| SooperKanoon Citation | sooperkanoon.com/47441 |
| Court | Company Law Board CLB |
| Decided On | Aug-21-1997 |
| Judge | K Balu |
| Reported in | (1998)93CompCas275 |
| Appellant | Ernakulam Financiers and Kuries |
| Respondent | Joseph Chandy and ors. |
1. According to the company, it had received a statement dated December 9, 1996, from the respondents requesting the company to convene an extraordinary general meeting under Section 169(1) of the Companies Act, 1956, in order to remove all the existing directors on the board of the company on the ground that the entire board of the company have not been managing the affairs of the company in the best interests of the company and its shareholders. The respondents wanted the company to circulate the statement to all the shareholders of the company who are entitled to have notice of the next general meeting of the company. The company had decided to hold the next annual general meeting on February 27, 1997. The statement of the respondents being defamatory in nature, had a direct adverse effect on the business of the company among the shareholders and the general public. The statement would affect the image and future prospects of the company. The company would suffer irreparable loss and injury if the statement is circulated and even lead to total collapse of its present business of kuries and chits. The company, therefore, decided not to circulate the statement among its members in any of the general meetings. The respondents had no bona fides in their requisition to convene an extraordinary general meeting for removal of the board of directors of the company. The respondents did not deposit with the requisition a sum reasonably sufficient to meet the company's expenses in giving effect thereto as per Section 188(4)(b) of the Act. This Bench, on the representation made by the applicant, exercising its powers under Sub-section (5) of Section 188 ordered the company not to circulate the statement regarding removal of the directors on February 6, 1997. In spite of the interim order dated February 6, 1997, the respondents convened an extraordinary general meeting on February 19, 1997, illegally and removed the existing directors. The applicant has, therefore, filed two miscellaneous applications, one for prosecuting and punishing the respondents for wilful disobedience and gross violation of the interim order dated February 6, 1997, of this Bench and the other restraining the respondents from acting as its directors before various authorities under the Act.
2. According to respondents Nos. 1 to 4, the application filed by the company under Section 188 is not maintainable. The application is vitiated by gross and deliberate suppression of facts and also in violation of the orders of the Munsiff's Court, Ernakulam. The respondents gave a request under Section 169 of the Act, to the board of the company to convene an extraordinary general meeting for removal of the directors of the company. Though the requisition was a valid one, the board of the company refused to convene the meeting.
Thereafter, the respondents circulated the proposed resolution to all the shareholders of the company with the notice dated January 27, 1997, convening an extraordinary general meeting before the interim order dated February 6, 1997. There was no prohibition against the respondent either from circulating the resolution on January 27, 1997, or convening the extraordinary general meeting on February 19, 1997, pursuant to Section 169(6) of the Act. The interim order dated February 6, 1997, was only against the company not to circulate the statement among members. Accordingly, the extraordinary general meeting was duly convened by the respondents in accordance with the provisions of Section 169(6) of the Act, unanimously resolving to remove all the members of the existing board and elected a new board in its place, who took charge of the company's affairs. The new board has been functioning as a competent board of directors of the company. The new board of directors of the company had filed a suit in O.S. No. 363 of 1997 on the file of the Munsiff's Court, Ernakulam, and obtained an ex parte order of ad interim injunction in I.A.No. 1127 of 1997, on February 21, 1997, against all the members of the erstwhile board of the company restraining them from interfering with the affairs of the company or representing themselves to be directors of the company. The ex parte order was confirmed on March 24, 1997. Though an appeal in C.M. A.No. 52 of 1997, on the file of the District Court, Ernakulam, was preferred against the order of injunction, the appellate court had not interfered with the said order. Shri M. B. Lonappan, who is the signatory to the present application has been deliberately violating the orders of the above courts. It is in these circumstances, the main application and miscellaneous applications are liable to be dismissed.
