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Dhakeswari Cotton Mills Ltd. and ors. Vs. Nil Kamal Chakravorty and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKolkata
Decided On
Reported inAIR1937Cal645,173Ind.Cas.622
AppellantDhakeswari Cotton Mills Ltd. and ors.
RespondentNil Kamal Chakravorty and ors.
Cases ReferredAllison v. Johnson
Excerpt:
- .....proceedings to be taken '? in my opinion they cannot do that.5. the case of the defendants in the present suit is that the resolution was carried by a majority. immediately after the resolution was passed on 30th april 1933, the plaintiff wrote to the company stating that it was not passed by the statutory majority. the company took no steps in the matter. on 22nd may 1933, the plaintiff instituted the present suit impleading the company as a defendant in the suit. the company in its defence took up the position that the resolution was carried by the statutory majority. it would have been therefore useless for the plaintiff to ask the company to call a meeting to decide whether a suit should be instituted for a declaration that the resolution was not binding on the company. for the.....
Judgment:

Nasim Ali, J.

1. The Dhakeswari Cotton Mills Ltd., appellant 1 in this appeal, is a joint stock company incorporated under the Companies Act (Act 7 of 1913). It was registered under the Act on 6th September 1922. The registered share capital of the company is rupees thirty lakhs divided into three lakhs shares of Rs. 10 each. Appellants 2 to 4 are the Managing Directors and appellants 5 to 10 and respondents 2 to 5 are the Directors of this Company. Respondent 1 purchased 20 shares of the Company on 17th December 1926. By Article 63 of the Articles of Association of this Company it is provided that the monthly salary of the Managing Director or Managing Directors in any case shall not exceed Rs. 1,000 and the rate of commission payable to them shall not exceed more than 5 per cent. of the net profit. On 30th April 1933 a general meeting of the share-holders of the Company was held to consider a special resolution for altering these provisions in Article 63 with the object of increasing the monthly allowance of the Managing Director or Managing Directors to Rs. 1,500 and the commission to 7 per cent. of the net profits, if the profit would exceed 10 per cent. of the subscribed capital of the Company. At this meeting, the Chairman declared on a show of hands that the resolution was carried. No poll was demanded. On 22nd May 1933 respondent 1 instituted a suit in the third Court of the Munsif at Dacca against the appellants and the other respondents in this appeal for a declaration that the resolution was not binding on the Company as it was not carried by the majority as required by Section 81, Companies Act, and for consequential injunctions. The appellants contested the suit. Their defences, so far as they are material for the purpose of the present appeal, are: (1) that the suit is not maintainable in law; and (2) that the resolution was binding on the Company as it was passed by the statutory majority. The Courts below have overruled these defences and have decreed the suit. Hence this second appeal by the Company, its Managing Directors and some of its Directors. The first point for determination in this appeal is whether the suit is maintainable.

It is clear law that in order to redress a wrong done to the company... the action should prima facie be brought by the company itself: per Lord Davey in Burland v. Earle (1902) A C 83 at p. 93.

2. The will of the majority of the shareholders is ordinarily the will of the company for this purpose. Where the acts complained of can be ratified by the majority, there is nothing for which the company can sue. The rule that it is the company which must decide whether the litigation should be undertaken, ought therefore to be limited to cases where the act complained of is ratifiable. If the majority of its shares are controlled by those against whom the relief is sought, the complaining share-holders may sue on their own names, but must show that the acts complained of are of a fraudulent character or beyond the powers of the company: Burland v. Earle (1902) A C 83. In Dominion Cotton Mills Co., Ltd. v. George E. Amyot (1912) A C 546 at p. 551. the following observations of Lord Macnaghten appear:

The principles applicable to cases where a dissentient minority of share-holders in a company seek redress against the action of the majority of their association, are well settled. Indeed they were not contested at the Bar. In order to succeed it is incumbent on the minority either to show that the action of the majority is ultra vires or to prove that the majority have abused their powers and are depriving the minority of their rights. It would be pedantry to go through the line of decisions by which these principles have been established.

