The Requirement of ‘Intention’ in Special Resolutions

By Gunjan Bahety and Tanmay Joshi, fourth-year students at MNLU, Nagpur

Introduction

Under the Companies Act, 2013 (‘Act’), decisions are taken and executed with the consent of the shareholders through resolutions. The consent of the shareholders is duly taken by the casting of votes. Special Resolution under the Act has been defined as:

“A resolution shall be a special resolution when

  1. the intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the members of the resolution; 
  2. the notice required under this Act has been duly given; and 
  3. the votes cast in favor of the resolution… are required to be not less than three times the number of the votes, if any, cast against the resolution by members so entitled and voting.”[i]

The very first requirement that the section provides is for “intention to propose the resolution as a special resolution” which needs to be “duly” mentioned in the notice. Going by the literal text of the statute, prima facie it seems that the requirement of intention is mandatorily an element for classification of a resolution as a special resolution. However, the courts have interestingly taken an opposite view of the same. 

Is Intention Really a Mandatory Requirement?

The Courts have time and again held that the requirement of “intention” under clause (a) of section 114 is not a mandatory requirement.[ii]

The Andhra Pradesh High Court had held in a case:

“requirement of setting out the intention to move a resolution as a special resolution in the notice could not be said to be such a mandatory requirement, that the failure to comply with it would invalidate the resolution.”[iii]

The Court then differentiated between a directory requirement and a mandatory requirement. The Court held:

“There is no general rule for determining whether a particular provision in a statute is mandatory or directory. The court must look at the purpose of the provision, its nature, and intention of the Legislature to find out whether it is directory or mandatory.”[iv]

The Court was of the view that even the use of the word “shall” is not decisive of the matter and many other aspects have to be looked into.[v] However, there are other aspects that the Courts need to consider while reaching this conclusion. The Supreme Court (‘SC‘) recently has stated that:

“the Legislature inserts every part of a statute with a purpose & the legislative intention is that every part thereof should be given effect to. If the words used are capable of only one construction, it is not open to the court to adopt any other hypothetical construction on the ground that it finds it more consistent with the alleged object and policy of the Act.”[vi]

Parallelly, the SC had held in a case that “the first and primary rule of construction is that the intention of the legislation must be found in the words used by the legislature itself.”[vii] Citing various case laws, the Apex Court had concurred, “when the Legislature has employed a plain and unambiguous language, the Court is not concerned with the consequences arising therefrom”[viii] and construal is to be done only when the text is incomprehensible. The Court further held that “it is a cardinal principle of interpretation of statutes that the words of the statute is to be given prima facie meaning, irrespective of the consequences”. However, equally it is important to look at the interpretation from another perspective, as cited by the SC:

“In matters of interpretation one should not concentrate too much on one word and pay too little attention to other words. No provision in the statute and no word in any section can be construed in isolation. Every provision and every word must be looked at generally and in the context in which it is used.”[ix]

The above-mentioned method of interpretation would obviously make it reasonable to give effect to the legislative intent and the purpose of the provision while keeping in mind to not focus much on the wordings of the section so as to defeat the purpose of the legislation. In light of the above analysis, even the court opined that the inconveniences which would arise if the resolution would fail even after being passed as a special resolution were certainly not the intention of the legislature.[x] Hence, the requirement of intention under section 114 cannot be said to be a mandatory requirement but only a directory requirement. Further, the Court held that the decisions which require a special resolution to be adopted are mandatory but the notice convening the meeting and implying the intention that the resolution is to be passed as a special resolution is only directory. The Court thus, adopted harmonious construction in practice. 

Hence, what would be of material importance would be the contents of the resolution and the consent of the members and certainly not what the irregularities in the notice would say. Therefore, it would be sufficient if the provision is only substantially complied with. The Gujarat High Court had also observed that the requirement of intention in the notice under section 114 to move a special resolution could not be said to be such a strict and necessary requirement that the failure to comply with it would invalidate the resolution.[xi]

It would be of relevance to discuss here the Duomatic Principle as was laid down in In Re Duomatic Limited 1969[xii]. Buckley J. held that given the shareholders who had a right to attend and vote at a general meeting, had informally assented to a decision in the meeting, that assent is binding and a formal meeting cannot be insisted upon.[xiii] The English Court took the view of In re Express Engineering Works Ltd.[xiv] and other cases[xv], wherein it was held that “where all the corporators in fact approve, the mere absence of the technicality of a formal resolution in general meeting is immaterial”. The Court accordingly held that “the agreement between all shareholders of the company had the effect of overriding the articles so far as was necessary.”[xvi] However, for the application of this principle, the existence of consensus-ad-idem among all the shareholders of a company for a particular course is a condition precedent.[xvii] The scope of this principle has been defined in various foreign cases. In Stakefield (Midlands) and others v. Doffman and another[xviii], it was held that “the principle cannot be applied for a transaction amounting to an unlawful return of capital”. In some cases, it has been held that the principle can be employed to alter the company’s articles.[xix] It has also been accepted as a defense for violation of fiduciary duties.[xx] It is to note that, “the Duomatic principle does not permit shareholders to do informally what they could not have done formally by way of written resolution or at a meeting.”[xxi]

