Company Law Board
L. Rama Subbu And Anr. vs Madura College Board on 10 February, 1998
Equivalent citations: [1998]93COMPCAS246(CLB)
JUDGMENT
1. This is a petition filed by the petitioners under Sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as "the Act"), for declaration that the deletion of Articles 8 and 9 of the articles of association of the company in terms of the resolution passed in the general body meeting of the company held on March 14, 1992, is illegal and void and for restoration of the said Articles 8 and 9.
2. The respondent company was incorporated under the provisions of the Indian Companies Act, 1882, on June 9, 1905, with its registered office at Madurai, Madras (now called Tamil Nadu). The company is limited by guarantee.
3. The main objects of the company are promotion of Hindu religion and Hindu culture, Hindu civilisation and educational institutions. The company is a non-profit-making body and has obtained a licence under Section 25 of the Act.
4. The articles of association of the company provide for control and management of Madura College and other educational institutions. The qualifications for members are prescribed in the articles which are revised from time to time. Under the articles any person seeking admission should be a Hindu by birth or religion or sympathetic towards the ideals of Hindu religion, culture and civilisation and shall pay, on admission, a life subscription of Rs. 250 now increased to Rs. 500. A member possessing prescribed qualifications is admitted by a three-fourths majority of members present at the meeting of the company or by a majority of three-fifths of the total number of votes polled in the event of circulation by the executive committee. The executive committee may invite persons of distinction to become a member and in such event the invitee need not pay the life subscription.
5. It is stated by the petitioners that in 1935, the company had certain financial difficulties resulting in the introduction of patron members by amendment of articles. According to Articles 8 and 9, as was in force prior to their deletion, any person donating Rs. 25,000 for the benefit of the college would be invited by the executive committee to become a patron of the college and all such persons would become members of the board and governing body without being admitted as members of the College Board. It is stated that at present the total strength of membership with the company is 66. In or about April, 1992, Messrs. R. Shankar, R. Satya-moorthy and the first petitioners were admitted to the board of directors of the company on donating Rs. 25,000 each to the company.
6. In the meantime, the respondent company in its annual general body meeting held on March 14, 1992, attended by 21 members, passed a resolution deleting Articles 8 and 9 thereby abolishing the clause of patron members. It is claimed, however, by the petitioners that that the petitioners could not attend the meeting and came to know thereafter that the said two Articles 8 and 9 were deleted by resolution taken in the said annual general meeting.
7. One Shri R. Lakshmipathi challenged the said deletion of the said Articles 8 and'9 by filing a suit, being a Suit O. S. No. 609 of 1992, in the court of the Subordinate Judge at Madurai, and obtained an order of injunction restraining the company from admitting new members pending disposal of the suit. The said suit was recently dismissed by the court and the appeal preferred therefrom also withdrawn. Thereafter, this present petition is filed under Sections 397 and 398 of the Act by the petitioners. The petitioners claim that they were not the parties in the said suit. The petitioners, inter alia, contend in this petition that the deletion of the said two articles is oppressive to the members. This petition has been filed with the support and consent letters of nine other members meeting the requirements of Section 399 of the Act.
8. The company, the respondents in this proceeding, has filed its affidavit-in-reply. The respondent state that the company is running the following educational institutions :
(i) Madura College,
(ii) Madura College Higher Secondary School,
(iii) Setupati Higher Secondary School, and
(iv) Town Primary School.
9. It is claimed by the respondent company that it has a strength of 51 members and there are 15 vacancies caused by death and retirement of members. Between October, 1985, and 1988, four vacancies arose on account of demise of certain members. It is alleged by the respondent company that, as is the fact, the board of directors of the company in its meeting held on January 31, 1988, admitted Shri R. Shankar, Shri L. Ramasubbu, Shri Ashok Muthanna and Shri R. Satyamoorthy and it is claimed that they are related to the then secretary. It is further claimed that the said four persons were admitted as patron members invoking Articles 8 and 9 on payment of Rs. 25,000 each by way of donation and that was done in spite of objections raised by ten other members by their letter dated January 24, 1988.
