Case: Shailesh Harilal Shah and Others Vs. Matushree Textiles Limited and Others

reported in 1973 (43) CC 17 : 1972 AIR(Bom) 276 ) (Laljibhai C. Kapadia v. Lalji B. Desai) and the decision reported in 1964 (34) CC 777, 1965 AIR(GUJ) 96, 1965 AIR(Gujarat) 96, 1964 (1) CompLJ 326 , (Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd.). The learned Counsel urged that Item 8 of the 9th 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% 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 loan or deposits, etc. to bodies, corporates 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 by 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 and which the Board of Directors may utilise for giving loans and it is, therefore, advisable in the interest of the Company to obtain 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 and 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 time 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. The 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 Gulf War and money conditions being tight. It is not correct that the financial condition of the Company was not sound because one of the resolutions at the 9th Annual General Meetings was to declare a dividend. 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 to remain present at the Annual General Meeting and raise objections or to impress upon other shareholders the claim of mismanagement. Secondly, the assumption of the plaintiffs that the Board of Directors would siphon of 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 Body 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 9th Annual General Meeting was for the purpose of enabling Board of Directors to grant loans to their own concerns. Thirdly, the explanatory statement also recites that the surplus funds may be available during off season and 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.16. It is required to be mentioned that though the plaintiffs had claimed before the trial Court that the Company had no authority to convene 8th Annual General Meeting after December 1990, the said contention was not pressed by Shri Kapadia during the arguments. The trial Judge negatived the contention by holding that there is no prohibition to hold Annual General Meeting after the statutory period and the only consequence is of penalty payable by the Company. In 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 relief and accordingly, the appeals as well as Suits Nos. 3002 and 3003 of 1991 must fail in accordance with the consent statements filed by the parties.

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

Explanation:
0[ds]It is not possible to accede to the submission of the learned counsel. 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 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 proposed to be appointed as a Director. We are in agreement with the view expressed by the learned single Judge of Madras High Court that the appointment of additional Director does not amount to a contract as contemplated by S. 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 S. 300(1). The observation of Justice Rajagopalan Ayyangar that the arrangement within the meaning of Section must receive the interpretation that 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 Ss. 209 and 301 of the Act. S. 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 S. 301 of the Act. Shri Cooper pointed out that none of the Companies have entered such appointments in the register maintained under S. 301 of the Act because the arrangement contemplated under S. 300 though directly not a contract must take the colour from the context of contractual relationship contemplated under the Section. The arrangement is something akin 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 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 party or party to the arrangement. The Company is not a party for making appointment of a person as director; nor the appointment is on behalf of Company. To accept the submission that the appointment of additional Director amounts to 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 discussion or vote on the resolution to appoint defendant No. 2 as additional Director in view of prohibition of S. 300(1), therefore, cannot be84 of the Company in that case was almost in the identical terms with Regulation 80. There was a challenge to the resolutions passed convening the Annual General Meeting on the ground that the meeting was convened by de facto Directors. The contention was that there was no duly constituted board which could validly convene the Annual General Meeting of the Company, as the meeting was called by persons who were merely de facto Directors. It was held that the resolution for calling the meeting was passed at the Board meeting; the notice of it was duly sent to every shareholders, and one of the objects of the meeting was to confirm the acts therefore done by persons purporting to act as directors, and in these circumstances, any informality in convening the meeting should be treated as a mere irregularity, and not sufficient to invalidate any resolution passed at the Annual General Meeting. The decision refers to several earlier decisions. In 1968 (2) SCR 252  , 1968 AIR(SC) 772, 1968 (38) CC 543, 1968 (1) CompLJ 275, 1968 (2) ILR(All) 1, (Seth Mohan Lal v. Grain Chambers Ltd., Muzaffarnagar), the scope of Regulation 94 of Table A to the First Schedule of the Companies Act, 1913 and which is similar to Regulation 80 of Table A of schedule I to the Companies Act, 1956 came up for consideration and it was decided that in absence of evidence that the Directors were aware of the disqualification which would be incurred