3. The company in its counter-reply submitted that the requisition dated December 9, 1996, submitted by the respondents along with a resolution and statement for removal of the entire board of directors of the company in an extraordinary general meeting is not proper and valid and the respondents were accordingly advised by the company in its letter dated December 20, 1996. The respondents instead of tendering a fresh valid and proper requisition to the company convened an extraordinary general meeting of the company on February 19, 1997, in terms of their notice dated January 27, 1997. The respondents failed to comply with the requirements as specified in Section 188(4)(a) and (b) of the Act enabling the company to circulate the members' resolution and the statement annexed thereto. The respondents have no authority to circulate the statement and circulation at the instance of the respondents will have no legal consequence but it is an act of nullity in law. It is the statutory responsibility and liability of the company, failure of which attracts penalty under Section 188(8) of the Act. The respondents cannot convene an extraordinary general meeting under Section 169(6) and (7) of the Act. The company shall before removal of the existing directors comply with the requirements of Section 284 of the Act. The removal of directors and appointment of directors in the place of the existing vacancies are a special business as contemplated under Section 173(1)(b) of the Act, in which case the explanatory statement cannot be dispensed with. Any special business transacted without circulation of the explanatory statement, in violation of Section 173(1) and (2) of the Act will be null and void.
The company is required to circulate the members' statement, as provided under Section 188, in order to meet the requirements of Section 173(1) and (2) of the Act. The powers under Section 188 are to be exercised by the company and the company alone. The respondents cannot transact any special business including removal and appointment of directors unless the explanatory statement is circulated by the company. The company is not bound to circulate any statement regarding removal of directors so long as the order dated February 6, 1997, of the Company Law Board is in force. The statutory hurdle cannot be overcome by the respondents by obtaining an order of injunction in I.A.No. 1127 of 1997, in O. S. No. 363 of 1997, of the Munsiff's Court, Ernakulam. The said order is under challenge in C.M.A.No. 52 of 1997 of the 1st Additional District Court, Ernakulam. The respondents without getting themselves appointed to the board of the company in accordance with the provisions of the Act, trespassed and. ransacked the registered office of the company in gross violation of the order of temporary prohibitory injunction passed by the Munsiff's Court, Kochi, in I.A.No. 555 of 1997, in O. S. No. 79 of 1997, and took physical control and possession of the records. However, bank operations by the respondents on behalf of the company have been restrained by virtue of an order dated July 23, 1997 of the Subordinate Judge's Court, Ernakulam, in I.A.No. 2633 of 1997, in O. S. No. 281 of 1997. The term of the present directors will expire by the end of the year 1997-98.
Shri M. V. Lonappan continues to be the chairman and managing director of the company. The company has, therefore, submitted that the Company Law Board may confirm its interim order dated February 6, 1997, and allow the application,directing the company not to circulate the statement deposited by the respondents.
4. According to the fifth respondent; he was not aware of the affairs of the company for the last 2-3 years and joined respondents Nos. 1 to 4 in requisitioning a meeting under Section 169 of the Act. The company has obtained an order of injunction against the respondent in the Munsiff's Court, Kochi, but the order of interim injunction was served on the respondents on February 18 and 19, 1997. In the meanwhile, a meeting of the members was held on February 19, 1997, wherein a resolution was passed for removing all the 14 existing directors and substituting 14 others as directors of the company, In the said meeting the third respondent was elected as chairman and managing director and the fourth respondent as joint managing director. The third respondent, chairman, instituted a suit on February 21, 1997, against eight directors of the company before the Munsiff s Court, Ernakulam, in O.S. No. 363 of 1997, praying for an injunction to restrain them from interfering in the administration of the company. Thereafter, respondents Nos. 1 to 4 took over the possession and management of the company. Respondents Nos. 1 to 4 alone are managing the affairs of the company. The other directors are not even attending the board meeting of the company. The new board of the management is acting adverse to the interest of the company and its shareholders. Respondents Nos. 1 to 4 are making unlawful gains for themselves and their families.
Respondents Nos. 1 to 4 are acting prejudicially to the interest of the members of the company. The present attempt of respondents Nos. 1 to 4 is to oust the other five families and capture control of the company by unlawful means and own the company exclusively by their families.
The authorised share capital of the company is Rs. 15 lakhs divided into 15,000 equity shares of Rs. 100 each, out of which only 12,080 shares are paid-up. Respondents Nos. 1 to 4 have now issued 1996 equity shares in their names and relatives as stated in the counter with the ulterior motive of gaining control over the company. Respondents Nos. 1 to 4 attempted to convene an extraordinary general meeting on June 7, 1997, for increasing the authorised capital of the company from Rs. 15 lakhs to Rs. 50 lakhs which was restrained by an order of injunction dated June 6, 1997, of the District Court at the instance of the present directors of the company. Respondents Nos. 1 to 4 are tampering with the account books of the company and attempting to fabricate a new scroll book (cash book). Respondents Nos. 1 to 4 were not allowing this respondent and other shareholders to verify the books. Consequently, this respondent and other shareholders, filed a complaint before the Circle Inspector of Police, Central Station, Ernakulam, pursuant to which the Sub-Inspector of Police made investigations and seized the original cash book and the newly fabricated cash book. Thereafter, this respondent filed a criminal complaint against respondents Nos. 1 to 4 before the Additional Chief Judicial Magistrate's Court, Ernakulam, and a case has been registered against respondents Nos. 1 to 4 which is under investigation.
