Raghu Nandan v. Swadeshi Cloth Dealers Ltd Case

This suit[1] is filed for a declaration that the notice which dates back to 1st of March 1963 is null and void, and that the resolutions which got its mentions in that purported notice are illegal, unlawful and ultra vires the articles of the defendant company. There was a seeking of further declaration as well for the general meeting which was held by the company on the 30th of March 1963. It was asked in the case that the resolutions passed purportedly in the said general meeting are illegal and ultra vires and have no effect and not binding on the plaintiff and other shareholders of the company. An injunction is asked as well for the restraining of the defendants from implementing or giving effect to the resolution which may be passed at the meeting. One more injunction was asked by the plaintiff for restraining the defendants from implementing or giving effect to the resolutions which were purported to be passed at the meeting.

FACTS OF THE CASE

In this case, the plaintiff is a shareholder of the defendant company which is named as Swadeshi Cloth Dealers Ltd. and Others. There are co-defendants as well, defendants nos. 2, 3, 4 and 5 are the directors of the company. They are alleged by the plaintiff that they are giving effect to the resolutions which were passed and which we discussed above, even when the Companies Act, 1956[2] does not empower these defendants to recommend the payment of any dividend for the financial years ending on the 31st of March 1962. These defendants are further impleaded on the allegations that neither the Companies Act, 1956[3] nor the Articles of Association of the defendant company gives the power, authorization or permission to these defendants as the Board of Directors of the company to issue any notice or to declare any dividend as payable to the shareholders of the company in the manner as proposed in the alleged notice.

The suit was instituted by the plaintiff on 29th of March 1963 and an interim order was asked for and an interim order was made. On 30th March, 1963, the notice of motion was made returnable. The interim order was modified up to some extent. During this time, the parties to the suit were the plaintiff and the company and the directors, who were the defendants. The two other defendants, Jaipuria defendants and the Poddar defendants were added as parties to the suit later in May, 1963.

After the contention of the Jaipuria defendants, that by the reason of the fact that the meeting had been held, the plaintiff’s suit is not maintainable. After this, the plaintiff applied for the adjournment of the suit for applying for the amendment of the plaint. Certain amendments among those which they applied for related to the plaint and in prayers were allowed.

ISSUES

The following issues are raised in the suit:-

(1) Could dividends be declared only at an Annual General Meeting of the defendant company?

(2) Is Article 178[4] of the Articles of Association of the defendant company ultra vires and of no effect?

(3) Was the Board of Directors of the defendant company not authorised or empowered to issue the notice dated March 1, 1963?

(4) Is the said notice bad and illegal on the grounds alleged in paragraph 15 of the plaint?

(5) As the resolutions in question have been passed after the institution of this suit, is this salt maintainable?

(6) Has the plaintiff been set up by the defendants Nos. 1 to 5 to institute the suit?

(7) To what reliefs, if any, is the plaintiff entitled?

The issue no. 2 and 4 of the aforesaid 7 issues were raised by the defendant company .

After the plaint was amended, the added defendants raised the following issues:-

(1) Was the meeting dated 3oth March, 1963 ultra vires and illegal as alleged in paragraph 24 (a) of the plaint?

(2) Is this suit maintainable in the absence of fresh leave under Order 1 Rule 8[5] of the Code of Civil Procedure?

CONTENTION OF THE PARTIES

Contention on behalf of the plaintiff:-

The plaintiff contended that the notice dated 1st March, 1963, in which an extraordinary meeting was called to be held on March 30, 1963, for passing the resolution that dividends at Rs. 10/- per share are subject to deduction of tax for the year ending 31st March, 1961, and the dividends at Rs.80/- per share are subject to deduction of tax for the year ending 31st March 1962 was bad, illegal and ultra- vires the powers of the company.

