Source: https://www.legalcrystal.com/case/332162/laljibhai-c-kapadia-vs-lalji-desai
Timestamp: 2018-02-25 00:19:43
Document Index: 713330960

Matched Legal Cases: ['Art. 142', 'Art. 164', 'Art. 142', 'Art. 83', 'Art. 83', 'Art. 83', 'Art. 83', 'Art. 12', 'Art. 83', 'Art. 574', 'Art. 164', 'Art. 164', 'Art. 164', 'Art. 169', 'Art. 102', 'Art. 85', 'Art. 85', 'Art. 90', 'Art. 85', 'Art. 90', 'Art. 90']

Laljibhai C Kapadia and anr Vs Lalji B Desai and ors - Citation 332162 - Court Judgment | LegalCrystal
Laljibhai C. Kapadia and anr. Vs. Lalji B. Desai and ors. - Court Judgment
LegalCrystal Citation legalcrystal.com/332162
Case Number A.F.O.D. No. 262 of 1971
Reported in AIR1972Bom276; (1972)74BOMLR85; ILR1972Bom917
Acts Companies Act, 1956 - Sections 172, 172(1), 173, 173(1), 173(2), 256, 257, 258, 260, 264, 264(1), 264(2) and 396(1); ;Code of Civil Procedure (CPC), 1908 - Sections 100 - Order 6, Rule 4
Appellant Laljibhai C. Kapadia and anr.
Respondent Lalji B. Desai and ors.
Appellant Advocate F.S. Nariman, Adv. and ;A.B. Diwan, Adv., i/b., Chimanlal Shah and Co., Attorneys
Respondent Advocate G.A. Thakkar, Adv. and ;A.N. Mody, Adv., i/b., ;Haridas and Co., Attorneys, ;D.H. Buch, Adv. and ;G.K. Munshi, Adv., i/b., ;Bhaishankar Kanga and Girdharlal, Attorneys
a) the case debated on increase in number of directors of the company by the board with respect to section 258 of the companies act, 1956 - it was held that the board of directors could not appoint additional director to increase the strength of the board in relevance to affect the power of the company under section 258 of the act ; b) the case debated on increase in number of directors of the company by the board with respect to section 258 of the companies act, 1956 - there were no formalities and no separate resolution was needed to be passed by the company in this regard - the provisions of section 258 of the act was complied with when the company chose to appoint the additional directors in the permissible limits to increase the number of directors - hence it was held that absence.....1. this is an appeal by defendants 2 and 3 and is directed against the judgment and decree passed in the suit filed by respondents 1 and 2 against the appellants and respondent no. 3. the suit was for a permanent injunction restraining respondent no. 3 and its directors, servants and agents from allowing the appellants to act as directors of the respondent no. 3 company. a similar injunction was also claimed against the appellants restraining them from acting in any manner as the directors of the respondent no. 3 company.2. respondent no. 3 is a public limited company registered under the indian companies act and carries on business, inter alia, as manufacturer of rayon yarn and has its registered office at bombay. it is the plaintiffs' case that on 9-4-1969 the board of directors.....
1. This is an appeal by defendants 2 and 3 and is directed against the judgment and decree passed in the suit filed by Respondents 1 and 2 against the appellants and Respondent No. 3. the suit was for a permanent injunction restraining Respondent No. 3 and its directors, servants and agents from allowing the appellants to act as directors of the Respondent No. 3 company. A similar injunction was also claimed against the appellants restraining them from acting in any manner as the directors of the respondent No. 3 company.
2. Respondent No. 3 is a public limited company registered under the Indian Companies Act and carries on business, inter alia, as manufacturer of rayon yarn and has its registered office at Bombay. It is the plaintiffs' case that on 9-4-1969 the Board of Directors appointed the appellants as additional directors of Respondent 3 company. The Board of Directors consisted at that time of 8 members excluding these additional appointed directors. The plaintiffs have referred to the 8 directors as functioning directors and that may be to distinguish them from the appellants who are appointed additional directors. Thereafter notices dated 10th April 1969 were received by Respondent No. 3 company proposing the appellants as directors at the next Annual General Meeting. On 11-6-1969 the 22nd Annual General Meeting of the Respondent 3 company was convened. At the General Meeting two directors Kasturbhai Lalbhai and Naval H. Tata retired by rotation and were again elected as directors. At the same meeting by two separate resolutions the appellants were appointed directors. The two resolutions are referred to in the Plaint as Resolutions Nos. 5 and 6.
3. The plaintiffs by the suit challenged the legality of the appointment of the appellants on certain grounds. According to the plaintiffs the number of directors on the Board can be increased by the company under Section 258 of the Indian Companies Act by passing a resolution. No such resolution was ever duly notified, proposed and passed. In the absence of any such resolution, Respondent No. 3 company had not the power to appoint the appellants as directors. The plaintiffs submit that Resolutions Nos. 5 and 6 are, therefore, invalid, void and of no effect.
4.The plaintiffs also submit that without prejudice to the aforesaid ground, the appointment of the appellants as directors was illegal, void and of no effect as they had not filed letters of consent under Section 264(1) of the Act in respect of their proposed appointment as directors at the Annual General Meeting. The plaintiffs, as share - holders of Respondent 3 company, have the right to property in Respondent 3 company. It is for this reason that they had filed the suit restraining the appellants from acting as directors of Respondent 3 company.
5.Respondent 3 company filed its written statement and submitted that the appointment of the appellants as directors was valid and legal. It has stated that a separate resolution to increase the number of directors was not required under the provisions of the law. The company also stated in para 2 (a) of the written statement that on 9th April 1969 the appellants had filed their letters of consent to act as directors, if appointed. After receipt of these letters the appellants were appointed as directors. It is mentioned in the written statement that after their appointment as Additional Directors on 10th April 1969, two share - holders delivered to the company notices under Section 257 of the ct intending to propose the appellants as candidates for the office of the directors of respondent 3 company at the next Annual General Meeting of the company. The appellants were not required to file any letters of consent under Section 264(1) of the Act before their election as directors at the 22nd Annual General Meeting. According to the company the appellants were validly proposed and elected as directors.
6.The appellants between themselves filed one written statement and supported the validity of their appointment on all the grounds alleged by Respondent 3 company. In addition the appellants stated that on their appointment as Additional Directors, the strength of the board was increased to 10 directors. In paragraph 8 of the written statement it is submitted that they were not required to file any letters of consent under Section 264(1) of the Act before their appointment as directors at the meeting. Without prejudice to this defence it is also pleaded tht they did file the letters of consent on 9th April 1969 with Respondent 3 company. they argued that as Additional Directors, they were persons to whom Section 264(1) of the Act did not apply. Assuming that there was any such requirement, it is asserted that it was a mere irregularity and that did not disable them from acting or functioning as directors. They made it clear that it was implicit in the two resolutions appointing them as directors that the number of directors was, if necessary, being increased. According to them no separate resolution under Section 258 of Article 169 of the Articles of Association of the company was necessary for increasing the number of directors from 8 to 10. At any rate, the absence of any separate resolution will not affect the validity of there solution appointing them as directors of Respondent 3 company. they denied that it is mandatory under S. 258 of the Companies Act or under Article 169 of the Articles of Association of the company that before the bumper of directors is increased, a resolution increasing the number of directors ought to have been duly notified or proposed or passed. There were other allegations made by the appellants against the plaintiffs but for deciding the points raised in this appeal they are not at all relevant. As the parties had not sought any issues on the basis of those allegations, the learned Judge was not called upon to consider whether they were true or false. the substance of those allegations was that according to the appellants the plaintiffs had filed the suit mala fide at a late stage at the instance of one Rasiklal, J. Chinai who was defeated in the contest for election of directors at the general meeting of the share - holders of Respondent 3 company.
7.At the trial the learned Judge framed the relevant issues. Parties did not lead any oral evidence. By consent of the parties only documents were exhibited. The defendants had also resisted the suit on the ground that the plaintiffs being share - holders cannot have any grievance against respondent 3 company as the matter in dispute was concerning the internal management of the company and the suit by the two share - holders was not maintainable. Perhaps it was felt by the parties that the issues arising in the suit are purely questions of law and it was not necessary to adduce any oral evidence.
8.The learned Judge, on a consideration of the evidence on record and the submissions of the parties, has recorded his findings. He held that the present suit is maintainable. He came to the conclusion that the letters of consent under S. 264(1) of the Act for the appointment of the appellants as directors at the Annual General Meeting were not necessary. In view of this finding he held that whether or not such letters were filed need not be considered. According to him the impugned resolutions Nos. 5 and 6 passed at the Annual General Meeting of the company on 11-6-1969 appointing the appellants as directors of the company were illegal. Consistent with this finding the learned Judge decreed the plaintiffs' suit and granted the injunctions against Respondent No. 3 company and the appellants.
