1. The point of law raised in this writ petition relates to the jurisdiction of the Civil Court to entertain a civil suit involving the question as to the disqualification of the Director of a Company, under the Indian Companies' Act in the context of sections 2(11)10, 283 and 299 of the Indian Companies Act (hereinafter called the Act) and sec. 9 of the Code of Civil Procedure.
2. The petitioner is a company registered under the Act and the 1st respondent is the Principal Subordinate Judge, Tirupathi. The 2nd respondent Sri M.B Vasantha Kumar who is the plaintiff in the suit was the Managing Director of the petitioner company. The petitioner-company was initially having its registered office at Secunderabad, A proposal to shift the registered office of the company from Secunderabad to Tirupathi was accepted by the Board of Directors at a meeting dated 13-6-1980. At Tirupathi, the Company was to be located in a premises bearing No. 194.C, Prakasam Road, Tirupathi as a lesee of another firm Triveni Enterprises, which in its turn, was the principal lessee from the owners of the building. Certain disputes arose between the Directors of the petitioners-company in September, 1983. The matters came to a crisis during February, 1984. The 2nd respondent-plaintiff was a partner of Avanthi Enterprises with whom the petitioner-company entered into the sub-lease. The 2nd respondent had not ‘specifically’ disclosed the fact of his being a partner of Avanthi Enterprises to the company as required by section 293 read with section 299 of the Act. On that ground the other Directors are said to have passed a resolution on 13-2-1984 that the petitioner has become disqualified from being a Director with retrospective effect from 13-6-1980. This was because 13-6-80 was the date on which the company passed a resolution to shift the registered office from Secunderabad to Tirupathi and according to the petitioner, was the date on which the 2nd respondent did not “specifically” disclose his being a partner of Triveni Enterprises and incurred the disqualification. A letter intimating the passing of this resolution was communicated to the 2nd respondent by a letter dated 14-2-1984. The 2nd respondent denied the passing of any such resolution. The 2nd respondent then filed the present suit stating that he was present at the meeting which took place on 13-2-1984 and no such resolution disqualifying him was passed. The allegation of the petitioner that the 2nd respondent had gone out of the meeting when this item was taken up in the agenda was denied.
3. The reliefs claimed in the suit are for a declaration that the plaintiff— 2nd respondent is an continues to be the Managing Director of the 1st defendant (petitioner—company) and for a further declaration that any Board meeting held by the petitioner subsequent to 13-2-1984 are null and void and also for a further declaration that any change effected on the Board of the petitioner subsequent to 13-2-1984 is illegal and for a permanent injunction restraining the defendants therein from interfering with the office of the 2nd respondent—plaintiff, as Managing Director in the day-to-day affairs of the petitioner-company. In the lengthy plaint, the 2nd respondent has denied the passing of this resolution on 13-2-1984 and has also set out various facts, which, according to him, show that the other Directors of the company including the Chairman, formed into one group to oust the 2nd respondent from the Board of Directors and that they had thus infringed the rights of minority arbitrarily and with malafide intentions. It is also alleged in the plaint that the 2nd respondent was excluded by all the other Directors who joined into a kind of an illegal arrangement to siphon off the funds of the company with a view to damage the interests of the share-holders. There were also certain interlocutory orders passed in the suit.
4. It was at that stage that the present writ petition was filed subsequently on 30-4-1984. By an order dt. 2-5-1984 passed by this Court, the proceedings in the suit were stayed.
5. The main contention of Sri V.T.M Prasad, the learned counsel for the petitioner is that the disqualification specified in Sections 283(1)(i) and 299 of the Act relates to certain rights unknown to the common law and that these rights as well as the remedies in that regard are those specially created by the Companies' Act and the 2nd respondent should have approached the Company Court (the High Court) and not the Civil Court for adjudication of disputes relating to his disqualification.
