Madras High Court
K.N. Sankaranarayanan And Another vs Shree Consultations And Services Pvt. ... on 28 January, 1994
Equivalent citations: [1994]80COMPCAS558(MAD), (1993)IIMLJ298
JUDGMENT Thangamani, J.
1. The appellants claim to be the managing director and director respectively of Senka Carbon P. Ltd., the second respondent herein. Some of the shareholders of the company entertained a grievance against them that from its very inception, the financial affairs of the company have been grossly mismanaged and the second appellant has made personal gain at the cost of the company and its shareholders. The entire action on the part of the appellants are mala fide, a gross abuse of power, inequitous and motivated exclude the majority shareholders and unjustly enrich themselves. Both have connived together in managing the affairs of the company in such manner so as to make vast secret profits. Thereupon, the present first respondent, Shree Consultations and Services P. Ltd., came forward with Company Petition No. 59 of 1992 before the Company Law Board, Principal Bench, New Delhi, seeking a declaration that the appellants have ceased to be directors of the company, appointment of some fit and proper person as administrator of the company in the place of the board of directors, rendition of accounts by the appellants and other appropriate reliefs including suitable orders and directions for management, regulation and conduct of the company as the Company Law Board deems fit and proper. The said Shree Consultations and Services P. Ltd., purported to file this company petition for themselves and for and on behalf of the members who have given their consent to the petition being presented on their behalf. The letter of consent of members included in the schedule is in annexure A-2. The appellants, while resisting the petition, inter alia, contended before the Company Law Board that the petition did not comply with the mandatory requirements of section 399(3) of the Companies Act inasmuch as the consent in annexure A-2 filed before the Company Law Board was not a valid and proper one under the Act. This question as to compliance with the requirements of section 399(3) and the maintainability of the petition goes to the root of the matter since the Company Law Board would have no jurisdiction to entertain or make any orders in the petition if it was not properly instituted. So, the Company Law Board considered the maintainability of the petition as the preliminary objection and in its order dated May 14, 1993, came to the conclusion that the consent found in annexure A-2 satisfied the requirements of section 399 and hence the petition was maintainable. Accordingly, it fixed the date of further hearing of the main petition. And the correctness of this order is challenged in the present appeal under section 10F of the Companies Act.
2. Let us now extract the provision of sections 397, 398, and 399 in order to appreciate the relevant contentions of both sides :
"397. Application to court for relief in cases of oppression. - (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 any one 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. Application to court for relief in cases of mismanagement. - (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 interest of the company; or
(b) that a material change (not being a change brought about by, or in the interest of, any creditors including debenture holders, 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. Right to apply under section 397 and 398. - (1) The following members of a company shall have the right to apply under section 397 or section 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,"
3. From this it is evident that section 397(1) contemplates the 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 :
(1) the affairs of the company are being conducted in a manner prejudicial to public interest - this is common to sections 397(1) and 398(1) of the Act;
(2) the affairs of the company are being conducted in a manner prejudicial to the interest of the company; and (3) a material change has taken place in the management or control of the company.
4. Consequently, for any petition to be filed under section 397 of 398 or under both, it is necessary that the petition should make a reference to any one of these complains as the foundation for invoking the jurisdiction of the court under the relevant sections.
5. Bearing this background in mind the requirements of section 399(3) have to be considered. Under this provision any petition under section 397 or 398 in the case of a company having a share capital can only be at the instance of :
(1) hundred members of the company;
(2) or not less than one-tenth of the total number of its members, whichever is less;
(3) or any member or members holding not less than one-tenth of the issued share capital of the company.
6. This provision enjoins that the applicants should have paid all calls and other sums due on their shares. Annexure A-2 of the application in this case gives a list of 22 shareholders and their purported signatures along with their shareholdings. Thiru Raghavan, learned senior counsel for the appellants, first submitted that the copy of the annexure circulated to him contained 25 signatures whereas in fact only 22 members had signed the consent before the Company Law Board. Evidently this difference in numbers between the original and the copy circulated cannot be of any assistance to us in resolving the present controversy.
