Consentia on Law - VOl - II

Corporate Rights against Personal Rights of Members: A Legal View

INTRODUCTION

Sec. 41 of the Companies Act, 1956 and now Section 2(55) of Companies Act, 2013 defines members as any person who is the subscribers of the memorandum of a company or every other person who agrees in writing to become a member of a company and whose name is entered in its register of members.

A member of a company has two kinds of rights namely, i) individual rights and ii) corporate rights. Every shareholder can enforce his individual rights singly but corporate rights have to be enforced by the majority.[1]

However, individual and corporate membership may not be mutually exclusive. Where the same transaction infringes both individual and corporate membership rights, one composite action can be brought.[2] In case of infringement of a personal right, a member may sue a wrongdoer and the company in his own name. But for the infringement of his corporate right, the action should be brought in the name of the company. The company should be plaintiff and the wrongdoer should be made the defendants and in such cases the benefit of the suits cannot be claimed by the person as it is claim of the company not of individual shareholders.

The main objective of this project is to define what are the personal rights and corporate membership rights of a member and secondly to demarcate the key difference between the corporate membership rights and the personal rights of the members as it has been seen in most of the case as often seen that some of the members try to assert their corporate rights so as to stop the majority from taking decisions which under the Act are given the power to make decisions on behalf of the company. Therefore, the duty of the court in such cases is to assert whether disputed rights constitute a violation personal or corporate rights of a member as there is a only a thin line which demarcate between the two set of rights. Thus, there is a pertinent need to properly characterize the different rights of members as these rights can severely affect the management and affairs of the company and hamper the normal day to day functioning of the company which may lead to heavy loss caused to the company.

 

Chapter-1

PERSONAL AND CORPORATE RIGHTS OF MEMBERS

PERSONAL RIGHTS OF MEMBER

Individual Rights of members: There are certain rights of the members of a company, which they can enjoy in their individual capacity. These rights are basically contractual right and cannot be taken away except with the written consent of the member concerned.

The individual rights of a member arise in part from the contract between the company and the member which are implied on his becoming a member, and in part from the general law. Under the contract implied from his membership.

Some of the contractual individual/ personal  rights are -:

  • he is entitled to have his name and shareholding entered on the registrar of members and to prevent unauthorised additions or alterations to the entry, to vote at meetings of members[3],
  • to receive dividends which have been duly declared or which have become due under the articles [4]
  • to exercise pre-emption rights over other members shares which are conferred by the articles[5]
  • to have his capital returned in the proper order of priority in the winding up of the  company or on a duly authorized reduction of the capital. [6]
  • under the general law he is entitled to restrain the company from doing acts which are ultra vires [7]
  • to have a reasonable opportunity to speak at meeting of members [8]
  • to move amendments to resolutions proposed at such meeting[9] to transfer his shares[10].
  • The Supreme Court in the case of LIC v. Escorts Ltd.[11]; certain rights of shareholders were recognized by the court such as to elect directors, to participate in the management, to enjoy the profits, to share on winding up etc.

Other Individual/personal rights recognized by the Companies Act are-:

  • right to vote at the meetings [Sec. 87 –Companies Act,1956][Sec. 47- Companies Act,2013],
  • right to requisition an extraordinary general meeting of the company [Sec. 169- Companies Act,1956][Sec. 100- Companies Act,2013].
  • right to receive notice of a general meeting [ Sec. 172- Companies Act,1956][Sec. 101- Companies Act,2013]
  • right to require the company to circulate resolution [Sec. 18- Companies Act,19568][Sec. 13- Companies Act,2013].
  • to have the certificate of shares [Sec. 113- Companies Act,1956][Sec. 56- Companies Act,2013], to transfer shares [Sec. 82- Companies Act,1956][Sec. 44- Companies Act,2013]
  • to inspect registrar of members and debentures holders [Sec. 163- Companies Act,1956][Sec. 94- Companies Act,2013]
  • to obtain on request, minutes of proceedings at general meeting [Sec. 196- Companies Act,1956][Sec. 119- Companies Act,2013]
  •  to participate in the removal of the director by passing an ordinary resolution [Sec. 284- Companies Act,1956][Sec. 169- Companies Act,2013].

