9911796707
TMI Blog2015 (4) TMI 1053X X X X Extracts X X X X X X X X Extracts X X X X ..... did episode needs to be briefly recounted for adjudication of this appeal. 03. The company was initially promoted by J.A. Narasimha Raju who is none other than the father of appellant No.1, and his friend Dasu Ramaswami in the year 1953 in the State of Maharashtra. It was engaged in the business of pharmaceutical products and vaccines. It is the pleaded case of appellant No.1 that his father held the majority shares. Ten years after the company came into existence, it was shifted from Mumbai to Hyderabad in the year 1964. The father-in-law of appellant No.1, Venkata Krishnam Raju Datla, joined the father of appellant No.1, in running the company and later the business relationship has got converted into family relationship with Late Dr. Vijay Kumar Datla s/o. Venkata Krishnam Raju Datla, marrying appellant No.1, in the year 1967. With the death of the father of appellant No.1 in the year 1969, the mantle of running the company fell on the husband of appellant No.1, who was made the Chairman and Managing Director of the company. Late Dr. Vijay Kumar Datla who became the Chairman and Managing Director w.e.f. 1-5-1972 for a long time, successfully ran the company without the involvem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his inability to continue as a member of the Board. He has wished to relinquish his role as the Director with immediate effect with a request to acknowledge the letter of resignation and arrange to file Form No.32 with the Registrar of Companies. It appears, the said G.V. Rao has changed his mind and has addressed another letter dated 9-4-2013 to the Board of Directors wherein he has expressed his inclination to continue as a member of the Board and informed that he was withdrawing his resignation letter dated 6-4-2013. The events that have taken place immediately following his purported withdrawal have become the subject matter of serious disputes between appellant No.1 and respondent Nos.2 to 4. 07. On the same day of purported withdrawal of his resignation letter, a meeting of the Board of Directors was claimed to have been held by Mr. G.V. Rao.. In the said purported meeting, one of the three daughters of appellant No.1 i.e., respondent No.4, was allegedly appointed as a Director. On 10-4-2013, another meeting of the Board of Directors was stated to have taken place wherein the Board, based on a purported Will executed by Late Dr. Vijay Kumar Datla, transmitted 81% of the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... null and void ab initio and to set-aside the resolutions passed in the said meetings; for removal of respondent Nos.2 to 5 as the Directors of the Company and transmission of 4,00,961 equity shares held by Late Dr. Vijay Kumar Datla in favour of respondent No.2 as illegal, null and void and consequently to rectify the register of the members by ordering transmission of such shares to appellant No.1; to supersede the company and appoint an Administrator/Special Officer to take charge of the management of the affairs of the company; and to declare that the resolutions passed in the Annual General Meeting held on 18-12-2013 are null and void. 10. Appellant No.1 has also claimed several interim reliefs. The three reliefs which are relevant for the present appeal are to supersede the Board of Directors of the company and to appoint an interim Administrator/Special Officer for taking charge of the management and the affairs of the company; for an injunction to restrain respondent Nos.1 to 7 from altering or changing in any manner the shareholding pattern and paid up capital of the company; and a direction to the respondents not to hold the meeting of the shareholders of the company and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeting held on 10-4-2013 by respondent Nos. 4 and 5, transfer of 81% shares held by Late Dr. Vijay Kumar Datla in favour of respondent No. 2, and the appointment of respondent Nos. 2 and 3 as Directors of the Company are also illegal. (v) That similarly, the purported Board meeting held on 11-4-2013 in which respondent No. 2 was designated as Managing Director was equally invalid and illegal. (vi) That the decisions taken in the meetings which were illegal to the knowledge of respondent Nos. 2 to 6 cannot get validated under Section 290 of the Act, that too in respect of the matters which are not concerned with third parties, for Section 290 would not come to the aid of usurpers of the offices. In support of this submission, the learned Senior Counsel relied upon the Judgment in M. Moorthy v. Drivers and Conductors Bus Service P. Ltd. (1991) 71 Comp. Cases 136 (Mad) and Eastern Linkers Pvt. Ltd. v. Dina Nath Sodhi 1984(55) Comp. Cases 462 (Delhi). (vii) That the Annual General Meeting held on 18-12-2013 wherein the Board resolutions dated 9-4-2013, 10-4-2013 and 11-4-2013 were purportedly ratified was also invalid as the said meeting was not validly convened and held and that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2013, during which shares were transferred in favour of respondent No. 2 as such participation is barred by Section 300 of the Act. (xiv) That as per Article 70 of the Articles of Association, for registration of transfer of shares, the original share certificates have to be produced, while no such certificates were produced as evident from para 13(i) of the Form annexed to be submitted by the Company Secretary under the Companies (Compliance Certificate) Rules 2001." 