TaxTMI 
TaxTMI 
1983 (7) TMI 223
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....ation Act was filed in November, 1973. It may be noted that an application for winding up of M/s. Globe Motors Ltd. was moved in March, 1968. Globe Motors was having one of its industrial units manufacturing steel under the name of Globe Steels. The agreement purports to appoint the respondents as distributors for the sale and marketing 1/6th of the company's steel products. Objection was taken by the official liquidator on various grounds. Broadly, the grounds raised were: (i) whether the application filed under section 20 of the Arbitration Act was barred by limitation; (ii) whether the agreement dated June 1, 1967, was valid; and (iii) the next question related to whether the agreement was vitiated on the grounds of fraud and being against the interest of the company. The learned single judge found all the pleas against the appellant and in favour of the respondents, and has, therefore, directed the matter to be referred to the arbitration. Hence the appeal by the official liquidator. The first contention raised by Mr. Andley, the learned counsel for the appellant, is that as the agreement was entered into on June 1, 1967, the application filed under section 20 in November....
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....of the board of the company. Section 299 of the Companies Act provides that every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the board of directors. Reference to the agreement and the resolution dated June 15, 1967, which was passed by the board of directors shows that when the board approved the resolution in favour of the respondents, it was specifically noted that some of the directors, mentioned therein, of the company indicated their interest in the above arrangement and took part neither in this discussion nor on the resolution. Amongst these, the name of Harnam Singh is included. Mr. Andley, of course, seriously doubts whether any interest was disclosed and also castigates the manner inasmuch as the five directors continued sitting in the meeting when the decision was taken. Be that as it may, the fact remains that interest in the agreement was disclosed by the director. It is not, therefore, possible to accept the argume....
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....ense and to some extent trustees or in the position of trustees. It is impossible now to dispute the position that they are in some sense trustees, that position having been established by a long series of cases (Vide Palmer's Company Precedents, 16th edition, part I, pages 561 to 564) . The courts have been very jealous in seeing that the fiduciary relationship of the directors with the company is not abused. The directors have been held to be trustees of the assets of the company and courts have directed them to reimburse the loss to the company where it was found that directors had applied the company's money in payment of an improper commission. The strictness with which the courts view the responsibility and the sacredness of the trust reposed in the directors was emphasised long time back in Imperial Mercantile Credit Association v. Coleman [1873] LR 6 HL Cas. 189. In that case, one Coleman, broker and a director of a financial company, had contracted to place a large amount of railway debentures for a commission of 5 per cent. He proposed that his company should undertake to place them for a commission of 1½ per cent. to the company. He was held liable to account f....
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.... and they are expected to display the utmost good faith towards the company whether their dealings are with the company or on behalf of the company. They should not use the company's money or other property or information or other matters in their possession in their capacity of directors, in order to gain any advantage to themselves at the expense of the company, and if they make any profit for themselves or cause any damage to the company, they will be liable to make good the same to the company. Similar observations were made in the report of the High-Powered Expert Committee on Companies and MRTP Acts (1978) which succinctly expresses the legal position of the directors as follows (para. 5.14 at p. 42): "Directors are appointed to act in the interests of the company and an important area of their legal responsibility stems from the law of trusts-they have a fiduciary relationship with the company. The duties arising from this relationship are well defined, viz., to exercise their powers for the benefit of the company, to avoid a conflict of interests, and a duty not to restrict their right (by contract or otherwise) to freely and fully exercise their duties and powers. In ad....
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....company would otherwise have enjoyed. (Vide Pennington's Company Law, 4th Edition, page 596); Gower in Company Law, 3rd edition, page 526, has noticed that because of the trustee-like position of the directors a contract between the company with another firm of partnership of which one of the directors was a partner have been avoided at the instance of the company notwithstanding that its terms were perfectly fair and that in the words of Lord Cranworth L.C. "so strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into........". Thus the contract will be voidable at the instance of a company and any profits made by the directors personally will be recoverable by the company (page 527 of Gower). Various remedies could be resorted to by the company in case of a breach of duties by the directors. Thus, one of the remedies provided to the company is rescission of a contract, another is accounting for profits. The liability of the director may arise out of a contract made between a director and a company. In such a case accounting is a remedy additional to avoidance of contract and is normally a....
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....aluja, Mr. K. R. Saluja, Mr. S. L. Saluja and Mr. Narinder Singh Kohli were partners. All of them were present at that time in the board meeting. Resolution No. 21 deals with the present case in which it approved the appointment of M/s. Teja Singh and Co. as distributors for l/6th of the products of M/s. Globe Steels. The partnership consisted of Mehta Harnam Singh and his two sons. Mehta Harnam Singh was a director of the company and was present at the said board meeting. It will thus be seen that out of 13 directors who attended the board meeting on June 15, 1967, 6 of them were interested in three agreements which were approved by the board on that day. Technically we may accept what is recorded in the minutes of the board that the directors had disclosed their interest in the agreement which was being approved and also did not take part in the discussion or vote on the resolution. Though, therefore, there may not be any technical objection to these resolutions, yet we cannot overlook the patent incongruity of accepting that unbiased mind was brought to bear on the merits of these agreements when almost half of the board was interested in one or the other agreement. In suc....
