Madras High Court
M.C. Duraiswami vs Sakthi Sugars Ltd. on 14 June, 1978
JUDGMENT Ismail, J.
1. This is an appeal preferred by the petitioner in Company Petition No. 9 of 1976 against the order of Ramaprasada Rao J., as he then was, dated 25th August, 1977, dismissing the said petition. That petition was purported to be one under Sections 397 and 398 of the Companies Act, 1956, hereinafter referred to as " the Act", and it prayed for the following reliefs:
(a) an order suspending the powers of the board of directors of the company and the appointment of an administrator to take charge of the affairs of the company ;
(b) to order an investigation into the affairs Of the company as to the diversion of the funds of the company into the several organisations mentioned therein ;
(c) to order an investigation into the fraudulent inducement (?) of the funds belonging to the canegrower-ryots who supplied sugarcane to the company into shares of the companies named therein ;
(d) to order an investigation into any matter into the affairs of the company as the court may deem fit;
(e) to direct such persons as the court may find responsible for the loss occasioned to the company to make good the same ;
(f) to direct the shifting of the registered office of the company to Erode or to Appakkadal;
(g) to pass such orders on the basis of the result of investigation ; and
(h) to order costs of the petition.
2. The appellant herein purported to file along with the petition, a letter of consent signed by 147 shareholders similar to the appellant herein, in order to satisfy the requirements of Section 399 of the Act. One of the objections taken by the company in the nature of preliminary objection was that the present petition under Sections 397 and 398 of the Act was not maintainable as it violated one of the conditions precedent prescribed in the statute itself not only for its validity but also for its maintainability. In support of this objection, 73 affidavits sworn to by 73 out of 147 persons whose signatures found a place in the annexure to the petition were filed. The contention in those affidavits was that they were asked by the appellant herein that, as an extraordinary general meeting was to be called for in connection with the fixation of cane price, they should sign a letter or statement of consent to that effect and that it was in that context that they signed the paper placed before them by the appellant herein ; that they never gave consent to a company petition being instituted by the appellant herein ; that they had signed the annexure on misrepresentations and that there was no consensus as between them and the appellant in the matter of the real scope and content of the petition. In some of the affidavits it was also stated that they understood the appellant to mean that an extraordinary general meeting was being called for the purpose of requesting the company to review the cane price and that it was in pursuance of such representation that they affixed their signatures on the document. The learned judge, after taking into account these affidavits as well as the requirements of Sections 397, 398 and 399 of the Act, held that the petition was not maintainable and dismissed the same. It is the correctness of this conclusion that is challenged before us.
3. Sections 397, 398 and 399 of the Act read as follows :
" 397. (1) Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including anyone or more of themselves) may apply to the court for an order under this section, provided such members have a right so to apply in virtue of Section 399.
(2) If, on any application under Sub-section (1), the court is of opinion-
(a) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members ; and
(b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up ;
the court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit. "
" 398. (1) Any members of a company who complain-
(a) that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or
(b) that a material change (not being a change brought about by, or in the interests of, any creditors including debentureholders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its board of directors, or of its managing agent or secretaries and treasurers or manager, or in the constitution or control of the firm or body corporate acting as its managing agent or secretaries and treasurers, or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company ;
may apply to the court for an order under this section, provided such members have a right so to apply in virtue of Section 399.
(2) If, on any application under Sub-section (1), the court is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the court may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit. "
" 399. (1) The following members of a company shall have the right to apply under Section 397 or 398 :--
(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares ;
(b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members.
(2) For the purposes of Sub-section (1), where any share or shares are held by two or more persons jointly, they shall be counted only as one member.
(3) Where any members of a company are entitled to make an appli cation in virtue of Sub-section (1) any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.
(4) The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to the court under Section 397 or 398, notwithstanding that the requirements of Clause (a) or Clause (b), as the case may be, of Sub-section (1) are not fulfilled.
