Case: M/S. Chandulal &amp; Company Limited &amp; Others Vs. Natwarlal Chunilal Bhalakia &amp; Others

2. The circumstances which gave rise to the suit may be shortly stated as follows:In 1937, one Chandulal Karsandas Mashruwala, Chhotalal Bhalakia and some others thought of erecting a Textile Mill at Ahmedabad, and with that object in view they floated Chandulal and Co. Ltd. the present defendant 1 which was to be appointed to manage the Textile Mill. The share capital of the defendant No. 1 Company was Rs. 640 divided into 128 ordinary shares of Rs. 5/ pie of a rupee 72 of these shares were allotted to the said Chandulal and his nominees who had agreed to manage the affairs of the defendant No. 1 Company and on its behalf to act as Secretaries, Treasurers and Agents of the Textile Mill and 58 shares were allotted to subscribers of the capital of the Bhalakia Mills Company, Ltd. and each of those persons who agreed to subscribe 171 ordinary shares, each of Rs. 100/in the capital of the Bhalakia Mills Company was allotted one ordinary share of the defendant No. 1 CompanyChandulal and Company Ltd. was formed on8 and Bhalakia Mills Company Ltd. was also registered on the same date. For the sake of brevity, the Bhalakia Mills Company, Ltd. will hereafter be referred to as The Mills Co. and Chandulal and Co. Ltd. will hereafter be referred to as Defendant No. 1 Co.1. He was succeeded as the Managing Agent of the two companies by Seth Jethalal Purushottamdas Bhalakia in 1932, and the following was substituted for the original cl. (15) in para. III of the Object of the defendant No. 1 Company in its Memorandum of Association(15) To appoint Seth Jethalal Purushottamdas Bhalakia as the Managing Agent of the Company to manage solely and exclusively the affairs of this Company as well as of the Bhalakia Mills. Company Ltd. Seth Jethalal Purushottamdas Bhalakia or his nominee and la case of his death without any nomination such other person as his heirs executors, administrators, assigns or legal representatives shall nominate, shall have the sole right to manage this Company as well as the Bhalakia Mills Company LtdThe said Jethalal Purushottamdas Bhalakia or his nominee or any other person nominated in the manner abovenamed will be the only person authorised on behalf of this Company to work ad and to sign as and for the Secretaries, treasurers and Agents of the Bhalakia Mills Company LimitedAnd no other member of this Company has any right to interfere in the management of this company or the Bhalakia Mills company Ltd., and every member, present or future is deemed to have joined the Company on this basis. This appointment is confirmed on the terms and conditions and the remuneration set out in the agreement as per revised Sen. A between the Bhalakia Mills Company Ltd. and this Company and the Board of Directors are hereby authorised to execute the said agreement as well a further agreement as per draft approved by the Board of Directors of this Company in favour of Seth. Jethalal Purushottamdas Bhalakia, with such modifications, if any, as the Board and Seth Jethalal Purshottamdas Bhalakia may agree upon3. The Articles of Agreement entered into between defendant No. 1 Company and the said Jethalal in connection with the managing agency were executed on2 and are at Ex. 126. Article 1 of this Agreement stated inter alia that the sole and exclusive right to manage the affairs of the defendant No. 1 Company was to vests in Seth Jethalal Purshottamdas Bhalakia and or in such other person or persons as he nominates and in case of his death without nominating his successors in the person nominated from amongst themselves by his heirs executors, administrators, assigns or legal representatives, etc7. Thereafter he was succeeded by Seth Narottam Jethalal, defendant 5 in the suit, by virtue of his nomination under the terms of the above Article, and the Directors of defendant No. 1 Company recognised that nomination and passed a resolution at a meeting held on, stating that the said Seth Narottamdas Jethalal was to work in place of the deceased Seth Jethalal Purshottamdas with all the rights, as Secretary, Treasurer and Agent which vested in the deceased Jethalal and as per agreement made between defendant No. 1 Company and the said deceased JethalalThat resolution is at Ex. 97. The working of the two Companies continued under this arrangement and on9 the defendant No. 1 Company issued a notice calling the 22nd Annual Ordinary General Meeting of theof defendant No. 1 Company on Monday,9 at 10 a.m. at the registered office of the Company located in the Mills CoThe fifth item of business on the agenda in the notice was regarding payment of Special Additional Remuneration to companys agent Seth Narottamdas Jethalal. It appears that some of the shareholders including Jiwanlal Purshottamdas, plaintiff 6 