The grounds by which notice is assailed was mentioned in the plaint and that showed that the grounds are first that by reason of the provisions of the Companies Act and particularly Sections 166[6], 186[7], 210[8], 211[9] and 217[10] and the provisions in Schedule VI, Part II, Clause 3 (XIV) no dividend can or could be declared except at an annual general meeting; secondly, according to the true construction of the Articles of Association declaration of dividend it a matter pertaining to the Board of the company for the relevant year and the recommendation for the declaration of any dividend for any particular year has to be made by the Board of Directors of the Company for that very year, and because the defendant nos. 2 to 5 purported to issue the notice or to recommend the declaration of dividend in their capacity have no power or authority to do so as members of the present Board; thirdly it is contended that no dividend was recommended or declared by the relevant Board of Directors for the financial years ending 31st March, 1961 and 31st March, 1962 and the defendants Nos. 2 to 5 constituting the present Board of Directors could not and cannot recommend the declaration of any dividend for the financial years ending 31st March. 1061 and 31st March, 1962: fourthly, as no dividend was declared for the financial years ending 31st March, 1961 and 31st March, 1962 and as the accounts and the balance-sheets in respect thereof were considered and passed at the annual general meeting of the Company held on December 1, 1961 and October 29, 1962, it is beyond the powers of the defendants Nos. 2 to 5 under the Articles of Association of the Company or under the Companies Act to recommend now the declaration of any dividend for the financial years ending on March 31, 1961 and March 31, 1962; fifthly, it is contended that the Companies Act does not empower the defendants Nos. 2 to 5 to recommend any dividend as suggested in the notice.

Contention by the defendants:-

The written statements were presented by the defendants:-

The written statements were filed on behalf of the company and on behalf of the directors. The company denies in the written statement that the notice dated March 1 is bad or illegal or ultra vires. The defendant company denies that it is beyond the powers of the defendants Nos. 2 to 5 to recommend declaration of dividend, and the defendant company does not admit that the Companies Act, 1956 or the Articles of Association do not empower or authorize or permit the defendants Nos. 2 to 5 to issue any notice or to declare any dividend. The defendant, company denies the other allegations in the plaint.

The defendant directors filed separate written statements. The director defendants have taken pleas similar to those of the company.

The added defendants, Jagadish Prasad Poddar, Sriprokash Poddar, Sm. Radha Devi Poddar and Sm. Sushila Devi Poddar filed joint written statement and thereafter additional written statement in answer to the amendments of the plaint.The contentions raised in the written statements, of these added defendants are broadly, first, that the declaration of dividend is lawful and valid, secondly, that the articles permit such declaration of dividend; thirdly, that the declaration of dividend is not ultra vires the Companies Act, and fourthly, that the plaintiff is not competent to maintain the suit by reason of absence of fresh leave under Order 1, Rule 8, at the time of obtaining amendments in the suit.

The defendants also referred a few cases before the Court for supporting their points.

GROUNDS TAKEN IN THE CASE

Here, we will take a look at the relevant articles which got their reference in this case and will try to find that after taking what interpretation of those, Court gave its decision in this case:-

Section 166[11] of the Companies Act, 1956:-

Annual general meeting.

Every company shall in each year hold in addition to any other meetings a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it; and not more than fifteen months shall elapse between the date of one annual general meeting of a company and that of the next: Provided that a company may hold its first annual general meeting within a period of not more than eighteen months from the date of its incorporation; and if such general meeting is held within that period, it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation or in the following year: Provided further that the Registrar may, for any special reason, extend the time within which any annual general meeting (not being the first annual general meeting) shall be held, by a period not exceeding three months.

Every annual general meeting shall be called for a time during business hours, on a day that is not a public holiday, and shall be held either at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated;

Provided that the Central Government may exempt any class of companies from the provisions of this sub- section subject to such conditions as it may impose: Provided further that-

a public company or a private company which is a subsidiary of a public company, may by its articles fix the time for its annual general meetings and may also by a resolution passed in one annual general meeting fix the time for its subsequent annual general meetings; and

a private company which is not a subsidiary of a public company, may in like manner and also by a resolution agreed to by all the members thereof, fix the times as well at the place for its annual general meeting.

Section 186[12] of the Companies Act:-

Power of Company Law Board to order meeting to be called.

