1985 (4) TMI 245 - HC - Companies Law

Court - Jurisdiction of Directors vacation of office by Director - Disclosure of interest by

Summary

Issues Involved:
1. Jurisdiction of the civil court to entertain a civil suit regarding the disqualification of a director under the Companies Act, 1956.
2. Whether the rights and obligations in question are creatures of the Companies Act or traceable to a basic contract.
3. Applicability of the rule in Foss v. Harbottle and its exceptions.
4. Whether the disqualification under sections 283(1)(i) and 299 of the Companies Act is a statutory creation or a common law obligation.

Summary:

1. Jurisdiction of Civil Court:
The primary issue is whether the civil court has jurisdiction to decide the question relating to the alleged disqualification of the second respondent u/s 283(1)(i) read with section 299 of the Companies Act in the context of section 211 and section 10 of that Act, and section 9, Civil Procedure Code. The court highlighted that there is no express provision ousting the jurisdiction of the civil court in any particular respect. Section 10 of the Act merely specifies "the court" having jurisdiction under the Act and does not purport to invest the company court with jurisdiction over every matter arising under the Act. The court concluded that the suit filed by the second respondent is maintainable as it deals with an individual right.

2. Rights and Obligations:
The court examined whether the rights and obligations in question are creatures of the Companies Act or traceable to a basic contract. It was held that the general law of contracts is the basis of the rights of parties and that the Companies Act, 1956, merely regulates these rights and does not create any new rights or remedies. The court emphasized that unless there is an exclusion of the jurisdiction of the civil court by words express or implied, the suit is maintainable.

3. Rule in Foss v. Harbottle:
The court discussed the rule in Foss v. Harbottle and its exceptions, noting that the majority cannot confirm an act which is ultra vires the company or illegal, constitutes a fraud against the minority, or requires a qualified majority but has been passed by a simple majority. The court cited various cases to support the view that a shareholder can insist on the strict observance of the legal rules, statutory provisions, and provisions in the memorandum and articles which cannot be waived by a bare majority of shareholders. The court concluded that the present case deals with an individual right of the second respondent, and the suit is maintainable.

4. Disqualification under Sections 283(1)(i) and 299:
The court rejected the argument that the disqualification of a "managing" director covered by sections 283(1)(i) and 299 are creatures of the Companies Act. It was held that the obligation of a director to disclose his interest in a contract entered into or to be entered into is an obligation similar to that of a trustee, arising out of common law. The court concluded that the alleged disqualification in question can be the subject-matter of a civil suit.

Conclusion:
The court held that the civil suit filed by the second respondent is maintainable. The writ petition was dismissed, and the interim stay granted earlier was vacated.