9911796707
TMI Blog1995 (2) TMI 299X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent is a company and is also a nidhi. The second respondent is a person who was proposed for election as a director of the first respondent in the annual general body meeting to be fixed on August 4, 1994. Items Nos. 7 and 8 in the notice have been proposed as special business. Along with the suit, the applicants have filed O.A. No. 708 of 1994, for the grant of interim injunction restraining the respondent in any manner considering the subjects, viz ., items Nos. 7 and 8 of the notice dated June 29, 1994, issued by the first respondent. On August 3, 1994, the injunction application was moved before me. The first respondent s counsel took notice and submitted that the meeting as proposed could go in including the special business, viz ., items Nos. 7 and 8 of the agenda but the first respondent would not give affect to the same until further orders if carried on in the said annual general meeting. On the same day, I passed an order. Instead of granting injunction, I allowed the first respondent to proceed with the annual general meeting with the agenda already printed and circulated to all the shareholder. I made it clear that any decision taken regarding items Nos. 7 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of his candidature as a director seeking re-election. On September 9, 1991, the said Mohanakrishnan wrote to the first respondent stating that the contention of the first respondent was wrong. He also accused the first respondent of negligence in not verifying the provisions of section 257 of the Companies Act before announcing his candidature. He had further stated that he was entitled to seek re-election and in support of this contention he mentioned that on an earlier occasion when a director was co-opted in a casual vacancy, the said person was not called upon to remit the sum of Rs. 500. Mohanakrishnan also tendered a demand draft for Rs. 500. The first respondent by its letter dated September 10, 1991, rejected the contention of Mohanakrishnan and returned the draft sent by him, as, according to the first respondent, the tender was in violation of the provisions of the Companies Act. It also appears that the said Mohanakrishnan did not pursue the matter further. In the annual general meeting held on June 21, 1093, the second respondent was treated as a retiring director and be was said to have been re-elected. By letter dated December 30, 1993, the first applicant en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong done to shareholders. ( b )The cardinal principle of corporate law that the courts will not interfere with the internal management of the company will apply to the facts alleged in the present petition. ( c )The applicants are guilty of laches. The first respondent did not permit one Mohanakrishnan from seeking appointment as a director because of the non-compliance of section 257 of the Companies Act and that the first respondent has not adopted a different stand against the second respondent. The second respondent was appointed as a director in the casual vacancy and he was treated as a retiring director and he was re-elected on September 4, 1990. ( d )The shareholders of the first respondent thought it fit to reappoint the second respondent unanimously and again his term for reappointment came up for consideration at the annual general meeting held on June 21, 1993. The applications, who were the shareholder even at that relevant point of time, did not choose to object to such appointment or bring to the notice of the first respondent has not followed the procedure under section 257 of the Companies Act. ( e )The first applicant is the father-in-law of one S. R. Kish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve every right to see that the legal provisions are strictly adhered and the rights of the shareholders are protected. Regulation 72 of Table A has no application at all as the articles of association of the first respondent clearly say that only Table A in the modified form alone would apply. In paragraph 27 of the reply affidavit, it is stated as follows : "I submit that the fabrication of the minutes of the meeting can be very easily understood from the fact that the minutes itself states that the number of shareholders present were only 1411. Paragraph 25 of the counter-affidavit states that 244 shareholders took part in the poll. However, the result of the poll mentioned states that Manavalan had fetched a vote of 7,392 votes. There is no mention about any proxy at all in the minutes of the meeting. In the circumstances it is not clear as to how only with 1,411 shareholders, there could be a possibility of 7,392 votes being polled and when the minutes itself does not say anything about proxies. It is cardinal principle of the meetings that if proxies were received by the company, there should be verification of the proxies and there should be an announcement about the number ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty but one requiring the management to make a fair and full disclosure. He laid particular emphasis on the word not to be duped by the management. According to him, the following facts are material for items Nos. 7 and 8 of the notice of the annual general meeting, which items have been impugned in the present application. ( a )In the explanatory statement, the directors have recommended to the shareholders to elect the second respondent as he is said to possess expertise and experience in nidhi matters. No particulars of any expertise or experience have been set out. ( b )The second respondent was allowed to continue as a director notwithstanding the defect in the appointment and notwithstanding the fact that