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Judgment
390 paragraphs · 8,461 wordsA.R. Lakshmanan J.
The applicants in O. A. No. 708 of 1994 are the plaintiffs in the suit. The prayer in the suit is as follows :
(a) For a declaration that the notice dated June 29, 1994, issued by the first respondent for the proposed annual general body meeting of the first
respondent to be held on August 4, 1994, in so far as it relates to items Nos. 7 and 8 of the said notice is illegal and void.
(b) For permanent injunction restraining the respondents in any manner considering the said subjects, viz., items Nos. 7 and 8 of the notice dated
June 29, 1994, issued for the proposed annual general body meeting of the first respondent to be held on August 4, 1994, or on any other day.
The first respondent is a company and is also a nidhi. The second respondent is a person who was proposed for election as a director of the
first respondent in the annual general body meeting to be fixed on August 4, 1994. Items Nos. 7 and 8 in the notice have been proposed as
special business"".
Along with the suit, the applicants have filed O. A. No. 708 of 1994, for the grant of interim injunction restraining the respondents in any manner
considering the subjects, viz., items Nos. 7 and 8 of the notice dated June 29, 1994, issued by the first respondent. On August 3, 1994, the
injunction application was moved before me. The first respondent''s counsel took notice and submitted that the meeting as proposed could go on
including the special business, viz., items Nos. 7 and 8 of the agenda but the first respondent would not give effect to the same until further orders if
carried on in the said annual general meeting. On the same day, I passed an order. Instead of granting injunction, I allowed the first respondent to
proceed with the annual general meeting with the agenda already printed and circulated to all the shareholders. I made it clear that any decision
taken regarding items Nos. 7 and 8, if carried on, will not be given effect to until further orders of this court. I also permitted all the applicants to
attend the annual general meeting and participate in the discussions. The first respondent has now filed application No. 5055 of 1994, for vacating
the order passed on August 3, 1994, in O. A. No. 708 of 1994. In support of the said application, the first respondent relied upon the counter-
affidavit filed in O. A. No. 708 of 1994. The first respondent contended that the two subjects, viz., items Nos. 7 and 8, were passed with huge
majority in the annual general meeting held on August 4, 1994.
The first respondent was incorporated in the year 1922. It is a nidhi which could have transactions only with its members. According to the
applicants, on August 7, 1988, a director by name Giripal Mudaliar died and the second respondent N. G. Manavalan, who is the son of the said
Giripal Mudaliar, was appointed by the board of directors of the first respondent as a director on August 11, 1988, in the casual vacancy caused
by the death of Giripal Mudaliar. The second respondent could hold office only up to the period to which Giripal Mudaliar would have held the
office of director. In the annual general meeting held on September 4, 1990, the second respondent was treated as a retiring director and he was
re-elected. There was no nomination for his election as a director of the first respondent and a sum of Rs. 500 was not paid under the provisions of
section 257 of the Companies Act, 1956.
It is contended that one Gopalratnam, a director of the first respondent, resigned his post and in his place Mohanakrishnan was appointed in the
casual vacancy. In the annual general meeting for 1990-91, he was proposed as a retiring director and controversy arose on that account.
Subsequently, before the meeting could take place, the first respondent refused to treat him as a retiring director and controversy arose on that
account. The first respondent sought legal opinion and its counsel gave an opinion on September 5, 1991, stating that since Mohanakrishnan was
only appointed in the casual vacancy, he could not be treated as a retiring director, and since he did not comply with the provisions of section 257
of the Companies Act, his candidature was invalid. It appears that he was intimated by the first respondent by letter dated September 7, 1991,
about the rejection of his candidature as a director seeking re-election.
On September 9, 1991, the said Mohanakrishnan wrote to the first respondent stating that the contention of the first respondent was wrong. He
also accused the first respondent of negligence in not verifying the provisions of section 257 of the Companies Act before announcing his
candidature. He had further stated that he was entitled to seek re-election and in support of this contention he mentioned that on an earlier
occasion when a director was co-opted in a casual vacancy, the said person was not called upon to remit the sum of Rs. 500. Mohanakrishnan
also tendered a demand draft for Rs. 500. The first respondent by its letter dated September 10, 1991, rejected the contention of Mohanakrishnan
and returned the draft sent by him, as, according to the first respondent, the tender was in violation of the provisions of the Companies Act. It also
appears that the said Mohanakrishnan did not pursue the matter further.
In the annual general meeting held on June 21, 1993, the second respondent was treated as a retiring director and he was said of have been re-
elected. By letter dated December 30, 1993, the first applicant enquired whether the second respondent had remitted a sum of Rs. 500 when he
sought election and mentioned that if he had not deposited the amount towards his appointment, which took place on September 4, 1990, his
appointment would be invalid and is in violation of section 257 of the Companies Act. According to the applicants, the first respondent did not
reply to the said letter. The first applicant again wrote a letter on February 9, 1994, stating that even after 45 days, there was no reply to his letter.
