Karnataka High Court
Idl Chemicals Ltd. And Another vs Astra Pharmaceuticals Ab And Others on 30 March, 1994
Equivalent citations: [1997]88COMPCAS649(KAR), ILR1994KAR1699, 1994(3)KARLJ493
JUDGMENT R. Ramakrishna, J.
1. The appellants are the plaintiffs in the trial court. They have filed a suit against the respondents for the relief of a declaration that the respondents are bound to act in accordance with the terms of the joint venture agreement, the shareholders' agreement and the articles of association of the second respondent company and for further declaration that the proceedings of the board of the second respondent company held on February 1, 1994, after the resignation of the fourth respondent as chairman are null and void and for a further declaration that the appointment of the third respondent as chairman is illegal, void and nonest and consequent reliefs of issue of permanent injunction and mandatory injunction restraining the directors of the second respondent company to implement the resolution as it relates to the appointment of the chairman in the meeting held on February 1, 1994, and for a mandatory injunction.
2. The appellants have filed three interlocutory applications for getting interim reliefs. All these interlocutory applications are filed under Order 39, rules 1 and 2 of the Code of Civil Procedure, 1908.
3. Under I.A. No. I, the relief sought was for grant of a temporary injunction restraining the third respondent from claiming...holding out....acting...functioning or discharging any powers or duties as chairman of the second respondent company pending disposal of the suit. I.A. Nos. II and III were also for reliefs almost similar to I.A. No. I where, in addition to the third respondent, the restraint order was sought against the other directors to give legal status to the proceedings held on February 1, 1994.
4. The trial court has passed a common order and all three interlocutory applications were rejected by its order dated March 21, 1994. The appellants who have moved this court on March 22, 1994, confined their relief, initially as against the order passed on I.A. No. I. Sri S.G. Sundaraswamy, the learned senior advocate for the appellants, however, submitted that due to the paucity of time, the present appeal is filed only against the order passed in I.A. No. I and separate appeals will be filed against the order passed on I.A. Nos. II and III in due course.
5. The appeal was heard at great length and initially, the argument were confined to the grant of an interim order to restrain the third respondent from discharging any powers or duties as chairman of the board of directors of the second respondent company and further restraining him from holding a meeting on March 22, 1994, at Bombay at 11 a.m. and alternatively of the same cannot be ordered, to appoint an observer to attend the meeting.
6. The learned advocates have made arguments on this application which almost covered the merits of the appeal also. Therefore, by taking the consent of the learned advocates the entire appeal is heard and the following judgment is passed.
7. The first appellant is a company incorporated under the Companies Act, 1956 (hereinafter referred to as "the Act"), and it is the shareholder of the second respondent company. The second appellant is the managing director of the first appellant and also one of the nominated directors of the second respondent-company. The first respondent is a company incorporated in Sweden and it is a shareholder of the second respondent. These companies entered into a joint venture agreement as well as shareholders' agreement to create the second respondent-company. The second respondent is a public limited company with an authorised capital of 2.5 corers. 25.75 per cent. (Rs. 64,37,500) of paid-up capital of the second respondent is held that the first appellant and another 25.75 per cent (Rs. 64,37,500) is held by the first respondent and the balance is held by the public and financial institutions. Respondents Nos. 4 to 10 are the other directors of the second respondent company. According to the appellants, through the efforts made by the first appellant an agreement was entered into with the first respondent, a Swedish company and by joint venture the second respondent company was formed for manufacturing drugs and pharmaceuticals. The second appellant is the managing director of the first appellant and a nominated director of the second respondent company. A copy of the joint venture agreement dated December 5, 1977, entered into between the first appellant and the first respondent is produced. Consequent on which, the incorporation of the second respondent on November 6, 1979, is also produced. The memorandum and articles of association of the second respondent include provisions to give effect to the joint venture agreement.
