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TMI Blog1991 (12) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... ares of Rs. 50,000 each. They have been holding these shares ever since 1967. The petitioners thus held 50 per cent, of the issued capital of the company and as such they are entitled to invoke section 399 of the Companies Act, 1956, for relief under sections 397 and 398 of the Act. The company constructed a theatre known as Carnatic Talkies situated in Big Bazaar Street, Coimbatore, which is the subject-matter of the present proceedings. The company has been carrying on only the business of exhibiting motion pictures in the said theatre. As stated above, the petitioners' father, V. Guruviah Naidu, became the holder of 25 shares on and from April 27, 1951, and the remaining shares came to be held by his brother, V. Baluswamy Naidu. The late V. Guruviah Naidu was functioning as the managing director of the company from April 27, 1951, till June, 1962, while the late V. Baluswamy Naidu was the only other director of the company throughout the said period and he was acting as the managing director till his death. Subsequent to the death of Baluswamy Naidu, Guruviah Naidu was acting as the managing director of the company till his death on January 10, 1970. The 25 shares which were hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner from continuing the lease of the theatre by making his brother, the third respondent, who was the co-lessee, to refrain from co-operating with the first petitioner to obtain the licence for running the theatre, although the first petitioner was put in possession of the theatre. The second respondent was interfering with the running of the theatre of the first petitioner from May, 1972, onwards with the result that the first petitioner was forced to institute O. S. No. 43 of 1972 on the file of the Sub-Court, Coimbatore, for restraining his co-lessee, V. B. Gopalakrishnan, from interfering with the theatre by him. The licence granted could not be renewed after its expiry because of the non-co-operating attitude of the respondents, with the result that the theatre had to be closed down and consequently, the company had incurred heavy loss, there was no income from the theatre and the delicate machinery got rusted and deteriorated in value. By preventing the third respondent from co-operating with the first petitioner for renewing the licence, the second respondent was responsible for such an oppressive management and he was also responsible for such oppressive management and opp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the other branch and if the offer so made to the members of the other branch is also not accepted, then the sale should be effected to third parties. When the trial court decreed the suit, appeals were preferred by the petitioner and the sixth respondent to the District Court at Coimbatore in A. S. Nos. 57 of 1977 and A. S. No. 112 of 1977, which were dismissed. Second Appeals Nos. 1994 of 1978 and 2163 of 1978 filed by the petitioners and the sixth respondent respectively to this court were disposed of by a common judgment. While dismissing the second appeals this court directed a modification of the decree of the trial court by substituting the names of respondents Nos. 3 to 5 herein in the place of the petitioners. In other respects, it was held that all other terms of the decree of the trial court would stand. Aggrieved by the judgment and decree passed in the said two appeals, both the petitioners herein and the sixth respondent preferred special leave petitions to the Supreme Court and the Supreme Court granted leave to the petitioners as well as to the sixth respondent to prefer appeals. The said civil appeals were numbered as Civil Appeals Nos. 1946-47 of 1980. When the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y petition, pursuant to which the company was managed by the board constituted, viz., the second petitioner and the second respondent as the only two directors of the company in accordance with the articles of association of the company. As per the said orders, the term of office of the board of directors of the company was to come to an end on December 27, 1980. The second respondent, who was acting as the managing director of the first respondent company, failed to convene either the meeting of the board of directors or the general body meeting of the company and the first and third petitioners were, therefore, obliged to file Company Application No. 2048 of 1980 in the said Company Petition No. 88 of 1973 against respondents Nos. 1 and 2, praying for directions to the board of directors for convening a general body meeting of the company for the purpose of electing directors and also for appointment of a chairman for the purpose of conducting the proceedings of the general body meeting and also for necessary directions for electing the directors in the general body meeting for constituting a board consisting of at least three directors. The second petitioner filed his counter-af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etition No. 1 of 1981, for rectification of the register of members since it became necessary to have the register of members rectified since the second respondent removed from the register of members of the company the name of the sixth respondent without any reasonable cause. It is, therefore, stated that the second respondent taking advantage of his position as managing director of the company at the relevant time pursuant to the order passed in Company Petition No. 88 of 1973 by compromise had interpolated the alleged proceedings dated October 8, 1980, in the minutes book of the company without even bringing it to the notice of the second respondent, who was during the relevant time, the only other director of the company. This act on the part of the second respondent is harsh, oppressive burdensome, wrongful and prejudicial to the interest of the petitioners herein and the object of the second respondent in meddling with the records of the company is only to gain complete control of the company for himself and his brother by excluding the petitioners from having any control or participation in the administration of the company. The second respondent did not take any steps to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oners left the meeting, are mere make-believe affairs prepared by the second respondent in collusion and conspiracy with his brothers. It