The first respondent by its letter dated February 24, 1994, mentioned that the second respondent did not deposit the sum of Rs. 500 and that he
had not complied with the provisions of section 257 of the Companies Act at the annual general meeting held on September 4, 1990, and that the
first respondent had obtained legal advice and due to the same, the second respondent resigned his post as a director, but in view of his services,
the other directors of the first respondent had co-opted him as an additional. director.
In reply to the said letter, the first applicant wrote a letter stating that there was suppression of vital facts from the shareholders and also
informed the first respondent that there was no power vested in the board of directors of the first respondent to appoint the second respondent as
an additional director. The first applicant also stated that the first respondent had no power to waive any amount of remuneration, sitting fees and
other payments to a person who held the office of a director illegally, and called upon the first respondent to take corrective action. This was
followed by letters dated March 15, 1994, and April 24, 1994, but the first respondent did not take any action. On this background, the notice
dated June 29, 1994, was issued in which item No. 7 related to the election of the second respondent as a director, and item No. 8 to waive the
remuneration paid to the second respondent of a sum of Rs. 97,320 paid between September 4, 1990, and February 23, 1994, was sought. Since
these two resolutions were under the category of ""special business"" an explanatory statement was annexed to the said notice.
The first respondent filed a counter-affidavit through its secretary. The following are its contentions :
(a) The suit is not maintainable. The suit is not filed in a representative capacity and there is no individual wrong done to shareholders.
(b) The cardinal principle of corporate law that the courts will not interfere with the internal management of the company will apply to the facts
alleged in the present petition.
(c) The applicants are guilty of laches. The first respondent did not permit one Mohanakrishnan from seeking appointment as a director because of
the non-compliance of section 257 of the Companies Act and that the first respondent has not adopted a different stand against the second
respondent. The second respondent was appointed as a director in the casual vacancy and he was treated as a retiring director and he was re-
elected on September 4, 1990.
(d) The shareholders of the first respondent thought it fit to reappoint the second respondent unanimously and again his term for reappointment
came up for consideration at the annual general meeting held on June 21, 1993. The applicants, who were the shareholders even at that relevant
point of time, did not choose to object to such appointment or bring to the notice of the first respondent that the first respondent has not followed
the procedure u/s 257 of the Companies Act.
(e) The first applicant is the father-in-law of one S. R. Kishore, who was an employee of the first respondent, and the third applicant is the brother
of S. R. Kishore. The said S. R. Kishore was suspended and later dismissed for the misconduct arising out of the misappropriation of the funds of
the first respondent. The matter is sub-judice as S. R. Kishore has taken the matter to the Labour Court and the matter is pending disposal. As the
father-in-law of the said S. R. Kishore, the first applicant and as the brother of the said S. R. Kishore, the third applicant along with another is
causing interference with the affairs of the first respondent by making allegations which are untenable. Section 290 of the Companies Act saves
acts of directors whose appointment is found to be defective.
(f) The first respondent has applied to the Central Government for waiver of remuneration paid to the second respondent inasmuch as the second
respondent has acted as a director and rendered service to the first respondent. It is entirely for the shareholders of the first respondent to decide
whether recovery should be made or the same should be waived. It is an internal management of the first respondent and there is no illegality
attached to the consideration by the shareholders of the matter concerning the waiver of the recovery of remuneration. If the shareholders of the
first respondent or the Central Government rejects the proposal for waiver of recovery of the remuneration, then the first respondent would take
steps to recover the same from the second respondent subject to any defence that are open to the second respondent.
(g) The appointment of the second respondent, which is found to be defective, has come to an end with the resignation of the second respondent
on February 23, 1994. At the time when the present suit came to be filed, the second respondent has acted as additional director pursuant to the
appointment as additional director on February 23, 1994, u/s 260 of the Companies Act, and that the power to appoint the second respondent as
additional director is contained in regulation 72 of Table A to the Companies Act. The particulars set out in the explanatory statement give full and
correct material particulars about the special business to be considered by the members.
A reply affidavit was filed to the counter-affidavit of the first respondent stating that the shareholders of the first respondent have every right to
see that the legal provisions are strictly adhered and the rights of the shareholders are protected. Regulation 72 of Table A has no application at all
as the articles of association of the first respondent clearly say that only Table A in the modified form alone would apply. In paragraph 27 of the
reply affidavit, it is stated as follows :
I submit that the fabrication of the minutes of the meeting can be very easily understood from the fact that the minutes itself states that the number
of shareholders present were only 1411. Paragraph 25 of the counter-affidavit states that 244 shareholders took part in the poll. However, the
result of the poll mentioned states that Manavalan had fetched a vote of 7,392 votes. There is no mention about any proxy at all in the minutes of
the meeting. In the circumstances it is not clear as to how only with 1,411 shareholders, there could be a possibility of 7,392 votes being polled
and when the minutes itself does not say anything about proxies. It is cardinal principle of the meetings that if proxies were received by the
company, there should be verification of the proxies and there should be an announcement about the number of proxies received which are valid.
