Decided on July 05,1983


Referred Judgements :-



RaJindar Sachar, J. - (1.)THIS is an appeal filed against the order of the learned single Judge by which he allowed the application under Section SO of the Arbitration Act filed by the respondents.
(2.)THE respondent's case was that an agreement had been entered into with the appellant company which is now under liquidation by means of an agreement dated 1-6-1967011 the terms mentioned therein. In the said agreement it was also stated that any dispute or difference arising in regard to any of the terms contained in the agreement, shall be settled in accordance with the provisions of the Arbitration Act. THE application under Section 20 of the Arbitration Act was filed in November, 197.3.
It may be noted that application for winding up of M/s Globe. Motors Ltd. was moved in March, 1968 Globe motors was having one of its industrial units manufacturing steel under the name of Globe Steels. The agreement purports to appoint the respondents as distributors for the gale and marketing l/6th of the company's steel products. Objection was taken by the Official Liquidator on various grounds. Broadly the grounds raised were-(i) whether the application filed under Section 20 of the Arbitration Act was barred by limitation; (ii) whether the agreement dated 1-6-1967 was valid and the next question related to whether the agreement was vitiated on the grounds of fraud and being against the interest of the company. The learned single Judge found all the pleas against the appellant and in favour of the respondents, and has, therefore, directed the matter to be referred to the arbitration. Hence the appeal by the Official Liquidator.

The first contention raised by Mr. Andley the learned counsel for the appellant is that as the agreement was entered into on 1-6-1967 the application filed under Section 20 in November, 1973 is barred by time. It is common case that article 137 of the Schedule to Limitation Act 1963) which provides for a period of 3 years is applicable to application hied under Section 20 of the Arbitration Act. Mr. Andley urges that the right to apply accrued when the first default took place in payment of the monthly payment of Rs. 10,000.00 in terms of Article IV(b) of the agreement and as admittedly company made no payment, limitation would start from August, 1967, and application had become barred by 1970. The learned single Judge however, has held that the firms' claim was repudiated only on 29-4-1971 therefore, the period of three years is to be calculated from that date, and if that is done the application filed in November 1973 was within time, We deem it unnecessary to examine whether the right to apply accruned from the date of repudiation, namely, 29-4-1971 because even accepting the argument of Mr. Andley that the period was to be calculated and the right to apply accrued when the company defaulted in making payment of Rs. 10,000.00 monthly, it is evident that limitation would start from each default when it was committed. Thus for defaults committed for non-payment of monthly payments from October, 1970, would have to betreated within time as application was moved in November, 1973. The application for arbitration on the ground of limitation, therefore, could not be thrown out for right to apply accrued for part of the claim only from October, 1970 onwards, which was within time. Of course it may have been open to the appellant to urge before the arbitrator that the claim of the respondents for a period prior to October, 1970 was barred by time. We decide nothing on this point because once it was held that the matter had to be referred to arbitration the other question, namely-whether any particular part of the claim is time barred or not, would evidently be a matter for the arbitrator to decide. We, therefore, agree with the learned single Judge that the application was not time barred.

The next contention of the appellant was that the agreement had not been put to the general body of the shareholders, and therefore, it was not valid. The learned single Judge has, in our view, rightly rejected this contention. It is true that Mehta Harnam Singh with whom the agreement was entered into, was a Director of the Board of company. Section 299 of the Companies Act provides that every director of acompany who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to beentered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of Directors. Reference to the agreement and the resolution dated 1.5-6-1967 which was passed by the Board of Directors shows that when the Board approved the resolution in favour of the respondents, it was specifically noted that some of the Directors, mentioned therein, of the Company indicated their interest in the above arrangement and neither took part in this discussion or on the resolution. Amongst these the name of Harnam Singh is included. Mr. Andley of course seriously doubts whether any interest was disclosed and also castigates the manner in as much the five directors continued sitting in the meeting when the decision was taken. Be that as it may, the fact remains that interest in the agreement was disclosed by the Director. It is not, therefore, possible to accept the argument that there was any violation of Section 299 of the Companies Act. The Board having thus approved the agreement, the same is not in any way invalid because there is no requirement of Jaw to place this agreement before the general body of the company. It has not been shown that the exercise of power by the Board of Directors in approving this agreement was in any way beyond the powers given to them under the Articles of Association.

