1998 PLP 237 (CLC)

(ii) Subramenia Aiyar and others v. United Life Insurance Company and others AIR 1926 Madras 1215. In this case plaintiffs were Advocates of the High Court who brought a suit against insurance company for declaration that they were validly elected policy holders' directors and for further declaration that insurance company has no power to nominate policy holders' directors. A learned Single Judge of Madras High Court following the law laid down in the case of Pul Brook v. Richmand Consolidated Mining Company (1878) 9 Ch.D. 610 held that a director can maintain an action in his own name against the other directors on the ground of individual injury to himself. (iii) Sardar Gulab Sin v. Punjab Zamindara Bank Limited AIR 1940 Lahore 243: In this case plaintiff was removed from his post of Managing Director in an extraordinary meeting of the shareholders. The plaintiff filed a suit for declaration praying that he be declared to be the Managing Director of the defendant Company with the prayer of injunction restraining the defendants from preventing him from acting as such. It was held by a learned Single Judge of the Lahore High Court that the resolution removing the plaintiff from the office of Managing Director was ultra vires and as such suit of the plaintiff was maintainable. (iv) Sati Nath Mukeriee v. Suresh Cahndra Roy and others AIR 1941 Calcutta 136: In this case the company involved was an insurance company. During an ordinary, general meeting held on 29‑9‑1939 where elections of the directors were also to be held, one set of directors was retired and other set was declared elected. In the said meeting a new resolution was adopted declaring that only two out of other retiring directors were to be elected. In these circumstances the aggrieved directors filed a suit. It was held by a learned Single Judge of the Calcutta High Court that the suit up to the extent whether the plaintiff is a director was good and maintainable. (v) Satyavart Sidhwantalankar and others v A rya Samai Bombay AIR 1946 Bombay 516: In this suit defendant was a society registered under Societies Act, 1860. One of the issues involved in this suit was whether resolution under question was ultra vires and whether it amounts to interference in the internal management of the society and whether such suit was maintainable. It was held by a learned Single Judge of Bombay High Court Mr. Bhagwati, J. (as he then was) that the Court will not interfere in the internal management of the Companies acting within their rights as this principle is based on the supremacy of the majority. But the learned Judge imposed a rider on the exercise of the powers of the majority in the following words:‑‑‑ (a) Where the act complained of is ultra vires (b) Where the act complained of is a fraud on the minority; and (c) Where there is absolute necessity to waive a rule in order that there may be no denial of justice It was impliedly laid down that under such circumstances a Court was competent to interfere. (vi) Faceed Sons Ltd. v. Karachi Cotton Association PLD 1956 Karachi 315: This was a suit filed by, the plaintiff on the original side of this Court. Alongwith the suit the plaintiff filed an application under Order XXXIX, Rules 1 and 2, C.P.C., read with section 151, C.P.C., praying that the defendants be restrained from putting into effect a clarification regarding particulars of cotton tenders. After considering the cases of Arya Samaj, Bombay and of V.N. Bhajekar v. K.M. Shinkar and others (AIR 1934 Bombay 243) Mr. Inamullah, J. (as he then was) held as follows:‑‑‑ "I would be reluctant to interfere with the internal management of the association unless I had reason to hold that the action of the board was fraudulent or against natural justice." (vii) Parvaiz Aslam Mian Aslam v Synthetic Chemical Company Ltd Karachi and other PLD 1980 Karachi 401: In this suit, filed on the original side of this Court, an application was also filed praying for temporary injunction restraining the defendant from taking steps or action for implementation of a special resolution passed in an extraordinary general meeting for winding up of defendant No.

