1968 (1) TMI 41 - HC - Companies Law

Summary

Issues Involved:
1. Allegations of prejudice to the interests of the company under Section 398 of the Companies Act, 1956.
2. Legality and advisability of continued financial assistance to the Mysore Race Club.
3. Validity of the requisition for an extraordinary general meeting and the proposed resolution.
4. Potential conflict of interest among directors.
5. Compliance with paragraph 4 of the memorandum of association regarding the application of income and property of the company.

Detailed Analysis:

1. Allegations of Prejudice to the Interests of the Company:
The petitioner, a member of the Bangalore Turf Club Ltd., filed a petition under Section 398 of the Companies Act, 1956, alleging a state of affairs prejudicial to the interests of the company. The allegations were traversed by a common affidavit filed by the company and its governing body.

2. Legality and Advisability of Continued Financial Assistance to the Mysore Race Club:
The Bangalore Turf Club had been providing financial assistance and facilities to the Mysore Race Club, including covering its losses. The losses incurred by the Mysore Race Club were disclosed in the balance sheets of the Bangalore Club and adopted by its general body. Differences of opinion arose among the members regarding the advisability of continuing this assistance. At an annual general meeting on March 20, 1967, no definite resolution was adopted regarding the continued association between the two clubs. Subsequently, a requisition for an extraordinary general meeting was sent by the petitioner and 43 others to move a resolution to terminate the agreements with the Mysore Race Club and cease financial assistance.

3. Validity of the Requisition for an Extraordinary General Meeting and the Proposed Resolution:
At the extraordinary general meeting held on August 21, 1967, a point of order was raised questioning the legality of the proposed resolution. The president ruled that the resolution, if passed, would interfere with the discretionary powers vested in the committee under the articles of association and that the general body should first amend the relevant articles of association by a special resolution before issuing such directives. Dissatisfied with this ruling, the petitioner approached the court. However, the committee of the company, at a subsequent meeting on September 6, 1967, resolved to grant permission to the Mysore Race Club to run its races in Bangalore, subject to certain conditions, including the recovery of a Rs. 15,000 loan and sharing net profits equally between the two clubs.

4. Potential Conflict of Interest Among Directors:
The petitioner argued that certain directors had an interest in the Mysore Race Club, which should have disqualified them from participating in decisions related to the association between the two clubs. The court noted that the interest attributed to these directors was their position as stewards of the Mysore Race Club, a position held under nomination by the Bangalore Club. The court concluded that no express disclosure of this interest was necessary as the company was already aware of it. Furthermore, no mala fides or personal advantage was attributed to any of the directors, and the controversy was one of commercial prudence rather than dishonesty.

5. Compliance with Paragraph 4 of the Memorandum of Association:
The petitioner contended that the arrangement with the Mysore Race Club violated paragraph 4 of the memorandum of association, which prohibits the distribution of the company's income and property by way of profit to its members. The court held that the profits earned from the races conducted by the Mysore Race Club were not profits of the Bangalore Club. The assistance provided by the Bangalore Club was within the scope of its objects and did not constitute a distribution of its profits. Therefore, there was no contravention of paragraph 4 of the memorandum of association.

Conclusion:
The court concluded that the petitioner failed to establish any prejudice to the interests of the company either from a financial perspective or in terms of a departure from its objects or contravention of its constitution. The petition was dismissed, and no costs were awarded. The related company application was also closed as no further orders were necessary.