in the present suit, objected to the inclusion of this item and therefore a notice was given by the said Jiwanlal to the Chairman of the Board of Directors of defendant No. 1 Company on, stating that the subject referred to in item No. (5) in the notice could not be discussed at the said meetingTo this notice defendant No. 1 Company gave a reply on9 asserting that the inclusion of item No. (5) in the agenda was quite proper and legal. Therefore Natwarlal Chunilal, plaintiff 1, for self and other, except defendants 2 to 5, of defendant No. 1 Company filed the present suit on9 to get a declaration that defendant No. 1 Company was not authorised or entitled to give or pay any remuneration to its Secretary, Treasurer and Agent, defendant 5 and for a permanent injunction restraining the defendant No. 1 Company from paying or giving any remuneration to the said Managing Agent, and also for a permanent injunction restraining the defendant No. 1 Company from parsing or discussing any such resolution as was mentioned in the notice calling the meetingIt appears that the plaintiffs had succeeded in getting a temporary injunction against the defendant No. 1 Company, but the same came to be dissolved on9 and the meeting of the Company came to be held on the said day and the resolution for extra remuneration contemplated in item (5) of the agenda was passed by the Company by 86 to 11 votesThe plaintiffs accordingly applied for an amendment of the plaint, which was allowed oil, by which the plaintiffs prayed for a declaration that the resolution for giving extra remuneration, passed by defendant No. 1 Company, was ultra vires, fraudulent and illegal, for a permanent injunction restraining the Company from acting up to and paying in the terms of the said resolution extra remuneration to defendant 5It is the case of the plaintiffs that the Managing Agent was to be given a commission of 9 annas in the rupee in the profits of the Mills Co., and that was done by allotment of 72 shares of defendant No. 1 Company and that it was of the essence of the incorporation of the defendant No. 1 Company that the Managing Agents were not to be given any remuneration for the said management beyond thisAccording to the plaintiffs, the action of the Board of Directors of defendant No. 1 Company, in proposing the resolution to give any, was ultra vires, illegal and against the objects and constitution of the CompanyAccording to the plaintiffs, the Managing Agents of the defendant No. 1 Company were not entitled to claim, and the Company was debarred from paying, any remuneration because the Managing Agents had agreed, in consideration of the commission of 9 annas, to manage the affairs of the defendant No. 1 Company. It was also urged that the notice calling the meeting, so far as item (3) of the business on the agenda of the meeting was concerned, was vague, illegal and invalid4. The defendants resisted the suit on several grounds. They stated that the Court had no jurisdiction to entertain the suit because the resolution solution of defendant No. 1 Company and making payment in pursuance thereof to any of the Companys employees, including its Agent, was a question of internal autonomy of the management of the CompanyThey contested the plea that it was the essence of the incorporation of defendant No. 1 Company and of the appointment of its Managing Agents that no remuneration was to be paid or was made payable to the persons managing the affairs of the said CompanyThey also denied that the notice convening the meeting, so far as item (5) was concerned, was vague or in any way illegal and stated that the notice was clear and specific and that the question of the amount to be fixed and the reasons for the payment of the said amount were to be discussed in the said meeting and depended on the wishes and directions of theof the Company assembled at the said meetingThey stated that the members of the Company assembled at its adjourned meeting held on9 had passed by an overwhelming majority a resolution sanctioning payment of extra remuneration to its Agent, defendant 5, as per and in the manner set out in the said resolution. The defendants urged that the plaintiffs were not entitled to get the reliefs asked for by them and prayed for dismissal of the suit with costs5. On these pleadings the learned trial Judge framed several issues and held that defendant No. 1 Company was not authorised to give or pay remuneration to its agents for managing the affairs of the Company, that the notice dated, so far as item No. (5) was concerned, was illegal and invalid and the resolution to given to defendant No. 5 passed as per item No. (5) of the notice, was ultra vires and illegal. The trial Court, therefore, decided the suit in plaintiffs favour and passed a decree in terms already stated above. The defendants have now come in appeal.