8. The fourth respondent was the chairman of the 71st meeting of the board of directors of Astra IDL Ltd. held on February 1, 1994. The minutes of the meeting of the board of directors held on November 10, 1993, was confirmed. Under the second subject other subject of the minutes of the meeting dated November 10, 1993, was considered. Immediately after the second subject, the fourth respondent, the then chairman of the board of directors, has made an announcement expressing his desire to relinquish the chairmanship of the board which he held for a continuous period of nine years and tendered his resignation with immediate effect. However, he expressed his desire to continue as a director of the company. He has also requested the board to elect a new chairman amongst those present to take the chair relinquished by him. He proposed the name of the third respondent, Mr. D.E. Udwadia, who was one of the founder directors of the company, and served the company for nearly 15 years be appointed as chairman of the board. He has also explained to the board of directors the suitability of the third respondent. However, the second appellant, Dr. E.G. Mahadevan, and the eighth respondent, Mr. B.D. Punjabi, persuaded the fourth respondent to continue his chairmanship until the next meeting of the board. This suggestion was declined by the fourth respondent. Dr. Nityanand, the seventh respondent, seconded the proposal of Mr. Ghosh. However, the second appellant and the eighth respondent expressed their objections with regard to the procedure followed, without making any personal allegations against the third respondent. According to them, the election of the chairman being an important issue, it should have been formally included in the agenda as an item for consideration and they have also expressed their view that the election of the next chairman should be deferred until the next board meeting, thereby this agenda can be included formally in the board of directors' meetings. The other directors felt that this can be done only if Mr. Ghosh continued as chairman until the next board meeting. Since Mr. Ghosh formally declined to continue as chairman on the ground of ill-health, the sixth respondent, Mr. Kaare Gyllvick, also agreed to this proposal and for an immediate appointment of a chairman. The majority decided to appoint a chairman in that meeting. After taking the view of Mr. Udwadia to accept the offer, the voting was made wherein six directors voted the resolution in favour, out to ten directors. The minute shows that Mr. Punjabi and Mr. Mahadevan abstained from voting, so also the tenth respondent, who was a nominee of the Government. Mr. Udwadia has not cast his vote. The result of the voting is that Mr. Udwadia was declared elected as chairman and, thereafter, the board of directors' meeting continued and as many as 10 subjects were attended.
9. The appellants are contending that the election of Mr. Udwadia is invalid and the proceedings of the meeting is against the articles of association.
10. The trial court on the strength of the arguments made by the learned advocates, framed the points as required to be determined in the matter of granting temporary injunction such as prima facie case, balance of convenience and the question of irreparable loss and injury; and held all the points against the appellants and dismissed the applications.
11. After hearing the arguments of the learned advocates, the validity of election of the chairman is mainly dependent upon the interpretation of article 146 of the articles of association governing the second respondent. This point required a careful consideration as no personal allegation was made against Mr. Udwadia and Mr. Ghosh regarding their integrity, efficiency and service rendered throughout their career either as board of directors or chairman.
12. Articles 112 and 113 also play a decisive role in deciding the controversy.
13. Sri. S.G. Sundaraswamy, the learned senior advocate for the appellants, submits that the election of the chairman is vitiated in the absence of an affirmative vote by the second appellant, a nominated member to the board of directors in accordance with the articles of association. The learned advocate further submits that the entire proceedings are a stage managed affair as there was no difficulty for Mr. Ghosh to continue as chairman in the 71st meeting to take up the election of a new chairman in a subsequent board of directors' meeting after the introduction of a subject for that purpose. According to the learned advocate, it was quite unexpected and unwarranted without any necessity for Mr. Ghosh to announce his retirement in the middle of the proceedings and also persuading the other directors to consider the name of Mr. Udwadia to take effect immediately and to continue the proceedings under his chairmanship.
14. However, Dr. Singhvi, the learned senior advocate for the second respondent, Sri Udaya Holla, Sri T.N. Subramaniam and Sri A.N. Jayaram, the learned advocates for respondents Nos. 3 and 11, 4 and 9, and 7 have supported the order of the trial court and further by placing their reliance on the articles of association and the law governing a situation of this nature prayed for dismissal of the appeal both on the merits and maintainability.
