AI Drafter 
TaxTMI 
TaxTMI 
1964 (2) TMI 50
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....mmodity Corporation as its sole selling agent for the sale of jute backing cloth and ordinary burlap over the width of hundred inches manufactured by the said company for the territories of the United States of America, its possessions, Canada and Mexico with effect from February 1, 1962, inter alia, on the following terms and conditions: "(1) that National hereby appoint B.M.T. as its exclusive distributors in and for the United States of America, its possessions, Canada and Mexico only for the sale of (a) jute backing cloth, and (b) ordinary burlap over a width of hundred inches manufactured by National; (2) that B.M.T. hereby undertakes that it will represent National exclusively in the territories aforesaid for sale and distribution of the said two commodities and will not import, sell, handle or deal in any manner directly or indirectly in the said goods or any other similar substitute product manufactured by any one else in India or elsewhere; (3) that B.M.T. shall make their best efforts to promote and secure maximum sales and/or distribution of National's said goods and shall in all matters act loyally and faithfully to National and take all possible steps to prote....
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....effected by B.M.T.; (13) that the business between National and B.M.T. will be as principal to principal basis notwithstanding any provisions or stipulations relating to variation in prices, claims or otherwise and National will have no responsibility in respect of B.M.T's customers and B.M.T. themselves will be responsible for all risks in respect of deliveries effected by them except for certain claims as mentioned in the agreement; (14) that National decides to have their own representative in New York or elsewhere in the U.S.A. or Canada and he shall be consulted by B.M.T. on all matters and B.M.T. undertakes to meet any reasonable expenses of such a representative not exceeding U.S. three thousand dollars per annum; (15) that National's representative shall be entitled to full access to B.M.T's warehouse, stocks and books and records relating to stocks and sales and in other matters relevant to this agreement and B.M.T. shall be fully bound to provide all information and explanations concerning these as may be required by the National's representative ; (16) that this agreement shall be effective from February 1, 1962, and remain in force till January 31, 1957, and....
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....an eminent lawyer that the arragement did not constitute B.M.T. Commodity Corporation as agent but nevertheless, the arrangement was referred to by the directors in their report to the shareholders and this amounted to approval of the arrangement by the shareholders. But in view of the wishes of the Registrar as expressed in his letter, dated December 3, 1962, the company would be glad to place the matters again before the shareholders in a general meeting. The letter concluded with the following words: "Kindly confirm if the above course has your approval" and it was signed by director, R. N. Goenka. On January 22, 1963, the reply was written by the office of the Registrar of Companies stating that the office had no objection to the course of action proposed to be taken by the company at the ensuing general meeting of the shareholders for proper compliance of the provisions of section 294 of the Companies Act in respect of the appointment of B.M.T. Commodity Corporation. On March 15, 1963, the National Co. Ltd. entered into an agreement in writing with one Delca International Corporation having its principal office at 233, Broadway, New York, appointing Delca as its exclusive d....
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.... "(7) As an ordinary resolution-Resolved that the approval and ratification of the company be and is hereby given to the arrangement entered into by the company with Messrs. B.M.T. Commodity Corporation of New York on 27th day of January, 1962, by which they are acting as sole distributors in respect of the U.S.A. and its possessions, Canada and Mexico for the sale of (a) jute backing cloth and (b) ordinary burlap over a width of hundred inches manufactured by the company for a period of five years, commencing from 1st of February, 1962, subject to the provisions that the arrangement may be terminated by either party giving 90 days notice to the other during November of any of the years 1964, 1965 and 1966 and that the terms of sales shall be on "principal to principal" basis and that the prices at which the company shall bill the B.M.T. Commodity Corporation shall be as follows: (a)For jute backing cloth and burlap over the width of hundred inches: At the price at which B.M.T. will sell to its customers, as reduced by 12 per cent, thereon. (b)For jute backing cloth of hundred inches and below in width : At the price at which B.M.T. will sell to its customers, as reduced by ....
