section 255 nd 256 along with case
TRANSCRIPT
255. Appointment of directors and proportion of those who are to retire by rotation.(1) 6[ Unless the articles provide for the retirement of all directors at every annual general meeting, not less than two- thirds] of the total number of directors of a public company, or of a private company which is a subsidiary of a public company, shall-(a) be persons whose period of office is liable to determination by retirement of directors by rotation; and(b) save as otherwise expressly provided in this Act, be appointed by the company in general meeting.
(2)The remaining directors in the case of any such company, and the directors generally in the case of a private company which is not a subsidiary of a public company, shall, in default of and subject to any regulations in the articles of the company, also be appointed by the company in general meeting,
256. Ascertainment of directors retiring by rotation and filling of vacancies.(1) At the first annual general meeting of a public company, or a private company which is a subsidiary of a public company, held next after the date of the general meeting at which the first directors are appointed in accordance with section 255 and at every subsequent annual general meeting, one- third of such of the directors for the time being as are liable to retire by rotation, or if their number is not three or a multiple of three, then, the number nearest to one- third, shall retire from office.(2) The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment, but as between persons who became directors on the same day, those who are to retire shall, in default of and subject to any agreement among themselves, be determined by lot.(3) At the annual general meeting at which a director retires as aforesaid, the company may fill up the vacancy by appointing the retiring director or some other person thereto.(4) (a) If the place of the retiring director is not so filled up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place.(b) If at the adjourned meeting also, the place of the retiring director is not filled up and that meeting also has not expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been reappointed at the adjourned meeting, unless-(i) at that meeting or at the previous meeting a resolution for the reappointment of such director has been put to the meeting and lost;(ii) the retiring director has, by a notice in writing addressed to the company. or its Board of directors, expressed his unwillingness to be so reappointed;(iii) he is not qualified or is disqualified for appointment;
(iv) a resolution, whether special or ordinary, is required for his appointment or re- appointment in virtue of any pro- visions of this Act; or(v) the proviso to sub- section (2) of section 263 1[ is applicable to the case. 2[ 3[ Explanation.- In this section and in section 257, the expression" retiring director" means a director retiring by rotation.
Swapan Dasgupta vs Navin Chand Suchanti And Ors. on 12 January, 1988
Equivalent citations: 1988 64 CompCas 562 Cal
Bench: D K Sen, S K Sen
Swapan Dasgupta vs Navin Chand Suchanti And Ors. on 12/1/1988
JUDGMENT
Dipak Kumar Sen, Actg. C.J.
1. The material facts on record and the proceedings leading up to this
appeal are, inter alia, that Sinclair Freight and Chartering Consultants P.
Ltd. (hereinafter referred to as " the freight company ") was incorporated
under the Companies Act, 1956, on June 20, 1968. Swapan Dasgupta, the
appellant, was a subscriber to the memorandum of the freight company
and under Article 11 of the articles of association of the freight company,
the appellant became and was named as one of its first directors. The
appellant was also appointed a managing director of the freight company
and continued as such till the time as hereinafter stated.
2. On December 2, 1971, Sinclair Hotels P. Ltd. (hereinafter referred to
as " the hotels company ") was incorporated under the Companies Act,
1956. The appellant was also one of the subscribers to the memorandum
of the hotels company and under Article 11 of the articles of association
of the hotels company, the appellant became and was named as one of
the first directors thereof.
3. On July 14, 1978, a scheme of amalgamation was approved and
sanctioned by this court in Company Petition No. 196 of 1978 connected
with Company Application No. 39 of 1978 whereby the business and
undertaking including all property, assets and liabilities of the freight
company was directed to be transferred and vested in the hotels
company on the terms and conditions of the said scheme. After such
transfer and vesting, the freight company was directed to be dissolved.
4. It was provided in the said scheme that the hotels company would take
over the services of the existing managing director of the freight
company, i. e., the appellant, on the same terms and conditions.
5. The name of the hotels company was subsequently altered to Sinclairs
Hotels and Transportation P. Ltd.
6. Subsequent to the amalgamation, the appellant continued as a
managing director of the hotels company. On May 1, 1981, the appellant
was reappointed as the managing director of the hotels company for a
period of five years. On November 4, 1981, the hotels company was
converted into a public limited company and named as Sinclairs Hotels
and Transportation Ltd., hereinafter referred to as "the said company".
7. The appointment of the appellant as the managing director of the said
company was approved by the Central Government by its letters dated
September 13, 1982, and May 17, 1983.
8. At an extraordinary general meeting of the shareholders of the said
company held on January 11, 1983, the appointment of the appellant as
the managing director for five years was approved with effect from May
1, 1981.
9. On April 30, 1986, the appellant ceased to be the managing director of
the said company but continued to act as a director and the chairman of
the board of directors thereof.
10. On August 16, 1986, there was a meeting of the board of directors of
the said company which was presided over by the appellant. At this
meeting, a committee of management was constituted with the appellant
as the chairman. Certain additional duties in respect of the affairs of the
said company were allotted to the appellant and it was decided to issue a
power of attorney in his favour. It was recorded in the minutes of its
meeting, inter alia, that the appointment of the appellant as the
chairman-director of the said company had been and was thereby
reaffirmed until the next annual general meeting of the said company. In
the return of the said company filed with the Registrar of Companies on
September 8, 1986, it was recorded that the appellant had been
appointed the chairman-director and the constituted attorney of the said
company on August 16, 1986.
