Annual general meeting is an institution for the protection of the shareholders of a company, which proves the ultimate control and destiny of a company, is vested in the hands of its shareholders-Explain and Illustrate?

  Introduction:

Annual General Meeting commonly referred to as an AGM, is a formal meeting which is held once a year. It is a legal requirement for voluntary organizations that have company status. It is good practice for charities to have an AGM to act as a review of the year and deal with issues such as the election of committee/board members and reviewing the annual accounts. Each individual organization should have a section of its Constitution which deals with AGMs, and this gives guidance as to how the AGM should be run and what matters should be dealt with. Although it is a formal meeting, it can also be a good opportunity to communicate with members, clients, partners and other interested parties.

Sections 81-89 of the companies Act 1994 deal with meetings and proceedings of the company

(A)General Meetings: Sections 81-89 of the Companies Act 1994 deal with meetings and proceedings of the company. The provisions are broadly similar to those in the Act of 1913 but some changes have been introduced in the light of the recommendations of the Report of the Company Law Reforms Committee, 1979, and the experience of other countries.

 Section 81 provides that every company must hold a general meeting called the annual general meeting every year but so that not more than fifteen months elapse between the meetings. A company must hold the first annual general meeting within eighteen months of its incorporation. The Registrar has been given the power to extend the time for holding such meetings if an application is made within one month from the date of expiry of the period specified for holding such meetings but no such extension shall exceed the 31st day of December of the year in which the meeting was scheduled to be held. This provision is new and is meant to give relief to parties who do not want to go to the Court if they have bonafide missed holding such meetings. Section 81 further provides that the Court may, on the application of any member of the company/call or direct the calling of a general meeting of the company and give such ancillary or consequential direction as the Court thinks expedient in relation to the calling, holding and conducting of the meeting. Section 82 provides for a fine not exceeding take ten thousand and a continuing fine which may extend up to two hundred fifty taka for every day that the default continues.

 (B)  The power of the Court to call’ or direct the calling of a general meeting should be read with the power of the Court given under section 85(3) of the Act. If for any reason it is impracticable to call a meeting of the company in the manner in which meetings of that company may be called or conducted in the manner prescribed by the articles or the Act the Court may, either on its own motion or on the application of any director or member who would be entitled to vote at the meeting, order a meeting of the company to be called, conducted and held in such a manner as the Court thinks fit, and may give such ancillary or consequential directions as it thinks expedient, and any meeting held and conducted in accordance with any such order shall for all purposes be deemed to be a meeting of the company duly called, held and conducted. There has been some extensive case law in this country .touching disputes among shareholders for control of the company. These will be discoed below (section 10.1.4).

 (C) The Act requires a public company to hold a statutory meeting within a period of riot ”less than one month nor more than six months from the date at which the company is entitled to commence business . A report known as a statutory report shall have to be sent twenty one days before the meeting with the Registrar. The statutory report shall state certain basic facts about the company like the number of shares allotted, total amount of cash received showing the heads they are so received , the names , address and occupations of the directors, managing agents, managers and secretaries , the particulars of any contract which should be submitted to the company for approval, the extent to which underwriting contract if any has not been carried out, the arrears if any due on calls from every director, managing agent etc, and the particulars of any commission , brokerage etc paid or to be paid in connection with the issue or sale of shares or debentures to any director and managing agent. The statutory report has to be certified by at least two directors including the managing director. The report shall have to be certified by the auditors of the company so far as shares allotted by the company and the cash received by the company are concerned. The report shall have to be filed with the Registrar of Joint Stock Companies. The directors shall cause a list showing the names, addresses and occupation of the members of the company and the number of shares held by them respectively. A company may be wound up if default is made in holding the statutory meeting or in filing the statutory report,[1] but the Court, on a petition made to it, may instead of directing that the company be wound up give directions for the statutory report to be filed.[2]

Section 84 requires the directors to call an extraordinary general meeting on the requisition of holders of not less than one tenth of the issued share capital of the company upon which all calls have been made. The requisition must state the objects of the meeting and must be signed and deposited at the registered office of the company by the requisitions. If the directors do not, within twenty one days from the date of deposit of the requisition, proceed to call a meeting on a day not later than forty five days from the date of the requisition, then the requisitions or a majority of them in value, may themselves call the meeting but any meeting shall not be held after the expiration of three months from the date of the requisition.

