Pasari Mills Ltd. vs Keshavdeo

Shivdayal, J.—This is an appeal from the order of the Additional District Judge, Vidisha, disallowing the Plaintiff''s application for appointment of a receiver. The main contention of Shri Adhikari is that at present unauthorised persons are meddling with the affairs of the Pasari Flour Mills Ltd., Bhilsa (hereinafter referred to as the Company) and are running the four mills without any warrant.

In the Plaintiffs'' suit which is pending before the Additional District Judge, Vidisha, there are in main 5 disputes for determination. The contest between the two parties in the suit relates to the validity of their being directors of the company. The company itself is Plaintiff No. 1. The other Plaintiffs (Nos. 2, 3, 4 and 5) claim to be validly and legally appointed directors of the company and contend that Defendant No. 1 has already ceased to be a director and the appointment of Defendants Nos. 2 and 3 as directors was ultra vires. The Defendant''s claim and contention is vice versa.

The Pasari Flour Mills Ltd., Bhilsa, is a company which was initially incorporated on November 16, 1937, under the Gwalior State Companies Act of Samvat 1963 and which is now deemed to be a company incorporated under the Companies Act, 1956. The principal asset and business of the company is a flour mill situate at Bhilsa. The authorised share capital of the company is Rs. 5,00,000 divided into 5000 ordinary shares of Rs. 100 each. The issued capital of the company is Rs. 2,00,000 consisting of Rs. 2,000 ordinary share of Rs. 100 each and the subscribed and paid-up capital is Rs. 1,24,200 divided into 1242 ordinary share of Rs. 100 each. By virtue of an agreement in writing between the Company of the one part and M/s Ramnarain Premsukhdas and Sons (a firm consisting of Birmadutta s/o Premsukhdas and Keshavdeva s/o Premsuskhdas) of the other part, the said firm was appointed managing agents of the company for a period of 31 years as and from the date of its incorporation. The first directors of the company were (1) Seth Pratap Singh (2) Seth Ramdhandas (3) Seth Beni Prasad (4) Seth Umadutta Nemani (5) Seth Radhakrishna (6) Seth Birmadutta (7) Seth Nagarmal and (8) Seth Keshavdeva. In or about 1940 the managing agents, in exercising of their powers under the said agreement, appointed Birmadutta as an ex-officio director and Pratap Seth was designated by the managing Agents as an ex-officio chairman of the Board of Directors of the company. Pratap Seth resigned on December 31, 1937. The resignation was accepted by the company on July 31, 1948, whereupon Umadutta Nemani was nominated by the managing agents as ex-officio Chairman on or about July 31, 1948. The company was initially governed by the provisions of the Gwalior Companies Act No. 1 of Samvat 1963, and from April 1, 1951, by the Indian Companies Act No. of VII of 1913 by virtue of Part B State (Laws) Act No. III of 1951. Since April 1, 1956, it is governed by the Companies Act, 1956 (hereinafter called the Act). All these facts appear to be undisputed.

The 17th annual general meeting of the company for the year ended June 30, 1954, was held on April 7, 1956. At that meeting Keshavdeva (Defendant No. 1) retired by rotation. By an ordinary resolution he was reappointed a director. The Plaintiff contention is that this appointment was in contravention of Section 261 of the Companies Act, 1956. This is the first dispute which has far reaching consequences, as will be seen presently.

On April 30, 1956, the managing agents intimated to the company that thereafter Birmadutta would be the sole ex-officio director. The very fact of the alleged intimation is in dispute. If it is found that such an intimation was in fact given, Umadutta Nemani no longer remained an ex-offico director but reverted to his original position of an ordinary director liable to retire by rotation.

The 18th annual general meeting of the company for the year decided June 30, 1955, should have been held by March 31, 1956 at the lates as required by the Companies Act. The Registrar extended time upto September 30, 1956. No meeting was, however, held on that day or at any other time thereafter. The Plaintiffs contend that Umadutta ceased to be a director on September 30, 1956, as he must be deemed to have retired by rotation u/s 256 of the Act.

The fourth dispute is that according to the Plaintiff Keshavdeva must be deemed to have retired by rotation on June 30, 1957 which was the last date (as extended by the Registrar) for ho ding the 19th annual general meeting of the company for the period ended June 30, 1956, although no such meeting was held and has not so far been held. This contention is in the alter naive, if it is held that the reappointment of Keshavdeva in the meeting of April 30, 1956 was valid.

The fifth dispute which would rather be resolved as a consequence of the determination of the foregoing disputes, is about the appointment of Defendants Nos. 2 and 3 as directors in a meeting of the Board of Directors held on August 17, 1959 (convened by Keshavdeva) and likewise about the appointment of Plaintiffs Nos. 3 and 4 who were appointed in a meeting of the directors held on August 29, 1959, which was called by Birmadutta as also of the appointment of the 5th Plaintiff in another meeting of the Board of Directors held on December 15, 1959.

