2002 (10) TMI 682 - HC - Companies Law

Court injunction stops new director appointments, deems annual accounts adoption unlawful, rejects director resignation relief.

The court granted the injunction against the appointment of new directors as it was found to be contrary to the company's articles of association. The ... Enforceability of shareholder agreement provisions against company articles - Validity of directors' appointment and quorum - Effect of section 290 of the Companies Act on acts of de facto directors - Requirement of affirmative vote for adoption of accounts under articles - Interim relief under Section 9 of the Arbitration and Conciliation Act, 1996Enforceability of shareholder agreement provisions against company articles - Whether the court could restrain the company from accepting resignations of directors based on a provision in the subscriptioncumshareholders' agreement - HELD THAT: - The court held that provisions in a shareholders' or subscription agreement which purport to govern the management of the company are not binding on the company or its shareholders unless incorporated in the articles of association. Reliance was placed on the principle in V.B. Rangaraj v. V.B. Gopalakrishnan and related authorities to the effect that restrictions not embodied in the articles cannot be enforced to control corporate management. The subscription agreement's assurance regarding continuance related only to the second respondent and, in any event, was not translated into the articles so as to constrain acceptance of resignations. Consequently the court could not direct continuation of the second, third and fourth respondents as directors. [Paras 6, 7]Prayers seeking injunctions to prevent acceptance of the resignations of the second, third and fourth respondents are rejected.Validity of directors' appointment and quorum - Whether the appointments of the fifth and sixth respondents on 20th August 2002 were valid having regard to article 159B(xxix) (affirmative consent for inclusion/removal of members on the board) - HELD THAT: - Article 159B(xxix) required the affirmative vote of the petitioners' nominee director for inclusion of members on the board; the clause must be given its ordinary meaning (a 'member on the board' being a director). The induction on 20th August 2002 occurred without that affirmative assent and therefore was ultra vires the articles. Subsequent events (confirmation of minutes on 29th August and later votes) did not amount to waiver: the petitioners were entitled to appoint nominee directors under article 145(c) (being majority shareholders) and, by letter dated 30th August 2002, explicitly recorded objection citing the positive consent requirement. Accordingly the appointments were invalid. [Paras 9, 10, 11, 12, 13]The appointments of the fifth and sixth respondents on 20th August 2002 were contrary to the articles and therefore invalid.Effect of section 290 of the Companies Act on acts of de facto directors - Whether acts of the fifth and sixth respondents are validated by section 290 of the Companies Act despite invalidity of their appointment - HELD THAT: - Section 290 protects acts of a person purporting to be a director notwithstanding later discovery of defects in appointment, but its proviso denies protection after the invalidity has been shown to the company. The court found that by letter of 30th August 2002 the invalidity of the appointments had been clearly shown to the company. Even if the defect was not shown on 20th August 2002, from 30th August 2002 onwards the protection under section 290 was unavailable. Thus acts done after that date could not claim the benefit of section 290. [Paras 14, 15, 16]Section 290 does not validate acts of the fifth and sixth respondents after 30th August 2002, when their invalidity was shown to the company.Requirement of affirmative vote for adoption of accounts under articles - Validity of board meeting and quorum in absence of nominee directors - Whether the adoption of annual accounts at the adjourned board meeting on 6th September 2002 was lawful - HELD THAT: - Article 159B(viii) required the affirmative vote of the petitioners for adoption of accounts; article 151 made the petitioners' nominee directors part of the quorum unless leave of absence in writing was given. The adjourned meeting at 5.30 p.m. on 6th September 2002 was not shown to have been adequately notified to the petitioners as the board itself had asked respondent No.5 to ensure such communication; no affidavit proves notice was given. Moreover, excluding the invalidly appointed fifth and sixth respondents, the directors present did not constitute the required quorum. The respondents' contention that the articles' provisions were repugnant to the Companies Act was rejected: the articles, validly adopted, can require affirmative assent and are not repugnant to the Act as applied here. Consequently the adoption of accounts at the adjourned meeting was unlawful and the petitioner was entitled to relief. [Paras 25, 26, 27, 28, 29]The adoption of the accounts at the adjourned board meeting on 6th September 2002 was unlawful; the petitioners are entitled to relief and the company