by entering into contracts of sale or purchase or supply of goods with the Company, the resolution passed by the Directors in respect of such contracts cannot be invalidated. In our judgment, even assuming that the resolution appointing defendant No. 2 as additional Director amounts to a contract or an arrangement as covered by S. 300 of the Act, still the appointment of defendant No. 2, at 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 be struck down at the behest of somequestion as to whether Art.88 was attracted arose for determination. The articles of the company provided that the number of directors should not be less than four. The learned Judge found that there were never more than three Directors and the three Directors carried on the business of the Company from the inception. Reliance was placed on Art. 88 to claim that the three continuing Directors can summon the meeting. The contention was not accepted by reliance on two earlier decisions where clear distinction was made between the cases where Directors too few in number can and cannot act as continuing Directors. It was observed :"In one case you have a board insufficient in number from the first, and notwithstanding the continuing clause it was held that the board could not transact business. In the other case you have a board which was originally competent to transact business but was diminished by retirement to a number less than that provided for by the articles. The continuing clause was held to apply and those directors were held to be competent to transact the business of thedecision undoubtedly supports the contention of the defendants that the continuing Directors, i.e. defendants Nos. 3 and 4 were entitled to nominate defendant No. 2 as additional Director and the Board was properly constituted. Reference can be usefully made to decision reported in 1952 (22) CC 324, 1953 AIR(Mad) 467, (Ananthalakshmi Ammal v. Indian Trades and Investments Limited) where Mr. Justice Venkatarama Aiyar, as he then was, held that the power toa Director might be exercised notwithstanding that the strength of the directorate has fallen below the minimum required and below the quorum prescribed by the Articles of Association. In that case, the contention was that there was only one Director, there was no Board of Directors as required by Art. 75 and that, therefore, there could be no validas the power tocould only be exercised by the Board. In answer to the contention, reliance was placed on Art. 81 which provided that the continuing Directors may act notwithstanding any vacancy in their Body but only to ensure that number does not fall below the minimum and except in emergencies. The learned Judge, after considering a large number of English decisions, referred to the decision in 1911 (2) Ch 430 with approval. We are in respectful agreement with the view taken by the Division Bench of Madras High Court. An identical view was taken in 1957 (27) CC 340 : 1956 AIR(Pep) 89 ) (Fateh Chand Kad v. Hindsons (Patiala) Ltd.). It is, therefore, not possible to accede to the submission of Shri Kapadia that the Board of Directors was not properly constituted at the meeting held on January 1, 1991 and the continuing Directors could not have nominated defendant No. 2 as additional Director.Shri Kapadia referred to unreported decision dated January 15, 1991 delivered by single Judge of this Court in Appeal From Order No. 929 of 1990 (Ketan Champaklal Bakshi v. Mrs. Sheela Sidhdharth Balsi). The decision has no application because in that case, the Board was never validly constituted at any stage. The learned Judge held that the principle that the acts done by any person acting as Director are valid when the appointment was afterwards found to be defective has no application to a case where there has been total absence of appointment or fraudulent usurpation of authority and referred to the decision in 1946 (1) AllER 586, 115 LJCh 177, 1946 (16) CC 186, 1946 AC 459, (Morris v. N. Kanseen). The decision of House of Lords in Morris v. Kanssen and others 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 the balance sheet and the notices convening 8th and 9th 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, therefore, necessary to examine the object, purpose and scope of S. 171 of the Act to determine whether the requirement is mandatory or directory. The recommendations of Company Law Committee in Paragraphs 75(i) and 78 of the Report indicates that the period of 21 days was provided instead of 14 days as earlier fixed to enable the shareholders to campaign and canvass the proxies if they so desired. The shareholders required reasonable time to canvass opinion in favour or against the particular resolution proposed to be considered at the meeting of the Company. The object, therefore, is obviously to give proper and reasonable opportunity to the shareholders for participating effectively in the meeting. The length of notice, the contents and the manner of service of notice have all been prescribed with this end in view. The fact that(2) of S. 171 of the Act enables the shareholders to consent for shorter duration of notice is an indication that Legislature never thought the length of notice as sacrosanct.(2) of S. 171 of the Act indicates that it is for the shareholders to consider and decide whether they have got necessary opportunity of properly participating in a meeting.(3) of S. 172 of the Act is an indicator that the Legislature never desired that the proceedings of the meeting should be invalidated merely because notice as prescribed under(1) of S. 171 is of insufficient duration.