7. Thiru Raghavan, next pointed out that the issued, subscribed and paid-up share capital of the company is Rs. 21,50,000 divided into 21,500 equity shares of Rs. 100 each. In the annexure A-2, the petitioner, M/s. Shree Consultations and Services P. Ltd., is stated to own 700 shares. This does not constitute one-tenth of the paid-up share capital of the company. And so the petitioner alone cannot maintain the application since section 399(1)(a) requires that only a member holding not less than one-tenth of the issued share capital of the company has right to file an application under section 397 or 398. This contention is not controverted and it is not the case of the first respondent that its qualification comes under this provision.
8. The first respondent herein is purported to have instituted the company petition with the consent in writing of 22 shareholders of the company, Senka Carbon P. Ltd. Annexure A-2 is challenged by the appellants alleging that the signatures therein bearing serial number 18 and 19 do not tally with the specimen signatures available with the respondents. The Company Law Board ought to have seen that the present first respondent did not hold the requisite number of shares with reference to the total membership under section 399 of the Companies Act. Whereas Thiru G. Subramaniam, learned senior counsel for the first respondent, points out that the petition presented before the Company Law Board itself contains three signatures and in page 3 signatory No. 5 is Mr. Sodhani, who is the author of the company petition. Admittedly, the total number of members of the company is only 34. So the signatures of these four members which constitute one-tenth of the total shareholders is sufficient to satisfy the requirements of section 399(1)(a).
9. But, it is significant to note that the company petition has been instituted in the same of Shree Consultations and Services P. Ltd. Sri Chandra Prakash Sodhani claiming to be the director of the said company has verified the petition and signed the same. Shri Raghavan, learned senior counsel for the appellants, argues that the petitioner being a company, the institution of any proceedings on its behalf should be duly authorised by its board of directors. Sri C. P. Sodhani does not even claim to be a managing director of M/s. Shree consultations and Services P. Ltd. He has described himself only as a director. He has not made any averment in the petition that he is duly authorised to file the same. In spite of this matter being raised in the counter, his rejoinder does not make a positive averment that he possessed any such authority. So the petition has not been validly instituted. To substantiate his contention he has placed reliance on the decision In Nibro Ltd. v. National Insurance Co. Ltd. [1991] 70 Comp Cas 388, wherein it has been held by the Delhi High Court that it is well settled that under section 291 of the Companies Act, 1956, except where express provision is made that the power of a company in respect of a particular matter are to be exercised by the company in general meeting, in all other cases the board of directors are entitled to exercise all its powers. Individual directors have such powers only as are vested in them by the memorandum and articles. It is true that ordinarily the court will not non-suit a person on account of technicalities. However, the question of authority to institute a suit on behalf of a company is not a technical matter. It has far-reaching effects. Order 29, rule 1 of the Code of Civil Procedure, 1908, does not authorise person mentioned therein to institute suits on behalf of a corporation - it only authorises them to sign and verify the pleadings on behalf of the corporation. Thus, unless a power to institute a suit is specifically conferred on a particular director, he has no authority to institute a suit on behalf of the company. Such power can be conferred by the board of directors only by passing a resolution in that regard. The Calcutta High Court has in Mohan Lal Mittal v. Universal Wires Ltd. [1983] 53 Comp Cas 36 specifically laid down that further, rule 88 of the Company (Court) Rules, which prescribes the procedure for the presentation of a petition under sections 397 and 398 of the Companies Act, requires the letter of consent signed by the member, authorising the petitioner or petitioners to present the petition, must be annexed to the petition. The said letter of consent constitutes the required qualification under section 399 of the Companies Act, 1956, and is a substantive right of a petitioner who is a member of the company in respect of whose affairs the petition under sections 397 and 398 of the Companies Act was present. Therefore, such a letter of consent to present the petition under sections 397 and 398 of the Companies Act can never be said to be a matter of administrative or ministerial character like verifying and signing a pleading. The decision must be taken by a resolution of the board of company on whose behalf the letter of consent is to be issued. It cannot be done by individual director or the secretary of the company unless he is so authorised by a board's resolution to issue such letter of consent for the presentation of a petition under section 397 and 398 of the Companies Act, 1956, by the petitioner. It is an admitted position that in the case on hand the present first respondent-company has not placed its memorandum or articles of association nor any resolution passed by the company authorising the said Sodhani to initiate the action.
