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TMI Blog2009 (11) TMI 511X X X X Extracts X X X X X X X X Extracts X X X X ..... members of the community from Tuticorin, Sivakasi and Virudhunagar. 2. In the year 1994, seven different companies constituting a group, known as ESSAR group of companies, purchased 1,91,455 shares from about 229 individual shareholders. The shares purchased by this group worked out to about 67 per cent of the total paid-up capital of the bank. When the transferees filed applications for effecting the transfers in the register of members, the board of directors rejected them, by a resolution dated 6-2-1995. 3. Aggrieved by the resolution of the Board, the transferee-companies filed company petitions in Company Petition Nos. 7 to 13 of 1995 on the file of the Southern Region Bench of the Company Law Board. The bank also filed petitions in Company Petition Nos. 30 and 31 of 1995, under section 250 of the Companies Act, 1956, for an investigation into the ownership of the shares sought to be transferred. Another petition was filed by some of the directors in Company Petition No. 39 of 1995 under section 409 of the Act. 4. All these petitions were disposed of by the Company Law Board by various orders, the effect of which was that the refusal to effect the transfers was hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, the bank decided to seek acknowledgement from the RBI for the transfer of the balance of shares and to convene all the annual general meetings for the years 1996-97 to 2002-03. 9. However, a new problem cropped up with the board of directors suspending the chairman of the bank. On being informed of the same, the Company Law Board passed orders on 19-12-2003 reinstating the chairman and suspending all the other directors. The Company Law Board also directed that the bank would function under the supervision of a committee comprising of 2 nominees of the RBI and 2 nominees of the Central Government. The decision of the Company Law Board was to a great extent upheld by this Court in an appeal in CMA No. 3379 of 2003 [ see P. Natarajan v. Central Government [2004] 51 SCL 76 (Mad.)]. 10. Subsequently, seven annual general meetings were held en bloc on 12-3-2004 under the chairmanship of a retired Judge of this Court, Mr. Justice S. Ramalingam. The right of the power of attorney agents to appoint proxies was questioned in that meeting, but the chairman allowed the proxies. 11. Thereafter, the 82nd annual general meeting was convened to be held on 24-12-2004. After ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06 applications in OA Nos. 597 to 599 of 2006 were moved by the plaintiff in CS No. 981 of 2004 seeking interim orders of injunction. On 26-7-2006, S.R. Singaravelu, J. (as he then was), passed an order in those applications, permitting the 83rd annual general meeting to go on, in respect of agenda items 1, 2 and 6, but directing the postponement of agenda items 3 to 5, which related to election of directors. 15. In the meantime, two directors by name M.G.M. Maran and B. Ramachandra Adityan (who are defendants 20 and 19, respectively, in CS No. 481 of 2008), entered into agreements with the Sterling group. By that agreement dated 10-3-2006, these two directors were authorised to identify buyers, to whom shares could be sold in consonance with the guidelines issued by the Reserve Bank of India and other applicable laws. In accordance with the said agreement, these two directors (of whom one is the applicant herein) identified resident Indian investors, who agreed to buy small percentage of shares, aggregating to 10 per cent. They also identified 9 non-resident Indians and foreign institutional buyers, each of whom agreed to buy less than 5 per cent shares, aggregating to 23.6 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts on 4-2-2008 and attempted to get the compromise recorded. But it was opposed by the applicant herein, who was the second defendant in that suit, and, hence, the plaintiffs made an endorsement abandoning their claim as against defendants 12 to 19. Consequently, CS No. 491of 2007 was dismissed as against defendants 12 to 19 therein. 20. At this stage, taking a sudden u-turn, the board of directors of TMB passed a resolution on 17-3-2008 restricting the voting rights of the foreign investors to 10 per cent, in terms of section 12(2) of the Banking Regulation Act. The resolution was forwarded to the Reserve Bank of India on 20-3-2008. This resolution ran contrary to the earlier resolution dated 13-5-2007. 21. In the meantime, the bank took out an application in A. No. 23 of 2007 seeking suitable directions for holding the 84th annual general meeting. In that application, an order was passed by me on 27-3-2008 appointing Justice R. Balasubramanian (Retired) as the chairman for holding the 83rd, 84th and 85th annual general meetings and also extending the time for holding the meetings up to 6-6-2008. Immediately after the said order, the TMB also communicated to the foreign i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purchasers of the shares. There were also disputes with regard to the proxies. Interestingly, some of the disputes were between the shareholders and proxies and the others were between the proxies appointed by the same set of shareholders, in favour of different persons. The chairman, therefore, evolved a set of formula, with the assistance of two experts appointed by him, and submitted sealed covers containing the results of the election. 