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Shalagram Jhajharia Vs. National Co. Ltd. and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKolkata High Court
Decided On
Case NumberSuit No. 974 of 1963 and Appeal from Original Order No. 136 of 1963
Judge
Reported in[1965]35CompCas706(Cal),69CWN369
ActsCompanies Act, 1956 - Sections 173, 217, 217(1) and 294; ;Companies (Amendment) Act, 1960
AppellantShalagram Jhajharia
RespondentNational Co. Ltd. and ors.
Appellant AdvocateG.P. Kar, ;R.C. Deb and ;B.K. Bachawat, Advs.
Respondent AdvocateSubimal C. Roy and ;Sisir Kumar Mukherjee, Advs.
DispositionAppeal allowed
Cases ReferredZacharia v. Republic of Cyprus. As
Excerpt:
- bose, c.j.1. this is an appeal from an order of a. n. ray j. refusing an application for an interlocutory injunction restraining the passing of certain resolutions of a company known as national co. ltd. at the proposed annual general meeting of the company. the appellant is a shareholder of the national co. ltd, the case of the appellant is that in the middle of1961, the national co. ltd. purported to appoint in calcutta one b.m.t. commodity corporation of new york state in the united states of america as its sole selling agent. after the said appointment the first general meeting of the national co. ltd. was held on july 17, 1961. on january 27,1962. the board of directors of the said company by an agreement in writing appointed the said b.m.t. commodity corporation as its sole selling.....
Judgment:

Bose, C.J.

1. This is an appeal from an order of A. N. Ray J. refusing an application for an interlocutory injunction restraining the passing of certain resolutions of a company known as National Co. Ltd. at the proposed annual general meeting of the company. The appellant is a shareholder of the National Co. Ltd, The case of the appellant is that in the middle of1961, the National Co. Ltd. purported to appoint in Calcutta one B.M.T. Commodity Corporation of New York State in the United States of America as its sole selling agent. After the said appointment the first general meeting of the National Co. Ltd. was held on July 17, 1961. On January 27,1962. the board of directors of the said company by an agreement in writing appointed the said B.M.T. Commodity Corporation as its sole selling agent for the sale of jute backing cloth and ordinary burlap over the width of hundred inches manufactured by the said company for the territories of the United States of America, its possessions, Canada and Mexico with effect from February 1, 1962, inter alia, on the following terms and conditions :

'(1) that National hereby appoint B.M.T. as its exclusive distributors in and for the United States of America, its possessions, Canada and Mexico only for the sale of (a) jute backing cloth, and (b) ordinary burlap over a width of hundred inches manufactured by National;

(2) that B.M.T. hereby undertakes that it will represent National exclusively in the territories aforesaid for sale and distribution of the said two commodities and will not import, sell, handle or deal in any manner directly or indirectly in the said goods or any other similar substitute product manufactured by any one else in India or elsewhere ;

(3) that B.M.T. shall make their best efforts to promote and secure maximum sales and/or distribution of National's said goods and shall in all matters act loyally and faithfully to National and take all possible steps to protect and safeguard the rights and interests of National;

(4) that B.M.T. assures National that they have the capacity and the resources for sale or distribution of the goods of National;

(5) that B.M.T. shall place their orders with National regularly from month to month, approximately one month in advance for manufacture in the succeeding calendar months and shall accept these ordered goods on shipment from National;

(6) that B.M.T. shall effect sales of National's manufactured goods to B.M.T.'s customers at prices mutually agreed upon between National and B.M.T.;

(7) that B.M.T. shall regularly submit to National copies of all their sales contracts within a month from the date of the respective contract;

(8) that B.M.T. shall pay National for all purchases of aforesaid goods at cost and freight port of destination basis at the following prices :

(a) For jute backing cloth and burlap over hundred inches width ; Price as agreed upon less 12 per cent, thereon.

(b) For jute backing cloth hundred inches and below in width : Price as agreed upon, less 91/2% thereon.

The said 12 per cent, or 91/2% is subject to revision in case of change of rate or rates in customs duty, clearance charges, handling charges, etc.;

(9) that National undertakes to indemnify B.M.T. against all just claims made by B.M.T.'s customers for defective quality, shortage of material, wrong specifications, late shipment or non-shipment of goods by National, but National shall not be liable for any indirect or consequential claims, losses or damages or in case of force majeure ;

(10) that National undertakes to protect B.M.T. against any decline in sales, prices, in case B.M.T. is unable to have its customers take delivery of goods because of decline in market prices and B.M.T. undertakes to use all its efforts to have its customers take delivery of goods contracted for and shall also take due action to recover such losses on price decline and possible damages for non-fulfilment of contract by such customers unless National and B.M.T. think it inadvisable to do so ;

(11) that B.M.T. shall make payment for its purchases by establishing irrevocable letters of credit on terms mentioned in the agreement;

(12) that B.M.T. will furnish National monthly stock inventory reports and copies of all their invoices immediately when shipments to their customers are effected by B.M.T.;

(13) that the business between National and B.M.T. will be as principal to principal basis notwithstanding any provisions or stipulations relating tovariation in prices, claims or otherwise and National will have no responsibility in respect of B.M.T's customers and B.M.T. themselves will be responsible for all risks in respect of deliveries effected by them except for certain claims as mentioned in the agreement;

(14) that National decides to have their own representative in New York or elsewhere in the U.S.A. or Canada and he shall be consulted by B.M.T. on all matters and B.M.T. undertakes to meet any reasonable expenses of such a representative not exceeding U.S. three thousand dollars per annum;

(15) that National's representative shall be entitled to full access to B.M.T's warehouse, stocks and books and records relating to stocks and sales and in other matters relevant to this agreement and B.M.T. shall be fully bound to provide all information and explanations concerning these as may be required by the National's representative ;

(16) that this agreement shall be effective from February 1, 1962, and remain in force till January 31, 1957, and can be terminated by either party giving 90 days notice during November of any of the years, viz., 1964, 1965 and 1966 ;

(17) that on the expiration or termination of this agreement National will arrange for goods remaining unsold with B.M.T. to be taken over from B.M.T. against payment of the C. & F. price plus actual importing expenses; alternatively, National will keep B.M.T. covered for fall in prices or against claims or actual further expenses as mentioned in different clauses of the agreement until those goods are sold by B.M.T. and B.M.T. shall sell those goods according to the advice by National;

(18) that all steel cores on which National delivered jute backing cloth shall be returned by B.M.T. to National.'

2. There are also clauses for arbitration in case of disputes arising between the parties.

3. The next general meeting of the company was held on May 31, 1962, but the purported appointment of the B.M.T. Commodity Corporation as the sole selling agent was not approved either in the meeting held on July 17, 1961, or on May 31, 1962. It appears however that on August 29, 1962, an annual general meeting of the company was held in which the report of the directors dated April 9, 1962, which contained a reference to the agreement dated January 27, 1962, was passed. On December 3, 1962, the Registrar of Companies, West Bengal, Calcutta, wrote to the National Co. Ltd. intimating that upon an examination of the agreement dated January 27, 1962 (wrongly dated as January 20, 1962), and particularly its Clauses (1), (2), (3), (4), (6), (7), (12) and (18) respectively, the Central Government was of the opinion that the appointment of the B.M.T. Commodity Corporation as exclusive distributors for sale of the products of National Co. Ltd. should be regarded as that of sole selling agents for the territories specified in the agreement and so request was made to obtain the approval of the shareholders of the company at a general meeting in respect of the said appointment in pursuance of the provisions of Section 29A. of the Companies (Amendment) Act, 1960, and a copy of the resolution should be filed with the office of the Registrar of Companies in order to regularise the position and an early compliance was requested. On December 11, 1962, a director of National Co. Ltd. replied to the letter of the Registrar stating that the company had been advised by an eminent lawyer that the arrangement did not constitute B.M.T. Commodity Corporation as agent but nevertheless the arrangement was referred to by the directors in their report to the shareholders and this amounted to approval of the arrangement by the shareholders. But in view of the wishes of the Registrar as expressed in his letter, dated December 3, 1962, the company would be glad to place the matters again before the shareholders in a general meeting. The letter concluded with the following words: ' Kindly confirm if the above course has your approval' and it was signed by director, R. N. Goenka. On January 22, 1963, the reply was written by the office of the Registrar of Companies stating that the office had no objection to the course of action proposed to be taken by the company at the ensuing general meeting of the shareholders for proper compliance of the provisions of Section 294 of the Companies Act in respect of the appointment of B.M.T. Commodity Corporation.

