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Judgment
Panchapagesa Sastri, J.—Defendants are the appellants. This appeal arises out of an action instituted by the two respondents who were
share-holders and directors of the first appellant company known as ""The Saraswathi Vilasam Shanmughanandha Nidhi, Ltd.,"" Vellore. Appellants
2 and 3 who were defendants 2 and sin the lower Court were respectively the Secretary and Vice-President of the said Nidhi. The suit was for a
declaration that a certain resolution passed by the general body on 30-4-1944 was invalid. The suit is a representative suit.
Article 5 of the Memorandum of Association of the company is as follows:
The share capital of the company is Rs. 20,000 divided into 2000 shares of Rs. 10 each.
The object of the company was to carry on the business of banking. The articles of association of the company provided for the management of
the company. Article 21 was as follows:
The members of the Managing Committee shall each take not less than 26 shares in the company.
Article 20ran as follows:
The Managing Committee shall consist of not less than five persons and not more than ten persons inclusive of the President, Vice-President,
Treasurer, Secretary and Auditor.
On 30-3-1944, the company issued a notice of general body meeting in pursuance of a requisition u/s 78 , Companies Act. The meeting was to be
held on Sunday 30th April at the registered office. The subject noted was as follows :
To add to Para. 21 of the Rules of the Nidhi that the directors shall each keep a sum of Rs. 1000 (one-thousand) in fixed deposit''.
The meeting was duly held on 30th April and: the following special resolution was passed:
That the following shall be added to Para. 21 of the Rules of the Nidhi, namely, ''the directors shall each keep a sum of Rs. 1000 (one thousand)
in fixed deposit.''
It was unanimously resolved by all the members of the general body that this rule shall be binding on the directors functioning at present and the
directors who may succeed them hereafter.
It was unanimously resolved by all the members of the general body that in accordance with the provisions of the Indian Companies Act, if the
directors. commit default in making the fixed deposit aforesaid within 60 days from today they shall be removed without any notice.
The two plaintiffs who were two of the directors then functioning filed this suit on 29-6-1944 and prayed for a declaration that the resolution of the
general body is illegal and void and also that the Court may grant an injunction against the defendants restraining them from removing either the
plaintiffs or such other directors who do not comply with the above resolution There was a prayer for costs and for such other relief as the Court
may think fit. The contention in the plaint was that this resolution imposing an additional qualification for directors was opposed to the Companies
Act and also to the provisions of the Memorandum of Association. There was a subordinate contention that the resolution making it applicable to
past directors was not properly included in the subject-matter of the agenda as set out in the notice convening the meeting. The trial Court held that
there was nothing in the Companies Act which prohibited a company from laying down in its articles a qualification requiring that a director should
have a certain amount of fixed deposit in the company. It rejected the agreement on behalf of the plaintiffs that the only qualification which could be
imposed by the articles was a requirement compelling a director to have a certain number of shares. It was very broadly argued that no other
qualification can be imposed by the articles except a share qualification. The trial Court held further that the resolution was passed in the general
interests of the company and it could not be characterised as an oppression of the minority by a majority. As regards the wisdom of the policy
underlying the resolution as passed, the Court observed that it was not for the Court to substitute its judgment in the matter, in the place of the
judgment of the shareholders. It also held that the subject-matter as mentioned in the agenda was wide enough for permit the additional resolution
that the qualification newly imposed shall be binding on the past directors as well. The action was accordingly dismissed with costs.
On appeal by the plaintiffs, the learned Subordinate Judge took the view that this resolution imposing a qualification of having a fixed deposit of
Rs. 1000 was ultra vires of the powers of the company. In its view, the Companies Act would not permit an article of that type. The Court was
also of the opinion that it contravened Article 5 of the Memorandum of Association. On these grounds the Court declared the resolution to be
illegal and void irrespective of the fact whether it was in the general interests of the share-holders or not.
The defendants have now come on appeal against this decree of the Subordinate Judge and contend that the special resolution was perfectly in
order and there was nothing in the Companies Act to prohibit the same. On behalf of the respondents it was urged that the only qualification which
could be imposed on directors was a share qualification, i.e., a requirement necessitating the holding of a certain number of shares by the director.