(3) of S. 172 of the Act provides that the accidental omission to give notice to, or theof notice by, any member should not invalidate the proceedings and that clearly indicates the anxiety of the Legislature not to invalidate the proceedings, even though no prejudice whatsoever is caused to the interest of theTo hold that the provisions of S. 171(1) of the Act are mandatory would lead to very unusual results and making it difficult for large Public Companies to effectively function. A couple ofcannot be permitted to defeat the interest of large body of shareholders by raising 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 o S. 171(1) of the Act, the conclusion is inescapable that the provision is merely directory and not mandatory.Shri Kapadia heavily relied upon the decision reported in 1949 ILR(Mad) 808 : 1949 (19) CC 175, 1951 AIR(Mad) 831, 1 MLJ 662   (2)) (N.V.R. Nagappa Chettiar v. The Madras Race Club) and this judgment requires closer scrutiny. The Madras Race Club is a Body Corporate registered under the Companies Act of 1913 and the business and the object of the Club is to carry on business of Race Club and to provide amenities to the members. There were 260 Club members, of whom 23 were living outside British India. On October 16, 1947, notice was issued to the Club members of the Extraordinary General Meeting convened on November 7, 1947. The notice was posted at Guindy on October 16, 1947. The meeting held on November 7, 1947 and the resolutions passed therein were challenged by two members of the Club by filing a suit for themselves and on behalf of other members of the Club after obtaining permission under Order I, rule 8 of the Code of Civil Procedure. A declaration was sought that the meeting was invalid and void and all business transacted thereat was invalid, null and void and one of the contention in support of the declaration was that the notice of the meeting contravened the provisions of S. 81(2) of the Companies Act, 1913 as 21 days were not allowed between the date of the meeting and the receipt of the notice. The trial Judge concluded that though there was some irregularity at the meeting there was no illegality in the proceedings of the meeting and the resolutions were validly passed. The plaintiffs carried an appeal and the Division Bench held that the provision was mandatory and the meeting was not legally convened. The contention that the plaintiffs had not remained present at the meeting and, therefore, must be deemed to have waived the objection was turned down on the ground that such a plea was not specifically raised in the written statement, nor any issue was framed. While examining the contention that the shareholders can dispense with by agreement the duration of the notice, it was observed that the agreement must be of all the members of the Club and it was not enough that the members present at the meeting either expressly or impliedly consented to or acquiesced in shortening the period of notice. According to the Division Bench of Madras High Court, an express consent of all the members to waive the notice must be established and even if the members present at the meeting agreed to waive the defect, that would not cure the defect and the meeting would not be invalid. Shri Kapadia submitted that the decision of the Madras High Court, entirely supports the submission and it should be concluded that two Annual General Meetings convened were not valid meetings and the resolutions passed therein are ineffective. With respect, we are unable to share the view of Madras High Court.A contrary view has been taken by two Calcutta decisions and to which we will immediately refer. The first decision is reported in 1973 (1) ILR(Cal) 207 (Surajmull Nagarmull v. Shew Bhagwan Jalan). Mr. Justice A. N. Sen, as he then was, by detailed judgment examined the ambit and scope of Sections 171 and 172 of the Act. The learned Judge held that Sections 171 to 186 of the Companies Act apply to the meetings of the Company and have been enacted for the proper holding of the meetings, the object being to ensure that the members of the Company get necessary and proper opportunity of attending and presenting their views effectively at the meeting. Examining the ambit of Section 171 (2) of the Act, the learned Judge held that the notice of short duration in breach of provisions of(1) of Section 171 of the Act does not necessarily lead to voiding of the meeting and rendering the proceedings illegal, ineffective and void. The learned Judge disagreed with the observations of the Madras High Court and held that prior consent of the members would completely render(2) of Section 171 nugatory and seeking such prior consent may make waste of valuable time. The learned Judge held that consent referred need not necessarily be obtained before calling any meeting and the consent may be obtained before or after calling of the meeting and also at the meeting. The consent need not be express or in writing and may be implied and inferred from the conduct of the members. The learned Judge then examined the provisions of Section 171 and held that the provision is clearly directory and not mandatory. It was observed that the provision is not so imperative that the requirement thereof cannot be waived at all and is not mandatory in the sense that any breach thereof will necessarily and invariably invalidate the meetings and the proceedings thereof. The learned Judge observed that noncompliance with the statutory requirement of Section 171(1) of the Act may render the proceedings voidable and in appropriate cases any such breach may have the effect of invalidating the meeting and the proceedings thereat. We are in entire agreement with the reasonings and the conclusions reached by the learned Judge in regard to the ambit of