JUDGMENT
1. The appellant is aggrieved by the orders passed by the IX Additional City Civil Judge, Bangalore, in respect of I.A. Nos. 1 and II. However, the appellant has confined this appeal only against the order on I.A. No. I. I.A. No. I is an application filed under O. 39, Rr. 1 and 2 read with S, 151, C.P.C. for an order of temporary injunction restraining the respondents 10 hold the meeting on 5-1-1994 or any other date subsequent thereto for the purpose of replacing the Chairman and Managing Director i.e., second respondent or the Management of the first respondent-company pending disposal of the case.
2. The main prayer made in that suit was to pass a judgment and decree restraining respondents 2 to 9 from holding the Board of Directors meeting of the first respondent-company either on 5-1 -1994 or any other dale subsequent thereto till the two Directors viz., Sri T. Sudhakar Pai and Sri G. M. Prabhu Shiroorkar takes charge as the Board of Directors of the Board by issuing decree of perpetual injunction.
3. The case filed by the appellant before the trial Court represents a remarkable sequence of events, which also gives an idea as to how a company incorporated for an avowed purpose of functioning as an investment and finance company with an initial share capital of Rs. 10 crores developed to higher magnitude due to the efforts made by the several Directors on the guidance of the Chairman and Managing Directors now
resort to have an infighting between themselves and thereby affecting the interest of share-holders which ultimately lead to filing of several suits in several courts by proxy-litigations and throwing blame on each other as the instruments for this ugly state of affairs. Therefore, a brief advertance to the undisputed facts is necessary and they are as follows :–
4. The first respondent is a public limited company incorporated under the provisions of the Companies Act, 1956. Its incorporation was in the year, 1971. The idea was initially mooted by late Padmashri Dr. Madhava Anantha Pai, President Academy of General Education, Manipal, D. K. who also served as a Director and Chairman until he breathed his last and in memory the Board of Directors of the Company held a meeting on 13-6-1981 and after placing on record the excellent work done by late Dr. Madhava Anantha Pai, the second respondent was elected as Chairman unanimously on that date.
5. The appellant contended that she is one of the shareholder of this company having about 200 shares and she is interested in the good administration of this company, which depended on the good management by the Board of Directors. The Memorandum of Articles of Association of this company provided for 12 Directors. Since there were only 8 Directors on the Board till 7-10-1993, in the Annual General Meeting held on that day one Sri T. Sudhakara Pai and Sri G. M. Prabhu Shiroorkar were elected as Directors. She further contends that due to certain misunderstandings and in view of certain family quarrels there was infighting among the Directors inter-se throwing the interest of the company. She having learnt that some of the Directors under the leadership of the third respondent with a view to prevent the two Directors elected on 7-10-1993 have set up one Sri Shambu Prasad Agarwai to file a suit in the High Court of Calcutta against the first respondent-company and others and obtained an interim order restraining the first respondent from initially affecting the resolution passed on 7-10-1993 in the 22nd Annual General Meeting. This act was committed
with a view to defeat the democratic process and with a view to gain upper hand by respondent Nos. 3 to 9. It is further contended that the group headed by the second respondent is holding about 20 per cent of the shares and the group headed by the third respondent is holding 15 per cent of the shares. The balance of 65 per cent of shares are held by financial institutions and innumerable individuals including the appellant. In view of the differences of opinion between the two fractions, the respective groups have been trying to treat the first respondent-company as their family property and without caring for the shareholders of the company and without realising that it is a public limited company are indulging in securing power over the company and therefore, the group headed by the third respondent managed to file a suit in the High Court of Calcutta to prevent the newly elected Directors to participate as Board of Directors and in their absence, the Company Secretary Sri S. S. Karriath, who is siding the group headed by the third respondent managed to fix a meeting of the Board of Directors on 5-1-1994 at 11 a.m. at Bangalore.
6. The appellant having reliably learnt that the main object of calling such meeting was not to discuss the subjects that were fixed for debate but only to remove the second respondent from the working committee of the Directors and now from the post of the Chairman and Managing Director. She is contending that alround growth of the company was due to the sincere efforts and hard work of the second respondent and therefore, if the respondents 3 to 9 arc allowed to take a decision to remove [he second respondent there would be irreparable less and injury and therefore, she has obliged to file a suit before the trial Court on 5-1-1994.
7. On 5-1-1994 there was a representation to the first respondent-company. The trial Court having considered the importance in taking any decision either in favour of the appellant or the first respondent passed an order to the effect that if there is a meeting by the Board of Directors with 8 or 10 members, the decision taken thereon for replacing the
Chairman and the Managing Director or the management of the first respondent-company shall not be implemented until further orders of the Court. Thereafter, the respondents are allowed to file their objection statement to I.A. No. I.
8. When I.A. No. I was pending, the second respondent filed I.A. No. II seeking permission to represent for himself and on behalf of the first respondent-company as according to the averments, there would not be any proper representations if the company’s Secretary Sri S. B. Kamath is allowed to represent the first respondent-company and others. This direction is obviously made as the appellant’s prayer to the Court is to safe-guard the position held by the second respondent. The appellant filed I.A. No. III for amendment of the plaint to the extent that the first respondent-company is represented by the second respondent in the capacity of Chairman and Managing Director. The trial Court has disallowed I.A. No. II and partly allowed I.A. No. III.
