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N.V. Vaidyanatha Ayyar and anr. Vs. Indian Bank Ltd., Tiruchirapalli and ors. - Court Judgment

LegalCrystal Citation
CourtChennai High Court
Decided On
Case NumberA.A.O. Nos. 316 and 387 of 1954
Reported inAIR1955Mad486
ActsCode of Civil Procedure (CPC) , 1908 - Order 21, Rule 90; Companies Act, 1913 - Sections 153C(1); Evidence Act, 1872 - Sections 115
AppellantN.V. Vaidyanatha Ayyar and anr.
RespondentIndian Bank Ltd., Tiruchirapalli and ors.
Appellant AdvocateS.S. Ramachandra Iyer and ;V. Sundaresan, Advs.
Respondent AdvocateC.R. Pattabriraman, ;S. Ramchandra Iyer, ;P.S. Srisailam, ; R. Ramasubba Iyer, ;K. Varadarajan and ;A.D. Sitaraman, Advs.
Cases ReferredGholam Murteja Chowdhry v. Goluck Chunder Roy
.....under order xxi, rule 90, of the code of civil procedure, to set aside an execution sale,; held, in the absence of any indication in the order that the admission was provisional, the application must be deemed to have been admitted. once the petition is admitted, the court has no jurisdiction to insist on security being furnished.; held, further, a an application by an individual share-holder in a limited company under order xxi, rule 90, of the code of civil procedure, to set aside a sale of property belonging to the company, on the ground that the managing director acted in the execution sale in fraud of the company and in collusion with the auction-purchaser, would not lie, as he has no locus standi. the petitioner has a specific remedy under section 153-c of the indian..........that the initials of the subordinate judge appear. the notes paper shows that on 5-4-1954, - the notice ordered on 26-3-1954 having been given - counter was filed, and the petition was ordered to be taken up on 6-4-1954. on that date the petitioner was ordered to deposit cash or furnish security of im-moveable property by 10-4-1954. that day the judge was on leave and so the petition was adjourned to 12-4-1954.on that date the petition to set aside the sale was dismissed on the ground that security as ordered was not furnished.2. meantime, that is to say, on 26-3-1954, one vaidyanatha lyer, a share-holder in the trichinopoly automobiles ltd., filed e. a. no. 584 of 1954 to set aside the sale. among others, he urged the ground that the managing agent of the trichinopoly automobiles.....
1. The properly which forms the subject-matter of these proceedings is a building on Macdpnald's Road, Tiruchirapalli, Cantonment. A limited liability company, called the Trichinopoly Automobiles Ltd., owned that building and was doing its business there. The Vasudeva Funds Ltd., a banking con cern in Tiruchirapalli, lent Rs. 50,000, to the Automobiles Ltd. The date when the loan was made was not mentioned to us; but it. must have been sometime prior to April 1948. In that month, the Indian Rank Ltd., lent a sum of Rs. 1,00,000 to the Automobiles Ltd., on the mortgage of this and other properties.

The Indian Rank sued on the mortgage in its favour, and, on 12-12-1950, obtained a decree for Rs. 1,05,000, and odd. On 28-9-1951, the Vasudevai Funds obtained a decree for Rs. 49,000 and odd. Sometime before 2-12-1953 - here too the dale was not mentioned to us - the Indian Bank Ltd., filed an execution petition for the sale of the hypo-theca. While the execution petition was pending, the Vasudeva Funds brought the property to sale and at a court sale held on 21-12-1953 it purchased the property for Rs. 11,005.

This purchase was of course, subject to the mortgage in favour of the Indian Bank. The sale of the property in execution of the decree which the Indian Bank had obtained was proclaimed for 24-2-1954. On that date, the Vasudeva Funds filed E. A. No. 360 of 1954 for adjournment of the sale by three months. But that application was dismissed. The property was then sold and purchased by Chellappa Chcttiar for Rs. 55,000. On 24-3-1954, the Vasudeva Funds filed E. A. No. 574 of 1954 for setting aside the sale on various grounds.

At the same time, it filed E. A. No. 575 of 1954 praying that the personal security of the petitioner be accepted and the petition for setting aside the sale proceeded with. Both the applications were opposed. Over the date 26-3-1954, the following appears in the notes paper of E. A. No. 574 of 1950; "The petitioner prays to set aside the sale held on 24-2-1954 and posted for confirmation to 8th April 1954. Personal security offered. Notice 5th April 195-1"

This part of the note appears to be in the handwriting of an officer of the court and below that the initials of the Subordinate Judge appear. The notes paper shows that on 5-4-1954, - the notice ordered on 26-3-1954 having been given - counter was filed, and the petition was ordered to be taken up on 6-4-1954. On that date the petitioner was ordered to deposit cash or furnish security of im-moveable property by 10-4-1954. That day the judge was on leave and so the petition was adjourned to 12-4-1954.