15. The second respondent company was incorporated on July 11, 1979, and the articles of association were duly accepted by the Registrar of Companies on November 6, 1979. The articles of association will have a binding force a contract under section 36 of the Act.
16. Mr. Udwadia was the first director of the company which fact is narrated under article 111. The appointment of director of Astra Pharmaceuticals is dealt under article 112. Under this article the first respondent shall have the right to nominate one person as a director of the company and to remove such person from office and on a vacancy being caused in such office from any cause whatsoever, including resignation, death or removal of any such person so appointed, to appoint another in the vacant place. Under sub-article (2) of article 112 any appointment or removal of a director shall be by a notice writing addressed to the company under the hand of the president, vice-president, a director or secretary of the first respondent and shall take effect forthwith upon such notice being delivered to the company. Consequent on this article, it is contended that the second appellant was nominated as a director on the board of the second respondent company in place of the fourth respondent Mr. Ghosh whose nomination was withdrawn by a letter dated July 13, 1984.
17. Under article 113, the first appellant shall have the right to appoint one person as a director of the company and to remove such person from office, on a vacancy being caused in such office from any cause whatsoever including resignation, death or removal of any such person so appointed to appoint another in the vacant place. Sub-article (2) of article 113 is one and the same found in sub-article (2) of article 112. The IDL representation was duly approved by the first respondent.
18. Under article 114, subject to the provisions of section 255 of the Act, the directors appointed by the first appellant and the first respondent pursuant to articles 112 and 113, respectively, shall not be liable to retire by rotation. All other directors of the company shall be elected by the shareholders of the company in the general meeting and shall be liable to retire by rotation as provided under the article.
19. Article 145 deals with the election of chairman and the duties to be performed by him as chairman. Article 145 reads thus :
"The directors may from time to time elect from among their number a chairman of the board and determine the period for which he is to hold office. The chairman of the board shall be entitled to take the chair at every meeting of the board. If at any meeting of the board, he shall not be present within fifteen minutes of the time appointed for holding such meeting or if he shall be unable or unwilling to take the chair, the directors present may choose one of their number to be the chairman of the meeting."
20. On a reading of this article, the directors of the company are invested with the power of elect a chairman of the board among themselves whenever such necessity requires. The term "may from time to time" is indicative of the fact that there should be scope for such an occasion. The board of directors are also invested with the power to choose a chairman for a particular meeting only if the chairman is not present within fifteen minute of the time appointed for holding such meeting or if he is unable or unwilling to take the chair.
21. Under this article, in the event of the above contingencies no vaccum will be created. The meeting will continue by selecting a chairman for that meeting. Therefore, the board of directors can meet both situations of electing a chairman for the full tenure or choosing a chairman only for the purpose of that particular board of directors meeting.
22. Article 146 deals with deciding all questions at board meetings. Article 146 reads thus :
"Questions arising at any meeting of the board shall be decided by a majority of votes provided such majority shall include the affirmative votes of the non-retiring directors appointed by Aktiebolag Astra and by IDL Chemicals Limited under articles 112 and 113 hereof respectively to his or their alternate director. In the case of an equality of votes, the chairman shall have a second or casting vote. Provided that if the non-retiring director appointed by Aktiebolag Astra and by IDL Chemicals Limited or his or their alternate, if any, is unable to attend the meeting of the board but addresses a written communications to the board expressing his to their concurrence or approval to the passage of any particulars resolutions by the board, such communication shall, for the purpose of this article, be deemed to be his or their affirmative vote."
23. On a reading of article 146, a power of veto is given to the nominees of the first appellant and the first respondent who altogether are holding a paid-up capital of 51.50 per cent. This article also provides that the non-retiring directors who are unable to attend the meeting of the board can address a written communication expressing their concurrence or approval which will be deemed to be their affirmative vote.
