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255. Appointment of directors and proportion of those who are to retire by rotation.

(1) 6[ Unless the articles provide for the retirement of all directors at every annual
general meeting, not less than two- thirds] of the total number of directors of a public
company, or of a private company which is a subsidiary of a public company, shall-
(a) be persons whose period of office is liable to determination by retirement of
directors by rotation; and
(b) save as otherwise expressly provided in this Act, be appointed by the company in
general meeting.

(2)The remaining directors in the case of any such company, and the directors generally in
the case of a private company which is not a subsidiary of a public company, shall, in default
of and subject to any regulations in the articles of the company, also be appointed by the
company in general meeting,

256. Ascertainment of directors retiring by rotation and filling of vacancies.


(1) At the first annual general meeting of a public company, or a private company
which is a subsidiary of a public company, held next after the date of the general
meeting at which the first directors are appointed in accordance with section 255 and
at every subsequent annual general meeting, one- third of such of the directors for
the time being as are liable to retire by rotation, or if their number is not three or a
multiple of three, then, the number nearest to one- third, shall retire from office.
(2) The directors to retire by rotation at every annual general meeting shall be those
who have been longest in office since their last appointment, but as between persons
who became directors on the same day, those who are to retire shall, in default of and
subject to any agreement among themselves, be determined by lot.
(3) At the annual general meeting at which a director retires as aforesaid, the
company may fill up the vacancy by appointing the retiring director or some other
person thereto.
(4) (a) If the place of the retiring director is not so filled up and the meeting has not
expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the
same day in the next week, at the same time and place, or if that day is a public
holiday, till the next succeeding day which is not a public holiday, at the same time
and place.
(b) If at the adjourned meeting also, the place of the retiring director is not filled up
and that meeting also has not expressly resolved not to fill the vacancy, the retiring
director shall be deemed to have been reappointed at the adjourned meeting, unless-
(i) at that meeting or at the previous meeting a resolution for the reappointment of
such director has been put to the meeting and lost;
(ii) the retiring director has, by a notice in writing addressed to the company. or its
Board of directors, expressed his unwillingness to be so reappointed;
(iii) he is not qualified or is disqualified for appointment;
(iv) a resolution, whether special or ordinary, is required for his appointment or re-
appointment in virtue of any pro- visions of this Act; or
(v) the proviso to sub- section (2) of section 263 1[ is applicable to the case.
2[ 3[ Explanation.- In this section and in section 257, the expression" retiring
director" means a director retiring by rotation.
Swapan Dasgupta vs Navin Chand Suchanti And Ors. on 12
January, 1988
Equivalent citations: 1988 64 CompCas 562 Cal
Bench: D K Sen, S K Sen

Swapan Dasgupta vs Navin Chand Suchanti And Ors. on 12/1/1988

JUDGMENT

Dipak Kumar Sen, Actg. C.J.

1. The material facts on record and the proceedings leading up to this appeal are,
inter alia, that Sinclair Freight and Chartering Consultants P. Ltd. (hereinafter
referred to as " the freight company ") was incorporated under the Companies Act,
1956, on June 20, 1968. Swapan Dasgupta, the appellant, was a subscriber to the
memorandum of the freight company and under Article 11 of the articles of
association of the freight company, the appellant became and was named as one of its
first directors. The appellant was also appointed a managing director of the freight
company and continued as such till the time as hereinafter stated.

2. On December 2, 1971, Sinclair Hotels P. Ltd. (hereinafter referred to as " the hotels
company ") was incorporated under the Companies Act, 1956. The appellant was also
one of the subscribers to the memorandum of the hotels company and under Article
11 of the articles of association of the hotels company, the appellant became and was
named as one of the first directors thereof.

3. On July 14, 1978, a scheme of amalgamation was approved and sanctioned by this
court in Company Petition No. 196 of 1978 connected with Company Application No.
39 of 1978 whereby the business and undertaking including all property, assets and
liabilities of the freight company was directed to be transferred and vested in the
hotels company on the terms and conditions of the said scheme. After such transfer
and vesting, the freight company was directed to be dissolved.

4. It was provided in the said scheme that the hotels company would take over the
services of the existing managing director of the freight company, i. e., the appellant,
on the same terms and conditions.

5. The name of the hotels company was subsequently altered to Sinclairs Hotels and
Transportation P. Ltd.
6. Subsequent to the amalgamation, the appellant continued as a managing director
of the hotels company. On May 1, 1981, the appellant was reappointed as the
managing director of the hotels company for a period of five years. On November 4,
1981, the hotels company was converted into a public limited company and named as
Sinclairs Hotels and Transportation Ltd., hereinafter referred to as "the said
company".

7. The appointment of the appellant as the managing director of the said company
was approved by the Central Government by its letters dated September 13, 1982,
and May 17, 1983.

8. At an extraordinary general meeting of the shareholders of the said company held


on January 11, 1983, the appointment of the appellant as the managing director for
five years was approved with effect from May 1, 1981.

9. On April 30, 1986, the appellant ceased to be the managing director of the said
company but continued to act as a director and the chairman of the board of
directors thereof.

10. On August 16, 1986, there was a meeting of the board of directors of the said
company which was presided over by the appellant. At this meeting, a committee of
management was constituted with the appellant as the chairman. Certain additional
duties in respect of the affairs of the said company were allotted to the appellant and
it was decided to issue a power of attorney in his favour. It was recorded in the
minutes of its meeting, inter alia, that the appointment of the appellant as the
chairman-director of the said company had been and was thereby reaffirmed until
the next annual general meeting of the said company. In the return of the said
company filed with the Registrar of Companies on September 8, 1986, it was
recorded that the appellant had been appointed the chairman-director and the
constituted attorney of the said company on August 16, 1986.

