DHAKESWARI COTTON MILLS LTD Vs. NIL KAMAL CHAKRAVORTY

JUDGEMENT

(1.) The Dhakeswari Cotton Mills Ltd., appellant 1 in this appeal, is a joint stock company incorporated under the Companies Act (Act 7 of 1913). It was registered under the Act on 6th September 1922. The registered share capital of the company is rupees thirty lakhs divided into three lakhs shares of Rs. 10 each. Appellants 2 to 4 are the Managing Directors and appellants 5 to 10 and respondents 2 to 5 are the Directors of this Company. Respondent 1 purchased 20 shares of the Company on 17 December 1926. By Art. 63 of the Articles of Association of this Company it is provided that the monthly salary of the Managing Director or Managing Directors in any case shall not exceed Rs. 1,000 and the rate of commission payable to them shall not exceed more than 5 per cent. of the net profit. On 30 April 1933 a general meeting of the share-holders of the Company was held to consider a special resolution for altering these provisions in Art. 63 with the object of increasing the monthly allowance of the Managing Director or Managing Directors to Rs. 1,500 and the commission to 7 per cent. of the net profits, if the profit would exceed 10 per cent. of the subscribed capital of the Company. At this meeting, the Chairman declared on a show of hands that the resolution was carried. No poll was demanded. On 22 May, 1933 respondent 1 instituted a suit in the third Court of the Munsif at Dacca against the appellants and the other respondents in this appeal for a declaration that the resolution was not binding on the Company as it was not carried by the majority as required by Section 81, Companies Act, and for consequential injunctions. The appellants contested the suit. Their defences, so far as they are material for the purpose of the present appeal, are: (1) that the suit is not maintainable in law; and (2) that the resolution was binding on the Company as it was passed by the statutory majority. The Courts below have overruled these defences and have decreed the suit. Hence this second appeal by the Company, its Managing Directors and some of its Directors. The first point for determination in this appeal is whether the suit is maintainable. It is clear law that in order to redress a wrong done to the company... the action should prima facie be brought by the company itself: per Lord Davey in Burland V/s. Earle (1902) A C 83 at p. 93.

(2.) The will of the majority of the shareholders is ordinarily the will of the company for this purpose. Where the acts complained of can be ratified by the majority, there is nothing for which the company can sue. The rule that it is the company which must decide whether the litigation should be undertaken, ought therefore to be limited to cases where the act complained of is ratifiable. If the majority of its shares are controlled by those against whom the relief is sought, the complaining share-holders may sue on their own names, but must show that the acts complained of are of a fraudulent character or beyond the powers of the company: Burland V/s. Earle (1902) A C 83. In Dominion Cotton Mills Co., Ltd. V/s. George E. Amyot (1912) A C 546 at p. 551. the following observations of Lord Macnaghten appear: The principles applicable to cases where a dissentient minority of share-holders in a company seek redress against the action of the majority of their association, are well settled. Indeed they were not contested at the Bar. In order to succeed it is incumbent on the minority either to show that the action of the majority is ultra vires or to prove that the majority have abused their powers and are depriving the minority of their rights. It would be pedantry to go through the line of decisions by which these principles have been established.

(3.) Mr. Gupta appearing on behalf of the appellants contended that as the Managing Directors did not hold the majority of the shares of the Company, the plaintiff before the institution of the suit was bound to give the Company an opportunity of expressing its view whether litigation should be undertaken. We are unable to accept this contention. Assuming that the act complained of is fraudulent or ultra vires of the corporation,-it could not be ratified by any majority and therefore the rule that it is the corporation which must decide whether or not litigation shall be undertaken has been generally taken to apply only to cases where the act complained of is ratifiable. There is some weak authority for a view that all decisions as to whether litigation shall proceed are of an internal character and it has been held even in cases where the Act is covered by a majority resolution that a locus panitentia should be allowed, and the action has been adjourned for a general meeting. The case for such adjournment is strong where the act impugned is that of directors acting on their own responsibility, and it may be urged that a company should in every case have an opportunity of expressing its view whether litigation should be avoided, since, if not involving it in costs, it may still affect its credit. The bulk of the cases in which corporators have been allowed to succeed on proof of ultra vires or fraud give no clear guidance as to whether, in the absence of any explanation for the corporation not being consulted, the action could have succeeded. They are rather occupied in pointing out the circumstances which make the action good, and where the action fails, it is on the merits, and not because no meeting has been called. In some cases the plaintiff actually represents the majority of share-holders, though not of the directors: in others, a meeting has already been held, or cannot be held, and generally circumstances exist to show that the corporation will take no action. It is, however, possible to point to judicial utterances which suggest that no meeting of the corporation need have been called. Thus Lord Langdale, M.R. said: If a rule has been laid down that in a case of this kind an individual has not the right to sue on behalf of himself and others, when there is art injury done to the whole corporation, without having first attempted to get the concurrence of the whole corporation, it is not my province or duty to deviate from it... This bill may be sustained in its present form, though there has been no attempt to obtain the concurrence of the company; "and Jessel, M.R. in another case asked: Is it reasonable to say to a minority of shareholders who are defrauded by the majority that they must apply to the company to institute proceedings? It therefore appears that it is not necessary, as a matter of law, formally to ascertain the views of the majority before proceeding, but nevertheless, if no reason is given for the corporation not being consulted before litigation is undertaken, it must be clearly alleged, and made to appear, that the transaction is fraudulent or ultra vires: Street's Doctrine of Ultra Vires, 1930 Edition, pp. 352-353.