IN THE HIGH COURT AT CALCUTTA Ordinary Original Civil Jurisdiction Original SIDE Present : The Hon'ble Justice [ENTITY] GA No.2437 of 2014 CS No.284 of 2014 STARLIGHT REAL ESTATE (ASCOT) MAURITIUS LIMITED & ANR. VS. JAGRATI TRADE SERVICES PRIVATE LIMITED & ORS. For the plaintiffs : Mr. [ENTITY], Sr. Adv., Mr. [ENTITY], Adv. Mr.[ENTITY] Adv. For the defendant no.1/Applicant : Mr. [ENTITY], Sr. Adv., Mr.[ENTITY], Sr. Adv. Mr. [ENTITY], Adv., Mr. [ENTITY], Adv. Mr.[ENTITY], Adv., Mr. [ENTITY],Adv. Ms. [ENTITY], Adv. For the defendant no.2/Respondent no.2 : Mr. [ENTITY], Sr. Adv., Mr. [ENTITY], Adv.
Mr. Adtiya Garodia, Adv., Mr. Amitesh Roy, Adv.
Heard on :19.01.2015, 04.02.2015, 16.02.2015, 18.02.2015, 23.02.2015, 02.03.2015, 04.03.2015, 18.03.2015, 23.03.2015, 25.03.2015, 30.03.2015.
Judgment on : 14th May, 2015 [ENTITY], 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 [ENTITY] group. The defendant no.2 is a joint-venture company. The proforma defendant and the defendant no.1 hold the entire issued paid up and subscribed capital of the defendant no.2. Pursuant to the permission granted by the Government of India, Ministry of Finance, by its letter dated 14th June, 2007 to the plaintiff no. 1, the proforma defendant was incorporated as a wholly owned subsidiary of the plaintiff in India, interalia, for the purpose of engaging in construction, development projects, including and by way of consortium and joint development agreement and to make downstream investment in the wholly owned subsidiaries and joint ventures engaged for the aforesaid activities. Pursuant to the approval of the Foreign Investment Promotion Board (FIPB), foreign equity participation of US $ 10,000,000 was to be made by the plaintiff no. 1 in the paid up share capital of the proforma defendant. Following the approval, the plaintiff no. 1 subscribed to the paid up share capital and holds 99.5% of the share capital of and in the proforma defendant and balance 0.5% of the share capital is being held by the proforma defendant. In the meantime, in or about July 2007, the plaintiffs through the proforma defendant had entered into a joint venture agreement with the [ENTITY] Group, represented by defendant no.1 for developing land and construction buildings and other real estate development activities. In terms of the joint venture agreement, the proforma defendant held 50% of the equity share capital in the defendant no.2, whereas the balance share capital of the company was held by the defendant no.1. However, the directorial pattern was not as agreed and Mr. [ENTITY] all along had and has control over the defendant no.2 through his nominated board of directors. The plaintiffs, all throughout reposed trust and faith in Mr. [ENTITY] and had never objected to the same. Between 12th September, 2007 and 31st March, 2009, there have been changes in the board of directors. By reason of cessation of office by [ENTITY] and [ENTITY] on 31st March, 2009 and 23rd April, 2009, respectively the defendant no.3 became the sole director of the proforma defendant.