No such statement has been made. The conclusion is that the company had not received any proxies. In the circumstances, it is impossible for
Manavalan to get 7,392 votes unless the minutes themselves are concocted and fabricated.
On the above pleadings, Mr. C. Harikrishnan, learned counsel for the appellants, argued three points : They are,
(a) The explanatory statement for items Nos. 7 and 8 do not satisfy the requirement of section 173 of the Companies Act.
(b) The waiver sought for in item No. 8 is ultra vires the company/first respondent and, therefore, cannot be permitted, and
(c) Even otherwise, the claim of the first respondent that the said items were passed in the annual general meeting held on August 4, 1994, cannot
be accepted.
Point (a) : Mr. C. Harikrishnan submitted that an explanatory statement is mandatory u/s 173 of the Companies Act and not directory as held by
the Supreme Court in Life Insurance Corporation of India Vs. Escorts Ltd. and Others, , and also the decision in Balasundaram (V. G.) v. New
Theatres Carnatic Talkies Pvt. Ltd. [1993] 77 Comp Cas 324 at 349 rendered by AR. Lakshmanan J. Learned counsel for the applicants relied
on the following passage at page 349 of the decision second cited, which is as follows :
The object of enacting section 173 is to secure that all the facts which have a bearing on the question on which the shareholders have to form their
judgment are brought to the notice of the shareholders so that the shareholders can exercise an intelligent judgment. The provision is enacted in the
interest of the shareholders so that the material facts concerning the items of business to be transacted at the meeting are before the shareholders
and they also know what is the concern or interest of the management in any item of business, the idea being that the shareholders may not be
duped by the management and may not be persuaded to act in the manner desired by the management unless they have formed their own judgment
on the question after being placed in full possession of all material facts and apprised and the interest of the management in any particular action
being taken.
According to Mr. C. Harikrishnan, the above passage makes it clear that the explanatory statement is not an empty formality but one requiring
the management to make a fair and full disclosure. He laid particular emphasis on the word not to be duped by the management. According to him,
the following facts are material for items Nos. 7 and 8 of the notice of the annual general meeting, which items have been impugned in the present
application.
(a) In the explanatory statement, the directors have recommended to the shareholders to elect the second respondent as he is said to possess
expertise and experience in nidhi matters. No particulars of any expertise or experience have been set out.
(b) The second respondent was allowed to continue as a director notwithstanding the defect in the appointment and notwithstanding the fact that
the company knew about the defect in his appointment but on the other hand, in the case of Mohanakrishnan prompt action was taken about the
defect even at the time of his candidature. The company was informed about the defect in the appointment of the second respondent by the first
applicant''s letter dated September 9, 1991. These facts ought to have been disclosed.
(c) So far as the second respondent was concerned, the first applicant had raised the objection in his being appointed as an additional director but
in spite of the objection, he was allowed to continue as additional director. According to the first applicant, there is no provision in the articles of
association for the appointment of additional director.
(d) The second respondent was paid much more than what has been mentioned in the explanatory statement. In the explanatory statement, the
waiver was sought only for a sum of Rs. 97,000 but the second respondent had drawn nearly a sum of rupees one lakh in addition to the aforesaid
amount.
(e) Even before the resolution for waiver was placed before the general body meeting, the first respondent had made an application to the Central
Government for waiver of the amounts paid to the second respondent.
According to Mr. C. Harikrishnan, a shareholder decides to attend the meeting and make an intelligent and meaningful participation only after
seeing the contents of the notice. The explanatory statement provided for items Nos. 7 and 8 is not only defective but also misleading and contains
full of misstatements. Learned counsel contends that the above facts ought to have been disclosed in the explanatory statement, more particularly
by company which is a nidhi and which can have transactions only with its members. Therefore, he contends that, the omission is deliberate and as
such, the resolutions should be set aside.
Mr. T. K. Seshadri, learned counsel for the first respondent, denied that the first respondent adopted a different stand when the second
respondent was appointed in a casual vacancy and he was treated as a retiring director and was re-elected on September 4, 1990. The
correspondence exchanged between the first applicant and the first respondent would not at any point of time disclose that the applicants put an
issue before the first respondent, that the first respondent adopted a different stand to Mohanakrishnan and another stand to the second
respondent. It is stated in the counter that at the time when the second respondent''s election came up for consideration on September 4, 1990, the
first respondent was under the bona fide belief that by virtue of article 22 of the articles of association, the second respondent was only a retiring
director and, therefore, when the second respondent''s election for reappointment came up for consideration at the meeting held on September 4,
1990, the shareholders of the first respondent thought fit to reappoint him unanimously and again his term for reappointment came up for
consideration at the annual general meeting held on June 21, 1993. The shareholders approved his reappointment unanimously. The applicants
were shareholders at the relevant point of time and they did not choose to object to such appointment or bring to the notice of the first respondent
that the first respondent has not followed the procedure u/s 257 of the Companies Act.
