AI Drafter 
TaxTMI 
TaxTMI 
1964 (9) TMI 35
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....and became indebted to the Imperial Bank of India in the sum of Rs. 21,00,000. It was at that time that the applicant No. 1 is alleged to have come to the rescue of the company by taking over the managing agency. In 1930, the applicant No. 1 and Bhattacharjee by their combined efforts started an insurance business and promoted the Metropolitan Insurance Co. Ltd. They also promoted the Calcutta Friends Society (Private) Ltd., Bengal Luxmi Soap Works (Private) Ltd. and Metropolitan Printing and Publishing House (Private) Ltd. The shares in all these companies were held by the applicant No. 1 and Bhattacharjee in equal proportion. Bhattacharjee died in 1945, leaving him surviving his widow and four sons of whom Debendranath Bhattacharjee, the respondent No. 2, was the eldest. The managing agency of the company was originally taken jointly by the applicant No. 1 and Sachidananda Bhattacharjee. Thereafter, they promoted a private company known as Bengal Textile Agency Ltd., which took over the managing agency of the company and continued to act as such managing agent till 1957, when the managing agency of the company came to an end by reason of the requirement of the Companies Act, 1....
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....any were detected, as a result of which the respondent No. 2 and his supporter, A. B. Chatterjee, resigned the director ship of the Metropolitan Industrial Corporation Ltd. This resignation toot effect from March 1, 1963. It is alleged that the detection of misappropriation of the compensation money raised suspicion in the mind of the applicant No. 1 and the two brothers of the respondent No. 2, who together controlled the majority of the votes of the said different companies. It is next alleged that, after the detection of the said misappropriation, investigations were started and it was found that huge sums had been misappropriated by the respondent No. 2. The Metropolitan Industrial Corporation Ltd. held 8,500 half paid up shares of the respondent company of the face value of Rs. 40 each. The Metropolitan Printing and Publishing House (Private) Ltd. held 734 fully paid up ordinary shares of the same face value and the Calcutta Friends Society (Private) Ltd. also held 610 fully paid up ordinary shares of the respondent company. It is alleged that, when the said attempt to issue rights shares of Metropolitan Printing and Publishing House (Private) Ltd. failed, the respondent....
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....d to transfer of any of the shares held by the Metropolitan Industrial Corporation Ltd. It is further alleged that the applicant came to know that the respondent No. 2, collusion and conspiracy with his benamidars, fraudulently caused a tansfer of 8,500 equity shares of the company, which were held by the Metropolitan Industrial Corporation Ltd. This sale was effected, it is alleged, after receipt of the said letter of January 24, 1963, by an antedated sold note dated January 22, 1963, through a broker, at Rs. 14 per share. It is further alleged that the shares were delivered to the broker on receipt of price on January 28, 1963, but the cheque was not sent for collection until January 31, 1963. These shares were purchased by two persons, namely, Nathuram Poddar and Tarachand Poddar. At a meeting of the board of directors of the company held on January 31, 1963 transfer of shares in the name of the said purchasers was approved. This board meeting is challenged by the applicant No. 1 on the ground that he received no notice of this meeting. It is alleged that no board meeting was actually held on January 31, 1963, and that the Metropolitan Industrial Corporation Ltd. never authorise....
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....ndent No. 2 was reappointed the managing director for a further term of five years. It is alleged that in the board of directors of the company, consisting of five directors, the respondent No. 2 commands a majority of four, with the result that he enjoys all the powers of management and control, and is conducting the affairs of the company as he pleases. It is further alleged that Nalinakshya Chowdhury, son of the applicant No. I, was the secretary of the company. On July 15, 1963, the respondent No. 2, without the approval of the board and without assigning any reason, purported to dismiss the secretary. In the affidavit affirmed by the applicant No. 1 on June 3, 1964, in support of this application, various charges have been made regarding mismanagement, misappropriation, malpractice and fraudulent acts. I should mention the more important charges, in order to appreciate their nature and scope. It is alleged that the respondent No. 2 took out large sums through fictitious transactions with the Calcutta Friends Society Ltd. and fictitious entries regarding commission and brokerage alleged to have been paid to the Calcutta Friends Society Ltd. Orders have been placed at high ra....
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....arket rate. Cotton waste is being sold at much lower than the market rate without calling tender. There are allegations that criminal complaints have been lodged against the respondent No. 2 for breach of trust, defalcation and falsification of accounts and also that the Registrar of Companies has obtained an order for seizure of books and records of the company. On the above allegations the grounds formulated for this application for interim relief are as follows : (a)The respondents Nos. 2, 3, 4 and 5 in collusion and conspiracy with each other are trying to manipulate the shares so that the respondent No. 2 may retain his control over the company. (b)The balance sheet for the year ending March, 1963, shows that the Company is indebted to the State Bank of, India in Rs. 23,81,908 and National Industrial Development Corporation Ltd. in Rs. 19,69,907. The .respondent No. 2 is recklessly dissipating the assets of the company and mismanaging its affairs. No arrangements have been made for repayment of the loans. (c)The applicant No. 1 has guaranteed the said loans. He is the owner of immovable property valued at over Rs. 50,00,000. The other directors collectively are not....
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....f a block of 8,500 shares of the company, raised a preliminary objection to the maintainability of this application. He argued that the petition under sections 397 and 398 is being supported by several shareholders, as is required by section 399 of the Act, and the letters of consent signed by them are annexed to the petition. All these letters were signed by the consenting shareholders on various dates in September, 1963. But the petition in support of the application dealt with matters which happened six months after the consent letters were signed by the members. He referred to the allegations in paragraph 46, sub-paragraph (s), of the said petition, in which it has been alleged that some time in March, 1964, the Registrar of Companies took steps and obtained an order from the Presidency Magistrate for the seizure of books and records of the company. It was urged that there was internal evidence to prove that the supporting members did not have the petition before them, when they gave their letters of consent and indeed they could not possibly have the said petition before them, as the same could not have been ready in September, 1963. Mr. Chaudhuri argued that section 399(3)....