9.As stated above the appellants, aggrieved by the decree, have come to this Court with the present appeal. Mr. Nariman appears for the appellants. Mr. Thakkar with Mr. Mody instructed by M/s. Haridas & Co., appears for respondents 1 and 2, the original plaintiffs. Mr. D. H. Buch with Mr. G. K. Munshi instructed by M/s. Bhaishankar Kanga and Girdharlal, appears for Respondent 3 company. It must be stated at the outset that Respondents 1 and 2 have purported to file cross - objections against the finding recorded by the learned Judge about the consent letters under S. 264(1) of the Act. Mr. Thakkar conceded that the cross - objections are misconceived but mentioned that he had the right, as an advocate appearing for the respondents, to assail the decree under appeal on any of the grounds decided against him. Therefore, the points for determination in this appeal are :-
(1) Whether the Board of Directors of the Company before and after the Annual General Meeting consisted of ten members or whether at the Annual General Meeting the strength of the Board of Directors was increased from 8 to 10.
(2) Whether the Company can increase the strength of the Board of Directors only by passing a separate and distinct resolution before proceeding to appoint directors by filling the additional sanctioned posts ?
(3) Has the Board of Directors contravened the mandatory provisions of Section 173 of the Act by not furnishing any information about the proposed special business or by furnishing information which is hopelessly inadequate or misleading.
(4) Can the plaintiffs rely on the above contravention in any form without specific averments in the Plaint ?
(5) Has the learned Judge erred in holding that the Additional Directors, like the retiring directors, are not, required to file written consent duly signed before their reappointment as directors by the Company ?
(6) Is the suit not competent as the alleged irregularities arise in the course of the internal management of the company
10.Before I proceed to consider the various points urged before me, it is desirable to refer to the relevant provisions of the Companies Act, 1956 and the Articles of Association of Respondent 3 company.
11.Section 2(13) of the companies Act defines 'director', as any person occupying the position of director by whatever name called. Section 255 provides for the appointment of directors and the proportion of those who are to retire by rotation. Section 256 contains provisions for ascertainment of directors retiring by rotation and filling up of the vacancies. Under Section 257 a person who is not a retiring director shall be eligible for appointment to the office of director if he or some member intending to propose him has, not less than fourteen days before the meeting, left at the office of the company a notice in writing under his hand signifying his candidature for the office of director or the intention of such member to propose him as a candidate for that office. The other provisions of Section 257 are not quite relevant and need not be referred to here.
12.Under Section 258 of the Act subject to the provisions of Ss. 252, 255 and 259, a company in general meeting may, by ordinary resolution, increase or reduce the number of its directors within the limits fixed in that behalf by its articles. S. 259 in certain cases requires the sanction or approval of the Central Government for any increase in the number of its directors. Section 260 provides that the Board of Directors, if permitted by the Articles of Association, can appoint additional directors. The Board is to exercise that power so as not to exceed the maximum strength fixed for the Board by the Articles. the first proviso to Section 260 makes it clear that such additional directors shall hold office only upto the date of the next Annual General Meeting of the company. S. 262 deals with the filing of casual vacancies amongst directors. Under Section 264(1) ordinarily there will be only one resolution for the appointment of one director at the Annual General Meeting of the company. A single resolution is permitted under certain special circumstances for appointing more than one director. Section 263(2) provides that a resolution moved in contravention of sub - section (1) shall be void, whether or not objection was taken at the time to its being so moved. Section 264(1) under certain circumstances requires that the candidate for directorship should file his written consent with the company before his appointment as director at the meeting. Section 264(2) requires that a person appointed as a director shall not act as a director unless he has within the prescribed time signed and filed his consent with the Registrar to act as such director.
13.Apart from the group of these sections, there are two more sections which assume importance while deciding the points which arise in this appeal. Section 172 requires that every notice of a meeting of a company shall contain certain relevant particulars, leaving the other details, I must only mention that under Section 172(1) such notice shall contain a statement of the business to be transacted at the meeting. Under Section 173(1)(a) in the case of an Annual General Meeting, all business to be transacted at the meeting shall be deemed special, with the exception of business relating to four specified items. Item No. 3 deals with the appointment of directors in the place of those retiring. Section 173(1)(b) makes it clear that in the case of any other meeting, all business shall be deemed special. Section 173(2) contains a direction that where any items of business to be transacted at the meeting are deemed to be special under sub - section (1), there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business, including in particular the nature of the concern or interest, if any, therein of every director, the managing agent, if any, and the manager, if any. The proviso also requires further and better particulars in specified cases. It is not necessary to refer to that proviso at any length.
14.Now it remains to mention the relevant Articles of Association of the company. Under Art. 142, the Directors have power at any time and from time to time to appoint any other qualified person to be a Director as an addition to the Board so that the total number of Directors at any time shall not exceed the maximum fixed. Any person so appointed as an addition to the Board shall retain his office only upto the date of the next Annual General Meeting but shall be eligible for re - election at such meeting. Under Art. 164 at every Annual General Meeting of the Company, one - third of such Directors for the time being as are liable to retire by rotation or if their number is not three or a multiple of three, the number nearest to one - third shall retire from office. Article 166 makes to clear that a retiring Director shall be eligible for re - election. It is true that counsel on either side did refer to other sections and articles to elucidate the various points raised by them. I need not consider them all at this stage.
15.The first point made by Mr. Nariman on behalf of the appellants is about the strength of the Board of Directors of the Company. He objected to the expression 'functioning Directors' and 'Additional Directors' as used by the plaintiffs in the plaint. He said that there is no warrant for any such distinction. Whether the Directors are appointed at the meeting or by the Board of Directors, they all together constitute the Board. The Directors in that capacity have the same rights, privileges and obligations under the provisions of the Act. He referred to the definition of 'director' as contained in Section 2(13) of the Companies Act. In all other places the Act the Board of Directors was mentioned as such and he says that the distinction sought to be made by the plaintiffs is without any legal significance, It appears to me that the plaintiffs have used the different expressions only for a better understanding of their case. The appellants were, in the first instance, appointed as Additional Directors and later on they were re - appointed as Directors. But apart from this fine distinction in phraseology that point of substance made by Mr. Nariman is that the company had not increased the number of Directors from 8 to 10 at the Annual General Meeting by the reappointment of the appellants. When the Board of Directors in exercise of their power under Section 260 of the Act co -opted the appellants, the number of Directors on the Board was increased from 8 to 10. Even at the meeting the number was not reduced. The two Directors retired by rotation and the two Additional Directors ceased to hold office. There were, therefore, four clear vacancies. When the Company passed four resolutions reappointing the four persons as Directors there was no increase and the provisions of Section 258 are not attracted. I find it very difficult to accept this submission. the composition of the Board of Directors with Additional Directors will not be the same as the Board of Directors appointed by the Company at the General Meeting. It cannot be said that the company that the company had at any time surrendered its inherent or statutory power to increase the number of directors or co - opted Additional Directors. As observed by Lord Hanworth, M. R. in Worcester Cursetry Limited v. Witting reported in 1936 (1) Chancery 640 - 648, the power conferred on the directors to appoint additional Directors is a temporary power vested in them, and this is to be reviewed and perhaps confirmed at the General Meeting. Even the wording of Section 260 underlines the temporary nature of this power conferred on the Board of Directors. Section 260 first proviso makes it clear that such Directors shall hold office only upto the date of the next Annual General Meeting. It is true that under Art. 142 of the Company, the Board of Directors can appoint any number of Additional Directors at any time and from time to time so as not to exceed the permitted maximum limit. Consistent with the first proviso to Section 260, the Article also makes it clear that the person so appointed as an addition to the Board shall retain his office only upto the date of the next Annual General Meeting. I am of the view that the Board of Directors cannot by the appointment of Additional Directors increase the strength of the Board so as to affect the power of the Company vested in it under Section 258 of the Act.
16.Then Mr. Nariman argued that the learned Judge was not justified in holding that the company can increase the strength of the Board only by passing a separate and distinct resolution before proceeding to appoint Directors by filling the additional sanctioned posts. I have not used the exact words of the learned Judge but in substance that appears to be the finding recorded by him. According to Mr. Nariman all that S. 258 requires is that the company, subject to the other restrictions imposed on it, must resolve to increase or reduce the number of Directors in the General Meeting. The section itself has not prescribed any other formality for effecting the increase or decrease in the number of Directors, Mr. Nariman points out that under the Companies Act, wherever separate resolutions were found necessary, provisions were made in that behalf. He referred to Section 263 of the Act. I have already mentioned above the substance of that section. Ordinarily there will be a separate resolution for appointing a person as a Director at the Annual General Meeting of the Company. Mr. Nariman says that the Company can exercise the power vested in it under Section 258 by passing one or more resolutions and as no form is prescribed, one will have to look at the substance. When there are 8 members on the Board of Directors, the Company can by simply appointing two members in addition increase the number and this can be done without passing a separate resolution. He says that it is implicit in the act of appointing. The company has exercised the power to increase the number.
