CMA/3379/2003 of Vs on 31 December 2003

:JUDGMENT

(Delivered by R.Jayasimha Babu, J.)

In this appeal one of the additional directors of the Tamil Nadu MercantileBank Limited has challenged the ex parte directions given by the Company LawBoard that the Board of Directors of the Company be superseded with thefurther direction that a committee comprising of the three nominee directorsof the Reserve Bank of India, one of whom is the Chairman, and the two otherDirectors nominated by the Central Government, function as the Board till theapplication that was filed by the Central Government before it, forsuperseding the Board is finally decided.

2. Certain other directions also have been given in that order with regard tothe holding of the Annual General Meeting which has been deferred by theCompany Law Board in order that the share certificates may be despatched tothe persons entitled thereto, as the number of such transfers is large, andthe Investors Forum which had organised and effected purchase of about thirtyfor percent of the issued shares and which had been allowed to assist theBoard in this regard has not yet been able to complete it's work.

3. A group led by a non resident Indian had purchased about sixty seven percent of the paid up capital some time prior to the year 1996. However, theshares were not transferred in favour of the purchaser, the Reserve Bank ofIndia whose consent for transfer was required under the Banking Regulation Acthaving declined to grant approval for the transfer, on the ground that thepurchaser was an industrial house.

4. Subsequently, that group is said to have transferred about thirty four percent of the paid up capital to the members of the Investors Forum, which issaid to represent over 25,000 investors belonging to the Nadar community,which community it is said by counsel, regards this bank as their own andmeant for them. The balance thirty three per cent, we are informed, has beentransferred by the NRI purchaser to four investment companies belonging to agroup known as Sterling Group. As each of the companies has purchased morethan five percent of the paid up capital, transfer in their favour has not yetbeen effected as the RBI is yet to give it's approval for the transfer.

5. The Board of Directors comprises of 15 Directors. Three including theChairman are nominees of the RBI. Two have been nominated by the CentralGovernment pursuant to direction given earlier by the Company Law Board. Theother ten Directors are persons who had not been elected by the General Body,but had been co-opted to the Board. Such co-option in case of many of theseDirectors was by persons who had themselves been co-opted. This Bankingcompany has not held it's Annual General Meetings for over seven yea rs.These Additional Directors assert a right to remain on the Board despite theiradmitted failure to convene and hold the Annual General Meetings.

6. Having regard to the unsatisfactory state of affairs of this Bank, theCentral Government approached the Company Law Board initially with a petitionunder Section 408, which was subsequently amended into one under Sections 397and 398, seeking suitable directions with regard to the management of theaffairs of this Bank. One of the prayers is that the Central Government be given power to nominate the majority of the Directors on the Board of theBank.

7. After the Central Government had amended the petition, further developments, wholly unanticipated, took place which, having been brought tothe notice of the Company Law Board, it was prompted to make the ex parteorder superseding the Board of Directors.

8. On 25th November 2003, at a Board Meeting the additional directors passeda resolution removing, the resolution having been later modified as oneseeking the removal of the Chairman who had been nominated by the Reserve Bankof India. The Reserve Bank of India did not agree to such removal beingeffected. Thereafter a suit was filed to restrain the Chairman fromfunctioning as Chairman. An interim order was also secured which had to bechallenged before this Court and this Court suspended that interim order. TheChairman who was nominated by the Reserve Bank of India now is functioning asthe Chairman of the Board.

9. The Chairman in his affidavit filed in this Court has narrated the highhanded conduct of these additional directors, who having been thwarted intheir cozy arrangements of utilising the Bank's funds for their business byobtaining liberal foreign currency loans at low rates of interest, had afterpassing the resolution for the removal of the Chairman deprived him of all thefacilities that he was entitled to have as Chairman, and had prevented himfrom discharging his duties as Chairman. He is a formal General Manager ofanother scheduled Bank.

10. This conduct on the part of the additional directors in trying to restcontrol of the Board for themselves and the manner in which they went aboutdoing it by ousting the Chairman who had been appointed by the Reserve Bank ofIndia in the public interest provoked the Central Government to apply to theCompany Law Board, inter alia, seeking the supercession of the Board. TheCompany Law Board which took up the application for hearing immediately afterit was filed was of the view that the developments brought to it's noticewarranted an ex parte supercession pending consideration of the applicationthat had been filed by the Central Government.

11. The legality of that direction has been challenged before us by one ofthe additional directors, the other additional directors supporting himthrough their counsel.

12. Additional Directors are appointed under Section 260 of the CompaniesAct, which, inter alia, provides that additional Directors shall hold officeonly 'upto the date of the next Annual General Meeting' of the Company.Section 166 of the Companies Act which deals with the Annual General Meetingprovides that every company shall in each year hold in addition to any other meetings, a general meeting as its annual general meeting. It also providesthat not more than fifteen months shall elapse between the date of one generalmeeting of a company and that of the next.

13. In this case, admittedly the last annual general meeting was held some time in the year 1996 and no annual general meeting has been held thereafter.It is the stand of some of the additional directors before us that they have aright to remain in office as Directors, until such time as a annual generalmeeting is, in fact, held. This claim is not one which can be accepted.Section 260 was not meant to enable persons to become directors of a companywithout having to obtain the support of the general body and thereafter,remain on the Board for years together by not holding the annual generalmeeting.