5. There has been no circulation of any statement for removal of directors by the company on account of the interim order dated February 6, 1997, of this Bench. Consequently, the resolution allegedly passed on February 19, 1997, in the extraordinary general meeting cannot take effect for want of circulation of the statement as required under Section 173(1) and (2) of the Act. On account of the interim order dated February 6, 1997, of this Bench, it is not legally possible to pass any resolution for removal of the directors after circulating the explanatory statement as required under Section 173. He has, therefore, prayed for vacating the interim order dated February 6, 1997, and dismissal of the application to enable the respondents to take legal steps compelling the company to circulate the statement for removal of the existing directors and appoint new directors.
6. During the hearing, Mr. Philip Mathew, counsel for the company, while reiterating the submissions made in the application/counter-reply, submitted that under Section 188 of the Act, the requisitionists must deposit the requisition at the registered office of the company not less than two weeks before any general meeting, along with a sum sufficient to meet the company's expenses for circulation of the statement. Unless the requisition and money are deposited, the company is under no obligation to circulate the statement. In the present case, the requisitionists failed to comply with the said requirement. As the company is aggrieved on account of the defamatory remarks contained in the statement, it moved this Bench and obtained directions that the company need not circulate the statement. According to him, the respondents have no right to circulate the statement and it is obligatory only on the part of the company to circulate the statement provided the requisitionists meet the requirement of deposit for expenses, failure of which attracts penalty on the part of the company under Sub-section (8) of Section 188 of the Companies Act, 1956. In this connection, he relied upon the following decisions ;Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548, 636 ; [1986] 1 SCC 264, 343 : "Thus, we see that every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements, to call an extraordinary general meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling a meeting and he is not bound to disclose the reasons for the resolutions proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review. It is true that under Section 173(2) of the Companies Act, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each item of business to be transacted at the meeting including, in particular, the nature of the concern or the interest, if any, therein, of every director, the managing agent, if any, the secretaries and treasurers, if any, and the manager, if any. This is a duty cast on the management to disclose, in an explanatory note, all material facts relating to the resolution coming up before the general meeting to enable the shareholders to form a judgment on the business before them. It does not require the shareholders calling a meeting to disclose the reasons for the resolutions which they propose to move at the meeting." "The company has got the statutory duty to circulate the statement and not members Of the company".
(c) Pedley v. Inland Waterways Association Ltd. [1977] 1 All ER 209 (ChD) (headnote) :.
"(English) Section 142 merely conferred on the members of a company the right to receive notice in the manner provided for by that section of any resolution of which special notice was required and had already been duly given, and which was to form part of the agenda to be dealt with at the relevant meeting. Section 142 did not confer on an individual member the right to compel the inclusion of a resolution in the agenda of a company meeting and the phrase in Section 142 beginning : 'and the company shall give its members notice' was merely part of the machinery designed to ensure that members generally, as well as the director or auditor concerned, had at least 21 days' notice of any resolution of which special notice was required. Therefore, unless a single member was able to rely on (English) Section 140 or a provision in the articles of association of a particular company the member had no right to compel the inclusion of such a resolution in the agenda." 7. Counsel for the company has further submitted that the requirements specified in Sub-sections (2) and (3) of Section 284 of the Companies Act, 1956, must be complied with for removal of the board of directors.
The respondents' action to convene an extraordinary general meeting for removal of the members of the board of the company without complying with the legal formalities specified in Section 284 is neither valid nor binding upon the company. The respondents have also failed to comply with the statutory requirement of circulating the explanatory statement along with the notice for removal of the directors in accordance with Sub-section (2) of Section 173 of the Act, when especially, removal of the directors is a special business of the company as contemplated in clause (b) of Sub-section (1) of Section 173 of the Companies Act, 1956. Consequently, the resolution passed'on February 19, 1997, removing the erstwhile directors of the company is hit by Section 173(2) of the Act. The respondents have no power and locus standi to call for an extraordinary general meeting of the company and such power is vested only with the Company Law Board.
