9911796707
TMI Blog1993 (11) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... eir interest is directly in conflict with the interest of SAE (India) Limited. It was also asserted that the said defendants are not entitled or authorised to represent SAE (India) Limited, or its shareholders, as they are wrongdoers. It was also asserted that they were misutilising and misapplying the funds of the company for illegal purposes in furtherance of their conspiracy. The alleged brief facts were stated thereafter. The important fact which has to be kept in mind, is that it was asserted in the plaint itself, that SAE (India) Limited is an existing company, incorporated under the Indian Companies Act VII of 1913. It was incorporated as Company No. 17 on May 12, 1951, at Waltair in the State of Tamil Nadu to execute a contract from the then Madras State Electricity Board for the construction of a 132 KV Machkund Project Transmission Line. This assertion makes it clear that SAE (India) Limited is an Indian company, incorporated under the laws of India. The disputes which are raised in this plaint, appear to have crystallised as a result of the economic liberalisation policies of the present Narasimha Rao Government. Consequent upon the liberalised economic policies, it ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of directors approve in principle the increase of share capital for issue of shares to Elettrofin S.A. shareholding to 51 per cent. 2.Resolved that ICICI Securities and Finance Company Limited be asked to suggest a fair price for the said shares. 3.Resolved that the board of directors approved in principle the amalgamation of the company with Asea Brown Boveri Ltd. 4.Resolved that S.B. Billimoria and Co., chartered accountants, be asked to suggest a fair exchange ratio for the shares for the purpose of amalgamation. 5.Resolved that Amarchand and Mangaldas and Hiralal Shroff and Co., Solicitors and Advocates, be asked to prepare a draft of a scheme for amalgamation. 6.Resolved that a committee of the board of directors be appointed comprising Mr. J.M. Mukhi and Mr. N.S. Mittal to examine the assessments and evaluations and to recommend fair terms for the said increase and issue of shares as above and the amalgamation of the company with Asea Brown Boveri Limited for consideration of the board of directors. It appears from what is stated in the plaint that serious disputes arose between some of the members of the board of directors, namely, J.M. Mukhi, Mr. Madan and Mr. N.S. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the plaint in the suit. By that time, Mr. Dave had presented himself in court, and stated, without entering appearance in court as required by Order III, rule 4 of the Code of Civil Procedure, 1908, that they have filed a caveat which was, at that time, not on record. I dealt with I.A. No. 8507 of 1993, by my order dated September 28, 1993. I allowed the same. As by September 29, 1993, caveat has been lodged, summons in the suit and notice of the application were taken by Mr. R.P. Dave, who was being led by Mr. R.K. Garg, senior advocate. Copies of the amended plaint and documents were ordered to be given to Mr. Dave. Direction was given to file written statement within two weeks. I had heard the parties in part, and directed on August 27, 1993, that the interim orders sought by the plaintiff, be crystallised by counsel for the plaintiff. By the next date, counsel for the defendants also wanted to make submissions, and I have heard them also. I had pointed out to Mr. Sen that the instant plaint is a very unusual plaint, inasmuch as it lacked an averment, as per practice in this court, the plaint did not have an assertion at its beginning, or within the first few paragraphs, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, has to be a person authorised to institute the suit. The authority to institute a suit is distinct from and in addition to what is contemplated by Order 29 of the Code of Civil Procedure, 1908, which deals only with signing of plaints and verification of pleadings by certain persons mentioned in that provision. It was contended by Mr. Sen that all the documents and papers which confer authority to institute a suit on behalf of SAE (India) Limited on Mr. Sias, are in the custody of the defendants. These include the power of attorneys which have been granted to Mr. Sias by resolution of the board of directors. The defendants had filed a caveat in court, and during the course of hearing, handed over copies of the power of attorneys granted in favour of Mr. Sias. They have also shown the original power of attorney to me. The relevant provisions of the power of attorney indicate that Mr. Sias has also been given power to institute suits jointly with certain persons named in that power of attorney. All the powers of attorney are to be strictly construed, and the power of attorney in favour of Mr. Sias, being power of attorney, dated May 28, 1993, only gives power to sue jointly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different things. The authority to institute pre-exists the institution of the suit, and ratification of the act of institution of suit which is filed, is after the suit has been instituted by a person not authorised to do so. As regards the authority to commence an action, it cannot be doubted that the board of directors of the company are authorised by resolutions to act on behalf of the company. In fact, the memorandum and articles of association of SAE (India) Limited itself says that the SAE (India) Limited shall function through its board of directors. It is so