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....he members, having obtained the con sent in writing of the requisite number of members, may make the application on behalf of and for the benefit of all of them. He contended that there was no averment in the petition that it was being made for and on behalf of the petitioners and also for and on behalf of and for the benefit of the other consenting members. Mr. Subimal Roy, appearing for the company and the respondent No. 2, supported the contentions of Mr. S. Chaudhuri. He argued that under section 399 and rule 88, the petition was required to be placed before the consenting shareholders. Such shareholders, Mr. Roy argued, must know the contents of the petition and also who the petitioners were. The internal evidence in the petition, namely, the said allegations in para graph 46(s), leaves no room for doubt that the petition was not before the supporting members when they put their signatures to the letters of con sent. This, Mr. Roy argued, is fraud on the supporting shareholders. Mr. B. Sen, also appearing for the company, supported the argument of Mr. S. Chaudhuri. Mr. S. Sen, learned counsel for the applicants, contended that this application was not the main applica....
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....er the petition was got ready and not before. A petition, according to Mr. S. Sen, is a petition with the consent letters annexed thereto and not without such annexure. Rule 88, he argued, required that the constant letters should be annexed to the petition and therefore at the time when such letters are to be annexed, the letters must be in existence and, therefore, such letters must be signed by the supporting shareholders before the petition was prepared. Mr. S. Sen next contended that the argument advanced on behalf of the respondents that no relief could be granted because of infirmities in the main petition could not be sustained. Such objections, according to him, could not be raised by way of objection to this application for interim relief, but should properly be raised in a separate application either for dismissal of the petition or for setting aside the order admitting the petition. The question of maintainability of the application, he argued, could not be raised by way of objection to this application for interim relief. A challenge to the authority of the petitioners, he contended, could only be made by an application for dismissal of the petition on the ground th....
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....authority to maintain an action can be challenged, not by way of defence to the action itself, but only by a separate and independent motion. As to the meaning and import of consent by members of a company, a reference should be made to the decision of the Allahabad High Court in Makhanlal Jain v. Amrit Vanaspati Co. Ltd. [1953] 23 Comp Cas, which was relied upon by Mr. B. Sen in support of his argument that consent in writing meant consent given by the members after the petition was made ready. In that case while dealing with the meaning of the phrase "consent in writing" as required by section 153C and section 153D of the Indian Companies Act, 1913, it was held that "consent in writing" implied that the persons who gave the consent had applied their minds to the question before them, and had given their con sent to certain action being taken. Mr. S. Sen, however, relying upon this decision, argued that consent in writing was not consent to the petition, but a consent to certain action being taken, namely, an application under section 397 and section 398 of the Act. It was not necessary, Mr. S. Sen submitted, that the petition should be before the members who were giving their ....
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....with the requirement of the Forms prescribed in Appendix IV of the Act. Regarding the maintainability of the preliminary objections at this stage, when this court is considering an application for interim relief, I am of opinion that the objections, such as they are, cannot be raised in this application for interim relief. The objections are not such as to make it clear either that the petitioners have no right to apply for non-compliance with the Act and the Rules or that this court has no jurisdiction to entertain the main application under section 397 and section 398. "The petition under section 397 and section 398 has been admitted by this court, and various ad interim orders have been made on that petition. The order admitting the petition is a valid and binding order, and has not been set aside, recalled, varied or modified, either in this or in any other proceedings. That being so, in my view the respondents cannot raise by way of objection to this application for interim relief, questions of maintainability of the application. I do not wish to say that the respondent cannot raise such objections at all. Indeed it is open to them, if law gives them the right, to apply to ....
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....ot be compared with the consent in writing required under section 399 of the Companies Act. Since I have already held, however, that there has been sufficient compliance with section 399 and rule 88, and that the application does not suffer from any defect for non-compliance either with the Act or Rules or the Forms prescribed in the appendix, it is not necessary for me to linger any further on this subject. The next point urged on behalf of the respondents are regarding verification of the pleadings and of particulars as furnished of charges of misappropriation, misapplication of funds and other improper conduct alleged by the applicants. Mr. S. Chaudhuri urged that the material para graphs in the affidavit, affirmed by Satish Chandra Chowdhury on June 3, 1964, being the grounds of this application, are based on information received upon enquiries and investigations made by others and were not true to the knowledge of the deponent. In paragraph 36 of the affidavit it has been alleged that the respondent No. 2, in collusion and conspiracy with his benamidars and henchmen, fraudulently caused an alleged sale and transfer of 8,500 equity shares of the company. Having made this all....
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....y, who is being oppressed by the majority, to furnish all details of particulars of charges. Further, Mr. Sen argued, that it could not be the intention of the legislature that the minority group of members, who come to court with charges of mismanagement, oppression and fraud, should give all details of such conduct in the petition or affidavit in sup port of the application. If that was what was required, he argued, every application by a minority group would be liable to be defeated, because no minority could have access to all the books and records of the company which alone contain the evidence of misconduct, misapplication, misappropriation and oppression. While it is true that a minority group of members cannot possibly furnish every single detail that they might wish to furnish, and which would constitute sufficient evidence of misconduct and misappropriation or fraud, it is equally true that where charges of fraud, misappropriation, misapplication and misconduct are made, sufficient particulars must be given in order to enable the party charged, to know what he is charged with, and what he is required to answer. If that were not so, and if the court were called upon to ....