11. On November 24, 1986, a notice was issued convening the annual general meeting
of the said company to be held on December 29, 1986. Under item No. 6 of the
agenda, an ordinary resolution was proposed to be passed that the appellant be
appointed as a director of the said company on a notice under Section 257 of the
Companies Act, 1956, by a member of the company. In the explanatory statement to
the said notice, it was further stated that on August 16, 1986, at a meeting of the
board of directors of the said company, the appellant had been appointed as the
chairman-director and constituted attorney of the said company until the next
annual general meeting and that the appellant will hold his office as such additional
director up to the date of the said meeting.

12. In the directors' report it was also stated that the appellant had retired as the
managing director of the said company on April 30, 1986, but had continued as the
chairman. Pursuant to Article 111 of the articles of association of the said company,
the appellant will hold his office up to the date of the next annual general meeting.

13. At a meeting of the board of directors of the company held on November 24,
1986, a resolution was passed again appointing the appellant as the managing
director and chairman of the said company for a period of three years with effect
from January 1, 1987.

14. On or about December 22, 1986, one Gopal Vyas, a shareholder of the company,
instituted a suit in this court against the said company and others, being Suit No. 934
of 1986, entitled Gopal Vyas v. Sinclairs Hotels and Transportation Ltd. (Suit No. 934
of 1986--22-12-1986), challenging, inter alia, the proposed appointment of the
appellant and others as directors of the said company and the annual general
meeting proposed to be held on December 29, 1986. On the same date, an ad interim
order was passed in the said suit whereby it was directed that the said meeting would
be held on December 22, 1986, only for the purpose of adjournment and a learned
advocate of this court was appointed as the chairman to preside over the said
meeting. On an appeal from the said ad interim order, on December 23, 1986, the
appeal court modified the said ad interim order and directed that the said annual
general meeting would be held on December 29, 1986, as scheduled but items Nos. 3,
4, 6, 7 and 8 of the agenda which related to the appointment of directors would stand
adjourned till January 20, 1987. By subsequent directions of the court, the said
meeting still stands adjourned.

015. On February 6, 1987, a further order was passed by the appeal court whereby it
was made clear that the order passed by the appeal court on December 23, 1986, was
not intended to affect the position of the existing directors of the said company by
reason of the directions to hold the said annual general meeting in part and
adjourning the other items of the agenda. The parties were, however, left free to
contend that the status of the existing directors of the said company were affected for
reasons apart from the said meeting.

16. Some time in June, 1986, Navin Chand Suchanti, respondent No. 1, acquired
some shares of the said company and became a shareholder. On January 7, 1987,
respondent No. 1 filed the above suit, being Suit No. 5 of 1987, against the appellant
and respondents Nos. 2 to 9 with leave under Order 1, Rule 8 of the Code of Civil
Procedure claiming, inter alia, a declaration that appellant No. 1 was never appointed
as an additional director of the said company and that the appellant and Sanat
Kumar Mukherjee, respondent No. 2, were not directors of the said company after
December 29, 1986. Respondent No. 1 also claimed a permanent injunction
restraining the appellant and respondent No. 2 from representing or holding
themselves out or acting or functioning as directors of the said company in any way
and from interfering with the management and affairs thereof. A permanent
injunction was also sought restraining the appellant and respondent No. 2 from
entering into or attending the offices of the said company. On the same date, that is,
January 7, 1987, respondent No. .1 moved an application in the said suit for the
following interim orders :

(a) An injunction restraining the appellant and respondent No. 2 from representing
or holding themselves out or acting or functioning as directors of the said company
in any way and from interfering or intermeddling in the management and affairs of
the latter.

(b) An injunction restraining the appellant and the respondent No. 2 from entering
or attending the offices of the said company.

The case of respondent No. 1 in his pleadings was, inter alia, that the appellant was
appointed as a managing director of the said company for a period of five years from
May 1, 1981. On April 30, 1986, the appellant ceased to be the managing director of
the said company.

17. On the basis of the minutes of the meeting of the board of directors held on
August 18, 1986, and the said notice of the annual general meeting of the said
company dated November 24, 1986, the appellant was claiming to have been
appointed as an additional director of the said company on August 16 1986. It would
be apparent from the minutes of the said meeting of the board of directors held on
August 16, 1986, that the appellant was not appointed as an additional director of the
said company at the said meeting.

18. In any event, the appointment of the appellant as an additional director, if at all,
could continue only until the next annual general meeting of the said company. In
the agenda of the said annual general meeting under item No. 6, it was proposed to
appoint the appellant as a director of the said, company. In the explanatory
statement annexed to the said notice, it was stated that the appellant continued to
hold office as an additional director of the said company only up to the date of the
said annual general meeting.

CONTENTIONS

19. Under Section 260 of the Companies Act, 1956, and also under Article 111 of the
articles of association of the said company, the appellant, as an additional director,
could hold his office only up to the date of the next annual general meeting of the
said company. In the premises, on the date of the next annual general meeting, i.e.,
December 29, 1986, the appellant ceased to be a director of the said company. In
spite thereof, the appellant has continued to represent and had held himself out to be
a director of the said company, was acting as such and interfering and intermeddling
in the manngement of the affairs of the said company.

