Case: Shailesh Harilal Shah Vs. Matushree Textiles Limited

[1973] 45 Comp Cas 17 (Bom) and the decision in Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 (Guj); AIR 1965 Guj 96 . Learned counsel urged that item 8 of the ninth annual report sets out a resolution conferring power upon the board of directors to make any loan to any body corporate from time to time on such terms and conditions as the directors may deem fit provided that the aggregate of the loans outstanding at any one time made to the company shall not exceed 30 per cent. of the aggregate of the subscribed share capital. The explanatory note to item No. 8 sets out that in the course of business, the company may have to make loans or deposits, etc. , to bodies corporate in excess of the limits and section 370 of the act provides that no company shall make any loan or loans to any body corporate in excess of the limits fixed by the Central Government unless making of such loans has been previously authorised by a special resolution of the lending company. The explanatory note recites that the company may have surplus funds during off season which the board of directors may utilise for giving loans and it is, therefore, advisable in the interest of the company to obtain the consent of the members by special resolution. Shri Kapadia complains that the explanation is a tricky one because the claim that the company may have surplus funds is totally false. Reference was made to the minutes of the meeting held on January 1, 1991, at which meeting Santoshkumar was appointed as additional director. One of the reasons set out for appointing Santoshkumar was that the business of the company of manufacturing cotton printed sarees and texturised/twisted yarn and P. O. Y. was undergoing recession and the company under the circumstances of the crisis has trying times ahead and Santoshkumar can help the company to come out of the crisis. Shri kapadia submits that this reason is indicative of the fact that the financial state of the company was not healthy and if that is so, it is impossible to imagine that the company may have surplus funds as set out in the explanatory statement. It was urged that the power was sought by the board of directors only with a view to siphon away the funds of the company to the concerns in which defendants Nos. 2 and 3 have control and interest. Learned counsel urged that the fact that the company did not give a truthful explanation is sufficient to invalidate the resolutions passed at the meetings. It is not possible to find any merit in the contention for more than one reason. In the first instance, the claim that the financial health of the company was not sound cannot be accepted merely because in the meeting held on January 1, 1991, one of the reasons given for nominating Santoshkumar was to overcome the recession in the market and which was due to the gulf War and money conditions being tight. It is not correct that the financial condition of the the company was not sound because one of the resolutions at the ninth annual general meeting was to declare a divided. Shri Kapadia submitted that the company wants to disburse the dividend not out of the profits but out of the assets of the company and declaration of dividend was a ruse to mislead the shareholders. It is not possible to accept the claim made on behalf of the plaintiffs because nothing prevented the plaintiffs from remaining present at the annual general meeting and raising objections or to impress upon other shareholders the claim of mismanagement. Secondly, the assumption of the plaintiffs that the board of directors would siphon off the funds to the concerns of defendants Nos. 2 and 3 is without any foundation. There is not a whisper of complaint in the plaints that defendants Nos. 2 and 3 have previously siphoned away the funds of the company or had given loans to bodies corporate in which these defendants have any interest. Save and except the averment made in paragraph 11 to which reference is made hereinabove, the plaintiffs have not pointed out any act of defendants Nos. 2 and 3 to create suspicion that resolution No. 8 at the ninth annual general meeting was for the purpose of enabling the board of director to grant loans to the own concerns. Thirdly, the explanatory statement also recites that the surplus funds may be available during the off season and the conferring of a power cannot necessarily lead to the inference that the power was to be misused by the board of directors. Again, it is not permissible for the plaintiffs who were fully conscious of the business to be transacted at the annual general meeting to remain absent and thereafter complain of insufficiency of information or tricky explanation. In our judgment, the challenge to the business conducted in the meetings is without any substance and there is no reason to nullify the resolutions passed at the annual general meetings. ( 30 ) IT is required to be mentioned that though the plaintiffs had claimed before the trial court that the company had no authority to convene the eighth annual general meeting after December, 1990, the said contention was not pressed by Shri Kapadia the during the arguments. The trial judge negatived the contention by holding that there is no prohibition on holding annual general meeting after the statutory period and the only consequence is of penalty payable by the company. In the absence of any arguments on this aspect, it is not necessary to examine the finding. In our judgment, the plaintiffs have not made out any case for grant of relied and accordingly, the appeals as well as Suits Nos. 3002 and 3003 of 1991 must fail in accordance with the consent statements field by the parties.