1. It was held by a learned Single Judge of this Court, Mr. Naeemuddin, J. (as he then was) that there are three conditions precedent for interfering in the internal management of company by the Courts. Following is the relevant portion of the said reported case: "Lastly, it is well‑settled that a Court cannot interfere in the internal management of the company unless the act, complained of, is ultra vires, mala fide, fraudulent or against the principle of natural justice. " From the case‑law as discussed hereinabove, it can be safely held that the Courts are not competent to interfere in the day to day working of a company on the well‑established doctrine of indoor management. But this is not an absolute bar and there are situations where a Director or a shareholder can bring a case before the Court against a company and its Directors. The Court will be justified to interfere if the following conditions are fulfilled:‑‑‑ (1) Where the majority has acted in depriving the minority of their lawful and legitimate rights. (2) Where the acts, complained of, are ultra vires of the Memorandum and Articles of Association of the company. (3) Where the directors have acted malafidely and against the interest of the company. (4) Where there is a violation of a principle of natural justice. (5) Where the act, complained of, amounts to fraud and misrepresentation. In the instant case allegation of the plaintiffs are that plaintiff No. 1, for all legal and pecuniary purposes, was "removed" (as discussed infra) from the assignment of Chief Executive without adopting due course of law. It is further argued by the learned counsel for the plaintiff that the meeting of 7‑8‑1995 was mala fide and that the said resolution is ultra vires of the company, therefore, in view of such averments of the plaint, I am of the considered view that this suit is very much maintainable as the plaintiffs have no other remedy available under the other provisions of Companies Ordinance, 1984 through which they are entitled to seek such declaration as to their legal status in the Board of Directors after passing of the impugned resolution. Mr. Khalid Anwar, learned counsel appearing for the plaintiffs has attacked with force the resolution, dated 7‑8‑1995 passed by the Board of Directors on the ground that the time between issuance of notice and the date of meeting was neither sufficient nor reasonable. He has also invited the Court's attention to Articles 81 and 84 of the Articles of Association of the company wherein the presence of two Directors of N.D.F.C. and the Director of S.A.P.I.C.O. were made mandatory while deciding such matters as of the resolution. In reply to these grounds, it is argued by Mr. Qamar Abbas, Advocate that the quorum provided in Article 58(e) of Association for the meeting of Directors is 1/3rd of the numbers or four Directors whichever is greater. According to Mr. Qamar Abbas, six Directors attended the meeting on 7‑8‑1995. To determine this question it will be necessary to examine Articles 81 and 84 of the said Company's Articles of Association. Both the relevant articles are reproduced as follows:‑‑‑ That notwithstanding anything to the contrary contained in any article herein, the decisions of the Board on all the following matters shall always require the participation of National Development Finance Corporation's (N.D.F.C.) nominees on the Board of Directors of the Company: (a) Appointment/change of M.D./Chief Executive; (b) Appointment of key personnel and consultants; (c) Award of contracts to any Suppliers of Plant, Machinery and Equipment and for construction of civil works of the project; (e) Capital expenditure exceeding Rs.4 million per item during any financial year; (j) Delegation of powers of M.D./Chief Executive and (k) Recommendation on the appointment of auditors. Notwithstanding any provision to the contrary contained in any article herein all decisions of the board shall be taken by majority provided that decision on the following matters shall always require the concurrence of SAPICO nominee(s) on the Board of Directors without which concurrence the purported action would be ultra vires the Company: (i) Appointment/change of M.D./Chief Executive. (ii) Appointment of key personnel/Departmental Heads/Managers and Consultants. (xi) Delegation of power of M.D. /Chief Executive. (xii) Recommendation on the appointment of Auditors. Perusal of the abovesaid articles shows that the participation of the three Directors of N.D.F.C. and SAPICO is mandatory, particularly in reference to the nature of transactions mentioned in Articles 81 and

84. The resolution, dated 7‑8‑1995, prima facie amounts to withdrawing the powers of Chief Executive and entrusting the same to other Directors. It is pertinent to note that in the impugned resolution the authority to operate bank accounts is now entrusted to any of the two Directors consisting of plaintiff No.l and the two defendants. In the similar manner, the abovementioned three persons are further authorised to appoint or engage any advocate and to sign on behalf of the Company all agreements, deeds, contracts and documents. Any two of the abovesaid Directors are now authorised to operate bank accounts, to appoint attorneys and to execute agreements or contracts on behalf of the company. Through this resolution the defendants No. l and 2 can administer, run and manage the Company by themselves without concurrence of the plaintiff No. l and can easily ignore him while dealing with the affairs of the Company who is admittedly the Chief Executive of the company. Through such mechanism the defendants have removed the plaintiff No. l from the assignment of Chief Executive without adopting due course of law. This view is further supported by the fact that through the said resolution a sub‑committee consisting of defendants Nos. l and 2 was constituted which was entrusted vast powers to run the affairs of the Company, thus, taking away powers of the Chief Executive of the Company. Be that as it may, this impugned resolution amounts to at the very least delegation of the powers of Chief Executive. I am not unmindful of the fact that NDFC and SAPICQ are repositories of huge amount of public funds which have been invested and advanced to the defendant No.

