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TMI Blog2015 (6) TMI 771X X X X Extracts X X X X X X X X Extracts X X X X ..... there is, therefore, no question of claiming any protection of sub-section (6), I have not considered the question whether these appointments were or were not "duly made". That question would have a bearing on the maintainability of the suit only in the alternative, if the appointments of defendants Nos. 7 to 12 were held to have been made under sub-section (3) or (4). So also, the other questions, namely, whether the circulars of the Reserve Bank issued under section 35A of the Banking Act override the articles of defendant No. 6 and whether article 110 has any purpose or operation after the exit of Rabobank and what is the correct interpretation of the articles providing for the rights of Indian Partners, need not detain us at this stage. All these questions may be relevant from the point of view of interim reliefs claimed under the notice of motion, but are not necessary to be decided under the preliminary issues framed by this court. Civil suit challenging the appointment of directors - Under section 9 of the Code of Civil Procedure, civil courts have jurisdiction to try all suits of a civil nature unless barred under a statute either expressly or by necessary implication. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to appointment of directors as well as claiming declarations concerning the rights of the plaintiff shareholders under the articles of association of the company and injunctive reliefs against other shareholders based on these rights. On the application of the plaintiffs for interlocutory reliefs, objections to the jurisdiction of the court were raised by the defendants. Preliminary issues concerning jurisdiction were accordingly framed by this court under section 9A of the Code of Civil Procedure, 1908. Evidence was led on these issues. The issues are being decided by this order. 2. The preliminary issues framed by this court are as follows : (i) Whether the suit, as filed, is maintainable in law ? (ii) Whether this court has jurisdiction to entertain and try the suit ? 3. A brief overview of the pleadings of the parties and their evidence is as follows : Plaintiffs Nos. 1 to 3 are widow, daughter and son, respectively, of one Ashok Kapur who was a co-founder of defendant No. 6 a banking company with his brother in law, defendant No. 1. Both Ashok Kapur and defendant No. 1 were described as Indian Partners in the articles of association of defendant No. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day. 7. Even after his death, Ashok Kapur group continued to be a major shareholder in defendant No. 6. Plaintiffs Nos. 1 to 3 continued to represent the late Ashok Kapur as his successors and legal representatives. The group presently holds about 12 per cent. of the issued, subscribed and paid-up capital of defendant No. 6 and together with defendant No. 1 group of shareholders constitutes the Indian Partner of defendant No. 6 holding equity capital of 25 per cent. between the two groups. 8. Since about 2011, there were bickerings between Ashok Kapur group represented by the plaintiffs and defendant No. 1 group concerning the exercise of the rights of Indian partners jointly under the articles. There were meetings and discussions between the two groups. In May 2013, the plaintiffs received a notice of the 9th annual general meeting of defendant No. 6 to be held on June 8, 2013. The notice, inter alia, concerned passing of resolutions for appointments of defendants Nos. 7 to 9 on the board of directors of defendant No. 6 under items designated as Special Business . Defendant No. 7 was proposed to be appointed as independent director, whilst defendants Nos. 8 and 9 were pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntments of directors, which have been challenged in the present suit, have all been duly made. Learned counsel relies upon the provisions of sections 193 and 194 of the Companies Act, the articles of association of defendant No. 6 and the documents such as notices of appointment, notice of 9th annual general meeting of defendant No. 6, minutes of the annual general meeting, etc. (in the case of appointments of defendants Nos. 7 to 9) and recommendations of the HR Committee, minutes of the Nomination and Governance Committee, minutes of the board meeting, etc. (in the case of appointments of defendants Nos. 10 to 12). Secondly, learned counsel submits that a civil suit challenging appointment of a director is impliedly barred under the provisions of the Companies Act. He submits that such appointment is governed by principles of corporate democracy. Learned counsel also submits that the remedies under the Companies Act are a complete code for the matters provided therein. He relies on the judgments of the Supreme Court and several High Courts including our court in support of his contentions. Learned counsel also relies upon several circulars of the Reserve Bank of India issued unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 7 to 9) and by its board (in case of defendants Nos. 10 to 12) by duly following the procedure under the Companies Act consistently with the provisions of the Banking Act and the Reserve Bank circulars. These appointments, according to learned counsel, were not in pursuance of any nomination by defendant No. 1 and even if they were, the appointments were not contingent upon any valid nomination and having been lawfully made under the Companies Act, were not open to challenge. Learned counsel reiterates the submissions of Mr. Kadam on the implied bar under the Companies Act and submits that the word jurisdiction under section 9A of the Code of Civil Procedure is used in a wider sense and covers every aspect of maintainability of a suit. 13. The learned advocate general, appearing for the plaintiffs, counters these submissions by contending that the provisions of the Banking Act are in addition to and not in derogation of the Companies Act. He submits that the exclusion of jurisdiction under section 10A (6) has to be strictly construed having regard to the object of section 10A. He submits that only reconstitutions made under the provisions of sub-sections (3), (4) or (5) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rience in, which would in the opinion of the Reserve Bank, be useful to the banking company : Provided that out of the aforesaid number of directors, not less than two shall be persons having special knowledge or practical experience in respect of agricultural and rural economy, co-operation or small-scale industry ; and (b) shall not- (1) have