9. I.A. No. I which was filed as a step-in-aid to the main prayer made in the suit, there are two sets of objections filed to that application. The first objection is by the company Secretary on behalf of the first respondent-company and the second objection is by the third respondent in the capacity of Joint Managing Director of the first respondent-company.
10. The company Secretary Sri S. S. Kamath contended in his objection statement dated 6-1-1994 that the suit is not maintainable and there is no power vested with the appellant to restrain the company from holding the Board of Directors meeting. The relief sought by the appellant is also questioned as the said relief is contrary to S. 41 of the Specific Relief Act. It is further contended that the appellant as a shareholder of the company can only file a company petition under S. 397/398 of the Companies Act, 1956 before the Company Law Board and the Civil Court has no right to entertain a suit. According to him, the company is one of the largest non-banking financial company in the country having total share holding to the
extent of 7-10 crores, deposit from the public of about 160 crores. The company has also borrowed by the L.I.C., U.T.I, etc., and lent money to the extent of 250 crores.
11. With regard to the Board of Directors meeting in question the Secretary contended the meeting dated 6-1-1994 is to transact the various business. One of the agenda of the business is to consider the loan of 10 million dollars sanctioned by the Asian Development Bank, Manila in favour of the first respondent-company. There is also 12 items are fixed which comprises of hire purchase and leasing facility to an extent of 19 crores and therefore, if this meeting is prevented by means of an injunction there would be substantial loss to the company and it affects the interest of the shareholders also.
12. The substantial portion of the objection statement is to project the efficiency of
the other Board of Directors who are scheduled to participate in the said meeting and
another portion of the statement is to show
the opinion of the Board of Directors as to
what they have formed in respect of the
second respondent. Their main grievance is
that the second respondent’s attitude towards
rival company viz., Maharashtra Apex
Corporation Ltd., (shortly ‘MACL) where
the second respondent is also a Chairman and
his son Sudhakar Pai is a Managing Director
who were indulging in persuading the share
holders of this company to have their transactions with the MACL and therefore, they have set up one Vasudeva Pai to file a suit to
restrain the Board of Directors of this
company from passing any resolution regarding the removal of Directors including the
second respondent where they being un
successful, the said Sudhakar Pai set an
imposter to file suit on the file of the High
Court of Judicature at Calcutta to restrain the
Board of Directors from passing any resolution for the removal of the second respondent and also obtained an interim order restraining implementation of any resolution regarding his removal.
13. It is also averred that the plaintiff in that suit is one Mr. Junjanwala and he was not the person who filed that suit as later it
was transpired that by a forged signature the said suit was filed. The reference was also made to the suits filed before the trial Court at Bangalore City in O.S. No. 85 of 1994 by one Sri Geetha Dhareswar and O.S. No. 86 of 1994 by one Sri Raghupathy where the averments in the pleadings are verbatim to the averments made by the present appellant and therefore, the suits are motivated and mala fide in nature. The Secretary also disputed the election of Sri T. Sudhakar Pai and Sri G. M. Prabhu Shiroorkar in the Annual General Meeting held on 7-10-1993. It is also pointed out that the candidature of these two Directors were considered on 7-10-1993 which is an adjourned meeting from 30-9-1993 at the instance of the second respondent and in this regard a suit was also filed by a shareholder in the Court of the Munsif at Mangalore restraining the company and the second respondent from holding the adjourned Annual General Meeting on 7-10-1993 and also obtained an injunction order. Therefore, the majority of the shareholders including U.T.I, did not attend the meeting which was held on 7-10-1993. Since the said meeting dated 7-10-1993 is contrary to the injunction granted by the Munsiff’s Court and therefore in the suit filed by one Shambu Prasad Agarwal, the High Court of Judicature at Calcutta passed an order not to give effect to the election of these two Directors until further orders and this order continued to be in force and therefore, there is no question of these two Directors participating in the Board of Directors’ meeting.
14. The further objection is in respect of rivalry that is existing between the second and third respondents.
15. With these averments, the Secretary of the company justified the Board of Directors meeting to be held on 6-1-1994 where the Board shall take decision regarding several important matters mentioned earlier.
16. The objection of the third respondent to the application I.A.I. is in pari materia represents the contention taken by the Company’s Secretary. This respondent further adds that the Board of Directors meeting which was fixed on 5-1-1994 is, in
fact, adjourned to 6-1-1994 at the instance of the second respondent only as he expressed some inconvenience to participate on 5-1-1994.
17. The sum and substance of the objection statement filed by the third respondent and the Secretary of the company is that the second respondent being indulged in various activities prejudicial to the interest of the first respondent-company has also set up some of the shareholders to fight proxy litigation to thwart any legitimate decision of the Board of Directors in removing the Second respondent in accordance with the democratic process.
18. As I said earlier, the second respondent was not allowed to contest the application for himself and on behalf of the first respondent-company and therefore, initially it can be held that there was want of material by the trial Court to pass a suitable order on I.A. No. I which is directly safeguarding the interest of the second respondent.
