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The Bank of Poona Ltd. Vs. Narayandas Shriram Somani - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai High Court
Decided On
Case NumberA.F.O.D. No. 819 of 1955 (With First Appeal No. 820 of 1955)
Judge
Reported inAIR1961Bom252
ActsCompanies Act, 1913 - Sections 91, 91-B, 91-B(1), 91(2) and 91-D(3)
AppellantThe Bank of Poona Ltd.
RespondentNarayandas Shriram Somani
Appellant AdvocateR.B. Kotwal, ;C.R. Dalvi and ;K.H. Bhabha, Advs. and ;M.A. Rane
Respondent AdvocateS.V. Gupte, ;K.J. Abhyankar, ;V.J. Jhaveri and V.D. Malpani, Advs.
Excerpt:
.....of section 91-b(1) of the indian companies act, 1913, by a director does not render the contract void. it would be voidable at the instance of the company and not the director.;pratt (bombay), limited v. sassoon & co., limited (1935) 87 bom. l.r. 978, pratt (bombay), limited v. m.t. limited (1988) 40 bom. l.r. 1109, p.c., transvaal lands company v. new belgium (transvaal) land and development company [1914] 2 ch. 488 and york tramways company v. willows (1882) 8 q.b. 683, referred to. - - 1. (1 to 9) it is, however, contended that we must go back to the initial transactions between the parties and if the shares themselves were not validly allotted to the defendant for one reason or the other,,then the debt of ramnath itself could not be sustained and therefore the 'havala' entry..........were between three companies, which have been throughout the judgmentcalled pratts, m.ts. and sassoons. pratts were indebted to m.ts. and m.ts. in their turn were indebted to the sassoons, it was agreed by pratts to execute a document of mortgage in favour of sassoons for a sum of rs. 9 lacs due to the sassoons from m.ts. out of the amount of rs. 9 lacs borrowed by m.ts. rs. 4,50,000 were lent to pratts. one a. j. raymond, who was the managing directorof the sassoons was also a director of m.ts., and had voted at the resolution passed by pratts in the meeting of the directors in favour of the execution of the document. all the directors of pratts and m.ts. were common. it was therefore contended by the liquidator for pratts that the whole transaction was bad as it was hit by section.....
Judgment:

Patel, J.

1. (1 to 9) It is, however, contended that we must go back to the initial transactions between the parties and if the shares themselves were not validly allotted to the defendant for one reason or the other,, then the debt of Ramnath itself could not be sustained and therefore the 'havala' entry could not be effective since in that event the consideration would have failed. It is this part of the argument that we must now consider. The argument is founded on Section 91-B of the Indian Companies Act which says:

'(1) No director shall, as a director, vote on any contract or arrangement in which he is either directly or indirectly concerned or interested nor shall his presence count for the purpose of forming a quorum at the time of any such vote; and if he does so vote, his vote shall not be counted'. The proviso to Sub-section (1) is not necessary for our purpose. Sub-section (2), says;

'Every director who contravenes the provisions of Sub-section (1) shall be liable to a fine not exceeding one thousand rupees'. The rest of the section is not material for our purpose. It is argued by Mr. Gupte, that since the defendant's presence is not to be counted for the purpose of forming a quorum at the time of the vole, there was no quorum at the meeting since there were only three Directors present, at the meeting and therefore any business transacted at this meeting could not be said to be validly transacted and therefore the allotment was void ab initio.

(10) The section itself does not say that the contract would be void as does Section 91-D (3) which says:

'If any such manager or other agent makes default in complying with the requirements of this section-

(a) the contract shall, at the option of the company, be void as against the Company; and

(b) such manager or other agent shall be liable to a fine not exceeding two hundred rupees'. It is true that a penalty is provided but that by itself cannot make the contract void. It would be voidable at the instance of the Company and not the Director.

11. Mr. Gupte has referred us to the case of Pratt (Bombay) Ltd, v. Sassoon and Co. Ltd. reported in 37 Bom LR 978 : AIR 1938 Bom 62. In this case the transactions were between three companies, which have been throughout the judgmentcalled Pratts, M.Ts. and Sassoons. Pratts were indebted to M.Ts. and M.Ts. in their turn were indebted to the Sassoons, It was agreed by Pratts to execute a document of mortgage in favour of Sassoons for a sum of Rs. 9 lacs due to the Sassoons from M.Ts. Out of the amount of Rs. 9 lacs borrowed by M.Ts. Rs. 4,50,000 were lent to Pratts. One A. J. Raymond, who was the Managing Directorof the Sassoons was also a Director of M.Ts., and had voted at the resolution passed by Pratts in the meeting of the Directors in favour of the execution of the document. All the directors of Pratts and M.Ts. were common. It was therefore contended by the Liquidator for Pratts that the whole transaction was bad as it was hit by Section 91-B of the Indian Companies Act. Sir John Beaumont C. J. in his judgment at p. 1008 (of Bom LR): (at p. 81 of AIR) after reviewing the evidence and the law observes:

'It seems to me, in the circumstances of this case, impossible to hold otherwise than that Sassoons had notice that the votes of the directors of Pratts in favour of the execution of this document,under which they claim, ought not to have been counted by reason of the provisions of Section 91-B. It that is so, the resolution of the directors of Pratts of February 23, 1928, is void, and the execution of the mortgage in favour of Sassoons must also be void'.

