Karnataka High Court
Sri B.G. Somayaji And Another vs Karnataka Bank Ltd. And Another on 1 March, 1995
Equivalent citations: AIR1995KANT344, [1995]83COMPCAS649B(KAR), 1995(3)KARLJ71, AIR 1995 KARNATAKA 344, (1995) 83 COMCAS 649, (1995) 3 COMLJ 334, (1996) BANKJ 71
JUDGMENT
1. This is an appeal filed by two of the Directors of the Karnataka Bank Limited and is directed against an order dated 28-2-1995 on I.A. II whereby the learned trial Judge has declined to grant the application on the part of the appellants. The respondent No. 1 Bank has by a notice dated 27-1-1995 convened an extra-ordinary general meeting of the shareholders which is scheduled to be held on 2-3-1995 at 10.30 a.m. at Mangalore. The two appellants, who are directors of the bank had moved the trial Court principally on the ground that according to them there are certain irregularities/illegalities with regard to the convening of the general body meeting in question. Briefly stated, it is their contention, quite apart from certain mala fides which have been pleaded, that the requirements of law prescribe that the convening of such a meeting has to be accompanied by an explanatory statement which is provided for under S. 173 of the Companies Act. The appellants who are the plaintiffs before the trial Court, have stated that on 7-1-1995 the Chairman of the bank addressed a letter to the Reserve Bank of India, which admittedly is the supervisory authority wherein inter alia he has stated that the two appellants who are directors of the bank had indulged in certain acts which were very much against the interest of the of institution and for the reasons set out by him in that letter he had contended that they should be removed from the directorship of the bank. The plaintiffs' contention is that the R.B.I. has so far not responded to that letter nor has it taken any action as asked for and that therefore the Chairman of the Bank who is not well disposed towards them because of certain conflicts that are referred to in the plaint, is alleged to have instigated certain persons to convene the general body meeting for purposes of removing the plaintiffs from the directorship of the bank. According to them, the names of approximately three thousand shareholders who have signed the requisition for holding the general body meeting have not been disclosed and there is also an allegation in the correspondence exchanged that these so called signatures have been "obtained". That part of the controversy however is not of much consequence because the principal ground that was canvassed before the learned trial Judge effectively centres around the legality or the validity involved in the convening of the meeting. The mala fides and other surrounding circumstances are larger issues which the trial Court wilt subsequently look into. For purposes of the immediate interim order that was sought namely the stoppage of the holding of the extra-ordinary general meeting the plaintiffs essentially relied on the fact that a very cryptic explanatory statement has been annexed to the notice which states that the other directors have no interest in the item of business and only states that a requisition has been received for the convening of the meeting. A copy of the special notice has also been made part and parcel of the explanatory statement. That special notice set out four proposed resolutions for removal of four directors which includes the two present appellants. The special notice is silent with regard to the reasons or circumstances under which the removal is sought for.
2. The learned trial Judge after hearing the parties came to the conclusion that this was not a fit case in which ad interim orders for stoppage of the meeting are to be passed and therefore dismissed I.A. II. The present appeal is directed against that order. In view of the fact that the meeting is scheduled for tomorrow, an urgent application was made to this Court and the appeal was virtually taken up out of turn. The respondents are represented by Mr. Holla, the learned counsel and I have heard both the learned advocates on the question of whether to grant or refuse the interim relief prayed for.