20. The appellant affirmed on affidavit on January 10, 1987, which was filed in
opposition to the petition of respondent No. 1. It was contended in the said affidavit
that the suit filed by respondent No. 1 as framed was not maintainable as the said
company had not been made a party thereto. It was contended further that the said
company should have been the proper plaintiff and there was no explanation why it
was not impleaded. The suit was liable to be dismissed on the ground of nonjoinder
of the said company. In any event, respondent No. 1 was not entitled to any
interlocutory relief and leave granted under Order 1, Rule 8 of the Code of Civil
Procedure should be revoked. It was further contended that he had been a director of
the hotels company and the freight company which were private limited companies
since their inception and was also the managing director of the freight company.
After the merger of the said companies, the appellant was appointed the managing
director of the hotels company in terms of the scheme sanctioned by this court. He
was thereafter reappointed as the managing director of the said company by its board
of directors with effect from May 1, 1981, for five years.

21. The appointment of the appellant as the managing director of the said company
was approved by its shareholders at an extraordinary general meeting held on
January 11, 1983. The said appointment was also approved by the Central
Government.

22. It was contended that the appellant was not appointed as a director, additional or
otherwise, at the general meeting of the board of directors of the said company held
on August 16, 1986. The appellant was already a director on that date. After the
expiry of his appointment as the managing director of the said company, the
appellant continued as a director thereof. The termination of the office of the
managing director did not bring to an end the office of the appellant as a director.
This position was reiterated and reaffirmed at the said meeting of the board.

23. The notice of the annual general meeting to be held on November 24, 1986, the
explanatory statement thereto and the relevant portions of the directors' report for
the said meeting had to be construed in the context of the aforesaid and to the extent
the same were inconsistent with the aforesaid would be of no consequence. The same
would be subject to suitable correction and the said meeting had been adjourned
under orders of this court.

24. It was contended in the alternative that the description of the appellant as an
additional director appointed on August 16, 1986, was a mis-description or a
misnomer and did not affect the factual position that the appellant was a director of
the said company and was entitled to continue as such till the next annual general
meeting of the company was held. The said annual general meeting has not yet been
concluded and after transaction of some business had been adjourned under orders
of court.

25. Respondent No. ! affirmed on affidavit on January 12, 1987, which was filed in
reply to the aforesaid affidavit of the appellant. It was alleged in the said affidavit,
inter alia, that the appellant was never appointed as a director of the said company.
In any event, the appellant could not continue to act as a director or managing
director of the said company after April 30, 1986, In the alternative, it was contended
that the appellant was only entitled to hold office as a director up to the date of the
next annual general meeting of the said company to be held on December 29, 1986,
after which he would cease to be a director of the said company.

26. The said application of respondent No. 1 was allowed as against the appellant by
a judgment and order dated November 19, 1987, of the first court. It was held by the
learned judge, inter alia, that the application of respondent No. 1 was prima facie
maintainable as respondent No. 1 was not asserting any corporate right. The said
company might be a proper party but it could not be held prima facie that it was a
necessary party in whose absence no interim order could be passed.

27. The learned judge noted that the appellant was not quite clear about his case and
that there was some confusion in his pleadings. It was held that it was not
established that the appellant was appointed as an additional director on August .16,
1986, though he was described as such in the records. It was also not shown that the
appellant has been appointed a director by the shareholders of the said company at
any annual general meeting. On the facts, it was necessary for the court to construe
the scope and effect of Section 260 of the Companies Act, 1956, in the case of the
appellant. The learned judge noted that the appellant had made out a contrary case
before the Company Law Board contending that he was appointed as an additional
director of the said company on August 16, 1986, and that there was no evidence that
the appellant was ever appointed a director by the shareholders. The learned judge
recorded that the articles of association of the said company as also those of its
predecessors in force at the relevant time in 1971 were not produced. The subsequent
articles of association adopted by the said company, it was held, were not relevant.
The learned judge came to the conclusion that the appellant had failed to establish
that he was a director appointed by the shareholders or that he had been appointed
as an additional director of the said company on August 16, 1986, or at any other
meeting.

28. The present appeal is from the said judgment and order dated November 19,
1987. At the instance of the parties, the appeal was treated as in the day's list and was
heard along with the application filed in the appeal. The appearing respondents
waived service of the notice of the appeal. Service of such notice on the non-
appearing respondent was dispensed with. By consent of the appearing parties, filing
of paper book was dispensed with and the undertaking given in that behalf was
directed to stand discharged. The records and pleadings before the first court were
produced and considered.

29. At the hearing, learned advocate for the appellant produced before us the original
memoranda and articles of association of the hotels company and the freight
company as at the time of their incorporation. The memorandum and articles which
were adopted after the freight company merged into the hotels company and which
were again adopted when the amalgamated company was converted into a public
limited company were already on record.

30. Learned advocate for the appellant submitted that the appellant had been duly
appointed as one of the first directors of the hotels company as also of the freight
company under their respective articles and that the appellant had continued in his
office as such director all along. After the freight company merged into the hotels
company, the appellant continued to be a director of the amalgamated company by
reason of his original appointment as a director in both the original companies. The
hotels company and the freight company, till their amalgamation, remained private
companies. After the merger, the amalgamated company also remained a private
company till November 4, 1981. It was submitted that till November 4, 1981, there
was no question of retirement of the appellant from his office as a director under
Sections 255 and 256 of the Companies Act, 1956, inasmuch as till that date the
companies involved remained private companies.

