2000SCMR506 (PLP)

SAIDUZZAMAN SIDDIQUI, C.J.

The above appeal with the leave of this Court is directed against the judgment of a learned Division Bench of Lahore High Court, dated 17-1-1996 dismissing R.F.A. No.252 of 1992 filed by the appellants to question the judgment and decree, dated 11-11-1992 passed by the Civil Judge, 1st Class, Lahore, in a suit for specific performance.

2. The relevant facts of the case are that the land measuring 290 Kanals situated in Rakh Khamba, Raiwind Road, Lahore (hereinafter to be referred as the suit land), which was owned by the appellants was agreed to be sold to the respondents through an agreement of sale, dated 24-12-1987 at the rate of Rs.27,000 per Kanal. It is an admitted position that a sum of Rs.15,00,000 was paid by the respondents to the appellants on execution of agreement of sale and the balance was to be paid within a period of nine months. The agreement was, however, not performed and on 16-8-1988 the appellants served a notice on the respondents repudiating the agreement of sale on the ground that the agreement of sale arrived at between the parties was subject to the approval of Managing Committee of the appellants which declined to confirm the agreement of sale. It was also pleaded in the said notice that the Circle Registrar Cooperative Societies had taken the view that the appellants were not entitled to sell the suit land. In view of the above stand taken by the appellants, respondents instituted a civil suit for specific performance of the agreement of sale, dated 24-12-1987 after serving notice through his counsel calling upon the appellants to perform the agreement. The suit was resisted by the appellants and on basis of the pleadings of the parties, following issues were framed:-- "(1) Whether the suit is not maintainable as alleged vide Preliminary Objection No. l? OPD (2) Whether the sale agreement, dated 24-12-1987 between the plaintiff and the defendant is void, ab initio? OPD (3) Whether the suit is mala fide? OPD (4) Whether the plaintiff has no cause of action against the defendant? OPD (5) Whether the plaintiff is entitled to the specific performance of the sale agreement, dated 24-12-1987? OPD (6) Relief. " The learned trial Court after recording evidence of the parties on the above issues decreed the suit and R.F.A. No.252 of 1992 filed by the appellants against the judgment and decree of the trial Court was dismissed by an Hon'ble Division Bench of Lahore High Court against which leave was granted as follows:-- "The question whether the doctrine of Indoor Management applies to Cooperative Societies needs consideration. Leave to appeal is, therefore, granted to examine the above question. As regard the interim relief, it is not disputed that the land in question is with the petitioner. Learned counsel for the respondent apprehends that if it is allowed to remain with the petitioner. it will alienate or otherwise encumber the land, and thus, create difficulties for the respondent. In the circumstances, we direct that status quo shall be maintained during the pendency of the appeal and till then the petitioner will not alienate or part with the possession of the land in any case or encumber the land in any. manner. In view of the nature of the case, this appeal be fixed for hearing in November, 1996 so that, if possible, it may be decided within this year. We have heard the learned counsel for the appellants and respondents at length. Mr. Raja Muhammad Anwar, the learned Senior Advocate Supreme Court for the appellants has raised the following contentions in support of the appeal:-- (1) That the doctrine of indoor management applies only to companies registered under the Companies Ordinance, 1984. This doctrine, according to the learned counsel, has no application in the case of a Cooperative Society which is governed under the Cooperative Societies Act, 1925. (2) That the provisions of Companies Ordinance, 1984 having been excluded in their application to the Cooperative Societies specifically both under the Cooperative Societies Act, as well as Companies Ordinance, the doctrine of indoor management could not be extended to the case of -a Cooperative Society. (3) That the evidence on record clearly established that the Society had membership of more than 100, and therefore, the resolution under which the President of the appellant was authorised to sign agreement of sale in favour of respondents, was not binding, as the said resolution authorising the President was not passed in accordance with the provisions of bye-laws of the Society (appellant); and (4) That the transaction entered into by the President of the appellants with the respondents, was against the interest of the appellants and therefore, in spite of the fact that the Court reached the conclusion that the agreement was executed on behalf of the appellants, it should not have granted relief of specific performance which is an equitable relief and discretionary with the Court. In reply to the above contentions of the learned counsel for the appellants, the learned counsel for the respondents contended that the evidence on record did not prove that the membership of the appellant Society was 100 on the date when the agreement of sale was entered into between the appellants and the respondents. It is contended by the learned counsel for the respondents that there was ample evidence on record to show that the total membership of the Society at the relevant time was only 30 and 15 members having attended the general body meeting in which the resolution was passed authorising the President of the appellant's Society to execute the agreement of sale in favour of the respondents, the agreement between the parties was legally valid: It is also contended by the learned counsel for the respondents that the finding of the two Courts below holding that the agreement of sale was duly executed between the appellants and respondents could not be interfered with by this Court in the absence of any misreading or non-consideration of any material piece of evidence on record by the two Courts below. It is lastly contended by the learned counsel. for the respondents that the doctrine of indoor management is based on public policy, and therefore, it was equally applicable to the case of a Cooperative Society. After hearing the learned counsel for the appellants, we are of the view that no case for interference with the judgment of High Court is made out. It is not disputed that before entering into agreement, the general body meeting of appeals was held which was attended by 15 members and in that meeting the appellant's President was authorised to , execute the agreement of sale between the appellants and the respondents. The minutes of the meeting held on 15-12-1987 whereunder, Mr. Anwar Ali was authorised to execute the agreement of sale between the appellants and the respondents, read as follows:-- The contention of the appellant in the above case is that the members of the Society were more than 100, and therefore, under bye-laws of the Society, the resolution authorising the President to execute a deed in favour of respondents could not be passed in a general body meeting where the number of the members present was less than 1/3rd of the total membership of the Society. The appellants contended before the Trial Court that the total membership of the Society was between 120/125, and therefore, at least 34 members should have been present in the meeting, which passed the resolution authorising the President of the Society to execute the sale deed in favour of the respondents. It is not disputed by the learned counsel for the appellants that when the Society was formed, its total membership was only