According to Mr. T. K. Seshadri, at a later point of time when the election of Mohanakrishnan came up for consideration, the first respondent
thought fit to obtain an opinion from counsel and intimated Mr. Mohanakrishnan of the requirement of the compliance of section 257 of the
Companies Act. Mohanakrishnan realised the difficulty and did not pursue the matter. Since the second respondent was appointed as a director
unanimously at two annual general meetings held on September 4, 1990, and June 21, 1993, by the shareholders, it escaped the attention of the
first respondent of the earlier defect in the appointment on September 4, 1990. However, when it was brought to the notice of the first respondent
during December, 1993, the first respondent referred the matter to its legal advisor and obtained an opinion. On the basis of the legal opinion, it is
noticed that there is a defect in the appointment of the second respondent as a director as a result of non-compliance with section 257 of the
Companies Act, and, therefore, the first respondent informed the second respondent who in turn submitted his resignation on February 23, 1994.
The board of directors thought fit that the service of the second respondent was necessary and since the violation was of a technical nature, the
board of directors thought fit to appoint the second respondent as an additional director on and from February 24, 1994.
Mr. T. K. Seshadri would then submit that the first respondent has also written to the Central Government for waiver of recovery of
remuneration subject to the approval of the general meeting on April 12, 1994. The Central Government on September 5, 1994, was pleased to
remit the waiver of recovery of a sum of Rs. 8,373, which is paid to the second respondent as remuneration subject to the approval of the general
body. In paragraph 2 of the communication, the Central Government is specific that the approval was accorded subject to the approval of the
company in the general meeting as required by section 309(2) of the Companies Act. So, it is for the shareholders to consider whether the
recovery should be made or waived and that it is the internal management of the company. It is further stated in the counter-affidavit that there is no
illegality attached to the consideration by the shareholders in the matter of waiver of the recovery of the remuneration.
With regard to the allegation of payment of rupees one lakh to the second respondent towards survey fees, etc., it is submitted by the first
respondent that whenever a member makes an application for loan, as per the articles of association and the bye-laws framed by the first
respondent, a director of the first respondent is deputed to make an inspection and survey the property and in relation thereto, expenditure is met
by the member who makes the application for loan. The expenditure met in connection with the survey, preliminary and inspection fees are paid in
the course of business, which is a business expenditure and the said expenditure is not a remuneration. Therefore, in my view, the expenditure
incurred towards survey fees, preliminary and inspection fees are not remuneration and it cannot be recovered from the director. It is not denied in
the counter-affidavit that factually the first respondent had not paid rupees one lakh to the second respondent.
In this context, it is useful to extract the two items mentioned as ""Special business"", which are items Nos. 7 and 8, as they are the bone of
contention of the applicants for seeking relief in the plaint as well as in the application. They are,
Item No. 7 : To consider and if thought fit, to pass with or without modification the following resolution as an ordinary resolution :
''Resolved that Thiru N. G. Manavalan be and is hereby appointed as director of the company.''
Item No. 8 : To consider and if thought fit, to pass, with or without modification the following resolution as an ordinary resolution :
''Resolved that the recovery of a sum of Rs. 97,320 paid/payable as remuneration and sitting fees Thiru N. G. Manavalan (the details of which are
set out in the explanatory statement), director of the company the period from September 4, 1990, to February 23, 1994, be and is hereby waived
subject to the waiver being approved by the Central Government''.
The first respondent has furnished an explanatory statement u/s 173(2) of the Companies Act for both the items.
Item No. 7 : Thiru N. G. Manavalan was appointed as additional director of the company with effect from February 23, 1994. According to the
provisions of section 260 of the Companies Act, 1956, Thiru N. G. Manavalan will be holding office until the conclusion of this annual general
meeting. Notice u/s 257 of the Companies Act, 1956, together with deposit of Rs. 500 has been received by the company from a member
signifying his intention to propose the candidature of Thiru N. G. Manavalan as a director of the company. In the explanatory statement, it is stated
that Thiru N. G. Manavalan is the son of late Thiru N. C. Giripal Mudaliar (former director of our fund) and has vide experience and expertise in
mutual benefit society matters and have been found beneficial to our company. Therefore, it is considered appropriate that he should be appointed
as a director of the company. Hence, the board recommends passing of the resolution under item No. 7. Thiru N. G. Manavalan is willing to act as
director, if so appointed and has filed with the fund his consent u/s 264(1) of the Companies Act, 1956. None of the directors except Thiru N. G.
Manavalan is interested in the above resolution.