On that date the petition to set aside the sale was dismissed on the ground that security as ordered was not furnished.

2. Meantime, that is to say, on 26-3-1954, one Vaidyanatha lyer, a share-holder in the Trichinopoly Automobiles Ltd., filed E. A. No. 584 of 1954 to set aside the sale. Among others, he urged the ground that the Managing Agent of the Trichinopoly Automobiles Ltd., had been acting in fraud of the company and that Chellappa Chettiar the court auction purchaser, was his own nominee.

At the same time, a separate application for accepting personal security was filed. On that, notice was ordered on 5-4-1954. On 5-4-1954, the petition was ordered to be called on 6-4-1954. The petition was then adjourned to 10-4-1954 and re-posted on that date to 12-4-1954. This petition too was dismissed on the ground that security, was not furnished as ordered.

3. Against the orders dismissing the two petitions the present appeals have been filed. C. M. A. No. 316 of 1954 has been filed by Vaidyanatha Iyer and C. M. A. No. 387 of 1954 by the Vasudeva Funds Ltd. The former may be first disposed of.

4. Mr. C. R. Pattabhiraman the learned advocate for the Indian Rank took the objection that the peti tioner, Vaidyanatha Iyer, is only a share-holder in the Trichinopoly Automobiles Ltd., that the property which was sold was the property of the Automobiles Ltd., and not of the petitioner and that therefore he has no 'locus standi' in the matter at all. On the other side, the reply was this. This first paragraph of Order 21, R. 00, C. P. C. runs as follows:

"Where any immovable property has been sold in execution of a decree, the decree-holder or any person entitled to share in a rateable distribution of assets or 'whose interests arc affected by the sale, may apply to the court to set the sale aside'. . ."

The petitioner, being a share-holder in the company, is a person whose interests are affected by the sale and ho is therefore entitled to object, liefcr-ence was made to certain well known cases. The earliest of these is - 'Hoole v. Great Western Rly. Co,', (1867) 3 Ch App 262 (A), where it was held, "an individual member of a corporation may maintain a bill in his own name, without suing on behalf of other persons as well as himself, to restrain the corporation from doing an act which is ultra vires."

The next case is 'Burland v. Earle', 1902 AC 83 (B). The second paragraph of the head-note to the report runs as follows ;

"The company must sue to redress a wrong done to it; but if a majority of its shares are controlled by those against whom relief is sought, the complaining share-holders may sue in their own names, but must shew that the acts complained of are either fraudulent or ullra vires."

The tliird case is - 'Vadi Lal Raghavji v. Maneck Lal; AIR 1925 Bom 1SS (C). The plaintiff, there was a share-holder of the defendant company. He alleged that the firm of the first defendant, as agents of the company, had been guilty of fraud and that it had taken advantage of its fiduciary position to obtain pecuniary advantages for itself. The plaint was filed on 9-3-1919, and on 1-4-1919, an extraordinary meeting of the defendant-company was held at which the plaintiff's suit was repudiated and the company affirmed the course of dealings which the managing agents had taken.

At that meeting, the plaintiff was the sole dissentient. The trial Court held that the piaintiff could not maintain the suit since the majority of the company did not desire the action to be brought. On appeal, the decision was reversed and the suit was remanded for re-trial. Marten J. observed :

"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 - Toss v. Harbottle', (1843) 2 Hare 461 (D), 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."

5. It was stated on behalf of the appellant that the property of the company had been sold to Chellappa Chettiar at an unconscionably low price as a result of collusion between him and the manag ing director of Trichinopoly Automobiles Ltd., and that if the petitioner is not permitted to intervene, the company would be put to loss and through the company the petitioner also.

On the other side, Mr. Pattabhiraman argued that the contention of counsel for the appellant runs counter to all established legal notions about the position of a limited liability company. A shareholder is not in any sense of the word an owner or part owner or co-owner of any of the properties of the company. The legal ownership of the property is vested in the company and only in the com-pany. The company can act only through its accredited representatives - accredited in the manner prescribed by its constitution.