17.While dealing with this power of the Company to increase the number, Mr. Nariman referred to the corresponding English Law and submitted that the provisions are substantially similar. Mr. Nariman relied on an English case Worcester Corsetry Ltd. v. Witing, (1936) 1 Ch D 640. The learned Judges were considering the effect of two apparently inconsistent Articles of the Company. But as the case also dealt with the power of the Company to appoint directors and thereby increase the number, it has some relevance while appreciating the point raised before me. Article 83 of Table A contained the provisions similar to Section 258 of the Indian Companies Act. At page 649 Lawrence, L.J. Observes as follows about the existence of the power to increase and its exercise by the company :-
'Art. 83 of Table A shows in the plainest terms that the company has power to increase or reduce the number of its board. It is said that that does not involve the nomination and appointment of particular gentlemen or ladies as directors, but it seems to me that that is necessarily implied in the provision of Art. 83. If, for instance, there have been four directors, within the maximum number of directors, and the board desire that two additional directors shall be appointed, it can convene, in my judgment, a meeting under Art. 83 for the purpose of increasing the number of directors by two named persons, appointing those two persons, and thereby increasing the number of directors'.
Slesser, L. J. at page 654 approves the above observations and says :-
'The more natural view of Art. 83 is that it is not redundant or merely introducing unnecessary machinery which is already provided by Art. 12 in dealing with the maximum and minimum, but, as Lawrence L. J., has indicated, is itself conferring a power not only to increase that number but to increase that number by itself appointing directors to the extent to which it is intended to increase the number.'
18.About the power of the company to increase the number of directors under its Articles of Association, the learned author in his book 'Penington's Company Law' 2nd Edn. p. 456 - 57 sums up the legal position as under :-
'The power to appoint subsequent directors is usually exercisable by the members of the company in general meeting by ordinary resolution. If the articles prescribe the maximum number of directors who may be appointed, appointments in excess of the maximum are void. Usually, however, the members are empowered to increase or reduce the maximum number of directors by ordinary resolution, and then an appointment of a director in excess of the former maximum is taken to be an exercise of the power to increase the number of directors, and is valid'.
While making the last - mentioned observation, the learned author in the footnote has referred to the above mentioned c2ase. So Mr. Nariman argued that Section 258 was an enabling section which authorised the Company to increase or decrease the number of directors just by an ordinary resolution. As singular includes plural, one has to look at the result and not the number of resolutions to find out whether the company has exercised the power vested in it.
19.Mr. Thakkar, with equal force, stressed the word resolution and said that it was a condition precedent to the valid appointment of directors resulting in the increase of the number of directors. Any other construction, he says, will render Section 258 nugatory or meaningless. Mr. Thakkar tried to distinguish the said decision on certain grounds. He says that Art. 83 construed by the learned Judges refers to a General Meeting. Section 258 of the Companies Act provides that the company may in general meeting by ordinary resolution increase or reduce the number of its directors. In my opinion this distinction is not one of substance. Any such difference in the wording will not affect in any manner the efficacy of the observations made by the learned Judges in the above - mentioned case.
20.Then Mr. Thakkar was at pains to point out that no such point was ever raised and debated in that case. The observations of the Judges quoted above are merely obiter dicta. Mr. Thakkar says that the Judges were reconciling the two apparently conflicting articles which conferred the power of appointing directors on the Board of Directors and the company. He referred to several text books on Company Law, viz., Pennington's Company Law, 2nd Edn, p. 456 - 57; Modern Company Law by C. B. Gover, IIIrd Edn. p. 21; Palmer's Company Law p. 533; Halsbury's Laws of England Vol. 6, p. 279. Art. 574; Buckley on the Companies Act, 13th Edn. p. 885 and submitted that the above mentioned authority was quoted by the learned author to show that the company had not surrendered its power to appoint directors in favour of the Board of Directors. But the decision is not cited by Mr. Nariman as a binding authority on this Court. Mr. Nariman relies only on the wording of the Article considered by the Judges, which resembles the wording of S. 258. Under both the provisions the company has the power to increase the number of directors. When the company at its meeting resolves to appoint additional directors in excess of the present strength of the Board, then it is an instance where the company is exercising its two - fold powers. The company increases the number not by separate resolution but by appointing additional directors. The effect is that the company has increased the number of directors. That appears to be a sensible construction which can be adopted while interpreting the relevant provisions contained in Section 258 of the Indian Companies Act. In the result, in may opinion, it is not necessary for the company to pass a separate resolution increasing the number of directors before appointing the directors to fill the additional sanctioned posts. In law it is possible for the company to comply with the provisions of Section 258 when it chooses to appoint within the permitted limit additional directors so as to increase the strength of its present Board. The learned Judge was in error in coming to the conclusion that in the absence of a separate resolution the appointment of the appellants as directors of Respondent 3 company was null and void. The legality of the Resolutions Nos. 5 and 6 cannot be challenged on the ground that there was any contravention of the provisions of S. 258 of the Act.
21.Then I propose to consider points Nos. 3 and 4 together as the discussion of law is likely to be overlapping. Point No. 3 will involve the consideration of the provisions of Sections 172 and 173 of the Act and point No. 4 is about the sufficiency or otherwise of the pleadings.
22.I have already set out above the relevant provisions of Section 173 of the Act. Section 173 will have to be read with Section 172(1) of that Act. Under Section 172(1) every notice of a meeting of a company, among other things, must contain a statement of the business to be transacted at the meeting. Section 173(1) contains classification of the business and indicates when the business shall be treated as special. Under Section 173(2) any items of special business mentioned in the notice must be accompanied by a statement setting out all material facts concerning such items of business.
23.Mr. Nariman for the appellants drew my attention to the notice of the meeting which is produced at Ex. D at p. 90 of the paper book. It is worthwhile to reproduce the material items of business :-
Serial No. 3 : To elect a Director in the place of Shri Kasturbhai Lalbhai who retires by rotation under Art. 164 of the Articles of Association of the Company, but being eligible, offers himself for re - election.
Serial No. 4 : To elect a Director in the place of Shri Naval N. Tata, who retires by rotation under Art. 164 of the Articles of Association of the Company, but being eligible, offers himself for re - election.
Serial No. 7 : To appoint a Director in place of Shri Laljibhai Chhaganlal Kapadia who was appointed an additional Director of the Company by the Board of Directors on 10th April 1969 and who ceases to hold office under Section 260 of the Companies Act, 1956 on the date of this meeting in respect of whom a notice as required by S. 257 of the Companies Act, 1956 has been received by the Company.
Serial No. 8 : to appoint a Director in place of Shri Nimjibhai Chhaganlal Kapadia who was appointed an additional Director of the Company by the Board of Directors on 10th April 1969 and who ceases to hold officer under Section 260 of the Companies Act, 1956 on the date of this meeting in respect of whom a notice as required by Section 257 of the Companies Act 1956 has been received by the Company.
24.Items Nos. 3 and 4 constitute ordinary business and Items Nos. 7 and 8 constitute special business within the meaning of Section 173 of the Act. Being special business Items 7 and 8 are followed up by explanatory statements contained in an annexure to the notice. Explanatory statement accompanying Item No. 7 reads as under :-
'Shri Laljibhai Chhaganlal Kapadia was pointed an additional Director on 10th April 1969 by the Board of Directors of the Company and he retains his office as a Director only upto the date of this Annual General Meeting under the provisions of Section 260 of the Companies Act, 1956. As required by Section 257 of the Companies Act, 1956, a notice has been received from a member signifying his intention to propose his appointment as a Director. It is recommended that he be appointed as a Director'.
Explanatory Statement accompanying Item No. 8 is identical with the difference that it is in respect of the other additional Director Shri Nimjibhai Chhaganlal Kapadia. Relying on the context of the notice in general and the explanatory notes in particular, Mr. Nariman submits that there is compliance with the requirement of Section 173 of the Act. Mr. Nariman points out that under Art. 164 of the Articles of Association of the Company, at every Annual General Meeting of the Company, one - third of such of the Directors for the time being as are liable to retire by rotation or if their number is not three or a multiple of three, the number nearest to one - third are to retire from office. The strength of the Board was 8 and obviously the number of Directors retiring by rotation will be two. Items Nos. 3 and 4 in the notice is unmistakable terms give an indication of this factual and legal position. As these items of business were not special there was no explanatory statement in the annexure to the notice. items Nos. 7 and 8 constituted special business. the contents of these items conveyed to the body of shareholders sufficient information about the proposal to fill up additional posts. The two persons had acted as additional directors and they ceased to hold office under Section 260 of the Act on the day of the meeting. It is stated that the company had received proposals about their appointment under Section 257 of the Act. It is implicit in this statement that the Board wants the company to consider the appointment of Directors for two additional posts. The explanatory statement contains one important additional particular. The Board of Directors has made a recommendation that the two persons who have acted as additional Directors be appointed Directors at the meeting. According to Mr. Nariman the Board has complied with the provisions of Section 173 of the Act.
