JUDGMENT
1. Admit. Respondents waive service. By consent taken up for hearing and final disposal forthwith.
2. In these proceedings under Section 9 of the Arbitration and Conciliation Act, 1996, the following reliefs have been prayed for and urged before this Court in the submissions :
(i) An injunction restraining the first respondent, from giving effect to or acting upon the resignation tendered by the second, third and fourth respondents from the board of directors of the first respondent;
(ii) An injunction restraining the first respondent, from giving effect to the resolution of the board of directors dated 20th August 2002 purporting to appoint the fifth and sixth respondents as directors of the first respondent; and
(iii) An injunction restraining the first respondent, from acting upon the resolution dated 6th September 2002 of the board of directors purporting to pass the annual accounts of the first respondent.
3. A subscription-cum-shareholders’ agreement was entered into on 25th March 2000 by and between the petitioners, the first respondent which is a company incorporated under the Companies Act, 1956 and the second respondent amongst other parties. Under the terms of the agreement, the petitioners agreed to subscribe to 59,25,926 Optionally Convertible Preference Shares (OCPS) of the first respondent of the face value of Rs. 13.50 each at and for an aggregate value of Rs. 8 crores. By the Subscription-cum-Shareholders’ agreement, the petitioners under Article 7.10-2 were permitted to seek redemption from the company of a part or of the entire holding at any time after four years from the date of investment. The clause provided that the redemption premium paid by the company shall result in a minimum of 18 per cent annual yield to the OCPS holder calculated from the date of investment. Under Clause 7.10-3 the petitioners were entitled to exercise a “Put Option”. The option was not to be exercised within three years from the date of investment if no conditions that trigger the ‘Strategic Sale’ materialised during that period. At this state, it is not necessary to go into all the provisions of the agreement since the disputes between the parties have been referred to arbitration. The petitioners exercised the “Put Option” on 11th March 2002 in a composite notice of their Advocates dated 11th March 2002 exercising that option and seeking a reference to arbitration.
4. In pursuance of an arbitration agreement contained in Article 16 of the subscription-cum-shareholders’ agreement dated 25th March 2000, a reference to arbitration has been made by this court on 13th September 2002 in a petition filed under Section 11 of the Act. These proceedings under Section 9 are maintainable before this Court having regard to the decision of the Supreme Court in Sundaram Finance Ltd. v. NEPC India Ltd. ASSR 1999 SSC 565. The jurisdiction of the Court to grant an interim measure of protection under Section 9 extends both before or during the arbitral proceedings, and thereafter until the award is enforced under Section 36.
5. For the implementation of the provisions of the subscription-cum-shareholders’ agreement dated 25th March 2002, the articles of association of the first respondent have been duly amended. Article 3.10 of the subscription agreement provided that the promoters undertook that the second respondent shall not resign from the board “till the validity of the agreement”. The second, third and fourth respondents have, however, tendered their resignations from the board of directors of the first respondent. On the basis of the provisions contained in Article 3.10 of the subscription agreement, the petitioners seek an order of injunction restraining the first respondent from accepting the resignations of these three directors. The third respondent is the wife of the second respondent. The first contention urged on behalf of the petitioners is that they had contributed to the OCP shares of the first respondent on the assurance of the continuance of the second respondent and that they are, therefore, entitled to ensure the due fulfilment of that assurance.
6. In considering the correctness of the first submission, it would be at the outset necessary to note that the assurance which is held out to the petitioners in Article 3.10 of the subscription agreement is only in so far as continuance of the second respondent on the board is concerned. Ex-facie, there is no assurance in so far as either the third or the fourth respondents are concerned. But, the more fundamental defence of the respondents which in my view, has to be sustained is that the provision contained in the subscription agreement to the effect that the second respondent would not resign from the board “till the validity of this agreement” was not translated into an amendment of the articles of association of the company. The fact that the company is a party to the subscription agreement makes no difference to this position because the position in law is well settled. The provisions in an agreement such as the one in the present case, cannot be given effect to insofar as the management of the affairs of the company is concerned, unless those provisions have been incorporated into the articles of association. This point is no longer res integra but, is covered by the decision of the Supreme Court in V.B. Rangaraj v. V.B. Gopalakrishnan . The Supreme Court has held that a restriction which is not specified in the articles of association is not binding either on the company or on the shareholders. An attempt was made to distinguish the judgment of the Supreme Court by counsel for the petitioners on the ground that the law laid down by the Supreme Court in that judgment applies only in the context of a restriction on the transfer of shares of the company in V.B. Rangaraj’s case (supra) undoubtedly involved a situation relating to a restriction on the transfer of shares but the principle of law which has been enunciated by the Supreme Court cannot be confined to only that situation. Amongst the authorities cited in the judgment of the Supreme Court is the decision rendered earlier in Shanti Prasad Jain v. Kalinga Tubes Ltd. in which the question which arose related to the enforceability of ah agreement between two groups of shareholders of a company which had not been embodied in the articles of association. The principle laid down by the Supreme Court in V.B. Rangaraj’s case (supra) is, therefore, not confined to a situation involving only a transfer of shares. Therefore, in my view, the judgment of the Supreme Court would clearly be attracted to the facts of this case. The Articles of association do not stipulate that the second respondent shall be a permanent director of the company. In any event, I am of the view that it would not be possible for this court to issue any directions in terms of the relief sought in prayer Clause (a) which is to the effect that the second, third and fourth respondents be directed to continue as directors of the first respondent.