The dividing line between personal and corporate rights is very hard to draw, and perhaps the most that can be said is that the court will be inclined to treat a provision in the memorandum or articles as conferring a personal rights on a member only if he has a special interest in its observance distinct from the general interest which every member has in the company adhering to the terms of its constitution. In Pender v. Lushington[12], it was observed that the right to exercise his vote by a share-holder in a company is an individual fight, and that an infringement of that right will give rise to a justiciable issue.

A consequence of the distinction between personal and corporate rights is that a member cannot bring a personal action for the loss that he has suffered by the diminution in the value of his shares resulting from breaches by the defendants of provision of the company’s memorandum or articles which do not confer personal rights on members, or from breaches of fiduciary duties owed by the defendants to the company, even if the member can prove a conspiracy between the defendants to commit the breaches complained of.

CORPORATE MEMBERSHIPS RIGHTS

Corporate Rights are the rights, which, each member has agreed, to be exercised by majority at general body meetings. This involves the principles of submission by all members to the will of the majority, provided that the will is exercised in accordance with the law and Memorandum and Articles of Association of the company

REPRESENTATIVE AND DERIVATIVE ACTION

In certain circumstances an individual member may bring an action to remedy a wrong done to his company or to compel his company to conduct it affair in accordance with the constitution and the rules of law governing it, even though no wrong has been done to him personally, and even though the majority of his fellow members do not wish the action to be brought. The form of his action in these exceptional cases is peculiar, because the plaintiff does not sue in his own right alone, but on behalf of himself and all his fellow members other than those, if any, against whom the relief is sought. If the members sue for relief against the company, it must, of course be made a defendant; if he seeks to enforce a corporate claim against other persons, the company must still be joined as a co-defendant so that it may be bound by the judgment, and so that it may enforce any order giving relief against the substantive defendants.[13]

The individual member’s action in these exceptional cases may be described as “representative” because it is brought on behalf of himself and persons other than himself who would go along with him to protect their legitimate corporate rights. When relief is sought against third parties for the company’s benefit, the action may also be described as derivative, because the individual member sues to enforce a claim which belongs to the company, and his right to sue is derived from it.

The plaintiff shareholder can complain in a derivative action of wrong committed before he became a member [14] the court will only allow a derivative action to proceed if it is brought for the benefit of the company, and so if the plaintiff motive is to benefit a rival concern which has encouraged him to sue and has indemnified him against costs, the action will be stayed[15]. It is thus submitted that an important aspect of enforcing a corporate membership right the action should be brought for the benefit of the company.

SHARES: PERSONAL RIGHT OR PROPERTY RIGHT

A share is an item of property, and can be sold or transferred. Holding a share makes the holder a member of the company, and entitles it to enforce the provisions of the company’s constitution against the company and against other members. The concept of transfer of voting rights without transfer of shares has been contended in many cases and the courts have usually held affirmative view on the same based on the argument that a right to vote cannot be a personal right but is only a property right. The same has been discussed below in light of available case law.

In E.D. Sassoon And Co. Ltd. v. K.A. Patch, 1922 it was argued that the right to vote is a right personal to the shareholder, that it is, therefore, not transferable under Section 6 of the Transfer of Property Act, 1882, and cannot be the subject of a trust under Section 8 of the Indian Trusts Act. But the right to vote has no connection with the personality of the shareholder. It is suggested that the company has a right that the shareholder shall exercise his own personal judgment on matters considered at meetings. That is not so. The company cannot inquire into a shareholder’s motives or invalidate his vote on the ground that he has a private interest: East Pant Du United Lead Mining Company {Limited) v. Merryweather [16].

A shareholder may bind himself by contract not to vote or to vote in a particular way: Greenwell v. Porter[17]. If he can be so bound by contract, it follows that he can be bound by the directions of his beneficiary. The truth is that the right to vote is a right of property annexed to the shares and transferable or assignable with the share.

As discussed in case of Mohini Mohan Chakravartty, it is held that shares are property rights and the pawnee of shares in a company cannot be treated as the holder of shares nor is he entitled to receive any dividend on the shares.

