TMI Blog1998 (12) TMI 626X X X X Extracts X X X X X X X X Extracts X X X X ..... onsisting of not less than three and not more than 11 directors. The subscribers to the memorandum and articles of association were the first directors of the company. Subsequently, the directors were elected in the general body meetings. The four plaintiffs and defendants Nos. 2 to 4 in O. S. No. 723 of 1992 were elected directors of the company as on August 18, 1992. The second defendant. Dr. T.M. Paul, was the managing director. The eighth defendant, Dr. Aravind Babu, was also an elected director, but was abroad for some period and had not attended the previous three meetings of the board of directors and had thus incurred a disqualification under Section 283(1)(g) of the Companies Act. Some shareholders of the company had given a notice to the managing director on August 6, 1992, requesting him to convene an extraordinary general body meeting. The second defendant, in his capacity as the managing director, convened a director meeting to be held at 11 a.m. on August 18, 1992, and issued exhibit-A2 notice dated August 15, 1992, for the purpose. The business proposed to be conducted on August 18, 1992, as disclosed by the agenda in exhibit-A2 notice were : (1) passing the minu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 2 had actually met the second defendant on August 15, 1992, in the hospital where he was convalescing after an operation. The second plaintiff indicated that he will be away in Pondicherry in connection with a meeting of the board of examiners for L. L. M. and was expected back only on August 18, 1992. Knowing that the second plaintiff will not be available in the locality, and that it will be inconvenient for the first plaintiff to attend the meeting, the second defendant had convened a meeting consisting of himself and defendants Nos. 3 and 4 who were none other than his wife and brother-in-law and manipulated and fabricated resolutions, highly detrimental to the interests of the plaintiffs and the company. They also alleged that the eighth defendant had ceased to be a director and could not have been permitted to attend and participate in the meeting. The plaintiffs further alleged that the first plaintiff had not taken any money from the hospital as alleged and the decision taken in the meeting on August 29, 1992, to forfeit and sell her 97 shares for realisation of the alleged debt was also illegal. On these allegations, the plaintiffs in O. S. No. 723 of 1992, prayed for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at meeting at the beginning, but declared that the general body meeting could not be held as there was a stay order from the honourable High Court, but that was not accepted by the other members who proceeded with the meeting. Based on the resolution passed on November 6, 1992, Dr. V.K. Thomas, claiming to represent the hospital along with the first plaintiff in O. S. No. 723 of 1992, filed O. S. No. 41 of 1993, inter alia, praying for an injunction against the first defendant therein (second defendant in O. S. No. 723 of 1992) from exercising the functions of the managing director and also restraining the other defendants therein from functioning as directors and also restraining the eighth defendant therein from acting as the lessee. There was also a prayer for a declaration that the third plaintiff therein who is the first plaintiff in O. S. No. 723 of 1992 continued to be a shareholder holding 97 shares and the purported forfeiture and transfer of her shares by virtue of the resolutions dated August 28, 1992, and September 5, 1992, were invalid. 6. In the meantime, the fourth defendant in O. S, No. 723 of 1992 had filed O. S, No. 897 of 1992 challenging the notice by some of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1992 challenging the decree and judgment therein. Defendants Nos. 1 and 2 in O. S. No. 723 of 1992 are the appellants in A. S. No. 757 of 1994, defendants Nos. 4 to 7 therein are the appellants in A. S. No. 689 of 1994, and the eighth defendant is the appellant in A. S. No. 706 of 1994. A. S. Nos. 480 of 1994, 489 of 1994, 497 of 1994, 498 of 1994 and 680 of 1994 are by the different defendants in O. S. No. 41 of 1993, challenging the judgment and decree in that suit. Counsel for the appellant in A. S. No. 688 of 1994, who is the first appellant in A. S. No. 689 of 1994 also has reported that he has no instructions from the party. A. S. No. 689 of 1994 is prosecuted by the other appellants therein. A. S. No. 688 of 1994 is not being prosecuted. 9. When these appeals came up for consideration before a learned single judge of this court, the learned judge noticed that the appeals involved an important question of law as to the jurisdiction of the civil court to entertain the suits and the decisions of the various courts on the subject were not uniform and the earlier decisions of this court also strike divergent notes. The learned judge also noticed that other important questions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. In Raja Ram Kumar Bhargava v. Union of India [1988] 171 ITR 254, 255 ; AIR 1988 SC 752, 756 , the principle regarding implied exclusion of jurisdiction has been explained as follows : Generally speaking, the broad guiding considerations are that wherever a right, not pre-existing in common law, is created by a statute and that statute itself provided a machinery for the enforcement of the right, both the right and the remedy having been created uno flatu and a finality is intended to the result of the statutory proceedings, then, even in the absence of an exclusionary provision the civil courts' jurisdiction is impliedly barred. If, however, a right pre-existing in common law is recognised by the statute and a new statutory remedy for its enforcement provided, without expressly excluding the civil courts' jurisdiction, then both the common law and the statutory remedies might become concurrent remedies leaving open an element of election to the persons of inherence. 