8. Shri Kurian George Kannathanam, counsel for respondents Nos. 1 to 4, while reiterating the submissions made in the counter has stated that the company cannot seek any relief under Sub-section (5) of Section 188 of the Act. The respondents have served notice under Section 169 of the Act after complying with the requisite formalities specified in Section 173(2). Section 173(2) does not specify the person who shall circulate the notice.
9. Not are the respondents prohibited under Section 173(2) to circulate the statement. The respondents, therefore, made arrangements to circulate the statement. The application does not lie under Section.
188 and the company is not entitled for the prayer sought by it, The decisions cited by counsel for the company are not applicable in the facts and circumstances of the case. In the light of the civil suit filed by the applicant against the respondents for identical remedy, this Bench cannot grant the prayer made in the application. The interim order dated February 6, 1997, of this Bench is against the company not to circulate the statement. There has been no restraint order against the respondents. Moreover, the statement had already been circulated by the respondents long before the interim order dated February 6, 1997, passed by this Bench and, consequently, they are not guilty of violation of the interim order. In the circumstances counsel for respondents Nos. 1 to 4 has prayed for dismissal of both the application and miscellaneous application.
10. Shri A. D. Baby, counsel for the fifth respondent, while reiterating the submissions made in the counter, stated that the statement dated December 9, 1996, for removing the directors had already been circulated. The resolution for removal of the directors was passed in the extraordinary general meeting on February 19, 1997.
No amount was deposited by the respondents towards the company's expenses in circulating the statement. He has prayed for vacating the interim order dated February 6, 1997, passed by this Bench and dismissal of the application to enable the company to circulate the statement for removal of the existing directors and to appoint new directors in their place to avoid the present stalemate faced by the company.
11. I have considered the pleadings and arguments advanced by counsel.
The company is seeking the relief under Section 188 of the Act for not circulating the requisition dated December 9, 1996 (annexure A-2), deposited by the respondents on the following grounds : (a) that the respondents failed to deposit any sum reasonably sufficient to meet the company's expenses for circulation of the statement.
(b) that the respondents have no authority or right to circulate the statement among members.
12. The contention of the respondents is that the requisition dated Decem ber 9, 1996, was deposited with the company to convene an extraordinary general meeting for removal of the directors and election of new direc tors in their place in accordance with the provisions of Section 169 of the Act.
13. In view of the conflicting positions taken by the company as well as respondents, annexure A-2 will have to be considered against the background of the provisions of Sections 188 and 169 of the Act.
14. Section 188 provides that a specified number of shareholders may make use of the administrative machinery of the company- (i) to introduce resolutions on their own account at the annual general meeting and inform other, members of the purpose for which the resolutions are proposed to be introduced, [Section 188(1)(a)] and (ii) to circulate among the members at any general meeting (whether it is the annual general meeting or any other general meeting) a statement of not more than one thousand words in respect of any resolution to be moved or any business to be dealt with at that meeting [Section 188(1)(b)], provided the procedure contemplated in this section is followed.