25. After the Court re-opened after summer recess on 6-6-2008, the applications in OA Nos. 534 to 536 of 2008 in CS No. 481 of 2008 were listed and the learned counsel appearing for the TMB submitted the sealed covers containing the report of the chairman of the meeting. The sealed covers were then opened by me in the open Court, in the presence of all the learned counsel, on the same day, viz., 9-6-2008. The report of the chairman contained three different sets of results that were possible of production. The projection of the results under three different possibilities were, ( i )The possible outcome if the holders of all the disputed shares or their proxies, were permitted to vote fully; ( ii )The possible outcome if the voting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat since the erstwhile Board had undergone a change in the AGM held on 5-6-2008, the managing director and the two nominee directors of the Reserve Bank of India alone should continue on the Board till the sub-application in the contempt application filed by the plaintiff in CS No. 481/2008 was disposed of. 27. As against the order passed on 23-6-2008, dismissing their injunction applications, the plaintiffs filed appeals in OSA Nos. 274 to 277 of 2008. These appeals were dismissed by the Division Bench with costs of Rs. 25,000, by an order dated 4-9-2008. The special leave petitions, arising out of the judgment of the Division Bench, were also dismissed by the Supreme Court in SLP (C) Nos. 26996-26999 of 2008 by order dated 21-11-2008. 28. As against the initiation of contempt proceedings by the plaintiffs against the managing director of the bank, two third parties, who had secured sufficient votes in the elections held on 5-6-2008 to be declared elected, filed contempt appeals. Since the very maintainability of these appeals were questioned, a Division Bench of this Court considered the issue in detail and passed an order dated 29-7-2008, holding the appeals to be maint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii )The 20th defendant and his father M.G. Muthu totalling to 13,289 shares, ( iii )One P.S. Sathyaseelan in respect of 2,386 shares, ( iv )One C.S. Rajendran in respect of 3,220 shares, and ( v )P.S. Sathyaseelan and C.S. Rajendran jointly in respect of 17,780 shares. 31.1 In other words, the applicant herein wants the declaration of the results, after excluding the votes in respect of above 1,07,581 shares. 32. The contentions of Mr. C. Harikrishnan, learned senior counsel appearing for the applicant/19th defendant, are as follows : ( a )The defendants 10 to 18, who, together purchased 70,906 shares, were found to have acted in concert and actually constituted a group . Therefore, the board of directors of the bank resolved on 26-5-2008, to keep in abeyance all the rights attached to these equity shares. The board of directors had necessary powers to pass such a resolution, in view of section 291 of the Companies Act, 1956. Though section 9 of the Companies Act confers overriding effect for the provisions of the Act, both upon the memorandum and articles of the company and upon any resolution passed and though section 87(1) of the Act confers a right to vote ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Muthu were concerned, it is the contention of the applicant that Mr. M.G. Muthu was seriously ill and was in a hospital in Singapore for three months prior to the meeting held on 5-6-2008. Mr. M.G.M. Maran was also not in the country. Therefore, the proxies allegedly executed by them in respect of their 13,289 shares ought to have been rejected. It is also the contention of the applicant that the 20th defendant had received a sum of Rs. 31 crores for the transfer of the shares in favour of the 10th defendant at a time when he was the chairman of the bank. Therefore, the votes polled by them in the election were liable to be rejected. ( c )The votes polled by P.S. Sathyaseelan and C.S. Rajendran, both on their own behalf and as proxies for others, were also liable for rejection, since they entered into a compromise with some of the transferees and attempted to withdraw the suits instituted by them in a representative capacity, in CS Nos. 491 of 2007 and 1099 of 2007. Therefore, according to the applicant, these persons had also become part of the group of transferees and, hence, their votes were also liable to be rejected. ( d )In the meeting held on 5-6-2008, the chairman ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s relating to the election of directors. The agenda relating to election of directors got postponed by virtue of the orders passed by S.R. Singaravelu, J., on 26-7-2006. Therefore, the postponed items, viz., the items relating to election of directors, was taken up in the 83rd AGM convened on 5-6-2008 under orders of this Court along with the agenda for the 84th and 85th AGMs. Article 97 of the articles of association, which is in tune with section 255 of the Companies Act, 1956, makes one-third of the directors liable for retirement by rotation. Since the 82nd, 83rd, 84th and 85th meetings related to the years 2003-04, 2004-05, 2005-06 and 2006-07, respectively, any person elected in the 83rd AGM cannot hold office beyond the 86th AGM. Since 86th AGM relates to the year 2007-08, the AGM should have been convened either before 30-9-2008 or at least before 31-12-2008 with the permission of the Registrar. A director, who is liable to retire, cannot continue in office, merely because of non-convening of the AGMs. ( b )4 directors by name R. Kannan Adityan, B. Ramachandra Adityan (applicant herein), Selva Ganesh and M.G.M. Maran, who were liable to retire by rotation in the 84th AG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 and 31 and a few others, altogether holding 32.62 per cent shares at present, had acted in concert and that, therefore, the RBI guidelines on acknowledgement of transfer/allotment of shares in private sector banks issued on 3-2-2004 had to be applied. Even while holding so, the Executive Director of RBI had indicated in paragraph-20C of his order dated 12-10-2009 that the request made to him, not to take into account the voting on 95,898 shares, in the elections held on 83rd, 84th and 85th AGMs, cannot be accepted, since the matter is sub judice before this Court. In such circumstances, the Executive Director issued a direction in paragraph 21 of his order to the Tamil Nadu Mercantile Bank to approach RBI along with full details in the format enclosed, for the acknowledgement of transfer of shares in favour of the aforesaid transferees. 