7. Besides the decision of the Supreme Court in V.B. Rangaraj’s. case (supra), there is a judgment of a Division Bench of this court in Rotta India Ltd. v. Venire Industries Ltd. [2000] 100 Comp. Cas. 19, 24 SCL 13. Chief Justice Y.K. Sabharwal (as the Learned Chief Justice then was) speaking for a division bench of this court held that a pooling agreement, in that case, could not be used to supersede the statutory rights given to the board of directors to manage the company, the underlying reason being that the shareholders cannot achieve by a pooling agreement that which is prohibited to them if they are voting individually. Having regard to the settled position in law, I am of the view that the relief which has been prayed in respect of the resignations of the second, third and fourth respondents cannot be granted. Counsel for the fourth respondent stated before the court that the fourth respondent had resigned as far back as on 4th April 2002 and that an intimation has been furnished to the Registrar of Companies on 14th September 2002. Besides, neither the third nor the fourth respondents are parties to the arbitration agreement. The prayers for relief in terms of prayer Clauses (a), b(i) and b(ii) are rejected.
8. The Second relief that has been prayed is in regard to the appointment of the fifth and sixth respondents on the board of directors of the first respondent. Their appointment took place on 20th August 2002. The minutes of the meeting of the board of directors held on 20th August 2002 would show that at that meeting there were two directors of the first respondent present viz., Shri U.S. Sethia and Shri Arun T. Korati. The articles of association of the company provide in Article 126 that subject to the provisions of Sections 255 and 256 of the Companies Act, 1956 unless otherwise determined by the company in the General Meeting and subject to Section 252 of the Act, the number of directors shall not be less than 3 or more than 12 inclusive of all kinds of other directors, if any. In the present case, on 20th August 2002, following the resignations of the second, third and fourth respondents, the number of directors on the board was less than the minimum stipulated in Article 126. Article 131 of the articles of association provides that the continuing directors may act notwithstanding any vacancy in their body but so that if the number falls below the minimum above fixed, the directors shall not except in emergencies or for the purpose of filling vacancies or of summoning a general meeting, act so long as the number is below the minimum, Article 154 which was a part of the articles of association at one point of time provided that subject to the provisions of the Act, questions arising at any meeting shall be decided by a majority of votes, each director having one vote, and in case of an equality of votes, the chairman shall have a second or casting vote. However, it is common ground and there is no dispute between the parties that Article 154 had been deleted and that at the material time when the meeting of the board took place on 20th August 2002, there was no provision in the articles entitling the Chairman to cast a second or casting vote. Article 159B provides a list of matters on which inter alia a decision of the board of directors requires the affirmative vote of a nominee director of the petitioners. Besides, Article 159B provides that 7 days’ prior notice is required to be issued by the company to the nominee director or directors of the petitioners in respect of a board meeting for discussing the agenda in relation to the aforesaid matters. Amongst the matters specified in Article 159B are (a) resolutions to adopt the annual accounts and approval to the principles and policies of accounting Clause (vii) and (b) “any proposal to include/remove members on the Board”. (Clause xxix).
