Case: Dr. Satya Churn Law and Others Vs. Rameshwar Prosad Bajoria and Others

FAZAL ALI, J. 1. This is an appeal from a decision of a Division Bench of the High Court of Judicature at Fort William in Bengal, reversing the judgment of a single Judge of the said High Court. The facts of the case, in so far as they bear on the point to be decided in the appeal, are briefly these. 2. The Lothian Jute Mills Co., Ltd. (which will hereinafter be referred to as the company) is a joint stock company of which Messrs. Andrew Yule & Co. are the managing agents. In October, 1944, the directors of the company were Mr. Cumberbatch, Sir David Ezra, Dr. Satya Charan Law and Mr. Champalal Jatia. At a general meeting of the company held on the 9th March, 1945, Mr. Rameshwar Prosad Bajoria, the 1st Plaintiff, was elected a director of the company, and Sir David Ezra, who had retired by rotation and offered himself for re-election, was not elected. On the 28th December, 1945, Dr. Satya Charan law, Mr. Cumberbatch and Mr. Champalal Jatia requested Mr. Bajoria in writing, in terms of Art. 116 (k) of the Articles of Association of the company, to resign his directorship of the company and appointed Sir David Ezra in his place. Art. 116 (k) runs thus :- The office of a director shall ipso facto be vacated if - * * * * * * * (k) (not being an ex officio Director) he be requested in writing by all his co-Directors to resign or if he be removed from office by an Extraordinary Resolution of the Company. 3. The suit, which has given rise to this appeal, was instituted on the 14th January, 1946, by Mr. Bajoria and three others, against the four directors of the company, including Sir David Ezra (who has since died), and, in this suit, the company was also made a co-Plaintiff. The substance of the allegations made in the plaint was that the three directors, Dr. Satya Charan law, Mr. Cumberbatch and Mr. Jathia, has acted wrongfully, illegally and mala fide, in asking Plaintiff No. 1, Mr. Bajoria, to resign, that they had exercised their power under Art. 116 (k) of the Articles of Association not in the interest of or for the benefit of the company and its share-holders but for their own ends, that their act was a mere contrivance for excluding the majority of the share-holders from having an effective control or voice in the management of the company, that Sir David Ezra, who was appointed in place of Plaintiff No. 1, did not enjoy the confidence of the majority of the share-holders and his appointment was made with the object or representative of one group of share-holders who were acting in the interests of the managing agents whose aim was to perpetuate their control of the affairs of the company to the detriment of the company and its share-holders, and the exclusion or removal of Plaintiff No. 1 from his office as a director was a wrong done to him and also to the company. On the basis of these allegations, the Plaintiffs asked for a declaration that Plaintiff No. 1 was still a director of the company, that the act of the Defendants purporting to remove Mr. Bajoria from the office of director was void and inoperative, and that the appointment of Defendant No. 4, Sir David Ezra, as a director of the Company was illegal and should be cancelled. The Plaintiffs further asked for an injunction restraining the Defendants from preventing Plaintiff No. 1 from acting as a director of the company and restraining Defendant No. 4 from acting as a director in the place of Plaintiff No. 1.On the 2nd February, 1946, the Defendants put in a written statement, denying the allegations made by the Plaintiffs and stating among other things that the company had been wrongfully impleaded as Plaintiff and its name should be struck out from the plaint. Later on, a number of issues were framed in the suit, the first issue being in these terms : Has the company been properly impleaded as Plaintiff ? This issue was set down by Edgley, J., before whom the case ultimately came for hearing on the Original Side, as a preliminary issue, and the learned Judge, after hearing the parties, answered it in favour of the Defendants and directed the name of the company to be struck off from the plaint. The learned Judge, however, observed that it was open to the Plaintiffs to make the company a Defendant. The decision of Edgley, J., was subsequently reversed on appeal by a Division Bench of the High Court, which held that the suit had been properly filed and the company had been correctly made a co-Plaintiff in the suit. The sole question which we have to decide is which of the views taken by the Courts below is correct. 4. For the purpose of answering this question, it is, as will appear presently, material to refer to Arts. 148 and 149 (6) of the Articles of Association of the Company. Art. 148 provides as follows :- The control of the Company shall be vested in the directors and the business of the Company shall be managed by the directors who in addition to the powers and authorities by these presents or otherwise, expressly conferred upon them, may exercise all such powers and do all such acts and things as may be exercised or done by the Company and are not hereby or by statute law expressly directed or required to be exercised or done by the Company in General Meeting but subject nevertheless to the provisions of any statute law and of these presents and to any regulations not being inconsistent with these presents from time to time made by the Company in General Meeting; provided that no regulation so made shall invalidate any prior act of the directors which would have been valid if such regulation had not been made.Art 149 (6) runs thus :- Without prejudice to the general powers conferred by the last preceding article and to any other powers or authorities conferred by these presents on the Directors or on the Managing Agents, it is hereby expressly declared that the Directors shall have the following powers, that is to say, power - * * * * * * * (6) subject to the provisions of sec. 86H (b) of the Act, to institute, conduct, defend, compound or abandon any legal proceedings by or against the Company or its officers or otherwise concerning the affairs of the Company and also to compound and allow time for payment or satisfaction of any debts due and of any claims or demands by or against the Company. 