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1923 Supreme(SC) 31
Privy Council
Salvesen, Ameer Ali, Sir John Edge, Carson, Justice Sumner, JJ.
(Seth) Kevaldas Tribhovandas -Appellant
Versus
Sakerlal Bulakhidas and another -Resopndent
P. C. A. No. 21 of 1922
Decided On : 21-06-1923
T.L. Wilson and Co., E. Dalgado, J.M. Parikh, W.H. Upjohn, E. B. Raikes, De Gruyther
A suit is not lawfully adjusted under Order 23, Rule 3 of the Civil Procedure Code unless a lawful agreement is proved to the court's satisfaction and the court records it and passes a decree; internal resolutions based on misrepresentation by a fiduciary do not constitute such adjustment.
Headnote:(A) Civil Procedure Code - Order 23, Rule 3 - Adjustment of suit - For a suit to be considered adjusted under the Code, it must be proved to the satisfaction of the Court that the suit has been adjusted wholly or in part by a lawful agreement or compromise, upon which the Court shall order such agreement to be recorded and pass a decree in accordance therewith - Internal resolutions passed by shareholders do not constitute a lawful adjustment of a pending suit unless the requirements of the Code are met and the Court records the satisfaction.
(B) Fiduciary Duty - Misrepresentation - A person under a special obligation to make full and true disclosure who misappropriates funds cannot rely on a settlement obtained through misrepresentation to avoid liability.
Facts of the case:
A shareholder filed a suit against the managing agents and directors of a company, seeking an account of company funds used by the manager for personal purposes and a declaration that a factory erected by the manager was company property. A preliminary decree was passed directing accounts. During the pendency of an appeal against this preliminary decree, the manager convened shareholder meetings and passed resolutions for the company to purchase the factory from him at a specified price. The manager subsequently contended that these resolutions constituted a settlement and adjustment of the suit, which should lead to its dismissal.
Findings of Court:
The alleged adjustment lacked reality and was not based on an examination of accounts or facts. It was not brought to the notice of the courts during the appeal against the preliminary decree nor mentioned before arbitrators. The resolutions were obtained through misrepresentation by a person in a fiduciary position, and the defendant failed to ask the Court to record the satisfaction or pass a decree based on the alleged adjustment.
Issues: Whether resolutions passed by shareholders to purchase property from a defendant in a pending suit constitute a lawful adjustment of the suit under Order 23, Rule 3 of the Civil Procedure Code.
Ratio Decidendi: The court held that for an adjustment to be legally valid under Order 23, Rule 3 of the Civil Procedure Code, the agreement must be proved to the satisfaction of the Court, and the Court must record the agreement and pass a decree. In the absence of such judicial recording and proof of a bona fide agreement, internal company resolutions—especially those based on misrepresentation—do not operate as a legal adjustment of the suit.
Result: Appeal dismissed.
Legal Category Hierarchy
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company law
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corporate governance
- directors' duties
- shareholders' resolutions
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corporate governance
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practice and procedure
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civil procedure code
- compromise and adjustment of suits
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appellate procedure
- scope of appeal
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civil procedure code
Mr. Ameer Ali :-
The plaintiff (respondent) is a shareholder in the Bharatkhand Cotton Mills Com pany, Limited, carrying on business in the City of Ahmedabad, Bombay Presidency. He brought this suit, the nature of which will be explain ed presently, so long ago as the 5th January, 1909. The first five defendants are managing agents and directors of the Company, the sixth is a retired director; the seventh defendant is the Company itself, having been added as a party to the suit later in the course of the proceedings.
The first defendant (the present appellant before the Board), Keval das Tribhovandas acted as Chair man of the Board of Directors and is the manager of the Company. The plaintiff seeks in the suit an account of the funds belonging to the Company used by the appellant for his own purposes, and for a declaration that a weaving factory erected and worked by him is the property of the Company. The Company appears to have been established sometime in the year 1896. The evidence shows that in 1905 the defendant Kevaldas Tribhovandas started the weaving factory which he claimed as his own property. The plaintiff char ges that that factory was built and erected by the defendant with money belonging to the Company, and that he has worked the same for his own benefit. He seeks an account of the profits made by the defendant therefrom and a decla ration that such profits also belong to the Company.
The date for filing the defence was originally the 12th February 1909, but the appellant applied for time which was extended to the 14th April, 1909, when the written statement was filed. It is unneces sary to refer in detail to the con tentions raised by him against the plaintiffs claim. It is enough to say that on the 23rd December of the same year the Subordinate Judge delivered a judgment in which he overruled the defendant's technical objections to the suit; and that on the 26th January, 1910, he made a preliminary decree directing accounts against the de fendant and appointing a Commis sioner to take the same.
The defendant preferred an ap peal from this preliminary judgment to the District Judge. While this appeal was pending he convened a meeting of the shareholders which was held on the 29th April, 1910. At this meeting a resolution was adopted which the plaintiff charges was at the instance of the defendant. This resolution was subsequently on the 15th May affirmed, it is charged, under similar circumstances. It runs as follows :-
" On reading the application receiv ed from some shareholders and the "scheme" which has been submitted thereupon by Pari. Kevaldas Tribho wandas (it appears that) Pari. Keval das Tribhowandas has asked for Rs. 4,00,000, in words four lacs as the price of the weaving factory erected by himself (sic). But on a considera tion of the said (matter, it appears that) as he has worked the same up to this day, depreciation had been caused and profit had been made (or) loss had been sustained. After deducting a lump sum of Rs. 49,000, in words forty-nine thousand for both the items Rs. 3,51,000, in words three lacs and fifty-one thousand in the lump be brought to account with reference to him and possession of the said weav ing-factory be taken by us and as owing to this the work of "Vahiwat" (management) (to be done) by Pari. Kevaldas Tribhowandas would in crease Rs. 8,000, in words eight thou sand be continued to be paid every year to him and his heirs and repre sentatives for his trouble after debit ing the same to the account of ex penses."
It is necessary to mention here that on the 4th November, 1900, at a meeting of the shareholders a resolution had been adopted, which is extremely material in the con sideration of this case. It is as follows :-
" The moneys of the Company shall not be lent to any one on personal security. And the Vahivatdar (the manager) shall not keep the account of the Company in his own shop ; so also the Vahivatdar shall not with draw by debiting in his own name, any amount whateve