31. It was submitted that after the amalgamated company became a public company,
the question of retirement of the appellant from his office as a director thereof arose
for the first time. But on May 1, 1981, the appellant was duly reappointed as the
managing director of the said company for a period of five years. Under Article 144 of
the articles of association of the said company, as long as the appellant continued to
hold the office of the managing director, he was not subject to retirement by rotation
and as such the appellant continued to be a director as also the managing director of
the said company till April 30, 1986, when the tenure of the appellant as the
managing director of the said company came to an end. On and from May 1, 1986,
the appellant ceased to be the managing director of the said company but continued
to retain his office as a director thereof and would be liable to retire at the next
annual general meeting of the said company but not before that. The next annual
general meeting which was initially scheduled to be held on December 29, 1986, has
not yet been concluded. By reason of the orders passed in the said Suit No. 934 of
1986 instituted by Gopal Vyas, the meeting stands adjourned from time to time and
the appellant continues to be a director of the said company.

32. Learned advocate for the appellant also submitted that at a meeting of the board
of directors of the said company held on November 24, 1986, the appellant has been
reappointed as the managing director and chairman of the board of directors of the
said company for a further period of three years with effect from January 1, 1987.

33. Learned advocate submitted further that in the facts and circumstances, no prima
facie case has been made out by respondent No. 1 that the appellant has ceased to be
a director of the said company and as such respondent No. 1 was not entitled to the
interim order in his suit under appeal. This interim order has resulted in the ouster
of the appellant from his office. By the said interim order, the suit of respondent No.
1 stands decreed in part at the initial stage. On the ground of balance of convenience
also, such an interim order should not have been passed.

34. Learned advocate for the appellant also submitted that no interim order should
have been passed in the suit instituted by respondent No. 1 in the absence of the said
company. The said company was vitally interested as to who were its directors and
the interim order passed in the suit of respondent No. 1 seriously affects the
administration of the said company. The said company is a necessary party to the
suit and in its absence the suit was liable to be dismissed. It was also submitted that
the pleadings of respondent No. 1 contained categoric admissions that the appellant
had continued as a director of the said company till its next annual general meeting
and it could not be contended by respondent No. 1 that the appellant was never
appointed as a director at all.

35. Learned advocate for Sudhir Kumar Bhattacharyya, respondent No. 7, supported
the appellant.

36. In support of his contentions, learned advocate for the appellant relied on and
cited the following decisions.

(a) Richard B.T.H. Chow v. James Chow Wakin [1970] 75 CWN 173. In this case, it
was laid down by a Division Bench of this court that in an application for an
injunction restraining persons from acting as directors, one of the considerations was
whether the case of the applicant was manifestly clear and free from doubt so as to
entitle him to an injunction in an interlocutory proceeding. Where the appointment
of the directors had not been disputed but they were sought to be restrained by an
injunction on other grounds which could not be said to be free from doubt, other
questions such as delay, acquiescence, balance of convenience and waiver were
required to be considered. It was observed as follows :

"In the case of an illegality arising out of clear and manifest violation of statutory
provisions, the court has the power, and indeed it is the duty of the court, to restrain
a person from acting as a director of a company, and in'such cases, delay,
acquiescence, balance of convenience and waiver would be no bar to the issue of an
injunction. "

(b) Catesby v. Burnett [1916] 2 Ch 325. In this case, the articles of association of a
company provided that a member would be qualified to be elected a director of the
company on a written notice of his intention in that behalf to be given to the
company not less than 14 clear days before the date of election of directors. An
ordinary general meeting of the company was held on December 10, 1959, when two
of the directors retired but there was no election of new directors. A committee of
shareholders was appointed to investigate into the affairs of the company and submit
a report to the general meeting which was adjourned to a future date. In the
meantime, notice was given to the company by a member stating that at the
adjourned meeting he proposed to move for election of four directors. At the
adjourned meeting, it was held by the chairman that the subsequent notice for
election of directors was invalid and he left the meeting. Thereafter, the shareholders
appointed a new chairman and elected four new directors. On an application by the
shareholders for an interim injunction to restrain the former two directors, who had
retired earlier, from continuing to act as directors, it was held that the date of the
election of the directors within the meaning of the said article was the date of the
adjourned meeting and that the notice for election of the four new directors was in
compliance with the articles. It was held that the said directors had been duly elected
at the adjourned meeting and the directors who had retired on the earlier occasion
were not entitled to act as directors.

(c) United Commercial Bank v. Bank of India, . This decision of the Supreme Court
was cited for the following observations (at page 209 of 52 Comp Cas) :

" In the instant case, the High Court has assumed that the plaintiffs had a prima facie
case. It has not touched upon the question where the balance of convenience lay, nor
has it dealt with the question whether or not the plaintiffs would be put to
irreparable loss if there was no injunction granted, In dealing with the prima facie
case, the High Court assumes that the appellant was in breach. There is no basis for
this assumption at all ... The question whether the appellant was in breach is an issue
to be tried in the suit. "

Learned advocate for the appellant also cited an unreported judgment dated
November 22, 1985, in Appeal No. 260 of 1984, entitled Ambari Tea Co. Ltd. v.
Manjushree Saha. I was a party to this judgment where it was held, inter alia,
construing the provisions of Section 256 of the Companies Act, 1956, that directors
appointed by the shareholders in an annual general meeting of a company do not
retire ipso facto from their office if no further annual general meetings of the
company are held. It was only at the subsequent annual general meetings that the
retirement of the erstwhile directors and their re-election as also election of new
directors would have to be decided. A different construction of Section 256 of the Act
would result in a vacuum in the management of a company which is not the object of
the statute. The retirement of the directors appointed earlier would take place at the
actual meeting held.

