C R PRIYACHANDRAKUMAR Vs. PURASAWALKAM PERMANENT FUND LIMITED

JUDGEMENT

(1.) THE applicants in O. A. No. 708 of 1994 are the plaintiffs in the suit. THE prayer in the suit is as follows : (a) For a declaration that the notice dated June 29, 1994, issued by the first respondent for the proposed annual general body meeting of the first respondent to be held on August 4, 1994, in so far as it relates to items Nos. 7 and 8 of the said notice is illegal and void. (b) For a permanent injunction restraining the respondents in any manner considering the said subjects, viz. , items Nos. 7 and 8 of the notice dated June 29, 1994, issued for the proposed annual general body meeting of the first respondent to be held on August 4, 1994, or on any other day. THE first respondent is a company and is also a nidhi. THE second respondent is a person who was proposed for election as a director of the first respondent in the annual general body meeting to be fixed on august 4, 1994. Items Nos. 7 and 8 in the notice have been proposed as "special business". Along with the suit, the applicants have filed O. A. No. 708 of 1994, for the grant of interim injunction restraining the respondents in any manner considering the subjects, viz. , items Nos. 7 and 8 of the notice dated June 29, 1994, issued by the first respondent. On August 3, 1994, the injunction application was moved before me. THE first respondent's counsel took notice and submitted that the meeting as proposed could go on including the special business, viz. , items Nos. 7 and 8 of the agenda but the first respondent would not give effect to the same until further orders if carried on in the said annual general meeting. On the same day, I passed an order. Instead of granting injunction, I allowed the first respondent to proceed with the annual general meeting with the agenda already printed and circulated to all the shareholders. I made it clear that any decision taken regarding items Nos. 7 and 8, if carried on, will not be given effect to until further orders of this court. I also permitted all the applicants to attend the annual general meeting and participate in the discussions. THE first respondent has now filed application No. 5055 of 1994, for vacating the order passed on August 3, 1994, in O. A. No. 708 of 1994. In support of the said application, the first respondent relied upon the counter-affidavit filed in O. A. No. 708 of 1994. THE first respondent contended that the two subjects, viz. , items Nos. 7 and 8, were passed with huge majority in the annual general meeting held on August 4, 1994. THE first respondent was incorporated in the year 1922. It is a nidhi which could have transactions only with its members. According to the applicants, on August 7, 1988, a director by name Giripal Mudaliar died and the second respondent N. G. Manavalan, who is the son of the said Giripal Mudaliar, was appointed by the board of directors of the first respondent as a director on August 11, 1988, in the casual vacancy caused by the death of Giripal mudaliar. THE second respondent could hold office only up to the period to which Giripal Mudaliar would have held the office of director. In the annual general meeting held on September 4, 1990, the second respondent was treated as a retiring director and he was re-elected. THEre was no nomination for his election as a director of the first respondent and a sum of Rs. 500 was not paid under the provisions of section 257 of the Companies Act, 1956. It is contended that one Gopalratnam, a director of the first respondent, resigned his post and in his place Mohanakrishnan was appointed in the casual vacancy. In the annual general meeting for 1990-91, he was proposed as a retiring director and controversy arose on that account. Subsequently, before the meeting could take place, the first respondent refused to treat him as a retiring director and controversy arose on that account. THE first respondent sought legal opinion and its counsel gave an opinion on september 5, 1991, stating that since Mohanakrishnan was only appointed in the casual vacancy, he could not be treated as a retiring director, and since he did not comply with the provisions of section 257 of the Companies Act, his candidature was invalid. It appears that he was intimated by the first respondent by letter dated September 7, 1991, about the rejection of his candidature as a director seeking re-election. On September 9, 1991, the said Mohanakrishnan wrote to the first respondent stating that the contention of the first respondent was wrong. He also accused the first respondent of negligence in not verifying the provisions of section 257 of the Companies Act before announcing his candidature. He had further stated that he was entitled to seek re-election and in support of this contention he mentioned that on an earlier occasion when a director was co-opted in a casual vacancy, the said person was not called upon to remit the sum of Rs. 500, Mohanakrishnan also tendered a demand draft for rs. 500. THE first respondent by its letter dated September 10, 1991, rejected the contention of Mohanakrishnan and returned the draft sent by him, as, according to the first respondent, the tender was in violation of the provisions of the Companies Act. It also appears that the said Mohanakrishnan did not pursue the matter further.