24. After the board meeting held on February 1, 1994, the first appellant sent a letter dated February 14, 1994, to the secretary of the second respondent in which he contends that the appointment of the new chairman was irregular and improper as according to him, in the midst of the meeting Mr. Ghosh without any prior notice or consultation expressed his wish not to continue as chairman with immediate effect and simultaneously proposed the name of D.E. Udwadia as a new chairman and he has refused to postpone the consideration of this matter and the resolution purported to be passed on the show of hands by six directors where two directors dissented and one director not voted.
25. It is further contended that the directors of the board were not appraised of article 146 which makes it mandatory to obtain the concurrence of the nominee of the first appellant, for the questions arising in the meeting. So the provisions of article 146 were ignored and the directors were misled as the item was considered by mere motion. He has also brought to the notice of the secretary that the proceedings are in breach of the provisions of the joint venture agreement which provides for consultation and concurrence by IDL Chemicals and Astra Pharmaceuticals for the appointment of a chairman. The election is clearly in breach of article 146 and it is also in breach of the whole tenor of the joint venture and the shareholders' agreement entered into between Astra and IDL. He also made it clear that if the chairman continues with the appointment, the first appellant will adopt appropriate proceedings. The eighth respondent, Mr. Punjabi, has also concurred with this view and according to them the proceedings of the 71st meeting of the board of directors in electing a chairman are not valid.
26. Dr. Singhvi, learned senior advocate representing the second respondent, submits that the second appellant is not a nominee director as contended by him as according to articles 112 and 113 the necessary resolution is to be made after the nomination and since the second appellant has retired and was re-elected in the annual general meetings, he cannot be classified as a nominee director to invoke the veto power under article 146. It is further submitted that the second appellant is guilty of suppressing these facts and wrongly invoked article 146 and, therefore, his contentions cannot be accepted.
27. All said and done, the fact remains that the appointment of the chairman in the 71st meeting caused considerable disturbance otherwise in the smooth going of these sister concern companies. Since no personal vengeance is attributed by any of the parties to these proceedings, the only question left open for the court is to decide the true intention in inserting article 146 in the articles of association.
28. One of the ground taken by the appellant is that the trial court has failed to appreciate the scope of article 146 in the scheme of the articles of association which have been created on the basis of the joint venture agreement and the shareholders' agreement to consider the validity of article 146. The appellants have made available the joint venture agreement as document No. 1. In this agreement, the first appellant and the first respondent promoted the establishment of a new company, i.e., the second respondent, and ways and means are spelt out in the agreement. At page No. 3, the composition of the board of directors is incorporated where it is agreed that three directors each shall be of the choice of Astra and IDL making in the aggregate six directors and two directors shall be persons possessing professional repute who shall be acceptable to both Astra and IDL. One of the directors of the choice of Astra shall be non-rotational director. IDL also had the right to appoint one non-rotational director out of the directors of the choice of IDL. Under the sub-clause (c) all the directors other than the non-retiring directors shall be liable to be retired by rotation. Other clauses in the agreement deal with the subject to safeguard the interest of the first appellant and the first respondent.
29. Consequent to this joint venture agreement, articles 113 and 114 came into existence in the articles of association. A reading of these two articles makes it clear that the first appellant and the first respondent have reserved the right to appoint one person each as non-rotational director. The power conferred on such a director under article 146 is that the questions arising at any meeting of the board shall be decided by a majority of votes provided such majority shall include the affirmative votes of the non-retiring directors appointed by the first appellant and the first respondent.
30. The contention of the contesting respondents is that though the second appellant was nominated as a director as per the letter dated July 13, 1984, such status was altogether lost due to the fact that the second appellant has been retired and reappointed by the shareholders on December 7, 1984, December 18, 1987, September 13, 1989 and September 30, 1992. Therefore, the second appellant is estopped to contend that his status fall within the spirit of article 113 or article 114 of the articles of association and, therefore, he is not vested with the power of veto under article 146.
31. The trial court has considered this aspect of the matter at para 58 of its judgment and it reached a conclusion that the second appellant is not a non-rotational director in view of his re-election and according to the trial court, the second appellant has voluntarily acquiesced his right to the nature of non-rotational director and, therefore, it cannot be said that he is invested with the power contained in article 146.
