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A. Ananthalakshmi Ammal and anr. Vs. the Indian Trades and Investments Ltd. and anr. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtChennai High Court
Decided On
Case NumberOriginal Side Appeal Nos. 120 of 1951 and 15 of 1952
Judge
Reported inAIR1953Mad467; (1953)IMLJ275
ActsCompanies Act, 1913 - Sections 76, 76(3), 83B and 86I
AppellantA. Ananthalakshmi Ammal and anr.
RespondentThe Indian Trades and Investments Ltd. and anr.
Appellant AdvocateG. Vasantha Pai, Adv.
Respondent AdvocateV. Radhakrishnayya and ;V. Sambandamurthy, Advs.
DispositionAppeal dismissed
Cases ReferredG. E. Rly. v. Turner
Excerpt:
indian companies act (vii of 1913)--company--board of directors--strength below minimum fixed and below quorum--power to co-opt continues--directors who should retire at annual meeting--deemed to retire on last day for such meeting;the articles of a company provided that the minimum strength of its board of directors should be four and that if the number fell below the minimum fixed, the directors should not, except in emergencies, or for the purpose of filling up vacancies, act so long as the number was below the minimum. the quorum fixed for the board was two. on a question raised as to whether the co-options of two other directors to the board made by a single continuing director were valid,;held: the power to co-opt could be exercised by the directors even though the strength of the.....1. the question raised in these appeals is whether the co-option of k.n. narayana iyer and k.c. chandy as directors in a company called the amalgamated coffee estates ltd., is valid. this company was formed with the object of carrying on business in coffee, tea, cardamom and other commodities and was incorporated under the indian companies act in 1944. the last annual meeting of the company was held on 31-1-1949. article 55 of the articles of the company provides that a general meeting shall be held within 18 months from the date of its incorporation and thereafter once at least in every calendar year at such time (not being more than 15 months after the holding of the last preceding general meeting) and place as the directors may decide. in accordance with this provision the last day for.....
Judgment:
1. The question raised in these appeals is whether the co-option of K.N. Narayana Iyer and K.C. Chandy as directors in a company called the Amalgamated Coffee Estates Ltd., is valid. This company was formed with the object of carrying on business in coffee, tea, cardamom and other commodities and was incorporated under the Indian Companies Act in 1944. The last annual meeting of the company was held on 31-1-1949. Article 55 of the Articles of the company provides that a general meeting shall be held within 18 months from the date of its incorporation and thereafter once at least in every calendar year at such time (not being more than 15 months after the holding of the last preceding general meeting) and place as the directors may decide. In accordance with this provision the last day for holding the annual meeting would be 30-4-1950, but no meeting was held either on or before that date. Notices were issued by the management on 21-7-1950 for an annual meeting to be held on 6-8-1950. But this meeting, however, was cancelled on the ground that objections were taken to its legality. On 14-3-1950 one of the shareholders, Mrs. A. Ananthalakshmi Animal filed an application under Section 76(3) of the Indian Companies Act, Appln. No. 2813 of 1950 for an order that the Court should call for a general meeting, and in the affidavit filed in support of that application it was alleged that no general body meeting had been called after 31-1-1949 that the directorate consisted of only three members, V.R. Veeramani, A. S. Padmanabhan and B.V. Raman while Article 75 provided for a minimum of four directors; that the affairs of the company were being grossly mismanaged and that accordingly the Court should direct that a general body meeting should be convened for scrutinising the balance sheets, appointing auditors and electing "new directors in the vacancies caused".

There was also a prayer that a Commissioner should be appointed to convene the meeting and act as Chairman therefor. A similar application was filed by one of the debenture holders, Appln. No. 2813 of 1950 and therein Appln. No. 2820 of 1950 was made for an injunction restraining the management from co-opting any person as director. On 18-8-1950 an interim injunction was issued. On 21-8-1950 the management applied In Appln. No. 2954 of 1950 for cancelling interim injunction and all the four applications were heard together by Krishnaswami Nayudu J. who passed an order on 26-9-1950 that the annual meeting be called on 29-10-1950 for discussing the balance-sheet and profit and loss account, for "election of directors in the places vacant" and to consider the auditor's report, and that notices of the said meeting be issued in the names of the two directors, V.R. Veeramani and B.V. Raman. He also appointed an advocate, Mr. Sanjeevi Naidu as Commissioner to preside over the meeting the injunction petition was dismissed on the ground that in view of the orders passed In Appln. Nos. 2813 of 1950 and 2814 of 1950 no orders were necessary. On 7-10-1950 notices were issued for an annual meeting on 29-10-1950 in terms of the order dated 26-9-1950. The notices also stated that

"two directors, A.S. Padhmanabhan and B.V. Raman retire. The vacancies created by their retirements have to be filled. Of the retiring directors Mr. B.V. Raman offers himself for re-election."