37. Apart from bringing to my notice, the order passed by the Reserve Bank of India, Mr. A.L. Somayyaji, learned senior counsel for the bank, submitted the following, for my consideration : ( i )The bank is now being managed only by two nominee directors of the Reserve Bank of India and the managing director, who were authorised by this C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to some of the defendants. The learned senior counsel also questioned the locus standi of the applicant to challenge the elections held on 5-6-2008, since he was not a contestant. The applicant herein had already completed tenure of 8 years and, hence, he could not even be a contestant and, hence, he cannot challenge the election, when the contestants have not chosen to challenge the election. The learned senior counsel further submitted that the entire controversy in the suit relates only to 95,418 shares and that even if the votes in respect of these shares are totally excluded, his client gets elected. Therefore, the learned senior counsel pleaded that the results should be declared. 39. Mr. R. Murari, learned counsel appearing for the 31st defendant, took exceptions to the very maintainability of the application, on the ground that the prayer in this application travelled beyond the scope of the suit. At any rate, a harmonious construction of sections 87 and 616( b ) of the Companies Act, 1956, with section 12(2) of the Banking Regulation Act, would show that there was no bar on transfer of shares. The learned counsel also requested me to look at the metamorphosis in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated a forum for the purpose of retrieving the shares from the Essar group and scouted for probable buyers, these defendants came into contact with them and agreed to buy the shares. Though, according to the learned senior counsel, each of these defendants 11 to 14 had nothing to do with each other, they just formulated a method by which the arrangement for the purchase of shares could be gone through. This cannot be taken to amount to acting in concert . The very same applicant and the 20th defendant did not think that these defendants constituted a group, when they spotted these defendants, negotiated with them, made them agree to buy the shares and also wrote letters to RBI and went to the extent of passing Board resolutions. Therefore, the sudden volte face on the part of the applicant, according to the learned senior counsel, should not be allowed, especially in view of the fact that the applicant himself has not made any specific averment as against these defendants at any point of time. Moreover, it is the contention of the learned senior counsel that if more than two persons should be taken to be acting in concert, merely because of the number of proxies delivered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned counsel wanted the suit to be taken up for trial and all these issues decided at the time of trial in the light of the order passed by the Reserve Bank of India. It is also his contention that many of the contesting respondents had not filed written statements in the suit and, hence, they should be construed as ex parte and cannot be allowed to advance arguments in the application. 44. Mr. C. Mohan, learned counsel appearing for the Reserve Bank of India, after taking me through the contents of the written statement filed by the Reserve Bank of India and also the various guidelines issued by the RBI from time to time, in exercise of the power conferred by section 35A of the Banking Regulation Act, 1949, submitted that, by the order dated 12-10-2009, the Executive Director has directed the Tamilnad Mercantile Bank to submit proposals in the enclosed format for considering the question of grant of acknowledgement. This, according to the learned counsel, being a statutory requirement, should necessarily be complied with. Even while pointing out this stand of the RBI, the learned counsel submitted that from 9-6-2008, the Tamilnad Mercantile Bank is carrying on its activitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of two consul-tants, viz., ( i ) Deloitte Haskins and Sell, and ( ii ) Karvy Consultants Ltd. ( d )In the meeting, three things were brought to the notice of the chairman. The first was the resolution passed by the board of directors on 17-3-2008, restricting the voting rights of the transferees to 10 per cent of the total share capital. The second was the resolution of the board of directors dated 26-5-2008, by which all the rights including the voting rights of foreign investors relating to 70,906 shares were decided to be kept in abeyance. The third was the fax message sent by the Reserve Bank of India on 30-5-2008 to the effect that the Reserve Bank had earlier given its approval for the transfer of 53,611 shares, after examining the proposal from various regulatory angles, on the basis of the information furnished at that point of time and that since the issue became subjudice, the RBI was unable to comment upon the second resolution of the Board dated 26-5-2008. ( e )After the discussions, the chairman was requested by some to decide on the validity of the resolutions of the board of directors dated 17-3-2008 and 26-5-2008. However, the chairman took a decision to l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved notice on the board of directors, calling upon them to defer the elections on the ground that the conduct of elections would amount to contempt of the order dated 26-7-2006, passed in OA Nos. 597 to 599 of 2006 in CS No. 981 of 2004. However, after consulting the bank s counsel and after going through the records and orders of all the proceedings, the chairman decided to proceed with the agenda indicated in the notices of the meetings. ( i )Two representations were made to the chairman. One was by the plaintiff in CS No. 981 of 2004, to count the votes in respect of the transferred shares, viz., 95,418 shares separately and to put them in a separate cover. The other representation was by one Mr. Soundarapandian, alleging that the proxies lodged by M.G. Muthu and his son, M.G.M. Maran, were