32. The grievance of the second appellant is that when the election of the chairman took place the secretary has not brought to his immediate attention the power vested under article 146, but, however, according to him, it matters little, as he has abstained from voting as per the minutes of the meeting, but, according to him, he has opposed the election thereby he tendered an opposing vote for the election of the third respondent and, therefore, his conduct in seeking re-election cannot be considered as he has been nominated as a non-rotational director. The second appellant, indeed, brought to the notice of the secretary of the second respondent by his letter, dated February 14, 1994, that he as a secretary has failed to appraise the directors of the board that under article 146 it is mandatory to obtain concurrence and, therefore, the entire proceedings of the election of the chairman have become irregular and illegal.
33. On February 26, 1994, the first appellant, in fact, sent a letter to the second respondent that the nomination of the second appellant on the board of the second respondent company was made pursuant to article 114 and, therefore, he is a non-retiring director and shall not be liable to retire by rotation. Even if it is presumed that his letter is made to overcome the acts committed by the second appellant in seeking re-election by the shareholders, but it is very difficult to accede to the fact that the second appellant was ignorant of article 146 and he came to realise after 14 days from the date of election of the chairman. The second respondent contended that the company is not a party to this joint venture agreement. But the fact remains that the object of the joint venture agreement by the first appellant and the first respondent is the birth of the second respondent company and the spirit of the joint venture agreement is clearly incorporated in the articles of association. It is equally binding on the second respondent.
34. In fact, the fourth respondent, who is the founder-member of the second respondent company who subsequently nominated, has also undergone the process of retirement and re-election along with the second appellant. The object of articles 113 and 114 is to control the activities of the second respondent company due to the fact that the first appellant and the first respondent held 52.50 per cent. of shares of that company. Therefore, by invoking the rule of promissory estoppel and estoppel by conduct made out by the second respondent is a weal attempt in view of the articles of association applicable to the second respondent company, is the submission of the second appellant.
35. The waiver is the abandonment of a right in such a way of that the other party is entitled to plead the abandonment by way of concession and avoidance if the right is therefore asserted, and is either express or implied from conduct. A person who is entitled to rely on a stipulation, existing for his benefit alone, in a contract or of a statutory provision, may waive it, and allow the contract or transaction to proceed as though the stipulation of provision did not exist. In general, where the party has, by his words or conduct, made to the other a promise or assurance which was intended to affect the legal relations between them and to be acted on accordingly, then, once the other party has taken him at his word and acted on it, so as to alter his position, the party who gave the promise or assurance cannot afterwards be allowed to revert to the previous legal relationship or if no such promise or assurance had been made by him, but he must accept their legal relations subject to the qualification which he has himself so introduced, even though it is not supported in point of law by any consideration.
36. The term "acquiescence" is used where a person refrains from seeking redress when it is brought to his notice a violation of his rights of which he did not know at the time, and in that sense acquiescence is an element in laches. The term is, however, properly, used where a person having a right, and seeing another person about to commit or in the course of committing an act infringing upon that right, stands by in such a manner as really to induce the person committing the act, and who might otherwise have abstained from it, to believe that he assents to its being committed.
37. Though these articles of association came into existence on November 6, 1979, there was no occasion to test the validity of article 146. The affirmative vote referred to in the articles implies that the consent of the non-retiring director is absolutely necessary to take a decision on the question that will arise during the board of directors meeting. This article gives a remedy to exercise the power of veto even in the absence of a non-retiring director as it can be exercised through his alternate or by a written communication to the board.
38. But the real question that requires to be determined is whether the nomination of the second appellant through the letter dated July 13, 1984, is to be construed as a nomination that would fall under article 114. The respondents have made available the minutes of the 25th meeting of the board of directors of the second respondent company held on September 28, 1984. Subject No. 3 is related to changes in directors, which reads as follows :
"A letter received from Mr. S. Ghosh dated July 19, 1984, was placed before the board. The board noted that Mr. Ghosh had resigned from the office of director of the company. Board placed on record its deep appreciation of the services rendered by Mr. Ghosh during his tenure as a director.