2. On 9-10-1950 two of the directors, Veeramani and B.V. Raman passed a resolution co-opting K.N. Narayana Iyer as a director in the place of one Dakshinamurthi who had resigned on 18-6-1950. 911 11-10-1950 V.R. Veeramani resigned his office as an elected director and was nominated by the managing agents as a director under Article 82-A; and in the vacancy thus created K.C. Chandy was co-opted as a director. Both the co-options took place after the Court had passed an order on 26-9-1950 for holding the annual meeting on 29-10-1950 and after notices thereof had actually been issued. Thus on 29-10-1950 the position was that V.R. Veeramani had become a nominated director; two directors had to be elected in the place of Padmanabhan and B.V. Raman whose terms of office had expired; and K.N. Narayana Iyer and K.C. Chandy had been co-opted as directors.

3. At the annual meeting held on 29-10-1950 when the subject of "election of directors in the places vacant was taken up disputes arose as to the number of vacancies which were available to be filled. On behalf of Mrs. Ananthalakshmi Animal it was contended that the expression "places vacant" would include the maximum number of directors that could be elected under Article 75 arid that should be determined by the general body and that further the co-options of K.N. Narayana Iyer and K.C. Chandy were invalid. The management contended that the election should be limited to the two vacancies mentioned in the notice & that the co-options of Narayana Iyer and K.C. Chandy Were valid. In this conflict of opinion it was decided to adjourn the meeting and obtain from the Court a clarification of the order dated 26-9-1950. Appln. No. 4025 of 1950 was then filed by Mrs. Ananthaiakshmi Ammal for that purpose and on that Krishnaswami Nayudu J. passed an order on 3-11-1950 that apart from the two vacancies mentioned in the notice there was also a vacancy caused by the resignation of Dakshinamurthi on 18-6-1950 and that an election should be held to fill up that vacancy as well. On the question of the validity of the co-options he observed that it was unnecessary to go into the question in these proceedings.

4. Against this order the management filed O. S. A. No. 103 of 1950, their contention being that as there was valid co-option in the place of Dakshinamurthi there were only two vacancies. Mrs. Ananthaiakshmi Ammal filed O. S. A. No. 110 of 1950 claiming that V. R. Veeramani was the only director validly in office, that all the other places were vacant & that the shareholders had the right to fill the vacancies up to the maximum as provided under Article 75. Both these appeals were disposed of by the judgment of this Court dated 9-2-1951. Therein it was held that for the purpose of election of directors "in the places vacant" as provided in the order dated 26-9-1950, it was necessary to determine the number of vacancies and that to decide that, it was necessary to decide whether the co-options were valid or not. The matter was accordingly remanded for decision on the validity of the co-options of K.N. Narayana Iyer and K.C. Chandy. There was also a direction that the Court might order, at its discretion, addition of parties for the purpose of a satisfactory disposal of the points in dispute.

5. In pursuance of this order of remand, Appln. No. 2813 of 1950 and 2814 of 1950 came up for rehearing before Krishnaswami Nayudu J. The two directors, the validity of whose co-option was at issue, Narayana Iyer and K.C. Chandy, were also impleaded as parties. The whole case was reheard and on 14-11-1951 Krishnaswami Nayudu J. pronounced judgment upholding the co-option of K.N. Narayana Aiyar and rejecting that of K.C. Chandy. It is against this judgment that the present appeals have been brought. In O. S. A. No. 120 of 1951 Mrs. Ananthaiakshmi Ammal contends that the co-option of K.N. Narayana Iyer on 9-10-1950 is invalid. In O. S. A. No. 15 of 1952 Mr. K.C. Chandy contends that this co-option on 11-10-1950 is valid. These are the questions that fall to be determined in these appeals.

