must be taken to have retired not earlier than July 31, 1971, the last annual general meeting having been held on April 30, 1970 (there can be an interval of 15 months between two general meetings). Then, Yogesh C. Gupta, having become a director later than Sheel Chandra, he could continue as director till the next day on which the annual general meeting was to be held and in this sense did have the potentiality, according to Shri Veda Vyas, of co-opting other directors. I have referred to these aspects which may possibly have to be considered not for the purpose of deciding them but only for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. J. K. Eastern Industries P. Ltd. [1957] 27 Comp. Cas. 86 ; A.I.R. 1956 Cal. 658, P. B. Mukharji J. (as he then was) reviewed the case law in question and agreed with the principles decided by the aforesaid cases but still declined to order a meeting in that case. He observed that a discretion granted under section 186 should be sparingly used and with great caution so that the court does not become either a shareholder or a director of the company trying to participate in internecine squabbles of a company. In a still later case before the same High Court S. P. Mitra J. reviewed all the authorities in United Breweries Ltd. v. Ruttonjee & Co. Ltd. [1962] 2 Comp. L.J. 155 (Cal.) and summarised the principles to be borne in mind in an application under section 186. It seems to me that the following principles were re-stated : (1)the court would not ordinarily interfere with the domestic management of a company which should be conducted in accordance with the articles; (2)the discretion granted under section 186 should be used sparingly and with caution so that the court does not become either a share holder or a director of the company; in other words, the court will ordinar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to move the same resolutions at the next extraordinary general meeting; on the same day he took summons asking for a meeting to be called by the court under section 135(1) of the Act of 1948 for the purpose of passing the resolutions, and for a direction that one member of the company should be deemed to constitute a quorum at such meeting. The application was opposed by the directors. An order directing a meeting to be held and that one member present should constitute a quorum was made in the circumstances. This case illustrates the exercise of such power in order to suit the exigency of each situation. It is also of interest to note that there was no reference here to the previous decision of the English Court of Appeal in MacDougall v. Gardiner [1875] 10 Ch. App. 606 (C.A.). It was held in that case that where by the articles of association of a company, the directors, and in the alternative, a certain portion of the shareholders can summon a meeting of the company, the court will not order the directors to summon a meeting for the general purposes of the company. Reliance was placed by the petitioner upon a Full Bench decision of the Allahabad High Court in Balkrishna Mah ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... association and some general provisions of the law". The Full Bench decision is, therefore, of no assistance to the petitioner; this is not a simple case, free from complexity. Shri Ved Vyas, on the other hand, contended that the present petitions not having been brought in the name of the company they are not maintainable according to the well-known rule in Foss v. Harbottle [1843] 2 Hare 461; 67 E.R. 189. As an important facet of the principle of majority rule, it was held that if a wrong has been done to a company only the company could sue. To this rule itself there are exceptions like the act or resolution complained of being itself illegal or ultra vires, the controllers of the company acting in breach of the articles of association and fraud on the minority being committed. This case was followed in a number of cases including Mozley v. Alston [1847] 1 Ph. 790 ; 41 E.R. 832, where two shareholders in their individual capacity brought proceedings against the company and members of the board of directors seeking to restrain the directors from acting as such until four of their members had retired by rotation, as required by the company's constitution, and four new directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s regard is seen to be without much force in so far as a petition under section 186 need not be on behalf of the company for the very language of that section even permits the court suo motu to call a meeting of the company if it has become impracticable to call a meeting, other than an annual general meeting. But the submission of Shri Ved Vyas may have force if this petition, under section 186, is sought to be used mainly for obtaining reliefs pertaining to the alleged usurpation of office by directors. However, an action need not be in the name of the company for actions concerning injuries personal to the petitioner. There is also one other aspect of the rule in Foss's case (supra), and the line of cases following it, namely, that the English court of equity had constantly and consistently refused to interfere on behalf of share holders until they have done their best to set right the matter of which they complain, by calling general meetings (vide Lindley L. J. in Isle of Wight Railway Company v. Tahourdin [1884] 25 Ch. D. 320, 333 (C.A.)). The ground has now been prepared for discussing some of the even more important aspects of this case. The English cases pertaining to wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... virtue of any provision contained in this Act or in the articles : Provided that nothing in this section shall be deemed to give validity to acts done by a director after his appointment has been shown to the company to be invalid or to have terminated". The corresponding section of the Indian Act of 1913 was section 86 and of the English Act section 180. The principle obviously is that there should be no vacuum in the affairs of a company and that all acts done bona fide should be fully protected not only between third parties and the company but also between the company and its members and between members and members. While considering an article providing for the validity of acts of directors, notwithstanding the discovery later of some defect in the appointment of such directors, Chitty L.J. observed as follows in Dawson v. African Consolidated