12. The above two decisions were rendered in cases questioning the validity of taxation statutes and refund of tax paid. Learned counsel on both sides have also brought to our notice a numbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... workman for a declaration that the termination of service was illegal and for reinstatement and in the alternative for compensation for wrongful termination was maintainable and the civil court could award compensation though it could not decree reinstatement. In Jitendra Nath Biswa v. Empire of India and Ceylon Tea Co., AIR 1990 SC 255 , the Supreme Court held that the relief of reinstatement with back wages was available only under the Industrial Disputes Act and such a relief could not be granted by a civil court and the provisions in the Industrial Disputes Act impliedly exclude the jurisdiction of the civil court as regards such a relief. In Rajasthan S. R. T. Corporation v. Krishna Kant, AIR 1995 SC 1715, a three-judge Bench of the Supreme Court considered all the earlier decisions and summarised the principles as follows (headnote); (1) Where the dispute arises from general law of contract, i.e., where reliefs are claimed on the basis of the general law of contract, a suit filed in the civil court cannot be said to be not maintainable, even though such a dispute may also constitute an industrial dispute within the meaning of Section 2(k) or Section 2A of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice and are binding both upon the employers and employees, though they do not amount to 'statutory provisions'. Any violation of these standing orders entitles an employee to appropriate relief either before the forums created by the Industrial Disputes Act or the civil court where recourse to civil court is open according to the principles indicated herein. (7) The policy of law emerging from the Industrial Disputes Act and its sister enactments is to provide an alternative dispute resolution mechanism to the workmen, a mechanism which is speedy, inexpensive, informal and unencumbered by the plethora of procedural laws and appeals upon appeals and revision applicable to civil courts. Indeed, the powers of the courts and tribunals under the Industrial Disputes Act are far more extensive in the sense that they can grant such relief as they think appropriate in the circumstances for putting an end to an industrial dispute. 14. The Bench further directed that the principles enunciated in that judgment shall apply to all pending matters except where decrees had been passed by the trial courts and the, matters were pending in appeal or second appeal, as the case may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k Exchange Ltd. [1990] 69 Comp Cas 256 (Ker). The view expressed by Dixit C. J. in Nava Samaj Ltd. v. Civil Judge, Class I, Rajnandgaon, AIR 1966 MP 286, that the courts nominated under Section 10 have exclusive jurisdiction to take cognizance of all matters covered by the Companies Act was not accepted by the other learned judge constituting the Bench. Learned counsel for the appellants have also pointed out the decision of N .C. Mukherji J. in Hirendra Bhadra v. Titwin Engineering Co. (P) Ltd., [1976] 80 CWN 242 where the learned judge held that the civil court could not grant a relief of declaration and injunction as regards the disqualification of a director under Section 299 of the Companies Act. But the learned judge has not stated the specific provision by which the company court can grant such a relief. In Vitthalrao Narayanrao Patil v. Maharashtra State Seeds Corporation Ltd. [1990] 68 Comp Cas 608 (Bom), a learned judge of the Bombay High Court also held that a director could not file a civil suit challenging a letter from the managing director to the effect that he had ceased to be a director. The learned judge placed reliance on the decision of the Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not confer any exclusive jurisdiction on the designated court and the jurisdiction is conferred on the designated company court only by the other provisions in the Act and that the earlier decisions on this aspect do not require reconsideration. 17. In fact, the argument of the learned counsel for the appellants is not that the plaintiffs in O. S. Nos. 723 of 1992 and 41 of 1993 should have approached the High Court for the reliefs sought for therein. The contention of the appellants is that the nature of the allegations in the two suits are of oppression and mismanagement coming under the purview of Sections 397 and 398 of the Companies Act and they should have approached the Company Law Board for the appropriate relief. It is contended that the Company Law Board has adequate jurisdiction and powers to enquire into allegations of mismanagement including allegations of fraud in management and grant reliefs and hence the jurisdiction of the civil court is impliedly barred. 