10. Learned senior counsel for the first respondent herein submits that whether the resolution was passed is a matter which has to be established by adducing evidence. This cannot be tried as a preliminary point. Moreover, absence of any resolution is not an irregularity going to the root of the matter. The resolution by the board can be either prior to the institution or it can also be ex post facto and factually there is a resolution by the board authorising Mr. Sodhani to file the company petition. Failure to refer to the same in the rejoinder is not material. It cannot be termed as a transaction by the directors which is beyond their powers. This pertains to the internal management of the company in which courts do not interfere. He cites the decision in Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1 in which the Supreme Court has held that though the telegram and the letter of the chairman terminating the services of the appellant were in pursuance of an invalid resolution, the subsequent resolution passed by the board confirming the action of the chairman amounted to ratification by the board of the action of the chairman. Ratification related back to the date of the act ratified. Evidently, this argument of learned senior counsel for the respondents is untenable since the initial infirmity in presenting the company petition without authority is incurable. The question of authority to initiate legal action on behalf of a company be equated with an administrative act like terminating the service of an employee or verifying a plaint. Instead it is a flaw which goes to the root of the matter. Any cause instituted without authority makes it invalid from is inception and it cannot be validated by a later ratification. I am in respectful agreement with the view of learned single judges of the Delhi High Court and the Calcutta High Court as expressed in the above said two decisions relied on the appellants. So, it cannot be said that the company petition herein has been validly presented.
11. Under section 399(3) of the Companies Act, any shareholder entitled to make an application may do so after having obtained the consent of the rest to file an application on this behalf and for the benefit of all the members. It is the argument of Raghavan, learned senior counsel, that in this case such consent is not properly secured under section 399(3) of the Companies Act. The letter of consent, as found in annexure A-2, does not satisfy the requirements of the above said section. The said annexure A-2 runs as under :
"We, the following members of Senka Carbon P. Ltd., express our strong resentment to the manner in which Mr. K. N. Sankaranarayanan and/or Mr. K. Krishnan have been conducting the affairs and management of the company whereby not only are they mismanaging the company and syphoning off large amounts of money and making secret profits but are also acting in a manner which is oppressive to the shareholders and against the interest of the company. Their conduct is also prejudicial to public interest. We the undersigned members do hereby give our consent to the filing of a petition by M/s. Shree Consultations and Services P. Ltd. and which petition is being presented to the Company Law Board at Delhi under the relevant sections of the Companies Act, 1956, including, inter alia, under sections 397, 398 and 402 for appropriate reliefs including the displacement of the present board of directors, appointment of the administrator, etc. We have read the final draft of the petition and give our consent to the petition, proceedings and all applications that may be made therein."
12. The main argument of learned senior counsel for the appellants is that this consent speaks of the signatories having gone through the final draft of the petition and expressing their approval to the petition that may be made. So the consent given by the person claiming to be members of the company is with reference to the alleged draft petition and not to the main petition presented before the Company Law Board. The first respondent has failed to establish any nexus between the draft petition in annexure A-2 and the main petition before the Company Law Board. In the absence of the draft of the final petition which is stated to have been perused and consented to, the consent will be an incomplete one which cannot satisfy the requirements of the Act. The Company Law Board has wholly failed to apply its mind to this aspect and give judicial reasons as to how the first respondent satisfies the requirements of section 399 of the Company Act. Neither the Companies (Court) Rules framed by the Supreme Court for regulating the procedure to be adopted in matters relating to the Companies Act before the High Courts, nor the regulation of the Company Law Board prescribe any form for the consent to be accorded in writing by the shareholders under section 399(3) of the Act. Rule 88 of the Companies (Court) Rules, 1959, merely requires that the list of names and addresses of all the members on whose behalf the petition is presented shall be set out in a schedule and annexed to the petition. The petition shall state whether the applicants have paid all calls and other sums due on their respective shares. Form No. 43 prescribes the mode by which the names and addresses of the members who have given their consent are to be entered in the schedule. The language and text of both rule 88 and the form thereunder make it clear that the mere entry of the name of a person in the schedule to a petition is not enough to establish that he has given his consent. Something more has to be proved in cases where in objection is taken about the quality and content of such consent that the parties whose names are entered in the annexure or the schedule to Form No. 43 were willing participants to the "petition concerned".
