Kerala High Court
Marikar (Motors) And Anr. vs M.I. Ravikumar And Ors. on 1 June, 1981
JUDGMENT M.P. Menon, J.
1. Defendants Nos. (1) and (2)in 0. S. No. 40/79 of the the Subordinate Judge's Court of Trivandrum are the revision petitioners. The first petitioner is a company and the second is its managing director. The plaintiffs in the suit are four shareholders. And what is challenged is an order disposing of issues (1) and (21) to (24) as preliminary issues. I will assume that the revision is maintainable.
2. The plaint allegations were these The 37th annual general meeting of the company was held after a lapse of 22 months from the date of the previous general meeting, in violation of Section 166 of the Companies Act. In October, 1978, the company had only one director, namely, the 2nd defendant. He co-opted defendants Nos. (3) to (-6) as additional directors; this was beyond his competence. The board so constituted called the 38th annual general meeting in December, 1978. The board was not competent to approve the balance-sheet and profit and loss accounts or to call the meeting. No proper notice was given to many members. Defendants Nos. (2) to (6) were indulging in fraudulent practice? detrimental to the interests of the company. Part of the company's business was transferred to another company of which the 2nd defendant's wife was the managing director. Funds were, diverted to still another company of which the 2nd defendant himself was the managing director. Manipulations were made in transferring agency business. Recoverable debts were written off as bad debts. Assets of, the company were transferred unauthorisedly and illegally. Defendants Nos. (2) to (6) were mismanaging the affairs of the company and oppressing the minority. The main reliefs claimed on the above allegations were :
(i) declare the co-option of defendants Nos. (3) to (6) as illegal and void ;
(ii) remove defendants Nos. (2) to (6) from the board of directors as unfit for holding office by reason of mismanagement, oppression and fraud ;
(iii) appoint an administrator till a legally constituted board is appointed ; and
(iv) declare the 37th and 38th annual general meetings and the decisions taken thereat as illegal and void.
3. It appears that leave was obtained for suing in a representative capacity under Order 1, Rule 8, CPC. It also appears that no evidence, oral or documentary, was adduced during the trial of the preliminary issues, and that the main point raised at the hearing was about the maintainability of the suit. At any rate, that is the only paint pressed before me.
4. The issues in question are the following :
1. Whether the suit is maintainable ?
21. Has the civil court jurisdiction to try the suit in view of the provision in the Companies Act ?
22. Whether there is proper publication under Rule 8 of Order 1, CPC?
23. Whether the plaintiffs are competent to challenge the validity of meetings and resolutions approved by the general body of the company ?
24. Whether the reliefs are properly valued ?
5. The learned subordinate judge held that issue No. 22 could not be tried as a preliminary issue. All other issues were held in favour of the plaintiffs.
6. Mr. Vyasan Potti for the revision petitioners contends that the court below should have dismissed the suit as not maintainable, on three alternate grounds:
(i) the Companies Act is a complete and self-contained code, and only the company court, in proceedings under the Act, could resolve disputes between a company and its members. The Act excludes the jurisdiction of the ordinary courts in all such matters;
(ii) the rule in Foss v. Harbottle [1843] 2 Hare 461 prevents courts from interfering with the internal management of a company; and
(iii) in view of Chap. VI of the Companies Act, any complaint against oppression and mismanagement at least could only be voiced before the company court or the Central Government, and not before the civil court.
7. I am dealing with these three contentions only from the point of view of maintainability of the suit in question, and I shall not be understood as holding that the powers of the ordinary courts are co-extensive with those of the company court or the Central Govt. under Sections 402 and 408 of the Companies Act, in the matter of granting relief.