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....ts possessions, Canada and Mexico for the sale of jute backing cloth and ordinary burlap over the width of hundred inches manufactured by the company for a period of five years commencing from 1st February, 1962. The agreement has been entered into with them in January, 1962. The directors took opinion of eminent counsel about the nature of this agreement and they were advised that the provisions of section 294 of the Companies Act are not attracted. The salient features were however mentioned in the report of the directors on the accounts for the year 1960-61. Since the Department of Company Law Administration has asked the company by its letter, dated 3rd December, 1962, to get a resolution passed under section 294 in respect of this arrangement, this resolution is placed before you for your approval. Copy of the agreement may be inspected by the members at the registered office of the company on any working day between 2 p.m. and 4 p.m. on week days and between 2 a.m. and 4 p.m. on Saturdays. None of the directors has any interest in the aforesaid resolution save to the extent that they are members and directors of the company. Resolution No. 8.-Since the production of ....
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.... restraining the defendants and their agents and servants from giving any effect to the said resolution if passed and for certain other incidental reliefs. On the very same date the appellant applied for an interim injunction and an ad interim order was made. This application came up for hearing before A. N. Ray J. and on 19th June, 1963, the learned judge made an order dismissing the application and vacating the interim orders. It is against this order of the learned judge that the present appeal has been preferred. The principal question to be considered in the appeal is whether the appellant has been able to make out a prima facie case for an interlocutory injunction. The first point which arises for determination is whether the effect of the agreement dated the 27th January, 1962, was to create a sole selling agency or that the relationship created was that of seller and buyer or between principal and principal. Now "agency" has been defined in various ways. It is said to be a contract of employment for the purpose of bringing another in legal relation with a third party. The relationship is founded upon contract either express or implied by which one of the parties co....
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....which formed the consideration for the promise on the part of the defendants to entrust to the plaintiffs the selling part of the business. In my opinion, the words in the agreement 'appoint the plaintiffs sole selling agents of all bricks and other materials manufactured at the defendants' works' mean that the plaintiffs were to have the sole right of selling in their capacity as agents the bricks and other materials manufactured by the defendants at their works without any reservation in favour of the defendants themselves." Upon an appeal preferred from this decision, Scrutton L.J., in construing the relevant words of the agreement, observed [1932] 1 KB 710 ; 101 LJKB 214 (CA) : " Now it is well-known that in certain trades the word 'agent' is often used without any reference to the law of principal and agent. The motor trade offers an obvious example where persons described as 'agents' are not agents in respect of any principal but are purchasers who buy from manufacturers and sell independently of them ; and many difficulties have arisen from this habit of describing a purchaser, sometimes a purchaser upon terms, as an agent." Then after referring to certain terms of ....
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....d to express our opinion whether there is a prima facie case or not and that is all that we propose to do now ; and any opinion expressed by us at this stage is to be regarded as made only for the purpose of disposal of the interlocutory matter before us. Now the internal features of the agreement, dated the 27th January, 1962, as disclosed by its terms are that : "(1) The National Co. Ltd. appoint B.M.T. Commodity Corporation as its exclusive distributors in U.S.A., its possessions, Canada and Mexico for sale of jute backing cloth and ordinary burlap over a width of hundred inches manufactured by National Co. Ltd. (2) B.M.T. Commodity Corporation is not to sell, import, handle or deal in any manner in the said goods or any other similar substitute pro ducts manufactured by any one else either in India or elsewhere. (3) B.M.T. is to make their best efforts to promote and secure maximum sales and distribution of National's goods and to act in all matters loyally and faithfully to National and take all possible steps to protect and safeguard all the rights and interests of National. (4) B.M.T. assures National that they have the capacity and the resources for the sale ....