must reconvene the board in accordance with the articles for finalisation of accounts.Interim relief under Section 9 of the Arbitration and Conciliation Act, 1996 - Whether the High Court, under section 9, could grant interim measures to protect the petitioners' rights pending arbitration - HELD THAT: - The court observed that section 9 confers jurisdiction to grant interim measures before, during and until enforcement of arbitral proceedings, and that the company is party to the arbitration agreement. Pending repayment or resolution under the subscriptioncumshareholders' agreement, the petitioners remain entitled to exercise contractual rights incorporated in the articles; thus interim relief to preserve those rights is permissible under section 9. The court therefore exercised its powers to grant interlocutory reliefs necessary to protect the petitioners' contractual rights while reserving all merits questions for arbitration. [Paras 4, 32, 33, 34]The petitioners are entitled to interim reliefs under section 9 to protect their rights under the agreement and the articles pending arbitral adjudication; accordingly certain reliefs were granted while others were refused as indicated.Final Conclusion: The court rejected the prayers to restrain acceptance of the resignations and to invalidate certain earlier board actions insofar as those sought to compel continuance of particular directors; it held the inductions of the fifth and sixth respondents on 20th August 2002 to be invalid, ruled that acts by them after 30th August 2002 are not protected by section 290, and declared the adoption of accounts on 6th September 2002 unlawful. Interim reliefs preserving the petitioners' rights under the articles and subscription agreement were granted under section 9, and the company was directed to reconvene the board to finalise accounts in accordance with the articles; all other observations were confined to this section 9 disposal and the merits remain for arbitration. Issues Involved:1. Injunction against resignation of directors.2. Injunction against appointment of new directors.3. Injunction against the adoption of annual accounts.Summary:Issue 1: Injunction Against Resignation of DirectorsThe petitioners sought an injunction restraining the first respondent from giving effect to the resignation of the second, third, and fourth respondents from the board of directors. The court noted that the subscription agreement provided that the second respondent shall not resign from the board 'till the validity of the agreement.' However, this provision was not incorporated into the articles of association of the company. Citing the Supreme Court's decision in V.B. Rangaraj v. V.B. Gopalakrishnan, the court held that a restriction not specified in the articles of association is not binding on the company or its shareholders. Therefore, the relief sought in prayer clauses (a), b(i), and b(ii) was rejected.Issue 2: Injunction Against Appointment of New DirectorsThe petitioners sought an injunction against the appointment of the fifth and sixth respondents as directors. The court found that the appointment of these directors on 20th August 2002 was contrary to the provisions of the articles of association, specifically article 159B(xxix), which required the affirmative vote of the nominee director of the petitioners for any proposal to include or remove members on the board. The court held that the appointments were ultra vires the articles of the company and granted interim relief in terms of prayer clause (b)(iii).Issue 3: Injunction Against Adoption of Annual AccountsThe petitioners challenged the adoption of annual accounts at the board meeting held on 6th September 2002 on multiple grounds, including the absence of their nominee directors and the lack of proper notice. The court found that the meeting was unlawful due to the absence of the petitioners' nominee directors, who were required to constitute a quorum under article 151 of the articles of association. The court also noted that the affirmative vote of the petitioners was necessary for the adoption of accounts as per article 159B(viii). Consequently, the adoption of accounts was declared unlawful, and the court directed the first respondent to reconvene a fresh meeting for the finalisation of accounts, granting relief in terms of prayer clause (b)(iv).Additional Observations:The court clarified that the reliefs granted under section 9 of the Arbitration and Conciliation Act, 1996, are in aid of the final relief and are necessary to ensure that the rights of the petitioners under the subscription-cum-shareholders' agreement are not abridged pending the arbitral proceedings. The court also emphasized that the observations made in the order are confined to the disposal of the application under section 9 and should not be construed as final opinions on the merits of the case.Conclusion:The arbitration petition was allowed in terms of prayer clauses (b)(iii) and (b)(iv), while the prayers for relief in terms of clauses (a), (b)(i), and (b)(ii) were rejected. The parties were directed to comply with the directions regarding the holding of a fresh board meeting for the finalisation of accounts.