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The Appeals court in Brown versus La Trinidad held that a pre-incorporation contract entered into by the company would not bind the company, subsequent to the incorporation of the company if the conditions of the pre-incorporation agreement have not been fulfilled by the other party. In this case, the company sought to remove the plaintiff after the incorporation, whereas the agreement prohibited the same, but the company was held to be free to do so.
Facts of the Case
In Brown versus La Trinidad a company named La Trinidad Ltd. was incorporated on November 28th, 1884. However, there was an agreement entered into by the plaintiff, Browne. The agreement dated November 24th, 1884, involved three parties – Browne – the vendor; J.C.K. Van Ee; and E. Harvey – acting on behalf of a company named La Trinidad Ltd. which was yet to be incorporated, as per the agreement. The purpose of the agreement was the sale of some mining property by the plaintiff to the company. The mining property was situated in Mexico, and the agreement stipulated that upon the sale of the property to the company, or the assurance for the same, or if the company requires this to be done beforehand, the vendor i.e. Browne (Plaintiff) would become a director of the company and that he may not be removed, or forced to retire before the year 1888.
The memorandum of association of the company also listed as one of the objects being the adoption of the agreement that had been entered into by the company with the plaintiff dated November 24th, 1884. This agreement was put into force when by a resolution passed by the directors on February 2nd, 1885 the plaintiff was invited to join the Board of Directors as per clause 5 of the Agreement dated November 24th, 1884. This decision of the Board of Directors was also later affirmed in the meeting organized on February 9th, 1885. After that, the plaintiff took the seat as a director of the company. However, in time, some disputes arose between the plaintiff and the other directors of the company, in which the directors stated that the plaintiff had not completely fulfilled his side of the bargain regarding the turning over of the property in Mexico to the company properly.
Subsequently, on September 28, 1887, two directors at a meeting without the presence of the plaintiff passed a resolution, wherein an extraordinary general meeting was called for, and two resolutions were proposed to be passed in the meeting, out of which, one was to remove Browne (plaintiff) as a director of the company. Proper notice was issued by the Board in regards to the calling of the extraordinary general meeting on 12th October, and another subsequent meeting on 28th October and the minimum seven-day requirement for the notice of the same was met.
The plaintiff initiated this action against the company on 8th October, before the extraordinary general meeting could be commenced, claiming that the company did not have the power to remove the plaintiff from his position as a director until the year 1888, and that the extraordinary general meeting to be held on October 12th had not been convened in a proper and just manner, and the plaintiff sought an injunction against both these actions taken by the Board of Directors of La Trinidad Ltd.
In Brown versus La Trinidad the Court of appeals was faced with the question whether –
- The Directors of the Company were within their power to remove the plaintiff as a director of the company?
- Whether the plaintiff had sufficient notice of the alleged meeting wherein the plaintiff was proposed to be removed as director of the company?
Subsequent to the notice regarding the extraordinary general meeting, the meeting was actually held on 12th of October, and was attended by more than 200 shareholders, and the proposed resolutions – to remove the plaintiff, Browne as a director of the company and to issue 50,000 preference shares, were approved by all of them without any dissent. After that, the plaintiff moved before the Court on October 19th, seeking an injunction against these decisions of the Board of Directors of the company.
The learned judge held that there was some improper conduct in the manner by which the extraordinary general meeting was conducted. The plaintiff had no notice of the Board meeting that was held on October 28th. Therefore, the learned judge granted the plaintiff with an injunction. The injunction so granted put a block on the company from holding any meeting wherein the first proposed resolution could be passed, and also put a stop on the other directors of the company from acting in a manner which restricted the plaintiff from acting as a director of the company. This decision of the learned judge was appealed against by the company before the Court of Appeals.
However, on appeal, the Court of Appeals held that the reason based on which the learned Vacation Judge granted the plaintiff an injunction was the fact that the plaintiff had little or no notice regarding the meeting of the Board of Directors, however, the Court of Appeals differed against this observation. It stated that the length of the notice was not prescribed, and thus, it could be assumed that the notice was proper in regards to the plaintiff, since he was aware that his conduct would be assessed and his impeachment would be contested in the next meeting. In light of that, the Court of appeals concluded that it can be assumed that the plaintiff had abundant notice for the same. The Court of appeals also opined that the removal of the plaintiff as a director of the company was well within the powers of the other directors of the company, and that the agreement so claimed by the plaintiff to restrict this power of the other directors has no basis. The Court stated that the agreement so claimed by the plaintiff states that the same agreement may be adopted by the directors and then enforced, but there was nothing to show that the agreement was ever adopted. The Court also averred that the plaintiff had also not fulfilled his side of the obligation wherein he was supposed to transfer the alleged mining property in Mexico to the company, which was also one of the reasons why the dissatisfaction of the directors of the company with the plaintiff arose.
The Court in Brown versus La Trinidad concluded that the rights of the Plaintiff were not violated merely because he was given short notice of the meeting being held for the impeachment of his position as a director of the company. The Court also took note of the fact that the shareholders who were present at the meeting dated October 12th were unified when approving both the proposals presented – to issue the preference shares and remove the plaintiff from the position of the director of the company. However, none of the participants of those meetings objected to the absence of the plaintiff from the meeting. The decision of the shareholders when given unanimously was indicative of the fact that the conduct of the plaintiff was unsatisfactory as compared to the assurance which was given in the pre-incorporation contract.