Amar Nath Malhetra vs M.C.S. Limited
1992 Latest Caselaw 367 Del

JUDGMENT

Anil Dev Singh, J.

(1) This is plaintiff's application under Order 39 rule 4 read with Section 151 Civil Procedure Code for "setting aside the interim injunction" dated September 7,1991 granted by the learned Sub Judge. Delhi and for dismissal of plaintiff's application under Order 39 rules 1 and 2 CPC. The events leading to this application are as follows: The defendant company, which is a public limited company, fixed its Annual General Meeting (for short AGM') on September 9,1991 and in this regard circulated a notice dated July 1, 1991 informing the plaintiff, who is a shareholder of the defendant company in turn informed the latter that he will be moving the following resolution under Section 225(2) of the Companies Act, 1956 (for short the Act) at the forthcoming 'AGM': "RESOLVED that M/s. Ram Pal Gupta & Associates 6781, Beri Wala Bagh Chowk, Azad Market, Delhi-6, Chartered Accountants be and is hereby appointed as Auditors of the Company in place of M/s. Amod Agarwal-Associates, Chartered Accountsnts".

The Vice President of the Company vide his letter dated August 24,1991 wrote to the plaintiff that the proposed resolution, which the latter intends to move at the 'AGM' for appointing M/s. Rampal Gupta & Associates as auditors of the company in place of Amod Agarwal & Associates, Chartered Accountants was not in accordance with the provisions of the Act and therefore, no action can be taken in regard to the proposed resolution. The refusal of the company to take action in regard to the proposed resolution implied that the defendant was neither circulating the proposed resolution to the members of the company nor was including the same in the agenda for the 'AGM'. Aggrieved by this refusal of the defendant, the plaintiff instituted the present suit in the court of the Senior Sub Judge fer declaration, that the notice dated July 1, 1991 for holding the 'AGM' of the defendant company is illegal and null and void, besides being violative of interests of the shareholders. In the suit a perpetual injunction is also claimed for restraining the defendant company from holding the 'AGM' on September 9,1991. Along with the plaint, an application under Order 39 rules 1 and 2 Cpc, being IA.No.323 of 1992, was also moved whereby the plaintiff prayed for an exparte interim injunction against the defendant company from holding the 'AGM' on the scheduled dale. On September 7,1991, the learned Sub Judge made certain directions with regard to the publication and circulation of the proposed resolution of the plaintiff. According to the directions of the learned subordinate Judge, the resolution was deemed to be properly filed with the company subject to the plaintiff depositing a sum of Rs. 2500.00 with the company. It was also directed that the resolution shall be taken as item No. 4A in the ordinary business of the company in the agenda. Not satisfied with the order of the learned Sub Judge the defendant filed a petition under Clause 9 of the Letters Patent and under Article 227 of the Constitution before the High Court. On December 2.1991 J.K. Mehra, J. transferred the suit pending before the learned Subordinate Judge to this court on the original side. This order was passed on the agreement of the parties and the defendant was given liberty to move such application or take such action as may be open to it under law for revocation, modification or alteration of the impugned order. Pursuant to the order the plaintiff has filed the present application. This is how the matter is before me.

(2) Mr. P.N. Lekhi, learned counsel appearing on behalf of the defendant, submitted that the interim order dated September 7, 1991, was causing grave injustice, prejudice and hardship to the defendant. According to the learned counsel, since no 'AGM' has taken place it was not possible to declare the dividend payable to the shareholders for the year 1990-91, Learned counsel invited my attention to several letters of the shareholders demanding dividend for the year 1990-91. Mr. Lekhi, further submitted that the right under Section 225 of the Companies Act, 1956 cannot be exercised by an individual member and any resolution and notice in respect thereof can be effective only if the requirement of Section 188 is complied with, namely, the proposed resolution must be signed by members representing 1/20th of the total voting power of all the members having a right to vote or by at least 100 members having the said right and holding shares of the value of more than Rs. 1.00 lakh. As said condition was not complied with by the plaintiff, the company was not obliged to circulate the proposed resolution or to include the same in the agenda of the Annual General Meeting.