5. It is contended on behalf of the Appellants that, on the basis of the above articles, the directors alone are authorized to use the name of the company in any litigation concerning the company and if the majority of the ordinary share-holders are dissatisfied with the policy adopted by the directors, the only course open to them is to change the Articles of Association or remove the directors by a special resolution and to appoint other directors in their place by an ordinary resolution. It is also contended that, by adopting these articles, the share-holders must be taken to have divested themselves of the control and management of the company and, even if they are in a majority, they have no right to conduct any litigation on behalf of the company, not can a numerical majority of the share-holders, at a general meeting of the company, impose its will upon the directors, who can be deprived of their control and management of the company only by a statutory majority which can alter the articles. On the other hand, the main contention put forward on behalf of the Respondents is that in order to redress a wrong done to the company and its share-holders by the directors in whom power is vested under Arts. 148 and 149 (6), the ultimate control vests in the majority of the ordinary share-holders, and as the Plaintiffs-Respondents admittedly command a majority of votes of these share-holders, it is proper that the suit should proceed with the name of the company as co-Plaintiff. It may be stated here that though no meeting of the ordinary share-holders was held for the purpose of authorizing the Plaintiffs to file the present suit on behalf of the Company, it was conceded by for the Defendants before Edgley, J., that it would be unnecessary that such a meeting should be held in order to ascertain the wishes of the majority of the share-holders inasmuch as the Plaintiffs commanded a majority of the votes of the ordinary share-holders. The case has, therefore, proceeded in both the Courts below on the footing that at a meeting of the ordinary share-holders, the Plaintiffs would be able by a majority to assure the passage of a resolution empowering them to continue the suit. The case has also proceeded on the footing that whatever the ultimate decision in regard to the Plaintiffs allegations might be, for the purpose of deciding the preliminary issue, it must be assumed that the acts complained of by the Plaintiffs, namely, the removal of Plaintiff No. 1 from the board of directors and the appointment of Sir David Ezra, were due to the fraudulent conduct of the Defendants, were illegal and were detrimental to the interests of the company.It seems to be well-settled now that in order to redress a wrong done to a company or to recover monies or damages alleged to be due to the company, the action should prima facie be brought by the company itself. [See Fose v. Harbottle, Mozley v. Alston and MacDougall v. Gardiner]. The following observations made by James, L. J., in the last-mentioned case seems to be pertinent to the point :- If the majority of the company really are in favour of any particular share-holder has been interfered with improperly, by misconduct of a director, by misconduct of a chairman, by miscarriage of a meeting, or of certain share-holders at a particular date -if the company think that any share-holder has anything which ought to be made the subject of complaint, there is never any difficulty whatever arising from the apparent possession of the seal by the directors, or from any such cause in filing a bill in the name of the company, if the majority of the company desire it to be filed. Any one of the share-holders might have filed his bill in the name of the company, and then if the directors had said, you are not the company; the majority do not act with you, but with us - the Court would, as it has done in other cases, have taken the means of ascertaining which party it is, the Plaintiffs or Defendants, which really represents the majority of the company. 6. To the same effect are the following observations of Mellish, L. J., in the above case :- Looking at the nature of these companies, looking at the way in which their articles are formed, and that they are not all lawyers who attend these meetings, nothing can be more likely than that there should be something more or less irregular done at them - some directors may have been irregularly appointed, some directors are irregularly turned out, or something or other may have been done which ought not to have been done according to the proper construction of the articles. Now, if that gives a right to every member of the company to file a bill to have the question decided, then if there happens to be one cantankerous member, or one member who loves litigation, everything of this kind will be litigated; whereas if the bill must be filed in the name of the company, then, unless there is a majority who really wish for litigation, the litigation will not go on. Therefore, holding that such suits must be brought in the name of the company does certainly greatly tend to stop litigation. 