(5) The Central Government may, before authorising any member or members as aforesaid, require such member or members to give security for such amount as the Central Government may deem reasonable, for the payment of any costs which the court dealing with the application may order such member or members to pay to any other person or persons who are parties to the application. "
4. A perusal of Section 397(1) of the Act will show that a petition filed thereunder may be based on a complaint that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members including any one or more of themselves. Thus, it will be clear that the foundation of a petition under Section 397(1) will be the allegation or complaint that the affairs of the company were being conducted in a manner prejudicial to public interest which will necessarily and naturally involve giving particulars as to how it was prejudicial to public interest. Similarly, an averment or allegation as to the affairs of the company being conducted in a manner oppressive to any member or members must necessarily involve giving of particulars as to what constituted " oppressive manner ". Section 398(1) of the Act, in its turn, contemplates a complaint that the affairs of the company were being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company. In fact, "in a manner prejudicial to public interest" is common to both Sections 397(1) and 398(1) of the Act. On the other hand, the second alternative under Section 398(1), namely, " in a manner prejudicial to the interest of the company " does not find a place in Section 397(1). Section 398(1)(b) refers to yet another ground, namely, a material change having taken place in the management or control of the company. Thus, Section 397(1) contemplates making of two types of complaints, namely :
(1) that the affairs of the company are being conducted in a manner prejudicial to public interest ; and (2) that the affairs of the company are being conducted in a manner oppressive to any member or members. Section 398(1) in its turn contemplates three different complaints, one of them being, namely, that the affairs of the company are being conducted in a manner prejudicial to public interest being common to Section 397(1) and Section 398(1) of the Act and the other two being that the affairs of the company are being conducted in a manner prejudicial to the interests of the company and that a material change has taken place in the management or control of the company. Consequently, for any petition to be filed under Section 397 or Section 398 or under both, it is necessary that the petition should make a reference to any one of these complaints as the foundation for invoking the jurisdiction of the court under the relevant sections.
5. It is against the background of these requirements that we will have to see what constitutes " consent in writing " as contemplated by Section 399(3) of the Act.
6. From the very nature of the case, "consent in writing" contemplated in Section 399(3) of the Act is a consent to the filing of a particular petition with a particular allegation for a particular relief under Section 397 or Section 398 or under both. There cannot be a blanket consent like a certain member or members consenting to some other member filing a petition under Section 397 or Section 398 or under both. In this particular case, the annexure to the petition filed by the appellant contains the following statement :
" We, the undersigned, the members of Sakthi Sugars Limited, whose particulars are given below give consent for M. C. Duraiswamy (the appellant herein) a member of the company for filing a petition in the High Court of Judicature at Madras on their behalf under Sections 397 and 398 of the Companies Act of 1956. "
7. Below this, the following particulars are found, namely, name of the member, address of the member, number of shares held by him, whether all the calls/other dues on the shares have been paid or not and the signature. The question for consideration is, whether such a consent satisfies the requirements of Section 399(3) of the Act or not.
8. We are of the opinion that for the reasons mentioned above, such a consent cannot be said to be a valid consent as contemplated by Section 399(3) of the Act. Before a member can be said to have consented to a particular action, the said member should have known what was the action to be taken, what was the relief to be prayed for and what was the ground to be urged in support of the relief claimed. It is one thing to say that the member who gives consent should have applied his mind to the question before him before giving consent; it is another thing to say that before a member gives his consent, the actual petition prepared, to be filed, must be before him. It is in this context that a reference to the decision of the Calcutta High Court very strongly relied on by the learned counsel for the appellant becomes relevant. That decision is In re Bengal Luxmi Cotton Mills Ltd. [1965] 35 Comp Cas 187. At page 199 of that report, the following passage occurs:
" As to the meaning and import of consent by members of a company, a reference should be made to the decision of the Allahabad High Court in Makhan Lal Jain v. Amrit Banaspati Co. Ltd. [1953] 23 Comp Cas 100, which was relied upon by Mr. B. Sen in support of his argument that consent in writing meant consent given by the members after the petition was made ready. In that case while dealing with the meaning of the phrase ' consent in writing ' as required by Section 153C and Section 153D of the Indian Companies Act, 1913, it was held that ' consent in writing ' implied that the persons who gave the consent had applied their minds to the question before them, and had given their consent to certain action being taken. Mr. S. Sen, however, relying upon this decision, argued that consent in writing was not consent to the petition, but a consent to certain action being taken, namely, an application under Section 397 and Section 398 of the Act. It was not necessary, Mr. S. Sen submitted, that the petition should be before the members who were giving their consent. It was enough if the consenting members had considered the question of a petition being moved under Section 397 and Section 398. In my opinion, Mr. S. Sen's contention that Section 399 does not require that the consenting members should have the petition before them before they give their consent, is sound. There is nothing in Section 399 or in Rule 88 to indicate that the members giving their consent should have the petition before them, and, for that purpose, the petition should be prepared well in advance of the consent in writing given by the members ".