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....nd dollars per annum and B. M. T. is to consult such representative on all important matters particularly in respect of the price and about claims of B. M. T.'s customers for defective quality etc. (13) The agreement is to remain in force for a period of five years from 1st February, 1962, terminable by 90 days' notice from the date of the despatch of the letter. (14) Upon the expiration or termination of the agreement National is to arrange for goods remaining unsold with B. M. T. to be taken over from B. M. T. against payment of the C. & F. price plus actual importing expenses or alternatively National is to keep B. M. T. covered for fall in prices and against claims of customers and for the actual further expenses until those goods are sold by B. M. T. but such sale is to be effected by B. M. T. according to the advice by National." It will thus appear as a result of the analysis of the agreement that B. M. T. Commodity Corporation were to be the exclusive sellers in an area so that the manufacturer could sell to no one in this area during that currency of the agreement except through B. M. T. In other words, the manufacturing part of the business was to be in the hands....
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....ts specially Marseilles for the price of cargo of castor seeds sold by the French firm to the London firm. The defence set up by the London firm was that they had a counter-claim against the French firm for a larger amount in respect of the non-delivery of a cargo of groundnuts. The nature of the arrangement which formed the basis of the counter-claim was in dispute and the main contest in the case was whether the London firm was acting as buyer in the transaction and whether they were entitled to sell for whatever profit they could get or whether they were acting as agents. Before the Judicial Committee the London firm tried to maintain that they were not acting as agents but as principals. In dealing with this contention. Lord Phillimore, who delivered the judgment of the Judicial Committee, observed AIR 1925 PC 161, 163, 164, 165, 166: "There is great force in the observations which were made by their Lordships upon the extension which modern business has given to the terms 'agent' and 'agency'. In many trades-particularly, for instance, in the motor-car trade-the so-called agent is merely a favoured and favouring buyer, one who under an overriding contract undertakes to do h....
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....td. and Delca International Corporation contains practically similar terms as the agreement of B.M.T. Commodity Corporation and also certain additional terms. In my opinion it is also an agency agreement as contemplated in section 294 of the Companies Act, 1956. The next question which arises for consideration is as to the true interpretation, the scope and implications of section 294 and as to whether it is a directory or a mandatory provision. The material portion of section 294 may be conveniently set out hereunder : "294. (1) No company shall, after the commencement of the Companies (Amendment) Act, 1960, appoint a sole selling agent for any area for a term exceeding five years at a time: Provided that nothing in this sub-section shall be deemed to prohibit the re-appointment, or the extension of the term of office, of any sole selling agent by further periods not exceeding five years on each occasion. (2) After the commencement of the Companies (Amendment) Act, 1960, the board of directors of a company shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company....
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....n is to make a fresh appointment and then comply with the requirements of the provisions of section 294. The fact remains that in the present case the appointment of B. M. T. Commodity Corporation was not approved at the first general meeting held on 31st May, 1962. It is contended on behalf of the respondent by Mr. Roy that although the agreement dated 27th January, 1962, was not approved on the 31st May, 1962, when the first general meeting was intended to be held, it was in fact approved at the annual general meeting held on 29th August, 1962, which was nothing but a continuation of the annual general meeting to be held on the 31st May, 1962, which was adjourned from time to time and was ultimately held on the 29th August, 1962. It is pointed out that the report of the directors dated the 9th April, 1962, which contained a specific reference to the agreement of 27th January, 1962, and which also set out the substance of the nature of that agreement, was approved and adopted by the shareholders at such meeting held on the 29th August 1962. The resolution which was carried by majority of poll was to the following effect and is to be found set out as item 6 in the minutes of the ad....
