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.