TMI Blog1971 (3) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... m the Managing Agent, firm Swaroopchand Hukumchand and Co. (defendant No. 1) or respondent No. 1, hereinafter called the firm for the period from May 18, 1915, to November 18, 1945. 2. On September 16, 1954, Prakashchandra, the appellant purchased a share of 100 and became a shareholder of the company. On November 21, 1955, he instituted the suit in the following capacities; (i) individual; (ii) representative; and (iii) derivative. Sir Seth Hukumchand was defendant No, 2. He died during the pendency of the suit. His legal representatives were brought on record. Defendants 3 to 6 were the other members of the said joint Hindu Family firm during the relevant period. 3. The Company (Hukumchand Mills Ltd.) is a company incorporated under the Indore Companies Act, 1914, (No. 6 of 1914) (hereinafter called the Act). That Act bodily incorporated the Indian Companies Act, 1913, subject to certain modifications which were contained in a schedule. It was published in the Holkar State Gazette dated September 28, 1914. On May 18, 1915 the Company appointed the firm (Firm Swarupchand Hukumchand and Co.) as their Managing Agents, Secretaries and Treasurers under the Act. Clause 3 of the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emed 10 have been made as from the date of their appointment as such Secretaries, Treasurers and Agents, and that such variation shall take effect on the passing of this resolution whether the same be embodied in a supplementary agreement or not. The Directors are authorised to execute a supplementary Agreement embodying the above variation whenever required by the said Messs. Swarupchand Hukumchand Co., or their assignees. (Ex. P. 4-B). 9. This resolution was passed at 3 P. M. Half an hour later at 3. 30 P. M. the resignation was accepted and, on the same day, Sir Hukumchand and Mannalal Co. were appointed as the new Managing Agents with retrospective effect from January 1, 1918, for a period of 20 years on the terms contained if, the agreement (Ex. P. 10-A), clause 2(b) of which defines the expression net profits as meaning the profits of the company calculated after allowing for all the usual working charges, interest on loans etc., but without any deduction in respect of depreciation, Income Tax or Super Tax, Corporation or Excess Profits Tax, or any other tax, or duty or income or revenue. 10. The appellant in the present suit challenged the validity of the resol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 14,1949, was intra vires the Company; that there was no collusion, conspiracy, undue influence or mala fides on the part of the majority share holders; nor was the minority defrauded, or deprived of any legitimate dues; nor were they oppressed. The special resolution was in accordance with law and perfectly consistent with the Articles of the Association of the Company and the terms of the agreement of managing agency. No question of want of consideration arose. He further held that the suit was barred so far as the relief of accounts was concerned. 13. Shri Bobde, learned counsel for the appellant, contended that the trial Court erred in holding that the impugned resolution dated November 21, 1955, was in consonance with the terms of the agreement of managing agency of 1915. Relying on their Lordships' decision in I. T. Commissioner v. Delhi Flour Mills Co. Ltd. A I R 1959 S C 185 , it was urged that for the purpose of managing agency commission, the annual net profits had to be arrived at after deducting all taxes and it was immaterial that in 1915 or 1922, the Industrial Tax and the Excess Profits Tax were not in contemplation of the patties. In this context, learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be annual profits for the purposes of that clause. The manner in which the profits of the Company had to be arrived at was also expressly stated in the clause. No deduction was to be made on account of depreciation or otherwise. We find that the language is emphatic enough to make it abundantly clear what was to be excluded. The wording denoting exclusion and the language denoting non-exclusion were both made exhaustive by employing the word only in the former and the words or otherwise in the latter. To put it differently, all that could be deducted for calculating the annual profits was all actual working expenses only . The word only emphasised that nothing also could be deducted. This was further fortified by saying what was not to be deducted and that was expressed again by employing an exhaustive expression. Depreciation was not to be deducted, but that was merely illustrative. The words or otherwise was clearly deposited the intention of the parties that nothing else was to be deducted. 16. Shri Bobde argued that in 1922, when the clause was amended, the expression net profits was employed and that expression must be read as interpreted by their Lord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the auditors' remarks in their reports, some more facts have to be stated. It appears that as a matter of law but not as a matter of the terms agreement, a question arises whether a payment by trader a computed in relation to profits, represents a mere division of profits with another party, or is an item of expenditure the amount of which is ascertained by reference to profits. The importance of this question lies in its legal consequence in as much as that payment would be allowable in the second but not in the first. 22. In Pondicherry Ry. v. Commissioner of Income-Tax AIR 1931 PC 165 (589A 239. ) a railway company in consideration of a ninety nine year concession from the French Colonial Government agreed to make over to the colonial government during the whole duration of the concession one half of the company's net profits to be ascertained in a prescribed manner. It was held by the Privy Council that the Company was not entitled to any deduction in respect of the half-share of its profits made over to the Colonial Government. Lord Mac Milan said:- A payment out of profits and conditional on profits being earned cannot accurately be described as a payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. However, it appears that in 1931, the question was considered by the Government of His Highness the Maharaja of Indore, which is recapitulated in the Notification No. 13, dated July 14, 1933. A full Bench of the High Court of Indore. To which the matter was referred was of the opinion that the managing agents' commission on profits was not an item of expenditure incurred solely for the purpose of earning the said profits within the meaning of rule 3 (2) (ix) of the Indore Industrial Tax Rules. Thereupon, the Ruler of Indore, vide Shri Shankar Order No.173, dated June 29, 1933, ordered that the cabinet resolution No.1072 dated August 29, 1931, which also had expressed the view which was taken by the Full Bench of the High Court, be given effect to and the Industrial Tax due on the amount of managing agency commission on profits be recovered with effect from the date of the said cabinet resolution. This matter was later on considered in Rajkumar Mills Ltd v. Madhya Bharat State AIR 1953 M B 135 , In that case, the company had agreed to pay 16 percent on the net profits of the company to the Managing Agents. The amount of the Commission was not to be less than ₹ 25,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect to adjustment for taxation . The Directors also made a mention of this in their reports. 