Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: SH. MAQBOOL ELAHI AND 2 OTHERS VS Respondent: KHAN ABDUL RAHMAN KHAN AND 6 OTHERS
P L D 1958 (W
P L D 1958 (W. P.) Lahore 721
Before M. R. Kayani, C. J. and Masud Ahmad, J
Sh. MAQBOOL ELAHI and 2 others‑Petitioners
versus
KHAN ABDUL RAHMAN KHAN and 6 others Respondents
Writ Petition No. 1074 of 1957 decided on 6th June 1958.
(a) Companies Act (VII of 1913), Ss. 46‑F and 91‑A-----General disclosure of interest under S. 91‑A not enough to save director from vacating office under S. 86‑F in regard to trans actions mentioned in latter section.
Held, that the "consent of the directors" spoken of in section 86‑F should not mean a general consent, because, a general consent would defeat the object of section 86‑F, which was to enable the directors in each individual case to examine the nature and implications of a contract and decide whether it would be more beneficial to the company or to the director con cerned: If, however, the directors could consent to a future contract without knowing its nature and extent, they might consent to something very injurious to the company.
As a part of S. 86‑F is common with section 91‑A, the former will override the latter, and a general disclosure of interest under section 91‑A will not save a director from vacating office under section 86‑F in regard to the particular transactions mentioned therein, unless he has obtained the previous consent of the directors because the effect of section 86‑1 is that the moment a certain thing happens, "the office of a director shall be vacated", apparently without any further ceremony.
It was argued by petitioner's counsel that the contracts mentioned in section 86‑F should be regarded as formal contracts, which are entered into after some procedural observance. It was difficult, however, to draw a line between formal and informal contracts, and in the garb of informality an injurious contract might be transacted.
If a director enters into a contract with the company, his office automatically becomes vacant.
Where, however, a contract is not admitted, an opportunity must be given to the director concerned to clear his position.
The petitioners in this case impliedly admitted the truth of the charge that contracts had been entered into without the express consent of the directors in three particular cases. Consequently, it was unnecessary to give the directors concerned any notice of the fact that they were to be "removed" from office. There was no removal They had ceased to be.
In re Bodega Company 1 Chancery Division 276 rel.
Walchandnagar Industries v. Ratanehand A I R 1953 Born. 285 and Turnbull v. West Riding Athletic Club 70 Law Times 92 considered.
(b) Company‑Internal management‑Whether mandamus lies‑Constitution of Pakistan, Art. 170.
English cases have looked upon the general body of share holders as being the ultimate resort, and they have done so in the belief that the general body will not put up with the arbitrary acts of the directors. . In the context of the Companies Act (VII of 1913), if the Court does not interfere even though some thing wrong has been done, the general body gets the impression that what the directors have done is unexceptionable. The general body is not so alive to its responsibilities and powers. Further, by the Cede of Civil Procedure the Courts have juris diction to try all suits of a civil nature. Of course, where the question is strictly one of internal management, Courts would be reluctant to interfere. Particularly in mandamus or writs of like nature there is no restraint.
In the present case, moreover, one of the petitioners had a personal grievance that his suspension as secretary of the board of directors was not in order because the new directors had not been properly elected, and for this reason, if for no other, the High Court entertained the petition.
Fosse v. Harbottle (1843) 62 Revised Reports 185 ; Mosley v. Alston (1847) 65 Revised Reports 520 ; Bainbridge v. Smith (1889) 41 Chancery Division 462 ; Cotter v. National Union of Seaman (1929) 2 Chancery Division 58 ; Pulbrook v. Richmond Consolidated Mining Company (1878) 9 Chancery Division 610 ; Edwards v. Halliwell (1950) 2 All England Law Reports 1064 ; in re The Albert Mills Company Limited v. Shivji Ma'nkibba'i (1872) 9 Bombay High Court Reports 438 and Ducket v. Gover (1877) 6 Chancery Division 82 considered.
(c) Company‑Meeting of board of directors‑Quorum Presence of‑Whether dispenses with agenda.
(d) Affidavit‑Sworn by A for B "on information received from B" who is existing and present‑Disapproved.
(e) Writ petition‑Additional plea‑Admissible‑Constitution of Pakistan, Art. 170.