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....requirements of section 294. As the provision of section 294 is mandatory, mere substantial compliance is not enough but strict compliance is necessary. The adoption or approval of the report of the directors was treated as ordinary business at the annual general meeting. It was not treated as an item of special business. Consideration of the accounts, balance-sheet and the report of the directors and auditors is treated under section 173(1)(a) of the Companies Act, 1956, as ordinary business and not special business. Section 173(1)(a) provides as follows : " 173. (1) For the purposes of this section- (a) in the case of an annual general meeting, all business to be transacted at the meeting shall be deemed special, with the exception of business relating to (1) the consideration of the accounts, balance-sheet and the reports of the board of directors and auditors, (ii) the declaration of a dividend, (iii) the appointment of directors in the place of those retiring, and (iv) the appointment of, and the fixing of the remuneration of, the auditors." Section 173(1)(b) provides that-In the case of any other meeting, all business shall be deemed special. In this connection....
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....oration or of the directors affecting or relating to Kelvin Jute Co. Ltd. or Megna Mills Co. Ltd. was not mentioned or disclosed in the explanatory at all. Moreovet, the notice gives the impression that the, business to be transacted under the agreement was on "principal to principal" basis. So the notice did not contain a full and frank disclosure of the true nature and character of the agreement dated the 15th March, 1963. It was a tricky notice and mere offer of inspection of the agreement at the registered office of the company made in the foot-note of the explanatory notes did not cure the defect: (See Bimal Singh Kothari v. Muir Mills. Co. Ltd. [1952] 22 Comp Cas 248 ). In the circumstances, it appears to be that the appellant has made out a prima facie case for an injunction. On behalf of the respondents it has been urged that the matter of injunction being a discretionary remedy, the discretion should not be exercised in this case in favour of the appellant, as the appellant has not taken any steps for advertisement under Order I, rule 8, of the Code of Civil Procedure although the suit purports to be a representative suit. It is also urged that the appellant has been....
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....es numbering seventy-five whose complaint in the suit is that the directors have violated the mandatory provisions in the Indian Companies (Amendment) Act of 1960, and purported to appoint sole selling agents of the company's products disregarding the provisions in the Act as to informing the shareholders of the arrangements entered into and trying to get the same approved at a general meeting in violation of the law. From the documents before us the following facts emerge: The directors of the defendant company had entered into some sort of arrangement with a body known as B. M. T. Commodity Corporation of New York some time in the year 1961 for sale of wide looms and narrow loom products of the company. The company's goods were sent to America and stocks were kept with B. M. T. Commodity Corporation on the company's account. No writing evidencing this arrangement is forthcoming. But according to the defendants there were sales on principal to principal basis. The shareholders were not informed of any such arrangement in the general meeting of the company held on July 17, 1961. On January 27, 1962, the directors entered into a written agreement with B.M.T. Commodity Corporation....
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....ng as exclusive distributors of similar products manufactured by Kelvin Jute Company, Limited, and Megna Mills Co. Ltd. (two Indian jute companies in the territories mentioned in the agreement. On April 26, 1963, the company issued notice of annual general meeting to be held on May 31, 1963, at which besides considering and adopting the audited accounts of the company for the year ending October 31, 1962, etc., certain special business indicated in resolutions 7 and 8 were proposed to be transacted. These were : " 7. As an ordinary resolution : Resolved that the approval and ratification of the company be and is hereby given to the arrangement entered into by the company with M/s. B.M.T. Commodity Corporation of New York on 27th day of January, 1962, by which they are acting as sole distributors in respect of U.S.A. and its possessions, Canada and Mexico for the sale of (a) jute backing cloth and (b) ordinary burlap over a width of 100 inches manufactured by the company for a period of five years, commencing from first of February, 1962, subject to the provisions that the arrangement may be terminated by either, giving 90 days' notice to the other during November of any of th....
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....ection 173 of the Companies Act, 1956, or items Nos. 5 to 8 of the agenda are annexed hereto." In the explanatory statement with regard to resolution No. 7 the directors quoted what had been said in their report dated April 9, 1962, under the heading "export" and added that the matter was being placed before the company in general meeting for approval at the suggestion of the department of Company Law Administration although it had been advised that section 294 of the Companies Act was not attracted. The members were further informed that a copy of the agreement might be inspected at the registered office of the company on any working day and that the directors had no interest in the said resolution except to the extent that they were members and directors of the company. With regard to resolution No. 8 the directors stated by way of explanation that the company had entered into the agreement in order to cope with the sale of wide loom cloth of the company's manufacture which was steadily on the increase. The shareholders were informed that a director of B.M.T. Commodity Corporation was also a director of Delca International Corporation and if the arrangement was approved by the....
