Smt. Shrimati Jain Petitioner v. Delhi Flour Mills Co. Ltd. & Ors. S

S. Rangarajan, J.:— This Order will also dispose of Company Petitions No. 1 and 2 of 1973, which have been filed by the husband of the petitioner and another shareholder, respectively, of the Delhi Flour Mills Co. Ltd. (hereafter referred to as the Company) for calling a meeting of the Company (the calling of which “otherwise” has become “impracticable”), and for certain other directions (which are not uniform in all the three petitions) without which the petitioner's purpose in calling such a meeting may not be served. Under S. 186 of the Companies Act of 1956 (hereafter called the Act), the Court has been given power to call a meeting other than an annual general meeting; section 167 of the Act enables the Central Government alone to call an annual general meeting. To the details of these I shall revert later. It is necessary, to start with, to notice briefly the facts which have led to these petitions.

The Company was registered in the year 1916 as a public limited Company, but is stated to have been controlled by the husband of the petitioner, R. K. Jain (petitioner in C.P 1/73) and some of their family members; Oudhvir Prasad (petitioner in C.P 2/73) who holds 63 ordinary shares of Rs. 10/- each, is the son-in-law of the petitioner and was also a senior executive of the Company. The petitioner and her husband had no male issue and had, therefore, adopted R. P. Jain, the brother-in-law of Sheel Chandra. Yogesh C. Gupta is said to be a friend of Sheel Chandra and R. P. Jain. There seems to have been considerable animosity between the petitioner and her husband on one side and their adopted son R. P. Jain as well as Sheel Chandra and Yogesh C. Gupta, on the other.

The Articles of Association of the Company (96) provide for eight directors, but there were actually three: (1) R. K. Jain (2) Sheel Chandra and (3) Yogesh C. Gupta. It is common ground that R. K. Jain had been appointed a managing director of the Company for five years under an agreement to take effect from 5-10-1967 i.e till 4-10-1972. Nonetheless he had also been in fact re-elected at least once, in 1969, as a director, even subsequent to the said agreement. Sheel Chandra, who had retired by rotation was re-elected on 30-4-1968. Yogesh C. Gupta who had to retire by rotation next, according to the petitioner, was not in fact re-elected and had to retire at the farthest when the annual general meeting had to be held, namely, 30-4-1971. The accounting year of the Company ends on the 31st October of each year. The accounts for the year ending 31-10-1969 were passed at the annual general meeting held on 30-4-1970. There has been no annual general meeting thereafter.

Article 106 provides for the continuing directors acting notwithstanding any vacancy in their body; the interpretation of Article (2) says that words importing the singular number include, where the context administers or requires, the plural number and vice-versa. Article 115 provides for a quorum of three directors; but this is seen to be contrary to section 287 of the Act, which provides for one third the number or two, whichever is higher, this section does not permit any Article provision to the contrary, as some other sections of the Act seem to permit. The retirement of directors by rotation is provided by sections 255 and 256 of the Act and Articles 109 — 112. To these details also I shall revert later.

Before the impugned right shares under section 81 of the Act were issued and allotted (on 4-12-1972) the petitioner held about 46% of the shares out of a total of Rs. 8,86,380 worth of shares, the claim by the contesting respondents being that by the impugned issue and allotments the shares were increased to Rs. 12,27,100 thus reducing the proportion of petitioner's holdings to about 25%. It would be sufficient to notice this broad feature but not the details of the holdings. The decision to increase the share capital (under S. 81) is said to have been taken at a meeting of the Board at which R. K. Jain is said to have been present, but R. K. Jain denies that he was present then. The validity of the said meeting is also denied. More importantly, a notice is said to have been given by the Company to the petitioner (and others) concerning the issue of right shares (on 17-11-1972). There is some controversy as to whether an application for allotting right shares was in fact made and even whether one is necessary to be made in writing; it is, however, asserted for the petitioners that a sum of Rs. 2,12,540 was deposited in the Company's bank by the petitioner on 4-12-1972 (3rd December being Sunday) when she came to know of the issue from Bombay through some other source. The money is said to have been either loaned or arranged by Bk. Shivcharan Singh, learned counsel for the petitioner. According to the contesting respondents, the petitioners knew and were also informed in time about the issue of right shares, but they made no application because they did not raise the money and the money which was paid only on the afternoon of the 4th (after the allotments of the shares on the 4th morning) represents the money which R. K. Jain had secreted from out of the Company's funds during his management. Applications Nos. 725 of 1972 and 73 of 1973 were filed for the petitioner, her husband etc. being cross-examined on the said matters.

To complete the narrative it may also be noticed at this stage that S. L. Verma, yet another shareholder, a stranger, holding 3054 ordinary shares, had applied to this Court in C.A 481/72 in C.P 71/72) for an order restraining the Company from issuing right shares and Bk. Shivcharan Singh, appearing himself for the Company, an order was passed restraining the issue of such shares. It is stated for the petitioners that in view of this restraint order, passed on 5th December, 1972, the contesting respondents have been put to a Hobson's choice, as it were, of either making the allotments later, in violation of the restraint order, or land themselves in another difficulty by having to assert that the shares had been allotted even on the 4th December, 1972 (It is contended for the petitioner that this was short of the requisite period of notice under section 81). S. L. Verma has since filed a suit in this Court (No. 28 of 1973) making all the parties in this proceeding also as parties to that suit, alleging that in a petition under section 186 of the Act (these three petitions) the question of the validity of these allotments could not be gone into and asking for a declaration that the issue and allotment of 42070 right shares (of Rs. 10/- each) were illegal, that there was no legally constituted Board after 30th April, 1971, that the directors who now purport to function (Sheel Chandra, Yogesh C. Gupta, Balbir Singh and Pritam Singh — the last two being coopted on 9th and 4th December, 1972, respectively) are not the directors and that they should be restrained from acting as such.

It was not found necessary to record evidence or allow the request made as aforesaid for cross-examining Mr. and Mrs. R. K. Jain in particular, because Bk. Shivcharan Singh stated that he was willing to argue these applications on facts which were admitted and the legal consequences arising therefrom.

