TaxTMI 
TaxTMI 
1994 (1) TMI 299
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....rs and unjustly enrich themselves. Both have connived together in managing the affairs of the company in such manner so as to make vast secret profits. Thereupon, the present first respondent, Shree Consultations and Services P. Ltd., came forward with Company Petition No. 59 of 1992 before the Company Law Board, Principal Bench, New Delhi, seeking a declaration that the appellants have ceased to be directors of the company, appointment of some fit and proper person as administrator of the company in the place of the board of directors, rendition of accounts by the appellants and other appropriate reliefs including suitable orders and directions for management, regulation and conduct of the company as the Company Law Board deems fit and proper. The said Shree Consultations and Services P. Ltd., purported to file this company petition for themselves and for and on behalf of the members who have given their consent to the petition being presented on their behalf. The letter of consent of members included in the schedule is in annexure A-2. The appellants, while resisting the petition, inter alia, contended before the Company Law Board that the petition did not comply with the mandato....
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....p; (a) that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company; or (b) that a material change (not being a change brought about by, or in the interest of, any creditors including debenture holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its board of directors, or of its managing agent or secretaries and treasurers or manager, or in the constitution or control of the firm or body corporate acting as its managing agent or secretaries and treasurers, or in the ownership of the company's shares, or if it has no share capital, in its membership or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company, will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; may apply to the court for an order under this section, provided such members have a right so to apply in virt....
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..... 5. Bearing this background in mind the requirements of section 399(3) have to be considered. Under this provision any petition under section 397 or 398 in the case of a company having a share capital can only be at the instance of: (1) hundred members of the company; (2) or not less than one-tenth of the total number of its members, whichever is less; (3) or any member or members holding not less than one-tenth of the issued share capital of the company. 6. This provision enjoins that the applicants should have paid all calls and other sums due on their shares. Annexure A-2 of the application in this case gives a list of 22 shareholders and their purported signatures along with their shareholdings. Thiru Raghavan, learned senior counsel for the appellants, first submitted that the copy of the annexure circulated to him contained 25 signatures whereas in fact only 22 members had signed the consent before the Company Law Board. Evidently this difference in numbers between the original and the copy circulated cannot be of any assistance to us in resolving the present controversy. 7. Thiru Ra....
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....irector. He has not made any averment in the petition that he is duly authorised to file the same. In spite of this matter being raised in the counter, his rejoinder does not make a positive averment that he possessed any such authority. So the petition has not been validly instituted. To substantiate his contention he has placed reliance on the decision In Nibro Ltd. v. National Insurance Co. Ltd. [1991] 70 Comp Cas 388, wherein it has been held by the Delhi High Court that it is well settled that under section 291 of the Companies Act, 1956, except where express provision is made that the power of a company in respect of a particular matter are to be exercised by the company in general meeting, in all other cases the board of directors are entitled to exercise all its powers. Individual directors have such powers only as are vested in them by the memorandum and articles. It is true that ordinarily the court will not non-suit a person on account of technicalities. However, the question of authority to institute a suit on behalf of a company is not a technical matter. It has far-reaching effects. Order 29, rule 1 of the Code of Civil Procedure, 1908, does not authorise person menti....
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....ally there is a resolution by the board authorising Mr. Sodhani to file the company petition. Failure to refer to the same in the rejoinder is not material. It cannot be termed as a transaction by the directors which is beyond their powers. This pertains to the internal management of the company in which courts do not interfere. He cites the decision in Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1 in which the Supreme Court has held that though the telegram and the letter of the chairman terminating the services of the appellant were in pursuance of an invalid resolution, the subsequent resolution passed by the board confirming the action of the chairman amounted to ratification by the board of the action of the chairman. Ratification related back to the date of the act ratified. Evidently, this argument of learned senior counsel for the respondents is untenable since the initial infirmity in presenting the company petition without authority is incurable. The question of authority to initiate legal action on behalf of a company be equated with an administrative act like terminating the service of an employee or verifying a plaint. Instead it is a flaw which goes ....
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.... alleged draft petition and not to the main petition presented before the Company Law Board. The first respondent has failed to establish any nexus between the draft petition in annexure A-2 and the main petition before the Company Law Board. In the absence of the draft of the final petition which is stated to have been perused and consented to, the consent will be an incomplete one which cannot satisfy the requirements of the Act. The Company Law Board has wholly failed to apply its mind to this aspect and give judicial reasons as to how the first respondent satisfies the requirements of section 399 of the Company Act. Neither the Companies (Court) Rules framed by the Supreme Court for regulating the procedure to be adopted in matters relating to the Companies Act before the High Courts, nor the regulation of the Company Law Board prescribe any form for the consent to be accorded in writing by the shareholders under section 399(3) of the Act. Rule 88 of the Companies (Court) Rules, 1959, merely requires that the list of names and addresses of all the members on whose behalf the petition is presented shall be set out in a schedule and annexed to the petition. The petition shall sta....
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....ion to a reasonable mind that they applied their minds and gave the consent for the filing of a particular application for a particular relief under section 397 and section 398 ... one of the essentials, and which appears to be elementary, for a person to allege consent of another to an act of his should be that the other person, who is said to have given consent, should have exercised his mind and not only acquainted himself with the contents of the petition to which he was giving consent in writing as a willing participant but also should make it appear from the circumstances of the case that his participation was not involuntary but voluntary .... To give consent means that there was consensus ad idem between the sponsor or promoter and the other named shareholders in the annexure in the matter of the presentation of the particular petition with particular allegations and complaints against the company under sections 397 and 398 of the Act. 14. The decision referred to above was the subject of appeal before the Division Bench in Duraiswami (M. C.) v. Sakthi Sugars Ltd. [1980] 50 Comp Cas 154. While dismissing the appeal, Ismail J. (as he then was), who spoke for the Bench, po....
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....s have perused the company petition, it is impossible to establish a nexus between the petition presented before the court and the petition referred to in the annexure. He also pointed out that if the company petition, in the same form or in substance, is appended to the letters of consent and the signatories have signed such a petition, there would not have been any difficult. There is no proof that the consenting members knew about the nature of the action to be taken and the basis for such action and the nature of the reliefs to be sought for. 16. The next decision cited by learned senior counsel for the appellants is that of Padmanabhan J. (C.P. No. 30 of 1979). There the petitioner claimed that he was supported by 106 shareholders. The allegation was that the managing director and directors had siphoned off funds from the company to the tune of several lakhs by taking advantage of their official position in the company. It was claimed by the petitioner therein that those 106 shareholders have given their consent in writing to him to file that application under sections 397 and 398 of the Companies Act, Relying on the ratio laid down by Division Bench referred to above, the ....
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....elled this convention and held that the non-alteration in the registers of the company of the description of its members cannot be taken advantage of by a person who files a petition under section 397 or 398 of the Act to overcome an inherent lacuna in the petition based on section 399 of the Act. He further held that compliance with section 399 of the Act should be at the time of the filing of the petition and any subsequent compliance with section 399 of the Act will not cure the initial infirmity. 19. In the light of the ratio laid down by the decisions referred to above, if we analyse the terms of annexure A-2, it cannot be said that we could spell out any nexus between the draft of the final petition which is stated to have been perused and consented to by the signatories and the actual petition presented before the Company Law Board. Evidently, this nexus cannot be established by oral evidence or any subsequent affidavits. We have to search for the same in the wording of the consent letter itself. The letter of authority discloses that the shareholders have read the final draft of the petition and given their consent to the petition that may be made therein. There is nothi....