13. In support of his contention Sri Raghavan, learned senior counsel for the appellants, first placed reliance on the judgment of Ramaprasada Rao J. (as he then was) in M. C. Duraiswami v. Sakthi Sugars Ltd. (Company Petition No. 9 of 1976, dated August 25, 1977). There the allegation was regarding diversion of the funds of the company into the several organisation mentioned therein. In that context, the annexure to the petition filed by the appellant contained the following statement : "We, the undersigned, the members of Sakthi Sugars Ltd., 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". While interpreting the above said terms of the consent letter, the learned judge has held that there was no showing that such signatories to the so-called letter of consent had applied their minds when they affixed their signatures and were willing parties to the action taken by the petitioner in the manner he did by filing the present action in this court on the company side... The terms of the consent letter gave the impression that the signatories thereto had mechanically subscribed their signature to it an one does not gain the reasonable impression that they applied their minds to it. In the view of the learned judge, 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 section 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 section 398 ... one of the essentials, and which appears to be elementary, for a person to allege consent of another to an act of his should be that the other person, who is said to have given consent, should have exercised his mind and not only acquainted himself with the contents of the petition to which he was giving consent in writing as a willing participant but also should make it appear from the circumstances of the case that his participation was not involuntary but voluntary .... 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 the particular petition with particular allegations and complaints against the company under sections 397 and 398 of the Act.
14. The decision referred to above was the subject of appeal before the Division Bench in Duraiswami (M. C.) v. Sakthi Sugars Ltd. [1980] 50 Comp Cas 154. While dismissing the appeal, Ismail J. (as he then was), who spoke for the Bench, pointed out that "consent in writing" contemplated in section 399(3) of the Companies Act, 1956, 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 member or members consenting to some other member filing a petition under section 397 or section 398 or under both. 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. The members giving the consent should have applied their minds to the question before them which necessarily implies that the application of the mind was to the particular relief sought to be prayed. A mere consent for filing an application under section 397 or section 398 or under both without any particulars 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. A combined reading of sections 399(1) and 399(3) will also reinforce the above conclusions. However, 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.
15. In Kathare v. Madras Oxygen and Acetylene Co. Ltd. (C.P. No. 106 of 1977, dated June 30, 1978), Nainar Sundaram J. (as he then was) had occasion to consider once again the requirements of section 399(3) of the Companies Act. There the annexure to the petition read that the signatories who are the shareholders of the company have perused the company petition prepared by the said N. G. Kathare and they were in full agreement with the averments contained therein and thereby they expressed their consent for the said N. G. Karthare, another shareholder of the said company, to file the company petition under sections 397 and 398 of the Companies Act 1 of 1956. The learned judge following the above said Division Bench decision has held that though it is stated that the signatories have perused the company petition, it is impossible to establish a nexus between the petition presented before the court and the petition referred to in the annexure. He also pointed out that if the company petition, in the same form or in substance, is appended to the letters of consent and the signatories have signed such a petition, there would not have been any difficult. There is no proof that the consenting members knew about the nature of the action to be taken and the basis for such action and the nature of the reliefs to be sought for.
16. The next decision cited by learned senior counsel for the appellants is that of Padmanabhan J. (C.P. No. 30 of 1979). There the petitioner claimed that he was supported by 106 shareholders. The allegation was that the managing director and directors had siphoned off funds from the company to the tune of several lakhs by taking advantage of their official position in the company. It was claimed by the petitioner therein that those 106 shareholders have given their consent in writing to him to file that application under sections 397 and 398 of the Companies Act, Relying on the ratio laid down by Division Bench referred to above, the learned judge had held that the letter of authority in that case merely authorised the petitioner to make necessary petition under sections 397 and 398 and it cannot be deemed to be a consent in writing for filing a particular petition on particular grounds for a particular relief under sections 397 and 398 or under both. It can only mean that the petition is generally authorised to make whatever petition he deems necessary for whatever reliefs he may deem fit. This certainly is not the consent in writing that is contemplated under the section.