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]It is undoubtedly true as held by the Supreme Court that the director is an agent of the company but the assumption of the plaintiffs that the relationship of principal and agent can be created only by contract is not accurate. The relationship can be created by operation of law and in such cases, the relationship cannot to be treated as a contract. The director is treated as an agent or a trustee by operation of law and not because the company or shareholders have entered into contractual relationship with the person purposed to be appointed as a director. We are in agreement with the view expressed by the learned single judge of the Madras High Court that the appointment of additional director does not amount to a contract as contemplated by section 300 (1) of the Act. It is also not possible to accede to the submission of Shri Kapadia that in any event the appointment of a director amounts to an arrangement under section 300 (1 ). The observation of justice Rajagopala Ayyangar that the arrangement within the meaning of section must receive thethat it must be of such a nature as would arise in the case of personal pecuniary nature in the context of the company is accurate and the expression "arrangement" must bear the meaning of it as in sections 209 and 301 of other Act. Section 301 demands that every company shall keep one or more registers in which shall be entered separately particulars of all contracts or arrangements and the particulars to be entered are the date of the contract or arrangement, the names of the parties thereto, the principal terms and conditions thereof, etc. It is impossible to accept that the appointment of the director amounts to an arrangement and it is required to be entered in the register maintained by the company under section 301 of the Act. Shri Cooper pointed out that none of the companies have entered such appointments in the register maintained under section 301 of the Act because the arrangement contemplated under section 300 though directly not a contract must take the colour from the context of contractual relationship contemplated under the section. The arrangement is something skin to a contract though not strictly a contract as contemplated by the Contract Act. There is one more aspect which cannot be overlooked. What section 300 (1) prescribes is a contractual arrangement entered into "by or on behalf of the company" and it is impossible to suggest that appointment of an additional director is by and on behalf of the company. The section postulates that the contract or arrangement is by the company or on behalf of the company and that means that the company is one of the contracting parties or parties to the arrangement. The company is not a party for making an appointment of a person as director; nor is the appointment on behalf of the company. To accept the submission that the appointment of an additional director amounts to a contract or arrangement, it would be necessary to conclude that such a contract or arrangement is by or on behalf of the company, and it is not possible to do so. In our judgment, the contention that defendant No. 3 could not have participated in the discussion or vote on the resolution to appoint defendant No. 2 as additional director in view of the prohibition of section 300 (1), therefore, cannot beour judgment, even assuming that the resolution appointing defendant No. 2 as additional director amounts to a contract or an arrangement as covered by section 300 of the Act, still the appointment of defendant No. 2, the most, would be irregular due to the participation of defendant No. 3, but the acts done by defendant No. 2 and especially in convening the annual general meeting cannot the struck down at the behest of somedecision of the house of Lords in Morris v. Kanssen [1946] 1 All ER 536 (HL) has no application to the facts of the present case, as it is not the claim of the plaintiffs that the board of directors was not properly constituted prior to January 1, 1991, In our judgment, the meeting held on January 1, 1991, was legal and valid and the action of defendants Nos. 3 and 4 as continuing directors in nominating defendant No. 2 as additional director does not suffer from any infirmity. The contention of the plaintiffs that the signing of theand the notices convening the eighth and ninth annual general meetings of the company by defendant No. 2 was vitiated and, therefore, the resolutions passed at the meetings should be struck down cannot beis not in dispute that section 171 (1) of the Act provides that the general meeting of the company may be called by not less than 21 days notice in writing.(2) of section 171 provides that the general meeting may be called after giving shorter notice if consent is accorded thereto by all the members entitled to vote thereat.(3) of section 171 provides that the accidental omission to give notice to, or theof notice by, any member or other person to whom it may be given shall not invalidate the proceedings at the meeting. The two notices convening the two meetings are dated september 2, 1991, but were posted on September 7, 1991, and were received by the plaintiffs on September 12, 1991. In view of the deeming provision under section 52 (b) (i) of the Act, the notice is deemed to have been served on the shareholders on September 9,hold that the provisions of section 171 (1) of the Act are mandatory would lead to very unusual results making it difficult for large public companies to effectively function. A couple of shareholders cannot be permitted to defeat the interest of a large body of shareholders by raising the contention that the duration of notice was not sufficient and even though such complaints do not indicate any prejudice by service of notice of shorter duration. In our judgment, looking to the object, purpose and scope of provisions of section 171 (1) of the act, the conclusion is inescapable that the provision is merely directory and notshare or debentures constitute property and the Legislature was particular that the transfers should not be effected unless the requirements of the section are strictly complied with. The reason is obvious that such holder of the share or debenture certificate should not be deprived of the properly right without the company being satisfied that the transfer is6 ) SHRI Kapadia sounded an apprehension that in case the provisions of section 171 (1) of the act are held to be directory, then every company would hold the annual general meetings by service of notice of any duration and this would defeat the object of service ofnotice. The submission is not accurate because even if the provision is held to be directory, that does not confer a charter on the company to serve