6. Sri M. Ramachandra Reddy, the learned counsel for the 2nd respondent has contested the above propositions.
7. The only question that arises for consideration is: whether the civil Court has jurisdiction to decide the question relating to the alleged disqualification of the 2nd respondent under Sections 283(1)(i) read with Section 299 of the Indian Companies Act in the context of Section 211 and Section 10 of that Act, and S. 9 C.P.C
8. Before going into the main question, it is necessary to refer to the relevent statutory provisions. It is provided in Section 283(1)(i) and Section 299 that a Director has to disclose his interest-in a contract to be entered into by the Company-at the first meeting and otherwise he becomes disqualified. Section 10 of the Act deals with jurisdiction of Courts. Sub-clauses (1) and (2) of Section 10 of the Act read as follows:
“10(1): The Court having jurisdiction under this Act shall be—
(a) The High Court having jurisdiction in relation to the place at which the registered office of the company concerned is situate, except to the extent to which jurisdiction has been conferred on any District Court or District Courts subordinate to that High Court in pursuance of sub-clause 2;
(b) Where jurisdiction has been so conferred, the District Court in regard to matters falling within the scope of the jurisdiction conferred, in respect of Companies having their registered office in the district.
(c) In respect of companies, with a paid—up share capital of not less than one lack of rupees by Part VII (Sections 425 and 560) and the other provisions of this Act relating to the winding up of Companies”.
9. It is also necessary to refer to the definition of the words ‘the Court’ used in the above section. Section 2(11) of the Act reads as follows:—
“2(11): ‘the Court means:
(a) with respect to any matter relating to a company (other than any offence against Act,) the Court having jurisdiction under this Act with respect to that matter relating to that company, as provided in Section 10;
(b) with respect to any offence against this Act, the Court of a Magistrate of the first class or, as the case may be, a Presidency Magistrate having jurisdiction to try such offence”.
10. The above provisions in Section 2(11) as Section 10 fall for consideration on the question of jurisdiction.
11. It will be noted that there is no express provision ousting the jurisdiction of the Civil Court in any particular respect. All that Section 10 does is to state that “the Court” having jurisdiction under the Act shall be the High Court in whose jurisdiction, the registered office of the Company is situate, except to the extent to which the jurisdiction has been conferred on any District Court under sub-section (2) by notification issued by the Central Government. The Central Government can empower a District to exercise all or any jurisdiction conferred by this Act “upon the Court” except the jurisdiction conferred by Section 237, 391, 394, 395 and 397 to 407 (both inclusive) and not being the jurisdiction conferred in respect of Companies with paid-up share capital of not less than Rs. one lakh by Part-VII and the provisions of the Act relating to winding up of companies.
12. It may be seen that there are various provisions in the Act which refer to “the Court”, such as Section 107, 155, 163(6), 237, 391, 394, 385 and 397 to 407, 425 etc. The Central Government is empowered, however, to confer jurisdiction on the District Court powers only in respect of some of these sections but not all.
13. In my view section 10 of the Act only proceeds to enumerate or specify “the court having jurisdiction under this Act”, wherever such jurisdiction is conferred on “the Court, by the other provisions of the Act. Powers are conferred by the Act not only on Courts but also on other authorities like the Central Government, the Company Law Board and the Registrar and where a power is vested in a Court that Court has to be specified Beyond so specifying the Court competent to deal with a matter arising under the Act, Section 10 does not purport to invest the Company Court with jurisdiction over every matter arising under the Act. It may be that, in view of the elaborate provisions contained in the 1956 Act in regard to the Managing and the conduct of a Company's affairs including important internal matters of administration, the Court's interference by Civil Court has become more limited, but the power has not at all been taken away. Every suit for redress of individual wrongs cannot be considered as merely concerned with matters of internal management. (M.P Menon, J. in P. Prakasam v. Sri Narayana Dharma Paripalan Yogam (1) 1980 (50) Company Cases page 611.
14. In Foss v. Harbottle (2), (1843) 2 Hare 461, the minority shareholders alleged that the Company had a claim in damages against some of the Directors by reason of the fredulant acts of the Directors, but at the general meeting, the majority resolved that no action should be taken against them. Two of the minority share holders took legal proceedings against the Directors and others to compel them to make good the losses to the company. The Court dismissed the action on the ground that, as the acts of the Directors were capable of confirmation by the majority of members, the court should not interfere. It was thus left to the majority to decide what was for the benefit of the company. This rule has been applied in several cases later — vide Mac Dougall v. Gardiner (3) (1875) 1 Ch. D.13.
