Case: Shailesh Harilal Shah Vs. Matushree Textiles Limited

( 1 ) MATUSHREE Textiles Limited is a public limited company incorporated under the Companies act, 1956 (hereinafter referred to as "the Act"), and the authorised share capital of the company is Rs. 1,50,00,000 only divided into 15,00,000 equity shares of face value of Rs. 10 each. The subscribed capital is Rs. 89,00,000 divided into 8. 90 lakhs shares. The shares of the company are listed on the Bombay Stock Exchange and at the relevant time, the value quoted was Rs. 40 per share. The seventh annual general meeting of the company was held on September 30, 1989, for the year ending March 31, 1989, and, consequently, the eighth annual general meeting was statutorily required to be held as per section 166 of the Act latest by December 31, 1990. The meeting was not convened by the company within the stipulated time. The eighth annual general meeting for the year ending March 31, 1990, was convened on September 30, 1991, by notice under September 2, 1991. The notice to the shareholders was sent by post on September 7, 1991, and under section 53 (2) (b) (i) the Act, the notice is deemed to have been effected at the expiration ofhours after the letter is posted and accordingly, the notice is deemed to have been served on September 9, 1991.( 2 ) THE plaintiffs instituted Suit No. 3002 of 1991 on September 21, 1991, for a declaration that defendants Nos. 1 to 4 are not entitled to convene the eighth annual general meeting on september 30, 1991, or any other date as calling of the said meeting is ultra vires and null and void. The plaintiffs sought a declaration that notice dated September 2, 1991, convening the annual general meeting is ultra vires, invalid and illegal. The plaintiffs sought a perpetual injunction restraining the defendants from holding and/or proceeding with the annual general meeting and from in any manner giving effect or acting upon in furtherance of implementation of the resolutions to be passed at the meeting. The plaintiffs are holders of 3,110 equity shares and their holding is 0. 3 per cent. of the total equity subscribed. Defendant No. 1 is the company, while defendants Nos. 2 to 4 are the directors. The notice of the eighth annual general meeting sets out that the following subjects will be transacted at the meeting : 1. To receive and adopt the audited profit and loss account and thetogether with reports of directors and auditors thereon; 2. To appoint a director in place of Mr. Vimal Kumar Poddar who retires by rotation and is eligible for reappointment; 3. To appoint auditors and to authorise the board to fix their remuneration; 4. To pass an ordinary resolution appointing Mr. Santosh Kumar Poddar as a director, and 5. To pass in ordinary resolution appointing Rajnikant Mehta as3 ) THE plaintiffs complained that the eighth annual general meeting convened on September 30, 1991, was proposed to be held beyond the statutory period contemplated under section 166 of the act and, therefore, the company is not entitled to call the meeting unless appropriate orders are obtained from the appropriate forum seeking extension of time. The plaintiffs further claimed that notice dated September 2, 1991, and which was deemed to have been served on September 9, 1991, for convening the meeting on September 30, 1991, does not comply with the requirement of section 171 of the Act as the duration of notice is less than 21 clear days. The plaintiffs further claimed that defendant No. 2, Santoshkumar Poddar, ceased to be a director of the company as from January 1, 1991, and his appointment as additional director pursuant to the resolution of the board of directors was bad in law. The plaintiffs claimed that on retirement of defendant No. 2, the board was not properly constituted as the minimum number of directors required is three in number. The plaintiffs further claimed that the quorum required was two and defendants Nos. 2 and 3 being real brothers and closely related, it was not open for defendant no. 3 to participate in the meeting for appointment of defendant No. 2. The plaintiffs claimed that the resolution appointing defendant No. 2 as additional director was vitiated as there was no quorum required by the Act. The plaintiffs further claimed that if the appointment of defendant no. 2 was illegal and bad, the notice convening the annual general meeting signed by defendant no. 2 is bad in law and inoperative. The plaintiffs further claimed that the company had deliberately circulated an abridgedso as to cover up the acts of misconduct, misfeasance and malfeasance indulged in by defendants Nos. 2 to 4. The plaintiffs claimed that a perusal of the auditors report and notes on accounts makes it very clear that the substratum of defendant No. 1 has disappeared and defendants Nos. 2 to 4 are mismanaging the4 ) THE plaintiffs instituted Suit No. 3003 of 1991 in respect of the ninth annual general meeting for the year ending March 31, 1991, convened on September 30, 1991, by notice dated september 2, 1991. The notices were issued by the company to convene both the eighth and ninth annual general meetings on the same date and both the meetings were also to be held on the same date, i. e. , September 30, 1991. Suit No. 3003 of 1991 challenges the right of the company to hold the ninth annual general meeting for identical reasons as set out in companion suit No. 3002 of 1991. The notice for convening the ninth annual general meeting sets out the following agenda : 1. To receive and adopt the audited profit and loss account for the year ended March 31, 1991; 2. To declare a dividend; 3. To appoint a director in the place of Mr. Rajnikant Mehta, who retires by rotation and being eligible offers himself for reappointment; 4. To appoint auditors and authorise the board to fix their remuneration; 5. To consider whether the authorised share capital of the company be increased from Rs. 1,50,00,000 to Rs. 2,00,00,000 divided into 20,00,000 shares of Rs. 10 each; 6. To issue 8,90,000 rights shares at the face value of Rs. 10 to the existing shareholders, and 7. To authorise the board of directors to make loans to any body corporate from time to time and 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 of the5 ) SUIT No. 3139 of 1991 was instituted on September 30, 1991, by Arunkumar Poddar and rajkumar Bajaj and to whom the plaintiffs in other two suits are closely related and/or are friends. Arunkumar Poddar is the real brother