6. In O. S. A. No. 120 of 1951 Mr. Vasanta Pai, the learned advocate for the appellant contends that co-option of Narayana Iyer on 9-10-1950 was invalid because there was only one director who was entitled to act on that date and that the power to co-opt could not be exercised when there is no Board of directors competent to act under Article 75; that in any event such a power could not be exercised after an annual meeting had been called; that at any rate on the facts of the present case such a power could not be exercised as the Court had ordered on 26-9-1950 that the shareholders should elect the directors in the vacancies at an annual meeting to be held on 29-10-1950 & that the resolution dated 9-10-1950 did not comply with the requirements of Article 99 of the Articles of the company. It was further argued that even if the power to co-opt could be validly exercised on 9-10-1950 it was not in fact so exercised as the co-option was made not in the interests of the shareholders but of the management. The management controverts the soundness of these contentions.

7. The position that the power to co-opt directors comes to an end when once an annual meeting is convened, is not sought to be supported by anything in the Companies Act or in the Articles of the company. Nor is any authority cited in support of it. We have no hesitation in rejecting it. Nor is there any substance in the argument that the order of the Court dated 26-9-1950 directing that the annual meeting be convened for filling up vacancies has the effect of extinguishing that power. Though interim injunction was issued against co-option in Appln. No. 2826 of 1950 on 18-8-1950 that became dissolved on the dismissal of that application on 26-9-1950. It is true that the order of dismissal was made not on the merits but in view of the orders passed in Appln. Nos. 2813 of 1950 and 2814 of 1950 and it must have been assumed that all the places would be filled by election at the annual meeting on 29-10-1950. This circumstance, though material on the question whether the exercise of power on 9-10-1951 and 11-10-1951 was bona fide or not, does not operate to deprive the management of its powers under Article

81. The objection based on Article 99 that the resolution dated 9-10-1950 was not signed by all the directors but only by two of them must also be rejected inasmuch as no contention is raised by the management that the co-option of K.N. Narayana Iyer, if not valid under Article 81 could still be upheld as one passed in circulation under Article 99.

8. The two substantial contentions urged on behalf of the appellant are (1) that on 9-10-1950 there was only one director competent to act and according to the Articles of the company he would have no power to co-opt a director and (2) that in any event the exercise of the power was not for the benefit of the shareholders and therefore void. With reference to the first contention it is necessary to set out the relevant articles' of the company on which it is based. Under Article 75 "Until otherwise determined by a general meeting the number of the directors shall not be less than four or more than nine". Article 83 provides that

"at the first ordinary meeting of the company the whole of the directors excepting the ex-officio directors, shall retire from office and at the ordinary meeting in every subsequent year, one-third of the directors (other than the ex-officio directors) for the time being or if their number is not three or a multiple of three, then the number nearest to one-third shall retire from office".

Section 83-A (1) of the Indian Companies Act enacts that "every company shall have at least three directors". Turning to the facts it should be remembered that the last annual meeting was held on 31-1-1949. Even at that time there were only three directors in office, A.S. Padhmanabhan, M.S. Periaswami Nadar and V.B. Veeramani. Of these Padhmanabhan was due to retire under Article 83 at the next annual meeting. Periaswami Nadar resigned in August 1949 and in his place Dakshinamurthi was co-opted on 25-9-1949. On 22-3-1950 one B.V. Baman was co-opted as the fourth director but he was also due to retire at the next annual meeting. The meeting should have been held under Article 55 on 30-4-1950 at the latest. On 18-6-1950 Dakshinamurthi resigned and it was in his place that K.N. Narayana Iyer was co-opted by a resolution of the directors, Veeramani and B.V. Raman.

9. On these facts it was argued by the learned advocate for the appellants that two of the directors, Padhmanabhan and B.V. Raman who were due to retire at the annual meeting next to that held on 31-1-1949, should be held to have vacated their office on the last date on which the annual meeting should have been held and that in consequence they ceased to be directors after 30-4-1950. This contention is amply supported by the authorities. in 're Consolidated Nickel Mines Ltd.' (1914) l Ch. 883, the question arose whether two directors, Steel and Phillips were entitled to remuneration as directors. Article 101 of the Company provided that at the ordinary meeting all the directors should retire from office. Section 49 of the Companies Act provided that the directors were bound to summon a general meeting of the company once in every calendar year. After 1905 no meeting was called but the two directors continued to act. It was held that they vacated the office on the last day on which the annual meeting should have been held, that is on 31-12-1906 and that therefore they were not entitled to remuneration thereafter.