In the explanatory statement for item No. 8, it is stated that on August 7, 1988, Thiru N. C. Giripal Mudaliar, who was then a director of the
company, died. In the casual vacancy caused by his death, the board of directors appointed Thiru N. G. Manavalan as a director of the company
on August 11, 1988. The said Thiru N. G. Manavalan came for retirement by rotation in the year 1990 (being the date when the late Thiru N. C.
Giripal Mudaliar would have retired.) He was duly elected by the shareholders in 1990. Again, after a period of three years, Thiru N. G.
Manavalan came for retirement by rotation and once again he was duly re-elected as a director of the company. However, in 1990, inadvertently
the said Thiru N. G. Manavalan omitted to make a deposit of Rs. 500 as required u/s 257 of the Companies Act. The company is now advised
that the appointment is defective in view of the aforesaid omission. During the period from September 4, 1990, to February 23, 1994, Thiru N. G.
Manavalan has been paid/to be paid his eligible remuneration, sitting fees as under :
-------------------------------------------------------------------
Year ending Remuneration Sitting fee Total
-------------------------------------------------------------------
(Rs.) (Rs.) (Rs.)
-------------------------------------------------------------------
31-3-1991 1,322 5,350 6,672
31-3-1992 4,183 9,450 13,633
31-3-1993 7,331 25,600 32,931
31-3-1994 13,584 30,500 44,084
-------------------------------------------------------------------
The board is of the opinion that since the appointment became defective only on a technical ground and since Thiru N. G. Manavalan has
rendered valuable service to the company, the recovery of the aforesaid remuneration/sitting fees paid to him may be waived. The board
recommends this resolution. None of the directors except Thiru N. G. Manavalan is interested in the above resolution.
According to Mr. T. K. Seshadri, on the date of the said allegation, the applicants sought for a declaration that the notice dated August 29,
1994, issued by the first respondent of the proposed annual general meeting scheduled to be held on August 4, 1994, in relation to items Nos. 7
and 8 is illegal and void and for consequential permanent injunction restraining the first respondent from in any manner considering the subjects,
via., items Nos. 7 and 8 of the notice dated June 29, 1994, issued of the annual general meeting scheduled to be held on August 4, 1994. In the
injunction application, the applicants sought for an interim injunction restraining the first respondent from in any way considering those items in the
meeting scheduled to be held on August 4, 1994. When the application came up for consideration before this court on August 3, 1994, the first
respondent took notice. On the same day, I passed an order permitting the first respondent to transact the businesses mentioned in items Nos. 7
and 8. But, I made it clear that if resolutions are passed, the same should not be given effect to until the disposal of the injunction application.
Subsequently, the first respondent filed its counter-affidavit and also pointed out that the resolutions mentioned as items Nos. 7 and 8 were carried
and as per the resolutions of the elections on poll, the votes polled for and against are as under :
RESOLUTION NO. 7
N. G. Manavalan . . . 7,396 votes
A. B. Sudarsanam . . . 15 votes
J. V. Sunderrajan . . . 4 votes
Invalid votes . . . 22 votes
RESOLUTION NO. 8
Votes polled in favour . . . 7,392 votes
of the resolution
Votes polled against . . . 10 votes
Invalid votes . . . 19 votes
On the basis of the resolution submitted by the scrutineers, the chairman of the meeting declared the resolutions passed. Further, in view of the
order of this court, the chairman informed that the resolutions would not be given effect to until further orders of this court in O.A. No. 708 of
1994.
Mr. T. K. Seshadri, learned counsel for the first respondent submits that the resolutions relating to item Nos. 7 and 8 are sought to be
challenged by the applicants on the ground that the explanatory statement for items Nos. 7 and 8 is misleading and it is not in proper compliance
with the Companies Act. It is mentioned in the plaint as well as in the affidavit filed in support of O.A. No. 708 of 1994, that the explanatory
statement did not contain the information that on an earlier occasion Mohanakrishnan''s candidature was rejected on account of non-compliance
with section 257 of the Companies Act and that the candidature of the second respondent was accepted earlier without compliance with section
257 of the Companies Act. It is further stated that the explanatory statement also does not say that the second respondent was illegally treated as a
retiring director in both the meetings held on September 4, 1990, and June 21, 1993. It is stated that the explanatory statement does not contain or
disclose that the second respondent was co-opted with the board of directors in the absence of the board to co-opt when he resigned. It is further
mentioned that the explanatory statement would state about the experience and expertise of the second respondent in mutual benefit society and
that his election would be in the interest of the company. The said statement would not specifically state as to what was expertise and what
beneficial service the second respondent rendered to the first respondent. The said statement would amount to canvass the support of the second
respondent by the first respondent.
The above is the objection in relation to the explanatory statement for items Nos. 7 and 8. The applicants have not stated as to what is the
provision of law under which the first respondent shall be entitled to waive. The explanatory statement would not also mention about the additional
sum of rupees one lakh paid to the second respondent. The explanatory statement, according to the applicants, should have mentioned that all the
sums of money paid to the second respondent are recoverable and the director should be personally liable for the said amount. It is stated by the
applicants that the object of the first respondent proposing the subject without proper disclosure is to get through the subject with the mala fide
intention of conferring special benefit to the second respondent and to cover up the illegality.
