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Vadilal Raghavji Vs. Maneklal Mansukhbhai - Court Judgment

LegalCrystal Citation
Decided On
Case NumberFirst Appeal No. 154 of 1922
Reported inAIR1925Bom188; (1925)27BOMLR48
AppellantVadilal Raghavji
RespondentManeklal Mansukhbhai
DispositionAppeal allowed
Excerpt: for account-allegations of fraud- resolution of majority of shareholders repudiating suit-suit not barred by resolution-trial of suit on merits.;the plaintiff, a shareholder in a limited liability company, sued the secretary, treasurer and agent of the company and also the company, for an account of profits made by the secretary by an improper diversion of the goods of the company to his use and of profits made in transactions entered into in the name of the company in cotton. after the filing of the suit, an extraordinary general meeting of the shareholders of the company was held, at which a resolution was passed repudiating the suit, the plaintiff alone being the dissentient voter. the trial court, without going into the merits of the case, dismissed it on the..........any trace of any such express prohibition as counsel stated. the case therefore is in point in the present suit, and is directly opposed to the propositions of law advanced by counsel for the defendants.fawcett j. 20. i concur. i fully appreciate the distinction which sir chimanlal setalvad for defendant no. 1 has put before us that in the present case there was an independent majority against the plaintiff's suit. but i am not convinced that the english authorities do not favour the plaintiff's right of suit inasmuch as the defendant no. 1 has a controlling voice in the voting on resolutions at meetings of the company : and at the date the plaint was filed, the plaintiff was in a position to rely upon that fact as bringing the suit within the recognised exceptions to the rule laid down.....

Marten, J.

1. This is a first appeal from the judgment of Mr. K. J. Desai, First Class Subordinate Judge at Ahmedabad, dismissing the plaintiff's suit on the preliminary issues Nos. 1, 2, 4, 6, 7 and 8. In effect these preliminary issues are in the nature of what would have been in old days a demurrer to the plaintiff's case as pleaded in his plaint.

2. The suit is one brought by the plaintiff on behalf of himself and all other shareholders in the defendant company except the first defendant and his nominees and those under his control. The first defendant is the manager and agent of the defendant company, or as the phrase runs in India, one of its Secretaries, Treasurers and Agents, and his firm was so appointed in the Memorandum of Association itself as is unfortunately often done in this Presidency.

3. The charges brought against defendant No. 1 are based on fraud. Para 5 of the plaint alleges that the first defendant's firm as agents of the company have been guilty of frauds as thereinafter mentioned and they decline to allow the plaintiff to inspect the account books of the company as they are afraid that such inspection will assist the plaintiff in exposing the frauds aforesaid. Para 6 alleges that:-

The first defendant's firm have taken advantage o the fiduciary position they occupy towards the company and have obtained pecuniary advantage for themselves (1) by on divers occasions wrongfully diverting the goods of the company or to which the company were entitled to their own use and advantage : (2) by appropriating to their own use large profits made in transactions entered into in the name of the company in cotton, all of which transactions have been concealed from the company and not entered in the account books of the company.

Certain particulars are then given in the plaint and it is alleged that in addition to the particulars given there are other instances of fraud which would only be brought to light on a proper discovery. Then the prayer asks for an account of all profits and pecuniary advantages obtained by the first defendant by reason of his wrongful acts and for payment of the same, and an account of the profits he has made by the use of the company's money and for the payment of the same.

4. The plaint further alleges that the defendant No. 1 himself holds 620 shares out of the 924 shares of the company, and that with the shares held by his co-directors who are his relations or nominees or friends he can control in all some 647 shares, and that as the minority of the shareholders hold only 277 shares, it is impossible for the suit to be brought in the name of the company as the Board would not allow it, and accordingly the plaintiff is entitled to sue on behalf of himself and the other shareholders.

5. The plaint was filed on March 7, 1919. On April 1, 1919, an extraordinary meeting was held of the defendant company at which in effect the plaintiff's suit was repudiated, and the company affirmed the past mode of dealing between the first defendant and the company, and also the course which defendant No 1 had taken in regard to the matters complained of in the plaint. At that meeting the plaintiff was in a minority of one. Everybody there who was present in person or by proxy voted against him, so that quite apart from what I may call the interested votes of the first defendant and his co-directors, there was an independent majority against the plaintiff. It does, however, appear that some thirteen shareholders holding in all twenty- six shares did not attend the meeting either in person or by proxy, but in any event their voting would not have affected the result actually arrived at.