forged ones. ( j )Before the commencement of the meeting on 5-6-2008, the bank furnished the list of valid and invalid proxies, arrived at after a strict scrutiny. The list is as follows : No. of proxies No. of shares Valid proxies 11,065 2,01,468 Invalid proxies 4,389 24,717 Total 15,454 2,26, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual General Meeting Results - all votes considered Names No. of Votes Rank P. Mahindravel 1,56,978 1 B. Prabhakaran 1,56,101 2 T. Raja Kumar 1,55,880 3 Shankar Jaganathan 1,55,707 4 Thirukumar Vethanayagam 1,55,620 5 S. Ganapathy 1,55,468 6 P. Yesunathan 1,51,975 7 Results - with 10% restriction Names No. of Votes Rank P. Mahindravel 1,14,517 1 B. Prabhakaran 1,13,640 2 T. Raja Kumar 1,13,419 3 Shankar Jaganathan 1,13,246 4 Thirukumar Vethanayagam 1,13,159 5 S. Ganapathy 1,13,007 6 P. Yesunathan 1,09,514 7 Results - Ignoring 70,906 shares Names No. of Votes Rank P. Mahindravel 86,072 1 B. Prabhakaran 85,195 2 T. Raja Kumar 84,974 3 Shankar Jaganathan 84,801 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applicant, it is necessary to have a comparative study of some of the provisions of the Companies Act, 1956, and the Banking Regulation Act, 1949. 49.1 Section 9 of the Companies Act, 1956, reads as follows : "9. Act to override memorandum, articles, etc. Save as otherwise expressly provided in the Act ( a )the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its board of directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and ( b )any provision contained in the memorandum, articles, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be." 49.2 Section 87 of the Companies Act, 1956, reads as follows : "87. Voting rights. (1) Subject to the provisions of section 89 and subsection (2) of section 92 ( a )every member of a company limited by shares and holding any equity share capital therein shall have a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... various provisions of the Companies Act, 1956, both for the purpose of making them applicable in some cases and also for the purpose of excluding them in certain cases. A bird s eye view of the Banking Regulation Act would disclose that it contains a non obstante clause ( a ) with specific reference to the provisions of the Companies Act at some places, and ( b ) with general reference to any other law for the time being in force, at some other places. A summary of the provisions of the Banking Regulation Act, which contain a non obstante clause are as follows : ( i )Section 10A of the Banking Regulation Act, 1949, mandates that not less than 51 per cent of the total number of members of the board of directors of a banking company shall consist of persons having special knowledge in one or more of the matters listed in clause ( a ) of sub-section (2) of section 10A. This provision contains a non obstante clause to the effect that it will have force, notwithstanding anything to the contrary contained in any other law for the time being in force. ( ii )Similarly, section 10B contains a non obstante clause, making it necessary for a banking company to have one of its dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specifically provides that Part IIA of Banking Regulation Act, 1949, dealing with the appointment or removal of a director, chief executive officer or other officer or employee in pursuance of section 36AA or 36AB, shall have effect notwithstanding anything to the contrary contained in the Companies Act, 1956 or any other law. ( xiv )Section 38(1) empowers the High Court to order the winding up of a banking company notwithstanding anything contained in sections 391, 392, 433 and 583 of the Companies Act, 1956. ( xv )Section 39 enables the High Court to appoint the Reserve Bank of India or any other bank, as the Official Liquidator of a banking company, in the course of its winding up, notwithstanding anything contained in section 488 or 449 of the Companies Act, 1956. ( xvi )Section 39A makes all the provisions of the Companies Act, relating to a Liquidator, applicable to a Liquidator appointed under the Act, insofar as those provisions are not inconsistent with the Banking Regulation Act, 1949. ( xvii )Section 40 restricts the power of the High Court to stay the proceedings for winding up of a banking company, notwithstanding anything to the contrary contained in section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees of the banking company, notwithstanding anything to the contrary contained in the Indian Evidence Act, 1872. ( xxviii )Section 45-O(2) containing a special period of limitation for a banking company in liquidation, to recover the arrears of calls from any director, is made applicable notwithstanding anything to the contrary contained in the Limitation Act or section 543 of the Companies Act. ( xxix )Section 49 makes the exemptions available to a private company under sections 90, 165, 182, 204, 225, 293(1)( a ) and ( b ), 300, 388A and 416 of the Companies Act, inapplicable to a private banking company. ( xxx )Section 49B makes it incumbent upon the Central Government to take a no objection from the Reserve Bank, before approving the change of name of a banking company, notwithstanding anything contained in section 21 of the Companies Act. ( xxxi )Section 49C makes an application for alteration of the memorandum of a banking company, not maintainable, unless the Reserve Bank issues no objection, notwithstanding anything contained in the Companies Act, 1956. 