Posted On by &filed under Andhra High Court, High Court.

Andhra High Court
Avanthi Explosives P. Ltd. vs Principal Subordinate Judge, … on 9 April, 1985
Equivalent citations: 1987 62 CompCas 301 AP
Author: M J Rao
Bench: M J Rao

M. Jagannatha Rao, J.

1. The point of law raised in this writ petition relates to the jurisdiction of the civil court to entertain a civil suit involving the question as to the disqualification of the director of a company, under the Companies Act, 1956, in the context of sections 2(11), 10, 283, and 299 of the Companies Act (hereinafter called “the Act”) and section 9 of the Code of Civil Procedure.

2. The petitioner is a company registered under the Act and the first respondent is the Principal subordinate Judge, Tirupathi. The second respondent, Sri N.S. Vasantakumar, who is the plaintiff in the suit was the managing director of the petitioner-company. The petitioner- company was initially having its registered office at Secunderabad. A proposal to shift the registered office of the company from Secunderabad to Tirupathi was accepted by the board of directors at a meeting dated June 13, 1980. At Tirupathi, the company was to be located in premises bearing No. 194/C, Prakasam Road, Tirupathi, as a lessee of another firm, M/S Triveni Enterprises, which, in its turn,. was the principal lessee from the owners of the building. Certain disputes arose among the directors of the petitioner-company in September, 1983. The matters came to a crisis during February, 1984. the second respondent-plaintiff was a partner of M/S Avanthi Enterprises with whom the petitioner-company entered into the sub- lease. The second respondent had not “specifically” disclosed the fact of his being a partner of M/S Avanthi Enterprises to the company as required by section 293 read with section 299 of the Act. On that ground, the other directors are said to have passed a resolution on February 13, 1984, that the petitioner has become disqualified from being a director with retrospective effect from June 13, 1980. This was because June 13, 1980, was the date on which the company passed a resolution in shift the registered office from Secunderabad to Tirupathi and, according to the petitioner, was the date on which the second respondent did not “specifically” disclose his being a partner of Triveni Enterprises and incurred the disqualification. A letter intimating the passing of this resolution was communicated to the second respondent by a letter dated February 14, 1984. The second respondent denies the passing of any such resolution.

3. The second respondent then filed the present suit stating that he was present at the meeting which took place on February 13, 1984, and no such resolution disqualifying him was passed. The allegation of the petitioner that the second respondent had walked out of the meeting when this item was taken up in the agenda was denied.

4. The reliefs claimed in the suit are for a declaration that the plaintiff, second respondent, is and continues to be the managing director of the first defendant (petitioner-company) and for a further declaration that any board meeting held by the petitioner subsequent to February 13, 1984, is null and void and also for a further declaration that any change effected on the board of the petitioner subsequent to February 13, 1984, is illegal and for a permanent injunction restraining the defendants therein from interfering with the office of the second respondent-plaintiff as managing director in the day-to-day affairs of the petitioner-company. In the lengthy plaint, the second respondent has also set out various facts, which, according to him, show that the other directors of the company including the chairman, formed into one group to oust the second respondent from the board of directors and that they had thus infringed the rights of the minority arbitrarily and with mala fide intentions. It is also alleged in the plaint that the second respondent was excluded by all the other directors who joined into a kind of an illegal arrangement to siphon off the funds of the company with a view to damage the interest of the shareholders. There were also certain interlocutory orders passed in the suit.

5. It was at that stage that the present writ petition was filed subsequently on April 30, 1984. by an order dated May 2, 1984, passed by this court, the proceedings in the suit were stayed.

6. The main contention of Sri V. T. M. Prasad, learned counsel for the petitioner, is that the disqualification specified in sections 283(1)(i) and 299 of the Act relates to certain rights unknown to the common law and that these rights as well as the remedies in that regard are those specially created by the companies Act and the second respondent should have approached the company court (the High Court) and not the civil court for adjudication of disputes relating to his disqualification.

7. Sri M. Ramachandra Reddy, learned counsel for the second respondent, has contested the above propositions.

the only question that arises for consideration is :

Whether the civil court has jurisdiction to decide the question relating to the alleged disqualification of the second respondent under section 283(1)(i) read with section 299 of the Companies Act, in the context of section 211 and section 10 of that Act, and section 9, Civil Procedure Code.

