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TMI Blog2015 (5) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs of members, to receive dividends which have been duly declared, to exercise pre-emption rights conferred by the articles, and to have his capital returned in proper order of priority on a winding up or on a properly authorized reduction of capital. Under the general law he is entitled to restrain the company from doing acts which are ultra vires, to have a reasonable opportunity to speak at meetings of members and to move amendments to resolutions proposed at such meetings to transfer his shares; not to have his financial obligations to the company increased without his consent; and to exercise the many rights conferred on him by the Companies Act, such as his right to inspect various documents and registers kept by the Company. The dividing line between personal and corporate rights is not always very easy to draw. The Courts, however, incline to treat a provision in the memorandum or articles as conferring a personal right on a member, if he has a special interest in its observance distinct from the general interest which every member has in the company adhering to the terms of its constitution. In an action for violation of personal rights a single shareholder suing alone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al purpose. As a juristic legal person, a company can sue in its name and be sued by others. The pleadings in the suit if taken, as a whole, would clearly indicate that the plaintiffs are seeking to enforce their personal cause of action as opposed to derivative action. The same would be further clear from Paragraph 41 of the Plaint where the plaintiffs have specifically stated that the defendants in collusion and conspiracy with each other have perpetrated fraud on the plaintiffs through the proforma defendant. This sentence clearly indicates that it is a wrong done to the plaintiffs. It makes it very clear that the plaintiffs are espousing their personal cause of action. A party to a contract with the company is no way concerned with the inter se disputes between the directors. In case of a dispute with regard to the internal management of the Company and as to who would represent the company and/or authorize to represent the company, the proper course is to file a suit for declaration and injunction and to seek appropriate remedy against the miscreant directors and for persons asserting their right as directors. In the instant case, it appears that there are disputes with reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication is allowed in part. - GA No.2437 of 2014, CS No.284 of 2014 - - - Dated:- 14-5-2015 - Soumen Sen, J. For the Appellant : Mr. Surajit Nath Mitra, Sr. Adv., Mr. Deepak Jain, Adv. Mr. Suman Dutt Adv. For the Respondent: Mr. Pratap Chatterjee, Sr. Adv., Mr. Ranjan Bachawat, Sr. Adv., Mr. Sanjay Ginodia, Adv., Mr. Manoj Kr. Tiwari, Adv. Mr.Ravi Kapur, Adv., Mr. Sarosij Dasgupta,Adv., Ms. Pubali Sinha Chowdhury, Adv., Mr. Jishu Saha, Sr. Adv., Mr. Amitesh Banerjee, Adv., Mr. Adtiya Garodia, Adv., Mr. Amitesh Roy, Adv. JUDGEMENT Soumen Sen, J.:- This application has been filed by the defendant no.1, praying inter alia, for rejection of the plaint. The applicant is an award-holder. The question which arises in this application for determination is, if a share-holder of a company can maintain an action by a way of a suit to challenge an award on behalf of the company. A brief summary of facts as appear from the pleadings are narrated hereinafter. The plaintiffs are incorporated in Mauritius and jointly hold the entire issued paid up and subscribed capital of the proforma defendant. The defendant no.1 is a company owned by Sarda group. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid illegal and unauthorized board meetings appointed defendant nos.4 and 5 as additional directors in the board of directors of the proforma defendant. The defendant no.3, as sole director of the proforma defendant was incapable of holding any valid board meeting or could appoint defendant nos.4 and 5 as additional directors of the proforma defendant. The said appointments are illegal, invalid and not binding on the proforma defendant or on the plaintiffs. The plaintiffs recorded its objection to such appointments in an electronic mail, dated 1st October, 2009, sent to the defendant no.3. The defendant no.3, however in disregard to such objection, continued to act as director of the proforma defendant and sanctioned unsecured loan to the alleged three directors amounting to ₹ 1 crore, each. By reason of such illegal activities, the plaintiffs, held a meeting on 15th December, 2009 and revoked the authority of defendant nos.3 and 4, and appointed two new secretaries for operation of the bank account of the proforma defendant. Thereafter, on 22nd December, 2009, in an Extra Ordinary General Meeting, the defendant nos.3 to 5 were removed from the board of the proforma