1971 Supreme(Bom) 96

IN THE HIGH COURT OF BOMBAY
IN THE HIGH COURT OF BOMBAY
S.B.Bhasme, J.
Appellants: Laljibhai C. Kapadia and Anr.
Vs.
Respondent: Lalji B. Desai and Ors.
A.F.O.D. No. 262 of 1971 Decided On: 27.07.1971
Counsels:
For Appellant/Petitioner/Plaintiff: F.S. Nariman, Adv. and A.B. Diwan, Adv., i/b., Chimanlal Shah and Co., Attorneys

The provisions of Section 173 of the Companies Act, 1956 are mandatory and not directory.

Headnote:

Companies Act, 1956 - Ss. 258, 260, 263, 264, 172, 173 - Articles of Association - Arts. 142, 164, 166 - Increase in the number of directors - Whether a separate resolution is necessary - Whether the company can increase the number of directors by appointing additional directors - Whether the notice of the meeting and the explanatory statement accompanying the notice were defective - Whether the provisions of S. 173 are mandatory or directory - Whether the additional directors, like the retiring directors, are required to file any written consent duly signed by them before their reappointment by the company.

Fact of the Case:

The appellants were appointed as additional directors of the respondent company on 9-4-1969. The Board of Directors consisted at that time of 8 members excluding these additional appointed directors. The plaintiffs have referred to the 8 directors as functioning directors and that may be to distinguish them from the appellants who are appointed additional directors. Thereafter notices dated 10th April 1969 were received by Respondent No. 3 company proposing the appellants as directors at the next Annual General Meeting. On 11-6-1969 the 22nd Annual General Meeting of the Respondent 3 company was convened. At the General Meeting two directors Kasturbhai Lalbhai and Naval H. Tata retired by rotation and were again elected as directors. At the same meeting by two separate resolutions the appellants were appointed directors. The two resolutions are referred to in the Plaint as Resolutions Nos. 5 and 6.

Finding of the Court:

1. The company can increase the strength of the Board of Directors only by passing a separate and distinct resolution before proceeding to appoint directors by filling the additional sanctioned posts. 2. The Board of Directors cannot by the appointment of Additional Directors increase the strength of the Board so as to affect the power of the Company vested in it under Section 258 of the Act. 3. Section 173 is mandatory and not directory. 4. The additional directors, like the retiring directors, are not required to file any written consent duly signed by them before their reappointment by the company.

Issues: 1. Whether the Board of Directors of the Company before and after the Annual General Meeting consisted of ten members or whether at the Annual General Meeting the strength of the Board of Directors was increased from 8 to 10. 2. Whether the Company can increase the strength of the Board of Directors only by passing a separate and distinct resolution before proceeding to appoint directors by filling the additional sanctioned posts ? 3. Has the Board of Directors contravened the mandatory provisions of Section 173 of the Act by not furnishing any information about the proposed special business or by furnishing information which is hopelessly inadequate or misleading. 4. Can the plaintiffs rely on the above contravention in any form without specific averments in the Plaint ? 5. Has the learned Judge erred in holding that the Additional Directors, like the retiring directors, are not, required to file written consent duly signed before their reappointment as directors by the Company ? 6. Is the suit not competent as the alleged irregularities arise in the course of the internal management of the company ?

Ratio Decidendi: 1. The power conferred on the directors to appoint additional Directors is a temporary power vested in them, and this is to be reviewed and perhaps confirmed at the General Meeting. 2. The company has not surrendered its power to appoint directors in favour of the Board of Directors. 3. Section 173 is mandatory and not directory. 4. It is in the interest of the general body of Share - holders that the legislature has made provisions in Section 173 (2) requiring the notice of a meeting to set out a statement containing all material facts concerning each special item of business. 5. A notice of meeting when it contains items of special business within the meaning of Section 173 (1) (b) must disclose all the material facts. 6. All the share - holders must be in a position to make up their mind in advance whether they will attend the meeting or leave it to the good sense of the majority at the meeting. 7. Any non - compliance with this requirement will nullify the action taken at the meeting. 8. While considering the efficacy of any such notice, a benevolent construction will not be adopted so as to defeat the provisions of the statute. 9. It is also clear that whether or not a particular notice or an explanatory statement in a given case complies with the statutory requirement is a mixed question of fact and law. 10. When a challenge is made in a court of law the court will have to consider all the facts and circumstances of the case and then decide one way or the other. 11. The additional directors, like the retiring directors, are not required to file any written consent duly signed by them before their reappointment by the company.

Final Decision: The appeal is allowed. The judgment and decree passed by the learned Judge in the suit is set aside. The suit is dismissed with costs throughout.