4. On March 15, 1963, the National Co. Ltd. entered into an agreement in writing with one Delca International Corporation having its principal office at 233, Broadway, New York, appointing Delca as its exclusive distributors of its products, viz., jute backing cloth of any width and ordinary burlap having a width of hundred inches or more in all the countries in the continents of North America and South America. This agreement also contained similar terms and conditions as in the agreement with B.M.T. Commodity Corporation dated January 27, 1962, with certain modifications in some of its clauses and it also contained certain additional clauses. Reference may be made to some of the material clauses included in this agreement:

' (3) National is aware that Delca is acting as the exclusive distributor of similar products manufactured by Kelvin Jute Co. Ltd. and Megna Mills Co. Ltd. in the territories mentioned in the schedule hereunder written and save as aforesaid Delca hereby undertakes that it will not during the continuance of this agreement, import, sell, handle or deal in any manuer indirectly or directly in the similar goods or in any substitute thereof manufactured by any one else in India or elsewhere; ......

(10) Delca shall be entitled to the following commission on the price at which the goods are actually sold by them to their own buyers at the following rates:

(a) On jute backing cloth and burlap having a width of hundred inches or more : At the rate of 12 per cent, of such price;

(b) On jute backing cloth below hundred inches width : At the rate of 91/2% of sale price as mentioned above....

(n) In making payment of the price, Delca will be entitled to deduct their own commission.

(18) That business between National and Delca will be as principal to principal notwithstanding any provisions or stipulations relating to variation in prices, claims or otherwise.'

5. The other terms are more or less the same as already stated in the agreement with the B.M.T. Commodity Corporation.

6. On April 26, 1963, a notice was issued by the board of directors of the National Co. Ltd. stating that the annual general meeting of the members of the company will be held at the registered office of the company on Friday, May 31, 1963, at 2-30 p.m. to transact the following business and under the heading ' Special Business ' items Nos. (7) and (8) related to proposed resolutions concerning the agreements entered into with B.M.T. Commodity Corporation and Delca Corporation dated January 27, 1962, and March 15, 1963, respectively and may be set out hereunder :

' (7) As an ordinary resolution--Resolved that the approval and ratification of the company be and is hereby given to the arrangement entered into by the company with Messrs. B.M.T. Commodity Corporation of New York on 27th day of January, 1962, by which they are acting as sole distributors in respect of the U.S.A. and its possessions, Canada and Mexico for the sale of (a) jute backing cloth and (b) ordinary burlap over a width of hundred inches manufactured by the company for a period of five years, commencing from 1st of February, 1962, subject to the provisions that the arrangement may be terminated by either party giving 90 days notice to the other during November of any of the years 1964, 1965 and 1966 and that the terms of sales shall be on ' principal to principal ' basis and that the prices at which the company shall bill the B.M.T. Commodity Corporation shall be as follows:

(a) For jute backing cloth and burlap over the width of hundred inches : At the price at which B.M.T. will sell to its customers, as reduced by 12 per cent, thereon.

(b) For jute backing cloth of hundred inches and below in width : At the price at which B.M.T. will sell to its customers, as reduced by 91/2 per cent, thereon.

(8) As an ordinary resolution--Resolved that pursuant to the provisions of Section 294 and other provisions, if any, of the Companies Act, 1956, approval be and is hereby given to the directors for entering into an arrangement with Messrs. Delca International Corporation, Delaware, U.S.A.,by which they would become the sole distributors for the territories of North America and South America for the sale of (a) jute backing cloth and (b) ordinary burlap having a width of hundred inches or more manufactured by the company for a period of 3 years with effect from 26th March, 1963, provided however that the arrangement may be renewed by mutual consent for any period not exceeding five years at a time and that the terms of the sale would be on ' principal to principal ' basis and that the prices at which the company shall bill Delca International Corporation shall be as follows:

(a) For jute backing cloth and burlap over hundred inches width : At the price at which Delca International Corporation will sell to its customers as reduced by 12 per cent, thereon.

(b) For jute backing cloth--hundred inches and below in width : At the price at which Delca International Corporation will sell to its customers as reduced by 91/2 per cent, thereon. Resolved further that the directors be and are hereby empowered to make such modifications in the agreement as may be deemed necessary in order to comply with the suggestions, if any, that may be made by the Reserve Bank of India while approving the agreement.'

7. There were explanatory statements appended under Section 173 of the Companies Act, 1956, and with regard to resolutions Nos. 7 and 8, the following explanatory notes were set out in the notice dated 26th April, 1963 :

' Resolution No. 7.--In order to sell the wide loom products of the company in the U.S.A., its possessions, etc., negotiations were made with B.M.T. Commodity Corporation of New York State in the United States of America and broad outlines were decided with them. From the middle of 1961, sales of wide loom and narrow loom products were made in order to try their working and stocks were also kept with them on company's account. The sales were made on ' principal to principal ' basis. Since their working has been satisfactory, decision was taken in January, 1962, to appoint them as sole distributors in respect of U.S.A., its possessions, Canada and Mexico for the sale of jute backing cloth and ordinary burlap over the width of hundred inches manufactured by the company for a period of five years commencing from 1st February, 1962. The agreement has been entered into with them in January, 1962. The directors took opinion of eminent counsel about the nature of this agreement and they were advised that the provisions of Section 294 of the Companies Act are not attracted. The salient features were however mentioned in the report of the directors on the accounts for the year 1960-61, Since the Department of Company Law Administration has asked the company by its letter, dated 3rd December, 1962. to get a resolution passed under Section 294 in respect of this arrangement, this resolution is placed before you for your approval.

Copy of the agreement may be inspected by the members at the registered office of the company on any working day between 2 p.m. and 4 p.m. on week days and between 11 a.m. and 1 p.m. on Saturdays.

None of the directors has any interest in the aforesaid resolution save to the extent that they are members and directors of the company.

Resolution No. 8.--Since the production of wide loom cloth of the company has been increasing day by day, the directors negotiated and finalised an arrangement with Messrs. Delca International Corporation of Delaware, U.S.A., having their principal place of business at New York on the terms and conditions set out in the resolution. The territories of operation are North America and South America. A director of Messrs. B.M.T. Commodity Corporation is also a director of this concern. Further an American who has experience for quite a long number of years in the trade of jute products is also a director of Delca International Corporation. As such your directors have thought it fit that they would be in a position to market the products of your company which they have undertaken, in larger areas. If this arrangement is approved by the Reserve Bank of India, Messrs. B.M.T. Commodity Corporation have agreed for termination of their agreement entered into with your company by mutual consent. Further, Delca International Corporation have agreed to take over all the outstanding forward contracts entered into between B.M.T. Commodity Corporation and the company. The terms fixing the selling price are reasonable and are being allowed by others in the trade. The shareholders are requested to give their approval for this resolution.

Copy of the agreement may be inspected by the members at the registered office of the company on any working day between 2 p.m. to 4 p.m. on week days and between 11 p.m. to 1 p.m. on Saturdays.

The directors have no interest in this resolution except that they are directors and members of this company.'

8. It appears that the appellant received the notice dated 26th April,1963, on 6th May, 1963, and on 9th May, 1963, he took inspection of the agreements and on 15th May, 1963, he took copies of the agreements and on 31st May, 1963, the appellant instituted the suit out of which this appeal arises against National Co. Ltd. (defendant No. 1), Ramnath Goenka (defendant No. 2), Bhagwandas Goenka (defendant No. 3), Bhagwati Prosad Khaitan (defendant No. 4) and Ghanshyam Kejriwal (defendant No. 6) for an injunction restraining the defendants and their servants and agents from getting passed the resolutions Nos. 7 and 8 mentioned in the notice dated 26th April, 1963, in the proposed annual general meeting to be held on the 31st May, 1963, or any subsequent date and also for injunction restraining the defendants and their agents and servants from giving any effect to the said resolution if passed and for certain other incidental reliefs. On the very same date the appellant applied for an interim injunction and an ad interim order was made. This application came up for hearing before A.N. Ray J. and on 19th June, 1963, the learned judge made an order dismissing the application and vacating the interim orders. It is against this order of the learned judge that the present appeal has been preferred. The principal question to be considered in the appeal is whether the appellant has been able to make out a prima facie case for an interlocutory injunction.

9. The first point which arises for determination is whether the effect of the agreement dated the 27th January, 1962, was to create a sole selling agency or that the relationship created was that of seller and buyer or between principal and principal.

10. Now ' agency ' has been defined in various ways. It is said to be a contract of employment for the purpose of bringing another in legal relation with a third party. The relationship is founded upon contract either express or implied by which one of the parties confides to the other the management of some business to be transacted in his name or on his account and by which the other assumes to do the business and renders an account of it.

11. Section 182 of the Indian Contract Act defines an agent as a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done or who is so represented is called the principal.

