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Arantee Manufacturing Corporation Vs. Bright Bolts Private Ltd. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai High Court
Decided On
Judge
Reported in[1967]37CompCas758(Bom)
ActsCompanies Act, 1956 - Sections 2, 9, 294, 294(2) and 297(2)
AppellantArantee Manufacturing Corporation
RespondentBright Bolts Private Ltd.
Appellant AdvocateG.A. Thakkar, Adv.
Respondent AdvocateJ.L. Nain, Adv.
Excerpt:
company - distributionship - sections 2, 9, 294 (2) and 297 of companies act, 1956 - plaintiffs claimed to be appointed as sole agents of defendants by agreement - validity of appointment challenged for agreement not made subject to condition that appointment shall cease to be valid if not approved by company in its first general meeting after appointment by virtue of section 294 (2) - condition prescribed in section 294 (2) is condition precedent whose non-compliance renders appointment bad ab initio - failure of incorporation of said condition in agreement renders it in violation of section 294 (2) - held, non-compliance of section 294 (2) renders plaintiff's appointment invalid. - maharashtra scheduled castes, scheduled tribes, de-notified tribes (vimukta jatis), nomadic tribes,.....tulzapurkar, j.1. this is a petition filed by arantee manufacturing corporation, a partnership firm (plaintiffs) against bright bolts private limited (defendants) for an order that the arbitration agreement contained in clause 12 of the sole selling agency agreement, copy whereof has been annexed as exhibit f to the petition, be filed in this court and for an order of reference referring all disputes and differences between the plaintiffs and the defendants relating to the sole selling agency agreement to the arbitration of tan arbitrator in accordance with clause 12 of the said agreement and for incidental reliefs. 2. the petition is filed in the following circumstances: the plaintiffs have alleged that the defendants, who are a private limited company manufacturing nuts, bolts, screws.....
Judgment:

Tulzapurkar, J.

1. This is a petition filed by Arantee Manufacturing Corporation, a partnership firm (plaintiffs) against Bright Bolts Private Limited (defendants) for an order that the arbitration agreement contained in clause 12 of the sole selling agency agreement, copy whereof has been annexed as exhibit F to the petition, be filed in this court and for an order of reference referring all disputes and differences between the plaintiffs and the defendants relating to the sole selling agency agreement to the arbitration of tan arbitrator in accordance with clause 12 of the said agreement and for incidental reliefs.

