1983 (7) TMI 223 - HC - Companies Law

Directors Power of Director Disclosure of interest by Appointment of sole selling agent

Summary

Issues Involved:
1. Whether the application filed under section 20 of the Arbitration Act was barred by limitation.
2. Whether the agreement dated June 1, 1967, was valid.
3. Whether the agreement was vitiated on the grounds of fraud and being against the interest of the company.

Issue-wise Detailed Analysis:

1. Limitation:
The appellant contended that the application under section 20 of the Arbitration Act, filed in November 1973, was barred by limitation as the agreement was entered into on June 1, 1967. The court acknowledged that Article 137 of the Limitation Act, 1963, which provides a three-year limitation period, was applicable. The appellant argued that the limitation started from the first default in payment in August 1967, making the application time-barred by 1970. However, the court held that the right to apply accrued from each default, meaning defaults from October 1970 onwards were within time as the application was filed in November 1973. Therefore, the application was not time-barred.

2. Validity of the Agreement:
The appellant argued that the agreement was invalid as it was not put before the general body of shareholders. The court found that the agreement was approved by the board of directors, with the interested directors disclosing their interest and not participating in the discussion or voting. The court held that there was no violation of section 299 of the Companies Act, and the board's approval was within their powers under the articles of association. The court also rejected the argument that the agreement required approval under section 294 of the Companies Act, as the agreement did not appoint the respondents as sole-selling agents for any specific area.

3. Fraud and Interest of the Company:
The appellant claimed that the agreement was vitiated by fraud and was against the interest of the company. The court emphasized the fiduciary duty of directors, likening them to trustees who must act in the company's best interest. The court scrutinized the agreement and found that it was heavily skewed in favor of the respondents, who were directors of the company. The agreement required the company to pay a minimum fee of Rs. 1.2 lakhs per annum to the respondents, irrespective of sales, and to reimburse all expenses incurred by the respondents. The court found no evidence of the respondents providing any service or incurring any expenses for the company. The court concluded that the agreement was a sham, designed to siphon off funds for the directors' personal benefit, and was patently against the company's interest. Consequently, the court held that the agreement was void and the official liquidator was entitled to rescind it. As the agreement was void, the arbitration clause did not survive, and the respondents could not seek arbitration.

Conclusion:
The court allowed the appeal, set aside the judgment of the learned single judge, and dismissed the respondents' application under section 20 of the Arbitration Act. The court also noted that the arbitrator's fee, already paid by both parties, would not be refunded.