9911796707
TMI Blog1981 (11) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... rticular provision has been breached. 2. The petitioners, Mehta Teja Co. (Agencies), are a partnership firm (referred to as the firm ). Mehta Harnam Singh and his two sons were the partners. The respondent Globe Motors Limited, was a public limited company ( company ). It fell on evil days. It sustained heavy losses. It went into liquidation. The official liquidator then appeared on the scene. Though originally the petition was made against Globe, the official liquidator contested the petition after the order of winding-up was made in May, 1977. 3. Mehta Harnam Singh was one of the 18 directors of Globe. He was also a partner of the firm, M/s. Mehta Teja Singh Co. (Agencies). The company wanted to appoint a distributor for marketing the produce of Globe Steels, a division of Globe. The directors of Globe decided to appoint Mehta Teja Singh Co. (Agencies) as their distributors on certain terms and conditions which were reduced to writing. On June 1, 1967, an agreement, was made between the company and the firm This was an agreement for distribution and marketing of 1/6th of the produce of Globe Steels. The firm was to promote the sale of Globe Steels. The company was to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . These issues were framed on 14th February, 1975, when the company was still functioning. After the order of winding-up, following two additional issues were framed at the instance of the official liquidator on December 5, 1978 : 5. Whether mere failure to pay the amount claimed amounts to a dispute which would attract the provisions of the Arbitration Act ? (Onus of proof on the defendants). 6. Whether the disputes raised do not fall within the arbitration clause ? (Onus of proof on the defendants). 6. Though the issues are six, the questions for decision are only three. The first and foremost is the question of limitation which is the subject matter of issue No. 2. The second question is about the validity of the contract dated 1st June, 1967. This is the subject- matter of issues Nos. 1 and 3. The third question will be about the scope of the arbitration clause. This is the subject of issues Nos. 5 and 6. 7. Limitation : The official liquidator says that the present application is barred by limitation. He relies on art. 137 of the Limitation Act, 1963. There is no dispute that art. 137 applies to all applications under the Arbitration Act. The period of limita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in their 12th annual report dated 22nd February, 1972, reported that the company made payment of selling agency commission in Globe Steels Division and on sale of vehicles, exide batteries, etc., to various directors or their friends and relations or firms or companies in which they were interested under agreements executed by them. In the opinion of the directors, no service was rendered by such persons and appropriate steps are being taken to claim back the amounts . 10. From these proceedings it would appear that the firm's claim was repudiated for the first time on 29th April, 1971 (Ex. P-15), and this stand was reiterated in the 12th annual report dated 22nd February, 1972 ( Ex. DW 1-6). This stand was again repeated in the letter dated June 19, 1973 ( Ex. P. 19). This is the result of the entire correspondence on this subject. The right to apply , Therefore, did not accrue before 29th April, 1971. If 29th April, 1971, is taken as the starting point of limitation, then the firm is well within time, because it filed the petition on 27th November, 1973. It is true that the contract was for a period of 5 years. But as the contract was repudiated on 29th April, 1971, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he produce of Globes Steels. This appointment was approved for a period of 5 years commencing from 16th June, 1967. The firm was to get commission @ 4.8% on the sales subject to a minimum of ₹ 1,20,000 in one financial year. On these terms the governing director was authorised to execute the agreement on behalf of the company. Mehta Harnam Singh was present at this meeting but he neither took part in the discussion nor voted on this resolution. In the minutes of the meeting it is clearly recorded that Mehta Harnam Singh, director of the company, being an interested party in this contract neither took part in the discussion nor voted on the resolution. This is in accord with s. 297 of the Companies Act, 1956 (the Act). The Act requires directors of all companies, public or private, to disclose to the board of directors any interest, direct or indirect, which they might have in a contract or proposed contract with the company and that this minimum requirement cannot be abrogated by the articles. The director has to declare has to declare the nature of his interest at a meeting of the board of directors. In this case Mehta Harnam Singh had direct interest in the contract because ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no fraud in the transaction. The directors were acting bona fide. They did not contravene their fiduciary duty when they awarded contract to one of themselves because there was perfect disclosure on the part of Mehta Harnam Singh. Mehta acted in a personal capacity as partner.. He had another capacity as a director of the company. Therefore, disclosure was essential. This is why he disclosed his interest. The directors are in a fiduciary position. They must exercise their powers for the benefit of the company, as I have said. Nothing has been shown in this case to convince me that the contract made with the firm was not for the benefit of the company or was in any way prejudicial to its interest. 17. Nor am I impressed with the argument that the contract was without consideration. Consideration is stated in the contract itself. It was a service contract A contract of employment to boost sales. The firm was to push up sales of the company. There was a target point. It was ₹ 1,50,00,000. If the sales reached the target the firm was to get a fee of 4.8% of the total proceeds of the sale. Otherwise it was to get a minimum sum of ₹ 1,20,000 per year for the services re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t considers these agreements fraudulent,, collusive and void and has, Therefore, made no provision in these accounts for any liability for any commission. In November, 1973, Messrs. Mehta Teja Singh Co. (Agencies) have filed a suit in the Delhi High Court requiring the company to file the said agreement under the Arbitration Act The company is strongly resisting the suit. 20. The real question for decision is : Did the agreement dated 1st June, 1967, require the approval of the shareholder ? The agreement had the approval of the board of directors. Was it necessary for the shareholders to give their approval before the agreement could have effect ? This is the question. The answer to this question is simple. Neither the article not the provisions of the Act require the matter to be put to the shareholders for approval. The spheres of the directors and the general body of the shareholders are quite separate and distinct. In exercising their powers the directors do not act as agents for the majority or even all of the members, and so the members cannot by a resolution passed by a majority or even unanimously supersede the directors powers, or, instruct them how they shall exerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing machinery. He says : The old idea that the general meeting alone is the company's primary organ and the directors merely the company's agents or servants, at all times subservient to the general meeting, seems no longer to be the laws as it is certainly not the fact. (Gower's Principles of Modern Company Law, 4th edn., p. 152). 23. The result of the discussion appears to be that the directors have ceased to be mere agents of the company. The doctrine of sovereignty of the directors within the limits of the powers specifically reserved to them, as Prof. Pennington has phrased it, represents the modern view. Apply these principles here. Now it has not been shown that there is any article of the company which requires this contract to be approved by the shareholders at the annual general meeting. Nor is there any statutory provision requiring this to be done. So my conclusion is that the directors were given the powers to manage the affairs of the company and they were perfectly competent to make this contract with the firm as this matter was one which related to the actual management of the company and was in the allotted field of the directors. The assen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is impossible to hold that the firm was the agent or sole selling agent, as the official liquidator contends. The firm's obligation was to provide for the company the service of its selling organisation, whose duties shall be promote in every reasonable manner to the satisfaction of the company the sale of the products of Globe Steels . The contract provides that in consideration of the services the company was to pay to the firm a fee at the rate of 4.8% or a minimum fee of ₹ 1, 200,000 if the target of sales is not achieved. This is the purport of the contract. I cannot see how it can be said to be a sole selling agency. More so in view of the fact that only 1/6th of the products of Globe Steels was given to the firm. The remaining 1/6th was given to another person, namely, Urvinder Singh Kohli, as is recited in the agreement itself. For a sole selling agent it is necessary to define the area of the agency. No such area has been defined in this agreement. I cannot, Therefore, hold that the contract in question was a contract of sole selling agency as has been contended by the official liquidator. 27. The official liquidator then referred me to s. 314 of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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