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V.N. Bhajekar Vs. K.M. Shinkar - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtMumbai
Decided On
Case NumberO.C.J. Suit No. 1118 of 1933
Judge
Reported inAIR1934Bom243; (1934)36BOMLR483
AppellantV.N. Bhajekar
RespondentK.M. Shinkar
DispositionAppeal dismissed
Excerpt:
.....the proposed agreement with the 7th defendant company was discussed clause by clause in the directors meeting as well as in the extraordinary general meeting of february 27. the question as to who were partners in the 7th defendant company was specifically raised and explanation as to the constitution of the company was given. amendments to the resolution regarding the agreement complained of were invited and some were moved, considered and voted upon. 2 in his speech stated that he wanted further alteration in the agency agreement and complained that his views placed before the directors were not given effect to in the meeting of february 27. he asked the shareholders to vote against the resolution moved and reject it. having regard to the minutes of the meetings, the notice..........agency agreement was deferred to monday the 20th, defendants 1 2 and 3 proceeded to consider and passed a resolution authorizing the said 6th defendant company to enter into the said agreement with the 7th defendant agency company. the service of the notice of the said meeting was so effected as to make it certain that the 2nd plaintiff would not be able to attend.4. it will be seen from this that there is no complaint in the plaint here that another resolution which was admittedly passed by the board of directors on february 18, 1933, to call an extraordinary general meeting for the purpose of considering certain resolutions as extraordinary resolutions (see ex. a to the plaint) was invalid. in the course of the argument, however, it was urged that this resolution to call the meeting.....
Judgment:

Rangnekar, J.

1. The suit is a sequel to a resolution passed by the board of directors of the 6th defendant company and an extraordinary resolution passed in a general meeting and confirmed as a special resolution in another extraordinary general meeting of the shareholders of the company. In pursuance of the last two resolutions an agreement was executed by the 6th defendant company, the effect of which is to appoint the 7th defendant company as managing agents of the 6th defendant company. The plaintiffs, who are some of the directors, have brought this suit for challenging the said resolutions and the respective meetings in which they were passed, and for a declaration that the said resolutions were invalid and of no effect, and for an injunction restraining the 7th defendant company from acting on the agreement executed in pursuance thereof.

2. After the institution of the suit the plaintiffs took out a notice of motion for an interim injunction restraining the 7th defendant company from acting upon the said agreement, and in my interlocutory judgment on the motion I have set out the facts and contentions of the parties. I then directed that a meeting of the shareholders of the 6th defendant company should be held in order to find out whether the company was willing to maintain the suit and to proceed with it. I gave full directions as to notices and advertisement and as to the execution of proxies and other incidental matters, and further directed that the meeting should be presided over by the Commissioner of this Court and the resolution passed should be communicated to this Court. This course was adopted by me on the authority of several English cases, to which it is not necessary to refer here. Accordingly, a meeting of the shareholders of the company was held on September 10, 1933. The Commissioner's report shows that the resolution which was put to the meeting was in these terms : Whether the 6th defendant company, the Indian Co-operative Navigation & Trading Co., Ltd., is willing to maintain the suit and to proceed with it. The report further shows that on a poll being demanded and taken the said resolution was lost. No exceptions to the report are filed by any of the parties.

3. The grounds on which the resolutions are attacked are set out in paragraph 15 of the plaint. As to the first resolution passed by the board of directors on February 18, 1933, the plaintiffs contend that two of the directors were interested parties, and there was no proper quorum, and that the meeting of the board of directors on the 18th was held in direct violation of a decision arrived at on a previous meeting of the board on February 17, 1933, to the effect that the next meeting of the board of directors should be held on February 20, 1933. In paragraph 8 of the plaint the plaintiffs state as follows :

In spite of the aforesaid arrangement an urgent meeting of the Board of Directors was summoned at the instance of Ghellabhai Hansraj the 2nd defendant abovenamed for February 18, 1933, and held on that day at 4 p.m. The following Directors were present, viz., the 3rd plaintiff abovenamed and defendants 1, 2 and 3, the 2nd defendant being in the chair. Notwithstanding the protest of the 3rd plaintiff that the consideration of the said agency agreement was deferred to Monday the 20th, defendants 1 2 and 3 proceeded to consider and passed a resolution authorizing the said 6th defendant company to enter into the said agreement with the 7th defendant Agency Company. The service of the notice of the said meeting was so effected as to make it certain that the 2nd plaintiff would not be able to attend.