Keshavdeva and Birmadutta are step brothers (same father). It seems that they fell out in or about May 1958 and due to their bickerings the working of the mills came to a stop. Since August 1959 Keshavdeva and his appointees are running the mills.

Having stated in brief the facts material for this appeal and the main contentions between the parties, I must now consider whether the Plaintiffs have prima facie a good case. Before I do so, I must make two things very clear. Firstly, this being a case where the business of a company is involved, the question whether a receiver should be appointed or not has to be seriously considered keeping in view the interests of the share-holders, and not as an ordinary case of private dispute between two individuals. Secondly, the entire discussion and the conclusions arrived at in this appeal are made only for the limited purpose of examining whether it is just and convenient to appoint a receiver. I am after all not determining finally the questions on which the parties have joined issue in the suit.

I shall deal with the first point first. Shri Adhikari relying on Section 261 of the Companies Act, 1956, urges that the appointment of Keshavdeva as a director in the meeting held on Apr 1 7, 1956, was in contravention of Clauses (a) and (f) of Sub-Section 1 to that section.

Learned Counsel for the Respondent strenuously argues that in the absence of a specific allegation in the plaint the Plaintiff cannot be allowed here to raise that point. It is true that in paragraph 9 of the plaint, the Plaintiff has not given material facts but has contended himself by saying that by virtue of the provisions of the Companies Act, 1956, and in particular Section 261, the said purported appointment and election of Keshavdeva is invalid, illegal and inoperative in law. Whether it is so or not is a question of law to be determined by the Court. Rules of pleadings require that a party has to state all the material facts. The reply to para 9 of the plaint is no less vague in the written statement when the traverse is in these terms:

In para 9 it is admitted that an ordinary general meeting of the Company (annual) was held on 7th April 1956, at which Defendant No. 1 was appointed a director. It is, however, denied that the election of this Defendant was invalid under any of the provisions of the Companies Act, 1956 and particularly Section 261 thereof.

Such a traverse is a negative pregnant and is defective. Even so, in view of the affidavits filed by the parties and relied on before me, both the parties are aware of the Plaintiff''s stand that among other things the reappointment of Keshavdeva without a special resolution has been questioned by the Plaintiffs.

Section 261 (1) imposes a restriction for the appointment of certain categories of persons enumerated in Clauses (a) to (g) of that Sub-section as directors of the company except by a special resolution passed by the company. This restriction applies to a public company which has a managing agent and such managing agent is authorised by the articles or by an agreement to appoint any director to the Board, as is the case here. Clause (a) of Sub-section (1) brings under the mischief of that Sub-section any person who is an officer or employee of, or who holds any office or place of profit under, the company. Keshavdeva was admittedly a partner in the managing agent firm (Ramnarain Premsukhdas) and as such an "officer" of the company as defined in section 2 (30) of the Act. But he is protected by the proviso to Clause (a) of Sub-section (1) inasmuch as he was already a director of the company. As I read the Sub-section together with the said proviso I am clear in my mind that a special resolution is not required, even in the case of such company, when a director is to be reappointed. However, the difficulty in the Defendants'' way appears to be insurmountable when Clause (f) is applied. The last mentioned clause speaks of" an associate..... ......of the managing agent". And the word "associate" in relation to a managing agent (where the managing agent is a firm) includes every member of such firm, as defined in section 2 (3) (b). Keshavdeva was admittedly a member of the managing agent firm. To his appointment as a director in the meeting on April 7, 1956 (when the Act of 1956 had come into force) Section 261 (1) was thus attracted and a special resolution was imperative. Since he was appointed a director in that meeting by an ordinary resolution, prima facie, his appointment was in contravention of the law and was, therefore, invalid and illegal.

Shri Jagdish Sawaroop, learned Counsel appearing for the Respondents, asks me to read Section 261 as a provision imposing the restriction on the power of the managing agent to appoint a director to the Board of Directors and not on the power of the company to appoint a director. To put it differently, the argument is that the managing agent of such company is disentitled to appoint any of the persons enumerated in Clauses (a) to (g) as a director unless and until they obtain a prior sanction from the company in the form of a special resolution passed by it. According to the learned Counsel this section has nothing to do with the powers of the company to appoint a director straightway.