Since the defendant No. 3 was the sole director, he could not hold a valid board meeting. However, the said defendant no.3 illegally and unauthorisedly held board meetings of the proforma defendant and in the said 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 Rs.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 defendant and two new directors were appointed in the said Board. The plaintiffs, thereafter, duly informed the banker of the proforma defendant about the removal of the said defendant nos. 3 to 5, as directors of the said company and requested Hong Kong and Shanghai Bank to freeze the account of the proforma defendant. The proforma defendant, however, could not file the requisite Form 32 recording the cessation of directorship and appointment of the two new directors, as the said form was to be filed electronically under a valid digital signature of an authorized signatory registered with the concerned Registrar of Companies, and such digital signature was not available with the plaintiffs. The non-filing of such Form 32, however, did not and could not entitle the defendant nos. 3 to 5 to claim themselves as the directors of the proforma defendant after 22nd December, 2009. Subsequently, the plaintiffs, through a Company Secretary, addressed a mail dated 18th February, 2010, to the Registrar of Company, Mumbai, requesting the said office to issue necessary order and direction, so that the requisite Form 32 recording the appointment of the directors could be uploaded. The plaintiffs, however, did not receive any formal written response from the Registrar of Companies. Thereafter, the plaintiffs were served with a Writ Petition, being [CASE NUMBER], filed by the proforma defendant along with defendant nos. 3 and 4 against the Reserve Bank of India, complaining that the cheques issued by the defendant nos. 3 and 4 as authorized signatories/directors of the proforma defendant on HSBC, in favour of the defendant no.2, were dishonoured by the said bank, although more than sufficient funds were available in the account of the proforma defendant. The Division Bench of the Bombay High Court by an order dated 24th November, 2011 directed the Writ Petitioners to implead the plaintiffs as respondents, since the Bank had acted at the behest of the plaintiffs and plaintiffs as shareholders were required to be heard. It was only thereafter upon service, the plaintiffs became aware of the said proceeding. The said Writ Petition was disposed of by recording that there is undoubtedly a dispute with regard to the affairs of the proforma defendant. The defendant nos. 3, 4 and 5 claimed to be the directors of the proforma defendant and the defendant nos.3 and 4 claimed to 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 [SECTION] of the [ACT] 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 approach the appropriate forum. Subsequently, another Writ Petition, being [CASE NUMBER], was filed by the defendant no.2 and [ENTITY], as one of the directors of the defendant no.2, against the order of the Banking Ombudsman, to revoke the orders dated, 13th April, 2011 and 14th October, 2011, by which the Banking Ombudsman, closed the complaint filed by the defendant no.2 based on a finding that the freezing of the account was done by the Hong Kong Bank on the basis of the Board resolution, and not on the request of the shareholders. The Hong Kong Bank refused to honour the cheques on the basis of the instructions received from the plaintiffs.
On a notice being issued, the plaintiffs were impleaded as Respondent nos. 7 and 8.
The Hon'ble Division Bench of the Bombay High Court by a judgment and order dated 8th January, 2014 after referring to the earlier Division Bench order in [CASE NUMBER] held that the defendant nos. 2 to 5 having availed the remedy provided under [SECTION] of the [ACT], it was incumbent upon the Banking Ombudsman to decide the said complaints on merits. The orders passed by the ombudsman and appelate authority were set aside and the matter was referred to the ombudsman with a direction to decide the complaint after giving hearing to the plaintiffs and respondent nos. 2 to 5. On 10th July, 2014, the plaintiffs received a letter dated 7th July, 2014 from the HSBC wherefrom the plaintiffs came to learn for the first time that on 2nd July, 2014, an order was served upon the bank in connection with [CASE NUMBER], directing the bank to pay the Receiver appointed in the said execution proceeding a sum of Rs.28,51,83,561/- from the account of the proforma defendant maintained with the said bank. Further enquiry revealed that the defendant no.1 initiated a purported arbitration proceeding in Kolkata against the proforma defendant on the basis of Clause 16 of the Joint- venture Agreement dated 12th July, 2007. Such initiation of the purported arbitration proceeding was by a letter in which the defendant no.1 sought modification of the arbitration clause contained in the Arbitration Agreement dated 12th July, 2007. In the statement of claim it was alleged that on 3rd September, 2010, the proforma defendant had failed to fulfil its obligation under the Joint-venture Agrement 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 [ACT] issued two several cheques both dated 9th October, 2010, drawn on the HSBC for a sum of Rs.5 crore and Rs.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 defendants, in collusion and conspiracy with each other, have perpetrated fraud on the plaintiffs through the proforma defendant. The defendant nos. 3 to 5 and each one of them purported to represent themselves as directors of the proforma defendant even after 22nd December, 2009, knowing fully well that they were not authorized to do so. The defendant nos. 1 and 2 are both being controlled by Mr. [ENTITY], actively concealed the fact that they were fully aware that the defendant nos. 3 to 5 had no authority to issue any cheque or cheques on behalf of the proforma defendant. The defendant nos. 1 and 2, actively concealed the fact that the plaintiffs, being the 100% shareholders of the proforma defendant, were only entitled to represent the proforma defendant, and the defendant nos. 3, 4 and 5 had no authority to represent the proforma defendant. The alleged dispute between the defendant no.1 and the proforma defendant was not covered by the arbitration clause contained in the Joint-venture Agreement dated 12th July, 2007. The defendant nos. 1 and 3 to 5 were not authorized and not entitled to the arbitration clause contained in the Joint- venture Agreement dated 12th July, 2007. A false impression has been created that money was due and payable by the proforma defendant to the defendant no. 2 inasmuch as, the defendants and each one of them suppressed that the alleged cause of action, if any, was that of the defendant no. 2 and the defendant no.1 was not entitled to initiate any proceeding.