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....sorted to by one accused of fraud must necessarily be completely unravelled and cleared up and made plain before a verdict can be properly found against him. If these were not so, many a clever and dexterous knave would escape." These observations of the Judicial Committee however do not dispense with the necessity of particulars being furnished by a party. Mr. Roy Chowdhury next referred to the decision in Bhikaji Keshao Joshi v. Brijlal Nandalal Biyani AIR. 1955 SC 610. In this case the Supreme Court was considering the question of particulars in an election petition. It was held that the Tribunal, while dealing with the question of particulars, should not have dismissed the application and should have exercised its powers and called for better particulars and on non-compliance therewith, it should have struck out such of the charges which were vague. This case, to my mind, is against Mr. Roy Chowdhury's contention as the Supreme Court held that vague charges in a petition ought to be struck out. Mr. Roy Chowdhury also relied upon the decision in Lady Dinbai Dinshaw Petit v. Dominion of India ILR. [1955] Bom. 72 in which it was held that, when allegations of fraud are made, th....
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.... allegations in sub-paragraphs (a) to ( q) have been verified, as based on enquiries and investigations made by and or on behalf of the petitioners, and information received therefrom and believed to be true and the allegations in sub-paragraphs (r), ( s), (t), (u) and (v ) have been verified as true to the knowledge of the deponent. should at once point out that all the material particulars of misappropriation and mismanagement are contained in the said sub-paragraphs (a) to (q) and the allegations in the sub-paragraphs (r) to (v) contain no particulars of mismanagement or misappropriation, but are certain allegations of a general nature which cannot be treated as and in fact are not particulars of the charges of fraudulent acts, mismanagement or misappropriation. Mr. S. Sen contended that verification of pleadings has to be done according to the provisions in the Code of Civil Procedure. He argued that under Order 6, rule 15, of the Code, the verification of the pleading should be done at the foot by the party, or by one of the parties, and the person verifying shall specify, by reference to the paragraphs, what is verified of his own knowledge and what is verified upon inform....
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....d enquiries and investigations have not come forward to put their statements on affidavits and their names have not even been disclosed. The deponent's statements, therefore, made upon information furnished by these others, whose names have not been disclosed, cannot be relied upon by this court in this application which is to be heard and disposed of on the statements made in the affidavits. Mr. B. Sen referred to a decision of this court in Bisakha Rani Chose v. Satish Chandra Roy Sinha AIR. 1956 Cal. 496 in which it was held that affidavits must be affirmed as true to the knowledge or from the information received, provided the source of information is disclosed, or as to what the deponent believed to be true provided the grounds for such belief were stated. Mr. B. Sen also referred to another decision in Bhikaji Keshao Joshi v. Brijlal Nandalal Biyani AIR 1955 SC. 610. In this case the Supreme Court pointed out the distinction between a verified pleading and affidavit as follows: " It is to be noticed that a verified pleading is different from an affidavit, which, by virtue of Order 19, rule 3, is specifically required to be confined to such facts as the deponent is able of ....
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....omp Cas by the learned counsel for all the respondents in support of the pro position that an affidavit in a proceeding under section 397 and section 398 must be in terms of Order 19, rule 3, of the Code. In that case I had the occasion to go into this question and had held as follows : " An application under section 397 and section 398 of the Act is not an interlocutory application. The matter is finally disposed of by the order made on the application itself. Nothing remains outstanding, unless orders are made keeping certain matters outstanding. The application is disposed of on the basis of the averments in the pleadings, unless the matter is directed to be tried on evidence. The pleadings in the matter including the petition and the affidavits are to be treated as evidence, and that being so, the rules of evidence must be strictly adhered to. The averments in the petition and in the affidavits, which are verified as based on information, are, by their very nature, hear say evidence and if such averments are the foundation of the case made out by the petitioner or the foundation of the defence made out by the respondents, the court should not rely or act upon the same. To do ot....
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....ication that the applicants are entitled to that relief in this application, on the verification of the affidavit in support of this application being what it is, would have the effect of holding that the applicants as petitioners in the petition under section 397 and section 398 would be entitiled to the same relief on the identical allegations in the petition, verified in the identical manner. This judgment, in my view, should not produce any such effect. Even though this is an interlocutory application, Order 19, rule 3, of the Code, should have been strictly complied with. Regarding the allegations in the affidavit, which are not true to the deponent's knowledge, but which have been verified by him as believed to be true, the grounds of the belief should have been stated the names of the persons, who are alleged to have made the enquiry and investigation on behalf of the deponent should have been disclosed. That not having been done, the allegations so verified cannot be relied on. I shall now proceed to deal with the merits of the present application for appointment of a receiver or special officer to take charge of the proper ties, assets, books and documents of the compan....
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.... company held 610 fully paid up ordinary shares of the company. It is alleged that the block of shares held by Metropolitan Insurance Company Ltd. (later on the name of which was changed to Metropolitan Industrial Corporation Ltd.) and Metropolitan Printing and Publishing House (Private) Ltd. is the controlling block. The respondent No. 2, it is alleged, with a view to perpetuate his control of the affairs of the company, caused a fraudulent transfer of the block of shares held by the said three companies. These sales, it is alleged, are fraudulent transfer of the shares of the company to the nominees of the respondent No. 2, and have been purported to be effected in spite of the protest of the applicant No. 1. The 8,500 shares held by Metropolitan Industrial Corporation Ltd. nave been sold to Nathuram Poddar and Tarachand Poddar who, it is alleged, are the nominees and benamidars of the respondent No. 2. The 734 shares held by the Metropolitan Printing and Publishing House (Private) Ltd. were sold to one Fakir Samaddar, who was an employee of the company, but whose real name is Sachin Chatterjee. The 610 shares held by Calcutta Friends Society Ltd. were sold to Sawalram Poddar who....
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....398 of the Act. So far as the sale of the shares is concerned, the allegations in the plaints in the said two suits are identical with the allegations in the petition under sections 397 and 398 and also in the affidavit in support of this application. The other grounds for supersession of the board and appointment of a special officer have been set out in the sub-paragraphs under paragraph 43 of the affidavit, to which I have already referred in connection with the question of furnishing particulars of allegations of fraud and also verification of the pleadings. The immediate cause of the rupture between the parties followed by the petition under section 397 and section 398 and thereafter by this application, is the sale of shares by the said three companies. The applicant No. 1 and his supporters realised that, by reason of the sale of shares, the respondent No. 2 had acquired such voting strength as to enable him to control the affairs of the company, so long at any rate the purchasers of the shares remained under the control of the respondent No. 2. Mr. S. Sen contended that in the events that have happened, so far as this court is concerned, an order should be made sup....