9. On 20th August 2002 the two members of the board of directors then constituting the board were present at the meeting. These ‘remaining directors’ were permitted by Article 131 to act inter alia for the purpose of filling up the vacancies on the Board, On 20th August 2002 Shri Sethia, one of the Directors representing the interest of the promoters sought to propose the induction of two new persons on the Board of Directors viz., Shri L.R. Daga and Shri S.K. Joshi. The nominee Director of the petitioners objected to the appointment of these persons on the ground that it would be desirable to induct persons with foundry experience on the Board and he accordingly suggested that the profile of certain additional candidates may be considered at the next meeting. The nominee director of the petitioners suggested that one director each of the petitioners and of the promoters, can be inducted after discussion. However, this was opposed by Mr. Sethia, the Director representing promoters’ group who suggested that the petitioners could appoint their nominee or nominees at the next Board meeting. The resolution was carried purportedly with the casting vote of the Chairman and the minutes recorded that the nominee director of the petitioners was against it.
10. Now, ex facie, the induction of the two directors on 20th August 2002 was contrary to the provisions of the Articles of association. As already noted earlier, Article 159B(xxix) stipulates that the affirmative vote of the nominee director of the petitioners would be required for any proposal to include or remove members on the board. Counsel for the respondents sought to urge that the expression “members on the board” must mean “shareholders on the board” and that since one of the two directors inducted, respondent No. 6, was never a shareholder, there can be no objection to his appointment. The learned counsel sought to place reliance on the definition of the expression “members” in Article 2 of the articles of association which defines that expression to mean the duly registered holders, from time to time of the shares of the company. Article 2, however, provides that the meaning assigned to the expressions defined therein shall apply unless repugnant to the subject or context. Having regard to the provisions contained in Clause (xxix) of Article 159B, there can be no manner of doubt that the expression “members” in that clause refers to a director on the board. The expression, ‘members on the board’ in Clause (xxix) must be given its ordinary and natural connotation which means a member of the board of directors. The submission was that the clause uses the expression “members on the board” and not “members of the board”. That in my view, is an exercise in hairsplitting. It must be realized that two verbs have been used in Clause 29 viz., to include and to remove. Inclusion can never be of a member of the Board but, of a member on the board. In that context, the clause used the expression as “members on the board”. Besides, even apart from pure semantics, it would be wholly incongruous to give an interpretation to Clause (xxix) as suggested by the respondents. The petitioners have subscribed to the optionally convertible preference shares of the first respondent and have an investment of Rs. 8 crores. It was in that context, that an overriding right was conferred upon the petitioners by incorporating in the articles of association the requirement that the petitioners must agree to the taking of important decisions, amongst them, the induction or removal of directors. There is no reason why Clause (xxix) should be interpreted to mean that the petitioners could only be given the right to agree or disagree with the induction of a shareholder on the board of directors but that this right would not extend to a situation where the promoters seek to induct a person other than a shareholder on the board of directors. The petitioners could well have an objection whether or not the person who was sought to be inducted on the board of directors is or is not a shareholder and their affirmative vote would be necessary in either of the situations. That would be the plain meaning which can be ascribed to Clause (xxix).
11. Consequently, in the absence of the affirmative vote of the petitioners to the induction of the fifth and sixth respondents on the board of directors, their appointments were ultra vires the articles of the company.
12. After the meeting of the board of directors on 20th August 2002, the next meeting took place on 29th August 2002. The minutes of the meeting of 29th August 2002 provide, as is normal in such cases, that the minutes of the previous meeting were read, confirmed and signed by the Chairman. However, the confirmation of the previous minutes of 20th August 2002 cannot be read as amounting to an acceptance by the petitioners that the decision which was taken to induct the fifth and sixth respondents on the board of directors at the previous meeting was lawful. All that the confirmation meant was that the minutes of the meeting dated 20th August 2002 correctly recorded what had transpired at that meeting.
