The Suburban Bank Private Limited v. Thariath and Others

The case discusses the balance between the powers held by directors of the company and the shareholders of the company holds the fate of the company and how effective day-to-day management of work is vital for the prosperity of the company
Estimated Reading Time: 9 minutes

Introduction

The balance between the powers held by directors of the company and the shareholders of the company holds the fate of the company. The effective day-to-day management of work is vital for the prosperity of the company. Even the courts cannot interfere in the internal management of the company. Restrictions are also imposed on shareholders such that some powers are exclusive to the directors. The demarcation between these powers had to be carefully put across in the Article of Association of each company. If not done properly, it may lead to disputes between shareholders and directors. One such instance is discussed in the judgment of The Suburban Bank Private Limited v. Thariath and Others[1]where the Kerela High Court decided on the matter of powers of general meeting of shareholders with respect to the powers of directors of company which  are provided under Chapter II Part VI of the Companies Act, 1956.[2] It also discussed the procedure of removal of directors under Section 284 of the Companies Act, 1956.[3]

Facts

The Bank, appellant, had instituted a suit for recovery of amounts due from the defendants-respondents under a promissory note executed by defendants along with their father-deceased jointly on 21-3-49. The loan amounted to Rs. 6, 56,330. Exhibit P1 was the promissory note and Exhibit D-1 was the Article of Association of the Bank. According to the defendants, a resolution was passed on 14th May, 1960 by the General Body wiped off the dues from defendants and hence no amount was due.

After hearing both the sides, the concerned Trial Court rejected the defendants claim. On appeal, the lower appellate court set aside the decision of the Trial court and accepted the defendants’ contention. Aggrieved by this, the plaintiffs appealed before the Kerela High Court which set aside the decision of lower appellate court and thus restored the decree of the Trial Court favoring the appellant.

Issues

The High Court was faced with the question that whether a resolution passed by the General Meeting has the power to override the decision of Board of Directors or not.

Contentions from both the Sides

The appellant-Bank contended that the amounts were due from the loan executed under the promissory note. It was also argued that resolution of the General meeting would not be binding on the appellant.[4]

The defendants, on the other hand argued that the reason of promissory note not being executed was to secure a liability of the second defendant to indemnify the appellant against the losses caused to it by dishonor of cheque which the second defendant discounted while he was agent of the Bank. They also contended that considering the payments made by second defendant and his faithful conduct the General meeting passed a resolution dated 14th May 1960 to wipe off the balance amount due from the defendant. Therefore, according to the defendants no amount was due from them on the date of institution of suit.[5]

Court decision and judgment

The Trial Court rejected the contentions of the defendants on the ground that resolution passed by the General Meeting was just a recommendation. So it was not binding on the Board of Directors. Therefore, Bank was right to realize full amount due from the defendants.

Being dissatisfied with what the court held, the second defendant went on to appeal. The lower appellate court reversed the Trial court judgment. It observed that the resolution passed on 14th May 1960 was not a recommendation rather it was the final decision taken by the General Meeting. Thus, the Board of Directors had no right to interfere with the decision. Hence, the decision being binding in nature the balance amount due from defendants was wiped off. It ruled in favour of defendants.[6]

Aggrieved by this, the appellant-Bank preferred a second appeal to the High Court. The High Court firstly analyzed the Article of Association of the Bank. Therein it observed that Article 14 of the Ex. D-1 mandated- the business of the Company is to be managed by the Directors who may exercise all such powers as are not exercised by the Company in General Meeting. The copy of the rules and regulations of the Bank had conferred full powers of all business, finance, and affairs of the Bank to the Board of Directors. The Court also stated that in absence of any article enabling the General Meeting to interfere in the internal management of the company, it was apparently clear that Board of Directors had full power to manage the internal affairs of the company. [7]

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To reach this conclusion, the High Court relied on the case of Murarka P. & V. Works v. Mohanlal[8] where it was held that if powers are vested in Directors by the articles of association of the company then shareholders cannot interfere in the matter. The High Court also relied on Halsbury’s Laws of England[9] which explored the division of powers between directors and shareholders in depth. The Court also observed that since there was no special resolution passed to modify the articles of association therefore, there was no doubt that the appellant could extract the full amount due from the defendants.

The High Court allowed the appeal, set aside the decision of lower and appellate Court and restored the judgment of the Trial Court with costs.

Analysis

Part IV of the Companies Act, 1913[10] titled as Management and Administration defined the scope of powers of a director of the company. Similarly, Chapter II of Part VI of the Companies Act, 1956 propounded the ambit of powers of the directors of a company[11]. Both these legislations explained in length the authority of the director. It was clear from the beginning that the balance of power will always tilt towards the director more than the shareholders. Apart from the Companies Act, the Article of association of each company goes on to decide the extent of powers to be vested in each organ of the company- directors and shareholders. In the present judgment, the High Court appreciated the value of Articles of Association and accordingly decided rightly in favor of the appellant-Bank whereas the lower appellant court erred by overlooking the Articles of Association of the company. The decision of the High Court was also in line with the valid law at that time and the approach adopted by it was also correct.