Both sides, however, covered very wide ground touching various aspects in controversy between the parties.

Before discussing at least the important among them it is necessary to read section 186 of the Act;

“186 (1). If for any reason it is impracticable to call a meeting of a company other than an annual general meeting, in any manner in which meetings of the company may be called, or to hold or conduct the meeting of the company in the manner prescribed by this Act or the articles, the Court may, either of its own motion or on the application of any director of the company, or of any member of the company who would be entitled to vote at the meeting, —

(a) order a meeting of the company to be called, held and conducted in such manner as the Court thinks fit; and

(b) give such ancillary or consequential directions, as the Court thinks expedient, including directions modifying or supplementing in relation to the calling, holding and conducting of the meeting, the operation of the provision of this Act and of the company's articles.

Explanation — The directions that may be given under this sub-section may include a direction that one member of the company present in person or by proxy shall be deemed to constitute a meeting.

2. Any meeting called, held and conducted in accordance with any such order shall, for all purposes, be deemed to be a meeting of the company duly called, held and conducted”.

Section 79 (3) of the Act of 1913 enabled the Court to order even an annual general meeting of the company. The present provision (section 186) only enables the Court to call a meeting of the company, other than an annual general meeting. The English Companies Act of 1929 provided [Section 112 (3) ] that the Court may call a general meeting of the company. But there was an amendment of the English Companies Act as a result of the report of a committee headed by Justice Cohen in the year 1945 recommending that it would save expense if the power of calling an annual general meeting should be transferred from the Court to a Board of Trade. It was this later position that was made applicable to India by section 186 of the Act of 1956 which restricted the Court's power in the matter of calling an annual general meeting, the same being vested in the Central Government alone.

Every company shall hold every year, in addition to any other meeting, a general meeting. It is called the annual general meeting. Not more than 15 months shall elapse between the date of the general meeting and the next; the first general meeting of the company has to be held within 18 months after incorporation (section) 66. At the annual general meeting the following items of business (which shall be deemed to be special) have to be put on the agenda:—

(1) Consideration of account, balance-sheet and reports of the Board of Directors and Auditors;

(2) Declaration of dividend;

(3) appointment of directors in the place of those retiring;

(4) appointment and fixing the remuneration of auditors (section 173).

The above items are within the exclusive domain of the annual general meetings.

Section 257 enables a person to stand for directorship at any general meeting, which may be held, and not necessarily only at an annual general meeting. So long as the company is not having the maximum number of directors fixed by its Articles, additional directors may be appointed at general meetings up to the maximum limit. The only effect of introducing I-A to section 257 seems to be that no one other than a director can stand as a candidate for appointment unless not less than 14 days notice is given to the company, the company, not having the power to waive such notice.

Concerning the retirement of directors by rotation section 255 of the Act provides that unless the Articles provide for retirement of all directors at every annual general meeting, not less than 2/3rd of the total number of directors of a public company, or of a private company which is a subsidiary of a public company shall (a) be persons whose period of office is liable to determination by retirement of directors by rotation, and (b) save as otherwise expressly provided in the Act, be appointed by the Company at its general meeting. The remaining directors in the case of any such company, which is not a subsidiary of a public company, shall, in default of and subject to any regulations in the Articles of the company also be appointed by the company in general meeting.

Section 256 deals with appointments of rotational retirement of directors at annual general meetings; one third of the directors of a public limited company retire at every annual general meeting.

There is a conflict of judicial opinion on the question whether those directors who have to retire by rotation also vacate their offices by reason of their own failure to call a general meeting. Venkatarama Aiyar, J. (as his Lordship then was), speaking for the Division Bench of the Madras High Court, in A. Ananthalakshmi Ammal v. The Indian Trades and Investments Ltd. (A.I.R 1953 Madras 467 (1) held that they must be deemed to have vacated their offices. That case arose under sections 76 and 79 of the Act of 1913. This view was followed by a Division Bench of the Bombay High Court in Krishna Prasad v. Kolaba Land and Mills Ltd. 1959 Company Cases 273) and by a single Judge in re: Hindusthan Cooperative Insurance Society Ltd., [65 (1960-61) C.W.N 68]. The single Judge of the Calcutta High Court had not noticed an earlier Division Bench decision of the same High Court in Kailash Chandra Dutt v. Jogesh Chandra Majumdar (32 C.W.N 1085), which had taken a contrary view. The Bombay decision did not specifically discuss the effect of, though it did notice, section 256 (4) of the Act, which reads as follows:

“256. ** ** **

(4) (a) If the place of the retiring director is not so filled up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place or if that day is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place.

(b) If at the adjourned meeting also, the place of the retiring director is not filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have re-appointed at the adjourned meeting, unless —

(i) at that meeting or at the previous meeting a resolution for the reappointment of such director has been put to the meeting and lost;

(ii) the retiring director has, by a notice in writing addressed to the company or its Board of directors, expressed his unwillingness to be so reappointed;

(iii) he is not qualified or is disqualified for appointment;

(iv) a resolution, whether special or ordinary, is required for his appointment or re-appointment in virtue of any provisions of this Act; or

(v) the proviso to sub-section (2) of section 263 is applicable to the case.

Explanation — In this section and in section 257, the expression “retiring director” means a director retiring by rotation”.

In a later decision Lalchand Mengraj v. Shree Ram Mills Ltd. [38 (1968 Comp. Cases 606) ] (2), Vimadalal, J. discussed the above-said newly added provision from an unusual angle, namely, the impact of the order of the Companies Tribunal (as it then was) restraining to the company from considering an item on the agenda relating to the offer by the director retiring by rotation for re-election, but allowing the said item to be adjourned pending further orders of the Tribunal. Vimadalal, J. held that there was nothing in sub-section (4) (b) of section 256 to lead to the conclusion that the deeming provision was to apply only when a company had the choice of fulfilling its conditions or not. Reliance was placed on Grundt v. Grant Boulder Proprietary Mines Ltd. (1948 Ch. Div. 145) (3) concerning an article provision somewhat similar to section 256 (4) (b) (1). The concerned article provision in that case reads as follows:

“If at any general meeting at which an election of directors ought to take place, the place of any director retiring by rotation is not filled up, he shall, if willing, continue in office until the ordinary meeting in the next year, and so on from year to year until his place is filled up, unless it shall be determined at any such meeting on the due notice, the number of directors in office”.