11. On November 24, 1986, a notice was issued convening the annual
general meeting of the said company to be held on December 29, 1986.
Under item No. 6 of the agenda, an ordinary resolution was proposed to
be passed that the appellant be appointed as a director of the said
company on a notice under Section 257 of the Companies Act, 1956, by a
member of the company. In the explanatory statement to the said notice,
it was further stated that on August 16, 1986, at a meeting of the board
of directors of the said company, the appellant had been appointed as the
chairman-director and constituted attorney of the said company until the
next annual general meeting and that the appellant will hold his office as
such additional director up to the date of the said meeting.
12. In the directors' report it was also stated that the appellant had
retired as the managing director of the said company on April 30, 1986,
but had continued as the chairman. Pursuant to Article 111 of the articles
of association of the said company, the appellant will hold his office up to
the date of the next annual general meeting.
13. At a meeting of the board of directors of the company held on
November 24, 1986, a resolution was passed again appointing the
appellant as the managing director and chairman of the said company for
a period of three years with effect from January 1, 1987.
14. On or about December 22, 1986, one Gopal Vyas, a shareholder of
the company, instituted a suit in this court against the said company and
others, being Suit No. 934 of 1986, entitled Gopal Vyas v. Sinclairs
Hotels and Transportation Ltd. (Suit No. 934 of 1986--22-12-1986),
challenging, inter alia, the proposed appointment of the appellant and
others as directors of the said company and the annual general meeting
proposed to be held on December 29, 1986. On the same date, an ad
interim order was passed in the said suit whereby it was directed that the
said meeting would be held on December 22, 1986, only for the purpose
of adjournment and a learned advocate of this court was appointed as the
chairman to preside over the said meeting. On an appeal from the said ad
interim order, on December 23, 1986, the appeal court modified the said
ad interim order and directed that the said annual general meeting would
be held on December 29, 1986, as scheduled but items Nos. 3, 4, 6, 7 and
8 of the agenda which related to the appointment of directors would
stand adjourned till January 20, 1987. By subsequent directions of the
court, the said meeting still stands adjourned.
015. On February 6, 1987, a further order was passed by the appeal
court whereby it was made clear that the order passed by the appeal
court on December 23, 1986, was not intended to affect the position of
the existing directors of the said company by reason of the directions to
hold the said annual general meeting in part and adjourning the other
items of the agenda. The parties were, however, left free to contend that
the status of the existing directors of the said company were affected for
reasons apart from the said meeting.
16. Some time in June, 1986, Navin Chand Suchanti, respondent No. 1,
acquired some shares of the said company and became a shareholder. On
January 7, 1987, respondent No. 1 filed the above suit, being Suit No. 5
of 1987, against the appellant and respondents Nos. 2 to 9 with leave
under Order 1, Rule 8 of the Code of Civil Procedure claiming, inter alia,
a declaration that appellant No. 1 was never appointed as an additional
director of the said company and that the appellant and Sanat Kumar
Mukherjee, respondent No. 2, were not directors of the said company
after December 29, 1986. Respondent No. 1 also claimed a permanent
injunction restraining the appellant and respondent No. 2 from
representing or holding themselves out or acting or functioning as
directors of the said company in any way and from interfering with the
management and affairs thereof. A permanent injunction was also sought
restraining the appellant and respondent No. 2 from entering into or
attending the offices of the said company. On the same date, that is,
January 7, 1987, respondent No. .1 moved an application in the said suit
for the following interim orders :
(a) An injunction restraining the appellant and respondent No. 2 from
representing or holding themselves out or acting or functioning as
directors of the said company in any way and from interfering or
intermeddling in the management and affairs of the latter.
(b) An injunction restraining the appellant and the respondent No. 2 from
entering or attending the offices of the said company.
The case of respondent No. 1 in his pleadings was, inter alia, that the
appellant was appointed as a managing director of the said company for
a period of five years from May 1, 1981. On April 30, 1986, the appellant
ceased to be the managing director of the said company.
17. On the basis of the minutes of the meeting of the board of directors
held on August 18, 1986, and the said notice of the annual general
meeting of the said company dated November 24, 1986, the appellant
was claiming to have been appointed as an additional director of the said
company on August 16 1986. It would be apparent from the minutes of
the said meeting of the board of directors held on August 16, 1986, that
the appellant was not appointed as an additional director of the said
company at the said meeting.
18. In any event, the appointment of the appellant as an additional
director, if at all, could continue only until the next annual general
meeting of the said company. In the agenda of the said annual general
meeting under item No. 6, it was proposed to appoint the appellant as a
director of the said, company. In the explanatory statement annexed to
the said notice, it was stated that the appellant continued to hold office
as an additional director of the said company only up to the date of the
said annual general meeting.
CONTENTIONS
19. Under Section 260 of the Companies Act, 1956, and also under
Article 111 of the articles of association of the said company, the
appellant, as an additional director, could hold his office only up to the
date of the next annual general meeting of the said company. In the
premises, on the date of the next annual general meeting, i.e., December
29, 1986, the appellant ceased to be a director of the said company. In
spite thereof, the appellant has continued to represent and had held
himself out to be a director of the said company, was acting as such and
interfering and intermeddling in the manngement of the affairs of the
said company.
20. The appellant affirmed on affidavit on January 10, 1987, which was
filed in opposition to the petition of respondent No. 1. It was contended
in the said affidavit that the suit filed by respondent No. 1 as framed was
not maintainable as the said company had not been made a party thereto.