12. The relationship is to be determined not by name but by the conduct of the parties and the purport of their dealings. Thus, facts may show that a sole selling agent is not in fact an agent but a buyer with the sole right to sell the goods of a manufacturer. In the case of W.T. Lamb & Sons v. Goring Brick Co. Ltd., [1932] 1 K.B. 710by an agreement in writing dated 21st April, 1927, certain manufacturer of bricks and other building materials appointed a firm of builders and merchants, sole selling agents of all bricks and other materials manufactured at their works. The appointment was for a period of three years and afterwards continuous subject to 12 months' notice by either party. During the currency of the agreement the manufacturers by their letter dated the 25th September, 1929, informed the merchants that they intended in future to sell all their bricks themselves without the intervention of any agent and thereafter they effected certain sales to customers directly. The firm of merchants thereupon brought an action against the manufacturers for breach of the agreement. Wright J., before whom the action came to be tried, in construing the agreement, observed :

' The agreement is a commercial document. It is well known that in certain branches of trade a division of functions is common between manufacturers or producers on the one hand, the merchants or salesmen on the other and I think that the fair construction of this agreement is that the parties intended that the manufacturing part of the business being in the hands of the defendants, the merchanting or selling part of the business should be entrusted to the plaintiffs. The plaintiffs, as merchants, it might be assumed, had the necessary selling organisation, the necessary connection with possible buyers and the habit of making bargains in the best possible way. It was the promise of the plaintiffs to put their organisation and their services at the disposal of the defendants which formed the consideration for the promise on the part of the defendants to entrust to the plaintiffs the selling part of the business. In my opinion, the words in the agreement 'appoint the plaintiffs sole selling agents of all bricks and other materials manufactured at the defendants' works ' mean that the plaintiffs were to have the sole right of selling in their capacity as agents the bricks and other materials manufactured by the defendants at their works without any reservation in favour of the defendants themselves.'

13. Upon an appeal preferred from this decision, Scrutton L.J., in construing the relevant words of the agreement, observed, [1932] 1 K.B. 710; 101 L.J K.B. 214 (C.A.):

' Now it is well-known that in certain trades the word 'agent' is often used without any reference to the law of principal and agent. The motor trade offers an obvious example where persons described as 'agents' are not agents in respect of any principal but are purchasers who buy from manufacturers and sell independently of them ; and many difficulties have arisen from this habit of describing a purchaser, sometimes a purchaser upon terms, as an agent.'

14. Then after referring to certain terms of the agreement, the learned Lord Justice stated at page 718 as follows:

' Here the words ' sole selling agent' have a distinct meaning implying that the manufacturers are to sell to no one but the merchants who pay them the fixed price and the merchants sell, and they are the only persons to sell, to various builders and contractors.'

15. The ultimate conclusion, to which Scrutton L.J. came, was that the manufacturers by selling the goods directly to the customers had committed a breach of the contract with the firm of merchants and held that the appeal must be dismissed.

16. Lord Justice Greer gave his version of the agreement with the following observations :

' It is somewhat remarkable that notwithstanding the numerous cases in which the difference between a buyer and an agent has been pointed out,there are still innumerable persons engaged in business who do not understand the simple and logical distinction between a buyer and an agent for sale, but are content to treat the two words as synonymous.... I can only read that document as an agreement in which the manufacturers are the sellers and those who are called selling agents are to be the buyers over a period of three years of the goods described in paragraph I, that is, of all bricks and other materials manufactured at their works. '

17. Upon this construction Lord Justice Grcer also agreed that the appeal be dismissed.

18. Lord Justice Slesser, in delivering a separate judgment, observed:

' I agree with my brothers that the agreement is not one of agency at all.... The appellants are under obligation to sell their goods to the merchants who may re-sell them to other purchasers and, in my opinion, so long as the agreement of 21st April, 1927, remains in force, the appellants have parted with the right to sell their own products themselves. During that period the merchants have been appointed sole sellers, which means sole purchasers from the manufacturers in order that they may have the sole right of selling to third parties.'

19. Slesser L.J. also agreed that the appeal should be dismissed.

20. Now so far as the case before us is concerned we have not before us at this stage all the facts and materials. The suit is still to be tried and full facts will be disclosed after the evidence is adduced by the parties. At this interlocutory stage we have to proceed on the materials now available to us and to express our opinion whether there is a prima facie case or not and that is all that we propose to do now; and any opinion expressed by us at this stage is to be regarded as made only for the purpose of disposal of the interlocutory matter before us.

21. Now the internal features of the agreement, dated the 27th January, 1962, as disclosed by its terms are that:

' (1) The National Co. Ltd. appoint B.M.T. Commodity Corporation as its exclusive distributors in U.S.A., its possessions, Canada and Mexico for sale of jute backing cloth and ordinary burlap over a width of hundred inches manufactured by National Co. Ltd.

(2) B.M.T. Commodity Corporation is not to sell, import, handle or deal in any manner in the said goods or any other similar substitute products manufactured by any one else either in India or elsewhere.

(3) B.M.T. is to make their best efforts to promote and secure maximum sales and distribution of National's goods and to act in all matters loyally and faithfully to National and take all possible steps to protect and safeguard all the rights and interests of National.

(4) B.M.T. assures National that they have the capacity and the resources for the sale and/or distribution of the goods of National.

(5) National undertakes not to sell its products in the areas covered by the agreement except through B.M.T.

(6) B.M.T. is to place orders with National regularly from month to month and approximately one month in advance.

(7) B.M.T. is to effect sales of National's goods to B.M.T.'s customers in the territories covered by the agreement at prices mutually agreed upon and B.M.T. shall pay National for all purchases of the said goods at cost and freight port of destination basis at prices determined as follows :

(a) for jute backing cloth and burlap over hundred inches width: Prices as agreed upon less 12 per cent, thereon ; (b) for jute backing cloth hundred inches and below in width : Prices as agreed upon less 91/2% thereon. These rates of 12 per cent, and 91/2% being subject to revision in case of change of rate or rates in customs duty, clearance charges, handling charges, insurance charges, bank charges and interest charges to banks, etc., incurred by B.M.T (8) B.M.T. is to regularly submit to National copies of all their sales contracts, monthly stock inventory reports and copies of invoices immediately when shipments to their customers are effected by B.M.T.

(9) National is to indemnify B.M.T. against all just claims made by any of the customers of B.M.T. for defective quality, shortage of material, wrong specifications, late shipment or non-shipment of goods against orders placed by B.M.T. and accepted by National, but National is not to be liable for any indirect or consequential claims, losses or damages or in case of force majeure.

(10) National undertakes to protect B.M.T. against decline in sales prices.

(11) The business between National and B.M.T. will be as principal to principal and National will have no responsibility in respect of B.M.T.'s customers and B.M.T. will be responsible for all risks in respect of deliveries except for defective quality, etc., as already stated.

(12) National's representative shall be entitled to have full access to B.M.T.'s warehouse, stocks and books and records relating to stocks and sales and any other matters relevant to this agreement and B.M.T. shall be bound to provide all information and explanation concerning these and B.M.T. is to meet any reasonable expenses of such representative of National not exceeding three thousand dollars per annum and B.M.T. is to consult such representative on all important matters particularly in respect of the price and about claims of B.M.T.'s customers for defective quality etc.

(13) The agreement is to remain in force for a period of five years from 1st February, 1962, terminable by 90 days' notice from the date of the despatch of the letter.

(14) Upon the expiration or termination of the agreement National is to arrange for goods remaining unsold with B.M.T. to be taken over from B.M.T. against payment of the C. & F. price plus actual importing expenses or alternatively National is to keep B.M.T. covered for fall in prices and against claims of customers and for the actual further expenses until those goods are sold by B. M, T. but such sale is to be effected by B.M.T. according to the advice by National. '

22. It will thus appear as a result of the analysis of the agreement that B.M.T. Commodity Corporation were to be the exclusive sellers in an area so that the manufacturer could sell to no one in this area during the currency of the agreement except through B. M, T. In other words, the manufacturing part of the business was to be in the hands of National Co. Ltd. and the marketing or selling part of the business was to be in the hands of B.M.T. in such area. The ' franchised ' right of distribution of the goods is in B.M.T. and they are to make their best endeavours to promote and secure maximum sales or distribution of National's goods and are io receive certain commission or discount. There are also terms which involve the highest degree of mutual confidence and trust between the contracting parties. B.M.T. is to furnish all explanations and information regarding the stock and their dealings in National's goods and they are to give access to the books, records, stock, etc., relating to National's goods.

23. It seems to me looking at the document as a whole that the form of the agreement resembles more closely the nature of an agreement of agency than an agreement between ' principal and principal ' or an agreement between a buyer and seller--pure and simple. It is true that Clause (15) of the agreement talks of the business of the contracting parties being on ' principal to principal' basis but the other features of the agreement to which I have made reference, in my view, outweigh this consideration.