17. In C.P. No. 42 of 1979, the consent letter merely stated that they thereby give their consent to one Gnanagiri Nadar to apply to the High Court for an order under section 398 of the Companies Act, 1956. Shanmugham J. in his order dated August 20, 1981, on a comparison of consent filed in that case and the one under consideration by the Division Bench found that they were in substance identically the same and it was inescapable that the ratio of the Division Bench squarely applied to the case before him and held that there was no valid consent.
18. In the next decision Rajashankar v. Tuticorin spinning Mills Ltd. (C.P. No. 69 of 1985, dated December 1, 1987), relied on by learned counsel for the appellants, the petitioner who was a shareholder had obtained the support of five shareholders, three of whom were described as minors. If the total shareholding of the petitioner and those shareholders who had given support to the petitioner were taken together, there was no dispute that the total shareholding of these members was more than 10 per cent. of the issued share capital of the company. It was contended on behalf of the respondents that two of the allege minors had become major long before the filing of the petition and, therefore, the consent given for those minors by their mother was not a valid consent and as such, the consent of those minors could not be taken into consideration. The contention of the petitioner was that those two described in the registers of the company as minors represented by their respective guardians. In any event, the two erstwhile minors had subsequently expressed their consent for continuing the company petition. Since they have ratified the filing of the company petition, it must be taken that it was sufficient compliance with section 399 of the Companies Act. Bhaskaran J. repelled this convention and held that the non-alteration in the registers of the company of the description of its members cannot be taken advantage of by a person who files a petition under section 397 or 398 of the Act to overcome an inherent lacuna in the petition based on section 399 of the Act. He further held that compliance with section 399 of the Act should be at the time of the filing of the petition and any subsequent compliance with section 399 of the Act will not cure the initial infirmity.
19. In the light of the ratio laid down by the decisions referred to above, if we analyse the terms of annexure A-2, it cannot be said that we could spell out any nexus between the draft of the final petition which is stated to have been perused and consented to by the signatories and the actual petition presented before the Company Law Board. Evidently, this nexus cannot be established by oral evidence or any subsequent affidavits. We have to search for the same in the wording of the consent letter itself. The letter of authority discloses that the shareholders have read the final draft of the petition and given their consent to the petition that may be made therein. There is nothing further to indicate that all the contents of the final draft find a place in the present petition.
21. Thiru G. Subramaniam, learned senior counsel for the first respondent. vehemently argued that annexure A-2 revealed that the consent given was for the filing of the petition under sections 397, 398 and 402 on the ground of mismanagement of the company by the directors, syphoning off of funds, making secret profits, acting in a manner prejudicial to the shareholders and against the interest of the company and their conduct is prejudicial to the company. Therefore, the members gave consent to the filing of the petition by Shree Consultations and Services P. Ltd. for relief of removal of the directors, appointment of administrators, etc. They knew 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. Consequently, the requirements pointed out by the Division Bench in M. C. Duraiswami v. Sakthi Sugars Ltd. [1980] 50 Comp Cas 154 have been fully satisfied in the present case. However, on a careful consideration of the terms of annexure A-2 and in the light of the ratio laid down in the decision referred to above, I am unable to accept his contention. It is true that all the consenting members need not be aware of each and every averment contained in the petition. But, it is imperative that these consenting members must be conscious of the various grounds of oppression and mismanagement on the part of those in-charge of the management and they must have reached the conclusion that a petition under sections 397 and 398 should be filed and they must have been aware of what are the reliefs claimed in that petition. The consent letter itself should indicate that the signatories/shareholders had applied their minds to the allegations to be made and the reliefs to be sought in the proposed action and have given their consent for seeking those reliefs. The consent letter cannot be treated as a letter creating agencies. And there is no indication that the consenting shareholders subscribed their consent to this particular action in the form and substance as projected in the company petition. I, therefore, hold that annexure A-2 does not constitute valid consent in writing under section 399(3) of the Act. And the company petition has to fail also for the reason that Mr. C. P. Sodhani had no valid authority to present the company petition.
22. In the result, the appeal is allowed and the order of the Company Law Board dated May 14, 1993, is set aside and Company Petition No. 59 of 1992 is dismissed. No order as to costs.