At the annual general meeting held in July, 1947 Grundt retired by rotation but a resolution for re-electing him was lost by show of hands. There was no resolution, however, to reduce the number of directors. It was held that despite what happened Grundt continued in office in terms of the above-mentioned article provision. Lord Greene, M.R was not led to come to a different result merely on account of the absurdity of deeming Grundt to be re-elected despite his re-election having been lost by show of hands. “Absurdity” observed Lord Greene, M. R. “I cannot help thinking, like public policy, is a very unruly horse”. What is of greater significance is that a previous decision in Robert Batcheller & Sons, Limited v. Batcheller (1945 Ch. Div. 169) (4), which came to an opposite conclusion in identical circumstances, was disapproved. In Robert, also the articles contained a similar provision and the retiring directors were not re-elected on a show of hands. A poll was demanded and the meeting was adjourned to take the poll, but due notice was not given as required by the articles for the adjourned meeting. At the illegally convened meeting the shareholders purported to elect other directors. Romer, J. held that the retiring directors could not be deemed to have been re-elected thus enforcing what was exactly the opposite of what had in fact happened. Cohen, L.J, with whom Lord Greene, M. R. concurred in Grundt disapproved of Robert as not being consistent with still an earlier decision by Maugham, J. in Holt v. Catterall (1931 47 T.L.R 332) (4a). The decision in Grundt was nullified by a change made in the Companies Act of 1948 (Schedule I Table A Article 92) providing that the deeming provision would not apply in a case where a resolution for the re-election of such director had been put to the meeting and lost. Vimadalal, J. observed that any statutory change made in England would not affect the validity of Grundt in the matter of interpreting an article of association. Ananthalakshmi Ammal having been a decision rendered under the Act of 1913 did not have to concern itself with section 256 (4). Without referring to the same, which was a Division Bench decision, a single Judge of the Madras High Court held a contrary view in V. Selvaraj v. Mylapore Hindu Permanent Fund Ltd., [38 (1968) (Comp. Cases 153) ] (4b) and observed that the directors retired at the annual general meeting which was convened but the meeting had not commenced at all owing to the confusion which prevailed; it was held that the previous directors must be deemed to continue in office. The contrary holdings of each of the two High Courts, Madras and Calcutta, introduce an additional element of uncertainty about the true legal position. In the view taken of this petition it seems unnecessary to express an opinion on this rather difficult question which may require fuller consideration when it arises.

The Indian decisions which hold that a retiring director vacates office if he fails to hold the annual general meeting seem to be based upon the view taken by the English Court in the Consolidated Nickel Mines Ltd., (1914) 1 Ch. 883 (4) and the statement in Buckley's Companies Act (12th Ed. p. 882). Probably the decision of the House of Lords in Morris v. Kanssen (1946 A. C. 459) (5) is also material. In that case the question was whether the allotment of shares by some who purported to act as directors was valid when it was found that there was no appointment at all, the observations were expressly applicable to the case of there being no appointment at all or the original appointment itself being fraudulent. In Consolidated Nickel Mines Ltd. the question for consideration was whether the two directors were entitled to remuneration in spite of the obligation laid down on them by section 497 of the Act that the directors had to summon a general meeting every year and the Articles of Association providing that all the directors retire from office at the ordinary meeting.

Shri Ved Vyas, learned counsel for the respondent company, referred to the uncertainty regarding the legal position in support of his contention that in the circumstances it could not be stated that the directors who were at least functioning de facto had notice of any defect in their appointment and for that reason the allotment of the right shares issued by them could not be questioned on the ground of their lacking the necessary authority to do so.

The Articles of Association of this Company provide that at the second ordinary general meeting and at every succeeding ordinary general meeting, two of the directors exclusive of the ex-officio directors and the debenture director (if any), shall retire from office; the provisions of this Article are subject to the terms of any agreement between the company and a director (Art. 109), Articles 110 to 112 are also material and they read as follows:

“110. The Directors to retire at the Second Ordinary General Meeting shall, unless the Directors concerned agree among themselves, be determined by lot, in every subsequent year the Directors to retire, shall be those who have been longest in office. As between Directors who have been in office an equal length of time, the Directors to retire shall, in default of agreement between them, be determined by lot. The length of time a Director has been in office shall be computed from his last election or appointment where he has previously vacated office. A retiring Director shall be eligible for re-election.

111. The Company at any General Meeting at which any Directors retire in manner aforesaid shall fill up the vacated offices by electing a like number of persons to be Directors; provided that it shall not be obligatory upon the Company to fill up any vacancy or vacancies not necessary to be filled up in order to make up the minimum number of Directors required under Article 96

112. If at any General Meeting at which an election of Directors ought to take place, the place of any retiring Director is not filled up, such Director shall, if willing to continue in office, be deemed to have been re-elected at such meeting, unless it shall be determined at such meeting to reduce the number of Directors, or to leave any vacancy unfilled”.

It may be recalled that Article 106 provides that the continuing Directors may act notwithstanding any vacancy in their body and that Article 2 (interpretation clause) states that “words importing the plural number also include the singular number”.

Venkatarama Aiyar, J. in A. Ananthalakshmi Ammal (noticed above) quoted the observations of Swinfen Eady, L.J in Channel Collieries Trust, Limited v. Dover, St. Margaret's and Martin Mill Light Railways (1914 2 Ch. 506) (6a):

“I think the text requires that the words ‘remaining directors’ should include the case of a remaining director. . . and so long as there is any remaining director he may proceed to fill up the board by appointing persons when casual vacancies occur”.