8. The contention that the Companies Act is a complete and self-contained code has to be rejected outright, in view of the history and development of company law, and the indications available in the statute itself. A company is an association of persons for doing business and such associations were in existence in England at least by the end of the 16th century, long before any law relating to companies was placed on the statute book. They were a kind of a loose partnership or a quasi-partnership. The strict rules of partnership law under which each partner is an agent of the others could be applied only to small compact bodies where each member has trust and confidence in the others ; they could not be usefully applied to a more complicated form of association having larger and fluctuating membership. But men and women were doing business in that form and, therefore, the equity courts of England were applying the doctrine of trust to regulate their relationship. The first type of business organisation with the name "company" appended to it was formed by the merchant--adventures of England for trading overseas ; and they obtained charters from the Crown, conferring privileges of monopolistic trade. The members of these companies could carry on their trade privately also, but there was a "joint stock" to which they contributed. The joint stock and the profits made from it were being divided among the members at the end of each voyage. By agreement, the division became annual or once in three years later, and it was only after the middle of the 17th century that a "permanent joint stock" was conceived of. Still there was no distinction between unincorporated partnerships and incorporated companies ; many joint stock companies were originally formed as partnership by agreement under seal, providing for division of the undertaking into shares which were transferable. The failure of the "South Sea Company" and the defrauding of investors by similar ventures compelled Parliament, for the first time, to intervene by resolution of the House of Commons in April, 1720, declaring certain undertakings as illegal and void. That was the first attempt to legislate on companies, and its scope was severely limited to prevention of fraud, in certain areas alone. Business associations, whether known as companies or not, were in existence long before 1720 and a body of law regulating the relationship between their members had been built up even by that time. And, despite the resolution and the shadow of the South Sea Bubble, such associations continued to exist and flourish by what was called the method of "deed of settlement". Subscribers of capital would get together and agree to be associated in an enterprise with a prescribed joint stock divided into a specified number of shares. The "dead of settlement" would provide for the management of the stock by the committee of directors, and the vesting of joint stock property into a separate body of trustees, some of whom would be the directors themselves. Often, the trustees would be authorised to sue on behalf of the association or company ; and the equity courts permitted them to do so. The association was in law unincorporated, but the principles of trust conferred on it all the advantages of incorporation.
While debates continued about the legality of such associations, the realities of economic development and the ingenuity of lawyers continued to nourish their growth and expansion, till the Trading Companies Act of 1834 permitted the Crown, by letters patent, to confer the privileges of incorporation on such associations. Then came the Joint Stock Companies Act of 1844 providing for registration of companies. The Limited Liability Act of 1855, followed by the Joint Stock Companies Act of 1856, recognised the principle of limited liability, provided for mere registration, abolished the need for the deed of settlement, replacing it with the memorandum and articles of association, and also made provisions for winding up. Subsequent legislation in the field of company law has been directed towards imposing more restrictions and greater controls, and towards insisting on more publicity with a view to eschew fraud and underhand dealings.
9. The above history shows that legislation in the field of company law was only trying to keep pace with its development, stepping in to prevent malpractices in certain areas and providing for safeguards in others; there has never been an attempt to codify the entire law on the subject. In other words, the various enactments dealt with only certain aspects of the law relating to companies, and were never exhaustive. Gower in Principles of Modern Company Law, 4th Edn., pp. 8, 51, says:
"No attempt has ever been made to codify English company law. The Companies Act, 1948, was merely a consolidation of the existing statutory rules and as a result of subsequent legislation, notably the Acts -of 1967 and 1976, there is at present not even a complete consolidation. Behind the Acts is a general body of law and equity applying to all companies irrespective of their nature, and it is there that most of the fundamental principles will be found."
"As already pointed out, the Companies Acts are far from being a complete code and it would be misleading to give an impression that the major developments during the 19th century were entirely statutory. On the contrary, the courts, building on the foundations of partnership law, the law of corporations and statutes, had for the first time evolved a coherent and comprehensive body of company law. Many of the most fundamental principles were worked out by the courts with little or no help from the statutes and their decisions constitute landmarks which later Acts have done little to obliterate."
10. The long title to the Companies Act, 1956, recites it as "an Act to consolidate and amend the law relating to companies and certain other associations". A consolidating statute merely collects the statutory provisions relating to a particular topic and embodies it in one enactment, and it is different from a codifying statute designed to state the whole of the law upon a particular subject, including pre-existing statutory law and the common law rules. Parliament has attempted only to consolidate the law relating to companies; it has not attempted to codify. The position becomes clear if some of the Other provisions of the Act are examined. For example, Section 543 provides for misfeasance proceedings against promoters, directors, managers, etc., in the course of the winding-up of a company. What is misfeasance or breach of trust in the context ? The statute does not explain, and one has to travel outside the statutory provisions to learn what it is. Section 543 provides only a convenient remedy, to be availed of in the course of winding-up; the entire body of law relating to the fiduciary duties of directors and others stands outside its fold. Again, Section 155 empowers the company court in rectification proceedings to decide disputes regarding transfer of shares; but it is settled law that the jurisdiction of the' ordinary courts to deal with such disputes is not ousted thereby, because, after all, the dispute is about a contract though- subject to some statutory provisions. The broad contention that the Act is a complete code cannot, therefore, be, accepted, even if it is assumed that the effect of codification is to oust the jurisdiction of the ordinary courts.
