AVANTHI EXPLOSIVES PVT. LTD                       Vs  PRINCIPAL SUBORDINATE JUDGE

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This was a writ petition[1] filed in the Andhra High Court related to the jurisdiction of Civil Court to entertain a civil suit dealing with the question related to the disqualification of the director of a company under the Sections 2(11)[2], 10[3], 283[4] and 299[5] of the Companies Act,1956[6].

FACTS OF THE CASE

In this case, the petitioner is a registered company under the Companies Act,1956, whereas among the respondents, the first respondent was the Principal Subordinate Judge, Tirupathi  and the second respondent was a person named Sri N.S.Vasant Kumar, who was a plaintiff in the suit as well as a managing director of the petitioner company.

The registered office of the company was shifted with the acceptance of the board of directors from Secunderabad to Tirupathi. The company located itself in the premises as a lessee of another firm named M/S Triveni Enterprises, which was the principal lessee of the owners of the building. The disputes popped up among the directors of the company of the petitioner which eventually took the form of the crisis. The second respondent-plaintiff was a partner of M/S Avanthi Enterprises with whom the petitioner-company stepped in into the  sub-lease.

The problem began when the second respondent did not specifically introduced him as the partner of M/S Avanthi Enterprises to the company as per the Section 293 r/w Section 299 of the Companies Act,1956. Taking this ground into consideration, the other directors passed a resolution on February 13, 1984, that the second-respondent had disqualified from being a director in the company with retrospective effect from 13th June,1980 as this was the date when the resolution was passed by the company to shift the registered office of the Company from Secunderabad to Tirupathi and petitioner stated that it was only on this date that the second respondent did not disclose “specifically” regarding him being a partner to  M/S Triveni Enterprises and this incurred him the disqualification.

 Though the second respondent denied the passing of any resolution of disqualification on 13th Feb 1984. This made the second respondent filed for suit stating that he was present there in the meeting of 13th February,1984 and no resolution like disqualifying him took place. The allegation of the petitioner that the second respondent had walked out of the meeting at the time when the disqualification item was taken up, was completely denied by the second respondent.

RELIEFS CLAIMED IN THE SUIT

The reliefs claimed by the plaintiff in the suit were:-

  • For giving a declaration that the plaintiff cum second respondent is and continues to be the managing director of the petitioner company ( defendant at that time when suit was filed by the plaintiff)
  • To declare that any board meeting held by the petitioner company after 13th February,1984  is illegal
  • Asked for a permanent injunction retraining the defendants therein from interfering with the office of the plaintiff cum second respondent as the managing director of the petitioner company in day-to-day activities.

The plaint also found allegations against the other directors who according to the plaintiff formed a kind of illegal arrangement to exclude the plaintiff for siphoning off the funds of the company with a view to harm the shareholders’ interests.

This made passing of certain interlocutory orders in the suit. At this stage, the writ petition was filed by the petitioner company on 30th April,1984 and through the order dated 2nd May,1984 passed by this court, the stay was imposed on the proceedings in the suit filed by the plaintiff.

ISSUES

The issue raised by the petitioner company before the Hon’ble Court in this case was:-

  • Whether the civil court has the power to entertain a civil suit involving the question dealing with the disqualification of the director of the company under Section 283(1)(i) read with Section 299 of the Companies Act,1956 in aspect of Section 211 and Section 10 of the Companies Act and Section 9 of the Civil Procedure Code.

CONTENTIONS

Contention by the petitioner:-

The main contention of the petitioner was that the disqualification mentioned under Section 283(1)(i)[7] and Section 299[8] of the Companies Act relates to certain rights unknown to the common law and that the rights and the remedies in respect to that are specially created by the Companies Act,1956 and therefore, as per those, the second-respondent should have approached the company court, i.e. the High Court rather than Civil Court for adjudication of this matter of disqualification.

Contention by the second respondent:-

  • The second respondent contended that to find the answer of the issue in the case, it is required to refer relevant statutory provisions. The respondent drew the attention of the Court towards the Sections 283(1)(i) and 299 of the Companies Act where it has been provided that there is a need for the director to disclose his interest in a contract to be entered into by his company at the very first meeting, failing to do it leads to the disqualification of the director.
  • Now dealing with the Section 10[9] of the Companies Act, it was found about the jurisdictions of the courts.

Section 10 of the Companies Act:-  Jurisdiction of Courts.