substantial interest in, or be connected with, whether as employee, manager or managing agent,- (i) any company, not being a company registered under section 25 of the Companies Act, 1956 (1 of 1956), or (ii) any firm, which carries on any trade, commerce or industry and which, in either case, is not a small-scale industrial concern, or (2) be proprietors of any trading, commercial or industrial concern, not being a small-scale industrial concern. (2A) Notwithstanding anything to the contrary contained in the Companies Act, 1956 (1 of 1956), or in any other law for the time being in force,- (i) no director of a banking company, other than its chairman or whole-time director, by whatever name called, shall hold office continuously for a period exceeding eight years ; (ii) a chairman or other whole-time director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold office until the date up to which his predecessor would have held office, if the election had not been held, or, as the case may be, the appointment had not been made. (8) No act or proceeding of the board of directors of a banking company shall be invalid by a reason only of any defect in the composition thereof or on the ground that it is subsequently discovered that any of its members did not fulfil the requirements of this section. 15. Section 10A of the Banking Act prescribes certain requirements for the board of directors of a banking company. It is a non obstante clause and provides that every banking company shall comply with the requirements of the section. Sub-section (2) requires that not less than fifty one per cent. of the total number of members of the board of a banking company shall consist of persons who have special knowledge or practical experience in respect of one or more of the subjects provided therein and at the same time have no substantial interest or connection with a company or a firm or a proprietorship carrying on trade, commerce or industry, which is not a small scale industrial concern. The other requirements, which are stipulated by s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectors as a whole. The appointment or removal of a director of a banking company, as much as any other company, is governed by the Companies Act, which is a self-contained code. The constitution of the board of directors of a banking company is very much governed by sections 252 to 266 of the Companies Act. The appointment of directors and proportion of those who are to retire by rotation and filling up of their vacancies, are matters governed by sections 255 and 256 of that Act. Removal of directors of a banking company is under section 284 of the Companies Act. Section 10A of the Banking Act makes provisions requiring the board of directors of a banking company to fulfil certain criteria. These provisions do not supplant or substitute the provisions of the Companies Act, but override them. What this means is that the appointments of directors, though made under the Companies Act, must be consistent with the provisions of section 10A of the Banking Act, particularly sub-section (2) thereof. If and to the extent they are not so consistent, the provisions of section 10A will have an overriding effect and will have to be followed. Not less than 51 per cent of the board members must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sub-section (2) of section 10A. To the extent of inconsistency sub-section (2) will prevail, in which case consequences of sub-sections (3), (4) and (5) will follow. Thus whilst retiring two-thirds or all of directors and appointing directors in their place, if the overall composition of the Board conforms with the requirements of sub-section (2), nothing needs to be done under section 10A. The removals and appointments are all under the Companies Act read with the articles. But if the overall constitution does not conform with the requirements of sub-section (2), steps will have to be taken under sub-sections (3), (4) or (5), as the case may be. Whilst taking those steps, only those provisions of the Companies Act and articles need to be followed which are consistent with section 10A. As long as that is done, the reconstitution of the board and every appointment, removal made or election held therefor, is final and cannot be called into question in any court of law. 19. I am fortified in this view by a judgment of the Madras High Court in the case of T. S. Arumugham v. Lakshmi Vilas Bank Ltd. [1994] 80 Comp Cas 814. In that case, the petitioner, an employee of a scheduled ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , be useful to the banking company. From and out of the persons appointed as directors of the bank, not less than two shall be persons having special knowledge of practical experience in respect of agriculture and rural economy, co-operation or small-scale industry. Section 10A of the Act further provides that where the Reserve Bank of India is of opinion that the composition of the board of directors of a banking company is such that it does not fulfil the requirements of sub-section (2) it may, after giving to such banking company a reasonable opportunity of being heard, by an order in writing direct the banking company to so reconstitute the board of directors as to ensure that the said requirements are fulfilled and if the banking company does not comply with the directions made by the Reserve Bank, the Reserve Bank may remove such person from the office of director and with a view to complying with the provisions of sub-section (3) appoint a suitable person as a member of the board of directors, in the place of the person so removed whereupon the person so appointed shall be deemed to have been duly elected by the banking company as its director. From the above, it is manifest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent.) and which get the protection from challenge. A further complication may arise if any vacancy in them is created before the expiry of the term and filled up. Would the person in the place of the protected director get the protection or would the seventh director move one place up to become protected ? On the other hand, in a situation where a banking company having regard to the mandate of sub-section (2) elects ten directors, six of whom meet the special qualifications, if one of the six resigns, a vacancy would have to be filled up under sub-section (3). If the protection of sub-section (6) is available only to an appointee who comes in under sub-section (3), a peculiar situation may result-only the additional director appointed in the place of the sixth director would be protected and not the other five. 