1949 (12) TMI 29 - Other - Companies Law

Appellate Court Rules Shareholders Can Sue for Company: Major Win for Corporate Governance

Dr. Satya Charan Law Versus Kameshwar Prosad Bajoria

The appellate court reversed the initial decision and held that the company was correctly impleaded as a co-plaintiff in the suit. The court emphasized ... Oppression and mismanagement Issues Involved:1. Proper impleading of the company as a plaintiff.2. Authority of the directors to use the company's name in litigation.3. Rights of the majority shareholders to initiate litigation on behalf of the company.Detailed Analysis:1. Proper Impleading of the Company as Plaintiff:The primary issue revolved around whether the company was correctly made a co-plaintiff in the suit. The plaintiffs argued that the directors acted wrongfully and against the interests of the company and its shareholders by requesting Mr. Bajoria to resign and appointing Sir David Ezra in his place. The High Court initially ruled in favor of the defendants, striking out the company's name from the plaint. However, this decision was reversed on appeal, with the appellate court holding that the suit was properly filed and the company was correctly impleaded as a co-plaintiff.2. Authority of the Directors to Use the Company's Name in Litigation:The appellants contended that, according to articles 148 and 149(6) of the articles of association, the directors alone were authorized to use the company's name in any litigation concerning the company. Article 148 vested the control of the company in the directors, while Article 149(6) empowered them to conduct, defend, or abandon any legal proceedings by or against the company. The appellants argued that the majority shareholders, dissatisfied with the directors' policy, could only change the articles of association or remove the directors by a special resolution.3. Rights of the Majority Shareholders to Initiate Litigation on Behalf of the Company:The respondents argued that the ultimate control vests in the majority of the ordinary shareholders, who could redress a wrong done to the company by the directors. It was conceded that the plaintiffs commanded a majority of the votes of the shareholders, and thus, it was proper for the suit to proceed with the company as a co-plaintiff. The court acknowledged the principle that ordinarily, the company should be the plaintiff in such cases, but an exception exists when the directors themselves are the wrongdoers and act against the company's interests.Legal Precedents and Principles:The judgment referenced several key cases to support its conclusions:- Foss v. Harbottle [1843] 2 Hare (Ch) 461: Established that the company should prima facie bring actions to redress wrongs done to it.- MacDougall v. Gardiner [1875] 1 Ch. D 13: Highlighted that if the majority of the company supports a shareholder, the company can file a suit in its name.- Pender v. Lushington [1877] 6 Ch. D 70: Affirmed that the company could be a proper plaintiff when the majority of shareholders support the litigation.- Burland v. Earls [1902] AC 83: Summarized that the court will not interfere with the internal management of companies unless the directors control the majority of shares and prevent an action in the company's name.The court emphasized that while the directors usually conduct litigation in the company's name, the majority shareholders could initiate litigation when the directors act mala fide or beyond their powers, and their personal interests conflict with their duties to the company.Conclusion:The court upheld the appellate court's judgment, affirming that the company was properly made a co-plaintiff and that the majority shareholders had the right to initiate litigation on behalf of the company when the directors acted wrongfully. The appeal was dismissed with costs.