7. A similar view has been taken in Pender v. Lushington. In that case, an action was brought be a share-holder whose vote had been rejected on behalf of himself and all others who has voted with him, namely the company as co-Plaintiff, against the directors, for an injunction to restrain them from acting on the footing of the votes being bad, and Jessel, M. R., dealing with the objection that the company ought not to be Plaintiff, observed as follows :- It is said that the company ought not to have been made Plaintiffs. The reasons given were reasons of some singularity, but there is no doubt of this, that under the articles the directors are the custodians of the seal of the company, and the directors, who in fact are Defendants, have certainly not given any authority to the solicitor for the Plaintiffs on this record to institute this suit in the name of the company as Plaintiffs. It is equally clear, if I am right in the conclusion of which I have come as to the impropriety of the decision of the Chairman in rejecting these votes, that it is a case in which the company might properly sue as Plaintiffs to restrain the directors from carrying out a resolution which had not been properly carried, and then comes the question whether I ought or ought not to allow the company now to remain as Plaintiffs. The first point to be considered is this : Supposing there was no objection to the right of a general meeting to direct an action to be brought, could I, even in that case, allow the company to sue ? I think I could. In that case the general meeting, having a right to direct an action to be brought, would act by the majority of the members. The majority wish their rights to be protected. A meeting could be called, and, if the Court was satisfied that the majority would direct an action to be brought, the companys name would not be taken away. In the meantime, the Court must act. It being decided that the company is a proper Plaintiff, that the grievance is one of which the company could complain, that the majority of the company are of the opinion, and that there is no time to call a formal meeting, what is the Court to do? Is it to refuse justice altogether, and say, it being a case for an injunction, that the directors are to have for several weeks (for the articles require three weeks notice at least of a general meeting) the power of destroying the property and rights of the company altogether.Such as course in cases of injunction would be equivalent to saying that there shall be no justice at all administered. It would be an absolute denial of justice, and it appears to me that the Court of Appeal in the case of MacDougall v. Gardner, have deliberately adopted that view of the matter. 8. Again, the law on the subject was summed up by Lord Davey in Burland v. Earle in these words :- It is an elementary principle of the law relating to joint stock companies that the Court will not interfere with the internal management of companies acting within their powers, and in fact has no jurisdiction to do so. Again, it is clear law that in order to redress a wrong done to the company or to recover moneys or damages alleged to be due to the company, the action should prima facie be brought by the company itself. These cardinal principles are laid down in the well- known cases of Foss v. Harbottle and Mozley v. Alston and in numerous later cases which it is unnecessary to cite. But an exception is made to the second rule, where the persons against whom the relief is sought themselves hold and control the majority of the shares in the company, and will not permit an action to be brought in the name of the company. In that case the Courts allow the share-holders complaining to bring an action in their own names. 9. These cases make it quite clear that ordinarily the company would be a proper Plaintiff in a case like the present, but, as has been already stated, the Appellants rely upon the Articles of Association governing the company in so far as they vest the management of the affairs of the company in the directors and empower them to conduct litigation on its behalf and use its name as Plaintiffs, and contend that these specific provisions take the present case out of the ordinary rule and the correct view on the facts of the present case should be that even though the Plaintiffs may be in a position to command a majority of votes at an ordinary meeting of the company, they cannot use the companys name as Plaintiffs in the suit, so long as Arts. 148 and 149 stand. In support of this contention, they rely principally on three cases. The first of these cases is Automatic Self-Cleansing Filter Syndicate Company, Limited v. Cunninghame in which the facts were these. A company had power under its memorandum of association to sell its undertaking to another company having similar objects, and by its Articles of Association the general management and control of the company were vested in the directors, subject to such regulations as might from time to time be made by extraordinary resolution, and particular, the property of the company on such terms as they might think fit. At a general meeting of the company a resolution was passed by a simple majority of the shareholders for the sale of the companys assets on certain terms to a new company formed for the purpose of acquiring them, and directing the directors to carry the sale into effect. The directors, being of opinion that a sale on those terms was not for the benefit of the company, declined to carry the sale into effect. Upon these facts, it was held by Warrington, J., that, upon the construction of the articles, the directors could not be compelled to comply with the resolution. The decision of Warrington, J., was upheld by the Court of Appeal, and the view taken by that Court is set out by Cozens-Hardy, L. J., in these words :-It seems to me that the share-holders have by their express contract mutually stipulated that their common affairs should be managed by certain directors to be appointed by the share-holders in the manner described by other articles, such directors being liable to be removed only be special resolution. It you once get a stipulation of that kind in a contract made between the parties, what right is there is king in a contract made between the parties, what right is there to interfere with the contract, apart, of course, from any misconduct on the part of the directors ? There is no such misconduct in the present case. Is there may analogy which supports the case of the Plaintiffs ? I think not. It seems to me the analogy is all the other way.... Your are