Friday, August 08, 2008

Companies Act_Practical Problems_30

M/s ABC Ltd. had power under its memorandum to sell its undertaking to another company having similar objects. The Articles of the company contained a provision by which directors were empowered to sell or otherwise deal with the property of the company. The Shareholders passed an ordinary resolution for the sale of its assets on certain terms and required the directors to carry out the sale. The Directors refused to comply with the wishes of the shareholders where upon it was contended on behalf of the shareholders that they were the principal and directors being their agents were bound to give effect to their decision. Based on the above facts, decide the following issues, having regard to the Provisions of the Companies Act, 1956 and case laws.

(i) Whether the contention of shareholders against the non-compliance of their wishes by the directors is tenable.
(ii) Can shareholders usurp the powers which by the articles are vested in the directors by passing a resolution in the general meeting?

(i) The Board is the supreme body having the management of the company. The Board has the absolute power to do all things except those that are expressly required to be done by the company in general meeting. The shareholders cannot interfere in the day to day management of the company. The shareholders cannot supersede or usurp the Board's powers, or instruct it as to how it shall exercise its powers.

Also, as per Sec. 293, the power to sell, lease or otherwise dispose of any undertaking of the company is vested with the Board, though the Board can exercise such power only with the consent of the shareholders in general meeting. Thus, it is evident that a direction by the shareholders does not make it obligatory for the Board to exercise such power.

If in the opinion of the Board, it is not in the best interest of the company to sell its assets, the Board is not bound to do so, notwithstanding the fact that the company in general meeting has resolved that the assets should be sold [Pothen v Hindustan Trading Corpn. (P) Ltd.].

Thus, the contention of the shareholders is not tenable.
(ii) The powers of management are vested in the Board of directors; the Board alone can exercise such powers Even a unanimous resolution of the shareholders will not enable the shareholders to exercise the powers of the Board. The shareholders cannot interfere in the day to day management of the company. Thus, the shareholders cannot usurp the powers vested in directors.

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