Venkatarama Aiyar, J. applied those principles and held that the power to co-opt directors can be exercised even though the strength of the directors falls below the minimum and even when there was only one director capable of acting. Where there was at least one director he was capable of coopting other directors. Pritam Singh and Balbir Singh are stated to have been coopted on 4-12-1972 by Sheel Chandra and Yogesh C. Gupta. R. K. Jain (husband of the petitioner) retired in 1969 and he was re-elected despite the agreement according to which he was to be a managing director till 4-10-1972 (five years from 4-10-1967). That agreement does not expressly contain any term to the effect that R. K. Jain did not have to retire as a director. In none of the model forms which have been suggested by Palmer's Company Precedents is there any particular form to suggest that by reason of any agreement alone the director could be a managing director for a period of 5 years without his also having to continue as director. It seems reasonable that the agreement would be operative if the person concerned was a director throughout the period mentioned in the agreement; in other words, if he ceased to be a director earlier than that period he may not by virtue of that agreement alone claim to be a managing director. As a fact, however, he seems to have been taken as continuing.

In the view that out of a total of three directors Sheel Chandra and Yogesh C. Gupta alone continued as directors, article 109 would be relevant. It provides that at the second ordinary general meeting of the company and at every succeeding ordinary general meeting two of the directors, exclusive of the ex-officio director and debenture directors (if any) shall retire from office, but the provisions of this article are subject to an agreement between the company and the director. The expression in Article 109 “two of the directors” itself suggests that the retirement by rotation of directors would take place only when there are more than two directors that is to say only if there are more than two directors, two, out of them, can retire by rotation. It is instructive to refer to In re David Moseley and Sons, Limited (1939 1 Ch. Div. 719) (6) where the concerned article provided for one third of the directors retiring and also that if the number is not a multiple of three, then the number nearest to two but “not exceeding one third” to retire from office. At the material date there were only two directors. Simonds, J. observed (at P. 723) as follows:

“The article, in my judgment, does not provide for the retirement of a director unless one of two conditions is satisfied: either there must be a number which is one-third of the directors, or there must be a number which is nearest to two but does not exceed one-third. Here it is clear that neither of those conditions is satisfied. There are two directors and, therefore, you cannot find a number which is one-third. There are two directors and, therefore, you cannot find a number which is nearest to two but does not exceed one third”.

This case was referred to and distinguished by Venkatarama Ayyar, J. in B. N. Vishwanathan v. Tiffin's Barytes, Asbestos and Paints, Ltd., (1953) 1 M.L.J 346 (7) on the basis of the language employed in David Moseley and the absence of analogous language in Viswanathan: it was held that even one of two directors should retire at the meeting. The language of article 109 is analogous to that employed in David Moseley.

Even if this view is not correct Sheel Chandra must be taken to have retired not earlier than 31-7-1971, the last annual general meeting having been held on 30-4-1970 (there can be an interval of 15 months between two general meetings). Then, Yogesh C. Gupta having become a director later than Sheel Chandra, he could continue as director till the next day on which the annual general meeting was to be held and in this sense did have the potentiality, according to Shri Ved Vyas, of coopting other directors. I have referred to these aspects, which may possibly have to be considered not for the purpose of deciding them but only for the purpose of indicating that these are extremely difficult and complex questions which cannot be satisfactorily and properly decided, collaterally, for the purpose of finding out whether it is “impracticable” for the company to conduct a meeting.

The expression “impracticable” is not, however, to be construed as “impossible”. Sinha, J. observed in Lothian Mills Ltd. (55 C.W.N 646) (7A) that section 79 (3) of the Companies Act of 1913 contemplated that the Court should exercise its powers were it cannot say with reasonable approach to certainty, or even prima facie, that the meeting called in exercise of the powers contained in the regulations will be valid. This was to ensure that the shareholders should not be exposed to uncertainty flowing from the situation and the consequent litigation. Banerjee, J. also held in re Malhati Tea Syndicate (55 C.W.N 653) that the word “impracticable” means “impracticable from a reasonable point of view”. The Court must take a “commonsense view” of the matter and must act as a prudent person of business. Following the observations of the Judicial Committee in the Commissioner, Lucknow Division v. The Deputy Commissioner of Pratapgarh (41 C.W.N 1072) (7B), Banerjee, J. observed in re Malhati Tea Syndicate Ltd. that when there is doubt as to the existence of a Board of validly appointed directors and there is possibility of interminable troubles and prejudice to the interest of the company if a meeting is held otherwise than under the direction of the Court, it will be expedient for the Court to call a meeting of the Company. The observations of Banerjee, J. were followed by a Division Bench of the same Court in the Indian Spinning Mills Ltd. v. His Execellency Lt. General Madan Shamsher Jang Bahadur (A.I.R 1953 Calcutta 355) (8). An appeal against an order of Mookerjee, J. calling a meeting was dismissed by the Division Bench, to which Banerjee, J. also was a party, when it was felt that the calling of a meeting by the requisitionists would lead to endless litigation and where matters may arise for debate and decision which were already the subject matter of suits. The Division Bench had no difficulty in holding in such circumstances that a meeting of the company would be “impracticable”. In a still later decision of the same High Court in Bengal & Assam Investors Ltd. V. J. K. Estern Industries Private Ltd. 60 C.W.N 956 (9), P. B. Mukherji J. (as he then was) reviewed the case law in question and agreed with the principles decided by the aforesaid cases but still declined to order a meeting in that case. He observed that a discretion granted under section 186 should be sparingly used and with great caution so that the court does not become either a shareholder or a director of the company trying to participate in internecine squables of a company. In a still later case before the same High Court S. P. Mitra, J. reviewed all the authorities in United Breweries Ltd. v. Ruttonjee and Co. Ltd. and others (1962 2 Comp. L.J (155) (10) and summarised the principles to be borne in mind in an application under section 186. It seems to me that the following principles were re-stated:

(1) The Court would not ordinarily interfere with the domestic management of a company which should be conducted in accordance with the Articles;

(2) the discretion granted under section 186 should be used sparingly and with caution so that the Court does not become either a shareholder or a director of the company; in other words, the court will ordinarily keep itself aloof and not participate in quarrels of rival groups of directors or companies;

(3) the word “impracticable” has to be construed from a practical point of view;

(4) but where the meeting can be called only by the directors and there are serious doubts and controversies as to who are directors or there is a possibility that one or two or both the meetings called by rival groups have been invalid, the Court ought not to expose the shareholders to uncertainty and should hold that a position has arisen which makes it “impracticable” to convene a meeting in any manner in which the meeting may be called;

(5) the Court should exercise its powers under section 186 when on considering all the facts and circumstances of a case it can with reasonable approach to certainty and even prima facie say that the manner in which meetings are previously called under the Act and/or under the Articles would be invalid.