37. Learned advocate for respondent No. 1 contended to the contrary and submitted
that it was the admitted position that the appellant was neither an additional director
appointed by the board of directors of the said company nor was he a director
appointed by the shareholders of the said company or its predecessors at any annual
general meeting. The appellant could at best be deemed to be a director of the
companies involved as a subscriber to the memoranda of association under Section
254 of the Companies Act, 1956. In any event, as such a deemed director, the
appellant could not have been continued as a director of the said company or its
predecessors for all time. Such a deemed office would necessarily come to an end
when directors would be duly appointed by the companies involved at their annual
general meeting under Section 255 of the Companies Act, 1956.

38. Learned advocate for respondent No. 1 next submitted that even though the
appellant was nominated as one of the first directors in the hotels company as also
the freight company, he could not continue in his office as a director in the said
companies indefinitely on the strength of his nominations. Construing Sections 254,
255 and 256 of the Companies Act, 1956, learned advocate for respondent No. 1
submitted that even in a private company, as a rule, directors were meant to be
appointed in general meetings. The first directors of a private company nominated in
the articles would be in the same position as the deemed directors of such a company
under Section 254 of the Companies Act, 1956, and they would cease to hold their
office at the first general meeting where regular directors were to be appointed. If the
first directors were not reappointed or re-elected as directors at the annual general
meeting of the company held after its incorporation, they would cease to hold their
office. It was submitted that the above appeared to be the scheme of the statute.

39. Learned advocate for respondent No. 1 conceded that Section 255 of the
Companies Act, 1956, provided an exception in the case of private companies to the
general rule that the directors of a company other than additional directors should be
appointed in a general meeting. If the articles of association of a private company
provided for appointment of directors otherwise than in a general meeting, the same
would override the general rule laid down in the section. In the instant case, the
articles of the hotels company from which the office claimed by the appellant
originated only provided that the appellant would be one of the first directors. It was
not stated that the appellant would continue as such first director for any particular
or definite period, limited or unlimited. In the absence of any provision for period of
office of the first directors, the articles could not and did not override the general rule
in Section 255 of the Act and the directors of the hotels company as also of the freight
company were required to be appointed in the usual course under Section 255 of the
said Act at the first general meeting of the said companies held after their
incorporation. The appellant was admittedly never appointed as a director of any of
the companies involved at any general meeting and as such the appellant could not
continue to hold his office as a director only by virtue of his initial appointment as a
first director in the hotels company or the freight company under their respective
articles.

40. It was next submitted that the fact that the appellant has continued as a director
and also a managing director of the companies involved since their inception would
not make any difference to the legal position. The appellant ceased to hold his office
as a director of the companies involved long ago and thereafter he was never
reappointed by the shareholders of the companies involved at any annual general
meeting. There was no other basis on which the appellant could claim or was
claiming that he had been appointed and remained a director of the said company.

41. It was submitted that more than a prima facie case had been established by
respondent No. 1 that the appellant has ceased to have any locus standi to continue
to act as a director of the said company. The interim order passed by the first court
under appeal was a proper and valid order and should be sustained.

42. It was submitted last that the said company might be a proper party in the
proceedings but it could not be held that it was a necessary party in the absence of
which the suit of respondent No. I was bound to fail. In the instant case, an effective
order could be made restraining the appellant from continuing to act as a director of
the said company in the absence of the latter.

43. In support of his contentions, learned advocate for respondent No. 1, relied on
what he stated to be an official circular published in Company News and Notes, dated
July 1, 1963, on Section 256 of the Companies Act, 1956, as follows :

Section 256 : Retirement of directors :

(b) It is open to a private company which is not a subsidiary of any public company to
provide in its articles, the manner of appointment and the vacation of office of all its
directors. Thus it is permissible for such a private company to provide in its articles
that none of its directors is liable to retire by rotation. In the absence of anything to
the contrary in the articles of association, however, all the first directors of such a
private company who have been appointed under the articles may hold office till the
directors are appointed in accordance with the provisions of Section 255(2) at the
first general meeting held after incorporation but before the holding of the first
annual general meeting.
Learned advocate for respondents Nos. 1 and 7 also relied on and ci'ted the following
decisions :

(a) Eyre v. Milton Proprietary Limited [1936] 1 Ch D 244. In this case, the relevant
article of association of a company provided that an additional director of the
company could hold office only until the next following, ordinary general meeting of
the company. Construing the said article, the English Court of Appeal held that at the
ordinary general meeting of the company, the additional directors will not be in
office. That is, at the moment when the next following ordinary general meeting of
the company would begin, the said directors would no longer be in office whereas the
other directors who were not additional directors but under the relevant articles of
association were scheduled to retire at the said ordinary general meeting would
continue to act as directors throughout the meeting.

(b) Udit Narain Singh Malpaharia v. Additional Member, Board of Revenne, Bihar, .
This decision of the Supreme

Court was cited for the following observations (at p. 788) :

" A necessary party is one without whom no order can be made effectively ; a proper
party is one in whose absence an effective order can be made but whose presence is
necessary for a complete and final decision on the question involved in the
proceeding."