18. Sections 397 and 398 provide for prevention of oppression and mismanagement of companies. Sections 397 and 398 read : 397. Application to Company Law Bard for relief in cases of oppression.-- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id the Company Law Board may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit. 19. The provisions in Sections 397 and 398 were first introduced in the Indian Companies Act, 1913, as Section 153C by the Amendment Act LII of 1951, following the enactment of Section 210 of the English Companies Act, 1948. Section 397 provides against oppression of minority shareholders and Section 398 provides for relief against mismanagement. The scope and ambit of Sections 397 and 398 has been elaborately dealt with by Sri P.N. Bhagwati J. (as he then was) in Mohanlal Ganpatram v. Sayaji Jubilee Cotton and Jute, Mills Co. Ltd. [1964] 34 Comp Cas 777 ; AIR 1965 Guj 96. It is held that the remedy provided by Sections 397 and 398 is of a preventive nature so as to bring to an end oppression and mismanagement on the part of controlling shareholders and not to allow its continuance to the detriment of the aggrieved shareholders or the company. The remedy is not intended to enable the aggrieved shareholders to set at naught what has already been done by the controlling shareholders in the management of the company. The sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have conducted themselves in such a manner to tilt the scales and create a majority for themselves. Some of the allegations may amount to mismanagement also within the meaning of Section 398 giving jurisdiction to the Company Law Board to give appropriate reliefs under Section 397, 398 or 402 of the Act, but there too it is restricted to bringing to an end or preventing the matters complained of or apprehended. In O. S. No. 723 of 1992 and O. S. No. 41 of 1993, the plaintiffs have complained of acts affecting their individual membership rights as well as corporate membership rights. They have also complained of fraud in the conduct of the meeting of the board of directors. They have alleged that the meeting was convened on August 18, 1992, without proper notice to the second plaintiff and adequate notice to the other plaintiffs knowing that the second plaintiff will be away and the first plaintiff will not be able to attend the meeting. They have challenged the decisions for leasing out the hospital and also taking over the equipment from defendants Nos. 2 and 3 and another, as detrimental to the interests of the company. The decision in the subsequent meeting to forfeit and sell t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court regarding exclusion of the jurisdiction of the civil courts noticed earlier, it is not possible to accept the contention that the civil courts do not have jurisdiction to entertain the suits and grant relief in these cases. 22. Nextly, it is contended that the civil courts cannot interfere with the internal management of a company. The argument is based on the principle enunciated in Foss v. Harbottle [1842] 2 Hare 461. That was a case where the minority shareholders alleged that the company had a claim for damages against some of the directors by reason of the fraudulent acts of those directors. But at the general meeting the majority resolved that no action need be taken against them. The minority shareholders took legal proceedings against the directors to compel them to make good the loss caused to the company. The suit was dismissed on the ground that the acts of directors were capable of confirmation by the majority of members and the court should not interfere. It was for the majority to decide what was for the benefit of the company. That was an action on behalf of the company itself, which could not find approval from the majority of shareholders. But subseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notice and the request of the first plaintiff for postponement of the meeting was rejected ; 3. The resolutions passed were not in the agenda ; 4. The board had no authority to co-opt defendants Nos. 5, 6 and 7 as directors ; 5. The decision to. purchase the equipment from defendants Nos. 2 and 3 and Dr. K.K. Abraham was detrimental to the interests of the company, and defendants, Nos. 2 and 3 as directors had not disclosed their interest in the resolution as required by Section 299 of the Companies Act; 6. The eighth defendant, Dr. Aravinda Babu, had incurred a disqualification under Section 283(1)(g) and vacated office as he had not obtained leave of absence for the earlier meetings. 26. The plaintiffs have specifically alleged that the resolutions were vitiated by mala fides, ulterior motives and fraud and were not in the best interests of the company. The second defendant was aware that he could not command a majority in the board and adopted an illegal method of unlawfully co-opting three of his close relatives as directors for creating an artificial majority for himself. 