13. At the meeting which took place on 29th August 2002, two directors were inducted as nominee directors of the petitioners. These two directors were Mr. Muneesh Chawla, Managing Director of IVC and Mr. Manoj Borkar, Chief Financial Officer of IVC (the petitioners are collectively referred to as IVC). One Shri S.C. Agarwal was also appointed as Additional Director on the Board. Counsel for the respondent sought to urge that at the aforesaid meeting, the resolution of the board of directors was voted upon by four directors including Shri L.R. Daga and Shri S.K. Joshi and that, therefore, the petitioners must be deemed to have accepted the lawfulness of the appointment of Shri Daga and Shri Joshi, (the fifth and sixth respondents) to the board. There is no merit in that submission. For one thing, even if the votes of the fifth and sixth respondents are excluded, there were still two other directors, Shri Sethia and Shri Korati who voted in support of the resolution to induct two nominee directors. But, quite apart from this, under the provisions of Article 145(c) of the articles of association, it was expressly provided that so long as the subscription-cum-shareholders’ agreement continued to be valid, the petitioners shall be entitled to nominate one or more directors pro rata to the percentage of shareholding of the Investors in the company. The petitioners admittedly hold over 50 per cent of the share capital of the company and, therefore, they were in any event entitled to nominate two directors as an incident of the right conferred by Article 145(c). Therefore, the appointment of the two nominee directors in the meeting held on 29th August 2002 can in no circumstances be held as a waiver of the objection which the petitioners continued to have in regard to the appointment of the fifth and sixth respondents; In their letter dated 30th August 2002, the petitioners expressly recorded that in terms of Clause 10.1-29 of the Subscription-cum-Shareholders’ Agreement the positive consent of the petitioners was required to add any members to the Board. The petitioners stated that they had objected to the addition of he fifth and sixth respondents during the board meeting held on 20th August 2002 and that they “were surprised to see non-members at the board meeting held on August 29, 2002”. The petitioners also recorded that in the subsequent, meeting held on 29th August 2002, Mr. Manoj Borkar had brought it to the notice of the company that the articles of association of the company did not permit the Chairman of the meeting to have a casting vote. This recording letter would be sufficient to reject the submission that there was an acceptance or the part of the petitioners of the appointment of the fifth and sixth respondents at the meeting which was held on 29th August 2002.
14. The next point which has been urged for the consideration of the court in defence to the appointment of the fifth and sixth respondents is that under Section 290 of the Companies Act, 1956 acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defects or disqualification or had terminated by virtue of any provision contained in the act or in the articles. However, the proviso to Section 290 lays down that nothing in the section shall be deemed to give validity to acts done by a director after his appointment has been shown to the company to be invalid or to have terminated. The submission that was urged was that if the minutes of the meeting held on 20th August 2002 are considered, it cannot be stated that the appointment of the fifth and sixth respondents had been shown to the company to be invalid. Consequently, it was submitted that the validity of the acts done by the fifth and sixth respondents on 20th August 2002 and thereafter cannot be questioned. Reliance was sought to be placed on a judgment of the Punjab High Court in Karnal Distillery Co. Ltd. v. Ladli Parshad Jaiswal . In that case, a Division Bench of the Punjab High Court held that the “Section as its language shows, refers to ‘discovery of defects’ and not ‘discovery of facts'”. The court held that “it is the subsequent discovery of defect in the appointment or qualification of a director which the section seeks to cure for certain purposes and not the subsequent discovery of complete absence of factual appointment of a director”.
15. Now if the minutes of the meeting held on 20th August 2002 are perused what would emerge is that the objection of the nominee director of the petitioners to the appointment of the fifth and sixth respondents has been recorded. At that stage, the nominee director had not expressly adverted to the provisions of Article 10.1-29 of the subscription agreement which was equivalent to Article 159B(xxix) which warranted that the affirmative vote of the petitioners will be required for any proposal for the inclusion of members on the Board of directors. The specific point that the consent of the petitioners was necessary has been recorded in the letter dated 30th August 2002 addressed by the petitioners to the Managing Director of the Company. This letter has been addressed with reference to the meeting of the board which took place on 29th August 2002 and it specifically records that under the provisions of the shareholders’ Agreement the positive consent of the petitioners was required to add any members on the board. That being the position, at least as on 30th August 2002, the invalidity in the appointment of the fifth and sixth respondents was clearly shown to the first respondent. Consequently, even if the submission of the respondents is accepted, which is to the effect that the invalidity of the appointment was not shown on 20th August 2002, that argument would cease to have any substance in so far as the proceedings on and after 30th August 2002 are concerned. On and after 30th August 2002, the first respondent was clearly informed of the invalidity of the appointment of the fifth and sixth respondent. Consequently, the benefit of the substantive part of Section 290 of the Companies Act, 1956 would not in any event be available after 30th August 2002. The learned counsel appearing on “behalf of the petitioners has sought to urge that the benefit of Section 290 can normally be taken by a third person and not by the directors or their close relations. In support of this proposition, reliance was sought to be placed on the judgment of the Punjab and Haryana High Court in Col. K.S. Dhillon v. Paragaon Utility Financers [1988] 64 Comp. Cas. 19. It is not necessary for this Court to express any opinion on that aspect since, I am of the view that with effect from 30th August 2002, the invalidity of the appointment of the fifth and sixth respondents had been shown to the Company. Any Act done after the appointment of the fifth and sixth respondents was shown to be invalid will not be protected by Section 290.