Chapter-2

DIFFERENCE BETWEEN CORPORATE RIGHTS AND INDIVIDUAL or PERSONAL RIGHTS OF MEMBERS

            The Principle of Corporate rights against personal rights of members can be in a way said to be established in the case of Foss v. Harbottle where the rule that majority will prevail was seen.

  • DIFFERENCE IN TERMS OF MEANING:

In the landmark case of C.L. Joseph v. Jos and Anr.[18]; the Kerala High Court observed that;

“There are two kinds of rights for a member of the Company, one the individual membership right and the other the corporate membership right. So far as the corporate membership rights are concerned a shareholder can assert those rights only in conformity with the decision of the majority of the shareholders. An “individual membership right” is a right to maintain himself in full membership with all the rights and privileges appertaining to that status. This right implies that the individual shareholder can insist on the strict observance of the legal rules, statutory provisions and provisions in the memorandum and articles which cannot be waived by a bare majority of shareholders.”

 The distinction between individual membership rights and corporate membership rights of a share-holder can thus be summarized as-:

By his contract with the company the shareholder undertakes with respect to some and, in fact, most rights which his membership carries, to accept as binding upon him the decisions of the majority of shareholders, if arrived at in accordance with the law and the articles; these membership rights are known as corporate membership rights. Other fights of the shareholders, according to his contract with the company cannot be taken away from him unless he consents; if such right is in question, a single shareholder can, on principle, defy a majority consisting of all the other shareholders. Rights of this type are known as individual membership rights.[19]

Thus we can conclude that a company and its functioning can be compared to the parliamentary system of democracy with the company’s general body as the Legislature and the board of directors as the executive. A company functions under its constitution consisting of its memorandum and articles of association and the applicable provisions of the Companies Act. The individual rights of a member stem from the implied contract between the member and the company. A shareholder may bring an action against a company for a wrong done to him personally or he may invoke his corporate rights. If a shareholder alleges that a wrong has been done to the company by persons in control thereof, he may bring a derivative action where he derives the authority from his corporate right to sue on behalf of the company. The company is impleaded as a defendant in such action and the premise on which the court entertains this extraordinary form of action is upon the complaining shareholder’s assertion that the company cannot sue as persons at its helm would not bring an action on its behalf or for its benefit for these are the wrongdoers.[20]

  • DIFFERENCE IN TERMS OF RELIEF GRANTED BY THE COURT:

The application for judicial review is a powerful instrument for minority shareholders in order to enforce their interests against a majority shareholder by temporarily blocking measures that have already been resolved. Since restructuring measures, corporate actions, corporate integrations, and squeeze-outs often have to be implemented without any delay, the minority shareholders often achieve a higher exchange rate of share certificates or a better cash compensation, particularly with regard to restructuring processes.

In the case of infringement of corporate membership right the affected person has the remedy to approach the High Court under a writ seeking for relief while in case of infringement of a personal right of member the remedy available is in the nature of a civil suit.

In the case of Santosh Poddar and Anr. v. Kamalkumar Poddar and Ors.[21], the question before the Bombay High Court was that plaintiff filed suit in the civil court for declaration that defendant ceased to be director of company and alleged meetings and resolution passed therein were illegal. The Civil Court opined that Court had no jurisdiction to entertain the suit.

Then subsequently a writ was filed before the Bombay High court. The preliminary objection was raised as regard to the maintainability of the said writ petition. The Issue in question framed by the Bombay High Court was-

Whether High Court has jurisdiction to try suit in view of Section 10 (Sec.2(26), Companies Act,2013)of the Companies Act, 1956 ?”

The Court observed that it is well settled that there is a clear distinction between the corporate rights and personal rights of members. The Court said that the cause of action related to individual rights and not to corporate rights. Hence the Company Court was not invested with jurisdiction, much less exclusive jurisdiction, to grant reliefs in such a matter nor does the High court have the power to tried  such suits, such suit  has to be tried by Civil Court.