 (D) Complaint for not holding annual general meetings cannot be made directly to the High Court. The application made direct to the High Court for taking penal action was untenable and misconceived. The High Court would have jurisdiction to try the accused if the case is committed to the High Court under section 194(1) Cr. P.C. or if the proceedings are started on an application of the Attorney General under section 195(2) Cr. P.C. or are transferred to it under section 526 Cr.P.C.[3] The Dhaka High Court has held that the High Court Division can in exercise of its powers to call a meeting under section 79(3) of the Act of 1913 (equivalent to section 85(3) of the present Act) allow annual general meeting of the company to be held within fifteen months   from the date of the previous annual general meeting and that sections 76 and 79(3) of the Act of 1913 corresponding to sections 81 and 85 of the Act, are supplementary to each other.[4] The legislature recognizes that there may be circumstances in which the holding of the annual general meeting cannot be held within time. The legislature has therefore bestowed on the Court the power to direct that such a meeting of the company be called held and conducted in such a manner as the Court thinks fit. In this, the Court can act not only on an application of any director of the company or of a member of the company but also suo moto. In directing the holding of such a meeting the Court is to “look to the general interest of the public and not to any individual consideration.”[5]  The Court while deciding on an application under section 85(3) of the Act is not required adjudicating on an allegation about the misdoings of the President.[6] A member of a company which has separate legal entity is entitled to apply to the court under section 85(3) of the Act for calling an annual general meeting.[7] Where meeting could not be held in compliance with the manner prescribed by the Articles, the court ordered that delay in holding the first general meeting be condoned.[8]

 In exercising the powers under section 85(3)
the Court will look at the facts from a reasonable commonsense point of view and as a prudent person of business to decide whether it has become impracticable to call a general meeting and in normal circumstances should not supersede the rights of shareholders.[9]

  A division bench of the High: Court Division observed in BCIC vs. Registrar of Joint Stock Companies[10] that the words “not more than 15 months after holding of the last preceding general meeting” can be interpreted in two different ways. When a company does not hold its annual general meeting within eighteen months of incorporation and there after fails to hold its successive annual general meetings the company is in perennial default and its statutory legal obligation commences from the date when the last general meeting ought to have been held in accordance with the statutory provision. If no meeting was actually held time would run from the date when the meeting fell due, in terms of the statute. But when the company has actually held its last preceding annual general meeting within the time extended by the High Court Division, the legal obligation to hold the next general meeting will start from the date when the meeting was actually held. The petitioner Bangladesh Chemical Industries Corporation controlled the Sylhet Pulp and Paper Mills Ltd. which failed to hold its annual general meeting within the prescribed time .The company approached the High Court Division and obtained extension of time to hold the meeting. The company held the meeting within the time extended by the Court but when it held the next annual general meeting the Registrar’s office verbally told that the return would not be accepted because that meeting was not held within fifteen months of the time the previous meeting ought to have been held. The Registrar’s office counted the time from the day the meeting ought to have been held before its extension by the High Court. According to Mr. Justice Mustafa Kamal delivering the judgment of the Court   the words after the holding of the last preceding general meeting” clearly postulate the actual holding of a meeting. The condensation of delay

The learned Counsels then cited decisions of various Courts of this sub-continent in support of their respective contentions as to the proper extent and scope of the powers conferred upon the Company Court to order such meeting.

Referring to a number of decisions cited by counsel for appellant1 and also by counsel for respondent2 the Court continued: On going through the affidavits and after hearing the submissions made by the parties’ learned Counsels, both on facts and law, it appears that the essence of the controversy appears to be whether the Annual General Meeting of the Company ordered by the Company Judge imposing certain conditions as mentioned above is permissible. There is no dispute that powers conferred under sections 79(3) read with section 76(3) of the Companies Act to call such a meeting, are exercisable by the Court in the circumstances stated therein. Decisions cited by the learned Counsels have considered a few principles as to the extent of such powers which may be referred to. In exercising such powers the Court has to regard what is provided in the Articles of the Company. The other constraint on the exercise of powers under the aforesaid provisions of law is that the Court should not ordinarily interfere with internal management of the Company. The provisions contained in the aforesaid sections are not mutually exclusive, but supplement each other. It is only when the Court in the particular circumstances of the case is of the view that it is impracticable to call a meeting, it could intervene and order such meeting to be held. Reasons why the powers so conferred should be used sparingly and with caution are that the court’s neutrality may be seen to have become involved in the process and trying to participate in the management of the internal affairs of the company either as a shareholder. Or director of the Company. If necessary, the Court may, in exercise of the powers conferred by section 79(3), appoint an independent person to preside over such meeting. This may not be viewed as interference with the internal management of the Company. Impracticability of calling a meeting may not be equated with impossibility of calling such a meeting. Having regard to the powers conferred under section 79(3), the Court may order a meeting of the Company in any of the circumstances mentioned therein, namely, if for any reason it is impracticable to call a meeting of the company; if for any reason it is impracticable to hold a meeting; if for any reason it is impracticable to conduct the meeting. On the happening of any or all of the circumstances as above the Court may order such meeting. Above all, before exercising powers conferred under section 79(3), the Court must be satisfied that it has been impracticable to call a meeting in the manner in which such a meeting is to be called.