3. I shall confine this order to the material aspects of the case only as the rest of the allegations and counter allegations and the defence thereof are something which the trial Court will look into and which I do not need to take cognizance of Mr. Raghavan, in support of application submitted that S. 173 of the Companies Act casts a statutory duty, not merely an obligation on the company convening a meeting of this type, to circulate to the shareholders an explanatory statement containing all materials facts that are relevant as far as the agenda of the meeting is concerned as also, from the point of view of the transmission to the shareholders, factual details for purposes of their coming to a right conclusion or decision with regard to the items on the agenda. In this regard, he has sought to place reliance on ajudgment of the Bombay High Court in the Firestone case reported in (1971) 41 Com Cas 377. The High Court had occasion to deal with various aspects of the law but as far as the requirements of Section 173 are concerned, the High Court reiterated the position that it is a mandatory requirement of law that all material facts as also the interests or otherwise of directors must be disclosed in the explanatory statement. The reason for this is obvious in so far as there would be a class of shareholders who on the basis of the data would like to decide on attending the meeting or not but more importantly as far as those who attend and participate are concerned, the law takes cognizance of the fact that they must be posted with enough material from which they would be able to ascertain as to what is the nature of the controversy on which their opinion or decision is sought. It is also necessary since it is a matter of importance touching the business of the company, that the shareholders be posted with enough factual data for purposes of arriving at a judgment in matters where decisions have to be taken. Mr. Raghavan submitted that on the facts of the present case admittedly the company had on record a letter dated 7-1-1995 concerning the very issue which is the subject matter of the E.G.M. and in fact the only matter that is on the agenda for this E.G.M. He produced a copy of that letter in support of his submisison that the Chairman of the bank reported to the R.B.I. certain specific acts, which he termed as acts of grave misconduct on the part of the two appellants and he also recommended that they should be removed from the directorship of the bank. Mr. Raghavan adverted to certain other averments in the plaint and in the correspondence and he submitted that having regard to the situation that prevails, that as far as the Chairman is concerned that he is very much and in fact (sic) and personally interested in the removal of the two appellants. According to Mr. Raghavan, it was incumbent on the part of the company to have mentioned these material facts in the explanatory statement. Having regard to the importance of the matter, it would have perhaps impelled several persons who would otherwise not have attended the meeting to do so (sic) but more importantly many of the shareholders would have a desire to know as to what are the charges against the appellants and what is the reaction of a senior persons like the. Chairman of the company to that situation. More importantly, the letter to the R.B.I. from the Chairman is an aspect of crucial importance because it is an official letter seeking the removal of the two appellants because the Chairman has come to the conclusion that their continuance on the board of the directors is contra indicated and not in the interest of the company. According to Mr. Raghavan, these are all very material aspects that could not and should not have been kept back from the shareholders. They were facts within the knowledge of the company and for this purpose will come within the ambit of the requirements of S. 173. It was very necessary that these material facts should have been disclosed.
4. Mr. Raghavan has also advanced certain other arguments with regard to the manner in which the E.G.M. ought to have been convened and it is his submission that it is not enough for one of the shareholders to have forwarded a requisition and to have annexed 381 pages (sic) to it but that it is a requirement of S. 169 that all the requisi-tionists should lodge the requisition with the company. To my mind, there is absolutely no substance in this objection for the simple reason that the law does not require duplication of a requisition. If a requisition is drafted out by any one of the shareholders who is entitled to ask for the holding of the meeting and even countersigned by the prescribed number of shareholders the lodging of that requisition document with the company is deemed compliance of S. 169. As far as this objection is concerned therefore I do not see any reason why it should be upheld.
5. Appearing on behalf of the respondents Mr. Holla submitted that the full facts have not been placed before the Court. With regard to the objection regarding the so called disclosure of material, Mr. Holla stated that the present appellants to whom a copy of the requisition was sent and who have taken part in the board meeting wherein the decision to convene the E.G.M. was taken, had themselves sent a detailed written explanation or reply setting out their side of the case. They had also requested that this should be circulated to all the shareholders and Mr. Holla stated that the bank has circulated to all the 28,000 shareholders printed copy of the reply/ explanation that was sent by the present appellants. It is his case therefore, that on the one hand the required material is now to the knowledge of the shareholders and he also advances the plea that under these circumstances the appellants are estopped from contending otherwise. As far as the plea of estoppel is concerned, there can be no such bar in situations of the present type. If the law permits a citizen to move a court for a relief merely because he might have tried some salvage operation at an earlier point of time it would not preclude him from the enforcement of a legal right, I do not propose therefore to deal with the aspect of estoppel.