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....s Nos. 2 to 5 did not give the material facts relating to the agreement in their explanatory statement in violation of section 173(2) of the Companies Act." The prayers in the petition were : "(a)An injunction restraining the defendants from passing and/or getting passed resolutions Nos. 7 and 8 as mentioned in the notice dated April 26, 1963, at the proposed annual general meeting of the company. (b)An injunction restraining the defendants from giving any effect to the resolutions even if passed at the annual general meeting." In the affidavit-in-opposition of the defendants affirmed by Bhagwandas Goenka, the following averments are made : "1. The agreement of January 27, 1962, with B.M.T. Commodity Corporation was duly approved by the Reserve Bank of India. The shareholders were not approached for sanction thereto under the advice of counsel. Substantial particulars thereof were mentioned in the report of the directors dated April, 9, 1962, which was duly passed by the shareholders at the general meeting held on August 29, 1962. By adopting the said report the shareholders approved of the agreement. It was only at the suggestion of the department of the Company Law....
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....all take all possible steps to protect and safeguard all the rights and interests of National. Clause (4) .-National undertakes not to sell its above said products in the areas covered through channels other than B.M.T. Clause (5).-B.M.T. shall place their orders with National regularly from month to month, enabling National to plan its manufacturing programme of jute backing cloth and ordinary burlap over 100 inches and, upon acceptance of the orders. National shall deliver these goods in accordance with the accepted orders. Clause (6) .-B.M.T. shall effect sales of National's manufactured goods to B.M.T.'s customers in the territories covered by this agreement at prices mutually agreed upon between National and B.M.T. Clause (7).-B.M.T. shall regularly submit to National copies of all their sales contracts within a month from the date of the respective contracts. Clause (8).-B.M.T. shall pay National for all purchases of aforesaid goods at cost and freight, port of destination basis, at prices determined as follows, namely : (a)For jute backing cloth and burlap over 100 inches width : Prices as agreed upon under paragraph 6, less 12 per cent, thereon. (b)For ....
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....e presented to B.M.T.'s bankers along with copy of invoice, etc. Clause (14) .-B.M.T, will furnish National monthly stock inventory reports in the form acceptable by National. B.M.T. shall also submit to National copies of all their invoices immediately when shipments to their customers are effected by B.M.T. Clause (15) .-Business between National and B.M.T. will be as principal to principal notwithstanding any provisions or stipulations relating to variation in prices, claims or otherwise. National will have no responsibility in respect of B.M.T.'s customers, and B.M.T. themselves will be responsible for all risks in respect to all deliveries effected by them, except for claims as provided in paragraph (10). Clause (17).-If National decides to have their own representatives in New York or elsewhere in the U.S.A. or Canada, he shall be consulted by B.M.T. on all important matters and particularly those covered by paragraphs (6) and (10) hereof. B.M.T. undertakes to meet any reasonable expenses of such a representative not exceeding U.S. dollars 3,000 per annum. Clause (18) .-National's representative shall be entitled to have full access to B.M.T.'s warehouse, stocks a....
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....iven exclusive rights to sell goods of another person in a particular area. In order to find out whether the agreement is an agency agreement or not, the terms have to be read as a whole to find out whether one was being appointed as an agent by the other. Under section 182 of the Indian Contract Act, "agent" is a person employed to do any act for another or to represent another in dealings with third persons. Under section 211 an agent is bound to conduct the business of his principal according to the directions given by the principal. Under section 212 he is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business. Under section 213, he is bound to render proper accounts to his principal on demand. Under section 222 the employer of an agent is bound to indemnify him against the consequence of all lawful acts done by such agent in exercise of the authority conferred upon him. On a construction of the whole agreement there can be little doubt that, prima facie, the agreement of National and B.M.T. was a sole selling agency agreement. By it the B.M.T. was appointed representative of National exclusively for sale ....
