2008 Supreme(Mad) 180

IN THE HIGH COURT OF JUDICATURE AT MADRAS.
S. Rajeswaran, J.
M. Rajendra Naidu and Another
Versus
Sterling Holiday Resorts, Chennai and Others
C.A. No. 1899 of 2007, C.A. No. 1900 of 2007, C.A. No. 2284 of 2007C.A. No. 2285 of 2007C.A. No. 2286 of 2007C.A. No. 2287 of 2007C.A. No. 2288 of 2007C.A. No. 2303 of 2007C.A. No. 2304 of 2007 in C.P. No. 140 of 2005
Decided on: 22nd January, 2008.

The scope and ambit of Section 237 of the Companies Act, 1956, and the effect of annulment of adjudication on the vesting of property.

Headnote:

COMPANIES ACT - SECTION 237 - INVESTIGATION INTO THE AFFAIRS OF THE COMPANY - SCOPE AND AMBIT OF SECTION 237 - JURISDICTION OF THE COURT - CONCURRENT JURISDICTION - DISCRETIONARY RELIEF - ALTERNATIVE REMEDY AVAILABLE - COMPANY LAW BOARD - INSOLVENCY - EFFECT OF ANNULMENT OF ADJUDICATION - VESTING OF PROPERTY - DOCTRINE OF OSTENSIBLE AUTHORITY - INDOOR MANAGEMENT - INJUNCTION - INTERIM INJUNCTION - BALANCE OF CONVENIENCE - IRREPARABLE INJURY - MAINTAINABILITY OF SUIT BY INSOLVENT - SUBSEQUENT ANNULMENT OF ADJUDICATION - VALIDITY OF SUIT.

Fact of the Case:

The petitioner, a shareholder of Sterling Holiday Resorts (India) Ltd., filed a petition under Section 237(a)(ii) of the Companies Act, 1956, praying for a declaration to declare that the affairs of the company ought to be investigated by inspectors appointed by the Central Government. The petitioner alleged that the chairman and managing director of the company, who had been declared insolvent, continued to function as a director and vice chairman of the company by suppressing the real fact. The company sold a property in Chittoor District to the third respondent through the second respondent, who was declared as an insolvent at the relevant point of law. The petitioner challenged the sale deed on the ground that during the relevant period, the second respondent was an insolvent.

Finding of the Court:

The Court held that the petitioner had an alternative remedy available under Section 397 and 398 of the Companies Act, and therefore, the application for investigation under Section 237(a)(ii) was not maintainable. The Court further held that the effect of the annulment of the adjudication was to bring about the same state of affairs as if there had never been an adjudication, and therefore, the property vested in the appellant on the relevant dates. The Court also held that the doctrine of ostensible authority in relation to a limited company gives rise to difficult legal problems and the strangers dealing with bona fide with officers of the company have a right to assume that they have been duly appointed. The Court further held that a stranger dealing with a company has a right to assume as against the Company that all the requirements of the internal management have been duly complied with.

Issues: 1. Whether the petitioner had an alternative remedy available under Section 397 and 398 of the Companies Act, and therefore, the application for investigation under Section 237(a)(ii) was not maintainable? 2. Whether the effect of the annulment of the adjudication was to bring about the same state of affairs as if there had never been an adjudication, and therefore, the property vested in the appellant on the relevant dates? 3. Whether the doctrine of ostensible authority in relation to a limited company gives rise to difficult legal problems and the strangers dealing with bona fide with officers of the company have a right to assume that they have been duly appointed? 4. Whether a stranger dealing with a company has a right to assume as against the Company that all the requirements of the internal management have been duly complied with?

Ratio Decidendi: 1. The Court held that the petitioner had an alternative remedy available under Section 397 and 398 of the Companies Act, and therefore, the application for investigation under Section 237(a)(ii) was not maintainable. The Court relied on the decision of the Delhi High Court in V. V. Purie v. E. M. C. Steel Ltd. and Others, wherein it was held that Section 237 should not be given an interpretation which would make it possible for any person to start litigation in respect of what does not concern them. 2. The Court held that the effect of the annulment of the adjudication was to bring about the same state of affairs as if there had never been an adjudication, and therefore, the property vested in the appellant on the relevant dates. The Court relied on the decision of the Madras High Court in Gamoji Venkata Ramakrishna Rao v. Gullpalli Sambamurti, wherein it was held that the effect of annulment of adjudication was to bring about the state of affairs as if there had never been an adjudication and the property was deemed to have been the property of the applicant on the relevant dates. 3. The Court held that the doctrine of ostensible authority in relation to a limited company gives rise to difficult legal problems and the strangers dealing with bona fide with officers of the company have a right to assume that they have been duly appointed. The Court relied on the decision of the House of Lords in Freeman and Lockyer v. Buckhurst Park Properties (Mangal) Limited, wherein it was held that the doctrine of ostensible authority in relation to a limited company gives rise to difficult legal problem and the strangers dealing with bona fide with officers of the company have a right to assume that they have been dully appointed. 4. The Court held that a stranger dealing with a company has a right to assume as against the Company that all the requirements of the internal management have been duly complied with. The Court relied on the decision of the Madras High Court in Nellai Metal Rolling Mills Pvt. Ltd. v. Southern India Central Benefit Fund, wherein it was held that even though, no resolution authorizing the directors of the Company to enter into suit transaction was passed, that need not be given undue significance because in fact the company received and enjoyed the benefits of the transaction, even though it suffered the infirmity of lack of a resolution by the Board of Directors.

Final Decision: The Court dismissed the petition filed by the petitioner under Section 237(a)(ii) of the Companies Act, 1956, and also dismissed the applications filed by the proposed impleading applicants.