2. The petition is filed in the following circumstances: The plaintiffs have alleged that the defendants, who are a private limited company manufacturing nuts, bolts, screws and hardware, had negotiations with them for the purpose of appointing them as their sole selling agents for the goods manufactured by them throughout India, that between the beginning of October, 1964, and 19th October, 1964, discussions took place between Mr. K. M. Mehta, a director of the defendants as representing the defendants and the two partners of the plaintiffs-firm, that during the course of the said discussions the terms and conditions on which the plaintiffs were to be appointed as sole selling agents were discussed, and that ultimately on or about 19th October, 1964, the said negotiations were finalised and a concluded contract was arrived at between the parties as a result whereof the plaintiffs were appointed as sole selling agents of the defendants for a period of three years commencing from 19th October, 1964, for the whole of India in respect of the bolts and screws manufactured by the defendants on terms and conditions that were subsequently recorded in an agreement. The plaintiffs have further alleged that on 19th October, 1964, in furtherance of the said agreement the plaintiffs deposited with the defendants a sum of Rs. 35,000 as orally agreed upon between the parties and that the said deposit was accepted by the defendants and the defendants passed a deposit receipt in that behalf in plaintiffs' favour. The plaintiffs have further alleged that in furtherance of the said agreement and acting upon the same the defendants addressed letters to their several customers informing them that they had appointed the plaintiffs as sole selling agents for their goods and the customers were requested to make their inquiries directly with the plaintiffs to enable the plaintiffs to give the said customers their most competitive quotations. The plaintiffs have further alleged that draft advertisements were forwarded by the defendants to them, which the plaintiffs got published in newspapers such as 'Times of India', 'Bombay Samachar' and 'Janmabhumi' and that the said advertisements contained statements that the defendants had appointed them as their sole selling agents. It is further alleged by the plaintiffs that round about Divali of 1964 they got their greeting cards printed, which contained statements to the effect that the plaintiffs were the sole selling agents of the defendants for all over India and that they also got calendars and diaries for the year 1965 printed which contained similar statements and that, in spite of copies of the greeting cards and calendars and diaries having been sent to the defendants, no objection was at any time raised by the defendants to the statements contained in those greeting cards, calendars and diaries. It is further alleged that in respect of the advertisements which were got published by the plaintiffs they forwarded debit notes in respect of half of such costs to the defendants but these debit notes were after a lapse of considerable time returned by the defendants as rejected upon legal advice. It is further alleged that in or about November, 1964, the plaintiffs' partner, Mr. Tribhuvan Shah, got prepared a draft agreement of the sole selling agency containing the points discussed and agreed upon by the between the parties and the said draft was approved by shri K. M. Mehta of the defendants on or about 2nd December, 1964, and Shri Mehta asked the plaintiffs' partner to get the said agreement typed out on engrossment on the requisite stamp paper. It is the plaintiffs' allegation further that as per the request of Mr. Mehta the draft agreement was got engrossed in duplicate on the requisite stamp paper and both the engrossments were delivered to Shri K. M. Mehta on 3rd December, 1964, and Shri Mehta retained both the engrossments stating that that day being Amas he would execute the same on an auspicious day in a day or two thereafter. The plaintiffs have further alleged that on 4th December, 1964, Shri Mehta of the defendants told one of the partners of the plaintiffs that he wished to make a couple of alterations in the engrossment and it is the plaintiff's case further that the advocate, who had drafted the agreement, was sent for and in the presence of the advocate certain alterations were accepted by the plaintiffs. It is the plaintiffs' case further that some of these alternations were written out on the first page of the engrossment which was initialled by Shri K. M. Mehta on behalf of the defendants and as some of the alternations to be made on the second page were too lengthy running into some lines their advocate told Shri Mehta he would get the second page of the engrossment re-typed such alterations. Accordingly, the second page of the engrossment was got re-typed and thereafter a completed agreement containing all the terms and conditions agreed upon by and between the parties was sen to the defendants for their signature but the defendant on some pretext or the other refused to execute and sign the said agreement. It is the plaintiffs' case further that the defendants with a view to get out of the agreement addressed a letter dated 2nd January, 1965, to the plaintiffs falsely complaining about the plaintiffs' rates to their customers being too high and making several other false allegations therein. The plaintiffs by their reply dated 7th January, 1965, denied all those allegations and contentions put forward by the defendants in their aforesaid letter. It is the plaintiffs' case that, in the correspondence that ensued between the parties, the defendants made it clear that they had never appointed the plaintiffs as their sole selling agents, but on one occasion they forwarded another draft agreement appointing the plaintiffs as one of their selling agents and called upon the plaintiffs o approve of the same and execute the same, which the plaintiffs refused to do. In the circumstances, the plaintiffs have alleged that there is a concluded contract arrived at between the parties whereunder the defendants have appointed the plaintiffs as their sole selling agents in respect of their goods for the whole of India and that the terms and conditions upon which they were no appointed are contained in the terms and conditions upon which they were so appointed are contained in the agreement, a copy whereof is annexed as exhibit F to the petition. The plaintiffs have further alleged that clause 12 of the sole selling agency agreement (exhibit F o the petition) contains a provision for a reference to arbitration and it is the plaintiffs' case that disputes and differences have arisen between the parties including the question as to whether the plaintiffs have been appointed as sole selling agents of the defendants or not-all of which are liable to be referred to arbitration pursuant to the arbitration clause contained in the said agreement. The plaintiffs have, therefore, prayed for an order that the agreement be filed in this court and that an order of reference referring all the disputes and difference between the parties to an arbitration of arbitrators as per clause 12 of the agreement, be made.