52. Thus, it is clear that the scheme of the Banking Regulation Act, 1949, is ( i )To make it co-ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of a non obstante clause in section 12(2) of the Banking Regulation Act does not resolve our problem fully. If we look into the legislative history of these enactments it is seen that the law relating to banking companies, originally formed part of the general law applicable to companies and was actually contained in Part XA of the Indian Companies Act, 1913. It was first introduced in 1936 and it underwent two subsequent modifications, before a separate legislation was brought forth. Thus, the law relating to other companies and the law relating to banking companies, have always walked together, hand in hand and the Legislature was always conscious of both mutually complimentary as well as conflicting provisions contained in both the enactments. Therefore, the absence of a non obstante clause in section 12(2) assumes significance to a limited extent, not because of its own reach but because of something else, which we shall consider now. 56. Though one cannot fall back upon section 12(2) of the Banking Regulation Act, due to the reasons stated above to contend that it overrides the provisions of the Companies Act, 1956, one should certainly go by section 616( b ) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banks (other than nationalised and foreign banks), was the one bearing reference No. EFS. 93/C.249.70, dated 13-1-1970. The Circular directed all scheduled and non-scheduled banks to advise the regional office of the Reserve Bank of India, of all necessary particulars, whenever an application is made seeking transfer of so much of shares as would make the holding of the proposed transferee equivalent to 1 per cent and over of the total paid-up capital of the bank. The banks were also directed, by the said Circular, to file a declaration to the effect that the proposed transferee was not likely to acquire either by himself or with others in a group a controlling interest in the bank. If the bank suspected any attempt at cornering of shares with a view to acquiring a controlling interest in the bank, the same was also to be informed to the RBI. The Reserve Bank further directed all the banks by the aforesaid Circular to await an acknowledgement from RBI before effecting such transfers. This Circular of the RBI, dated 13-1-1970, was obviously in tune with two amendments made to section 12(2), by Banking Companies (Amendment) Act, 1959 and by the Banking Laws (Miscellaneous Provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociated enterprises (as defined in section 92A of the Income-tax Act). In paragraph 7, it was indicated that RBI would ensure, before taking a decision, that the shareholders meet the fitness and propriety tests, adopted internationally as a regulatory mechanism. In paragraph 9, the relevant factors for determining the fitness and propriety of a person to be a shareholder are enlisted. In paragraph 9, the additional factors that could be taken into account by the RBI, in cases where the acquisition or investment takes the shareholding of an applicant to a level of 10 per cent or more and up to 30 per cent, are indicated. In paragraph 10, the special factors to be taken into account, in cases where the acquisition or investment exceeds the level of 30 per cent, are enlisted. 60. It is interesting to note that in paragraph 13 of the annexure to the Circular dated 3-2-2004, it was made clear that the voting rights, restrictions and other related provisions of the Banking Regulation Act will continue to be applicable as appropriate . By paragraph 14, these guidelines were declared to be effective from the date of issue, viz., 3-2-2004. 61. Incidentally, it is also to be no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 3 of the Reserve Bank of India Act. Section 35A(1) of the Banking Regulation Act empowers the Reserve Bank to issue directions. As observed earlier, the Reserve Bank is constituted as a body corporate with common seal and perpetual succession under section 3(2) of the Reserve Bank of India Act, 1934. Therefore, the exercise of all powers and the performance of all acts and things that may be exercised by the Reserve Bank, stand entrusted to the central board of directors of the Reserve Bank under section 7(2). They also stand entrusted with the Governor and, in his absence, with the Deputy Governor, under section 7(3). The powers and functions about which sub-sections (2) and (3) of section 7 speak, are two fold, viz., ( i ) the general superintendence and direction of the affairs and business of the Reserve Bank, and ( ii ) all powers and all acts and things that may be exercised or done by the Reserve Bank. Therefore, the power conferred by section 35A of the Banking Regulation Act may fall under the second limb of sub-sections (2) and (3) of section 7 of the Reserve Bank of India Act, 1934. In such circumstances, I do not know how far the Circulars, dated 13-1-1970, 16-4-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ledgement before effecting transfer of shares to persons who constitute a group, show a clear trend. The trend is that if such shareholders pass the fitness and propriety tests and satisfy the factors indicated in the 2004 Circular, it is still possible for such shareholders to obtain acknowledgement from the RBI. In other words, the public policy, if any, reflected by these Circulars, is not to impose a regime of total ban on transfer of shares, but to impose a regime of restricted entry after clearance . 65. Therefore, it appears that a dichotomy is maintained between the property rights of a person in the shares that he owns and his voting rights conferred by statute. Though the right to acquire, hold and dispose of property is not a fundamental right after the 44th Amendment to the Constitution, it is nevertheless guaranteed by Article 300A. Therefore, the right can be deprived only by authority of law. Alternatively, the very document by which a property is conveyed can also impose certain restrictions. This is why the restriction on the right of the member of a private company to transfer his shares is both recognised by law as well as by the very nature of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... left the property rights untouched, but merely restricted the voting rights conferred by statute to a particular percentage. One must not lose sight of the fact that the directions issued by the Reserve Bank of India under section 35A of the Banking Regulation Act, 1949, are in the nature of subordinate legislation. What is to be done in a case where a person holds so much of shares in a public company as would confer upon him voting rights in excess of a particular percentage is covered by section 12(2) of the Act. When the Act, which is the parental legislation has gone only so far as to merely restrict the statutory rights (voting rights), it is not known whether the subordinate legislation could take it further and curtail the property rights in the shares also. 69. If the provisions of the Companies Act, the Banking Regulation Act and the Circulars, are understood in the above perspective, it would become clear that, at the most, the applicant could only seek a restriction on the total voting rights of the transferees to 10 per cent of the total paid-up capital. The applicant cannot contend that the votes of all the transferees should be rejected in entirety. 