2002 Supreme(Bom) 1110

IN THE HIGH COURT OF BOMBAY
Dr. Chandrachud D.Y., J.
IL FS Trust Company Limited another .... Petitioners
Versus
Birla Perucchini Limited others.... Respondents.
Arbitration Petition LD. No. 524 of 2002, decided on 10-10-2002.
Advocates appeared :
Virag V. Tulzapurkar, Chirag Balsara i/b. Negandhi Shah Himayatullah, for petitioners.
Virendra V. Tulzapurkar, Sr.A. with Kirti Munshi Someshwar Sundaresan i/b. Udwadia, Udeshi Berjis, for respondents.

Headnote:Arbitration and Conciliation Act, 1996 - Section 9 - Raising issue of defective appointment of Directors - Two directors got appointment without approval of subscriber shareholders - Contention that Section 290 of companies Act restricts objection to appointment of Directors, once it is made - Defect brought to notice of company - Any action taken by company subsequent to that shall not get protection of Section 290 of the Act. - Now if the minutes of the meeting held on 20th August, 2002 are perused what would emerge is that the objection of the nominee Director of the petitioners to the appointment of the fifth and sixth respondents has been recorded. At that stage, the nominee Director had not expressly adverted to the provisions of Article 10.1.29 of the subscription agreement which was equivalent to Article 159-B (xxix) which warranted that the affirmative vote of the petitioners will be required for any proposal for the inclusion of members on the Board of Directors. The specific point that the consent of the petitioners was necessary has been recorded in the letter dated 30th August, 2002 addressed by the petitioners to the Managing Director of the Company. This letter has been addressed with reference to the meeting of the Board which took place on 29th August, 2002 and it specifically records that under the provisions of the shareholders agreement the positive consent of the petitioners was required to add any members on the Board. That being the position, at least as on 30th August, 2002, the invalidity in the appointment of the fifth and sixth respondents was clearly shown to the first respondent. Consequently, even if the submission of the respondents is accepted, which is to the effect that the invalidity of the appointment was not shown on 20th August, 2002, that argument would cease to have any substance in so far as the proceedings on and after 30th August, 2002 are concerned. On and after 30th August, 2002, the first respondent was clearly informed of the invalidity of the appointment of the fifth and sixth respondents. Consequently, the benefit of the substantive part of Section 290 of the Companies Act, 1956 would not in any event be available after 30th August, 2002. The counsel appearing on behalf of the petitioners has sought to urge that the benefit of Section 290 can normally be taken by a third person and not by the Directors or their close relations. In support of this proposition, reliance was sought to be placed on the judgment of the Punjab and Haryana High Court in Col. K.S. Dhillon v. Paragaon Utility Financers, 1988 Company Cases (Vol. 64) page 19. It is not necessary for this Court to express any opinion on that aspect since, Court is of the view that with effect from 30th August, 2002, the invalidity of the appointment of the fifth and sixth respondents had been shown to the company. Any act done after the appointment of the fifth and sixth respondents was shown to be invalid will not be protected by Section 290. In the circumstances, Court is of the view that the petitioners are entitled to the grant of interim relief in terms of prayer clause (b)(iii) of the arbitration petition.

       Companies Act, 1956 - Sections 255 and 256 - Binding effect of agreement with subscribers - Investment in preferential shares on condition that a Director of the Company will not resign till the agreement for subscription subjects - Held - The articles of respondent company do not incorporate such agreement - Nor such articles could bind the company - Court cannot grant injunction against company directors not to resign. - In considering the correctness of the first submission, it would be at the outset necessary to note that the assurance which is held out to the petitioners in Article 3.10 of the Subscription Agreement is only in so far as continuance of the second respondent on the Board is concerned. Ex facie, there is no assurance in so far as either the third or the fourth respondents are concerned. But, the more fundamental defence of the respondents which, has to be sustained is that the provision contained in the subscription agreement to the effect that the second respondent would not resign from the Board "till the validity of this agreement" ws not translated into an amendment of the Articles of Association of the Company. The fact that the company is a party to the subscription agreement makes no difference to this position because the position in law is well settled. The provisions in an agreement such as the one in the present case, cannot be given effect to in so far as the management of the affairs of the company is concerned, unless those provisions have been incorporated into the Articles of Association. This point is no longer res integra but, is covered by the decision of the Supreme Court in V.B. Rangaraj v. Gopalakrishnan, AIR 1992 SC 453. The Supreme Court has held that a restriction which is not specified in the Articles of Association is not binding either on the company or on the shareholders. An attempt was made to distinguish the judgment of the Supreme Court by Counsel for the petitioner on the ground that the law laid down by the Supreme Court in that judgment applies only in the context of a restriction on the transfer of shares of the company. Rangaraj s case (supra) undoubtedly involved a situation relating to a restriction on the transfer of shares but the principle of law which has been enunciated by the Supreme Court cannot be confined to only that situation. Amongst the authorities cited in the judgment of the Supreme Court is the decision rendered earlier in S.P. Jain v. Kalinga Tubes Ltd., AIR 1965 SC 1535, in which the question which arose related to the enforceability of an agreement between two groups of shareholders of a company which had not embodied in the Articles of Association. The principle laid down by the Supreme Court in Rangaraj s case is, therefore, not confined to a situation involving only a transfer of shares. Therefore, the judgment of the Supreme Court would clearly be attracted to the facts of this case. The Articles of Association do not stipulate that the second respondent shall be a permanent Director of the company. In any event, that it would not be possible for this Court to issue any directions in terms of the relief sought in prayer Clause (a) which is to the effect that the second, third and fourth respondents be directed to continue as Directors of the first respondent