3. Mr. Gupta appearing on behalf of the appellants contended that as the Managing Directors did not hold the majority of the shares of the Company, the plaintiff before the institution of the suit was bound to give the Company an opportunity of expressing its view whether litigation should be undertaken. We are unable to accept this contention. Assuming that the act complained of is fraudulent or ultra vires of the corporation,-it could not be ratified by any majority and therefore the rule that it is the corporation which must decide whether or not litigation shall be undertaken has been generally taken to apply only to cases where the act complained of is ratifiable. There is some weak authority for a view that all decisions as to whether litigation shall proceed are of an internal character and it has been held even in cases where the Act is covered by a majority resolution that a locus panitentia should be allowed, and the action has been adjourned for a general meeting. The case for such adjournment is strong where the act impugned is that of directors acting on their own responsibility, and it may be urged that a company should in every case have an opportunity of expressing its view whether litigation should be avoided, since, if not involving it in costs, it may still affect its credit. The bulk of the cases in which corporators have been allowed to succeed on proof of ultra vires or fraud give no clear guidance as to whether, in the absence of any explanation for the corporation not being consulted, the action could have succeeded. They are rather occupied in pointing out the circumstances which make the action good, and where the action fails, it is on the merits, and not because no meeting has been called. In some cases the plaintiff actually represents the majority of share-holders, though not of the directors: in others, a meeting has already been held, or cannot be held, and generally circumstances exist to show that the corporation will take no action. It is, however, possible to point to judicial utterances which suggest that no meeting of the corporation need have been called. Thus Lord Langdale, M.R. said:

If a rule has been laid down that in a case of this kind an individual has not the right to sue on behalf of himself and others, when there is art injury done to the whole corporation, without having first attempted to get the concurrence of the whole corporation, it is not my province or duty to deviate from it... This bill may be sustained in its present form, though there has been no attempt to obtain the concurrence of the company;'

'and Jessel, M.R. in another case asked:

Is it reasonable to say to a minority of shareholders who are defrauded by the majority that they must apply to the company to institute proceedings? It therefore appears that it is not necessary, as a matter of law, formally to ascertain the views of the majority before proceeding, but nevertheless, if no reason is given for the corporation not being consulted before litigation is undertaken, it must be clearly alleged, and made to appear, that the transaction is fraudulent or ultra vires: Street's Doctrine of Ultra Vires, 1930 Edition, pp. 352-353.

4. The following observations of Swinfen Eady, L.J. in Baillie v. Oriental Telephone and Electric Co., Ltd. (1915) 1 Ch 503 at p. 518 are also pertinent to the point under discussion:

It was then contended that the plaintiff is not entitled to sue. The plaintiff's counsel urged that if this as a special resolution was invalidly passed, how is it to be impeached if the plaintiff cannot sue? how can the question of illegality be raised? Suppose he called a meeting and the majority of the share-holders were to say 'We are content with the present position and we will not raise any question', can it be said that by a side wind as it were, not being able to pass a valid special resolution, they could pass an invalid one and then by a bare majority say 'We will not allow any proceedings to be taken '? In my opinion they cannot do that.

5. The case of the defendants in the present suit is that the resolution was carried by a majority. Immediately after the resolution was passed on 30th April 1933, the plaintiff wrote to the Company stating that it was not passed by the statutory majority. The Company took no steps in the matter. On 22nd May 1933, the plaintiff instituted the present suit impleading the Company as a defendant in the suit. The Company in its defence took up the position that the resolution was carried by the statutory majority. It would have been therefore useless for the plaintiff to ask the Company to call a meeting to decide whether a suit should be instituted for a declaration that the resolution was not binding on the Company. For the aforesaid reasons we are of opinion that the suit cannot be thrown out on the ground that the plaintiff did not consult the views of the majority before he instituted the present suit, if from the allegations from the plaint it would appear that the act complained of was ultra vires. Plaintiff's case is that the alteration of Article 63 was ultra vires and is not binding on the Company and its members as the majority of the three-fourths of the share-holders present at the meeting did not give their consent to the alteration at the general meeting held on 30th April 1933. The articles of association of a company define the duties, the rights and powers of the governing body as between themselves and the company at large and the mode and form in which the business of the company is to be carried on and the mode and form in which the changes in the internal regulation of the company may from time to time be made.

Of the internal regulations of the company the members of it are absolute masters and provided they pursue the course marked out in the Act, that is to say holding a general meeting and obtaining the consent of the share-holders, they may alter those regulations from time to time: see Ashbury Railway Carriage and Iron Co. v. H. Riche (1875) 7 H L 653 at p. 671.