24. Mr. Subimal Roy, learned counsel for the respondents, has argued that the elements which furnish unmistakable signs against the nature of the agreement as between principal and agent are that (1) no privity is created as a result of the dealing of B.M.T. with its own customers between such customers and the National Co. Ltd. ; (2) National is made not liable for damages or losses resulting from force majeure and National is also under no responsibility for B.M.T.'s risks in respect of B.M.T.'s customers and Clause (15) of the agreement, which according to the learned counsel is the paramount clause, expressly provides that the business to be transacted under the agreement is to be on ' principal to principal ' basis. Mr. Roy has also placed reliance on a decision of the Judicial Committee reported as Hope Prudhomme & Co. v. Hamel & Horley Ltd. In this case a French firm of merchants carrying on business at Madras as exporters of groundnuts, castor seeds and other country produce had brought an action againsta company carrying on business as merchants in London as intermediaries for the placing of the French firm's merchandise at European continental ports specially Marseilles for the price of cargo of castor seeds sold by the French firm to the London firm. The defence set up by the London firm was that they had a counter-claim against the French firm for a larger amount in respect of the non-delivery of a cargo of groundnuts. The nature of the arrangement which formed the basis of the counter-claim was in dispute and the main contest in the case was whether the London firm was acting as buyer in the transaction and whether they were entitled to sell for whatever profit they could get or whether they were acting as agents. Before the Judicial Committee the London firm tried to maintain that they were not acting as agents but as principals. In dealing with this contention. Lord Phillimore, who delivered the judgment of the Judicial Committee, observed :

' There is great force in the observations which were made by their Lordships upon the extension which modern business has given to the terms ' agent' and ' agency '. In many trades--particularly, for instance, in the motor-car trade--the so-called agent is merely a favoured and favouring buyer, one who under an overriding contract undertakes to do his best to find a market for the manufacturer's stock, who is given some special advantages, such as a special discount or preference in complying with his orders; but who in each particular contract acts as a buyer from the manufacturer and sells at whatever price he can get, unless--as is sometimes the case--he is by a special provision in the overriding contract forbidden to sell too cheaply or required not to spoil the market by asking too much. '

25. After making these observations Lord Phillimore went on to analyse the relevant documents and referred in extenso to the material clauses as set out in the correspondence and one of such clauses was to the effect :

' For all these articles we would prefer to deal with you as principal to principal on C. I. F. or C. & F. basis, as the case may be and you fix your own remunerations, each party paying their own cable and incidental expenses ...'

26. Then at page 165 the result of the analysis was recorded in the following terms :

'As a result, however, in their Lordships' opinion the documents antecedent to the particular contract in question support the general relation as being one of agency in the legal sense of the term and not one of sale and purchase.'

27. Then Lord Phillimore dealt with the principal contract and came to the following conclusion :

' Their Lordships agree with both the courts below that the respondents were in the strict sense agents, and that, unless they can show that theappellants, with knowledge of what they had done, adopted and ratified it, they have no case. The appellate court thought they had so ratified it. Their Lordships find this very difficult to understand. '

28. Ultimately their Lordships of the Judicial Committee set aside the decision of the appellate court on the question of adoption and ratification and restored the judgment of the court of first instance with costs. So this decision of the Judicial Committee is not of much assistance to the contention put forward by Mr. Subimal Roy, In my view the agreement dated 27th January, 1962, is an agreement of agency and comes within the purview of Section 294 of the Indian Companies Act, 1956, as amended by the Act of 1960. The other agreement which was entered into on the 15th March, 1963, between the National Co. Ltd, and Delca International Corporation contains practically similar terms as the agreement of B.M.T. Commodity Corporation and also certain additional terms. In my opinion it is also an agency agreement as contemplated in Section 294 of the Companies Act, 1956.

29. The next question which arises for consideration is as to the true interpretation, the scope and implications of Section 294 and as to whether it is a directory or a mandatory provision. The material portion of Section 294 may be conveniently set out hereunder:

'294. (1) No company shall, after the commencement of the Companies (Amendment) Act, 1960, appoint a sole selling agent for any area for a term exceeding five years at a time:

Provided that nothing in this sub-section shall be deemed to prohibit the re-appointment, or the extension of the term of office, of any sole selling agent by further periods not exceeding five years on each occasion. (2) After the commencement of the Companies (Amendment) Act, 1960, the board of directors of a company shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made.

(2A) If the company in general meeting as aforesaid disapproves the appointment, it shall cease to be valid with effect from the date of that general meeting ......

(5A) Where a company has a sole selling agent (by whatever name called) for an area and it appears to the Central Government that there is good reason so to do, the Central Government may require the company to furnish to it such information regarding the terms and conditions of the appointment of the sole selling agent as it considers necessary for the purpose of determining whether or not such terms and conditions are prejudicial to the interest of the company. '

30. It will therefore appear that Sub-section (1) of Section 294 deals with the terms or period of appointment and prohibits appointment for more than five years at a time ; but the agent may be reappointed for further periods not exceeding five years at a time. Sub-section (2) provides that appointment is to be always subject to the condition that if the appointment is not approved by the company in the first general meeting held after the date of appointment, it shall cease to be valid but no indication is given by this sub-section as to the point of time of such invalidity. Sub-section (2A) says that if such appointment is disapproved, that is, if there is a positive act of disapproval, the appointment will cease to be valid from the date of the general meeting. There is therefore scope for presuming that if the appointment is not placed at all at the first general meeting held after the appointment or if the appointment for some reason is not considered, though placed at the first general meeting, and is thus not approved at such meeting, the appointment will be invalid from its very inception or, in other words, it will become a void appointment; but whether it ceases to be valid from its very inception or not, it is fairly clear that it becomes invalid after the first general meeting if the appointment is not approved at such meeting. It appears to me that whether it is a case of ' not approved ' or ' disapproved ' under Section 294(2) or 295(2A) the appointment, if it has become invalid, is to be regarded as dead and cannot be resuscitated or revived and cannot be ratified by approval at a subsequent meeting. In such a case the only course open is to make a fresh appointment and then comply with the requirements of the provisions of Section 294, The fact remains that in the present case the appointment of B.M.T. Commodity Corporation was not approved at the first general meeting held on 31st May, 1962. It is contended on behalf of the respondent by Mr. Roy that although the agreement dated 27th January, 1962, was not approved on the 31st May, 1962, when the first general meeting was intended to be held, it was in fact approved at the annual general meeting held on 29th August, 1962, which was nothing but a continuation of the annual general meeting to be held on the 31st May, 1962, which was adjourned from time to time and was ultimately held on the 29th August, 1962. It is pointed out that the report of the directors dated the 9th April, 1962, which contained a specific reference to the agreement of 27th January, 1962, and which also set out the substance of the nature of that agreement, was approved and adopted by the shareholders at such meeting held on the 29th August, 1962. The resolution which was carried by majority of poll was to the following effect and is to be found set out as item 6 in the minutes of the adjourned annual general meeting held on the 29th August, 1962.

' Resolved that the reports of the directors and auditors and the accounts of the company for the year ended 31st October, 1961, be and are hereby approved and adopted.'

31. This fact of the adoption and approval of the report of the directors, dated 9th April, 1962, is stated in paragraphs 13 and 16 of the affidavit-in-opposition affirmed by Bhagwandas Goenka on 10th June, 1963. But the question is whether the approval of the report of the directors is approval of the appointment of the B.M.T. Corporation within the meaning of Section 294. In other words is substantial compliance with the requirements of Section 294 enough

32. This leads us to the question whether the provisions of Section 294 are directory or mandatory in character. It is well settled that the directory or imperative form of language employed is not always a sure index of the intention of the legislature. But where the command or mandate of the legislature is such that its non-compliance nullifies the thing done, it can fairly be regarded as imperative in character. Section 294 enjoins that no appointment of a sole selling agent can be made except subject to the condition that if it is not approved by the company in the first general meeting held after the appointment, then it shall cease to be valid. So in clear and unambiguous language it is indicated in the section that the effect of non-approval of the appointment at the first general meeting after appointment, is to render the appointment invalid. So compliance of the provisions of the section is made a condition precedent to the validity or legality of what is done and the neglect of the statutory requisites would therefore obviously be fatal. In my opinion rigorous observance of the provisions of the section is essential and since the appointment was not made subject to the prescribed condition, and the appointment was not approved at the first general meeting in express terms, the appointment was rendered invalid.

33. The fact that the agreement dated 27th January, 1962, was referred to in the report of the directors dated the 9th April, 1962, and certain particulars about the agreement had been mentioned in the report and the report was adopted and approved at the adjourned annual general meeting of the 29th August, 1962, is not in my view proper compliance with the requirements of Section 294. As the provision of Section 294 is mandatory, mere substantial compliance is not enough but strict compliance is necessary. The adoption or approval of the report of the directors was treated as ordinary business at the annual general meeting. It was not treated as an item of special business. Consideration of the accounts, balance-sheet and the report of the directors and auditors is treated under Section 173(1)(a) of the Companies Act, 1956, as ordinary business and not special business.

