Case Law: N.V.R. Nagappa Chettiar And Anr. vs The Madras Race Club

Introduction

The notion of majority rule has been applied to the management of corporate affairs. Resolutions on various topics are passed by a simple majority or a three-fourths majority of the members. When a resolution is passed with the required majority, it becomes binding on all company members. As a result, the court will not usually intervene to safeguard the minority interest affected by the resolution, because when a person joins the company, he or she implicitly agrees to submit to the majority’s decision. Thus, if a company is wronged, the company is the legal entity with its own personality, and it can only file a lawsuit against the perpetrator; shareholders do not have the right to do so individually. In the landmark decision of case  Foss v. Harbottle, the aforementioned rule was established.

In Rajahmundry Electric Supply Co. v. Nageshwara Rao, the Supreme Court stated, “The Courts will not, in general, intervene at the request of shareholders in matters of internal administration, and will not interfere with the management of the company by its directors so long as they are acting within the powers conferred on them under the articles of the company.”

It’s essentially a logical extension of the idea that a company is a different legal entity from the individuals who make up its membership. Once it is established that a company is a separate legal entity, it follows that if it is wronged, the company is the competent party to sue. Only the wounded party may sue, according to this straightforward rule of procedure that applies to all wrongs.

The Delhi High Court in ICICI v. Parasrampuria Synthetic Ltd. has held the mechanical and automatic application of Foss v. Harbottle Rule to the Indian situations, Indian conditions and Indian corporate realities would be improper and misleading. The principle, in the countries of its origin, owes its genesis to the established factual foundation of shareholder power centering around private individual enterprise and involving a large number of small shareholders, is vastly different than the ground realities in our country.

If the Foss v. Harbottle Rule is applied mechanically, it would amount to giving weightage to that majority of the shareholding having notionally holding more percentage of shares, than to the financial institutions which may own a small percentage of shares though contributed 80% or more in terms of the finances to such companies. It is these financial institutions which have really provided the finance for the company’s existence and, therefore, to exclude them or to render them voiceless on an application of the Principles of Foss v. Harbottle Rule would be unjust and unfair. Thus, the exceptions to the rule have been adopted by the Indian Courts as well the Companies Act, 2013.

Exceptions to the rule of Majority Power

1. Personal Rights of the members: It should be highlighted, however, that the aforementioned “Principles of Foss v. Harbottle” only apply when a member’s corporate right is violated. When a member’s individual right is denied, the rule does not apply. Individual rights of a member are derived in part from the implied contract between the company and himself when he joins the company, and in part from general law.
2. Representative and Derivative Action: Even if no wrong has been done to him personally, and even if the majority of his fellow members do not wish the action to be brought, an individual member may bring an action to remedy a wrong done to his company or to compel his company to conduct its affairs in accordance with its constitution and the rules of law governing it in certain circumstances.The plaintiff sues on behalf of himself and all of his fellow members, with the exception of those, if any, against whom remedy is sought. If the member sues the company for relief, it must be made a defendant; if he tries to enforce a corporate claim against other people, the company must still be made a co-defendant so that it can be bound by the judgment.
3. Ultra Vires or illegal acts: It does not apply where the act complained of is ultra vires the company, because such an act cannot be ratified even by a unanimous vote of the shareholders. In such instances, the plaintiff shareholder appears to have the option of bringing a personal action based on the company’s breach of its memorandum, or a derivative action based on the harm done to the company by those who have caused the breach.
4. Breach of Fiduciary duty: A derivative action may be brought against directors and promoters who have breached their fiduciary duties to the company if they are able to prevent the company from suing them in its own name because they control a majority of the votes at a general meeting or are otherwise able to prevent a general meeting from resolving that the company will sue them.
5. Oppression and Mismanagement: It must involve an unconscionable exercise of the majority’s power that results in, or is likely to result in, financial loss or unfair or discriminatory treatment of the minority, and it must be more serious than the majority’s failure to act in the company’s best interests, which will cause the court to strike down a resolution changing the company’s memorandum or articles of Association:
6. Inadequate notice of resolution of passed at a meeting: In many cases, it has been held that if a resolution to be proposed at a general meeting is given insufficiently informative notice, any member who does not attend the meeting or votes against the resolution may bring a representative action to prevent the company and its directors from carrying out the resolution.
7. Qualified Majority: When the Act or the articles of Association need a qualified (or special) majority to adopt a resolution, the Foss v. Harbottle rule cannot be used to circumvent these requirements. If this were not the case, laws requiring qualified majorities would be meaningless because a simple majority could easily ratify an irregularly enacted special resolution.