If an individual share-holder feels that the managing directors are acting in fraud of the company or otherwise to its and his detriment, steps must be taken in the manner provided in the constitution of the company and the Companies Act. He referred in this connection " to the decision in - 'Charanjitlal Chowclhnri v. Union of India', (E). On p. 52 it is stated :

". . . . The fundamental rights guaranteed by the Constitution are available not merely to individual citizens but to corporate bodies as well except where the language of the provision or the nature of the right compels the inference that they are applicable only to natural persons. An incorporated company, therefore, can come up to this court for enforcement of its fundamental rights an_d so may the individual share-holders to enforce their own; hut 'it would not be open to an individual share-holder to complain of an act which affects the fundamental rights of the company except to the extent that it constitutes an infraction of his own rights as well'.

This follows logically from the rule of law that a corporation has a distinct legal personality of its own with rights and capacities, duties and obligations separate from those of its individual members. As the rights are different and inhere in different legal entities, it is not competent to one person to seek to enforce the rights of another except where the law permits him to do so." Again on p. 53:

"It is settled law that in order to redress a wrong done to the company, the action should 'prima facie' be brought by the company itself."

Again on p. 65:

"In my opinion, although a share-holder may, in a sense, be interested to see that the company of which he is a share-holder is not deprived of its property, he cannot, as held in - 'Darnell v. State of Indiana', (1912) 226 US 390 (F), he heard to Complain, in his own name and on his own behalf, of the infringement of the fundamental right to property of the company for, in law, his own right to property has not been infringed as he is not the owner of the company's properties,

An interest in the company owning an undertaking is not an interest in the undertaking itself. The interest in the company which owns an undertaking is the "property" of the share-holder under Article 31(2), but the undertaking is. the property of the company and not that of the share-holder and the latter cannot be said to have a direct interest in the property of the company. This is the inevitable result of attributing a legal personality to a corporation."'

It seems to us that the preliminary objection must prevail.

6. A share-holder is no doubt interested in the property of the company in which he holds shares;, if the property is not properly looked after and administered, the share-holder would naturally suffer in his pocket. But this does not mean that every share-holder, who apprehends that the property of the company is being mismanaged or is even fraudulently disposed of, is entitled to come to court in the manner the petitioner has done.

It is easy to see that if such a course were permitted, the business of the company can be brought to a complete standstill when differences of opinion exit among the members of the company. One legal effect of incorporation is to vest the ownership of the property in the company, which acquires, a separate legal existence. The property has to be managed by the directors, subject to the control of the share-holders and the provisions of the constitution of the company. If the directors misbehave, they can be removed.

If they are able to get the backing of the majority and threaten to use that majority to oppress the minority, that will be an occasion when the court will interfere. The petitioner alleges that the managing director has perpetrated a fraud on the company in collusion with Chellappa Chettiar. In respect of such a conduct, the petitioner has a specific remedy provided under Section 153-C, Indian Companies Act. The first sub-section of it runs as follows:

"Without prejudice to any other action that may be taken, whether in pursuance of this act or any other law for the time being in force, any member of a company who complains that the affairs of the company are being conducted-

(a) in a manner prejudicial to the interests of company, or

(b) in a manner oppressive to some part of the members (including himself), may make an application to the court for an order under this section."

And then elaborate provisions follow as to what the court might do on such an application being made. If the allegation of the petitioner that there had been fraudulent collusion between the managing director and Chellappa Chettiar is true, he can get sufficient and adequate relief by bringing an application asking that the property which Chellappa Chettiar has acquired be brought rack and returned to the company.

7. In the result C. M. A. No. 316 of 1954 is dismissed with costs.

8. C. M. A. No. 387 of 1954: We have already stated that the application filed by the Vasudeva Funds for setting aside the sale was dismissed on the ground that security as ordered was not furnished and that this is an appeal by the Vasudeva Funds Ltd., against that order. The arguments for the appellant may be thus summarised. The first proviso to Order 21, It. 90, C. P. C., as it applies in Madras runs:

"Provided that the Court may, after giving notice to the applicant, call upon him before admitting the application either to furnish security to the satisfaction of the court for an amount equal to that mentioned in the sale warrant or that realised by the sale, whichever is less, or to deposit such amount in court."

By reason of this proviso, the court has authority to call for security only before admitting the petition to set aside the sale; but once the petition is admitted, it has no jurisdiction whatsoever to demand a security. In the present case, E. A. No. 574 of 1954, which was filed to set aside the sale, was admitted by the court on 26th March 1954, and after that it had no jurisdiction to insist on security in any form. lieference was made to - 'Narasimha Pattamaha-devi v. Annan Naidu', AIR1940 Mad 624 (GJ and - 'Chidambaram v. Lakshminarayana Chettiar', AIR 1941 Mad 652 (II). In the former case, Moc-kett J; referred to a Full Bench decision in - 'Brij Bechari Lal v. Finn Srinivas Ram', AIR 1039 Pat 248 (FB) (I) where it was stated: X

"Admission of the application presumably means the stage when the court decides to issue notice upon such application to the opposite parties concerned."