In the above background, I shall now consider point (a) raised by Mr. C. Harikrishnan. His objection is that the explanatory statement does
not satisfy the requirements of section 173(2) of the Companies Act. Section 173(2) is extracted hereunder :
(2) Where any items of business to be transacted at the meeting are deemed to be special as aforesaid, there shall be annexed to A the
notice of the meeting a statement setting out all material facts concerning each such item of business, including in particular (the nature of the
concern or interest) if any, therein, of every director (managing agent, if any, the secretaries and treasurers, if any, and the manager, if any) :
Provided that whether any item of special business as aforesaid to be transacted at a meeting of the company relates to or affects any other
company, the extent of shareholding interest in that other company of every director (the managing agent, if any, the secretaries and treasurers, if
any) and the manager, if any, of the first mentioned company shall also be set out in the statement if the extent of such shareholding interest is not
less than 20 per cent. of the paid up share capital of that other company.
It is the contention of Mr. C. Harikrishnan that section 173(2) of the Companies Act is mandatory and non-compliance with the said provision
is a fatal and incurable defect. He seeks to rely on the decision of mine in V.G. Balasundaram and others Vs. New Theatres Carnatic Talkies Pvt.
Ltd. and others, in support of his contention that compliance with section 173(2) of the Companies Act is mandatory. There is no dispute with
regard to the proposition laid down therein since there was no explanatory statement to the notice in that case. But, in the instant case, as rightly
pointed out by Mr. T. K. Seshadri, there is an explanatory statement given in accordance with section 173(2) of the Companies Act. There is,
therefore, no non-compliance with the provisions of the Companies Act as contended by the learned counsel for the applicants. The question is,
whether the material facts concerning each item of business are set out in the explanatory statement or not. Mr. T. K. Seshadri, in support of his
contention, has relied on a Bench decision of the Calcutta High Court in East India Commercial Co. Private Ltd. Vs. Raymon Engineering Works
Ltd., , wherein the Bench has observed that the courts do not scrutinise these notices with a view to exercise criticism or to find out defects, but it
looks at them fairly. The Bench has also pointed out that the solution of the problem as to whether all material facts were disclosed in an
explanatory statement, depends upon the facts of each case.
It is settled law that the notice must specify the business to be done. The object of the notice was to be a fair notice, intelligible to the minds of
the ordinary man, the class of men who were the shareholders in the company and to whom it was addressed. In the above Calcutta case, the
Bench took note of the director''s reports also along with the facts set out in the explanatory statement and found that the material facts necessary
for the purpose of the proposed resolution were given in the explanatory statement. The Bench has further held that it is not the function of the
explanatory statement to travel beyond the proposed resolution. It is then stated by the Bench that material facts have to be given but not detailed
particulars.
Mr. T. K. Seshadri also referred to the following decisions with regard to the proposition that material facts are facts which are relevant to the
resolution and not detailed particulars to be given. Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp Cas 543 553 (SC); Firestone Tyre
and Rubber Co. v. Synthetics and Chemicals Ltd. [1971] 41 Comp Cas 377 Sitaram Jaipuria and Others Vs. Banwarilal Jaipuria, ; Life Insurance
Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 at 618 (SC); Gopal Das Gujarati v. Titaghar Paper Mills Co. Ltd. [1986] 60
Comp Cas 920 and Meenakshi Amma v. Sree Rama Vilas Press and Publications (P) Ltd. [1992] 73 Comp Cas 275 at 282. In the decision
reported as Sitaram Jaipuria and Others Vs. Banwarilal Jaipuria, , a Division Bench of the Calcutta High Court has held as follows (headnote) :
Any and every legal requirement need not be placed before the general meeting of the general body of the shareholders. It is to be presumed that
all legal requirements, before the venture is undertaken, is carried on properly. The explanatory statement should not be too strictly construed, but
should be given a liberal construction and the only requirement should be that its contents are clear to an ordinary person engaged in business.
Section 173(2) of the Companies Act, should not be construed, in my opinion, in a rigid manner and should not be made so as to hamper the
conduct of business. The notice has to be construed in a realistic business like manner and if it satisfies the essence of section 173(2) of the
Companies Act, the meeting should not be invalidated on the technical ground that the notice has not complied with section 173(2) of the
Companies Act. If the shareholder is aware of the material facts pertaining to the transaction to be carried out at the meeting, he cannot reasonably
complain of any insufficiency of notice. If he is present at the meeting, he must point out to the chairman about the irregularity before the meeting
proceeds with the agenda. In the instant case, the explanatory statement given under items Nos. 7 and 8 clearly brings out the material facts in
relation to the resolution to be passed. The resolution to be passed with regard to item No. 7 relates to the appointment of the second respondent
as a director of the first respondent.