21. A closer look at these so-called anomalous situations, in the light of the law discussed above, shows that there is nothing strange or anomalous about them. In the first place, when a banking company elects its board as a whole in compliance with section 10A(2), the appointments are not under section 10A and there is no question of any of the directors having a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of defendant No. 6 does not make any reference to section 10A or compliance with requirements thereof. There was a poll conducted in the annual general meeting and its result and the respective resolutions declared as passed are reflected in the minutes of meeting of the annual general meeting. These minutes are silent on the appointments being under sub-section (3) or (4) or for compliance with the mandate of sub-section (2). This applies equally to the appointments of defendants Nos. 10 to 12, who were recommended by defendant No. 1 and appointed by the board of directors purportedly in pursuance of article 127A of defendant No. 6. The recommendations of the HR Committee, the minutes of the Nominations and Governance Committee and the minutes of the board of directors of defendant No. 6, in respect of their appointments, which are placed on record, do not indicate that these appointments were under sub-section (3) or (4) of section 10A. There is, thus, no case of appointment of any of defendants Nos. 7 to 12 being under sub-section (3) or (4) or having any protection of sub-section (6). 23. Since I have come to the conclusion that these appointments were not made under sub-sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Apparels Exports Promotion Council [1986] 60 Comp Cas 353 (Delhi), Berar Trading Co. Ltd. v. Gajanan Gopalrao Dixit [1972] 42 Comp Cas 48 (Bom) and Sarat Chandra Chakravarti Atul Chandra Moitra v. Tarak Chandra Chatterjee, AIR 1924 Cal 982 in support of his contention. 25. Under section 9 of the Code of Civil Procedure, civil courts have jurisdiction to try all suits of a civil nature unless barred under a statute either expressly or by necessary implication. A few basic principles, whenever a court is called upon to decide whether the jurisdiction is so barred, have long since been established by authority. Firstly, bar of jurisdiction of a civil court is not to be readily inferred. A provision seeking to bar jurisdiction of civil court requires strict interpretation. Secondly, the court would normally lean in favour of a construction, which would uphold the retention of jurisdiction of the civil court. Thirdly, the burden of proof in this behalf shall be on the party who asserts that the civil court's jurisdiction is ousted (see Dwarka Prasad Agarwal's case (supra). Where a statute does not expressly bar jurisdiction of a civil court, it is necessary to examine the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depends, as already noticed, on the language of the particular provisions (like sections 107, 155, 397 and others) and not on sections 2(11) and 10. 27. The Supreme Court also noted in Dwarka Prasad Agarwal's case (supra), the Delhi High Court decision in Maharaja Exports case (supra) holding as follows (page 214 of 117 Comp Cas) : Unlike some statutes, the Companies Act does not contain any express provision barring the jurisdiction of the ordinary civil courts in matters covered by the provisions of the Act. In certain cases like winding up of companies, the jurisdiction of civil courts is impliedly barred. Where a person objects to the election of directors and claims a decree for a declaration that he was one of the directors, there is no provision which bars the civil court either expressly or by implication from trying such a suit. 28. A Division Bench of our court in the case of Santosh Poddar (supra) laid down a similar proposition of law. In Santosh Poddar's case (supra), the plaintiffs had claimed a declaration that the first defendant had ceased to be a director and the plaintiffs continued to be directors of the third defendant company. Construin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n there is no express provision excluding jurisdiction of the civil courts, such exclusion can be implied only in cases where a right itself is created and the machinery for enforcement of such right is also provided by the statute. If the right is traceable to general law of contract or it is a common law right, it can be enforced through civil court, even though the forum under the statute also will have jurisdiction to enforce that right. There is a plethora of decisions of the various High Courts including the decisions of the High Courts of Kerala, Andhra Pradesh, Madras, Punjab and Haryana, and Calcutta in favour of the view that these sections 397, 398 and 408 do not confer exclusive jurisdiction on the company court to grant reliefs against oppression and mismanagement. The scope of these sections is to provide a convenient remedy for minority shareholders under certain conditions and the provisions therein are not intended to exclude all other remedies. The suits by minority shareholders against oppression and mismanagement, have been time-honoured exception to the rule in Foss v. Harbottle [1843] 2 Hare 461 and in the absence of word expressly or impliedly barring them it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting by appointing a chairman or otherwise. The court held that whilst rule 9 of the Companies (Court) Rules, 1959, can be invoked by the company court only under one or the other substantive provision of the Companies Act, the civil court cannot intervene to conduct a company meeting not in the manner prescribed by the Act or by the articles of association or override the same in exercise of its inherent powers. That case has no application to the facts of our case. The judgment of the Rajasthan High Court in the case of Dr. G. S. Bali (supra), where the court refused to interfere with a decision of the trial court refusing to grant injunction to a director of the company who had grievances against other directors, was delivered on an interlocutory application and on a prima facie view of the law and facts of that case. The judgment does not contain any precedent for this court to follow. 33. In the result, the jurisdiction of this court to entertain a challenge to the appointment of defendants Nos. 7 to 12 as directors is not impliedly barred under the Companies Act. 34. Both the preliminary issues are, accordingly, answered in favour of the plaintiffs. The suit, as filed, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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