25.Then Mr. Nariman argued that in the present state of pleadings, it was not open to the plaintiffs to raise any objection about the non - compliance with the requirement of Section 173 of the Act. He says that the plaint nowhere refers to Section 173 of the Act. A fair reading of the plaint would show that the main grievance of the plaintiffs was that no resolution was proposed or passed under Section 258 of the Companies Act read with Art. 169 of the Articles of Association of the Company about increasing the strength of the Board of Directors. According to the plaintiffs the two resolutions appointing the appellants as directors are not valid as they in effect increased the number of directors from 8 to 10 without an appropriate resolution being passed as required by Section 258 of the Act. This is the only grievance of the plaintiffs about the non - compliance with the condition in Section 258 of the Act. Mr. Nariman says that in view of this specific case made out by the plaintiffs, there was no occasion for the defendants to meet any other case about the illegality resulting from the non - compliance with the provisions of Section 173 of the Act. Mr. Nariman in this connection heavily leaned upon a decision of the Orissa High Court reported in Kalinga Tubes Ltd. v. Shanti Prasad Jain, : AIR1963Ori189 . The learned Judges of the Division Bench of that High Court had to tackle a similar point about the sufficiency or otherwise of the pleadings. While dealing with issue No. 4 (a) in that proceeding Misra, J. at page 202 in para 17 observed as follows :-
'The notice is challenged as fraudulent and contrary to the statute. None of the grounds have been pleaded. For the first time this contention appears to have been advanced in course of argument before Mr. Justice Barman. In none of the affidavits the petitioner swears that the notice was tricky, misleading or insufficient. the question is one of mixed question of fact and law, and it is not permissible to be taken at the stage of hearing for the first time'.
The learned Judge certainly refers later on to Section 172(1) and S. 173(2) of the Act. At page 214 para 58 Das, J. observes as follows :-
'At the outset, I must say that the plea of invalidity of the notice was not taken either in the plaint which was filed in the Court of the Subordinate Judge or in the petitions and affidavits before the Honourable company Judge of this Court. At a fairly late stage of the case, oral submissions were made challenging the validity of the notice for the extraordinary General Meeting of 29-3-1958. On that ground alone, the point could have been left out of consideration'.
However, it must be stated that the learned Judges despite the insufficiency of he pleadings considered the merits of the case, and held that the notice was in compliance with the statutory requirements of Section 173 of the Companies Act, and the meeting held on the basis of such notice and the resolutions passed therein were not in any way invalid. Mr. Nariman says that this authority has acquired additional sanctity as it was in terms approved by the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd., : [1965]2SCR720 . Wanchoo, J. at page 1545 para 24 has observed as follows :-
'It is, however, urged that the notice for the general meeting of the 29th March 1958 was not in accordance with Section 173 and so the proceedings of the meeting must be held to be bad. The objection was, however, not taken in the petition and we have, therefore, not permitted the appellant to raise it before us, as it is a mixed question of fact and law. We may add that though the objection was not taken in the petition, it seems to have been urged before the appeal court. Das, J. has dealt with it at length and we would have agreed with him if we had permitted the question to be raised.'
Relying on these decisions Mr. Nariman maintained that the resolutions cannot be challenged on the ground that the notice of the meeting and the explanatory statements accompanying the notice were defective in any manner.
26.Mr. Nariman also submitted that the provisions of Section 173 were directory and not mandatory. Strict compliance with Section 173 was not necessary and there was in the present case substantial compliance with the provisions of that section. It is for this reason that, according to Mr. Nariman, any defect in the notice is capable of being waived by the shareholders. The company had unanimously appointed the appellants at the Annual General Meeting. If there were any averments in the plaint setting out the various defects and irregularities in the drafting of the notice and the explanatory statements, then it was open to the defendants to adduce evidence and satisfy the court that the plaintiffs by their conduct were stopped from objecting to the legality of the resolutions. As an instance of the so - called irregularity, Mr. Nariman referred to In re : Express Engineering Works Ltd., (1920) 1 Ch 466. it was a case where the legality of the Company's meeting was challenged on the ground that it was styled a Directors' Meeting and business was transacted as if it was a General Meeting. The issue of debentures at the meeting was challenged as not valid. Younger, L. J. agreed with Lord Sterndale M. R. who held that the share - holders must be deemed to have acted in the meeting as shareholders and not as directors. What is stated by Younger, L. J. at page 471 is to the following effect :-
'I am of the same opinion. I am content to rest my conclusion upon what was said by Lord Davey in Soloman's case that a company is bound in a matter which is intra vires by the unanimous agreement of all the corporators'.
But this decision is not of any assistance to us. A syndicate of five persons formed a private company. They were all the directors and also shareholders. They all attended the meeting and transacted business. The objection to the legality of the meeting was rightly overruled.
27.Mr. Nariman then dwelt on the case In re : Oxted Motor Co. Ltd., (1921) 3 KB 32. The Court held that it was not open to a creditor to impeach the validity of a resolution to wind up the company as it was competent to the shareholders of the company acting together to waive the formalities required by Section 69 of the Companies (Consolidation ) Act, 1908 as to notice of intention to propose a resolution as an extraordinary resolution. Even this decision will not carry us any further as in the present case everything turns upon the interpretation of the words of S. 173 of the Companies Act.
28.Then Mr. Thakkar for the respondents submitted that Section 173 was in terms mandatory and not directory. He strongly relies upon a decision of the Gujarat High Court in Mohanlal Ganpatram v. Sayaji Jubilee Cotton & Jute Mills Co. Ltd., : (1964)0GLR804 . Mr. Thakkar pin - points the following observations of Bhaagwati, J. (as he then was) at page 338 :-
'The object of enacting Section 173 is to secure that all facts which have a bearing on the question on which the shareholders have to form their judgment are brought to the notice of the shareholders so that the shareholders can exercise an intelligent judgment. The provision is enacted in the interests of the shareholders so that the material facts concerning the item of business to be transacted at the meeting are before the shareholders and they also know what is the nature of concern or interest of the management in such item of business, the idea being that the shareholders may not be duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment on the question after being placed in full possession of all material facts and apprised of the interest of the management in any particular action being taken. Having regard to the whole purpose and scope of the provision enacted in Section 173, I am of the opinion that it is mandatory and not directory and that any disobedience to its requirements must lead to the nullification of the action taken'.
29.Mr. Thakkar reinforced his argument by reference to a Calcutta decision in which it was held that it was incumbent on the directors to disclose in the notice of the General Meeting full facts. Before I refer to the relevant observations of the learned Judges, it is necessary to know in brief the facts of that case. Section 294(2) of the Companies Act (as amended by Act 65 of 1960) provides that the appointment of a sole selling agent by the Board of Directors shall cease to be valid if it is not approved by the company in the first General Meeting held after the date on which the appointment is made. The Court held that the provision was not directory but mandatory. Tehmere substantial compliance was not enough but there must be a strict compliance. The impugned agreement about the appointment was referred to in the report of the Directors and the same was adopted in the subsequent adjourned annual general meeting. But the adoption or approval of the report was treated as ordinary business and not as special business. In the circumstances the learned Judges allowed the appeal and granted ad - interim injunction against the company and the directors restraining them from getting passed the resolution in the ensuing Annual General Meeting of the Company. At page 124 of the report Shaligram Jhajharia v. National Co. Ltd., (1965) 1 Comp LJ 112 (Cal). Bose. C. J. has made the following observations after quoting Section 173 (2) and (3) of the Act :-
'So it appears that under S. 173(2) an explanatory note with regard to the special items of business has to be annexed to the notice of the meeting; but this was not done with regard to the agreement dated the 27th January 1962. Therefore, there was no compliance with the requirements of the Statute inasmuch as it was incumbent under the Section, if any special business was to be transacted at the meeting, to specify the nature of such business in the notice'.
Mitter, J. at page 134 dilates as follows on the importance of the statutory provision :-
'The provision for inspection of the agreement at the registered office of the company in terms of Section 173(3) is not sufficient for the purpose of Section 173(2). ......................As the legislature has thought it fit to provide that shareholders must approve of the appointment of selling agents the opportunity given to the shareholders must be full and complete and there must be a full and frank disclosure of the salient features of the agency agreement before the shareholders can be asked to give their sanction. The provision for inspection of the document at the registered office of the company is not enough. Few shareholders have either the time or the inclination to go to the registered office to find out what the company is about to do. Moreover such an opportunity is illusory in the case of shareholders who do not live in Calcutta when the registered office is situate here'.
Coming nearer home, Mr. Thakkar quotes a recent decision of this Court reported in Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd., (1971) 41 Com Cas 377 (Bom) Madon, J. reviewed the entire case law on the subject while interpreting Section 173(2) of the Act. I reproduce the headnote which nearly summarises the conclusions of the learned Judge :-
'Under Section 173(2) of the Companies Act, where any items of business to be transacted at the meeting are deemed to be special, there shall be annexed to the notice of the meeting, a statement setting put all material facts concerning each such item of business, including, in particular, the nature of the concern or interest, if any, therein, of every director, the managing Agent, if any, and the manager, if any. The object underlying Section 173(2) is that the share - holders may have before them all facts which are material to enable them to form a judgment on the business before them. Any fact which would assist them in making up their mind, one way or the other, would be a material fact under Section 173(2) and has to be set out in the explanatory statement. This provision is mandatory and not directory and disobedience to its requirements must lead to nullification of the action taken.' Then Mr. Thakkar brought to my notice one more decision of the Calcutta High Court in Shaligram jhajharia v. National Co. Ltd., (1967) 1 Com LJ 29 (Cal). It must be noted that the subject - matter of the litigation in this case was an impugned selling agency agreement which figured in the Calcutta decision cited earlier by Mr. Thakkar. The plaintiff challenged the legality of the notice of the Annual General Meeting on the ground that the explanatory statement attached to the proposed ordinary resolution was in contravention of Section 173 of the Act. On facts it was held that the explanatory statement was misleading in relation to the facts stated and it did not disclose certain other material facts. While concluding that the explanatory statement in that case was bad and in violation of Section 173 of the Act. A. N. Ray, J indicated the correct principle of law. He says at page 36 :-
'The further question is whether the explanatory statement is in violation of provisions contained in Section 173 of the Companies Act. ................. It depends upon the facts of each case as to whether an explanatory statement is tricky or misleading.'
