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TMI Blog1956 (8) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... dras) Ltd., is a public company registered under the Indian Companies Act. It is managed by a board of three directors and under the articles of the company the board acts either at meetings or by resolutions passed by circulation. On 2nd June, 1953, the board of directors which then consisted of T.P. Khaitan, V.S. Krishnaswami and V.S. Bhasin passed by circulation the following resolution: "Resolved that the Chartered Bank of India, Australia and China, Madras, the Imperial Bank of India, Madras, the National Bank Ltd., Madras, the Indian Bank Ltd., Madras, and the Eastern Bank Ltd., Madras and Bombay, be and are hereby empowered, whether the company's account is in credit or overdrawn, to honour cheques, bills of exchange, and promissory notes, drawn, accepted or made on behalf of the company, by any one of the two gentlemen: 1. Sri T.P. Khaitan 2. Sri V.S. Krishnaswami and act on any instructions and accept any receipts or other documents relating to the account transactions or affairs of the company, if so signed on behalf of the company." All the three directors including the two named in the resolution signed in the minutes in token of the resolution being passed. On 22 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the company. (2) Every director who contravenes the provisions of sub-section (1) shall be liable to a fine not exceeding one thousand rupees. (3) This section shall not apply to a private company: Provided that where a private company is a subsidiary company of a public company, this section shall apply to all contracts or arrangements made on behalf of the subsidiary company with any person other than the holding company." The basis of the prosecution was that the accused as directors voted on a contract or arrangement in which he or they was or were either directly or indirectly concerned or interested and that they had thereby contravened the provisions of sub-section ( i ) so as to bring them within the penal consequence enacted by sub-section (2). Before dealing with the meaning of the expression "contract or arrangement in which he is either directly or indirectly concerned or interested" in sub-section (1), it might be useful to refer to the terms of section 91A, which also refers to "an interest on the part of the directors in a contract or arrangement with the company". "91A. ( a ) Every director who is directly or indirectly concerned or interested in any con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or business of the c6mpany while acting on its behalf. As was stated in Northwest Transportation Co. v. Beatty [1886] App. Cas. 589 "a director is precluded from dealing on behalf of the company with himself entering into engagements in which he has a personal interest conflicting or which possibly makes conflicts with the interests of those whom he is bound by fiduciary duties to protect and this rule is as applicable to the case of one of several directors as to a managing or a sole director." The object of the statutory provision in section 91A was to secure that there shall be no conflict between the personal interest of each of the directors and their duty towards the company without the nature of that interest being disclosed to the directors and the shareholders. When there is a possibility of such a conflict, by a director having personal interest in any contract or arrangement entered into by the company, section 91A provides for its disclosure to the other directors so that the company would have the advantage of the unbiassed and informed judgments of the other directors as to whether in the interests of the company such a transaction need be entered into or not. Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same principle namely that a transaction in which a director purporting to act on behalf of the company has in fact been dealing with himself as an individual could not stand if his interest conflicted with that of the company applied to the cases of companies incorporated under the English Companies Act, 1862. The same principle was, however, not recognised at law. But this ceased to be of any consequence after the Judicature Act, 1875. The principle of this statutory provision was, though somewhat inadequately, sought to be achieved by provisions in the articles of the several of the companies registered under the earlier English Companies Acts; particularly as the rules of the Stock Exchange, London, required that in the case of company requiring a quotation, the articles must provide that a director shall not vote on any contract in which he is interested and that if he does so, his vote shall not be counted, In the English Companies Act, 1948, section 199, which re-enacted section 149 of the Companies Act, 1929, provides: "It shall be the duty of a director of a company who is in any way directly or indirectly interested in a contract or a proposed contract with the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he directors as such were to be hit at by the sections, the management of companies by the board of directors would become impossible and the work of every company would be at a standstill. If it is borne in mind that the purpose of the sections is the avoidance of conflicts between duty and interest it would be apparent that the carrying on of the business of the company for which the directors are appointed cannot give rise to that conflict. Peterson J. had to consider a similar question in Foster v. Foster [1916] 1 KB 532 . Article 93 of a company provided that a director might contract with the company but prohibited a director from voting in respect of any contract in which he was interested and under article 99 the directors "may from time to time appoint any one or more of their body to be managing director or directors, for such period, at such remuneration, and upon such terms as the directors think fit." One Mrs. Foster who was one of the board of directors was appointed as chairman and joint managing director of the company without remuneration. The resolution appointing her to this office was passed at a meeting of the board at which she was present and in which sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion Act, 1870, which provided that a member of a school board who "shall in any way share or be concerned in the profits of any bargain or contract with or any work done under the authority of such school board" was liable to a penalty and his office became vacant. The respondent, a member of a school board, sold sand and gravel to a builder who had entered into a contract with the board for the building of a school knowing at the time of his sale that these materials were intended to be used in the building of the school. Ridley and Darling JJ. held that the respondent had contravened the provisions. The learned judges referred to Nutton v. Wilson [1889] 22 QBD 744 , and stated that these provisions were intended to ensure that members of public bodies "shall be free from any suspicion of deriving profit, directly or indirectly, by reason of the position they hold." If this was the object of the enactment, it follows that the mere carrying out the duties of a director would not amount to "being concerned in any contract or arrangement" within section 91A or 91B of the Indian Companies Act. In this connection I will only repeat that the expression "interest in an arrangeme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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