  •  The Court conferred with jurisdiction under this Act shall be-
  •  the High Court having jurisdiction in relation to the place at which the registered office of the company concerned is situate, except to the extent to which jurisdiction has been conferred on any District Court or District Courts subordinate to that High Court in pursuance of subsection (2); and
  • where jurisdiction has been so conferred, the District Court in regard to matters falling within the scope of the jurisdiction conferred, in respect of companies having their registered offices in the district.
  • The Central Government may, by notification in the Official Gazette and subject to such restrictions, limitations and conditions as it thinks fit, empower any District Court to exercise all or any of the jurisdiction conferred by this Act upon the Court, not being the jurisdiction conferred-
  • in respect of companies with a paid- up share capital of not less than one lakh of rupees, by Part VII (sections 425 to 560) and the other provisions of this Act relating to the winding up of companies.
  • The second respondent then also referred the Section 2(11)[10] to find the meaning of the Court in the Companies Act,1956.

Section 2(11) of the Companies Act,1956 :- ” the Court” means,-

  • with respect to any matter relating to a company other than any offence against this Act, the Court having jurisdiction under this Act with respect to that matter relating to that company, as provided in section 10;
  •  with respect to any offence against this Act, the Court of a Magistrate of the First Class or, as the case may be, a Presidency Magistrate, having jurisdiction to try such offence;
  • The second respondent contended that there is not any express provision ousting the jurisdiction of the Civil Court in any particular specific request. What really Section 10 states that “the Court” which shall have jurisdiction under this Act be the High Court in whose jurisdiction the registered office of the company is situated, except to the extent to which the jurisdiction has been given on any District Court under the sub-section (2) as per the notification issued by the Central Government.
  • Even the Central Government can empower a District Court to exercise all or any jurisdiction under this Act mentioned by the terms “upon the court”, except the jurisdiction conferred as per the Sections 237, 391, 394, 395 and 397 to 407(both inclusive) and not the jurisdiction conferred in regard with the companies with the paid-up share capital of less than Rs. 1 lakh by Part VII as well as the provisions of the Act related to winding up of the companies.
  • The second respondent contended that it is not the purpose of Section 10 of the Companies Act to allot the Company Court with jurisdiction over every matter arising under the provisions of the Act as there are the mentions in the Act where the jurisdiction is conferred on “the court” and also on the other authorities like Central Government, the Company Law Board and the Registrar.

DECISION 

The Hon’ble Court in this case dismissed the writ petition and held that the suit filed by the plaintiff in the Civil Court is maintainable and the interim stay granted was removed from the suit pending in the Civil Court. While giving its judgement in the favor of the second respondent, Court gave the subsequent reasoning to establish the point:-

  • The Court stated that the provisions of Sections 283(1)(i) and 299 of the Companies Act,1956 are merely a re-enactment of the obligations of a trustee arising out of the common law. Therefore, the contention that the alleged disqualification  happened in this case cannot be a subject-matter of a civil suit is not the point to agree upon. This is not a point to agree on. The Civil suit is having its sphere to assume in itself even the disqualification matter of the directors of the Company. Therefore, the suit filed by the plaintiff cum second respondent is maintainable.
  • But the Court refrained itself from going into the question argued by the second respondent that the knowledge of other directors in regard to information which the plaintiff shall, as per the petitioner have intimated to the other directors, was sufficient enough to put the plaintiff cum second respondent out of the disqualification, if any imposed by the Section 283(1)(i) and Section 299. The Court in this matter just stated that it is a matter which arises on the merit of the suit and therefore refrained from going into that question.

ANALYSIS

In this case, there were any provisions of the Companies Act as well as Civil Procedure Code was looked upon to get an understanding to find the correct interpretation of the provisions of this Act. In this aspect, we will look into different sections referred in this case besides the Sections we already discussed while putting the contention of the parties.

  1. Section 283[11] of the Companies Act,1956:-

Vacation of office by the directors:-

  • The office of a director shall become vacant in case:-
  •  he fails to obtain within the time specified in sub- section (1) of section 270[12], or at any time thereafter ceases to hold, the share qualification, if any, required  of him by the articles of the company;
  • he is found to be of unsound mind by a Court of competent jurisdiction;
  • he applies to be adjudicated an insolvent;
  • he is adjudged an insolvent;
  • he is convicted by a Court of any offence involving moral turpitude and   sentenced in respect thereof to imprisonment for not less than six months;
  • he fails to pay any call in respect of shares of the company held by him,    whether alone or jointly with others, within six months from the last date fixed for the payment of the call unless the Central Government has, by notification         in the Official Gazette, removed the disqualification incurred by such failure;
  • he absents himself from three consecutive meetings of the Board of directors, or from all meetings of the Board for a continuous period of three months,   whichever is longer, without obtaining leave of absence from the Board;
  •  he (whether by himself or by any person for his benefit or on his account), or any firm in which he is a partner or any private company of which he is a director, accepts a loan, or any guarantee or security for a loan, from the    company in contravention of section 295[13];
  • he acts in contravention of section 299[14];
  • he becomes disqualified by an order of Court under section 203[15];
  •  he is removed in pursuance of section 284[16];or
  • Having been appointed a director by virtue of his holding any office or other  employment in the company, or as a nominee of the managing agent of the   company, he ceases to hold such office or other employment in the company or, as the case may be, the managing agency comes to an end.
  • Notwithstanding anything in clauses (d), (e) and (j) of sub- section (1), the   disqualification referred to in those clauses shall not take effect-
  • for thirty days from the date of the adjudication, sentence or order;
  • where any appeal or petition is preferred within the thirty days aforesaid   against the adjudication, sentence or conviction resulting in the sentence, or       order until the expiry of seven days from the date on which such appeal or petition is disposed of; or
  •  Where within seven days aforesaid, any further appeal or petition is preferred in respect of the adjudication, sentence, conviction, or order, and the appeal or petition, if allowed, would result in the removal or the disqualification, until      such further appeal or petition is disposed of.