16. In the circumstances, I am of the view that the petitioners are entitled to the grant of interim relief in terms of prayer Clause (b)(iii) of the arbitration petition.
17. The last and final aspect of the matter relates to the meeting of the board of directors that took place on 6th September 2002 at which the accounts of the First Respondent came to be passed. In fact, there were two meetings on 6th September 2002; the first at 4.30 p.m. which came to be adjourned for want of quorum and the second at 5.30 p.m. Both the meetings were attended by four directors viz., Shri U.S. Sethia, Shri S.C. Agarwal and by the fifth and sixth respondents. None of the nominee directors of the petitioners was present. The challenge of the petitioners to the aforesaid meeting is on the following grounds :
(i) The passing of accounts in the absence of the affirmative vote of the petitioners is clearly impermissible having regard to the provisions of Article 159B(viii) of the articles of association;
(ii) The presence of the nominee director of the petitioners was necessary to constitute a quorum having regard to the provisions of Article 151 which stipulates that the nominee directors of the petitioners shall be part of the quorum for the Board meeting as well as any quorum for the Committee meetings of the Board of directors unless leave of absence has been sought in writing;
(iii) The petitioners were not furnished notice of the meeting which must be of 7 days having regard to the provisions of Article 159B; and
(iv) The fifth and sixth respondents who were not validly inducted on the Board could not have attended the meeting.
18. In order to consider the correctness of these submissions, it would be necessary to refer to the meeting which took place on 20th August 2002. One of the items on an agenda of the meeting was the approval of accounts for the year ending 31st March 2002. The Minutes of the meeting record that draft accounts were presented to the Board for adoption and approval. However, since the accounts which were presented to the Board were not initialled by the auditors, the nominee director of the petitioners suggested that the accounts could not be considered and should be discussed in the next Board meeting. Moreover, the nominee director stated that there was a letter from the Auditors, S.R. Batliboi & Associates, listing out certain unresolved issues and that accordingly there should be a letter from the Auditors, stating that “all the issues have been extinguished”. Apart from this, the nominee director, stated that the petitioners desired to have a special study of the accounts and certain further information. In view of these objections, it was decided that “the next meeting can be held with initialled accounts along with the Auditors Report” which would be considered by the Board for adoption and approval of the accounts.
19. On 29th August 2002, which was the date on which the next board meeting was held, it was recorded that since the accounts along with the report of the auditors initialled by the Auditors did not reach the meeting in time, it was decided that the issue may be discussed in the next meeting to be held on 6th September 2002. On 30th August 2002, the petitioners in a letter addressed to the Managing Director stated that they had ‘strong objection’ to the manner in which the agenda papers were presented to the Board and about the fact that some papers were provided to the petitioners “just few minutes before the meeting”.
20. The agenda for the next board meeting was sent to the petitioners on 30th August 2002 and the notice convening the meeting stated that the meeting would be held at 4.30 p.m. on 6th September 2002. The agenda for the meeting included the approval of the audited final results for the year ended 31st March 2002 and the adoption of the balance-sheet and profit and loss account for the said year.
21. On 5th September 2002, a letter was addressed by the petitioner raising specific queries in regard to the accounts of the first respondent. The letter recorded that at the previous meeting held on 29th August 2002, the petitioners had sought a specific letter from the auditors of the company with reference to certain issues which the auditors had brought to the notice of the Board on 12th August 2002. The petitioners protested that the agenda papers of the Board meeting did not carry any communication from the auditors. Apart from this objection, the petitioners sought a clarification in writing with reference to certain issues on the draft accounts for the Financial Year 2002. Amongst these was the fact that the auditors had expressed doubts about the existence of the company as a going concern. The petitioners stated that they had serious concerns about this aspect. The petitioners in their letter recorded that there were several lapses on the part of the company on various issues, most of which related to the subscription-cum-shareholders’ agreement signed with the petitioners. In these circumstances, the petitioners sought a rescheduling of the Board meeting to be held on 6th September 2002. The petitioners specifically drew attention to the fact that the “presence and positive consent” of their nominee was required to adopt the accounts.
