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Someshchandra Manilall Nanavati Vs. Jivanlal C. Chinai and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai High Court
Decided On
Case NumberA.F.O.D. No. 599 of 1955
Judge
Reported inAIR1956Bom190
ActsCompanies Act, 1913 - Sections 17 and 86-I
AppellantSomeshchandra Manilall Nanavati
RespondentJivanlal C. Chinai and ors.
Appellant AdvocateY.B. Rege, Adv., i/b., Matubhai Jamiatram and Madan, Attorneys
Respondent AdvocateK.T. Desai, ;N.A. Modi and ;M.R. Mody, Advs., i/b., Kanga & Girdharlal, Attorneys
Excerpt:
.....'it goes without saying',some term not ex-pressed but necessary to give to the transaction such business efficacy as the parties must have intended. the parties may well intend that a person who has been appointed a director under article 88 should not vacate office unless he is requested in writing to retire by the party or parties who appointed him......director. the next paragraph of article 89 provides:'every nominated director shall be entitled to hold office until requested in writing to retire by the party or parties who appointed him or who are or is entitled to appoint his successor and accordingly a nominated director shall not be bound to retire by rotation or be subject to clauses 103 and 104. as and whenever a nominated director vacates office, whether upon request as aforesaid or by death or otherwise, the company, person or persons whoever is entitled to appoint his successor may appoint another director in his place'.and the third paragraph provides that the nominated director shall not require any qualification. article 91 provides for qualification of directors and is to the following effect:'unless otherwise determined.....
Judgment:

Chagla, C.J.

1. The question that arises in this appeal is whether the first respondent is entitled to continue as a nominated director of the National Art Silk Mills Ltd. This is a Private limited company which was incorporated on 10-1-1938 with a capital of 3,000 ordinary shares and 2,000 preference shares of the face value of Rs. 100/- each. The first four directors were the plaintiff, the first defendant the second defendant and Chandulal B. Nanavati whose widow is the third defendant.

In the first allotment of shares which was on 8-3-1938, 250 ordinary shares were allotted to the first defendant. In the second allotment which was on 8-6-1938, 85 ordinary shares were allotted to the first defendant. In the third allotment which was on 28-4-1941, 500 ordinary and 500 preference shares were allotted to the first defendant.

On 6-8-1953 the first defendant transferred cut of the ordinary shares first allotted to him, 50 to his grandson Mahesh, 50 to another grandson Madhukar and 50 to his third grandson Dinkar, and 50 to defendant 2, and on this transfer taking place the plaintiff contended that the first defendant had ceased to be a nominated director.

He then filed a suit out of which this appeal arises for a declaration that the first defendant was not a director of the company and that he should be prevented from acting in that capacity. The learned Judge dismissed the plaintiff's suit and the plaintiff has come in appeal.

2. Now, whether the first defendant continues to be a nominated director of this company or not depends upon the construction of a few articles of the Articles of Association. Article 47 nominates the first four directors to be the first defendant, the second defendant, Chandulal Nanavati, and the plaintiff.

Article 88 provides that so long as Mr. Jivanlal C. Chinai, his wife, children or child hold jointly or severally, individually, or collectively the first 250 ordinary or preference shares in the company to be allotted to them or any of them, Mr. Jivanlal C. Chinai his wife, children or child so holding the said 250 ordinary or preference shares shall be entitled to appoint and from time to time to remove and reappoint one director, and the contention of the plaintiff is based on the fact that Jivanlal the first defendant ceased to hold the first 250 ordinary shares, on 6-8-1953 when he transferred 150 of these shares to his grandsons.

The submission is that the first 250 ordinary shares must be held either by the first defendant or the group indicated in Article 88, the group consisting of Jivanlal, his wife, children, or child, and as 150 shares had been transferred to his grandchildren they do not constitute members of the group and therefore the first defendant no longer holds the first 250 ordinary shares allotted to him. Then the rest of Article 88 makes similar provisions with regard to other directors, with which we are not concerned.

The last paragraph of Article 88 provides that the above-named Mr. Jivanlal C. Chinai shall be deemed to have been appointed by the said Mr. Jivanlal C. Chinai, which means that Article 88 having given the power to Jivanlal to nominate either himself or anyone else as a nominated director, the article itself provides that Jivanlal has nominated himself as a nominated director. Then we come to Article 89 which provides that Jivanlal and the other directors appointed under Article 88 shall be called the nominated directors. It is by reason of this that Jivanlal was a nominated director. The next paragraph of Article 89 provides:

'Every nominated director shall be entitled to hold office until requested in writing to retire by the party or parties who appointed him or who are or is entitled to appoint his successor and accordingly a Nominated Director shall not be bound to retire by rotation or be subject to Clauses 103 and 104. As and whenever a nominated director vacates office, whether upon request as aforesaid or by death or otherwise, the company, person or persons whoever is entitled to appoint his successor may appoint another director in his place'.