10. In -- 'Srinivasan v. Subramania Aiyar', 61 Mad L. J. 724 Cornish J. followed the decision in 'Re Consolidated Nickel Mines Ltd.,' (1914) 1 Ch, 883. In -- 'Kansseen v. Rialto (West End) Ltd.', (1944) Ch. 346, the point for decision was whether the allotment of shares made at a directors' meeting held on 30-3-1942 was valid. Two persons Cromie and Strelitz purported to act as directors and made the allotment. Strelitz claimed to have been appointed as director at a meeting held on 1-2-1940. It was found that there was no meeting or appointment. Cromie was one of the original directors but under Rule 73 of Table A of the Companies Act, 1929, which in substance corresponds to Article 83 in the present case the directors would have to retire at the annual meeting and the last day on which such a meeting should have been held was 31-12-1941. On these provisions Lord Green M. R. who delivered the leading Judgment of the Court of appeal observed as follows:

"Neither Mr. Cromie nor Mr. Strelitz was then (on 30-3-1942) a director of the company. Mr. Cromie had been a director but he had vacated the office on 31-12-1941, by reason of Article 73 of the Companies Articles of Association. See in 'Re Consolidated Nickel Mines Ltd.' (1914) 1 Ch. 883."

This decision was affirmed by the House of Lords in -- 'Morries v. Kansen1, (1946) A. C. 459. On the point now under consideration the decision is thus stated in the headnote:

"No general meeting was held in 1941 and accordingly by the effect of Article 73 of Table A as varied by Article 22 of the Company's articles of association, there were thereafter no de jure directors."

Vide the observations in the speech of Lord Simonds at pp. 467-468 &

471. In Buckley on Companies Acts the learned author commenting on Rule 89 in schedule 1 of the Companies Act, 1948, which in terms corresponds to the present Article 83 states the law as follows:

"If in any calendar year an annual meeting is not held under an article in this form, those directors who would have retired at the meeting had the same been held will vacate office on the last date of the year." (12th Edn. page 882)

On these authorities it must be held that both Padhmanabhan and B. V. Raman ceased to be directors after 30-4-1950 & that at the time of the co-option of K.N. Narayana Iyer on 9-10-1950 there was only one director, Veeramani, who was lawfully in office.

11. What follows on this conclusion? The appellant contends that if on 9-10-1950 there was only one director, then there was no board of directors as required by Article 75 and that therefore there could be no valid "co-option as the power to co-opt could only be exercised by the board. The respondent relies on Article 81 which is in these terms:

"The continuing directors may act notwithstanding any vacancy in their body; but so that if the number falls below the minimum above fixed the directors shall not, except in emergencies or for the purpose of filling up vacancies, act so long as the number is below the minimum."

The argument is that this is a special provision made for meeting contingencies like the present and that the co-option made thereunder is valid. The contention of the appellant is that even for invoking the power under Article 81 there must be a board with the minimum strength as required by Article 75 but this is opposed to the plain language of the Article which expressly confers power on the continuing directors to fill vacancies when the number falls below the minimum and the minimum that is referred to in this Article is the minimum prescribed under Article 75.

12. There is also considerable body of authority in England on the construction of clauses similar to Article 81. In 'Re Scottish Petroleum Co.' (1883) 23 Ch. D. 413, the Article fixed a minimum strength of the board of directors at four and the quorum for the board's meeting at two as do Arts. 75 and 93 in the present case. The strength of the board came down to two; when they co-opted another director and allotted shares to him, Article 83 of the company provided that the continuing directors may act notwithstanding any vacancy in the board. On these provisions it was held that the power to co-opt a director could be exercised even though the strength of the board had fallen below the minimum. The following observations occurring in the judgment of Baggallay L. J. may be usefully quoted:

"It is also contended that though by the articles two directors form a quorum when the board is duly constituted, there could not be a quorum capable of transacting business when the board of directors was not filled up to the minimum number. I assume that the retiring directors had ceased to be directors, and if that be so, the board was not made up to the minimum number. Still I think that having regard to Article 83, the objection cannot be maintained. It Is urged that this article can only apply when the number of directors is more than four, I see no reason for adopting that view."

