1987 (1) TMI 433 - HC - Companies Law

Company Service of documents on members by Directors vacation of office by Winding up Company when deemed unable to pay its debts Applicability of Code of Civil Procedure

Issues Involved:
1. Opportunity to Lead Evidence
2. Continuation of Partnership Principles
3. Removal of Permanent Directors
4. Validity of Resolution Dated May 8, 1981
5. Service of Notices for Meetings
6. Appointment of Additional Directors and Allotment of Shares
7. Allegations of Mismanagement
8. Relief Under Sections 397 and 398 of the Companies Act

Detailed Analysis:

1. Opportunity to Lead Evidence:
The appellants argued that they were not given an opportunity to lead evidence, and issues were not framed by the learned company judge. The court examined Rule 6 and Rule 9 of the Companies (Court) Rules, 1959, and concluded that it depends on the facts whether evidence is required or if the case can be decided based on affidavits and documents. The court found that the parties did not object to deciding the case on documents and affidavits and did not request to lead evidence during the hearings. Therefore, this grievance was deemed without merit.

2. Continuation of Partnership Principles:
The appellants contended that the company was an extension of their partnership business and that the basic agreement of equal shares and participation was flouted by inducting additional directors and allotting shares to them. The court referred to the principles laid down in Ebrahimi v. Westbourne Galleries Ltd. and the Supreme Court's decision in Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla. It concluded that the principles of partnership dissolution do not apply liberally to private companies unless there is a complete deadlock and lack of probity in management. The court found that the appellants themselves had handed over the management to respondent No. 1 due to financial difficulties and had voluntarily executed the agreement dated May 8, 1981.

3. Removal of Permanent Directors:
The appellants argued that as permanent directors under clause 18 of the articles of association, they could not be removed, and their removal under section 283(1)(g) of the Companies Act was illegal. The court held that section 283(1)(g) applies to permanent directors as well, and the appellants ceased to be directors due to their continuous absence from meetings. The court found that the appellants had notice of the meetings and deliberately chose to remain absent.

4. Validity of Resolution Dated May 8, 1981:
The appellants claimed that the resolution and agreement dated May 8, 1981, were invalid as they contravened clause 33 of the articles of association. The court held that clause 33 allows for the appointment of a managing director for more than one year if agreed upon in a contract. The agreement was executed voluntarily, without coercion or fraud, and was binding on the parties. The resolution dated September 22, 1981, could not supersede the agreement unless quashed by a competent court.

5. Service of Notices for Meetings:
The appellants alleged they did not receive notices for meetings. The court examined section 53(2)(a) of the Companies Act and found that notices were sent under certificate of posting, properly addressed, and pre-paid. The court drew a presumption of service based on the certificates of posting and the appellants' conduct, including their admission of receiving the letter dated April 19, 1982, informing them of their removal as directors. The court concluded that the appellants deliberately remained absent from the meetings.

6. Appointment of Additional Directors and Allotment of Shares:
The appellants argued that respondents Nos. 2 to 5 were illegally appointed as additional directors and allotted shares, reducing the appellants to a minority. The court found that the appointments and allotments were necessary due to the appellants' non-cooperation and the company's financial needs. The appellants were given the option to purchase new shares but declined. The court held that the appointments and allotments were valid and necessary for the company's functioning.

7. Allegations of Mismanagement:
The appellants alleged various acts of mismanagement, including not holding the first annual general meeting within 18 months, forming a parallel company, and not being given access to the company's premises and books of account. The court found that the annual general meeting was held within the required period, the parallel company had not commenced business, and the appellants had access to the premises and books until September 22, 1981. The court also found no evidence to substantiate allegations of misuse of pledged goods, non-payment of dues, or manipulation of accounts. The court concluded that the allegations of mismanagement were not proved.

8. Relief Under Sections 397 and 398 of the Companies Act:
The court examined the requirements for relief under sections 397 and 398 of the Companies Act and found that no case of oppression or mismanagement was made out against the respondents. The court noted that the company had made progress under respondent No. 1's management and that the appellants had voluntarily handed over management and remained absent from meetings. The court dismissed the appeal and upheld the resolution dated May 8, 1981, offering the appellants the option to sell their shares to respondents Nos. 1 to 5 at the prevalent market rate.

Conclusion:
The appeal was dismissed with costs, and the resolution dated May 8, 1981, was upheld. The appellants were offered the option to sell their shares to respondents Nos. 1 to 5 at the prevalent market rate.

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