14. The provision for an additional director is one which is meant to enablethe companies to have the benefit of the services of a person, who otherwiseis suitable for serving on the Board, and whose presence in the Board isdesirable in the interests of the company till upto the time the next annualgeneral meeting is held. That provision is not meant to enable the company tokeep on its Board a person as additional director for an indefinite period oftime by not holding the annual general meeting. Section 260 of the Act,therefore, must necessarily be read with Section 166 of the Act whichstipulates that the annual general meeting be held every year and not morethan fifteen months shall elapse between the date of one annual generalmeeting and the next.

15. A Division Bench of this Court comprising of Rajamannar, C.J., andVenkatarama Aiyar, J., as he then was in the case of A. Ananthalakshmi Ammalvs. The Indian Trade and Investments Ltd. Reported in AIR 1 953 Mad 467 withVenkatarama Aiyar, speaking for the Bench, after a review of the Englishcases, held that directors of a company who are due to retire at an annualgeneral meeting vacate their office on the last date on which the annualgeneral meeting should have been held though the meeting in fact was not held.

16. The Bombay High Court in the case of Krishna Prasad Pilani vs. ColabaLand & Mills, Jwaladutt Co. Ltd., AIR 1960 Bom 312, a case which was arguedby a galaxy of Company lawyers, considered the question as to whether the theelected Directors can continue after the expiry of the statutory period laiddown for calling of the Annual General Meeting, and held that "we find littledifficulty in reaching the conclusion that a Director vacates his office atthe latest on the last day on which an Annual General Meeting could have beencalled as required by Section 166".

17. The Court also considered in that case the tenure of Additional Directorsand held that all directors - whether elected or co-opted vacate office on thelast date on which the Annual General Meeting should have been called underSection 166. The Court rejected the contention that despite the breach on thepart of the directors of their statutory duty to call for AGM, they wouldstill continue to be Directors till the AGM is in fact held.

18. In reaching the conclusion it did, the Bombay High Court followed thedecision of a Division Bench of this Court in the case of Ananthalakshmi Ammalvs. Indian Trades & Investments Ltd., AIR 1953 Mad 467 .

19. All the additional directors, therefore are persons who have no right toremain on the Board as Directors as their term came to an end long ago on the date on which the annual general meeting for different years should have beenheld. Their failure to hold the meeting cannot be taken advantage of by themto hang on to the position of Directors indefinitely.

20. It was submitted by counsel that under Section 167 the Central Governmenthas power to call for an annual general meeting and that an attempt by ashareholder was in fact made to have such a meeting called but withoutsuccess. We have not been shown the orders of the Central Government or therecord in relation to that alleged attempt.

21. The fact that the Central Government has the power to convene a meetingis however evident from a perusal of section 167. The additional directorswho were on the Board had obviously made no attempt whatsoever to invokeSection 167 if they were of the view that there were impediments to theirbeing able to call a meeting and that it was necessary to apply to the CentralGovernment for having such a meeting called and held. The additionaldirectors cannot take advantage of their own acts of omission in this regard.

22. All these ten additional directors had vacated their office of Directorslong ago and cannot assert any right to remain on the Board. The 'de facto'doctrine will save the decisions taken, when they acted as Directors despitetheir having in law vacated their office. That, however, does not clothethese persons with any right to remain in office 'de jure'.

23. We, therefore, do not find any illegality in the directions issued by theCompany Law Board superseding the Board which comprised of additionaldirectors and in it's place empowering the nominee directors whose tenure wasnot dependent upon and was not for any specified period to function asDirectors, the Chairman also being a nominee of the Reserve Bank of India.

24. This arrangement however can only for a limited period till the annualgeneral meeting is held. The annual general meeting which has not been heldfor several years must now be held with utmost expedition. The Company LawBoard has already directed that the process of distribution of sharecertificates to the members of the investors Forum be completed before the25th January 2004, that the Members Register close as on that date, and thatnotice of the AGM be sent to those whose names appear in the Register ofMembers on that date.

25. We must however take note of the Reserve Bank of India's failure to actwith a sense of urgency with regard to application said to have been sent toit some time in October 2003 with regard to the transfer of shares to fourinvestment companies belonging to the Sterling group. The transfer of sharesin their favour has already been, we are told, approved by the Board ofDirectors of this company, subject to the Reserve Bank of India giving it'sapproval.

26. Learned Additional Solicitor General who appeared for the Reserve Bank ofIndia assured us that the Reserve Bank will definitely take a decision andcommunicate the same to the company within a period of two weeks from today.

27. We direct the Reserve Bank of India to complete the process within twoweeks from today so that thereafter, in the event of the transfer being approved, notice of the AGM can be sent to the purchasers after bringing theirnames on record in the Register of Members, and in the event of permissionbeing refused, notice of the meeting can be sent to persons in whose namesthose shares presently stand in the Register of Members.

28. The Company Law Board shall fix the date for holding the annual generalmeeting after giving sufficient time for the despatch of notice and thatmeeting shall as far as possible be held before the end of February 2004 andin any event not later than 15th March 2004.

29. The Committee now constituted by the Company Law Board under the impugnedorder shall only take decisions with regard to day today matters and thenormal functioning of the bank and shall not embark upon any new major projector take any major decision affecting the future of the bank, as the directorsto be elected by the general body should have the opportunity to deal withthose matters after the annual general meeting is held.

30. We make it clear that the Company Law Board may proceed with the hearingof the application filed by the Central Government after the counteraffidavits of the respondents to that application are filed before it and makeappropriate orders thereon.

31. This appeal is dismissed.

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