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....0% of the face value. Considering the penury condition of the company it cannot be said that the respondent did badly at this price. Finding by the learned single judge, that there was a consideration of Rs. 5 lakhs for this agreement, is not supported by the record. The learned single judge has not accepted that the contract was without consideration. The learned judge holds that it was a service contract for the purpose of employment to boost sales and because of this service there was a good consideration even to paying Rs. 1 lakh and 20 thousand per annum as a minimum fee. Normally, if a party undertakes to boost sales and use his expertise for this purpose on some minimum fee it is possible to say that there was a proper consideration for the contract. But it was the official liquidator's case in reply to the application for arbitration that none of these agencies including the respondents had ever dealt with steel products or had any experience in the line and that this device was fraudulently and collusively adopted to siphon away the company's funds for the individual and personal benefits of the said directors, at a time when the company to their full knowledge was pass....
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....obe Steels. ' Prima facie, article 2 read by itself may appear to show that some duties had been cast on the distributors under which some services were to be performed by them, they were even expected to bear some expenses and even reimburse the company for the sale promotion expenses incurred by it on behalf of distributors. But this impression is a deliberate illusion created to fog the whole issue; a reference to article 4 of the agreement would immediately dispel it. Under article 4 allegedly in consideration of the services defined in article 2, the company was obligated to pay to the distributor a fee at the rate of 4.8% of 1/6th of total proceeds of sale of products of Globe Steels through distributors or directly by the company, but if sale proceeds fell below 1.50 crores in any financial year, a sum of Rs. 1.20 lakhs will be paid as a minimum fee in any financial year. Not only that the agreement is so heavily weighed one way in favour of the respondents that clause (b) of article 4 lays down that the minimum fee of Rs. 1 lakh and 20 thousand shall be paid and allowed to the distributors in equal monthly instalments of Rs. 10,000 each irrespective of the sales of each ....
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.... given to the respondents simply because six of these directors present had interest in similar arrangements to their advantage. In that view, to expect any of them to have considered the benefit of the company, is to ignore the obvious. The Board on June 15, 1967, did nothing but conveniently divide the assets of the company for the benefit of some of the directors. The company was not only not a penny gainer, but, was on the other hand, to be a loser in all respects. It is not even a case where the respondents were professionally qualified people who were expected to give their knowledge or experience of the trade to the company. Bedi. the chairman of the company, admitted that the respondents had no experience of manufacture in this line, nor had they done anything in furtherance of the sale of the products. In these circumstances the learned single judge was, and we say so with respect, in error in holding that the directors acted bona fide and the agreement was for the benefit of the company and the transaction was in good faith. The learned judge seems to have assumed that because directors disclosed their interest and did not vote for the resolution that was the end of the m....
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.... view of the matter as the agreement is held not to be subsisting, being void, and as the arbitration clause forms a part of the agreement will naturally not survive. The effect would be that there is no existing arbitration agreement and the respondents cannot ask for the matter to be referred to arbitration. As a result, we would, in the circumstances, allow the appeal, set aside the judgment of the learned single judge and dismiss the application of the respondents filed under section 20 of the Arbitration Act. The parties will bear their costs throughout. We may note that the learned single judge, while appointing an arbitrator had fixed his fee at Rs. 4,000 to be paid in equal shares by the official liquidator and the respondents. We are given to understand by the official liquidator that the said amount has been paid equally by both the parties to the arbitration. Though we are dismissing the application filed by the respondents, we, however, make it clear that the fee which has already been paid to the arbitrator will not be sought to be refunded or claimed back. The arbitrator is entitled to retain the fee of Rs. 4,000 paid to him. We are doing this because the matter....
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....pon the company, and a sort of bounty extended to respondents to the detriment of the company's interest. The appellant has asserted before us that no sales whatsoever were got effected by the respondents, and even before the learned arbitrator they have simply put up a claim at the rate of rupees 1.2 lakhs per year. The respondents when enquired if they, in fact, effected any sales, were entirely vague and stated that they must be recorded in the company's books which are said to be with the police. They had not kept any documents or accounts of the sales with themselves. This was highly unusual as the firm which was entirely constituted for carrying on the distribution agency, and was to conduct sales worth lakhs, if not crores, did not choose to maintain any documents and accounts. This in a way reflects the figurehead status of the respondents. One of the clauses in the agreement specifically provided that the respondents would submit at regular intervals, reports on market conditions and prepare estimates of demand for the products of "Globe Steels". The respondents do not possess any documents or copies thereof showing the submission of any such reports or estimates of dem....