It was contended further that the said company should have been the
proper plaintiff and there was no explanation why it was not impleaded.
The suit was liable to be dismissed on the ground of nonjoinder of the
said company. In any event, respondent No. 1 was not entitled to any
interlocutory relief and leave granted under Order 1, Rule 8 of the Code
of Civil Procedure should be revoked. It was further contended that he
had been a director of the hotels company and the freight company
which were private limited companies since their inception and was also
the managing director of the freight company. After the merger of the
said companies, the appellant was appointed the managing director of
the hotels company in terms of the scheme sanctioned by this court. He
was thereafter reappointed as the managing director of the said company
by its board of directors with effect from May 1, 1981, for five years.
21. The appointment of the appellant as the managing director of the
said company was approved by its shareholders at an extraordinary
general meeting held on January 11, 1983. The said appointment was
also approved by the Central Government.
22. It was contended that the appellant was not appointed as a director,
additional or otherwise, at the general meeting of the board of directors
of the said company held on August 16, 1986. The appellant was already
a director on that date. After the expiry of his appointment as the
managing director of the said company, the appellant continued as a
director thereof. The termination of the office of the managing director
did not bring to an end the office of the appellant as a director. This
position was reiterated and reaffirmed at the said meeting of the board.
23. The notice of the annual general meeting to be held on November 24,
1986, the explanatory statement thereto and the relevant portions of the
directors' report for the said meeting had to be construed in the context
of the aforesaid and to the extent the same were inconsistent with the
aforesaid would be of no consequence. The same would be subject to
suitable correction and the said meeting had been adjourned under
orders of this court.
24. It was contended in the alternative that the description of the
appellant as an additional director appointed on August 16, 1986, was a
mis-description or a misnomer and did not affect the factual position that
the appellant was a director of the said company and was entitled to
continue as such till the next annual general meeting of the company was
held. The said annual general meeting has not yet been concluded and
after transaction of some business had been adjourned under orders of
court.
25. Respondent No. ! affirmed on affidavit on January 12, 1987, which
was filed in reply to the aforesaid affidavit of the appellant. It was alleged
in the said affidavit, inter alia, that the appellant was never appointed as
a director of the said company. In any event, the appellant could not
continue to act as a director or managing director of the said company
after April 30, 1986, In the alternative, it was contended that the
appellant was only entitled to hold office as a director up to the date of
the next annual general meeting of the said company to be held on
December 29, 1986, after which he would cease to be a director of the
said company.
26. The said application of respondent No. 1 was allowed as against the
appellant by a judgment and order dated November 19, 1987, of the first
court. It was held by the learned judge, inter alia, that the application of
respondent No. 1 was prima facie maintainable as respondent No. 1 was
not asserting any corporate right. The said company might be a proper
party but it could not be held prima facie that it was a necessary party in
whose absence no interim order could be passed.
27. The learned judge noted that the appellant was not quite clear about
his case and that there was some confusion in his pleadings. It was held
that it was not established that the appellant was appointed as an
additional director on August .16, 1986, though he was described as such
in the records. It was also not shown that the appellant has been
appointed a director by the shareholders of the said company at any
annual general meeting. On the facts, it was necessary for the court to
construe the scope and effect of Section 260 of the Companies Act, 1956,
in the case of the appellant. The learned judge noted that the appellant
had made out a contrary case before the Company Law Board contending
that he was appointed as an additional director of the said company on
August 16, 1986, and that there was no evidence that the appellant was
ever appointed a director by the shareholders. The learned judge
recorded that the articles of association of the said company as also
those of its predecessors in force at the relevant time in 1971 were not
produced. The subsequent articles of association adopted by the said
company, it was held, were not relevant. The learned judge came to the
conclusion that the appellant had failed to establish that he was a
director appointed by the shareholders or that he had been appointed as
an additional director of the said company on August 16, 1986, or at any
other meeting.
28. The present appeal is from the said judgment and order dated
November 19, 1987. At the instance of the parties, the appeal was
treated as in the day's list and was heard along with the application filed
in the appeal. The appearing respondents waived service of the notice of
the appeal. Service of such notice on the non-appearing respondent was
dispensed with. By consent of the appearing parties, filing of paper book
was dispensed with and the undertaking given in that behalf was
directed to stand discharged. The records and pleadings before the first
court were produced and considered.
29. At the hearing, learned advocate for the appellant produced before us
the original memoranda and articles of association of the hotels company
and the freight company as at the time of their incorporation. The
memorandum and articles which were adopted after the freight company
merged into the hotels company and which were again adopted when the
amalgamated company was converted into a public limited company
were already on record.
30. Learned advocate for the appellant submitted that the appellant had
been duly appointed as one of the first directors of the hotels company as
also of the freight company under their respective articles and that the
appellant had continued in his office as such director all along. After the
freight company merged into the hotels company, the appellant
continued to be a director of the amalgamated company by reason of his
original appointment as a director in both the original companies. The
hotels company and the freight company, till their amalgamation,
remained private companies. After the merger, the amalgamated
company also remained a private company till November 4, 1981. It was
submitted that till November 4, 1981, there was no question of
retirement of the appellant from his office as a director under Sections
255 and 256 of the Companies Act, 1956, inasmuch as till that date the
companies involved remained private companies.
