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TMI Blog1965 (12) TMI 73X X X X Extracts X X X X X X X X Extracts X X X X ..... iations with them for the purpose of appointing them as their sole selling agents for the goods manufactured by them throughout India, that between the beginning of October 1964, and 19th October, 1964, discussions took place between Mr. K.M. Mehta, a director of the defendants as representing the defendants and the two partners of the plaintiffs-firm, that during the course of the said discussions the terms and conditions on which the plaintiffs were to be appointed as sole selling agents were discussed, and that ultimately on or about 19th October, 1964, the said negotiations were finalised and a concluded contract was arrived at between the parties as a result whereof the plaintiffs were appointed as sole selling agents of the defendants for a period of three year commencing from 19th October, 1964, for the whole of India in respect of the bolts and screws manufactured by the defendants on term and conditions that were subsequently recorded in an agreement. The plaintiffs have further alleged that on 19th October, 1964; in furtherance of the said agreement the plaintiffs deposited with the defendants a sum of Rs. 35,000 as orally agreed upon between the parties and that the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth the engrossments were delivered to Shri K.M. Mehta on 3rd December, 1964, and Shri Mehta retained both the engrossments stating that that day being Amas he would execute the same on an auspicious day in a day or two thereafter. The plaintiffs have further alleged that on 4th December, 1964, Shri Mehta of the defendants told one of the partners of the plaintiffs that he wished to make a couple of alterations in the engrossment and it is the plaintiffs' case further that the advocate, who had drafted the agreement, was sent for and in the presence of the advocate certain alterations were suggested by Shri K.M. Mehta and these alterations and modifications went accepted by the plaintiffs t is the plaintiffs' case further that some of these alterations were written out on the first page of the engrossment which was initialled by Shri K.M. Mehta on behalf of the defendants and as some of the alterations to be made on the second page were too lengthy running into some lines their advocate told Shri Mehta he would get the second page of the engrossment re-typed containing such alterations. Accordingly, the second page of the engrossment was got re-typed and thereafter a completed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the plaintiffs and the defendants in the matter of appointing the former as their selling agents, they have contended that there was no concluded contract arrived at between the parties. The defendants have categorically denied that they have ever appointed the plaintiffs as their selling agents, much less sole selling agents as alleged by the plaintiffs. The defendants have further contended that during the course of negotiations the plaintiffs offered to get a draft of the agreement for selling agency prepared as the basis for negotiation between the parties, but since the draft agreement as well as the engrossment purported to appoint the plaintiffs as sole selling gents of the defendants they did not approve of the same. As regards the sum of Rs. 35,009 deposited by the plaintiffs with them the defendants have, denied that the said amount was deposited in part performance or acting upon any agreement. They have contended that the said sum was deposited during the progress of the discussions for appointing the plaintiffs as the selling agents and that the receipt passed in the plaintiffs' favour also categorically stated that the deposit was for the selling agency. The d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he condition that the appointment shall cease to be valid if it is not approved of by the company in the first general meeting held after the date on which the appointment is made. The defendants have further contended that after the plaintiffs alleged that they had been appointed as sole selling agents of the defendants all over India Shri Mehta called a general meeting of the defendants company on 20th February, 1965, to place before the company the claim of the plaintiffs and Shri Mehta requested the general meeting either to approve or disapprove of the appointment as claimed by the plaintiffs and accordingly the general body of the defendants-company resolved at the said meeting that the proposal of appointing the plaintiffs as the sole selling agents was not in the interest of the company. It is, therefore, contended that the company in its meeting not having approved of the appointment of the plaintiffs on any terms or conditions, the plaintiffs' claim is illegal and their appointment as such sole selling agents is invalid. The defendants have pointed out that they have filed a suit in the City Civil Court at Bombay being Suit No. 1135 of 1965 against the plaintiffs wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de subject to the condition that the appointment shall cease to be valid if it was not approved by the company in the first genet meeting to be held after the date on which the appointment was made. Thirdly it is contended that though the defendants denied that there was any such appointment of the plaintiffs as sole selling agents Shri K.M. Mehta, a director of the defendants-company, placed before the general meeting of the defendants-company held on 20th February, 1965, all the correspondence and the plaintiffs' claim that they had been so appointed as sole selling agents and he asked the company either to approve or disapprove of such appointment and the company disapproved of such appointment.' On these three grounds the defendants have contended that the reliefs sought by the plaintiffs in this petition cannot be granted for, if the contract of appointment itself is bad in law, clause 12 containing the provision for reference to arbitration must also fall to the ground. As I have said above, out of these three contentions which have been principally advanced by the defendant, the preliminary issue, being issue No. 2, covers the defendants' contention that the agreement allege ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be a condition of defeasance, in the sense that if the condition mentioned in sub-section (2) was not complied with by the company the appointment shall cease to be valid. As regards the decision of the Calcutta High Court on which reliance was placed by Mr. Nain, it was urged by Mr. Thakkar that the decision could be distinguished on facts and further the observations on which specific re-liance was placed by Mr. Nain in the case should be regarded as obiter. In order to appreciate the rival submissions that have been made before me, it will be necessary to consider the