1995 (2) TMI 333 - HC - Companies Law

Summary

Issues Involved:
1. Validity of the explanatory statement under Section 173 of the Companies Act, 1956.
2. Legality of the waiver of remuneration paid to a director.
3. Validity of the resolutions passed in the annual general meeting.

Issue-wise Detailed Analysis:

1. Validity of the Explanatory Statement under Section 173 of the Companies Act, 1956:

The applicants argued that the explanatory statement for Item Nos. 7 and 8 did not satisfy the requirements of Section 173 of the Act. They contended that the statement lacked material facts and was misleading. The court noted that the purpose of Section 173 is to ensure that shareholders are fully informed about the matters on which they are to vote, allowing them to exercise an intelligent judgment. The applicants pointed out that the explanatory statement failed to disclose critical information, such as the expertise and experience of the second respondent, the defect in his appointment, and the differential treatment of another director, Mohanakrishnan.

The court, however, found that the explanatory statement provided by the first respondent did meet the requirements of Section 173(2). It stated that the explanatory statement included the necessary material facts related to the resolutions, such as the circumstances of the second respondent's appointment, the defect in his previous appointment, and the reasons for seeking a waiver of remuneration. The court emphasized that the explanatory statement should not be scrutinized too strictly but should be given a liberal construction. It concluded that the explanatory statement was adequate and complied with the legal requirements.

2. Legality of the Waiver of Remuneration Paid to a Director:

The applicants contended that the waiver sought for in Item No. 8 was ultra vires the company and could not be permitted. They argued that the payment made to the second respondent was unauthorized as his appointment was defective. The court examined whether the company had the power to make such payments and whether the waiver was justified.

The court noted that the remuneration was paid for services rendered by the second respondent, and Section 290 of the Act validates the acts of a director whose appointment is found to be defective until the defect is shown to him. The court found that the remuneration paid to the second respondent during his tenure as a director was valid and that the company had sought and obtained approval from the Central Government for the waiver of recovery. The court concluded that the payment was not ultra vires the company and that the resolution seeking waiver was valid.

3. Validity of the Resolutions Passed in the Annual General Meeting:

The applicants challenged the validity of the resolutions passed in the annual general meeting on the grounds that the explanatory statement was misleading and that the procedure adopted during the meeting was flawed. They pointed out discrepancies in the minutes of the meeting, such as the number of votes cast and the absence of a proposer for the second respondent's candidature.

The court examined the minutes of the meeting and the procedures followed. It noted that the minutes are prima facie evidence under Sections 193 and 195 of the Act. The court found that the applicants failed to provide sufficient evidence to dislodge the presumption of validity attached to the minutes. It also observed that the applicants did not raise any objections during the meeting or participate in the deliberations.

The court concluded that the resolutions passed in the annual general meeting were valid and that the applicants had not made out a prima facie case to challenge them. It emphasized that the balance of convenience lay in favor of the respondents and that not giving effect to the resolutions would cause prejudice to the second respondent, who was validly elected as a director with the approval of the majority of shareholders.

Conclusion:

The court allowed Application No. 5055 of 1994, dismissed OA No. 708 of 1994, and vacated the interim order granted on 3-8-1994. The court found that the explanatory statement complied with Section 173(2) of the Act, the waiver of remuneration was not ultra vires the company, and the resolutions passed in the annual general meeting were valid. The court's findings were based on a prima facie consideration of the materials presented by both sides and would not affect the trial of the suit.