stated in article 116, which reads as under : "Subject to the provisions of the Act, the control of the company shall be vested in the board who shall be entitled to exercise all such power, and to do all such acts and things as the company is authorised to exercise and do: Provided that the board shall not exercise any power or do any Act or thing which is directed or required, whether by the Act or any other statute or by the memorandum of the company or by these articles or otherwise, to be exercised or done by the company in general meeting : Provided further that in exercising any such power or doing any such ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies Act. Mr. Sen referred to the provisions of section 2(26) of the Companies Act, which relate to the managing director. That section reads as under : " 'managing director' means a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its board of directors or by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called : Provided that the power to do administrative acts of a routine nature when so authorised by the board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management : Provided further that a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company, in which they are directors. In the instant case, the foreign company Elet-trofin Societa Anonima Finanziaria holds only 33 per cent. of the shares. The rest of the shares are owned by financial institutions in India, or by shareholders in India. The board of directors of SAE (India) Limited would be acting properly if they were looking after the interest of the majority of the shareholders as a whole. Mr. Sen also referred to Pender v. Lushington [1877] 6 Ch 70. The observations at pages 78 and 79 go to show that the court is empowered to hold over an action, to call a meeting of the shareholders to assert the wishes of the majority of the shareholders. The facts of that case are different from the present one. The principle of law laid down may be good, but does not merit application to the present case. Mr. Sen also referred to Dr. Satya Charan Law v. Rameshwar Prosad Bajoria [1950] 20 Comp. Cas. 39 (FC). According to Mr. Sen, an unusual situation has arisen vis-a-vis the affairs of SAE (India) Limited. According to him, fundamental changes have been effected in the management of the company, whereas the company was managed by the five directors earlier, name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofin Societa Anonima Finanziaria, an Italian company, which is in turn, connection with Asea Brown Bovery, Zurich, which is also connected with Asea Brown Boveri, Sadelmi. K.N. Shenoy is a director of Asea Brown Boveri (India) Limited, and Ruggieri is based in Milano, Italy, and is connected with the companies, associated with or connected with Asea Brown Boveri Limited, namely, Asea Brown Boveri, Zurich, Asea Brown Boveri, Sadelmi and Elettrofin Societa Anonima Finanziaria. Mr. Sen also referred to and relied upon the observations mentioned in Gower's Principles of Modern Company Law, at page 643, which are as under : "1.The proper plaintiff in an action in respect of a wrong alleged to be done to a corporation is prima facie the corporation. 2.Where the alleged wrong is a transaction which might be made binding on the corporation and on all its members by a simple majority of the members, no individual member of the corporation is allowed to maintain an action in respect of that matter because, if the majority confirms the transaction, cadit quaestio : or, if the majority challenges the transaction, there is no valid reason why the company should not sue. 3.There is also no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention of Mr. Garg. Mr. Sias has accepted by the said general power of attorney that he is director, and also manager, for the purposes specified in that power of attorney, it is not possible for him to contend that he is the managing director of the company. Furthermore, according to the said general power of attorney issued in favour of Mr. Sias, it is not permissible for him to act otherwise than in accordance therewith. That power of attorney authorises Mr. Sias to institute the suit, but only in a particular manner. The particular manner of institution of the suit is that he must join with the persons named in the power of attorney, while instituting the suit. He has not done so. The relevant provisions of the power of attorney dated May 28, 1993, have been reproduced above. Mr. Sias has to join with others. Unless the others join with him, and none of them has joined him, he does not have authority to institute the suit on behalf of the company. Mr. Garg has contended that according to the articles of association of the company, the quorum of the meeting for the board of directors is two directors, and for the meeting of the board to be held on September 15, 1993, notice whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which notice message had been duly received, and there was sufficient time to attend the meeting, had they been so inclined, and as a matter of fact, Mr. Sias did attend the meeting. The notices were received not only by Ruggieri at Milano, Italy, but also were served at the place where notices were usually served, to Mr. Shenoy. That they did not attend the meeting held on September 15, 1993, was of their own doing, and what was done at the meeting, cannot lead to a conclusion that what transpired at the meeting on September 15, 1993, should be nullified. In other words, Mr. R.K. Garg contends that the proposition laid down by Justice North in the said