relevant provisions of section 294 as a whole as also the setting in which the said section occurs in the Companies Act. Section 294 occurs in Chapter II dealing with "directors" in Part VI of the Companies Act, which deals with the "management and administration of companies". It is one in the group of sections which deals with powers of the board of directors and it is clear that it is a section which puts restrictions or curbs on the powers of the board of directors in the matter of making-appointment of sole selling agents for the company. The relevant provisions are to be found in sub-sections (1), (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appointment "shall cease to be valid". Which indicate that, the appointment must be valid till the time it ceases to be valid. Secondly, sub-section (2A) expressly provides that if the appointment is disapproved by the company in the first general meeting the appointment shall cease to be valid with effect from the date of that general meeting . He, therefore, urged that the condition mentioned in sub-section (2) should be regarded as a condition of defeasance. There is some force in this contention of Mr. Thakkar. However, in my view, if regard be had to the manner in which the section is enacted, the language used therein and the place at which the section appears in the entire scheme of the Act, it will be clear that the condition mentioned in sub-section (2) will have to be regarded as a condition which attaches to the very act of making the appointment of a sole selling agent by the board of directors and, therefore, a condition precedent. The object of the section, as I have already indicated above, is to place restrictions or curbs on the powers of the board of directors. The language employed in sub-section (1) and sub-section (2) is clearly, negative which suggest that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g agent by board of directors shall be deemed to be subject to such a condition, and such provision could have been followed by sub-section (2A). Under sub-section (2) as it stands; if an appointment of a sole selling agent is made by the board of directors; subject to the condition mentioned therein, it would be a valid appointment and if it is made without such condition it would be invalid and void ab initio and it is only when a valid appointment is made by the board of directors after complying with the condition mentioned in sub-section (2) that such valid appointment has to be put before the general meeting of the company for its approval and under sub-section (2A) if the company in its general meeting disapproved such appointment then it shall cease to be valid with effect from the date of that general meeting. Mr. Thakkar on behalf of the plaintiffs invited my attention to section 9 of the Companies Act, which gives an overriding effect to the provision of the Act and, relying upon that section, he contended that the condition mentioned in sub-section (2) of section 294 should be deemed to be incorporated in the contract of appointment of a sole selling agent, if any m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oval expressed by the company fee plaintiffs' appointment shall continue, then such provision in that agreement would have become void under section 9 of the Companies Act, but it is not possible to accept Mr. Thakkar's contention that because the agreement is silent on the point, under section 9 of the Companies Act, the condition mentioned in sub-section (2) of section 294 should be deemed to have been incorporated in the said agreement. In this view of the matter, it is clear to me that sub-section (2) of section 294 should be interpreted to mean that it contains a condition precedent that attaches to the very act of making the appointment of a sole selling agent by the board of directors. Therefore, if any appointment of a sole selling agent is made by a board of directors without such a condition as mentioned in sub-section (2) the same would be contrary to the said provisions and would be void ab initio. Turning to the decision of the Calcutta High Court in the case of Shalagram Jhajharia v. National Co. Ltd. [1965] 35 Comp. Cas. 706 , 738 it may be stated that the court held the appointment of the sole selling agent to be bad on two grounds. In the first place, admit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roved by the company in the first general meeting shows the obligatory nature of the enactment. It is well known that the use of negative language generally leads to the conclusion that the provision is mandatory .. Therefore, if the directors choose to enter into an agreement with a sole selling agent without the condition that the appointment shall cease to be valid if not approved by the company in the first general meeting held there after the appointment is bad ab initio and the directors can be injuncted from acting on it in a properly framed suit because they would be doing some thing which the law does not allow them to do. This is not a matter of mere internal management." Chief Justice Bose, the other learned judge, who delivered a separate but concurring judgment, has made the following observations (page 724): "Section 294 enjoins that no appointment of a sole selling agent can be made except subject to the condition that if it is not approved by the company in the first general meeting held after the appointment, then it shall cease to be valid. So in clear and unambiguous language it is indicated in the section that the effect of non-approval of the appoint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing it passed before the general body of shareholders at the general meeting of the company. He urged that it was a case dealing with the rights of shareholders of a company inter se while the present case is one where third party's rights are involved. I do not think that this distinction which has been pointed out by Mr. Thakkar has any effect upon the question as to what should be the proper interpretation of section 294 of the Companies Act. If the non-compliance of the conditions prescribed in sub-section (2) of section 294 was regarded as having the effect of rendering the appointment bad in law from its commencement, that is to say, rendering the appointment void ab initio then the contract of' appointment would be bad, whether it was sought to be challenged at the instance of a shareholder of a company or at the instance of the company as against a third party claiming a right under such contract. Secondly, Mr. Thakkar has contended that the Calcutta High Court was dealing with an appeal that had been preferred by a shareholder against the judgment of the learned trial judge, who had refused an interlocutory injunction and therefore, the appeal court was primarily conce ..... X X X X Extracts X X X X X X X X Extracts X X X X
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