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SUPREME COURT OF INDIA
A.K. SARKAR, J.R. MUDHOLKAR AND R.S. BACHAWAT, JJ.
1. Narayandas Shreeram Somani (In C. A. No. 801 of 1962), 2. Ramkrishna Ramratan Somani and another (In C. A. No. 802 of 1962), Appellants
Versus
Sangli Bank Ltd. (In both the Appeals), Respondents.
Civil Appeals Nos. 801 and 802 of 1962.
Advocates appeared
Mr. Purshottam Trikamdas, Senior Advocate, (Mr. V. J. Jhaveri, Advocate and Mr. S. N. Andley, Advocate of M/s. Rajinder Narain and Co., with him), for Appellants (In both the Appeals); M/s. K. H. Bhabha and Iqbal Chagla, Advocates and Mr. J. B. Dadachanji, Advocate of M/s. J. B. Dadachanji and Co., for Respondent (In both Appeals).
-a Director of a Company stands in a fiduciary position towards the Company and is bound to protect its interest. It has been an established rule of equity that he must not place himself in a position in which his personal interest conflicts with his duty, and unless authorised by the Company’s articles, and he must not vote as a director on any contract or arrangement in which he is directly or indirectly interested. If he votes in such a case, his vote would not be counted, and his presence would not count towards the quorum, that is to say, the minimum number fixed for the transaction of business by a board meeting, for a quorum must be disinterested quorum, and must be comprised of Directors who are entitled to vote on the particular matter before the meeting. If an interested director votes and without his vote being counted there is no quorum, the meeting is irregular and the contract sanctioned at the meeting is voidable by the Company against the Director and any other contracting party who has notice of the irregularity, but the Company may waive the irregularity and affirm the transaction. The Section 300 of the 1956 Act (Section 91 B of the old Act) embodied the existing rule of equity in the form of a statutory provision. The Section is a concise statement of the general rule of equity and the transaction on which the interested directors had voted were voidable. The voting by the interested Director, of itself, does not invalidate the contract. The effect of this provision is that the vote of the interested director must be excluded and if as a result of such exclusion there is no quorum the resolution sanctioning the contract is irregular and the contract is liable to be avoided by the Company against the directors and any other contracting party having notice of the irregularity. This Section 300 is meant for the protection of the Company, and the Company only, if it chooses, waive the irregularity and affirm the contract,
Judgement
BACHAWAT, J. : The Bank of Poona Ltd., (hereinafter referred to as the Company) now amalgamated with the Sangli Bank, Ltd. was incorporated in 1945. The Company was promoted by N. G. Parulekar and Murlidhar Chaturbhuj Loya. The authorised capital of the Company was Rupees fifty lakhs divided into 50,000 ordinary shares of Rs. 100 each. By the end of April, 1946, the Company was able to find subscribers for 4,860 shares only. In view of S. 277 (I) of the Indian Companies Act, 1913, the Company was unable to carry on business unless the subscribed capital was not less than half the authorised capital. In order to comply with the requirements of S. 277 (I), the directors of the Company decided that they or their nominees would subscribe for a large number of shares. Narayandas Shriram Somani was one of the directors of the Company. Ramnath Shriram Somani is his brother. They carried on business in the name of Ramkisan Ramratan Somani. Jivanbai is the mother of Narayandas and Ramnath, Goverjabai is the wife of Narayandas, and Kamalabai is the wife of Ramnath. Narayandas decided to subscribe for 2,000 shares in the names of the three ladies. At a meeting held on May 25, 1946, the board of directors of the Company allotted 500 shares to Goverjabai, 500 shares to Kamalabai and 1,000 shares to Jivanbai against three separate applications for shares signed by them. The applications were accompanied by three separate hundis, dated May 25, 1946 for Rs. 25,000 Rs. 12,500 and Rs. 12,500 drawn by Narayandas in favour of the Company. The meeting of May 25, 1946 was attended by three directors, Murlidhar Loya, D. R. Nayak and Narayandas. At that meeting, the directors also sanctioned a loan of Rs. 60,000 to Ramnath. On May 28, 1946, Ramnath obtained from the Company the loan of Rs. 60,000 against his promissory note, and a separate loan account No. 1/18 was opened in his name in the books of the Company. The three hundis were honoured on May 29, 1946. The directors of the Company at a meeting held on June 8, 1946 resolved to give an overdraft of Rs. 40,000 to Ramnath. A separate overdraft account LA/C No. 71 in the name of Ramnath was opened in the books of the Company, and Ramnath obtained the sanctioned overdraft by a cheque, dated June 27, 1946 for Rupees 15,000 and another cheque, dated June 29, 1946 for Rs. 25,000. The balance of the application and allotment moneys amounting to Rs. 12,500, Rs. 12,500 and Rs. 25,000 in respect of the shares of Goverjabai, Kamalabai and Jivanbai were paid to the Company on June 22, June 28 and June 29, respectively. There is reason to believe that the subscription of the 2,000 shares was financed by the advances to Ramnath.
2. On December 28, 1948, Ramnath was indebted to the Company in his loan account for Rs. 65,743-6-6 and in his overdraft account for Rs. 41,909-10-0. On that date, both accounts were closed, and a new loan account No. 9 with a debit of Rs. 1.09,500 was opened in the name of Ramnath, who executed a promissory note. The Reserve Bank of Indian was pressing the Company to take steps in respect of the advances to Ramnath. In these circumstances, Ramnath repaid to the Company Rs. 18,500 on December 29, 1950 and Rs. 1,500 on January 2, 1951. At the same time, on January 6, 1951, the Company gave a new loan of Rs. 20,000 to Ramkisan Ramratan Somani and Ramnath, and the borrowers executed a joint and several promissory note in favour of the Company for the sum of Rs. 20,000. In respect of this loan, a separate loan account was opened in the books of the Company. In his loan account No. 9, Ramnath repaid Rs. 1,00,000 on December 27, 1951 and Rs. 4,198-8-0 on December 29, 1951, anmd as a result of the last payment, the account was closed. The above sum of Rs. 1,00,000 was paid on behalf of Ramnath by Narayandas, who on the same date obtained a loan of Rs. 1,00,000 from the Company. On the same date, Narayandas executed a promissory note for the sum of Rs. 1,00,000, a letter of pledge and
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