of defendants Nos. 2 and 3, Santoshkumar and vimalkumar Poddar, respectively. Arunkumar Poddar and Rajkumar Bajaj claimed that initially, they were directors of the company but defendants Nos. 2 to 4 illegally claimed that they had ceased to be directors by virtue of section 283 (1) (g) of the Act by operation of law. It was claimed that the contention of defendants Nos. 2 to 4 that Arunkumar Poddar and Rajkumar bajaj failed to attend the meetings and, therefore, ceased to be directors is not correct. Arunkumar Poddar and Rajkumar Bajaj, apart from seeking a declaration that they continue to be the directors of the company and all meetings of the board of directors held without their presence were illegal and invalid and resolutions non est, sought relief in respect of the eighth and ninth annual general meetings convened on September 30, 1991. The relief in respect of these two meetings was based on the same averments which were made in the two companion suits. It hardly requires to be stated that the dispute between Arunkumar Poddar and his two brothers had led to the institution of the three suits. It is required to be stated at this juncture that at one stage, the dispute between the three brothers was referred to a spiritual leader in whom the brothers had confidence but the decision of the spiritual leader was not accepted by Arunkumar poddar and the parties decided to fight out the litigation in court.( 6 ) TWO notices of motion being Notice of Motion No. 2131 of 1991 and Notice of Motion No. 2132 of 1991 were taken out by the plaintiffs in Suits Nos. 3002 and 3003 of 1991, respectively, seeking interim relief restraining the company from holding and/or proceeding with the eighth and ninth annual general meetings convened on September 30, 1991. The plaintiffs also sought relief restraining the defendants from implementation of the resolution and business proposed to be transacted at the said annual general meetings. Notice of Motion No. 2158 of 1991 was taken out by Arunkumar Poddar in Suit No. 3139 of 1991 for identical reliefs. The plaintiffs applied for grant of ad interim relief pending of the disposal of the notice of motion, but the learned trial judge declined to grant any ad interim relief. The plaintiffs thereupon preferred appeals before the Division Bench of this court and the Division Bench granted ad interim relief only in respect of the prayer restraining the defendants from implementing the resolutions to be passed at the two annual general meetings. As the court declined to restrain the defendants from holding and proceeding with the two annual general meetings, it is not in dispute that the meetings were held on September 30, 1991. Though Arunkumar had lodged proxies prior to the date of the meetings, neither Arunkumar Poddar, nor any of the plaintiffs in the three suits attended the meetings. The resolutions proposed in the meetings were passed7 ) THE notices of motion were taken up for hearing by the learned single judge after the date of the two meetings and the question which survived for consideration was whether the company should be restrained from implementing the resolutions which were passed. The resolutions providing for increase of share capital and issuance of rights shares and distribution of dividend could not be implemented because of grant of ad interim order. The defendants resisted the relief sought by the plaintiffs in respect of implementation of the resolutions by urging that the contentions urged by the plaintiffs in respect of the validity of the notice convening the two annual general meetings cannot be sustained. The defendants pointed out that though the statutory period contemplated by section 166 of the Companies Act for convening the annual general meeting had expired, still there is no prohibition under the Act to convene the meeting and the company at the most would be liable to a penalty for convening a meeting beyond the statutory period. The company did not seriously dispute that notice under section 171 of the Act was not of 21 clear days but of 20 days only, but urged that the provisions of section 171 of the act are not mandatory but merely directory and the business transacted at the two meeting should not be struck down unless the plaintiffs establish any prejudice. The defendants pointed out that the plaintiffs have not even pleaded prejudice due to the shorter duration of the notice. The defendants also pointed out that the appointment of defendant No. 2 as additional director could not be invalidated and there is ample power under the Act for the existing members of the board to make the appointment. The contention of the plaintiffs that quorum was not available and, therefore, the appointment of defendant No. 2 is invalid was controverted and it was asserted that even though defendant No. 3 was related to defendant No. 2, there was no prohibition for defendant No. 3 to vote at the meting because the appointment of defendant No. 2 as additional director did not amount to contract or any other arrangement as prescribed by section 300 of the Act. The trial judge, by order dated October 15, 1991, found prima facie merit in the contentions urged to behalf of the defendants and held that the convening of the two annual general meetings did not suffer from any defect and it was not necessary to prevent the company from implementing the resolutions which were unanimously passed at the two annual general meetings. As a result of this finding, the trial judge dismissed the two motions. The third motion taken out by Arunkumar Poddar also ended in dismissal by a separate order dated october 15, 1991. It is required to be stated that in the notice of motion taking out by Arunkumar poddar only two grounds were urged; one being that the dividend was declared in contravention of provisions of section 205 of the Act, and the second that the directors report does not set out the true, fair and correct picture of the company and window dressing is attempted to make a show that the company is making profits, while, in fact, the company is a sick unit. The trial judge did not find favour with the contentions of the plaintiffs.( 8 ) APPEALS Nos. 1001 and 1002 of 1991 are filed by the plaintiffs in Suits Nos. 3003 and 3002 of 1991, respectively, while Appeal No. 1082 of 1991 is filed by Arunkumar Poddar from order passed on Notice of Motion No. 3139 of 1991.

Court's reasoning:
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.