3. The petition is resisted by the defendants on several grounds. Though the defendants have admitted that there were negotiations between the plaintiffs and the defendants in the matter of appointing the former as their selling agents, they have contended that there was no concluded contract arrived at between the parties. The defendants have categorically denied that they have ever appointed the plaintiffs as their selling agents, much less sole selling agents as alleged by the plaintiffs. The defendants have further contended that during the course of negotiations the plaintiffs offered to get a draft of the agreement for selling agency prepared as the basis for negotiations between the parties, but since the draft agreement as well as the engrossment purported to appoint the plaintiffs as sole selling gents of the defendants they did not approve of the same. As regards the sum of Rs. 35,000 deposited by the plaintiffs with them the defendants have denied that the said amount was deposited in part performance or acting upon any agreement. They have contended that the said sum was deposited during the progress of the discussions for appointing the plaintiffs as the selling agents and that the receipt passed in the plaintiffs' favour also categorically stated that the deposit was for the selling agency. The defendants have denied that they have written letters to their customers intimating them that they had appointed the plaintiffs as their sole selling agents. They have contended that during the course of the negotiations the defendants addressed some letters to their customers, but in those letters they had merely started that the plaintiffs were being appointed as mere selling agents. As regards the advertisements which appeared in newspapers the defendants have denied that they forwarded any draft advertisements to the plaintiffs and they contended that the said advertisements were inserted by the plaintiffs without their consent or knowledge and after these advertisements were seen by them Shri Mehta, the director of the defendants, verbally protested to the plaintiffs and also told them that there was no sole selling agency under discussion and that what was to be negotiated was only a selling agency and that the plaintiffs promised not to repeat such advertisements. The defendants have denied that the plaintiffs sent any greeting cards to them or to any of their directors. The defendants have categorically denied that Shri Mehta approved their draft agreement shown to him by the plaintiffs' partner as alleged and they have further denied that Mr. Mehta told the plaintiffs that the said draft should be got typed out on a requisite stamp paper. The allegations about the engrossments having been sent by the plaintiffs to the defendants and Shri Mehta having been sent by the plaintiffs to the defendants and Shri Mehta having approved of the engrossment, etc., have been specifically denied by the defendants. The defendants have denied that they wrote their letter dated 2nd January, 1965, to the plaintiffs in retaliation or with a view to make out a false case or in an attempt to get out of any agreement. They have contended that no concluded agreement of sole selling agency was at any time arrived at between the parties and that all that they wanted to do was to appoint the plaintiffs as their selling agents only. By their affidavit filed in reply the defendants have also raised legal contentions based on the provisions of section 294 of the Companies Act, 1956. The defendants have contended that in any case, the appointment of the plaintiffs as sole selling agents as alleged by them is invalid and contrary o the provisions of section 294, inasmuch as on their own showing the said agreement has not been made subject to he condition that the appointment shall cease to be valid if it is not approved of by the company in the first general meeting held after the date on which the appointment is made. The defendants have further contended that after the plaintiffs alleged that they had been appointed as sole selling agents of the defendants all over India Shri Mehta called a general meeting of the defendants company on 20th February, 1965, to place before the company the claim of the plaintiffs and Shri Mehta requested the general meeting either to approve or disapprove of the appointment as claimed by the plaintiffs and accordingly the general body of the defendants company resolved at the said meeting that the proposal of appointing the plaintiffs as the sole selling agents was not in the interest of the company. It is, therefore, contended that the company in its meeting not having approved of he appointment of the plaintiffs on any terms of conditions, the plaintiffs' claim is illegal and their appointment as such sole selling agents is invalid. The defendants have pointed out that they have filed a suit in the City Civil Court at Bombay being Suit No. 1135 of 1965 against the plaintiffs wherein they have asked for an injunction against the plaintiffs restraining and prohibiting them from alleging that they are sole selling agents of the defendants in respect of any of the products of the defendants for India or from alleging themselves to be such sole selling agents by advertisements in press, circulars or otherwise.

