In Re: Southean Automotive Corporation Private, Ltd.

Ramaswami, J.—This is an application for dispensing with the calling of an Extraordinary General meeting of the Southern Automotive

Private Limited, Madras. The Southern Automotive Corporation Private Limited has made a petition for obtaining the sanction of this Court for

amalgamation with another company, viz., the South India Automotive Corporation Private Limited, which is carrying on similar business in the

City of Madras. S. 394 of the Indian Companies Act, 1956, requires the convening of an Extraordinary General meeting of the members under the

directions of this Court under S. 391 of the said Act for the purpose of considering and passing the proposed arrangement for amalgamation. The

applicant wants this procedure to be short-circuited on the ground that there was a General Meeting of the members on 15th June 1959 and that

they have approved unanimously this arrangement for amalgamation and that therefore the holding of an Extraordinary General Meeting of the

company as required by S. 391 to consider and approve the amalgamation would be superfluous and would cause hardship, unnecessary expense

and undue delay.

I am unable to accede to this request for these reasons. First of ail, the learned Advocate for the applicant was not able to point out any

hardship or unnecessary or undue delay which would be caused by compliance with the provisions of S. 391. Secondly, the duties of this Court

under S. 394 are onerous and have to be carefully exercised and therefore this Court can come to the decision required of it under S. 394 of the

Act only if it is satisfied that the matter has been considered at an Extraordinary General Meeting of the members specially called for under the

directions of the Court under S. 391 of the Act.

The importance of the convening of the Extraordinary General Meeting cannot be easily overlooked. The primary organization through which the

company functions is the meeting of the shareholders. It is by using their power at meetings that shareholders exercise control over directors. The

resolution of the majority, voting at the general meeting, binds the company and its members. The shareholders have to act in accordance with the

provisions of the Companies Act as also the Memorandum and Articles of the Company, in so far as the provisions therein are not inconsistent

with the Act. It must be remembered that the shareholder is not a creditor of the company nor a debenture-holder thereof. His rights can only be

exercised in accordance with the Act. There may be occasions where the majority acts in a manner oppressive to the rights of the minority

shareholders or of any particular shareholder. In such cases the Act had made provision for protecting the rights of the minority or the individual

shareholder. The principle upon which this is done is that the shareholders have a fiduciary responsibility to act not in the interests of a majority only

but in the interests of the shareholders as a whole. Where this position is abused there is a fraud on the minority, as the term is understood in law,

and there need not be necessarily fraud or deceit in the ordinary sense.

The shareholders forming the company can ordinarily function only at the general meeting and at such other extraordinary general meetings as

may be convened under the Act. They do so as already stated, subject to such rights and obligations as attach to their shares and subject to the

provisions in the Act and the Memorandum and Articles of Association of the Company. These can happen only once in a way and all that the

shareholders can do is to decide on such matters as the Act provides and discharge major functions such as the appointment of directors and

auditors and the passing of the balance-sheet and profit and loss account, and they have inherent power to take all steps to ensure its proper

working and this includes the power to appoint directors as provided by the Act. The present Act confers on them considerably larger rights than

before. Except such powers as are reserved to the shareholders to be exercised at their meeting all the powers exercisable by the company are

vested under the Act in the Board of Directors. Besides the Board of Directors, the Act provides for various forms of executive machinery.

The Company Law Committee had the following observations to make :

The nature of a shareholder''s control over the affairs of a company has been the subject of much comment in recent discussions on the subject of

company law reform both in this country and elsewhere. As the Cohen Committee observed :

The illusory nature of the control theoretically exercised by shareholders over directors has been accentuated by the dispersion of capital among

an increasing number of small shareholders who pay little attention to their investments so long as satisfactory dividends are forthcoming, who lack

sufficient time, money and experience to make full use of their rights as occasion arises and who are, in many cases, too numerous and too widely

dispersed to be able to organise themselves.

The Millin Commission in South Africa expressed itself in almost similar terms when it stated :

The assumption underlying existing legislation is that shareholders are able to take an active interest in the Company''s affairs and will always be

able to use their voting power to the company''s advantage. The assumption may have been justified in earlier days when the capital of the

companies was largely in the hands of persons who knew enough about the business of the company to maintain an effective check on the activities

of the directors they elected and were able to attend meeting to enforce their views. It is certainly not justified today when the shareholders in

public companies are distributed over wide areas, and it is impossible that they can ever be gathered together in one place for attendance at

company meetings....

In addition to the facts mentioned above some recent developments in corporate finance, e.g., the growth of investment trust companies have

further tended to widen the gap between the ultimate investors and those in charge of the management of his investments, while circumstances in

this country have imposed a special handicap on them. The comparatively low standard of business knowledge and experience of the average

investor, the absence of any well informed and reliable financial press, and long distances which make it difficult for investors to combine for the

exercise of their rights, have rendered them particularly ineffective.

There are only two ways in which the Company Law can partially redress the balance in favour of share-holders--first by the fullest possible

disclosure of the facts relating, to the promotion, formation and working of joint stock companies; and secondly, by enactment of such suitable

provisions for the holding and conduct of company meetings as will enable active and competent shareholders to take an effective part in the

business transacted in them......

(See T. R. Srinivasa Iyengar, Companies meetings, Accounts Audit and Investigations (1957) (Law Book Co., Allahabad) Page 14 and following.

T. R. Srinivasa Iyengar Companies Administration (1958) (Law Book Co.,), Page 1; Gore-Browne, Handbook of Joint Stock Companies, Forty,

first Edition, Page 410 and following; Buckley on the Companies Act, Thirteenth Edition, Page 319and following; Ghosh, The Indian Company

Law Tenth Edition, Part II, S. 789 and following.

Therefore, the applicant is directed to hold an Extraordinary General Meeting of the shareholders as contemplated by S. 391 of the Companies

Act and as per rules, and then move this Court under S. 394 of the Act and which will be considered then on merits.