2016 (7) TMI 34 - HC - Companies Law

Whether the plaintiff No.2 has authority to file suit on behalf plaintiff No.1 - lack of authorization - there was no board resolution authorizing Plaintiff No.2 to file the present suit on behalf of Plaintiff No.1 - Held that - The Plaintiff No. 2 admittedly being the Promoter and Managing Director of the Company has not only not produced the Investment Agreement and/or Investment Agreement-I and/or the Subscription Agreement but has also not asserted before this Court that there is any inconsistency between the provisions of Articles 1 to 36 and the provisions of the Investment Agreement and/or the Investment Agreement-1 and/or the Subscription Agreement. It is therefore once again established that the Plaintiff No. 2 is trying to raise issues only with a view to keep the suit pending and delay the determination of the preliminary issue. Sub-clause (t) of Article 17A makes it clear that the litigation must be material in the context of the Company s business and need not actually relate to its business. A defamatory allegation concerning the Company s business, which had caused a considerable adverse impact on the Company s business leading to substantial damages to the tune of ₹ 500 crores can only be described as material in the context of the Company s business . In the circumstances it is clear that as per the Plaintiffs own case, the alleged defamatory statements are extremely material in the context of Plaintiff No.1 s business and the Plaintiffs cannot be heard to say that the present suit is not in the context of the Company s business , let alone not being material to it. The present suit qua Plaintiff No. 1 is not maintainable for want of authority of Plaintiff No. 2 to file the suit on behalf of Plaintiff No.1 and the Suit is accordingly dismissed qua Plaintiff No.1

Summary

Issues Involved:
1. Authority of Plaintiff No. 2 to file the suit on behalf of Plaintiff No. 1.
2. Requirement of VC Investor's consent under the Articles of Association.
3. Validity of Articles of Association under Section 28 of the Indian Contract Act, 1872.
4. Role of the Official Liquidator post-winding up order.

Issue-wise Detailed Analysis:

1. Authority of Plaintiff No. 2 to File Suit on Behalf of Plaintiff No. 1:
The Defendant challenged the maintainability of the suit, arguing that Plaintiff No. 2 lacked authority to file the suit on behalf of Plaintiff No. 1 due to the absence of a board resolution authorizing such action. The court framed Issue No. 3 to address this question. Plaintiff No. 2 claimed authority based on a resolution passed on 9th April 2000. However, the Articles of Association required consent from a Director nominated by the VC Investor for any litigation, which was not obtained. The court found that Plaintiff No. 2 lacked the requisite authority to file the suit, leading to the dismissal of the suit qua Plaintiff No. 1.

2. Requirement of VC Investor's Consent Under the Articles of Association:
Article 17A(t) of the Articles of Association stipulated that any litigation material to the company's business required a resolution with consent from a VC Investor-nominated Director. The court observed that no such resolution had been passed, and Plaintiff No. 2 did not contend that any consent existed. The court emphasized that this issue was a pure point of law, foreclosing any need for further evidence. The absence of the required consent rendered the suit unauthorized.

3. Validity of Articles of Association Under Section 28 of the Indian Contract Act, 1872:
Plaintiff No. 2 argued that the Articles of Association were void under Section 28 of the Indian Contract Act, which voids agreements restraining legal proceedings. The court rejected this argument, stating that Article 17A did not bar filing a suit but prescribed a condition precedent. Section 28 pertains to absolute restrictions on enforcing contractual rights, which was not applicable here as the suit was for defamation, not contract enforcement.

4. Role of the Official Liquidator Post-Winding Up Order:
The Official Liquidator argued that under Sections 441 and 457 of the Companies Act, 1956, they could ratify the suit. The court disagreed, stating that the defect in filing the suit without the required consent could not be cured post-facto by the Official Liquidator. The defect was not procedural but jurisdictional, and the suit remained unauthorized and non-est. The judgment in All India Reporter Ltd. v. Ramchandra Dhondo Datar was found inapplicable as it dealt with procedural defects, not jurisdictional ones.

Conclusion:
The court concluded that Plaintiff No. 2 lacked authority to file the suit on behalf of Plaintiff No. 1 due to non-compliance with Article 17A of the Articles of Association. The suit was dismissed qua Plaintiff No. 1, and Issue No. 3 was answered in the negative.