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.... the Act. But, Mr. Sen argued, that was not done. The period of two years having expired as early as April, 1958, there was no justification for a pretended compliance with section 372 by sale of the shares in January, 1963. The price paid for the shares by the purchasers was much in excess of the market price of the shares, which was Rs. 28 for each fully paid up share. But, Mr. Sen contended, the 8,500 shares were paid up only to the extent of Rs. 20 per share and these were sold for Rs. 14 for each share, and, therefore, the purchaser had purchased the shares for Rs. 34 each, which was Rs. 6 per share in excess of the market price. This higher price was paid, according to Mr. Sen, because the purchasers acquired the controlling block of shares. Mr. Sen next contended, by referring to the said two pending suits relating to the sale of shares, that this court had come to the conclusion that the sale was unlawful, and therefore issued ad interim injunctions restraining disposal of the shares, and also exercise of voting rights attached to the shares at the general meeting, notice of which was issued. It was next argued by Mr. Sen that the orders for injunction made by this court....
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....les on which the court interferes with the internal management of a company's affairs are by no means uncertain. If this court is satisfied that grounds exist for interference and that the conditions laid down in sections 397 and 398 have been satisfied, appropriate orders would undoubted be made. But the pendency of criminal proceeding, or of investigation by the police into offences of a criminal nature, and even conviction for a criminal offence, should not induce this court to make an order under section 397 and section 398 of the Act. To hold otherwise and to make an order under section 397 or section 398 on the ground that a criminal complaint has been made against the directors or even on the ground that the directors had been convicted of a criminal offence, would be introducing into the law relating to companies, matters which are entirely foreign to company law and administration, and beyond the ambit of the jurisdiction, which this court exercises. Mr. S. Sen next urged that his client's stake in the affairs of the company was very large. He submitted that, on taking the managing agency, his client had made an immediate payment of Rs. 7,00,000 to the Imperial Bank of ....
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.... substance in the contention of the applicant No. 1 that he had a large stake in the company. In my opinion, Mr. R. Chaudhuri's contentions are well founded, and the contention of the applicant No. 1 that he had a large stake in the company is not what it has been made out to be. If he had given the guarantee, he had in the same process benefited himself to the detriment of the interest of the company. The next point urged by Mr. R. Chaudhuri was that no grounds have been made out in the petition for relief either under section 397 or under section 398. He contended that an order under section 397 could not be made unless grounds have been made out for the winding up of the company. And in this case no such grounds have been made out. He argued that the principle of winding up of a private company on the ground of lack of confidence as in the case of a partnership, which was enunciated in Loch v. Blackwood [1924] AC. 783 , did not apply in this case, as the company in this case was a public company, and not a private company in the garb of a public company. Large number of outsiders were also shareholders of the company. It was next urged by Mr. R. Chaudhuri that sufficient g....
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....ecision in In re Cuthbert Cooper & Sons Ltd. [1937] 1 Ch. 392. In this case, on the refusal of the directors to register certain transfer of shares, the transferees applied for winding up on the just and equitable ground. It was held that, in considering the question of winding up, the court should look at the allegations in the petition and should not travel beyond them. Relying upon the decisions discussed above, Mr. R. Chaudhuri argued that, as in the case of a winding up petition, grounds for an order under section 397 and section 398 must be made in the petition itself, and if they are not so made, the petition should be dismissed, or, at any rate, no order should be made on them. I cannot accept this contention of Mr. Chaudhuri. All the cases relied upon by him on this question were cases in which winding up of the company was sought for. So far as winding up is concerned, the law indeed is long and well settled, namely that the grounds for winding up must be stated in the petition itself and the court should not look at any other evidence or any other affidavits to find out if a grounds for winding up had been made. But the question is, can this principle of law be applie....
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....12 Comp Cas 215 in which it was held that in the case of a petition for winding up, the petitioner has got to make out a case for winding up in the petition, and he could not be allowed to fish out a case by cross-examination of the deponents or by inspection of accounts. I have already dealt with this question earlier and it is not necessary for me to deal with this question at length again. Mr. S. Sen argued that the court should take notice of events which had happened subsequent to the presentation of the petition. In this case it was urged that investigation has been started by the police with regard to certain criminal offences, that certain books of the company have been seized by the Registrar of Companies for the purpose of this investigation and also that the magistrate had made various orders in a criminal com plaint that has been lodged against the respondent No. 2. It was argued that the oppression contemplated by section 397 is not a single act of oppression, but a continuous course of oppression over a period of years. And that being so, the court was not precluded from looking into and considering subsequent evidence in aid of the case made in the petition. Mr....
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....ary. This is so, even though the oppression complained of is a continuous course of oppression and continues even after the presentation of the petition. The Act does not impose upon the court a duty to hold a rambling enquiry into allegations made in the petition and supporting affidavits, if any, which by themselves do not constitute grounds for relief under section 397 and section 398. It was next urged by Mr. R. Chaudhuri that the dispute between the parties is a private dispute, and this application is the result of a private dispute between the applicant No. 1 and the respondent No. 2. The contention of the applicant No. 1 is that he has been removed from the position of control which he occupied, and the respondent No. 2 has assumed such control. The only object of the applicant No. 1 is to regain such control. Mr. Chaudhuri argued that section 397 and section 398 are not intended to resolve such private disputes between rival groups of share holders. Two suits have been filed in this court relating to the transfer of shares which is alleged to have resulted in a transfer of the- control. The subject-matter of the complaint in this application is the same as the cause of ....