11. Turning to the second contention based on Foss v. Harbottle [1843] 2 Hare 461, it is true that the courts do not interfere with the internal management of a company, at the instance of a minority of members dissatisfied with the conduct of its affairs by the majority. It is a good policy that management functions are left to those in management with the support of the majority and that the court's views are not imposed on them. And if it is a matter of policy only, that is, of reluctance to interfere with the right of the majority, no question of jurisdiction arises. The jurisdiction is there, but in its exercise, the court forges some fetters on itself. But the rule has no doubt been stretched further in some cases at least, the courts refusing to remedy wrongs done to the company unless the grievance is backed by the majority. The question then is one of locus standi, and the principle seems to be that the company, with a separate legal personality of its own, can alone complain of wrongs done to it. An action brought by a dissatisfied minority cannot be recognised as an action on behalf of the company. But the twin principles of majority rule and locus standi have always admitted of exceptions, as the case-law will reveal. An action by some of the members, notionally in the interests of all, to enforce the rules of conduct governing the conduct of the company's affairs, is a recognised exception to the first principle; and an action against third persons who have wronged the company, and where the plaintiffs are supposed to be the champions of the company's interest is an equally recognised exception to the second. In both these cases, the plaintiffs will be asserting their corporate rights in a representative capacity.
12. Suppose, for instance, that the directors of a company decide, with the Support of the majority, to use its funds for purposes not authorised by the memorandum and articles of association. The decision, if carried out, will not only be injurious to the company but also beyond its powers. It is settled law that in such an event, even a minority of shareholders can sue to restrain the company from giving effect to the decision. Ultra vires is the first and most well-recognised exception to the rule in Foss v. Harbottle [1843] 2 Hare 461. Again, take a case where the directors decide upon a course of action which is advantageous to themselves but injurious to the company. If the majority of the shareholders also support them, it will be a case where none will be able to prevent the mischief, if the locus standi principle is strictly enforced. But I, for one, would think that the directors in such a case are not acting as directors, but are wronging the company as third persons, and that a suit by a minority as champions of the company's interests would He. The minority's grievance, in such a case, would be that a fraud is being perpetrated, that they are being oppressed by lack of probity and fair dealing. In C.P. No. 1/79, R. Prakasam v. Sree Narayana Dharma Paripalana Yogam [1980] 50 Comp Cas 611, 616 (Ker). I had observed;
" ......there are recognised exceptions to the rule in Foss v. Harbottle [1843] 2 Hare 461. Even a majority resolution of the company not to sue may be of no avail against an action by members to restrain the commission of an ultra vires act, or an action to compel the directors to compensate the company for loss sustained by such acts. , Similarly, it is open for members to sue for restraining a threatened breach of the provisions of the memorandum or articles. A member can also seek a declaration against a resolution altering the memorandum or articles, though passed in proper form, on the ground that it is not in good faith for the benefit of the members as a whole. Again where a resolution is passed by a general meeting, when it should have been passed as a special or extraordinary resolution, its validity can likewise be challenged by the members. A representative action to restrain the company from doing an act contrary to the provisions of the Companies Act, or the general law, or from giving effect to an invalid decision of the general meeting, is also permissible. At the root of the above exceptions lies either a question of vires or contract, and the remedy is mostly to prevent a threatened act, and not to get undone something improperly done.