19. The trial Court on the materials gathered from I.A. No. I and objections of the first and third respondents proceeded to decide this important aspect of the matter by formulating the points. That appears to be proper to decide this important question. The first point framed by the trial Court relates to the question of a prima facie case of the appellant to prevent respondents 2 to 9 from holding a meeting of the Board of Directors either on 5-1-1994 or any other subsequent date pertaining to the subject of replacing the second respondent or the management of the first respondent-company. It also formulated a point regarding the balance of convenience. The third point relates to the participation of the second respondent in the proceedings for himself and also on behalf of the first respondent-company in the capacity of a Chairman-Managing Director. The trial Court negatived all the points on appreciation of the materials placed by both the parties.
20. The trial Court in coming to such a conclusion has virtually formed an opinion that the second respondent is instrumental in filing of various suits to prevent the respondents 3 to 9 by passing a resolution against the
second respondent. The reasoning of the trial Court is, however, premature and one sided because a statutory right of the shareholders as owners of a company in protecting the future of the company, is involved and secondly their right to question the action of the Directors, who stood as trustees to the shareholders is being involved and also calling for any general body meeting is to have its own results as it is a time consuming factor the other democratic process which are the statutory rights vested to every shareholder, these proceedings are taken momentum after the last General Body Meeting on 30-9-1993. By refusing I.A. No. II the trial Court had insufficient material to come to a proper conclusion while deciding I.A. No. I.
21. The second respondent was allowed to participate in this appeal independently through a legal representative of his choice and also with a view to appreciate the various contentions raised by the parties. Consequently, the second respondent filed a counter-affidavit by way of objections on 30-3-1994. The sum and substance of the objection statement is that the company has reached the present situation out of the misunderstanding on account of personal prides and prejudice of some of the Directors who are trying to make personal gains out of the existing turmoil in the company. Since he had no opportunity to have his say in the matter before the trial Court, now he has been forced to state his case to put the records clean and straight.
22. This statement further shows that the Annual General Body Meeting of the Company was held on 30-9-1993 in accordance with the mandatory requirements where all the respondents participated and at the instance of the third respondent and some others the general body meeting was adjourned for filing up the post of two Directors and on 7-10-1993 which adjourned date is in accordance with the procedure prescribed under law, two Directors were elected. Immediately after the adjournment on 30-9-1993 the third respondent managed to initiate a suit through one Sri Sunder Bhandary in O.S. No. 1057 of 1993 on the
file of the Munsiff, Mangalore and obtained an interim order staying the holding of the adjourned General Body Meeting on 7-10-1993. He also got a suit filed by one Sri Shambhu Prasad Agarwal in O.S. No. 411 of 1993 on the file of the High Court of Calcutta and obtained an interim order not to give effect to the resolution passed in the adjourned General Body Meeting held on 7-10-1993. However, the legal opinion was sought due to conflicting interim orders and the General Body Meeting was held oh 7-10-1993 where two Directors were elected.
23. Later, the third respondent and his henchmen by taking advantage of non-participation of newly elected Directors in view of the interim order of Calcutta High Court with the tacit and active connivance of Secretary who was ready to oblige the third respondent and his henchmen by calling for the meeting of the Board of Directors with the Agenda, in whatsoever form they wanted, throwing to the winds the actual secretarial practice, have fixed the Board of Directors Meeting, which, at his instance, adjourned to 6-1-1994 and though there was no agenda for removing him from the Managing Directorship and Chairmanship they have tried to pass a resolution to that effect. Having sensed their evil intention he has requested the High Court of Calcutta to grant an interim order restraining the first respondent and others from giving effect to any resolutions passed by them for removing him and the Calcutta High Court was pleased to grant that relief in his favour. It is his further contention that he has also filed an original suit in O.S. No. 24 of 1994 on the file of the Civil Judge, Udupi and has obtained an interim order restraining the first respondent from giving effect to the resolutions passed by the third respondent and others for removing him from his post. Therefore, it is contended that there was no necessity for him to set up any body to safeguard his interest and he has also not indulged in instituting any proxy-litigations. He has denied the various averments made by the third respondent in his counter affidavit to I.A.. No. I before the trial Court and also in this appeal. It is also pointed out that when he wanted to bring all these factors before the
trial Court he was not allowed by the trial Court and he has been shut out from speaking for himself which resulted in respondents 3 to 9 obtaining a right to represent the first respondent and misleading the court by misrepresenting the facts. He has further proceeded to say that the third respondent and others must have set up the appellant and other persons and got the suits filed through them for the purpose of obtaining an interim order in his favour to pre-empt from getting any relief either in the Calcutta High Court or in the suit filed by him in the court of the Civil Judge, Udupi. He has not ruled out the possibility of the appellant being a shareholder as the person in safeguarding their interest having filed this suit to save the company. Therefore, it cannot be said that he has instigated the appellant to file the suit as there was no need for him to do so as he has already obtained an interim order in his favour as set out earlier.
24. It is further contended that the conduct of the third respondent and others in calling Board of Directors Meeting at short intervals and on the ascertained most inconvenient dates and passing resolutions much against the interim orders passed by the Courts clearly indicate the hollowness of their contentions.
