1937 (6) TMI 10 - HC - Companies Law

Invalid Special Resolution Deemed Not Binding on Company - Court Upholds Lower Court Decrees

The Dhakeswari Cotton Mills Ltd. Versus Nilkamal Chakravarthy

The Dhakeswari Cotton Mills Ltd. Versus Nilkamal Chakravarthy - [1937] 7 COMP. CAS. 417 (CAL.) Issues Involved:1. Maintainability of the suit.2. Validity of the special resolution under Section 81 of the Indian Companies Act.Issue-Wise Detailed Analysis:1. Maintainability of the Suit:The primary issue for determination was whether the suit instituted by the respondent was maintainable. The general principle, as elucidated by Lord Davey in *Burland v. Earle* (1902) A.C. 83, is that 'in order to redress a wrong done to the company, the action should prima facie be brought by the company itself.' This principle is based on the notion that the will of the majority of the shareholders is ordinarily the will of the company. However, this rule is limited to cases where the act complained of is ratifiable by the majority.The court noted that if the majority of shares are controlled by those against whom the relief is sought, the complaining shareholders may sue in their own names, provided they show that the acts complained of are of a fraudulent character or beyond the powers of the company. This principle was supported by the observations of Lord Macnaghten in *Dominion Cotton Mills Company, Ltd. v. George E. Amyot* (1912) A.C. 546.The appellants contended that the managing directors did not hold the majority of the shares, and therefore, the respondent was bound to give the company an opportunity to express its views on whether litigation should be undertaken. The court rejected this contention, stating that if the act complained of is fraudulent or ultra vires, it could not be ratified by any majority. Thus, the rule that the corporation must decide on litigation applies only to ratifiable acts.The court further referred to judicial utterances and legal doctrines suggesting that it is not necessary, as a matter of law, to formally ascertain the views of the majority before proceeding with litigation if the act is fraudulent or ultra vires. The court concluded that the suit could not be dismissed on the ground that the respondent did not consult the majority before instituting the suit, provided the act complained of was ultra vires.2. Validity of the Special Resolution under Section 81 of the Indian Companies Act:The next issue was whether the special resolution passed on April 30, 1933, was in contravention of Section 81 of the Indian Companies Act. The respondent's case was that the alteration of Article 63 was ultra vires and not binding on the company because the resolution was not passed by the required majority of three-fourths of the shareholders present at the meeting.The Articles of Association define the duties, rights, and powers of the governing body and the mode in which the business of the company is to be carried on. Under Section 21 of the Indian Companies Act, the Articles bind the company and its members. Section 20 allows a company to alter its Articles by a special resolution, which must be passed and confirmed as per the provisions of Section 81.Clause 3 of Section 81 states that the Chairman's declaration on a show of hands that the resolution is carried is conclusive evidence of the fact unless a poll is demanded. However, the court noted that if there is a dispute about the Chairman's declaration, the court must determine what the declaration was. In this case, the courts below found that the Chairman declared the resolution as carried with 218 votes for and 78 against, which indicated that the resolution was lost.The court held that the conclusiveness of the Chairman's declaration attaches only where the Chairman does not find by his declaration the figures for and against the resolution. Since the Chairman erroneously declared the resolution as passed despite the figures showing otherwise, the resolution could not be said to have been passed according to law.Consequently, the court concluded that the special resolution was not binding on the company, and the decrees of the lower courts were upheld. The appeal was dismissed with costs.Separate Judgment:Remfry, J., concurred with the judgment, noting that although he had initial reservations, he agreed that the decisions in *In re Caratal New Mines Ltd.* and *Allison v. Johnson* should be followed, which held that the Chairman's note as to the voting was part of the declaration.