If for any reason it is impracticable to call a meeting of a company, other than an annual general meeting, in any manner in which meetings of the company may be called, or to hold or conduct the meeting of the company in the manner prescribed by this Act or the articles, theCompany Law Board may, either of its own motion or on the application of any director of the company, or of any member of the company who would be entitled to vote at the meeting,–

order a meeting of the company to be called, held and conducted in such manner as the Company Law Board thinks fit; and

give such ancillary or consequential directions as the Company Law Board thinks expedient, including directions modifying or supplementing in relation to the calling, holding and conducting of the meeting, the operation of the provisions of this Act and of the company’ s articles. Explanation.- The directions that may be given under this sub- section may include a direction that one member of the company present in person or by proxy shall be deemed to constitute a meeting.

Any meeting called, held and conducted in accordance with any such order shall, for all purposes, be deemed to be a meeting of the company duly called, held and conducted.

Section 210[13] of the Companies Act, 1956:-

Annual accounts and balance sheet.

At every annual general meeting of a company held in pursuance of section 166, the Board of directors of the company shall lay before the company-

a balance sheet as at the end of the period specified in sub- section (3); and

a profit and loss account for that period.

In the case of a company not carrying on business for profit, an income and expenditure account shall be laid before the company at its annual general meeting instead of a profit and loss account, and all references to” profit and loss account”,” profit” and” loss” in this section and elsewhere in this Act, shall be construed, in relation to such a company, as references respectively to the” income and expenditure account”,” the excess of income over expenditure”, and” the excess of expenditure over income”.

The profit and loss account shall relate-

in the case of the first annual general meeting of the company, to the period beginning with the incorporation of the company and ending with a day which shall not precede the day of the meeting by more than nine months; and

(b) in the case of any subsequent annual general meeting of the company, to the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting by more than six months, or in cases where an extension of time has been granted for holding the meeting under the second proviso to subsection (1) of section 166, by more than six months and the extension so granted.

The period to which the account aforesaid relates is referred to in this Act as a” financial year”; and it may be less or more than a calendar year, but it shall not exceed fifteen months:

Provided that it may extend to eighteen months where special permission has been granted in that behalf by the Registrar.

If any person, being a director of a company, fails to take all reasonable steps to comply with the provisions of this section, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to one thousand rupees, or with both: Provided that in any proceedings against a person in respect of an offence under this section, it shall be a defence to provethat a competent and reliable person was charged with the duty of seeing that the provisions of this section were complied with and was in a position to discharge that duty: Provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully.

If any person, not being a director of the company, having been charged by the Board of directors with the duty of seeing that the provisions of this section are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to one thousand rupees, or with both: Provided that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully.

The other related sections which are cited as well were Section 211 and Section 217 of the Companies Act, 1956. There were many articles of the Article of Association of the Company as well, which got their reference in the suit as well, like Article 178 of the Articles of Association around which the question of the suit also revolved. Other articles also got their reference as well. Let’s take a look at those:-

Article 168 of the AoA :- Subject to the rights of the person (if any) entitled to shares with special right as to dividends all dividends shall be declared and paid according to the amounts paid on the shares, but if so long as nothing is paid upon any of the shares of company dividends may be declared and paid according to the amounts of the shares.
Article 169 of the AoA:- The profits of the Company or so much thereof as may be thought fit shall be distributed by the Company by way of dividends in payment of a dividend to the members in proportion to the amount paid up or credited as paid up thereon. Subject as aforesaid the profits of the company which it shall from time to time be determined to divide in respect of any year or other period shall be applied first in paying the fixed cumulative preferential dividend on the preference shares to the close of such year or other period and as to the residue in paying a dividend for such year on the ordinary shares.
Article 170 of AoA:- No larger dividend shall be declared than what is recommended by the Directors, but the Company in General Meeting may declare a smaller dividend.
Article 171 of AoA:- No amount paid on a share in advance of calls, shall while carrying interest be treated fox the purpose of the Arts. 185 and 186 as paid on the share.

No dividend shall carry interest as against the Company.

Article 172 of the AoA:- No dividend shall be payable except out of the profits of the year of the Company or any other undistributed profits.