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.... and section 398 to be exercised when the same questions would be more fully debated and adjudicated upon in the pending actions? this on the answer to these questions that the question of maintainability of this application on this branch of the argument would depend. In my opinion, however, the extraordinary and summary jurisdiction of the court under section 397 and section 398 ought not to be exercised when suits covering the same subject have been instituted in this court and interim orders have been obtained restraining voting rights and alienation of shares If those suits had not been instituted, and the remedy relating to the alleged wrongful sale of the shares not sought for in those suits, the position would have been different. It would have been, in that event, open to this court to go into the questions of propriety, legality, and validity of the transfer of the shares. But the suits are pending and are ready for hearing and so far as the question of validity and legality of the transfer of the shares is concerned, this court must stay its hands. The forum has been chosen, and that choice must be adhered to. Remedy has been sought for and that remedy must be pursued....
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....ions of Lord Romilly in York and North Midland Railway Co. v. Hudson [1845] 16 Beav. 845 : " The directors are persons selected to manage the affairs of the company, for the benefit of the shareholders ; it is an office of trust, which, if they undertake, it is their duty to perform fully and entirely." Mr. R. Chaudhuri also relied upon the observations of Kay J. in In re . Faure Electric Accumulator Co. [1889] 40 Ch. D. 141 150 as follows : " They certainly are not trustees in the sense of those words as used with reference to an instrument of trust, such as a marriage settlement or a will. One obvious distinction is that the property of the company is not legally vested in them. Another and perhaps still broader difference is that they are the managing agents of a trading association, and such control as they have over its property, and such powers as by the constitution of the company are vested in "them, are confided to them for purposes widely different from those which exist in the case of such ordinary trusts as I have referred to, and which require that a larger discretion should be given to them. Perhaps the nearest analogy to their position would be that of the m....
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.... director, because the law is well settled that the court would leave matters relating to a company's administration to be decided in the domestic forum except in certain specified cases, namely, fraud, misappropriation and breach of statutory provisions. Even in the case of charges of misappropriation and misapplication of funds, the court hesitates to interfere in a company's affairs and indeed the court interferes only when the remedy available in the domestic forum has become ineffective or cannot be invoked or pursued for one reason or another. For these reasons I cannot accept Mr. Sen's contentions that the directors of the company are trustees and are liable to be removed on the grounds on which a trustee is liable to be removed. The next point urged by Mr. S. Sen was that there was no board of directors of the company. The board of directors that is now purporting to function is an illegal board and should not be allowed to function as a board nor should the directors be allowed to function as directors individually. Before I proceed to deal with this question, I should point out that this case, namely, that there is no board of directors, or that the board that is purpo....
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.... retired, but is ineligible to act as a director by reason of the bar imposed by section 280 and section 281 of the Act. Hence, it was argued, there was a reduction in the number of directors fixed by the articles of association of the company and such reduction not having been sanctioned at a general meeting, there was no board of directors. Any increase or reduction in the number of directors within the limits fixed by the articles can be sanctioned only by an ordinary resolution at a general meeting of the company. No such resolution having been passed, there is a reduction in the number of directors caused by the retirement and also the ineligibility of A. Rahman, and hence there was no board of directors. Mr. S. Sen next argued that the managing director of a company enjoyed delegated authority from the board of directors, and if there was no lawful board, there could be no delegation. A valid delegation, it was argued, had to be made from year to year by a duly elected board of directors, and the delegation that was made in 1962 could not hold good for 1963, because the board of directors of a company was a changing body. It was further argued that article 101 of the artic....
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....hat section 258 of the Act produced the same effect as the decision in this case. Though the articles of the company, Mr. Sen argued, fixed the maximum and the minimum, the numerical strength of the existing board could neither be raised nor reduced, except by an ordinary resolution of the company as required by section 258. In this case, Mr. Sen argued, the applicant No. 1 had ceased to be a director for absence without leave from board meetings since January 31, 1963 and A. Rahman also retired by rotation and was ineligible by reason of his age until a resolution as required by section 280 and section 281 was passed. The above decision to my mind does not support Mr. Sen's contentions. In the first place, the court was not considering the question of the validity of the board ; in the second place, it was an action by a director for a declaration that he was a director of the company; and, in the third place, the annual general meeting of the company was held, but this meeting failed to fill up the vacancy caused by the retirement of the plaintiff. Indeed, in the Companies Act, 1956, there are specific provisions to meet such a situation in sub-sections (4)(a) and (4)(b) of se....
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.... management of the company's affairs through a special officer by superseding the board. The above observations of Viscount Haldane however do not support the particular contention now under consideration. The next case relied upon by Mr. Sen is H. L. Bolton (Engineering) Co. Ltd. v. T. J. Graham & Sons Ltd. a In that case, dealing with the question whether the company's intention or desire was to occupy certain premises, which it had let out to another company, could be expressed by any one other than the board as a whole, Denning L.J. held that the company in many ways was like a human body. It had a brain and nerve centre and had also hands which hold the tools and act in accordance with the directions from the centre. Relying upon this case, it was argued, that the company's will and its acts must be represented through an organ which was the board of directors of the company and the managing director, neither of whom in this case could function as there was no board. These general observations regarding functions of the board of directors are not helpful. Mr. Sen next relied upon a decision of this court in B. P. Khaitan v. New Central Jute Mills Co. Ltd. [1960] 64 CWN. ....
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.... a third and the three held board meetings and allotted shares including 2,000 shares as fully paid by way of commission to the promoter of the company. The promoter transferred some of the shares to the solicitor of the company partly as gift and partly in payment of costs. The company was wound up before commencement of business. The liquidator took out a summons for rectification of the share register by striking off the name of the promoter and of the solicitor. In dealing with this application Neville J. held that there never having been a properly constituted board, the allotment made by the three directors could not be justified either because they constituted a quorum or because they were continuing directors. It was held that merely because the three constituted a quorum, their acts did not make legitimate acts by a board consisting of less than four members and that there must be a board before there can be a quorum. Dealing with the question of the authority of continuing directors to act, it was held that the expression " continuing " applied to cases where the number of the original board had been reduced by death or otherwise and in such cases those who were left woul....