dealing here, as in the case of a partnership, with parties having individual rights as to which there are mutual stipulations for their common benefit, and when you once get that, it seems to me that there is no ground for saying that the mere majority can put an end to the express stipulations contained in the bargain which they have made. Still less can that be so when you find in the contract itself provisions which show an intention that the powers conferred upon the directors can only varied by an extraordinary resolution, that is to say, by a three-fourths majority at one meeting, and that the directors themselves when appointed shall only be removed by special resolution, that is to say, by three-fourths majority at one meeting and a simple majority at a confirmatory meeting. That being so, if you once get clear of the view that the directors are mere agents of the company, I cannot see anything in principle to justify the contention that the directors are bound to comply with the votes or the resolutions of a simple majority at an ordinary meeting of the share- holders.The second case to which reference was made is Gramophone and Typewriter, Limited v. Stanley. That was a case under the Income-tax Act of 1853, but the Appellants relied upon the following observations of Fletcher Moulton, L. J. :- The legal proposition that the legal corporator cannot be held to be wholly or partly carrying on the business of the corporation is not weakened by the fact that the extent of his interest in it entitles him to exercise a greater or less amount of control over the manner in which that business is carried on and in is a wholly different thing both in fact and in law from carrying on the business itself. The directors and employees of the corporation are not his agents, and he had no power of giving directions to them which they must obey. It has been decided by this Court, in the case of Automatic Self-Cleansing Filter Syndicate Co., Ltd. v. Cunninghame, that in an English company, by whose Articles of Association certain powers are placed in the hands of the directors, share-holders cannot interfere with the exercise of those powers by the directors, even by a majority at a general meeting. Their course is to obtain the requisite majority to remove the directors and put persons in their place who agree to their policy. This shows that the control of individual corporators is something wholly different from the management of the business itself. 10. The last case was John Show & Sons (Salford), Ltd. v. Shaw. In that case, the question arose as to whether in a case in which the management of the business of the company had been entrusted to directors, a resolution by the share-holders at an extra-ordinary general meeting was effective for the purpose of directing the discontinuance of certain legal proceedings started by the directors against the Defendants who were indebted to the Plaintiff-Company. One of the pleas taken by the Defendants was that they had been brought into Court without proper authority, but this contention was rejected for reasons which are set out in the judgment of Greer, L. J., in these words :-I am, therefore, of opinion that the learned Judge was right in refusing to dismiss the action on the plea that it was commenced without the authority of the Plaintiff company. I think, the Judge was also right in refusing to give effect to the resolution of the meeting of the share-holders requiring the Chairman to instruct the companys solicitors not to proceed further with the action. A company is an entity distinct alike from its share-holders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the share-holders in general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers. The only way in which the general body of the share-holders can control the exercise of the powers vested by the articles in the directors is by altering their articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose action they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of share-holders. 11. The effect of these cases is summarized by Buckley in his book on Companies (11th Edition, p. 723) in these words :- Even a resolution of a numerical majority at a general meeting of the company cannot impose its will upon the directors when the articles have confided to them the control of the companys affairs. The directors are not servants to obey directions given by the share- holders as individuals; they are not agents appointed by and bound to serve the share-holders as their principals. They are persons who may by the regulations be entrusted with the control of the business, and if so entrusted they can be dispossessed from that control only by the statutory majority which can alter the articles. Directors are not, I think, bound to comply with the directions even of all the corporators acting as individuals.This statement of the law cannot be questioned, but, as the learned author has himself pointed out, there may be exceptions, such as when the directors are acting mala fide and the case of Marshalls Valve Gear Company, Limited v. manning, Wardle & Co., Limited has been cited by him as a possible illustration of the exception. In that case, the directors of a company had the entire management of the company and their powers were defined in almost the same terms as the powers of the directors in the present case. One of these directors, Marshall, held 42, 900 shares, the other three directors held 28, 000 shares, and the remaining 600 shares were held by others. The three directors who held Defendant company. At a directors meeting Marshall proposed a suit against the Defendant company for infringement of patent rights. The other three directors overruled his proposition. He, therefore, brought a suit against the Defendant in name of the company. Thereafter, at a meeting of the Board of Directors of the Plaintiff company, which Marshall did not attend, a resolution was passed that a Marshall had instituted a suit in the name of