And the third paragraph provides that the nominated director shall not require any qualification. Article 91 provides for qualification of directors and is to the following effect:

'Unless otherwise determined by the Company in general meeting it shall not be necessary for a director to hold shares in the company'.

Article 94 provides for cases where the office of a director is 'ipso facto' vacated, & these cases are bankruptcy, lunacy, (not?) holding of required shares if such holding is made necessary under Article 91, absence from meetings, and resignation in writing. Under the Companies Act, under Section 86-I a director vacates office, if the contingencies mentioned in that section take place. That is a statutory provision and the Articles of Association cannot detract from the provisions contained in this section. But Sub-section (2) provides that nothing contained in this section shall be deemed to preclude a company from providing by its articles that the office of director shall be vacated on grounds additional to those specified in this section.

Therefore, it is open to the Articles of Association to provide for cases other than those mentioned in Section 86-I which would render the office of a director vacant. But just as the grounds on which the office of a director is vacated are specified in Section 86-I, the additional grounds must equally be specified in the Articles of Association, and the very narrow question that we have to consider in this appeal is whether the ground on which Mr. Rege is relying is a ground which is specified in the Articles of Association.

3. The ground suggested by Mr. Rege is that as soon as the group mentioned in Article 88 ceases to hold shares which entitles the group to appoint a director and also to remove him, the person appointed by that group ceases to be a nominated director. in other words, a director who has been duly appointed under Article 88 as a nominated director is disqualified and vacates his office as soon as the appointing authority does not hold shares required by Article 88.

Mr. Rege fairly concedes that there is no specific provision in the Articles of Association to this effect, but he asks us to incorporate this provision by necessary implication, and for this purpose he relies on a well known passage in the judgment of Lord Wright in 'Luxor (Eastbourne) Ltd. v. Cooper' 1941 AC 108 (A) Lord Wright in the first place points out:

'The general presumption is that the parties have expressed every material term which they intended should govern their agreement, whether oral or in writing'.

Then the learned Law Lord goes on to say:

'But it is well recognised that there may be, cases where obviously some term must be implied if the intention of the parties is not to be defeated, some term of which it can be predicated that 'it goes without saying', some term not ex-pressed but necessary to give to the transaction such business efficacy as the parties must have intended. This does not mean that the Court can embark on a reconstruction of the agreement on equitable principles, or on a view of what the parties should, in the opinion of the Court, reasonably have contemplated. The implication must arise inevitably to give effect to the intention of the parties'.

Applying this 'test, can it be said on reading these articles that it goes without saying that a direct or appointed by the group mentioned in Article 88 vacates office as soon as the appointing authority ceases to hold the shares referred to in Article 88? Or, to apply the second test, can it be said that this implication must arise inevitably to give effect to the scheme of these articles? Obviously, the answer is in the negative. The parties may well intend that a person who has been appointed a director under Article 88 should not vacate office unless he is requested in writing to retire by the party or parties who appointed him.

The whole of Mr. Rege's contention is this that when the party who appoints the nominated director ceases to have power to ask him to retire, the nominated director automatically ceases to hold office. The mere fact that by reason of circumstances this particular contingency cannot take place, it does not follow that the necessary inference must be drawn that the person who held office by appointment under Article 88 ceases to hold office.

One of the grounds mentioned in Article 89 of a director ceasing to hold office is the request made to him by the party or parties who appointed him. It is only on that request being made that he ceases to hold office. If no request is made then he continues to hold office. Merely because no request can be made under the circumstances possibly lead to the result that he has ceased to hold office.

It is difficult to understand why, if no request is ever made, the director would continue to hold office as a nominated director, but because the request cannot be made he should incur disqualication when no such disqualification is specifically mentioned in Article 89. Apart from the request being made, there are other grounds mentioned to Article 89 which would lead to the director vacating office. It mentions death and it mentions 'otherwise'. Obviously 'otherwise' refers to the grounds mentioned in Article 94 and also the grounds mentioned in Section 86-I.

Mr. Rege wants us to give a wide meaning to the expression 'otherwise' and to hold that this particular contingency which was to take place would be included in the expression 'otherwise'. 'Otherwise' can only mean that the director vacates office according to law or according to the Articles of Association; 'otherwise' cannot incorporate a fresh ground of disqualification which is neither to be found in the articles nor-in Section 86-I, Companies Act.

4. Therefore, in our opinion, the learned Judge was right in the view that he took that the mere fact that the first defendant has transferred 150 of his ordinary shares to his grandchildren and he along with his wife and children no longer held the first 250 ordinary shares and thereby he has no longer the power to appoint a director nor has he the power to remove him, does not bring about a vacancy in the office of thefirst defendant as a nominated director. (Therest of the judgment is not material to this report.)

5. Appeal dismissed.


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