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....rsons as directors and three was fixed as a quorum. The number of directors was reduced by death to five and one other director became insolvent and therefore disqualified. The company passed a resolution at an ordinary meeting whereby the requirement of the articles that there must be a minimum of five and a maximum of seven was changed by substituting three for five. This resolution was declared to be invalid not being passed according to the articles. Later the four remaining directors made a call. The insolvent director made default in payment of the call and a resolution was passed declaring the shares of the insolvent director forfeited. The company went into voluntary liquidation and it was found that there were surplus assets available to the shareholders. In these circumstances it was held that the call and forfeiture having been made by four directors only were invalid and hence the insolvent director was entitled on payment of his calls to be treated as shareholder and to participate in the surplus assets. This was not a case of retirement by rotation and the question whether the board of directors becomes invalid by reason of a vacancy caused by retirement was not consi....
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....o board and no managing director was fallacious. Mr. Chaudhuri pointed out that under article 91 there should be a minimum of three and a maximum of five directors Without disturbing the numerical strength, Mr. Chaudhuri argued, the company might keep a vacancy in the board. If Mr. Sen's argument was correct, then supposing a director died or resigned, the board could not Function at all, not even for the purpose of co-opting or appointing an additional director to fill up the casual vacancy. At the annual general meeting, Mr. R. Chaudhuri contended, the members might choose not to fill up a vacancy caused by death or resignation. One-third of the directors retire by rotation and there was no bar under sections 258, 259 and 260 to a vacancy in the board not being filled up. An office of director, Mr Chaudhuri contended, could be left vacant without disturbing the number of directors. This did not mean that there was a reduction in the number of directors. The number of directors fixed remaining the same it was quite competent for the general meeting not to fill up a vacancy. Mr. R. Chaudhuri next argued by referring to the provisions in section 256(3), section 256(4)(a) and sect....
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....ision has been made for filling up a casual vacancy. Under this section if the office of a director became vacant, before the expiry of his term, the casual vacancy created thereby could be filled by the board of directors at a meeting of the board. But if the board becomes invalid the moment there is a vacancy, as Mr. Sen contended, because there is a reduction in the number of existing directors, the casual vacancy could not be filled up at the meeting of the board of directors, as it had ceased to be a valid board. In other words, the occurrence of a vacancy in the office of a director by death or resignation does not and cannot make the board invalid. In spite of such a vacancy, the board can function as a board of directors under section 262 for appointing a director to fill up the casual vacancy. The Act quite clearly recognises that in spite of the reduction in the number of, directors, the board does not become invalid and can still function as 1 board and is still authorised to so function, because it is the board which fills up the casual vacancy. It was next argued by Mr. R. Chaudhuri that the retirement of a director by rotation under section 255 did not amount to a ....
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.... not filled up as there was no resolution reducing the number. He was to continue as a director of the company. This, Mr. Chaudhuri submitted, was entirely different from saying that the board becomes invalid because there is a vacancy in the board which has not been filled up. I have dealt with the decision earlier and it is not necessary for me to say anything more. In my opinion, Mr. Chaudhuri's contentions are sound. The mere occurrence of a vacancy in the board, by reason of retirement, by rotation or by reason of a disqualification incurred or death or resignation, cannot have the effect of the board becoming invalid, and for that reason unable to function as a board. The Act contemplates the occurrence of vacancy in the board and even contemplates a situation where a general meeting may not have filled up a vacancy which has occurred. Provision has been made for filling up such vacancy and power has been given to the board to appoint directors for the purpose of filling up the vacancy. To hold that a board becomes an invalid board because a vacancy has occurred and a resolution has not been passed by the company reducing the number, would be to introduce a principle in co....
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....director. A litigant at whose instance, and for whose benefit, such orders have been made cannot turn round and complain that there is no valid board, because a vacancy caused by retirement by rotation has not been filled up. There is however a still larger question involved on this aspect of the case. Assuming for a moment that there is no valid board, and again assuming that the present board cannot function as it has ceased to be a lawful board of directors of the company, can this court in exercise of its powers under section 397 and section 398 supersede the board and appoint a special officer ? Is it an act of oppression as contemplated by section 397 which would justify the court in making an order under that section ? Or is it an act of mismanagement or act prejudicial to the interest of the company requiring intervention under section 398 ? If there is no board of directors or if the board of directors is not a lawful board or the managing director is not a lawful managing director, why should this court interfere in a matter which should be considered in the domestic forum ? Such difficulties are easily resolved, and are intended to be resolved, by calling a general me....
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....er, was in nourishing state and made large profits. It was held that there was a complete deadlock and an order for winding up ought to be made on the just and equitable ground, because this was a private company in the guise of a partnership, and if it was a partnership, there were grounds for dissolution and that being so, the company ought to be wound up. Mr. Sen contended that in this case also the parties had become hostile and therefore the court should interfere under section 397 and section 398. But there is a very important distinguishing feature, namely, that in the instant case now before me, there is no deadlock and the application is not an application for winding up nor is the company a private company. It is a public company in which outsiders hold a substantial block of shares. In my opinion the principle that lack of confidence among the directors in a private company resulting in a deadlock is a ground for a winding up order on the just and equitable ground, cannot be applied in this case, in which the special discretionary jurisdiction of the court under section 397 and section 398 has been invoked. Mr. Sen urged that there was a serious dispute between the ri....
