2015 (8) TMI 1515 - HC - Companies Law

Court affirms shareholder rights in challenging AGM decisions, emphasizes club's purpose in property matters

The High Court upheld the Trial Court's decision that the suit, seeking a declaration that the Annual General Meeting (AGM) was illegal, void, and not ... Rejection of application under Order 7 Rule 11 of the Code - seeking declaration that the aforesaid Annual General Meeting held on 31.08.2007 and the decisions taken therein are illegal, invalid and void - seeking declaration that the Extraordinary General Meeting proposed to be held on 28.12.2007 is illegal, invalid and void - seeking permanent injunction restraining the defendant Club from alienating any land in its possession for establishing a Hotel - HELD THAT:- It is relevant to narrate the facts from the plaint for the purpose of Order 7 Rule 11 of the Code. It is a settled proposition of law that the Court shall confine its perusal and scrutiny to the averments made in the plaint or the documents annexed thereto when the rejection is sought on the ground that the plaint does not disclose cause of action or is barred by law. The suit as it appears is a simplicitor suit for declaration that the AGM held on 31st August, 2007 was in violation of the Article of association of the club and the decision taken therein is illegal, void and not binding being opposed to clauses 3(a), (d) & (e) of the memorandum and article of association of the defendant club. The plaint case proceeds that in the notice for AGM to be held on 31st August, 2007, there was no agenda for setting up the hotel project which was circulated to the members present in the said meeting and was thereafter passed by majority by raising of hands. It is further stated that Article 57 of the memorandum and article of association relatable to the business of the AGM stipulates the election of captain, committee, appointment and fixation of remuneration of auditors as ordinary business and the special resolution shall be transacted only after compliance under Section 173 (2) (3) of the Companies Act - The special resolution being not in conformity with the said clause is, therefore, bad and is also opposed to the object for which the club was established. It is undeniable that the application for temporary injunction was dismissed by the Trial Court as the Plaintiff/Opposite Party failed to make out any prima facie case and affirmed by the Court of appeal below, on the other point that the suit is otherwise hit under Section 10GB of the Companies Act. Before the revisional Court, the defendant- petitioner conceded that the suit is not hit by the provision of Section 10GB of the Companies Act and, therefore, the plea under Order 7 Rule 11 of the Code in this regard cannot be taken as a ground for rejection of the plaint. A point which was agitated at an earlier point of time in course of the suit having decided, cannot be allowed to be agitated at the different stages of the same proceeding. The suit at the instance of an individual shareholder, alleging the infringement of a right for an action and the majority shareholders being opposed to the memorandum and article of association, cannot be said to be an imperfect suit liable to fail on the parameters of Order 7 Rule 11 of the Code. Mere reference of more than 3100 members does not, ipso facto, raise a presumption that the suit is not maintainable in absence of any leave under Order 1 Rule 8 of the Code. Section 9 of the Code of Civil Procedure postulates that the Civil Courts have jurisdiction to try all suits of civil nature unless there is an express or implied bar. It is no longer res integra that such exclusion should not be readily inferred and the rule of construction being that every presumption should be made in favour of his existence rather than exclusion of the jurisdiction of the Civil Court. The petitioner-club says that the challenge is made to a resolution dated 31st August, 2007 when, in fact, the resolution have been adopted in a subsequent AGMs which are not a subject-matter of the instant suit. In all the subsequent AGMs, the resolution adopted in the AGM dated 31st August, 2007 is ratified and confirmed and a consequential steps and/or the consequential resolution have been taken therein. None of the resolutions adopted in the subsequent AGM have virtually superseded and/or withdrawn resolution taken in AGM dated 31st August, 2007. If the resolution in the subsequent AGM are based upon the parent resolution taken in the first AGM which is a subject-matter of the suit, it cannot be said that the suit become infructuous - This Court, therefore, does not find that the suit become infructuous because of the subsequent events. The cause of action pleaded in the plaint is clear and explicit in consonance with the reliefs claimed therein and it cannot be said that the plaintiff