And added his respectful agreement with that view. He went on:

" 'Admission' to my mind conveys that point of time when an application or suit, as the case may be, is received into court and accepted for decision, and that stage is when notice is given to the opposite side",, .

The facts in the latter case were these: Two petitions were filed in court, one to s_et aside a sale and the other to dispense with security. The advocate on the other side was actually heard before orders were passed on both the petitions. Thereafter, the Court called for security and since that was not furnished, the petition to set aside the sale was dismissed. On appeal, Pandrang Row and King JJ. allowed the appeal on the ground that the court had no jurisdiction to make the order it did. They observed:

"It is quite possible of course that the lower court did not intend really to admit the petitions;, but if in law the procedure adopted by it has necessarily the effect of having brought about the admission of the petitions, it is not possible for us now to regard them as not having passed the admission slage when the order to give security was made."

On the other side, the decision in - "Vcnkata-lingama v. Rajagopala Venkata Narasimha', AIR 1942 Mad 509 (J) was cited. The facts there were as follows: On 27-10-1939, the appellant applied under Order 21, R. 90, C. P. C. to have a sale set aside. The Subordinate Judge ordered that he should furnish security and granted him one week for the purpose. On 31st October, the appellant filed another application asking for more time for furnishing security.

Time was extended to the llth November. On that date, a draft security bond was filed. On the 15th November, without passing any orders in regard to the adequacy of the security tendered or to the necessity for furnishing any registered security bond, the court issued notice to the opposite side. When the respondent appeared, he took the objection that the property offered as security was not sufficient. The security was then tested and found to be wholly inadequate.

The Court then dismissed the application to set aside the sale without considering it on its merits, on the ground that the appellant failed to furnish, security. The petitioner then appealed to this court. Before King and Happell JJ. the decision in AIR 1942 Mad 509 (J) was cited and it was argued that the court had no jurisdiction, after having admitted the petition, to insist on security.

The learned Judges held that the mere fact that notice was issued was not conclusive on the question whether the petition had been admitted. They observed:

"After all, in spite of the incidental remark made in the judgment in AIR 1941 Mad 652 (H) the essential element in the admission of an application is the act of the court admitting it.

As was there held, if some act has been done which in law can amount to nothing else than the admission of an application, then the application must be deemed to be admitted, even if the court did the act without really applying its mind to its consequences.

But whereas in this case, we are able upon the facts to ascribe to the court a quite different intention when it issued the notice, then it would be absurd to hold that there is any principle of law by which the court should be deemed to have done what it consciously did not intend to do;

It is clear therefore to us that in issuing "notice, the court did not intend to deprive itself of the power of deciding whether the security to be even-tually furnished by the petitioner was adequate or not, and when it was found that the security was riot adequate, the court was entitled under R. 90 as now amended to dismiss the application without any further consideration of its merits."

9. These' decisions need not be regarded as being necessarily in conflict. All of them concur in the view that once s petition to set aside a sale is admitted, the court cannot thereafter call upon the petitioner to furnish security. Where they appear to differ is this: In the first two Cases, it was held that when a petition is numbered and notice thereon is ordered, that would be conclusive evidence that the petition has been admitted.

In the last case, it was held that this is not so and that where it is otherwise clear that the court did not intend to admit the petition, the circumstance that notice was ordered will not have the effect of admitting, the petition. Whether a peti-tion has been admitted or not would therefore depend upon the circumstances in each case.

10. Now, the numbering of a petition is really an act of a ministerial officer of the court. When a petition is presented, it is checked in the office of the court, and, if it is in order, it is automatically numbered. No judicial process is involved at that stage. But, when notice is ordered to go, it normally means that the court has applied its mind to the petition and decided to hear the petitioner and the opposite side. Normally, that would be cogent evidence that the petition has been admitted. But, there may be cases where, notwithstanding the fact that notice has been ordered to issue, it is clear that such a result was not intended.

What is. it that happened in the present case? On behalf of the respondents, it was explained that along with the petition to set aside the sale, another petition was filed praying that personal security be accepted and that notice was ordered to go on both these petitions. Therefore, the reasonable conclusion-so it was said-is that the court decided to admit the petition to set aside the sale only provisionally and subject to such orders as it might pass on the petition to accept personal security.

That, of course, is not an unreasonable way of looking at the matter. But, one difficulty in accepting that view is that no words were used to indicate that the admission of the petition to set aside the sale was provisional. The order was merely "Notice" and no qualifying words were used. We have remarked that that the word "Notice" in E. A. NO. 574 -of 1954 appears to be in the handwriting of a ministerial officer of the court and it is, therefore, possible to say that when ordering notice the court did not apply its mind to the questions before it, viz., whether security should be insisted on before admitting the petition, or whether the petition should be admitted provisionally and subject to the result of the enquiry on the petition to accept personal security.