(2.) IN the annual general meeting held on June 21, 1993, the second respondent was treated as a retiring director and he was said to have been re-elected. By letter dated December 30, 1993, the first applicant enquired whether the second respondent had remitted a sum of Rs. 500 when he sought election and mentioned that if he had not deposited the amount towards his appointment, which took place on September 4, 1990, his appointment would be invalid and is in violation of section 257 of the Companies Act. According to the applicants, the first respondent did not reply to the said letter. The first applicant again wrote a letter on February 9, 1994, stating that even after 45 days, there was no reply to his letter. The first respondent by its letter dated February 24, 1994, mentioned that the second respondent did not deposit the sum of Rs. 500 and that he had not complied with the provisions of section 257 of the Companies Act at the annual general meeting held on September 4, 1990, and that the first respondent had obtained legal advice and due to the same, the second respondent resigned his post as a director, but in view of his services, the other directors of the first respondent had co-opted him as an additional director. IN reply to the said letter, the first applicant wrote a letter stating that there was suppression of vital facts from the shareholders and also informed the first respondent that there was no power vested in the board of directors of the first respondent to appoint the second respondent as an additional director. The first applicant also stated that the first respondent had no power to waive any amount of remuneration, sitting fees and other payments to a person who held the office of a director illegally, and called upon the first respondent to take corrective action. This was followed by letters dated March 15, 1994, and April 24, 1994, but the first respondent did not take any action. On this background, the notice dated June 29, 1994, was issued in which item No. 7 related to the election of the second respondent as a director, and item No. 8 to waive the remuneration paid to the second respondent of a sum of Rs. 97, 320 paid between September 4, 1990, and February 23, 1994, was sought. Since these two resolutions were under the category of "special business" an explanatory statement was annexed to the said notice. The first respondent filed a counter-affidavit through its secretary. The following are its contentions : (a) The suit is not maintainable. The suit is not filed in a representative capacity and there is no individual wrong done to shareholders. (b) The cardinal principle of corporate law that the courts will not interfere with the internal management of the company will apply to the facts alleged in the present petition. (c) The applicants are guilty of laches. The first respondent did not permit one Mohanakrishnan from seeking appointment as a director because of the non-compliance of section 257 of the Companies Act and that the first respondent has not adopted a different stand against the second respondent. The second respondent was appointed as a director in the casual vacancy and he was treated as a retiring director and he was re-elected on september 4, 1990. (d) The shareholders of the first respondent thought it fit to reappoint the second respondent unanimously and again his term for reappointment came up for consideration at the annual general meeting held on june 21, 1993. The applicants, who were the shareholders even at that relevant point of time, did not choose to object to such appointment or bring to the notice of the first respondent that the first respondent has not followed the procedure under section 257 of the Companies Act. (e) The first applicant is the father-in-law of one S. R. Kishore, who was an employee of the first respondent, and the third applicant is the brother of S. R. Kishore. The said S. R. Kishore was suspended and later dismissed for the misconduct arising out of the misappropriation of the funds of the first respondent. The matter is sub judice as S. R. Kishore has taken the matter to the Labour Court and the matter is pending disposal. As the father-in-law of the said S. R. Kishore, the first applicant and as the brother of the said S. R. Kishore, the third applicant along with another is causing interference with the affairs of the first respondent by making allegations which are untenable. Section 290 of the Companies Act saves acts of directors whose appointment is found to be defective. (f) The first respondent has applied to the Central government for waiver of remuneration paid to the second respondent inasmuch as the second respondent has acted as a director and rendered service to the first respondent. It is entirely for the shareholders of the first respondent to decide whether recovery should be made or the same should be waived. It is an internal management of the first respondent and there is no illegality attached to the consideration by the shareholders of the matter concerning the waiver of the recovery of remuneration. If the shareholders of the first respondent or the Central Government rejects the proposal for waiver of recovery of the remuneration, then the first respondent would take steps to recover the same from the second respondent subject to any defence that are open to the second respondent. (g) The appointment of the second respondent, which is found to be defective, has come to an end with the resignation of the second respondent on february 23, 1994. At the time when the present suit came to be filed, the second respondent has acted as additional director pursuant to the appointment as additional director on February 23, 1994, under section 260 of the Companies act, and that the power to appoint the second respondent as additional director is contained in regulation 72 of Table A to the Companies Act. The particulars set out in the explanatory statement give full and correct material particulars about the special business to be considered by the members.

(3.) THE first respondent has furnished an explanatory statement under section 173 (2) of the Companies Act for both the items. Item No. 7 : Thiru N. G. Manavalan was appointed as additional director of the company with effect from February 23, 1994. According to the provisions of section 260 of the Companies Act, 1956.