case, is good law, but on the facts the same does not apply to the instant case. I agree with what is stated by Mr. R.K. Garg. Mr. Garg also relied upon the observations of this court made in Abnash Kaur v. Lord Krishna Sugar Mills [1974] 44 Comp. Cas. 390 (Delhi) ; [1972] ILR 2 Delhi 413, in which it has been held that because of section 286 of the Companies Act, law does not require that there was to be an agenda for a meeting of the board of directors. Only a notice of the meeting of the board is required by section 286 of the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... open to him to contend that he is governed by section 2(24) of the Companies Act. It is rightly contended by Mr. Garg that Mr. Sias is a manager of SAE (India) Limited, having powers of attorney, the terms whereof have been approved by the Government of India, as contained in the power of attorney dated May 28, 1993, and inasmuch as the general power of attorney dated May 28, 1993, also gives power or authority to Mr. Sias only to institute a suit jointly with other persons, mentioned in clause 21 of the power of attorney, he has no authority to institute the instant suit. In this connection, Mr. Garg has referred to and relied upon Turner Morrison and Co. Ltd. v. Hungerford Investment Trust Ltd. [1972] 42 Comp. Cas. 512 ; AIR 1972 SC 1311. Mr. Garg has also relied upon and referred to Nibro Limited v. National Insurance Co. Ltd. [1991] 70 Comp. Cas. 388 (Delhi) ; AIR 1991 Delhi 25, in which Bhandare J., after reviewing cases bearing upon the subject, has come to the conclusion, a conclusion with which I am in respectful agreement, that the authority to institute a suit is distinct from signing and verification of the plaint under Order 29 of the Code of Civil Procedure, 1908. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Limited shares was unfair. According to Mr. Garg, it will be clear from a note on valuation of shares prepared by J.M. Mukhi, that the only thing which was being sought was that the valuation of the shares should be a fair valuation, and not an unfair valuation. It is also contended by Mr. Garg that with the increased shareholding of Elettrofin Societa Anonima Finanziaria, the sanctioning of the amalgamation scheme, would be a matter of formality, and a majority shareholding of 51 per cent. will be able to push the matter of amalgamation through in accordance with a time-bound programme of merger, which had been drawn up for the amalgamation of the two companies. Mr. Garg meets the contention of Mr. Sen that there was no cause for holding a meeting of the board of directors on September 15, 1993, by asserting that inasmuch as the decision had already been taken by the board of directors regarding the issue of additional shares to Elettrofin Societa Anonima Finanziaria, and amalgamation of the company with Asea Brown Bovery (India) Limited by the resolution of the board of directors, in which J.M. Mukhi and N.S. Mittal had participated, that a letter dated September 11, 1993, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company in which they are directors. It appears to me that it is fundamental to the functioning of any company that the board of directors of the company should owe allegiance only to the company in which they are the directors. It is not permissible for the board of directors to act on the dictates of any other company, even if it is a subsidiary of that other company. It also cannot be that the directors of the company give up their duty and right of independent action, to act for the well being and the interest of the company in which they are the directors, as also the interest of the entirety of shareholders of the company in which they are directors. Mr. Garg contends that there is no corporate injury to the company SAE (India) Limited, which is the basis on which the suit has been filed. The contention of Mr. Sen that there is corporate injury, is without any foundation. Mr. Garg has brought to my notice that before Mr. Sias came to India as a general manager of SAE (India) Limited, he was working as general manager of Sadelmi at Lagos in Nigeria, and Sadelmi is a company of Asea Brown Bovery, Zurich. There is very strong assertion that Mr. Sias is looking after the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y insisting upon a proper and fair and just valuation of shares of the company in which they are directors, and it is only at that proper, fair and just value that the shares of the company should be offered to the holding company, which seeks to gain majority control of the company in which there are distinct shareholders. The interest of the shareholders of any company must, at all times, be protected by the directors of the company. In the instant case, the directors of SAE (India) Limited were duty bound to protect the interest of the company, which is an independent legal entity under the Indian Companies Act, and the entity is quite distinct from Elettrofin Societa Anonima Finanziaria, which is a foreign company. It was the duty of the directors of SAE (India) Limited, to protect the interest of shareholders of the company. It was the duty of the board of directors of SAE (India) Limited that the interest of SAE (India) Limited be looked after by them by insisting upon a fair and just valuation of the shares, and the directors of the Indian company were duty bound to ensure that they did not allow the majority control take over of the Indian company by a foreign company unles ..... X X X X Extracts X X X X X X X X Extracts X X X X
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