Article 173 of the AoA:- The declaration of the. Directors as to the amount of the net profits of the Company shall be conclusive.

7.Article 174 of the AoA:- The Directors may from time to time pay to the members such interim dividends as in their judgment the profits of the Company justifies.

8. Article 178 of the AoA:– The Company in Ordinary or Extraordinary General Meeting may declare a dividend to be paid to the members according to their right and interests in profits, and any sum carried to the reserve, depreciation, or other special funds for the purpose of the equalisation carried to the reserve depreciation or other special funds may, subject to due provision being made for actual look or depreciation, be applied in payment thereof.

9. Article 179 of the AoA:- If several persons are registered as joint-holders of any share, any one of them may give effectual receipt for any dividend payable on the share.

10. Article 180 of AoA:- Any General Meeting declaring a dividend may make a call on the members of such amount as the meeting fixes but so that the call on each member shall not exceed the dividend payable to him and so that the call be made payable at the same time as the dividend and the dividend may if so arranged between the Company and the members be set off against the call. The making of a call under this Article shall be deemed ordinary business of an Ordinary Meeting which declares dividend.

11. Article 190 of AoA:- The directors shall as required by Sections 131 and 131-A of the Act, cause to be prepared and to be laid before the company in general meeting such profit and loss accounts, balance sheets and reports as are referred to in those sections.

12. Article 191 of AoA:- At the Ordinary Meeting every year the Directors shall lay before the Company a Profit and Loss account and a balance-sheet containing & summary of too property and liabilities of the Company mode up to a date not more than nine month before the meeting from the time when the last preceding account and balance-sheet were made up. The said balance-sheet shall be in the form marked ‘F’ in the third Schedule to the Act or as near thereto as circumstances admit and shall be signed by at least two Directors or if there is only one Director for the time being in India by such Director. Whenever any such balance-sheet is signed by one Director only, there shall be subjoined thereto a statement signed by such one Director explaining the reason why it has not been signed by second Director.

(ii) The Auditors’ report shall be attached to the balance-sheet and the report shall be read before the Company in General Meeting and shall be open to inspection by any share-holder.

13. Article 192 of the AoA:- The profit and loss account shall in addition to the matters referred to in Sub-section (3) of Section 132 [14] of the Act, show, arranged under the most convenient heads, the amount of gross income, distinguishing the several sources from which it has been derived, and the amount of gross-expenditure distinguishing the expenses of the establishment, salaries and other like matters. Every item of expenditure fairly chargeable against the year’s income shall be brought into account, so that a just balance of profit and loss may be laid before the meeting, and, in case where any item of expenditure which may in fairness be distributed over several years has been incurred in any year the whole amount of such item shall be stated, with the addition of the reasons why only a portion of such expenditure is charged against the income of the year.

14. Article 193 of AoA:– Every such balance-sheet shall be accompanied by a report of the Directors as to the state and conditions of the company and as to the amount which they recommend to be paid out of the profits by way of dividend, or bonus to the members and the amount (if any) which they propose to carry to the Reserve Fund, and the account, report and balance-sheet shall be signed by at least two Directors.

A General Meeting of the Company shall be held within 18 months from the date of its incorporation and thereafter once at least in every calendar year at such time (not being more than 15 months after holding of the last preceding Annual General Meeting) and at such place as may be prescribed by the Company in the General Meeting and if no time or place are so prescribed at such time and place as may be determined by the Directors. The General Meeting referred to in this Article shall be called Ordinary General Meeting and all other meetings of the Company shall be called Extra-Ordinary General Meetings.

Article 91 of AoA:- The Directors may whenever, they think fit, call an extraordinary general meeting of the Company.

Article 93 of AoA:- At least fourteen days’ notice (exclusive of the day on which the notice is served or deemed to be served but inclusive of the day on which notice is given) of every general meeting shall be given la writing to the members specifying the place, day and hour of meeting with a statement of business to be transacted at the meeting in the manner hereinafter provided.