6. Mr. Holla submitted that the ambit and scope of S. 169 of the Companies Act read with S. 173 have been the subject matter of several decisions. He drew my attention to the decision of the Supreme Court in the Escorts case . He laid particular emphasis on the Headnote G wherein the Supreme Court had occasion to observe that it is within the right of any shareholder to call for the convening of a special general meeting and that it is not obligatory on the part of the shareholder to set out grounds and explanations in support thereof. Mr. Holla's argument proceeds on the footing that since there is no obligation on the part of a shareholder or group of shareholders who asks for the convening of such a meeting to disclose the reasons therefore, that in such circumstances the company is relegated to the position of a post office. Learned advocate states that the only obligation on the part of the company in such circumstances is to make known to the shareholder through the explanatory statement a copy of the requisition and to mention that it is pursuant to such a requisition that the meeting is being held. In these circumstances, learned counsel submits that the bank has more than fully complied with the requirements of law. Mr. Holla also relied on a passage from Ramaiah which is extracted at p. 1094 wherein, the learned author has reproduced the ratio of the law as laid down in the Escorts case. Apart from this, Mr. Holla has drawn my attention to several other decisions and it is his contention that on the special facts of the present case the company has more than fully complied with what it was obliged to do.
7. Mr. Holla has thereafter drawn my attention to certain other parts of the record wherein he has contended that there exists more than enough justification as far as the present case is concerned for the shareholders to convene the present meeting. According to Mr. Holla, the company is shortly to go for a large public issue and that in these circumstances any adverse statements, publicity or material that is not condusive to the reputation and good name of the company or inter se disputes would affect the working, welfare and prospects of the company. Mr. Holla has submitted, that on facts this is a fit case in which even as far as the merits go, that this court should not intervene.
8. As regards the grant of a relief of the type that has been prayed for, Mr. Holla has relied significantly enough on an earlier decision of this Court reported in 1993 (2) Kar LJ 230 wherein, this very bank had come in appeal in somewhat similar circumstances. Mr. Holla has placed reliance on one part of the judgment wherein this Court has taken the view that it would not be open to a party to apply for an injunction for purposes of stopping a meeting of the present type. The learned Judge in that decision had considered the usual plea that is advanced in such cases namely the aspect of irreparable damage and injury and had negatived the plea principally on the ground that a person functioning as a director of a company does not virtually on the basis of the confidence that is reposed in him by the shareholders and at their will. If, therefore, for whatever reason, the shareholders propose to remove the person from the directorship, the learned Judge observed that it would not be open to him to argue that the damage to his reputation is something irreparable. The grant of interim relief in that case was therefore turned down. On an analogy, Mr. Holla, submits that the decision in this case apply on all fours to the present case and that consequently, this Court regardless of whatever technicalities are pleaded, should refuse to stop the meeting particularly since it is to be held tomorrow.
9. The next submission canvassed by Mr. Holla is that the appellants have moved this Court virtually at the zero hour. He states that the bank has a large number of shareholders approximately 28000 who are living all over the country and that in matters of importance such as the present one that the attendance is reasonably high. He points out that even as far as the similar meetings are concerned that a couple of thousand shareholders had physcially attended the meeting and under these circumstances quite apart from the expenditure incurred by the bank, that very serious loss, inconvenience and harassment would be caused to the shareholders if there is a last minute stoppage. He submits that in the decision referred to in Datar's case, this Court has held that the overriding consideration which would weigh with the court in such cases is a question as to how much of damage should be prevented by refusal of an interim relief. In this regard, he has drawn my attention to one more decision of this Court reported in 1977 (2) KLJ 266 in the case of Poorna Investments. This Court on that occasion had gone into an in-depth consideration of the aspect of balance of convenience. The Court took the view that in situation of this type, where at the eleventh hour a general body meeting is sought to be stopped that the balance of convenience lies heavily on the side of the party convening the meeting and that regardless of the amount of damage that is alleged, that the Court should refuse to stop the meeting. On the basis of these submissions, learned advocate contended that quite apart from the merits of the matter, that even the aspect of balance of convenience lies heavily in favour of the respondents and that consequently, no relief should be granted to them.
