1947 (2) TMI 16 - HC - Companies Law

Summary

Issues Involved:
1. Whether the defendant company had been borrowing monies, receiving, renewing, or advertising for deposits or investing its funds in shares of other companies in violation of the object clause of the company given in the memorandum of association? If so, what is its effect?
2. Whether the matters mentioned in issue No. 1 relate to the internal management of the company and the plaintiff has no right to agitate them in a Court of law?
3. Whether the plaintiff is estopped to bring this suit by his conduct?
4. If issue No. 1 is proved in favor of the plaintiff and issue No. 2 against the company, cannot the plaintiff be granted the relief sought for?

Issue-wise Detailed Analysis:

1. Violation of the Object Clause:
The plaintiff, a shareholder of the Punjab Textile Mills Limited, alleged that the company was carrying on the business of banking without complying with the provisions of the Indian Companies Act in relation to banking companies, applying its funds in the acquisition of speculative shares of other companies, and borrowing beyond the genuine needs of the business. The trial Judge found that the act of the defendant company in borrowing, receiving, renewing, and advertising for deposits to the extent of the amounts invested in the shares of other companies, or applying its funds in the purchase of shares of other companies, was ultra vires and not binding on the plaintiff. However, the Senior Subordinate Judge reversed this decision, holding that the company had very wide powers under the memorandum of association and could even carry on the business of buying and selling shares. It was observed that borrowing and investment of funds are matters relating to the internal management and regulation of the company and could not be litigated in a civil Court.

2. Internal Management and Plaintiff's Right to Agitate:
The Senior Subordinate Judge noted that the question of the violation of the objects clause did not arise even if the company had been borrowing excessively and beyond the genuine needs of the business. It was held that borrowing of money, receiving, renewing, or advertising of deposits, or investing its funds in shares of other companies is not in violation of the objects clause of the memorandum of association of the company and is not ultra vires. The matters mentioned in issue No. 1 relate to the internal management of the company, and the plaintiff had no right to agitate them in a Court of law. The appellate court emphasized that the remedy for any abuse of power by the directors lies within the four corners of the Companies Act and not by having resort to a suit for declaration and an injunction.

3. Estoppel by Conduct:
The trial Judge found in favor of the plaintiff on the issue of estoppel, but the Senior Subordinate Judge did not address this issue directly. The appellate court's focus was on whether the acts of the directors were ultra vires of the company or merely in excess of their powers. The appellate court concluded that the directors' actions, even if in excess of their powers, were not ultra vires of the company and thus could be ratified by the company.

4. Relief Sought by Plaintiff:
The trial Judge granted a decree for a declaration that the acts of the defendant company were ultra vires but refused the relief of an injunction. The appellate court dismissed the plaintiff's suit entirely, holding that the matters raised by the plaintiff concerned the internal management of the company and could not be examined by a civil Court. The appellate court also noted that the company was not carrying on the business of purchase and sale of shares habitually, and the particular borrowing in the year 1943 was done with a purpose to buy the shares of the Saraswati Sugar Syndicate Limited, which could be said to be extra vires the directors but not ultra vires of the company.

Conclusion:
The appellate court held that the matters raised by the plaintiff were internal management issues and could not be examined by a civil Court. The plaintiff's appeals were dismissed on the ground that the remedy for the redress of the grievance lies within the Indian Companies Act. Both parties were ordered to bear their own costs throughout.