Suburban Bank Private Ltd. versus Thariath and Anr.

Introduction

The case of Suburban Bank Private Ltd. versus Thariath And Anr. is considerably important in demonstrating the position of directors of a company in managing the company’s business. The Articles of Association (hereinafter referred to as ‘AOA’) can limit the powers of directors of a company. However, simple resolutions which are like recommendations cannot be used as a means to force the directors to act in a certain manner.

Facts

The Suburban Bank Private Ltd. had filed a suit against the respondent i.e. Thariath, to recover the amount that had been withdrawn by the respondents by way of the execution of a promissory note. As alleged by the defendants, in this case, the promissory note was executed by them to secure a liability of the second defendant. The defendants executed the promissory note stating that it was done to indemnify the bank of the loss which it had suffered due to the second defendant while the second defendant, in this case, i.e. the father Lonan had been the Agent of the complainant bank at the Pazhayannur Branch of the bank. The execution of the promissory note, as per the defendants had been done following a resolution that had been passed by the General Body of the Shareholders of the Bank. The Body was supposed to have taken into consideration the dedication of the second defendant and the service that had been rendered by the second defendant, and in view of that, had passed a resolution, which had consequentially wiped off any doubt that was left on the part of the second defendant. There was later a claim made by the bank, based on the promissory note that had been executed by the defendants, against which the defendants claimed that the suit was not maintainable.

Issue

The major issue which the court faced was whether the boardresolution passed by the General Body of Shareholders of the Bank was bindingin nature, or was only in the form of a recommendation.

Held

The trial court discarded the submissions made by the defendants. Onthe contrary, the Trial Court initially held that the resolution passed by theGeneral Body of Shareholders of the Bank was in the form of a mererecommendation and was not binding on the Board of Directors of the Bank. Sincethe same was not a binding document, and when now the board had decided torealize the full amount which was due, the same was liable to be paid in fullby the defendants, in the eyes of the Trial Court. However, since thedefendants were not satisfied with the decision, they appealed against thisdecision. Contrary to the view of the Trial Court, the Lower Appellate Courtheld that even though the resolution passed by the General Body of Shareholdersof the Bank was in the form of a recommendation, it was indeed a final decisionthat was taken on the matter. The Lower Appellate Court also held that theBoard of Directors had no right to override the decision taken by the GeneralBody of the Shareholders. The Lower Appellate Court decreed the suit in thefavour of the defendants and held that in the light of the resolution, theamount due in the name of the defendants should be deemed to be have been fullyremitted.

However, the Bank preferred an appeal against this decision beforethe Kerala High Court. Seeking proper relief, the appeal was then filed againstthe order of the Lower appellate court wherein the decision of the Trial Courthad been set aside. The High Court referred to the AOA of the Bank and someother judgments to arrive at its conclusion. It applied the principles laiddown under the Companies Act and held that the document of resolution which hadbeen passed by the General Body of Shareholders of the Bank was indeed arecommendation in its true nature, and in no way the Directors of the Bank werebound by what had been stated in this recommendation. The Directors of the Bankwere well within their rights to base this suit on the promissory note andclaim the remainder of the amount due in the name of the defendants

Analysis

Suburban Bank Private Ltd. versus Thariath And Anr. demonstrated the stand of the directors of the company. The Kerala High Court assessed the powers vested in the hands of the directors keeping in mind the AOA of the Bank. The Court stated that unless it is stated otherwise in the AOA of the Bank, or within the provisions of the Companies Act, the company cannot take the management of the company out of the hands of the directors of the company provided it is done by the way of a special resolution. The same also applies to the path of action taken by the directors. The directors cannot be compelled to follow a particular path of action recommended by the company. The High Court opined that if the company did not want the directors to manage the company or if the company was dissatisfied with the directors, it may choose to remove the directors. However, the Court stood firm on its opinion that the resolution passed at the General Meeting could not directly interfere with the management of the business of the company by its directors.