def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have mandate to operate the bank account whereas the plaintiffs contended that on resolution passed at the Extra Ordinary General Meeting of the proforma defendant held on December 22, 2009, the said mandate was revoked. Whether the defendant nos. 3 and 4 have a mandate which is valid and operative in law is itself a matter of serious dispute, since the bank was informed of a resolution on the basis of which the mandate was terminated. The Hon ble Division Bench, by a judgment and order dated 4th January, 2012, dismissed the Writ Petition on the ground that jurisdiction under Article 226 of the Constitution of India could not be exercised in deciding disputes about internal management upon which the ultimate authority to operate the bank account must rest. However, it was mentioned in the said judgement that it would be open to the proforma defendant and defendant No. 2 and for that matter the plaintiffs herein to move the appropriate forum for appropriate orders. The Review Petition filed by the Writ Petitioners was dismissed. A Special Leave Petition was also dismissed by recording that the Division Bench of the High Court has already granted liberty to the writ petitioners to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t dated 12th July, 2007 by investing a minimum of 5 million dollars in terms of Press Note 2 of 2005. On 9th October, 2010, the proforma defendant in compliance of their obligation under the Press Note-2 of 2005 issued two several cheques both dated 9th October, 2010, drawn on the HSBC for a sum of ₹ 5 crore and ₹ 15 crore, respectively in favour of the joint-venture company. On 13th October, 2010, upon presentation of those cheques, the same were returned by the banker with the remark refer to drawer . On 4th March, 2011, the banker of the proforma defendant furnished documents to the said joint-venture company relating to freezing of the account of the proforma defendant. The proforma defendant had an obligation under the Joint-venture Agreement dated 12th July, 2007 to invest in the defendant no. 2 in terms of Press Note- 2 of 2005, issued by the Govt. of India, on which it had failed to do. On the basis of the aforesaid allegations, arbitration proceeding was initiated and an award was passed on 7th October, 2012, which, however, was subsequently corrected on 16th May, 2013. The defendant no.1 has put that award into execution. It is alleged that the defendant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of alleged wrongs done to the proforma defendant company. It is well-settled that if a wrong is done to a company, then it is the company alone, who is the proper plaintiff for initiating a suit for wrongs done against it. In the instant suit, the company, namely the proforma defendant, has not been made a plaintiff. A derivative action will not lie. Even on the assumption that the allegations in the plaint are taken to be true and correct that the plaintiffs are 100% shareholders and are in control, they are not entitled in law to maintain the instant suit without making the company, that is, the proforma defendant, a plaintiff. Accordingly, in its present form, the suit as framed is a creature unknown to law without a head, body or tail. Mr. Chatterjee has relied upon the following decisions in support of the aforesaid submission: 1) Satya Charan Law vs- Rameshwar Prosad Bajoria reported at AIR 1950 FC 133 @ para 17 2) Narendra K. Berlia vs- Om Prakash Berlia reported at 2011(3) CHN (Cal) 147 @ para 3, 5 and 11 3) Jhajharia Bros. vs- Sholapur S. W. Co. reported at AIR 1941 Cal 174 @ pages 177-179 4) Western Coalfields Limited vs- Special Area Development Autho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion proceedings and for challenge to an Award may, if at all, be maintainable only in cases where there is a doubt as to the execution and existence of the arbitration agreed. In the instant case, the existence and validity of the arbitration agreement is an admitted fact and is not under challenge. The defendant No.1 has relied upon Jamuna Transport Corporation Limited Ors. vs- Ghanshyamdas Baheti Ors. reported at 2010(4) CHN (cal) 488 @ para 54. It is argued that reliefs in relation to the control and management of the company, that is, the proforma defendant cannot be granted by impleading it as a proforma defendant. The plaintiffs are not entitled to seek adjudication of the rights of the defendant nos. 3 to 5 to act as Directors of the proforma defendant in this suit and the suit as framed is not maintainable. According to the plaintiffs, even though the defendant nos. 3 to 5 were removed as Directors of the proforma defendant in December, 2009, they continued to act as Directors. It is the admitted case of the plaintiffs that they knew of the continuance of the defendant nos. 3 to 5 as Directors of the proforma defendant since 22nd December, 2009 and have intentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e