15. The procedural character of the rule in Foss v. Harbottle (2) was explained by Jankins L.J, in Edward v. Halliwell (4) (1950) 2 All E.R 1064 at 1066.
16. Palmer in his Company Law (21st Edn. (1968)., points out that in English Company Law, while the substantive aspects of the rule of the majority are not neglected the emphasis is on the procedural character of that rule. The reasoning on which the rule is founded is that in these cases, it is for the Company to complain, by suing the alleged wrong doer; The company, is thus, the proper plaintiff and the company is ruled by the majority.
17. However, the following exceptions to the rule in Foss v. Harbottle (2) are admitted as pointed out by Jenkins L.J in Edwards v. Halliwell (4) namely, the majority cannot confirm—
(1) an act which is ultra vires the company or illegal.
(2) an act which constitutes a fraud against the minority and the wrong — doers are themselves in control of the company; or
(3) a resolution which requires a qualified majority but has been passed by a simple majority.
18. In other words, the rule in Foss v. Horbottle (2) does not apply to such acts as referred to above in as much as the majority cannot sanction these acts. A resolution which is ultra vires or illegal or is a fraud on the minority or is not bonafide or for the benefit of the Company as a whole or is intended to discriminate between the majority share — holders and the minority share — holders, is illegal and can be questioned by a separate action in the civil court. The reason for this is that if the minority were denied that right, their grievence could never reach the Court because the wrong — doers themselves being in control, do not allow the company to sue. In some cases, it has been held that further exceptions to the rule in Foss v. Horbottle (2) are permissible in cases in which “justice requires that the Courts should intervene” to assist an otherwise minority share—holder. In Heyting v. Dupond (5) (1964) 1 W.L.R 843 Harman L.J said:—
“…. there are cases which suggest that the rule (in Foss v. Horbottle) is not a rigid one and that the exceptions will be made where the justice of the case demands it”.
19. The above rule in Foss v. Horbottle (2) has come up for consideration in several High Courts in our country K.K Mathew J. (as he then was) was dealing in., Joseph…* v. Jos…. (6), (1964) 34 Company Cases 931 (Ker) with a suit for a declaration that the proceedings of the meeting regarding the election of certain Directors was null and void and for a permanent injunction restraining defendants 3 to 5 therein from functioning as Directors and for directing the defendant—company to hold the meeting for re-electing three Directors. After referring to the rule in Foss v. Horbottle (2) and the exceptions thereto, the learned Judge made a distinction between ‘individual membership right’ and the ‘corporate membership right’ of a shareholder. It was held that the rule against interference by Court with the internal management of companies, was not applicable to cases of infringement of the individual membership right. The learned Judge quoted from Palmer's company Law (20th Edn.,) P. 492:—
“By contract with the company (and the other members; c.f.s 20) the share—holder undertakes with respect to some—and, in fact, most rights which his membership carries, to accept as binding upon him, the decision of the majority of share—holders, if arrived at in accordance with the law and the articles, these membership rights are known as corporate membership rights. Other rights of the snare-holder, according to his contract with the company, cannot be taken away from him unless he consents; if such right is in question a single share-holder can, on principle, defy a majority consisting of all the other share-holders Rights of this type are know as individual membership rights”:
(emphasis supplied).
20. Mathew, J. then concluded:—
“….. the wrong done to the plaintiff is not a wrong which the majority can ratify as it would be against the provisions of the articles of Association, and it is settled by authorities that a share-holder can insist on the strict observance of the legal rules, statutory provisions and provisions in the memorandum and articles which cannot be waived by a bare majority of the share-holders”.
and, the plaintiff's right to move the Civil Court was upheld.
