B G SOMAYAJI Vs. KARNATAKA BANK LTD

JUDGEMENT

(1.) This is an appeal filed by two of the Directors of the Karnataka Bank Limited and is directed against an order dated 28-2-1995 on I.A.II whereby the learned trial Judge has declined to grant the application on the part of the appellants. The respondent No. 1 Bank has by a notice dated 27-1-1995 convened an extra-ordinary general meeting of the shareholders which is scheduled to be held on 2-3-1995 at 10.30 a.m. at Mangalore. The two appellants, who are directors of the bank had moved the trial Court principally on the ground that according to them there are certain irregularities/ illegalities with regard to the convening of the general body meeting in question. Briefly stated, it is their contention, quite apart from certain mala fides which have been pleaded, that the requirements of law prescribe that the convening of such a meeting has to be accompanied by an explanatory statement which is provided for under S. 173 of the Companies Act. The appellants who are the plaintiffs before the trial Court, have stated that on 7-1-1995 the Chairman of the bank addressed a letter to the Reserve Bank of India, which admittedly is the supervisory authority wherein inter alia he has stated that the two appellants who are directors of the bank had indulged in certain acts which were very much against the interest of the of institution and for the reasons set out by him in that letter he had contended that they should be removed from the directorship of the bank. The plaintiffs' contention is that the R.B.I. has so far not responded to that letter nor has it taken any action as asked for and that therefore the Chairman of the Bank who is not well disposed towards them because of certain conflicts that are referred to in the plaint, is alleged to have instigated certain persons to convene the general body meeting for purposes of removing the plaintiffs from the directorship of the bank. According to them, the names of approximately three thousand shareholders who have signed the requisition for holding the general body meeting have not been disclosed and there is also an allegation in the correspondence exchanged that these so called signatures have been "obtained". That part of the controversy however is not of much consequence because the principal ground that was canvassed before the learned trial Judge effectively centres around the legality or the validity involved in the convening of the meeting. The mala fides and other surrounding circumstances are larger issues which the trial Court will subsequently look into. For purposes of the immediate interim order that was sought namely the stoppage of the holding of the extra-ordinary general meeting the plaintiffs essentially relied on the fact that a very cryptic explanatory statement has been annexed to the notice which states that the other directors have no interest in the item of business and only states that a requisition has been received for the convening of the meeting. A copy of the special notice has also been made part and parcel of the explanatory statement. That special notice set out four proposed resolutions for removal of four directors which includes the two present appellants. The special notice is silent with regard to the reasons or circumstances under which the removal is sought for.

(2.) The learned trial Judge after hearing the parties came to the conclusion that this was not a fit case in which ad interim orders for stoppage of the meeting are to be passed and therefore dismissed I.A. II. The present appeal is directed against that order. In view of the fact that the meeting is scheduled for tomorrow, an urgent application was made to this Court and the appeal was virtually taken up out of turn. The respondents are represented by Mr. Holla, the learned counsel and I have heard both the learned advocates on the question of whether to grant or refuse the interim relief prayed for.

(3.) I shall confine this order to the material aspects of the case only as the rest of the allegations and counter allegations and the defence thereof are something which the trial Court will look into and which I do not need to take cognizance of Mr. Raghavan, in support of application submitted that S. 173 of the Companies Act casts a statutory duty, not merely an obligation on the company convening a meeting of this type, to circulate to the shareholders an explanatory statement containing all materials facts that are relevant as far as the agenda of the meeting is concerned as also, from the point of view of the transmission to the shareholders, factual details for purposes of their coming to a right conclusion or decision with regard to the items on the agenda. In this regard, he has sought to place reliance on a judgment of the Bombay High Court in the Firestone case reported in (1971) 41 Com Cas 377. The High Court had occasion to deal with various aspects of the law but as far as the requirements of Section 173 are concerned, the High Court reiterated the position that it is a mandatory requirement of law that all material facts as also the interests or otherwise of directors must be disclosed in the explanatory statement. The reason for this is obvious in so far as there would be a class of shareholders who on the basis of the data would like to decide on attending the meeting or not but more importantly as far as those who attend and participate are concerned, the law takes cognizance of the fact that they must be posted with enough material from which they would be able to ascertain as to what is the nature of the controversy on which their opinion or decision is sought. It is also necessary since it is a matter of importance touching the business of the company, that the shareholders be posted with enough factual data for purposes of arriving at a judgment in matters where decisions have to be taken. Mr. Raghavan submitted that on the facts of the present case admittedly the company had on record a letter dated 7-1-1995 concerning the very issue which is the subject matter of the E.G.M. and in fact the only matter that is on the agenda for this E.G.M. He produced a copy of that letter in support of his submisison that the Chairman of the bank reported to the R.B.I. certain specific acts, which he termed as acts of grave misconduct on the part of the two appellants and he also recommended that they should be removed from the directorship of the bank. Mr. Raghavan adverted to certain other averments in the plaint and in the correspondence and he submitted that having regard to the situation that prevails, that as far as the Chairman is concerned that he is very much and in fact (sic) and personally interested in the removal of the two appellants. According to Mr. Raghavan, it was incumbent on the part of the company to have mentioned these material facts in the explanatory statement. Having regard to the importance of the matter, it would have perhaps impelled several persons who would otherwise not have attended the meeting to do so (sic) but more importantly many of the shareholders would have a desire to know as to what are the charges against the appellants and what is the reaction of a senior persons like the Chairman of the company to that situation. More importantly, the letter to the R.B.I. from the Chairman is an aspect of crucial importance because it is an official letter seeking the removal of the two appellants because the Chairman has come to the conclusion that their continuance on the board of the directors is contra indicated and not in the interest of the company. According to Mr. Raghavan, these are all very material aspects that could not and should not have been kept back from the shareholders. They were facts within the knowledge of the company and for this purpose will come within the ambit of the requirements of S. 173. It was very necessary that these material facts should have been disclosed.