31. It was submitted that after the amalgamated company became a
public company, the question of retirement of the appellant from his
office as a director thereof arose for the first time. But on May 1, 1981,
the appellant was duly reappointed as the managing director of the said
company for a period of five years. Under Article 144 of the articles of
association of the said company, as long as the appellant continued to
hold the office of the managing director, he was not subject to retirement
by rotation and as such the appellant continued to be a director as also
the managing director of the said company till April 30, 1986, when the
tenure of the appellant as the managing director of the said company
came to an end. On and from May 1, 1986, the appellant ceased to be the
managing director of the said company but continued to retain his office
as a director thereof and would be liable to retire at the next annual
general meeting of the said company but not before that. The next annual
general meeting which was initially scheduled to be held on December
29, 1986, has not yet been concluded. By reason of the orders passed in
the said Suit No. 934 of 1986 instituted by Gopal Vyas, the meeting
stands adjourned from time to time and the appellant continues to be a
director of the said company.
32. Learned advocate for the appellant also submitted that at a meeting
of the board of directors of the said company held on November 24,
1986, the appellant has been reappointed as the managing director and
chairman of the board of directors of the said company for a further
period of three years with effect from January 1, 1987.
33. Learned advocate submitted further that in the facts and
circumstances, no prima facie case has been made out by respondent No.
1 that the appellant has ceased to be a director of the said company and
as such respondent No. 1 was not entitled to the interim order in his suit
under appeal. This interim order has resulted in the ouster of the
appellant from his office. By the said interim order, the suit of respondent
No. 1 stands decreed in part at the initial stage. On the ground of
balance of convenience also, such an interim order should not have been
passed.
34. Learned advocate for the appellant also submitted that no interim
order should have been passed in the suit instituted by respondent No. 1
in the absence of the said company. The said company was vitally
interested as to who were its directors and the interim order passed in
the suit of respondent No. 1 seriously affects the administration of the
said company. The said company is a necessary party to the suit and in
its absence the suit was liable to be dismissed. It was also submitted that
the pleadings of respondent No. 1 contained categoric admissions that
the appellant had continued as a director of the said company till its next
annual general meeting and it could not be contended by respondent No.
1 that the appellant was never appointed as a director at all.
35. Learned advocate for Sudhir Kumar Bhattacharyya, respondent No.
7, supported the appellant.
36. In support of his contentions, learned advocate for the appellant
relied on and cited the following decisions.
(a) Richard B.T.H. Chow v. James Chow Wakin [1970] 75 CWN 173. In
this case, it was laid down by a Division Bench of this court that in an
application for an injunction restraining persons from acting as directors,
one of the considerations was whether the case of the applicant was
manifestly clear and free from doubt so as to entitle him to an injunction
in an interlocutory proceeding. Where the appointment of the directors
had not been disputed but they were sought to be restrained by an
injunction on other grounds which could not be said to be free from
doubt, other questions such as delay, acquiescence, balance of
convenience and waiver were required to be considered. It was observed
as follows :
"In the case of an illegality arising out of clear and manifest violation of
statutory provisions, the court has the power, and indeed it is the duty of
the court, to restrain a person from acting as a director of a company,
and in'such cases, delay, acquiescence, balance of convenience and
waiver would be no bar to the issue of an injunction. "
(b) Catesby v. Burnett [1916] 2 Ch 325. In this case, the articles of
association of a company provided that a member would be qualified to
be elected a director of the company on a written notice of his intention
in that behalf to be given to the company not less than 14 clear days
before the date of election of directors. An ordinary general meeting of
the company was held on December 10, 1959, when two of the directors
retired but there was no election of new directors. A committee of
shareholders was appointed to investigate into the affairs of the company
and submit a report to the general meeting which was adjourned to a
future date. In the meantime, notice was given to the company by a
member stating that at the adjourned meeting he proposed to move for
election of four directors. At the adjourned meeting, it was held by the
chairman that the subsequent notice for election of directors was invalid
and he left the meeting. Thereafter, the shareholders appointed a new
chairman and elected four new directors. On an application by the
shareholders for an interim injunction to restrain the former two
directors, who had retired earlier, from continuing to act as directors, it
was held that the date of the election of the directors within the meaning
of the said article was the date of the adjourned meeting and that the
notice for election of the four new directors was in compliance with the
articles. It was held that the said directors had been duly elected at the
adjourned meeting and the directors who had retired on the earlier
occasion were not entitled to act as directors.
(c) United Commercial Bank v. Bank of India, . This decision of the
Supreme Court was cited for the following observations (at page 209 of
52 Comp Cas) :
" In the instant case, the High Court has assumed that the plaintiffs had a
prima facie case. It has not touched upon the question where the balance
of convenience lay, nor has it dealt with the question whether or not the
plaintiffs would be put to irreparable loss if there was no injunction
granted, In dealing with the prima facie case, the High Court assumes
that the appellant was in breach. There is no basis for this assumption at
all ... The question whether the appellant was in breach is an issue to be
tried in the suit. "
Learned advocate for the appellant also cited an unreported judgment
dated November 22, 1985, in Appeal No. 260 of 1984, entitled Ambari
Tea Co. Ltd. v. Manjushree Saha. I was a party to this judgment where it
was held, inter alia, construing the provisions of Section 256 of the
Companies Act, 1956, that directors appointed by the shareholders in an
annual general meeting of a company do not retire ipso facto from their
office if no further annual general meetings of the company are held. It
was only at the subsequent annual general meetings that the retirement
of the erstwhile directors and their re-election as also election of new
directors would have to be decided. A different construction of Section
256 of the Act would result in a vacuum in the management of a company
which is not the object of the statute. The retirement of the directors
appointed earlier would take place at the actual meeting held.