10. It is stated in the reply that the company thereafter realised the possible misuse of Articles 8 and 9 and in its annual general meeting held on March 14, 1992, deleted the said Articles 8 and 9. It claimed that the meeting was attended by 22 members who unanimously passed the resolution deleting the said two articles. It is contended on behalf of the respondent company that the said deletion of Articles 8 and 9 was challenged by R. Lakshmipathi, the father of the first petitioner, in a civil suit which was later dismissed in June, 1996. It is further contended that the grounds taken in this petition challenging the deletion of said two articles were more or less same taken in the said suit filed by the first petitioner's father and the said suit according to the company was dismissed in June, 1996. It is, therefore, contended on behalf of the company that the same issue cannot be agitated twice by filing a petition before the Company Law Board in the present proceedings.
11. It is further contended on behalf of the respondent company that the said deletion was made as early as on March 14, 1992, but the petitioners have chosen to approach the Company Law Board after five years in June, 1997, after exhausting the remedy of filing a suit through the first petitioner's father. It is the further contention on behalf of the respondent company that the petitioners had not explained the delay between March, 1992, and June, 1997, and the petition is, therefore, liable to be dismissed in limine on the grounds of delay and laches. It is claimed by the respondent company that the first petitioner and his father are residing in the same house and the petitioners in collusion with the first petitioner's father have filed this present petition.
12. The respondent company has also challenged the maintainability of the petition by contending that out of nine members who have consented to the filing of the present petition, Shri N. M. R. Krishnamoorthy, Shri N. Ganapathy Subramaniam and Shri K. S. Venkateswaran had participated in the annual general body meeting held on March 14, 1992, and they were parties to the said unanimous resolution taken in the said annual general meeting deleting the said two Articles 8 and 9. It is, therefore, submitted on behalf of the respondent company that if those three members are taken out from the category of the said nine members then the requirement under Section 399 of the Act is not fulfilled before filing this petition. It is also submitted that the said three members have not explained in their respective letters of consent as to what made them reverse their earlier stand. The company, therefore, submits that the petition on this ground alone is not maintainable and should be dismissed in limine.
13. The petitioners in their rejoinder have stated that the said four members who are admitted as patron members under the said Articles 8 and 9 as were then in force and such induction of members was in the interest of the company. The petitioners have also stated that the secretary is not the sole admitting authority and the respondent company has not disclosed as to who were those ten members protesting against the admission of the said four patron members in the year 1988, and the company has also not disclosed in this proceeding the said letter alleged to have been made by ten other members.
14. Regarding the contention of the company that the subject-matter of the present petition is the same as in the said suit and that after exhausting the remedies in the civil court the present petitioners cannot approach this Bench with a petition made under Sections 397 and 398 of the Act, it is the submission of the petitioners that the present petitioners were not parties to the said suit and the findings in the said suit as to the validity of the said resolution deleting the said Articles 8 and 9 are not binding on the present petitioners and the filing of the said suit cannot be taken as a bar to the filing of the present petition.
15. Shri Harikrishnan, learned senior counsel appearing on behalf of the petitioners, reiterated the submissions made in the petition. Learned senior counsel narrating the history of the company as also the financial position of the company has submitted that the provision of patron member as contemplated by the said Articles 8 and 9 would facilitate introducing persons of calibre and substance on the board without undergoing the process of seeking consensus of the general body. Learned counsel further submits that the said two articles were there to induct men of status and position and by so inducting the members from the public on payment of Rs. 25,000 by each member, the company would generate adequate finances for fulfilling the objects of the company. It is, therefore, strenuously contended by Mr. Harikrishnan, learned senior counsel that the said deletion of Articles 8 and 9 would adversely affect the monetary benefits and participation of persons of substance. Learned counsel contends that the company is a non-profit-making body in the nature of a public trust and the main object of the company is to further the noble objects as contemplated in the objects clause. It is submitted by learned counsel in furtherance of his argument that the said deletion of Articles 8 and 9 as approved in the general body meeting of the company would debar the company from achieving its objects in the nature of public trust and also would interfere with the interests of the members of the company in the pursuit of the noble objects of the company. It is further contended by learned senior counsel appearing on behalf of the petitioners that deletion is against the public interest of the company when the company has to look after the welfare of a large number of students and the development of the Hindu religion as also the advancement of Hindu culture and tradition.