Ray, J. while considering the essentials of a valid notice convening an extraordinary general meeting extracted two broad principles from the authorities cited before him. At page 135 he says :-
'Two broad principles can be extracted from the authorities :first that notice must be fairly and intelligently framed and it must not be misleading or equivocal. A benevolent construction cannot be applied. Secondly, some matters must be brought pointedly to the attention of the share - holders, for example where the directors are interested in a contract or matter which is to be submitted to a meeting for confirmation or approval, it appears to be desirable and in certain cases absolutely necessary to disclose the fact in the notice convening the meeting or some accompanying circular.'
30.In the wake of these various judicial pronouncements, Mr. Thakkar thought it wise to draw upon the comments of the learned author of 'Law and Practice of Meetings' Frank shackleton, 5th Edn. At page 27 under the Caption 'Special Business must be clearly stated', the following requirements are noted :-
'As to the essentials of a notice, it must state clearly the nature of any special business to be transacted, as no other business can be transacted in addition or otherwise, unless the notice refers to ordinary business which it is competent for the meeting to transact ........................
It is, however, always desirable to state clearly the nature of any special business to be transacted, and if the regulations provide for notice of such special business, any resolutions passed without due notice will be invalid.'
31.To reiterate with emphasis the importance of the notice of a meeting, Mr. Thakkar referred to Grundt v. Great Boulder Proprietary Gold Mines Ltd., (1948) 1 All ER 21. Article 102 of the Articles of Association of the Company provided as follows :-
'If at any general meeting at which an election of directors ought to take place the place of any director retiring by rotation is not filled up, he shall, if willing, continue in office until the ordinary meeting in the next year, and so on from year to year until his place is filled up, unless it shall be determined at any such meeting on due notice to reduce the number of directors in office.' The question arose whether the plaintiff, a retiring director, despite his failure to get re - elected, continued in office. His claim was resisted on the ground that the company in effect had at its meeting reduced the number of directors. Cohen, L. J. overruled the contention and held that the number of directors in office cannot be reduced unless there was a specific resolution of the company to that effect after a mention of the general nature of such resolution has been made. The concluding words of Art. 102 require a specific notice to that effect. Lord Greene, M. R. at p. 30 of the report clarifies the legal position in the following words :- 'In the present case counsel for the company argued that the company had, in effect, determined to reduce the number of directors in office (a) by refusing to re - elect the retiring plaintiff, and (b) by not electing anybody to fill that vacancy. I do not accept that argument. It appears to me that the concluding words of Article 102 require a specific resolution , not merely to re - elect A but a specific resolution that nobody shall be elected to fill the vacancy.'
32.It must be noted that the absence of due notice and a specific resolution was linked up with certain legal consequences, for instance, continuation of the retiring director in office. It was mostly on account of the peculiar wording of Article 102 that the court held that a proper resolution after due notice of the proposed special business was absolutely necessary.
27-7-1971.
33.Then Mr. Thakkar cited a decision in Tiessen v. henderson, (1899) 1 Ch 861. the relevant part of the headnote of that case may be stated :-
'The notice of an extraordinary general meeting must disclose all facts necessary to enable the share - holder receiving it to determine in his own interest whether is not he ought to attend the meeting; and pecuniary interest of a director in the matter of a special resolution to be proposed at the meeting is a material fact for this purpose.'
While restraining the company by an ad interim injunction form acting upon or carrying into effect certain - special resolutions for reconstruction alleged to have been passed and confirmed at its extraordinary general meetings, the learned Judge Kekewich, J. has made rather strong remarks at page 866 of the report :
'The application of the doctrine of Foss v. Harbottle, (1843) 2 Hare 461 to joint stock companies involves as a necessary corollary the proposition that the vote of the majority at a general meeting, as it binds both dissentient and absent share - holders, must be a vote given with the utmost fairness that not only must he matter be fairly put before the meeting, but the meeting itself must be conducted in the fairest possible manner ...................'
Then at pages 870 - 871 the learned Judge makes a further observation -
'If a meeting properly convened, and properly instructed as to the purpose for which it is convened, chooses to assent to this, there is no reason, why it should not do so, but I think it ought to have the opportunity of considering the point. The man I am protecting is not the dissentient, but the absent share - holder - the man who is absent because, having received and with more or less care looked at this circular, he comes to the conclusion that on the whole he will not oppose the scheme, but leave it to the majority. I cannot tell whether he would have left it to the majority of the meeting to decide if he had known the real facts; and, therefore, I think the resolution is not binding upon him.'
34.Now, I may sum up what emerges from these various authorities cited by Mr. Thakkar. Bearing in mind the object of the legislature. I must say that Section 173 is mandatory and not directory. It is in the interest of the general body of Share - holders that the legislature has made provisions in Section 173(2) requiring the notice of a meeting to set out a statement containing all material facts concerning each special item of business. A notice of meeting when it contains items of special business within the meaning of Section 173(1)(b) must disclose all the material facts. All the share - holders must be in a position to make up their mind in advance whether they will attend the meeting or leave it to the good sense of the majority at the meeting. Any non - compliance with this requirement will nullify the action taken at the meeting. While considering the efficacy of any such notice, a benevolent construction will not be adopted so as to defeat the provisions of the statute. It is also clear that whether or not a particular notice or an explanatory statement in a given case complies with the statutory requirement is a question of fact. There are two ways in which the mandatory provisions contained in Section 173 may be contravened. It may be a case where no explanatory statement is at all appended to the item of special business, or it may be a case where the statement is incomplete, misleading or tricky. The contravention may be the result of an act of omission or an act of commission. Whatever be the nature of the contravention, the question always is a mixed question of fact and law. When a challenge is made in a court of law the court will have to consider all the facts and circumstances of the case and then decide one way or the other.
35.As the contravention alleged by the plaintiffs in this case is a mixed question of law and fact, the pleadings certainly assume importance. Mr. Nariman has made a point, as stated above, that the pleadings give no indication that the plaintiffs ever alleged any contravention of Section 173. As the resolution is challenged on the ground of breach of Section 258 in particular and the provisions of the Companies Act in general, there is certainly some difficulty in permitting the plaintiffs to raise this point.
36.Mr. Thakkar has not accepted the position that the plaint does not contain sufficient averments. He has pointed out from the plaint and the written statement that the pleadings certainly given an indication that the plaintiffs wanted to challenge the legality of the action on the ground of either want of or a defective resolution. Mr. Thakkar relied upon the averments in para 7 of the plaint. The plaintiffs have averred that before increasing the number of directors under Section 258 of the Act and Article 169 of the Articles of Association, a resolution ought to have been passed after due compliance with the requirements of the provisions of the Companies Act. Mr. Thakkar says that though the plaintiffs have alleged contravention of the Companies Act, they have by implication referred to the requirement of an explanatory statement under Section 173 of the Act. Then Mr. Thakkar also read out portions of the written statement of the appellants, particularly paragraphs 9 and 10, which, according to Mr. Thakkar, show that the defendants were aware of the challenge made by the plaintiffs to the legality of the resolutions on the various grounds. Even apart from the pleading, according to Mr. Thakkar, the parties were aware of all the relevant facts and the point about the applicability of Section 173 of the Act. In this connection reliance was also placed on the affidavits filed at the interlocutory stage in support of the notice of motion taken out for interim relief. Plaintiffs had in their affidavits referred to the defective explanatory statement and said that there is non - compliance with the requirements of Section 173. A reference was also made to the appeal memo (A. O. No. 436 of 1970) filed by the respondents in this Court against the interlocutory order. After considering all these submissions, I am of the opinion that Mr. Thakkar can at best show in this case that there is no explanatory note at all accompanying the item of special business. But the averments referred to above are certainly insufficient to cover a plea that the explanatory statement appended to the notice of the meeting about the special business is insufficient or misleading. Any such plea about insufficiency of the explanatory statement is very much like the plea of fraud. It is well settled that the plea of fraud must be substantiated by all relevant particulars disclosed in the pleadings.
37.Then I have to deal with the point raised by Mr. Thakkar that in the present case there is no explanatory statement and, therefore, there is a clear contravention of the provisions of S. 173 of the Act. Mr. Thakkar says that there was no proposal in so many words about the increase of the number of directors. There was no such item in the notice. Therefore, there was no occasion for any explanatory statement.