(3) Mr. Mahna, learned counsel for the plaintiff contended that the order dated September 7, 1991 ought not to be varied or modified as the conditions contemplated under rule 4 of Order 39 of the Code of Civil Procedure for varying or modifying the order have not been satisfied. According to the learned counsel the letters asking the defendant to pay the dividend are of no consequence as the same have been managed by the company from the shareholders. It is the contention of the learned counsel that no hardship or prejudice in being caused by the order dated September 7,1991. On merits of the controversy it is submitted that a proposed resolution of which special notice is required need not comply with the provisions of Section 188 of the Act. It is the contention of the learned counsel that a single shareholder can invoke the provisions of Section 225 of the Act and the refusal of the defendant company to include the proposed resolution in the agenda of the 'AGM' was illegal and misconceived.

(4) The first question for determination is whether or not a case has been made out by the defendant under Rule 4 of Order 39 of the Code of Civil Procedure justifying its prayer for discharge, variation and setting aside of the interim order dated September 7,1991.

(5) It is not disputed that so far the compa

(6) The next question for consideration is whether the defendant company was bound to give notice to its members of the proposed resolution of the plaintiff for removal of the auditor and was also obliged to include the same in the agenda for the AGM. In order to answer the question it will be necessary to analyze the relevant provisions of the Act

(7) According to the Indian Companies Act, 1913 three types of resolutions could be passed at a general meeting, namely, ordinary resolution, special resolution and extraordinary resolution. The Company Law Committee (for short CLC) recommended the doing away with extraordinary resolutions. It was the view of the Committee that the company meetings will be rendered much simpler by abolition of the extraordinary resolutions and their replacement by special resolutions except where ordinary resolutions were recommended by them. They also recommended that uniform notice period of 21 days be given for all resolutions. This was another reason for recommending the abolition to extraordinary resolutions. Section 189 of the Act gives effect to these recommendation of CLC.

(8) Following the provisions of Section 142 of the English Act of 1948 it was also suggested by the Clc that in certain cases special notices of proposed resolutions should be Squired to be given to the company which in turn must give it to the shareholders. Under the .English Act special notice is required in the case of a resolution to remove a director (Section 184) or to dispense with director's age limit (Section 185) or to purpose the appointment of an auditor other than the retiring auditor (Section 160). Similar provisions have been incorporated in the present Act based on the recommendations of the CLC. These are Sections 190, 225 and 284 of the Act.

(9) Section 190 of the Act corresponds to Section 142 of the said English Act. This section reads as under:    "S.190,Resolutions requiring special notice-(1) Where, by any provision contained in this Act or in the articles, special notice is required of any resolution, notice of the intention to move the resolution shall be given to the company not less than (fourteen days) before the meeting at which it is to be moved, exclusive of the day on which the notice is served or deemed to be served and the day of the meeting. (2) The Company shall, immediately after the notice of the intention to move any such resolution has been received by it, give its members notice of the resolution in the same manner as it gives notice of the meeting, or if that is not practicable, shall give them notice thereof, either by advertisement in a newspaper having an appropriate circulation or in any other mode allowed by the articles, not less than seven days before the meeting)".  

(10) According to the above provision the requirements of special notice are as follows:    (A)Notice of intended resolution to be moved should be given to the company 14 days before the meeting at which it is to be moved. (b) The company must give notice of the intended resolution in accordance with Section 53 of the Companies Act or if that is not practicable by advertisement in a newspaper having proper circulation or by other mode allowed by Articles of Association not less than 7 days before the meeting.  