Mr. Gupte naturally relies on these observations to show that the transaction is void ab initio. But considering the judgment closely it appears that this conclusion is not justified. If the transaction Were void ab initio, there could have been no question of notice to Sassoons and the learned Judge has made it very clear that it was in view of the fact that Sassoons had notice that he held that the transaction was void. It only means that the transaction was voidable, i.e. one that could be avoided by the Company against whose interest it was. This conclusion is supported by the confirming judgment of the Privy Council in Pratt (Bombay) Ltd v. M. T. Ltd. , the observations being at p. 1131 (of Bom LR): (at p. 163 of AIR), The Privy Council does not use the word Void'. It says:

'Subject to the question whether the Sassoon Company had notice of the facts as to the interest of the directors of Pratts, their Lordships think, therefore, that the indentures of February 28, 1928, and August 11, 1931, are voidable by the Official Liquidator. They are not of opinion that S. 91-B would operate to deprive of the benefit of his contract with the company a third party who had no notice of the defect in the directors' authority'.

It is contended that the observations in 37 Bom LR 978: (AIR 1936 Born 62) were not with reference to a quorum but with reference to some directors being common between the two companies i.e. Pratts and M.Ts. and Raymond being common to all the three companies. From the statement of facts at p. 982 (of Bom LR) it appears that the directors of Pratts and M.Ts. were identically the same and A.Y. Raymond a director of Sassoon was one of the directors. If that is so, it would clearly appear that if the directors of M.Ts. were also theDirectors of Pratts and the resolution was voted by the Directors of Pratts, there could be no quorum at all and on the argument of Mr. Gupte, the resolution should be void and still this Court and also the Privy Council said that it was merely voidable. The conclusion therefore that the resolution is void is not supported by those authorities.

Same would seem to be the view expressed in Transvaal Lands Co. v. New Belgium (Transvaal) Land and Development Co.(1914) 2 Ch. 488. In that case there was provision in the articles of the Company corresponding to the one contained in Section 91, At p. 505 the Court observed:

'The provisions of this article were not observed when the resolution to purchase the Lydenberg shares was carried, as Harvey voted in favour of it, and without his vote being counted there was no quorum, whereof the defendants, the other contracting party, had full notice. The result is that the contract was voidable, and has been duly avoided...' This case is sought to be distinguished on the ground that in that case only articles of the company were involved while in this case there is a statutory prohibition and therefore the principle of that case will not apply to this case. It is difficult to accept this contention. The fundamental result of the provisions, whether they be in the articles of association or in the statute, is the same, viz. there was no quorum without the defendant being a member of the Board and voting at it, and that is the only basis on which reliance is placed for holding that the allotment resolution was void and ineffective. In principle, therefore, there does not appear to be any difference between the two cases and it will not be possible to say merely from this circumstance that the allotment is void ab initio: it can only be voidable.

12. It is contended by Mr. Kotwal that the defendant being himself a party to the resolution and being primarily responsible for committing the illegality, he cannot be allowed to say that the allotment is bad and not effective. Now, the directors of a company have a peculiar position in the management of a Company since it must act through others. They control its destinies and enjoy large powers. As such, they are treated as being in a fiduciary position and greatest good faith is expected in the discharge of their duties. This provision is therefore enacted so that they would be prevented from acting in such a manner that duty and self interest should conflict. This section would appear to be intended for the protection of the interests of the Company and if that is so the contract could not be avoided by the defaulting director. Mr. Kotwal is supported by the case of York Tramways Company v. Willows (1882) 8 QBD 685, the observations of Brett, L. J. being pertinent:

'But I will assume that the defendant was not qualified to be a director, and that he did not accept the shares at the meeting in November: nevertheless he acted as a director, and did so bona fide and with the intention of discharging the duties of a director. Under this state of circumstances I think that the reasoning of Lord Cairns in Murray v. Bush (1873) 6 HLC 37 applies. I prefer to follow the doctrine laid down by him rather than that laid down by Lord Chelmsford inthe same case. I think that the defendant was boundby acting as a director; in this point of view alsoit must be taken that he joined in the allotment tohimself, and I think that he is estopped from denying his liability. I feel more strongly upon thispoint that the Lord Chief Justice appears to do'.Even on general principles the defendant cannot beallowed to plead his own default for avoiding theallotment because he now finds it onerous. It thestatute had itself made the transaction void ongrounds of public policy, position may have beendifferent. That however is not the case here. Wemust therefore hold that it is not open to the defendant to challenge this transaction. It may be thatunder certain circumstances the Company may heaggrieved and in that case the Company or a shareholder of the Company may challenge the transaction.But that is not the case. The transaction was tothe advantage of the Company which would, if theshares had not been sold within the time limit, havebeen required to reduce its capital and would havesuffered in credit. The defendant cannot be allowed to challenge the allotment,

13. Appeals allowed.


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