In view of these principles enunciated in the decisions cited by the learned Counsels of the appellant and respondents, there remains no doubt about the powers of the Court to call a meeting  of the Company when invoked by a shareholder or director of the Company under section 79(3) of the Act.

The Appellate Division in the above case ordered another general meeting of the company to be held to consider the balance sheet etc and to ratify the appointment of S.F.Ahmed & Co if so needed[11]. Delay in holding Annual General Meeting was condoned as balance sheet and profit and loss account were not received.[12]

In Social Marketing Co. vs Mr Mahbubuzzaman1 Mr Justice Mahmudur Rahman, sitting in a case where the company inadvertently held the annual general meeting beyond the statutory period, held that the High Court is empowered to condone the delay in holding the annual general meeting of the company where it could not be held within the statutory period. The meeting held already was not a valid meeting as the same was held after the statutory period. The Court however ordered that the meeting be held under the chairmanship of a learned advocate.[13]

Business of Annual General Meeting: The Act does not precisely say what business must be transacted at the annual general meeting. But the presentation of the accounts and reports and the appointment of auditors must normally be undertaken at regular intervals, and the company’s articles will almost certainly provide for other matters of an annually recurring nature. Schedule 1 to the Companies Act indicates that the agenda of sanctioning a dividend, the consideration of the accounts, balance sheets and directors’ reports, auditors, the election of directors and other officers in the place of those retiring by rotation, and the fixing of the remuneration of auditors are matters that are usually taken up at the annual general meeting. That meeting may take up any other matter with prior notice that may be discussed at a general meeting. ( Regulations 50 and 51 of Schedule 1).

The AGM is the one occasion when members can have an opportunity of meeting the directors and of questioning them on the accounts, on their report, and on the company’s financial position and prospects. It is at this meeting that the members may exercise their power of not electing the existing directors when they retire. Most of the powers of the shareholders at the annual general meeting may also be exercised by them in other general meetings but the AGM is a convenient time to exercise the powers of shareholders. Small shareholders may not be able to master enough votes to requisition an extra ordinary general meeting. Professor Gower comments that’ the AGM is a general meeting, and anything that can be done at a general meeting can be undertaken at the AGM. There is, for example, no reason why a special resolution or an extra ordinary resolution should not be considered.[14] In practice however the shareholders of big public companies come in at a gala function arranged by the directors and take home token presents and make speeches trying to find fault of the directors but in the end get tired and approve the balance sheet and the directors’ report. If the company declares a good dividend the shareholders are naturally pleased but if they do not, then there will be a rough time for the management at the meeting. In the case of non-exempt public companies, the company must file with the Securities and Exchange Commission a copy of audited financial statements, annual report and minutes of the annual general meeting within fourteen days of the completion of the audit or, as the case may be, holding of the annual general meeting.[15]

 Notice of Meetings: Section 85 provides for the rules pertaining to calling and holding of general meetings. An annual general meeting may be called by notice of fourteen days in writing and a meeting other than an annual general meeting or a meeting for the passing of a special resolution may be called by twenty one days notice in writing , provided that a meeting may be called by shorter notice than aforesaid if it is so agreed in writing in the case of an annual general meeting by all the members entitled to attend and vote thereat and in the case of any other meeting , by the members of the company holding not less than 95% of the paid up share capital and having a right to vote at the meeting. Notice of the meeting must be served on every member in the manner provided in Schedule 1 to the Act. It is not understood why a shorter notice is needed for an annual general meeting which covers important issues like the balance sheet and the directors’ report than needed in an extraordinary general meeting. Moreover, the method of sending notice as provided for in the Schedule 1 seriously hampers the directors as they are required to follow the ancient method of sending notice personally or by registered post. The modern methods of communicating by e-mail or fax etc. are totally forgotten. This is important as more and more foreign investors are coming into the country. Sending notice to them by registered post involves loss of valuable time. It was held in Azad Publications vs Md. Qamrul Anam Khan[16] that notice of an AGM must be sent by registered post. Section 85 also provides that five persons present in person or by proxy or member or members holding not less than one tenth of the issued capital which carries voting rights may demand a poll, provided that in the case of a private company, if not more than seven members are personally present, one member, and if more than seven members are personally present, two members shall be entitled to demand a poll. An instrument of proxy, if in the form set out in Schedule 1, shall suffice irrespective of any special requirements in the article. A shareholder enjoys the same rights as other shareholders of the same class. If the articles do not make any special provision then votes may be given either personally or by proxy. In the case of a private company if the number of members does not exceed six then two members and if the number exceeds six then three members shall form a quorum In the case of a public company five members personally present shall be a quorum. In the absence of a contrary provision in the articles, a proxy need not be a member of the company. In the case of a company limited by guarantee the appointment of a proxy is not allowed.