It was then sought to be contended that the agreement should have been put before the general body of shareholders, and attempt was made to invoke Section 294 which lays down that no coinpany shall after the commencement of the Companies (Amendment) Act,1960, appoint a sole selling agent for any area for a term exceeding live years at a time-, and to Sub-section (2) which provides that the Board of Directors shall not appoint a sole selling agent for any area except subject to the condition that the appointment shall cease to be valid if it is not approved by the company in the first "general meeting held after the date on which the appointment is made. This argument however, assures that the" arrangement which was approved by the Board on 15-0-1967 ami which ii recorded in the agreement of 1-6-191-17 was that of a sole selling agent. We however, cannot so read the said agreement. The agreement is straight forward appointment of the respondents as their distributors for the sale and marketing of the" company's steel products to the extent of 1/6111 of the total procceds of the sale of products. No specific area is ear-marked fur the respondonts in which the respondents could be shown to be the sole selling agents The learned Judge w-is, therefore, right in his conclusion that the agrement did not .have to be put to the general body ineeting the its confirmation. The more seiious objection raised by Mr. Andley, counsel for the appellant is to the finding of the learned single Judge by which he rejected the argument that the agreement was vitiated because of the fraud or act of the Directors acting in a manner so patently against the benefit of the company. Now it is not disputed and in fact the learned single Judge accepts that the Directors have fiduciary duly to the company. The position of Directors in their relationship to the company is no longer in doubt. Directors are not only the agents but they arc in some sense and to some extent trustees or in the position of is impossible now to dispute the position that they are in some sense trustees. That position having been established by a long series of cases (Vide Palmer's Company Precedents, 16th Edition, Part I, Page 561 to 564).

The courts have been very jealous in seeing that the fiduciary relationship of the Directors with the Company is not abused. The Directors have been held to be trustees of tlie assets of the company and courts have directed them to reimburse the loss to the company where it was found that Directors had applied tlie Company's money in payment of an improper commission. Tlie strictness with which the courts view the responsibility and the sacredness of the trust reposed in the Directors was emphasised long time back in Imperial Mercantile Cradi.t Assn. v. Coleman, (1873) L.R.61-I.L. 189) In that case one Coleman broker and a Director of a financial company, had contracted to place a large amount of railway debentures fora commission of 5 percent. He proposed that his company should undertake to place them for a commission of 1-1/2 percent to the company. He was held liable to account of 3-1/2 percent. In so deciding Malins, V.C. made the following observations, which were later on upheld by the House of Lords :-

'It is of the highest importance that it should be distinctly understood that it is the duty of Directors of companies to use their best exertions for the benefit of those whose interests are committed to their charge, and that they are bound to disregard their own private interests whenever a regard to them conflicts with the proper discharge of such duty.'
These observations were reiterated with approval in R'gal v. Gulliver; 1942(1) All. E.R.378. In that case an action was brought by the company against the defendants directors to recover from them the sums of money which were alleged to have been profits made by them improperly and against the interest of company. Viscount.Sankey, one of the law Lords accepted that the Directors were in a fiduciary position and their liability to account does not depend upon proof of male fide. In holding that the Directors were liable to account for tlie company the Court observed (p. 383 F) "at all material times they were directors and in a fiduciary position, and they used and acted upon their exclusive knowledge acquired as such directors. They framed resolutions by which they made a profit for themselves. They sought no authority from the company to do so, and by reason of their position and actions they made large profits for which, in my view, they are liable to account to the company." "The courts in Scotland have treated directors as standing in a fiduciary relationship towards their company and, applying to the equitable principle have made them accountable for profits accruing to them in tlie course and by reason of their directorship. It will be sufficient to refer to Huntinglon Copper Co. v. Henderson, in which the Lord President cites with approval the following passage from the judgment of the Lord Ordinary:
'Whenever it can be shown that the trustee has so arranged matters as to obtain an advantage whether in money or money's worth to himself personally through the execution of his trust, he will not be permitted to retain, but be compelled to make it over to his constituent. ' (P. 389 A supra).
Thus it cannot be disputed that the fiduciary duties of directors are basically the same as those of other trustees and they are expected to display the utmost good faith towards the company whether their dealings are with the company or on behalf of the company. They should not use the company's money or other property or information or other matters in their possession in their capacity of directors, in order to gain any advantage to themselves at the expense of the company, and if they make any profit for themselves or cause any damage to the company, they will liable to make good the same to the company. Similar observations were made in the Report of the HighPowered Expert Committee on Companies and MRTP Acts (1978) which succinctly expresses the legal position of the directors as follows:-
'Directors are appointed to act in the interests of the company and an important area of their legal responsibility stems from the law of trusts-they have a fiduciary relationship with the company. The duties arising from the relationship are well defined viz, to exercise their powers for the benefit of the company, to avoid a conflict of interests, and a duty not to restrict their right (by contract or otherwise) in freely and fully exercise their duties and powers. In addition to their fiduciary duties, directors also owe a duty of care to the company not to act negligently in the management of its affairs the standard being that of a reasonable man looking after his own affairs.'