4. Upon these rival pleadings the following issues were raised:

'(1) Whether there is a concluded sole selling agency agreement between the parties to the suit on the terms and conditions set out in exhibit F to the petition

(2) Whether the agreement alleged by the plaintiffs, viz., exhibit F to the petition, is void ab initio for not containing the condition that the appointment shall cease to be valid if it is not approved by the company at the first general meetings held after the alleged date of the agreement

(3) Whether the appointment alleged by the Plaintiffs has been approved of by the defendants-company in their first general meeting held after the date of the alleged agreement and if not whether the alleged agreement has ceased to be valid and

(4) Whether there is a valid and subsisting agreement of arbitration between the parties in terms of clause 12 of the agreement (exhibit F to the petition ).'

5. Out of these issues it was agreed at the bar that issue No. 2, which raises a purely legal contention, would be tried as a preliminary issue and accordingly arguments have been advanced on behalf of the plaintiffs and defendants at great length on that issue. From the rival pleadings, which I have mentioned above, it will appear clear that on the one hand the plaintiffs have alleged that there was a concluded contract of sole selling agency arrived at between the parties whereby the defendants appointed the plaintiffs as their sole selling agents for a period of three years in respect of certain goods manufactured by the defendants. On the other hand, the defendants have raised a three-fold plea in this behalf. In the first place it has been contended that on the factual aspect no concluded contract was at any time arrived at between the parties as alleged by the plaintiffs. Secondly, it is contended that even if i were assumed for the purpose of argument that any such sole selling agency contract had been concluded between the parties, the same would be bad in law, inasmuch as admittedly the said agreement was not made subject to the condition that the appointment shall cease to be valid if it was no approved by the company in the first general meeting to be held after the date on which the appointment was made. Thirdly it is contended that though the defendants denied that there was any such appointment of the plaintiffs as sole selling agents Shri K. M. Mehta, a director of the defendants-company, placed before the general meeting of the defendants-company held on 20th February, 1965, all the correspondence and the plaintiffs' claim that they had been so appointed as sole selling agents and he asked the company either to approve or disapprove or such appointment and the company disapproved of such appointment. On these three grounds the defendants have contended that the reliefs sought by the plaintiffs in this petition cannot be granted for, if the contract of appointment itself is bad in law, clause 12 containing the provision for reference to arbitration must also fall to the ground. As I have said above, out of these three contentions which have been principally advanced by the defendants, the preliminary issue, being issue No. 2, covers the defendants' contention that the agreement alleged by the petitioners is void ab initio as being in contravention of the provisions of section 294 of the Companies Act. It is clear that if this preliminary issue is decided in favour of the defendants no further question will survive in the petition and if, on the other hands, i is answered in the plaintiffs' favour, then the further issues on facts will have to be gone into.

6. Mr. Nain, appearing on behalf of the defendants, strongly relied upon sub-section (2) of section 294, which contains the relevant provision to the effect that the board of directors of a company shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made. He urged that this provision, which is to be found in section 297(2), is of a mandatory character and that unless the appointment would be void ab initio and in support of his contention he relied upon a decision of the Calcutta High Court in the case of Shalagram Jhajharia v. National Co. Ltd. [1965] 35 Comp. Cas. 706. On the other hand, Mr. Thakkar appearing on behalf of the plaintiffs has urged that it is not necessary that the contract of appointment of a sole selling agent should contain a provision as one of its conditions that the appointment shall cease to be valid if it is not approved by the company in the first general meeting of the company held after the date on which the appointment is made, but according to him all that sub-section (2) of section 294 provides is that every appointment of a sole selling agent made by the board of directors of a company will be subject to that condition and as sub-section (2A) of section 294 clearly indicates the appointment made by the board of directors shall cease to be valid only if the company in the general meeting disapproved of the appointment and it shall cease to be valid from the date of such general meeting where the appointment is disapproved. He urged that the provisions of section 294 should be read as a whole and, if they are so read, it will appear clear that the condition mentioned in sub-section (2) of section 294, subject to which the appointment of the sole selling agent is to be made, is not a condition precedent but at the most would be a condition of defeasance, in the sense that if the condition mentioned in sub-section (2) was not complied with by the company the appointment shall cease to be valid. As regards the decision of the Calcutta High Court on which reliance was placed by Mr. Nain, i was urged by Mr. Thakkar that the decision could be distinguished on facts and further the observations on which specific reliance was placed by Mr. Nain in the case should be regarded as obiter.

