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TMI Blog1952 (4) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... ors may decide. In accordance with this provision the last day for holding the annual meeting would be 30th April, 1950, but no meeting was held either on or before that date. Notices were issued by the management on 21st July, 1950, for an annual meeting to be held on 6th August, 1950. But this meeting, however, was cancelled on the ground that objections were taken to its legality. On 14th August, 1950, one of the shareholders, Mrs. A. Ananthalakshmi Ammal filed an application under section 76(3) of the Indian Companies Act, Application No. 2813 of 1950, for an order that the court should call for a general meeting, and in the affidavit filed in support of that application it was alleged that no general body meeting had been called after 31st January, 1949, that the directorate consisted of only three members, V.R. Veeramani, A.S. Padmanabhan and B.V. Raman, while Article 75 provided for a minimum of four directors, that the affairs of the company were being grossly mismanaged and that accordingly the court should direct that a general body meeting should be convened for scrutinising the balance sheets, appointing auditors and electing "new directors in the vacancies caused". The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpired; and K.N. Narayana Iyer and K.C. Chandy had been co-opted as directors. At the annual meeting held on 29th October, 1950, when the subject of "Election of directors in the places vacant" was taken up disputes arose as to the number of vacancies which were available to be filled. On behalf of Mrs. Ananthalakshmi Ammal it was contended that the expression "places vacant" would include the maximum number of directors that could be elected under Article 75 and that should be determined by the general body and that further the co-options of K.N. Narayana Iyer and K.C. Chandy were invalid. The management contended that the election should be limited to the two vacancies mentioned in the notice and that the co-options of Narayana Iyer and K.C. Chandy were valid. In this conflict of opinion it was decided to adjourn the meeting and obtain from the court a clarification of the order dated 26th September, 1950. Application No. 4025 of 1950 was then filed by Mrs. Ananthalakshmi Ammal for that purpose and on that Krishnaswami Naidu, J., passed an order on 3rd November, 1950, that apart from the two vacancies mentioned in the notice there was also a vacancy caused by the resignation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to act on that date and that the power to co-opt could not be exercised when there was no board of directors competent to act under Article 75; that in any event such a power could not be exercised after an annual meeting had been called; that at any rate on the facts of the present case such a power could not be exercised as the court had ordered on 26th September, 1950, that the sharaholders should elect the directors in the vacancies at an annual meeting to be held on 29th October, 1950, and that the resolution dated 9th October, 1950, did not comply with the requirements of Article 99 of the articles of the company. It was further argued that even if the power to co-opt could be validly exercised on 9th October, 1950, it was not in fact so exercised as the co-option was made not in the interests of the shareholders but of the management. The management controverts the soundness of these contentions. The position that the power to co-opt directors comes to an end when once an annual meeting is convened, is not ought to be supported by anything in the Companies Act or in the articles of the company. Nor is any authority cited in support of it. We have no hestiation in rejecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directors." Turning to the facts it should be remembered that the last annual meeting was held on 31st January, 1949. Even at that time there were only three directors in office, A.S. Padmanabhan, M.S. Periasami Nadar and V.R. Veeramani. Of these Padmanabhan was due to retire under Article 83 at the next annual meeting. Periasami Nadar resigned in August 1949 and in his place Dakshinamurthi was co-opted on 25th September, 1949. On 22nd March, 1950, one B.V. Raman was co-opted as the fourth director but he was also due to retire at the next annual meeting. The meeting should have been held under Article 55 on 30th April, 1950, at the latest. On 18th June, 1950, Dakshinamurthi resigned and it was in his place that K.N. Narayana Iyer was co-opted by a resolution of the directors, Veeramani and B.V. Raman. On these facts it was argued by the learned advocate for the appellants that two of the directors, Padmanabhan and B.V. Raman who were due to retire at the annual meeting next to that held on 31st January, 1949, should be held to have vacated their office on the last date on which the annual meeting should have been held and that in consequence they ceased to be directors after 30th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Buckley on Companies Acts the learned author commenting on Rule 89 in Schedule I of the Companies Act, 1948, which in terms corresponds to the present Article 83 states the law as follows:-- "If in any calender year an annual meeting is not held under an article in this form, those directors who would have retired at the meeting had the same been held will vacate office on the last date of the year." (12th edition, page 882). On these authorities it must be held that both Padmanabhan and B.V. Raman ceased to be directors after 30th April, 1950, and that at the time of the co-option of K.N. Narayana Iyer on 9th October, 1950, there was only one director, Veeramani, who was lawfully in office. What follows on this conclusion? The appellant contends that if on 9th October, 1950, there was only one director, then there was no board of directors as required by Article 75 and that therefore there could be no valid co-option as the power to co-opt could only be exercised by the board. The respondent relies on Article 81 which is in these terms:-- "The continuing directors may act notwithstanding any vacancy in their body; but, so that if the number falls belows the minimum above