70. As a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating the intention of the shareholder to supersede the same by another proxy and, hence, the procedure adopted is faulty, and ( ii ) that unless the revocation of the earlier proxy by the execution of a later one, is notified, such revocation would be invalid. 74. In support of the above contention, Mr. C. Harikrishnan, learned senior counsel for the applicant, relied upon a decision of the Division Bench of this Court in S.RM.S.T. Narayanan Chettiar v. Kaleeswarar Mills Ltd. [1951] 21 Comp. Cas. 351 . In that case, one of the questions that arose for consideration was as to whether the chairman of the meeting was justified in rejecting the revocation of proxies. It was held by the Division Bench, on the said issue, as follows : "Until recently, both in England and in India, a member had no right to vote by proxy unless the articles provided for such a right as common law did not recognise voting by proxy. The articles, however, generally conferred such a right subject to such conditions and limitations as are prescribed thereunder. This right has now been recognised by statute both in England from 1947, now enacted as section 136 of the Act of 1948; and by section 79 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at contract of agency are governed and have to be determined by applying the law of contracts. In India such law is to be found in the Contract Act. The argument on behalf of the respondents amounts to this that all the rights and liabilities which flow from a contract by reason of the application of the general law of contracts do not attach themselves to a contract unless they are enumerated in the contract itself. In other words, if there is a contract of sale of goods unless all the rights and liabilities of the seller and buyer which are to be found in the Sale of Goods Act are specifically enumerated in the contract itself, they have no application. When once there is a contract all the legal incidents of such a contract are governed by the law of contracts whether it is in the form of a statute as in India or is ascertainable from judicial decisions as in England. It will be an intolerable state of affairs if one is obliged to embody in every contract the provisions of the Contract Act or the Sale of Goods Act, as the case may be, relevant to such a contract. When once the relationship enters the region of contract, the law of contract alone must determine its incidents. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... became a contractual right. This right was first recognised by statute, under section 79 of the Indian Companies Act, 1913, as amended in 1936. It is now recognised by section 176 of the present Act, viz., the Companies Act, 1956. ( ii )The relationship between the shareholder and his proxy is that of a principal and agent. Since the said relationship is contractual in nature, the rights and obligations that govern the relationship can be traced to the law of contracts. Consequently, ( i ) the right of revocation recognised by section 203 of the Contract Act, ( ii ) the limitations imposed under section 204 of the Contract Act, on the exercise of such a power, ( iii ) the entitlement of the agent to compensation under section 205, ( iv ) the effect of revocation under section 208 upon third parties, and ( v ) the termination of authority by the death of the principal, by virtue of section 209, are all applicable to the revocation of proxy by a shareholder. ( iii )Since the right of the shareholder to vote in person is paramount to the right of the proxy, the shareholder will still be entitled to attend and vote at the meeting, despite the presence of the proxy holder, provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... longer period than forty-eight hours before a meeting of the company, for depositing with the company or any other person any instrument appointing a proxy or any other document necessary to show the validity or otherwise relating to the appointment of a proxy in order that the appointment may be effective at such meeting, shall have effect as if a period of forty-eight hours had been specified in or required by such provision for such deposit. (4) If for the purpose of any meeting of a company, invitations to appoint as proxy a person or one of a number of persons specified in the invitations are issued at the company s expense to any member entitled to have a notice of the meeting sent to him and to vote thereat by proxy, every office of the company who knowingly issues the invitations as aforesaid or wilfully authorises or permits their issue shall be punishable with fine which may extend to one thousand rupees : Provided that an officer shall not be punishable under this sub-section by reason only of the issue to a member at his request in writing of a form of appointment naming the proxy, or of a list of persons willing to act as proxies, if the form or list is available ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he claim of both. The third option available to a returning officer, in an election to the local body or the assembly or the Parliament, viz., that of allowing the rival claimant also to cast a vote as tendered vote , is unknown to the law of contracts and consequently to the law relating to proxies under the Companies Act. 80. Under section 203 of the Contract Act, 1872, the principal is entitled to revoke the authority given to his agent at any time before the authority has been exercised, so as to bind the principal. But once the authority has been partly exercised, no revocation is permissible, by virtue of section 204, as regards the acts and obligations that arise from the acts already done in the agency. The notice contemplated under section 206, for revocation or renunciation, is obviously for the purpose of avoiding any damage resulting from such revocation or renunciation to the principal or the agent as the case may be. But section 207 makes it clear that the revocation by the principal and the renunciation by the agent may be express or implied in the conduct of the principal or agent respectively. The illustration under section 207 of the Contract Act goes as fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be necessary nor is it possible for him to conduct an enquiry to go beyond the dates indicated therein and find out which of the two forms were executed later. Similarly, if both forms carry the same date, the chairman would have no alternative except to declare both as invalid. 84. A similar view was taken by a learned Judge of the Delhi High Court Swadeshi Polytex Ltd. s case ( supra ). In the Guide to The Companies Act by A. Ramaiah, the learned author says, in his commentary under section 176 as follows : "If there are two or more proxies given by the same shareholder in respect of the same shares, the proxy bearing the latest date will supersede the earlier ones. If the proxies bear no date or bear the same date, both the proxies would be ineffective." 84.1 Even in respect of proxies signed and delivered in blank, the learned author has the following to say : "A proxy signed in blank as to the name of the appointee, or as to the date of the meeting and delivered with authority to fill up the blank, is not open to objection if, when deposited with the company, the blank has been duly filled up. It is not a deed and there is, therefore, no objection to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers of this Court and those meetings were held together on 5-6-2008 under the chairmanship of Justice R. Balasubramanian (Retired). The statutory notices for the 83rd AGM (in respect of the adjourned agenda items 3, 4 and 5 relating to election of directors), 84th AGM and 85th AGM were finalised and approved by the board of directors on 5-5-2008. On 5-5-2008, the resolution approving the statutory notices was passed by the Board comprising of Mr. G. Narayana Moorthy, Managing Director and CEO, Mr. R. Kannan Adityan (son of the applicant herein), Mr. V. Bhaskaran, Mr. P.H. Arvindh Pandian, Mr. A. Narayanan, Mr. N. Balasubramanian, Mr. A. Selvaganesh, and Mr. S. Swaminathan, (RBI nominee). 88. While approving the notice for the 85th AGM, the board of directors took note of the impending retirement by rotation of 3 directors by name, V. Baskaran, A. Narayanan and N. Balasubramanian. But the fact that, by the resolutions of the Board dated 5-5-2007, 4 persons, namely ( i ) M.G.M. Maran, ( ii ) the applicant herein (B. Ramachandra Adityan), ( iii ) the applicant s son (R. Kannan Adityan), and ( iv ) A. Selva Ganesh were co-opted only as additional directors under section 260 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sacted at the meeting, it was held therein as follows : "There is no need to specify that the business is special. There is no need to specify the exact nature of the business. It is not necessary to say I propose A or X as a director . All you have to do, to comply with the articles, is to specify the general nature of the business. I think there is in this notice a sufficient specification of the general nature of the business to bring it within the competence of the meeting to elect directors up to the number permitted by the articles." 90.1 The said decision of the Chancery Division was also upheld by the Court of Appeal. Therefore, it is clear that if there was sufficient indication in the notice, of the nature of the business to be transacted, it cannot be contended that the resolution passed was without proper notice. 91. The notices for the 83rd as well as the 85th AGM were both dated 5-5-2008. Both notices were also sent simultaneously. While the notice for the 83rd AGM indicated the retirement of three directors by rotation, the notice for the 85th AGM indicated the names of three others as retiring by rotation. Since both meetings were to be held on the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to propose such person as a candidate for that office, by serving individual notices on the members not less than seven days before the meeting : Provided that it shall not be necessary for the company to serve individual notices upon the members as aforesaid if the company advertises such candidature or intention not less than seven days before the meeting in at least two newspapers circulating in the place where the registered office of the company is located, of which one is published in the English language and the other in the regional language of that place." 