Introduction

A company is distinguishable from other business models and a preferred mode of transacting business for its few unique features - separate legal entity, perpetual succession, ability to sue and be sued in its own name.1 Suits by and against corporations are governed under Order XXIX of the Civil Procedure Code, 1908 ("CPC")2. In this article, we examine an aspect which is seemingly a simple matter of process but can, in fact, be treacherous if not treated appropriately at the point of initiation of legal proceeding - the legal requirement of "authorization" of a person by a corporation to represent itself in dispute resolution. We also analyze the effect of defective authorization and possible cure of it during the pendency of the litigation. Further, we examine the effect of intra-board disputes on the company's ability to pass board resolutions, and thereby initiate or ratify the initiation of disputes on behalf of the company. Finally, since commercial / corporate dispute resolution is arbitration-centric, we also consider the requirement of a board resolution for initiation of arbitration proceedings under the Arbitration and Conciliation Act 1996 ("ACA") as against regular suits.

Genesis and requirement of board resolution in legal proceedings by a corporation

A party may be represented in court only by: (i) the party in person, (ii) his recognized agent, or (iii) a pleader on his behalf.3 A "recognized agent" is someone who holds powers-of-attorney, authorizing them to represent the parties.4 The appointment of a pleader to file a suit on behalf of a company can only be done by an authorized representative of the company.5

But what is a "party in person" in the context of a company, which can have any number of members or employees? The answer to this question lies in the history of company law itself. The evolution of modern company law can be traced back to the Joint Stock Companies Act, 1844 ("JCA 1844").6 Prior to the JCA 1844, with the advent of the Industrial Revolution, many businesses operated as unincorporated associations of persons ("AoPs") and a litigation was initiated against each of the members of such AoP - which was excessively cumbersome. Thus, the concept of a company, a legal fiction, was created to enable the efficient administration of an unincorporated AoP. Since an AoP acts as a collective entity, it can be said to act only when a majority of its members elect to act in a certain way - by way of a resolution.

The legal requirement of a board resolution to initiate a suit is illustrated in the case of M/s. Hari Shree Enterprises vs. M/s. Vikas Housing Limited7. In that case, it was held that the managing director of a company could not sue on behalf of the company merely by virtue of his office, as, a company does not sue as a part of its day-to-day affairs. The company, being a juristic person acts only through a resolution and the power of the company can be given only by the company resolving to sue through a board resolution.8

Distinction drawn between verification of pleadings and initiation of a suit

Under Order VI Rule 14 of CPC, every pleading is to be signed by the party (or by a person duly authorized by the party) and his pleader.9 The pleadings are required to be verified by a "duly authorized" person.10 If a person is expressly authorized to sign the pleadings on behalf of the company, through a board resolution or by a power of attorney, this would be sufficient compliance with the provisions of Order VI Rule 14 of CPC.11 However, Order XXIX of CPC, which governs suits by and against corporations does not place any emphasis on "authorization" and allows the secretary, director or other principal officer who is able to depose to the facts of the case to sign and verify the pleadings.12 Simultaneously, Section 21 of the Companies Act 2013 ("CA 2013") states that a document or proceeding requiring authentication by a company may be signed by any key managerial personnel or an officer of the company duly authorized by the board of directors on this behalf.13

To resolve this conflict, the courts have held that even in the absence of a board resolution or power of attorney, a person referred to in Order XXIX Rule 1 can sign and verify the pleadings on behalf of the corporation, and such act by the officer of signing the pleadings may be expressly or impliedly ratified by the corporation.14 For example, in Naresh Kumar, the Supreme Court observed that since the suit had been filed in the name of the company, the court fee was paid by company and the trial had continued for about two years - this is sufficient to show implied ratification of the officer's act by the company.15 However, if the trial court is unable to conclude on the basis of evidence on record that such act of the officer was ratified by the corporation, the court must direct a proper power-of-attorney or board resolution to be produced as per Order 41 Rule 27(1)(b) of CPC.16

However, the ability to sign and verify pleadings on behalf of the company under Order XXIX Rule 1 of CPC does not extend to the institution of suits.17 In Schmenger GMBH, the company had filed a letter authorizing the liaison officer to take any decision independently insofar as the case is concerned, but had not filed any board resolution authorizing the liaison officer to file the suit. The High Court of Madras held that a suit on behalf of the company may only be instituted by its directors, specifically empowered by the board of directors, who may then execute a power-of-attorney authorizing any other person. However, the company can always authorize some person to sign on behalf of the company.

Thus, unless the power to institute a suit is specifically conferred on a particular director through a board resolution, he has no authority to institute a suit on behalf of the company.18 In a case where the suit was instituted by a person on the basis of a letter of authority from its chief executive officer and no evidence was adduced to show that such a person was a director or authorized by way of a board resolution, the Supreme Court {held that the suit was not maintainable.19 However, in a case where the managing director, in accordance with a separate agreement between the company and himself, had executed a power of attorney in favour of a person to institute a suit without the company seal, it was held that the lack of company seal was not a fatal defect.20 We note that in case such agreement between a company and managing director is not executed or it doesn't contain an express power to initiate legal action, the recourse is for the board to pass the necessary resolution.