(c) Joseph v. Jos [1964] 34 Comp Cas 931. This decision of a learned judge of the
Kerala High Court was cited for the proposition that where infringement of a
corporate membership right was alleged, the remedy of a shareholder of a company
was by way of a representative action on behalf of himself and other shareholders or
in some instance by an action in the name of the company. But if such a corporate
membership right was subject to the will of the majority expressly, in accordance
with law and the articles of the company, then the same would be a matter of internal
management and could not be questioned except in very limited cases. But where the
wrong complained of was one which could not be ratified by the majority as the same
would be against the provisions of the articles of association or otherwise illegal, any
shareholder of the company could insist on strict observance of the legal rules,
statutory provisions and the provisions of the memorandum and articles which could
not be waived even by a majority of the shareholders. In such a case, a suit and action
initiated by the shareholders would be maintainable.
(d) Comptroller of Customs v. Western Lectric Co. Ltd. [1966] AC 367 (PC). This
decision was cited for the proposition laid down by the Privy Council that an
admission by a man, of something of which he knew nothing was of no real evidential
value and the admission made by a person on the basis of documents on record was
of no more evidential value than the record itself.

(e) Ram Autar Jalan v. Coal Products P. Ltd. [1970] 40 Comp Cas 715 (SC). In this
case, a suit was instituted by a company alleging that the defendant was wrongfully
and without authority purporting to act as one of its directors. An application was
filed in the suit for an injunction restraining the defendant from acting as director
and from operating a bank account of the company. The company produced its share
registers, minutes books and other documents which established that the defendant
was neither a shareholder of the company nor had he been appointed as a director.
The first court refused to grant any injunction, inter alia, on the ground that the
defendant was functioning as a director de facto. On an appeal, the said decision was
reversed and an interim injunction was granted against the defendant on a
consideration of the records of the company. On further appeal to the Supreme
Court, the order of the first appeal court was upheld. The Supreme Court observed
that the whole question was whether the defendant was entitled to function as a
director in law and the first court instead of considering this important aspect
decided the matter mainly on the basis that the defendant was functioning as a
director de facto. The first court was also not justified in ignoring the records
produced by the company to establish that the defendant was neither a shareholder
nor had been appointed a director.

(f) Desk Bandhu Gupta and Co. v. Delhi Stock Exchange Association Ltd., . In this
case, the Supreme Court in

construing a notification issued by the Central Government under Section 18 of the


Securities Contracts (Regulation) Act, 1956, dated June 27, 1969, took note of and
considered a press statement issued by the Ministry of Finance immediately upon the
issuance of the notification and also a communication dated June 28, 1969, from the
Joint Director of the Ministry of Finance, Department of Economic Affairs. The
Supreme Court observed as follows (at p. 1054):

"It may be stated that it was not disputed before us that these two documents which
came into existence almost simultaneously with the issuance of the notification could
be looked at for finding out the true intention of the Government in issuing the
notification in question, particularly in regard to the manner in which the
outstanding transactions were to be closed or liquidated. The principle of
contemporanea expositio (interpreting a statute or any other document by reference
to the exposition it has received from contemporary authority) can be invoked
though the same will not always be decisive of the question of construction.
(Maxwell, 12th edition, page 268). In Crawford on Statutory Construction, 1940
edition, in para. 219, at pages 393-395, it has been stated that administrative
construction (i.e., contemporaneous construction placed by administrative or
executive officers charged with executing a statute) generally should be clearly wrong
before it is overturned ; such a construction, commonly referred to as a practical
construction although not controlling, is nevertheless entitled to considerable weight
as it is highly persuasive."

In reply, learned advocates for the appellant and respondent No. 7 submitted that
under Section 255 of the Companies Act, 1956, directors could be appointed by the
shareholders of a private company at a general meeting. This might be the general
rule. But, in the section itself, an exception was provided that in a private company
the articles of association could provide for appointment of directors otherwise than
in a general meeting by the shareholders and if such a provision was made, the
articles would override the section.

44. In the instant case, the articles of association of the freight company as also the
hotels company not only provided for but actually appointed the appellant as a
director of both the companies by nomination. The articles did not provide as to how
long the appointment of such first directors would continue and, therefore, it must be
held that the first directors would continue in their office indefinitely. The articles
did not provide that the first directors would continue only till the next general
meeting of the said companies.

45. Construing Sections 255 and 256 of the Companies Act, 1956, learned advocates
for the appellant and respondent No. 7 submitted that the said sections specifically
provided for appointment of directors of a public company as also of a private
company. Retirement of directors of a public company was also provided for. The
said sections did not provide for termination of the office of a director of a private
company. Section 283 of the Companies Act, 1956, provided for vacation of office by
directors of a company in certain contingencies. In that section, it was not provided
that the first directors of a private company appointed by its articles would vacate
their offices at the next general meeting.
46. To appreciate the controversies involved, it is convenient to refer to the relevant
provisions of the Companies Act, 1956 :

"Section 2(26): 'Managing director' means a director who, by virtue of an agreement


with the company or of a resolution passed by the company in general meeting or by
its board of directors or, by virtue of its memorandum or articles of association, is
entrusted with substantial powers of management which would not otherwise be
exercisable by him, and includes a director occupying the position of a managing
director, by whatever name called."

" Section 26 : There may in the case of a public company limited by shares, and there
shall in the case of an unlimited company or a company limited by guarantee or a
private company limited by shares, be registered with the memorandum, articles of
association signed by the subscribers of the memorandum, prescribing regulations
for the company."