       Companies Act, 1956 - Sections 255 and 256 - Interpretation of documents - Allegation that induction of Directors was contrary to provisions under Articles of Associa- tion - Contention that subscribers could not nominate Directors - Held - No evidence to suggest that bar shall be applicable upon shareholder Directors only - It was necessary to decide issue by counting affirmative votes - In absence of any appointment of outsider as Director would not be possible.

       Companies Act, 1956 - Sections 255, 256 and 290 - Objection to appointment of Directors - Two of the Directors alleged to be appointed without consent of subscribing share holders - Section 290 of the Act bars any objection to appointments of Director - After proper appointment - Once they are appointed they cannot be objected to. - If the minutes of the meeting held on 20th August, 2002 are perused what would emerge is that the objection of the nominee Director of the petitioners to the appointment of the fifth and sixth respondents has been recorded. At that stage, the nominee Director had not expressly adverted to the provisions of Article 10.1.29 of the subscription agreement which was equivalent to Article 159-B(xxix) which warranted that the affirmative vote of the petitioners will be required for any proposal for the inclusion of members on the Board of Directors. The specific point that the consent of the petitioners was necessary has been recorded in the letter dated 30th August, 2002 addressed by the petitioners to the Managing Director of the Company. This letter has been addressed with reference to the meeting of the Board which took place on 29th August, 2002 and it specifically records that under the provisions of the shareholders agreement the positive consent of the petitioners was required to add any members on the Board. That being the position, at least as on 30th August, 2002, the invalidity in the appointment of the fifth and sixth respondents was clearly shown to the first respondent. Consequently, even if the submission of the respondents is accepted, which is to the effect that the invalidity of the appointment was not shown on 20th August, 2002, that argument would cease to have any substance in so far as the proceedings on and after 30th August, 2002 are concerned. On and after 30th August, 2002, the first respondent was clearly informed of the invalidity of the appointment of the fifth and sixth respondents. Consequently, the benefit of the substantive part of Section 290 of the Companies Act, 1956 would not in any event be available after 30th August, 2002. The Counsel appearing on behalf of the petitioners has sought to urge that the benefit of Section 290 can normally be taken by a third person and not by the Directors or their close relations. In support of this proposition, reliance was sought to be placed on the judgment of the Punjab and Haryana High Court in Col. K.S. Dhillon v. Paragaon Utility Financiers, 1988 Company Cases (Vol. 64) page 19. It is not necessary for this Court to express any opinion on that aspect since, with effect from 30th August, 2002, the invalidity of the appointment of the fifth and sixth respondents had been shown to the company. Any act done after the appointment of the fifth and sixth respondents was shown to be invalid will not be protected by Section 290.

       Companies Act, 1956 - Section 288 - Validity of subsequent meeting - When held without issuance of notice to its members - As regards subsequent meeting Section 288 says that such meetings will automatically get discharged and would automatically be held on subsequent date for which there is no need to inform all subscribers - Therefore, such a meeting will not be invalid. - Counsel appearing on behalf of the respondents sought to urge that no notice of an adjourned meeting is required to be furnished and in this regard sought to rely upon an extract from Gore Brown on Company Law. Section 288 of the Companies Act, 1956 provides that if a meeting of the Board cannot be held for want of quorum, then unless the articles otherwise provide, the meeting shall automatically 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. Article 152 of the Articles of Association in the present case provide that if a meeting of the Board cannot be held for want of quoram, then the meeting shall stand adjourned to such day, time and place as the Director or Directors present at the meeting may fix.