In the case of N.V.R Nagappa Chettiar and Anr. v. The Madras Race Club, the honourable Madras High Court also accepted the above notion of qualified majority being an exception to the rule of the Foss v. Harbottle. This article deals with the various aspects of the case to understand the ratio of the court.

Facts of the case 

1. The Madras race club was a company incorporated under the 1913 Act. The management of the business of the Club was vested in six Stewards who must be club members. They occupied the position of the directors of a company and discharged similar functions in respect of the Club.
2. 45 members of the Club sent a demand to the Club in April 1947, requesting that an extraordinary general meeting be called, among other things, to create a committee to review the Articles of Association and make revisions where appropriate. In accordance with this, an extraordinary general meeting was conducted on June 21, 1947, at which a special committee of seven members, excluding the Stewards, who served as ex officio members, was formed for the purpose of revising the Articles of Association and suggesting revisions.
3. The special committee met numerous times, and at the meeting on September 13, 1947, they proposed various changes to the Articles, the most important of which was that the control of the Club’s affairs should be delegated to a 12-member Managing Committee rather than the Stewards. They also recommended the abolition of the proxy system of voting.
4. The special committee directed the Club’s solicitors to propose the necessary resolutions in proper form altering the Articles of Association in the manner suggested, and at a subsequent meeting on September 26, 1947, the Club’s solicitors were also requested to further revise the proposal and send it to the Government for approval.
5. the Government approved the revised Articles of Association proposed by the Club but with one modification. The Government also pointed out that the revised Articles of Association should be adopted by passing a special resolution under Section 81(2) of the Indian Companies Act.
6. On the 15th of October, 1947, the special committee discussed the Government’s order and decided to call an extraordinary general meeting of the members on the 7th of November, 1947, to consider the report and pass a special resolution, and asked the solicitor to draft the resolutions. On the 16th of October, notice was issued to the Club members of the extraordinary general meeting on the 7th of November, 1947.
7. On November 5, 1947, the Government of Madras proposed that the Articles of Association be adequately altered to abolish proxy voting and to abolish certain Articles entirely, in order for the Race Club’s members to bear full responsibility for the appropriate conduct of racing.
8. In light of this idea, the government requested a new drafting along those lines, or that the existing Articles be adequately revised and accepted by the general body, and then presented to them for approval through the Registrar of Joint Stock Companies, Madras, before “it is finalised.” The special committee convened at 5 p.m. on November 7, 1947, to evaluate the Government’s proposal and passed two resolutions for the same.
9. On the 10th of November, 1947, the first meeting of the Managing Committee was conducted, and the chairman and five Stewards were elected. Mr. Annamalai Chettiar claimed that the Chairman had not submitted the proposed special resolution to the meeting at all on November 7, 1947, and that it had not been passed by the required statutory majority.
10. After obtaining the necessary permission under Order 1, Rule 8, Civil Procedure Code, the present suit was filed on the 8th of December, 1947 by two members of the Club for themselves and on behalf of the other members of the Club other than those who were originally impleaded as defendants in the suit seeking the following relief:

(a) a declaration that the meeting of the general body of the Club’s members convened on November 7, 1947, was null and void, and that all business done there was null and void

(b) a declaration that the defendants who were purportedly elected to the Managing Committee at the above mentioned meeting were not lawfully or properly elected and should not allowed to assume office

(c) a declaration that the proposed revised Articles have not been passed in their entirety and are therefore ineffective

(d)a declaration that the Stewards who were in office before to November 7, 1947, are still in office and are the only people legally and lawfully allowed to manage and administer the Club, and

(e) a declaration that the general meeting’s proceedings on November 18, 1947, were illegal, unlawful, and void. A relief for an injunction against defendants was also seeked.

Arguments of the parties

The arguments of the parties were:

(1) The petitioners claimed that the meeting on November 7, 1947, was not called by the proper authority, namely the Stewards, as required by the Articles.