8. Before going into the main question, it is necessary to refer to the relevant statutory provisions. It is provided in section 283(1)(i) and section 299 that a director has to disclose his interest – in a contract to be entered into by the company – at the first meeting, or otherwise he becomes disqualified. Section 10 of the Act deals with the jurisdiction of the courts. Sub-clauses (1) and (2) of section 10 of the Act read as follows :

“10 (1). The court having jurisdiction under this act shall be –

(a) The High Court having jurisdiction in relation to the place at which the registered office of the company concerned is situate, except to the extent to which jurisdiction has been conferred on any District Court or District Courts subordinate to that High Court in pursuance of sub-section (2) ; and

(b) where jurisdiction has been so conferred, the District Court in regard to matters falling within the scope of the jurisdiction conferred, in respect of companies having their registered offices in the district.

(2) The Central Government may, by notification in the Official Gazette and subject to such restrictions, limitations and conditions as it thinks fit, empower any District Court to exercise all or any of the jurisdiction conferred by this act upon the court, not being the jurisdiction conferred –

(a) in respect of companies generally, by sections 237, 391, 394, 395 and 397 to 407, both inclusive ;

(b) in respect of companies with a paid-up share capital of not less than one lakh of rupees, by Part VII (sections 425 to 560) and the other provisions of this Act relating to the winding up of companies.”

9. It is also necessary to refer to the definition of the words “the court” used in the above section.

“2(11). `the court’ means, –

(a) with respect to any matter relating to a company (other than any offence against this Act), the court having jurisdiction under this Act with respect to that matter relating to that company, as provided in section 10 ;

(b) with respect to any offence against this Act, the Court of a Magistrate of the First Class or, as the case may be, a Presidency Magistrate having jurisdiction to try such offence.”

The above provisions in section 2(11) and section 10 fall for consideration on the question of jurisdiction.

10. It will be noted that there is no express provision outsting the jurisdiction of the civil court in any particular respect. All that section 10 does is to state that “the court” having jurisdiction under the Act shall be that High Court in whose jurisdiction the registered office of the company is situate, except to the extent to which the jurisdiction has been conferred on any District Court under sub- section (2) by a notification issued by the Central Government. The Central Government can empower a District Court to exercise all or any jurisdiction conferred by this Act “upon the court”, except the jurisdiction conferred by sections 237, 391, 394, 395 and 397 to 407 (both inclusive) and not being the jurisdiction conferred in respect of companies with paid-up share capital of not less than Rs. 1 lakh by Part VII and the provisions of the Act relating to winding up of companies.

11. It may be seen that there are various provisions in the Act which refer to “the court”, such as sections 107, 155, 163(6), 237, 391, 394, 395 and 397 to 407, 425, etc. The Central Government is empowered, however, to confer jurisdiction on the District Court powers only in respect of some these sections but not all.

12. In my view, section 10 of the Act only proceeds to enumerate or specify “the court having jurisdiction under this Act “, wherever such jurisdiction is conferred on “the court” by the other provisions of the Act. Powers are conferred by the act not only on courts but also on other authorities like the Central Government, the Company Law Board and the Registrar ; and where a power is vested in a court, that court has to be specified. Beyond so specifying the court competent to deal with a matter arising under the Act, section 10 does not purport to invest the company court with jurisdiction over every matter arising under the Act. It may be that, in view of the elaborate provisions contained in the 1956 Act in regard to the management and the conduct of a company’s affairs including important internal matters of administration, the court’s interference by civil court has become more limited, but the power has not at all been taken away. Every suit for redress of i individual wrongs cannot be considered as merely concerned with matters of internal management. (M. P. Menon J. in R. Prakasam v. Sree Narayana Dharma Paripalana Yogam [1980] 50 Comp Cas 611 (Ker)).

13. In Foss v. Horbottle [1843] 2 Hare 461, the minority shareholders alleged that the company had a claim in damages against some of the directors by reason of the fraudulent acts of those directors, but at the general meeting, the majority resolved that no action should be taken against them. Two of the minority shareholders took legal proceedings against the directors and others to compel them to make good the losses to the company. The court dismissed the action on the ground that, as the acts of the directors were capable of confirmation by the majority of members, the court should not interfere. it was thus left to the majority to decide what was for the benefit of the company. This rule has been applied in several cases later, vide MacDougall v. Gardiner [1875] 1 Ch 13.