9. We are of the opinion that the above observations of the Calcutta High Court do not support the claim of the appellant at all in the present case. The above observations have laid down a limited rule on the basis of the contention advanced before the court. The contention advanced was that before the members give their consent, they should have the petition before them and for that purpose the petition should be prepared well in advance of the consent in writing given by the members. We are of the opinion that the decision of the Calcutta High Court, if we may say so with respect, is correct. But that is far different from stating that the consenting members need not know anything about what the petition should contain. In fact, when the language used is, " they should have applied their minds to the question before them ", it necessarily implies that the application of the mind was to the particular relief sought to be prayed and the ground on which that relief was sought to be prayed. A mere consent for filing an application under Section 397 or Section 398 or under both, without any particular, such as the nature of the allegation or complaint to be made in the petition and the nature of the relief sought to be claimed in the petition, cannot be the result of an application of the mind to the question before them and, therefore, such a consent cannot be a valid consent. It is this point that has been stressed by Ramaprasada Rao J., as he then was, in the present case. The learned judge after extracting the relevant provisions of law, has pointed out:
" ' consent' used in this Act could be interpreted in the same sense as ' consent' defined in the Indian Contract Act, which means that one or more persons are said to consent when they agree upon the same thing in the same sense. In my view, the consent that is required, which has to be obviously in writing, should be such that there should be prima facie proof that the shareholders who get themselves involved in petitions under Sections 397 and 398 should give the impression to a reasonable mind that they applied their minds and gave the consent for the filing of a particular application for a particular relief under Section 397 and/or Section 398....
To give consent means that there was consensus ad idem between the sponsor or promoter and the other named shareholders in the annexure in the matter of the presentation of a particular petition with particular allegations and complaints against the company under Sections 397 and 398 of the Act."
10. If we may say so with respect, the above statements correctly represent the legal requirements as explained by us already. The learned judge actually recorded a finding by stating :
" In the instant case, I have perused the annexure to the petition which was obviously filed in compliance with rule 88 and Form No. 43 prescribed thereunder. That gives the impression that the signatories thereto have mechanically subscribed their signatures to it and one does not gain the reasonable impression that they applied their minds to it. "
11. Here again we may point out that a perusal of the annexure can lead only to that inference and nothing else. The said annexure itself shows that many persons have signed their names only in Tamil and some others have affixed only their thumb impressions and it is reasonable to infer that they could not have understood what has been typed in English on the top of the said annexure.
12. The expression " consent in writing " occurring in Section 399(3) of the Act will have to be read in the context of the provisions contained in Section 399(1). Section 399(1)(a) contemplates not less than 100 members of the company filing the application. Instead of all such members signing the application and pursuing the application in court by taking all the trouble, Parliament thus provided for a procedural facility in Sub-section (2) of Section 399. The expression occurring in Section 399(3) is that:
"......any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them. "
13. Consequently, the appellant in the present case was purporting to file the application on behalf of and for the benefit of all the 147 persons who figured in the annexure. From this it necessarily follows that the said 147 persons must know what exactly the appellant was doing and that he was acting for their benefit. They can know this only if they know what was the actual ground to be put forward for invoking the jurisdiction of the court under Section 397 or Section 398 or both and what was the relief proposed to be claimed in the petition. Therefore, the consent contemplated under Section 399(3) is an intelligent consent, in the sense, a consent given for the purpose of making a particular allegation in the petition and for the purpose of claiming a particular relief therein and, therefore, a blanket consent as in the present case cannot be a consent as contemplated by Section 399(3). Thus, a combined reading of Section 399(1) and (3) will also reinforce the conclusions we have already reached.
14. Under these circumstances, it is clear that the requirements of Section 399(3) of the Act are not satisfied and, therefore, the company petition filed by the appellant herein was not maintainable and consequently was rightly dismissed.
15. In this view, it is unnecessary to consider the effect of the affidavits filed by 73 out of the 147 persons who have subscribed their signatures to the annexure to the petition.
Consequently, there is no substance in the appeal and the same is dismissed.