7. In order to appreciate the rival submissions that have been made before me, it will be necessary to consider the relevant provisions of section 294 as a whole as also the setting in which the said section occurs in the Companies Act. Section 294 occurs in Chapter II dealing with 'directors' in Part VI of the Companies Act, which deals with the 'management and administration of companies.' It is one in the group of sections which deals with powers of the board of directors and it is clear that it is a section which puts making appointment of sole selling agents for the company. The relevant provisions are to be found in sub- sections (1), (2) and (2A) thereof and those relevant provisions run as follows :

'294. Appointment of sole selling agents to require approval of company in general meeting.- (1) No company shall, after the commencement of the Companies (Amendment) Act, 1960 (65 of 1960), appoint a sole sole selling agent for any area for a term exceeding five years at a time:

Provided that nothing in this sub-section shall be deemed to prohibit the re-appointment, or the extension of the terms of office, of any sole selling agent by further periods not exceeding five years on each occasion. (2) After the commencement of the Companies (Amendment) Act, 1960 (65 of 1960), the board of directors of a company shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made.

(2A) If the company in general meeting as aforesaid disapproves the appointment, it shall cease to be valid with effect from the date of that general meeting.'

8. On a fair reading of the aforesaid provisions, it will at once become clear that the provisions of sub-section (1) and sub-section (2) shall have to be regarded as not directory but mandatory having regard to the negative language employed therein. It was not disputed by Mr. Thakkar that the provision in sub-section (2) will have to be regarded as mandatory provision and he fairly conceded that any or every appointment of a sole selling agent must be subject to the condition mentioned in sub-section (2), viz., that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made, but his contention is that the said condition is not a condition precedent but would be a condition of defeasance in the sense that every such appointment through not made subject to that condition should be deemed to be so made and if the appointment is either not approved of by the company or expressly disapproved by the company in the first general meeting that is held after the date on which the appointment is made the appointment shall cease to be valid. He argued that this interpretation of sub-section (2) is warranted by two factors. In the first place, in sub-section (2) itself the words used are that the appointment 'shall cease to be valid', which indicate that the appointment must be valid till the time it cases to be valid. Secondly, sub-section (2A) expressly provides that if the appointment is disapproved by the company in the first general meeting the appointment shall cease to be valid 'with effect from the date of that general meeting'. He, therefore, urged that the condition mentioned in sub-section (2) should be regarded as a condition of defeasance. There is some force in this contention of Mr. Thakkar. However, in my view, if regard be had to the manner in which the section is enacted, the language used therein and the place at which the section appears in the entire scheme of the Act, it will be clear that the condition mentioned in sub-section (2) will have to be regarded as a condition which attaches to the very act of making the appointment of a sole selling agent by the board of directors and, therefore, a condition precedent. The object of the section, as I have already indicated above, is to place restrictions or curbs on the powers of the board of directors. The language employed in sub-section (1) and sub-section (2) is clearly negative which suggest that the provisions are to be regarded as mandatory. Sub-section (1) provides that 'No company shall....appoint a sole selling agent for any area for a term exceeding five years at a time.' The proviso makes it clear that the aforesaid absolute prohibition will not apply to the re-appointment or extension of the term of office of any sole selling agent, but that such re-appointment or extension of term should not exceed the period of five years on any one occasion. In my view, sub-section (1) puts an embargo upon the company by prohibiting the company from making any appointment of a sole selling agent for any term exceeding five years at a time. Similar is the position with regard to sub-section (2). Sub-section (2) provides that the board of directors of a company 'shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made.' Sub-section (2) also puts an embargo upon the board of directors of a company by prohibiting the board from making any appointment of a sole selling agent except subject to the condition mentioned therein. In other words, the board of directors of a company are only free to make appointment of a sole selling agent subject to the aforesaid condition. The language used, viz., 'shall not