26. Shri Chitale's contention was that in the above background it was only natural for the managing agents, who had tendered non resignation, that they desired the position to be made clear once for all. They were naturally keen for the company to consider the matter and give their final decision. The Company then passed the impugned resolution. 27. This brings us to the main issue whether the resolution of 1949 is vitiated as ultra vires, fraudulent or oppressive against the minority share holders. Before we deal with this question, it is necessary to consider the defendant's contention that the plaintiff had no right to sue. 28. It is true that the plaintiff became a share-holder of the company only on September 16, 1954, when he purchased one share of ₹ 100/-. He was not a share-holder when the impugned resolution dated November 14, 1949, was passed. Therefore, he had no right to sue in his personal capacity either for the declarations he has sought, or for rendition of accounts for the period prior to his becoming a member. In our opinion, it is undoubted position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l I think, in general be found that the case is allowed to go to trial to ascertain the facts before it is finally determined whether the action of the majority can in fact bind the minority. This is because until the facts are ascertained at the expense of the company. In Dominion Cotton Mills Co. Ltd. v. George W. Amyot 1912 A C 546 (551), Lord Machaghten succinctly stated the rule thus:-- The principles applicable to cases where a dissentient minority of share holders in a company seek redress against the action of the majority of their association, are well-settled........... In order to succeed, it is incumbent on the minority either to show that the action of the majority is ultra vires or to prove that the majority have abused their powers and are depriving the minority of their rights. 31. The plaintiff being a share holder of the Company was, therefore, entitled to sue in the representative capacity on behalf of the other share holders as his allegations against the majority and against the Company, on which the suit was based, are within the exceptions stated above. 32. Furthermore, it is new well recognised that where a Company is entitled to bring an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or charter. Such an act will be ulna vires the company, though it may not be unlawful or contrary to public policy as when done by an individual. This is because the incorporation of a company is under a statutory authority. It cannot, therefore, do anything which is beyond the powers expressly or by necessary implication conferred upon it by the statute or the memorandum of association. Therefore, any purported activity in excess of its powers is void and it is of no consequence that it was agreed to by all the members. This affords protection to investors so that they know the objects in which their money would be employed. This further protects the creditors so that they are ensured that the company's funds will not be dissipated on unauthorised activities. 36. The term ultra vires is also applied to an act or transaction which is beyond the lawful powers of any person, for instance, the Directors; but in such a case, the expression ultra vires the Directors must necessarily be used, to describe the situation when the Directors of the Company have exceeded the powers delegated to them. 37. There can be no confusion between the two entirely distinct legal principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 (597) , said: -- A trustee may buy from the cestui qe trust, provided there is a distinct and clear contract, ascertained to be such after a jealous and scrupulous examination of all the circumstances, proving, that the cestui qe trust intended, the trustee should buy; and there is no fraud, no concealment, no advantage taken by the trustee of information acquired by him in the character of trustee. I admit, it is a difficult case to make out, whenever it is contended that the exception prevails It is stated in Kerr on Fruad and Mistake, 6 th Edition, page 192: -- Thus, a trustee for sale may purchase the trust estate, if the cestui qe trust fully and clearly understands with whom he is dealing and makes no objection to the transation, and the trustee fairly and honestly discloses all that he knows respecting the property and gives a just and fair price, and does not seek to secure surreptitiously any advantage for himself. The onus however rests upon the trustee, and he is bound to produce clear affirmative proof that the parties were at arm's length, that the cestui qe trust had the fullest information upon all material facts, and that having this information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' remuneration is fixed by agreement, the principal can subsequently enhance the remuneration even with retrospective effect from the date of the original agreement. This power is not disputed. Therefore, the consideration in such a case will be the services rendered by the agents both for the remuneration as originally fixed and also for the enhanced remuneration. There is no question of any ex-gratia payment in such a case. That case will be quite different where the company makes a payment as managing agency commission to a person or firm which has not actually worked as the managing agent. In the latter case it can be said that the payment is gratuitous. But where a managing agent had worked as such, enhancement of his remuneration cannot be said to be ex-gratia; and no question of fresh consideration arises. It cannot, therefore, be said that the company, by its resolution of 1949, ratified the managing agents' act of drawing their commission on profits before deduction of taxes, without quid pro quo. 43. On the above discussion we have reached the following conclusions:-- (1) It is incontestable that an agreement to pay remuneration to the managing agents on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been taken into consideration by the learned trial Judge. It reads thus-- By a principal against his agent for moveable property received by the latter and not accounted for three years. When the account is during the continuance of the agency, demanded and refused or, where no such demand is made, when the agency terminates. In our opinion, so far as the suit for accounts is concerned, this Article clearly applies. The defendants being the managing agents, secretaries and treasurers of the company, received moneys out of which they drew their managing agency commission. The suit could, therefore, be brought within three years of the termination of the managing agency. The managing agency terminated in 1949, but the suit was brought in 1955. It was, therefore, barred by time so far as the suit for accounts was concerned. 46. Even if Article 120 applied, since a suit for accounts for every year had to be instituted within six years of that year because the cause of action for accounts of every particular year accrued at the end of that year and since the suit was instituted in 1955, it would have been within limitation for the year 1948-49 only provided the plainti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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