In 'Re Bank of Syria', Owen and Ashworths claim, Whiteworth's claim, (1900) 2 Ch. 272 Article 33 of the company provided that the members of the council shall be not less than three and not more than nine. At the time of the transaction there were only two directors and the question arose whether they had the power to act. Article 42 provided that "the continuing council may act notwithstanding any vacancy." It was held by Wright J. that under this clause the directors were entitled to act. He observed

"I am asked to say that inasmuch as there were only two directors acting at that time, they had no power to bind the company. But it seems to me that I ought to hold having regard to the authorities, that Article 42 which provides that a continuing council may act notwithstanding any vacancy, gets over the difficulty. X X X X It seems to mo having in view Article 42, that the principle in 'Re Scottish Petroleum Co., Ltd.' (1883) 23 Ch. D. 413 applies to the present case."

There was an appeal against this decision. Vide in 're Bank of Syria' Owen and Ashworth's claim, Whiteworth's claim,' (1901) 1 Ch. 115. Lord Alverstone C. J. in agreeing with the decision of Wright J. 0:1 this point observed that even if the number of directors fell below the quorum fixed for a directors' meeting the principle laid down in 'Scottish Petroleum Co.', (1883) 23 Ch D. 413, would apply and that the continuing directors would be entitled to act under Article 42. That is to say, the power to co-opt might be exercised notwithstanding that the strength of the directorate has fallen below the minimum required and below the quorum prescribed, by the articles.

13. 'In Re Sly Spink and Co', (1911) 2 Ch. 430, the articles required that the number of directors should not be less than four, that the quorum for a board's meeting should be three and Article 88 gave authority to the continuing directors to fill in vacancies. Prom the very start the company had never a board of four directors. Only three directors were appointed and they allotted shares. The company having gone into liquidation the question arose whether the allotment of shares was valid. It was contended that the three directors had authority to act under Article 88 and that the allotment was consequently valid. Neville J. held that Article 88 would apply only if there had been a properly constituted Board of directors in the first instance but that where there never was a board with the minimum strength, Article 88 would not apply. The following observations may be quoted:

"It is said that they were continuing directors because they had not ceased to be directors. I do not think that is a reasonable interpretation to put upon the words contained in the articles. The expression Is familiar one and it applied to cases where the number of original board has been reduced by death or otherwise, and in such cases those who are left, subject to the provisions of Article 88, would be entitled to conduct the business of the company. With regard to that, I think the two cases which were cited --'in re Scottish Petroleum Co', (1883) 23 Ch. D 413 & -- 'in re British Empire Match Co', (1889) 59 LT 291, show very clearly the distinction between the case where the directors too few in number can and cannot act as continuing directors. In one case you have a board insufficient in number from the first and notwithstanding the continuing clause it was held that the board could not transact business. In the other case you have a board which was originally competent to transact business but was diminished by retirement to a number less than that provided for by articles. The continuing clause was held to apply and those directors were held to be competent to transact the business of the company."

The company in the present case started with four directors, being the minimum strength under Article 75. Vide the allegations in Para 5 in the| affidavit of Davar in Appln. No. 2954 of 1950; and therefore the continuing directors would under the decision -- 'in re Sly Spink and Co', (1911) 2 Ch. 430, have power to act under Article 81. In --'Channel Collieries Trust Ltd. v. Dover St. Margaret's and Martin Mill Light Rly.', (1914) 2 Ch. 506 the articles of the company provided that the minimum number of directors should be three; that the quorum for the board's meeting should be two and article 89 gave power to the "remaining directors" to fill vacancies. The company began with three directors, then two of them resigned leaving only one director in office and he co-opted a director under Article 89. It was contended that this co-option was invalid because the Board had neither the minimum strength nor even the quorum provided by the articles. Rejecting this contention Lord Cozens Hardy M.R. observed as follows:

"Sir John Jackson thus became sole director. What was his power? Under the Companies Clauses Act, 1845, as continuing director, he had power to fill up the vacancies on the board. The fact that a person exercising that power does not constitute a quorum is not really a relevant matter. The generality of the language used In Section 99 is so clear that it is impossible for us to overlook it. Any other view on that point would paralyse many a company."