Land and Trading Co. [1898] 1 Ch. 6, 14 (C.A.): "It is not framed so as to render valid a resolution passed by any persons who without a shadow of title assume to act as directors of a company .... The clause is addressed..........to cases of defective appointment or disqualification". Dawson's case (supra ) was followed in British ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same effect is also the decision of a Division Bench of the Allahabad High Court in Shiromani Sugar Mills Ltd. v. Debi Prasad [1950] 20 Comp. Cas. 296 ; A.I.R. 1950 All. 508, where Desai J., speaking for the Division Bench, considered some of the cases and held that the actions of de facto directors are protected when brought to their minds. A similar view was also taken by Chopra J. in Fateh Chand Kad v. Hindsons (Patiala ) Ltd. [1957] 27 Comp. Cas. 340 ; A.I.R. 1956 Pepsu 89 Without recording evidence it is hardly proper to go into the facts bearing on this contention. The materials on record do not show any consciousness on the part of those concerned, before the controversies arose, that all or any of the retiring (?) directors could not legally continue. When by letter dated 6th December, 1972 (annexure "C" to the petition), Yogesh C. Gupta informed Bk. Shivcharan Singh (in reply to his letter of the 5th informing the company of the restraint order (annexure "B" to the petition) that the allotment of right shares had been made on 4th December, 1972, Bk. Shivcharan Singh wrote a long letter on 9th December, 1972 (annexure "D"), informing Yogesh C. Gupta about his various leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made on December 4, 1972; December 3, 1972, was a Sunday. Section 81 of the Act provides for the issue of further capital; such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date. This offer should be made by notice specifying the number of shares offered and limiting the time "not being less than fifteen days" from the date of the offer within which the offer, if not accepted, will be deemed to have been declined. In construing the expression "not less than 15 days" it is urged by the petitioner that the date of issuing the notice and receiving the notice must be excluded. It is at par with the expression "7 clear days' notice", which was interpreted in King v. Turner [1910] 1 K.B. 346 (C.C.A.)as exclusive of the dates of dispatch and receipt. The same was followed in In re Hector Whaling Ltd [1936] Ch. 208; [1937] 7 Comp. Cas. 22 (Ch. D.) as exclusive of the date of service of the notice and exclusive of the day on which the meeting is to be held. The same view was taken by a Division Bench of the Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omplicated questions and the parties could properly be referred to a suit in such a case. The following passage from Halsbury's Laws of England, third edition, page 218, may be usefully referred to : "If the court thinks that the case, by reason of its complexity or on the ground that there are matters requiring investigation or otherwise, could more satisfactorily be dealt with by an action, the court will decline to make an order on a motion, without prejudice to the right of the applicant to institute an action for rectification". A similar approach has been adopted by the Indian courts also (vide In re Dhelakhat Tea Co. Ltd. [1953] 28 Comp. Cas. 62 ; A.I.R. 1957 Cal. 476, and Mahendra Kumar Jain v. Federal Chemical Works Ltd. [1965] 35 Comp. Cas. 651 (All.)). There is also great force in the contention that a suit having been filed, though not by the petitioner but by S. L. Verma (another shareholder) to which the petitioner and her husband are parties, specifically raising the question of the invalidity of the allotment of the right shares and rectification of the register of members concerning the entries made on the basis of the said allotments, it would not be proper to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claration concerning its invalidity cannot be granted in the absence of those who would be affected by it. Bk. Shivcharan Singh drew my attention to In re Sly, Spink & Co. [1911] 2 Ox. 430 (Ch. D.) where rectification of register of members was granted when the shares were allotted by directors who were less than the quorum. (This argument subsumes that Pritam Singh and Balbir Singh were not properly co-opted and that even if Sheel Chandra and Yogesh C. Gupta were validly continuing as directors they could not by themselves (two of them alone) decide to raise the capital of the company. But then R.K. Jain is said to have been present at a meeting when such a decision was taken; R. K. Jain disputes this and this leads to a controversy concerning facts also). Assuming that everything contended for by Bk. Shivcharan Singh is true and valid we are confronted here with a somewhat extraordinary request to cancel the allotment of right shares without even an application to rectify the register of members, without even having all those who would be affected by that decision as parties before the court and when a suit for such a relief is pending in this very court. Perhaps the greatest di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... J. in Viswanathan's case ( supra) has referred to this direction by Krishnaswamy Nayudu J. as follows i "to this course the company could have no objection". In the case on hand, however, there are several objections (they have been already noticed) to a direction being given that there should be no voting on the basis of the right shares. The petitioner's purpose would not be served if such a direction is not given. What was originally 46% had been reduced to about 25% after the said issue; even if the petitioner is supported by the other two petitioners and S.L. Verma it would be of no avail. The circumstances discussed at length do not justify the court using its discretion under section 186 of the Act to call a meeting as prayed for. C. A. Nos. 725 of 1972 and 73 of 1973 are accordingly dismissed. The separate application filed (C.A. No. 119 of 1973) to dismiss the main petition on the admissions contained therein has also become unnecessary. It is also needless to be detained by the question who is the proper person to represent the company, a point raised in C.A. No. 700 of 1972. All these interlocutory applications as well as the main petition (C.P. No. 96 of 1972) are di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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