4. It will be seen from this that there is no complaint in the plaint here that another resolution which was admittedly passed by the board of directors on February 18, 1933, to call an extraordinary general meeting for the purpose of considering certain resolutions as extraordinary resolutions (see Ex. A to the plaint) was invalid. In the course of the argument, however, it was urged that this resolution to call the meeting was invalid. The minutes show that this resolution was passed unanimously by all the members present including plaintiff No. 3, and the minutes were duly confirmed and signed at the next meeting by plaintiff No. 2.

5. As to the extraordinary general meeting and the resolutions passed therein on February 27, 1933, the plaintiffs say that the meeting was irregularly and improperly convened and that there was in law no valid extraordinary general meeting held on February 27, 1933. For the same reason the plaintiffs submit that the confirmatory meeting on March 15, 1933, was also invalid and improper. It may be stated that the extraordinary resolutions with regard to the execution of the proposed agreement between the 6th defendant company and the 7th defendant company for employing the latter as managing agents was passed at the extraordinary general meeting of February 27, 1933, and confirmed in the confirmatory meeting of March 15, 1933.

6. On behalf of the defendants the following issue was raised as a preliminary issue, namely, whether the suit is maintainable. The issue is in the nature of a demurrer to the bill.

7. It is clear from the facts set out that the subject-matter of the resolutions challenged and the questions raised by the plaintiffs are all relating to the internal management of the company acting within its powers. The contention is that these resolutions are illegal and void because of certain irregularities. The question, then, is, whether the Court has jurisdiction to interfere with the internal management of the company acting within its powers, and, secondly, if so, who can sue.

8. In the case of joint stock companies the question often arises, when can a minority of the shareholders of a company sue for themselves and on behalf of other shareholders? On this and cognate questions relating to companies the Courts adhere to the well-known rule in Foss v. Harbottle (1843) 1 Ph. 790 and Mbzley v. Alston (1847) 1 Ph. 790 These cases, which have been followed in numerous decisions to which it is unnecessary to refer, lay down, firstly, that the Court has no jurisdiction to interfere with the internal management of the companies acting within their own powers, and, secondly, to redress a wrong done to the company the action must prima facie be brought by the company itself. Even where a minority of shareholders are alleged to have been overborne by the vote of a majority, the plaintiffs cannot complain of acts which are valid if done with the approval of the majority of the shareholders or are capable of being confirmed by the majority, mere irregularity or informality which can be remedied by the majority being insufficient (see Halsbury Vol. V, (2nd Ed.), p. 408; Buckley's Company Law, p. 132 ; MacDougall v. Gardiner (1875) 1 Ch. D. 13 and Burland v. Earle [1902] A.C. 83 Where the action is brought by shareholders the plaintiff should distinctly allege the illegality of the act complained of and the impossibility of getting the company to impeach its validity : Halsbury Vol. V, Section 677, p. 411. In this case there is no such allegation. Mere irregularities committed by the directors cannot give a cause of action to shareholders and entitle them to challenge the validity of the resolutions passed, and the aggrieved shareholders must appeal to the company in general meeting : see Normandy v. Ind. Coope. and Co. Limited [1908] 1 Ch. 84

9. But this supremacy of the majority is subject to certain exceptions. These are, as the authorities show, (1) where the act complained of is ultra vires the company; (2) where the act complained of is a fraud on the minority; and (3) where there is an absolute necessity to waive the rule in order that there may not be a denial of justice (Palmer's Precedents, Vol. I, p. 1246).