is pertinent to point out that more than two directors cannot be elected inasmuch as in the articles of the company, there is provision for electing only two directors. The petitioners stated that no business was transacted at the meeting convened and held on January 5, 1981, and that in any event the third respondent has not been elected as a director of the first respondent company and is not a director of the company. The petitioners submitted that the articles of association of the first respondent company provide only for two directors and that there is no provision for a third director and that, therefore, the allegation of the third respondent as a director cannot be taken up without amending the articles of association of the first respondent company, by increasing the strength of the board as required by the provisions of the Companies Act. The petitioners filed Company Petition No. 1 of 1981 under section 155 of the Companies Act for rectification of the register of members deleting the names of respondents Nos. 2 to 5 in respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The petitioners submit that no notice of the meeting purported to have been held on June 11, 1973, was ever sent to the petitioners or their group or any meeting was really held on June 11, 1973. When the petitioners instituted proceedings under sections 397 and 398 of the Companies Act on the file of this court in Company Petition No. 88 of 1973, no whisper has been made about the amendment of the articles of the company. The petitioners filed the articles of association in the said proceedings and no objection was ever taken that the articles of association filed by the petitioner did not represent the correct position. For the first time the present articles of association in the alleged form came to light when the second respondent filed a typed set of documents in C. P. No. 1 of 1981. The petitioners had till then no knowledge of the return filed by the second respondent with the Registrar of Companies and there was no occasion for the petitioners to be apprised of the said amendment and they came to know of the same only on inspection of the relevant records with the Registrar of Companies and in view of the compromise entered into in C. P. No. 86 of 1973. The petitioners, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the provisions of the Companies Act. It is also essential in the interest of the company and its shareholders that the board of directors of the company should be superseded and the affairs of the company administered by one or more administrators to be appointed by this court for such period as may be decided by this court. As the action of the second respondent has resulted in serious loss to the company and its shareholders, it is necessary to give directions for appropriate proceedings being instituted against the second respondent pursuant to section 406 read with sections 539 to 544 of the Companies Act so that the second respondent may be surcharged and the company compensated for the loss sustained by the acts and omissions of the second respondent. With these averments, the petitioners have filed the above company petition praying : (1)to supersede the board of directors of the first respondent company and appoint one or more administrators to carry on the business of the company ; (2)to assess the damages sustained by the company by reason of the wrongful acts of the second respondent and to make an order surcharging the second respondent and dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... At the general body meeting accounts of the company for the year ended June 30, 1978, were laid and adopted. However, because of the absolute lack of co-operation and the obstructive attitude of the second petitioner as co-director, meetings of the board of directors could not be held more frequently and further general meetings could not be held to bring the accounts up to date. It is also stated in paragraph 8 of the counter-affidavit as to what transpired at the annual general meeting of the company held on January 5, 1981. They also denied the allegations made in the company petition concerning the proceedings of the general body meeting held on January 5, 1981. The contentions now advanced against the proceedings of the said meeting are an afterthought and obviously invented only for the purpose of this company petition. The respondents have also denied the allegations in paragraphs 18-A and 18-B of the company petition. According to them, article 31 of the articles of association of the company provides that the number of directors of the company shall be not less than two and not more than four. In the circumstances the election of the third respondent at the general meeting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and January 5, 1981, are illegal and void and not binding on the company apart from the factum of the meetings being disputed. For appointment of administrator the contention of the petitioners-is that ( a ) earlier pursuant to the order of this court in C. P. No. 88 of 1973 there would be two directors one being Mr. V. G. Sundar Raj (second petitioner) and the other Mr. V. B. Padmanabhan (second respondent) representing the two groups. Mr. V. G. Sunder Raj would be the managing director for the first three years from the date of his appointment and Mr. V. B. Padmanabhan would be the managing director for a period of two years immediately following the expiry of three years of the tenure of Mr. V. G. Sunder Raj. The total tenure contemplated is five years. The order does not contemplate the continuance of the two directors appointed by the court. A meeting dated January 5, 1981, was purported to have been convened. Whether the said meeting is valid is a question raised. The notice dated December 12, 1980, issued in the name of the board by Mr. V. B. Padmanabhan (R-2) as managing director of the company. The agenda referred to three items of business, viz., (1) consideration o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n extraordinary general meeting of the company for the purpose of passing a special resolution as required under section 284 of the Act. The resolutions were for the removal of the second respondent from the post of director of the company and to appoint the second petitioner to be the director of the company in the place of the second respondent. ( c )The letter dated June 6,1973, sent by the company to petitioners Nos. 2 and 