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2011 DIGILAW 505 (CAL)

Narendra Kumar Berlia v. Om Prakash Berlia

2011-04-06

SANJIB BANERJEE

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Judgment : SANJIB BANERJEE, J. Considerable time has been wasted in the Court failing to notice at the outset as to the form of the action. The frame of the suit makes it an apparent derivative action brought by shareholders but the reliefs claimed are as personal to the plaintiffs as partition of alleged joint family assets. On behalf of the plaintiffs it has been represented that the suit is for partition of joint properties. Much argument has been made on it being permissible to treat companies and their assets as family properties if the facts so warrant. It was only upon one of the contesting defendants, the fifteenth defendant company, referring to the cause-title and the relevant paragraph in the plaint that the glaring error has come to light. It is no longer necessary to consider the merits of the matter since the claim is so utterly misconceived that no interlocutory order can be made in aid of any of the reliefs claimed in the suit. It is imperative to first clear the air as to what is a derivative action. The doctrine of indoor management – otherwise known as the rule of judicial noninterference – that has flowed from Foss v. Harbottle [(1843) 2 Hare 461] recognises the ordinary refusal by the Court to interfere in the management of a company at the instance of minority shareholders who may be dissatisfied with the conduct of the company’s affairs. The rule embodies the paramount thought that the Court should not enquire into the desirability or wisdom of the acts of those responsible for the company’s affairs. In its most rigid form, the rule prevents the Court from remedying a wrong which has been done to the company unless its majority members want it to be righted. Over the years since Foss & Harbottle, the rule has undergone substantial transformation. Through MacDougall v. Gardiner [(1875) 1 ChD 13]; Pender v. Lushington [(1877) 6 ChD 70]; Burland v. Earle [(1902) AC 83]; Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cunninghame, [(1906) 2 ChD 34]; Cook v. Deeks [(1916) 1 AC 554]; Edwards v. Halliwell [(1950) 2 All ER 1064]; Pavlides v. Jensen [(1956) 2 All ER 518]; and, Prudential Assurance Company Ltd v. Newman Industries Ltd (No 2) [(1982) 1 All ER 354], among others, the inflexibility of the original rule has been moulded to accommodate complaints in several situations. Classically, a derivative action is where a member or some members can sue in his or their name where the beneficiary of the reliefs claimed is the company itself. The member or members suing derive their corporate right to sue on behalf of the company from the company itself. As has been succinctly explained in Pennington’s Company Law : “In certain circumstances an individual member may bring an action to remedy a wrong done to the company or to compel his company to conduct its affairs in accordance with its constitution and the rules of law governing it, even though no wrong has been done to him personally but only to the company, and even though the majority of his fellow members do not wish the action to be brought. The form of his action in these exceptional cases is peculiar, because the complainant does not sue in his own right alone, but he sues instead on behalf of himself and all his fellow members other than those, if any, against whom relief is sought. If the member sues for relief against the company, it must, of course, be made a defendant; if he seeks to enforce a corporate claim against other persons, the company must still be joined as a co-defendant so that it may be bound by the judgment, and so that it may enforce any order giving relief against the substantive defendants.” Till such time that a large percentage of Indian corporate entities had their registered offices within the territorial limits of the original jurisdiction of this Court, derivative actions aplenty have been carried to this Court. Glimpses as to the substance and form of the action are evident from the judgments reported at AIR 1941 Cal 174 (Jhajharia Bros v. Sholapoor Spinning & Weaving Co. Ltd) and AIR 1950 Federal Court 133 (Satya Charan Law v. Rameshwar Prosad Bajoria). The second case also originated in this Court. Typically, in a derivative action, as distinct from a representative action, the plaintiff or plaintiffs sue on behalf of all shareholders of the company except the recalcitrant defendants, where the company is traditionally arrayed as the first defendant. The legal basis of the seemingly vicarious action brought for the benefit of the company, is based on the four principal exceptions to the rule in Foss v. Harbottle. The legal basis of the seemingly vicarious action brought for the benefit of the company, is based on the four principal exceptions to the rule in Foss v. Harbottle. The underlying theme of such an action is that the wrongdoers qua the company are in control of the company and would not permit the company’s name to be used as the eo nomine plaintiff. The reliefs in such an action are for the benefit of the company and scarcely for the vindication of the personal rights of the named plaintiffs, though there would be a thin dividing line between personal rights and corporate rights. Satya Charan Law captures the essence of the legal position: “17. The correct position seems to us to be that ordinarily the directors of a company are the only persons who can conduct litigation in the name of the company, but when they are themselves the wrongdoers against the company and have acted mala fide or beyond their powers, and their personal interest is in conflict with their duty in such a way that they cannot or will not take steps to seek redress for the wrong done to the company, the majority of the share-holders must in such a case be entitled to take steps to redress the wrong. There is no provision in the articles of association to meet the contingency, and therefore the rule which has been laid down in a long line of cases that in such circumstances the majority of the share-holders can sue in the name of the company must apply. In MacDougall v. Gardiner, (1875) 1 Ch. D. 13: (45 L. J. Ch. 27) and Pender v. Lushington, (1877) 6 Ch. D. 70: (46 L. J. Ch. 317), specific reference was made to the fact that the directors, being the custodians of the seal of the company, were the persons who should normally sue in the name of the company, but nevertheless it was held that the majority of the shareholders were entitled to sue in the name of the company when relief was sought against the directors themselves. Even in Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cunninghame, (1906) 2 Ch. 34: (75 L. J. Ch. Even in Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cunninghame, (1906) 2 Ch. 34: (75 L. J. Ch. 437), it was recognised that “misconduct” on the part of the director provided an exception to the rule laid down in that case.” The cause-title relating to the present suit has this to say on the plaintiffs’ side: “ 1. Narendra Kumar Berlia for self and as Karta of Narendra Kumar Berlia, HUF and on behalf of all the shareholders of the defendant Nos. 9 to 21 save and except the defendant Nos. 1 to 8 and their nominees. 