In India, there have been numerous cases wherein the learned counsels have taken the aid of the Duomatic Principle.[xxii]The Indian Courts too applied the principle, for example in Darjeeling Commercial Co. Ltd. v. Pandam Tea Co. Ltd.[xxiii] the court while applying the principle concluded that the company adopted the loan in its annual general meeting through its members and now cannot take the defense that the said loan is fictitious or fraudulent. Even the Delhi HC had applied this principle and cited various English cases to back its view.[xxiv] Additionally, the Andhra Pradesh High Court in another case held that the principle in essence provides that if a statute provides that a course can be taken by the sanction of a certain number of members which is to be given in accordance with the prescribed procedure under the statute, then provided that the required number of members of that group sanction the decision, the prescribed procedure is not normally treated as being essential.[xxv]  However, extending the proposition, the Court concurred that “this should be the case when the Court is satisfied that the purpose of the given procedure is for the benefit of the members” of that group and enables a majority of that group to bind the minority in relation to the course in question.

Conclusion

Hence, what can be said is that the requirement of intention setting out in the notice under section 114 of the Companies Act, 2013 though not mandatory, but to avoid future instances of disputes, it would be better to declare such a notice as convening a meeting for the passing of a special resolution as there is no Supreme Court judgment to that effect. As we have seen the different approaches that the courts adopt while interpreting a statute and there is no straight-jacket formula to that, at times even plain text of the statute requires interpretation to mark it as “plain”. What is necessary to understand is to read the purpose of the section and not to fuss about the procedural requirements when can be easily resolved given the sanctions of the members.

Endnotes:


[i] Section 114, Companies Act 2013.

[ii] In Re: Novopan India Limited 1997 88 Comp Cas 596 AP, Brilliant Bio Pharma Limited v. Company Petition No.91 Of 2012; In Re: Maneckchowk And Ahmedabad [1970] 40 Comp Cas 819; C. Rajagopalachari v. Corporation of Madras [A.I.R. 1964 S.C. 1172].

[iii] In Re: Novopan India Limited 1997 88 Comp Cas 596 AP.

[iv] Ibid.

[v] Ibid.

[vi] N Sampath Ganesh v. Union of India (2020) Cr. Writ Petition NO. 4144 OF 2019.

[vii] Kanai Lal Sur vs Paramnidhi Sadhukhan 1957 AIR 907.

[viii] N Sampath Ganesh v. Union of India (2020) Cr. Writ Petition NO. 4144 OF 2019.

[ix] Illaichi Devi v. Jain Society, Protection of Orphans India, (2003) 8 SCC 413.

[x] In Re: Novopan India Limited 1997 88 CompCas 596 AP.

[xi] Maneckchowk and Ahmedabad Manufacturing Co. Ltd. [1970] 40 Comp Cas 819.

[xii] In Re Duomatic Ltd. [1969] 2 Ch 365.

[xiii] Re Duomatic, Buckley J at page 373.

[xiv] In re Express Engineering Works Ltd. [1920] 1 Ch. 466.

[xv] In Re Newman (George) & Co. Ltd. [1895] 1 Ch. 674, C.A.; Parker & Cooper Ltd. v. Reading [1926] Ch. 975; Salomon v. Salomon & Co. Ltd.[1897] A.C. 22, H.L.

[xvi] Ibid.

[xvii] Euro Brokers Holdings Ltd. v. Monecor (London) Ltd. [2003] 1 BCLC 506.

[xviii] Stakefield (Midlands) and others v. Doffman and another [2010] EWHC 3175.

[xix] Cane v. Jones [1980] 1 WLR 1451, The Sherlock Holmes International Society Ltd. v. Aidiniantz [2016] EWHC 1076 (Ch). 

[xx] Sharma v. Sharma [2013] EWCA Civ 1287.

[xxi]  Madoff Securities International Ltd v Raven & Ors. [2013] EWHC 3147 (Comm).

[xxii] Urban Infrastructure Trustees Ltd. v. Joyce Realtothers Pvt. Ltd. LNIND 2015 Bom 776; Dr. Renuka Datla And Others Versus M/Biological E Limited And Others Lnindord 2017 Ap 258Advansys India Private Limited & Others Versus M S Ponds Investment Limited & Others Lnind 2014 Bom 434.

[xxiii] Darjeeling Commercial Co. Ltd. vs Pandam Tea Co. Ltd. 1983 54 CompCas 814 Cal.

[xxiv] Adobe Properties Private Limited vs Amp Motors Private Limited CO.APPL.(M) 150/2016.

[xxv] In Re Torvale Group Ltd. [1999] All ER (D) 944, In Re Brilliant Bio Pharma Limited [2013] 180 Comp Cas 168 (AP).

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