The argument appeared attractive at first but on a little reflection. I found it untenable. According to the scheme of the 1956 Act the managing agents of a company cannot appoint more than one-third of the number of directors; the remaining two-thirds must be persons whose period of office is liable to terminate at any time by retirement of directors by rotation. Thus the evil of the managing agents putting up their own nominees for election for the entire board of directors has been curbed and the managing agents by reason of their position and influence which they exercise over the affairs of the company cannot swamp the Board with their own nominees. At the same time, if nominees of the managing agents are men of integrity and calibre and succeed in securing the suffrage of a large majority of the share-holders, it would not be in the interest of the company to prevent their election to the Board of Directors. But then the Board could be swamped by persons closely connected or associated with the managing agents by their election in the two-thirds quota. That is why a further restriction is imposed on their election as directors. Section 261 (1) specifies certain categories of persons who are deemed to he closely connected or associated with managing agents or to be under their influence. A special resolution (see Section 189 of the Act) has, therefore, been made necessary, which, inter alia, requires a majority of 75% votes to be cast in its favour.

Moreover, the interpretation suggested by the learned Counsel will produce an anomaly. If the managing agents cannot secure a three-fourths majority of the shareholders for sanctioning the appointment of a particular person of theirs as a director, they need only secure a bare majority of 51% and get that very person directly appointed by the share-holders. This would defeat that very object and purpose of requiring a special resolution.

It is further contended for the Respondents that Birmadutta having been present in that meeting it does not lie in his mouth to challenge the validity of a resolution which was unanimously passed and adopted. If Keshavdeva''s reappointment was in contravention of Section 261 of the Act-may be it was out of ignorance of law, which had come into force only a few days before the meeting-no amount of acquiescence on the part of Birmadutta could validate it.

Alternatively, it is maintained by Shri Jagdish Swaroop that the resolution appointing Keshavdeva as director in the meeting of 7 4-56 having been unanimously passed, alt the formalities prescribed in Section 189 (2) must be deemed to have been complied with and, in other words, all the defects must be deemed to have been cured. But, as pointed out by Shri Adhikari, all the share-holders were not present in the meeting of 7-4-56 when this resolution was passed. The proposition stated in Palmer (Twentieth Edition) or in 6 Halsbury (Salmond) 330 (para 649) and 345 foot note (m) does not help the Respondents in this case. If all the share-holders had been present at the meeting, application of the dictum in Re Pearce, Duff& Co. Ltd. 1960 (3) All. ER 222 (224) and the observation in Solomon v. Soolmon & Co., (1897) AC 22 (57) would have been considered.

In this view of the matter the appointment of Keshavdeva as director in the meeting of April 7, 1956 must be struck down, prima facie. As a necessary consequence the appointment of Defendants Nos. 2 and 3 as directors in a meeting convened by Keshavdeva arrogating to himself the style of the sole continuing director of the company must also be held ultra vires.

For the purposes of this appeal it now becomes unnecessary to consider the question of automatic retiremen, by fiction, on the last date when an annual general meeting on which a director was liable to retire by rotation should have been held. Similarly, it becomes necessary to consider whether Birmadutta Plaintiff No. 2 also retired by rotation or is a validly continuing director. There is no dispute that Birmadutta is a share-holder of the company. As such he has a locus standi.

In addition to the above conclusion that prima facie the appointment of Keshavdeva as director on April 7, 1956 was invalid and inffective, there are two other considerations which weigh against the Defendants: (1) the Defendants are not operating with any bank and (2) no accounts have been audited since the Defendants have taken possession of the business of the flour Mills. As to the first, Keshavdeva has stated in his affidavit that Birmadutta objected to the Defendant''s opening an account in three banks, every time that the latter endeavoured to do so. This can hardly be a satisfactory explanation. Birmadutta may have objected to the opening of a bank account in the name of the company and to be operated by Keshavdeva but he could not possibly have any objection if the Defendants had opened an account in their own names because of Birmadutt''s objections. On the Defendants'' own saying, they made a gross profit of about one lakh rupees in seven months. It is at once striking that such a big concern should work without having an account in any bank. Regarding the second point, Keshavdeva''s statement is that he approached the auditor of the company but he refused to audit the accounts in a much as he had not been reappointed audi or in a subsequent annual meeting. Be that as it may, the Defendants should have got the accounts audited by any other auditor for the period for which they have been working the mills. Clause 1 of the Schedule to the Chartered Accounts Act, 1949, was no impediment to the accounts being audited in the particular circumstances.

For these reasons, I have no doubt that this is a fit case where the appointment of a receiver is absolutely necessary for the protection of the rights and interests of the share-holders.