From the foregoing discussion, it is clear that while a corporation must duly authorize its officer by way of a board resolution or power-of-attorney to institute a suit in its name, any officer may sign and verify pleadings on behalf of the corporation and such defective authority is curable by ratification. The question of whether or not ratification of the act of the officer by the corporation has occurred must be determined on a case-to-case basis.

The effect of a "functional deadlock" on a company's ability to initiate disputes

It is often in the company's interest to pursue litigation for the enforcement of its rights so as to derive some monetary or legal benefit. Typically, only the company can initiate action against a violation of its legal rights, and an individual shareholder does not have any locus standi.21 However, in the course of business, the board of directors often finds itself in a "functional deadlock" and unable to perform its functions for want of authorization by the board. 22 These functions inter alia include the pursuit of the proper legal remedy in a given case, as the board may be unable (or unwilling) to pass necessary resolution(s) to authorize or ratify the act of its officer to signing and verifying pleadings.23 Practically, speaking, such situations may arise when the board is unable to pass a resolution due to lack of consensus or divergence of views within the board, when different blocks within the board of directors find themselves at loggerheads with each other, and also when the action sought to be initiated against persons who are related parties of some members of the board.

In certain cases, the shareholders of a company may be allowed to pursue a derivative action on behalf of the company.24 While the basis for derivative action in Indian law is borrowed from the Common Law principles, despite the codification of the law relating to derivative action in the United Kingdom and other jurisdictions, the legislature in its wisdom has chosen not to do so.25 In Dr. Satya Charan Law, the Supreme Court held that while only directors of a company can normally conduct litigation in its name, the shareholders of the company may be able to bring a "derivative action" where the directors are themselves the wrongdoers committing mala fide acts in their personal interest, conflicting with that of the company.26 Even a minority shareholder may bring a derivative action for a wrong done to a company which would be maintainable where the directors of the company themselves are the wrong doers.27

What differentiates a derivative action from an oppression and mismanagement ("O&M") petition under Section 241 of the CA 2013, is that while an O&M petition is filed by a group of shareholders for the violation of their rights as shareholders of the company, a derivative action is brought by the shareholders on behalf of and for the benefit of the company.28 The dispute is not between members of the company but between the company, who is the true plaintiff, and third parties (who may also happen to be directors of the company).29 Thus, the plaintiff in a derivative action is required to approach the court with clean hands.30 In Darius Rutton, the High Court of Bombay held that the derivative action would not be maintainable as family disputes of a personal nature were being agitated in the name of a derivative action.31

Intra-board disputes / claim of company against shareholder company

An interesting question arises as to the ability of minority shareholders to proceed with a derivative action to initiate an arbitration in the absence of a board resolution passed by the board of directors. Needless to mention, this situation would arise only where the board of directors have not authorized a company to institute the arbitration by way of an appropriate board resolution. The courts have taken conflicting views on this issue.

In the case of PPN Power, the company had entered into a power purchase agreement with the Tamil Nadu Electricity board ("TNEB") under which, according to the minority shareholders, the TNEB had breached its obligations.32 The minority shareholders filed a petition alleging acts of omission, commission and mismanagement of the company and inter alia prayed for the initiation of arbitration proceedings under the terms of the Power Purchase Agreement ("PPA"). After the Company Law board declined to grant the said relief, the minority shareholders proposed a resolution to initiate arbitration proceedings in terms of the agreement, which failed to pass. Subsequently, the minority shareholders filed a fresh application to authorize the minority shareholders, through two directors, to initiate arbitration in terms of the PPA, which was again rejected. Notwithstanding the order of the Company Law Board, the minority shareholders initiated the arbitration through a derivative action. The High Court of Madras held that respondents could not be injuncted from taking derivative action by exercising their common law right.

However, in Onyx musicabsolute.com, the High Court of Bombay took a different view.33 Relying on its own decision in Nirad Amilal Mehta , the High Court of Bombay affirmed the ability of minority shareholders to pursue a derivative action where the directors of the company themselves are the wrong doers. However, it held that such right does not extend to the initiation of arbitration as a derivative action is not contemplated before a private forum i.e., the Tribunal. It held that since the Tribunal gets jurisdiction only on agreement between the parties, arbitration could not be forced by the minority shareholders who obviously are not parties to the arbitration agreement. The High Court of Madras noted that pertinently the minority shareholders had not instituted arbitration proceedings in the name of the company, which was joined as a (formal) defendant. It appears that the High Court of Madras' decision may not have been brought to the High Court of Bombay's notice.