14. The procedural character of the rule in Foss v. Harbottle [1843] 2 Hare 461, was explained by Jenkins L. J. in the Edwards v. Halliwell [1950] 2 All ER 1064, 1066 (CA).

15. Palmer in his Company law, 21st edition (1968), points out that in English company law, while the substantive aspects of the rule of the majority are not neglected, the emphasis is on the procedural character of that rule. The reasoning on which the rule is founded is that in these cases, it is for the company to complain. by suing the alleged wrongdoer. The company is thus the proper plaintiff and the company is ruled by the majority.

16. However, the following exceptions to the rule in Foss v. Harbottle [1843] 2 Hare 461, are admitted as pointed out by Jenkins L. J. in Edwards v. Halliwell [1950] 1 all ER 1064 (CA), namely, the majority cannot confirm –

(1) an act which is ultra vires the company or illegal ;

(2) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of the company ; or

(3) a resolution which requires a qualified majority but has been passed by a simple majority.

In other words, the rule in Foss v. Harbottle [1843] 2 Hare 461 does not apply to such acts as referred to above inasmuch as the majority cannot sanction those acts. A resolution which is ultra vires or illegal or is a fraud on the minority or is not bona fide or for the benefits of the company as a whole or is intended to discriminate between the majority shareholders and the minority shareholders, is illegal and can be questioned by a separate action in the civil court. The reason for this is that if the minority were denied that right, their grievance could never reach the court because the wrongdoers themselves being in control, do not allow the company to sue. In some cases, it has been held that further exceptions to the rule in Foss v. Harbottle [1843] 2 Hare 461, are permissible in cases in which “justice requires that the courts should intervene” to assist an otherwise minority shareholder. In Heyting v. Dupont [1964] 1 WLR 843 (CA), Harman L. J. said (at page 854) :

“….there are cases which suggest that the rule (in Foss v. Harbottle [1843] 2 Hare 461) is not a rigid one and that exception will be made where the justice of the case demands it.”

The above rule in Foss v. Harbottle [1843] 2 Hare 461, has come up for consideration in several High Courts in our country.

17. K.K. Mathew J. (as he then was) was dealing in Joseph v. Jos [1964] 34 Comp Cas 931 (Ker), with a suit for a declaration that the proceedings of the meeting regarding the election of certain directors was null and void and for a permanent injunction restraining defendants Nos. 3 to 5 therein from functioning as director and for directing the defendant-company to hold a meeting for re-electing three directors.. After referring to the rule in Foss v. Harbottle [1843] 2 hare 461. and the exceptions thereto, the learned judge made a distinction between “individual membership right’ and the “corporate membership right” of a shareholder. It was held that the rule against interference by court with the internal management of companies, was not applicable to cases of infringement of the individual membership right. The learned judge quoted from Palmer’s Company Law, 20th edition, page 492 :

“By contract with the company (and the other members ; c.f.s. 20) the shareholder undertakes with respect to some – and , in fact, most rights which his membership carries, to accept as binding upon him, the decision of the majority of shareholders, if arrived at in accordance with the law and the articles; these membership rights are known as corporate membership rights. Other rights of the shareholder, according to his contract with the company, cannot be taken away from him unless he consents ; if such rights is in question, a single shareholder can, on principle, defy a majority consisting of all the other shareholders. Rights of this type are known as individual membership rights.” (emphasis *supplied)

Mathew J. then concluded (at page 935) :

“…the wrong done to the plaintiff is not wrong which the majority can ratify as it would be against the provisions of the articles of association, and it is settled by authorities the a shareholder can insist on the strict observance of the legal rules, statutory provisions and provisions in the memorandum and articles cannot be waived by a bare majority of shareholder.”

And, the plaintiff’s right to move the civil court was upheld.