25. This respondent concluded by saying that it is ultimately the shareholders who are going to suffer and the appellant has got every reason and right to file a suit for protecting her own interest in the first respondent-company and to put an end to the whims and fancies of the Directors whom she must have thought are not acting in the best interest of the company and therefore, the order under appeal is illegal, vexatious, absurd and further suffers from irregularities and capreciousness.
26. The second respondent also filed a counter-affidavit by way of objections to the interlocutory application filed by the third respondent. He has reiterated the averments made in his earlier counter-affidavit and contended to get over the orders passed in his favour in Calcutta High,Court in O.S. No.411 of 1993 filed by Sri Shambhu Prasad
Agarwal and the interim order passed in O.S. No. 24 of 1993 on the file of the Civil Judge, Udupi, the third respondent and his henchmen have set up various persons to make the orders obtained in his favour as nugatory.
27. The contentions raised in those counter-affidavits filed by the third respondent is not controverted by filing any objections to the various contentions raised in these two affidavits.
28. I have narrated the facts in detail to the extent it is necessary not like in any other appeals, because to understand a prima facie case the courts are bound to appreciate each and every circumstances that are necessary before forming any opinion. If the opinion is formed solely on the basis of an unrebuttable pleadings there is every likelihood of reaching an erroneous conclusion. When the courts are required to appreciate the contention of the parties through the pleadings and the documents only, it is all the more necessary to place the entire cards on the table. At this stage, we lack advantage to appreciate the circumstances taken by the parties due to lack of testing their averments by means of evidence where a person will be tested to prove his veracity by an effective cross-examination. This is precisely what the trial Court was lacking to hold that there was no prima facie case made out by the appellant. The trial Court had the opportunity of appreciating the case made out by the third respondent and the Secretary of the first respondent-company. It is admitted of no doubt that immediately after the General Body Meeting that was held on 30-9-1993, and put it more precisely after 7-10-1993, the altogether hidden feelings of the parties are gained surfacing and thereby the functions of the Board of Directors who are elected to safeguard the destiny of the company and the share-holders, turned out to be a company of faction riddled. This virtually made, prima facie, to some of the shareholders to move various courts to avert a show-down which ultimately happened on 6-1-1994. Therefore, it is quite premature to come to the conclusion that the persons who have filed suits in various capacities are proxy litigants either supporting the second respondent or the third respondent and his followers. Therefore, it can be said that the trial Court reached a conclusion of non-availability of prima facie case which naturally lead to the conclusion that the balance of convenience is against the appellant.
29. Therefore, this is not a pure and simple suit where a shareholder of this company is trying to interfere with the power vested with the Board of Directors to conduct the affairs of the company when the things are normal. But, it is a suit which was filed in the background of various instances that took place in respect of this company which has attracted several lakhs of shareholders to have their faith in investing their money to get suitable dividends and who are faced with an open war between the Directors to achieve their personal egos and prejudices are compelled to approach the Court of Law as it is the only course opened for them to safeguard their right and interest in this company.
30. Therefore, one should have altogether a different approach. Only then, the ends of justice can be met.
31. The second respondent sworn to the affidavits that he has already obtained an order of stay from the Calcutta High Court and also by filing a suit before the Civil Judge, Udupi which are not controverted by respondents 3 to 9. The Company’s Secretary who has been authorised to represent the company in any suit filed against it has made a very severe and far-reaching averments against the second respondent. Therefore, it is in the stage of a clear standing rift between the Company’s Secretary with the Chairman and Managing Director and they have reached a point of no return. The present position can be saved only by conducting an emergent General Body Meeting where the shareholders who are majority owners of this Company can give vent to their feelings by adopting a method as to who should be the future Directors to safeguard this Company. Therefore, it is absolutely necessary that the court should not give rise to allow the persons interested to use the company to achieve their own in disregarding the interest of the shareholders. This is a thing, however, left to
the choice of the shareholders who alone are the masters to decide the destiny of a company to some extent. Therefore, I initially hold that a right to approach a Civil Court by a shareholder under these facts and circumstances is not taken away though there is a specific provision made under Sections 397 and 398 of the Companies Act, 1956.