6. Under these circumstances it has been held by the learned trial Judge that the plaintiff cannot maintain the suit inasmuch as the majority of the company do not desire it to be brought. Further as regards the second branch of the complaint he held that the cotton transactions in question were ultra vires the company and that consequently in no event could the company claim the benefit of the transactions. He accordingly Marten J. dismissed the plaintiff's suit.

7. I wish to emphasize that for the purpose of testing whether this suit should be stopped at the outset, or whether it may proceed to trial we can only take the plaint before us and must assume for the sake of argument that all the allegations in the plaint are proved. Nothing therefore that I may say in my judgment must be taken as in the least implying that these odious charges of fraud are in any way proved against the first defendant. On the contrary, without in any way desiring to prejudice the trial of the action, it may be that when the plaintiff's allegations come to be tested or if evidence is adduced by the defendant which establishes the accuracy and truth of what he has pleaded in his written statement, then the defendant may satisfactorily prove to the trial Court that there is no fraud here whatever But we are at present in this embarrassing position that we cannot go into the truth of the written statement, because naturally under the circumstances no evidence has been taken by the learned Judge. We are, therefore, really in the dark as to what are the true facts and can only act on the allegations in the plaint.

8. Now I have read the plaint more than once, but shortly stated it alleges something like an illegal abstraction of the assets of the company by its fiduciary agent. The allegations might in certain circumstances amount to criminal breach of trust or to theft. And to test the question whether a majority can bind a minority under these circumstances, I put it to Sir Chimanlal Setalvad whether supposing a case was one of actual theft and the fiduciary agent had actually stolen the assets of the company counsel still contended that the majority of the shareholders could bind the minority not to recover those stolen assets of the company. Counsel was forced to argue that the majority could bind the minority. It was then pointed out to him that a limited liability company in strictly regulated by Statute and by the powers conferred by its Memorandum and Articles of Association. I was not surprised to find that counsel was unable to cite any authority for the proposition that a majority of shareholders may allow the assets of the company to be dissipated in thefts by its trusted agents, On general principles this proposition is clearly erroneous. The assets of the company, so far as they represent profits, may be distributed by way of dividend, Capital assets may be distributed in a win-ling up or in certain other limited ways under the Indian Companies Act. But this present Memorandum of Association or rather the rough translation before us affords no ground for thinking that any such power as is here contended for is either expressly given or should properly be implied as incidental to that business which the company is there authorised to carry on There is not even any express power to lend money at all either to the agent or anybody else. Much less is there any power to let it be stolen. This objection to my mind goes practically to the root of the whole case, and is sufficient to dispose of it, for the difference between theft and the gross fraud pleaded here is an insufficient distinction in principle.

9. But it was strenuously argued before us that even if you put aside this tainted majority of votes held by the first defendant, still even then the overwhelming independent body of shareholders wanted this action to be stopped, and that accordingly it cannot proceed. It was further argued that all the cases in which a suit on the present lines has been allowed to proceed were, cases in which what one may call the tainted votes were either the actual majority which passe 1 the particular resolution or else were a deciding factor in turning the balance of the voting on the particular resolution. That appears to be so. But on the other hand no authority was cited to us in support of this other argument, viz., that an independent majority is sufficient for the main proposition for which Sir Chimanlal was contending. I may, however, observe that in a case like this where fraud is alleged, and where consequently it is alleged that the suit is within one of the recognised exceptions to the principles laid down in Foss v. Harbottle (1843) 2 Her 461 it will, I think, in general be found that the case is allowed to go to trial to ascertain the facts before it is finally determined whether the action of the majority can in fact bind the minority. This is because until the facts are ascertained with some distinctness, it is difficult to say what is the precise action of the majority, and whether it only amounts on the one hand to those matters of internal management where the majority of the shareholders can rightly impose their will upon the minority, or whether on the other hand it is one of those cases in which the assets of the company are being improperly distributed by an attempt to pay them into the pockets of the majority of shareholders of the company or their friends at the expense of the minority.