the company without the sanction of the Board of Directors, the solicitors of the company should be instructed to apply to the Court to have the name of the company struck out. The matter ultimately came up before Neville, J., who dismissed the motion for striking out the name of the company and observed : The company is of course the owner of Marshalls patent, and alone able to litigate for the protection of that patent. The three directors had, in what I will assume to be the exercise of their discretion, refused on behalf of the company to oppose the grant of the patent to themselves or to those from whom they acquired it, and they have refused to commence, or to allow to proceed so far as they can help it, any action for the purpose of establishing that the new patent is an infringement of the patent of the company. New it is obvious that in the position in which they have placed themselves on this question their duty and their interest are in direct conflict. On the one hand it is their duty as directors to protect the interests of the original patent, which is the property of the company; on the other hand their personal interests are clearly to maintain the validity of the patent which belongs to them, and which, it is alleged, is an infringement. Mr. Marshall has commenced an action in the name of the company for the purpose of restraining an alleged infringement on the part of the owners of the new patent, and the other directors come to the Court and ask to have the writ in that action taken off the file on the ground that the action was commenced without the authority of the company. It admitted that the calling of a meeting of share-holders to ascertain the wishes of the company would be useless because the position of the voting power is perfectly well understood. It is divided between the persons concerned, and undoubtedly the managing director, who has commenced this action, would have the majority of votes at a general meeting, and, therefore, if it is right that effect should be given to the wishes of the majority of the company in the present case, it is admitted that no object is to be gained by calling a meeting because the result of that meeting is a foregone conclusion. Under these circumstances ought the Court to direct the removal of the writ ? The learned Judge answered the question posed by him, in the negative, and, while referring to the case of Automatic Self-Cleansing Filter Syndicate Co. v. Cunninghame expressed the view that the decision in that case was not inconsistent with any of the decisions that had preceded it, though some of the observations made by the learned Judge in that case extended beyond any of the decisions in the previous cases and appeared to be inconsistent with the law as it stood at the time when that case was decided. 12. The correct position seems to us to be that ordinarily the directors of a company are the only persons who can conduct litigation in the name of the company, but when they are themselves the wrongdoers against the company and have acted male fide or beyond their powers, and their personal interest is in conflict with their duty in such a way that they cannot or will not take steps to seek redress for the wrong done to the company, the majority of the share-holders 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 and Pender v. Lushington, 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 Company, Ltd. v. Cunninghame, it was recognised that misconduct on the part of the directors provided an exception to the rule laid down in that case.

Decision:
0[ds]It may be stated here that though no meeting of the ordinary share-holders was held for the purpose of authorizing the Plaintiffs to file the present suit on behalf of the Company, it was conceded by for the Defendants before Edgley, J., that it would be unnecessary that such a meeting should be held in order to ascertain the wishes of the majority of the share-holders inasmuch as the Plaintiffs commanded a majority of the votes of the ordinary share-holders. The case has, therefore, proceeded in both the Courts below on the footing that at a meeting of the ordinary share-holders, the Plaintiffs would be able by a majority to assure the passage of a resolution empowering them to continue the suit. The case has also proceeded on the footing that whatever the ultimate decision in regard to the Plaintiffs allegations might be, for the purpose of deciding the preliminary issue, it must be assumed that the acts complained of by the Plaintiffs, namely, the removal of Plaintiff No. 1 from the board of directors and the appointment of Sir David Ezra, were due to the fraudulent conduct of the Defendants, were illegal and were detrimental to the interests of the company.It seems to be well-settled now that in order to redress a wrong done to a company or to recover monies or damages alleged to be due to the company, the action should prima facie be brought by the company itself. [See Fose v. Harbottle, Mozley v. Alston and MacDougall v. Gardiner].9. These cases make it quite clear that ordinarily the company would be a proper Plaintiff in a case like the present11. The effect of these cases is summarized by Buckley in his book on Companies (11th Edition, p. 723) in these words :-12. The correct position seems to us to be that ordinarily the directors of a company are the only persons who can conduct litigation in the name of the company, but when they are themselves the wrongdoers against the company and have acted male fide or beyond their powers, and their personal interest is in conflict with their duty in such a way that they cannot or will not take steps to seek redress for the wrong done to the company, the majority of the share-holders 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 and Pender v. Lushington, 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 Company, Ltd. v. Cunninghame, it was recognised that misconduct on the part of the directors provided an exception to the rule laid down in that case