RAMKUMAR POTDAR Vs. SHOLAPUR SPINNING AND WEAVING COLD

JUDGEMENT

(1.) In this case the plaintiff sues on behalf of himself and the other shareholders of the Sholapur Spinning and Weaving Co. Ltd., and he asks, first, for a declaration that certain resolutions passed by the directors, which resolutions were for the dismissal of the company's agents, are in contravention of the memorandum and articles of association of the company, and are not binding on the members of the defendant company, and, secondly, for an injunction to restrain the defendants from acting upon the resolutions. Defendant No. 1 is the Sholapur Spinning and Weaving Co. Ltd., and the other defendants are the directors. It is a well-settled principle in company law that the Court does not generally interfere with the internal management of the affairs of a company, and, if the majority of the shareholders consider that a particular contract of employment should be terminated, the Court would not as a rule consider the matter at the instance of a minority of shareholders. To get over that difficulty, it is contended by the plaintiff that the dismissal of these agents is an act ultra vires the company, and, no doubt, the case of acts ultra vires the company does constitute an exception to the general rule that the Court will not interfere in the management of a company. But it is, on the face of it, startling to find it suggested that the dismissal of persons in the employment of the company, or under contractual relations with the company, is an act ultra vires the company. To get over that difficulty, the plaintiff alleges that the rights of the agents arise under the memorandum of association of the company, and, therefore, cannot be altered. But, at that point, another difficulty arises, i. e., that the memorandum of association, as it has been held many times, does not constitute a contract between the company and a third party who may be named therein. So that, ultimately, the argument assumes some such form as this, that it is a vital part of the constitution of the company that the company should employ the agents, that the company should conduct its business through the services of the agents, that that obligation arises apart from any contract with the agents, and that it is an obligation imposed upon the company as part of its charter which cannot be altered, having regard to the terms of Section 10 of the Indian Companies Act. In my opinion, the argument is quite untenable, and the plaintiff's action is wholly misconceived. With whatever skill the real object of the plaintiff is concealed, it is quite plain that the order which he asks for would have the effect of restraining the company from dismissing the agents, and it is well-settled that the Court will not make an order the effect of which is to enforce specifically any contract of personal service.

(2.) But, I think, the case may be based on another ground, because I am not prepared to accept the argument of the plaintiff that the material clause in the memorandum is really a vital part of the constitution of the company, or a condition of the memorandum within the meaning of Section 10 of the Indian Companies Act. The clause in question, which is Clause 6, is not incorporated amongst the objects of the company, but is an independent clause, and it is in these term:- That the firm of Morarjee Goculdas & Co., of Bombay, merchants, or whatever member or members that firm may for the time consist of, shall be the agents of the company, so long as the said firm shall carry on business in Bombay or until they shall resign, and they shall receive a commission of - anna per lb. on all the yarns and other material manufactured and sold by the company; should however the company during any one year be unable to declare a dividend of 4 per cent. owing to their profits being "less than that amount, the agents shall only be paid one-third of the above commission.

(3.) The clause does not purport in terms to impose any obligation of service upon the agents. It merely provides what remuneration the agents shall receive. Now, properly construed, it seems to me that what that clause really does is to provide that the company shall enter into a contract of agency, on the terms indicated, with the firm of Morarjee Goculdas & Co., that it confers a power upon the company and might more properly have been included amongst the objects of the company. Mr. Taraporewala for the plaintiff objects to that view of the matter, and says that there is no question of any contract between the company and the agents, but directly the company, after its incorporation, employs the agents, which it can only do with the agents consent, contractual relations must arise, and the clause must in effect impose on the company an obligation to enter into a contract with a third party. It has been held many times ;that a company cannot be bound by a contract entered into on its behalf before the company was formed, and, in my opinion, it is not competent to bring a company into existence bound to enter into a contract with a third party, the terms of which have been arranged before the company was formed. It is for the company to consider after its formation whether it will enter into the contract or not.