21. Bearing these general principles in mind, I shall now refer to certain rulings of the Madras and other High Courts wherein the infringement to an individual right of the share-holder was upheld. In Mudhideen Pichai v. Tinnevelly Mills (7) A.I.R 1928 Mad. 573 a suit for declaration that the plaintiffs were the validly elected “policy holders Directors” of the company and that the defendant company had no power to nominate such Directors and for a permanent injunction restraining the defendants from excluding the plaintiffs or in any way restraining or interfering with the plaintiffs' acting or attending as Directors was held maintainable. Vankatachalapathi v. Guntur Mills (8) A.I.R 1929 Mad. 353 related to a suit for a declaration that the defendant ceased to hold office from 31.3.1928 and for a permanent injunction restraining them from interfering with the Management of the company and for accounts and damages; Srinivasan v. Subramania (9) A.I.R 1932 Mad. 100 was a suit for a declaration that the appointments of certain Directors should be declared illegal and for a direction to order a poll for electing five share-holders as Directors in the vacancies Nagappa v. Madras Race Club (10) AIR 1951 Mad 834 was a suit for a declaration that the meeting of the general body held on 7.11.1947 was Invalid and that the Managing Committee comprising of certain defendants purported to have been elected at the said meeting was not entitled to assume office and for consequential injunction; Rathnavelu Swami v. Manickavelu (11) A.I.R 1951 Mad. 542 was a suit for a declaration that the removal from office of the Managing Director was void; Bank of Hindusthan v. K. Suryanarayana Rao (12) A.I.R 1957 Mad. 702 was a suit for a declaration that the plaintiffs were entitled to have their names cancelled, struck out and omitted in the Bank-Register of share-holders and to have the 2nd defendant or his nominees or transferers entered in their place and that the plaintiffs had ceased to own or hold 1668 shares; and all those suits were held maintainable. In Sree Krishna Jute Mills v. Krishna Rao (13) A.I.R 1947 Mad. 322 an application was filed in the High Court for a direction to the Secretary and Treasurer of the firm, to handover the records, account books, pass books, keys etc. to the applicant. The objection of the respondents that the petitioners should have filed a suit and not a company petition was upheld.
22. In the Kerala High Court in Star Tile Works v. N. Govindan (14) A.I.R 1959 Kerala 254 the Chief Justice & Justice Vaidyalingam held that a suit for a declaration that the entire proceedings of a meeting were void and illegal and that the audit report balance-sheet and election of certain Directors was illegal and for permanent injunction was maintainable. I have already referred to Joseph…* v. Jos…. (6); Prakash v. Sree Narayana Dharma Paripalana Yogam (1) was a case of a suit for a declaration that the annual general meeting was not duly and validly convened, that the election of the President, Vice President, Directors etc. made at a meeting was invalid and for a permanent injunction Manikan (Motors) v. M. 1 Ravi Kumar (15) (1982) 52 Company Cases 362 (Ker) was a suit for a declaration that the co-option of certain defendants as Directors was illegal and for removing some of them from the Board of Directors as their bung unfit for holding office by reason of mismanagement, oppression and fraud and for appointment of an administrator; these suits were held maintainable.
23. In our High Court in Bhagwandas v. Canara Bank Ltd. (16) (1978) 1 An. W.R 504 Chennakesav Reddi, J. (as he then was) held that a suit for recovery of money against the Canara Bank in respect of the deposit amount payable by the plaintiff in respect of twelve shares was maintainable, observing:—
“Section 10 of the Companies Act also confers exclusive jurisdiction on the High Court only in respect of matters covered by Sections 237, 391, 394, 395 and 397 to 407 (both inclusive) and in respect of matters covered by part VII of the Companies Act with a paid up capital of one lakh of rupees and over in respect of other provisions relating to winding up of the companies. Except in respect of these matters, the ordinary jurisdiction of the civil courts to decide the rights of parties is not excluded.”.
24. The Punjab High Court in Mani Lal v. Balwam Ravi Kumar (17) A.I.R 1965 Punjab 24 held that a suit for the taking of accounts and for distribution of surplus assets in the course of the winding up of the Company was maintainable. In Panipet Woolen and General Mills Company Limited v. R.L Kaushik (18) 39 Comp Cas 249 (P & H) the suit was for a declaration the plaintiff was a Director, and that one of the Directors was not properly elected and that the exclusion of the plaintiff was invalid and was held maintainable. In Gokul Chit Funds v. T.K.O Vareed (19) 47 Comp Cas 265 (P & H) an application filed on the Company side of the High Court that an election held on 8-9-1975 was illegal and contrary to the provisions of the Act was held not maintainable and the party was directed to a civil suit.