       In the present case, on 5th September, 2002, the petitioners while seeking a rescheduling of the meeting had drawn the attention of the first respondent to the fact that besides their objections to the adoption of accounts the presence and positive consent of the nominee directors was required for the adoption of accounts. The minutes of the meeting which was held at 4.30 p.m. on 6th September, 2002, record that the meeting was being adjourned to 5.30 p.m. to enable the nominee Directors of the petitioners to reach the venue and that respondent No. 5 was requested to personally ensure that this was communicated to the Directors of the petitioners. In a matter of this nature, it was only to be expected, especially in the backdrop of the serious disputes between the parties, that there would be a facsimile communication to the Directors of the petitioners requesting them to attend the adjourned meeting. This was in fact, the modality which was followed by the first respondent while informing the nominee Directors on 6th September, 2002 that the meeting fixed at 4.30 p.m. on that day could not be rescheduled. That the fax was sent after the time at which the meeting was convened is a separate matter. Therefore, the general principle that no fresh notice of an adjourned meeting is required would not apply to a case such as the present where the Board of Directors had, while adjouring the first meeting which took place at 4.30 p.m. required the fifth respondent to personally ensure that this was communicated to the nominee Directors of the petitioners with a view to convince them to attend the adjourned meeting. The Board was perhaps conscious of the fact that the affirmative vote of the petitioners was necessary for the adoption of the annual accounts since the attention of the first respondent had been expressly drawn to this position by the petitioners on 5th September, 2002. In the circumstances, though the Board of Directors had taken a decision to require the fifth respondent to ensure that the nominee Directors were informed of the adjourned meeting, there was no notice to the petitioners of the adjourned meeting which took place at 5.30 p.m. At any rate, the respondents have not stated on affidavit in these proceedings that any such notice was in fact, given.

       But, apart from this consideration, Article 151 of the Articles of Association would clearly interpose a fatal objection of the validity of the meeting in the absence of the petitioners. Article 151 provides that the quorum for a Board meeting shall be three Directors or one-third of the total strength whichever is higher. Since the fifth and sixth respondents were not entitled to act as Directors for the reasons which have already been indicated earlier, there were only two remaining Directors present who would not constitute the quorum. Independent of this, Article 151 provides that the nominee Director of the petitioners shall be part of the quorum for the Board meeting unless he had otherwise sought leave of absence in writing. Therefore, in any event, the Board meeting could not have proceeded to take place for adopting annual accounts in the absence of the nominee Directors from the group of the petitioners. In these circumstances, the adoption of accounts at the meeting which was held on 6th September, 2002 is unlawful.

       The adoption of accounts by the Board of Directors at the adjourned Board meeting on 6th September, 2002 is thus unlawful. Having regard to the provisions of the Articles of Association, it would be necessary for the first respondent to reconvene a fresh meeting, in accordance with the Articles of Association, of the Board of Directors and to take further action in pursuance thereof, in accordance with law. The petitioners are, therefore, entitled to the relief which has been prayed in terms of prayer Clause (b)(iv).

       Civil Procedure Code, 1908 - Order XXXIX, Rules 1 and 2 - Grant of injunction - Against Director of Company - Not to resign - Preferential shares subscribed - On conditions that one of the Directors will not resign as Director of Company - Articles of memorandum of company do not allow such condition - No injunction against respondent resigning as a Director can be granted. - In considering the correctness of the first submission, it would be at the outset necessary to note that the assurance which is held out to the petitioners in Article 3.10 of the Subscription Agreement is only in so far as continuance of the second respondent on the Board is concerned. Ex facie, there is no assurance in so far as either the third or the fourth respondents are concerned. But, the more fundamental defence of the respondents which has to be sustained is that the provision contained in the sub-scription agreement to the effect that the second respondent would not resign from the Board "till the validity of this agreement" was not translated into an amendment of the Articles of Association of the Company. The fact that the company is a party to the subscription agreement makes no difference to this position because the position in law is well settled. The provisions in an agreement such as the one in the present case, cannot be given effect to in so far as the management of the affairs of the company is concerned, unless those provisions have been incorporated into the Articles of Association. This point is no longer res integra but, is covered by the decision of the Supreme Court in V.B. Rangaraj v. V.B. Gopalakrishnan, AIR 1992 SC 453. The Supreme Court has held that a restriction which is not specified in the Articles of Association is not binding either on the company or on the shareholders. An attempt was made to distinguish the judgment of the Supreme Court by Counsel for the petitioners on the ground that the law laid down by the Supreme Court in that judgment applies only in the context of a restriction on the transfer of shares of the company. Rangaraj s case (supra) undoubtedly involved a situation relating to a restriction on the transfer of shares but the principle of law which has been enunciated by the Supreme Court cannot be confined to only that situation. Amongst the authorities cited in the judgment of the Supreme Court is the decision rendered earlier in S.P. Jain v. Kalinga Tubes Ltd., AIR 1965 SC 1535, in which the question which arose related to the enforceably of an agreement between two groups of shareholders of a company which had not been embodied in the Articles of Association. The principle laid down by the Supreme Court in Rangaraj s case is, therefore, not confined to a situation involving only a transfer of shares. Therefore, the judgment of the Supreme Court would clearly be attracted to the facts of this case. The Articles of Association do not stipulate that the second respondent shall be a permanent Director of the company. In any event, it would not be possible for this Court to issue any directions in terms of the relief sought in prayer Clause (a) which is to the effect that the second, third and fourth respondents be directed to continue as Directors of the first respondent.