What necessitated the first respondent to place in the meeting the reasons why the second respondent''s election is coming up for appointment
as a director ? The reason is, the second respondent''s earlier appointment was defective for non-conipliance with section 257 of the Companies
Act. Under what circumstances the second respondent was appointed earlier and when his appointment was found defective, he resigned, how he
has appointed as an additional director and that his term as additional director has come to an end at the annual general meeting, are the relevant
and material facts to the question as to the appointment of the second respondent as a director. The other objection with regard to item No. 7 is
that the company has mentioned about the experience of the second respondent as a director of a mutual benefit society and his appointment will
benefit the society. These are the additional facts which will go to the root of the matter. The material fact as to why this resolution is coming up for
consideration is mentioned. The reference to the first respondent''s views on Mohanakrishnan and the legal advice given are irrelevant and not
material facts.
With regard to item No. 8, material facts were given, namely, how the appointment of the second respondent has become defective and how
he drew remuneration as a director of the first respondent, and since this appointment is defective, the first respondent is seeking the approval of
the shareholders to waive the recovery. These are all the material facts which are relevant for the resolution. It is urged that the applications who
attended the annual general meeting did not participate in the deliberations when items Nos. 7 and 8 and placed before the shareholders for
consideration. The applicants clam to have knowledge as to the circumstances under which the resolutions are being brought before the annual
general meeting. As held by a Division Bench of the Kerala High Court in Meenakshi Amma v. Sree Rama Vilas Press and Publications P. Ltd.
[1992] 73 Comp Cas 285 the applicants being shareholders are aware of the material facts pertaining to the transactions to be carried out at the
annual general meeting and as such, they cannot reasonably complain of insufficiency of notice nor did they, having been present at the meeting,
point out to the chairman about the irregularity before the meeting proceeded with the agenda, nor did they participate in the deliberations and
bring to the notice of the shareholders who attended the meeting about the facts which according to them are material facts which influence the
shareholders in exercising their rights on the subject. In view of the above decision, I am of the view, the contention of learned counsel for the
applicants that there is non-compliance with the provisions of section 173(2) of the Companies Act does not merit any consideration.
Point (b) : Mr. C. Harikrishnan argued that there is no provision in the memorandum and articles of association of the first respondent to enable
the first respondent to make payment unauthorisedly. The payment which was made to the second respondent was a payment to a director. The
said payment was made with full knowledge by the first respondent that there was a defect in the appointment of the second respondent. The first
respondent cannot seek justification by relying upon section 309 of the Companies Act as that section applies only to managerial remuneration and
payment made to a director. Since the first respondent itself concedes that the original appointment of the second respondent was defective and
that the said position was confirmed by the legal opinion, the second respondent could never have been a director of the first respondent. The first
respondent knew about the defect in the appointment of the second respondent as a director. It has been falsely alleged in the counter-affidavit that
the said defect was known only after the first applicant wrote a letter on December 30. 1993. The first applicant had already pointed out the defect
in his letter dated September 9, 1991. The contention that the first respondent has power to co-opt a director cannot be true. Such of those
provisions for which there is no specific application is made, Table A, Schedule I to the Companies Act, cannot apply. This has been made very
clear in article 2 of the articles of association of the first respondent. Therefore, the co-option of the second respondent is invalid. Even section 290
of the Companies Act cannot come to the rescue as the defect was known to the first respondent, and notwithstanding the same, payments were
made deliberately. Therefore, it is a payment made to an unauthorised person and there is no power in the memorandum or articles of association
of the first respondent enabling such payment. As there is no power to make an unauthorised payment, a resolution to that effect will have no
meaning and therefore, the resolution was defective even from the inception and cannot be placed before the general body.
In reply to the above, Mr. T. K. Seshadri contended that the said objection is unsustainable for the reason that the remuneration sought to be
paid is for the services rendered. It is on the basis of section 72of the Contract Act as the service rendered by the second respondent is not
gratuitous. Section 290 of the Companies Act provide that all the acts of the director, whose appointment is found to be defective, till the defect is
shown to him are valid. I am, therefore, of the view, that once his actions as director are found to be valid, the remuneration payable to him during
the said period would be only in the capacity as director and it is only with that object the approval of the Central Government is sought by the first
respondent and on September 5, 1994, such approval was also obtained, which came to the first respondent after the annual general meeting was
over.
The first respondent in its application before the Central Government also set out the reasons for the approval which is sought for u/s 309 of
the Companies Act. The Central Government considered the application and granted approval for waiver of recovery subject to the approval of
the shareholders of the first respondent in the meeting. The remuneration sanctioned by the Central Government does not include the period when
the second respondent acted as additional director. Therefore, the question whether the second respondent''s appointment as additional director
u/s 260 of the Companies Act is valid or not does not arise in these proceedings. The second respondent is admittedly member. It is in relation to
the expenditure which the first respondent incurred during the management of the affairs of the first respondent. Therefore, the objection that the
payment to the second respondent is ultra vires the first respondent is, in my view, without any substance.