25. Following the aforesaid rulings, with which I respectfully agree, I hold that the present case deals with an individual, right of the 2nd respondent and that the suit filed by him is maintainable.
26. But it is urged by Sri V.T.M Prasad, the learned counsel for the petitioner that the rights of the 2nd respondent are creatures of the Company Law and hence the remedy under that law alone has to be followed. For the above proposition he places reliance on the decision of the Calcutta High Court in Hirendra Bhadra v. Titwin Ergied (20) (1975-1976) 80 Cal. W.N 242 where the decision of the Supreme Court in Premier Automobiles v. K.S Wadke (21) (1976) 1 SCC 496 : A.I.R 1975 S.C 2238 arising under the Industrial Disputes Act, 1947 was referred to. He referred to the well-known case of Wolverhampton New Water Works Co. v. Hawkesford (22) (1959) 6 C.B (NS) 336, the three classes of actions were analysed by Willes, J. and then to the third class mentioned therein:—
“There are three classes of cases in which a liability may be established by statute. There is that class where there is a liability existing at common law, and which is only re-enacted by the statute with a special form of remedy; there, unless the statute contains words necessarily excluding the common law remedy, the plaintiff has his election of proceeding either under the statute or at common law. Then there is a second class, which consists of those cases in which a statute has created a liability, but has given no special remedy for it, there the party may adopt an action of debt or other remedy at common law to enforce it. The third class is where the statute creates a liability not existing at common law, and gives also a particular remedy for enforcing it ………………………………………. with respect to that class it has always been held, that the party must adopt the form of remedy given by the statute.”.
27. The question therefore is whether the rights and obligations in question in this case owe their very creation to the Companies Act, or whether they are traceable to a basic contract which is statutorily regulated. What is the historical background of the Company statutes?
28. In the 18th and the beginning of the 19th centuries, the association namely the unincorporated company became increasingly popular. As the Industrial Revolution advanced, man of business began to recognise the advantages derived from co-operation in commercial enterprises, namely, the advantage of raising the funds for the purposes of large undertakings by means of contributions from a number of small capitalists ready and willing to cooperate, and that of minimising the risk by spreading the liability. The difficulty was how to secure these advantages. A charter of private Act of Parliament was often too costly or rather impracticable. Business men had to devise for themselves a new form of partnership which would possess the advantages as nearly as might be of a chartered corporation and in particular would have shares of a fixed amount freely transferable by the holders. The outcome of these commercial needs was the unincorporated company, the lineal ancestor, of the ordinary company under the Companies Act. The “deed of settlement” by which such an unincorporated company was formed was made between the various shareholders and a trustee or trustees with whom the share-holders covenanted to observe the provisions of the deed. The deed commonly declared that the several persons for the time being holding shares in the capital of the company should constitute and be a company with a specified name, with a specified capital and subject to specified regulations “set out in the deed” until dissolved in a specified manner. The deed usually also made the shares transferable. To secure the continuity of the concern, notwithstanding the death or bankruptcy of members, the management of the enterprise was transferred to a select body of directors, often known as the committee of directors, to the exclusion of the members generally, and the property of the company was vested in all or some directors as trustees. (Palmer's Company Law, 21st Edition, page 6).
29. The learned author then proceeds to give the history of the legislation in England and the passing of the Chartered Companies Act, 1837, the Joint Stock Companies Act, 1844, the Limited Liability Act, 1855, the Joint Stock Companies Act, 1856, the Companies Act, 1862, the Companies (Consolidation) Act 1908, the Companies Act of 1929 and then the Companies Act, 1948. (See also the history traced in Manikan Motor's case (15) by the Kerala High Court).
30. I may point out that as a result of reforms in recent times the English Company Law (subsequently) re-enacted as the Companies Act 1967, 1976, 1980, 1981) and the European Companies Act, 1972 came tobe enacted. The series of Acts only show that the Law of Contract which was the basis of the “deed of settlement company” was regulated by a statute at various Stages. It is therefore clear that the position in law is that the rights and liabilities between the contracting parties and governed by the articles of association are regulated by the various statutes relating to Company Law, and these laws have not created any special rights and remedies. This was also recognised by the Madras High Court in the following case.