1. In my view the presence of representatives of these institutions at a meeting where there were allegations and counter‑allegations of misappropriation of the funds of the defendant No. l to the detriment of the creditors and shareholders, was essential. Perusal of Article 81 of the Association shows that the participation of the two Directors of NDFC is necessary in such meetings while under Article 84 of the Association, the 'concurrence" of the SAPICO is the touchstone, in absence of which any resolution passed contrary to the items mentioned in these two Articles would be ipso facto, ultra vires of the Company. It is important to bear in mind that the purpose of meeting of the Board of Directors is to promote a mechanism for joint deliberations of all the Directors, to promote exchange of ideas for the betterment and smooth running of the Company as well as to provide an opportunity to the minority to canvass before the majority their point of view. Such mechanism helps in resolving several disputes among the directors and also help in reaching consensus and harmony. Any deliberation or transaction pertaining to the affairs as mentioned in Articles 81 and 84 of Articles of Association, if held in absence of the three nominee directors will be ultra vires of the Company as well as mala fide. It has not been denied that the three Directors belonging to the NDFC and SAPICO were from Islamabad and they were required to attend the meeting at Karachi. None of the parties has filed any proof of service of notice on these Directors. Even if it is presumed that the notice of meeting as issued on 5‑8‑1995 was served on 6th August, 1995 upon these three Directors, if not impossible, it would be certainly difficult for them to reach Karachi within 24 hours. Keeping in view these circumstances, I am of the view that the period in‑ between issuance of notice and holding of meeting was neither sufficient nor reasonable. (For further reference see the case of M.R. Murty v. Industrial Development Corporation of Orissa and others Vol. 47 C.S. 1977 page 389). There is an admission by the Directors who participated in the said meeting which has been incorporated in the said resolution filed as Annexure ' V' to the plaint, that through the said resolution some of the powers of the Chief Executive were withdrawn by them and that he was restrained from enjoying some of the implied powers conferred upon him vide the Companies Ordinance, 1984. Although there is no specific provision in the Companies Ordinance, 1984 defining the powers of Chief Executive but in section 2(6) the Chief Executive has been defined as an individual who is entrusted with the whole or substantially the whole powers of the management or affairs of company subject to the control and direction of the Directors. It cannot be denied that a company is to be run by the Directors. But at the same time, it is pertinent to observe that the Directors are not entitled to run the affairs to a company contrary to the provisions of the Companies Ordinance or contrary to the Memorandum or Articles of Association. In support of his contention that an injunction application, in such circumstances, is liable to be rejected, Mr. Qamar Abbas has relied upon the case of Syed Hasan Mansoor Zaidi and others v. Syed Ghayoor Zaidi and others (1988 CLC 1347). In this reported case, the plaintiffs were seeking injunction against the defendants restraining them from using and acting upon certain documents on which the signatures of the plaintiffs, as alleged, were obtained forcibly with threat and undue influence. It was held by a learned Single Judge of this Court, Mr. Syed Haider Ali Pirzada, J. (as he then was) after following the case of Bentile Stevens v. Jones (1974) 2 AER 653, that the Court cannot grant an interlocutory injunction in respect of "irregularities" which could be cured by going through proper process. In the instant case, as discussed above, it is not a matter of irregularities but as alleged by the plaintiffs the controversy relates to the illegalities, mala fides and ultra vires of the impugned resolution which cannot be cured by going through other process. Here, the presence and concurrence of the nominee directors of the NDFC and SAPICO, in a meeting which was discussing an agenda involving subject‑matter of Articles 81 and 84 of the Association was necessary. No such controversy was in issue before this Court in the abovementioned reported case. Therefore, the law laid down by this Court in the case of Syed Hasan Masroor Zaidi is not attracted on the facts of this case. In a recent case this Court refused to grant an injunction to a shareholder who has brought a suit for declaration and injunction against company and its directors seeking a declaration that he be declared as director of the company "elected unopposed" and that the elections scheduled to be held on 30‑4‑1991 be stayed. (See the case of Farrukh K. Captain v. Exxon Chemical Pakistan Ltd. and others PLD 1991 Karachi 441). The grounds on which injunction was refused to the plaintiff in the reported case are not available‑to the defendants in the instant case. The facts of both the cases are different. The reasons prevailed for the refusal of an injunction in the case of Farrukh Captain were as follows:‑‑‑ "Although the general body has adjourned the election of directors to 30‑4‑1991 and invited fresh nominations, the plaintiff is in the field and has neither been debarred nor prevented from contesting the election by the defendants who also undertake despite their objection to the failure of the plaintiff to hold qualification shares for election of directors, not to raise it at any stage of election. Be that as it may, there appears to be very slim chances of the plaintiff getting elected as he has earned open hostility of shareholders representating 96 persons of voting power, which fact has also been candidly conceded by Mr. Abdul Hafeez Pirzada, learned counsel for the plaintiff. To restrain the respondent No. l company from holding election will be too harsh an order against the will and wishes of such a thumping majority of shareholders which includes all but a meagre four per cent. represented by the plaintiff." In the instant case, the plaintiffs have, prima facie proved that the resolution, dated, 7‑8‑1995 is ultra vires to Articles 81 and 84 of the Articles of Association of the Company and that the meeting was held in haste without giving sufficient and reasonable time to three nominee directors to attend. The said resolution amounts to removal of plaintiff No. l from the charge of Chief Executive without adopting due course of law. I am satisfied that all the three ingredients for grant of injunctions are available in the favour of plaintiffs' case. The result of these observations is that the application for interim injunction filed by the plaintiffs is granted as prayed. Civil Miscellaneous Application 3939 of 1995 stands disposed of. In order to avoid any misunderstanding of misinterpretation of this order by the directors, I may` mention that nothing in this order will bar the company to call a fresh meeting, according to law, putting impugned resolution on agenda, but such meeting should be called after giving proper notice. In case, if the company calls a fresh meeting on such agenda they will intimate the Official Assignee about the said meeting who will attend the same and will prepare minutes of the meeting to foreclose further factual controversies between the parties. The company shall pay to the Official Assignee a fee of Rs.5,000 in case if such meeting, as observed above, is called by the company. With these observations Civil Miscellaneous Application 3939 of 1995 is allowed as prayed. A.A./M‑217/K Application accepted.