Point (c) : Dealing with the last point, Mr. C. Harikrishnan read out the counter-affidavit wherein it has been stated that the meeting was
attended by 1,411 persons. According to learned counsel there is no indication in the minutes as to how any shareholders attended in person or
through proxy and the value of the shares has not been given. However, in the alleged poll conducted some like 7,392 votes said to have been
cast. Mr. C. Harikrishnan also alleges that on the letter of the first respondent dated August 17, 1994, which has been appended to the reply
affidavit there was no proposer to the candidature of the second respondent when his election was taken up. Mr. C. Harikrishnan pointed out the
exact words of the first respondent as found at page 2 of the said letter, viz.,""In the case of Mr. N. G. Manavalan, there was no proposer at the
time of vote by show of hands made by the chairman"". According to learned counsel for the applicants, the chairman has no jurisdiction u/s 179 of
the Companies Act to order a poll straightway when there were no proposers and, therefore, the entire procedure adopted in the meeting was
wrong. Both factually and legally the first respondent cannot rely on the minutes produced, which must have been concocted subsequently and they
do not reflect what actually transpired in the meeting. Therefore, he would very strongly urge that no reliance can be placed on the minutes.
According to him, the letter of the first applicant annexed to the reply affidavit makes it clear. At any rate, in view of the fact that the resolutions
suffer from infirmities, however much they may be confirmed by the general body, they have no legal effect and, therefore, the court should not
permit the first respondent to implement the resolutions.
As pointed out earlier, the first respondent has filed a detailed counter-affidavit which has already been summarised by me in paragraphs supra.
According to Mr. C. Harikrishnan, the decisions cited by Mr. T. K. Seshadri will have to be understood on the facts arising in each case. None of
the decisions held that a meeting could go on with a defective and misleading explanatory statement as in the present case. The adequacy of an
explanatory statement is question of law and the expression ""material particulars"" has to be viewed in accordance with the company and the
substance of the resolution proposed. In the present case, the explanatory statement proposed by the first respondent fails the test. The facts which
ought to have been mentioned in the explanatory statement as pointed out by learned counsel for the applicants earlier, have been deliberately and
with mala fide objects concealed. Therefore, there cannot be a better example of duping the shareholders by the management than the present
case. In conclusion, Mr. C. Harikrishnan contended that it has been clearly demonstrated that the minutes produced are not proper and on the fact
of the admission made by the first respondent in its letter dated August 17, 1994, there cannot be any doubt that the minutes produced are not
true, and even if there is a presumption, the same stands discharged. He further states that the approval of the Central Government has been
obtained by misrepresentation and hence the same cannot be relied on by the first respondent, and at any rate, the opinion/approval of the Central
Government cannot be binding on the court nor can it cure the defect of ultra vires.
Mr. T. K. Seshadri, while answering the third point of counsel for the applicants, submitted that there is no discrepancy in the minutes to vitiate
the resolution concerning items Nos. 7 and 8. The minutes are prima facie evidence u/s 193 read with section 195 of the Companies Act. He also
invited my attention to the case reported in Sivaraman (B.) v. Egmore Benefit Society Ltd. [1992] 75 Comp Cas 198, wherein it has been held by
this court that by virtue of the record of proceedings in the minutes book duly made and filed with the Registrar of Companies, the applicants were
validly elected as directors since the respondents produced no evidence to dislodge the presumption u/s 195 of the Companies Act and that the
scrutineers'' report contained no evidence of manipulation of the poll. It is further held that the presumption is rebuttable and the onus of dislodging
the presumption is on the person who has challenged the resolution on the ground of malpractice or misdeed. In my opinion, the applicants have
failed to discharge the said onus. In my prima facie view, all the objections of the applicants do not merit any consideration since they have not
made out any prima facie case whatever.
The balance of convenience also lies in favour of the respondents. The Central Government have also considered the request made by the first
respondent and ordered waiver of recovery, which was paid to the second respondent as a remuneration subject to the approval of the general
body as required by sub-section (2) of section 309 of the Companies Act. So, it is for the shareholders to consider whether the recovery should
be made or the recovery should not be made and it is the internal management of the first respondent. The board of directors have also approved
and passed the resolution. As rightly pointed out by Mr. T. K. Seshadri, if the resolution passed by the majority of shareholders is not given effect
to, great prejudice would be caused to the second respondent, who was validly elected as a director at the annual general meeting, where the
majority of shareholders have approved of his appointment. However, I have rendered the above finding on a prima facie consideration of the
materials placed before me by both sides. This will not in any way affect the trial of the suit.
For the foregoing reasons, Application No. 5055 of 1994 is allowed and O.A. No. 708 of 1994 is dismissed and the interim order granted on
August 3, 1994, is vacated.