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....d customers and B.M.T. The disposal of goods left unsold at the expiry of the agreement would be B.M.T.'s business. National would not be concerned with decline in prices overseas after acceptance of orders from B.M.T. National would not have the right to inspect B.M.T.'s warehouse, stocks of goods, documents and papers or to advise B.M.T. in matters of sales or fixation prices. Mr. Roy, learned counsel for the defendants, argued that manufacturers nowadays take care to protect their own interest in matters like fixation of prices, providing for decline in prices and exercise some sort of control over persons who buy their goods for sale abroad. He drew our attention to the judgment of the Judicial Committee in Hope Prudhomme & Co. v. Hamel and Horley Ltd. [1925] ILR 49 Mad 1 AIR 1925 PC 161, 163, where it was observed : "There is great force in the observations which were made to their Lordships upon the extension which modern business has given to the terms 'agent' and 'agency'. In many trades-particularly, for instance, in the motor-car trade-the so-called agent is merely a favoured and favouring buyer, one who under an overriding contract undertakes to do his best to find a ....
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....nothing in this sub-section shall be deemed to prohibit the reappointment, or the extension of the term of office, of any sole selling agent by further periods not exceeding five years on each occasion." By the above provisions the legislature intended that a company was not to be free to have a sole selling agent for a period exceeding five years at a time. Under sub-section (2) of section 294: "After the commencement of the Companies (Amendment) Act, 1960, the board of directors of a company shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made." Sub-section (2A) provides that: "If the company in general meeting as aforesaid disapproves the appointment, it shall cease to be valid with effect from the date of that general meeting." The important change to note is that the appointment of a sole selling agent need not be brought before the company within six months as under the Act of 1956. The other important deviation is that there is no express provision as to what is to hap....
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....n only is to be resorted to. Our attention was drawn to a recent judgment of the Allahabad High Court in Maheshwari Khetan Sugar Mills v. Ishwari Kheian Sugar Mills [1963] 33 Comp Cas 1142, which is to the effect that as the law does not prescribe for the consequences or does not lay down any penalty for non-compliance of section 108 of the Companies Act, the provision is to be considered as directory only and not mandatory. This view was arrived at on a consideration of a group of sections relating to the transfer and registration of shares. It is not necessary to examine in detail the reasoning behind this decision and it is enough to point out that according to the judgment of the Allahabad High Court if sub-section (1) of section 108 was read in isolation it could be said that the provision was mandatory. The proviso to section 108 however shows that the company may in certain cases register as shareholder a person who does not present to it a proper instrument of transfer. There is no such exception clause in section 294. Therefore, if the directors choose to enter into an agreement with a soll selling agent without the condition that the appointment shall cease to be va....
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.... down that the board of directors of the company must report to the shareholders about the state of the company's affairs, the amounts to be carried to reserve in the balance-sheet, the amounts recommended by way of dividend and material changes and commitment regarding the financial position of the company. Under this sub-section the directors are not obliged to inform the shareholders of the appointment of any agents or managers although as a matter of practice a reference to this is often made. The directors' report is only meant to give the shareholders a general picture of how the company is being run. Moreove, the statement that the sales were made on principal to principal basis is hardly justifiable when the directors were in reality appointing a selling agent. The scanty information contained in the heading under "export" was not sufficient to inform the shareholders of what was being done. In my opinion, there is a good deal of force in the contention of the learned counsel for the appellant that resolutions Nos. 7 and 8 do not set out all material facts regarding the agreement with B.M.T. Commodity Corporation and Delca International Corporation. It is certainly not n....