notice of any duration according to their choice. Even if the provision is directory, it does not permit the company to bypass the statutory requirement and in every case where a breach is complained of, the court will have to examine whether the proceedings should be invalidated or otherwise. Learned counsel felt that a company may give notice of four or five days and will try to sustain the validity of the proceedings. It is impossible to assume that the court will close its eyes to the reality and accept the claim that notice of even one day is enough. The court will not proceed to invalidate the proceedings on the ground of insufficient duration of notice only when it is established that defect is not intentional or deliberate and no prejudice whatsoever is caused too a particular case by shorter duration of notice. It would be necessary for a party complaining of insufficient duration of notice to plead prejudice caused and in case such prejudice is established, then even though the provision is directory, the court would grant theis obvious that the plaintiffs never complained of any prejudice suffered because of shorter duration of notice and the contention urged by Shri kapadia with reference to the correspondence is imaginary. In Parashuram Detaram Shamdasani v. Tata Industrial Bank Ltd. , AIR 1928 PC 180  , it was held that the shareholders knowing the work to be transacted at the meeting and remaining absent cannot subsequently complain about insufficiency of notice for convening the meeting. In out judgment, the plaintiffs have not suffered any prejudice whatsoever by the notice being of only 20 clear days instead of 21 clear days and it is obvious that the plaintiffs are set up by Arunkumar Poddar who has personal quarrels with defendants Nos. 2 and 3 who are his real brothers. The shareholding of the plaintiff is extremely negligible being 0. 3 per cent. and it would be entirely unreasonable to invalidate the business transacted at the annual general meeting at the behest of these few shareholders and to the detriment of a large body of shareholders who had unanimously approved the resolutions moved at the meetings. We enquired from learned counsel as to which resolution passed at the meeting affects the interest of the plaintiffs and the grievance seems to be only about the issuance of right shares after increasing the authorised share capital and conferring power on the board of directors to make loans to any body corporate. The issuance of the right shares to all the existing shareholders can by no stretch of imagination affect the interest of the shareholders, nor would it change the controlling pattern of shareholding of the company. The grievance about conferring power upon the board of directors to make loans to bodies corporate is the apprehension that the directors may give loans to firms and companies in which they have interest. More about it at a later stage, but the prejudice complained of seems to be only of arunkumar Poddar who has personal complaints against defendants Nos. 2 and 3 and we are not at all impressed by the claim made by learned counsel that service of notice of 20 clear days has causedto the eighth annual report, learned counsel urged that the auditors had made certain remarks and the information supplied by the company was not sufficient and, therefore, it was not possible to pass the accounts at the annual generalmeeting. We are unable to find any merit in the contention. The directors report clearly recites that information as per section 217 of the Act is supplied and notes Nos. 5 to 8 on which counsel laid stress refer to estimated gratuity and liability, sundry debts, and interest on overdue bills and, in our judgment, the information supplied cannot be said to be insufficient so as to make it impossible for the shareholders to pass theis not possible to accept the claim made on behalf of the plaintiffs because nothing prevented the plaintiffs from remaining present at the annual general meeting and raising objections or to impress upon other shareholders the claim of mismanagement. Secondly, the assumption of the plaintiffs that the board of directors would siphon off the funds to the concerns of defendants Nos. 2 and 3 is without any foundation. There is not a whisper of complaint in the plaints that defendants Nos. 2 and 3 have previously siphoned away the funds of the company or had given loans to bodies corporate in which these defendants have any interest. Save and except the averment made in paragraph 11 to which reference is made hereinabove, the plaintiffs have not pointed out any act of defendants Nos. 2 and 3 to create suspicion that resolution No. 8 at the ninth annual general meeting was for the purpose of enabling the board of director to grant loans to the own concerns. Thirdly, the explanatory statement also recites that the surplus funds may be available during the off season and the conferring of a power cannot necessarily lead to the inference that the power was to be misused by the board of directors. Again, it is not permissible for the plaintiffs who were fully conscious of the business to be transacted at the annual general meeting to remain absent and thereafter complain of insufficiency of information or tricky explanation. In our judgment, the challenge to the business conducted in the meetings is without any substance and there is no reason to nullify the resolutions passed at the annual general30 ) IT is required to be mentioned that though the plaintiffs had claimed before the trial court that the company had no authority to convene the eighth annual general meeting after December, 1990, the said contention was not pressed by Shri Kapadia the during the arguments. The trial judge negatived the contention by holding that there is no prohibition on holding annual general meeting after the statutory period and the only consequence is of penalty payable by the company. In the absence of any arguments on this aspect, it is not necessary to examine the finding. In our judgment, the plaintiffs have not made out any case for grant of relied and accordingly, the appeals as well as Suits Nos. 3002 and 3003 of 1991 must fail in accordance with the consent statements field by the parties.