The imbalanced division of power between directors and shareholders was first recognized in the case of Wight Rly Co. v. Tahourdin.[12] Subsequently, in case of Automatic Self-cleansing Filter Syndicate Co. v. Cunning hame[13] it was held that the general meeting would be a nullity in as much as it affects the or alters the powers vested on the directors through the articles of association. The court in case of Marshall’s Valve Cear Company v. Manning Wardle and Co[14] while dealing with issues of management of company, ruled that the majority of the shareholders in a general meeting had a right to control the directors as long as it is not contrary to the articles of association. Following the Cunninghame approach, the Court in Salmon v. Quin and Axtens held that- “the directors were not servants to obey directions given by the shareholders as individuals but that they were persons entrusted by the regulations with the control of the business and could be dispossessed from that control only by the statutory majority which could alter the Articles.”[15]The similar approach was adopted in Scott v. Scott and others[16] where it was ruled that- “when powers had been delegated to the directors the members at the general meeting could not interfere with their exercise until they were taken, away by the amendment of Articles.[17]

Indian Courts

The same approach is followed by the Indian Courts. In the case of Jagdish Prasad and others v. Paras Ram and others[18], the Allahabad High Court observed that- “It is a first and elementary principle of company law that, when powers are vested in a board of directors by the articles of association of a company, they cannot be interfered with by the shareholders as such. If the shareholders are dissatisfied with what directors do, their remedy is to remove them in the manner provided by the articles. But so long as a board of directors exists and particular powers are vested in it by the articles, then they are entitled to exercise those powers without interference by the shareholders and it is, I think, irrelevant whether the shareholders approve of what the directors have done or not.[19] This principle was further adopted by the Calcutta High Court in Murarka P & V Works v. Mohanlal.[20]

The Halsbury’s Laws of England lays down the law regarding this aspect and explains the rationale of the division of power between director and shareholder and it is quoted as- “If, as is usual, the management of the company’s affairs is entrusted to the Directors by the articles of association, a numerical majority of the shareholders insufficient to alter the article cannot, in the absence of any provision in the articles reserving appropriate power, impose its will on the directors as regards matters so entrusted to them. If the articles provide that regulations may be made by extraordinary resolution, an ordinary resolution is not sufficient to make a regulation which will control the Directors. If no power is reserved to the company to control the Directors when acting within the powers conferred on them by the articles, the articles must be altered by special resolution, if it is desired to give the company the power. Where, under the articles, the business of the company is to be managed by the directors and the articles confer on them the full powers of the company subject to such regulations, not inconsistent with the articles, as may be prescribed by the company in general meeting, the share-holders are not enabled by resolution passed at a general meeting without altering the articles, to give effective directions to the directors how the company’s affairs are to be managed, nor to overrule any decision come to by the directors in the conduct of its business. An agreement made by the company which is inconsistent with the powers of management of the directors under the articles, as, for example, an agreement purporting to confer authority upon the manager of a department to act without interference by the directors, is ultra vires.[21]

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The abovementioned approach is the settled law of the country regarding the powers of directors in internal management of the company. Directors and shareholders are two important parts of a company. The balance between their powers is necessary for successful operation of company. Therefore, it becomes very all the more important to demarcate the authority between them very prudently. It cannot be ignored that the balance of power is slightly shifted towards the side of directors but considering the responsibility and its functions it is justified. There is only two ways by which shareholder can take away that power- either remove him from his position under Section 284 of the Companies Act, 1956[22] or pass a special resolution in general meeting to modify the article of association. There is no other alternative way to do so.

Conclusion

Keeping these principles in mind, the author is of the opinion that the approach adopted by the High Court was correct and itwas according to the valid law which still holds well. Chapter XII of the Companies Act, 2013 titled as Meeting of Board And Its Members lays down the powers of Board of directors and general meeting. The approach adopted by the Court was unanimously followed in Batokristo Nndy v. Ranadeb Chowdhuri[23], Mohanlal Mittal and others v. Universal Wires Limited and Others[24], CDS Financial Services (Mauritius) Limited v. BPL Commuications Limited and others[25] and Harsh Vardhan Lodha and others v. Ajay Kumar Newar and others[26]where the courts were satisfied with the interpretation of powers of general meeting with regard to authority of directors.

This is clearly a symbol of good law. The reasoning adopted by the Court is followed by courts across India presently.  Therefore, the judgment is important to understand the rationale behind the division of powers between shareholders and directors explains the limits of the exercise of power by general meeting and also throws light on the instances where this balance of power can be shifted on the side of shareholders.


[1] 1968 KLJ 19.

[2]Companies Act 1956, Chapter II of PART VI.

[3]Companies Act 1956, Section 284.

[4]Id, para 1.

[5]Id, para 1.

[6] 1968 KLJ 19.

[7] 1968 KLJ 19.

[8] AIR 1961 Cal 251.

[9]Lexis Nexis, The Halsbury’s Laws of England, (4th Edition, Lexis Nexis Butterworth Wadhwa and Co., 2016).

[10] Companies Act 1913, Part IV.

[11] Companies Act 1956, Chapter II of PART VI.

[12] (1883) 25 Ch D 320.

[13] 1906 2 Ch 34.

[14] 1909 1 Ch 267.

[15] 1909 1 Ch 311.

[16]1943 1 All ER 582.

[17] 1943 1 All ER 582.

[18] AIR 1941 All 360

[19]Id.

[20] AIR 1961 Cal 251.

[21]Lexis Nexis, The Halsbury’s Laws of England, (4th Edition, Lexis Nexis Butterworth Wadhwa and Co., 2016).

[22] Companies Act 1956, Section 284.

[23][1970]40CompCas491(Cal).

[24][1983]53CompCas36(Cal).

[25]2004 121 CompCas 374 Bom.

[26] 120 (2) CWN 673.

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