Apart from corporate rights which are but rights to get remedied wrongs done to a company, a member has also personal rights to sue for wrongs done to himself in his capacity as a member. These individual rights, stem partly from contract, express or implied, and partly from the general law. A contract is implied between a company and a member who joints it. And this gives him the right to have his name properly entered in the register of members with all correct particulars, to vote at meetings of members, to receive dividends and to have his capital returned to him in whole or in part, in the event of winding-up; and he can, therefore, sue for enforcing these rights. Under the general law, he has an individual right to restrain the company from doing ultra vires acts, to have a reasonable opportunity of attending and speaking at meetings, to move amendments at such meetings, to transfer his shares and not to have his financial obligations to the company increased without his consent. The Companies Act also gives him some personal rights such as rights to inspect documents, to get a share certificate issued and to appoint proxy at meetings. The Act, however, confers on him no general right to have all the provisions of the memorandum or articles duly observed, or to initiate action for violation of all the obligations the statute imposes on the company."
13. Tested in the above background, the reliefs claimed in the case on hand in so far as they relate to the validity of the 37th and 38th annual general meetings and the co-option of defendants Nos. (3) to (6) appear to be within the scope of a representative action recognised as an exception to the rule in Foss v. Barbottle [1843] 2 Hare 461. So too would be the complaint regarding oppression and mismanagement. Gower catalogues five classes of cases where a suit by a shareholder instead of by the company is considered permissible (pp. 644, 645):
" (i) When it is complained that the company is acting or proposing to act ultra vires,
(ii) When the act complained of, though not ultra vires the company, could be effective only if resolved upon by more than a simple majority vote, i. e., where a special or extraordinary resolution is required and (it is alleged) has not been validly passed,
(iii) Where it is alleged that the personal rights of the plaintiff shareholder have been infringed or are about to be infringed at any rate if the wrong to the plaintiff could not be rectified by an ordinary resolution of the company,
(iv) Where those who control the company are perpetrating a fraud on the minority,.. and
(v) Any other case where the interests of justice require that the general rule, requiring suit by a company, should be disregarded."
14. The decisions in Joseph v. Jos [1964] KLT 234 ; 34 Comp Cas 931 (Ker) and Star Tile Works v. N. Govindan, AIR 1959 Ker 254 also support the view that instances of the present kind are recognised exceptions to Foss v. Harbottle [1843] 2 Hare 461.
15. The last question is as to whether the provisions of Chap. VI of the Act exclude the jurisdiction of civil courts in matters relating to oppression and mismanagement. Section 397 provides that any members of a company having a grievance that its affairs are being conducted in a manner oppressive to them "may apply to the court for an order under this sub-section". Section 398 makes a like provision where the grievance is that the affairs are conducted in a manner prejudicial to the company's interests. But only a group of members having the specified voting strength under Section 399 could resort to these remedies. Section 408 empowers the Central Govt. also to grant some relief from oppression and mismanagement to the minority, but here again the application must be by a specified number of shareholders. If the argument on behalf of the defendants is that these statutory remedies exclude recourse to the ordinary courts, the short answer is that the plaintiffs here do not admittedly have the necessary voting strength to proceed under any of the three sections. Mr. Potti refers to the decision in Nava Samaj v. Civil fudge, AIR 1966 MP 286, wherein Dixit C. J. said thus (p. 290, Col. 2):
"Where a particular court is specified or a special tribunal is created, by or under the authority of an Act of Legislature, for the purpose of determining questions as to the rights which are the creation of the Act, then the jurisdiction of that court or tribunal is, unless otherwise provided, exclusive."
16. Apart from the circumstance that the other learned judge on the Bench was not pre-pared to go to that extent, it is doubtful whether the right to complain against oppression is a new creation of the Companies Act. If at all, the right created by the Act is to move the company court, and that right can be exercised only by the required number of shareholders joining together. The true question, it appears to me, is whether the scope of Chap. VI is only to provide a convenient remedy for the minority shareholders under certain conditions, or whether the provisions therein are intended to exclude all other remedies; and in order to incline to the latter view, I would require much more than a bare reference to a rule of construction about the creation of new jurisdictions. Suits by minority shareholders against oppression and mismanagement have been, as noticed earlier, a time-honoured exception to the rule in Foss v. Harbottle [1843] 2 Hare 461 and in the absence of Words expressly or clearly barring them, it is not possible to hold that Sections 397, 398 and 408 of the Companies Act exclude the jurisdiction of the ordinary courts.
17. All the three points urged on behalf of the petitioners thus fail, and the C.R.P. is dismissed without any order as to costs.