Reasoning:
As already stated above, in the resignation of Seth Chandulal Mashruwala as the Managing Agent, Seth Jethalal Purshottamdas came to be appointed in his place and the original cl. (15) in para. III of the objects of the defendant No. 1 Company was substituted by a new paragraph. The Board of Directors of defendant No. 1 Company were authorised therein to execute an agreement in connection with the terms and conditions of appointment and the remuneration of the said JethalalExhibit 133 is the Memorandum of Association of the Bhalakia Mills Company Ltd. with the Articles of Association and Sch. A annexed. The schedules annexed to Exs. 90 and 136 are identical, and the relevant portion of cl. 2(e) of the said schedule shows that out of the total net amount of the commission payable to the Agents firm a share of nine annas in a rupee of sixteen annas was to be called the Management Commission, while the remaining seven annas commission was to be called the Promoters commissionIn consideration of the work of management, 72 shares of defendant No. 1 Company representing the nine annas commission were allotted to Chandulal Karsandas Mashruwala and Seth Jethalal Purshottamdas, and on the resignation of Chandulal Karsandas Mashruwala the shares standing in his name were transferred to Seth JethalalThe remaining seven annas commission was payable to all the members of the Agents firm including Chandulal Karsandas Mashruwala and Seth Jethalal Purshottamdas and their heirs, executors, assigns and legal representatives, etc., from time to time in consideration of the help given by them in promoting and floating the Bhalakia Mills Company Ltd. subscribing to and getting subscribed a large number of shares by finding persons who will subscribe to its shares and by rendering financial helpThe lower Court was of the view that, the appointment of Seth Jethalal as the Managing Agent of the defendant No. 1 Company and the terms and conditions of his appointment and his remuneration constituted a condition in the Memorandum of Association of defendant No. It Company and the action of the company in passing a resolution givingn to the Managing AgentIn our opinion, this argument cannot be accepted. The mere fact that the appointment of the Managing Agent and the terms and conditions of his appointment and his remuneration were mentioned in the objects of the defendant No. 1 Company would not make the provisions relating to the appointment and the remuneration a condition contained in the Memorandum of association, as contemplated in S. 10 of the ActThe provision relating to the appointment of a managing agent is merely a detail concerning the management of the company and a company will be entitled to regulate that detail in such manner as it likes without going to the Court for its sanction and without recourse to a special resolution, as contemplated in S. 12, Indian Companies ActAs the judgment of Fry, L.J. at page 384 shows, provisions in the memorandum of association with regard to details as to the management of the company would not be conditions within the meaning of the Companies Act. And that is also the effect of the proviso to S. 10, Indian Companies Act. In our opinion, therefore, the view of the trial Court that defendant No. 1 Company was not authorised to pay extracould not pass a resolution in respect thereof cannot be accepted7. It recorded that in place of the deceased Seth Jethalal Purshottamdas, Seth Narottamdas Jethalal (defendant 5) was to work with all the rights as Secretary, Treasurer and Agent of the deceased Seth Jethalal Purshottamdas, as his legal representative in virtue of his own right and in virtue of his nomination, as contemplated by the agreement made between the Bhalakia Mills Company Ltd. and the defendant No. 1 Company7. Defendant 5 replaced the deceased Seth Jethalal as a Managing Agent of defendant No. 1 Company by virtue of the provisions in the Memorandum and Articles of Association of defendant No. 1 Company and as per agreement made between defendant No. 1 Company and Seth JethalalIf that be so, in our opinion, the provisions of S. 87C, Indian Companies Act have no application and would not require defendant No. 1 Company to pass a special resolution for payment of extra remuneration to its Managing AgentWe do not think that there is any substance in this argumentAs soon as the notice was received, the present plaintiffs seem to have immediately moved in the matter and plaintiff6. Jiwanlal Purshottamdas, gave a notice to the Chairman of the Board of Directors objecting to the inclusion of item (5) on the agenda of the meeting. To that notice, as already stated, defendant No. 1 Company gave a reply that the inclusion of the item was quite proper and legal, and before the meeting could be held the present suit came to be filed on9 by plaintiff 1 for self and other shareholders who agreed with him1. No other points were urged en behalf of the respondents in support of the decree of the trial Court. We may point out that after the present appeal was filed by the original defendants, defendant 5 Seth Narottamdas, died, and his heirs and legal representatives have been duly brought on record. It is not urged that the appeal would in any way be affected on account of the death of the original defendant 513. First Appeal No. 549 of 1951 was allowed to stand over on the request of Mr. A.S. Pradhan, who pleaded want of instructions from his clients and therefore wanted an adjournment. When the appeal was again fixed for hearing Mr. Karlekar on behalf of the respondents urged a preliminary objection that the appeal had become incompetent on account of the death of respondent 5 (original defendant 5) and though his heirs and legal representatives were brought on record, the plaintiffs could have no cause of action against them and could not prosecute the appealIn the suit out of which this appeal has arisen, the plaintiffs challenged the validity of the appointment of Seth Narottamdas Jethalal as the Managing Agent of Chandulal and Company Ltd., (defendant 1) and prayed for a declaration that defendant 5 was not validly and legally appointed Managing Agent of defendant No. 1 Company and for an injunction restraining defendant 5 from acting as suchThe trial Court held that the plaintiffs were not entitled to such a declaration and injunction, and dismissed the plaintiffs suit with costs. As the original defendant 5 Seth Narottamdas Jethalal is now dead, it is obvious that the plaintiffs right to sue does not survive against either defendant No. 1 Company or the heirs and legal representatives of defendant5. This position has been conceded by Mr. Munshi.