10. In this case there is no contention that the resolutions complained of are ultra vires the company. On the other hand, it is clear from the record that the plaintiffs were conscious of this lacuna in the case and were attempting to remedy it by way of an amendment of the plaint. Their summons, which it may be incidentally stated sought inter alia to bring in the second resolution passed unanimously on February 18 for calling the extraordinary general meeting and the confirmatory meeting, was, however, dismissed, and the only cause of action now is that the resolutions are invalid because of certain irregularities. Secondly, there is no allegation in the plaint that the plaintiffs personally have suffered any wrong. The whole case on behalf of the plaintiffs is that there was a wrong caused to the company. The report of the Commissioner, however, to which I have referred, shows clearly that the majority of the shareholders have decided not to proceed with the suit, and the position is that they have in effect approved of the resolutions complained of with full knowledge of all the material facts about the alleged irregularities in the passing of the resolutions and in the holding of the meetings complained of. Under these circumstances it is difficult to see how a few shareholders who represent a minority are entitled to maintain the suit and ask the Court to interfere on the question as to who should be the managing agents of the company. In MacDougall v. Gardiner (1875) 1 Ch. D. 13 James L.J. observed (p. 23):

If there is some one managing the affairs of the company who ought not to manage them, and if they are being managed in a way in which they ought not to be managed, the company are the proper persons to complain of that.

11. The plaintiffs' counsel attempted to bring the case, apart from the question of justice, within the second exception above referred to, that is, fraud. There is no allegation that the majority have practised any fraud on the minority of shareholders. The whole case is that two of the directors have practised fraud on other directors and perhaps on the shareholders. The only reference to fraud in the whole of the lengthy complaint is in paragraph 5 of the plaint, and the complaint is that the 7th defendant company is a bogus company, and was brought into existence for the purpose of perpetrating fraud on the 6th defendant company, and that defendants Nos. 1 and 3 are members of that company. In the first place, no particulars of the fraud practised on the 6th defendant company are given. The allegation of fraud as made is too vague to act upon. As far as one can' see there is nothing in law which can prevent a company from appointing what is called a bogus company as its managing agents if the company so desires.

12. The position, however, is that the acts complained of being capable of being approved and ratified, the company has now as the result of the Court meeting virtually approved of and adopted the resolutions complained of.

13. Mr. Engineer argues that there is one more exception, and relies on Battlie v. Oriental Telephone and Electric Company, Limited [1915] 1 Ch. 503 He relies upon the exception as stated in Halsbury, Vol. V. p. 409, in the words following:

Where, however, the persons against whom relief is sought hold and control the majority of the shares, and will not permit an action to be brought in the company's name, shareholders complaining may bring an action in their own names and on behalf of the others, and they may do so also where the effect of preventing them so suing would be to enable a company by an ordinary resolution to ratify an improperly passed special resolution.

14. He argues that the special resolution is bad and the suit can lie even though the majority is against it. Now it seems to me that this case went on its own facts which were of a specially exceptional character. There were two companies concerned in that case, one being the principal company and the other subsidiary company. The directors of the principal company were practically the masters of the situation and could dominate the subsidiary company. On the facts it was held that the notice calling the extraordinary general meeting, the validity of which was challenged, was tricky. Lord Cozens-Hardy M. Rule observed (p. 515):

I feel no difficulty in saying that special resolutions obtained by means of a notice which did not substantially put the shareholders in the position to know what they were voting about cannot be supported, and in so far as these special resolutions were passed on the faith and footing of such a notice the defendants cannot act upon them.

15. Kennedy L.J. delivered no separate judgment. Swinfen Eady L.J. seem : ed to hold that in certain cases members may sue on behalf of the corporation and such an action may be permitted in the interests of justice. This case is understood by Palmer as a case of a resolution being carried out by a trick. Even so, as Palmer points out, it is the company that must sue and not a few shareholders.

