1949 (12) TMI 40 - Other - Indian Laws

Directors' Duty: Shareholders Can Sue Company

The Federal Court upheld the decision of the Division Bench of the High Court, confirming that the company was properly impleaded as a plaintiff in the ... - Issues Involved:1. Whether the company was properly impleaded as a plaintiff.2. The validity of the removal of a director and the appointment of another director.3. The authority of directors versus the majority of shareholders in conducting litigation on behalf of the company.Issue-wise Detailed Analysis:1. Whether the company was properly impleaded as a plaintiff:The first issue addressed was whether the company was correctly made a co-plaintiff in the suit. The defendants argued that the company had been wrongfully impleaded and its name should be struck out from the plaint. The Single Judge, Edgley J., initially ruled in favor of the defendants, stating that the company should be struck off as a plaintiff but could be made a defendant. This decision was later reversed by a Division Bench of the High Court, which held that the suit had been properly filed and the company had been correctly made a co-plaintiff. The Federal Court needed to decide which of these views was correct.2. The validity of the removal of a director and the appointment of another director:The case involved the removal of Mr. Bajoria from his position as a director and the appointment of Sir David Ezra in his place. The plaintiffs alleged that the directors acted wrongfully, illegally, and mala fide in asking Mr. Bajoria to resign. They claimed that the directors exercised their power under Article 116(k) of the Articles of Association not in the interests of the company but for their own ends. The plaintiffs sought a declaration that Mr. Bajoria was still a director and that the removal and subsequent appointment were void and inoperative. They also sought an injunction to restrain the defendants from preventing Mr. Bajoria from acting as a director.3. The authority of directors versus the majority of shareholders in conducting litigation on behalf of the company:The appellants contended that, based on Articles 148 and 149(6) of the Articles of Association, the directors alone were authorized to use the company's name in any litigation. They argued that even if the majority of shareholders were dissatisfied with the directors' policy, they could only change the Articles of Association or remove the directors by a special resolution. The respondents, on the other hand, argued that the ultimate control vests in the majority of the ordinary shareholders, and since the plaintiffs commanded a majority of the votes, it was proper for the suit to proceed with the company's name as a co-plaintiff.The Federal Court referred to several precedents, including Foss v. Harbottle, Mozley v. Alston, MacDougall v. Gardiner, and Pender v. Lushington, which established that ordinarily, the company should be the plaintiff in actions to redress wrongs done to it. However, an exception exists where the directors themselves are the wrongdoers and the majority of shareholders support the litigation. The Court concluded that when directors act mala fide or beyond their powers, and their personal interests conflict with their duty, the majority of shareholders can sue in the company's name.Conclusion:The Federal Court upheld the view taken by the appellate court, confirming that the company was properly impleaded as a plaintiff. The Court recognized that the majority of shareholders could take steps to redress wrongs done to the company when the directors themselves were the wrongdoers. The appeal was dismissed with costs, affirming the decision of the Division Bench of the High Court.