Mr. [ENTITY], the learned Senior Counsel appearing on behalf of applicant/defendant no.1, submits that the suit challenging an award is not maintainable in law. It is submitted that in the suit primary challenge is an award dated May 16, 2013, passed against the proforma defendant and not against the plaintiffs. The proforma defendant neither has filed the present suit nor any application challenging the award. The suit has been filed by two shareholders of the proforma defendant. The suit is misconceived and a derivative action is not maintainable. The suit could not have been instituted by the shareholders of the proforma defendant. The proforma defendant alone is entitled in law to challenge the said award. The present suit is an unknown form of action.
The suit as framed is a personal action by two shareholders and is not maintainable in so far as it complains 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. [ENTITY] has relied upon the following decisions in support of the aforesaid submission:
1) [ENTITY] -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) [PRECEDENT] It is submitted that a shareholder has no interest in the assets of the company. There is not a single averment in the plaint that the suit is being filed for the benefit of or on behalf of the proforma defendant company. The suit is not for protection of assets of the proforma defendant company. The suit is essentially a personal cause of action and not a derivative action. Mr. [ENTITY] has relied upon [PRECEDENT] and [PRECEDENT] @ page 712.
It is submitted that the [ACT] mandates an application under [SECTION] as the only mode for setting aside of an award. The proforma defendant (against whom the award has been passed) has not challenged the said Award by filing an application under [SECTION] of the [ACT]. The mandatory period prescribed for filing an application for setting aside of an Award has long expired. Any challenge to an arbitral award can only be made by filing an application under [SECTION] of the [ACT] and not by filing a separate suit. No suit can lie for setting aside an Award. [PRECEDENT] was cited for the said propositions.
It is submitted that an award cannot be challenged by a third party. By the instant suit, the plaintiffs are seeking to do indirectly, what the law prohibits them from doing directly. Determination of questions relating to the execution, discharge and satisfaction of the said Award can only be determined by the Court executing the Award and not by way of a separate suit. Accordingly, the suit is barred under [SECTION] of the [ACT]. The said Act is a self-contained code and expressly curtails judicial intervention, as has been held by the Hon'ble Supreme Court of India in [PRECEDENT] and [PRECEDENT].
It is submitted that Arbitration is a creation of statute and not a Common Law right and therefore, the remedy must be as per statute only. A suit in relation to arbitration 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 [PRECEDENT].
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 intentionally permitted the state of affairs to continue. Though aware since December, 2009, the plaintiffs deliberately and intentionally chose to remain silent and did not institute any proceeding whatsoever against the defendant nos. 3 to 5. In the premises, challenge to the authority of the defendant nos. 3 to 5 to act as Directors of the proforma defendant is barred by the laws of limitation. Hence, prayer (c), (e) and (f) of the plaint cannot be granted. The reliefs other than those challenging the said Award are purely declaratory in nature without any consequential reliefs being claimed, and hence cannot be granted, in view of the law laid down in [PRECEDENT].
[ENTITY] has no authority to represent the plaintiff companies and execute a Power of Attorney for institution of the instant suit. Also, [ENTITY] has no authority to initiate the instant suit as he cannot possibly have any knowledge of the averments made in the plaint which have been verified as true to his knowledge. The Powers of Attorney are not properly executed and are incomplete and inadmissible and cannot be acted upon.