appoint....except subject to the condition' shows that the condition mentioned attaches to the very act of making the appointment by the board of directors. It will thus be clear that, if any appointment is made by the board of directors without such a condition, the appointment will be contrary to the provisions of sub-section (2) and, therefore, illegal and bad in law. In enacting that the board of directors shall not appoint except subject to the condition, the Parliament, I feel, has incorporated a condition precedent, which attaches to the very act of the board of directors of making appointment and it is clear, therefore, that if the board of directors make the appointment without complying with the conditions, such appointment will be void ab initio. If Parliament wanted to incorporate a condition of defeasance, as is sought to be urged by Mr. Thakkar, nothing would have prevented it from making a provision to the effect that every appointment of a sole selling agent by board of directors shall be deemed to be subject to such a condition, and such provision could have been followed by sub-section (2A). Under sub-section (2) as it stands, if an appointment of a sole selling agent is made by the board of directors, subject to the condition mentioned therein, it would be a valid appointment and if it is made without such condition it would be invalid and void ab initio and it is only when a valid appointment is made by the board of directors after complying with the condition mentioned in sub-section (2) that such valid appointment has to be put before the general meeting of the company for its approval and under sub-section (2A) if the company in its general meeting disapproved such appointment then it shall cease to be valid with effect from the date of that general meeting.

9. Mr. Thakkar on behalf of the plaintiffs invited my attention to section 9 of the Companies Act, which gives an overriding effect to the provisions of the Act and, relying upon that section, he contended that the condition mentioned in sub-section (2) of section 294 should be deemed to be incorporated in the contract of appointment of a sole selling agent, if any made by the board of directors, when the same is silent on the point. Section 9 runs as follows.

'9. Act to override memorandum, articles, etc.-Save as otherwise expressly provided in the Act- (a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its board of directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and (b) any provision contained in the memorandum, articles, agreement or resolution aforesaid shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be.'

10. What was urged by Mr. Thakkar was that having regard to the aforesaid provisions of section 9 the court should hold that if the agreement whereby the plaintiffs were appointment sole selling agents in the present case was silent as regards the condition mentioned in sub- section (2) of section 294, the said condition should be deemed to have been incorporated in that agreement. He urged that this also warranted an inference that the condition mentioned in sub-section (2) of section 294 should be regarded as a condition of defeasance and not a condition precedent attaching to the very making of the appointment. It is not possible to accept Mr. Thakkar's contention for, in my view, all that section 9 provides for is that if any provision is contained in the memorandum or articles of a company or in any agreement which is contrary to the Act then the provisions of the Act shall prevail over such contrary provision and sub-section (b) further provides that to the extent to which provision contained in the memorandum, articles or agreement is repugnant to the Act, the same shall become or be void. I do not think that section 9 has the effect of incorporating into the memorandum or articles or any agreement the provisions of the Act where the memorandum or the articles or the agreement is silent on the point. In the present case, if for instance, the agreement appointing the plaintiffs as the sole selling agent were to contain a provision that it was either not necessary for the company to approve the said appointment in the general meeting or that notwithstanding the disapproval expressed by the company the plaintiffs appointment shall continue, then such provision in that agreement would have become void under section 9 of the Companies Act, but it is not possible to accept Mr. Thakkar's contention that because the agreement is silent on the point, under section 9 of the Companies Act, the condition mentioned in sub-section (2) of section 294 should be deemed to have been incorporated in the said agreement. In this view of the matter, it is clear to me that sub- section (2) of section 294 should be interpreted to mean that it contains a condition precedent that attaches to the very act of making the appointment of a sole selling agent by the board of directors. Therefore, if any appointment of a sole selling agent is made by a board of directors without such a condition as mentioned in sub-section (2) the same would be contrary to the said provisions and would be void ab initio.