 Extraordinary resolutions must be passed by a majority of not less than three fourths of members entitled to vote at a general meeting of which notice specifying the intention to propose the resolution as an extraordinary resolution has been given. A special resolution must be passed by an identical majority of voters as required for an extraordinary resolution in a meeting of which twenty one days notice has been given specifying the intention to propose the resolution as a special resolution.[17] If all members entitled to attend and vote agree then such resolutions may be passed on shorter notice. The company is required to send a copy of the extraordinary or special resolution to the Registrar within fifteen days from the passing thereof. If articles have been registered then a copy of every special resolution for the time being in force shall be embodied in or annexed to every copy of the articles issued after the date of the resolution.[18] Proceedings of general meetings and directors should be maintained in books kept for that purpose and any such minute, if purporting to be signed by the chairman of the meeting shall be evidence of the proceedings and a member is entitled to get a copy for a nominal fee within seven days of the minutes.[19] The English courts hold that “days’ mean “clear days.[20]

 (A) It was observed in Mousel & Co Ltd vs The Registrar[21] that the Registrar had a quasi judicial function and ascertains discretion in the matter of recording resolutions. In this case the Registrar kept the return of a resolution passed in another country removing a director of a company and sought legal advice from the Legal remembrance. The Court discharged the Writ holding that the Registrar had not refused to register but observed extensively from Indian and English decisions. On the discretion and duty of the Registrar also see above.[22]

It was held in Moyejuddin vs State[23] that applications for copies of the proceedings of meetings by a shareholder must be made at the Head Office of the Company at Dacca and not at Pabna. In a proceeding for quashing criminal cases, a division bench of the Dacca High Court held that proceedings of all meetings of the company should be kept at the registered office of the company at Dacca. Under the law it is the registered office of a limited company where all documents, books and registers should be kept. It was therefore obvious that if any copy of a document was required, it would be furnished only from the registered office. Where the application for copies were not submitted at the registered office, the applicant was not entitled to get them within the periods mentioned in the Act and the officers of the company were not “in default” in sending the copies as a mere failure to furnish the copy was not an offence. In the case of Shamsul Huda and others vs Alauddin & Taiwa Textile Mills Ltd.’ Mr. Justice Mustafa Kamal pointed out that under section 40 of the Companies Act, 1913 (corresponding to section 45 of the Act of 1994) the register of members was the prima facie evidence on any matters by the Companies Act directed or authorized to be inserted therein. The Court further commented on the legal effect of the minutes of proceedings of meetings of shareholders and directors. His Lordship commented as follows:

  When a company produces the minutes of proceedings of its annual general meeting or of its Board of Directors signed by the Chairman of the meeting at which the meetings were held or by the Chairman of the next succeeding meeting the minutes shall be evidence of the proceeding, under section 83(2) of the Companies Act. (Corresponding to section 89(2) of the Act of 1994). Under section 83(3) of the Companies Act (corresponding to section 89(3) of the Act of 1994), until the contrary is proved, every general meeting of the company or meeting of the Board of Directors in respect of the proceedings whereof minutes have been so made shall be deemed to have been duly called and held, and all proceedings had thereat to have duly had. The onus is on the petitioners to show that the minutes of proceedings are not correct and until the petitioners so prove this Court shall take the minutes of proceedings to be evidence of the same.

 “48. Under section 83(3) of the Companies Act every meeting of the directors in respect of the proceedings whereof minutes have been so made shall be deemed to have been duly called and held and all proceedings had thereat to have been duly had until the contrary is proved. The burden of proof is upon the said respondents. Until the said burden is discharged the said respondents cannot be heard to say that the minutes of the proceedings of the Board of Directojswere wrong. Prima facie they were parties to the decision to sell the shares and they cannot be given credence at this stage.