32. On the question of the locus standi of the appellant to file a suit in a Civil Court, the definition of court in clause (11) of Section 2 and Section 10 of the Companies Act, 1956 that is jurisdiction of ‘courts’ read together enable the shareholders to decide as to which Court they should approach for remedy in respect of a particular matter. It is quite a difficult task to consider a definition clause as one conferring jurisdiction exclusive or otherwise and even Section 10 refers only to the courts jurisdiction under this Act where such jurisdiction is conferred by the Act under particular sections. A reference was also made to a case in R. Prakasam v. Narayana Dharma Paripalana Yogam, a judgment of the Kerala High Court, where the learned single Judge relied on a decision in Foss v. Harbottle, (1843) 2 Hare 461. A question of jurisdiction of the Court was required to be determined to fix up a correct forum as Sections 397 and 398 provided for relief against oppression and mismanagement. The learned Judge held as follows:–
“It appears to me that what the above definition clause does is to indicate that wherever other provisions of the Act contain the term ‘the Court’ with respect to any matter relating to a company, that has to be understood as the Court having jurisdiction under Section 10 with respect to that matter. And Section 10, dealing with ‘jurisdiction of Courts lays down that the High Court of the territory where the registered office of the company is situate is to have jurisdiction over all matters except to the extent such jurisdiction has been conferred by notification on District Courts. Take, for example Sec, 107. This Section provides that dissentient shareholders may apply to the ‘Court’ to have the variation cancelled. The shareholders concerned will have to find out which Court they
should resort to. It may be the High Court of one State or of another, depending upon where the Head Office of the” company is situated. It may be the District Court of one place or another, again depending upon the notifications issued under Section 19(2). The purpose of Section 2(11) read with Section 10 is only to enable the shareholders to decide as to which Court they should approach for remedy, in respect of that particular matter. It is difficult to construe the definition clause as one conferring jurisdiction, exclusive or otherwise; and even Section 10 refers only to “the Court having jurisdiction under the Act’, i.e., where such jurisdiction is conferred by the Act, as under Sections 107, 155, 163(2), 237, 397, 425, etc. In other words, the conferment of jurisdiction on ‘the Court’ is not under Section 10, but by other provisions of the Act like those enumerated above. If, on the other hand, Sections 2(11) and 10 are construed as not only nominating the Courts, but also conferring exclusive jurisdiction on them, the specific provisions in the other sections conferring jurisdiction on the Court to deal with the matters covered by them will become redundant. It may be that where the Act specifies the Company Court as the forum for complaint in respect of a particular matter, the jurisdiction of the Civil Court would stand ousted to that extent. This depends, as already noticed, on the language of the particular provisions like Sees. 107, 155,397 and others and not on Sections 2(11) and 10. For instance, there are decisions to the effect that the concurrent jurisdiction of the Civil Courts to rectify share registers is not affected by Section 155 which confers power on the Company court over the same matter”.
The observation of the learned Judge of the Kerala High Court is followed by this Court in Prakash Roadlines Ltd. v. Vijayakumar Narang, .
33. In Hind Overseas Pvt. Ltd. v. R. P. Jhunjhunwalla, , winding up petition under Section 433 of the Companies Act was under consideration and the duty of the Company Court was also dealt with. Their Lordships of the Supreme Court have referred to the decision of the Privy
Council in Loch v. John Blackwood Ltd., (1924) AC 783, wherein Section 127 of the Companies Act, 1910, of Barbados, identical with Section 433(f) of the Act was considered. In that decision, Lord Shaw of Dunfermline quoted in the judgment a passage from the case of Baird v. Lees, (1924) SC S3, which is as follows (at pp. 572-73 of AIR) :–
“I have no intention of attempting a definition of the circumstances which amount to a ‘just and equitable’ cause. But I think I may say this. A shareholder puts his money into a company on certain conditions. The first of them is that the business in which he invests shall be limited to certain definite objects. The second is that it shall be carried on by certain persons elected in a specified way. And the third is that the business shall be conducted in accordance with certain principles of commercial administration defined in the statute, which provide some guarantee of commercial probity and efficiency. If shareholders find that these conditions or some of them are deliberately and consistently violated and set aside by the action of a member and official of the company who wields on overwhelming voting power, and if the result of that is that, for the extrication of their rights as shareholders, they are deprived of the ordinary facilities which compliance with the Companies Act, would provide them with, then there does arise, in my opinion, a situation in which it may be just and equitable for the Court to wind up the company.”
34. It is admitted of no doubt that though the Articles of Association prescribe for a total of 12 Directors as the maximum and 5 Directors as the minimum, on 6-1-1994 there were only 8 Directors as the 2 newly elected Directors were prevented to participate in the proceedings due to an interim order passed by the High Court of Calcutta.
35. References- are also made to the decisions in John Shaw & Sons (Salford), Ltd. v. Shaw and Shaw, (1955) 2 KB 113 and Young v. Ladies Imperial Club, Ltd. (1920) 2 KB 523, to stress, the point that the participation of every Directors elected is necessary to take an important resolution and the notice to every such Director is necessary.
36. It is gathered by the help of the pleadings and also production of the documents that the meeting that was fixed on 5-1-1994 which was adjourned to 6-1-1994 the subject was also included the statement of the second respondent given to the Press dated 1-12-1993 to the shareholders. On a reference to the minutes of the meeting held on that day the meeting was solely confined for removing of the second respondent and setting rights of various actions initiated by the second respondent.
37. Sri Udaya Holla, the learned Advocate for respondents I and 3, has relied on a decision in L.I.C. of India v. Escorts Ltd., , to high light the fact that the Court of Law has no power to grant an injunction to restrain the holding of General Meeting to remove a Director and appoint another.
38. There is absolutely no quarrel with this proposition. The case of L.I.C. was concerned with purchase of shares of Indian Company by Foreign Companies by a particular person in management of the Company. Permission of Reserve Bank of India was also involved in consultation with the Government of India due to involvement of enormous foreign exchange which was found vital to the economy of the country. The transfer of shares also involved under Section 111 of the Companies Act. In this background requisition of the shareholders to convene a General Body Meeting was under consideration.