plaintiffs and is the subject matter of challenge in the above suit. Such acts of fraud affect the plaintiffs. The plaintiffs have a right to file the above suit for redressal of such acts of fraud. The reliefs claimed in the plaint and the pleadings in support thereof read as a whole would show that neither the suit is a challenge to the award dated 16th May, 2013 simplicitor nor is it a derivative action of the minority shareholders alleging fraud on minority. The award dated 16th May, 2013 is a product of such fraud. The primary wrong is the wrong done to the proforma defendant and through it to its shareholders being the plaintiffs. It is well-settled that an aggrieved person cannot be remediless. The learned Senior Counsel has referred to a decision of the Hon ble Supreme Court in Ashish Ranjan Vs. Anupma Tandon Anr. reported at (2010)14 SCC 274 para 11. The plaintiffs say that they are aggrieved by a purported award dated 16th May, 2013. It has to be deemed that such statement of the plaintiffs is correct. Since the plaintiffs were not parties to the arbitration agreement on the basis whereof such award was obtained, the plaintiffs though aggrieved by such award could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t suit. There is no bar in the majority shareholders of a company filing a suit to protect the interest of the company by joining the company as a proforma defendant, particularly when the directors on record of the company are the persons who are acting contrary to the interest of the company. None of the decisions relied on behalf of the defendant no.1 says that a suit like the instant suit is barred by law. Such decisions at best say that ordinarily when such a suit is filed, it can be filed with the company as one of the plaintiffs. Such decisions say that the suit has to be for the benefit of the company and not against the company. In dealing with the submission that the claims against the defendant nos. 3, 4 and 5 are barred by the laws of limitation it is submitted that from the plaint it would appear that the defendant nos. 3 to 5 started acting contrary to the interest of the proforma defendant in December 2009. In doing so, the defendant nos. 3 to 5 filed a Writ Petition in the Bombay High Court being W.P. No. 1971 of 2011, impleading the proforma defendant as one of the petitioners. In the said writ petition, the right of the defendant nos. 3 to 5 to represent the profo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Modern Set-Up by S. C. Sen, First Edition, The New Frontiers of Company Law by S. C. Sen, 1971 Edition and Guide To Companies Act , by A. Ramaiya, 17th Edition, are summarized, hereinafter. In company jurisprudence, company actions are divided into different groups:- (a) Actions by the Company for enforcement of Company s rights. (b) Derivate actions i.e., actions by shareholders for enforcement of the Company s rights (as distinguished from class rights of shareholders). (c) Representative actions i.e., actions by shareholders for enforcement of their class or corporate rights. (d) Personal actions by shareholders for enforcement of their personal rights. There is a clear distinction between individual and corporate membership rights of shareholders. A member can always sue for wrongs done to himself in his capacity as a member. The individual rights of a member arise in part from the general law. Under the contract emanating from his memberships, he is entitled to have his name entered and kept on the register of members, to vote at meetings of members, to receive dividends which have been duly declared, to exercise pre-emption rights conferred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was basically borrowed from the United States, but has in recent years also been in use in the United Kingdom. In a derivative action, the company would be the only party entitled to sue for redressal of any wrong done to it. However, since a company is an artificial person, it must act through its directors. Where the wrong is being done to the company by the directors in control, the company obviously cannot take action on its own behalf. It is in these circumstances that the derivative action by some shareholders (even if they are in a minority) becomes necessary to protect the interest of the company. The minority shareholders sue on behalf of themselves and all other shareholders except those who are defendants, and may join the company as a defendant. The directors are usually defendants. This action is brought instead of an action in the name of the company. The form of the action is always: A.B. (a minority shareholder) on behalf of himself and all other shareholders of the company against the wrongdoing directors and the company: (per Lord Denning M.R. in Wallersteiner v. Moir (No.2), (1975) QB 373 at 390 (CA). It is a procedural device for enabling the Court to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ders must in such a case be entitled to take