38.I have already referred to the contents of the Items Nos. 3, 4, 7 and 8 in the notice of meeting. Items Nos. 3 and 4 refer to ordinary business inasmuch as the directors retiring by rotation were to be re - elected. The permanent strength of the Board of Directors was 8. Under Article 164 of the Company, the number nearest to one - third had to retire from office. Items Nos. 3 and 4 certainly indicate that the company was to fill up the two vacancies caused by the retirement of the directors by rotation. Now, Items Nos. 7 and 8 state that the Board had appointed two additional directors on 10th April 1969. Those directors will cease to hold office under Section 257 of the Act, have been received by the company proposing the candidature of these additional directors at the meeting. This information about the item of business has to be considered along with the corresponding explanatory statement. The explanatory statement virtually restates what is contained in Items Nos. 7 and 8. One additional particular is also mentioned and that is the recommendation of the Board of Directors that the named persons be appointed as directors. Items Nos. 7 and 8 along with the explanatory statement certainly convey to the share - holders that the Board of Directors have made a proposal that two more additional directors be appointed at the meeting and if possible the two named persons be elected to fill up those additional posts. In my opinion this is nothing short of a proposal to increase the strength of the Board of Directors from 8 to 10. Mr. Thakkar tried to show that all this information has nothing to do with the proposal to increase the number of directors. But despite his best efforts he was in a position to convince me that all this information was in connection with some other intelligible topic. I have not been able to place any other construction on Items Nos. 7 and 8 and in my opinion the plaintiffs have failed to make out a case that there is no information at all about the proposed special business accompanied by the required explanatory statement.
39.Then Mr. Thakkar argued that at any rate the court must hold that the information given along with explanatory not is wholly misleading. Mr. Thakkar pointed out that the Board of Directors has nowhere indicated in the notice or the explanatory statement as to why it had made a proposal for increasing the number of directors.
40.Mr. Nariman, on the other hand, submitted that the Board can only disclose known reasons and it is not in a position to disclose the unknown reasons. I do not find any substance in either of these contentions. In the absence of a pleading in fact, Mr. Thakkar cannot successfully show that there was no reason contained in the statement about the proposed increase. In my opinion the statement is a comprehensive and compendious statement. The Board has in a way indicated the reasons for the increase. It has stated that it was required to appoint two men of their confidence as additional directors. It is implicit in this action and the statement that the company needed their services. This is followed by a recommendation by the Board that the two named persons be appointed to fill up the additional posts. This is sufficient reason for the proposed increase. A share - holder, after reading this information, can certainly form an intelligent judgment and make up his mind one way or the other. He may either choose to attend the meeting or leave it to the good sense of the majority of the voters. As the plaint does not show in what way the explanatory statement is defective, there is no reason to further examine the so - called defect pointed out by Mr. Thakkar. Mr. Nariman's distinction between known and unknown reasons is also very far from convincing. One acts only for known reasons. Acting without reasons is a leap in the dark and, therefore, there is never any occasion for giving unknown reasons. But I must make it clear that under Section 173(2) material facts will not necessarily include the reasons. It will all depend upon the nature of the subject - matter which constitutes the special business. Some times the facts stated are sufficiently eloquent and there is no need to justify the proposed action by giving reasons. In the absence of sufficient pleadings, the plaintiffs in the present case cannot challenge the statements contained in the notice and the explanatory statement on the ground that the particulars are insufficient and/or misleading. In the result I disagree with the finding of the learned Judge and hold that there is no contravention of the provisions of Section 173 of the Companies Act.
41.Then Mr. Thakkar argued that the learned Judge was in error in holding that the additional directors, like the retiring directors, are not required to file any written consent duly signed by them before their reappointment by the company. This question involves the interpretation of Section 264(1) of the Act. Section 264(1) as it originally stood in 1956 has gone through a process of one or two amendments. Before I consider the point and the various possible interpretations of Section 264, it will be necessary to state a few more facts.
42.On 9-4-1969 there was a move for appointing the appellants as additional directors. On the same day two letters were separately addressed by the appellants to the company. The letters purported to be consent in writing duly signed under Section 264(1) of the Act. The appellants have indicated their consent to act as directors of the company if appointed. On 10-4-1969 the Board of Directors appointed the appellants as additional directors under Section 260 of the Act. On 10-4-1969 separate proposals by two members were made in favour of the appointment of the appellants as directors at the ensuing meeting. Defendant No. 1 (3 ?) the company in its written statement, has stated that after the receipt of the letters of consent dated 9-4-1969 the appellants were appointed as additional directors. Mr. Thakkar referred to form No. 29, which was submitted on 26-4-1969, which was submitted on 26-4-1969, that, long before the Annual General Meeting of the company. All these facts and circumstances according to Mr. Thakkar show that the letters of consent were, in fact, filed by the appellants in connection with their appointments as additional directors. The learned Judge has accepted this position. But Mr. Nariman for the appellants is challenging this finding. I may not consider this controversy at this state.
43.As stated above, it will be necessary to point out the legislative changes before I consider Section 264 in its present form. Section 264 as originally enacted reads as follows :-
'(1) A person who is not a retiring director shall not be capable of being appointed director of a company unless he has himself or by his agent authorised in writing signed and filed with the Registrar a consent in writing to act as such director.
(2) Sub - section (1) shall not apply to a private company unless it is a subsidiary of a public company'.
44.The provision as enacted required all persons who desired to be considered for appointment as directors to file a written consent before their appointment. The consent has to be given before the appointment as without such consent the person was not capable of being appointed and he could not be considered a qualified or a fit person for appointment as a director. Only one person was exempted from this condition and that was a retiring director. It was not necessary for him to file any consent before his reappointment as a director. Then as a result of the Amending Act 65 of 1960 a new Section 264 was substituted with effect from 28-12-1960. The new section reads as under :-
'264 (2). Every person (other than a person who has left at the office of the company a notice under Section 257 signifying his candidature for the office of a director) proposed as a candidate for the office of a director shall sign, and file with the company, his consent in writing to act as a director, if appointed.
(2) A person other than -
(a) a director re - appointed after retirement by rotation or immediately on the expiry of his term of office, shall not act as director of the company unless he has within thirty days of his appointment signed and filed with the Registrar his consent in writing to act as such director. (3) This section shall not apply to a private company unless it is a subsidiary of a public company'.
The significant change in the wording is the deletion of the words 'shall not be capable of being appointed'. Section 264(1) dispenses with the formal consent in the case of a person who has proposed himself as a candidate for the office of a director under Section 257 of the Act. Sub - section (2) requires all persons newly appointed as directors to file with the Registrar within 30 days of their appointment a consent in writing to act as a director. Sub - section (2) makes it clear that unless such a consent is filed the person appointed shall not act as a director.
45.Thereafter by Act No. 31 of 1965 the section is substantially amended and I have to consider the section so amended. The section in the present form is as follows :-
'264 (1) 'Every person (other than a director retiring by rotation or otherwise or a person who has left at the office of the company a notice under Section 257 signifying his candidature for the office of a director) proposed as a candidate for the office of a director shall sign and file with the company, his consent in writing to act as a director, if appointed.
(a) a director re - appointed after retirement by rotation or immediately on the expiry of his term of office, or
(b) an additional or alternate director, or a person filling a casual vacancy in the office of a director under S. 262, appointed as a director or reappointed as an additional or alternate director, immediately on the expiry of his term of office, or
(c) a person named as a director of the company under its articles as first registered,
shall not act as a director of the company unless he has within thirty days of his appointment signed and filed with the Registrar his consent in writing to act as such director.
(3) This section shall not apply to a private company unless it is a subsidiary of a public company'.
46.The first point debated before me by counsel on either side is whether Section 264 is directory or mandatory. As the point is not covered by any direct authority, the counsel had toe rely upon their original submissions and they have also referred to decisions which deal with the construction of statutes.
47.Mr. Thakkar says that the section is mandatory because the condition referred to in the section of filing a written consent is a condition precedent to the valid appointment. The consent required under Section 264 is to be in writing and duly signed. Section 264(1) provides that the person who is a candidate for the office of a director shall file his consent in the prescribed form to act as a director, if appointed. Mr. Thakkar says that the use of the expression 'shall' indicates that the section is mandatory. Mr. Thakkar invited my attention to a number of judicial decisions about the interpretation of statutes. He relied upon a decision of the Supreme Court in Aswini Kumar Ghose v. Arabinda Bose, : [1953]4SCR1 for the proposition that if the specific words used by the legislature are clear then for interpretation the courts could not rely upon the Statement of Objects and Reasons. Patanjali Shastri, C. J. at page 378 (para 32) has made the following observations :-
'As regards the propriety of the reference to the Statement of Objects and Reasons, it must be remembered that it seeks only to explain what reasons induced the mover to introduce the bill in the House and what objects he sought to achieve. But those objects and reasons may or may not correspond to the objective which the majority of members had in view they passed it into law. The Bill may have undergone radical changes during its passage through the House or Houses, and there is no guarantee that the reasons which led to its introduction and the objects thereby sought to be achieved have remained the same throughout till the Bill emerges from the House as an Act of the Legislature, for they do not form part of the Bill and are not voted upon by the members. We, therefore, consider that the Statement of objects and reasons appended to the Bill should be ruled out as an aid to the construction of a statute'.