The following observations occurring in the Judgment of Swinfen Eady L.J. might also be usefully quoted:

"I think that the context requires that the words 'remaining directors' should include the case of a remaining director. It is obvious that the number of the board may, by death or resignation or otherwise, be so reduced that it may be below the quorum, as well as that there may be vacancies occurring In the board whilst still leaving a quorum, but in either case it is necessary or proper that the vacancy should be filled up. In my opinion the necessity of the case requires that 'the remaining directors' should be read as including the case of a remaining director, so that if and so long as there is any remaining director he may proceed to fill up the board by appointing persons when casual vacancies occur. For these reasons I am of opinion that it was open to Sir John Jackson as the sole remaining director, under Section 89 to appoint duly qualified persons to be directors in the place of the two who had ceased to be members of the board."

Applying these principles it must be held that the power under Article 81 could be exercised even though the strength of the board had fallen below the minimum prescribed by Article 75 and below the quorum mentioned in Article 92 and even when there is only one director capable of acting. The co-option of Narayana Iyer on 9-10-1950 must, therefore, be held to be within the scope of the authority conferred on the continuing directors under Article 81.

14. The only question that remains to be decided is whether on the facts and circumstances of this case the co-option of Narayana Iyer is open to attack as improper and mala fide. The learned advocate for the appellant argued that the directors stand in a fiduciary relationship to the shareholders that any power conferred on them must foe exercised for the benefit of the shareholders, that the co-option of directors should also be made only in the interests of the shareholders and that Narayana Iyer was co-opted only for the purpose of strengthening the hands of the management in their fight with their shareholders and it is, therefore, invalid. That the directors are in a fiduciary position in relation to the shareholders cannot seriously be questioned. In --'Ferguson v. Wilson', (1867) 2 Ch. 77, at p. 90, Lord Cairns while holding that the directors of the company were in the position of agents of the company in its dealings with the outside world, they were in the position of the trustees in relation to the shareholders. Similar observations are to be found in the judgment of Lord Selborne in --'G. E. Rly. v. Turner, (1873) 8 Ch 149 at p. 152. The position 15 thus summed up in Palmer's Company Precedents :

"Where the directors of a company are invested by the regulations with certain powers, the authority thus conferred is to be read subject to the general rules applicable to the exercise by directors of the powers vested in them, and in particular to the rule that the directors are to exercise the powers for the benefit of the company and in the true interests of the company and according to the best of their Judgment, for they stand in a fiduciary position, and must act accordingly."

(Vide Vol. 1 page 434 para 21; 16th edition) We, therefore, agree with the appellant that if the co-option of a director under Article 81 is not made in the interests of the shareholders but for other purposes it cannot stand.

15. What then are the facts? It is common ground that the affairs of the company were during this period in a very unsatisfactory condition. For want of funds the coffee and tea estates were in a state of neglect. More than Rs. 93,000 had to be paid for income-tax and the Government were taking coercive steps to recover the same. Interests due to the debenture holders had not been paid; nor dividends which had been declared on the shares. The creditors had obtained decrees against the company and execution proceedings were in progress. These facts are stated in the affidavits filed on behalf of the appellants in these proceedings. But it also appears from these affidavits that the coffee and tea plantations owned by the company were extensive and valuable and if finance was forthcoming they could be properly worked and made to yield profits. It is clear from the records that the managing agents were making strenuous attempts to get at a financier who would be willing to advance the necessary funds for the working of the estate and at last they found him in Narayana Iyer. This Narayana Iyer was the managing director of a company called Messrs. Parkins (India) Ltd, which has under its management several plantation companies owning tea, coffee and rubber estates. He has had experience in this line of business for about twenty years and is a man of considerable worth. It cannot be doubted that it would be to the advantage of the company if he could be persuaded to join it. It appears from para 3 of his affidavit that early in August 1950 the shareholders themselves approached him with a request to join the company and advance the necessary funds. This is borne out by a letter dated 7-9-1950 written by a director of Messrs. Parkins (India) Ltd. to the advocate for the appellant. This letter gives particulars about the status of Messrs. Parkins (India) Ltd, and of its managing director, Narayana Iyer and proceeds to state,

"Messrs. Parkins (India) Ltd. are willing and they are in a position to provide working finance and other finance required immediately to pay the pressing creditors of the Amalgamated Coffee Estates Ltd."