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....btained by the applicant restraining the transfer of shares and also voting rights. Yet the court made an order under sections 397 and 398. There fore, Mr. Sen contended that the mere fact that the applicant Had obtained an order for injunction in the pending suits should not debar the applicant from getting relief in this application. It was further held in that case that conditions that prevented proper functioning of the company according to the provisions of the Act, the de jure character of the board, and the difficulty of having this state of affairs rectified in the usual way, and the fact that the company was being run by the board in its own interest over riding the wishes and interest of the majority of shareholders, the prospect of costly litigation, were facts from which the court was bound to conclude that the affairs of the company were being conducted in the interest of a group and not in the interest of the company. Mr. Sen contended that in the instant case also, there was a serious question as to the validity of the board, litigation is pending by reason of the sale of shares, injunction has been issued restraining voting rights, the machinery of the company has b....
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.... similar question, it is not necessary for me to deal with this case. It was next urged by Mr. Sen that the applicant No. 1 was a guarantor, and had as such guaranteed repayment of the loans taken by the company. The applicant, therefore, Mr. Sen argued, was entitled to protection under section 145 of the Indian Contract Act. Under that section, in every con tract of guarantee, there is an implied promise by the debtor to indemnify the surety and the surety is entitled to recover from the debtor whatever sum has been rightfully paid under the guarantee. That being so, Mr. Sen contended, his client having furnished a guarantee for a large sum was entitled to repayment from the debtor any sums that he might be called upon to pay to the creditor. But Mr. Sen contended, if the assets of the company were allowed to be frittered away by the respondent No. 2 and his group, there would be no assets left from which his client could expect payment. Mr. Sen referred to the summary of the accounts furnished by the company and submitted that the total payments made by the company were Rs. 3,46,677.51 and the total receipts were Rs. 3,46,677-51. The payments, therefore, Mr. Sen contended, exc....
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.... was so the transfer of the shares was not an act of either oppression or mismanagement, so far as this company was concerned. It might be an act of oppression or mismanagement so far as the three holding companies mentioned above were concerned. If the directors of those three companies have wrongfully, unlawfully or fraudulently sold the shares held by those companies, such acts of transfer of shares might amount to an act of oppression or mismanagement by the majority of shareholders of those companies and the minority of shareholders of those companies might have a grievance on that account. But both Mr. S. Chaudhuri and Mr. R. Chaudhuri con tended that the transfer of the shares, even assuming them to be unlawful and fraudulent, was an act either of oppression or mismanagement so far as the minority shareholders of this company were concerned. It was argued that in order to constitute an act of oppression of the minority shareholders of this company, it must be an act relating to this company and no other. In my opinion, there is a good deal of force in this contention of Mr. S. Chaudhuri and Mr. R. Chaudhuri. According to the applicants. Metropolitan Industrial Corporation Lt....
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....idence of misappropriation the learned counsel for the applicant should have caused it to be produced in his opening address and not in the course of his reply, so that the respondents might have dealt with the cheque. But as this cheque was caused to be produced after the respondents had closed their case and concluded their arguments, it should not be looked into by this court or relied upon. Mr. R. Chaudhuri thereafter referred to the other allegations in tile sub-paragraphs under paragraph 46 of the affidavit. He contended that in sub-paragraph (e) it has been alleged that one Banamali Pathak, a benamidar of the respondent No. 2, in spite of having no qualification at all had been appointed the cashier of the company on a handsome salary. Mr. R. Chaudhuri submitted that Pathak was in the employ of the company for the last thirty years, as has been stated in paragraph 65 of the affidavit affirmed by the respondent No. 2 on June 22, 1964. The allegations in sub-paragraphs (g), ( h) and (i) relate to pay and bonus-sheets. It is alleged in sub-paragraph (i) that the accounts for the year ending with March 31, 1957, show that Rs. 32,59,289 have been debited to salaries and bonus,....
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.... a genuine and valid transaction and it was for that reason that the applicant No. 1 offered to buy back the shares and pay interest on the amount invested by the purchasers. Mr. R. Chaudhuri contended that this allegation completely demolished the applicant's case that the sale was a fictitious sale and the purchasers were benamidars of the respondent No. 2. The sale being fictitious, and the purchasers being benamidars of the respondent No. 2, there could be no question of the applicant's making the offer to buy back the shares and pay interest at 6 per cent, per annum on the amount spent by the purchasers. It seems to me that there is a good deal of force in Mr. Chaudhuri's contention. Mr. R. Chaudhuri next contended that the acts of misconduct alleged against the respondent No. 2 took place, according to the applicants, in 1956-57. Yet he nominated the respondent No. 2 as the managing director in 1959, knowing all about his misdeeds and misconduct. The respondent No. 2 was a nominee of the applicant No. 1, it was he who had appointed the respondent No. 2 the managing director* of the company. Having made this appointment knowing all about his alleged misdeeds, can the applic....
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.... and this application for relief regarding the said alleged acts of misappropriation was not moved until June 4, 1964. This enormous delay, Mr. S. Chaudhuri contended, completely debars the applicant in asking for reliefs under section 397 and section 398. Then again Mr. S. Chaudhuri contended that the transfer of the shares took place in January, 1963, nearly a year and a half before this application was moved. He also contended that since the petitioner had waited for a year and a half to see how things shaped out, there could certainly be no urgency, for any ad interim relief. He further argued that nothing had happened since January, 1963, which demands the supersession of the board. In answer to the argument regarding delay, Mr. S. Sen contended that delay would bar his clients' remedy only if they had been indolent and if by reason of their inactivity the respondents have in some way or other been prejudiced. Relying upon certain passages in N. D. Basu's Law of Injunction, 2nd edition, pages 107-110, Mr. Sen contended that delay and laches on the part of his clients would bar a remedy if only it caused disadvantage to the respondents. Secondly, it was argued that delay was....