30. It is also not denied by the learned counsel for the appellants that fresh members of the Society could be allowed in accordance with the following bye-law of the Society:-- In terms of the above bye-law of the Society, new members could be admitted in the Society by the Managing Committee subject to the conditions that their nomination was approved in a general body meeting by a majority of 2/3rd of the members of the Society. It was also necessary for admitting a new member in the Society that his name was recommended by at least two members of the Society. The appellants examined Syed Munawar Ali, the Secretary of the Society at the relevant time, as their witness. In his examination-in-chief, this witness stated that the time, the agreement was entered into between the appeltant Society and respondents, the total membership of the Society was between 125/126. He also stated that before entering into the agreement of sale, he had informed the respondent that only 12/13 members of the Society attended that meeting in which the President of the Society was authorised to execute the deed in his favour, and therefore, another general body meeting is to be called to approve the agreement of sale entered into between the Society and the respondents. He finally stated that in the general body meeting of the Society held on 4-6-1988, 50/60 members attended, and they rejected the agreement of sale, dated 24-12-1987 entered into between the appellants and respondents. In this cross-examination, this witness admitted that in a large number of general body meetings of the appellants held between 1985 to 1987, only 15 to 20 members attended the meetings. He also admitted that at the time the Society was registered, its membership was only 30 and that no meeting of the Society was ever held for increasing the membership of the Society. He failed to produce the register containing the names of the members of the Society and he further said that he was not aware of the manner of enrolment of the member of the Society. In view of the above evidence, the findings by the two Courts below that the appellants failed to prove that the membership of the Society at the relevant time was 120/125, is not open to any exception. Even otherwise, this concurrent findings of fact should not be interfered with by this Court in second appeal, as it did not suffer from any misreading of evidence or non-consideration of the relevant pieces of evidence on record. The findings being one of fact and based on evidence unexceptionable. The execution of the agreement of sale having been admitted, the burden of proving that the agreement was void or invalid, was entirely on the appellants which they failed to discharge. The evidence on record did not support the contention of the appellants that the agreement of sale executed by the President of the appellants, was unauthorised or invalid for reasons of violation of any bye-law of the Society. The fact that the Circle Registrar of the Cooperative Societies held in some proceedings, initiated by one of the members of the Society against the appellants, that the appellants were not competent to dispose of the suit land, is of no consequence in the circumstances of the case. The learned two Courts below have rightly come to the conclusion that these proceedings appear to be collusive in nature and were the result of the concession made by the appellants before the Registrar, and even otherwise, it is rightly observed by the learned Courts below that the order passed by the Circle Registrar is not binding on the respondents who were not party in the said proceedings. In view of our above conclusion, that the resolution of the general body of the appellants, dated 15-12-1987 was passed validly we could have disposed of this appeal on the basis of our above conclusion but as the leave in this appeal was granted for consideration of the specific point of law, whether the doctrine of indoor management was applicable to a Society registered under Cooperative Societies Act and it is contended by the learned counsel for parties that there is no authoritative pronouncement of this Court on this point, we are inclined to consider this legal question. The doctrine of indoor management is no doubt applied to a corporate entity like the registered company but we have not been referred to any statutory provision or a rule of law which could support the contention any the learned counsel for the appellants that the doctrine of indoor it management did not apply to a cooperative society registered under the Cooperative Societies Act, 1925 (hereinafter to be referred as 'the Act'). The learned Judges of the Division Bench in the impugned judgment, referred to a number of cases in support. of their conclusion that the agreement of sale entered into between the appellants and the respondents was protected under the doctrine of indoor management. No doubt majority of the cases referred in the impugned judgment related to transactions entered into between a registered Company and a third party but one of the reported judgments Pakistan Employees' Cooperative Housing Society Ltd. v. Anwar Sultan and others (PLD 1969 Karachi 474) noted in the impugned judgment did relate to a cooperative society. In addition to the cases noted in the impugned judgment, the following cases were also cited at the Bar before us. during the course of hearing of this appeal:-- (1) Muhammad Azim v. P.E.C.H.S. Ltd. PLD 1985 Karachi 481. (2) Ramchandran v. Registrar of Cooperative Societies, AIR 1963 Madras 105); and (3) Taj Construction Co. v. Federation of Pakistan (PLD 1982 Karachi 378). , In the case of Taj Construction Co. v: Federation of Pakistan (supra) decided by a learned Division Bench of the High Court of Sindh, the case of Pakistan Employees' Cooperative Housing Society Ltd. v. Anwar Sultana (supra) was quoted with approval as follows:--. "