39. In this background the Hon’ble Supreme Court examined the notice requisitioning the meeting of the company by the L.I.C. of India was considered and held that this action of L.I.C. was not liable to be questioned on any of the ground on which it was sought to be questioned in the writ petition. In this context, the Supreme Court held that a minority of shareholders in the saddle of power could not be allowed to pursue a policy of venturing into a litigation to which the majority of the shareholders were opposed. The matter was directly concerned with the power of a shareholder when the statute fixed for exercising the same.
40. The question involved in this case altogether falls on a different footing. A series of proxy litigations started after the General Body Meeting, inter se misunderstanding developed, attempts to gain power to hold the company by a group of Directors arc initiated, attempt to disallow two of the newly elected Directors to participate in the Board of Directors Meeting was made successful. The election of two Directors in the General Body dated 30-9-1993 was also put off. Therefore, it is difficult to hold that a shareholder of the company has not acquired a legal right to take the assistance of the court to stop such a show-down. The Supreme Court enumerated the rights of the shareholders and they are : (i) to elect Directors and others to participate in the management through them; (ii) to vote for resolutions at meetings of the company; (iii) to enjoy the profits of the company in the shape of dividends; (iv) to apply to the court for relief in the case of oppression; (v) to apply to the court for relief in the case of mismanagement; (vi) to apply to the court for winding up of the company; and (vii) to share in the surplus on winding up.
41. The Memorandum and Articles of Association of I.C.D.S. Ltd., (shortly ‘Articles.’) no doubt invest the power to the Board of Directors to appoint or remove a Managing Director under Articles 15 and 16-A of the Articles. Articles 15 and 16-A as they stand is as follows:–
“15. Subject to the provisions of the Companies Act, the Board of Directors of the Company may appoint one or more Directors as the Managing Director or whole time Directors of the Company on such terms and conditions as they think fit and from time to time modify the terms of appointment or remove them from office and appoint other Directors in their place. The Managing Director or whole lime Directors shall not, as long as they hold that office, be liable to retire by rotation, and if they cease to be Directors of the Company from any cause whatsoever, they shall ipso facto immediately cause to be the Managing Director or whole time Director as the case may be.
16. (a) The Directors of the Company may
from time to time elect a Chairman and a Vice-Chairman of the Board and determine the period for which they are to bold office.”
42. In Pyare Lal Gupta v. D. P. Agarwal, (1983) 53 Com Cas 586: (1981 Tax LR 2431), a learned single Judge of the Allahabad High Court upheld the action of the Board of Directors to carry out the duties assigned to them provided that there was no prima facie case nor the balance of convenience in favour of the Managing Director. To arrive at such a conclusion the court also considered the serious charges levelled against the petitioner. Therefore, the injective relief sought by the person who suffered removal by the Board of Directors was rejected.
43. In Jagdish Prasad v. Paras Ram, (1942) 12 Com Cas 21 : (AIR 1941 All 360), the learned Judge was considering the refusal of Directors to register the transfer of any shares to any person or found to be undesirable to admit as one of the shareholders. However, the court also held that the discretion vested in the Directors does not, however, entitle them to act ‘arbitrarily’ or ‘wantonly’. But if a shareholder challenges undoubted right of Directors to use their discretion in such a matter, the burden lies heavily on him to allege with particularity and to prove such mala fides on the part of the Directors as amounts to arbitrary and wanton conduct. The Directors are not exposed to suspicion of mala fides by reason merely of the fact that they have chosen to withhold their reasons. The learned Judge concluded by saying :
“So long as a Board of Directors exists and particular powers are vested in it by the articles, then they are entitled to exercise those powers without interference by the shareholders and it is irrelevant whether the shareholders approve of what the Directors have done or not. If the shareholders are dissatisfied with what the Directors do, their remedy is to remove them in the manner provided by the articles.”
Admittedly, in this case the question related to transfer all shares where the right was restricted the concerned articles provided
in a very usual way that except in the case of a transfer by a member to an immediate relative, no member was to be entitled to transfer his or her shares without giving the Directors an opportunity as therein provided for finding a purchaser or purchasers from among the existing members themselves. Having considered on this restricted right the Court proceeded to dismiss the prayer of the plaintiff.
44. A reference was also made to the decision in Cotton Corporation of India v. United Industrial Bank, , where Section 41(b) of the Specific Relief Act was considered, according to which an interim relief can be granted only in aid of, and as ancillary to, the main relief which may be available to the party on final determination of his rights in a suit or proceedings. If this be the purpose to achieve which power to grant temporary relief is conferred, it is inconceivable that where the final relief cannot be granted in the terms sought for, because the statute bars granting such a relief ipso facto the temporary relief of the same nature cannot be granted.
45. Therefore, it is essential to find out that the granting of interim relief will aid the final determination of the prayer made by the party. The Directors of a Company will be elected in a General Meeting and under the provisions of the Companies Act that the Articles of Association or the Regulations of the Company is binding on the company and its shareholders. Under Section 36 of the Companies Act, the Memorandum of Articles of Association are binding on all the members of the company. The Managing Director considered as an agent of the Board of Directors to carry out the duties assigned to him and therefore, he could be removed at liberty of the Bar. Therefore, in Pyare Lal Gupta’s case (1981 Tax LR 2431) (All), the injective relief to restrain the Board of Directors from interfering with the right of Managing Director to act as such cannot be issued when the balance of convenience is in favour of the Board.