37. Learned advocate for respondent No. 1 contended to the contrary
and submitted that it was the admitted position that the appellant was
neither an additional director appointed by the board of directors of the
said company nor was he a director appointed by the shareholders of the
said company or its predecessors at any annual general meeting. The
appellant could at best be deemed to be a director of the companies
involved as a subscriber to the memoranda of association under Section
254 of the Companies Act, 1956. In any event, as such a deemed director,
the appellant could not have been continued as a director of the said
company or its predecessors for all time. Such a deemed office would
necessarily come to an end when directors would be duly appointed by
the companies involved at their annual general meeting under Section
255 of the Companies Act, 1956.
38. Learned advocate for respondent No. 1 next submitted that even
though the appellant was nominated as one of the first directors in the
hotels company as also the freight company, he could not continue in his
office as a director in the said companies indefinitely on the strength of
his nominations. Construing Sections 254, 255 and 256 of the Companies
Act, 1956, learned advocate for respondent No. 1 submitted that even in
a private company, as a rule, directors were meant to be appointed in
general meetings. The first directors of a private company nominated in
the articles would be in the same position as the deemed directors of
such a company under Section 254 of the Companies Act, 1956, and they
would cease to hold their office at the first general meeting where
regular directors were to be appointed. If the first directors were not
reappointed or re-elected as directors at the annual general meeting of
the company held after its incorporation, they would cease to hold their
office. It was submitted that the above appeared to be the scheme of the
statute.
39. Learned advocate for respondent No. 1 conceded that Section 255 of
the Companies Act, 1956, provided an exception in the case of private
companies to the general rule that the directors of a company other than
additional directors should be appointed in a general meeting. If the
articles of association of a private company provided for appointment of
directors otherwise than in a general meeting, the same would override
the general rule laid down in the section. In the instant case, the articles
of the hotels company from which the office claimed by the appellant
originated only provided that the appellant would be one of the first
directors. It was not stated that the appellant would continue as such
first director for any particular or definite period, limited or unlimited. In
the absence of any provision for period of office of the first directors, the
articles could not and did not override the general rule in Section 255 of
the Act and the directors of the hotels company as also of the freight
company were required to be appointed in the usual course under
Section 255 of the said Act at the first general meeting of the said
companies held after their incorporation. The appellant was admittedly
never appointed as a director of any of the companies involved at any
general meeting and as such the appellant could not continue to hold his
office as a director only by virtue of his initial appointment as a first
director in the hotels company or the freight company under their
respective articles.
40. It was next submitted that the fact that the appellant has continued
as a director and also a managing director of the companies involved
since their inception would not make any difference to the legal position.
The appellant ceased to hold his office as a director of the companies
involved long ago and thereafter he was never reappointed by the
shareholders of the companies involved at any annual general meeting.
There was no other basis on which the appellant could claim or was
claiming that he had been appointed and remained a director of the said
company.
41. It was submitted that more than a prima facie case had been
established by respondent No. 1 that the appellant has ceased to have
any locus standi to continue to act as a director of the said company. The
interim order passed by the first court under appeal was a proper and
valid order and should be sustained.
42. It was submitted last that the said company might be a proper party
in the proceedings but it could not be held that it was a necessary party
in the absence of which the suit of respondent No. I was bound to fail. In
the instant case, an effective order could be made restraining the
appellant from continuing to act as a director of the said company in the
absence of the latter.
43. In support of his contentions, learned advocate for respondent No. 1,
relied on what he stated to be an official circular published in Company
News and Notes, dated July 1, 1963, on Section 256 of the Companies
Act, 1956, as follows :
Section 256 : Retirement of directors :
(b) It is open to a private company which is not a subsidiary of any public
company to provide in its articles, the manner of appointment and the
vacation of office of all its directors. Thus it is permissible for such a
private company to provide in its articles that none of its directors is
liable to retire by rotation. In the absence of anything to the contrary in
the articles of association, however, all the first directors of such a
private company who have been appointed under the articles may hold
office till the directors are appointed in accordance with the provisions of
Section 255(2) at the first general meeting held after incorporation but
before the holding of the first annual general meeting.
Learned advocate for respondents Nos. 1 and 7 also relied on and ci'ted
the following decisions :
(a) Eyre v. Milton Proprietary Limited [1936] 1 Ch D 244. In this case,
the relevant article of association of a company provided that an
additional director of the company could hold office only until the next
following, ordinary general meeting of the company. Construing the said
article, the English Court of Appeal held that at the ordinary general
meeting of the company, the additional directors will not be in office.
That is, at the moment when the next following ordinary general meeting
of the company would begin, the said directors would no longer be in
office whereas the other directors who were not additional directors but
under the relevant articles of association were scheduled to retire at the
said ordinary general meeting would continue to act as directors
throughout the meeting.
(b) Udit Narain Singh Malpaharia v. Additional Member, Board of
Revenne, Bihar, . This decision of the Supreme
Court was cited for the following observations (at p. 788) :
" A necessary party is one without whom no order can be made
effectively ; a proper party is one in whose absence an effective order can
be made but whose presence is necessary for a complete and final
decision on the question involved in the proceeding."