10. It is also no doubt true that the learned Single Judge disposed of the question relating to the binding effect of the contract only with reference to Resolution No.7 dated 3-2-1948 and ignored the effect of other Resolutions referred to by the learned counsel for the appellant. The other Resolution do seem to authorise Major Hassan with the authority to carry on the work of construction which would include the giving of contracts. It is not denied that payments were made towards the work done under contract under the authority of the Society. We do not see, therefore, how the society can now disown the contracts. In Pakistan Employees' Cooperative Housing Society Ltd. v. Anwar Sultana PLD 1969 Kar. 474, the facts were somewhat similar in so far as the Secretary of the Society had no power under the bye-laws to enter into contracts, but was authorised by a Resolution .of the Managing Committee to supervise the development works and the management of the affairs of the Society under the general control and guidance of the Managing Committee. The Secretary had entered into a contract on behalf of the Society which was challenged as in excess of authority and not binding on the Society. Anwarul Haq, J. (as he then) repelling the contention made by the following observations (sic): 'Assuming, however, that either there was no delegation of the necessary powers in favour of Mr. Imam, or that the allegation was not valid on account of its inconsistency with any rule or bye-law of the Society, then the transaction appears to be saved by what is known as the doctrine of 'Indoor Management.' Broadly and briefly stated, this doctrine is to the effect that persons contracting with a company and dealing in good faith may assume that the acts within its constitution and powers have been properly and duly performed and are not bound to enquire whether the acts of Internal Management have been regularly done. We have already held that it was within the competence of the society to grant the lease in question for an amenity plot'. Further, his Lordship referred to an observation on page 430 of Halsbury's Laws of England (3rd Edition) as follows:-- 'A company which has appointed a Manager of its business is bound by contracts made by him in the usual course of business, although sufficient powers have not in fact been delegated to him'. In the light of the aforesaid, I have examined the Bye-Laws of the society and it appears to me that the object of the Society were to carry on the. trade of building, and buying, selling, hiring, letting and developing land in accordance with cooperative principles etc. Bye-Law 53 provides that the Management of the business of the Society shall be vested in the Committee which may exercise all powers and do all such acts and things as may be exercised or done by the Society. Under Bye-Law 34 clause (h), the Committee had the power to enter into all contracts for the Society and settle the terms thereof. Under Bye-Law 58 the Committee was further authorised to delegate any of the powers given to it to a sub committee of its own members and Bye-Law 59 provides that all acts done. inter alia, by the sub-committee shall be valid notwithstanding that it may afterwards be discovered that there was any defect in the appointment of any committeeman or committeemen or that anyone or more of them were disqualified. In the circumstances of this case it has, therefore, been sufficiently established either that Major Hassan was authorised to enter into the contract or in any case the contract is binding on the Society under the doctrine of Indoor Management. Above all the fact remains that the work done by the appellant was executed on the land of the Society and the Society has owned it as its property. It cannot, therefore, now be permitted to raise the plea that the contract for the said work is not binding on it." In Muhammad Azim v. P. E. C. H. S. Ltd. (PLD 1985 Karachi 481) the contention that the doctrine of indoor management did not apply to the case of a Cooperative Society, was repelled by a learned Single Judge of High Court of Sindh, as follows:

"

50. Mr Akhlaq Hussain has further argued that the doctrine of indoor management will not be attracted to this case. He advanced the argument on the basis that having decided to dispose of the plot by publicity and invitation of tenders, they could not enter into negotiations. I am afraid and cannot agree with that contention. The society could enter into contracts and if Muhammad Azim dealt with Society in good faith, his interest will be fully protected. Admittedly Muhammad Azim like United Bank was not even a member of the Society and further he was dealing with the Negotiation Committee set up by the Society. Not only that, the decision of the Negotiation Committee was affirmed by the Managing Committee. He could reasonably presume the regularity of the acts performed by the functionaries of the Society. It cannot be considered that the Managing Committee could not set up a Negotiation Committee nor can it be said that the persons with whom plaintiff Muhammad Azim was dealing did not have the powers to do the acts that they have done. The doctrine of indoor management is fully applicable to the facts of this case. Even in the case of Pakistan Employee's Cooperative Housing Society Ltd. v. Anwar Sultana, the application of the doctrine of indoor management was considered. In that case the Managing Committee of the Society had not even passed a resolution disposing of a plot, but it was only the Secretary who had acted and the learned Judges of the Division Bench came to the conclusion in the following words:

'Outside parties are not concerned with the internal management of the Company. They are not concerned to see that there was a proper quorum of Directors present or that persons who are apparently Directors had in fact been validly appointed, those are matters of internal management'.

51. I would now like to consider some reported cases and the opinions of some authors on the doctrine of indoor management. L.C.B. Gower in "Modern Company Law, 11 Edition, at page 141 considered the rule in Turquand's case (1856) 6E & B 327 and stated, the case of agency and vicarious liability as follows:-- 'Here it must suffice to say that the Principal is liable if the Agent is doing: (i) What he has actually authorized to do? (ii) What an Agent of that type would normally have authority to do? or (iii) What he has been 'held-out' by the Principal as having authority to do, provided that, in cases (ii) and (iii) the other party to the transaction did not know that the Agent was exceeding his actual authority. " The rule when taken to its logical conclusion implies\that unless the circumstances are such that the third party knows that the official had no authority or the circumstances were such as to put him on inquiry, the transaction will be protected and binding on the Company. Of course in cases where the third party or the Agent is guilty of fraud or improper conduct, this protection will not' be available. In. Palmer's Company Law (XX Edition), at page 250, the rule in Turqaund's case was held to be fully applicable to transactions entered into by a third party with the agent of a Company unless the third party is on notice of an irregularity in its internal management in connection with the subject-matter of the dealings. Further, at page 251, the learned author has stated that in the circumstances of a particular case if a third party is put upon an inquiry with regard to irregularity, Turqaund's case will not be applicable. Similarly the ,learned author says that the principles of Turqaund's case do not apply if a document is forged so as to purport to be a Company's document. 1 In the case of P.E. C.H.S. v. Anwar Sultana, Anwaiul Haq, J. (as he then was), now a Judge of the Supreme Court, on consideration of cases reported in Dehrdum Mussorie Electrical Tramway Company Ltd. v: Jagmandar Das AIR 1932 All. 141; British Thomson Houston Company Ltd. v. Federated European Bank (1932) 2 KB 176; F.V. Demodara Reddy and another v. Indian National Agencies Ltd. AIR 1936 Mad. 35; Credit Bank Cassel v. Shenkers Ltd. (1926) All. ELR 421 and South London Greyhound Race Courses v. -Wake 1930 All. ELR 496 stated the case relating to contracts with companies on the basis of doctrine of indoor management as follows:-- 'Broadway. and briefly stated this doctrine is to the effect that persons contracting with the company and dealing in good faith may assume .that acts within its constitution and powers have been properly and duly performed and are not bound to inquire whether acts of internal management have been regularly done.' In this case which Was decided by a Division Bench of Anwarul Haq and Abdul Kadir Shaikh, JJ., the facts were that there was only correspondence in favour of the allottee and such communications were received by the allottee from the Secretary of the Society. The learned Judges held that the allottee was not required to inquire whether in fact the Society had approved the terms which had been offered to him.