6. Under Section 21, Companies Act, the articles of association of a company bind the company and the members thereof. By Section 20 of the Act, a company may by a special resolution alter its articles. The provisions relating to the mode in which such a special resolution can be passed by a company are contained in Clauses 1, 2 and 3 of Section 81, Companies Act, as it stood before its amendment in 1936. They are as follows:

(1) A resolution shall be an extraordinary resolution when it has been passed by a majority of not less than three-fourths of such members entitled to vote as are present in person or by a proxy (where proxies are allowed) at a general meeting of which notice specifying the intention to propose the resolution as an extraordinary resolution has been duly given. (2) A resolution shall be a special resolution when it has been (a) passed in manner required for the passing of an extraordinary resolution; and (b) confirmed by a majority of such members entitled to vote as are present in person or by proxy (where proxies are allowed) at a subsequent general meeting of which notice has been duly given, and held after an interval of not less than fourteen days, nor more than one month, from the date of the first meeting. (3) At any meeting at which an extraordinary resolution is submitted to be passed or a special resolution is submitted to be passed or confirmed, a declaration of the Chairman on a show of hands that the resolution is carried shall, unless a poll is demanded, be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against the resolution.

7. If the plaintiff succeeds in showing that the alteration of Article 63 was not in accordance with these statutory provisions, the alteration will not be binding on the Company. The decision on the question whether the present suit is maintainable by the plaintiff will therefore depend upon the decision on its merits.

8. The next point for determination therefore is whether special resolution was passed in contravention of the provisions contained in Section 81, Companies Act. Clause (3) of Section 81 makes the declaration of the Chairman that the resolution is carried conclusive evidence of the fact that it was carried by the majority of the shareholders as laid down in Cl(1). It therefore excludes evidence to show that at the meeting less than three-fourths of the members voted for the resolution. But before the bar under this clause can be applied, the Court has to determine what the declaration is. If there is no dispute about the Chairman's declaration, no difficulty arises, but if there is a dispute, the. Court has to determine on evidence what the declaration was. In this case the finding of the Court below is that the declaration was in these terms: '218 votes for; 78 against; Resolution carried'. The objection of demanding a poll after the declaration on a show of hands is to ascertain how many voted for and how many against, but if the declaration of the Chairman is that so many voted for and so many against and no one disputes the figures, the question of demanding a poll does not arise. It is true that there was no dispute in this case that the Chairman declared the resolution as carried. But this declaration was preceded by the announcement that 218 voted for and 78 against the resolution which on the face of it showed that the resolution was lost. The conclusiveness of the declaration of the Chairman contemplated by Clause 3 of Section 81 attaches to the declaration where the Chairman does not find by his declaration the figures for and against the resolution: see Be Hadleigh Castle Gold Mines Ltd. (1900). 2 Ch 419; Arnot v. United African Lands Ltd. (1901) 1 Ch 518; Re E.D. Sassoon United Mills Ltd. AIR 1929 Bom 38. But where, as in the present case, the Chairman by his declaration finds the figures and erroneously in point of law holds that the resolution has been duly passed, the resolution cannot be said to have been passed according to law: see In re Caratal (New) Mines Ltd. (1902) 2 Ch 498; In re Clark & Co., Ltd. (1911) S C 243 Scot; the English and Empire Digest, Vol. 9, p. 578 (footnote); Allison v. Johnson (1902) 46 S J 686. The special resolution passed on 30th April 1933 is therefore not binding on the Company. The decrees of the Courts below cannot therefore be successfully challenged in this appeal. The appeal is accordingly dismissed with costs.

Remfry, J.

9. I agree. The decision of Buckley, J., as he then was, in In re Caratal (New) Mines Ltd. (1902) 2 Ch 498, did not seem to me to explain the difficulty that the section makes the declaration of the Chairman conclusive and the declaration appeared to me to be of the result of the voting and of nothing more. But Farwell, J., as he then was, is reported in Allison v. Johnson (1902) 46 S J 686 to have held that the Chairman's note as to the voting was part of the declaration. Therefore, though not without considerable hesitation, I agree that these two decisions should be followed.


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