13. Mr. P.S. Raman made the following submissions: (i) That for maintenance of an appeal under Section 10-F of the Act, a question of law must arise and that no such question of law has been raised in this appeal. In support of his submission, the learned Senior Counsel has relied upon the Judgment in Commissioner of Income Tax, Bombay v. Scindia Steam Navigation Co. Ltd.: AIR 1961 S.C. 1633. (ii) That appellant No. 1 has not come to the Court with clean hands as she has violated the undertaking given by her to withdraw the civil suit. (iii) That appellant No. 1 has pressed three interim reliefs, namely, (a) for a restraint order against her removal as the Executive Director; (b) for appointment of an administrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resignation of a Director need not be accepted, with the withdrawal of his resignation, respondent No. 5 has continued as the Director and in the absence of rejection of the withdrawal letter by the Board of Directors, the resignation letter ceased to exist. (ix) That appellant No. 1 has indulged in suppression of material fact in C.P. No. 1 of 2013, namely, letter dated 9-4-2013 of respondent No. 5 withdrawing his resignation." 14. Mr. S. Niranjan Reddy, who has supplemented the submissions of Mr. P.S. Raman, made the following submissions: "(i) That appellant No. 1 has indulged in suppression and prevarication of facts by not disclosing the withdrawal letter of respondent No. 5 in C.P. No. 1 of 2013 and alleging fabrication of the withdrawal letter in her criminal complaint and that in the case on hand, she has pleaded that she has received the withdrawal letter, but not accepted the same. (ii) That appellant No. 1 has suppressed letter dated 15-4-2013 in C.P. No. 1 of 2013 as well as C.P. No. 36 of 2013 and in the appeal she has pleaded that the said letter was obtained by coercion. (iii) That appellant No. 1 has not disclosed her letter dated 24-5-2013 addressed to the Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r she is not entitled in law to challenge the appointment of respondent Nos. 2 to 4 as Directors and respondent No. 2 as the Managing Director and the action of the Board of Directors in transferring 81% shareholding in favour of respondent No. 2? 6. Whether the Annual General Meeting, dated 18-12-2013 was validly held and the resolutions passed therein cure the defects, if any, in the decisions taken in the Board meetings dated 9-4-2013, 10-4-2013 and 11-4-2013? 7. Whether the acts done by the Board on 9-4-2013, 10-4-2013 and 11-4-2013 are saved by Section 290 of the Act?" 17. I would like to proceed to decide the Points with the caveat that the findings on facts rendered in the Judgment are provisional as the Company Petition which is pending before the Company Law Board is still to be adjudicated and that these findings shall not prejudice either party in the adjudication of the Company Petition. Re Point No. 1: Dr. Vijay Kumar Datla, the Chairman and Managing Director of the company died on 20-3-2013. With his death, the number of Directors on the Board of the company was reduced to 2, namely, appellant No. 1 and G.V. Rao - respondent No. 5. On 6-4-2013, respondent No. 5 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence of the written notice sent by him to the company requesting their acceptance of his resignation as managing director? While answering this question, the learned Judge held as under : " .... That seems to me to depend entirely upon the proper construction to be put upon the articles of association of the company, and I think the most material articles are 84 and 85. I have no doubt that a director is entitled to relinquish his office at any time he pleases by proper notice to the company, and that his resignation depends upon his notice and is not dependent upon any acceptance. Consequently, it appears to me that a director, once having given in the proper quarter notice of his resignation of his office, is not entitled to withdraw that notice, but, if it is withdrawn, it must be by the consent of the company properly exercised by their managers, who are the directors of the company. But, of course, that is always dependent upon any contract between the parties, and that has to be ascertained from the articles of association. Now here, in the first place, I think that article 85, which declares that "The office of managing director shall be vacated on the happening of any of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calendar months. Thus, a subtle distinction was drawn between the vacation of office by a Director by resignation and arising of vacancy in the office of the Director. Indeed, even this distinction would not arise in this case as Article 129 of the Articles of Association does not contain a proviso similar to the one which existed to Article 84 in the case decided by the Chancery Division in Glossop (supra) (1907(G) 1034)-(1907) 2 Ch. 370. On a true and proper construction of Article 129(m), it does not admit of any doubt that once the Director sends his resignation by notice in writing addressed to the company, the office of the Director becomes vacant and the Director so resigned shall cease to be a Director from that time. 20. In T. Murari (supra) 1976(47) Comp. Cases 693 (Madras) the Madras High Court has quoted the learned authors Palmer and Ramaiya in paragraphs 14 and 15 of the Judgment, which could be profitably reproduced hereunder : "In Palmer's Company Precedents, 17th Edn., Part I, page 565, it is stated as follows: "Even in the absence of any express power to resign, it is submitted that, unless the Articles are specially framed, a director may by notice