(c) Joseph v. Jos [1964] 34 Comp Cas 931. This decision of a learned
judge of the Kerala High Court was cited for the proposition that where
infringement of a corporate membership right was alleged, the remedy of
a shareholder of a company was by way of a representative action on
behalf of himself and other shareholders or in some instance by an action
in the name of the company. But if such a corporate membership right
was subject to the will of the majority expressly, in accordance with law
and the articles of the company, then the same would be a matter of
internal management and could not be questioned except in very limited
cases. But where the wrong complained of was one which could not be
ratified by the majority as the same would be against the provisions of
the articles of association or otherwise illegal, any shareholder of the
company could insist on strict observance of the legal rules, statutory
provisions and the provisions of the memorandum and articles which
could not be waived even by a majority of the shareholders. In such a
case, a suit and action initiated by the shareholders would be
maintainable.
(d) Comptroller of Customs v. Western Lectric Co. Ltd. [1966] AC 367
(PC). This decision was cited for the proposition laid down by the Privy
Council that an admission by a man, of something of which he knew
nothing was of no real evidential value and the admission made by a
person on the basis of documents on record was of no more evidential
value than the record itself.
(e) Ram Autar Jalan v. Coal Products P. Ltd. [1970] 40 Comp Cas 715
(SC). In this case, a suit was instituted by a company alleging that the
defendant was wrongfully and without authority purporting to act as one
of its directors. An application was filed in the suit for an injunction
restraining the defendant from acting as director and from operating a
bank account of the company. The company produced its share registers,
minutes books and other documents which established that the
defendant was neither a shareholder of the company nor had he been
appointed as a director. The first court refused to grant any injunction,
inter alia, on the ground that the defendant was functioning as a director
de facto. On an appeal, the said decision was reversed and an interim
injunction was granted against the defendant on a consideration of the
records of the company. On further appeal to the Supreme Court, the
order of the first appeal court was upheld. The Supreme Court observed
that the whole question was whether the defendant was entitled to
function as a director in law and the first court instead of considering
this important aspect decided the matter mainly on the basis that the
defendant was functioning as a director de facto. The first court was also
not justified in ignoring the records produced by the company to
establish that the defendant was neither a shareholder nor had been
appointed a director.
(f) Desk Bandhu Gupta and Co. v. Delhi Stock Exchange Association
Ltd., . In this case, the Supreme Court in
construing a notification issued by the Central Government under Section
18 of the Securities Contracts (Regulation) Act, 1956, dated June 27,
1969, took note of and considered a press statement issued by the
Ministry of Finance immediately upon the issuance of the notification and
also a communication dated June 28, 1969, from the Joint Director of the
Ministry of Finance, Department of Economic Affairs. The Supreme Court
observed as follows (at p. 1054):
"It may be stated that it was not disputed before us that these two
documents which came into existence almost simultaneously with the
issuance of the notification could be looked at for finding out the true
intention of the Government in issuing the notification in question,
particularly in regard to the manner in which the outstanding
transactions were to be closed or liquidated. The principle of
contemporanea expositio (interpreting a statute or any other document
by reference to the exposition it has received from contemporary
authority) can be invoked though the same will not always be decisive of
the question of construction. (Maxwell, 12th edition, page 268). In
Crawford on Statutory Construction, 1940 edition, in para. 219, at pages
393-395, it has been stated that administrative construction (i.e.,
contemporaneous construction placed by administrative or executive
officers charged with executing a statute) generally should be clearly
wrong before it is overturned ; such a construction, commonly referred to
as a practical construction although not controlling, is nevertheless
entitled to considerable weight as it is highly persuasive."
In reply, learned advocates for the appellant and respondent No. 7
submitted that under Section 255 of the Companies Act, 1956, directors
could be appointed by the shareholders of a private company at a general
meeting. This might be the general rule. But, in the section itself, an
exception was provided that in a private company the articles of
association could provide for appointment of directors otherwise than in
a general meeting by the shareholders and if such a provision was made,
the articles would override the section.
44. In the instant case, the articles of association of the freight company
as also the hotels company not only provided for but actually appointed
the appellant as a director of both the companies by nomination. The
articles did not provide as to how long the appointment of such first
directors would continue and, therefore, it must be held that the first
directors would continue in their office indefinitely. The articles did not
provide that the first directors would continue only till the next general
meeting of the said companies.
45. Construing Sections 255 and 256 of the Companies Act, 1956,
learned advocates for the appellant and respondent No. 7 submitted that
the said sections specifically provided for appointment of directors of a
public company as also of a private company. Retirement of directors of a
public company was also provided for. The said sections did not provide
for termination of the office of a director of a private company. Section
283 of the Companies Act, 1956, provided for vacation of office by
directors of a company in certain contingencies. In that section, it was
not provided that the first directors of a private company appointed by its
articles would vacate their offices at the next general meeting.
46. To appreciate the controversies involved, it is convenient to refer to
the relevant provisions of the Companies Act, 1956 :
"Section 2(26): 'Managing director' means a director who, by virtue of an
agreement with the company or of a resolution passed by the company in
general meeting or by its board of directors or, by virtue of its
memorandum or articles of association, is entrusted with substantial
powers of management which would not otherwise be exercisable by him,
and includes a director occupying the position of a managing director, by
whatever name called."
" Section 26 : There may in the case of a public company limited by
shares, and there shall in the case of an unlimited company or a company
limited by guarantee or a private company limited by shares, be
registered with the memorandum, articles of association signed by the
subscribers of the memorandum, prescribing regulations for the
company."