46. Therefore, in Puma Investments Ltd. v. Southern Steelmet and Alloys Ltd.,
(1977) 2 Kant U 266 : (1977 Tax LR 2364), his Lordship Venkatachaliah, J., as he then was, on the application under Sections 397 and 398 of the Companies Act injunction was prayed for restraining the respondents from holding the proposed Annual General Meeting and the extraordinary General Meeting held :
“In the case of interlocutory injunctions the Court will first consider whether the applicant has established a prima facie case, in the sense that it is not a frivolous or vexatious claim but involves a serious matter to be investigated.
Assuming that the applicants have made out a prima facie case, the question that arises then is, as to the balance of convenience between the parties and the imminent and uncompensatable disadvantage or some irreversible detriment that may result to the applicants by the denial of the relief. At this stage, the Court cannot proceed on the assumption which would amount to prejudging the matter in issue. If the balance is fairly even then it may not be improper to take into account, in tipping the scales, the relative strength of each party’s case.
The burden of establishing that the inconvenience which the applicants will suffer by refusal of the injunction is greater than that the respondent will suffer, if it is granted, lies on the applicant.”
In para 10 of the judgment, it is held :
“The principles guiding the gram of interlocutory injunctions are fairly well settled. The relief is both (emporary and discretionary. In cases of interlocutory injunctions in aid of the rights of the party seeking it, the Court will first consider whether the applicant has established a ‘prima facie’ case, the expressions ‘prima facie’ in this context being understood in the sense that it is not a frivolous or vexatious claim but involves a serious matter to be investigated. The rules guiding the administration of this form of discretionary relief admit of being formulated in the following three sequential propositions :
(1) Discover whether the plaintiff’s case is frivolous or vexatious;
(2) If it is not, decide in whose favour the balance of convenience lies;
(3) If the balance is fairly even, then it may not be improper to take into account in tipping the balance the relative strength of each party’s case as revealed by the affidavit evidence adduced on the hearing of the application.
47. The appellant is a shareholder of this company. She having noted the events that took place following the General Meeting dated 30-9-1993 has expressed the apprehension that in the background of so many incidence that took place immediately after that General Meeting has prayed for an order of temporary injunction only to the extent of restraining respondents 2 to 9 from holding the meeting of the Board of Directors for the purpose of replacing the Chairman and Managing Director. According to her, removal of the second respondent is actuated by motives as according to her, the two Directors elected on 7-10-1993 were prevented to act as Directors by filing a suit before the High Court of Calcutta and obtained an interim order on several grounds and therefore, their presence is also necessary before taking any decisions to remove the second respondent from his present post.
48. In the background of what is stated it is very difficult to say that the case of the appellant is frivolous or vexatious. This company is entitled to have five Directors as minimum and 12 Directors as maximum. Admittedly, now there is a vacancy of 4 Directors including the 2 elected Directors who are prevented from interim order. Therefore, one cannot say that the plaintiff has not made out a prima facie case to prevent the Board of Directors to desist from the action which they were intended to take which ultimately happened. As could be seen that the second respondent was elected unanimously and no tenure of period was fixed. A Managing Director is to preside over the meeting and to accept the opinion of the majority in passing any resolutions.
49. The general powers of the Board is enumerated from Section 291 of the Act.
Section 292 enumerates certain powers to be exercised by the Board of Directors at meeting. Under Sections 316 and 386 there is a power for appointing a personas Managing Director or Manager who is the Managing Director or Manager of another company. Articles 15 and’ 16 has made provisions for appointing a Managing Director and also to elect a Chairman and a Vice-Chairman of the Board. The Board of Directors are also invested with the power to modify the terms of appointment from time to time or removal from office and appoint other Directors in that place. Articles of Association does not specifically say under what circumstances a Managing Director is to be removed. In a common parlance, a majority of the Directors present can remove a Managing Director in the Board’s meeting. Out of 7 Directors present, 5 Directors voted in favour of removing the Chairman and Sri K. K. Pai who was appointed as a Chairman was abstained from voting on the resolution and one Mr. Ramesh Pai voted against the resolution. In the said meeting, the third respondent as a Joint Managing Director of the company was authorised to exercise such powers and do all such acts and things as were delegated to and vested in the Managing Director by the Board of Directors from time to time. Therefore, it is obvious, as Mr. K. K. Pai was delegated to hold the office of Chairman was disinvested the power which was hitherto held by the second respondent as a Managing Director.
50. In these facts and circumstances one cannot held to say that the appellant has not made out a prima facie case to restrain the respondents 3 to 9 from removing the second respondent. This is obviously so because 2 Directors elected were prevented to act as Directors and two vacancies are yet to be filled and therefore, there is no majority view expressed for the removal of the Managing Director as the appellant’s case discloses that there was a strategy expounded for removal of the second respondent. In these circumstances, the course open to the Board of Directors is to fill the 4 Directors or alternatively, to have the opinion of the shareholders by calling a General Meeting to consider the future course of the company.
51. The trial Court has proceeded to dismiss I. A. No. I only on the basis of certain guidelines provided in some of the decisions and it had no opportunity to consider a prima facie case of the appellant as admittedly the second respondent was not allowed to file his defence as a party affected by the Board of Directors resolution.