 (B) If having sent the notices the company finds it necessary to change the raiue of the meeting it will have to notify members of the change before the expiration of the minimum period of notice prescribed by the Act or the articles. The members are entitled to that length of notice in order to make arrangements to attend if they want to.[24] The notice must fairly indicate the object of the meeting so as to enable a shareholder to decide whether he should attend the meeting or not. In the case of an AGM the “ordinary business” will denote consideration of the balance sheet, director’s report, auditor’s appointment, election of directors etc. If however, resolutions on other matters are to be proposed as special, extraordinary, elective or ordinary resolutions then it is customary to set out the resolutions verbatim.[25]

 (C)–Under Schedule: Regulations to the Act, proxies must be deposited at least 48 hours before the meeting. In the U.S.A. where there is no such practice, the meeting may be deliberately prolonged in order to obtain more proxy votes to be obtained by high pressure solicitation. It is quite an universal practice now for the board to send out proxy forms in their own favor with the notice of the meeting and for these to be stamped and addressed at the company’s expense. The directors thus have a significant advantage in securing the votes.

 Directors:

(A) Sections 90 -110 of the Companies Act deal with directors. Section 90 makes it obligatory for every public company and all private companies that are subsidiaries of a public company, to have a minimum of three directors. This section has improved upon the previous section 83A of the Act of 1913. It requires a private company to have at least two directors, and provides that only an individual may be appointed a director. This removes the shortcoming in the previous law which did not mention whether a private company is required to have any director or not. Also following the Indian Act, the law now requires that only an individual can now be appointed a director. This removes the complaint that the appointment of bodies corporate as directors was undesirable.

 (B) Section 91 provides that the subscribers to the memorandum of association shall be deemed to be the   directors of the company until the first directors are appointed. Other directors are to be elected by the members in general meeting or in the case of a casual vacancy to be appointed by the board but so that the new appointee retires at the meeting in which the outgoing director was to retire. At least one third of the directors must be such that they are required to retire by rotation at any time. Section 83(2) of the Act of 1913 required two third of the number of directors to retire by rotation and it is not understood why the new Act deviated from the time tested formula of requiring that at least two third of the board should be persons facing periodical elections at the general meeting.-This is important because apart from the three types of directors mentioned above there is another category of directors, namely, those who are appointed by outsiders under a contract, e.g., directors appointed by loan giving agencies. Previously the law required that permanent directors could not exceed one-third of the total number of directors but now it seems that up to two thirds of the total number of directors of a public company can be appointed under contract or on a permanent basis even under the articles.

 (C) The Act however leaves the determination of the number of directors to the company’s discretion. Not infrequently, articles provide for a maximum and minimum number of directors. If there is any inconsistency between the articles, only a question of construction arises. Thus, where one of the articles of association (article 109) of a company prescribed a maximum and minimum number of directors without any qualifying words, and another article (article 126) authorized the company in general meeting to increase or reduce the number of directors, subject to provisions of section 83 A of the Act of 1913 (section 91 of the current Act) , to alter their qualification and change the order of rotation of the increased or reduced number, it was held that this was a case of inconsistency of the articles. As to whether the power of the company by ordinary resolution to ‘ increase or reduce the number of directors conferred by article 126 was only exercisable within the limits set by the maximum and minimum prescribed by article 109, and whether a special resolution altering article 109 was required to increase the number of directors beyond the prescribed maximum, it was held by the Privy Council, reversing the decision of the Calcutta High Court, that the company had power to increase the number of directors beyond the maximum prescribed by article 109, by an ordinary resolution and consequently a special resolution altering article 109 for the purpose was not required. The power to “increase or reduce the number of directors”, according to the natural meaning of the words, includes power to increase the maximum without necessarily making specific appointments,, and subject to law, to reduce the minimum for otherwise, an ordinary resolution at a general meeting would suffice without then necessity of having a special article for that purpose.[26]Restrictions on Appointments and Disqualifications.