Article 99 of AoA:- The business of any ordinary meeting shall be:

(a) to receive and consider

(i) the profit and loss account,

(ii) the balance-sheet,

(iii) the reports of the directors, and of the auditors,

(b) to elect Directors, Auditors, and other Officers in the place of those retiring by rotation or otherwise,

(d) fixing of remuneration of the auditors, and

(e) to transact any other business which under these presents ought to be transacted at any Ordinary General Meeting and any business which arises out of the reports of the directors issued with the notice concerning the meeting.”

DECISION IN THE CASE

The Court here held that the declaration which is talking about the further dividend for the second time out of the profits of the past year is illegal and ultra-vires of the Articles of Association of the Company and the Companies Act, 1956 as well.

The Court in this case stated that both the parties as stated did what they thought to be correct and lawful, but as per the Court what the company did was not lawful and they would have to abide by it. The Court opined that the company should pay and bear the Jaipuria defendants who came to defend the suit on the question of law and it is because of the declaration of the dividend by the company that they have defended the suit. It is true that they were added as defendants at their risk and expense. The added defendants who contested the suit assisted the Court and therefore I am of opinion that the company should pay and bear their costs. One set of costs is to be divided amongst all persons who are contesting. There will be declaration in terms of prayer (c), (d), (e), (ee), (f) and an injunction in terms of prayer (g) (h) and (hh). The plaintiff will also get costs paid by the company because the plaintiff instituted the suit bona file and in legitimate protection of interest of shareholders. The remuneration of Mr. Khaitan the Receiver is assessed at Rs. 1,000/-. The company will pay such remuneration. Certified for two counsel for all parties. After taking everything into consideration, the Court gave its decision in the favour of the plaintiff and therefore, the plaintiff succeeded in the suit.

ANALYSIS OF THE CASE

The case had many interpretations and arguments whereby the plaintiff and the defendants in every way tried to prove their sides before the Court and also gave the logical reasoning associated with it to take that appropriate step. The major issue which this case dealt was whether the company can declare the further dividend when the dividend for that particular has already been decided or declared at the Annual General Meeting. In this case, this was also asked that whether there can be a declaration of the dividend for the past years regarding which the accounts have been closed already at the previous Annual General Meetings.

It is very normal in a company to decide or declare the final dividend at the Annual General Meeting, but that does not close the door for the company to declare the final dividend at an Extraordinary General Meeting. However, this case made it clear that once a dividend has been declared by the company at the Annual General Meeting, then it is restricted for the company to declare further dividend for the same financial year through a passing of the resolution at the Extraordinary General Meeting. In the same way, there cannot be any declaration of dividend for the past years, whose accounts have been closed already at the previously conducted Annual General Meetings. The Court in this case held that the declaration of further dividend for the second time from the profits of the past year was illegal and ultra vires of the Articles of Association and Companies Act, 1956.

CONCLUSION

This case brought several aspects before the Court and a bonafide approach was taken by the plaintiff in the benefit of the shareholders by bringing this suit in the court. This case gave a remarkable judgement which is considered to be a landmark judgement of the Companies Law. The way Court took into consideration of every point presented and also took care of the Articles of Association and the Companies Act, 1956 made this case get the right judgement in the benefit of the shareholders and really gave a good understanding of this issue and point.

[1] Raghunandan Neotia v. Swadeshi Cloth Dealers Ltd., (1964) 34 Comp Cas 570.

[2] Companies Act, 1956 (Act No. 1 of 1956).

[3] Companies Act, 1956 (Act No. 1 of 1956).

[4] AoA, Art. 178.

[5] CPC, 1908, Order 1, Rule 8.

[6] Companies Act, 1956, s. 166.

[7] Companies Act, 1956, s. 186.

[8] Companies Act, 1956, s. 210

[9] Companies Act, 1956, s. 211.

[10] Companies Act, 1956, s. 217.

[11] Companies Act, 1956, s. 166.

[12] Companies Act, 1956, s. 186.

[13] Companies Act, 1956, s. 210.

[14] Companies Act, 1956, s. 132.

Also Read Lagunas Nitrate Co versus Lagunas Syndicate, (1889) 2 Ch. 392