3 from the second respondent herein expressing their inability to convene the general body meeting for the removal of the second respondent in view of the pendency of the proceedings in 0. S. No. 870 of 1972 on the file of the District Munsiff Court, Coimbatore, and 0. S. No. 463 of 1972 on the file of the Sub-court, Coimbatore. ( d )Notice dated June 7, 1973, sent by registered post with acknow ledgment due from the first petitioner to the second respondent and also to the Registrar of Companies and to the chartered accountants. It is stated therein that the business of the company could not be transacted in view of the extraordinary circumstances mentioned in the said letter. The said communication was sent to place on record that no business was transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by V. G. Balasundaram, the first petitioner herein and the third defendant in O. S. No. 416 of 1973, and marked as exhibit P-14 in these proceedings is also relevant to be noticed in this context. It is also stated that no resolution is required under the articles for removal of a director. ( j )Company Petition No. 88 of 1973 was filed on October 16, 1973, on the file of this court by petitioners Nos. 1 to 3 impleading the first respondent company and V. B. Padmanabhan as respondents Nos. 1 and 2. The said petition was filed under sections 397 and 398 of the Companies Act. Several acts of misconduct have been alleged against the respondents therein. It is stated in paragraph 22 of Company Petition No. 88 of 1973 that the petitioners and the other members of the company are entitled to have the affairs of the company managed properly by a duly appointed board of directors in accordance with the provisions of the Companies Act. The articles of the company which were drawn up in the year 1935 are totally inadequate to ensure proper management of the company. The articles, particularly the provisions relating to the appointment of directors, their powers and duties require a revisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P-1. In this connection it is useful to refer to rule 22 in the Ramaiya's Companies Act, Eleventh edition, Appendix V, page 1786. Rule 22 provides that every petition and application mentioned in Appendix II shall be accompanied by the documents set opposite thereto in column (4) of the said Appendix. The petitioners' case is that it is only in the course of the hearing in C. P. No. 1(A) of 1981 that the purported meeting said to have been held on June 11, 1973, came to be known. The written statement filed by the petitioners in 0. S. No. 416 of 1973 would clearly show that the pleadings were on the basis of the existing articles of association without reference to the purported amendment. The minutes book of the proceedings is also not produced. There were at all times only two directors of the company. In para 22 of Company Petition No. 88 of 1973, specific reference is made that the articles were drawn up in 1935 and that the articles relating to the appointment of directors require revision so as to bring them in line with the provisions of the Companies Act, 1956. In the counter-affidavit filed by the second respondent, there is no reference to the amendment of the articl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produced before this court. According to the petitioners, no meeting was ever held on January 5, 1981, and even assuming that such a meeting was held, and the articles duly amended the proceedings of the said meeting were challenged with reference to the election of directors on two grounds : ( a )Appointment of a third director should be done by a special resolution ; ( b )Even in the so called amended articles the appointment of directors is contemplated by a special resolution. Section 189 of the Companies Act stipulates that the notice must specify the resolution as special resolution and to be passed. Article 27 of the articles of association of the company contemplates increase in the number of directors by special resolution in general meeting. If such an increase is contemplated with reference to the meeting held on January 5, 1981, a special resolution should have been passed for appointment of directors. The purported amended article 32 contemplates the appointment of directors in general meeting by special resolution. In my view, section 189 of the Companies Act is mandatory and has not been complied with in this case. Section 189(2) of the Act says as follows : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question. Section 210 of the Act provides that : "At every annual general meeting of a company held in pursuance of section 166, the board of directors of the company shall lay before the company ( a )a balance-sheet as at the end of the period specified in sub section (3), and ( b )a profit and loss account for that period". It is contended that the material provisions mentioned above have not been complied with by the respondents. Section 285 of the Act relates to the meetings of the board of directors, which contemplates that a meeting of the board of directors of the company shall be held at least once in every three months and at least four such meetings shall be held in every year. It is also seen that the petitioners sent a telegram on January 5, 1981, itself. There is also a dispute as to what happened on January 5, 1981, in the said meeting. It is seen from the proceedings of the first respondent company under subject No. 3 that according to the members as soon as this subject was taken up Shri V. G. Sundar Raj moved a resolution that subject No. 1 of the agenda to be deferred to another date and that the same may be considered by the general body at the adjourned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndara Raj be appointed as director of the company. ( b )The said resolution was seconded by Sri V. B. Jagadeesan and the resolution was then put to vote and declared and carried by the chairman on show of hands by three members voting for the resolution and Sri V. B. Gopalakrishnan voting against the resolution. ( c )Sri V. B. Jagadeesan proposed another resolution, proposing to appoint Sri V. B. Gopalakrishnan as director of the company. ( d )The said resolution was seconded by Shri V. B. Devarajan and then the said resolution was put to vote and declared and carried by show of hands unanimously. ( e )The meeting terminated with a vote of thanks to the chair. The minutes of the meeting was signed by the