Sections 171, 172 and 173(2) of the Act. The decision of the learned Judge was considered and followed by Division Bench of Calcutta High Court in the case reported in 1985 (58) CC 275, 1984 TaxLR 2163, 1984 (3) CompLJ 305 : 1985 (58) CC 275, 1984 TaxLR 2163, 1984 (3) CompLJ 305, (Calcutta Chemical Co. Ltd. v. Dhiresh Chandra Roy). An identical view was also taken by Delhi High Court in the decision reported in 1986 (60) CC 353, 1985 TaxLR 39 : 1986 (60) CC 353, 1985 TaxLR 39 (Maharaja Exports v. Apparels Exports Promotion Council). In our judgment the Calcutta decision lays down the correct law and the view of the Madras High Court is very technical and would lead to a very drastic problems in running the affairs of the Public Limited Companies. It hardly requires to be stated that the Public Limited Companies have got large number of shareholders and if a couple of shareholders are permitted to challenge the legality of the proceedings of the meetings on the ground of insufficiency of notice, and that too without indicating any prejudice, then it would be impossible to efficiently run the administration of Public Limited Companies. The view taken by Madras High Court while considering the case of members of the Race Club, who were few in number did not consider the serious repercussions which would follow in case of Public Limited Companies having a large number ofsubmission 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 tothe 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. The learned Counsel felt that a Company make give notice of 4 or 5 days and will try to sustain the validity of the proceedings. It is impossible to assume that the Court will close 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 to 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 the relief.It is obvious that the plaintiffs never made complaint of any prejudice suffered because of shorter duration of notice and the contention urged by Shri Kapadia with reference to the correspondence is imaginery. In 1928 AIR(PC) 180 (Parashuram Detaram Shamdasani v. Tata Industrial Bank Ltd.), 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 our judgment, the plaintiffs have not suffered any prejudice whatsoever by 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 persona1 quarrels with defendants Nos. 2 and 3 who are his real brothers. The share holding of the plaintiffs is extremely negligible being 0.3% 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 large body of shareholders who had unanimously approved the resolutions moved at the meetings. We enquired from the 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 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 affects the interests of the shareholders, nor would change the controlling pattern of share holding of the Company. The grievance about conferring power upon the Board of Directors to make loans to Body 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 the learned Counsel that service of notice of 20 clear days has causedare 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, 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 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 Gulf War and money conditions being tight. It is not correct that the financial condition of the Company was not sound because one of the resolutions at the 9th Annual General Meetings was to declare a dividend.It is not possible to accept the claim made on behalf of the plaintiffs because nothing prevented the plaintiffs to remain present at the Annual General Meeting and raise objections or to impress upon other shareholders the claim of mismanagement. Secondly, the assumption of the plaintiffs that the Board of Directors would siphon of 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 Body 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 9th Annual General Meeting was for the purpose of enabling Board of Directors to grant loans to their own concerns. Thirdly, the explanatory statement also recites that the surplus funds may be available during off season and 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.16. It is required to be mentioned that though the plaintiffs had claimed before the trial Court that the Company had no authority to convene 8th Annual General Meeting after December 1990, the said contention was not pressed by Shri Kapadia during the arguments. The trial Judge negatived the contention by holding that there is no prohibition to hold Annual General Meeting after the statutory period and the only consequence is of penalty payable by the Company. In 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 relief and accordingly, the appeals as well as Suits Nos. 3002 and 3003 of 1991 must fail in accordance with the consent statements filed by theare not inclined to continue the interim relief because the complaint about enforcement of resolution passed at the two Annual General Meetings is principally in respect of only two items, viz. (a) issuance of right shares, and (b) conferring power upon the Board of Directors to give loans. We do not find that even if these two resolutions are enforced, any prejudice whatsoever will be caused to the plaintiffs. The right shares are issued to the existing shareholders at par and issuance of such shares are not likely to affect the controlling pattern of the Company. The apprehension that the shareholders may transfer the shares and interest of third party may come in is without any merit. The conferring of power on the Board of Directors to grant loans to Body Corporate also is not going to affect the interests of the plaintiffs as there are several restrictions prescribed under the Act before grant of loan.