S. Varadarajan v. Venkateswara Solvent Extraction

The present judgment deals with two aspects of internal management- calling of extraordinary general meeting and removal of directors of company. Provisions for both these features are provided in Part VI of the Companies Act, 1956.
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Introduction

The management of company is one of the primary concerns of shareholders under corporate structures. Oftentimes, the governmental bodies have tried to intervene in its administration by taking away the power to appoint its own directors or getting access to confidential documents.  However, the Companies Act, 1956 and that of 2013 have come to rescue the companies from the clutches of government. Judiciary has also time-to-time ruled that internal management of a company is its own discretion. The Madras High Court in S. Varadarajan vs Venkateswara Solvent Extraction[1]dealt with two aspects of internal management- calling of extraordinary general meeting and removal of directors of company. Provisions for both these features are provided in Part VI of the Companies Act, 1956.

Facts

The first petitioner, S. Varadarajan, in the present case with four others had filed the main company petition under Sections 397 and 398 of the Companies Act, 1956[2] against the second respondent and his associates for mismanagement and hiding of affairs of the company- the first respondent.[3] Later the petitioner nos. 2 to 5, the other four shareholders, sold their shares to the second respondent so the applicant is left alone to proceed the matter before the court. This was communicated to the applicant’s counsel by the petitioners 2 to 5.

Sekaran, the second respondent was appointed as the managing director of the company for a period of three years, and his terms came to an end on September 1, 1990. Subsequently, the board of directors of the company appointed the third respondent as managing director of the company in a meeting of the board held on December 20, 1991. In the meantime, the second respondent had lodged a requisition on February 8, 1992, under Section 169[4] of the Act to call an extraordinary general meeting. Later, another notice dated March 28, 1992 was received by the applicant from the second respondent informing himof his decision to convene an extraordinary general meeting since there was no compliance of letter dated Feb 8, 1992.

The first petitioner challenged this convening of meeting by the second respondent. Subsequently, he filed an application for the grant of interim injunction against the meeting which was denied by the court with a precaution any resolution will not be given effect to. The Court heard the matter and decided in favour of second respondent.

Issues

The High Court faced five issues while dealing with the matter. The issues are as follows:-

  1. Whether the notice dated March 28, 1992 requisitioning the extraordinary general meeting was valid or not and did it conform to the requirements of the statute?
  2. Whether the requirements of section 173(2) should be satisfied when requisitionists issue the notice for extraordinary general meeting?
  3. Whether the requirements of section 284 need to be satisfied?
  4. Whether the petitioner has locus standi to maintain the application?
  5. Whether the petitioner is entitled for an order of injunction as relief?[5]

Out of these five issues, issue no, (a). (b) and (c) are the major concern of the discussion presently.

Contentions from both the Sides

The first petitioner challenged the convening of extraordinary general meeting on these grounds- a) the meeting convened by the second respondent was not according to the provision of section 169 of the Companies Act, 1956 which is mandatory in nature b) the second respondent’s second notice included various items of business not listed in the earlier requisition lodged by him with the company and the earlier notice did not mention any agenda thus invalid c) Section 284[6] of the Act had not been complied with by the second respondent.

The counsels for the respondents argued the following points:

a) the applicant had no locus standi to interfere in requisition meeting b) the application cannot be maintained in the petition as latter itself is not sustainable c) the application was collusion between the applicant and 3rd and 5th respondents d) the applicant was a minority shareholder so cannot interfere e) the requisition is in accordance with the section 169 of the Act f) section 284 of the Act would not apply in the matter as requisition concerned itself with revoking appointment of managing director and not removal of director as former falls under internal management of the company g) every shareholder has right to call an extraordinary general meeting.

Court decision and judgment

This judgment was pronounced by a single-judge bench of Madras High Court Wherein Hon’ble Justice Lakshmanan dealt with each issue specifically point-by-point. Dealing with the issue numbers 1 and 2, he ruled it against the applicant. The judge expressly stated that the requisitionists need not satisfy the requirement of Section 169 of the Act i.e., annexing an explanatory statement to the notice. He categorically relied on LIC of India v. Escorts Ltd.[7] to rule that the obligation to annex explanatory statement with the notice is of company only. Furthermore, the purpose was mentioned in requisition dated Feb 8, 1992 so it satisfied the statutory requirements of Section 169 of the Act. Thus, the court answered issue nos. 1 and 2 in negative for applicant.