16. Learned counsel for the petitioner, Mr. Harikrishnan, has also submitted that the said three members. K. S. Venkateswaran, N. M. R. Krishnamoorthy and N. Ganapathy Subramanian, having been parties to the said resolution passed on March 14, 1992, deleting Articles 8 and 9, are not estopped from challenging the said resolution by giving consent to the filing of the present petition under Sections 397 and 398 of the Act. Learned counsel has also submitted that the first petitioner was not aware of the said civil suit although he happens to be residing with his father in the same house and just by such chance residence it could not be presumed that there has been any collusion between the first petitioner and his father.
17. Shri Arvind P. Datar, learned counsel for the company, submits that admission of members rests with the general body under Articles 6 and 7 of the articles of association of the company. But the admission of patron members under Articles 8 and 9 rested with the executive committee of the company. He contends that the company's interests should be looked into by the general body of shareholders and invocation of Articles 8 and 9 by inducting some patron members at the behest of some interested members of the executive committee would only further the interest of some of the influential members of the executive committee as has been done in the present case. It is the submission on behalf of the company that this sort of anomaly or discretion should be done away with. Learned counsel for the company submits that the resolution deleting the Articles 8 and 9 was unanimous and fulfilled all the statutory requirements. It is the further submission by learned counsel appearing on behalf of the company that the purpose of the said resolution was to shift the rights and responsibilities from the executive committee to the general body and the general body comprises 66 members at present. It is the submission of learned counsel that a member can seek admission through Articles 6 and 7 if he has the approval of three-fourths or at least a three-fifths majority and not otherwise, whereas any induction of so called "patron members" on payment of Rs. 25,000 under the said Articles 8 and 9 could be made without the approval of the general body of members and the majority of members had no say in this mode of induction and that, according to learned counsel for the company, itself goes against the public interest as also interest of the general body members of the company.
18. Learned counsel for the company submits that in any event the said deletion of Articles 8 and 9 is to take effect prospectively and the induction of persons on the executive committee already made under the said Articles 8 and 9 would not in any way affect the interest of the petitioners nor any one of the existing members of the company. In dealing with the contentions made on behalf of the petitioners that the said provisions under Articles 8 and 9 should be preserved in the interests of the company as the induction of members under the said two articles on payment of Rs. 25,000 each would procure substantial monetary benefits to the company, learned counsel, Shri Datar, on behalf of the company, contends that the factual position would be otherwise as the income of the company at present varies from Rs. 1.50 crores to Rs. 2.26 crores during the period from 1990-91 to 1994-95 and the company is now in better form from the financial point of view.
19. Lastly, Shri Datar, learned counsel for the company, contends that three of the nine consentors were parties to the said resolution dated March 14, 1992, deleting the said Articles 8 and 9 and now their consent to the filing of the present petition challenging the said resolution is not valid in the eye of law and such consent given by the said three members should not be taken into account while considering the requisite shareholding under Section 399 of the Act, for maintaining this petition under Sections 397 and 398 of the Act. In the submission of Mr. Datar, if the said three members are taken out from the category of consenting members, then the petitioners failed to have their requisite shareholding as contemplated by Section 399 of the Act and the petition should fail on that ground. Learned counsel has also contended that the petitioners have slept over their alleged right in challenging the said resolution dated March 14, 1'992, deleting Articles 8 and 9 for five full years and there has been no explanation as to the delay in making the present petition. So, according to Shri Datar, the petition is also liable to be dismissed on the ground of delay and laches on the part of the petitioners.
20. Shri N. Venkataraman, the learned advocate following Shri Datar, has submitted that the patron members even under the provisions of Articles 6 and 7 of the articles of the company can be elected on contribution of Rs. 25,000 each when there is no maximum amount fixed by Articles 6 and 7. He argues that it should be in the interest of the company that new members are admitted by the general body of members which at present consists of 66 members and the executive committee comprises of only 12 members. He further argues that if Articles 8 and 9 are allowed to remain in the articles of association then it might enable the members of the executive committee to make arbitrary use of these two articles against the interest of the company and ignoring the wishes of the general body members,
21. We have considered the pleadings as well as the respective arguments made on behalf of the petitioners and the respondents. The short question involved in this proceeding is whether the deletion of Articles 8 and 9 of the articles of association of the company is against the interest of the company and oppressive to the petitioners as members of the company, and by way of relief whether those two articles should be restored to the articles of association.