2. Shreya Berlia 3. Megha Berlia All carrying on business from 208 Jamunalal Bajaj Street, Kolkata 700 007, within the jurisdiction aforesaid. Plaintiffs.” The defendant Nos. 1 to 8 are members of the Berlia family. The defendant Nos. 9 to 21 are companies that the plaintiffs claim are family companies of the Berlias. The defendant Nos. 22 to 32 are either human individuals or bodies corporate who, the plaintiffs insinuate, are nominees of the defendant Nos. 1 to 8. Paragraph 64 of the plaint reads thus: “The defendant nos. 9 to 21 are companies under the control of wrongdoers, being the defendant nos. 1 to 8 and/or their nominees. The plaintiffs are therefore filing the present suit for self and on behalf of and for the benefit of the said companies. The present suit is being filed by the plaintiff for and on behalf of the defendant nos. 9 to 21 and all its shareholders save and except the defendant nos. 1 to 8. It is not possible for the plaintiffs to ascertain the full particulars of the shareholders of the said companies, since the records of the companies are under the control of the defendant nos. 1 to 8. As such all the shareholders cannot be impleaded and the plaintiffs pray for leave under Order 1 Rule 8 of the Civil Procedure Code.” The reliefs claimed include partition of the defendant Nos. 9 to 21 companies; partition of all movable and immovable properties as mentioned in the relevant annexures to the plaint which include the properties of the companies; declaration of the shares of the five sons of Gurdayal Berlia, deceased; declaration that the defendant Nos. 9 to 21 companies; partition of all movable and immovable properties as mentioned in the relevant annexures to the plaint which include the properties of the companies; declaration of the shares of the five sons of Gurdayal Berlia, deceased; declaration that the defendant Nos. 9 to 21 companies and their business and assets form part of the joint family properties; and, declaration and injunction relating to alleged illegal directorial appointments and the dealing of assets of the defendant Nos. 9 to 21 companies. To start with, the cause-title on the plaintiffs’ side is inappropriate and incomprehensible. One would have expected the “for and on behalf of …” to cover all the plaintiffs; but the plaintiffs here have come with the first plaintiff suing on behalf of the several companies with the other two plaintiffs apparently espousing their personal causes of action. That, by itself does violence to a derivative action. Again, the action is not on behalf of one company but in respect of several companies. Though it is not necessary in the context to consider whether the disparate causes of action of several companies can be espoused in one suit, the head and body and tail are so mutually contradictory and destructive of each other that, to borrow a famous expression from Jhajharia, the animal appears to be unknown to legal science. It defies reason that one or more companies, since the action is styled as for their benefit, would seek partition of their assets in favour of the members of a family. In Jhajharia, the Court discussed the frame of the suit at some length. The basis for testing the maintainability of the action was captured in the following immortal words: “ … That being so, Mr. Banerjee, supported by the authorities which his learned junior ransacked, has attacked the plaint in its head, in its body and in its tail, that is to say cause-title, body and prayer and has sought to show that the animal is not known to legal science. This has logically led to an enquiry, as to what kinds of suit of this nature are allowed by the law.” The complainant in a derivative action seeks to enforce a cause of action which belongs to the company and not to the complainant personally. This has logically led to an enquiry, as to what kinds of suit of this nature are allowed by the law.” The complainant in a derivative action seeks to enforce a cause of action which belongs to the company and not to the complainant personally. Essentially, the action is to remedy a wrong done to the company and, if the suit succeeds, the judgment is given in favour of the company so that the complainant obtains no direct personal benefit therefrom. The complainant’s right to maintain the action, apart from the assessment as to whether it is in bona fide interest of the company, would hinge on the company’s right to sue. It is only in an exceptional case that a member may sue by a derivative action to compel persons in control of the company to conform to the company’s constitution and the rules governing the conduct of its affairs; or, to enforce a claim belonging to the company. Such an action is entertained and allowed to proceed where the members cannot remedy the illegality complained of. In the present case, the primary relief of partition of the assets of the several companies cannot be a claim falling within the exception to the rule in Foss v. Harbottle. A personal cause of action of the plaintiffs has been carried by way of a confused derivative action covering, strangely, a number of companies without the first plaintiff establishing or attempting to establish that he is a shareholder of each of the companies that he professes to sue on behalf of. Add to that the fact that the two other plaintiffs are not parties to the derivative action and sue for their personal benefit: that makes the plaint a really strange animal. It is like the plaintiffs attempting to sail in two boats that are globes apart. There is no application on date for rejection of the plaint relating to the suit but since it appears, prima facie, that the suit is unlikely to succeed, the interlocutory reliefs claimed by the plaintiffs cannot be acceded to. GA No. 164 of 2009 is dismissed with costs assessed at 1000 GM to be paid to the defendant no. 15. All interim orders in the suit stand vacated with immediate effect. GA No. 164 of 2009 is dismissed with costs assessed at 1000 GM to be paid to the defendant no. 15. All interim orders in the suit stand vacated with immediate effect. The merits of the claim, and even the plaintiffs’ entitlement to partition, have not been gone into since claiming partition of several companies’ assets in a derivative action is anathema to the recognised purpose of the form of the action. Urgent certified photocopies of this judgment, if applied for, be supplied to the parties subject to compliance with all requisite formalities.