A reading of this letter leaves no doubt that the shareholders considered that the accession of Narayana Iyer would add to the strength of the company and enable it to tide over its difficulties It is admitted in the affidavit filed in Appln. No. 2828 of 1950 that as early as August the management itself had been negotiating with Narayana Iyer with the object of bringing him in. He insisted naturally that if he should advance the necessary funds he should have a voice in the control and management of the company. The management agreed to this and co-opted him as a director on 9-10-1950. It appears from the affidavit of Narayana Iyer that after his co-option he advanced monies to the extent of a lakh of rupees for the working of the estate and harvesting coffee. The facts clearly show that the company was in need of finance, that Narayana Iyer was co-opted for the purpose of finding the necessary funds and that both from the point of view of his experience and financial status he would be a source of strength to the company.

16. But it is argued on behalf of the appellant that notwithstanding the above circumstances, the co-option of Narayana Iyer must be rejected as improper and mala fide because the vacancy is which he was filled arose on 18-8-1950 when Dakshinamurthi resigned, that the management did not choose to fill that vacancy then; that on the other hand, they stated in their counter-affidavits in Appln. Nos. 2813 of 1950 and 2814 of 1950 that they thought it fair not to co-opt a director in view of the general body meeting that was proposed to be convened; that an injunction was actually issued on 18-8-1950 restraining the managing agents from making any co-option and though ft became dissolved on 28-9-1950 it was understood by all persons that the vacancy would be filled by the shareholders at the annual meeting and that, therefore, the co-option on 9-10-1950 must be held to have been made with the object of depriving the shareholders of their right to elect a director.

17. But it must be remembered that during this period the management was on the look out for a suitable financier and that it was command-able on their part to have left the place vacated by Dakshinamurthi vacant until a suitable "person could be found and to have left it to the shareholders to fill the place if their endeavours to get at a financier did not succeed. Nor can any sinister purpose be spelt out of the fact that the co-option was made after a general meeting had been called. It is admitted that the coffee crops were ready for harvesting and if early steps were not taken to gather them considerable damage would result. In para 13 of the counter-affidavit filed by Davar in Appln. No. 2954 of 1950 it is alleged that

"the coffee plantations in Palghat and the cardamoms are deteriorating; crops were being spoilt and what little can be gathered from the crops would be lost to the shareholders and the debenture holders on account of the neglect and irresponsible attitude of the managing agents."

This was in August 1950. It is obvious that the urgency must have been greater in October and the managing agents acted in the best interests of the shareholders in concluding a bargain with Narayana Iyer on 9-10-1950.

18. On a review of all the circumstances we agree with Mr. Krishnaswami Nayudu J. that the co-option of Narayana Iyer was a proper exercise of the power under Article 81. O. S. A. No. 120 of 1951 must accordingly be dismissed with costs.

19. In O. S. A, No. 15 of 1952 the point for determination is whether the co-option of K.C. Chandy on 11-10-1950 was a valid exercise of the power under Article 81. The facts relating to this co-option present a picture totally different from what has been seen in the case of Narayana Iyer. No particular reason has been shown why this co-option should have been made on 11-10-1950 when the annual meeting had been called for on 29-10-1950. It is not stated that this co-option was made under any arrangement to advance funds for the company. That arrangement had already been concluded with Narayana Iyer. Nor does K.C. Chandy possess anything like the experience which Narayana Iyer undoubtedly does possess. He is an Advocate practising at Kottayam. The circumstances under which the co-option was made clearly stamp it as mala fide. V.R. Viramani who was the one director who has been in active management resigned his place as an elected director on 11-11-1950 and as part of the same proceedings he became a nominated director. It is clear that this manoeuvre was adopted for co-opting a director of the choice of the managing agents and it is open to the objection that it was made with a view to strengthen the hands of the managing agents and not in the interests of the shareholders. We agree With Krishnaswami Nayudu J. that this co-option cannot' be upheld.

20. It was argued by Mr. V. Radhakrishnaiya the learned advocate for the appellant that the validity of this co-option cannot be gone into in these proceedings but the matter is concluded by the judgment of this Court dated 9-2-1951 and even otherwise the decision on the validity of the co-option is incidental to the exercise of" the powers under Section 76(3) of the Companies Act. In the result the appeal fails and is dismissed with costs.

(The above appeals having beep set down this day for being mentioned, the Court delivered the following (Judgment): O. S. A. No. 120 of 1951:)

21. The adjourned meeting will be held at 3 p. m. on 3-5-1952 at 310-311 Linghi Chetti Street, George Town. The Commissioner will issue the necessary notices.


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