22. It will appear from the provisions contained in Articles 6 and 7 that a member may be admitted by a special majority of three-fourths of the members present at a meeting or by a majority of three-fifths of the total number of votes polled in the event of circulation by the secretary. Under Article 8 which came into effect in the year 1935, a person donating Rs. 25,000 can become the patron member. Article 9 bestows upon a patron, a special privilege by which the board of directors admit a patron to be a member. Under the provisions of the said Article 8, a patron member does not go through the electoral process as contemplated by Articles 6 and 7 and a patron member automatically becomes a member of the company in the event of any vacancy of membership. It is not disputed that till the year 1986, no patron member was admitted in pursuance,of Articles 8 and 9.
23. As stated above, the three main contentions were raised on behalf of the company, namely, (a) it is not equitable for the petitioners to seek the same relief before the Company Law Board, which had been sought for in the said civil suit filed by the father of the first petitioner challenging the very same resolution as is being challenged in the present proceedings ; (b) there has been undue delay in filing this petition ; (c) the consent given by the three of the consentors who participated and voted in favour of the said resolution cannot be taken as valid consent and consequently, the petition should fail not being in conformity with the requirements of Section 599 of the Act.
24. Let us first dispose of the last of the above contentions, namely, that the consent of the persons, K. S. Venkateswaran, N. M. R. Krishnamurthy and Ganapathy Subramanian, should be treated as invalid in view of their participation in the said resolution passed by the general body of members of the respondent company on March 14, 1992, deleting the said two articles. In the consent letters given by the said three persons it is explicitly stated that they are in full agreement with the allegations and averments contained in the petition and also reliefs sought for against the company. It would be difficult to accept a proposition that a person after voting for a proposal cannot resile from the same even if he is convinced later that his earlier decision was not appropriate. Thus, the mere fact that consentors changed their mind cannot be a ground for debarring them from supporting this petition.
25. Now, we propose to deal with the other two objections raised on behalf of the company, namely, that the subject-matter of challenge in this petition is similar to what had been agitated in the said suit in the civil court and disposed of in favour of the defendant company, and the delay in presenting this petition. The contention on behalf of the company is that the petitioners should not be allowed to agitate after a period of five years the subject-matter of challenge which had already been decided in the said suit.
26. It is an admitted position that there was a suit in the city civil court filed by the father of the first petitioner whereby he being the plaintiff in the suit challenged the legality of the resolution passed by the general body of members in the annual general meeting on March 14, 1992. It appears that the plaintiff in the said suit challenged the said resolution on more or less the same grounds as are taken in the present petition filed by the first and the second petitioners under Sections 397 and 398 of the Companies Act. As stated above, that suit has now been dismissed and the civil court upheld the legality of the said resolution rejecting the contention taken by the plaintiff in the suit. The said resolution deleting Articles 8 and 9 was unanimously passed in the general body meeting held on March 14, 1992. It is difficult to believe that the petitioners in the present proceedings before us did not have any knowledge of such resolution resulting in the deletion of the said Articles 8 and 9 immediately after the said resolution was carried unanimously in the said general body meeting held in March, 1992. The petitioners, however, have not taken any steps from March, 1992, until the present petition challenging the said resolution. It appears that the petitioners conveniently waited to know the result of the suit filed by the father of the first petitioner challenging the very same resolution which is also now being challenged in the present proceeding. The petitioners filed the present petition after coming to know about the fate of the suit filed by the father of the first petitioner and the said resolution is now being challenged practically on the same grounds as were taken in the suit filed by the father of the first petitioner. It appears that the legality of the said resolution was affirmed by the judgment delivered by the said civil court in the said civil suit filed by the father of the first petitioner. We are not inclined to go into the legality of the very same resolution which had been upheld by the judgment delivered by the said civil court as aforesaid. If we allow the petitioners to challenge the very same resolution on practically the same grounds or one or two more, we would be simply encouraging the petitioners to abuse the process of court.