22. The letter of 5th September 2002 addressed by the petitioners met with a response dated 6th September 2002. In the reply, the first respondent stated that it was unable to adjourn the meeting in view of the constraint of time for holding of the A.G.M. and other statutory meetings. The aforesaid communication of the first respondent dated 6th September 2002 was sent by a facsimile and was received at 4.56 p.m. which was after 4.30 p.m., the time at which the meeting had been convened.
23. The minutes of the first meeting which took place on 6th September 2002 note that no nominees of the petitioners were present at the meeting. Since none of the nominee directors was present, it was unanimously decided that “with a view to give more time and accommodate the IIM nominee-directors” the meeting would be adjourned to 5.30 p.m. at the same place “to enable the nominees of IIM to reach the venue”. The fifth respondent was directed to personally ensure that the nominee directors of the petitioners should be informed that the meeting had been adjourned to 5.30 p.m. with a view to convince them to attend the adjourned meeting. The grievance of the petitioners is that they were not informed of the holding of the adjourned meeting on 6th September 2002. In fact, their contention is that until the reply of the respondents was filed to the arbitration petition, the petitioners were not informed that the meeting was held. The learned counsel appearing on behalf of the respondents has fairly stated before the court on taking instructions that since no meeting was held subsequent to the meeting of 6th September 2002, the minutes of the meeting of 6th September 2002 were not communicated to the petitioners. In the rejoinder which has been filed before this court, the petitioners have contended that they had no valid notice of the adjourned meeting which took place at 5.30 p.m. on 6th September 2002. Though the Minutes of the adjourned meeting record that the fifth respondent informed the Board that the nominee directors had been informed of the meeting at 5.30 p.m., this is seriously disputed on behalf of the petitioners. The minutes of the meeting held at 5.30 p.m. on 6th September 2002 have not still been confirmed since the usual practice is to confirm the minutes, subject to objections raised thereto in the ensuing meeting of the board of directors.
24. Counsel appearing on behalf of the respondents sought to urge that no notice of an adjourned meeting is required to be furnished and in this regard sought to rely upon an extract from Gore Brown on Company Law. Section 288 of the Companies Act, 1956, provides that if a meeting of the Board cannot be held for want of quorum, then unless the articles otherwise provide, the meeting shall automatically stand adjourned till the same day in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday at the same time and place. Article 152 of the articles of association in the present case provide that if a meeting of the Board cannot be held for want of quorum, then the meeting shall stand adjourned to such day, time and place as the director or directors present at the meeting may fix.
25. In the present case, on 5th September 2002, the petitioners while seeking a rescheduling of the meeting had drawn the attention of the first respondent to the fact that besides their objections to the adoption of accounts the presence and positive consent of the nominee directors was required for the adoption of accounts. The minutes of the meeting which was held at 4.30 p.m. on 6th September 2002, record that the meeting was being adjourned to 5.30 p.m. to enable the nominee directors of the petitioners to reach the venue and that respondent No. 5 was requested to personally ensure that this was communicated to the directors of the petitioners. In a matter of this nature, it was only to be expected, especially in the backdrop of the serious disputes between the parties, that there would be a facsimile communication to the directors of the petitioners requesting them to attend the adjourned meeting. This was in fact, the modality which was followed by the first respondent while informing the nominee directors on 6th September 2002 that the meeting fixed at 4.30 p.m. on that day could not be rescheduled. That the fax was sent after the time at which the meeting was convened is a separate matter. Therefore, the general principle that no fresh notice of an adjourned meeting is required would not apply to a case such as the present where the board of directors had, while adjourning the first meeting which took place at 4.30 p.m. required the fifth respondent to personally ensure that this was communicated to the nominee directors of the petitioners with a view to convince them to attend the adjourned meeting. The Board was perhaps conscious of the fact that the affirmative vote of the petitioners was necessary for the adoption of the annual accounts since the attention of the first respondent had been expressly drawn to this position by the petitioners on 5th September 2002. In the circumstances, I am of the view that though the Board of directors had taken a decision to require the fifth respondent to ensure that the nominee directors were informed of the adjourned meeting, there was no notice to the petitioners of the adjourned meeting which took place at 5.30 p.m. At any rate, the respondents have not stated on affidavit in these proceedings that any such notice was in fact, given.