52. If we go through the pleadings, the plea of the appellant is that the impugned meeting dated 5-1-1994, which ultimately conducted on 6-1-1994, was only for the purpose of removing the second respondent and reconstitution of the Board of Management. According to the appellant after obtaining an interim order from the High Court of Calcutta to prevent the newly elected two Directors to participate in the Board meeting, the Secretary of the Company with active connivance of the third respondent called this meeting to take advantage of the situation to unseat the second respondent.
53. The Secretary of the Company and the third respondent in their counter-affidavit to I.A. No. I filed by the appellant, have mainly contended that the Board Meeting fixed on 6-1-1994 is to consider a very important subjects and the resolutions on those subjects will actually save the company from harassment and therefore, the Court shall not pass any interim order to prevent the holding of the Board of Directors.
54. The Agenda for the Board Meeting consisted of 12 items. One of the items was to discuss the circular letters issued by the second respondent to the shareholders. However, they have expressed the importance of this meeting to pass resolutions i.e. (i) to consider the loan of 10 million dollars sanctioned by the Asian Development Bank, Manila in favour of the company. Unless the Board passed appropriate resolutions and convene its approval for various terms and conditions of the loan and passes necessary resolutions regarding the modality of such acceptance of loan and execution of various documents in this regard, such loan will not be disbursed to the company. It would be a vital blow to the business and profitability (ii) consideration of hire-purchase’ and leasing
facilities involving disbursement of 19 crores is also to be resolved, failing which these monies will have to be kept idle, resulting in substantial loss to the company.
55. The above are the important agenda fixed for that meeting out of the 12 items for the day. The extract of minutes of the meeting dated 6-1-1994 is altogether gives a different picture. The entire transaction of business was aimed at the various acts committed by the second respondent which according to the contesting respondents are detrimental to the interest of the company and therefore, the supersession of resolution No. 515 passed by the Board meeting held on 13-6-1981 and pulling the resolution for voting gained importance.
56. This constitute a grave irregularity as the plea taken in the counter-affidavit was totally held to be untrue and false. In this backdrop if one views this case, the apprehension of the appellant ultimately found to be true and correct. This resolution was held after the parties have made their appearance before the learned trial Judge in the suit with their specific averments. The specific prayer in I. A. No. I was to restrain the respondents 2 to 9 from holding any meeting for the purpose of replacing the respondent 2 or the management of the first respondent-company. This prayer in no way prevented the Board of Directors to conduct the Board meeting to consider other items of the Agenda. The Company’s Secretary and the third respondent made a specific plea in their counter-affidavit that the Board Meeting is absolutely necessary to take other matters in the Agenda which are important in the interest of the company. At the Board meeting altogether confined to the subject of removing the second respondent and none of the subjects are discussed.
57. The trial Court was virtually handicapped due to non-consideration of these materials and therefore, it has reached a conclusion which is altogether contrary to the conclusion one can arrive on the admitted materials. There is no question of forming a different view, but this is the only view that was possible to arrive at on the materials
placed by the parties. As I said earlier, the trial Court unequivocally reached a conclusion that the second respondent is instrumental in instituting proxy-litigations by various persons has virtually prejudiced the mind of the trial Court to reach a conclusion adverse to the contention of the appellant. Therefore, looking from any angle the element was mala fide bad faith, strategem are writ large on the very face of the materials made available by the parties and therefore, this case has to be viewed altogether in a different angle. Then only the proper justice can be rendered to the parties. If the removal of a Managing Director, pure and simple, will not entail the courts to extend its jurisdiction to the act committed by the Board of Directors as enjoined under the Articles of Association. Therefore, it is inevitable to hold that the order of the trial Court is contrary to the materials and therefore, resulted in an adverse finding.
58. In the result, I pass the following:–
ORDER
1) This appeal is partly allowed. The order, dated 1-2-1994 made on I.A. No, 1 in O.S. No. 87 of 1994 by the IX Additional City Civil Judge, Bangalore, is hereby set aside.
2) The Resolution, dated 6-1-1994 passed by respondents Nos. 3. 4, 6, 7 and 9, as it relates to the removal of the second respondent and constitution of new management committee is stayed pending disposal of the suit.
3) However, this order will not take away the right of the shareholders :
a) to remove the Directors in a General Meeting including the second respondent, if the same is convened by the company; or
b) the right of Board of Directors to remove the second respondent, only after filling up of two more Directors in view of two Directors are already elected and their participation is stayed by the High Court of Calcutta and after the Board of Directors assumed full strength of 12 Directors.
59. Immediately after pronouncement of
the judgment, the learned Advocate for respondents 1 and 3 brought to the notice of this Court an application, I.A. No. II, filed under Section 151 of the Code of Civil Procedure on 3-4-1994 filed on 4-4-1994. The knowledge of this application is brought to this Court for the first time. In this application, the prayer of the third respondent is that the second respondent shall be restrained from chairing the General Meeting or Extraordinary General Meeting of the Company M/s. ICDS Limited and grant such other and further reliefs as are just.
60. In view of the finding given in the judgment and the reasons stated therein, this application cannot be considered at this stage. Therefore, the application I.A. No. II is dismissed.
61. Order accordingly.