9911796707
TMI Blog1993 (4) TMI 239X X X X Extracts X X X X X X X X Extracts X X X X ..... the eighth annual general meeting was statutorily required to be held as per section 166 of the Act latest by December 31, 1990. The meeting was not convened by the company within the stipulated time. The eighth annual general meeting for the year ending March 31, 1990, was convened on September 30, 1991, by notice dated September 2, 1991. The notice to the shareholders was sent by post on September 7, 1991, and under section 53(2)(b)( i) of the Act, the notice is deemed to have been effected at the expiration of forty-eight hours after the letter is posted and accordingly, the notice is deemed to have been served on September 9, 1991. The plaintiffs instituted Suit No. 3002 of 1991 on September 21, 1991, for a declaration that defendants Nos. 1 to 4 are not entitled to convene the eighth annual general meeting on September 30, 1991, or any other date as calling of the said meeting is ultra vires and null and void. The plaintiffs sought a declaration that notice dated September 2, 1991, convening the annual general meeting is ultra vires, invalid and illegal. The plaintiffs sought a perpetual injunction restraining the defendants from holding and/or proceeding with the annual gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. The plaintiffs further claimed that if the appointment of defendant No. 2 was illegal and bad, the notice convening the annual general meeting signed by defendant No. 2 is bad in law and inoperative. The plaintiffs further claimed that the company had deliberately circulated an abridged balance-sheet so as to cover up the acts of misconduct, misfeasance and malfeasance indulged in by defendants Nos. 2 to 4. The plaintiffs claimed that a perusal of the auditor's report and notes on accounts makes it very clear that the substratum of defendant No. 1 has disappeared and defendants Nos. 2 to 4 are mismanaging the company. The plaintiffs instituted Suit No. 3003 of 1991 in respect of the ninth annual general meeting for the year ending March 31, 1991, convened on September 30, 1991, by notice dated September 2, 1991. The notices were issued by the company to convene both the eighth and ninth annual general meetings on the same date and both the meetings were also to be held on the same date, i.e., September 30, 1991. Suit No. 3003 of 1991 challenges the right of the company to hold the ninth annual general meeting for identical reasons as set out in companion Suit No. 3002 of 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d at this juncture that at one stage, the dispute between the three brothers was referred to a spiritual leader in whom the brothers had confidence, but the decision of the spiritual leader was not accepted by Arun kumar Poddar and the parties decided to fight out the litigation in court. Two notices of motion being Notice of Motion No. 2131 of 1991 and Notice of Motion No. 2132 of 1991 were taken out by the plaintiffs in Suits Nos. 3002 and 3003 of 1991, respectively, seeking interim relief restraining the company from holding and/or proceeding with the eighth and ninth annual general meetings convened on September 30, 1991. The plaintiffs also sought relief restraining the defendants from implementation of the resolutions and business proposed to be transacted at the said annual general meetings. Notice of Motion No. 2158 of 1991 was taken out by Arunkumar Poddar in Suit No. 3139 of 1991 for identical reliefs. The plaintiffs applied for grant of ad interim relief pending the disposal of the notice of motion, but the learned trial judge declined to grant any ad interim relief. The plaintiffs thereupon preferred appeals before the Division Bench of this court and the Division Benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppointment of defendant No. 2 is invalid was controverted and it was asserted that even though defendant No. 3 was related to defendant No. 2, there was no prohibition for defendant No. 3 to vote at the meeting because the appointment of defendant No. 2 as additional director, did not amount to contract or any other arrangement as prescribed by section 300 of the Act. The trial judge, by order dated October 15, 1991,found prima facie merit in the contentions urged on behalf of the defen dants and held that the convening of the two annual general meetings did not suffer from any defect and it was not necessary to prevent the company from implementing the resolutions which were unanimously passed at the two annual general meetings. As a result of this finding, the trial judge dismissed the two motions. The third motion taken out by Arunkumar Poddar also ended in dismissal by a separate order dated October 15, 1991. It is required to be stated that in the notice of motion taking out by Arunkumar Poddar only two grounds were urged ; one being that the dividend was declared in contravention of provisions of section 205 of the Act, and the second that the directors' report does not set o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r five contentions to urge that the eighth and ninth annual general meetings held by the company were illegal and contrary to law. The first contention urged by learned counsel is that the notice signed by defendant No 2 as chairman and convening the meeting was illegal as the appointment of defendant No. 2, Santoshkumar, was illegal and consequently, the notice convening the meeting was not valid. It was contended that defendant No. 2 had vacated the office as director on December 31, 1990 in accordance with section 255 of the Act. The section, inter alia, provides that the directors shall retire by rotation unless the articles provide for the retirement of all directors at every annual general meeting. The meeting of the board of directors was held on January 1, 1991, and the minutes of meetings disclose that defendants Nos. 2 to 4 were present. The fact that Santoshkumar retires on December 31, 1990. by rotation was noticed and the minutes establish that defendant No. 3 who is the real brother of Santoshkumar requested the board that Santoshkumar be appointed a an additional director