Restriction on Appointment and Disqualification:

Sections 92 and 93 of the Act relate to restrictions on appointment of directors. A person shall not be capable of being appointed a director of a company by the articles, and shall not be named as a director in any prospectus issued by or on behalf of the company unless before the registration of the articles or the publication of the prospectus, he has signed and filed with the Registrar a consent in writing to act as such director and a contract in writing to take from the company and pay for his qualification shares if he has not already taken and paid for the shares and filed an affidavit to the effect that shares not less than qualification shares are registered in his name.[27] On an application for registration of the memorandum and articles of a company, the applicant shall file with the Registrar a list of the persons who have consented to become directors of the company. Section 93 requires that every person proposed as a candidate for the office of a director shall sign and file with the company his consent in writing to act as a director, if appointed, and shall not act as a director of the company unless he has, within thirty days of his appointment, signed and filed with the Registrar his consent in writing to act as a director. Section 94 provides for disqualifications of directors. A person shall not be capable of being appointed a director of a company if he is found to be of unsound mind by a court of competent jurisdiction, is an undercharged insolvent or has applied to be so adjudicated or has not paid the call money on his shares for six months or is a minor. A company may by articles provide for additional grounds for disqualification. This section is new and should be read with section 108 which provides that the office of a director shall be vacated in certain circumstances. Thus, a person will cease to be a director if he has failed to obtain his share qualifications within the time prescribed in section 97(1), or is found to be of unsound mind by a Court of competent jurisdiction, or is adjudged an insolvent , or fails to pay for his shares within six months of the call to pay such money, or he or any firm of which he is a partner or any private company of which he is a director without the sanction of the company in general meeting accepts or holds any office of profit under the company other than that of a managing director or manager or a legal or technical adviser or a banker, 6r absents himself from three consecutive meetings of directors or from all meetings of directors for a continuous period of three months whichever is longer without the leave of the Board, or accepts a loan or guarantee from the company in contravention of section 103, or acts in contravention of section 105 of the Act. A company by its articles may provide that the office of a director shall be vacated on additional grounds.

Sections 93 and 94 are new in our law. It was long felt that while the Act of 1913 provided for filing of consent to act as director if named so in the articles or the prospectus it did not require that all directors should give their consent to act so. Further, while a director would vacate his seat under certain circumstances, there was no provision for disqualifications of directors at the time of appointment. Three of the disqualifications, namely, being of unsound mind, undercharged insolvent or not paying for shares within six months of the call to do so, are common in both sections 94 and 108.

Section 98 provides that the acts of a director shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification, provided that nothing in this section shall be deemed to give validity to acts done by a director after the appointment of such a director has. Shown to be invalid.

 Elections of Directors: Provided he is not otherwise disqualified, any person can get himself elected to the board of directors if he can get the support of the majority of the directors. In Gujrat-Punjab Bus Ltd. vs Muhammad Ashrafi[28] Shafi J. held that the words ‘votes-majority’ meant majority of shares of shareholders present at a meeting convened for the purpose of electing the office holders. Regulation 57 of the Schedule 1 Regulations to the Act of 1994 provides that at any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands, unless a poll is demanded before or at the declaration of the result of the show of hands according to the provisions of section 85 of the Act. It is clear that any resolution, including a resolution for the election of directors, has, in the first instance, got to be put to the vote of the meeting, which must decide it on a show of hands. If the show of hands shows that a certain person has majority, then the chairman will declare him as having been so elected even though he may not have the support of the majority of the shares in his favour. In such a case, every person present has one vote, but if a poll is demanded then on a poll every member has one vote in respect of each share held by him. When no poll is demanded, the question of vote in respect of each share does not arise.

Acts to be valid: The acts of a director will be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification, but nothing can give validity to acts done by a director after his appointment has been shown to be invalid.[29] This law protects innocent outsiders in their transactions with invalidly appointed directors. However a person will not be allowed to take advantage of this section, if he has notice of some probable defect or if he knows that the regularity of the appointment has been challenged and takes no steps to ascertain the facts.[30] Also, this section does not justify the claims of a person against a company for services as liquidator where, because he had not been validly appointed, he never ha. authority from the company to act as liquidator.

 Qualification Shares: Section 97 requires a director to hold qualification shares within sixty days of his appointment. Regulation 71 of the First Schedule Regulations requires a director to have at least one share. It has been held that when the petitioner had transferred all his shares in a company he had ceased to be a director and chairman of the company.[31] A company’s articles of association frequently require its directors to hold a certain number of shares in the company to ensure that they have a material stake in its success and will consequently devote their best endeavors to its service.[32] The amount of the share qualification is often specified in the articles, but if the company is governed by Schedule 1 Regulations, it is enough to hold a single share in the company.[33] Unless the company’s articles so require, a director need not obtain his qualification shares before he is appointed, nor need he obtain them by allotment from the company, but unless he obtains them within two months after his appointment or such shorter time as is fixed by the articles, he ceases to be a director.[34]