The learned judge in dealing with the aspect whether the company now represented by the Official Liquidator was entitled to avoid the agreement of 1-0-1967, has proceeded on the basis that the same could only be done if fraud in execution of this agreement was proved and further that the way this fraud is to be proved was in the same manner .and by the same test as in a civil suit. lt is for this reason that the learned Judge seems to have placed over-emphasis on the enumeration of particulars if plea of fraud was to be established. Apart from the fact that this position is not factuaily correct (as we shall show later) this approach under-estimates the importance of the relationship of the Directors with the company which being lfiduciary has to bejudged by the tests broadly laid down for judging the conduct ofa trustee. In holding the director liable for or having worked against the interest of the company it is not necessary that fraud in the strictest term has to be proved. 'Thus a (.director may be shown to be so placed and to liave been so closely and so long associated personalty with the management of the company that he will be defined to be not meredy cognizant of but liable for fraud in the conduct of'the business of'the company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what must be obvious to cveryone who examines the affairs of' the company even superficially If he decs so he could be held liable for dereliction of duties undertaken by him and compelled to make good the losses incurred by the company due to his neglect even of fraud (emphasis supplied). It is enough if his negligence is of such a character as to enable frauds to be commited and losses thereby incurred by the company". (Vide Offici'al Liqidutor v. P.A. Tendulker (1973) 43 Company Gases 382 at S84,.

A derivative action can be brought against directors who are in control of the company to compel such directors to account to the company for profits made by appropriating for themselves a business opportunity which the coinpamy would otherwise have enjoyed. (Vide Penington's Company Lnv 4th Edition, paqe 596).

(3.)GOWER in Company Law 3rd Edition page, 526 has noticed that because of the trustee like position of the directors a contract between the company with another firm of partnership of which one of the directors was a partner liave been avoided at the instance of the company notwithstanding that its terms were perfectly fair and that in the words of Lord Granworth L.C. "so strictly is this principle adhered to th;it no question is allowed to be raised as to the fairness or unfairness of a contract so entered into......". Thus the contract Will be voidable at the instance of a company and any profits made by the Directors personally will be recoverable by the company (page 527 supra).
Various remedies could be resorted to by the Company in case of a breach of duties by the Directors. Thus one of the remedies provided to the company is recession of a contract, another is accounting for profits. The liability of the Director may arise out of a contract made between a director and a company. In such a case accounting is a remedy adaitional to avoidance of contract and is normally available whether or not is there recession, (page 559 supra. Gower).

A resume of the law would thus clearly show that no doubt the Companies Act does not forbid a contract being entered into by the company with a firm in which one of the Directors is a partners, it is also true that the respondent Director disclosed his interest in the agreement when the same was approved by the Board of Directors at its meeting held on 15-6-1967. But this fact by itself does not automatically prove that the arrangement which had been entered into by the company was not of such a nature which keeping in view the fiduciary relationship of Mehta Harnam Singh, a director of the company should not have been so entered into, thus giving a right to the company to avoid the contract and to ask for the recovery of the profits made by the Director. The test to be applied in the present case is-had the company been a going concern and had some payments in pursuance of this very agreement been made to the respondents could the company have asked for recession of the contract or in case any payments had been made to the respondent Harnam Singh and others, for the return of the same to the company. If the answer is in the affirmative, the claim of the appellant must succeed.

We must now turn to the examination of the agreement to find out whether its terms were such which in the words of the Supreme Court would show that circumstances were such that there could be no other conclusion than that the same was arrived at becuse of the peculiar position, which the respondent as Director, enjoyed in tile cumpany.


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