(2) They further alleged that the meeting notice which was posted on the 16th of October, 1947, was in violation of the provisions of the Indian Companies Act, since there were not 21 days between the date of the meeting and the receipt of the notice. The meeting notice also lacked the necessary details since it did not comply with the requirement that the general nature of the business be stated, and the proposed modified Articles of Association were not submitted along with the notice in order to provide 21 clear days’ notice.

(3) They also stated that the special resolution relating to the proposed amendment of the Articles was not moved or put before the meeting for being voted upon. The amendments moved were not within the scope and ambit of the original resolution and could not have been validly made.

(4) In any case, even though 66 members voted in favour of the special resolution at that meeting, it did not represent the statutory three-fourths majority of the members present, who according to the plaintiffs totaled 105.

(5) It was further alleged that the election of the 12 members of the Managing Committee was illegal because the notice was insufficient in terms of time and because the members were not informed of the Managing Committee’s qualifications and functions before they were asked to submit nominations.

(6) The defendants’ claimed that although 105 members signed the attendance sheet during the period of the meeting and 49 proxies were registered, only 66 members were actually present at the time when the resolution to adopt the new articles was put to vote. The also claimed that the notice was sent on 16th of October, 1947 and the date on which the notice was sent should be included with the ambit of 21 days.

Issues involved in the case 

The following issue was involved in the case:

1. Whether the rule of Majority power prevails in the present case when the statutory requirement for the revision of articles of association of the company was through the special majority?

Judgment of the case 

The court accepted the notion that a court has no jurisdiction to interfere with a company’s ordinary management working within its powers, and that a court has no jurisdiction to do so at the request of the shareholders. A shareholder has the right to file a lawsuit to assert his or her individual rights against the corporation, such as the right to vote or the right to run for a position as a director of the corporation in an election. However, if a shareholder wishes to seek restitution for a wrong done to the company or to recover cash as damages allegedly owing to the company, the action should normally be filed by the company. As a result, in order for a shareholder to file a lawsuit in the company’s name, the majority must approve corporate action.

The court further stated that it is the established principle of law that a shareholder or shareholders are entitled to bring an action:

a. in respect of matters which are ultra vires the company and which the majority of shareholders, were incapable of sanctioning

b. where the act complained of constitutes a fraud on the minority, and

c. where the action of the majority is illegal.

The court recognised a fourth exception where a special resolution was required by the company’s Articles and the company obtained the majority’s assent to such special resolution by deception, or even where a company authorised to do something only by special resolution does so without one duly passed.

The court held that the attempt of the plaintiff to bring the present case under two exceptions, namely, that the acts complained of are illegal acts, and secondly that if the special resolution was not passed or was passed illegally were successful based upon the evidence put forth by them.

Analysis of the case in the light of the majority rule

As a corollary, in most circumstances, this concept indicates that the majority’s will is supreme. If the thing complained of was something that the majority of the company were entitled to do lawfully and was within the company’s powers, a majority can always set right a thing that was done by the majority either illegally or irregularly by convening a new meeting. That is why, in such instances, the Court will not intervene at the request of a shareholder, even in a class action initiated by him. If the majority, on the other hand, oppresses the minority in such a way that the minority does not have no recourse. Sir James Wigram, Vice-Chancellor, who delivered the Foss v. Harbottle verdict, also foresaw this possibility and stated that:

“If a case should arise of injury to a corporation by some of its members, for which no adequate remedy remained, except that of a suit by individual corporators in their private characters and asking in such character the protection of those rights to which in their corporate character they were entitled. The claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are required to sue.”

Thus, the court has taken the decision in the light of equity and justice as the plaintiffs’ were indeed subjected to something illegal, oppressive, or fraudulent.

Conclusion 

The Delhi High Court in the very onset of the independent India, when the country was seeking to establish its corporate presence all across the globe, deduced an very important exception to the english principle of Majority rules. Certain actions can only be carried out by a special resolution passed at a general meeting of shareholders. As a result, any member or members can file an action to limit the majority if the majority intends to do so by adopting just an ordinary resolution or without issuing a special resolution in the manner required by law. Such an action was also allowed in the case of Dhakeswari CottonMills Ltd v Nil Kamal Chakravorty.