26. But, apart from this consideration, I am of the view that Article 151 of the Articles of association would clearly interpose a fatal objection of the validity of the meeting in the absence of the petitioners. Article 151 provides that the quorum for a Board meeting shall be three directors or one-third of the total strength whichever is higher. Since the fifth and sixth respondents were not entitled to act as directors for the reasons which have already been indicated earlier, there were only two remaining directors present who would not constitute the quorum. Independent of this, Article 151 provides that the nominee director of the petitioners shall be part of the quorum for the Board meeting unless he had otherwise sought leave of absence in writing. Therefore, in any event, the Board meeting could not have proceeded to take place for adopting annual accounts in the absence of the nominee directors from the group of the petitioners. In these circumstances, the adoption of accounts at the meeting which was held on 6th September 2002 is unlawful.
27. However, on behalf of the respondents, it was sought to be urged that the requirement in the articles of association that the adoption of accounts must have an affirmative vote of the petitioners is repugnant to the provisions of the Companies Act, 1956. Counsel urged that the petitioners have neither any voting right, nor any equity stake in the company and that it is for the equity shareholders of the company to pass the accounts of the company. In this regard, reliance was sought to be placed on the provisions of Sections 210 and 215 of the Companies Act, 1956. Section 210(1) of the Act provides that at every annual general meeting of the Company, the Board of directors of a company shall lay before the company a balance-sheet as at the end of the period specified under Sub-section (3) and a profit and loss account for that period. Section 215 provides that every balance-sheet and profit and loss accounts of a company shall be signed on behalf of the Board of directors in the case of a non-banking company, by its manager or secretary, if any, and by not less than two directors of the company and one of whom shall be a managing director where there is one. Sub-section (3) of Section 215 provides that the balance-sheet and profit and loss account shall be approved by the Board of directors before they are signed on behalf of the Board in accordance with the provisions of the section and before they are submitted to the auditors for their report thereon. It is not possible to accept the submission of the learned counsel appearing on behalf of the first respondent that the provision contained in Clause (xxix) of Article 159 is repugnant to the provisions of the Companies Act, 1956. The provisions of the Articles of association have been agreed upon by the shareholders of the company. Admitedly, the requisite procedures for the amendment of the articles of association, following the subscription-cum-shareholders’ agreement, have been pursued before the articles were amended. The shareholders of the company agreed to a particular provision being incorporated in the articles requiring the affirmative assent or vote of the petitioners for the adoption of accounts. There is nothing repugnant in this provision to the Companies Act, 1956. The petitioners had contributed an investment of Rs. 8 crores in the form of opitionally convertible preference shares and it was in that view of the matter, that it was considered appropriate that the petitioners should have some control over the accounts and financial policy of the company by requiring their affirmative vote before the Board of directors accepted the accounts. Counsel for the Respondents, relied upon the judgment of the court of appeal in England in Bushell v. Faithand [1969] 1 All E.R. 1002; of the House of Lords in the same case, in (1970) 2 W.L.R. 272 and on the judgment of the Chancery Division in Ayre v. Skelsey’s Adamant Cement Co. Ltd. [1904] 20 TLR 587. The principles which emerge from these decisions have been called out in the following extract from Halsbury’s Laws of England, [1996 Edition, Vol. 7(1) Para 538]:
“A company may by special resolution alter its articles, subject to the provisions of the Companies Act, 1985 and any special conditions contained in its memorandum; and any alterations so made are, subject to such provisions, as valid as if originally contained in the articles, and are subject in like manner to alteration by special resolution. In the case of an unlimited company formed and registered under the Joint Stock Companies Acts, this power of altering the articles extends to altering any regulations relating to the amount of capital or to its distribution into shares, notwithstanding that those regulations are contained in the memorandum.
Such power of alteration, which is statutory, cannot be modified by the articles. Nor can a company contract itself out of the power to alter its articles, even by the express terms of the articles. The conferring of special voting rights on a particular class of shares, which would in effect make it impossible to alter the articles without the consent of a particular person, would not however, be a provision depriving the company of the power to alter the articles; it is otherwise if the provisions were merely that no alteration should be made without the consent of a particular person.”
A distinction has been made between a case where special voting rights are conferred on a particular class of shares and a situation where a provision is made that no alterations can be made in the articles without the consent of a particular person. The conferment of special voting rights does not deprive the company of the power to alter its articles. The position is different, if it is provided that the alteration of the Articles cannot be made without the consent of the particular person.