Similarly in the case of Vijay M. Shah v. Flex Industries Ltd[22]. the same question was posed before the Delhi High Court as

Whether the High Court Has Jurisdiction to a matter filed under Section 81 and Section 10 and Rule 11 (b) and 17 of the Companies Act, 1956 with reference to allegation raised as to the non compliance of the notice.”

The Delhi High Court held when the grievance of the petitioners pertain to the realm of individual right of alleged wrong done to individual members and not to the realm of corporate rights, the petitioners should possibly insist on strict observance of relevant provisions in a civil suit. In any event the Company Court has no jurisdiction to grant relief in a matter like this and a writ petition is not maintainable.

Therefore it is submitted that it is a well settled proposition of law that in case of an personal right of members, the remedy available to such a person is to approach the civil court whereas in the case of infringement of corporate membership rights the remedy lies both to the High court and the Companies court.

  • THE RULE IN FOSS v. HARBOTTLE IS NOT APPLICABLE TO INDIVIDUAL MEMBERS RIGHTS

So far as individual membership right is concerned every shareholder has got the right to assert it in his own name, but if the infringement of a corporate membership right is alleged his remedy is a representative action on behalf of himself and other shareholders or in some instances an action in the name of the company. Individual membership right should not be confused with the rights available for qualified minorities. The question for decision therefore is whether the particular right asserted in this case is an individual membership right or a corporate membership right. If it is a corporate membership right it is subject to the will of the majority provided that will is expressed in accordance with the law and the article.

With respect to this right the principle of supremacy of the majority or corporate right against personal rights of members will apply and the rule in Foss v. Harbottle [23]will get itself attracted. In this landmark case the minority of shareholders had a claim in damage against some of the directors by reason of the fraudulent act of those directors. At the general meeting the majority resolved that no action should be taken against the delinquent directors. Two of the minority shareholders took out legal proceedings against the directors and others to compel them to make good the losses to the company; but the court dismissed the action on the ground that as the nets of the Directors were capable of being ratified by the majority of the members, the Court should not interfere, It was left to the majority to decide what was for the benefit of the Company, and their decision cannot be questioned except under certain well-defined circumstances.

From the above mentioned facts of the case we can reasonably deduce that the rule in Foss v. Harbottle is applicable to cases when the “corporate memberships” are involved provided that the case is not of an exception to the above rule for example  if the acts are done ultra vires.

But in the case of Edvards v. Halliwell. [24]the courts observed “The personal and individual rights of membership of each of them have been invaded by a purported, but invalid alteration……. In these circumstances, it seems to me the rule in Foss v. Harbottle has no application at all, for the individual members who are suing sue not in the right of the member but in their own right to protect from inversion their own individual rights as members.”

Also in India the same proposition of law has been accepted by the courts as in the case of Star Tile Works Ltd. Kallai v. Govindan [25]a Division Bench at the Court has occasion to consider a more or less similar question and the learned Judges came to the conclusion that the individual membership right is infringed an action to vindicate it is permissible and the rule in Foss v. Harbottle would not operate in such cases.

In the case of Avanthi Explosives (P.) Ltd. v. Principal Subordinate Judge[26], the Bench of Andhra Pradesh High Court, had opined that

“the rule against interference by the Court with the internal management of the companies is not applicable to cases of infringement of individual membership rights as distinguished from corporate membership rights.”

It is thus submitted that the principles of Foss v. Harbottle [27]; only applies where a corporate right of a member is infringed. The rule does not apply where an individual right is denied. Thus it is settled principle that the rule in Foss v. Harbottle case is of no application in case of an individual member’s right. Thus it is now well settled that the scope of the rule is confined to corporate membership rights and it has no application to individual membership rights.