93.1 But the contention on the basis of section 257(1A) cannot be entertained by me for two reasons, viz., ( i )Neither in the set of objections filed on 16-6-2008 nor in the affidavit in support of the present application A. No. 2954 of 2008 nor in the additional affidavit filed by the applicant by way of an application in A. No. 4278 of 2008, has this contention been raised. This contention is actually a mixed question fact and law, in the sense that the question whether or not a notice was actually given in terms of section 257, is a question of fact. Since it is not pleaded by the applicant, there was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicant, relied upon a decision of the Division Bench of this Court in A. Anantalakshmi Ammal v. Indian Trades Investments Ltd. [1952] 22 Comp. Cas. 324 . In that case, two issues arose before the Division Bench. One was about the validity of the co-option of a director, by the Board, of which all, but one, were deemed to have vacated the office on the last date for holding the meeting. Though ultimately the Division Bench held that even a truncated board with less than the minimum number of directors could exercise the power of co-option under article 81, the Division Bench incidentally accepted the contention that the directors who were due to retire at an annual general meeting should be held to have vacated their office on the last date on which the AGM ought to have been held. 96. However, the above decision of the Division Bench in A. Anantalakshmi Ammal s case ( supra ), was actually based upon rule 89 in Schedule-I of the Companies Act, 1948 (of England), which, in terms, corresponded to article 83 under the Indian Companies Act, 1913. Therefore, the learned Judges of the Division Bench quoted the commentary of Buckley on Companies Act to the following ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire by rotation at an annual general meeting, cannot continue in office after the last day on which the AGM should have been held as required by section 166(1). But the rationale behind this is that by omitting to summon the annual general meeting, which is one of the duties and responsibilities of the very Board itself, the Board should not get an extended tenure. It is a fundamental principle of law that no man can take advantage of his own wrong. Keeping this principle in mind, it appears that the Courts in England and India have taken the view that a director liable to retire by rotation at an annual general meeting cannot continue in office beyond the last date on which the AGM is to be held. A. Ramaiah cites several authorities for this proposition as follows : "{ See Consolidated Nickel Mines Ltd., In re [1914] 1 Ch 883; Kanssen v. Rialto [1945] 15 Comp. Cas. 23 (CA): [1944] 1 All ER 751 (CA) and Morris v. Kanssen [1946] 16 Comp. Cas. 186 (HL): [1946] 1 All ER 586 (HL). The principles laid down in these cases have been followed by the High Courts in India in the following cases : Anantalakshmi Animal v. Indian Trades Investments Ltd. [1952] 22 Comp. Cas. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors have not assumed office even for a single day on account of the litigation and where these directors were not responsible for the non-holding of the annual general meetings. The problem on hand is extra-ordinary to section 256 and, hence, the solution for the same cannot also be ordinary. Therefore, I do not accept the contention that by declaring the results of the 83rd and 85th AGMs, no purpose would be served and that those elected would have retired. 100. Thus, all the major contentions raised by the applicant are liable to be rejected. There are two more ancillary contentions raised by the applicant. They are ( i ) that the votes cast by persons claiming to be the proxies of M.G. Muthu and M.G.M. Maran should be rejected since the former was not in a position to execute proxies as he was bed ridden in a hospital at Singapore and a sum of Rs. 31 crores exchanged hands, and ( ii ) that the votes polled by C.S. Sathiyaseelan and Rajendran should also be rejected as they compromised their suits with the purchasers and thereby became part of the group . 101. The first of the above contentions cannot hold water, since M.G.M. Maran has filed a counter-affidavit denying t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , is already covered by the discussion relating to the first contention of the applicant in this application. Therefore, the same is liable to be rejected. 106. Insofar as the second and third contentions are concerned, I am of the view that even if the transferees of shares are presumed to have committed any wrong, in purchasing the shares, the issue has not attained finality. By the order dated 12-10-2009, the Reserve Bank has merely directed the Tamil Nad Mercantile Bank to file necessary forms for considering the question of acknowledgement. Therefore, neither the transferors nor the transferees nor even the bank can be said to have committed any wrong or attempted to achieve indirectly what could not be achieved directly. Hence, all the contentions of the learned counsel are rejected. 107. Coming to the contentions of Mr. V. Narayanan, learned counsel, for the first plaintiff in the present suit, out of which the present application arises, it is seen that there is no clarity on his part. At the beginning, the learned counsel took a stand that he was opposing the present application A. No. 2954 of 2008 on the ground that it does not arise out of the prayer in the suit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken a stand at the time of hearing of this application that the results should be declared and a full complement of the board of directors should take charge. This stand reflected in the notes of submissions filed by the learned counsel for the RBI, is also in tune with paragraph 20C( iii ) of the order of the Executive Director of the Reserve Bank of India, dated 12-10-2009, which reads as follows : "20C( iii ) Shri Kanagaraj s request for directing TMBL not to take into account the voting on 95,898 shares conducted in the 83rd, 84th and 85th annual general meetings held on 5-6-2008 can also not be accepted, as the matter is sub judice before the Hon ble High Court of Madras." 109.1 Therefore, there is no impediment for the declaration of the results. On the other hand, there is an imperative need to announce the results, in view of the fact that, as on today, there is no elected Board in terms of article 89, for the past more than 1 years, putting the very institution to jeopardy. 110. Once it is concluded that the results are to be declared, then the next question to be considered is as to whether all the votes of the transferees are to be rejected or whether all ..... X X X X Extracts X X X X X X X X Extracts X X X X
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