Case: Bajaj Auto Ltd Vs. N. K. Firodia &amp; Anr. Etc

against the Managing Agents. Firodia was justified in opposing reappointment of the Managing Agents without a specific resolution of the share-holders of the company and without a public notice to the shareholders to represent their views in the matter. The Bajaj group acted behind the back of Firodia and wanted to steal a march. The real motive of the Bajaj group was revealed first by imposing restrictions in the month of March, 1968 on the powers of Firodia as Chief Executive of the appellant company and secondly by the resolution in the month of May, 1968 to terminate the services of Firodia as Chief Executive.The refusal to register the transfers was at the meetings of the Board held in the months of May and June, 1968.29. The Directors had a hostile feeling against Firodia and they had the dominant desire to keep Firodia out of the company. The Directors did not act in the interest of the company and their discretion was tainted by unfair conduct and unjustifiable attitude against Firodia.30. The second reason given by the appellant company was that the Firodia group acquired the shares with a design of acquiring interest in the company which was likely to result in a threat to the smooth functioning of the management of the company and to vote down the passing of the special resolution. There are well-recognised safeguards as to notice and content for passing special resolution. Special resolutions are for limited purposes and are not matters of daily occurrence or of daily routine administration. The mere apprehension that a special resolution will not be passed is not a legitimate reason. The shareholders will bestow their intention on matters forming the subject matter of resolution. Passing of special resolutions will depend upon the mandate of the shareholders. It is manifest that the reason given by the Directors was a camouflage to cover their collateral and corrupt motive of preserving the hegemony of the Bajaj group. The motive is corrupt because the Bajaj group acted for their personal interest and not in the bona fide general interest of the company.31. The third reason given by the appellant company was that the shares were being acquired by the Firodia group not with a view of bona fide investment but with a male fide purpose and evil design of obstructing the business of the appellant company. Acquisition or transfer of shares under the Articles in the present case does not suffer from any restrictive impediment like preemption or personal objections to the transferees. There is no evidence that the transferees belonged to a rival concern. Equally, there is no evidence that the Firodia group ever obstructed in the management of the company. On the contrary, the Firodia group advanced large sums of money. Firodia was largely responsible for the gradual growth of the appellant company and for the prosperity of the company. It was therefore an abuse of the fiduciary power of the Directors to refuse to register transfer of shares.32. The Bajaj group obtained transfer of 16230 shares in their favour in the month of March, 1968. The Bajaj group purchased shares in the market at a maximum value of Rs. 411 per share. The holding of the Bajaj group prior to the acquisition of the said 16230 shares was 28600 shares or according to the Bajaj group 31,500 shares. The Firodia group on the other hand prior to the proposed transfer had 23,400 shares or 21,735 shares according to the Bajaj group. The general public held 52,250 shares. This was the position in the month of February, 1968. The Bajaj group by the acquisition of 16230 shares would have a numerical strength of 44830 shares where as the Firodia group would be having 26863 shares if the proposed transfers were allowed by the Directors. The Bajaj group paid Rs. 411 per share. The Firodia group paid roughly about Rs. 200 per share. Firodia was not on the Board of Directors of the appellant company. The Bajaj group and their friends were the Directors. In the year 1967 the Firodia group lodged 4243 shares for transfer in their names and the transfers were registered. Again, in the month of February, 1968 when the Firodia group lodged 68 shares with the appellant company for transfer, the appellant company accepted the said transfer. It is therefore, revealed that after the appellant came to know that Firodia wrote to the Company Law Board in the month of March, 1968 that the Directors of the appellant company developed antipathy against Firodia. The refusal to register the shares was a sequel to the termination of the appointment of Firodia as Chief Executive and it is manifest that the Directors acted for collateral reasons and in their own interest.33. Counsel on behalf of the appellant contended that of the seven Directors only Kamalnayan Bajaj belonged to the Bajaj family and each Director was an independent industrialist and could not be described to be of Bajaj group neither the status and wealth of the Directors nor their lack of relationship with the Bajaj family could be decisive as to whether they exercised their discretion on correct principle or without any corrupt motive. The Firodia group alleged that Kamalnayan Bajaj was an arbitrator in the family dispute of Ramnath A. Podar and that Shriyans Prasad Jain was a close associate of Kamalnayan Bajaj. Irrespective of these allegations, we have already indicated that the Directors failed to exercise their discretion properly by refusing to register transfer of shares on wrong principles and for corrupt and oblique motives.34. The discretion of the Directors is to be tested as the opinion of fair and sensible men in the interest of the company. In the present case the Directors did not act bona fide nor did they act in the general interest of the company. On the contrary, they acted upon a wrong principle and for the oblique motive of squeezing out Firodia The inescapable conclusion is that the Directors acted arbitrarily and unjustifiably.