18. Bearing these general principles is mind, I shall now refer to certain rulings of the Madras and other High Courts wherein the infringement to an individual right of the shareholder was upheld. In T.A.K. Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd., AIR 1928 Mad 571, a suit for declaration that the plaintiffs were the validly elected “policy-holders for directors” of the company and that the defendant company had no power to nominate such directors and for a permanent injunction restraining the defendants from excluding the plaintiff or in any way restraining or interfering with the plaintiff’s acting or attending as directors was held maintainable. Pydah Venatachalapathi v. Guntur Cotton, Jute and Paper Mills Co. Ltd. AIR 1929 Mad 353, related to a suit for a declaration that the defendant ceased to hold office from March 31, 1928, and for a permanent injunction restraining them from interfering with the management of the company and for accounts and damages ; M.K. Srinivasan v. Watrap S. Subrahmanya Ayyar [1932] 2 Comp Cas 147 ; AIR 1932 Mad 100, was a suit for a declaration that the appointments of certain directors should be declared illegal and for a direction to order a poll for electing five shareholders as directors in the vacancies ; N.V.R. Nagappa Chettiar v. Madras Race Club [1949] 19 Comp Cas 175 ; , was a suit for a declaration that the meeting of the general body held on November 7, 1947, was invalid and that the managing committee comprising of certain defendants purported to have been elected at the said meeting was not entitled to assume office and for consequential injunction ; M.R.S. Rathnavelusami Chettiar v. M.R.S. Manichavelu Chettiar , was a suit for a declaration that the removal from office of the managing director was void ; Bank of Hindustan Ltd. v. Kowtha Suryanarayana Rao, , was a suit for a declaration that the plaintiffs were entitled to have their names cancelled, struck out and omitted in the bank register of shareholders and to have the second defendant or his nominees or transferors entered in their place and that the plaintiffs had ceased to own or hold 1,668 shares ; and all those suits were held maintainable. in Sree Krishna Jute Mills Ltd. v. Mothey Krishna Rao [1947] 17 Comp Cas 63 (Mad) ; AIR 1947 Mad 322, an application was filed in the High Court for a direction to the secretary and treasurer of the firm to hand over the records, account books, pass books, keys etc., to the applicant. the objection of the respondents that the petitioners should have filed a suit and not a company petition was upheld.

19. In the Kerala High Court is Star Tile Works v. N. Govindan. , the Chief Justice and Justice Vaidialingam held that a suit for a declaration that the entire proceedings of a meeting were void and illegal and for permanent injunction was maintainable. I have already referred to Joseph v. Jos [1964] 34 Comp Cas 931 (Ker). R. Prakasam v. Sree Narayana Dharma Paripalana Yogam [1980] 50 Comp Cas 611 (Ker), was a case of a suit for a declaration that the annual general meeting was not duly and validly convened that the election of the president, vice-president, directors, etc., made at a meeting was invalid and for a permanent injunction ; Marikar (Motors) v. M.I. Ravi Kumar [1982] 52 Comp Cas 362 (Ker), was a suit for a declaration that the co-option of certain defendants as directors was illegal and for removing some of them from the board of directors as being unfit for holding office by reason of mismanagement, oppression and fraud and for appointment of an administrator ; the suits were held maintainable.

20. In our High Court in Bhagawandas Garg v. Canara Bank Ltd. [1978] 1 an WR 504 ; [1981] 51 Comp Cas 38 (AP), Chennakesav Reddy J. (as he then was) held that a suit for recovery of money against the Canara Bank in respect of the deposit amount payable by the plaintiff in respect of twelve shares was maintainable, observing (at page 46 of 51 Comp Cas):

“Section 10 of the Companies Act also confers exclusive jurisdiction on the High Court only in respect of matters covered by sections 237, 391, 394, 395 and 367 to 497 (both inclusive) and in respect of matters covered by Part VII of the Companies Act with a paid-up capital of one lakh of rupees and over and in respect of other provisions relating to winding up of companies. Except in respect of these matters, the ordinary jurisdiction of the civil courts to decide the rights of parties is not excluded.”

21. The Punjab High Court in Muni Lal Peshawaria v. Balwant Rai Kumar [1964] 34 Comp Cas 717, AIR 1965 Punj 24, held that a suit for the taking of accounts and for distribution of surplus assets in the course of the winding up of the company was maintainable. In Panipat Woollen and General Mills Co. Ltd. v. R.L. Kaushik [1969] 39 Comp Cas 249 (P&H), the suit was for a declaration that the plaintiff was a director and that one of the directors was not properly elected and that the exclusion of the plaintiff was invalid and was held maintainable. In Gokul Chit Funds and Trades P. Ltd. v. K. Thoundasseri Kochu Ouseph Vareed [1977] 47 Comp Cas 264 (Ker), an application filed on the company side of the High Court that an election held on September 8, 1975, was illegal and contrary to the provisions of the Act was held not maintainable and the party was directed to file a civil suit.