for reasons set out in the minutes. The resolution appointing Santoshkumar Poddar, defendant No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot nullify the resolutions passed at annual general meetings and the plaintiffs cannot be permitted to defeat the rights of the shareholders for their own grievances against the board of directors. Section 252 of the Act, inter alia, provides that every public company shall have at least three directors and section 287(2) of the Act sets out that the quorum for a meeting of the board of directors shall be one-third of the total strength or two directors, whichever is higher. Section 300(1) prescribes that no director of a company shall as a director take any part in the discussion of, or vote on, any contract or arrangement entered into by and on behalf of the company if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement. Sub-section (4) of section 300 provides that every director who knowingly contravenes the provisions of sub-section shall be punishable with fine which may extend to five thousand rupees. Shri Kapadia submitted that a director of the company is an agent and consequently, the appointment of the director amounts to a contract, the contract being between the principal and the agent. In support of the submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within the meaning of the section, although elastic in expression, must, in the context, receive the interpretation that it must be of such a nature as to involve a conflict between interest and duty of the same type as would arise in the case of a personal pecuniary interest in the contracts of the company. The learned single judge felt that the arrangement cannot be equated with the contract and the arrangement denotes all kinds of legal relationship which are not covered by a contractual relationship and all kinds of concern or interest arising out of such an arrangement. Shri Kapadia relying upon the observations of the learned judge submitted that the appointment of additional director should be treated as an arrangement falling under section 300 of the Act and, consequently, defendant No. 3, who is the real brother of defendant No. 2, had interest in the appointment of defendant No. 2 and was, therefore, not entitled to discuss or vote on the resolution. It is not possible to accede to the submission of learned counsel. It is undoubtedly true as held by the Supreme Court that the director is an agent of the company but the assumption of the plaintiffs that the relationship of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contract or arrangement by the company or on behalf of the company and that means that the company is one of the contracting parties or parties to the arrangement. The company is not a party for making an appointment of a person as director; nor is the appointment on behalf of the company. To accept the submission that the appointment of an additional director amounts to a contract or arrangement, it would be necessary to conclude that such a contract or arrangement is by or on behalf of the company, and it is not possible to do so. In our judgment, the contention that defendant No 3 could not have participated in the discussion or vote on the resolution to appoint defendant No. 2 as additional director in view of the prohibition of section 300(1), therefore, cannot be accepted. Shri Cooper, in this connection, submitted that in spite of the fact that defendant No. 3 was a relation of defendant No. 2 and even assuming that the appointment of defendant No. 2 as an additional director amounts to a contract or arrangement, still the participation of defendant No 3 in the appointment can at the most be treated as an irregularity It was urged that such, an irregularity cannot be que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovides that acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification by virtue of any provision contained in the Act or in the articles. Regulation 80, inter alia, prescribes that all acts done by any meeting of the board or by any person acting as a director, shall, notwithstanding that it may afterwards be discovered that there was some defect in the appointment be valid as if such director had been duly appointed. Shri Cooper submits that in view of the provisions of section 290 and regulation 80, even assuming that the contention of the plaintiffs in respect of appointment of defendant No. 2 is correct, still the acts done by defendant No. 2 in convening the two annual general meetings are required to be treated as valid. Reliance was placed on the decision in Boschoeh Proprietary Co. Ltd. v. Fuhe [1906] 1 Ch 148. Article 84 of the company in that case was almost in identical terms with regulation 80. There was a challenge to the resolutions passed convening the annual general meeting on the ground that the meeting was convened by de facto directors. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meeting held on January 1, 1991, was invalid and so also the resolution passed by the two directors, i.e., defendants Nos. 3 and 4, to appoint defendant No. 2 as an additional director. Shri Kapadia submitted that the trial judge was in error in referring to the provisions of regulation 75 of Table 'A' of the First Schedule to the Act. Regulation 75 reads as under: "The continuing directors may act notwithstanding any vacancy in the board; but, if and so long as their number is reduced below the quorum fixed by the Act for a meeting of the board, the continuing directors or director may act for the purpose of increasing the number of directors to that fixed for the quorum, or of summoning a general meeting of the company, but for no other purpose." It was contended that regulation 75 comes into the picture when the number of continuing directors is reduced below the quorum and the continuing directors can act for the purpose of increasing the number of directors to that fixed for a quorum or of summoning a general meeting. Shri Kapadia submitted that on retirement of defendant No. 2, the continuing directors were only defendants Nos. 3 and 4 and to constitute a quorum in