(11) Section 225 deals with appointment and removal of auditors while Section 284 deals with removal of directors. These matters relating to appointment of auditors and directors are of great significance for functioning of the companies. Therefore the legislature thought of providing special notice to the shareholders, directors and auditors as the case may be so that they are provided with sufficient opportunity to consider the matter before the meeting. The plaintiffs counsel placed reliance on Section 225 of the Act and contended that his clients' resolution should have been circulated to the members and included in the agenda for the AGM'. According to him, it was not necessary to comply with the provisions of Section 188 for moving the resolution. That is to say that it was not necessary to require the requisition to be signed by members representing l/20th of the total voting power of all the members or at least by 100 shareholders who hold shares of paid up capital of Rs. I lakh. To appreciate this argument a close scrutiny of Section 188 and 225 would be necessary. Section 188 relates to circulation of members' resolution. The said section reads as udner:    188(1) Subject to the provisions of this section, a company shall, on the requisition in writing of such number of members as is hereinafter specified and (unless this company otherwise resolves) at the expense of the requisitionists,- (a) give to members of the company entitled to receive notice of the next annual general meeting, notice of any resolution which may properly be moved and is intended to be moved at that meeting; (b) circulate to members entitled to have notice of any general meeting sent to them, any statement of not more than one thousand words to in any proposed resolution, or any business to be dealt with at that meeting. (2) The number of members necessary for a requisition under Sub-section (1) shall be (a) such number of members as represent not less than one twentieth of the total voting power or all the members having at the date of the requisition a right to vote on the resolution of business to which the requisition relates; or (b) not less than one hundred members having the right aforesaid and holding shares in the company on which, there has been paid up an aggregate sum of not less than one lakh of rupees in all. (3) Notice of any such resolution shall be given, and any such statement shall be circulated, to members of the company entitled to have notice of the meeting sent to them, by serving a copy of the resolution or statement on each member in any manner permitted for service of notice of the meeting; and notice of any such resolution shall be given to any other members of the company by giving notice of the general effect of the resolution in any mariner permitted for giving him notice of meetings of the company: Provided that the copy shall be served, or notice of the effect of the resolution shall be given, as the case may be. in the same manner and, so far as practicable, at the same time as notice of the meeting, and where it is not practicable for it to be served or given at that time, it shall be served or given as soon as practicable thereafter. (4) A company shall not be bound under this section to give notice of any resolution or to circulate any statement unless- (a) A copy of the requisition signed by She requisitionists (or two or more copies which between them contain the signatures of all the requisitionsts) is deposited at the registered office of the company- (i) in the case of a requisition requiring notice of a resolution. not less than six weeks before the meeting; (ii) in the case of a any other requisition, not less than two weeks before the meeting; and (b) there is deposited or tendered with the requisition a sum reasonably sufficient to meet the company's expenses in giving effect thereto. Provided that if, after a copy of a requisition requiring notice of a resolution has been deposited at the registered office of the company, at annual general meeting is called for a date six weeks or less after the copy has been deposited, the copy, although not deposited within the time required by this sub-section, shall be deemed to have been properly deposited for the purposes thereof. (5) The company shall also not be bound under this section to circulate any statement if on the application either of the company or of any other person who claims to be aggrieved, the (Company Law Board) is satisfied that the rights conferred by this section are being abused to secure needless publicity for defamatory matter; and the Company Law Board may order the company's costs on an application under this section to be paid in whole or in part by the requisitionists, notwithstanding that they are not parties to the application. (6) A banking company shall not be bound to circulate any statement under this section, if, in the opinion of its Board of Directors, the circulation will injure the interests of the company. (7) Notwithstanding anything in the company's articles, the business which may be dealt with at an annual general meeting shall include any resolution of which notice is given in accordance with this section, and for the purposes of this sub-section, notice shall be deemed to have been so given, not withstanding the accidental Commission, in giving it, of one or more members. (8) If default is made in complying with the provisions of this section, every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees.'  