Per contra, Mr. [ENTITY], learned senior counsel appearing on behalf of the plaintiffs, submits that it is well settled that while hearing an application under [SECTION] of the [ACT], the Court has to proceed on the basis that the statements contained in the plaint are all true and correct. The case of the plaintiff in short is that the defendants colluded with each other and perpetrated fraud not only on the plaintiffs but also on this Hon'ble Court to siphon off the funds of the plaintiffs which were lying with the proforma defendant. It is the further case of the plaintiffs that for the purpose of siphoning off such funds, the defendants in collusion and conspiracy with each other fraudulently procured an award against the proforma defendant. On the basis of such allegations, the plaintiffs have sought for recovery of the funds which were transferred from the account of the proforma defendant to the defendant no.1 and/or to the defendant no.2 and for obtaining such relief, have also prayed for reliefs touching the award fraudulently obtained against the proforma defendant. It is such acts of collusion and fraud which is the cause of action of the 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 [PRECEDENT] 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 not have filed an application under [SECTION] of the [ACT] for setting aside the same. In the normal course it was for the proforma defendant to challenge the said award. However, the proforma defendant has not challenged the award as its directors on record being the defendant nos. 3 to 5 are parties to the collusion and conspiracy which culminated into the fraudulent award. An application under [SECTION] of the [ACT] can only be made by a party as defined in [SECTION] of the said Act. In this connection, Mr. [ENTITY] has relied upon the following judgements:-
1) [PRECEDENT];
2) [PRECEDENT] paragraph 15.
The decisions relied upon on behalf of the defendant no.1 to contend that the above suit is barred by the [ACT], has no application to the instant suit. None of such decisions say that a non-party cannot institute a suit challenging an award particularly when such award prejudices or affects the right of such non-party. The only remedy left to the plaintiffs to protect their right and interest through the proforma defendant was to file the suit. Without prejudice to the aforesaid, it is submitted that the issues raised in the above suit cannot be decided in an application under [SECTION] of the [ACT]. The prayers (c) and (e) to (f) of the plaint cannot granted in an application under [SECTION] of the said Act. It is also well settled that in an application under [SECTION] of the [ACT], reliefs cannot be bifurcated and part rejection of the plaint is not permissible. Mr. [ENTITY] relied upon the decision of the Hon'ble Supreme Court in [PRECEDENT].
While making an application under [SECTION] the [ACT] a defendant has to show that the plaint filed in the suit and the statements contained therein are clearly barred by law. In the instant case, the defendant no.1 has not been able to show the same. There is no law which bars a suit like the instant 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 [CASE NUMBER], 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 proforma defendant was questioned. The Hon'ble Supreme Court by its order dated 2nd July, 2012 while dismissing the Special Leave Petition filed by the defendant no. 3 to 5 observed that the Division Bench of High Court had already granted liberty to the petitioners to approach the appropriate forum. The defendant nos. 3 to 5, thereafter did not approach any forum to assert or claim their right to represent the proforma defendant. Only on 10th July, 2014, the plaintiffs came to know about the further wrongful activities of the defendant nos. 3 to 5 which led to filing of the instant suit. Under the circumstances, it cannot be said that the claim of the plaintiffs against the defendant nos. 3 to 5 is barred by the laws of limitation. In any event, on that ground the entire suit cannot be dismissed.
In reply Mr. [ENTITY], the learned Senior Counsel submitted that in the plaint, the plaintiffs have referred to various documents and filed such documents along with plaint, but there is no specific pleading in the plaint about the said documents. The learned Senior Counsel has relied upon a Single Bench Decision of this Court in [PRECEDENT] and submitted that in the said decision it has been held that mere annexures without specific pleading is not enough and the plaintiffs are required to offer an explanation with regard to the said documents on which they are relying in the plaint.
Now let me examine the merits of the application for rejection of the plaint.
Company actions, in the wide sense including by and on behalf of the Company and also actions by shareholders have always been considered to be a vexed question in Company Law. Since [PRECEDENT], numerous attempts have been made to find escape routes leading to various modifications.
Since a criticism is made with regard to the frame of suit and it is submitted that the plaintiffs are only seeking to enforce their personal rights as opposed to derivative action and a suit as framed is a personal action by the shareholders it is necessary to examine the frame of the suit vis vis derivative action.