" Section 254 : In default of and subject to any regulations in the articles of a
company, subscribers of the memorandum who are individuals, shall be deemed to
be the directors of the company, until the directors are duly appointed in accordance
with Section 255."

" Section 255(1): Unless the articles provide for the retirement of all the directors at
every annual general meeting, not less than two thirds of the total number of
directors of a public company, or of a private company which is a subsidiary of a
public company, shall-

(a) be persons whose period of office is liable to determination by retirement of


directors by rotation ; and

(b) save as otherwise expressly provided in this Act, be appointed by the company in
general meeting.

(2) The remaining directors in the case of any such company, and the directors
generally in the case of a private company which is not a subsidiary of a public
company, shall, in default of and subject to any regulations in the articles of the
company, also be appointed by the company in general meeting."

" Section 256(1) : At the first annual general meeting of a public company, or a
private company which is a subsidiary of a public company, held next after the date
of the general meeting at which the first directors are appointed in accordance with
Section 255 and at every subsequent annual general meeting, one-third of such of the
directors for the time being as are liable to retire by rotation, or if their number is not
three or a multiple of three, then, the number nearest to one-third, shall retire from
office. "

" Section 260 : Nothing in Section 255, 258 or 259 shall affect any power conferred
on the board of directors by the articles to appoint additional directors :

Provided that such additional directors shall hold office only up to the date of the
next annual general meeting of the company:..."

We also note the provisions of Articles 111 and 144 of the articles of association which
were adopted by the said company.

Article 111 : The board is empowered, at any time and from time to time, to appoint
any other person to be a director of the company,... as an addition to the board, but
so that the total number of directors shall not exceed the maximum for the time
being prescribed. A person...... who is appointed as an additional director shall hold
office only up to the date of the next annual general meeting, but such person shall,
in either case, be eligible for re-election.

Article 144 : Subject as hereinafter provided, a managing director (which expression


shall include a joint managing director) shall not, while he continues to hold that
office, be subject to retirement by rotation of directors or be taken into account in
determining the number of directors liable to retire by rotation of directors ; but if he
ceases for any cause to hold the office of director, he shall, ipso facto and
immediately, cease to be managing director.

47. In this appeal, the scope of the enquiry is limited to the prima facie determination
of the initial appointment of the appellant as a director of the companies involved
and his continuation in such office up to the relevant time. On such prima facie
determination will depend whether the appellant was a lawful director of the said
company at the date of the institution of the suit.

48. It being the common case that the appellant had not been appointed as an
additional director in any of the companies involved and that the appellant was not
claiming to hold the post of such additional director, the question whether the
appellant ceased to hold such office as an additional director at the date of the annual
general meeting to be held on December 29, 1986, need not be considered further.
49. We note that the case of the appellant made in his pleadings is contradictory to
certain statements in the records of the said company, namely, the notice dated
November 24, 1986, convening the said annual general meeting and the explanatory
statement thereto as also the directors' report. We also note that the stand taken by
the appellant before the Company Law Board is also contradictory to the pleadings of
the appellant in this suit. Such contradictory stands of the appellant as to his office
and status cannot in our view affect the actual legal position which is to be
ascertained prima facie from the entire facts and circumstances.

50. It stands established from Article 111 of the articles of association of the hotels
company that the appellant was initially appointed as one of its first directors. Such
appointment was not as an additional director. The said article also did not prescribe
any time limit up to which the appellant would continue in his office.

51. The appointment of the appellant as a director of the freight company was made
by and recorded in the articles of association of the said company in an identical
manner.

52. When, the freight company was amalgamated with the hotels company, the
appellant continued to be a director of the amalgamated company.

53. Both the hotels company and the freight company were private companies and
their articles did not provide for retirement of their directors and as such there was
no question of retirement of the appellant from his office at any subsequent annual
general meeting. Furthermore, the appellant, at the material time, had been
appointed as the managing director of the freight company and continued as
managing director of the amalgamated company. Under Article 144 of the articles of
association adopted by the amalgamated company, the appellant was not liable to
retire from his office of director as long as he continued to hold the post of managing
director.

54. On April 30, 1987, when the appointment of the appellant as the managing
director of the said company came to an end, the said company had become a public
company and only then the question of retirement of the appellant from his office as
director arose for the first time on May 1, 1986. In the ordinary course, the appellant,
after the termination of his office as a managing director, would continue in his office
as a director but would be liable to retire at the next annnal general meeting of the
said company which was scheduled to be held on December 29, 1986.
55. Respondent No. 1 does not dispute that the appellant had been appointed as one
of the first directors of the hotels company as also of the freight company under their
respective articles of association. The contention of respondent No. 1 is that the office
of appellant No. 1 as first director came to an end at the next general meetings of the
two companies inasmuch as under Sections 255 and 256 of the Companies Act, 1956,
the directors of a private company, apart from the additional directors, were
generally required to be appointed at a general meeting by the shareholders unless
the articles provided otherwise. The articles of the said private companies being
silent as to the term of office of their first directors, it was contended that the first
directors would continue in their office till the next general meeting of the said
private companies.

56. We are unable to accept this contention of respondent No. 1. The expression "
first director " appears only in Section 256 of the Companies Act, 1956, noted
hereinabove and the said section applies only to public companies. The section
provides for retirement of the first directors by rotation at every annual general
meeting from the meeting held next after the general meeting at which they were
appointed.