have created an illusory cause of action with the clever draftsmanship which amounts to abuse of the process of the Court - This Court does not find that the order impugned deserves any interference. Revision application dismissed. Issues Involved:1. Maintainability of the suit under Order 7 Rule 11 of the Code.2. Personal or individual cause of action against the petitioner company.3. Infructuous nature of the suit due to subsequent events.4. Relevance of the memorandum and article of association in determining the legality of the AGM resolution.5. Jurisdiction of the Civil Court in light of Section 397 & 398 of the Companies Act.6. Consideration of subsequent events in rendering the original proceeding infructuous.Issue-wise Detailed Analysis:1. Maintainability of the suit under Order 7 Rule 11 of the Code:The petitioner sought rejection of the plaint under Order 7 Rule 11 of the Code on the grounds that the suit had become infructuous, lacked cause of action, and was barred under the Specific Relief Act and Company Law. The Trial Court rejected this application, stating that the grounds for rejection required determination after a full-fledged trial. The High Court upheld this decision, emphasizing that the Court must confine its scrutiny to the averments made in the plaint and the documents annexed thereto. The suit was found to be a simplicitor suit for declaration that the AGM held on 31st August 2007 was in violation of the Article of association of the club and thus illegal, void, and not binding.2. Personal or individual cause of action against the petitioner company:The petitioner argued that an individual member/shareholder could not maintain the suit as it was not a derivative action and lacked any personal or individual cause of action. The High Court, however, noted that the suit at the instance of an individual shareholder, alleging the infringement of a right for an action and the majority shareholders being opposed to the memorandum and article of association, could not be said to be an imperfect suit liable to fail on the parameters of Order 7 Rule 11 of the Code. The Court referenced the Division Bench judgment in Asansol Electric Supply Co. and Ors, which held that individual members could sue to protect their own individual rights as members.3. Infructuous nature of the suit due to subsequent events:The petitioner contended that the suit had become infructuous due to resolutions passed in subsequent AGMs of 2008, 2009, and 2010. The High Court rejected this argument, stating that if subsequent resolutions are based upon the parent resolution taken in the AGM of 31st August 2007, which is the subject-matter of the suit, the suit cannot be deemed infructuous. The Court emphasized that the subsequent events did not render the original proceeding infructuous.4. Relevance of the memorandum and article of association in determining the legality of the AGM resolution:The petitioner argued that the memorandum and article of association permitted the club to sell, mortgage, and deal with its property, thus justifying the AGM resolution. The High Court noted that while the power to deal with the property was present in the memorandum, it must be exercised in consonance with the object and purposes for which the club was formed. The Court referenced the earlier revisional application where it was held that the power to deal with the property must align with the primary object of promoting golf.5. Jurisdiction of the Civil Court in light of Section 397 & 398 of the Companies Act:The opposite party argued that despite the provisions of Section 397 & 398 of the Companies Act, a civil suit is maintainable if the challenge is made to a validity of a meeting that is per se illegal. The High Court agreed, stating that Section 397 & 398 provides a preventive remedy for oppression and mismanagement but does not expressly oust the jurisdiction of the Civil Court to declare a resolution ultra vires to the memorandum and article of association.6. Consideration of subsequent events in rendering the original proceeding infructuous:The Court acknowledged that subsequent events could be considered if they rendered the original proceeding infructuous. However, it held that the subsequent AGMs did not supersede or withdraw the resolution of 31st August 2007, and thus, the suit remained relevant. The Court referenced the judgment in Shipping Corporation of India Ltd., which held that it is the duty of the Court to take necessary action in the interest of justice if the original proceeding has become infructuous due to subsequent events.Conclusion:The High Court concluded that the suit was maintainable, the cause of action was clear and explicit, and the subsequent events did not render the suit infructuous. The revisional application was dismissed, and the Trial Court's order was upheld. There was no order as to costs.