27. The specific contention of the plaintiff is that the second defendant conve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended the previous three meetings and had thus incurred a disqualification under Section 283(1)(g). Of course, it could have been condoned by the board of directors. But no such resolution was passed condoning his absence and allowing him to continue as a director. As already noticed, the meeting held on August 18, 1992, passed a resolution to co-opt defendants Nos. 5 to 7 as directors by which the second defendant could command a comfortable majority in the directors board meeting. Co-option of these defendants was not in the agenda. So also the proposal for purchasing the equipment standing in the name of defendants Nos. 2 and 3 and Dr. K.K. Abraham. The proposal to lease the hospital was also not in the agenda. It cannot be disputed that decisions on these aspects have far-reaching consequences affecting the company as also the plaintiffs. According to the plaintiffs, the second defendant has taken advantage of the absence of the second plaintiff from the locality on August 18, 1992, and hastily called a meeting without disclosing these proposals in the agenda and got them passed and also created a majority for himself by co-opting defendants Nos. 5 to 7 in the directors board a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that ground. He has attended the very next meeting and recorded his objections. So there is no ratification of the resolutions also. As noticed earlier, the notice contained an agenda for the meeting. But the vital resolutions passed on that day were not in the agenda. Learned counsel for the plaintiffs/respondents points out the general principle stated in Kodiyathur Panchayat v. Dt. Panchayat Officer [1977] KLT 80 that notice of business must be specified and no other matter should be considered unless the whole body corporate is present and consents. But the provisions in the Companies Act do not require that there must be an agenda for a meeting of the board of directors. Learned counsel for the appellants have brought to our notice the decision of the Punjab and Har-yana High Court in Suresh Chandra Marwaha v. Lauls Private Ltd. [1978] 48 Comp Cas 110 (Punj) and also the decision of the Delhi High Court in Abnash Kaur (Smt.) v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp Cas 390 (Delhi) and submitted that there is no necessity for an agenda for the meeting of the board of directors. In Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances, the irresistible conclusion can only be that when the plaintiffs met him on August 15, 1992, the second defendant must have known that the second plaintiff will be away on August 18, 1992, and decided to call a meeting on that day itself. As D.W. 1 he has stated that the first plaintiff had no justification for absenting from the meeting. But, if really plaintiffs Nos. 1 and 2 had any inkling that a meeting would be called and these resolutions affecting the future of the company and their own personal interests would be passed, most likely the second plaintiff would have cancelled his trip and the first plaintiff would have made necessary adjustments for attending the meeting. It is clear that the second dei'endant had taken advantage of the absence of the second plaintiff and decided to call the meeting on August 18, 1992, itself without disclosing the real agenda and in the absence of the plaintiffs got all the resolutions passed with the help of other directors who were siding with him. The endeavour to alter other persons' rights and to one's own advantage by deception which constitutes fraud (vide Barium Chemicals Ltd. v. Company Law Board [1966] 36 Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Companies Act have been adopted and are applicable to the company. Article 2-B excludes only the application of regulations 21, 36 to 43, 64, 66, 70 and 71 of Table A. Regulation 72 of Table A to Schedule I confers the power on the board to appoint a per son as an additional director provided the number of directors does not exceed the maximum strength fixed for the board by the articles. So, according to the defendants, by adopting regulation 72 of Table A as part of the articles of association the power to co-opt and appoint an additional director has been conferred on the board of directors, Learned counsel for the plaintiffs-respondents points out that even if regulation 72 is applicable, there is no power to co-opt more than one member at a time as it speaks of the power to appoint a person as additional director only. But it cannot be understood as giving power to appoint only one at a time or at one meeting. The regulation must be understood as conferring power to appoint additional directors not exceeding the maximum strength fixed by the articles of association. Moreover, the second plaintiff as PW-1 in his cross-examination has admitted that there were earlier instanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was within the power of the board to give leave of absence also and permit him to continue as a director. However, in our opinion, this question is not very material for a decision in this case. The eighth defendant had attended the meeting held on August 18, 1992, He did not attend the meetings on August 29, 1992, and September 5, 1992. The meeting held on August 18, 1992, had a quorum even without the eighth defendant. It is stated that the resolution for taking the equipment was actually moved by him. But the records indicate otherwise. So, even in his absence, the other three directors could have passed the resolutions. The resolutions cannot be held to be bad merely because the eighth defendant is allowed to attend and participate in the meeting held on August 18, 1992. 