steps to redress the wrong. There is no provision in the articles of association to meet the contingency, and therefore the rule which has been laid down in a long line of cases that in such circumstances the majority of the share-holders can sue in the name of the company must apply. In MacDougall v. Gardiner, (1875) 1 Ch. D. 13: (45 L. J. Ch. 27) and Pender v. Lushington, (1877) 6 Ch. D. 70: (46 L. J. Ch. 317), specific reference was made to the fact that the directors, being the custodians of the seal of the company, were the persons who should normally sue in the name of the company, but nevertheless it was held that the majority of the share-holders were entitled to sue in the name of the company when relief was sought against the directors themselves. Even in Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cunninghame, (1906) 2 Ch. 34: (75 L. J. Ch. 437), it was recognised that misconduct on the part of the director provided an exception to the rule laid down in that case. In Jhajharia Bros. (supra) the form of a derivative actions was discussed and it was held that if a wrong is done to the company a special form of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atural right to sue a majority which is oppressing it, if it is suggested that there is any such thing legally as a wrong done by a bigger group to a smaller group within the company and, therefore, there is a class of action by a minority qua minority against a majority qua majority, I disagree. There can be no such thing as a legal war of parties. Brown v. British Abrasive Wheel Co. is in my opinion not an authority for such a theory nor did Mr. Sanyal cite it as such. In that case, if I remember rightly, the Court would not allow an alteration of articles so that the majority could appropriate a small minority. It was not allowed as being contrary to justice. The real significance of it, in my opinion, is that it was a violation of the constitution, so to speak, the rights in other words of all shareholders who are all citizens. Although this is a matter of theory its results on matters of practice are unusually important. The primary wrong is the wrong done to the company; in other words all the shareholders. There is, it is true, a secondary wrong in the suppression of the opposition of the minority, the overwhelming of the minority. In the normal case the distinction is purel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 in the arbitration proceeding knew that the defendant nos. 3, 4 and 5 had no authority to represent the proforma defendant in the said arbitration proceeding. The plaintiffs have referred to various orders passed by the Bombay High Court to show that the defendant No.1 was aware of the disputes existing between the plaintiffs and the defendant nos. 2, 3, 4 and 5 and it is contended that the defendants in collusion and conspiracy with each other have perpetrated fraud on the plaintiffs through the proforma defendant as enumerated in paragraph 41 of the plaint and in view thereof the award obtained in the said arbitration proceeding is not enforceable. The plaintiffs alleged that the said defendant nos. 3, 4 and 5 are the miscreants and they have fraudulently represented themselves as directors of the proforma defendant and in collusion and conspiracy with the defendant No.1 enabled the defendant No.1 to obtain the award. The award sought to be enforced is against the proforma defendant. It appears from the reading of the Plaint that it is essentially a personal cause of action against the Defendant nos. 3, 4 and 5. The plaintiffs are the majority shareholders. There is a dispute w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany is no way concerned with the inter se disputes between the directors. In case of a dispute with regard to the internal management of the Company and as to who would represent the company and/or authorize to represent the company, the proper course is to file a suit for declaration and injunction and to seek appropriate remedy against the miscreant directors and for persons asserting their right as directors. In the instant case, it appears that there are disputes with regard to the internal management of the proforma defendant company. The orders disclosed in this proceeding would not show that the defendant Nos.3 to 5 were not authorized to represent the said company in the arbitration proceeding. This observation, however, is not an expression of opinion with regard to the claim of the plaintiffs against the said defendant Nos.3 to 5, that the said defendants have ceased to become directors. The said defendant No.1 is no way concerned with the inter se disputes between the plaintiffs and the defendant Nos.3 to 5. Although, the plaintiffs have asserted that the said defendants for long years have ceased to become directors and since 2009 the said defendants were not entitled ..... X X X X Extracts X X X X X X X X Extracts X X X X
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