15. A careful scrutiny of annexure A-2 reveals that the respondents holding not less than one-tenth of the paid-up capital of the company had requested the chairman and board of directors of the company in pursuance of Section 169 of the Act to convene an extraordinary general meeting for removal of all the existing directors on the board of the company. For this purpose, it was proposed to move the following resolution at the proposed meeting : "Resolved that all the existing directors on the board of the company named below be and are hereby removed from their directorship for the reason that they have not been managing the affairs of the company in the best interest of the company and its shareholders." 16. Annexure A-2 contains the explanatory statement which runs as follows : "The company's affairs have not been managed satisfactorily by the present board of directors and the interests of both the company and the shareholders have suffered adversely and significantly in recent times. While, for the year ended March 31, 1994, the loss incurred was Rs. 2.83 lakhs, for the year ended March 31, 1995, the loss was as much as Rs. 7.26 lakhs. It is learnt that for the year ended March 31, 1996, the company has performed disastrously and the loss is likely to be much higher than the previous year. The accumulated loss up to March 31, 1995, as per balance-sheet is Rs. 28.85 lakhs against a paid-up capital of Rs. 4.52 lakhs only. This situation is going to be alarming as at March 31, 1996, and will be confirmed when the balance-sheet is circulated to the shareholders. Proper management of the company's resources is to be ensured and for this purpose, it is essential that the existing board which is responsible for this hopeless situation, is removed at the earliest and a better team of new directors installed on the board of the company. Hence, the proposed resolution is commended for acceptance." 17. Annexure A-3, a notice dated January 27, 1997, signed by the respondents and sent to all shareholders, directors, the auditor of the company and the Registrar of Companies, Ernakulam, reveals that the respondents holding not less than one-tenth of the paid-up capital of the company carrying the right to vote, had sent a requisition dated December 9, 1996 (annexure A-2), to the chairman and board of directors of the company requisitioning an extraordinary general meeting of the company for consideration of the matter relating to the removal and replacing of all the existing directors on the board of the company and that the board of the company did not convene the meeting in accordance with Section 169. Consequently, the respondents caused the notice dated January 27, 1997 (annexure A-3), convening an extraordinary general meeting of the company on February 19, 1997, in accordance with Section 169(6) of the Act to consider the business stated therein. Annexure A-3 contains the explanatory statement which runs as follows : "The company's affairs have not been managed satisfactorily by the present board of directors and the interests of both the company and the shareholders have suffered adversely and significantly in recent times. While, for the year ended March 31, 1994, the loss incurred was Rs. 2.83 lakhs, for the year ended March 51, 1995, the loss was as much as Rs. 7.26 lakhs. It is learnt that for the year ended March 31, 1996, also the company has performed disastrously and the loss is likely to be much higher than in the previous years. The accumulated losses up to March 31, 1995, as per the balance-sheet is Rs. 28.85 lakhs against a paid-up capital of Rs. 12.08 lakhs only.
This situation is going to be alarming as at March 31, 1996, and will be confirmed when the balance-sheet is circulated to the shareholders. Proper management of the company's resources is to be ensured and for this purpose, it is essential that the existing directors on the board, who are jointly and severally responsible for this hopeless situation are removed at the earliest and a better team of new directors named in the resolution is installed on the board of the company. Hence, the proposed resolution is commended for acceptance." 18. From the letter and spirit of the requisition dated December 9, 1996 (annexure A-2), it is rather evident that annexure-2 is neither a resolution introduced by members at the annual general meeting nor a statement at any general meeting in respect of any resolution or business proposed at that meeting and consequently does not fall either under Clause (a) or (b) of Sub-section (1) of Section 188 of the Act.
On the other hand, annexure-2 is a requisition under Section 169(1) to call an extraordinary general meeting of the company. By virtue of annexures A-2 and A-3, the respondents invoked the provisions of Section 169, according to which the directors must convene an extraordinary general meeting on the requisition of members holding not less than one-tenth of the total voting rights on the matter of requisition. The requisition must state the matters for consideration of which the meeting is to be called. It must be signed by the requisitionists and deposited at the registered office of the company.
The directors should, within 21 days from the date of the deposit of a valid requisition, move to call a meeting and should give 21 days notice to members for calling such a meeting and the meeting should actually be held within 45 days from the date of the requisition. If the directors fail to call the meeting within the above-mentioned time limits, the requisitionists representing not less than one-tenth of the total voting rights of all the members, may themselves convene a meeting within three months of depositing the requisition. It is, therefore, beyond doubt that the respondents had invoked the provisions of Section 169 and acted accordingly by means of annexures A-2 and A-3, as admitted by the company in the following words : "The company received a statement from the requisitionists above named who have asked the company to convene an extraordinary general meeting on requisition under Section 169(1) of the Companies Act, 1956, in order to remove all the existing directors on the board of the company on the ground that the entire board of the company have not been managing the affairs of the company in the best interests of the company and its shareholders. The requisitionists wanted the company to circulate the statement regarding the alleged mismanagement by the board of directors of the company to all shareholders of the company who are entitled to have notice of the next general meeting of the company ....," (Para. 6(1) in page 5 of the petition).
19. The applicant cannot, therefore, seek any relief under Section 188 of the Act. Nor is the application maintainable under this section. In view of this, without going into the merits of the other contentions of the company and the respondents regarding the validity of the resolution passed in the extraordinary general meeting held on February 19, 1997, and the various litigations between the parties, the application as well as miscellaneous application are dismissed. There is no need to go into the cases cited by counsel for the company.
20. With the above directions, the application and miscellaneous applications are dismissed.