31. Another resolution passed in the meeting held on August 18, 1992, was to purchase the equipment from defendants Nos. 2 and 3 and Dr. K.K. Abraham, which, according to the plaintiffs, was highly detrimental to the interests of the company. The plaintiffs contend that this was also not mentioned in the agenda and passing the resolutions in a meeting without proper notice and in the absence of the plainti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on provides for lease of all or any part of the property movable or immovable of the company. The power of the company can be exercised by the board of directors by virtue of Article 36 of the articles of association. So the resolution cannot fail for want of authority with the board of directors, but only for lack of propriety in passing the resolution without including it in the agenda and also for the reason that the meeting itself was not validly convened as found earlier. 33. Another decision that is challenged is the venue fixed for the general body meeting on September 19, 1992. Here again, it was within the powers of the board of directors to fix the place for holding the meeting. As the meeting itself did not take place, the validity of the decision need not be considered. 34. Item No. 3 in the agenda for the meeting held on August 29, 1992, was cash taken by Dr. Rosaline Sebastian from the cash counter totalling to ₹ 1,71,839.86 . In spite of opposition from the plaintiffs, the meeting held on August 29, 1992, passed a resolution to forfeit and sell the 97 shares held by the first plaintiff for realisation of the abovementioned amount. In the subsequent meeti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be exercised. Learned counsel for the appellants have pointed out some authorities that the lien can be enforced by the company without resort to a court of law. Article 9 of Table A of Schedule I also provides for a lien. Articles 10 to 12 deal with the enforcement of the lien and application of the amounts received. In the case of a public limited company, it may be possible to offer the shares for sale at the current market price in the stock exchange. But it is not possible in the case of a private limited company. The provisions in Articles 9 to 11 in exhibit A-1, Articles of association, prima facie, apply only for voluntary sales. In this case, the resolutions passed on August 29, 1992, and September 5, 1992, together have mixed up the provisions for enforcement of lien and forfeiture of shares and its allotment which, prima facie, appear to be illegal. As noticed above, the facts proved in the case do not establish that the first plaintiff was actually a debtor to the company. The amounts drawn by the first plaintiff were actually due to her brother and the second plaintiff. There was no claim from them for those amounts. It is stated that the first plaintiff did not prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be accepted. Reading Article 10 as a whole, it is clear that no sale shall be made unless both requirements are complied with. The plaintiff in O. S. No. 901 of 1992 has a case that he is an innocent purchaser and even if there is any defect in the sale, his title to the shares will not be affected. But, in this case, the entire proceedings are illegal and invalid. There has, in fact, been no proper sale of the shares to the plaintiff in O. S. No. 901 of 1992. The company was not possessed of the shares at any time to make an allotment in favour of the plaintiff in O. S. No. 901 of 1992 and so he cannot derive any right for the shares by the procedure. At best, he can claim refund of the amount allegedly paid by him. The first plaintiff continues to be a holder of the 97 shares in the company. 35. The other point in dispute is about the validity of the general body meeting held on November 6, 1992. The requisition for the meeting had been made by three members, namely, V.K. Thomas, N.V. Poulose and Vinu Thomas, under Section 169 of the Companies Act. As per Section 169(6) if the board does not, within 21 days from the date of the deposit of a valid requisition, proceed dul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he plaintiff in O. S. No. 901 of 1992. But as found above, there was no proper sale and the first plaintiff had not been divested of the shareholding. O. S. No. 901 of 1992 has been filed complaining that the plaintiff therein had no notice of the meeting. But since he had not become a shareholder, he had no valid claim to attend the meeting also. It is not possible to accept the contention of learned counsel for the appellants that the requisitionists will get a right to call a meeting only if the directors failed to take necessary steps. In this case, they had taken some steps but, themselves have obtained a stay order as they were not willing to proceed with the conduct of the general body meeting abiding by the directions given by the trial court. Such being the case, the requisitionists were entitled to call the meeting. There is no case that the meeting was invalid for any other reason. So the meeting held at the instance of the requisitionists on November 6, 1992, and the decisions taken therein milst be upheld. 36. The respondents/plaintiffs in O. S. No. 723 of 1992 have filed C. M. P. No, 6698 of 1997 praying for admission of additional documents in evidence. The docume ..... X X X X Extracts X X X X X X X X Extracts X X X X
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