34. Section 173(1)(a) provides as follows :

' 173. (1) For the purposes of this section- (a) in the case of an annual general meeting, all business to be transacted at the meeting shall be deemed special, with the exception of business relating to (1) the consideration of the accounts, balance-sheet andthe reports of the board of directors and auditors, (ii) the declaration of a dividend, (iii) the appointment of directors in the place of those retiring, and (iv) the appointment of, and the fixing of the remuneration of, the auditors. '

35. Section 173(1)(b) provides that--In the case of any other meeting, all business shall be deemed special.

36. In this connection Section 173(2) may also be set out:

' 173. (2) Where any items of business to be transacted at the meeting are deemed to be special as aforesaid, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business, including in particular the nature of the concern or interest, if any, therein, of every director, the managing agent, if any, the secretaries and treasurers, if any, and the manager, if any: Provided that where any item of special business as aforesaid to be transacted at a meeting of the company relates to, or affects, any other company, the extent of shareholding interest in that other company of every director, the managing agent, if any, of the secretaries and treasurers if any, and the manager, if any, of the first mentioned company shall also be set out in the statement if the extent of such shareholding interest is not less than twenty per cent, of the paid up share capital of that other company. '

37. Section 173(3) is also relevant and is as follows:

' 173. (3) Where any item of business consists of the according of approval to any document by the meeting, the time and place where the document can be inspected shall be specified in the statement aforesaid. '

38. So it appears that under Section 173(2) an explanatory note with regard to special items of business has to be annexed to the notice of the meeting ; but this was not done with regard to the agreement dated the 27th January, 1962. Therefore, there was no compliance with the requirements of the statute inasmuch as it was incumbent under the section, if any special business was to be transacted at the meeting to specify the nature of such business in the notice.

39. With regard to the agreement dated the 15th March, 1963, between the Delca International Corporation and the National Co. Ltd., there is however no question that it was not brought up for approval at the first general meeting held after the appointment. The notice which was issued on 26th April, 1963, for holding the annual general meeting on 31st May, 1963, suffers from the defect that it did not annex a proper explanatory note with regard to the proposed resolution for approval of the appointment dated the 15th March, 1963, of the Delca International Corporation which was numbered as resolution No. 8 in the notice. Interest of the company or the Corporation or of the directors affecting or relating to Kelvin Jute Co. Ltd. or Megna Mills Co. Ltd. was not mentioned or disclosed in the explanatory note at all. Moreover, the notice gives the impression that the business to be transacted under the agreement was on ' principal to principal ' basis. So the notice did not contain a full and frank disclosure of the true nature and character of the agreement dated the I5th March, 1963. It was a tricky notice and mere offer of inspection of the agreement at the registered office of the company made in the foot-note of the explanatory notes did not cure the defect: (See Bimal Singh Kothari v. Muir Mills Co. Ltd., [1952] 22 Comp. Cas. 248).

40. In the circumstances, it appears to be that the appellant has made out a prima facie case for an injunction.

41. On behalf of the respondents it has been urged that the matter of injunction being a discretionary remedy, the discretion should not be exercised in this case in favour of the appellant, as the appellant has not taken any steps for advertisement under Order 1, Rule 8, of the Code of Civil Procedure although the suit purports to be a representative suit. It is also urged that the appellant has been guilty of unreasonable delay in coming to court and such conduct disentitles the appellant from obtaining any relief by way of an injunction. The further ground put forward against the exercise of discretion in favour of the appellant is that if the company is restrained by an injunction, there is the risk of foreign exchange being refused or stopped by the Reserve Bank. Now so far as the question of delay is concerned, it appears to me that the same has been sufficiently explained in paragraph 38 of the petition. As regards the other points relating to foreign exchange and not taking steps under Order 1, Rule 8, of the Code are concerned, I am of the view that when a question of illegality or contravention of statute is involved considerations such as these do not preclude the appellant from bringing to the notice of the court the fact of the contravention or illegality and asking the court to put a stop to it. Moreover, so far as the question of advertisements under Order 1, Rule 8, of the Code is concerned, it is for the court to take such steps.

42. In the circumstances, the order of the learned trial judge cannot be sustained.

43. The result is that the judgment and order of the learned trial judge are set aside and the appeal is allowed. There will be an order for an injunction in terms of prayer (a) of the petition restraining the defendants and/or their agents and/or their servants from passing and/or getting passed the resolutions Nos. 7 and 8 as mentioned in the notice dated April 26, 1963. Costs of this appeal will be costs in the cause. Certified for two counsel.

Mitter, J.

44. This is an appeal from an order discharging an injunction obtained ex parte by a shareholder of a company restraining the company and its directors from passing two resolutions at an annual general meetingof the company for approving and ratifying certain arrangements entered into with two foreign firms for sole distributorship in America of products manufactured in India by the company.

45. The company is a manufacturer of jute goods and products to wit jute backing cloth and burlap over the width of 100 ' as well as below that figure. The material seems to be used mostly for the manufacture of carpet and had a large market in U.S.A. and other parts of the two American Continents. The defendants Nos. 2 to 5 are its directors while the plaintiff is a holder of ordinary shares numbering seventy-five whose complaint in the suit is that the directors have violated the mandatory provisions in the Indian Companies (Amendment) Act of 1960, and purported to appoint sole selling agents of the company's products disregarding the provisions in the Act as to informing the shareholders of the arrangements entered into and trying to get the same approved at a general meeting in violation of the law.

46. From the documents before us the following facts emerge : The directors of the defendant company had entered into some sort of arrangement with a body known as B.M.T. Commodity Corporation of New York some time in the year 1961 for sale of wide looms and narrow loom products of the company. The company's goods were sent to America and stocks were kept with B.M.T. Commodity Corporation on the company's account. No writing evidencing this arrangement is forthcoming. But according to the defendants there were sales on principal to principal basis. The shareholders were not informed of any such arrangement in the general meeting of the company held on July 17, 1961. On January 27, 1962, the directors entered into a written agreement with B.M.T. Commodity Corporation in the name of the company making elaborate provisions as to how the business between the parties was to be conducted.

47. The provisions of this arrangement will have to be scrutinised carefully as the dispute centres round the nature and character of it, i.e., whether the B.M.T. Commodity Corporation was thereby appointed the sole selling agent of the company or whether the parties acted as principals. According to the directors and the company the agreement was not one of agency and as such the question of its approval by the company never arose. In their report to the shareholders, dated April 9, 1962, under the heading 'export' the directors purported to give an outline of the terms of the arrangement with the B.M.T. Commodity Corporation. The first general meeting of the company after April 9, 1962, was held on May 31, 1962. No resolution was passed at this meeting approving of the agreement with B.M.T. Commodity Corporation. At the annual general meeting of the company held on August 19, 1962, the company approved the said report of the directors. On December 3, 1962, the Registrar of Companies, West Bengal, informed the company that the agreement entered into with B.M.T. Commodity Corporation on January 27, 1962, was one of sole selling agency and as such the company should obtain the approval of the shareholders at a general meeting in pursuance of the provisions of Section 294 of the Indian Companies Act. By its reply, dated December 11, 1962, the company informed the Registrar that the arrangement with B.M.T. Commodity Corporation had been referred to by the directors in their report to their shareholders amounting to an approval of the arrangement by the latter. According to the company itself the arrangement was not one of agency but the company would in deference to the wishes of the Central Government have the arrangement approved of by the shareholders at the next annual general meeting of the company to be held in April or May, 1963. On March 15, 1963 the company through its directors entered into an agreement with another body known as Delca International Corporation of Delaware, U.S.A., on terms which are substantially the same as those contained in the agreement with B.M.T. Commodity Corporation. This agreement was to be effective from March 26, 1963, and to remain in force for 3 years. It recites that Delca International was already acting as exclusive distributors of similar products manufactured by Kelvin Jute Company, Limited, and Megna Mills Co. Ltd. (two Indian jute companies) in the territories mentioned in the agreement. On April 26, 1963, the company issued notice of annual general meeting to be held on May 31, 1963, at which besides considering and adopting the audited accounts of the company for the year ending October 31, 1962, etc., certain special business indicated in resolutions 7 and 8 were proposed to be transacted. These were:

' 7. As an ordinary resolution :

Resolved that the approval and ratification of the company be and is hereby given to the arrangement entered into by the company with M/s. B.M.T. Commodity Corporation of New York on 27th day of January, 1962, by which they are acting as sole distributors in respect of U.S.A. and its possessions, Canada and Mexico for the sale of (a) jute backing cloth and (b) ordinary burla p over a width of 100 inches manufactured by the company for a period of five years, commencing from first of February, 1962, subject to the provisions that the arrangement may be terminated by either, giving 90 days' notice to the other during November of any of the years 1964, 1965 and 1966 and that the terms of sales shall be on 'principal to principal' basis, and that the prices at which the company shall bill the B.M.T. Commodity Corporation shall be as follows, namely:

(a) For jute backing cloth and burlap over a width of 100 inches at the price at which B.M.T. will sell to its customers as reduced by 12 per cent, thereon.