11. Turning to the decision of the Calcutta High Court in the case of Shalagram Jhajharia v. National Co. Ltd. [1965] 35 Comp. Cas. 706 it may be stated that the court held the appointment of the sole selling agent to be bad on two grounds. In the first place, admittedly, the agreement did not contain the condition that the appointment shall cease to be valid if not approved at the first general meeting to be held after the date of the appointment. Secondly, the two general meetings that were held immediately after the appointment had been made did not consider the item of the approval of this appointment of the sole selling agent but it was only when the Registrar of Companies drew the attention of the company to the fact that such approval had not been obtained the company purported to hold a meeting and got the said appointment approved and ratified by the general body of the shareholders. It was held that the agreement or the contract of appointment was void ab initio, inasmuch as it did not contain the requisite condition mentioned in sub-section (2) and, therefore, there was nothing which could be approved of or ratified by the general body of the shareholders. It was further held that, since general meeting that was held by the company immediately after the appointment had been made, the appointment had ceased to be valid and there was nothing which the general body of shareholders could approve or ratify at the subsequent general meeting. Mr. Nain, appearing on behalf of the defendants, has strongly relied upon the observations of Mr. Justice Mitter, who, after considering the provisions of section 294, took the view that the provisions were of a mandatory character and further held that, since the condition mentioned in sub-section (2) had not been complied with, the appointment was bad ab initio. The relevant observation on which reliance was placed by Mr. Nain run as follows:

'It was argued before us that section 294 was only directory and not mandatory as no penal provision was attached thereto. I find myself unable to accept this argument. The words of the statute are quite clear in that it prohibits the directors from entering into a contract with a sole selling agent without being obliged to bring the matter of the appointment before the company at the first general meeting thereafter. The only limitation imposed on the company's power of appointing a sole selling agent is that the period of agency must not exceed five years. The clear provision in the Act that the appointment by the directors is not to be valid unless approved by the company in the first general meeting shows the obligatory nature of the enactment. It is well known that the use of negative language generally leads to the conclusion that the provision is mandatory..............

Therefore, if the directors choose to enter into an agreement with a sole selling agent without the condition that the appointment shall cease to be valid if not approved by the company in the first general meeting held thereafter the appointment is bad ab initio and the directors can be injuncted from acting on it in a properly framed suit because they would be doing something which the law does not allow them to do. This is not a matter of mere internal management.'

12. Chief Justice Bose, the other learned judge, who delivered a separate but concurring judgment, has made the following observations (page 724):

'Section 294 enjoins that no appointment of a sole selling agent can be made except subject to the condition that if it is not approved by the company in the first general meeting held after the appointment, then it shall cease to be valid. So in clear and unambiguous language it is indicated in the section that the effect of non-approval of the appointment at the first general meeting after appointment, is to render the appointment invalid. So compliance of the provisions of the section is made a condition precedent to the validity or legality of what is done and the neglect of the statutory requisites would therefore obviously be fatal. In my opinion rigorous observance of the provisions of the section is essential and since the appointment was not made subject to the prescribed condition, and the appointment was not approved at the first general meeting in express terms, the appointment was rendered invalid.'