10. In the light of the aforesaid position, the short question that requires to be considered is as to whether any breach as alleged has been committed, if so how serious is that breach, what is the effect thereof and whether, assuming such a breach has been committed whether it is so fundamental and whether it is grave enough to warrant the stoppage of the E.G.M. tomorrow. As far as this aspect of the matter is concerned, I need to take cognizance of certain features that are special to the facts of this case. One cannot go by generalised propositions nor can an issue be decided in a vacuum. On the facts of the case before me, the sole business at the meeting is the removal of the two directros of the bank. This is an aspect of seriousness because in the first instance (sic) it would reflect on the bank itself that two of the directors were virtually removed by the shareholders if this is (sic) Secondly, the law also takes serious note of the rights of the directors themselves who are the aggrieved and the affected parties. In the case of removal of directors in circumstances such as the present ones, the act is on par with and tantamount to a situation of dismissal from office. The repurcussions of such an action are very grave and very far reaching in a given situation where it is warranted such action is very necessary but where the shareholders of a company are called upon to adjudicate on an issue on whether directors should be dismissed from office or not. To my mind the shareholders must be posted with all the necessary material that concerns the issue in the present instance. It is true that the requisitionists have not set out any of the grounds on which they want E.G.M. to be convened. That matter however does not rest there because admittedly, the company has on record a document of importance namely a letter dated 7-1-1995 addressed by the Chairman of the company to the Reserve Bank of India which is the officially designated statutory and supervisory authority wherein he has set out certain grounds in support of his application that the appellants should be removed from the directorship of the bank. If the appellants justifiably need to be removed from the directorship, this letter is of paramount importance. If on the other hand, the shareholders desire to fairly adjudicate on the question as to whether there is justification to take the step of dismissing them from the office, it is equally necessary that they should be made known of what exactly the allegations or the charges against the appellants are. The basic principles of natural justice that will guide most of such situations or almost all of them would apply even in a situtation of the present type. The company in the present instance had on record this particular document and there is no reason set out as to why there is not even a reference to it in the explanatory statement. It is a short letter. On the other hand, if the company desires to place the material before the shareholders without commenting as it is required to do, it could have easily annexed a copy of the letter to the explanatory statement or could have set out the gist thereof. An interested shareholder would have been in a position to acquaint himself with the aspect of what exactly the seriousness of the matter was. To my mind, this is a requirement of law and the company has failed to comply with this requirement. It is not a mere obligation. It is not optional but it is compulsory and the Courts while interpreting Section 173 have unequivocaly held so. Even in the headnote G of the Escorts case referred to supra, the Court has specified that this is a requirement of law and has amplified it to state that it is a requirement that is cast on the company. Under these circumstances it was absolutely necessary that this material should have been disclosed. I have no hesitation in holding that this particular information or these facts constitute what Section 173 refers to as material facts. In the Firestone case also referred to supra, the Court has in some detail referred to this requirement and has once again reiterated the position that it is an express requirement of the law.
11. The question arises as to what is the effect of such non-disclosure. Mr. Holla has advanced the plea that it is curable in so far as since the respondents themselves have circulated an explanatory statement, that the shareholders are in fact posted with the requisite facts and knowledge and that therefore the so called lacuna is not existing in this case. I am unable to accept this argument because what has been circulated by the appellants is their side of the dispute or their defence to the proposed action or the charges. A shareholder who reads this explanation would get a totally lop-sided view of the controversy. On the contrary, he would be left with only one side of the version and thereafter be relegated to a position (where in he) would be hurriedly required to make up his mind at the meeting on the basis of whatever is stated there. That unfortunately is not the scheme of the law. The purpose of circulating an explanatory statement is in order to give the shareholders enough time to consider and reflect on the subject matter of the agenda. There is also an additional reason for it namely the fact that after going through the explanatory statement it is often open to the shareholder to call for or inspect additional material prior to the holding of the meeting. The sum total of the situation can be summarised in so far as in the absence of requisite material made available the shareholder is hereby handicapped and he is not fully equipped to take a fair decision with regard to the important issues that are the subject matter of the meeting. In these circumstances in my view we are left with a situation whereby if the meeting were to be held on 2-3-1995 in the background that is disclosed to the Court, it would be abundantly clear that the shareholders will be required to take a decision in the absence of a full and proper consideration of material facts. Such a decision would neither be in the interest of the company but more importantly, it could be highly damaging to the present appellants. It would be contrary to the scheme of the law which requires that such decision must be taken after a complete study of all the material that is relevant. (sic.)