Reference was made to various sections of the Companies Act wherein share qualification of directors is referred to, particularly Ss. 84, 93, 103
and Regn. 70 of Table A and Regn. 77. It is true that these sections and Regulations relate to the share qualification, (if any) of the directors as
required by the articles. But there is nothing in these sections or Regulations or in any of the provisions of the Companies Act which precludes a
company from having other qualifications in addition for directorship, if the article so provided. After the arguments had proceeded to some extent,
learned counsel for the respondents admitted that even a share qualification was not compulsory in the sense that you can be a director without
having any shares. I can find nothing in the policy of the Companies Act or in its language which prohibits additional or different qualifications for
directorship apart from the holding of shares. The holding of shares as has been already pointed out, is not a necessary sine qua non. We are
aware of familiar instances of ex officio directors recognised as such and provided for in the articles without a share qualification at all. Equally it is
clear to my mind that the (share-holders may well desire to have other qualifications for a person to be a director, though it may not be a share
qualification. There is nothing unreasonable, for instance, in having a minimum age limit with a view to justify confidence in the mature judgment of
the person to be appointed, a literary qualification or even a technical qualification if the requirement of the company''s business should justify the
necessity for the same in the opinion of the organisers or promoters or share-holders. Indeed, in some cases it may even be necessary in the
interests of security of the State to prohibit a non-national from being in the direc torate of a concern of national importance, for instance, one for
the manufacture of atom, bombs or hydrogen bombs. The presence of an ""alien"" in the directorate of such a company promoted by a State would
obviously be very undesirable. I can find nothing in the Companies Act to preclude a provision for that. In truth the matter is left entirely to the
discretion and judgment of the share-holders. I am, therefore, of opinion, differing from the view of the Subordinate Judge and agreeing with the
view of the District Munsif, that this special resolution providing for a holding of a fixed deposit of Rs. 1000 as an additional qualification for a
director is entirely intra vires and legal. As a matter of fact, it is not uncommon to find in the Articles of Association of several companies a
provision that not more than one partner of a firm consisting of more than one partner, or not more than one member of a joint Hindu family
consisting of more than one, can be director of a company. Nor is it unusual to find that a director of one bank can not be a director of another
bank, a provision which has now been statutorily introduced in the recent Banking Act of 1949.
Nor can I agree with the view of the Subordinate Judge that this provision offends Article 4 of the Memorandum of Association of this
company. As already stated, that merely lays down the capital of the company and there is nothing in this new article which is consistent with
Clause (5) of the Memorandum.
Respondents'' counsel further argued that in essence this requirement for Rs. 1000 deposit would amount to an increase of capital. In my
opinion, it does not amount to an increase of capital at all, This Rs. 1000 is a fund which is to be kept in deposit only so long as a person is a
director and continues to be a director. If he ceases to be a director, obviously, the amount has got to be returned to him, He is entitled to call for
its return. If it is share capital, that could not be the position. Indeed if it were share capital and an increase of capital, learned counsel himself had
to concede that this resolution can be justified as coming within the share qualification clause which according to him, was not only permitted but
was the only clause in respect of qualification of directors. There is no substance, therefore, in this contention either.
In the result it follows, in my opinion, that the declaration granted by the lower appellate Court that the resolution is invalid and the amendment
of the article is inoperative should be vacated.
It was next argued that the portion of the resolution relating to the applicability of the new requirement to past directors was not justified. The
lower appellate Court does not deal with this matter, because, in the view it had taken, the main resolution itself was illegal. The trial Court decided
that the agenda was sufficiently comprehensive and the general body had every right to introduce this part of resolution also. While I do not dissent
from the view of the District Munsiff, I think it is unnecessary, however, to rest this judgment on that basis, because, admittedly the term of the
directors is now over and the respondents can, if at all, only stand for election under the articles as they stand now. It is not necessary, therefore, to
deal with this aspect of the matter.
Nor is it necessary to refer to the last contention on behalf of the respondents that the second portion of the resolution providing that in the
absence of the fulfilment of the requirement of Rs. 1000 deposit within two months, the past directors should vacate their place is not justified
under Article 22 , Articles of Association of the company, as they stand unamended, or under any of the provisions of the Companies Act. These
matters have now become merely academic by efflux of time.
The second appeal is, therefore, allowed with costs here and in the lower appellate Court and the decree of the trial Court restored. (Leave
refused.)