52. Summing up, therefore, the concept of indoor management, the law is fairly well-established that a third party may in all reason rely on the assertion of an agent of the Company in respect of the contracts entered on behalf of the company. His rights could be defeated only if it could be shown that the third party knew of circumstances tending to defeat his rights or the transaction was fraudulent. Every corporation in law is equal to a natural person and does have an independent entity of its owr." We may also refer here to the following passage from Halsbury's Laws of England (Fourth Edition), Vol.7 relating to the doctrine of ultra vires in favour of persons dealing with Company in good faith:-- "

701. Abolition of doctrine of ultra vires in favour of person dealing with company in good faith.--In favour of a person dealing with a company in good faith, any transaction decided on by the directors .is deemed to be one which is within the company's capacity to enter into, and the director's power to bind the company is deemed to be free of any limitation under the memorandum of articles of asso6iation.. A party to a transaction so decided on is not bound to inquire as to the company's capacity to enter into it or as to any such limitation on the director's powers;, and will be presumed to have acted in good faith unless the contrary is proved. As regards a person dealing with the company in good faith, therefore, the doctrine of ultra vires has been abolished, and the following paragraphs must be read in light of this position. The doctrine remains, however, in relation to a person not dealing with the company in good faith, and in relation to the accountability of the directors for their acts to the company." The "following paragraphs" referred to in the above quotation are paragraphs 702 to 712 Halsbury's Laws of England which deal with, Company's objects, construction of object clauses of ,memorandum, construction of contemporaneous memorandum and articles, meaning of "ultra vires", acts ultra vires the company, examples of ultra vires acts, Examples of acts not ultra vires, company exceeding statutory powers, guarantee of ultra vires act, and recovery of money paid under ultra vires contract and under all these headings it is stated that a person dealing in good faith with the Company is protected against the doctrine of ultra vires. We may also refer to the following passage in Halsbury's Laws of England (Fourth Edition) regarding Company's liability in contract for agents' acts:-- "

720. Company's liability in contract for agents' acts.--A company is liable in respect of contracts made by its agents when acting within the scope of their authority, provided that the contract is within the company's powers, but not for acts or representations not within that scope. The question whether the act or representation was committed or made by the agent for his own benefit or for the benefit of the company is irrelevant. Similarly the company may be bound by the knowledge of, or notice given to a subordinate official. " The contention of the learned counsel for the appellants that doctrine of indoor management would not apply to a cooperative society as the Act specifically excluded application of the provisions of Companies Ordinance to the Societies registered under the Act and that a similar provision exists in the Companies Ordinance excluding application of its provisions to the Societies registered under the Act, has no force. The doctrine of indoor management is not applied to the transactions entered into between registered company and a third party in good faith, on the basis of any statutory provisions in the Companies Ordinance. This doctrine, as would appear from the proceedings discussion is applicable to such transaction on the principle of public policy, equity and good conscience, to protect an innocent person dealing in good faith with a corporate entity. Section 23 of the Act confers a corporate status on a society registered under the Act as follows: "

23. Societies to be bodies corporate.--The registration of a society shall render it a body corporate by the name under which it is registered, with perpetual succession and a common seal, and with power to hold property, to enter into contracts, to institute and defend suits and other legal proceedings and to do all things necessary for the purposes of its constitution. " The corporate status conferred on a society registered under the Act is in no way different from the corporate status of a company registered .under the provisions of the Companies Ordinance, 1984. The' fact that a society may be registered under the Act with or without limited liability only if it has amongst its objects the promotion of the economic interest of its members in accordance with cooperative principles, is also no ground to exclude the application of the doctrine of indoor management to a transaction between a cooperative society and the third party. As would appear from the preceding discussion, the doctrine of indoor management would be applicable to a cooperative society not because of its objects but because of its corporate status. We are, therefore, of the view that the doctrine of indoor management applies to the transactions entered into between a third party ana a cooperative society registered under the Act in the same manner as it applies to transactions between third parties and a company registered under the Companies Act, 1913 or Companies Ordinance, 1984. In the case before us, there is no allegation that the agreement of sale entered into between the appellants and respondents was not a bona fide transaction or that it was the result of any fraud or manipulation on the part of the respondents. The only contention raised by the appellants in support of avoidance of the agreement of sale was, that the agreement of sale was not later approved by the general body of the appellants and that the first resolution of the general body authorising the President of the appellants to enter into the agreement of sale with respondents was not passed in accordance with the relevant bye-law of the Society. The preceding discussion clearly shows hat the appellants utterly failed to substantiate any of the abovementioned grounds. No case for interference with the judgment of High Court is made out. The appeal is, accordingly, dismissed but in the circumstances of the case we will make no order as to costs. M.B.A./C-44/S Appeal dismissed