16. In this case I am clearly of opinion that the claims of justice do not require any departure from the well-recognised rule in Foss v. Harbottle, Apart from the Court meeting, it is clear that even if the notice here is bad, being given as the result of the resolution passed on February 18 which the plaintiffs say is invalid-still the notice was ratified by the holding of the meetings complained of, no complaint was made as to the invalidity of the meetings. The plaintiffs knew the facts. The 3rd plaintiff was present at the extraordinary general meeting of February 27 and all the plaintiffs were present at the confirmatory meeting, plaintiff No. 1 being in the chair. The dissentient shareholders were at the meeting. It was open to them to complain and object to the validity of the meetings. This they did not do, and it is difficult to see how they or any one else can now object. The minutes of the meetings of the board of directors subsequent to the meeting of February 18 clearly show that no complaint was raised on behalf of the plaintiffs. Then they took part in these meetings. The proposed agreement with the 7th defendant company was discussed clause by clause in the directors meeting as well as in the extraordinary general meeting of February 27. The question as to who were partners in the 7th defendant company was specifically raised and explanation as to the constitution of the company was given. Amendments to the resolution regarding the agreement complained of were invited and some were moved, considered and voted upon. Various other points as to remuneration, &c;, were raised, discussed and disposed of. Various clauses of the proposed agreement were after discussion put to the vote separately. Finally, the whole agreement as amended was put to the vote and carried, one shareholder alone dissenting. At the confirmatory meeting plaintiff No. 1 who presided explained to the shareholders at the outset that the resolution was discussed at the last extraordinary general meeting on February 27, 1933, and it was duly passed by the shareholders after due consideration, explanation and amendment. He further stated that if the shareholders required further information they were at liberty to call for it. Plaintiff No. 2 in his speech stated that he wanted further alteration in the agency agreement and complained that his views placed before the directors were not given effect to in the meeting of February 27. He asked the shareholders to vote against the resolution moved and reject it. One of the shareholders put before the meeting what he had discovered as the result of his inspection of the file of the 7th defendant company from the office of the Registrar of Companies and inter alia disclosed the interests of defendants Nos. 1 and 3 in that company. Another shareholder urged that the agreement would be vitiated as some of the directors of the 6th defendant company were interested in the 7th defendant company and that defendant Shinkar was particularly interested in the 7th defendant company. Then, after the various objections were considered, the resolution was voted upon and declared carried by a large majority. Upon these admitted facts it is clear that the objection to the validity of the meeting, if any, was waived. The irregularities, if any, in the resolution calling this meeting were condoned and the resolution of February 18 was ratified. Having regard to the minutes of the meetings, the notice itself, the advertisement of the notice and the resolution, it is difficult to see how it can be said that the resolution complained of was obtained by a trick.

17. Mr. Engineer argues that a special resolution cannot be ratified retrospectively. I am at a loss to understand the objection. There is nothing to prevent a company from passing another special resolution appointing the 7th defendant company as their agents, and if such a resolution is passed, it would in effect ratify the irregular special resolution complained of. In this connection I may refer, to the case of Southern Counties Deposit Bank v. Rider and Kirkuood (1895) 73 L.T. 373 In that case the notices convening the, meeting at which a special resolution to wind up voluntarily was passed by the shareholders of a company were issued under the authority of a resolution passed at a meeting of the board of directors at which a quorum was not present. Six months afterwards the shareholders sought to have the special resolution declared invalid. It was held by Lord Justices Lindley, Lopes and Righby that the doctrine upon which the Court had acted since Foss v. Harbottle was not to interfere for the purpose of forcing companies to conduct their business according to the strictest rules, where the irregularity complained of could be set right at any moment, and that, therefore, the Court would not interfere, especially as no application had been made to it until six months had elapsed after J the passing of the resolution. It is clear on the authorities that a company cannot confirm or ratify anything which is beyond its powers, express or implied, in the memorandum or conferred by statute. Short of that a transaction by the directors which is beyond their own powers but within the powers of the company can be ratified by a resolution of the company in a general meeting or even by acquiescence, provided that the shareholders have knowledge of the facts relating to the transaction to be ratified or the means of knowledge are available to them. It is clear on the authorities that a company may by a resolution at a subsequent meeting ratify any business which it purported to transact at a meeting informally called.

18. In my opinion to disallow the demurrer is to allow a small minority of the body to which they belong to interfere in the conduct of the majority. This cannot be done, and 'an attempt to introduce such a remedy ought to be checked for the benefit of the community'. The demurrer, therefore, must be allowed. My finding on the issue is in the negative.

19. In the result the suit must be dismissed with costs. Notice of motion dismissed with costs. The costs of notice of motion to be taxed. There will be three separate sets of costs of the suit and the notice of motion, one for the 6th defendant company, one for the 7th defendant company, and one for defendants 1 to 5. The plaintiffs to pay the costs of and incidental to the meeting held on September 10, 1933, in pursuance of the order of August 3,1933 to the 6th defendant company. The Commissioner to return to the 6th defendant company the proxies and papers relating to the meeting.


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