For jute backing cloth of 100 inches and below in width the price at which B.M.T. will sell to its customers, as reduced by 91/2 percent, thereon.

8. As an ordinary resolution :

Resolved that pursuant to the provisions of Section 294 and other provisions, if any, of the Companies Act, 1956, approval be and is hereby given to the directors for entering into an arrangement with M/s. Delca International Corporation, Delaware, U.S.A., by which they would become the sole distributors for the territories of North America and South America for the sale of

(a) Jute backing cloth.

(b) Ordinary burlap having a width of 100 inches or more, manufactured by the company, for a period of three years with effect from March 26, 1963, provided however that the arrangement may be renewed by mutual consent for any period not exceeding five years at a time, and that the terms of the sale would be on ' principal to principal' basis and that the price at which the company shall bill Delca International Corporation shall be as follows:

(i) For jute backing cloth and burlap over 100 inches width at the price at which Delca International Corporation will sell to its customers as reduced by 12 per cent, thereon.

(ii) For jute backing cloth 100 inches and below in width at the price at which Delca International Corporation will sell to its customers as reduced by 91/2 per cent, thereon.

Resolved further the directors be and are hereby empowered to make such modifications in the agreement as may be deemed necessary in order to comply with the suggestions, if any, that may be made by the Reserve Bank of India while approving the agreement.

The register of members and share transfers of the company will remain closed from the 16th May, 1963, to the 31st May, 1963, both days inclusive.

By order of the Board of DirectorsCalcutta, For NATIONAL COMPANY, LIMITED. 26th April, 1963 B.D. GOENKA.Directors. Note.--(c) Explanatory statements pursuant to Section 173 of the Companies Act, 1956, or items Nos. 5 to 8 of the agenda are annexed hereto.'

48. In the explanatory statement with regard to resolution No. 7 the directors quoted what had been said in their report dated April 9, 1962, under the heading 'export' and added that the matter was being placed before the company in general meeting for approval at the suggestion of the department of Company Law Administration although it had been advised that Section 294 of the Companies Act was not attracted. The members were further informed that a copy of the agreement might be inspected at the registered office of the company on any working day and that thedirectors had no interest in the said resolution except to the extent that they were members and directors of the company. With regard to resolution No. 8 the directors stated by way of explanation that the company had entered into the agreement in order to cope with the sale of wide loom cloth of the company's manufacture which was steadily on the increase. The shareholders were informed that a director of B.M.T. Commodity Corporation was also a director of Delca International Corporation and if the arrangement was approved by the Reserve Bank of India, the arrangement with B.M.T. Commodity Corporation would stand terminated by mutual agreement and Delca International Corporation would take up all outstanding forward contracts entered into between the company and B.M.T. Commodity Corporation. As in the case of resolution No. 7 the shareholders were given liberty to inspect the written agreement at the registered office of the company and were told that the directors had no interest in the resolution except in the said capacity and as members.

49. The petitioner, the appellant before us, claims to have received the notice of the 26th April, on May 6, 1963, and obtained inspection of the agreement on May 9, 1963. Thereafter he secured copies of the agreements through one Ramkaran and consulted his lawyers. Being advised in that behalf he instituted a suit in this court on May 31, 1963, and obtained an injunction restraining the company from passing the said resolutions at the meeting fixed for the said date.

50. The petitioner contends that as the company had not approved the agreement of sole selling agency with B.M.T. Commodity Corporation either on July 27, 1961, or May 31, 1962, the same became void under Section 294 of the Companies Act even if it was not void ab initio. In the premises the petitioner contends that the resolution with regard to the appointment of B.M.T. Commodity Corporation cannot be approved of or ratified by the company at the general meeting fixed for May 31, 1963.

51. In paragraph 30 of his petition the appellant charges that the resolution No. 8 with regard to Delca International Corporation was tricky, misleading and fraudulent. It was fraudulent in that:

' (a) In the explanatory statement dated April 26, 1963, the defendants had suppressed that they (defendants Nos. 2 to 5) had already entered into a purported agreement with Delca International Corporation as sole selling agent.

(b) Although the agreement with Delca Corporation was to be effective from March 26, 1963, the explanatory statement of the directors purported to show that the agreement would come into force upon approval being obtained from the Reserve Bank of India.

(c) The defendants attempted to keep back from the shareholders the true nature of the agreement with Delca Corporation by stating in the explanatory statement that it was between a principal and a principal.

(d) The defendants Nos. 2 to 5 did not give the material facts relating to the agreement in their explanatory statement in violation of Section 173(2) of the Companies Act.'

52. The prayers in the petition were :

'(a) An injunction restraining the defendants from passing and/or getting passed resolutions Nos. 7 and 8 as mentioned in the notice dated April 26, 1963, at the proposed annual general meeting of the company.

(b) An injunction restraining the defendants from giving any effect to the resolutions even if passed at the annual general meeting.'

53. In the affidavit-in-opposition of the defendants affirmed by Bhagwandas Goenka, the following averments are made :

' 1. The agreement of January 27, 1962, with B.M.T. Commodity Corporation was duly approved by the Reserve Bank of India. The shareholders were not approached for sanction thereto under the advice of counsel. Substantial particulars thereof were mentioned in the report of the directors dated April 9, 1962, which was duly passed by the shareholders at the general meeting held on August 29, 1962. By adopting the said report the shareholders approved of the agreement. It was only at the suggestion of the department of the Company Law Administration that the matter was included in the agenda for the general meeting of which notice was given on April 27, 1963.

2. The agreement, dated March 13, 1963, cannot be effective without obtaining the approval of the Reserve Bank of India. The agreement is still under consideration of the said bank.

3. The plaintiff holds 75 shares in the company while the defendants Nos. 2 to 5 are the owners of no less than 60,000 shares.

4. The resolutions complained of are matters concerning the internal management of the company. No sufficient reason has been disclosed why the same should be interfered with in the hands of its directors.

5. By the arrangement entered into the defendant company is earning valuable foreign exchanges, an injunction restraining the company from pursuing the same will hit the export trade of the country.'

54. The first question which arises in this appeal is whether the agreement entered into by the company with B.M.T. Commodity Coporation or Delca International Corporation is a sole selling agency agreement. If the answer is in the affirmative, further questions will then arise as to whether they are in the form sanctioned by the Indian Companies (Amendment) Act of 1960 and secondly whether the shareholders were given sufficient information in regard thereto to enable them to give their sanction at the annual general meeting of the company.

55. The relevant clauses in the agreement between the company and the B.M.T. Commodity Corporation are as follows :

' Clause (1).--The Company appoints B.M.T. Commodity Corporation as its exclusive distributors for the sale of jute backing cloth and ordinary burlap over a width of 100 inches manufactured by the company in respect of certain areas in the United States of America and elsewhere.

Clause (2).--B.M.T. Commodity Corporation undertakes that it will represent National exclusively in the territories aforesaid for sale and distribution of jute backing cloth, etc., and will not import, sell, handle or deal in any manner, directly or indirectly, in the aforesaid goods or any other similar substitute products manufactured by any one else in India or elsewhere.

Clause (3).--B.M.T. shall make their best efforts to promote and secure maximium sales and/or distribution of National's aforesaid goods ... and shall in all matters, act loyally and faithfully to National. B.M.T. shall take all possible steps to protect and safeguard all the rights and interests of National.

Clause (4).--National undertakes not to sell its above said products in the areas covered through channels other than B.M.T.

Clause (5).--B.M.T. shall place their orders with National regularly from month to month, enabling National to plan its manufacturing programme of jute backing cloth and ordinary burlap over 100 inches and, upon acceptance of the orders, National shall deliver these goods in accordance with the accepted orders.

Clause (6),--B.M.T. shall effect sales of National's manufactured goods to B.M.T.'s customers in the territories covered by this agreement at prices mutually agreed upon between National and B.M.T.

Clause (7).--B.M.T. shall regularly submit to National copies of all their sales contracts within a month from the date of the respective contracts.

Clause (8).--B.M.T. shall pay National for all purchases of aforesaid goods at cost and freight, port of destination basis, at prices determined as follows, namely:

(a) For jute backing cloth and burlap over 100 inches width : Prices as agreed upon under paragraph 6, less 12 per cent, thereon.

(b) For jute backing cloth 100 inches and below width : Prices as agreed upon under paragraph 6, less 91/2 per cent, thereon.

The said 121/2 per cent, or 91/2 per cent, whichever be applicable as shown above is subject to revision in case change of rate or rates in customs duty, clearance charges, handling charges, warehousing charges, insurance charges, banking charges for imports, and interest charges to bank incurred by B.M.T. or due to necessity of maintaining stocks of jute backing cloth in warehouse for a period exceeding 60 days.

Clause (9).--National undertakes that all merchandise delivered by National to B.M.T. will be in accordance with the specifications of B.M.T.'s orders accepted by National.