(12) Except sub-section 5, this section is a replica of Section 140 of the English Act of 1948. The section has its roots in the following recommendations of the Company Law Committee:    "SECTION78 of the Act of 1913 deals with the right of shareholders to requisition a general meeting. We consider that this section should be supplemented by a suitable adaptation of the provisions of section 140 of the English Companies Act, 1948, which empowers a specified number of shareholders to make use of the administrative machinery of a company to introduce resolution on their own account at the annual general meeting and to inform other members of the purpose for which the resolutions are proposed to be introduced or the reasons for opposing any resolution submitted by the directors for consideration at the general meeting. The number of members necessary for a requisition under this section is: (a) a number representing not less than one-twentieth of the total voting rights of all the members having a right to vote at the meeting to be requisitioned; or (b) not less than 100 persons holding shares in the company on which there has been paid up an average sum per member of not less than a hundred pounds". (Report: Para 76).  

(13) As is evident from the aforesaid this section confers on shareholders right to have the intended resolution Along with explanatory statement up to 1000 words circulated to all the members through the instrumentality of the company but before the company can be asked to circulate the resolution which the shareholders intend to move at the next 'AGM' or at any other meeting, the following procedure laid down in the Section has to be followed.    (1)The proposed resolution must be in writing: (2) It must be supported by members representing not less than 1/20th of the total voting power of all the members having, on the date of the requisition a right to vote on the resolution or the proposed resolution should be supported by not less than 100 members having the said right and holding shares for which they had paid an aggregate sum of not less than Rs. 1 lakh. (3) A copy of the resolution duly signed by all the members intending to move the resolution must be deposited at the registered office six weeks before the meeting, in a case where the notice of the resolution was required and in any other case two weeks before the meeting. (4) The requisitionists must deposit reasonably sufficient sum to meet expenses for giving the notice by the company.  

(14) Once the above requirements are satisfied the company under Sub-section 1 of Section 188 is bound to circulate to the members resolution which the requisitionists intend to move at the Agm or at any of the meeting. It is note worthy that sub-section 7 of Section 188 of the Act which starts with a non obstante clause, specifically mandates the inclusion of a resolution of which notice has been given in according with the section, in the agenda of the annual general meeting. Subsection 8 ensures compliance with the provisions of this Section by prescribing penal punishment for default by any officer of the company in this regard. Having analysed Section 188 it is necessary to notice Section 225 of the Act. This section deals with resolutions for appointment and removal of auditors. Section 225 of the Act provides as follows:    "225(1)Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditors, or providing expressly that a retiring auditor shall not be re-appointed. (2) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor. (3) Where notice is given of such a resolution and the retiring auditor makes with respect thereto representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so,- (a) in any notice of the resolution given to members of the company, state the fact of the representations having been made; and (b) send a copy of the representations to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representations by the company; and if a copy of the representations is not sent as aforesaid because they were received too late or because of the company's default the auditor may (without prejudice, to his right to be heard orally) require that the representations shall be read out at the meeting: Provided that copies of the representations need not be sent om and the representations need not be read out at the meeting, if on the application either of the company or of any other person who claims to be aggrieved, the (Company Law Board) is satisfied that the rights conferred by this sub-section are being abused to secure needless publicity for defamatory matter; and the (Company Law Board) may order the company's costs on such an application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to the application. (4) Sub-sections (2) & (3) shall apply to a resolution to remove the first auditors or any of them under sub-section (5) of section 225 or to the removal of any auditor or auditors under subsection (7) .of that section, as they apply in relation to a resolution that a retiring auditor shall not he re-appointed".  

(15) From the above it is obvious that Section 225 postulates giving of a special notice under Section 190 in case of a resolution which is intended to be moved at an Agm lor removal or appointment of an auditor. The question for resolution is whether or not a single shareholder can ask the company to circulate its intended resolution to the shareholders for removal of an auditor. Sections 190 and 225 of the Act do not mention the number of shareholders who can move a resolution for removal of an auditor. Section 190 merely lays down the procedure for circulating a resolution for which special notice is required. The object of giving special notice of a resolution is to invite special attention of the company and through the company of its members to the proposed resolution. The company is also required to send a copy of the resolution to the auditor. Therefore the basic function of the special notice is to focus special attention of the shareholders about the importance of the resolution which is intended to be moved at the 'AGM'. The auditor has also been given a right to represent in writing to the company in respect of the said resolution. The company is then to ensure that the representation, it filed, by the auditor is circulated to the members. All this has been done to ensure that the shareholders have adequate opportunity to consider the matter and at the same time the auditor has the right to represent to the shareholders against the intended resolution. The object of sub-section 2 and 3 is that the auditors will have an opportunity of making a representation and also to be heard orally at the 'AGM'. This satisfies the requirement of natural justice as well.

(16) It is not possible to impute to the legislature an intention to confer on a single member right to compel inclusion of a resolution for appointment or removal of an auditor in the agenda of the AGM. It does not stand to logic that in matters which are less important Section 188 of the Act is required to be complied with in so far as the requirement as to number of shareholders to make use of the administrative machinery of a company to introduce a resolution at the annual general meeting is concerned, and in the matters which concerns the appointment, removal and supersession of an auditor no such requirement is necessary to be satisfied. It is significant to mention that much importance has been attached by the Act to the independence of the auditors. Section 226 of the Act is proof enough. This provides for the qualifications and disqualifications of the auditors. In fact the auditor is to act as a watchdog for the protection of the shareholders and is required to examine the accounts with a view to give the shareholders true and fair picture of the same.

(17) In the case of Institute of Chartered Accountants Vs. P.K. Mukherjee and another 1968 (2) Company Law Journal 211, the Supreme Court has commented upon the role of an Auditor under the Act in the following words: "Respondent No. 1 owed a duty to all the subscribers of the Provident Fund who were in the position of beneficiaries. It is not correct to say that respondent No. 1 owed a duty only to the company which had appointed him to perform the auditing. The contributors to the Provident Fund had the primary object of auditing the fund was to appraise them of the true financial position of the accounts and investments made from time to time. Respondent No, I therefore owed a duty to the contributors to the Provident Fund for making a true report to them of the financial position. In other words, the auditing was intended for protection of the beneficiaries and the auditor was expected to examine the accounts maintained by the trustees with a view to inform the beneficiaries of the true financial position. The auditor is, in such a case, under a clear duty towards the beneficiaries "to probe into the transactions" and to report on their true character. In our opinion the legal position of the auditor in the present case is similar to that of the auditor under the Indian Companies Act, 1956. In such a case the audit is, intended for the protection of the shareholders and the auditor is expected to examine the accounts maintained by the Directors with a view to inform the shareholders of the true financial position of the company. The Directors occupy a fiduciary position in relation to the shareholders and in auditing the accounts, maintained by the Directors the auditor acts in the interest of the shareholders who are in the position of the beneficiaries. In London Oil Storage Co. Ltd. vs. Seear, Hasluck & Co, Lord Alverstone stated as follows: "HE must exercise such reasonable care as would satisfy a man that the accounts are genuine assuming that there is nothing to arouse his suspicion of honesty and if he does that he fulfills his duty, if his suspicion is aroused, his duty is to 'probe the thing to the bottom' and tell the directors of it and get what information he can. Vide also the observations in 'Inre: London General Bank (No..2 )-in Re: Kingston Cotton Mill Co. (No.2) and in re, city Equitable Fire Insurance Co. Ltd.'

(18) Keeping in view the importance of the matter, provisions for moving resolutions for appointment, removal or supersession of an auditor or for that matter a director or all the directors have to be at least at par with the provisions for moving resolutions in matters which are less important, if not more stringent.