10. In Burland v. Earle [1902] A. C. 83 Lord Davey sets out with his usual clearness the rules governing the present class of suits. I need not read the whole page. But, after stating the ordinary rule laid down in Foas v. Harbottie, he comes to the exceptions and says (p. 93):-

The oases in which the minority can maintain such an action are, therefore, confined to those in which the acts complained of are of a fraudulent character or beyond the powers of the Company. A familiar example is where the majority are endeavouring directly or indirectly to appropriate to themselves money, property, or advantages which belong to the company, or in which the other shareholders are entitled to participate, as was alleged in the case of Menier v. Hooper's Telegraph Works (1874) L. R. 9 CA350. It should be added that no mere informality or irregularity which can be remedied by the majority will entitle the minority to sue, if the act when done regularly would be within the powers of the company and the intention of the majority of the shareholders is clear. This may be illustrated by the judgment of Mellish L. J. in MacDougall v Gardiner (1875) 1 Ch. D. 13, 25.

11. Then in Cook v. Deeks [1916] 1 A. C. 554, their lordships of the Privy Council say at p. 564:-

If, as their Lordships find on the facts, the contract in question was entered into under such circumstances that the directors could not retain the benefit of it for themselves, then it belonged in equity to the company and ought to have been dealt with as an asset of the company. Even supposing it be not ultra vires of a company to make a present to its directors, it appears quite certain that directors holding a majority of votes would not be permitted to make a present to themselves. This would be to allow a majority to oppress the minority. To such circumstances the cases of North- West Transportation Company v. Sealty (1887) 12 A. C. 589 and Burland v. Earle [1902] A. C. 83 have no application. In the same way, if directors have acquired for themselves property or rights which they must be regarded as holding on behalf of the company, a resolution that the rights of the company should be disregarded in the matter would amount to forfeiting the interest and property of the minority of shareholders in favour of the majority, and that by the votes of those who are interested in securing the property for themselves. Such use of voting power has never been sanctioned by the Courts, and, indeed, was expressly disapproved in the case of Menier v. Hooper's Telegraph Works (1874) L. R. 9 C. A. 350.

12. Then we have North-West Transportation Company v. Beatty (1887) 12 AC 589. That was a case on the other side of the line where it was held that the directors were not prevented from voting in a case where the proposed purchase of a steamer was a perfectly fair contract at a proper price. But even there the judgment says at p. 600 :-

It may be quite right that, in such a case, the opposing minority should be able, in a suit like this, to challenge the transaction, and to shew that it is an improper one, and to be freed from the objection that a suit with such an object can only be maintained by the company itself.

13. That is an instance of another case which went to trial and where it was not even attempted to shut out the plaintiffs by proceedings in the nature of a demurrer.

14. Then in Menier v. Hooper's Telegraph Works (1874) L. R. 9 CA. 350, Lord Justice Mellish at p. 354 says :

I am of opinion that although it may be quite true that the shareholders of a company may vote as they please, and for the purpose of their own interests, yet that the majority of shareholders cannot sell the assets of the company and keep the consideration, but must allow the minority to have their share of any consideration which may come to them.

15. So, too, in Alexander v. Automatic Telephone Company [1903] 2 Ch.. 56, Lord Lindley saya (p. 69):-

It is necessary, however, to consider the form of the action, and the relief which can be given. The breach of duty to the company consists in depriving it of the use of the money which the directors ought to have paid up sooner than they did. I cannot regard the case as one of mere internal management which, according to Foss v. Harbollle and numerous other cases, the Court leaves the shareholders to settle amongst themselves. It was ascertained and admitted at the trial that, when this action was commenced, the defendants held such a preponderance of shares that they could not be controlled by the other shareholders. Under these circumstances an action by some shareholders on behalf of themselves and the others against the defendants is in accordance with the authorities, and is unobjectionable in form: see Menier v. Hooper's Telegraph Works. An action in this form is far preferable to an action in the name of the company, and then a fight as to the right to use its name. But this last mode of procedure is the only other open to a minority of shareholders in cases like the present.