27. As we have noted above, learned senior counsel appearing on behalf of the petitioners submits that the very same resolution which is being challenged herein, if allowed to stay, then it would affect the interest of the petitioners and also it may amount to conducting the affairs of the company in a manner oppressive to the petitioners being members of the company. Learned counsel for the petitioner has also argued that in any event, the said resolution is against the public interest of the company or public policy. We are not inclined to accept this argument of learned counsel. The result of the deletion of the said Articles 8 and 9 would be that the executive committee of the company will not be empowered to induct any outsider called a patron member to the membership of the company. It would also appear that those articles were introduced in 1935 and since then only once in the year 1988 the articles were invoked. It also appears that the general body members of the company felt while deliberating on the resolution in the said general body meeting that the right of inducting new members vests in the general body of members of the company under Articles 6 and 7 and if the executive committee should feel that in the interest of the company some new members should be inducted into the membership of the company, then such an issue may be left to the general body of members who could consider such question under Articles 6 and 7 of the articles of association of the company. We fail to understand how such resolution as passed by the company in the said general body meeting could go against the public interest of the company. As would appear from the objects clause the aim of the company is to promote Hindu culture, civilisation and educational institutions established on the basis of the Hindu tradition or culture and we think that the general body of members is and should be the proper authority to consider who should be inducted into the membership of the company in furtherance of the promotion of the said objects of the company. We feel that if such power of induction of members called patron members as envisaged by the said Article 8 is left solely to the executive body then there may have been some occasion to abuse or misuse the said article for some personal gain of any individual or body of individual members of the executive committee.
28. It has been contended on behalf of the petitioners that such deletion of Articles 8 and 9 can be construed either as an act of oppression under Section 397 or an act of mismanagement under Section 398, the petitioners have not placed any material before us as to how this could be an act of oppression against them or any other member of the company excepting that counsel for the petitioner has submitted that this is against the public interest which is covered under Sections 397 and 398 of the Act. In our view, whether the decision to delete the articles is against the public interest or prejudicial to the interests of the company has to be considered with reference to the facts of the case. The said deletion has the effect of curbing the right of the executive committee in inducting the so-called patron members and vesting with the general body of members the right and authority of inducting all members according to the usual electoral process. This, in our view, by any stretch of imagination, cannot be said to be against any public interest or prejudical to the interests of the company. We do not see any substance in any of the contentions raised by the petitioners in this proceeding.
29. We find that the petitioners have not been able to substantiate their case as to oppression or as to anything done contrary to the interests of the company. Therefore, on the merits, the petition should fail even if we take the petition as maintainable. Sub-section (2)(b) of Section 397 stipulates that if the Company Law Board is of opinion 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 Company Law Board may make such order as it thinks fit. There has been no allegation by the petitioners that the company is liable to be wound up on the just and equitable ground, but the facts would justify not to make a winding up order on such ground. Therefore, the question of oppression can only be considered if the nature of oppression is such or if the affairs of the company are being conducted in such a manner prejudicial to the public interest that the winding up of the company would be the proper course but the facts of the case could justify not making of a winding up order with a view to bringing to an end the matters complained of. In our view, on this ground alone the petition should also fail.
30. We do not find any merit in the argument made on behalf of the petitioners as to the legality or validity of the resolution unanimously taken in the annual general meeting held on March 14, 1992, deleting the said articles being Articles 8 and 9 of the articles of association of the company.
31. Before parting with this order we would like the executive committee to place before the general body of members a proposal to increase the membership fee even for ordinary members taking into consideration the fact that Rs. 25,000 was fixed as patron membership fee in the year 1935. It is true that those articles, namely, Articles 8 and 9, were invoked only once in 1986 but the fact remains that there were persons desirous of becoming members of the company by paying a sum of Rs. 25,000. The company is a non-profit-making body which has the noble objective of managing educational institutions. Any addition to the corpus, irrespective of the quantum has a beneficial effect on the resources of the company. We hope that the general body of members of the respondent company will give a serious consideration to this issue.
32. For the reasons as aforesaid this petition should be dismissed and is hereby dismissed. All interim orders are vacated. There will be no order as to costs.