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C.L. Joseph Vs. Jos and anr. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKerala High Court
Decided On
Case NumberSecond Appeal No. 841 of 1963
Judge
Reported inAIR1965Ker68
ActsCompanies Act, 1956 - Sections 36 and 41; Specific Relief Act, 1877 - Sections 42
AppellantC.L. Joseph
RespondentJos and anr.
Appellant Advocate P.K. Subramania Iyer, Adv.
Respondent Advocate K.S. Sebastian and; P.A. Ittiachan, Advs.
DispositionAppeal dismissed
Cases ReferredRam Narain v. Ram Krishan
Excerpt:
.....hare for and that line of cases. -if a thing complained of is a thing which in substance the majority of the company are entitled to do or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having litigation about it, the ultimate end of which is only that a meeting has to be called and then ultimately the majority gets its wishes .in this case the wrong done to the plaintiff is not a wrong which the majority can ratify as it would be against the provisions of the articles of association, and it is settled by authorities that a shareholder can insist on the strict observance of the legal rules, statutory..........on behalf of him-self and other shareholders or in some instances an action in the name of the company. individual membership right should not be confused with the rights available for qualified minorities. the question for decision therefore is whether the particular right asserted in this case is an individual membership right or a corporate membership right. if it is a corporate membership right it is subject to the will of the majority provided that will is expressed in accordance with the law and the article. with respect to this right the principle of supremacy of the majority will apply and the rule in foss v. harbottle, 1843-2 hare 467 will get itself attracted. in that case the minority of shareholders had a claim in damage against some of the directors by reason of the.....
Judgment:

K.K. Mathew, J.

1. The 3rd defendant is the appellant. Defendants 3 to 5 were Directors of the 1st defendant Company. Item No. 4 in the agenda of the annual general meeting of that Company held on 23-3-1961 was the election of three Directors in the place of defendants 3 to 5 who were due to retire. Defendants 3 to 5 sought re-election and it was resolved in that meeting that there should be separate elections to the three posts. The first election was to fill up the vacancy to be caused by the retirement 6f the defendant. The plaintiff was a candidate, and he contested the elections, but was defeated, and the 5th defendant was elected, Then two share-holders moved a resolution that the election of the two other Directors may be postponed. The chairman disallowed the motion. Thereafter the plaintiff was proposed as a candidate to fill up the vacancy to be caused by the retire-ment of the 3rd defendant. But the chairman ruled that he was not qualified to stand as a candidate as he was already defeated in the contest with the 5th defendant. In the election the 3rd defendant was declared elected.

The suit was for a declaration that the proceedings of the meeting as regards the elections of the Directors were null and void, and for an injunction restraining defendants 3 to 5 from functioning as Directors and for directing the 1st defendant Company to hold a meeting for electing the three Directors. Several allegations were made in the plaint challenging the validity of the election. The main defence was that the question raised in the suit related to the internal management of the 1st defendant Company and that the suit was incompetent.

2. The courts below held that the chairman acted illegally in disallowing the nomination of the plaintiff to the vacancy caused by the retirement of the 3rd defendant, that the question raised in the suit did not relate to purely internal management of the 1st defendant Company and that the suit was competent. They also held that no direction could be given for convening a meeting of the company for electing the Directors.

3. The only point argued before me was that the suit was not maintainable, since the matter related to and was entirely concerned with the internal management of an incorporated company. In order to decide the question whether the ruling of the chairman that the plaintiff has no right to stand as a candidate for election to the post of a Director raised a justiciable issue, one has to look into the nature of the right which the plaintiff was asserting in the case. There are two kinds of rights for a member of the Company, one the individual membership right and the other the corporate membership right. So far as the corporate membership rights are concerned a shareholder can assert those rights only in conformity with the decision of the majority of the shareholders. An individual membership right is a right to maintain himself in full membership with all the rights and privileges appertaining to that status. This right implies that the individual shareholder can insist on the strict observance of the legal rules, statutory provisions and provisions in the memorandum and articles which cannot be waived by a bare majority of share holders. The distinction between individual membership rights and corporate membership rights of a share-holder is founded on the following considerations:

'By his contract with the company (and the other members; of Section 20) the share-holder undertakes with respect to some - and, in fact, most lights which his membership carries, to accept as binding upon him the decisions of the majority of share-holders, if arrived at in accordance with the law and the articles; these membership rights are known as corporate membership rights. Other fights of the shareholders, according to his contract with the company cannot be taken away from him unless he consents; if such right is in question, a single shareholder can, on principle, defy a majority consisting of all the other share-holders. Rights of this type are known as individual membership rights.'

(See Palmer's Company Law, 20th Edn., page192.)

So far as individual membership right is concerned every shareholder has got the right to assert it in his own name, but if the infringement of a corporate membership right is alleged his remedy is a representative action on behalf of him-self and other shareholders or in some instances an action in the name of the company. Individual membership right should not be confused with the rights available for qualified minorities. The question for decision therefore is whether the particular right asserted in this case is an individual membership right or a corporate membership right. If it is a corporate membership right it is subject to the will of the majority provided that will is expressed in accordance with the law and the article. With respect to this right the principle of supremacy of the majority will apply and the rule in Foss v. Harbottle, 1843-2 Hare 467 will get itself attracted. In that case the minority of shareholders had a claim in damage against some of the Directors by reason of the fraudulent act of those Directors. At the general meeting the Majority resolved that no action should be taken against the detinquent Directors. Two of the minority share-holders took out legal proceedings against the Directors and others to compel them to make good the losses to the company; but the court dismissed the action on the ground that as the nets of the Directors were capable of being ratified by the majority of the members, the Court should not interfere, It was left to the majority to decide what was for the benefit of the Company, and their decision cannot be questioned except under certain well-defined circumstances.