to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nema Ltd. v. Ennion 1931-2 Ch. 409. In the latter case, even resignation orally tendered at a general meeting and accepted by the meeting was held to be effective. See also State v. Sitaram: AIR 1967 Pat. 433. Where a resignation states that it is to take effect on acceptance, or the articles so require, acceptance is necessary to end the tenure of office. Where however, resignation says that it is to take effect immediately, acceptance is not necessary, unless the articles or any provision of law makes it necessary. Any form of resignation, whether oral or written, sufficient, provided the intention to resign is clear. In the absence of any indication otherwise, a resignation takes effect immediately. Resignation will not however relieve him from any accountable or other inability which he may have secured while in office. A resignation once made cannot be withdrawn except with the consent of the Company or the Board. See Rev. Mayor of Wigan 1886. 14 Q B.C. 908; Glassop v. Glassop 1907-2 Ch. D. 370; Sivial v. Tricamdas Mills Co. Ltd., 36, Bom. 564." 21. From the judicial precedents and the standard text books of renowned authors on Company Law, the law is well crystallized as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reject the withdrawal letter of respondent No. 5 would not arise as respondent Nos. 2 to 4 themselves would not have come into existence as Directors of the company had respondent No. 5 has not proceeded on the premise that his resignation letter stood withdrawn and that he continued as a Director. 24. On the analysis as above, this Court has no hesitation to hold that respondent No. 5 has ceased to be a Director of the Company w.e.f. 6-4-2013 and he was not reinstated as Director at any later point of time. Re Point No. 2 to 4: Under Section 252(2) of the Act, every company other than a public company mentioned under sub-section (1) thereof, shall have at least two Directors. Article 117 of the Articles of Association of the company also prescribed the minimum number of Directors as two. As found on Point No. 1, from 6-4-2013, the company had only one Director i.e., appellant No. 1. Under Section 287(2) of the Act the quorum for the meeting of Board of Directors shall be 1/3rd of its total strength or two Directors, whichever is higher. With the resignation of respondent No. 5 as a Director, the company failed to satisfy the mandatory provisions of Section 252(2). Under Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tings on 10-4-2013 and 11-4-2013 and the decisions taken therein are equally invalid, nay, per se illegal. 27. The validity of transfer of shares in favour of respondent No. 2 is assailed by appellant No. 1 on yet another ground i.e., respondent Nos. 2 to 4 are interested Directors and their participation in the Board meeting held on 10-4-2013 is contrary to the mandatory provisions of Section 300 of the Act. Sub-section (1) of Section 300 of the Act, which is relevant for this case, reads as under : "No director of a company shall, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement; nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote; and if he does vote, his vote shall be void." The above reproduced provision contains two phrases, namely, 'contract' or 'arrangement' entered into or to be entered into by or on behalf of the company. Mr. D. Prakash Reddy, learned Senior Counsel submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 108 of the Act) a properly stamped and executed instrument of transfer." Para-13(1) of the Form prescribed under Rule 3 of the Companies (Compliance Certificate) Rules 2001 requires the Company Secretary to state as to whether the Company has delivered all the certificates on allotment of securities. In the Form signed by the Company Secretary, he has not stated whether the share certificates were actually delivered to the transferee i.e., respondent No. 2. Therefore, I find merit in the submission of the learned Counsel for appellant No. 1 that the purported transfer of share certificates is in violation of Article 70 of the Articles Association of the company and the Form prescribed under Rule 3 of the 2001 Rules. 29. The above assigned reasons lead me to hold that (a) all the three meetings were not validly held; (b) respondent Nos. 2 to 4 were not validly appointed as Directors and (c) the transfer of 81% of the shares held by Late Dr. Vijay Kumar Datla in favour of respondent No. 2 has not validly taken place and consequently such a transfer cannot be recognized in law. Point No. 5: All the learned Counsel for the respondents have forcefully pleaded that appellant N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Metropolitan Magistrate, Hyderabad on 14-5-2014. Several serious allegations were made by appellant No. 1 in the said complaint, reference to which in the present context is unnecessary. However, with reference to letter dated 15-4-2013, she has alleged as under : "...... Accused No. 5 in furtherance of his criminal intrigue went on addressing the complainant and caused several communications to be written by the Accused No. 1 to 3 ascribing to the complainant most unpleasant and hasty things and made propaganda in society vilifying her character and placing it in bad and blackest odor and coaxing/coercing her into offering post facto consent to the said board meetings in order to obtain her ratification. It is under such undue influence and while undergoing shock of her husband's death, during mourning and surrounded by wicked persons actuated by criminal motives that the complainant was