accordan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuing clause was held to apply and those directors were held to be competent to transact the business of the company." The decision undoubtedly supports the contention of the defendants that the continuing directors, i.e., defendants Nos. 3 and 4, were entitled to nominate defendant No. 2 as additional director and the board was properly constituted. Reference can be usefully made to the decision in A. Ananthalakshmi Ammal v. Indian Trades and Investments Ltd. [1952] 22 Comp. Cas. 324 (Mad.); AIR 1953 Mad 467, where Mr. Justice Venkatarama Aiyar, as he then was, held that the power to co-opt a director might be exercised notwithstanding that the strength of the directorate has fallen below the minimum required and below the quorum prescribed by the articles of association. In that case, the contention was that there was only one director, 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. In answer to the contention, reliance was placed on article 81 which provided that the continuing directors may act notwithstanding any vacancy in their body but-only to ensu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed at the meetings are illegal and inoperative. It is not in dispute that section 171(1) of the Act provides that the general meeting of the company may be called by not less than 21 days' notice in writing. Sub-section (2) of section 171 provides that the general meeting may be called after giving shorter notice if consent is accorded thereto by all the members entitled to vote thereat. Sub-section (3) of section 172 provides that the accidental omission to give notice to, or the non-receipt of notice by, any member or other person to whom it may be given shall not invalidate the proceedings at the meeting. The two notices convening the two meetings are dated September 2, 1991, but were posted on September 7, 1991, and were received by the plaintiffs on September 12, 1991. In view of the deeming provision under section 52(2)(b)(i ) of the Act, the notice is deemed to have been served on the shareholders on September 9, 1991. Shri Kapadia submitted that the notice did not provide for clear 21 days' period before convening of the annual general meetings on September 30, 1991. Learned counsel urged that although none of the plaintiffs attended the annual general meetings and the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r it is mandatory or merely directory. Even if a penalty is prescribed for non-compliance, that itself is not sufficient to treat the provision as mandatory. The Supreme Court in Hari Vishnu Kamath v. Ahmad Ishaque, AIR 1955 SC 233, observed (at page 245): "It is well-established that an enactment in form mandatory might in substance be directory, and that the use of the word 'shall' does not conclude the matter. This question was examined at length in Julius v. Bishop of Oxford [1880] 5 AC 214, and various rules were laid down for determining when a statute might be construed as mandatory and when as directory. They are well-known and there is no need to repeat them. But they are, all of them, only aids for ascertaining the true intention of the Legislature which is the determining factor, and that must ultimately depend on the context." It is, therefore, necessary to examine the object, purpose and scope of section 171 of the Act to determine whether the requirement is mandatory or directory. The recommendations of the Company Law Committee in paragraphs 75(i) and 78 of the report indicates that the period of 21 days was provided instead of 14 days as earlier fixed to enable th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp. Cas. 185; AIR 1977 SC 536, the Supreme Court examined the question whether the provisions of section 108 of the Act are mandatory or directory. Section 108 deals with transfer of shares or debentures and provides that the company shall not register the transfer unless a proper instrument of transfer duly stamped and executed by the transferor and by the transferee has been delivered to the company along with the certificate relating to the shares or debentures or along with the letter of allotment of the share certificate. The Supreme Court observed that negative, prohibitory and exclusive words are indicative of the legislative intent when the statute is mandatory. The words "shall not register" are mandatory in character and that is strengthened by the negative form of the language. The Supreme Court held that merely because the non-compliance is not declared as an offence cannot lead to the conclusion that the section is directory. We are unable to appreciate how the decision will advance the case of the plaintiffs in claiming that section 171(1) of the Act is mandatory. The object, scope and intent of the two sections are t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shorter duration or that all the shareholders had consented to the notice being of shorter duration. Shri Kapadia heavily relied upon the decision in N.V.R. Nagappa Chettiar v. Madras Race Club [1949] 19 Comp. Cas. 175; ILR 1949 Mad 808 and this judgment requires closer scrutiny. The Madras Race Club is a body corporate registered under the Companies Act of 1913 and the business and the object of the club is to carry on business of the race club and to provide amenities to the members. There were 260 club members of whom 23 were living outside British India. On October 16, 1947, notice was issued to the club members of the extraordinary general meeting convened on November 7, 1947. The notice was posted at Guindy on October 16, 1947. The meeting held on November 7, 1947, and the resolutions passed therein were challenged by two members of the club by filing a suit for themselves and on behalf of other members of the club after obtaining permission under Order I, rule 8 of the Code of Civil Procedure. A declaration was sought that the meeting was invalid and void and all business transacted thereat was invalid, null and void and one of the contentions in support of the declarati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 171(2) of the Act, the learned judge held that notice of a short