The principles of derivative action as enunciated in various judgements and treaties on the subjects of which special reference can be made to 'Company Actions in the Modern Set-Up' by [ENTITY], First Edition, 'The New Frontiers of Company Law' by [ENTITY], 1971 Edition and 'Guide To [ACT]', by [ENTITY], 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 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 [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 [ACT]. In an action for violation of personal rights a single shareholder suing alone and not even on behalf of other shareholders may make the company a defendant and obtain his reliefs. Where a wrong has been done to the company and an action is brought to restrain its continuance or to recover the company's property or damages or compensation due to it, it is a derivative action. Here the company is the only true plaintiff. The dispute is not an internal one between those who constitute the membership of the company but one between the company on the one hand and third parties on the other. It makes no difference in principle that the third parties may accidentally happen to be the directors or controlling shareholders of the company. [PRECEDENT] itself is an illustration of such an action. Where such an action is allowed the member is not really suing on his own behalf nor on behalf of the members generally but on behalf of the company itself. In a derivative action, in the framing of the suit for the purpose of compliance of the formalities the plaintiff had to describe himself as a representative suing for and on behalf of all the members other than the wrong-doers. In a true derivative action the plaintiff shareholder is not acting as a representative of the other shareholders but is really acting as a representative of the company. The expression "derivative action" 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 do justice to a company controlled by miscreant directors or shareholders." (Per [ENTITY] in [PRECEDENT] at Page 376).
As a general rule, the courts will not interfere in matters of internal administration. It is for the majority of shareholders to decide the manner in which the affairs of the company are to be conducted. This principle was laid down in the celebrated case of [PRECEDENT]. The court held that in the case of an injury to the corporation, it is for the corporation to sue in its own name and individual shareholders cannot assume to themselves the right of suing in the name of corporation. The effect of the rule is that the majority shareholders cannot complain of any irregular act which the majority are entitled to do regularly. The circumstances in which minority shareholders' actions are allowable constitute the exceptions to the rule in [PRECEDENT]. Such an action is filed by the shareholder in his own name but is for the benefit and advantage of the company. The person filing a derivative claim has to show that the company has a right to sue but being indulgent in the matter is not likely to sue and, therefore, he gets a derivative authority to sue. ([PRECEDENT]] This type of action is a derivative action, i.e. the right to sue and enforce the right are derived from the company. The shareholders as such have no such right. If their own personal rights are being infringed they may bring a representative action. The reliefs in such an actions would be essentially, primarily and solely for the benefit of the company as opposed to vindication and enforcement of the personal rights of the named plaintiffs though there could be a thin dividing line between the two, namely, personal rights and corporate rights. [ENTITY] (supra) brings out the essence of such an action in the following words:-
"17. 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 mala 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 [PRECEDENT] and [PRECEDENT], 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 suit can be adopted as a matter of machinery to obtain relief under special and peculiar circumstances. It states:-
"I propose, as shortly as I can without going into the case in detail, to explain my understanding of the matter. There can of course be suits by shareholders against the company for individual wrong done to them. Apart from individual wrong there may be suits to restrain acts ultra vires. There is no question of ultra vires in this case and I propose to confine the discussion to suits other than those based upon complaints of acts ultra vires, although I am not suggesting that there is any fundamental difference in principle. Suit to restrain acts ultra vires and suits to restrain certain acts about to be discussed notwithstanding that the acts have the support of the majority of shareholders, are both exceptions to the rule that the Court will not interfere in the affairs of the company or with the decision of the majority. The Court interferes in cases of an ultra vires act, because it is not an act within the [ACT]. In the other class of cases the Court interferes upon a different basis. They have been referred to generally as cases of "fraud upon the minority." These cases of "fraud upon the minority" however are, in my opinion, only special examples of an action by the company for what is in theory regarded as a wrong done to the company, a special form of the suit being adopted as a matter of machinery to obtain relief under special and peculiar circumstances. If the wrong-doer has the balance of power, and, therefore, the company does not take action, there are two courses open. The minority may take the risk and boldly use the company's name. The other course, and what has been thought to be the better course, where the wrongful act is supported by the majority, is for the minority shareholders to sue in their own name or, as a matter of convenience, for a shareholder to sue on behalf of himself and all the other share-holders. If, however, as generally happens and must happen logically, the wrong-doers are also shareholders, these shareholders as a matter of course must be excluded from the category of the plaintiffs; hence the phrase "except those who are defendants."
In a suit so brought, the complaint is said to be a "fraud on the minority." If by this it is understood that the minority in a company have some natural 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. [PRECEDENT] is in my opinion not an authority for such a theory nor did Mr. [ENTITY] 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 [ACT], 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 purely theoretical, the wrong-doers are themselves the majority. I can conceive, however, of cases where the distinction may become apparent, in other words, where the primary wrong-doers, those committing the fraud or the wrongful act, are not themselves the majority but get the support of the majority."