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....e or condonation of the wrongful acts, the discretionary relief which the court exercises under section 397 and section 398 of the Act will not be granted. But in this case the question is not whether the petitioners in the petition under section 397 and section 398 would be entitled to relief which they have applied for on the ground of delay, but the question is whether there is any urgency at all for giving ad interim relief to the applicants by superseding the board of directors and appointing a special officer to perform the duties of the board by taking over the management and control of the company's affairs. Indeed if the applicants have waited since 1955-56 when the alleged acts of misappropriation were committed and since January, 1963, when the transfer of shares took place, there is no reason why this court, in dealing with an application for ad interim relief, should make an order for super session of the board and appoint a special office. I am not at the moment considering the petition under section 397 and section 398 and I say nothing as to whether delay would bar the remedy in that application. But so far as the present application for ad interim relief is concern....
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.... allegations made in the said affidavit in support of the summons that the prayer for appointment of a special officer has been founded. In my opinion the allegations in the said paragraphs of the affidavit do not provide any ground for interference nor do they disclose a state of urgency, which would justify interference by an order for supersession of the board of directors of the company. While alleging that in the event of withdrawal of the guarantee given by him the company will be wound up being unable to pay its debts the applicants have said nothing to show or establish that a winding up order would unfairly prejudice them or other supporting members of the company. It is not enough for an applicant to allege that the company's affairs are being conducted in such a manner that a winding up order would be appropriate, but he must also show that such an order would unfairly prejudice the applicant and other members. No such grounds have been made out of the possibility of prejudice to the applicants or supporting members. The next question to be considered is the justification for the sale of shares by the said three companies by reason of the requirement of section 372....
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.... the said three companies, none of which carry on any insurance business. The bar imposed under section 372(2) apply only to the investing company, none of which in this case are insurance companies nor do they carry on insurance business of any description. The opening words of section 372(1) quite clearly indicate that the restrictions are imposed on the investing company and not on the company in whose shares the investment is made. For this reason, section 372 has no application at all. Therefore, neither in fact nor in law, can the argument of Mr. R. Chaudhuri, that the transfer of shares was made to comply with the requirement of section 372, be accepted. The next question to be considered is whether any relief can be granted under section 397 and section 398 of the Act. Before proceeding to discuss this question, I should point out that in this application for interim relief, it would not have been necessary for me to consider this question, namely, whether the petitioners are entitled to relief in the petition under section 397 and section 398. But it has been contended on behalf of the respondents that if no relief can be granted to the petitioners in the petition under....
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....r relief if he succeeds in the action. If, on the other hand, it appears that relief cannot be granted in the action itself or in the main petition, ad interim relief which is always granted by the court in aid of the relief in the action itself should be refused. I shall now proceed to consider if relief can be granted to the applicant in the petition under section 397 and section 398 of the Act. Mr. R. Chaudhuri firstly contended that under section 397 of the Act an order could not be made unless there were grounds for making an order for the winding up of the company on the just and equitable ground. But Mr. Chaudhuri argued that an order for winding up on the just and equitable ground could not be made in this case. He referred to section 443(2) of the Act and contended that the court should refuse to make an order for winding up, if it was of opinion that some other remedy was available to the petitioners and they were acting unreasonably in seeking to have the company wound up, instead of pursuing that other remedy. Mr. Chaudhuri contended that sections 397 and 443(2) read together made it plain that if the petitioner for winding up had an alternative remedy, an order for ....
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..... Income-tax Investigation Commission [1954] 25 ITR. 167 ; [1954] SCR. 738 and Radhakissen v. Rajaram Rao AIR. 1955 Cal. 241. Relying upon these decisions Mr. R. Chaudhuri submitted that as in the case of article 226, relief under section 397 was a discretionary relief and if the applicant had adopted and pursued an alternative remedy, an order under section 397 should not be made. In this case, Mr. Chaudhuri contended that the petitioners had caused suits to be filed in regard to the sale of he shares and thus they had pursued the alternative remedy open to them and having done so, they had disentitled themselves to any relief under sect on 397, even assuming that they had made out grounds for relief under that section. Mr. S. Sen, on the other hand, contended that the alternative remedy contemplated under section 443(2) was an application under section 397 and section 398 and not an action at law. He next contended that the relief asked for in the petition under section 397 and section 398 could not be obtained in the two suits, which relate to the transfer of the shares only. He further contended that a suit is instituted to remedy the breach of an individual right, but an ap....
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....ing up of the company. If it was the intention of the legislature that the other remedy contemplated by section 443(2) is nothing but an application under section 397 and section 398, nothing would have been simpler than to make it clear that the court would refuse to make an order for winding up if it was of opinion that a remedy under section 397 and section 398 was available to the petitioner who was unreasonably seeking to have the company wound up instead of proceeding with an application under section 397 and section 398. To hold that the other remedy contemplated by section 443(2) is nothing but an application under section 397 and section 398, would have the result of reading into section 443(2) something which is not there at all. In my opinion, therefore, the said two suits cannot be excluded from the class of other remedies contemplated by section 443(2) of the Act. Mr. S. Sen contended that the affairs of the company are being con ducted in such a manner that the court ought to interfere. He argued that in a case of mismanagement and oppression an order under section 397 and section 398 was the only appropriate remedy. He referred to the decision in Trade Auxiliary C....
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....ge in the management or control of the company as to attract section 398(1)(b) ? Admittedly, the only change in the management or control of the company is the respondents' contention that the applicant has ceased to be a director. But no new directors have been appointed nor has any meeting of the company been held in which the purchasers of the shares have exercised their voting rights, so that it might be said that a change in the control had taken place. If a vacancy in the office of a director caused by retirement, resignation or death or caused by operation of law, is to be treated as a change in the management or control, then in every case where such vacancy occurs, a minority group of shareholders would have the right to come to court and ask for relief under section 398. That, in my view, is not the import of section 398 of the Act. Then again, it is to be noticed that the material change in the control or management of the company is to arise from certain specified facts as laid down in section 398(1)(b), and in this case the cause of such change is the transfer in the ownership of a block of shares. That is the only change in the management or control complained of by t....