22. Following the aforesaid rulings with which I respectfully agree, I hold that the present case deals with an individual right of the second respondent and that the suit filed by him is maintainable.

23. But it is urged by Sri V.T.M. Prasad, learned counsel for the petitioner, that the rights of the second respondent are creatures of the company law and hence the remedy under that law alone has to be followed. For the above proposition, he places reliance on the decision of the Calcutta High Court in Hirendra Bhadra v. Titwin Ergied [1975-76] 80 CWN 242, where the decision of the Supreme Court in Premier Automobiles Ltd v. Kamlekar Shantaram Wadke [1975] 48 FJR 252 ; AIR 1765 SC 2238, arising under the Industrial Disputes Act, 1947, was referred to. He referred to the well-known case of Wolverhampton New Waterworks Co. v. Howkesford [1859] 6 CB (NS)336, where the three classes of actions were analysed by Willes J. and then to the third class mentioned therein (at page 260 of 48 FJR) :

“There are three classes of cases in which a liability may be established by statute. There is that class where there is a liability existing at commone law, and which is only re-enacted by the statute with a special form of remedy ; there, unless the statute contains words necessarily excluding either under the statute or at common law. then there is a second class, which consists of those cases in which a statute has created a liability, but has given no special remedy for it ; there the party may adopt an action of debt, or other remedy at common law to enforce it. The third class is where the statute creates a liability not existing at common law. and gives also a particular remedy for enforcing it….with respect to that class it has always been held that the party must adopt the form of remedy given by the statute.”

24. The question, therefore, is whether the rights and obligation in question in this case owe their very creation to the Companies Act, or whether they are traceable to a basic contract which is statutorily regulated. What is the historical background of the company statutes ?

25. In the eighteenth and the beginning of the nineteenth centuries, the association, namely, the unincorporated company, became increasingly popular. As the Industrial Revolution advanced, men of business began again to recognise the advantages derived from co-operation in commercial enterprise, namely, the advantage of raising funds for the purpose of large undertakings by means of contributions from a number of small capitalists ready and willing to co-operate, and that of minimising the risk by spreading the liability.. the difficulty was how to secure these advantages. A charter or private Act of Parliament was often too costly or impracticable. Businessmen had to devise for themselves a new form of partnership which would possess the advantages as nearly as might be of a chartered corporation and in particular would have shares of a fixed amount freely transferable by the holders. the outcome of these commercial needs was the unincorporated company, the lineal ancestor of the ordinary company under the Companies Acts. The deed of settlement by which such an unincorporated and a trustee or trustees with whom the shareholders convenanted to observe the provisions of the deed. The deed commonly declared that the several persons for the time being holding shares in the capital of the company should constitute and be a company with a specified name, and with a specified capital, and subject to specified regulations (set out in the deed) until dissolved in a specified manner. The deed usually also made the shares transferable. To secure the continuity of the concern, notwithstanding the death or bankruptcy of members, the management of the enterprise was transferred to a select body of directors, often known as the committee of directors, to the exclusion of the members generally, and the property of the company was vested in all or some directors as trustees. (Palmer’s Company Law 21st edition, page 6).

26. The learned author then proceeds to give the history of the legislation in England and the passing of the Chartered Companies Act, 1837, the Joint Stock Companies Act, 1844, the Limited Liability Act, 1855, the Joint Stock Companies Act, 1856, the Companies Act, 1862, the Companies (Consolidation) Act, 1908, the Companies Act of 1929 and then the companies Act, 1948. (See also the history traced in Marikar (Motors) v. M. I. Ravikumar [1982] 52 Comp Cas 362 (Ker).