28. In the present case, the restriction which has been imposed is part of the articles of association which have been assented to by the shareholders of the company. The articles arc not repugnant to the Companies Act, 1956. Therefore, the principle of law which is laid down in the judgments referred to by counsel appearing on behalf of the first respondent have no application to the facts here. In any event, I am of the view that at the present stage, it would be impossible for the court to ignore the provisions of the articles of association which have been solemnly agreed upon and accepted. The law is well settled that subject to the provisions of the Companies Act, 1956 the company and its members are bound by the provisions contained in the articles of association. The articles regulate the internal management of the company and define the powers of its officers. The articles also establish a contract between the company and members and between the members inter se. The contract governs the ordinary rights and obligations incidental to the membership in the company. Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. .
29. The adoption of accounts by the Board of directors at the adjourned board meeting on 6th September 2002 is thus unlawful. Having regard to the provisions of the Articles of association, it would be necessary for the first respondent to reconvene a fresh meeting, in accordance with the articles of association, of the Board of directors and to take further action in pursuance thereof, in accordance with law. The petitioners are, therefore, entitled to the relief which has been prayed in terms of prayer Clause (b)(iv).
30. Counsel for the first respondent has expressed an apprehension that the petitioners may effectively obstruct the finalisation of accounts since under the provisions of the articles of association, the finalisation of accounts requires the affirmative vote of the petitioners in the Board meeting. The learned counsel appearing on behalf of the petitioners has stated on instructions that the petitioners would not obstruct the finalisation of the accounts howsoever and that they would co-operate in attending the Board meeting which would be convened by the first respondent, subject to due clarifications being issued by the first respondent to the queries raised by the petitioners in regard to the accounts of the company. It has been stated on behalf of the first respondent that the accounts were placed before the AGM of the company on 30th September 2002 and a reference has been made to the BIFR under the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985, on 4th October 2002. In this regard, on behalf of the petitioners it has been sought to be urged that under Section 15(2) of the Act, a reference had to be made to the BIFR within a period of 60 days from the finalisation of the duly audited accounts of the company and since the accounts were finalised in the AGM held on 30th September 2002, the first respondent ought not to have proceeded with such haste when the matter was pending before this court. In my view, the ends of justice would be served if a direction is issued to the effect that a meeting of the Board of directors of the first respondent be convened expeditiously for the finalisation of accounts for the year ending 31st March 2002.
31. Accordingly, after the learned counsel have sought instructions from their respective clients, the court is informed that it would be agreeable to the petitioners if the board meeting is convened by the first respondent on 17th October 2002 for the purposes of finalising the accounts. The learned counsel appearing on behalf of the first respondent states that the meeting will be held at 4 p.m. at the same venue at which the earlier meeting of 6th September 2002 took place. On the request of the learned counsel for the first respondent, it is clarified that in the event of the consent of the petitioners is unreasonably withheld to the finalisation of the accounts, the first respondent would be at liberty to move this court in appropriate proceedings for such directions as they may be advised to seek.
32. Finally, on behalf of the first respondent it has been sought to be submitted that the reliefs which are prayed for in the arbitration petition, cannot be granted under Section 9 of the Arbitration and Conciliation Act, 1996 since any relief granted under the aforesaid section has to be in aid of the final relief. In so far as this contention is concerned, it would be necessary to refer to the arbitration clause in the subscription-cum-shareholders’ agreement which provides in Article 16 that any dispute/s arising out of or due to the conditionalities of the agreement shall be settled through arbitration as laid down under the Arbitration and Conciliation Act of 1996. The first respondent company is a party to the arbitration agreement. Untill the investment made by the petitioners is repaid in terms of the subscription-cum-shareholders’ agreement, the petitioners are entitled to the exercise of such rights as are conferred upon them by the agreement and under the articles of association. That being the position, this court in the exercise of its powers under Section 9 would be justified in granting such reliefs as would be necessary to ensure that pending the arbitral proceedings, the rights of the petitioners in terms of the subscription-cum-shareholders’ agreement are not abridged and are duly implemented. There is, therefore, no merit in this contention.
33. Before concluding, it is necessary to clarify that all the observations contained in this order are confined to the disposal of the application under Section 9 and shall not be construed as amounting to the expression of any final opinion on the merits of the rights and contentions of the parties in the arbitral proceedings.
34. In the circumstances, the prayers for reliefs in terms of prayer, Clauses (a), (b)(i) and (b)(ii) are rejected. There shall be an order in terms of prayer Clauses (b)(iii) and (b)(iv). However, parties will comply with the directions issued hereinabove in regard to the holding of a fresh meeting of the Board of directors for the finalisation of the accounts, in terms of the statements recorded earlier.
35. The Arbitration petition is allowed in the above terms.