chairman of the meeting. In my opinion, the notice itself is not in consonance with section 189(2)( a ) of the Act for the reasons mentioned above. Exhibit P-1 is the memorandum and articles of association of the first respondent company. Paragraph 27 deals with the appointment of directors by a special resolution. Paragraphs 29 and 30( a ) have to be noticed in this connection. Paragraph 29 of exhibit P-l deals with show of hands only. It further deals with decision at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectors retiring by rotation or being reappointed. In that case, no explanatory statement is required. The object of enacting section 173 is to secure that all facts which have a bearing on the question on which the shareholders have to form their judgment are brought to the notice of the shareholders so that the shareholders can exercise an intelligent judgment. The provision is enacted in the interests of the shareholders so that the material facts concerning the item of business to be transacted at the meeting are before the shareholders and they also know what is the concern or interest of the management in any item of business, the idea being that the shareholders may not be duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all the material facts and apprised of the interest of the management in any particular action being taken. Having regard to the whole purpose and scope of the provision enacted in section 173, I am of the opinion that it is mandatory and not directory and that any disobedience to its requirements must lead to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meeting. According to the petitioners, no notice was served on them for the meeting held on June 11, 1973, That none of the petitioners attended the meeting is a common ground. The minutes are stated to be recorded for June 11, 1973, meeting. The minutes are stated to be recorded in some book which is not at all the minutes book. That is also not placed before this court. Hence, in my view, the statutory presumption under section 195 of the Act does not arise. The minutes of the general meeting should contain a fair summary of the proceedings of such meeting and in particular of all material questions asked or comments made. Section 193 of the Act provides that every company shall cause minutes of all proceedings of every general meeting of its board of directors or of every committee of the board to be kept by making within thirty days of the conclusion of every such meeting concerned, entries thereof in books kept for that purpose with their pages consecutively numbered. If the presumption is not under section 193, presumption under section 195 is not at all available. The factum with regard to the June 11, 1973, meeting is not placed before this court. This court is also not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , not in regard to their private life or affairs, but in regard to the company's business. Furthermore the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, whenever the lack of confidence is rested on a lack of probity in the conduct of the company's affairs, then the former is justified by the latter, and it is under the statute just and equitable that the company be wound up'." In Needle Industries (India) Ltd v. Needle Industries Newey (India) Holding Ltd, [1981] 51 Comp Cas 743 at 779, the Supreme Court had extracted a passage from Lindley on Partnership (14th Edition, pages 194-95) which cites Blisset v. Daniel [1853] 10 Hare 493 ; 68 ER 1022 as an authority for the proposition that : "The utmost good faith is due from every member of a partnership towards every other member; and if any dispute arise between partners touching any transaction by which one seeks to benefit himself at the expense of the firm, he will be required to show not only that he has the law on his side, but that his conduct will bear to be tried by the highest standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel for the petitioners has also cited the following decision : Seethiah v. Venhatasubbiah [1949] 19 Comp Cas 107 ; AIR 1949 Mad 675, and submitted that subsequent events after the filing of the petition can also be taken into account and that no pleading is necessary for the said purpose. It is a fact that no meeting was held after 1982 and no accounts have also been submitted and the company's position is not disclosed by the respondents and no particulars as to the position obtained in the company were made available to the court. No accounts whether audited or not were filed in this court. While arguing on this point, Mr. T. Raghavan, learned senior counsel for the petitioners drew my attention to the decision in Gopal Krishnaji Kethar v. Mohd. Haji Latif, AIR 1968 SC 1413 at page 1416. In the instant case, as mentioned above, the respondents have not placed before this court any documents and if they fail to do so, this court is always entitled to draw an adverse inference. Before I conclude I must also advert to the impact of the judgment of the Hon'ble Supreme Court dated November 28, 1991, in V. B. Rangaraj v. V. B. Gopalakrishnan [1992] 73 Comp Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed thereat are not binding on the first respondent company. Likewise the third respondent, who is purported to have been appointed at the meeting held on January 5, 1981, cannot function as such director of the first respondent company. The appointment of the third respondent was not considered as a special business under the provisions of section 173 of the Act. The notice issued for holding the meeting for January 5, 1981, has not disclosed the intention to move the election of the third respondent as a director as and by way of special resolution. There is also no explanatory statement attached to the notice as required under section 173 of the Act, which is mandatory and in the absence of compliance with the said provisions, I hold that the purported resolutions are illegal and void. For the aforesaid reasons : ( a )the petition filed by the petitioners has to be allowed in toto and in the interest of the company and its shareholders, the board of directors of the company is superseded ; ( b )the affairs of the company are directed to be administered by petitioners Nos. 1 to 3 ; ( c )since it is proved that the action of the second respondent has resulted in serious l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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