Before I proceed to issue direction''s and appoint a receiver. I must mention certain facts which I cannot ignore for those purposes. Firstly, much of the disputes between the parties and in particular about the further management of the flour mills would have came to an end if an annual general meeting of the shareholders had been held. The Defendants did issue a notice for such a meeting to be held on November 7, 1960. However, the Plaintiffs approached the Additional District Judge, Vidisha for issuing an injunction to restrain the Respondents from convening and holding the annual general meeting of the company called for November 7, 1960, and/or any other ordinary or extraordinary general meeting of the share holders. Side by side Radhelal Khetan, who is brother-in-law of Birmadutta (husband of Birmadutta''s full sister) instituted a suit in the city civil Court, Bombay and successfully applied for an interim injunction restraining the holding of the meeting convened by the Respondents for November 7, 1960.

Secondly, Birmadutta was himself present in the meeting held on April 7, 1956, in which Keshavdeva was unanimously appointed a director and he acquiesced in Keshavdeva''s acting as a director, upto 1958. The reappointment as a director prima facie, does not seem to be malicious or a deliberate violation of Section 261 of the Companies Act. Possibly it was due to ignorance of law, the Act having came into force only a week before.

Thirdly, it appears from the balance sheet circulated with the notice of the meeting to be held on November 7, 1960, that they made a gross profit of one lakh rupees. If the mills had remained closed, the company would have been deprived of at least that much profit.

These three considerations, in addition to the fact that admittedly the Respondents are actually the mills at present, strongly persuade me to appoint Keshavdeva Deft. No. 1 as the Receiver.

The result is that this appeal is allowed. The order passed by the trial Judge is set aside. The following order is made:

(1) Shri Keshavdeva Deft. No. 1 is appointed the Receiver of the first Plaintiff company (The Pasari Flour Mills Ltd., Vidisha) together with the plaint, machinery) and equipment thereof and also of other assets and properties of the said company and the books of account, records "and vouchers of the company as also of the monies lying in banks and the existing finished and unfinished goods raw materials, gunny bags and cash monies and other properties with all powers under Order 40 Rule 1 of the Code of Civil Procedure, including the power to run the flour mills of the said company and for that purpose the Receiver shall have, without prejudice to the general powers, the following specific powers:

(i) To retain the present staff and workmen, a list of which shall be submitted to the Court by the Receiver on or before August 15, 1961, showing the emoluments of each and the period for which he has been in the employment of the flour Mills.

(ii) To employ additional staff with the sanction of the Court.

(iii) To terminate the services of any of the present employees.

(iv) To pay all outgoings of the mills including salary and wages of the staff and workmen and charges for electricity and telephone for running the mills.

(v) To apply for and obtain quota of food grain, and to make purchases of food grains for the purposes of the mills.

(vi) To effect sales of flour and other products at best prices obtainable.

(vii) To receive and realise purchase price and amounts and dues to the company and give receipts and other discharges for the same.

(2) The Receiver shall maintain true, proper and regular accounts of the working of the mills and shall submit a summary of accounts to the Court regularly by the 15th day of every month beginning from August 15, 1961.

(3) The Receiver shall immediately open an account in the name of the company through himself in the State Bank of India If that bank has any objection to the opening of such account, an account shall be opened in the United Commercial Bank.

(4) M/s B.G. Shinde and Co., Chartered Accountants, Gwalior are appointed auditors to audit all the accounts of the company from May 1958 and also such earlier accounts as may be available (and not audited) and make a report within 90 days of this order. His remuneration will be fixed on his submitting an estimate of his audit fee after a preliminary look at the books and papers available. The Defendants shall produce before the Auditor all the books of accounts, vouchers, receipts, minute books and all other documents in their possessions, within four days from today, failing which Shri B.G. Shinde will proceed to Vidisha and take possession of the books etc. Let the preliminary estimate of their remuneration be submitted by the Auditors in this Court as soon as possible, so that it may be fixed and their work may start. If and when Shri B.G. Shinde is required to go to Vidisha for the purposes of this work, after obtaining sanction from this Court, he will be paid first class railway fare and Rs. 20 per day for incidental expenses.

(5) The second Plaintiff (Birmadutta) will be entitled to enter the premises and to inspect the working of the mills during working hours and also to inspect the accounts maintained by the Receiver as also all the previous accounts available but shall not in any way interfere with the working of the mills or the management of the Receiver.

(6) The Receiver will be at liberty to apply to the Court for further directions as and when occasions arise. Likewise, any of the parties to the suit may apply to the Court for further directions.

(7) The expression "Court" in the above directions means the trial Judge before whom the suit may be pending for the time being. The trial Judge shall not issue any direction which may be repugnant to or inconsistent with this order.

(8) Any party to the suit may apply to this Court for revoking or altering any of the above directions.

(9) Unless terminated earlier by an order of this Court, the term of the Receiver shall be upto the date the final disposal of this suit or date of the next general meeting at which directors are validly appointed, whichever is earlier.

The parties shall bear their own costs in this appeal as also costs so far incurred in these proceedings in the Court below.