16. In that case it was alleged that the directors had used their powers under the articles o making calls on shares in such a way that they were not obliged to pay their calls at the same time as the other shareholders, and it was eventually held that they must account for the profits which they had thereby made.

17. Under these circumstances, it seems to me that at any rate as regards the first branch of this case, viz. , the improper diversion of the goods of the company to the first defendant's private use the allegations must be investigated at the trial, and that at the present time we ought not to prevent this case from being heard. Similarly as regards the question as to the profits over the cotton contracts, we think that that matter must also go for trial and that the facts of the case must be, ascertained.

18. In saying this I wish to be clearly understood that this does not mean that these so-called preliminary issues Nos. 1, 2, 4, 6, 7 and 8 are answered in favour of the plaintiff. It merely means that in our opinion no answer at the present stage ought to be given to the issues until the suit has been properly heard at the trial In other words, they are not in the present case, having regard to the plaintiff's pleading, proper preliminary issues. And I wish again to say that in the absence of any evidence, it is quite impossible for us to go into the business matters raised in the written statement of the defendants and in particular to determine whether the alleged system of joint purchase was one which the majority of: the shareholders could under certain circumstances when proved bind the minority.

19. Accordingly I would allow the appeal and set aside the judgment of the lower Court and remand the suit for a trial on all the issues raised. [ The judgment also dealt with discovery and costs.]

Judge's Note. (September 20, 1924) In the course of the arguments I referred Sir Chimanlal Setalvad to Suit No. 18 of 1909 in the Ahmedabad Court brought by Sakerlal Bulakhidas against Kevaldas Tribbovandas and the Bharatkhand Cotton Mills Company Limited and others. This was a suit by a shareholder for a refund of moneys of the company which had been misappropriated by its agent. There, as here, the majority of the shareholders of the company passed resolutions against the suits and in favour of the agent. Both the Subordinate Judge and on appeal the District Judge held that these resolutions were ultra vires the company and therefore inoperative as the company had no power under its Memorandum of Association to lend money to its agent, and much less to allow him to appropriate the assets to his own use, and they referred to the judgment of Sir Norman Macleod in Re Bombay Cotton Manufacturing Company Limited (1909) 11 Bom. L. R. 1302 in support of their decisions. An appeal to the High Court was dismissed, (Second Appeal No. 388 of 1911), and accordingly the preliminary decree passed in the lower Court for an account stood. In its later stages the case again went to the High Court as First Appeal No. 99 of 1914, and subsequently to the Privy Council as Privy Council Appeal No. 21 of 1922 where the High Court decree for Rs. 1,46,453 against the agent was eventually confirmed. Sir Chimanlal sought to distinguish that case because according to him there was an express clause in the Memorandum of Association of the company prohibiting any such loan : and that this clause was quite distinct from a resolution which the company had passed in 1900 to prevent any such load, but which was rescinded after the litigation began. This was quite contrary to my recollection of the case but as the papers were not before me, I made no reference to the case in my judgment. I have since seen the relevant papers, and find that counsel was mistaken. The material documents will be found in the Privy Council Record, viz., the Memorandum at p. 104, and the first three judgments at pp. 113, 131 and 147. In none of them is there any trace of any such express prohibition as counsel stated. The case therefore is in point in the present suit, and is directly opposed to the propositions of law advanced by counsel for the defendants.

Fawcett J.

20. I concur. I fully appreciate the distinction which Sir Chimanlal Setalvad for defendant No. 1 has put before us that in the present case there was an independent majority against the plaintiff's suit. But I am not convinced that the English authorities do not favour the plaintiff's right of suit inasmuch as the defendant No. 1 has a controlling voice in the voting on resolutions at meetings of the company : and at the date the plaint was filed, the plaintiff was in a position to rely upon that fact as bringing the suit within the recognised exceptions to the rule laid down in Foss v. Harbottle (1843) 2 Here 461 and other similar cases.

21. I think that in considering the question whether a person has a right to sue, the Court should lean in favour of that right, unless it is plainly shown that the suit is barred. And I agree with my learned brother that the present is a case where it cannot properly be held that the plaintiff's suit does not lie at all. It is only after the main facts regarding the alleged frauds have been ascertained that it can be decided whether the resolution relied on by the company bars the suit.

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