duration in breach of provisions of subsection (1) of section 171 of the Act does not necessarily lead to the voiding of the meeting and rendering the proceedings illegal, ineffective and void. The learned judge disagreed with the observations of the Madras High Court and held that prior consent of the members would completely render sub-section (2) of section 171 nugatory and seeking such prior consent may make waste of valuable time. The learned judge held that the consent referred to need not necessarily be obtained before calling any meeting and the consent may be obtained before or after the calling of the meeting and also at the meeting. The consent need not be express or in writing and may be implied and inferred from the conduct of the members. The learned judge then examined the provisions of section 171 and held that the provision is clearly directory and not mandatory. It was observed that the provision is not so imperative that the requirement thereof cannot be waived at all and is not mandatory in the sense that any breach thereof will necessarily and invariably invalidate the meetings and the proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e notice of four or five days and will try to sustain the validity of the proceeding. It is impossible to assume that the court Will close its eyes to the reality and accept the claim that notice of even one day is enough. The court will not proceed to invalidate the proceedings on the ground of insufficient duration of notice only when it is established that defect is not intentional or deliberate and no prejudice whatsoever is caused to a particular case by shorter duration of notice. It would be necessary for a party complaining of insufficient duration of notice to plead prejudice caused and in case such prejudice is established, then even though the provision is directory, the court would grant the relief. Shri Kapadia then submitted that in the present case, the notice was short by one day and it has caused prejudice to the plaintiffs because the plaintiffs did not have sufficient time to canvass. In support of the submission, reference was made to a letter dated September 18, 1991, addressed to the company by attorneys of the plaintiffs. The letter demands supply of balance-sheets and profit and loss accounts. The letter sets out that Santoshkumai was appointed as additiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his real brothers. The shareholding of the plaintiffs is extremely negligible being 0.3 per cent, and it would be entirely unreasonable to invalidate the business transacted at the annual general meeting at the behest of these few shareholders and to the detriment of a large body of shareholders who had unanimously approved the resolutions moved at the meetings. We enquired from learned counsel as to which resolution passed at the meeting affects the interest of the plaintiffs and the grievance seems to be only about the issuance of right shares after increasing the authorised share capital and conferring power on the board of directors to make loans to any body corporate. The issuance of the right shares to all the existing shareholders can by no stretch of imagination affect the interest of the shareholders, nor would it change the controlling pattern of shareholding of the company. The grievance about conferring power upon the board of directors to make loans to bodies corporate is the apprehension that the directors may give loans to firms and companies in which they have interest. More about it at a later stage, but the prejudice complained of seems to be only of Arunkumar Po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aggregate of the loans outstanding at any one time made to the company shall not exceed 30 per cent, of the aggregate of the subscribed share capital. The explanatory note to item No. 8 sets out that in the course of business, the company may have to make loans or deposits, etc., to bodies corporate in excess of the limits and section 370 of the Act provides that no company shall make any loan or loans to any body corporate in excess of the limits fixed by the Central Government unless making of such loans has been previously authorised by a special resolution of the lending company. The explanatory note recites that the company may have surplus funds during off season which the 'Board of directors may utilise for giving loans and it is, therefore, advisable in the interest of the company to obtain the consent of the members by special resolution. Shri Kapadia complains that the explanation is a tricky one because the claim that the company may have surplus funds is totally false. Reference was made to the minutes of the meeting held on January 1, 1991, at which meeting Santoshkumar was appointed as additional director. One of the reasons set out for appointing Santoshkumar was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tiffs have not pointed out any act of defendants Nos. 2 and 3 to create suspicion that resolution No. 8 at the ninth annual general meeting was for the purpose of enabling the board of directors to grant loans to their own concerns. Thirdly, the explanatory statement also recites that the surplus funds may be available during the off season and the conferring of a power cannot necessarily lead to the inference that the power was to be misused by the board of directors. Again, it is not permissible for the plaintiffs who were fully conscious of the business to be transacted at the annual general meeting to remain absent and thereafter complain of insufficiency of information or tricky explanation. In our judgment, the challenge to the business conducted in the meetings is without any substance and there is no reason to nullify the resolutions passed at the annual general meetings. It is required to be mentioned that though the plaintiffs had claimed before the trial court that the company had no authority to convene the eighth annual general meeting after December, 1990, the said contention was not pressed by Shri Kapadia during the arguments. The trial judge negatived the contenti ..... 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