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

Explanation:
0[ds]In the present appeals, the reasons of the Directors have to be tested from three points of view. First, whether the Directors acted in the interest of the company; secondly, whether they acted on a wrong principle; and, thirdly, whether they acted with an oblique motive or for a collateralpurpose.This Court in M/s. Harinagar Sugar Mills Ltd. v. Shyam Sundar Jhunjhunwala, (1962) 2 SCR 339   = (AIR 1961 SC 1669  ) said that"the discretion of the Directors would be nullified if it were established that the Directors acted oppressively, capriciously or corruptly or in some other way male fide".On this evidence it is apparent that Firodia wrote to the Company Law Board in the larger interest of the company. Firodias allegations were against the Managing Agents. Firodia was justified in opposing reappointment of the Managing Agents without a specific resolution of the share-holders of the company and without a public notice to the shareholders to represent their views in the matter. The Bajaj group acted behind the back of Firodia and wanted to steal a march. The real motive of the Bajaj group was revealed first by imposing restrictions in the month of March, 1968 on the powers of Firodia as Chief Executive of the appellant company and secondly by the resolution in the month of May, 1968 to terminate the services of Firodia as Chief Executive.The refusal to register the transfers was at the meetings of the Board held in the months of May and June, 1968.29. The Directors had a hostile feeling against Firodia and they had the dominant desire to keep Firodia out of the company. The Directors did not act in the interest of the company and their discretion was tainted by unfair conduct and unjustifiable attitude against Firodia.30. The second reason given by the appellant company was that the Firodia group acquired the shares with a design of acquiring interest in the company which was likely to result in a threat to the smooth functioning of the management of the company and to vote down the passing of the special resolution. There are well-recognised safeguards as to notice and content for passing special resolution. Special resolutions are for limited purposes and are not matters of daily occurrence or of daily routine administration. The mere apprehension that a special resolution will not be passed is not a legitimate reason. The shareholders will bestow their intention on matters forming the subject matter of resolution. Passing of special resolutions will depend upon the mandate of the shareholders. It is manifest that the reason given by the Directors was a camouflage to cover their collateral and corrupt motive of preserving the hegemony of the Bajaj group. The motive is corrupt because the Bajaj group acted for their personal interest and not in the bona fide general interest of the company.31. The third reason given by the appellant company was that the shares were being acquired by the Firodia group not with a view of bona fide investment but with a male fide purpose and evil design of obstructing the business of the appellant company. Acquisition or transfer of shares under the Articles in the present case does not suffer from any restrictive impediment like preemption or personal objections to the transferees. There is no evidence that the transferees belonged to a rival concern. Equally, there is no evidence that the Firodia group ever obstructed in the management of the company. On the contrary, the Firodia group advanced large sums of money. Firodia was largely responsible for the gradual growth of the appellant company and for the prosperity of the company. It was therefore an abuse of the fiduciary power of the Directors to refuse to register transfer of shares.Counsel on behalf of the appellant contended that of the seven Directors only Kamalnayan Bajaj belonged to the Bajaj family and each Director was an independent industrialist and could not be described to be of Bajaj group neither the status and wealth of the Directors nor their lack of relationship with the Bajaj family could be decisive as to whether they exercised their discretion on correct principle or without any corrupt motive. The Firodia group alleged that Kamalnayan Bajaj was an arbitrator in the family dispute of Ramnath A. Podar and that Shriyans Prasad Jain was a close associate of Kamalnayan Bajaj. Irrespective of these allegations, we have already indicated that the Directors failed to exercise their discretion properly by refusing to register transfer of shares on wrong principles and for corrupt and oblique motives.The discretion of the Directors is to be tested as the opinion of fair and sensible men in the interest of the company. In the present case the Directors did not act bona fide nor did they act in the general interest of the company. On the contrary, they acted upon a wrong principle and for the oblique motive of squeezing out Firodia The inescapable conclusion is that the Directors acted arbitrarily and unjustifiably.