HIGH COURT OF KERALA
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(1.)The 3rd defendant is the appellant. Defendants 3 to 5 were Directors of the 1st defendant company. Item No. 4 in the agenda of the annual general meeting of that company held on 23rd March 1961 was the election of three Directors in the place of defendants 3 to 5 who were due to retire. Defendants 3 to 5 sought reelection and it was resolved in that meeting that there should be separate elections to the three posts. The first election was to fill up the vacancy to be caused by the retirement of the 5th defendant. The plaintiff was a candidate, and he contested the election, but was defeated, and the 5th defendant was elected. Then two shareholders moved a resolution that the election of the two other Directors may be postponed. The chairman disallowed the motion. Thereafter the plaintiff was proposed as a candidate to fill up the vacancy to be caused by the retirement of the 3rd defendant. But the chairman ruled that he was not qualified to stand as a candidate as he was already defeated in the contest with the 5th defendant. In the election the 3rd defendant was declared elected. The suit was for a declaration that the proceedings of the meeting as regards the election of the Directors were null and void, and for an injunction restraining defendants 3 to 5 from functioning as directors and for directing the 1st defendant company to hold a meeting for electing the three Directors. Several allegations were made in the plaint challenging the validity of the election. The main defence was that the question raised in the suit related to the internal management of the 1st defendant company and that the suit was incompetent.
(2.)The courts below held the chairman acted illegally in disallowing the nomination of the plaintiff to the vacancy caused by the retirement of the 3rd defendant, that the question raised in the suit did not relate to purely internal management of the 1st defendant company and that the suit was competent. They also held that no direction could be given for convening a meeting of the company for electing the Directors.
(3.)The only point argued before me was that the suit was not maintainable, since the matter related to and was entirely concerned with the internal management of an incorporated company. In order to decide the question whether the ruling of the chairman that the plaintiff has no right to stand as a candidate for election to the post of a Director raised a justiciable issue, one has to look into the nature of the right which the plaintiff was asserting in the case. There are two kinds of rights for a member of the company, one the individual membership right, and the other the corporate membership right. So far as the corporate membership rights are concerned, a shareholder can assert those rights only in conformity with the decision of the majority of the shareholders. An individual membership right is a right to maintain himself in full membership with all the rights and privileges appertaining to that status. This right implies that the individual shareholder can insist on the strict observance of the legal rules, statutory provisions and provisions in the memorandum And articles which cannot be waived by a bare majority of shareholders. The distinction between individual membership rights and corporate membership rights of a shareholder is founded on the following consideration:
"By his contract with the company (and the other members; of. S.20) the shareholder undertakes with respect to some - and, in fact, most - rights which his membership carries, to accept as binding upon him the decisions of the majority of shareholders, if arrived at in accordance with the law and the articles; these membership rights are known as corporate membership rights. Other rights of the shareholder, according to his contract with the company, cannot be taken away from him unless he consents; if such right is in question, a single shareholder can, on principle, defy a majority consisting of all the other shareholders. Rights of this type are known as individual membership rights." (See Palmer's Company Law, 20th Edn., page 492.)
So far as individual membership right is concerned every shareholder has got the right to assert it in his own name, but if the infringement of a corporate membership right is alleged, his remedy is a representative action on behalf of himself and other shareholders or in some instances, an action in the name of the company. Individual membership right should not be confused with the rights available for qualified minorities. The question for decision therefore is whether the particular right asserted in this case is an individual membership right or a corporate membership right. If it is a corporate membership right it is subject to the will of the majority provided that will is expressed in accordance with the law and the articles. With respect to this right the principle of supremacy of the majority will apply and the rule in Foss v. Harbottle 1843 (2) Hare 461 will get itself attracted. In that case, the minority of shareholders had a claim in damage against some of the Directors by reason of the fraudulent act of those Directors. At the general meeting, the majority resolved that no action should be taken against the delinquent Directors. Two of the minority shareholders took out legal proceedings against the Directors and others to compel them to make good the losses to the company; but the court dismissed the action on the ground that as the acts of the Directors were capable of being ratified by the majority of the members, the court should not interfere. It was left to the majority to decide what was for the benefit of the company, and their decision cannot be questioned except under certain well defined circumstances.
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