But Mr. Thakkar admitted that the rigour of the rule laid down in the above mentioned case was relaxed, in a subsequent decision of the Supreme Court in Commr. of Income - tax, M. P. Smt. Sodra Devi, : [1957]32ITR615(SC) :-
'It is clear that unless there is any such ambiguity it would not be open to the Court to depart from the normal rule of construction which is that the intention of the Legislature should be primarily gathered from the words which are used. It is only when the words used are ambiguous that they would stand to be examined and construed in the light of surrounding circumstances and constitutional principle and practice'.
At page 839 a further rule of construction of statute is stated :-
'Though it is not legitimate to refer to the statement of objects and reasons as an aid to the construction or for ascertaining the meaning of any particular word used in the Act or Statute (see Aswini Kumar Ghose v. Arabinda Bose, : [1953]4SCR1 , nevertheless this Court in the State of West Bengal v.Subodh Gopal Bose, : [1954]1SCR587 referred to the same for the limited purpose of ascertaining the conditions prevailing at the time which actuated the sponsor of the Bill to introduce the same and the extent and urgency of evil which he sought to remedy'.
Mr. Thakkar says that it is the primary rule of construction that the statute should be interpreted without looking into any other extraneous circumstances. It is only when there is some ambiguity then, as stated by the Supreme Court, reference may be made to the objects and reasons for the milted purpose of finding out the particular reason which prompted the Legislature to pass that enactment.
48.Then Mr. Thakkar referred to the rule which, in the judicial parlance, is recognized as the Golden Rule of construction of statutes. The statement of the rule of Burton, J. in Warburton v. Loveland, (1928) 1 Hud & B., 623 - 648 (IR) is reproduced by the learned author in Bindra's Interpretation of Statutes, 5th Edn. at p. 71 and is to the following effect :-
'I apprehend it is a rule in the construction of statutes, that, in the first instance, the grammatical sense of the words is to be adhered to. If that is contrary to, or inconsistent with any expressed intention, or declared purpose of the statute, repugnance, or inconsistency, the grammatical sense must then be modified, extended, or abridged as far as to avoid such inconvenience, but no further'.
The following passage in Chapter XIII from Maxwell on the Interpretation of Statutes, 12the Edn. 314 also lays down a sound principles :-
'It is impossible to lay down any general rule for determining whether a provision is imperative or directory. 'No universal rule' said Lord Campbell L. C. 'can be laid down for the construction of statutes, as to whether mandatory enactments shall be considered directory only or obligatory with an implied nullification for disobedience. It is the duty of Courts of justice to try to get at the real intention of the Legislature by carefully attending to the whole scope of the statute to be construed.' And Lord Pendance said :'I believe, as far as any rule is concerned, you cannot safely go further than that in each case you must look to the subject - matter; consider the importance of the provision that has been disregarded, and the relation of that provision to the general object intended to be secured by the Act; and upon a review of the case in that aspect decide, whether the matter is what is called imperative or only directory' '.
49.Viewed in the light of these principles, the section, in my opinion, appears to be directory in so far as the person who would desire to be a candidate for the office of a director would be required to file his consent. The object of the legislature is evident when one considers the various amendments made by the Legislature before the section was enacted in the present form. Those who have once acted as directors were only seeking reappointment. It was considered throughout that the formal consent on their part was not necessary. It is very clear as to why such a condition was found necessary. It may be that a person who is appointed as a director may refuse to act on the ground that he had never consented to act as a director. When such a flaw is discovered later on and the appointment will have to be ignored as ineffective, the company will have to take again further steps for filling the post of such director. Ordinarily a person appointed as a director is not likely to refuse to act. In a rare case he may do so. It is only to avoid the attending inconvenience that the Legislature has prescribed the condition. In the section as originally worded, somewhat strong language was used. It was enacted that a person shall not be capable of being appointed as a director unless he had filed earlier his consent in writing to act as such director. The deletion of these words in the subsequent amended form of the section is not without significance. Perhaps the Legislature thought that the condition was given comparatively more importance when it was introduced in the section. If this is the only object which the Legislature sought to achieve by prescribing a prior consent in writing then there is no reason why the absence of consent in all cases should invalidate the appointment. Even without a consent a person appointed may accept the appointment and prefer to act as a director. This is likely to happen in a majority of cases. Considering the section as a whole and bearing in mind the object of the Legislature, and magnitude of the mischief intended to be avoided I hold that Section 264(1) is clearly directory and not mandatory. I am only interpreting Section 264(1) of the Act and it is not necessary to pronounce any opinion about Section 264(2). Whether it is mandatory or directory will have to be decided in a suitable case. But I cannot help expressing my opinion that the difference in the language has certainly assisted me in reaching my conclusion about the directory nature of S. 264(1) of the Ct. The consent under S. 264(2) which is to be filed with the Registrar is a condition precedent for acting as a director. The sub - section provides that a person, who is being appointed for the first time as a director, shall not act as a director of the company unless he has filed the consent within the prescribed time. No argument is necessary for saying that the sub - section is mandatory.
50.Then Mr. Thakkar submitted that the learned Judge was in error in holding that there is really no difference between the retiring director and the additional director while considering the application of Section 264(1) of the Act. As all the relevant points were urged before me I had to consider them and give my decision accordingly. In fact when I found that the section is directory it is sufficient for the final disposal of the appeal but these are all points of law touching the interpretation of Section 264(1) as a whole and, therefore, I must consider each point urged by the counsel separately.
51. That takes me to the interpretation of the key words in S. 264(1) 'or otherwise'. The learned Judge while considering these words has relied on the dictionary meaning of the expression 'retire'. A person retires when he ceases to hold a particular office. There is no difference between retiring by rotation and retiring by ceasing to hold office. the additional directors appointed under Section 260 hold office only upto the date of the next Annual General Meeting. In other words they cease to hold office before the date of the next Annual General Meeting. Mr. Thakkar says that the learned Judge was not right in reaching this conclusion. According to Mr. Thakkar there is material difference between the two sets of directors. Mr. Thakkar points out that under Section 256(1) of the Act certain proportion of directors retire by rotation. Under S. `256(2) the directors retire by rotation at every Annual General Meeting. Whereas under Section 260 first proviso, the additional director holds office only upto the date of the next Annual General Meeting of the company. In other words, the additional director ceases to hold office earlier and thereafter the retiring director who vacates the office at the meeting remains in office for at least a short duration. Mr. Thakkar says that this distinction between the tenure of the two classes of directors is recognized even under the English Law. Mr. Thakkar has relied on a decision in Eyre v. Milton Proprietary Ltd., (1936) 1Ch 244. The court in that case was required to consider the exact connotation of two Arts. 85 and 90 of the Articles of Association of the Company. The court had to decide the meaning of the expression 'of the whole number of directors' in Art. 85. That was necessary to determine the number of directors who had to retire in a particular year. There was no doubt that the expression 'whole number of directors' did not include the Managing Director. Article 90 provided that the Board may from time to time appoint additional directors ...................but any director so appointed shall hold office only until the next following ordinary general meeting of the company, and shall then be eligible for re - election. The point for consideration depended for its answer on the words of Art. 85 as compared with the words of Art. 90 and in particular certain latter words of Art. 85. According to the Court there must be some point of time at which it was to be ascertained as to who are the whole number of directors to whom must be applied the provision relating to retirement. That point of time was to be at the ordinary general meeting. It was clear from Art. 90 that at the annual general meeting the two additional directors will not be in office as they were to hold office only until the next following ordinary general meeting of the company. At the commencement of the ordinary general meeting they will be no longer in office. But the retiring directors and the other continuing directors will act as directors throughout the meeting. In other words, they would constitute the total number of directors, for deciding the proportion of the directors retiring. Romer, L. J. at page 257 sums up the legal position in the following words :-
'I agree that in the circumstances the number of directors to be considered is the number of directors existing at the moment when the ordinary general meeting begins and inasmuch as at the particular moment that it begins the two directors elected under Art. 90 cease to be directors then must be taken to be five and not seven.' Mr. Thakkar relies on this decision for underlining a similar distinction between the directors retiring by rotation at every annual general meeting and the additional directors holding office only upto the date of the next annual general meeting. Mr. Thakkar says that when the Legislature has used the expression like 'retiring' and 'holding office' upto a particular point of time, the court will have to interpret the different words in a different way. In support of this rule of interpretation he relies on a decision of this Court in East and West Insurance Co. Ltd. v. Mrs. Kamala Jayantilal Mehta. : AIR1956Bom537 . Chief Justice Chagla, who delivered the judgment of the bench, says at p. 543 :- 'Now, the normal canon of construction either of a statute or of articles of association is that when different expressions are used they were intended to connote something different ...............'