12. The aspect of balance of convenience is one of paramount importance. I do not dispute the fact that in the majority of cases of Court will refuse relief even if a case is made out if it is pointed out that heavy damage would be caused if that relief is granted. In the present case, it is demonstrated that the meeting is scheduled for tomorrow, that the company has spent a large amount of money for purposes of holding of the meeting and further more that serious inconvenience will be caused to the shareholders as it is too late now to intimate them that the meeting is either postponed or cancelled. The sum total of this situation represents a certain degree of financial loss. That is a consideration of consequence but on the other hand I need to take note of the fact that the appellants are gravely exposed to a situation whereby some wrong or reckless decision could be taken at the meeting only because of the fact that the shareholders were not posted with all the material. The damage to the appellants and the consequent damage to the company and the subsequent consequences thereof to my mind completely and totally outweigh whatever financial loss the postponement or revocation of the meeting may entail. In my considered view, the balance of convenience also lies very much in favour of the present appellants.
13. The present appeal is only for the limited relief as far as the holding of the meeting on 2-3-1995 is concerned. To my mind, the appellants qualify for such a relief. The appeal is accordingly allowed. The respondents are accordingly restrained from holding an extraordinary general meeting of the first respondent company on 2-3-1995 or on an adjourned date unless and until they fully and completely comply with the requirement of law. At this stage, Mr. Holla points out to the Court that the respondents would like to take the matter higher and since, the appellants have virtually moved this Court at the last minute and since he does not have a copy of even the operative part of this judgment, that there is virtually no scope for him to obtain urgent orders from the Supreme Court. His first submission is that the order should be stayed for a reasonable time in order to enable him to consider his position. As far as this aspect of the matter is concerned since the meeting is to be held tomorrow, the effect of any order of stay would be that this Court would be overruling its own decision. In sum and substance, the view taken by this Court is that the notice convening the meeting is bad in law as the explanatory statement communicating the notice does not set out the requisite material that the law obligates. There are also subsidiary reasons why this Court has taken the view that in the present situation the holding of such a meeting is not fair. Under these circumstances, the application for stay of the order is rejected.
14. Mr. Holla has thereafter submitted that respondent No. 1 desires to take the matter higher and in the event of the appeal Court either staying or setting aside this order, that the company would be put to serious loss, inconvenience and time delay by having to issue a fresh notice and reconvene the meeting. Under these circumstances, he submits that since in effect this Court has taken the view that the meeting ought not to be held, that the Court should permit the meeting convened for tomorrow to be adjourned pending further orders to be passed by the appeal Court. Mr. Raghavan has vehemently opposed this application because according to him, since this Court has held that the notice itself is bad in law, that the meeting itself is virtually non est and consequently no garb of legality can be injected into it by seeking to adjourn it. I see considerable justification in the plea put forward by learned advocate who appears for the respondent in so far as it is true that they are left with virtually no time to approach the appeal Court but more importantly because appellants in the event of the appeal Court taking a view contrary to the one which this Court has taken, the respondent No. 1 company should in that event not be subjected to the lengthy and expensive exercise of reconvening the meeting. It shall therefore be permissible for them to adjourn the meeting for such period of time as they consider reasonable to approach the appeal Court. If the appeal Court grants permission to either to hold the same meeting or to continue with it, the respondents shall be entitled to do so. On the contrary, if the appeal Court were to confirm the view of this Court, the question of reconvening the meeting will not arise. The second application made by Mr. Holla is accordingly granted and respondent No. I is permitted to adjourn the meeting covnened for 2-3-1995. The Appeal is allowed, the injugued order is set aside. No costs.
15. Appeal allowed.