The board also considered a letter dated July 13, 1984, received from IDL Chemicals Limited.
The board unanimously resolved that Dr. E.G. Mahadevan be and is hereby appointed as the director of the company in the vacancy caused by the resignation of Mr. S. Ghosh and that Dr. E.G. Mahadevan will hold office up to the date at which Mr. Ghosh would have held office had he not resigned."
39. A reading of this minute along with the letter of nomination dated July 13, 1984, does not give rise to a presumption that the nomination of the second appellant was made as a non-rotational director. The respondents also produced annexure-III giving a statement showing the directors who so far worked in the second respondent-company, their date of appointment by the board, re-appointment by shareholders and date of cessation. The second appellant was reappointed by shareholders on four occasions, the last being dated September 30, 1992. Therefore, this material should be accepted as a fact that the second appellant has never been a non-rotational director as defined under article 114. As I said earlier, it is too difficult to appreciate the contentions raised by the second appellant that he was ignorant of article 146 altogether on February 1, 1994.
40. Sri Gururaj, who was the company secretary of the second respondent, swore to an affidavit before the trial court. He has specifically contended that from the inception of the company, the board of the second respondent has throughout been constituted by rotational retiring directors and there was no nomination of the second appellant in the sense of his being constituted into a non-retiring or non-rotational director. It could be seen that the second appellant was ignorant of the appointment for causal vacancy caused by the resignation of Mr. Ghosh as a director and was appointed as a director liable to retire by rotation.
41. Though the joint venture agreement and the shareholders' agreement gave power to the first appellant and the first respondent to appoint non-rotational directors of their choice who would represent them to have a check in the affairs of the second respondent company, it seems that such an attempt has not been made and only after the chairman's selection at the 71st meeting, the concerned directors have opened their eyes to these provisions. Because there are provisions found in the articles of association when a given event has occurred in the absence of any material, one cannot presume that the second appellant was a non-rotational director. The letter dated February 26, 1994, addressed by the IDL Chemical Ltd., declaring that the second appellant is a nominee and pursuant to article 114, a non-retiring director and shall not be liable to retire by rotation will not improve the situation as this letter will have only prospective effect and this cannot be considered as a letter having retrospective effect.
42. If it is held that the second appellant was a retiring director, who, in fact, retired by rotation and re-elected by the shareholders, the election of the third respondent as a chairman cannot be held as invalid, as admittedly, the majority of the directors have voted in favour of the third respondent. These directors who have voted in favour of the third respondent also made statements before the trial court that the mode of election was in accordance with the articles of association. Though the joint venture agreement and the shareholders' agreement invested power to the first appellant and the first respondent to exercise their right to check the activities of the second respondent, they have not exercised such an option so far, except the letter dated February 26, 1994. If the nomination of the second appellant was either under article 112 or article 113 there was no impediment to spell out the clear intention in the letter dated July 13, 1984.
43. Though the contention of Sri S.G. Sundaraswamy is quite attractive to hold that the nomination letter, dated July 13, 1984, was made only in the background of articles 112 and 113, in the absence of a clear intention made out in the said letter, it is dangerous to give such a colour to that letter when the third respondent was elected as chairman by the majority of the directors by following a procedure which is well recognised. Even if there is scope for one to view that the events that took place at the 71st meeting was quite unexpected, but one cannot attribute motives, when the chairman elected was well qualified and competent to hold that post. Though the occurrence was quite strange what conclusion one can reach depends upon the future one adopts to appreciate such situation. Therefore, it should be viewed which is beneficial to the second respondent company whose affairs are in question.
44. When the materials to hold that the second appellant is a non-rotational director are lacking one cannot hold him to be so by invoking a provision of the article. Therefore, the trial court has not committed any error in arriving at a conclusion in favour of the second respondent in the available materials.
45. In the result, this appeal fails and the same is dismissed with no order as to costs.