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Arjun Singh

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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

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

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

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 nd 256 along with case


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