(6) before exercising discretion under section 186 the Court must be satisfied that a director or a member moved an application bona fide in the larger interests of the company for removing a deadlock which is otherwise irremovable.

Mitra, J. referred to Re EL Sombrero, Ltd. (1953 3 A.E.R 1) which was a somewhat extraordinary case. The applicant held 90 per cent of the shares of a private company and each of the two directors held 5 per cent. According to the company's Articles of Association, the quorum for the general meeting was 2, present in person or by proxy; if within half an hour from the time appointed for a meeting the quorum was not present, the meeting, if convened on the requisition of members, would stand dissolved. No general meeting of the company had ever been held. On 11-3-1958 the applicant requisitioned an extraordinary general meeting under section 132 of the Companies Act, 1948 for the purpose of passing resolution removing the two directors and appointing two other persons as directors. The directors having failed to comply with the requisition the applicant himself convened an extraordinary general meeting for 21-4-1958. The directors did not attend the meeting either in person or by proxy; the quorum not being there the meeting stood dissolved. On 29-4-1958 the applicant served a special notice under section 142 of the Act of 1948 of his intention to move the same resolutions, at the next extraordinary general meeting; on the same day he took summons asking for a meeting to be called by the Court under section 135 (1) of the Act of 1948 for the purpose of passing the resolution, and for a direction that one member of the company should be deemed to constitute a quorum at such meeting. The application was opposed by the directors. An order directing a meeting to be held and that one member present should constitute a quorum was made in the circumstances. This case illustrates the exercise of such power in order to suit the exigency of each situation. It is also of interest to note that there was no reference here to the previous decision of the English Court of Appeal in Macdougall v. Gardiner (10 Ch. App. 606) (11). It was held in that case that where by the articles of association of a company, the directors, and in the alternative a certain portion of the shareholders, can summon a meeting of the company, the Court will not order the directors to summon a meeting for the general purposes of the company.

Reliance was placed by the petitioner upon a Full Bench decision of the Allahabad High Court in Bed Krishna Maheshwari v. Vina Shanker Mehrotra (A.I.R 1947 Allahabad 361) (11a), a case arising under the old Section 76 and 79 of the Companies Act of 1913. The District Judge of Kanpur had passed an ex parte order directing an annual general meeting of the company which was later on confirmed. The dispute related to the annual general meeting of the company for the year 1946, the last one having taken place on 3-2-1945. According to the Articles of Association the annual general meeting of the company for the year 1946 had to be called on some date before 31st March of that year. The management of the affairs of the Company lay in the hands of a Council of 21 members, including a President and a Vice President; the duty of calling the annual general meeting of the Company in every calendar year lay upon that Council. It was contended on one side that 14 days clear notice had been given for the meeting in 1946. It was contended on the other hand, that though a notice was directed to issue fixing a date, no notice had been issued and posted with the result that there could be no clear 14 days notice as required. An objection had been raised by one of the members to whom a notice had been sent that the notice had been invalid. The District Judge had held that a meeting of some sort was held on 28-3-1946 though it was without a clear margin of 14 days and was invalid. The Full Bench of the Allahabad High Court observed that the District Judge should also have held that he had the competence to find out whether there had been a previous valid meeting as a necessary step in the matter of calling the meeting sought for under section 186 of the Act. Mootham, J. speaking for the Full Bench, observed:

“It was strenuously contended by learned counsel that the determination of such an issue might often involve the decision of complicated question of fact and law and it must, therefore, be inferred that the law did not contemplate the determination of such a question in a miscellaneous proceeding under section 79 (3). We are not impressed at all by this argument because we do not think that in the large majority of cases any complicated questions of law and fact will arise for consideration.

5. The question of the validity or otherwise of a meeting will, in a vast majority of cases, turn upon the interpretation of the Company's Articles of Association and some general provisions of the law”.

The Full Bench decision is, therefore, of no assistance to the petitioner; this is not a simple case, free from complexity.

Shri Ved Vyas, on the other hand, contended that the present petitions not having been brought in the name of the Company they are not maintainable according to the well known rule in Foss v. Harbottle [Chancery (1843) 2 Hare 461; 67 E. R. 189] (12). As an important facet of the principle of majority rule, it was held that if a wrong has been done to a company only the company could sue. To this rule itself there are exceptions like the act or resolution complained of being itself illegal or ultra vires, the controllers of the company acting in breach of the Articles of Association and fraud on the minority being committed. This case was followed in a number of cases including Mozley v. Alston (Court of Chancery (1847) 1 Ph 790; 41 E. R. 833) (12a). Where two shareholders in their individual capacity brought proceedings against the Company and members of the Board of Directors seeking to restrain the directors from acting as such until four of their members had retired by rotation, as required by the company's constitution, and four new directors had been elected in their place. The action failed in the view that if injury was not one personally to the plaintiffs but to the company — an usurpation of the office of directors — being an invasion of the rights of the corporation; yet no reason had been assigned why the corporation had not put itself in motion to seek the remedy. The “pre-eminently procedural character” as described by Palmer (vide Company Law, 21st Edn. P. 503) of this rule was explained by Jenkins, L.J in Edwards v. Haliwell, (1950) 2 A.E.R 1064, (13) as follows:

“The rule in Foss v. Harbottle, as I understood it, comes to no more than this: first, the proper plaintiff in an action in respect of a certain wrong alleged to be done to a company or association of persons is prima facie the company or association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the Company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit questio. No wrong has been done to the company or association and there is nothing in respect of which any one can sue. If, on the other hand, a simple majority of the company or association is against what has been done, then there is no valid reason why the company itself cannot sue. In my judgement, if it is implicit in the rule that the matter relied on as constituting the cause of action should be a cause of action properly belonging to the general body of corporators or members of the company or association as opposed to a cause of action which some individual member can assert in his own right.”