4. In Nagappa Chettiar v. Madras Race Club, AIR 1951 Mad 831 (2) it was held that the right of a shareholder to vote or his right to stand as a candidate for election as a Director of the Company, is an individual membership right, which he can assert in his own capacity without the sanction of the majority or without impleading the company as a co-plaintiff or defendant.

5. In Pender v. Lushington, 1877-6 Ch D 70 it was observed that the right to exercise his vote by a share-holder in a company is an individual fight, and that an infringement of that right will give riseto a justiciable issue. In that case a resolution of the general meeting would have been carried, had the chairman not disallowed the nominee holding on behalf of the plaintiff. The plaintiff sued on behalf of himself and other members who had voted with him manning the company as co-plaintiff. He asked for an injunction to restrain the Directors from acting on the basis that the nominee votes were in admissible. Jessel M. .R. granted injunction and entered that the company's name should remain on second until & general meeting was convened and has decided whether the company wish to see and set as plaintiff. In the course of his judgment the said: -

'But there is another ground on which theaction may be maintained. This is an action by Mr. Pender for himself. He is a member of the company, and whether he votes with the majority or the majority he is entitled to have his vote recorded on individual right in respect of which he has a right to add. That has nothing to do with the question like that raised in 1843-2 Hare for and that line of cases. He has a right to say, whether I vote in the majority or minority, you shall record my vote, as that is a right of property be-longing to my interest in this company, and if you refuse to record my vote I will institute legal proceedings against you to compel you.' What is the answer to such an action. It seems to me it can to maintained as a matter of substance, and that there is no technical difficulty in maintaining it.'

6. In Edvards v. Halliwell, 1950-2 All E. R. (sic) at P. 1067 Jenkins L. J., observed:

'The personal and individual rights of member-ship of each of them have been invaded by a purported, but invalid alteration. . ... Inthese circumstances, it seems to me the rule in 1843-a Hare 461 has no application at all, for the individual members who are suing sue not in the rightof the member but in their own right to protect from inversion their own individual rights as members.'

( See also Walsbury's Laws of England, Third Edition Ved. 6, page 49, Art. BII)).

7. In Star Tile Works Ltd'. Kallai v. (sic) Govindan AIR 1959 Ker 254 a Division Bench at the Court has occasion to consider a more or less similar question and the learned Judges came to the conclusion that the individual membership right is infringed an action to vindicate it is permissible. (8) In AIR 1951 Mad 831 (2) already referreddo, it in observed:

The Rule in Foss v. Harbottle .... that a court will not interfere with the ordinary management of a Co. acting within its powers and has no jurisdiction to do so at the instance of the share-holders. A Shareholder is entitled to institute a suitto enforce his individual rights against the Co. such on his right to vote, or his right to stand as a director of a Co. at an election. If the shareholder however intends to obtain redress in respect of a wrong done to the Co. or recover monies as damages alleged to be due to the Co., the action should ordinarily be brought by the Co. itself.'

The rule in (1843) 2 Hare 461 is subject to a consider to eroeptions. But it is not necessary topursue that question in the facts and circumstancesof this case,

9. It was argued for the appellant relying onRam Narain v. Ram Krishan, 10 Ind Cas 515 atp. 523 (Lah) that all questions relating to the regularity of the meeting of the company and the votings therein are matters relating to the internalmanagement of the company. The question, therewas whether a shareholder was entitled to recoverdamages from the chairman who illegally refused to record his vote. Itwas held that a shareholder who had been wrongfully refused the right to vote for the election of aDirector cannot maintain an action for damagesagainst the chairman of the company without alleging and proving that the latter was actuated bymalice and that mere deprivation of the right of theplaintiff to vote would not entitle him to damages.Here no question of damages arises: The rulingis no authority for the point in controversy in thiscase. I do not think that the observations ofMellish L. J., quoted in that judgment are controlling. That quotation is as follows: --

'...,.. if a thing complained of is a thing which in substance the majority of the company are entitled to do or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having litigation about it, the ultimate end of which is only that a meeting has to be called and then ultimately the majority gets its wishes . . . '

In this case the wrong done to the plaintiff is not a wrong which the majority can ratify as it would be against the provisions of the Articles of Association, and it is settled by authorities that a shareholder can insist on the strict observance of the legal rules, statutory provisions and provisions in the memorandum and articles which cannot be waived by a bare majority of shareholders. In these circumstances, I am of the view that the contentions that the plaintiff bad no right to move the Civil Court must be overruled. I therefore hold that the suit was maintainable.

10. The only other point argued by counsel for the appellant was that as the plaintiff prayed for holding a meeting for carrying on the election and as that was rejected by both the courts below, the plaintiff was not entitled to have a declaration of the invalidity of the 3rd defendant's election as Director. It cannot be said from this circumstance that the plaintiff's suit was not maintainable. The plaintiff's suit was maintainable because there was the prayer for the consequential relief to hold a meeting from the stage at which the chairman declared the plaintiff to be incompetent to stand for election. I can sec no point in the argument of counsel that since the consequential relief was not granted by the courts below the declaration of the invalidity of the election granted by them cannot stand.

11. In the circumstances, the appeal has tobe dismissed, and I do so with costs.


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