13. As I have indicated above, two points arose for consideration in that case; one was whether an appointment of a sole selling agent made without the condition prescribed in sub-section (2) was invalid or not and, secondly, whether if the appointment of the sole selling agent had not been approved by the company at its first general meeting held after the appointment was valid or not and it appears that Mr. Justice Bose has more relied upon the latter aspect of the matter and has held that since the appointment had not been approved by the company in the fist general meeting that was held after the appointment, the appointment was rendered invalid, though in passing he has also observed that since the appointment was not made subject to the condition prescribed in sub- section (2) the appointment was invalid. Mr. Justice Mitter has, however, expressly dealt with the point with which I am concerned in the present case and he has taken the view that since the appointment had been made without the condition mentioned in sub-section (2) the appointment was to be regarded as void ab initio. In my view, the Calcutta decision relied upon by Mr. Nain supports the view which I am inclined to take of the provisions contained in section 294. Mr. Thakkar, however, sought to distinguish the Calcutta decision from the facts of the present case in one or two respects. In the first place, he has pointed out that in the case before the Calcutta High Court, the point had arisen in a suit which a shareholder had filed against the company and its directors restraining the company from passing certain resolutions whereby the appointment of a sole selling agent was sought to be approved or ratified from putting the said resolution for getting it passed before the general body of shareholders at the general meeting of the company. He urged that it was a case dealing with the rights of shareholders of a company inter se while the present case is one where third party's rights are involved. I do not think that this distinction which has been pointed out by Mr. Thakkar has any effect upon the question as to what should be the proper interpretation of section 294 of the Companies Act. If the non-compliance of the conditions prescribed in sub-section (2) of section 294 was regarded as having the effect of rendering the appointment had in law from its commencement, that is to say, rendering the appointment void ab initio then the contract of appointment would be bad, whether it was sought to be challenged at the instance of a shareholder of a company or at the instance of the company as against a third party claiming a right under such contract. Secondly, Mr. Thakkar has contended that the Calcutta High Court was dealing with an appeal that had been preferred by a shareholder against the judgment of the learned trial judge, who had refused an interlocutory injunction and, therefore, the appeal court was primarily concerned with the question as to whether any prima facie case had been made out by the shareholder for the purpose of obtaining an interim injunction. In the present case, he pointed out, the question is sought to be argued more thoroughly, inasmuch as the entire petition is sought to be disposed of on the preliminary point raised in the petition. This undoubtedly is true. The learned judges of the court of appeal in the Calcutta High Court have also expressly observed in their judgment that the question that was considered in the appeal was whether having regard to the facts obtaining in the case the plaintiff shareholder should be said to have made out a prima facie case entitling him to get an interim injunction, but while considering this question in prima facie manner the learned judges had to consider the question as to what should be the proper interpretation of the provisions of section 294 and I do not think that simply because they have expressed their views on proper interpretation of section 294 in a case dealing with a point on a prima facie view of the matter it should make any difference to the true and proper interpretation of section 294. Mr. Thakkar also contended that the observations on which reliance has been placed by Mr. Nain should be regarded as obiter. On this aspect of the matter, I am unable to accept Mr. Thakkar's contention. As I have observed above, both the points arose for determination before the court of appeal, though either of the points was sufficient to dispose of the appeal. But since both the points arose for determination in the case and were necessary for the determination of the case, I do not think that the observations relied upon could be regarded as obiter.

14. Having regard to the aforesaid discussion I am inclined to take the view that section 294(2) should be interpreted to mean that the condition prescribed in the said section is a condition precedent, which attaches to the very making of the contract of appointment of sole selling agent and non-compliance thereof would render the contract of appointment bad ab initio. In this view of the matter the preliminary issue raised in this case is answered in favour of the defendants. Consequently, the petition will have to be dismissed.

15. Having regard to the facts and circumstances of the case, the fair order as to costs would be that each party will bear its own costs and I accordingly direct that each party should bear its own costs.

16. The undertaking which has been given by the defendants as regards keeping separate accounts, will continue to operate for a period of 3 weeks from to-day.

17. Petition dismissed.


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