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The court then gave its decision on issue no. 3 that is application of section 284 of the Act. Hon’ble judge, after hearing all the arguments from both the sides, decided that section 284 of the Act did not have any application in the matter. He gave the reason that the matter concerns itself with power of the board of directors to revoke the appointment of managing director and not removal of directors. The latter would have invoked section 284 of the Act while former being the case of internal management would not fall under Section 284 of the Act. For coming to this conclusion, the court relied on the case of Major General Shanta Shamsher Jung Bahadir Rana v. Kamani Brothers P. Ltd.[8] Thus, the issue no.3 was also answered against the applicant.

The issue no. 4 was the only one which was ruled in favor of the applicant. The court decided that petition of the applicant, filed under Sections 397 or 398 of the Act[9], was maintainable. According to the Hon’ble judge, the first petitioner was acting in representative capacity and hence cannot be barred from filing the application irrespective of his shares in the company. Reliance was placed on inherent powers of court under Rule 9 of the Companies (court) Rules, 1959 and Section 399(3) of the Act. The court also substantially relied on L. RM. K. Narayanan v. Pudhuthottam Estates Ltd.[10] which was delivered by the Hon’ble judge itself.

Regarding the issue no. 5, the court ruled it in favor of the respondent. It relied on LIC of India v. Escorts Ltd.[11] where it was held that a shareholder has the statutory right subject to the fulfillmentof the provision of section 169 to call an extraordinary general meeting. Therefore, no injunction was issued restraining him from calling a meeting.

Thus, the application was dismissed with no costs.

Analysis

Legislative Provisions: Section 169 of the Companies Act, 1956 was the major provision in question in the judgment. The calling of extraordinary general meeting by requisitionist is one of the significant powers granted to him under company law. This section has a long legislative history. Section 132 of the English Act, 1948[12] corresponds to the section 169 of the Companies Act, 1956. Similarly, section 368 of the English Act, 1985 shared huge resemblance with section 169 of the Act[13]. The major predecessor of section 169 of the 1956 Act is the section 78 of the Companies Act, 1913.[14] Thus, calling of extraordinary general meeting by requisitionists was always a part of company law.

Another important provision which was significantly discussed in the judgment was Section 173 of the Act that is annexing explanatory statement to the notice. This provision was introduced later in the company law. The Register 50 of Table A of Companies Act, 1913 mentions similar provision as to section 173 of the Companies Act, 1956. The Companies (Amendment) Act, 1960 changed the phraseology of the Section 173(2) to bring it in line with Section 299 of the 1956 Act on the recommendation of Joint Committee.[15] It was again amended in the year 2000 where clause 69 of the Companies (Second Amendment) Bill, 1999 omitted the expression ‘managing agent, secretaries and treasurers’ in 173(2) because it was non-consequential in nature.[16] The effect of these two sections- 169 and 173(2) of the Act is that no injunction order can be granted to restrain the holding of such meeting to remove the director.

Case- Laws: In Isle of Wight Railway Company v. Tahourdin[17], Cotton L.J. said- “Then there is a second object, “to remove (if deemed necessary or expedient) any of the present directors, and to elect directors to fill any vacancy in the board.” The learned Judge below thought that too indefinite, but in my opinion a notice to remove “any of the present directors” would justify a resolution for removing all who are directors at the present time; any” would involve “all”. I think that a notice in that form is quite sufficient for all practical purpose.”[18] Similarly, in Bentley Stevens v. Jones[19] it was held that a shareholder had a statutory right to move a resolution to remove a director and emphasized that the court was not entitled to grant an injunction restraining him form calling a meeting. Again in Ebrahimi v. Westbourne Galleries Ltd.[20] it was recognized that calling of a meeting is an absolute right of the shareholder.

This right was expressly recognized by the apex court in Life Insurance Corporation of India v. Escorts Ltd.[21] where the Supreme court held that- “”Thus we see that every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements, to call and extraordinary general meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling a meeting and he is not found to disclose the reasons for the resolutions proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review. It is true that under section 173(2) of the Companies Act, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each item of business to be transacted at the meeting including, in particular, the nature of the concern or the interest, if any, therein, of every director, the managing agent, if any, the secretaries and treasures, if any, and the manager, if any. There is a duty cast on the management to disclose, in an explanatory note, all material facts relating to the resolution coming up before the general meeting to enable the shareholders to form a judgment on the business before them. It does not require the shareholders calling a meeting to disclose the reasons for the resolutions which they propose to move at the meetings.”[22]Therefore, after going through all these statutory developments and judicial decisions, the court reached the decision following the above-mentioned reasoning. Now, there is no doubt that shareholders need not annex explanatory statement to call an extraordinary general meeting.