In Edwards v. Haliwell two members of a trade union successfully sued two members of the executive committee of a trade union and the union itself for a declaration of illegality regarding a resolution passed by a delegate meeting of the union, without taking a ballot increasing the contributions of members contrary to the constitution of the union — that it was not to be altered until a ballot of the members had been taken and a two-thirds majority obtained.

The submission of Shri Ved Vyas in this regard is seen to be without much force in so far as a petition under Section 186 need not be on behalf of the Company for the very language of that section even permits the court suo-motu to call a meeting of the company if it has become impracticable to call a meeting, other than an annual general meeting. But the submission of Shri Ved Vyas may have force if this petition, under section 186, is sought to be used mainly for obtaining reliefs pertaining to the alleged usurpation of office by directors. However, an action need not be in the name of the Company for actions concerning injuries personal to the petitioner. There is also one other aspect of the rule in Foss v. Harbottle and the line of cases following it, namely, that the English Court of equity had constantly and consistently refused to interfere on behalf of shareholders until they have done their best to set right the matter of which they complain, by calling general meetings (vide Lindley, L. J. in Isle of Wight Railway Company v. Tahourdin, (1884) 25 Ch. Div. 320, 333), (14).

The ground has now been prepared for discussing some of the even more important aspects of this case.

The English cases pertaining to what is known as the rule in Royal Bank v. Turquand (1843-60 All E. R. 435; 119 E. R. 886) (15) have been described by Gower, as a “something of a jungle of irreconcilable decisions” (Principles of Modern Company Law, 3rd Ed. P. 153). The question which arose in that case whether a third party dealing with a company is bound to ensure that all the internal regulations of the company have in fact been complied with as regards the exercise and delegation of authority — was answered in the negative. In other words, third parties need not enquire into regularity of in-door proceedings and may assume that everything was validly done. Despite this rule having been laid down in such simple terms, as Gower (P. 153) points out, the tendency during the last thirty years has been “to whittle it away notwithstanding the vigorous opposition by judges more familier with company practice”. It is most confusing to go into the English cases which have either applied the said rule in Royal Bank v. Turquand or did not apply it. Another standard author, Palmer (Company Law, 21st Ed. Pages 249-50) thinks that there is an exception to the said rule, namely, where the persons concerned have knowledge of the irregularity or even when those persons are put on enquiry. The effort not to apply the said rule is really based on the theory of protecting the shareholders; the further question, however, is whether there can be any unwarrantable protection given to the shareholders where the interest of the whole community is made to suffer ? It does not appear to be necessary to go into these difficult and nice questions in the present case because counsel for both sides did not endeavour to go into them.

Shri Ved Vyas relied upon section 290 of the indian act in support of his contention that the directors who were functioning in this case, even in the view contended for by the petitioner that they were not de jure directors, were at least defacto directors who functioned without any knowledge of the defect in their continuance or functioning as directors. To appreciate this contention it would be necessary in the first instance to read section 290:

“290. Acts done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles:

Provided that nothing in this section shall be deemed to give validity to acts done by a director after his appointment has been shown to the company to be invalid or to have terminated.”

The corresponding section of the Indian Act of 1913 was section 186 and of the English Act section 180. The principle obviously is that there should be no vacuum in the affairs of a company and that all acts done bona fide should be fully protected not only between third parties and the company but also between the company and its members and between members and members.

While considering an article providing for the validity of acts of directors, notwithstanding the discovery later of some defect in the appointment of such directors, Chitty, L. J. observed as follows in Dawson v. African Consolidated Land and Trading Company, (1898) 1 Chancery Division 6 (16) ):

“It is not framed so as to render valid a resolution passed by any persons who without a shadow of title assume to act as directors of a company. . . The clause is addressed. . . to cases of defective appointment or disqualification”.

Dawson was followed in British Asbestos Company, Limited v. Boyd (1903) 2 Chancery Div. 439 (17). Until Dawson the object of such an Article and the concerned provision of the Act was understood as only protecting honest acts of de facto directors in relation to outsiders but not as between members of the company and the company. In British Asbestos Co. Ltd. v. Boyd (1903 2 Ch. Div. 439), (17). Farwell, J. had held the above view of law to be incorrect; bonafide acts of de facto directors were also good between members of the company inter se and members of the company and the company. The same principle was reiterated in Channel Collieries Trust, Limited v. Dover, St. Margaret's and Martin Mill Light Railway Company, (1914) 2 Ch. Div. 506 (18). It was pointed out by Lord Cozen Hardy, M. R., when dismissing the appeal against the judgment of Sargant, J. that the concerned statutory provision, which had to be construed broadly not only between the company and outsiders but also between the company and the members, validated the bona fide allotment of the shares in question. The view of Farwell, J. in Dawson that the subsequent discovery of a defect did not merely mean the discovery of facts but of the defect itself was approved. Swinfen Eady, L. J. referred to the defects not being present in the minds of the parties who so acted.

The said principle was affirmed by the House of Lords in Morris v. Kanssen (1946 A. C. 459) (19) also but the observations were confined to acts of defective appointment but not extending to cases of no appointment at all or a fraudulent usurpation of authority from the outset.

This distinction between discovery of facts and discovery of defects was also made by Dua, J. (as he then was), speaking for a Division Bench of the Punjab High Court in Messrs Karnal Distillery Co. Ltd. v. Ladli Parshad Jaiswal (A.I.R 1960 Punjab 655) (20). There is a full discussion of this aspect by Mallick, J. in Albert Judah Judah v. Rampada Gupta (A.I.R 1959 Calcutta 715) (21). Referring not only to standard text writers but also to Indian cases, Mallick, J. observed at pp 735-36 as follows:

“In all the authorities, however, cited before me and noticed before the term ‘de facto’ directors has been restricted to directors with defective appointment. No case has been cited in which the Court has upheld the act of a ‘pretended director’ without any appointment. In other words, in no case the term ‘de facto’ director has been applied to a mere usurper without any appointment whatsoever”.