made to sign a note on 15-04-2013 introducing her daughters as directors but utterly ignorant of their criminal conspiracy by means of conducting the board meetings and groping in dark about their ulterior motives." (Emphasis added) 31. The Court is informed that the criminal complain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... my back and that you all want that the I should not know of your above actions and wrong doings. Having treated me in the above manner, you have strengthened my resolve and purpose of struggle. You may also note that the Act does not give even in remote sense, any power to the majority members to violate the rules, breach the law, act in suppression of the interest of the minority and from your letter, I am very sorry to understand that you want to use the usurped majority to thump the law and that of the interests of the Minority. Please be noted that word of the majority that too, the majority acquired through illegal means is not rule of law always as you have tried to make out and I am very clear on the same. I will come on each of the replies given in you above letter shortly. Before concluding, I must state that you have avoided giving replies to my pointed issues except that you wanted me to know that you usurped the power and have been acting unilaterally under the so called majority rule. Anyhow, please restore my chamber and ensure my safety and security during my visit to the company and the earliest modes of attack are not repeated and in the event, any untoward event o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anything related to the personal agendas like fixing high remunerations and appointment of new directors and personal relatives at high positions with huge remunerations, burdening the financial position of the company...." Appellant No. 1 finally gave a piece of advice to respondent Nos. 2 to 4 and her sons-in-law as under : " ... This would not rest the divine soul of my husband in peace. My husband is none other than father of some of you, father in law of some others and friend and philosopher of others and I trust that you will listen to my good words and differ (defer) with the agenda items till they are discussed threadbare and other important issues are addressed and done with...." This letter puts to rest any doubt whether appellant No. 1 has reconciled herself to the events that have taken place following her husband's death. That her resolve to oppose all those actions was getting stronger and stronger is reflected in this letter. 35. The Supreme Court, in Dhirendra Nath Goari (supra: AIR 1964 S.C. 1300, referred to and relied upon the following passage in Maxwell's commentary "On the Interpretation of Statutes", 11th Edition, at page 375, thus: "Another ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the doctrine of acquiescence and held as under : " .... In order to constitute acquiescence not only (1) full knowledge of one's right is required, but (2) there must be some lying by him to the detriment of the other side. For it is elementary that there can be no acquiescence without full knowledge both of the right infringed and of the acts which constitute the infringed and of the act which constitute the infringement. Acquiescence implies that a person who is said to have acquiesced did so with knowledge of his rights and the other person acted in the bona fide belief that he was acting within his rights. The absence of either of these elements makes the doctrine inapplicable....." 38. Applying the proposition of law laid down as above to the facts of this case, Section 252 of the Act which prescribed a minimum of at least two Directors and Section 287 which prescribed quorum for Board meetings are undoubtedly conceived in public interest and therefore they cannot be waived. Conscious of this position in law, the learned Counsel for the respondents have fairly submitted that they are not pressing into service the doctrine of waiver or acquiescence. However, they have s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the decisions referred to above is that the doctrine of approbation and reprobation applies to a case where a party has made an election and he has derived benefit out of such election. 44. In the instant case, from the facts discussed above, appellant No. 1 cannot be said to have made an election to recognise the reconstituted Board of Directors and derived any benefit out of such election. However it is represented at the hearing that the decision taken in one of the Board meetings held on 22-8-2013 regarding the remuneration to Managing Director and all the Directors, including appellant No. 1, was implemented and appellant No. 1 is deriving the benefit from such decision. Appellant No. 1 who was present in the Court submitted that she has in fact opposed the increase in remuneration in her dissenting views expressed through her letter dated 22-8-2013 referred to in para-13 of the Minutes of the meeting dated 22-8-2013 and that without her consent the company has been crediting the increased remuneration to her bank account. 45. In her letter dated 22-8-2013, appellant No. 1 has seriously opposed the enhancement of remuneration and appointment of new Directors. If despite th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to justify all their actions commencing from convening and holding of the Board of Directors meeting on 9-4-2013 to the convening and holding of the Annual General Meeting on 18-12-2013 on the ground that they had no choice other than resorting to such actions with the death of the Chairman and the Managing Director of the company and the obvious non-cooperation of appellant No. 1 who was the Executive Director. 