1988 (1) TMI 277 - HC - Companies Law

Appointment of directors and proportion of those who are to retire by rotation, Ascertainment of directors retiring by rotation and filling up vacancies

Summary

Issues Involved:
1. Validity of the appellant's appointment and continuation as a director.
2. Legal implications of the appellant's status as a managing director.
3. Impact of the amalgamation on the appellant's directorship.
4. Interpretation of sections 254, 255, 256, and 260 of the Companies Act, 1956.
5. Necessity of the company's presence as a party in the suit.

Detailed Analysis:

1. Validity of the appellant's appointment and continuation as a director:
The appellant was initially appointed as one of the first directors of both the freight company and the hotels company under their respective articles of association. The articles did not specify a time limit for his tenure. Upon amalgamation of the freight company into the hotels company, the appellant continued as a director of the amalgamated entity. The court held that the appellant's appointment as a director was valid and continued indefinitely as long as the companies remained private entities. The appellant's continuation as a director was not subject to retirement by rotation under sections 255 and 256 of the Companies Act, 1956, as these provisions apply to public companies unless otherwise stated in the articles.

2. Legal implications of the appellant's status as a managing director:
The appellant was appointed as the managing director of the hotels company and continued in this role after the amalgamation. Article 144 of the articles of association of the amalgamated company stated that the managing director was not subject to retirement by rotation. The appellant's tenure as managing director ended on April 30, 1986, but he continued as a director of the company. The court concluded that the termination of his role as managing director did not affect his status as a director.

3. Impact of the amalgamation on the appellant's directorship:
The amalgamation of the freight company into the hotels company did not affect the appellant's directorship. He continued to be a director of the amalgamated company by virtue of his initial appointment in both the original companies. The court emphasized that the articles of association of both companies did not provide for the termination of the first directors' tenure, thereby allowing the appellant to continue indefinitely as a director.

4. Interpretation of sections 254, 255, 256, and 260 of the Companies Act, 1956:
Section 254 deems subscribers of the memorandum to be directors until directors are duly appointed. Section 255 mandates the appointment of directors at a general meeting unless the articles provide otherwise. Section 256 deals with the retirement of directors by rotation in public companies. Section 260 allows the board to appoint additional directors who hold office only until the next annual general meeting. The court held that the appellant's appointment as a first director under the articles constituted an exception to the general rule of appointment at a general meeting. The articles did not prescribe a termination of his tenure, allowing him to continue as a director indefinitely.

5. Necessity of the company's presence as a party in the suit:
The appellant contended that the suit was not maintainable without the company being made a party. The court noted that while the company might be a proper party, it was not necessarily a required party for the interim order. The court allowed for the possibility of the company being impleaded at a later stage, either by the respondent or suo motu by the court. The absence of the company did not invalidate the interlocutory application at this stage.

Conclusion:
The court allowed the appeal, setting aside the judgment and order dated November 19, 1987, against the appellant. The appellant was deemed to continue as a director of the company until the next annual general meeting, which had been adjourned. The suit could proceed without the company being a party at this interlocutory stage, but the company could be impleaded later. The costs of the proceedings were to be determined in the suit.