There is nothing in the policy of the Companies Act or in its language which prohibits the inclusion in articles of additional or different qualifications for directorships. Thus, a special resolution passed at the extraordinary meeting of a bank providing for a holding of a fixed deposit of Rs. 1000/- as an additional qualification for a director is intra virus and legal.8 In Zamir Ahmad vs. D.R.Banaji[35] the directors appointed did not acquire qualification shares but the company went into liquidation within two months of the appointment of the directors. On an application by the liquidator to put the names of the directors on the list of contributories, it was held that no contract to take shares had come into existence and that the names of the directors not being on |he register could not be included in the list. Mere appointment as a director does not mean that a contract has taken place to take the shares. The directors must specifically apply for allotment of shares from the company, for they are not bound to take up the unpaid shares directly from the company. It is open to the director concerned to choose the manner of acquiring shares. Before it was enacted that the failure of a director to obtain his qualification shares would cause him to vacate office, it was held in England that a director impliedly authorized the company to allot to him his qualification shares, if he did not obtain them elsewhere within the time fixed by the articles or, if no time was fixed, within a reasonable time after his allotment, which has been interpreted to near  before he first acted as a director’s.

 Now that the legislature requires the directors to obtain share qualifications within two months or in default, lose their directorships, it would seem that the company cannot allot shares to him so as to make him a shareholder and qualify him as a director. This is because the company’s authority to allot only arises at the expiration of the fixed time and at the moment when it arises the director has vacated office under statutory provisions, thus revoking the authority. The qualification shares must be registered in the director’s name especially where the articles require that they must be so qualified.[36] Similarly, if the articles require shares to be held in the director’s own right, then if one holds shares in a company as liquidator of another company (which held shares in the former), one is not entitled to treat them as qualification shares.[37]

It is enough if the director holds shares as a trustee but not beneficially. but see Cooper vs Griffin[38] for a contrary view. In this case Lord Coleridge C.J. discussed the Pull brook case and said that in that case the qualification clause required a director to hold the qualification shares as a registered member in his own right and Jessel J., while holding that registered ownership was sufficient under that clause to confer the qualification, founded his judgment upon the words ‘as registered member’. In Bainbridge vs Smith[39] Cotton LJ. said that in his opinion although the judgment in the Pull brook case was right, the dictum was not well founded and that the meaning of ‘a shareholder holding shares in his own right’, is that he must not only have the legal right to deal with them but must have the beneficial ownership of them, although he may still be the beneficial owner, if he has mortgaged his shares. A still later case, Sutton vs English and Colonial Produce Co., while confirming that holding qualification shares as a trustee without beneficial ownership is sufficient (if the articles require holding shares ‘in his own right’), held that it was not so, if he held them in a representative character. It was further held that, in such a case, it was not necessary that a director should hold the shares as a beneficial owner, but, to comply with the articles, he must hold them in such a way that the company might safely deal with them, whatever his interest in them might be. Sutton’s case appears to take a middle lane between the two extremes in the Pull brook case and the Cooper’s Case in holding that the company must be able to deal with the shares safely, although beneficial ownership is not necessary.

Modern day company practice however does not require that a director should be the beneficial owner. Directors who accept and hold their qualification shares in trust for and at the will of the promoter, to whom they hand blank transfers, are guilty of misfeasance, and the measure of damages is the highest value of shares during their holding. It is not only improper but it is misfeasance to qualify by taking shares in trust for the promoter to fill up at his pleasure. Directors so qualified hold office at the will of the promoter and as long as they fulfill his wishes. But as soon as they act contrary to the promoter’s wishes, he can fill up and lodge the transfers and disqualify them.

 The Court has jurisdiction to relieve a person who has acted as a director without having obtained qualification shares within the prescribed period from penalties under section 97(2).10 There the Court assumed jurisdiction under section 372(1) of the Companies Act 1929, which provided that the Court might excuse a director for negligence, if he had acted honestly and reasonably. The corresponding section in our Companies Act is section 396. As to what constitutes acting reasonably is a question of fact. Where a person had been given shares to qualify him, if he had held himself out as a shareholder, then he would be stopped

Appointment by Non-Members: An outsider may, by virtue of a special contract with the company, appoint directors and the articles of association may expressly empower an outsider to appoint directors and in that case the outsider’s right to appoint a director will be further strengthened. In British Murac Syndicate vs Appleton Rubber Co.[40] by an agreement made between the plaintiff syndicate and the defendant company, the plaintiff syndicate agreed to sell and the defendant company agreed to buy certain patent rights and the goodwill of a business in consideration of cash and shares in the defendant company. By a clause in the agreement it was provided that, so long as the plaintiff held at least 5000 shares in the capital of the defendant company, the plaintiff syndicate should have the right to nominate two directors on the board of the defendant company. This provision in the agreement was also entrenched in the articles of association. The patent rights having been assigned to the defendant company, and the purchase price paid and satisfied, two directors were nominated by the plaintiff, but the defendant company refused to accept their nomination.