the company knew about the defect in his appointment but on the other hand, in the case of Mohanakrishnan prompt action was taken about the defect even at the time of his candidature. The company was informed about the defect in the appointment of the second respondent by the first applicant's letter dated September 9, 1991. These facts ought to have been disclosed. ( c )So far as the second respondent was concerned, the first applicant had raised the objection in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share holders of the first respondent thought fit to reappoint him unanimously and again his term for reappointment came up for consideration at the annual general meeting held on June 21,1993. The shareholders approved his reappointment unanimously. The applicants were shareholders at the relevant point of time and they did not choose to object to such appointment or bring to the notice of the first respondent that the first respondent has not followed the procedure under section 257 of the Companies Act. According to Mr. T.K. Seshadri, at a later point of time when the election of Mohanakrishnan came up for consideration, the first respondent thought fit to obtain an opinion from counsel and intimated Mr. Mohanakrishnan of the requirement of the compliance of section 257 of the Companies Act. Mohanakrishnan realised the difficulty and did not pursue the matter. Since the second respondent was appointed as a director unanimously at two annual general meetings held on September 4, 1990, and June 21,1993, by the shareholders, it escaped the attention of the first respondent of the earlier defect in the appointment on September 4,1990. However, when it was brought to the notice of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure incurred towards survey fees, preliminary and inspection fees are not remuneration and it cannot be recovered from the director. It is not denied in the counter-affidavit that factually the first respondent had not paid rupees one lakh to the second respondent. In this context, it is useful to extract the two items mentioned as "Special business", which are items Nos. 7 and 8, as they are the bone of contention of the applicants for seeking relief in the plaint as well as in the application. They are, " Item No. 7: To consider and if thought fit, to pass with or without modification the following resolution as an ordinary resolution : 'Resolved that Thiru N. G. Manavalan be and is hereby appointed as director of the company.' Item No. 8 : To consider and if thought fit, to pass, with or without modification the following resolution as an ordinary resolution : 'Resolved that the recovery of a sum of Rs. 97,320 paid/payable as remuneration and sitting fees to Thiru N.G. Manavalan (the details of which are set out in the explanatory statement), director of the company for the period from September 4, 1990, to February 23, 1994, be and is hereby waived subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an has been paid/to be paid his eligible remuneration, sitting fees as under : Year ending Remuneration Sitting fee Total (Rs.) (Rs.) (Rs.) 31-3-1991 1,322 5,350 6,672 31-3-1992 4,183 9,450 13,633 31-3-1993 7,331 25,600 32,931 31-3-1994 13,584 30,500 44,084 The board is of the opinion that since the appointment became defective only on a technical ground and since Thiru N. G. Manavalan has rendered valuable service to the company, the recovery of the aforesaid remuneration/sitting fees paid to him may be waived. The board recommends this resolution. None of the directors except Thiru N.G. Manavalan is interested in the above resolution. According to Mr. T.K. Seshadri, on the date of the said allegation, the applicants sought for a declaration that the notice dated August 29, 1994, issued by the first respondent of the proposed annual general meeting scheduled to be held on August 4, 1994, in relation to items Nos. 7 and 8 is illegal and void and for consequential permanent injunction restraining the firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act and that the candidature of the second respondent was accepted earlier without compliance with section 257 of the Companies Act. It is further stated that the explanatory statement also does not say that the second respondent was illegally treated as a retiring director in both the meetings held on September 4, 1990, and June 21, 1993. It is stated that the explanatory statement does not contain or disclose that the second respondent was co-opted with the board of directors in the absence of the board to co-opt when he resigned. It is further mentioned that the explanatory statement would state about the experience and expertise of the second respondent in mutual benefit society and that his election would be in the interest of the company. The said statement would not specifically state as to what was expertise and what beneficial service the second respondent rendered to the first respondent. The said statement would amount to canvass the support of the second respondent by the first respondent. The above is the objection in relation to the explanatory statement for items Nos. 7 and 8. The applicants have not stated as to what is the provision of law under which the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in that case. But, in the instant case as rightly pointed out by Mr. T.K. Seshadri, there is an explanatory statement given in accordance with section 173(2) of the Companies Act. There is, therefore, no non-compliance with the provisions of the Companies Act as contended by the learned counsel for the applicants. The question is, whether the material facts concerning each item of business are set out in the explanatory statement or not. Mr. T.K. Seshadri, in support of his