57. It is to be noted that this section does not deal with the appointment of first
directors in a private company.

58. Section 255 of the Companies Act, 1956, provides, inter alia, also for retirement
of directors of a public company. The section also provides for appointment of
directors in both public companies and private companies.

59. So far as a private company is concerned, which is not a subsidiary of a public


company, the section provides that the directors of such a company are to be
appointed in a general meeting as in a public company but such appointment would
be subject to the articles which may provide otherwise.

60. It appears to us on a plain reading of the section that if the articles are silent as to
the appointment of directors in a private company, or do not specifically provide for
appointment of directors otherwise than in a general meeting, then the directors of a
private company are to be appointed by the shareholders at general meeting.

61. In the instant case, Article 111 of the articles of association of the hotels company
and freight company provided for and appointed the appellant as one of its first
directors. Under Section 256 of the said Act read with Section 26 thereof, such an
article may be held to prescribe, and constitute a regulation. This article, in our view,
constituted an exception to the general rule laid down under Section 255 of the Act.
Under the article, the appellant was appointed as one of the first directors of the
private company under the provisions of Section 255 of the Companies Act, 1956.
The article also did not provide for retirement or termination of office of such first
directors at any point of time. Accordingly, in our view, as long as the said two
companies continued to be private companies and after their amalgamation
remained a private company, there was no question of retirement of the appellant
from his office as a director or such office coming to an end.

62. We are unable to accept the interpretation of Sections 255 and 256 of the
Companies Act, 1956, as contained in the so called circular, which has been relied on
by learned advocate for respondent No. 1. We are not sure as to who is the author of
this so called circular. Apparently, this alleged circular is an excerpt from Company
News and Notes, presumably a journal. In any event, this document is not a
contemporaneous exposition or interpretation of Sections 255 and 256. As such, this
document cannot be treated in the same manner as a clarification or exposition
issued by a competent authority. In our view, the principles laid down by the
Supreme Court in Desk Bandhu Gupta and Co., AIR 1979 SC 1099, do not apply to
this document. In any event, the said document cannot be a conclusive exposition.

63. From the facts on record, it appears to us prima facie that the appellant was
appointed as a director of the hotels company under its articles under Section 255 of
the Companies Act, 1956, and continued in his office as a director after the freight
company was amalgamated with the hotels company. The amalgamated company
continued as a private company till November 4, 1981. On May 1, 1981, the appellant
was appointed as a managing director of the amalgamated company with the
approval of the Central Government and the shareholders for a period of five years.
As such, under Article 144 of the said companies, there was also no question of the
appellant retiring from his office as a director till April 30, 1986, even though the
amalgamated company became a public company on and from November 4, 1981.

64. We also hold prima facie that on the termination of his office as a managing
director, the appellant did not automatically lose his office as a director in the said
company. We accept the contention of the appellant that the appellant continued to
be a director of the said company which had become a public company by November
4, 1981, and was liable to be retired at the next annual general meeting scheduled to
be held on December 29, 1986. This meeting was held partially on December 29,
1986, but was not concluded and the meeting was restrained from considering or
passing resolutions pertaining to retirement, appointment or reappointment of
directors which were directed to be considered at an adjourned date. Following the
principles laid down in Ambari Tea Co. Ltd. (Appeal No. 260 of 1984--22-11-85
(Cal)), we hold that the question of retirement of the appellant would only arise at
the adjourned date of the said annual general meeting of the company when the said
meeting is held and not before that.

65. It follows that on the date when the present suit was instituted, the appellant
prima facie was a director of the said company and was entitled to act as such. This
prima facie position arises from the undisputed facts on record and cannot be
affected or detracted by statements or declarations to the contrary by the parties
concerned or the said company. A legal position or status cannot be affected by a
wrong or erroneous description. Admission, if any, by respondent No. 1 that the
appellant had continued as a director or as an additional director would also be
equally irrelevant.

66. It is unfortunate that the memorandum and articles of association of the hotels
company or the freight company were not produced or relied on before the learned
judge in the first court nor was a clear stand taken before the first court as to how the
appellant initially came to be appointed as a director of the companies involved. If
this was done, proceedings before the first court might have been shortened and the
correct position in law and fact would have emerged.

67. We next consider whether the present proceedings are maintainable in the
absence of the said company. As we have held that it has been prima facie established
that the appellant is continuing as a director of the said company and is liable to
retire at the next annual general meeting, it is not necessary to determine this
question at the interlocutory stage. Under the amended Civil Procedure Code, the
suit instituted by respondent No. I may ultimately fail by reason of non-joinder of the
said company which may be held to be a necessary party. It is open to respondent
No. 1 to apply for impleading the said company in the suit at any time before the
same is finally disposed of. It is also open to the court to implead the said company in
the suit suo motu at any stage. In that view, we are not inclined to hold that by
reason of non-joinder of the said company in the suit at this stage, an interlocutory
application in the suit will necessarily fail.

68. For the above reasons, this appeal is allowed. The judgment and order dated
November 19, 1987, are set aside so far as the appellant is concerned. The appeal and
the application are disposed of accordingly. Costs of the proceedings before us would
be costs in the suit.
69. We note that in the proposed annual general meeting of the said company which
stands adjourned by orders of court, no resolution has been proposed recording the
retirement of the appellant or for his re-election as a director. This is a question
which would arise at the meeting and we express no opinion on the same.

Shyamal K. Sen, J.

70. I agree.