f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wer to act. Article 42 provided that "the continuing council may act notwithstanding any vacancy." It was held by Wright, J., that under this clause the directors were entitled to act. He observed "I am asked to say that in as much as there were only two directors acting at that time, they had no power to bind the company. But it seems to me that I ought to hold, having regard to the authorities, that article 42, which provides that a continuing council may act notwithstanding any vacancy, gets over the difficulty... It seems to me, having in view Article 42, that the principle in Re Scottish Petroleum Company applies to the present case." There was an appeal against this decision. Vide Re Bank of Syria, Owen and Ashworth's claim, Whitworth's claim. LORD ALVERSTON, C.J., in agreeing with the decision of Wright, J., on this point observed that even if the number of directors fell below the quorum fixed for a directors' meeting the principle laid down in Re Scottish Petroleum Company would apply and that the continuing directors would be entitled to act under article 42. That is to say the power to co-opt might be exercised notwithstanding that the strength of the directorate has fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the decision in Re Sly, Spink and Co. have power to act under Article 81. In Channel Collieries Trust Ltd. v. Dover, St. Margaret's and Martin Mill Light Railway, the articles of the company provided that the minimum number of directors should be three, that the quorum for the board's meeting should be two and Article 89 gave power to the "remaining directors" to fill vacancies. The company began with three directors, then two of them resigned leaving only one director in office and he co-opted a director under Article 89. It was contended that this co-option was invalid because the board had neither the minimum strength nor even the quorum provided by the articles. Rejecting this contention Lord Cozens Hardy M.R. observed as follows:-- "Sir John Jackson thus became sole director. What was his power? Under the Companies clauses Act, 1845, as continuing director, he had power to fill up the vacancies on the board. The fact that a person exercising that power does not constitute a quorum is not really a relevant matter. The generality of the language used in section 99 is so clear that it is impossible for us to overlook it. Any other view on that point would paralyse many a comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of agents of the company in its dealings with the outside world, they were in the position of the trustees in relation to the shareholders. Similar observations are to be found in the judgment of Lord Selbourne in G.E. Railway v. Turner. The position is thus summed up in Palmer's Company Precedents: "Where the directors of a company are invested by the regulations with certain powers, the authority thus conferred is to be read subject to the general rules applicable to the exercise by directors of the powers vested in them, and in particular to the rule that the directors are to exercise the powers for the benefit of the company and in the true interests of the company and according to the best of their judgment, for they stand in a fiduciary position, and must act accordingly." (Vide Vol. 1, page 434, paragraph 21; 16th edition). We, therefore, agree with the appellant that if the co-option of a director under Article 81 is not made in the interests of the shareholders but for other purposes it cannot stand. What then are the facts? It is common ground that the affairs of the company were during this period in a very unsatisfactory condition. For want of funds the coffee and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insisted naturally that if he should advance the necessary funds, he should have a voice in the control and management of the company. The management agreed to this and co-opted him as a director on 9th October, 1950. It appears from the affidavit of Narayana Iyer that after his co-option he advanced monies to the extent of a lakh of rupees for the working of the estate and harvesting coffee. The facts clearly show that the company was in need of finance, that Narayana Iyer was co-opted for the purpose of finding the necessary funds and that both from the point of view of his experience and financial status he would be a source of strength to the company. But it is argued on behalf of the appellant that notwithstanding the above circumstances, the co-option of Narayana Iyer must be rejected as improper and mala fide because the vacancy in which he was filled arose on 18th June, 1950, when Dakshinamurthi resigned, that the management did not choose to fill that vacancy then; that on the other hand they stated in their counter-affidavit in Applications Nos. 2813 of 1950 and 2814 of 1950 that they thought it fair not to co-opt a director in view of the general body meeting that was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber, 1950. It is not stated that this co-option was made under any arrangement to advance funds for the company. That arrangement had already been concluded with Narayana Iyer. Nor does K.C. Chandy possess anything like the experience which Narayana Iyer undoubtedly does possess. He is an Advocate practising at Kottayam. The circumstances under which the co-option was made clearly stamp it as mala fide. V.R. Veeramani who was one director who has been in active management resigned his place as an elected director on 11th November, 1950, and as part of the same proceedings he became a nominated director. It is clear that this manoeuvre was adopted for co-opting a director of the choice of the managing agents and it is open to the objection that, it was made with a view to strengthen the hands of the managing agents and not in the interests of the shareholders. We agree with Krishnaswami Naidu, J. that this co-option cannot be upheld. It was argued by Mr. V. Radhakrishnayya the learned advocate for the appellant that the validity of this co-option cannot be gone into in these proceedings, but the matter is concluded by the judgment of this court dated 9th February, 1951, and even ot ..... X X X X Extracts X X X X X X X X Extracts X X X X
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