As has been lucidly explained in Pennington Company Law:-
"In certain circumstances an individual member may bring an action to remedy a wrong done to the company or to compel his company to conduct its affairs in accordance with its [ACT] and the rules of law governing it, even though no wrong has been done to him personally but only to the company, and even though the majority of his fellow members do not wish the action to be brought. The form of his action in these exceptional cases is peculiar, because the complainant does not sue in his own right alone, but he sues instead on behalf of himself and all his fellow members other than those, if any, against whom relief is sought. If the member sues for relief against the company, it must, of course, be made a defendant; if he seeks to enforce a corporate claim against other persons, the company must still be joined as a co-defendant so that it may be bound by the judgment, and so that it may enforce any order giving relief against the substantive defendants."
A company is a mere abstraction of law. By registration under the [ACT], a company is vested with corporate personality, which is independent of and distinct from its members. It is a legal person with perpetual succession and common seal. It is a body corporate having a separate identity and distinct from the directors and shareholders. The property of the company is not the property of the shareholders. In the eye of law, even a member holding majority shares or a managing director of a company is held liable for criminal misappropriation of the funds or property of the company, if he unauthorisedly takes it away and uses it for his personal purpose. As a juristic legal person, a company can sue in its name and be sued by others.
The company is a party to the arbitration proceeding. The existence of the agreement is not in dispute. It is the award of the arbitrator which is the subject of challenge in the suit. The plaintiffs as the majority shareholders of the proforma defendant contends that the defendant No.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 with regard to the internal management of the proforma defendant. The orders relied upon by the plaintiffs would not show that the Defendant nos. 3, 4 and 5 were restrained from representing the proforma defendant. In fact, the plaintiffs admit that the Form 32 is yet to be accepted.
The plaintiffs as shareholders of the proforma defendant neither could have initiated an arbitration proceeding in their own name, nor the said plaintiffs would be entitled to initiate arbitration proceedings and claim any relief on behalf of the company. No shareholder can say that because the company is a party to the arbitration agreement, he should be allowed to initiate arbitration proceedings and claim any relief in the said proceeding. It is the company who alone can initiate and/or defend such proceeding. A third party is no way concerned with the inter se disputes between the shareholders of the company. However if the said third party is a party to a fraud in an action in which a decree or an award is passed affecting the valuable right of the company and is prejudicial to the interest of the company, the shareholder can sue the miscreant directors and the persons and/or entities connected with the fraud on behalf of himself and other shareholders and in the name of the company to prevent any wrong being perpetrated on the company. In such a situation, the complainant shareholder would be seeking to enforce a cause of action which is available and belongs to the company and not to the shareholder personally. The essential purpose of such an action is to remedy a wrong done to the company and if the suit ultimately succeeds, the judgement is given in favour of the company, so that the complainant shareholder obtains no direct personal benefit therefrom.
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 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 to hold themselves as directors but the plaintiffs did not take recourse to any legal proceeding to prevent the said defendants from asserting their rights as directors since even thereafter the said defendants continued to assert their right as directors that had resulted in various litigation. Even if it is assumed that the defendant No.1 is aware of the inter se disputes between the plaintiffs and the defendant Nos.3 to 5, the defendant No.1 is under no obligation to disclose such dispute before the arbitrator since the claim of the defendant No.1 is against the proforma defendant. The defendant No.1 appears to have been roped in by clever drafting, in order to avoid the award passed against the proforma defendant. The reliefs claimed in the plaint so far as it seeks a declaration that the award against the defendant No.1 is nonest, illegal and not enforceable and the said award is required to be set aside, in my view, having regard to the frame of the suit is not maintainable and barred by law. The challenge to the award has now become barred by limitation. It is settled law that what cannot be done directly cannot be permitted to be done indirectly. It is not been alleged that the proforma defendant was prevented by the said defendants Nos. 3 to 5 to challenge the award.
In so far as other reliefs are concerned, in my view, they are required to be adjudicated at the trial and the suit cannot be dismissed as against the other defendants. Since the prayer for setting aside of the award is barred by law, I hold that the suit so far as it relates to setting aside of the award against the defendant No.1 is concerned is not maintainable. The application is allowed in part.
Urgent xerox certified copy of this judgment, if applied for, be given to the parties on usual undertaking.
([ENTITY], J.)