Petitions for writs do not stand on so much forma lity, even in regular suits a plea which does not take the opposite party by surprise or alter the cause of action is permis sible, and variation between the pleading and what is actually proved has always been held to be immaterial.
Ananda Chandar v. Broja Lal A I R 1923 Cal. 142 ref.
Mahmud Ali Qasuri Assisted by Nasim Hassan Shah and Ata Ullah Sajjad for Petitioners.
A. K. Brohi for Respondent No. 1.
Ved Vyas, Muhammad Siddiq and Sh. Khurshid Ahmad for Respondents Nos. 2 to 6.
Dates of hearing : 16‑4‑1958, 13‑5‑1958, 14‑5‑1958, 15‑5‑1958, 16‑5‑1958,20‑5‑1958 and 21‑5‑1958.
JUDGMENT
KAYANI, C. J.‑This petition for a writ of mandamus has been occasioned by a difference among the directors of the West Punjab Steel Corporation, Lahore.
2. The petitioners are three in number, the first two Sheikh Maqbool Elahi and Mian Muhammad Fazil‑being directors and the third, Abdul Majid Mufti, being its secretary. There are altogether seven directors, and on the relevant date the remaining five directors were Khan Abdul Rahman (Respondent No. 1), Haji Muhammad Amin (Respondent No. 5), Sardar Muhammad Umar Khan (Respondent No. 7), Mr. Abdul Aziz Malik and Seth Tahir Ali.
3. The petition stated, so far as it is relevant, that on the 16th of September 1957, at 9 a.m., there was an emergent meeting of the board of directors presided over by Khan Abdul Rahman, and the only question which was on the previously circulated agenda related to the convening of an extraordinary general meeting of the share‑holders to consider the affairs of the company and to the fixation of a date therefor. The directors present were :‑
(1) Khan Abdul Rahman,
(2) Haji Muhammad Amin,
(3) Mr. Muhammad Fazil,
(4) Mr. Abdul Aziz Malik, and
(5) Sh. Maqbool Elahi,
the last‑mentioned having arrived "a few minutes later" than others. Instead of taking up the agenda, however, the chairman asked the secretary to leave the room and then declared that Sheikh Maqbool Elahi and Sardar Muhammad Umar Khan had ceased to be directors (apparently by virtue of section 86‑F, Companies Act,) because they had entered into transactions with the company without the board's permission. In their place he proposed Mr. C. M. Latif (respondent No. 2) and Mr. Fazal Muhammad (respondent No. 3). At this stage Sheikh Maqbool Elahi entered the room with the secretary. The proposal was opposed, whereupon the chairman remarked that since he and Haji Muhammad Amin were in favour of it, while Mr. Abdul Aziz Malik and Mr. Muhammad Fazil were opposed to it, he would give his casting vote in favour of the proposal. He thus ignored the presence of Sheikh Maqbool Elahi, who strongly protested. The chairman, however, called in Messrs C. M. Latif and Fazal Muhammad, who appeared to have been just outside and who brought in supporters. At this stage he proposed the suspension of the secretary. Mr. C. M. Latif meanwhile took away the minute book and other papers, directing his men to remove the chairs in which the directors were sitting, while the chairman, announcing that he was adjourning the meeting because of rowdyism, left the room.
4. As the minute book had been removed, the first two petitioners and Mr. Abdul Aziz Malik recorded the minutes later on loose sheets of paper. They now understand that the chairman claims to have declared that Mr. Muhammad Fazil also had ceased to be a director and that Khan Muhammad Safdar Khan (respondent No. 4) had been substituted for him. They have also learnt that respondent No. 6 has been appointed the new secretary.
5. The petition maintained that the secretary could be suspended only by a vote of the directors and that the directors could be removed only by an extraordinary general meeting of the share‑holders. For the application of section 86‑F, it was necessary to call upon them to explain whether they had con travened the provisions of that section. Further, by resolution No. 6 of the 29th November 1950 (of which a copy was Annexure `C') the, directors were permitted to make purchases from the company even on credit, and for that reason, even on facts, the removal was illegal. Next, the newly‑appointed directors have no locus standi, not having been elected by the majority of the directors present.
6. It was, therefore, prayed that a writ of mandamus or other appropriate writ, direction or order be issued‑
(a) directing respondents Nos. 1 to 6 not to function in the name of the corporation,
(b) restraining respondents Nos. 1, 2, 3, 5 and 6 from operat ing on the bank account,
(c) directing respondents Nos. I to 6 to return the keys, the safe, the account books, the minute b9pk etc. to the secretary, and, finally,
(d) restraining respondents Nos. 1 to 6 from interfering with the functioning of petitioners Nos.' 1 and 2 and respon dent No. 7 as directors and petitioner No. 3 as secretary.
7. On the admission of the petition, temporary relief maintaining the previous status was granted.
8. In their reply, the respondents pleaded that the proper remedy was not mandamus but a civil suit. As to facts, they stated that the contracts into which the directors in question had entered with the company had been brought to the chairman's notice by a share‑holder a day before the meeting, and in any case there was no bar to the directors assembled at a meeting considering any matter relating to the affairs of the corporation, irrespective of whether or not it was on the agenda. At the meeting, there were present only four directors, Sheikh Maqbpo1 Elahi having arrived an hour later, and the decision to elect new directors was taken by a majority. Respondents Nos, 2 and 3 were called by the chairman by telephone and arrived only after the three new directors had been elected. After they pad joined, a resolution suspending the secretary was passed. There was no rowdyism, and minutes were recorded at the spot. A copy of these minutes was placed on the file.
9. The main contention of Mr. Brohi for the respondents was that the posts of directors occupied by Sheikh Maqbool Elahi and Sardar Muhammad Umar Khan had fallen vacant by reason of section 86‑F, Companies Act, read with section 86‑I, and that whatever further happened as regards the new elections, even if held to be irregular, was the concern of the share‑holders and was not a matter for the Courts to decide.
10. The first question for decision under section 86-F. Companies Act, is whether it is possible for the directors to give a general consent to one or all the directors to enter into contracts with the' company. To answer this question, it seems necessary to ascertain whether section 86‑F is linked in Any manner with section 91‑A, which deals with a kindred subject. The two sections are as follows :_.,_
Section 86‑F‑Except with the consent of the directors, a director of the company, or the firm of which he is a partner or any partner of such firm, or the private company of which he is a member or director, shall not enter into any contracts for the sale, purchase or supply of goods and materials With the company, provided that nothing herein contained shall affect any such contract or agreement for such sale, purchase or supply entered into before the commencement of the Indian Companies (Amendment) Act, 1936.
Section 91‑A.‑(1) Every director who is directly or indirectly concerned or interested in any contract or arrangement entered into by or on behalf of the company shall .disclose the nature of his interest at the meeting of the directors at which the contractor arrangement is determined on, if his interest then exists, or in any other case at the first meeting of the directors after the acquisition of his interest or the making of the contract or arrangement ;
Provided that a general notice that a director is a director or a member of any specified company or is a member of any specified firm, and is to be regarded as interested in any subsequent transaction with such firm or company, shall as regards any such transaction be sufficient disclosure within the meaning of this subsection and after such general notice, it shall not be necessary to give any special notice relating to any particular transaction with such firm or company.
(2) Every director who contravenes the provisions of sub section (1) shall be liable to a fine not exceeding one thousand rupees.
(3) A register shall be kept by the company in which shall be entered particulars of all contracts or arrangements to which subsection (1) applies, and which shall be open to inspection by any member of the company at the registered office of the company during business hours.
(4) Every officer of the company who knowingly and wilfully acts in contravention of the provisions of subsection (3) shall be liable to fine not exceeding five hundred rupees.
11. It would be profitable to reproduce here section 86‑I also.
Section 86‑L‑(1) The office of a director shall be vacated if
(a) he fails to obtain within the time specified in sub section (1) of section 85, or at any time thereafter ceases to hold, the share qualification, if any, necessary for his appoint ment, or
(b) he is found to be of unsound mind by a Court of com petent jurisdiction, or
(c) he is adjudged an insolvent, or
(d) he fails to pay calls made on him in respect of shares held by him within six months from the date of such calls being made, or
(e) he or any firm of which he is a partner or any private company of which he is a director without the sanction of the company in general meeting accepts or holds any office of profit under the company other than that of a managing director or manager or a legal or technical adviser or a ,banker, or
(f) he absents himself from three consecutive meetings of the directors or from all meetings of the directors for a con tinuous period of three months whichever is the longer with out leave of absence from the board of directors, or
(g) he or any firm of which he is a partner or any private company of which he is a director accepts a loan, or guarantee from the company in contravention of section 86‑D, or
(h) he acts in contravention of section 86‑F.
(2) Nothing contained in this section shall be deemed to preclude a company from providing by its articles that the office of director shall be vacated on grounds additional to those specified in this section.
12. It will be instructive to mention that sections 91‑A to 91‑D were inserted in the Companies Act by an amendment of 1914, while sections 86‑A to 86‑1 were inserted by an amendment in 1936. Section 91‑A required a director who was "directly or indirectly" concerned or interested in any contract into which a company entered to disclose the nature of his interest, and if he did not do so, he became liable‑ to a fine up to one thousand rupees. But he could give a general notice of his being a director etc. in a specified company, and that notice was t9 be regarded as sufficient disclosure of his interest in any subsequent trans action with that company. It will be noticed that section 91‑A encompasses a wider field than section 86‑F, where, in the first instance, the transactions are confined to sale, purchase or supply of goods and materials, and in the second instance, the transactions are direct transactions between the director and the company. There is no doubt that this part of section 86‑F is covered by section 91‑A, and it was, therefore, argued, on the lines of the argument which was not accepted in Walchandnagar Industries v. Ratanchand (A I R 1953 Bom. 285), that if section 91‑A means anything, the disclosure of interest by a general notice should do away with the consequences attendant on the absence of a consent under section 86‑F. In the case before us, section 91‑A is not operative, but it paves the way for a general consent ; because if a general consent is not contemplated, then although section 91‑A makes it possible for a director, after the accrual of his interest in a contract, to disclose it at the first meeting of the directors taking place thereafter, the effect of non‑consent under section 86‑F would be immediately to vacate the office of the contracting director under section 86‑I, clause (h).
13. We have seen that sections 86‑F and 86‑I were inserted by a later amendment. The Legislature must have been conscious of the existing provisions relating to contracts by companies with one or more of its directors. For certain purposes, those provisions were perhaps not regarded as adequate. They merely imposed a fine in the event of non‑disclosure of interest. By the time of the second amendment it was obviously considered proper to visit direct transactions by the directors with a drastic penalty, such as the vacation of office. If, therefore, as we think, some part of section 86‑F is common with section 91‑A, the former will override the latter, and a general disclosure of interest under section 91‑A will not save a director from vacating office under section 86‑F in regard to the particular transactions mentioned therein, unless he has obtained the previous consent of the directors. We use the word "previous" because the effect of section 86‑I is that the moment a certain thing happens, "the office of a director shall be vacated", apparently without an further ceremony. Thus a person of unsound mind shall vacate office as soon as he is found so by a Court of competent juris diction, and an insolvent vacates office as soon as he is adjudged insolvent.
14. Having disposed of section 91‑A, we do not hesitate in holding that the "consent of the directors" spoken of in 1, section 86‑F should not mean a general consent, because, as observed by Chagla, C. J. in the Walchandnagar liulustries` case and we respectfully agree with him‑a-General consent would defeat the object of section 86‑F, which was to enable the directors in each individual case to examine the nature and implications of a contract and decide whether it would be more beneficial to the company or to the director concerned. if ,I however, the directors could consent to a future contract without knowing its nature and extent, they might consent to something' very injurious to the company.
15. We are alive to the difficulty which this interpretation creates in respect of `ordinary and petty transactions, as where a company has a selling counter for the public and one of the directors, like an ordinary purchaser, pays a small sum for a soap box or some such trifle. Mr. Mahmud Ali, therefore, argued that, in the alternative, the contracts mentioned in section 86‑F should be regarded as formal contracts, which are entered into after some procedural observance. We have thought over this aspect of the case, and were at one time inclined to place upon the section a convenient interpretation, consistent with the object thereof, which was to keep all transactions above board. But we have felt that it would be difficult to draw a line between formal and informal contracts, and that, in the garb of informality an injurious contract might be transacted. The Indian Parliament has got over this difficulty by amending section 86‑F so as to exclude contracts of the value of five thousand rupees or below. In this view of the case, the fact that the transaction rests on a permit by the Steel Controller will not make any difference.
16. We have already indicated that the office of a director becomes automatically vacant if 'he enters into a contract with the company without obtaining the consent of other directors. For the contrary view Mr. Mahmud Ali relied on Turnbull v. West Riding Athletic Club (70 Law Time 92), where it was observed that an opportunity should be given to the director to explain his position, and that he might be able to win over the directors to his view. But how can there be any question of winning over, by eloquence or sophistry, where, by law, an office has become vacant? The view expressed in Turnbull's case was distinguished in In re Bodega Company (1 Chancery Division 276) where, on admitted facts, a director was secretly concerned in a contract with the company, and there was in the 'company's articles a provision similar to ours about the office falling vacant in the event of a director being concerned in any such contract. It was there held that on the act being done, the director ipso facto vacated office : There was no distinction between this and the other events mentioned in the article, such as bankruptcy, and there was no locus poenitentiae or any means by which the directors can condone the offence "except to satisfy themselves that the fact has happened if the fact be put in issue".
17. We, therefore, hold that if a director enters into a contract with the company, his office automatically becomes vacant. We agree, however, that where a contract is not admitted, an opportunity must be given to the director concerned to clear his position. . In the present petition we have not been E asked to give that opportunity to the three directors concerned. Nor has it been alleged in the petition that the allegation made against these three directors was incorrect. The very careful position taken by them is evident from paragraph No. 21 of the petition, which is as follows :‑
" That petitioners Nos. 1 and 2 and respondent No. 7 were never called upon to explain as to whether or not they had contravened the provisions of section 86‑F of the Companies Act, or what were the circumstances under which the alleged purchase was made by them. Actually respondent No. 7 was absent and did not know that the chairman had declared that he had ceased to be a director. Moreover, by resolution No. 6, dated the 29th November 1950, the directors of the West Punjab Steel Corporation were permitted to make pur chases from the corporation even on credit. Therefore, even on facts, the removal of the petitioners Nos. 1 and 2 and respondent No. 7 is entirely illegal and uncalled for. A copy of resolution No. 6 of the 29th November 1950, is attached as annexure `C'."
All that is complained of is that the three directors were not called upon to explain "whether or not they had contravened section 86‑F", which, of course, has several provisions relevant to the present case, and the petitioners might have in mind any particular provision suitable to them. Then, on facts, paragraph No. 21 relies on the consent resolution, so that it can be presumed that the petition impliedly admits the truth of the charge that contracts have been entered into without the express consent of the directors in these three particular cases. Consequently, it was unnecessary to give the directors concerned any notice of the fact that they were to be "removed" from office. There was no removal : They had ceased to be.
18. We are, therefore, unable to give the relief mentioned in clause (d) of paragraph No. 25, which prays for "restraining respondents Nos. 1 to 6 from interfering in any way with the functioning of petitioners. Nos. 1 and 2 and respondent No. 7 as directors of the Corporation * * * * * ". The relief in respect of the secretary (petitioner No. 3) will be examined later.
19. Mr. Brohi contended for the respondents that if the petitioners are not entitled to any personal relief, then, as regards the reliefs claimed in clauses (a), (b) and (c) of para graph No. 25 against the functioning of the new directors, this Court should not interfere in consonance with a distinguished line of English authorities based on Fosse v. Harbottle and Mosley v. Alston (1), which discourage interference in the internal management of a company. As most of the arguments on both sides were devoted to an examination of these authorities, it is only proper that we should mention some of the more prominent ones in some detail.
20. In Fosse v. Harbottle ((1843) 62 Revised Reports 185) a bill had been filed by two share‑holders on behalf of themselves and mil other share‑holder; against five directors, three of whom had become bankrupt, and against a share‑holder, solicitor and architect of the company, charging them with effecting ,fraudulent transactions whereby property of the company was misapplied, praying that the defendants should make up the losses. It was held that the conduct with which the defendants were charged constituted an injury not to the plaintiffs exclusively ; it was…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.