It is well settled law now that a member is entitled to institute a suit to enforce his individual rights against the company such on his right to vote, or his right to stand as a director of a company at an election. If the shareholder however intends to obtain redress in respect of a wrong done to the company or recover monies as damages alleged to be due to the company, the action should ordinarily be brought by the company itself.[28]

It is well settled that the courts will not interfere with the internal management of the company affairs. Generally, it is observed that as in the case of Foss v. Harbottle that sometimes members try to enforce their will over the majority by claiming infringement of corporate rights as their personal rights and in a way hampering the functioning of the company. It is a cardinal principle of Company Law that the majority will prevail over the minority. That’s why corporate rights are assigned to members to enforce their in case of infringement of their rights by any or a single member of the company. Thus, it is submitted that that corporate rights are to be separated from the personal rights of members which can be enforced against the company as well as the members whereas the corporate rights can be enforced only by the majority and thus can be said that in a way it is brought by the company for the benefit of company and personal rights are for the benefit of individual members. Thus there is a necessity to distinguish between the above two to ensure that the misuse of these rights can be done away with and only genuine claims are brought in the court.

 CONCLUSION

The dividing line between personal and corporate rights is very hard to draw, and perhaps the most that can be said is that the court will be inclined to treat a provision in the memorandum or articles as conferring a personal rights on a member only if he has a special interest in its observance distinct from the general interest which every member has in the company adhering to the terms of its constitution.

It is observed that every time a matter is brought before the court relating to infringement of members then the court is pitted against the question as whether the said infringement of rights is a personal or corporate membership right of members?. Also it is often seen that members try to enforce their corporate rights by claiming an infringement of the personal rights will adversely affect the management of the company.

It is submitted that in a given case there can be a violation of both personal and corporate rights of members. But it is pertinent to note hear that that the court has to be very careful while ascertaining which right is infringed of members as for instance if corporate right is enforced as personal rights it will hamper the management of the company along with it such a proposition will run in conflict with the Companies Act which will be bad in law.

Lastly, as it is a well settled proposition of law that the court will not interfere in the internal management of the company unless there is a need to protect the minority shareholder. Thus, there is a need to demarcate between the Corporate Membership Rights and personal rights of members so that in a given case there is no probability that a corporate right is enforced as the personal right of the members and vice versa.

[1] Suresh Chandra Marwaha v. Lauls (P.) Ltd., [1978] 48 Comp. Cas. 110 (Punj. & Har.).

[2] A.K. Majumdar & G.K. Kapoor, Taxmann’s Company Law and practice 395, (17th ed. 2012)

[3] Re British Sugar Refining Co.  (1857) 4 K & J 408.

[4] Pender v. Lushington, [1877] 6 Ch. D 636.

[5] Wood v. Odessa Waterworks Co., [1889] 42 Ch. D 636.

[6] Griffith v. Paget, [1877] 5 Ch. D 894.

[7] Simpson v. Wetminister Palace Hotel Co., [1860] 8 HL Cas. 712.

[8] Wall v. London and Northern

[9] Henderson v. Bank of Australasia, [1890] 45 Ch D 330.

[10] Re Smith Knight & Co. Weston’s case, [1868] 4 Ch. App. 20.

[11] [1986] 59 Comp.Cas. 548

[12] 1877-6 Ch D 70.

[13] Spokes v. Grosvenor, [1897] 2 QB 124.

[14] Bloxham v. metropolitian Rly., [1868] L.

[15] Forest v. Manchester, Sheffield and Lincoln Rly. Co., [1861] 4 De GF & J 126.

[16] (1864) 2 H.& M. 254

[17] [1902] 1 Ch. 530

[18] AIR 1965 Ker 68, [1964] 34 CompCas 931 (Ker).

[19] Geoffrey Morse, Palmer’s Company Law 192, (20th  ed. 2008)

[20] Jaideep Halwasiya v. Rasoi Ltd. and Ors. , [2009] 150 CompCas 1 (Cal).

[21] 1992 (3) BomCR 310.

[22] 1996 IAD (Delhi) 260, [2001] 103 CompCas 1063 (Delhi); 61 (1996) DLT 378.

[23] [1843] 2 Hare 467.

[24] 1950 2 All ER.1067, See also Walsbury’s Laws of England 49 (3rd ed. 2002).

[25] MANU/KE/0090/1959 ; AIR 1959 Ker 254

[26] 1985 Indlaw AP 72.

[27] Supra Note 22.

[28] N.V.R. Nagappa Chettiar and Anr. v. The Madras Race Club, AIR 1951 Mad 831.

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