31. A Division Bench of the Madras High Court consisting of Srini-vasa Ayyangar, J. and Anantha Krishna Iyyer J. in Mohideen Pichai v. Tinnevelly Mills (7) to which I have already referred, also pointed out the “regulatory” nature of the Act vis-a-vis the common law and held that the general right of suit cannot be considered to have been taken away merely because of some “regulatory” provisions. A Civil suit was held maintainable.
32. I, therefore, hold that the general law of contracts is the basis of the rights of parties and that the companies Act, 1956 merely regulates these rights and does not create any new rights or remedies. Unless as stated in Wolverhampton's case (22) there is an exclusion of the jurisdiction of the civil court, by words express or implied, the suit is maintainable, and no such exclusion has been held existing by the courts in respect of individual rights.
33. It is then urged by the learned counsel for the petitioner that the disqualification of a “Managing” Director covered by Sections 283(1)(i), 299 are creatures of Companies Act. I am unable to agree. The position of a ‘Managing Director’ is nothing but a special position of a Director of the Company with powers delegated to him from the other directors. It is clear from Palmer's Company Law above referred to and also at page 531 where the learned author says:—
“The maxim ‘delegatus nonpotest delegate’ applies to directors, so that, prima facie, they cannot delegate their powers; but this rule may be altered by giving the directors express or implied authority to delegate”.
34. Such special provision is usually made in the articles of association.
35. In that view of the matter it cannot be contended that the office of a “Managing” Director is something created by the statute.
36. It is next contended by Sri V.T.M Prasad that the disqualification” created under section 283(1)(i) and Section 2(11) of the Indian Companies Act is a disqualification created by a statute. I am unable to agree. The obligation of a Director to disclose his interest in a contract entered into or to be entered is an obligation similar to that of a trustee. We have already seen that the directors are in the position of trustees according to common law and they have a fiduciary relation towards the share-holders. It is well known that the trustees will become disqualified if they have any interest adverse to that of the beneficiaries and that they have to account for any secret profit made by them. This is clear from ‘Lawin on Trusts’ (XVIth Edn.) at page 193:
“The principle that a trustee must not benefit from his trust applies to agents, solicitors who are also mortgagees, guardians, who are trustees to the extent of the property come to their hands, directors of a company, a secretary of a company, promotors of a company etc…;.”
37. In my view, the provisions of Sections 283(1)(i) and 299 are mainly a re-enactment of the obligations of a trustee arising out of the common law. I am therefore unable to agree that the contention of the petitioner that the alleged disqualification in question cannot be the subject matter of a civil suit.
38. I therefore dissent from Hirendra Bhadra v. Titwing Eng. Co. (23) Calcutta Weekly Notes 1975-1976, Vol 80 (p 242) of the Calcutta High Court. I also dissent from the view taken by the Allahabad High Court in Patna Devi v. Harihar Prasad (24) (1978) Tax L.R 2292 (All) to the effect that a suit for a declaration that the defendants are not Directors of the Company and for restraining the defendants in financial matters is not maintainable. In that case, the differing views expressed in Nava Samaj Ltd. v. Civil Judge (25) A.I.R 1966 M.P 286 were referred.
39. For the aforesaid reasons, I hold that the suit filed by the 2nd respondent is maintainable.
40. It is argued for the 2nd respondent, relying upon Costa Rica Rly Co. Ltd. v. Forwood (26) (1901) 1 Ch. 746 that the knowledge of the other Directors with regard to information which the 2nd respondent shall, according to the petitioner, have intimated the other Directors, was sufficient to take the 2nd respondent out of the disqualification if any imposed by Sections 283(1)(i) and 299. The above English ruling has been referred to in Venkatachalapathi v. Guntur Mills (8). But in my opinion, that is a matter which arises on the merits of the suit and I cannot go into that question.
41. For the reasons give above, I hold that the civil suit is maintainable. The writ petition is accordingly dismissed but in the circumstances without costs. The interim stay granted earlier is vacated.