" Section 254 : In default of and subject to any regulations in the articles
of a company, subscribers of the memorandum who are individuals, shall
be deemed to be the directors of the company, until the directors are
duly appointed in accordance with Section 255."
" Section 255(1): Unless the articles provide for the retirement of all the
directors at every annual general meeting, not less than two thirds of the
total number of directors of a public company, or of a private company
which is a subsidiary of a public company, shall-
(a) be persons whose period of office is liable to determination by
retirement of directors by rotation ; and
(b) save as otherwise expressly provided in this Act, be appointed by the
company in general meeting.
(2) The remaining directors in the case of any such company, and the
directors generally in the case of a private company which is not a
subsidiary of a public company, shall, in default of and subject to any
regulations in the articles of the company, also be appointed by the
company in general meeting."
" Section 256(1) : At the first annual general meeting of a public
company, or a private company which is a subsidiary of a public
company, held next after the date of the general meeting at which the
first directors are appointed in accordance with Section 255 and at every
subsequent annual general meeting, one-third of such of the directors for
the time being as are liable to retire by rotation, or if their number is not
three or a multiple of three, then, the number nearest to one-third, shall
retire from office. "
" Section 260 : Nothing in Section 255, 258 or 259 shall affect any power
conferred on the board of directors by the articles to appoint additional
directors :
Provided that such additional directors shall hold office only up to the
date of the next annual general meeting of the company:..."
We also note the provisions of Articles 111 and 144 of the articles of
association which were adopted by the said company.
Article 111 : The board is empowered, at any time and from time to time,
to appoint any other person to be a director of the company,... as an
addition to the board, but so that the total number of directors shall not
exceed the maximum for the time being prescribed. A person...... who is
appointed as an additional director shall hold office only up to the date of
the next annual general meeting, but such person shall, in either case, be
eligible for re-election.
Article 144 : Subject as hereinafter provided, a managing director (which
expression shall include a joint managing director) shall not, while he
continues to hold that office, be subject to retirement by rotation of
directors or be taken into account in determining the number of directors
liable to retire by rotation of directors ; but if he ceases for any cause to
hold the office of director, he shall, ipso facto and immediately, cease to
be managing director.
47. In this appeal, the scope of the enquiry is limited to the prima facie
determination of the initial appointment of the appellant as a director of
the companies involved and his continuation in such office up to the
relevant time. On such prima facie determination will depend whether
the appellant was a lawful director of the said company at the date of the
institution of the suit.
48. It being the common case that the appellant had not been appointed
as an additional director in any of the companies involved and that the
appellant was not claiming to hold the post of such additional director,
the question whether the appellant ceased to hold such office as an
additional director at the date of the annual general meeting to be held
on December 29, 1986, need not be considered further.
49. We note that the case of the appellant made in his pleadings is
contradictory to certain statements in the records of the said company,
namely, the notice dated November 24, 1986, convening the said annual
general meeting and the explanatory statement thereto as also the
directors' report. We also note that the stand taken by the appellant
before the Company Law Board is also contradictory to the pleadings of
the appellant in this suit. Such contradictory stands of the appellant as to
his office and status cannot in our view affect the actual legal position
which is to be ascertained prima facie from the entire facts and
circumstances.
50. It stands established from Article 111 of the articles of association of
the hotels company that the appellant was initially appointed as one of its
first directors. Such appointment was not as an additional director. The
said article also did not prescribe any time limit up to which the
appellant would continue in his office.
51. The appointment of the appellant as a director of the freight company
was made by and recorded in the articles of association of the said
company in an identical manner.
52. When, the freight company was amalgamated with the hotels
company, the appellant continued to be a director of the amalgamated
company.
53. Both the hotels company and the freight company were private
companies and their articles did not provide for retirement of their
directors and as such there was no question of retirement of the
appellant from his office at any subsequent annual general meeting.
Furthermore, the appellant, at the material time, had been appointed as
the managing director of the freight company and continued as managing
director of the amalgamated company. Under Article 144 of the articles
of association adopted by the amalgamated company, the appellant was
not liable to retire from his office of director as long as he continued to
hold the post of managing director.
54. On April 30, 1987, when the appointment of the appellant as the
managing director of the said company came to an end, the said company
had become a public company and only then the question of retirement of
the appellant from his office as director arose for the first time on May 1,
1986. In the ordinary course, the appellant, after the termination of his
office as a managing director, would continue in his office as a director
but would be liable to retire at the next annnal general meeting of the
said company which was scheduled to be held on December 29, 1986.
55. Respondent No. 1 does not dispute that the appellant had been
appointed as one of the first directors of the hotels company as also of
the freight company under their respective articles of association. The
contention of respondent No. 1 is that the office of appellant No. 1 as
first director came to an end at the next general meetings of the two
companies inasmuch as under Sections 255 and 256 of the Companies
Act, 1956, the directors of a private company, apart from the additional
directors, were generally required to be appointed at a general meeting
by the shareholders unless the articles provided otherwise. The articles
of the said private companies being silent as to the term of office of their
first directors, it was contended that the first directors would continue in
their office till the next general meeting of the said private companies.
56. We are unable to accept this contention of respondent No. 1. The
expression " first director " appears only in Section 256 of the Companies
Act, 1956, noted hereinabove and the said section applies only to public
companies. The section provides for retirement of the first directors by
rotation at every annual general meeting from the meeting held next
after the general meeting at which they were appointed.