27. I may point out that as a result of reforms in recent times, the English Company Law (subsequently re-enacted as the Companies Act, 1967, 1976, 1980, 1981) and the European Companies act, 1972, came to be enacted. the series of Acts, only show that the law of contract which was the basis of the ‘deed of settlement company” was regulated by a statute at various stages. It is, therefore, clear that the position in law is that the rights and liabilities between the contracting parties and governed by the articles of association are regulated by the various statutes relating to company law, and these laws have not created any special rights and remedies. This was also recognised by the Madras High Court in the following case.

28. A Division Bench of the Madras High Court consisting of Srinivasa Ayyangar J. and Anantha Krishna Iyer J., in T.A.K. Mohideen Pichai Taraganar v. Tinnevelly mills Co. Ltd., AIR 1928 Mad 571, to which I have already referred, also pointed out the “regulatory” nature of the Act vis-a-vis the common law and held that the general right of suit cannot be considered to have been taken away merely because of some “regulatory” provisions. A civil suit was held maintainable.

29. I, therefore, hold that the general law of contracts is the basis of the rights of parties and that the Companies Act, 1956, merely regulates these rights and does not create any new rights or remedies. Unless, as stated in Wolverhampton’s case [1859] 6 CB (NS) 336, there is an exclusion of the jurisdiction of the civil court, by words express or implied, the suit is maintainable, and no such exclusion has been held existing by the courts in respect of individual rights.

30. It is then urged by learned counsel for the petitioner that the disqualification of a “managing” director covered by sections 283(1)(i) and 299 are creatures of the Companies Act. I am unable to agree. The position of the company with powers delegated to him from the other directors. It is clear from Palmer’s Company Law above referred to and also at page 531, where the learned author says :

“The maxim `delegates non protest delegare’ applies to directors, so that, prima facie, they cannot delegate their powers ; but this rule may be altered by giving the directors express or implied authority to delegate.”

31. Such special provision is usually made in the articles of association.

32. In that view of the matter, it cannot be contended that the office of a “managing director” is something created by the statute.

33. It is next contended by Sri V.T.M. Prasad that the “disqualification” created under section 283(1)(i) and section 2(11) of the Companies Act is a disqualification created by a statute. I am unable to agree. The obligation of a director to disclose his interest in a contract entered into or to be entered into is an obligation similar to that of a trustee. we have already seen that the directors are in the position of trustees according to common law and they have a fiduciary relation towards the shareholders. It is well known that the trustees will become disqualified if they have any interest adverse to that of the beneficiaries and that they have to account for any secret profit made by them. This is clear from Lewin on Trusts, XVIth edition, at page 193 :

“The principle that a trustee must not benefit from his trust applies to agents, solicitors who are also mortgagees, guardians who are trustees to the extent of the property coming to their hands, directors of a company, a secretary of a company, promoters of a company, etc…..”

34. In may view, the provisions of sections 283(1)(i) and 299 are mainly a re-enactment of the obligations of a trustee arising out of the common law I am, therefore, unable to agree with the contention of the petitioner that the alleged disqualification in question cannot be the subject-matter of a civil suit.

35. I, therefore, dissent from Hirendra Bhadra v. Titwin Engineering Co. [1975-76] 80 CWN 242, of the Calcutta High Court. I also dissent from the view taken by the Allahabad High Court in Patna Devi v. Harihar Prasad [1978] Tax LR 2292, to the effect that a suit for a declaration that the defendants are not directors of the company and for restraining the defendants in financial matters is not maintainable. In that case, the differing views expressed in Nava Samaj Ltd. v. Civil Judge, Rajnandgaon, , were referred to.

For the aforesaid reasons, I hold that the suit filed by the second respondent is maintainable.

36. It is argued for the second respondent, relying upon Costa Rica Railway Co. Ltd. v. Rorwood [1901] 1 Ch 746, that the knowledge of the other directors with regard to information which the second respondent shall, according to the petitioner, have intimated to the other directors, was sufficient to take the second respondent out of the disqualification, if any, imposed by sections 283(1)(i) and 299. The above English ruling has been referred to in Pydah Venkatchalapathi v. Guntur Cotton, Jute and Paper Mills Co. Ltd., AIR 1929 Mad 353.

37. But, in my opinion, that is a matter which arises on the merits of suit and I cannot go into that question.

38. For the reasons given above, I hold that the civil suit is maintainable. The writ petition is accordingly dismissed but in the circumstances without costs. The interim stay granted earlier is

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