(19) It seems to me that the provisions relating to special notice do not dispense with the aforesaid requirement of Section 188. Resolutions which require special notice do not cease to be resolutions as contemplated by Section 188 of the Act. Section 190 read with Section 225 neither expressly nor by implication overrides the aforesaid requirement of Section 188 of the Act. If the interpretation which is sought to be placed by the plaintiff is correct a single member can also require the company to circulate a special resolution to the members for being taken up at the AGM. In case a single member happens to be wielding extensive influence in commercial circles, mere giving of a special notice for removal of all the directors of the company by him can stultify the functioning of the company and might even inflict a death blow to it. In such a situation, the share prices of the company can fall as the members not sure about the future of the company may indulge in panic sale of shares. It is not difficult to imagine a situation where a large company may be faced by thousands of resolutions proposed by single members. It will be well nigh impossible for a company in that situation to handle and circulate the resolutions requiring special notice and equally difficult for the directors to file representations against them. In my view Sections 188, 190, 225 and 284 must be read together and if so read the intention of the legislature becomes manifest. In Pedley Vs. Inland Waterways Association Ltd. (1977) 1 All Engird Law Reports 209 a similar question came up for determination of the Law Lords of the Chancery Division, Slade, J. speaking for the court held as follows: "WITH respect to the plaintiff, I think that this submission involves a misconception as to the true construction and effect of S.142. The question must in the end turn on the meaning to be given to the phrase in the section beginning with the words 'and the company shall give its members notice of any such resolution....' on which the palintiff's argument wholly depends. There are two possible ways of reading this phrase, namely, (a) as being merely intended to confer on the members of a company the right to receive notice, in manner provided for by S.142, of any resolution of which special notice is required and has been duly given and which is to form part of the agenda to be dealt with at the relevant meeting; or (b) as being intended to have two distinct consequences namely, (i) to confer on any individual member of a company, on giving the necessary 28 days' notice to the company, the right to have any resolution of which special notice is required placed by the company on the agenda for the relevant meeting, that right being separate from and additional to the rights conferred on him by Section 140 of the Act and any other similar rights conferred on him by the company's articles of association, and also (ii) to confer on all other members of such company rights of the nature referred to in (a) above. In my judgment the narrower construction, (a) above, is clearly the correct one. First, there appears to me no sensible reasons why the legislature should have intended by S 142 to confer on an individual member rights to compel the inclusion of a resolution in the agenda for a company meeting, being rights much more extensive than those conferred by S 140 merely because the resolution happens to be resolution for the removal of a director, falling within S 184 or for the supersession of an auditor falling within Section 160. On the contrary, I can see powerful reasons why this would not have been the intention of the legislature. The plaintiffs submission, if it is correct, could apply mutates mutants in the case of any resolution of which special notice is required, and which is proposed by a single member of any company incorporated under the Act. Any such single member for example, having received notice of an annual general meeting of the company concerned, would be entitled to send to the company a Special notice expressed as being under Section 142 of the Act, and as required by Section 184 of an intention to move at the meeting a resolution that a director should be removed. Having received such a notice the company concerned would be bound and, be it noted, at its own expense to give its members notice of it in manner provided by Section 142 of the Act, if it was possible to do so not less than 21 days before the meeting as required by Section 142.'

(20) I am in respectful agreement with the view expressed by S lade, J. in regard to the interpretation of Sections 140, 142 and 184 of the English Act of 1948 which correspond to Sections 188. 190 and 284 of the present Act. It is also significant to note that Section 225 does not have any provision like sub-section 7 of Section 188 which starts with a non-obstante clause and specifically provides for inclusion of a resolution of which notice has been given in the agenda of the AGM.

(21) Having regard the above discussion, I am of the opinion that the plaintiff not having complied with the provisions of Section 188 of the Act is so far as it relates to the number of members required to sign the requisition, the defendant was not bound to either circulate the proposed resolution to its members or to include the same in the agenda for the AGM. The learned Sub Judge misconstrued the provisions of sections 188, 190 and 225 of the Act and erred in exercise of his discretion in granting interim relief by the order dated September 7, 1991.

(22) Having regard to the above, the application is allowed and the order of the learned Sub Judge is vacated.