 It was held that, as the agreement had been carried out by the assignment of the patent rights, it was a mere question of carrying out a subsisting obligation and as soon as the plaintiff syndicate nominated the two persons as directors, they became directors there and then and nothing remained to be done by the defendant company to perfect their appointment. So there being no objection of a personal nature as against one of the nominees, an injunction was granted to compel the acceptance of the said person as director of the company. It is to be noted that the articles constitute a contract between the members and the company only so that they do not confer rights or obligations on a member otherwise than in his capacity as a member.[41] In the instant case, the articles were only relevant to the question whether the agreement had been executed (and on facts it was found that it had), for as Eve J. said at about the same time this case was decided, (Plantations Trust Ltd. vs Bila Rubber Lands[42]) as a general rule the Court will not grant an injunction to enforce specific performance of an executor agreement between a company and an outside body to elect as director a nominee of such outside body.

 The courts are, however, reluctant to impose on a company as director a person unfit to act or one in whom the members generally have no confidence. Thus in the British Murac Syndicate case the Court adjourned the matter till the general meeting of the company had expressed its views as to whether it had any personal objection against the appointment of the other nominee, whose business was in competition with the company. It was commented in the course of the judgment[43] that although an outside body like the plaintiff syndicate may have the power of nominating two directors on the board, the Court would not by an injunction force the company to accept on its board persons who were unfit or thoroughly unacceptable as members of the board of directors. Under the managing agency system, managing agents often had a right to appoint directors on the board, but not exceeding one-third (at present two-thirds) of the total number of directors.

  Conclousion– Directors may therefore be appointed under an authority in the memorandum or articles, it being possible to give that authority to one or more members or to someone who is not a member, or appointed by the board while filling up a casual vacancy or appointed by the company in general meeting. The term of office is normally fixed by the memorandum or articles. This may provide for the appointment of named individuals with provision to cover the eventuality of the appointee’s death or onset of legal incapacity occurring while in office. Directors have to file written consent for acting as such. Subsequent directors can be appointed by the company in general meeting in the exercise of their inherent power to direct the control of the company, unless that power is excluded by the contract embodied in the articles, either expressly or by clear implication.[44] Typically, however, the articles make provision for the appointment of directors. Articles commonly provide for the power to appoint directors to be exercised by the general meeting (Schedule 1 Regulations 82, 84, 87). An article empowering the directors to appoint additional directors does not necessarily deprive the general meeting of its inherent power to appoint additional directors up to the maximum number prescribed by the articles,[45] sometimes with the qualification that the board may make appointments to fill casual vacancies, or as appointments of additional directors up to the maximum allowed by the articles.[46]

While the adoption of such provisions has become common, there are few limits to the kinds of arrangements which the incorporators may choose to make for the appointment of directors. In a small company it is not unusual for the holders of a majority of shares to have the power to appoint directors. In a joint venture company formed by several companies to carry out a project each venture will typically have power to nominate a number of directors proportionate to the value of the venture’s contribution. Where a company is being administered under a shareholder’s agreement the terms of appointment of directors may be laid down in the agreement. To avoid the possibility of a meeting electing a person as a director without proper notice to members, articles sometimes require notice of intention to propose a person for election, other than a retiring director, to be given to the company some days before the meeting as a condition of eligibility for election of the person proposed. Such a provision also protects incumbent directors against surprise nominations.

 The powers given to directors to fill casual vacancies and to appoint additional directors must, like other powers given to the board, be exercised for the benefit of the company as a whole. In exercising their powers the directors should consider whether the person nominating replacement directors appears to have the necessary voting powers to prevail in a general meeting. The directors are entitled to take into account the possible disruption and expense that could be caused by a contested election which develops into a proxy fight. If they decide to resist the nominations made by a person who claims to have attained control, they are entitled to reasonable use of the company’s resources to inform shareholders about candidates for election but they are not to campaign in a partisan way for particular candidates.[4

Bibliography

1.     Dr. M. Zahir, Company and Securities laws

1. 2.     www.google search .com
2. 3.     Times law Reports
3. 4.     Integrity case
4. 5.     Principal of Modern Company Law
5. 6.     Companies Act 12ED
6. 7.     Scottish Cases

 [1] (Section 241)