Clause (10),--National undertakes to indemnify B.M.T. against all just claims made by any of B.M.T.'s customers for defective quality, shortage of material, wrong specifications, late shipment or non-shipment of goods by National against orders placed by B.M.T. and accepted by National. However National shall not be liable for any indirect or consequential claims, losses or damages, or in case of force majeure.

Clause (11).--National undertakes to protect B.M.T. against any decline in sales prices in case B.M.T. is unable to have its customers take delivery of goods contracted for because of decline in market prices, B.M.T. undertakes to use all its efforts to have its customers take delivery of goods contracted for and shall also take due action to recover such losses on price decline, and possible damages for non-fulfilment of contracts by such customers unless it is agreed between National and B.M.T. that it is inadvisable to do so. Reimbursement to B.M.T. for any such price difference will be for the amount by which B.M.T. has to reduce the price in order to have customers take delivery, after reduction therefrom of 12 per cent, or 91/2 percent, whichever applicable.

Clause (13).--B.M.T. shall make payment for its purchase in accordance with the pricing structures shown in paragraph (8) by establishing irrevocable, without recourse to Letters of Credit. These letters of credit will be for 75 per cent, of the C. & F. price as stated in paragraph (8) for negotiation by National of their invoices. For the remaining 25 per cent, of the C. & F. price stated in paragraph (8), National shall draw a sight draft on B.M.T. which will be presented to B.M.T.'s bankers along with copy of invoice, etc.

Clause (14).--B.M.T. will furnish National monthly stock inventory reports in the form acceptable by National. B.M.T. shall also submit to National copies of all their invoices immediately when Shipments to their customers are effected by B.M.T.

Clause (15).--Business between National and B.M.T. will be as principal to principal notwithstanding any provisions or stipulations relating to variation in prices, claims or otherwise. National will have no responsibility in respect of B.M.T.'s customers, and B.M.T. themselves will be responsible for all risks in respect to all deliveries effected by them, except for claims as provided in paragraph (10).

Clause (17).--If National decides to have their own representatives in New York or elsewhere in the U.S.A. or Canada, he shall be consulted by B.M.T. on all important matters and particularly those covered by paragraphs (6) and (10) hereof. B.M.T. undertakes to meet any reasonableexpenses of such a representative not exceeding U.S. dollars 3,000 per annum.

Clause (18).--National's representative shall be entitled to have full access to B.M.T.'s warehouse, stocks and books and records relating to stocks and sales, and any other relevant to this agreement. B.M.T. shall be fully bound to provide all information and explanations concerning these that National's representative may require from time to time. B.M.T. agree to make available all facilities to National's representative for carrying on his work.

Clause (21).--On the expiration or termination of this agreement, National will arrange for goods remaining unsold with B.M.T. to be taken over from B.M.T. against payment of the C. & F. price plus actual importing expenses referred to in paragraph (8). Alternatively, National will keep B.M.T. covered for fall in prices mentioned in paragraph (11) or against claims mentioned in paragraph (10) and actual further expenses mentioned in paragraph (8) until those goods are sold by B.M.T. B.M.T. shall sell those goods according to the advice by National, but B.M.T. shall not be bound to hold those goods beyond three months, and will then be free to dispose of those goods at the best possible price.

Clause (25).--Any dispute or claims for defective quality, shortage of material, or wrong specifications arising between B.M.T. and their customers in reference to the fulfilment of contracts entered for the delivery of products of National covered by this agreement, which cannot be settled by amicable means, shall be settled by arbitration under the arbitration rules and by panel of the Burlap and Jute Association, New York. It is expressly understood that notwithstanding paragraph (24) of this agreement. National shall be fully bound by such an arbitration decision.'

56. Most of these terms are reproduced almost verbatim in the agreement between National and Delca International Corporation. Clause (3) of the latter agreement recites that National was aware that Delca was acting as the exclusive distributor of similar products manufactured by Kelvin Jute Company Limited and Megna Mills Co. Ltd. in the territories mentioned in the schedule and as aforesaid Delca undertook that it would not, during the continuance of the agreement, import, sell, handle or deal in any manner directly or indirectly in similar goods or in any substitute thereof manufactured by anyone else in India or elsewhere.

57. The expression 'sole selling agent' has not been defined in the Companies Act but it can only mean an individual or a firm or a company given exclusive rights to sell goods of another person in a particular area. In order to find out whether the agreement is an agency agreement or not, the terms have to be read as a whole to find out whether one was being appointed as an agent by the other. Under Section 182 of the IndianContract Act, ' agent ' is a person employed to do any act for another or to represent another in dealings with third persons. Under Section 211 an agent is bound to conduct the business of his principal according to the directions given by the principal. Under Section 212 he is bound to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business. Under Section 213, he is bound to render proper accounts to his principal on demand. Under Section 222 the employer of an agent is bound to indemnify him against the consequence of all lawful acts done by such agent in exercise of the authority conferred upon him. On a construction of the whole agreement there can be little doubt that, prima facie, the agreement of National and B.M.T. was a sole selling agency agreement. By it the B.M.T. was appointed representative of National exclusively for sale and distribution of the goods mentioned, to use their best endeavours to promote and secure the maximum sales, to act lawfully and faithfully, taking all steps to protect National's rights and interests. National's programme of manufacture was to fall in line with the orders placed by B.M.T. B.M.T. was to retain 12% of the sale price in respect of jute backing cloth and burlap over 100 inches and 91/2% of the price in respect of those below 100 inches in width.

58. In other words B.M.T. was not free to make such profits as it could by entering into contracts with parties in America. By Clause (10) of the agreement National was to give indemnity in respect of all claims for defective quality, shortage of material, etc., made by B.M.T.'s customers and was to be bound by all arbitration which may take place between B.M.T. and its customers in such matters. On the termination of the agreement National was to take over all goods which were left unsold. In case of decline of price during the continuance of the agreement, B.M.T. was to get reimbursement for any price difference in case it had to reduce the price in order to induce customers to take delivery of the goods. National was to have the right to advise B.M.T. with regard to fixation of prices, effecting sales and the claims of B.M.T. customers for defective quality, etc. B.M.T. was also to provide National's representative all information and explanation regarding such matters.

59. As against all this reliance was placed principally on Clause (15) that the business was to be as between principal and principal and that National would have no responsibility in respect of B.M.T.'s customers except as provided in Clause (10). Read as a whole, Clause (10) seeks to indemnify an agent against losses caused by a principal's default and only protects the latter against claims arising indirectly or by reason of circumstances beyond the control of the principal. The mere inclusion of a term that business will be as between principal and principal does not carry one very far in the light of all the other terms which the parties are agreed to.If the transaction was really as between principal and principal then normally National would not be concerned with any claim for defective quality or wrong specification made by B.M.T.'s customers. A fortiori it will have nothing to do with any arbitration between the said customers and B.M.T. The disposal of goods left unsold at the expiry of the agreement would be B.M.T.'s business. National would not be concerned with decline in prices overseas after acceptance of orders from B.M.T. National would not have the right to inspect B.M.T.'s warehouse, .stocks of goods, documents and papers or to advise B.M.T. in matters of sales or fixation prices. Mr. Roy, learned counsel for the defendants, argued that manufacturers nowadays take care to protect their own interest in matters like fixation of prices, providing for decline in prices and exercise some sort of control over persons who buy their goods for sale abroad. He drew our attention to the judgment of the Judicial Committee in Hope Prudhomme & Co. v. Hamel and Horley Ltd., where it was observed :

' There is great force in the observations which were made to their Lordships upon the extension which modern business has given to the terms 'agent' and 'agency'. In many trades--particularly, for instance, in the motor-car trade--the so-called agent is merely a favoured and favouring buyer, one who under an overriding contract undertakes to do his best to find a market for the manufacturer's stock who is given some special advantages, such as a special discount or preference in complying with his orders ; but who in each particular contract acts as a buyer from the manufacturer and sells at whatever price he can get, unless--as is sometimes the case--he is by a special provision in the overriding contract forbidden to sell too cheaply or required not to spoil the market by asking too much.'

60. No doubt this cannot be disregarded but having regard to the entire agreement it appears that National was employing B.M.T. as the channel through which all its sales in America were to take place with detailed instructions in and control of the various aspects of the distribution of its products. The agreement was, prima facie, a sole selling agency agreement. From 1956 onwards, the Indian legislature has sought to curb the power of directors of companies in the matter of appointment of sole selling agents. The relevant provisions in the Act of 1956 were as follows :

' 294. (1) After the commencement of this Act, the board of directors of a company shall not appoint a sole selling agent for any area, except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in general meeting within a period of six months from the date on which the appointment is made.

(2) If the company in general meeting disapproves of the appointment, or does not approve of it within the period of six months aforesaid, it shallcease to be valid with effect from the date of such disapproval, or the expiry of the period of six months aforesaid, whichever is earlier.'