contention, has relied on a Bench decision of the Calcutta High Court in East India Commercial Co. Pvt Ltd. v. Raymon Engineering Works Ltd., AIR 1966 Cal. 232, wherein the Bench has observed that the courts do not scrutinise these notices with a view to exercise criticism or to find out defects, but it looks at them fairly. The Bench has also pointed out that the solution of the problem as to whether all material facts were disclosed in an explanatory statement, depends upon the facts of each case. It is settled law that the notice must specify the business to be done. The object of the notice was to be a fair notice, intelligible to the minds of the ordinary man, the class of men who were the sharehol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pertaining to the transaction to be carried out at the meeting, he cannot reasonably complain of any insufficiency of notice. If he is present at the meeting, he must point out to the chairman about the irregularity before the meeting proceeds with the agenda, In the instant case the explanatory statement given under items Nos. 7 and 8 clearly bring out the material facts in relation to the resolution to be passed. The resolution to be passed with regard to item No. 7 relates to the appointment of the second respondent as a director of the first respondent. What necessitated the first respondent to place in the meeting the reasons why the second respondent's election is coming up for appointment as a director ? The reason is, the second respondent's earlier appointment was defective for non-compliance with section 257 of the Companies Act. Under what circumstances the second respondent was appointed earlier, and when his appointment was found defective, he resigned, how he has appointed as an additional director and that his term as additional director has come to an end at the annual general meeting, are the relevant and material facts to the question as to the appointment of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent to make payment unauthorisedly. The payment which was made to the second respondent was a payment to a director. The said payment was made with full knowledge by the first respondent that there was a defect in the appointment of the second respondent. The first respondent cannot seek justification by relying upon section 309 of the Companies Act as that section applies only to managerial remuneration and payment made to a director. Since the first respondent itself concedes that the original appointment of the second respondent was defective and that the said position was confirmed by the legal opinion, the second respondent could never have been a director of the first respondent. The first respondent knew about the defect in the appointment of the second respondent as a director. It has been falsely alleged in the counter-affidavit that the said defect was known only after the first applicant wrote a letter on December 30, 1993. The first applicant had already pointed out the defect in his letter dated September 9, 1991. The contention that the first respondent has power to co-opt a director cannot be true. Such of those provisions for which there is no specific appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to the expenditure which the first respondent incurred during the management of the affairs of the first respondent. Therefore, the objection that the payment to the second respondent is ultra vires the first respondent is in my view, without any substance. Point ( c ) : Dealing with the last point, Mr. C. Harikrishnan read out the counter-affidavit wherein it has been stated that the meeting was attended by 1,411 persons. According to learned counsel, there is no indication in the minutes as to how many shareholders attended in person or through proxy and the value of the shares has not been given. However, in the alleged poll conducted, something like 7,392 votes said to have been cast. Mr. C. Harikrishnan also alleges that in the letter of the first respondent dated August 17, 1994, which has been appended to the reply affidavit, there was no proposer to the candidature of the second respondent when his election was taken up. Mr. C. Harikrishnan pointed out the exact words of the first respondent as found at page 2 of the said letter, viz ., "In the case of Mr. N. G. Manavalan, there was no proposer at the time of vote by show of hands made by the chairman". According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st respondent, and at any rate, the opinion/approval of the Central Government cannot be binding on the court nor can it cure the defect of ultra vires . Mr. T.K. Seshadri, while answering the third point of counsel for the applicants, submitted that there is no discrepancy in the minutes to vitiate the resolution concerning items Nos. 7 and 8. The minutes are prima facie evidence under section 193 read with section 1957 of the Companies Act. He also invited my attention to the case reported in B. Sivaraman v. Egmore Benefit Society Ltd. [1992] 75 Comp. Cas.198, wherein it has been held by this court that by virtue of the record of proceedings in the minutes book duly made and filed with the Registrar of Companies, the applicants were validly elected as directors since the respondents produced no evidence to dislodge the presumption under section 195 of the Companies Act and that the scrutineers' report contained no evidence of manipulation of the poll. It is further held that the presumption is rebuttable and the onus of dislodging the presumption is on the person who has challenged the resolution on the ground of malpractice or misdeed. In my opinion, the applicants have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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