There cannot be any dispute about this rule of interpretation. Giving full effect to the rule it means that a retiring director ceases to hold office later than the additional director. The difference in the duration of their tenure is brought out by the Legislature by using appropriate expressions. But it will not be correct to carry this distinction too far. While interpreting the words appearing in Section 264, the expression 'retiring by rotation' has to be understood in conjunction with or along with the other key words 'otherwise'. These two expressions certainly are used for covering or for including different set of directors who cease to hold office. We know very well what is meant by a director retiring by rotation. Section 256(1) provides that at the first annual general meeting one - third of the directors for the time being as are liable to retire by rotation, or if their number is not three or a multiple of three, then the number nearest to one - third, shall retire from office. Then the question arises on a literal interpretation of the words as to who are the other directors who otherwise retire, that is, retire otherwise than by rotation. Mr. Thakkar says that the Articles of Association of a company may provide that all the directors en bloc shall retire and in that case the company might appoint directors to fill up all the vacancies. Mr. Thakkar has not been able to indicate any other class of directors who will be covered by the expression 'or otherwise'. He maintained that under Section 256(1) a company may by its articles provide that a certain proportion of directors will ever remain in office and only the remaining directors will wholly retire and it is to cover such a class of directors retiring in this manner that the expression 'or otherwise' is used by the Legislature in Section 264(1) of the Act.
52.It is difficult to accept this interpretation of S. 256(1). Section 256(1) provides :-
'...............one - third of such of the directors for the time being as are liable to retire by rotation, or if their number is not three or a multiple of three, then, the number nearest to one - third, shall retire from office'.
In the illustration by Mr. Thakkar, a certain fixed number of directors will remain in officer permanently and the others will retire, so as to enable the company to fill up those vacancies. Those who are retiring in this manner are, according to Mr. Thakkar, not retiring by rotation. I am not prepared to accept this interpretation of Section 256(1) of the Act. When few of the directors retire in the manner indicated in S. 256(1) of the Act, then they are retiring by rotation . If the articles so provide, all the directors may retire and that retirement certainly will not be covered by the expression 'retiring by rotation'. On a reference to the Shorter Oxford Dictionary, Vol. II - N - Z, 3rd Edn. revised with Addenda, I find that the adverb 'otherwise' would include one or more classes is not clear. At any rate, the expression is somewhat equivocal. In such a case I will be justified in following the dictum laid down by the Supreme Court in Virji Ram Sutaria v. Nathalal Premji Bhavadia, : [1969]2SCR627 . The Supreme Court in that case, while interpreting certain articles of the Constitution, relied upon the statement of objects and reasons. the Supreme Court had to decide whether certain provisions were directory or mandatory. As the provisions themselves were not clear, reliance was placed on the statement of objects and reasons for finding out the intention of the Legislature. I may reproduce the following passage from the judgment of Mitter, J. which appears at page 769 para 11 of the report :-
'The above cases are sufficient to show that non - compliance with the provisions of a statute or Constitution will not necessarily render a proceeding invalid if by considering its nature, its design and the consequences which follow from its non - observance one is not led to the conclusion that the legislature or the constitution - makers intended that there should be no departure from the strict words used'.
So, in other words, while interpreting the words or even while departing from the strict words, the Court may find out the intention of the legislature by referring to the statement of objects and reasons. Mr. Nariman rightly says that relying on this decision one can look at the notes on clauses preceding the amendment of Section 264 of the Act. (See Gazette of India, Extraordinary, Part II, Section II, 1964 dated 10-2-1964). Clause 32 reads as under :
'Section 264 requires that a person proposed as a candidate for the office of director shall file with the company his consent to act as director, if appointed. It also requires that a person other than a director reappointed after retirement by rotation shall not act as director unless he has filed with the Registrar his consent in writing to act as such. This amendment seeks to exempt persons who have served as directors in the immediate preceding terms from these requirements. It is felt that in the case of such persons the requirement to file their consent in writing is a formality which could well be dispensed with.'
Clause 32 shows in unmistakable terms as to why the exceptions were enacted to dispense with the filing of consent in certain cases. No such consent either under Section 264(1) or sub - section (2) was necessary in the case of persons who had immediately before the reappointment acted as directors. Considering the object of the amendment there is no reason why the additional directors who are expressly exempted from the requirement of filing a consent under Section 264(2) should be excluded while construing a somewhat similar exemption under Section 264(1) of the Act. In my opinion the expression 'otherwise' covers all the other directors who for one reason or the other cease to hold office and are immediately thereafter reappointed as directors. For these reasons I hold that the learned Judge was right when he recorded a finding that additional directors are not required to file any written consent under Section 264 of the Act, as a condition precedent for the validity of their reappointment.
53 - 54. Then Mr. Nariman submitted that no such consent under S. 265(1) is required for appointment of any person as an additional director under S. 260 of the Act. He relies on the wording of Section 264(1), viz. :
'Every person .....................proposed as a candidate for the office of a director shall sign and file with the company, his consent in writing to act as a director, if appointed'.
These words, according to Mr. Nariman, indicate that the consent contemplated is referable to the candidature of the person for the office of director. That can only be at the meeting of the company in which directors are appointed by unanimous or majority vote of the share - holders. Mr. Nariman says that S. 260 confers power on the Board of Directors to appoint additional directors when so permitted by the Articles of Association of the Company. Neither in Section 260 nor anywhere in the articles of the Company are there provisions requiring the person to file his consent before his appointment as additional director. A closer reading of Section 264(1) furnishes one more reason in support of the interpretation suggested by Mr. Nariman. One of the persons, who is exempted from the condition of filing such a consent is who has left at the office of the company a notice under Section 257 signifying his candidature for the office of a director. This clearly shows that the provision about consent is in connection with the appointment of directors at the meeting of the company. Even the consent that is prescribed is to be in writing to act as a director, if appointed. There are no such words to show that the consent is given to act as a director or an additional director. These various expressions used by the Legislature certainly indicate that Section 264(1) does not in any manner regulate the appointment of additional directors under Section 260 of the Act.
55.It is not disputed before me nor was there any dispute before the learned Judge about the fact that there in one set of written consent filed in this case on behalf of the appellants. It is not necessary to resolve the controversy whether it was with reference to the appointment as an additional director or with reference to the reappointment as a director. If no consent was required for any appointment under Section 260 that consent, if filed, will be redundant. It is true that the company by its written statement has taken up a contention that after receipt of these consents the appellants were appointed as additional directors. Mr. Thakkar also submitted that, that may be accepted as a fact in view of the various facts and circumstances mentioned above. But the appellants in their written statement have pleaded that these written consents certainly validated their appointment in the general meeting. Once it was found as a fact that no consent was required for the appellants' appointment as Addl. Directors, then there is no reason why the appellants should not be allowed to rely upon the letters of consent, when the validity of their appointment is challenged by the plaintiffs. Letters of consent were to be filed duly signed by the persons concerned with the company. They are so signed and filed with the company. There are no words used in the letters to indicate that they had given the consent only to act as additional directors, if appointed. In the absence of any such restrictive words, it can be fairly assumed that they gave their consent in writing not only to act as additional directors, if appointed, but also to act as directors, if appointed. In my opinion even for this additional reason the appointment of the appellants cannot be challenged.
56.The last point raised in the present appeal is about the maintainability of the suit. Mr. Nariman, consistent with the appellants' stand in the lower court, submits that the plaintiffs have come to the court with certain grievances about the irregularities committed by the company while appointing the appellants as directors. Mr. Nariman relied upon a decision of this Court in V. N. Bhajekar v. K. M. Shinkar, 36 Bom LR 483 = AIR 1934 Bom 243. It was a suit by the shareholders challenging irregularities committed by the directors. It was held that such a suit was not competent. The headnote indicates that there are certain recognized exceptions to the rule that mere irregularities committed during the course of the management of the internal affairs of the company do not furnish any cause of action to the shareholder or shareholders. The relevant headnote is to the following effect :-
'The supremacy of the majority of shareholders is subject to certain exceptions, viz :
(1) where the act complained of is ultra vires the company;
(3) where there is an absolute necessity to waive the rule in order that there may not be denial of justice'.
Mr. Nariman submits that the present case is not covered by any one of these three exceptions. The appellants were appointed directors by a unanimous resolution passed at the meeting of the company. The plaintiffs after a long lapse of time had no reason to rush to the court for any relief. It is not an act which is patently illegal or ultra vires the company. But I find it difficult to accept this contention of Mr. Nariman. I have already held that Section 173 is mandatory and not directory. Any non - compliance with the provisions of S. 173 will result in the nullification of the Act. The plaintiffs have alleged that there was contravention of Section 258 of the Indian Companies Act, as there are no valid resolution proposing the increase in the number of directors. It may be that the plaintiffs have not eventually succeeded in the suit. In view of the findings recorded by me, it cannot be said that the suit as framed is not competent. In my opinion the plaintiffs' case will be covered by the first of the three exceptions mentioned above. The learned Judge was, therefore, right when he held that the suit as framed was maintainable.
57.Mr. Buch with Mr. Munshi, who appeared for Respondent No. 3 Company, submits to the orders of this Court.
58.In the result the appeal is allowed, the judgment and decree of the lower court is set aside and the plaintiffs' suit is dismissed with costs throughout. Respondents 1 and 2 will not be liable to pay the costs of Respondent No. 3 throughout.
59. Appeal allowed.