57. It is to be noted that this section does not deal with the appointment
of first directors in a private company.
58. Section 255 of the Companies Act, 1956, provides, inter alia, also for
retirement of directors of a public company. The section also provides for
appointment of directors in both public companies and private
companies.
59. So far as a private company is concerned, which is not a subsidiary of
a public company, the section provides that the directors of such a
company are to be appointed in a general meeting as in a public company
but such appointment would be subject to the articles which may provide
otherwise.
60. It appears to us on a plain reading of the section that if the articles
are silent as to the appointment of directors in a private company, or do
not specifically provide for appointment of directors otherwise than in a
general meeting, then the directors of a private company are to be
appointed by the shareholders at general meeting.
61. In the instant case, Article 111 of the articles of association of the
hotels company and freight company provided for and appointed the
appellant as one of its first directors. Under Section 256 of the said Act
read with Section 26 thereof, such an article may be held to prescribe,
and constitute a regulation. This article, in our view, constituted an
exception to the general rule laid down under Section 255 of the Act.
Under the article, the appellant was appointed as one of the first
directors of the private company under the provisions of Section 255 of
the Companies Act, 1956. The article also did not provide for retirement
or termination of office of such first directors at any point of time.
Accordingly, in our view, as long as the said two companies continued to
be private companies and after their amalgamation remained a private
company, there was no question of retirement of the appellant from his
office as a director or such office coming to an end.
62. We are unable to accept the interpretation of Sections 255 and 256 of
the Companies Act, 1956, as contained in the so called circular, which
has been relied on by learned advocate for respondent No. 1. We are not
sure as to who is the author of this so called circular. Apparently, this
alleged circular is an excerpt from Company News and Notes,
presumably a journal. In any event, this document is not a
contemporaneous exposition or interpretation of Sections 255 and 256.
As such, this document cannot be treated in the same manner as a
clarification or exposition issued by a competent authority. In our view,
the principles laid down by the Supreme Court in Desk Bandhu Gupta
and Co., AIR 1979 SC 1099, do not apply to this document. In any event,
the said document cannot be a conclusive exposition.
63. From the facts on record, it appears to us prima facie that the
appellant was appointed as a director of the hotels company under its
articles under Section 255 of the Companies Act, 1956, and continued in
his office as a director after the freight company was amalgamated with
the hotels company. The amalgamated company continued as a private
company till November 4, 1981. On May 1, 1981, the appellant was
appointed as a managing director of the amalgamated company with the
approval of the Central Government and the shareholders for a period of
five years. As such, under Article 144 of the said companies, there was
also no question of the appellant retiring from his office as a director till
April 30, 1986, even though the amalgamated company became a public
company on and from November 4, 1981.
64. We also hold prima facie that on the termination of his office as a
managing director, the appellant did not automatically lose his office as a
director in the said company. We accept the contention of the appellant
that the appellant continued to be a director of the said company which
had become a public company by November 4, 1981, and was liable to be
retired at the next annual general meeting scheduled to be held on
December 29, 1986. This meeting was held partially on December 29,
1986, but was not concluded and the meeting was restrained from
considering or passing resolutions pertaining to retirement, appointment
or reappointment of directors which were directed to be considered at an
adjourned date. Following the principles laid down in Ambari Tea Co.
Ltd. (Appeal No. 260 of 1984--22-11-85 (Cal)), we hold that the question
of retirement of the appellant would only arise at the adjourned date of
the said annual general meeting of the company when the said meeting is
held and not before that.
65. It follows that on the date when the present suit was instituted, the
appellant prima facie was a director of the said company and was
entitled to act as such. This prima facie position arises from the
undisputed facts on record and cannot be affected or detracted by
statements or declarations to the contrary by the parties concerned or
the said company. A legal position or status cannot be affected by a
wrong or erroneous description. Admission, if any, by respondent No. 1
that the appellant had continued as a director or as an additional director
would also be equally irrelevant.
66. It is unfortunate that the memorandum and articles of association of
the hotels company or the freight company were not produced or relied
on before the learned judge in the first court nor was a clear stand taken
before the first court as to how the appellant initially came to be
appointed as a director of the companies involved. If this was done,
proceedings before the first court might have been shortened and the
correct position in law and fact would have emerged.
67. We next consider whether the present proceedings are maintainable
in the absence of the said company. As we have held that it has been
prima facie established that the appellant is continuing as a director of
the said company and is liable to retire at the next annual general
meeting, it is not necessary to determine this question at the
interlocutory stage. Under the amended Civil Procedure Code, the suit
instituted by respondent No. I may ultimately fail by reason of non-
joinder of the said company which may be held to be a necessary party. It
is open to respondent No. 1 to apply for impleading the said company in
the suit at any time before the same is finally disposed of. It is also open
to the court to implead the said company in the suit suo motu at any
stage. In that view, we are not inclined to hold that by reason of non-
joinder of the said company in the suit at this stage, an interlocutory
application in the suit will necessarily fail.
68. For the above reasons, this appeal is allowed. The judgment and
order dated November 19, 1987, are set aside so far as the appellant is
concerned. The appeal and the application are disposed of accordingly.
Costs of the proceedings before us would be costs in the suit.
69. We note that in the proposed annual general meeting of the said
company which stands adjourned by orders of court, no resolution has
been proposed recording the retirement of the appellant or for his re-
election as a director. This is a question which would arise at the meeting
and we express no opinion on the same.
Shyamal K. Sen, J.
70. I agree.