Skip to content


In Re: Southern Automative Corporation (Private) Limited - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtChennai High Court
Decided On
Reported in(1960)1MLJ230
AppellantIn Re: Southern Automative Corporation (Private) Limited
Excerpt:
.....undue delay which would be caused by compliance with the provisions of section 391 secondly, the duties of this court under section 394 are onerous and have to be carefully exercised and therefore this court can come to the decision required of it under section 394 of the act only if it is satisfied that the matter has been considered at an extraordinary general meeting of the members specially called for under the directions of the court under section 391 of the act. the comparatively low standard of business knowledge and experience of the average investor, the absence of any well informed and reliable financial press, and long distances which make it difficult for investors to combine for the exercise of their rights, have rendered them particularly ineffective.ramaswami, j.1. this is an application for dispensing with the calling of an extraordinary general meeting of the southern automotive corporation (private) limited, madras.2. the southern automotive corporation (private) limited, has filed a petition for obtaining the sanction of this court for amalgamation with another company, viz., the south india automotive corporation, (private), limited, which is carrying on similar business in the city of madras. section 394 of the indian companies act, 1956, requires the convening of an extraordinary general meeting of the members under the directions of this court under section 391 of the said act for the purpose of considering and passing the proposed arrangement for amalgamation. the applicant wants this procedure to be short-circuited on the.....
Judgment:

Ramaswami, J.

1. This is an application for dispensing with the calling of an Extraordinary General Meeting of the Southern Automotive Corporation (Private) Limited, Madras.

2. The Southern Automotive Corporation (Private) Limited, has filed a petition for obtaining the sanction of this Court for amalgamation with another company, viz., the South India Automotive Corporation, (Private), Limited, which is carrying on similar business in the city of Madras. Section 394 of the Indian Companies Act, 1956, requires the convening of an Extraordinary General Meeting of the members under the directions of this Court under Section 391 of the said Act for the purpose of considering and passing the proposed arrangement for amalgamation. The applicant wants this procedure to be short-circuited on the ground that there was a General Meeting of the Members on 15th June, 1959 and that they have approved unanimously this arrangement for amalgamation, and that therefore the holding of an Extraordinary General Meeting of the company as required by Section 391 to consider and approve the amalgamation would be superfluous and would cause hardship, unnecessary expense and undue delay.

3. I am unable to accede to this request for these reasons. First of all, the learned advocate for the applicant was not able to point out any hardship or unnecessary or undue delay which would be caused by compliance with the provisions of section 391 Secondly, the duties of this Court under Section 394 are onerous and have to be carefully exercised and therefore this Court can come to the decision required of it under Section 394 of the Act only if it is satisfied that the matter has been considered at an Extraordinary General Meeting of the members specially called for under the directions of the Court under Section 391 of the Act.

4. The importance of the convening of the Extraordinary General Meeting cannot be easily overlooked. The primary organisation through which the company functions is the meeting of the shareholders. It is by using their power at meetings that shareholders exercise control over directors. The resolution of the majority, voting at the general meeting, binds the company and its members. The shareholders have to act in accordance with the provisions of the Companies Act as also the Memorandum and Articles of the company, in so far as the provisions therein are not inconsistent with the Act. It must be remembered that a shareholder is not a creditor of the company nor a debenture-holder thereof. His rights can only be exercised in accordance with the Act. There may be occasions where the majority acts in a manner oppressive to the rights of the minority shareholders or of any particular shareholder. In such cases the Act had made provision for protecting the rights of the minority or the individual shareholder. The principle upon which this is done is that the shareholders have a fiduciary responsibility to act not in the interests of a majority only but in the interests of the shareholders as a whole. Where this position is abused there is a fraud on the minority, as the term is understood in law, and there need not be necessarily fraud or deceit in the ordinary sense.

5. The shareholders forming the company can ordinarily function only at the General Meeting and at such other Extraordinary General Meetings as may be convened under the Act. They do so as already stated, subject to such rights and obligations as attach to their shares and subject to the provisions in the Act and the Memorandum and Articles of Association of the company. These can happen only once in a way and all that the shareholders can do is to decide on such matters as the Act provides and discharge major functions such as the appointment of directors and auditors and the passing of the balance-sheet and profit and loss account, and they have inherent power to take all steps to ensure its proper working and this includes the power to appoint directors as provided by the Act. The present Act confers on them considerably larger rights than before. Except such powers as are reserved to the shareholders to be exercised at their meeting all the powers exercisable by the company are vested under the Act in the Board of Directors. Besides the Board of Directors, the Act provides for various forms of executive machinery.

6. The Company Law Committee had the following observations to make:

The nature of a shareholder's control over the affairs of a company has been the subject of such comment in recent discussions on the subject of company law reform both in this country and elsewhere. As the Cohen Committee observed:

'The illusory nature of the control theoretically exercised by shareholders over directors has been accentuated by the dispersion of capital among an increasing number of small shareholders who pay little attention to their investments so long as satisfactory dividends are forthcoming, with lack of sufficient time, money and experience to make full use of their rights as occasion arises and who are, in many cases, too numerous and too widely dispersed to be able to organise themselves'.The Millin Commission in South Africa expressed itself in almost similar terms when it stated:

'The assumption underlying existing legislation is that shareholders are able to take an active interest in the Company's affairs and will always be able to use their voting power to the company's advantage. The assumption may have been justified in earlier days when the capital of the companies was largely in the hands of persons who knew enough about the business of the company to maintain an effective check on the activities of the directors they elected and were able to attend meetings to enforce their views. It is certainly not justified today when the shareholders in public companies are distributed over wide areas, and it is impossible that they can ever be gathered together in one place for attendance at Company meetings....'

7. In addition to the facts mentioned above some recent developments in corporate finance, e.g., the growth of investment trust companies have further tended to widen the gap between the ultimate investor and those in charge of the management of his investments, while circumstances in this country have imposed a special handicap on them. The comparatively low standard of business knowledge and experience of the average investor, the absence of any well informed and reliable financial press, and long distances which make it difficult for investors to combine for the exercise of their rights, have rendered them particularly ineffective.

There are only two ways in which the Company law can partially redress the balance in favour of shareholders - first by the fullest possible disclosure of the facts relating to the promotion, formation and working of joint stock companies; and secondly, by enactment of such suitable provisions for the holding and conduct of company meetings as will enable active and competent shareholders to take an effective part in the business transacted in them....

See T.R. Srinivasa Iyengar's Companies Meetings, Accounts Audit and Investigations (1957) Law Book Co., Allahabad) page 14 and following; T.R. Srinivasa Iyengar, Companies Administration (1958) (Law Book Co.) page 1; Gore-Browne, Handbook of Joint Stock Companies, Forty first edition, page 410 and following; Buckley on the Companies Act, Thirteenth edition, page 319 and following; Ghose, The Indian Company Law, Tenth Edition, Part II, Section 709 and following).

8. Therefore, the applicant is directed to hold an Extraordinary General Meeting of the shareholders as contemplated by Section 391 of the Companies Act and as per Rules, and then move this Court under Section 394 of the Act which will be considered then on merits.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //