Shalagram Jhajharia v. National Co Ltd. — 1965 DIGILAW 247 (CAL)

JUDGMENT 1. THE plaintiff instituted this suit for a perpetual injunction restraining the defendants, their servants and agents, from passing or giving effect to resolution No. 6 if passed at the Annual General Meeting to to be held on April 30, 1965 and also for a perpetual injunction restraining the defendants, their servants and agents from acting under or giving effect to the purported agreement dated June 29, 1964 and an enquiry :into the amount parted with or paid to B. M. T. Corporation as mentioned in paragraph 32 of the plaint. 2. THE plaintiff is a shareholder of the defendant company. The defendants numbered 2 to 5 are alleged to be directors of the defendant company. The defendant No. 3 is the son of defendant No. 6. The defendant No. 6 is alleged to be in management or control of affairs of the defendant company. In the year 1961 the defendant company appointed B. M. T. Commodity Corpn. of New York State to sell the company's article as the sole selling agent. After that agreement was entered into the first General Meeting of the defendant company was held on July 27, 1961. At that meeting the appointment of B. M. T. Commodity Corporation as the sole selling agent was not approved by the shareholders. 3. BY a writing dated January 27, 1962 the Board of Directors of the defendant company appointed B. M. T. Commodity Corporation as its sole selling agent for sale of jute backing cloth and ordinary burlap for the territories of the United States of America, Canada and Mexico with effect from February 1, 1962. That appointment was not approved by the sharehloders at the first general meeting which was held on may 31, 1962. 4. THE plaintiff instituted suit No. 974 of 1963 in this Court against the defendant company from passing resolutions as mentioned in paragraphs 11 and 27 of the plaint in the 1963 suit. In that suit the plaintiff made an application for injunction. The appellate court made an order in that application, that the agreement appointing B. M. T. Commodity Corporation was invalid. In that suit the plaintiff made an application for injunction. The appellate court made an order in that application, that the agreement appointing B. M. T. Commodity Corporation was invalid. The plaintiff alleges that by writing dated June 29, 1964 the defendant company appointed B. M. T. Commodity Corporation as its sole selling agent for sale and distribution of jute backing cloth and ordinary burlap for the territories of the United States of america, Canada and Mexico on terms and conditions as alleged in paragraph 14 of the plaint. 5. ON April 5, 1965 the plaintiff received a notice of the Annual General meeting of the members to be held at the registered office of the company. On April 30, 1965 one of the terms of the agenda as an ordinary resolution was as follows: "resolved that the appointment of M/s. B. M. T. Commodity Corporation of New York, U. S. A. as the sole distributors for the sale of jute backing cloth and ordinary burlap having a width of 100" or more for the United States of America, its possessions, canada and Mexico in terms of the agreement dated 29 June, 1964 entered into with them subject to the approval of reserve Bank of India be and is hereby approved. " 6. IN the explanatory statement attached to the proposed resolution it was stated that one of the provisions of the agreement dated June 29, 1964 is that the agreement is subject to the approval of the Reserve Bank of India and the agreement will be acted, upon only after receipt of the Reserve Bank of India's approval and the plaintiff alleges that there is no such clause in the agreement. In paragraph 16 of the plaint the plaintiff has set out the explanatory statement under section 173 of the Companies Act in respect of the resolution No. 6 which is in relation to the appointment of B. M. T. Commodity corporation. The plaintiff impeaches the agreement as intended to defraud shareholders and that the agreement is detrimental and not beneficial to the interest of the defendant company on the grounds alleged in paragraph 17 of the plaint. The broad grounds are first the the agreement is described to be between principal and principal though in fact it is a selling agency agreement. The broad grounds are first the the agreement is described to be between principal and principal though in fact it is a selling agency agreement. Secondly commission to be paid is abnormally high and the method of deducting the commission is alleged to violate the provisions of the Foreign exchange Regulation Act. Thirdly the goods are to be sent on cost and freight basis and the B. M. T. Commodity Corporation will get commission on the invoice value which includes freight and by that process the defendant company is required to advance, the freight on behalf of the B. M. T. Commodity Corporation and to pay commission thereon to the B. M. T. Commodity Corpn. Fourthly goods are to be sent on consignment bas's but the b. M. T. Commodity Corpn. will get commission whether the goods are sold or not. Fifthly the company will compensate B. M. T. Commodity Corporation if the contract of the b. M. T. with its customers fall through because of decline in market price. Sixthly the defendant will also compensate B. M. T. Corporation for any loss suffered in respect of variation in price, claims or otherwise for defective quality, shortage of materials, wrong specification, late shipment or nonshpment of goods by the company against orders placed by B. M. T. Commodity Corporation. Seventhly the terms of appointment of B. M. T. Commodity Corporation as sole selling agent of the company would be extended by the defendant company in contravention of the provisions of section 294 of the Companies Act. Eightly the material terms in respect of payment, damage and/or compensation to be paid by the defendant No. 1, renewal of the agreement and for the B. M. T. Commodity Corporation to act for other manufacturers of like quality goods can be varied or substituted or altered without the consent and approval of the shareholders of the defendant company. 7. THE plaintiff further alleges that the object and purpose of the agreement is to drain away the resources and capital of the defendant company for the use and benefit of the defendants nos. 2, 3, 5 and 6. The plaintiff also alleges that the agreement does not provide for sanction of the Reserve bank of India as alleged in the explanatory statement and the directors report dated February 27, 1965. 8. THE plaintiff alleges that the defendant company paid to B. M. T. . 2, 3, 5 and 6. The plaintiff also alleges that the agreement does not provide for sanction of the Reserve bank of India as alleged in the explanatory statement and the directors report dated February 27, 1965. 8. THE plaintiff alleges that the defendant company paid to B. M. T. . over Rs. 67,00,000/- by way of commission and another sum of Rs. 10,00. 000/-by way of declining price for the accounting year 1962-63. In paragraph 25 of the plaint the plaintiff alleges that the resolution and the explanatory statement are tricky, misleading and fraudulent. The particulars alleged are that the company suppressed that the agreement dated march 15, 1963 had not been cancelled or terminated inspite of the finding of court dated Feb. . 13, 1984 (2) since reported in 69 C. W. N. 369 Secondly that though the agreement dated June 29, 1964 provided that the same was to be effective on and from july 1, 1964, in the explanatory statement it was stated that the agreement would come into force upon the approval being obtained from the Reserve bank of India. Thirdly it is alleged that in the explanatory statement it is stated that the agreement dated June 29, 1964 is subject to the approval of the Reserve Bank of India and no approval has been received and yet the defendants gave effect to the agreement on and from July 1, 1964. Fourthly the defendants described the agreement dated June 29, 1964 as agreement between principal and principal inspite of the finding of the Appellate Court that the previous agreement dated Jan. 27, 1962 was an agreement of sole selling agency. Fifthly the agreement dated june 29, 1964 is alleged to infringe section 294 of the Companies Act by the provision for renewal of the agreement for another 5 years with alteration of the terms and conditions without approval of the shareholders. The defendants filed a joint written statement and the defendants crave leave to refer to the agreement for ascertainment of terms and deny allegations in the plaint. The defendants further deny that the agreement is intended to defraud the shareholders or is detrimental or not beneficial. The defendants deny that the commission to be paid to the Corporation violates the provisions of the Foreign Exchange regulation Act. The defendants deny that the expalanatory statements are tricky and shaky. The defendants further deny that the agreement is intended to defraud the shareholders or is detrimental or not beneficial. The defendants deny that the commission to be paid to the Corporation violates the provisions of the Foreign Exchange regulation Act. The defendants deny that the expalanatory statements are tricky and shaky. The defendants deny that the plaintiffs are entitled to any relief. 9. ISSUES were framed at the trial. It should be stated that it was understood at the time of framing of the issues that the plaintiff wanted an enquiry as prayed for and that such a prayer would be embraced within issue no. 3 as to what relief, if any, is the plaintiff entitled. There is no oral evidence on either side. The documents were tendered and marked by consent of parties as exhibits A and B. 10. TWO broad issues are whether the agreement violates the provisions contained in section 204 and section 294 of the Companies Act and whether the explanatory statement is in violation of the provisions contained in section 173 of the Companies Act. Section 204 of the Companies Act was invoked by counsel for the plaintiff in aid of his argument that the proposed agreement offended section 204 of the Companies act by the insertion of a provision in the agreement that it would be renewed for a further period of 5 years on terms to be mutually agreed between the parties and that such a provision infringed sub-section 4 of section 204, of the Companies Act, Sub-section 4 is as follows : - "Section 204 (4).-Nothing contained in sub-section (1) shall be deemed to prohibit the re-appointment, re-employment, or extension of the term of office, of any firm or body corporate by further periords not exceeding five years on each occasion ; provided that any such reappointment, re-employment, or extension shall not be sanctioned earlier than two years from the date on which it is to come into force. " Section 294 of the Companies act enacts in sub-section 1 that no company shall, after the commencement of the Companies Act appoint a sole selling agent for any area for a term not exceeding five years at a time. " Section 294 of the Companies act enacts in sub-section 1 that no company shall, after the commencement of the Companies Act appoint a sole selling agent for any area for a term not exceeding five years at a time. The proviso to sub-section (1) of section 294 is as follows : - "Provided that nothing in the sub-section shall be deemed to prohibit the re-appointment, or the extension of the term of office of any sole selling agent by further periods not exceeding five years on each occasion. " The rival contentions in relation to section 294 are that according to the plaintiff reappointment of five years is subject to the provisions contained in section 204 whereas according to the defendant under section 294 the Company has a power to reappoint or extend the appointment by a period of five years without recourse either to section 204 or recourse to any meeting at all. It was also contended on behalf of the defendants that the appointment was not of sole selling agency. 11. SECTION 173 of the Companies act enacts that in the case of Annual general Meeting all business to be transacted at the meeting shall be deemed special with the exception first, of business relating to consideration of accounts, balance sheet and the reports of the Board of Directors, secondly, the declaration of dividend, thirdly, the appointment of directors in place of those retiring and fourthly the appointment of and fixing of remuneration of the auditors. The ether business at the Annual General Meeting is deemed special and section 173 contemplates that where any such special business is to be transacted there shall be annexed to the notice of the meeting a statement setting out all material facts concerning any such item of the business including in particular the nature of the concern or interest if any therein of every director, managing agent, secretaries and treasurers. 12. THE contentions on behalf of the defendants in relation to section 294 of the Companies Act are first that the appointment is for a period of five years and sanction is to be obtained only for the first appointment and any re-appointment does not require any sanction. The second contention is that section 294 applies to sole selling agents and the agreement in the present case is not of a sole selling agency. The second contention is that section 294 applies to sole selling agents and the agreement in the present case is not of a sole selling agency. The agreement in the present case is to be found at page 35 of Ext. A. In the first clause of the proposed agreement it is stated the Company appoints B. M. T. Commodity Corporation as its exclusive distributors in and for the united States of America, its possessions, Canada and Mexico only for the sale of (a) Jute Backing Cloth, and (b)Ordinary Burlap over a width of 100" manufactured by the company. In clause 3 of the agreement it is stated that b. M. T. Commodity Corporation shall make their best efforts to promote and secure sales or distribution of Company's afforesaid goods. In caluse 8 it stated that B. M. T.,shall pay the company for all purchases__of aforesaid_ goods and those goods are _jute Backing Cloth and Burlap over 100" width. Extracting clauses 1, 3 and 8 counsel on behalf of the defendants contended that the agreement showed that there were goods below 100" width and B. M. T. Commodity Corporation was not rppointed Agents in respect of such goods and therefore there were no sole selling agents. Reference was made to the meaning of the word 'sole' in the oxford Dicitionary and it was contended that the meaning of the word 'sole' was 'one and only' and 'exclusive' and the agreement in the present case did not mean that B. M. T. Commodity Corporation was the sole selling agent. I am unable to accept the contention on behalf of the defendants. To my mind it appears that the meaning of 'sole selling agency' is that the agent alone has been given the selling right in respect of the goods and such agency need not be in respect of all classes of goods as long as a particular kind of goods or a particular commodity is provided as sole agency of a person or a company. It is in my opinion sole selling agency of that company. The next contention on behalf of the defendants is that the proviso to section 294 shows that an appointment can be made for a period of five years and there can be re-appointment for a period of five years without recourse to the General Meeting. It is in my opinion sole selling agency of that company. The next contention on behalf of the defendants is that the proviso to section 294 shows that an appointment can be made for a period of five years and there can be re-appointment for a period of five years without recourse to the General Meeting. This question is inextricably bound up with section 204 of the Companies Act. Counsel on behalf of the defendants contended that section 204 of the Companies Act did not apply to the present case because the proposed agreement was not an office of profit. Reliance was placed by counsel for the defendants on the decision reported in 31 Chancery Division 496 and the decision reported in 10 equity 298 in support of the contention that neither a solicitor of the company not a banker of the company was an officer. An office of profit is dealt with in section 314 of the Companies Act. It is stated there that any office or place shall be deemed to be an office or place of profit under the company within the meaning of sub-section (1)of section 314, in case the office,or place is held by a director, if the director holding it obtains from the company; anything by way of remuneration over and above the remuneration to which he is entitled as a director, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise and secondly in case the office or place is held by an individual, other than a director or by any firm private company or other body corporate, if the individual, firm, private company or body corporate holding it obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisites the right to occupy free of rent any premises as a place of residence, or otherwise. It is true that office of profit is not defined in the Companies Act but sec. 314 gives some meaning to the phrase 'office of profit. ' Section 5 of the Companies act was invoked by counsel for the defendants in support of the contention as to who could be an officer who was in default. It is true that office of profit is not defined in the Companies Act but sec. 314 gives some meaning to the phrase 'office of profit. ' Section 5 of the Companies act was invoked by counsel for the defendants in support of the contention as to who could be an officer who was in default. In my opinion section 5 has no relevance to the scope and purpose of the present enquiry because section, 204 (1) deals with office of profit and not an officer of the company. The pharse 'office of profit' has to be given its ordinary and natural meaning, namely, that by virtue of the office any profit is derived. Judged by that test i am of opinion that the proposed agreement is an office of profit. 13. THE next question is whether the proposed appointment contravenes sections 204 and 294 of the Companies act. A reference may be made to the agreement which stated in clause 19 that the agreement was to be effective from the first day of July 1964 and would remain in force till the thirtieth day of June 1969 and might be extended for another five years on such terms and conditions as might be mutually agreed upon provided however that the agreement could be terminated by either party giving sixty days' notice. It is explicit in the agreement that it could be renewed by agreement for another five years, and secondly that the agreement could be renewed on such terms and conditions as might be mutually agreed upon. Counsel for the plaintiff in my view rightly contended on clause 19 that the proposed agreement contemplated not merely re-appointment for a period of five years but that the company also contemplated re-appointment for a period of five years on terms and conditions as might be agreed upon and such terms and conditions might be different to the terms recorded in the proposed agreement dated June 29, 1964, the intrinsic evidence in the agreement itself in my opinion supports the contentions on behalf of the plaintiff becaue the words such terms and conditions as may be mutually agreed upon' contemplated an agreement between the parties as to terms and conditions which need not be the same as found place in the proposed agreement. 14. IN this context reference may also be made to the explanatory statement to the proposed resolutions. 14. IN this context reference may also be made to the explanatory statement to the proposed resolutions. The explanatory statement is annexed to the plaint. In the explanatory statement some of the provisions of the agreement are miter alia as follows: "the appointment is at present for a period of five years and remains in force till the 30th June 1969 and may be extended for another five years as may be mutually agreed upon and can be terminated by either party by giving sixty days' notice at any time during the continuance of this agreement. ' it is important that the words 'on such terms and conditions as may be mutually agreed upon' are not brought to the notice of the shareholders in the explanatory statement. This absence in the explanation is characterised by counsel for the plaintiff to be misleading and tricky. In my opinion the contention is correct. It was said on behalf of the defendant that the agreement was placed at the disposal of shareholders and they could come and inspect but the Appellate Court in the judgment in relation to the previous appointment by this defendant company said that where the shareholders were outsiders it was an empty formality to place a copy of the agreement before the shareholders because they could not come and inspect on account of the distance and there was nothing to compel the shareholders to come and inspect. Counsel for the plaintiff contended that the proposed agreement offended the provisions contained in section 204 as well as section 294 by reason of the provision for re-appointment for a period of five years. I have already indicated that the agreement in the present case is in my view an office of profit and therefore it is within the provision of section 204 of the Companies Act. To my mind the effect of sections 204 and 294 is that an appointment of this nature is to be brought before the shareholders, at a meeting and it should be brought to the notice of the shareholders in accordance with the provision of sub-section (4) of section 204 namely that such reappointment is not to be sanctioned earlier than two years from the date on which it is to come into force. The agreement in the present case infiringes the provisions of sub-section (4) of section 204 and further infiringes the provisions of section 294 because the reappointment does not provide for any reference to the annual general meeting. In my opinion the effect of section 294 is that there is to be an appointment for a period of five years in the first place and such appointment is to be at the general meeting and if there be any reappointment it is governed by section 204 and this is to be brought up before the General meeting before any reapppointment is made. I am therefore of opinion that the plalntiff is entitled to succeed on issue No. 1 and I hold that the agreement violated the provisions contained in sections 204 and 294 of the Companies Act. 15. THE further question is whether the explanatory statement is in violation of provisions contained in section 173 of the Companies Act. Counsel on behalf of the defendant relied on two unreported decisions in (2) East India commercial Company Private Limited v. Raymon Engineering Works Limited, dated February 2, 1964 (Suit No. 1930 of 1964) and the unreported decision of the appellate court in the same case dated April 22, 1965 in support of the contention that the explanatory statement in the present case was not misleading. The nature of explanatory statement was considered in the decision reported in (3) 56 C. W. N. 361. It depends upon the facts of each case as to whether an explanatory statement is tricky or misleading. I have already indicated that the explanatory statement is misleading in relation to the proposed reappointment for a period of five years. Counsel for the plaintiff also contended that in the explanatory statement it was stated that the agreement is subject to the approval of the reserve Bank of India but the agreement itself did not mention that the agreement was subject to the approval of the Reserve Bank of India. Further, it was contended that the letter of the reserve Bank of India appearing at p. 60 of Ex. A would show that the Reserve Bank was not agreeable to the agreement as it stood and proposed certain changes and conditions. In other words the contention was that the reserve Bank did not accept the terms. I am of opinion that the explanation was misleading. A would show that the Reserve Bank was not agreeable to the agreement as it stood and proposed certain changes and conditions. In other words the contention was that the reserve Bank did not accept the terms. I am of opinion that the explanation was misleading. It was said in the explanatory statement that the agreement was subject to approval. The agreement did not provide for that. It may be that by that explanatory statement the company at its meeting wanted to win over people or mislead people into thinking that it was subject to approval. I am therefore of opinion that the explanatory statement in the present case is bad and is in violation of the provisions of section 173 of the Indian Companies Act. I therefore answer Issue No. 2 in favour of the plaintiff. 16. THE plaintiff is in my opinion entitled to injunction as asked. I grant an injunction in terms of prayer (b) and (c). I also order an enquiry in terms of prayer (d). This enquiry will be held by an officer appointed by the Registrar. The plaintiff is entitled to costs. Certified for two counsel.