1973 (5) TMI 54 - HC - Companies Law

Company Membership of, Share capital - Further issue of, Powers of Court to rectify register of members, Meeting and Proceedings Power of Company Law Board to Order Meeting to be Called, Appointment of directors and proportion of those who are to retire by rotation

Issues Involved:
1. Impracticability of calling a company meeting.
2. Validity of the board of directors and their actions.
3. Validity of the issuance and allotment of right shares.
4. Compliance with statutory notice requirements.
5. Application of the rule in Foss v. Harbottle.
6. Application of the rule in Royal British Bank v. Turquand.
7. Validity of actions by de facto directors under Section 290 of the Companies Act.
8. Rectification of the register of members.
9. Exercise of court's discretion under Section 186 of the Companies Act.

Detailed Analysis:

1. Impracticability of Calling a Company Meeting
The court examined whether it was impracticable to call a meeting of the company, other than an annual general meeting, under Section 186 of the Companies Act, 1956. The term "impracticable" was interpreted not as "impossible" but from a reasonable point of view. The court referred to various precedents, including Lothian Jute Mills Co. Ltd., Malhati Tea Syndicate, and United Breweries Ltd., to conclude that where there is doubt about the validity of the board or potential for endless litigation, it may be impracticable to call a meeting.

2. Validity of the Board of Directors and Their Actions
The court discussed the retirement and re-election of directors, particularly focusing on the Articles of Association and Sections 255 and 256 of the Companies Act. It was noted that the articles provided for the retirement of directors by rotation, but there was a conflict in judicial opinion on whether directors vacate office due to failure to hold a general meeting. The court did not resolve this conflict but noted that the directors in question were at least de facto directors.

3. Validity of the Issuance and Allotment of Right Shares
The petitioner challenged the validity of the issuance and allotment of right shares, arguing that it was done without proper authority and notice. The court noted that the decision to issue right shares was taken at a board meeting whose validity was contested. The petitioner claimed that the notice period was insufficient under Section 81 of the Act, but the court found that the notice period was prima facie sufficient.

4. Compliance with Statutory Notice Requirements
The court examined whether the notice for the issuance of right shares complied with statutory requirements. It was argued that the notice should exclude the date of dispatch and receipt, requiring a minimum of 15 clear days. The court found that the notice period was adequate as it provided 17 days from the date of the offer, which was in compliance with Section 81.

5. Application of the Rule in Foss v. Harbottle
The respondent argued that the petition was not maintainable under the rule in Foss v. Harbottle, which requires that any wrong done to a company should be addressed by the company itself. The court noted that Section 186 allows any member entitled to vote to apply for a meeting, thus the petition was maintainable. However, the court emphasized that the petition should not be used to address issues of usurpation of office by directors.

6. Application of the Rule in Royal British Bank v. Turquand
The court discussed the rule in Royal British Bank v. Turquand, which allows third parties to assume that internal company procedures have been complied with. The court noted that this rule has exceptions, especially when there is knowledge of irregularity. However, it was not necessary to delve deeply into this rule as both parties did not focus on it.

7. Validity of Actions by De Facto Directors under Section 290 of the Companies Act
Section 290 validates acts done by de facto directors unless their appointment was shown to be invalid. The court found that the directors acted without knowledge of any defect in their appointment, thus their actions, including the issuance of right shares, were valid. The court referred to various precedents supporting the protection of bona fide acts of de facto directors.

8. Rectification of the Register of Members
The petitioner sought to invalidate the allotment of right shares and rectify the register of members. The court emphasized that such a declaration could not be granted without the affected parties being present. The court cited the principle of natural justice and noted that a suit for rectification was already pending, making it inappropriate to decide this summarily.

9. Exercise of Court's Discretion under Section 186 of the Companies Act
The court concluded that it was not justified to exercise its discretion to call a meeting under Section 186. The petitioner had other remedies available, such as applying for an extraordinary general meeting or to the Central Government for an annual general meeting. The court noted that the primary motive of the petition seemed to be to challenge the right shares issue rather than genuinely seeking to call a meeting.

Conclusion
The court dismissed the petitions and associated applications, emphasizing that the petitioner had not demonstrated the impracticability of calling a meeting through other available means. The court also highlighted the importance of adhering to the principles of natural justice and the procedural requirements under the Companies Act.

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