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Section 284- The other significant contribution of this judgment is the interpretation of section 284 of the Companies Act, 1956.[23] Section 284 deals with the removal of directors. Similar provision was incorporated in English Act, 1948 in the form of section 184[24]. Section 303 and 304 of the English Act, 1985[25] also corresponded to the Section 284 of the 1956 Act. Similarly, section 86-G of the Companies Act, 1913 dealt with removal of directors. [26] Section 284 was amended in the year 1988 to vest the powers of sub-section 4 in the Company law board. By the Companies (second amendment) Act, 2002 it was amended to vest these powers from company law board to tribunal.

In the present judgment, the primary concern of the court was to the removal of managing director. Section 284 cannot be invoked for the same as it is company’s internal affairs in which court or government cannot intervene. This position has been first regarded by Bombay High Court in the case of Major General Shanta Shamsher v. Kamani Brothers[27] where it ruled that the section 284 doesn’t affect the power of the board of directors to revoke the appointment of the managing or other director made by the board. This same view was endorsed by the judges in the present judgment. It is pertinent to note that the articles of association play a very important role in interpreting the powers of shareholders in any regard.

Therefore, the view taken by the court with respect to provisions such as section 169, 173 and 284 of the Companies Act, 1956 was correct and valid according to law.

Conclusion

Section 169 of the Companies Act, 2013 resembles the section 284 of the 1956 Act. Similarly, sections 100 and 102[28] corresponds to sections 169 and 173 respectively.[29] This judgment has been relied on by Supreme Court in Bhagwati Developers Pvt Ltd v. Peerlees General Finance[30] and Dale and Carrington v. P.K. Prathapan.[31] It has also been followed by Delhi High Court in Jai Kumar Arya v. Chhaya Devi.[32] Therefore, the view endorsed by the judgment has become the valid law with regard to calling o extraordinary general meeting and removal of managing director by the board. Although there has been certain changes made in provisions of 2013 such as section 100 requires the meeting to be held in India only which was not present in section 169 of 1956 Act. But it hasn’t changed the essence of this judgment as its significance has not been reduced. None of the court shave contradicted the above position held by this judgment. Therefore, it can be concluded that the present case deals with correct and valid law for the time being and only a legislative interference can change it which will be redundant.


[1] 1994 80 CompCas 693 Mad.

[2] Companies Act 1956, Sections 397 and 398.

[3]Id.

[4] Companies Act 1956, Section 169.

[5]1994 80 CompCas 693 Mad, para 9.

[6] Companies Act 1956, Section 284.

[7]LIC of India v. Escorts Ltd, [1986] 59 Comp Cas 548.

[8]Major General ShantaShamsher Jung BahadirRana v. Kamani Brothers P. Ltd,[1959] 29 Comp Cas 501 (Bom).

[9]Supra 2.

[10]L. RM. K. Narayanan v. Pudhuthottam Estates Ltd, [1992] 74 Comp Cas 30 (Mad).

[11]LIC of India v. Escorts Ltd..1986 AIR 1370,

[12] Companies Act 1948, Section 132.

[13]Supra 4.

[14]CR Datta, Company Law (7th Edition, 2016).

[15]CR Datta, Company Law (7th Edition, 2016).

[16]Id.

[17]Isle of Wight Railway Company v. Tahourdin, (1883) 25 Chancery Division 320.

[18]Id.

[19]Bentley Stevens v. Jones, 1971 (2) All E.R.

[20]Ebrahimi v. Westbourne Galleries Ltd,[1973] AC 360.

[21] [1986] 59 Comp Cas 548.

[22] [1986] 59 Comp Cas 548.

[23]Supra 6.

[24] Companies Act 1948, Section 184.

[25] Companies Act 1985, Section 303 and 304.

[26]CR Datta, Company Law (7th Edition, 2016).

[27]Major General ShantaShamsher v. Kamani Brothers,AIR 1959 SC 201.

[28] Companies Act 2013, Sections 101 and 102.

[29] Companies Act 1956, Sections 169 and 173.

[30] (2013) 4 SCC (Civ) 493.

[31] (2005) 1 SCC 212.

[32](2018) 142 CLA 365.

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