But, whether the court applied its mind or not, the fact remains that an order of the court did go calling upon the parties to appear and answer to the petition. The effect of "that order cannot be whittled down by the circumstance that the order was suggested by the office, We must proceed on the basis that the learned Subordinate Judge accepted the suggestion of the office and made it an order of the court.

Normally, the effect of an order issuing notice is to admit the petition, and we are unable to find anything in the circumstances of this case sufficient to rebut the inference that normally follows from such an order.

11. It was pointed on behalf of the respondents that when the petitions came on for hearing, no objection was taken on behalf of the petitioner, in E. A. No. 574 of 1954 that his petition had been admitted and that, therefore, the court had no jurisdiction to insist on security.

Now, it will be realised that the petitioner could not have, consistently with what he had done previously, taken that objection. If any such objection had been taken, the opposite side would have fastened on it as clear evidence of want of bona fides in the petitioner.

We are inclined to think that what actually happened was that the learned Subordinate Judge, at the time he ordered that notice should be issued on both the petitions, did not bear in mind the requirement of O, 21, R. 90, C. P. C. that the petitioner could not be required to furnish security after the petition had been admitted.

12. Mr. Ramachandra Iyer the learned Advocate for Chellappa Chettiar raised another point, and in support of it he referred to the decision in - 'Gholam Murteja Chowdhry v. Goluck Chunder Roy', 3 Suth WR 191 (K) and - 'Makudam Maho-mmad v. Mohammad Sheik Abdul Kadir', AIR 1936 -Mad 856 (L). The facts in the first of these two cases appear to have been as follows: The plaintiff's obtained a decree in the trial court. On appeal, the court ordered a remand. .

This order of remand was made with the consent of the plaintiffs. After remand, the court of first instance dismissed the suit. An appeal taken by the plaintiffs failed. The plaintiffs then went up to the High Court and the point was taken that the order of remand was illegal. The court repelled the contention and observed:

"We think that it is now too late for the special appellant to take this objection. He should have done so before consenting to go down on remand. When a party submits, without making a31 the resistance in his power, to the taking of any material step in proceedings, he cannot afterwards be heard to complain of the legality of the step as an integral part of the proceedings."

The facts in the second case were these The question in the suit was whether the plaintiff was exclusively entitled to a house or whether the second defendant was jointly entitled to it. After all the evidence was taken, both the parties endorsed on the plaint that if the key produced by the second defendant would open the door of the house and the second defendant's articles were found in the house then the suit should be dismissed.

But that otherwise the suit should be decreed. The Commissioner sent by the Court found that the key produced by the second defendant would, not open the door and that all the articles in the house belonged to the plaintiff. After the Commissioner submitted his report, the defendant wanted to go back upon his endorsement. This he was not allowed to do. It was observed;

"When a party invites the court to adopt a procedure which is not contemplated by the Code of Civil Procedure and is in fact a procedure 'extra cursum curiae' he cannot turn round and say that the court is to blame for adopting the very procedure which he invited the court to follow. There is such a thing as estoppel apart from the question of adjustment and that the doctrine of estoppel would apply to a party who attempts to blow hot and cold in this fashion."

On the basis of these decisions Mr. Ramachandra Iycr strongly argued that the appellant is estopped from questioning the order of dismissal for failure to furnish security as ordered.

13. We consider that both these decisions are distinguishable. If, after having offered personal security, the petitioner had gone back upon that offer and declined to put into court an appropriate document on the basis of which his personal security could be enforced, then both these decisions would apply, and it can be properly said that after having invited the court to proceed on a certain basis he could not with impunity repudiate it. But this is not what happened here. . The Court declined to accept the personal secu rity and required the petitioner to furnish either cash security or the security of immovable property. That of course is a very different thing.

A person may be willing and able to furnish personal security, but he may not be able to deposit cash or to furnish security of immoveable property. The variation which the court ordered in the nature of the security to be furnished was a very material one and because of that it would not be right to say that there is any estoppel against the petitioner.

As we have already slated before, we must consider that E. A. No. 574 of 1954 was actually ad-mitted. Thereafter the court had no jurisdiction to insist on security in the form it did.

14. In the result, the appeal succeeds and the order of the court below dismissing the execution petition is set aside. The execution petition will go back to be disposed of according to law and on its merits. We do not think that in the circumstances of this case there should be any order as to costs.

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