(2A) Subject to the provisions of sub-sections (1) and (2), if a person functions as a director when he knows that the office of director held by him has become vacant on account of any of the disqualifications, specified in the several clauses of sub-section (1), he shall be punishable with fine which may extend to five hundred rupees per day on which he so functions as a director.

  • A private company which is not a subsidiary of a public company may, by its articles, provide, that the office of director shall be vacated on any grounds in   addition to those specified in sub- section (1).
  • Section 299[17] of the Companies Act,1956:-

Disclosure of interests by director.

  •  Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or  arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of directors.
  • (a) In the case of a proposed contract or arrangement, the disclosure required to   be made by a director under sub- section (1) shall be made at- the meeting of the Board at which the question of entering into the contract or arrangement is first taken into consideration, or if the director was not, at the date of that   meeting, concerned or interested in the proposed contract or arrangement, at   the first meeting of the Board held after he becomes so concerned or interested.

(b)  In the case of any other contract or arrangement, the required disclosure shall be made at the first meeting of the Board held after the director becomes concerned or interested in the contract or arrangement.

  • (a) For the purposes of sub- sections (1) and (2), a general notice given to the  Board by a director, to the effect that he is a director or a member of a specified body corporate or is a member of a specified firm and is to be regarded as concerned or interested in any contract or arrangement which may, after the date of the notice, be entered into with that body corporate or firm, shall be deemed to be a sufficient disclosure of concern or interest in relation   to any contract or arrangement so made.

(b)  Any such general notice shall expire at the end of the financial year in which it is given, but may be renewed for further periods of one financial year at a time, by a fresh notice given in the last month of the financial year in which it would otherwise expire.

(c)  No such general notice, and no renewal thereof, shall be of effect unless either it is given at a meeting of the Board, or the director concerned takes reasonable steps to secure that it is brought upon and read at the first meeting of the Board after it is given.

(4) Every director who fails to comply with sub-section (1) or (2) shall be punishable with fine which may extend to five thousand rupees.

(5) Nothing in this section shall be taken to prejudice the operation of any rule of law restricting a director of a company from having any concern or interest in any contracts or arrangements with the company.

(6) Nothing in this section shall apply to any contract or arrangement entered into or to be entered into between two companies where any of the directors of the one company or two or more of them together holds or hold not more than two percent of the paid-up share capital in the other company.

  • Section 9[18] of the Civil Procedure Code,1908[19]:-

 Courts to try all civil suits unless barred

 The Courts shall have jurisdiction to try all Suits of a civil nature except such suits of which their cognizance is either expressly or impliedly barred.

CONCLUSION

This case brought a turn afterwards in the cases related to Companies Act,1956 where there was an understanding between most of the High Courts that the Company Act gives the power to the High Courts in whose jurisdiction the registered office of the company is situated to decide the cases or disputes related to it. This case presented the correct interpretation of the provisions of the Companies Act,1956 and opened the way for Civil suit as well in certain matters related to the Companies Act,1956.


[1] Avanthi Explosives Pvt. Ltd. Vs Principal Subordinate Judge, 1987 62 CompCas 301 AP

[2] Companies Act,1956,  s . 2(11).

[3] Companies Act, 1956, s. 10.

[4] Companies Act, 1956, s. 283.

[5] Companies Act, 1956, s. 299.

[6] Companies Act 1956 (Act No. 1 of 1956)

[7] Companies Act, 1956, s. 283(1)(i).

[8] Companies Act, 1956, s. 299.

[9] Companies Act, 1956, s. 10.

[10] Companies Act, 1956, s. 2(11).

[11] Companies Act, 1956, s. 283.

[12] Companies Act, 1956, s. 270(1).

[13] Companies Act, 1956, s. 295.

[14] Companies Act, 1956, s. 299.

[15] Companies Act, 1956, s. 203.

[16] Companies Act, 1956, s. 284.

[17] Companies Act, 1956, s. 299.

[18] CPC, 1908, s. 9.

[19] CPC, 1908 (Act No. 05 of 1908).

Also Read  Empire Jute Company V. CIT AIR1980SC1946 / (1980) 17 CTR (SC) 113

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