61. Clearly, the object was that if the board of directors appointed a sole selling agent, the matter had to be brought before the company in general meeting within a period of six months from the date of appointment for its approval. If the company disapproves of the appointment at the general meeting it would cease to be valid. Even if there was no express disapproval, the appointment would cease to be valid after the lapse of six months from the date of appointment.

62. The section is now slightly differently worded. Section 294(1) provides that:

(i) No company shall, after the commencement of the Companies (Amendment) Act, 1960, appoint a sole selling agent for any area for a term exceeding five years at a time : Provided that nothing in this sub-section shall be deemed to prohibit the reappointment, or the extension of the term of office, of any sole selling agent by further periods not exceeding five years on each occasion.'

63. By the above provisions the legislature intended that a company was not to be free to have a sole selling agent for a period exceeding five years at a time. Under Sub-section (2) of Section 294 :

'After the commencement of the Companies (Amendment) Act, 1960, the board of directors of a company shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first general meeting held after the date on which the appointment is made.'

64. Sub-section (2A) provides that:

' If the company in general meeting as aforesaid disapproves the appointment, it shall cease to be valid with effect from the date of that general meeting.'

65. The important change to note is that the appointment of a sole selling agent need not be brought before the company within six months as under the Act of 1956. The other important deviation is that there is no express provision as to what is to happen if at the general meeting at which the matter is brought up before the company the shareholders do not expressly disapprove of the appointment. In my opinion this omission is of no significance. In such a case under the agreement itself the appointment would cease to be valid by virtue of the operation of Sub-section (2) of Section 294. The net result seems to be that the period of six months is done away with but the directors are not free to make the appointment except on condition that it would cease to be valid if not approved by the company in a general meeting. The general meeting was to decide the fate of the appointment. If it disapproves the same it would cease to be valid under Sub-section (2A) and if it did not approve of it, it would cease to be valid by the operation of the section itself. It was argued before us that Section 294 was only directory and not mandatory as no penal provision was attached thereto. I find myself unable to accept this argument. The words of the statute are quite clear in that it prohibits the directors from entering into a contract with a sole selling agent without being obliged to bring the matter of the appointment before the company at the first general meeting thereafter. The only limitation imposed on the company's power of appointing a sole selling agent is that the period of agency must not exceed five years. The clear provision in the Act that the appointment by the directors is not to be valid unless approved by the company in the first general meeting shows the obligatory nature of the enactment. It is well-known that the use of the negative language generally leads to the conclusion that the provision is mandatory. According to Craies on Statute Law, 6th edition, page 263 :

' If the requirements of a statute which prescribes the manner in which something is to be done are expressed in negative language, that is to say, if the statute enacts that it shall be done in such a manner and in no other manner, it has been laid down that those requirements are in all cases absolute, and that neglect to attend to them will invalidate the whole proceeding.'

66. In my opinion, it is not necessary that the statute should expressly lay down that a-thing is not to be done except in the manner prescribed for it to be held mandatory in operation. It is sufficient if the statute shows that one particular course of action only is to be resorted to.

67. Oar attention was drawn to a recent judgment of the Allahabad High Court in Maheshwari Khetan Sugar Mills v. Ishwari Khetan Sugar Mills, [1963] 33 Comp. Cas. 1142 which is to the effect that as the law does not prescribe for the consequences or does not lay down any penalty for non-compliance of Section 108 of the Companies Act, the provision is to be considered as directory only and not mandatory. This view was arrived at on a consideration of a group of sections relating to the transfer and registration of shares. It is not necessary to examine in detail the reasoning behind this decision and it is enough to point out that according to the judgment of the Allahabad High Court if Sub-section (1) of Section 108 was read in isolation it could be said that the provision was mandatory. The proviso to Section 108 however shows that the company may in certain cases register as shareholder a person who does not present to it a proper instrument of transfer. There is no such exception clause in Section 294.

68. Therefore, if the directors choose to enter into an agreement with a sole selling agent without the condition that the appointment shall cease to bevalid if not approved by the company in the first general meeting held thereafter the appointment is bad ab initio and the directors can be injuncted from acting on it in a properly framed suit because they would be doing something which the law does not allow them to do. This is not a matter of mere internal management. By passing resolutions Nos. 7 and 8 the company would be approving and ratifying what has already been done by the directors. If the directors had done something illegal there could be no question of ratification. It is only when an act which can be done regularly has been done irregularly that the question of ratification by the company and the court's unwillingness to interfere in the internal management of the company comes in. Of course if the defendants command a majority in the company there is nothing to prevent the company from entering into an agreement with a third person as a sole selling agent provided the shareholders are duly informed about it. Appointing a sole selling agent for the first time is one matter while approving and ratifying an act which was beyond the capacity of the directors under the law is quite another.

69. This brings us to the question as to whether the shareholders were given sufficient information about the agreement entered into by the directors either with B.M.T. Commodity Corporation or Delca International Corporation, Under Section 172(1) every notice of a meeting of a company must contain a statement of the business to be transacted there. Under Section 173(1)(a) except the three particular classes of business specified therein all other business to be transacted at the meeting is special and in respect thereof Section 173(2) enjoins that all material facts concerning each item of business including, in particular, the nature of the concern or interest of every director, managing agent, secretary, etc., must be set forth. Under Section 173(3) the time and place where the inspection of a document to be approved at the meeting can be had must be specified.

70. I find myself unable to accept the argument of Mr. Roy that as the directors had in their report dated 9th April, 1962, given an outline of the arrangement with B.M.T. Commodity Corporation under the heading ' Export' and the shareholders had adopted the report, they can be said to have approved of the sole selling agency agreement. Section 217(1) lays down that the board of directors of the company must report to the shareholders about the state of the company's affairs, the amounts to be carried to reserve in the balance-sheet, the amounts recommended by way of dividend and material changes and commitment regarding the financial position of the company. Under this sub-section the directors are not obliged to inform the shareholders of the appointment of any agents or managers although as a matter of practice a reference to this is often made. The directors' report is only meant to give the shareholders a general picture of how the company is being run. Moreover, the statement that the sales were made on principal to principal basis is hardly justifiable when the directors were in reality appointing a selling agent. The scanty information contained in the heading under 'export' was not sufficient to inform the shareholders of what was being done.

71. In my opinion, there is a good deal of force in the contention of the learned counsel for the appellant that resolutions Nos. 7 and 8 do not set out all material facts regarding the agreement with B.M.T. Commodity Corporation* and Delca International Corporation. It is certainly not necessary to inform the shareholders of each and every term of the agreement but in my view a little more detail specially with regard to Clauses (6), (7), (10), (11), (12), (15), (18) and (21) should have been given, so far as the agreement with B.M.T. Commodity Corporation is concerned. Similar details with regard to the agreement with Delca International Corporation should also have been furnished. The shareholders should further have been told that Delca International Corporation was already acting as sole distributors of the products of Kelvin Jute Co. Ltd. and Megna Mills Co. Ltd. The provision for inspection of the agreement at the registered office of the company in terms of Section 173(3) is not sufficient for the purposes of Section 173(2), It is well known that if a company can sell its products without the employment of agents its profits would be substantially higher than in case where the selling was done through agents. On the other hand it cannot be ignored that selling is best done through an organisation of experts and specially when sales have to be made to overseas customers the employment of an overseas agent is almost a necessity. As the legislature has thought it fit to provide that shareholders must approve of the appointment of selling agents the opportunity given to the shareholders must be full and complete and there must be a full and frank disclosure of the salient features of the agency agreement before the shareholders can be asked to give their sanction. The provision for inspection of the agreement at the registered office of the company is not enough. Few shareholders have either the time or the inclination to go to the registered office to find out what the company is about to do. Moreover, such an opportunity is illusory in the case of shareholders who do not live in Calcutta when the registered office is situate here. This aspect of the case is dealt with in the case of Bimal Singh Kothari v. Muir Mitts Co. Ltd.

72. The learned trial judge appears to have attached great significance to the fact that if any injunction was granted it would hit the export trade of the country. In my opinion, the court will not tolerate the breach of the provision of law merely because an injunction might hold up the selling of the company's products in the overseas markets temporarily. As had already been noted if the defendants command the majority share they can easily put matters right.

73. Lastly, it was argued that the orders being discretionary orders should not be interfered with in appeal. Ordinarily, no doubt, a court of appeal will be slow to interfere with the exercise of discretion by a trial court but this principle will not hold good if it be found that the trial court has ' clearly acted on some wrong principle, committed some error of law or failed to consider matters which demanded consideration ' : See per Viscount Simonds in Zacharia v. Republic of Cyprus. As we have held that Section 294 is a mandatory provision and as I have taken the view that, prima facie, the agreements are sole selling agency agreements, the exercise of discretion by the trial court cannot be upheld.

74. In the result, the appeal should be allowed.


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