To the same effect is also decision of a Division Bench of the Allahabad High Court in Shiromani Sugar Mills Ltd. v. Debi Prasad (A.I.R 1950 Allahabad 508) (22) where Desai, J. speaking for the Division Bench, considered some of the cases and held that the actions of de facto directors ate protected when it was not shown that the alleged defect was not brought to their minds. A similar view was also taken by Chopra, J. in Fateh Chand Kad v. Hindsons (Patiala) Ltd., A.I.R 1956 pepsu 89) (23).

Without recording evidence it is hardly proper to go into the facts bearing on this contention. The materials on record do not show any consciousness on the part of those concerned, before the controversies arose, that all or any of the retiring directors could not legally continue. When by letter dated 6th December, 1972 (Annexure C to the petition) Yogesh C. Gupta informed Bk. Shivcharan Singh (in reply to his letter of the 5th informing the Company of the restraint order, Annexure B to the petition) that the allotment of right shares had been made on 4th December, 1972, Bk. Shivcharan Singh wrote a long letter on the 9th December, 1972 (Annexure D) informing Yogesh C. Gupta about his various legal contentions, also citing some decisions in support. My attention has not been drawn to any communication prior to 4th December, 1972 drawing the attention of the Company to the fact that the right shares could not be issued on the ground that there was no validly constituted Board. For this reason alone it does not seem possible for the petitioner, without brining in more evidence if the same is available, on this question, to contend that the directors, if they were only de facto, did have notice of the alleged defects, and could not have validly allotted those right shares. Probably realising this difficulty Bk. Shivcharan Singh mounted his attack upon the invalidity pertaining to the decision to issue right shares and to the illegality of the notice issued in this behalf.

The invalidity of the decision to issue the right shares is only a part of the general question, discussed already, whether there were de jure or de facto directors and even if they were only de facto, they had notice of the alleged defects. Any other attack, on how the meeting, at which the decision to increase the capital was taken, was conducted would be possible only if detailed evidence is led on this question. In these circumstances Bk. Shivcharan Singh vigorously concentrated on the sufficiency of the notice that was issued to the petitioner (and others) concerning the issue of right shares.

According to Article 10 of the Articles of Association “where the Board of Directors of a Company decides to increase the subscribed capital of the company by allotment of further shares, then unless the requirements of sub-section (1A) of Section 81 of the said Act, are complied with (a) such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the Company, in proportion as nearly as circumstances admit, to the capital paid up on these shares at that date; (b) the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time, not being less than fifteen days from the date of offer, within which the offer, if not accepted, will be deemed to have been declined”. The notice is said to have been issued on 17-11-1972 and excluding the date of issue and the date of receipt the petitioner and her husband should have 15 clear days. which would take us to 3-12-1972, but the issue in this case is stated to have been made on 4-12-1972; 3-12-1972 was a Sunday.

Section 81 of the Act provides for the issue of further capital; such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date. This offer should be made by notice specifying the number of shares offered and limiting the time “not being less than fifteen days” from the date of the offer within which the offer, if not accepted, will be deemed to have been declined. In construing the expression “not less than 15 days” it is urged by the petitioner the date of issuing the notice and receiving the notice must be excluded. It is at par with the expression “7 clear days notice”, which was interpreted in The King v. Turner (1910 1 K.B 346) (24) as exclusive of the dates of despatch and receipt. The same was followed in re Hector Whaling, Limited (1936 1 Ch. Div. 208) (25) as exclusive of the date of service of the notice and exclusive of the day on which the meeting is to be held. The same view was taken by a Division Bench of the Madras High Court in N.V.R Nagappa Chettiar v. The madras Race Club (A.I.R 1951 Madras 831) (26) where a number of English decisions were also considered. A Division Bench of this Court consisting of P. N. Khanna, and Prakash Narain, JJ in Bharat Kumar Dilwali v. Bharat Carbon and Ribbon Manufacturing Co. Ltd., (1973) 43 Comp. Cases 197, (27) interpreted the expression “not less than 21 days notice” used in section 171 of the Act as notice of 21 whole or clear days. Part of the day, after the hour at which the notice is deemed to have been served, cannot be combined with the part of the day before the time of the meeting on the day of the meeting, to form one day.

The offer of right shares is stated to have been made by a letter dated 17-11-1972. The right shares are said to have been allotted on 4-12-1972; 3-12-1972 was a Sunday. 17 days notice inclusive of the date of issue and date of receipt of the letter will take us to 3-12-1972. Notice of not less than 15 days alone is necessary to be given; that will take us to 3-12-1972 alone exclusive of the day of the despatch and day of receipt of letter. A letter posted in Delhi ordinarily reaches another in Delhi, the next day. It is contended that the notice asked the offeree to accept the notice “within 17 days from the date of this offer” and therefore there is an extension of time for that reason beyond what the statute prescribes. 17 days from the date of the offer, namely, 17-11-1972, will not take it beyond 3-12-1972. Prima facie the notice does not appear to be shorter than what is required by section 81. Even assuming that the notice was short a declaration cannot be granted against the allottees of those shares in their absence. This would be plainly opposed to the rule of natural justice. It will be sufficient to cite the latest decision of the Supreme Court on this question i.e Smt. Jatan Kanwar Golcha v. M/s Golcha Properties Private Ltd. (A.I.R 1971 S.C 374) (28) in which both the Official Liquidator and the Company Court held to be bound by the rules of natural justice. Even an application for the rectification of the share register could not be disposed of without notice to the parties affected. The Court may even decline to grant rectification on an application made under section 155 if it involves any complicated questions and the parties could properly be referred to a suit in such a case. The following passage from Halsbury's Laws of England, Third Edn., p. 218 may be usefully referred to:

“If the court thinks that the case by reason of its complexity or on the ground that there are other matters requiring investigation or otherwise, could more satisfactorily be dealt with by an action, the court will decline to make an order or motion, without prejudice to the right of the applicant to institute an action for rectification”.