46. Countering this plea, the learned Senior Counsel for appellant No. 1 has pleaded that there were clearly three alternatives to left the members under the provisions of the Act, namely, (i) the required number of members as envisaged under Section 169(4) could have given a notice to the Board of Directors to call an extraordinary general meeting of the company; (ii) if the Board fails to conduct extraordinary general meeting within 21 days of the requisition, the members could approach the Company Law Board for a direction to conduct an extraordinary general body meeting under Section 169(7); or (iii) to approach the Company Law Board under Section 186 to order a meeting of the company to be called and held in the manner as may be directed by the Company Law Board. 47 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of acts of directors: Acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by 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." On a plain reading of the above reproduced provision, it is clear that this provision applies only in a case where invalidity of appointment of a director was discovered after he has done the acts. This provision fell for consideration of the Courts at least in two decisions, viz., M. Moorthy (3-supra) and Eastern Linkers Pvt. Ltd.(4-supra). In M. Moorthy (3-supra), almost a situation similar to the present one arose where out of three Directors only one Director was stated to have called Board meeting on 20-5-1978 in which a third party was stated to have been inducted as a Director and thereafter he was made the Managing Director. Thereafter, the Board lead by the self-claimed Managing Director has sold t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... third parties who enter into transactions with a company not knowing what the internal structure and mechanism of the company is. A person such as a Managing Director or a Director who is expected to know what is right and what is wrong and what is legal and what is illegal cannot be allowed to presume things in his favour, and if at the end he fails to prove that he has acted as per law, he cannot take shelter under Section 290 of the Act, more so, in a case where the Directors usurped their office. Conclusion on Point Nos. 1 to 7: 51. In the light of the discussion undertaken above, this Court has no hesitation to find all the issues against the respondents. Re Point No. 8: Mr. P.S. Raman, has made a strong submission that unless the Company Law Board is satisfied that the conditions which are necessary for winding up a company exist, it has no jurisdiction to pass any order against the company under Section 397(1) of the Act. In support of his submission, he has placed reliance on the Judgment in Sangram Singh (10-supra). There is no quarrel about this submission. Intervention by the Company Law Board can be made only if the applicant before it establishes that the company&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w Board for granting appropriate interim orders under Section 403 of the Act. 55. Another submission made by Mr. P.S. Raman is that appellant No. 1 has not approached this Court with clean hands as she has assured the Company Law Board that she will withdraw the civil suit filed by her in respect of the Will. It is the case of appellant No. 1 that the said statement was made before the Company Law Board on a wrong legal advise and that she has later realized that the scope of the cases before the Company Law Board and that of the suit before the Civil Court is distinct from each other. The learned Counsel has fairly conceded that the validity of the respective Wills propounded by both the parties cannot be adjudicated by the Company Law Board and that appellant No. 1 is entitled to pursue the suit. If appellant No. 1 has made the statement before the Company Law Board on a wrong advice, which to my mind appears so, she cannot be blamed for going back on her statement. 56. Mr. P.S. Raman further submitted that in strict sense, no question of law arises for maintaining an appeal under Section 10F of the Act. In my opinion, this submission has no merit as denial of interim orders in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of the case, this Court, therefore feels the necessity of making appropriate arrangement to ensure that the company's affairs are regulated properly till such time as the disputes between the parties are settled. 60. While appellant No. 1 has set up the Will stated to have been executed by her husband Late Dr. Vijay Kumar Datla, under which the testator has allegedly created life interest in her in respect of 81% of the shares held by him, respondent No. 2 has also set up another Will whereunder all the 81% of the shares of Late Dr. Vijay Kumar Datla were allegedly bequeathed in her favour. As noted hereinbefore, appellant No. 1 has filed O.S. No. 184 of 2014 for several reliefs based on the Will propounded by her. The respective rights of appellant No. 1 and respondent No. 2 have therefore to be necessarily adjudicated only in the pending civil suit. Till such adjudication is made, it is not possible for this Court to take any view on the genuineness or otherwise of these Wills. At this stage, therefore, this Court has no option other than ignoring both the Wills and assuming that Late Dr. Vijay Kumar Datla died intestate. 61. Under Section 8 of the Hindu Succession Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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