A similar approach has been adopted by the Indian Courts also (vide In the Matter of Dhelakhat Tea Co. Ltd., A.I.R 1957 Calcutta 476; (29) Mahendra Kumar Jain v. Federal Chemical Works Ltd., 1965 (1) Comp. L.J 451). (30) There is also great force in the contention that a suit having been filed, though not by the petitioner but by S. L. Verma (another shareholder) to which the petitioner and her husband are parties, specifically raising the question of the invalidity of the allotment of the right shares and rectification of the register of members concerning the entries made on the basis of the said allotments, it would not be proper to adjudicate on this question summarily.

A right of a shareholder of a company to vote is a right to property vide Lord Maugham in Carruth v. Imperial Chemical Industries Ltd., (1937 A. C. 707 at p. 765) (31). It has been repeatedly held by the Supreme Court that when Civil consequences are involved an order having such consequences should comply with the rules of natural justice. The Supreme Court has recently pointed out in Smt. Jatan Kanwar Golcha v. M/s. Golcha Properties Private Ltd. (noticed above) that the Company Court will not pass orders affecting the right of parties without notice to them; this is nothing but a rule of natural justice. It is instructive to also refer to Re Greater Britain Insurance Corporation Limited: Ex parte Brockdorff (Vol. 124 (1921) Law Times Reports 194, (32). The Court of Appeal dismissed the appeal against an order passed by Russel. J. throwing out an action praying for rectification of the register of members of the company on the ground that the interests of third parties were concerned and that it was not for the Court to exercise jurisdiction conferred upon it by Article 32 of the Companies (Consolidation) Act, 1908 in the absence of a party affected, even if satisfied, and that it must be enforced in an action to which affected persons are parties.

It remains to notice one other contention of Shri Ved Vyas that Article 115, fixing the quorum for the meeting of the Board of Directors at three, is ultra vires in view of section 287 (2), prescribing the maximum as two, not permitting an article provision to the contrary. It is true that there are some provisions contrary to what has been laid down (section 174 is one such) and that section 9 provides that save as otherwise expressly provided in the Act the provisions of the Act shall have effect notwithstanding anything to the contrary in the Memorandum or Articles of Association. I wonder whether it has any relevance here. I have also not been referred to any decided case where such an article provision as the present (though it seems to be common enough) was ever questioned merely on the ground that it provides for a greater quorum than what the Act insists — it may be another matter if the articles provide for less. It seems unnecessary to express an opinion on this question also. Even if the decision to issue right shares was invalid a declaration concerning its invalidity cannot be granted in the absence of those who would be affected by it.

Bk. Shivcharan Singh drew my attention to In Re Sly v. Spink and Co. (1911 2 Ch. 430) (33) where rectification of register of members was granted when the shares were allotted by directors who were less than the quorum. (This argument subsumes that Pritam Singh and Balbir Singh were not properly coopted and that even if Sheel Chandra and Yogesh C. Gupta were validly continuing as directors they could not by themselves (two of them alone) decide to raise the capital of the Company. But then R. K. Jain is said to have been present at a meeting when such a decision was taken; R. K. Jain disputes this and this leads to a controversy concerning facts also). Assuming that every thing contended for by Bk. Shivcharan Singh is true and valid we are confronted here with a somewhat extraordinary request — to cancel the allotment of right shares without even an application to rectify the register of members, without even having all those who would be affected by that decision as parties before the Court and when a suit for such a relief is pending in this very Court. Perhaps the greatest difficulty faced by the petitioner is on the above score.

Bk. Shivcharan Singh wanted the sympathy of the Court for the petitioner in the view that the adopted son was trying to displace his adoptive parents supported by his own brother-in-law and friends. But sympathy by itself would be hardly enough. The petitioner would have at least to show that there is no other option than to apply under section 186. Even this has not been done. Shri Ved Vyas contends, and with some force, that the members themselves may apply for an extraordinary general meeting under section 169 and Articles 64 to 66; if that were so it would not be for this Court to call such a meeting. The petitioner can also apply to the Central Government to convene an annual general meeting under section 167. The petitioner has not obviously considered it sufficient to apply under section 167 to the Central Government because no relief in regard to the issue of right shares could be obtained. That is why these petitions have been filed for getting a declaration concerning the invalidity of the issue and allotment of right shares under the guise of the court having to give directions pertaining to who should vote at such a meeting if one is to be called by this Court. I have endeavoured to study myself the reported decisions on this subject and I have not been able to come across a single case — none has been cited to me — where the court went to the extent of rectifying the register of members for the purpose of giving directions as to who should vote.

There was an exceptional situation arising out of the register of members and other records, maintained under the Building Societies Act, 1874, being destroyed due to enemy action, when Vaisey, J. (in Payne and another v. Coe, 1947 1 A. E. R. 841) (34) gave a direction to hold a meeting in accordance with the rules for ascertaining the names and addresses of the members by means of public advertisement. No question of rectifying the register of members for the purpose of giving such directions arose in that case.

Krishnaswamy Nayudu, J. of the Madras High Court had given a direction that those whose names appeared in the register of members on a certain date would vote at the meeting called under the old S. 79 (3), before the present section 186 was placed on the statute book. Venkatarama Aiyer, J. in Vishwanathan v. T. B. A. Paints Ltd. (1953 (i) M. L. J. 346, 355) (35) has referred this direction by Krishnaswamy Nayudu, J. as follows: “to this course the company could have no objection”. In the case on hand, however, there are several objections (they have been already noticed) to a direction being given that there should be no voting on the basis of the right shares. The petitioner's purpose would not be served if such a direction is not given. What was originally 46 per cent had been reduced to about 25 per cent after the said issue; even if the petitioner is supported by the other two petitioners and S. L. Verma it would be of no avail.

The circumstances discussed at length do not justify the court using its discretion under section 186 of the Act to call a meeting as prayed for.

C. As 725/72 and 73/73 are accordingly dismissed. The separate application filed (C.A No. 119/73) to dismiss the main petition on the admissions contained therein has also become unnecessary. It is also needless to be detained by the question who is the proper person to represent the company, a point raised in C. A. 700/72. All these interlocutory applications as well as the main petition (C. P. 96/72) are dismissed. There will be no order as to costs in any of them in the circumstances.

Petition dismissed.