Initiation of arbitration proceedings and requirement of board resolution

Under the ACA, the arbitration proceedings are said to commence upon the receipt of the request for arbitration ("RFA") by the other party. In arbitration proceedings the parties are typically required to file vakalatnamas before the tribunal / arbitration institution as the case may be, along with the board resolution authorizing a person to represent the company before the tribunal. However, the ACA does not preclude the parties from agreeing (or the tribunal from determining) that no resolution would be required to initiate arbitration.34

It is our understanding that whilst proper filing of the suit before a civil / commercial court is the initiation of the legal action, the same in the context of arbitration is achieved by virtue of receipt of notice under Section 21 of the ACA by the counter party. Reading together the provisions of various laws discussed above, it makes for an arguable case that a company needs to pass necessary board resolution for issuing the said notice and initiate arbitration proceedings. The view seems to be corroborated by the High Court of Bombay.

In the recent case of Sushma Arya v. Palmview Investments, arbitration proceedings were invoked vide Section 21 of the ACA notice by the claimant company.35 The counter party replied to the invocation notice claiming that the initiation of arbitration proceedings was sham and untenable. The board resolution of the claimant company authorizing the individual to represent the company (incorporated under British Virgin Island laws) was passed only after issuance of notice under Section 21 of the ACA. The claimant company filed a statement of claim thereafter. The said board resolution was also passed without any meeting and was signed by an authorized representative of the claimant company's sole director 'Execorp', which was also a British Virgin Island corporation.

The tribunal passed an order giving the claimant company an opportunity to either prove the validity of the said board resolution, or by filing a fresh resolution - since the irregularity is a curable / ratifiable defect. The claimant chose to file a fresh resolution. The counter party challenged the tribunal's order under Section 34 of the ACA. The learned single judge of the High Court of Bombay held that since there was no pleading that the board resolution was valid under British Virgin Island laws, and the board resolution is not valid as per Section 149 of CA 2013, the tribunal was not justified in treating the lack of authority as a curable defect. The tribunal's order was set aside on the grounds that the same was in contravention of the public policy of India. We note that the said judgement is under appeal.36

Conclusion

A board resolution is eminently desirable for initiation of suits / arbitration / connected applications on behalf of a company. When the verification of pleadings is done by an officer of the company who is not authorized by way of board resolution, the defect is albeit curable through ratification. Further, when an intra-board dispute exists and the board is unable to act in the interest of a company, the minority shareholders may bring a derivative action in the company's interest. However, such a remedy may not be available in all cases, and when it comes to the initiation of arbitration proceedings, Courts have rendered conflicting decisions.

The risk of not passing a board resolution before initiating litigation is ably demonstrated by the recent judgement of the High Court of Bombay in Sushma Arya v. Palmview Investments, wherein the lack of proper board resolution rendered the invocation of the arbitration clause as infructuous. Further, in the case of intra-board disputes, even the ratification of an act by the officer becomes difficult, as there is a possibility that board (and by extension, company) is held to ransom by certain interested or opportunistic directors who may block the ratification for some other benefit. Thus, as a measure of good corporate governance, companies ought to ensure that the board resolution is always passed to authorize its representative to initiate legal proceedings and arbitrations.

Footnotes

1. Section 9, Companies Act, 2013.

2. Subject to special procedural rules in states.

3. Order III, Rule 1, CPC.

4. Order III, Rule 2, CPC.

5. Order III, Rule 4, CPC; M/s. Nibro Limited v. National Insurance Co. Ltd., 1990 SCC OnLine Del 65.

6. 1844 c. 110 7 & 8 Vict. The JCA 1844 was the precursor to the more comprehensive Joint Stock Companies Act, 1856 which also included the concept of 'limited liability' introduced by the Limited Liability Act, 1855.

7. M/s. Hari Shree Enterprises v. M/s. Vikas Housing Limited, Chamber Summons No. 1705 of 2008 in Suit No. 3382 of 2007 decided on 19.03.2009. (hereinafter "Hari Shree")

8. Alcon Electronics Pvt. Ltd. v. Celem S.A., 2014 SCC OnLine Bom 1050, relying on Hari Shree.

9. Order VI, Rule 14, CPC.

10. Order VI, Rule 15A, CPC. This requirement is not applicable under Order VI, Rule 15, CPC in the case of non-commercial disputes. However, see Order II, Rule 9, Madras High Court (Original Side) Rules, 1956, which requires the person subscribing and verifying the plaint to be a "recognized agent".

11. United Bank of India v. Naresh Kumar, (1996) 6 SCC 660, ¶11. (hereinafter "Naresh Kumar")

12. Order XXIX, Rule 1, CPC.

13. Section 21, Companies Act, 2013.

14. Naresh Kumar, supra, note 11, ¶11.

15. New India Assurance Co. Ltd. v. Sesa Goa Ltd., 2020 SCC OnLine Bom 134, ¶23, discussing Naresh Kumar, supra, note 11.

16. Naresh Kumar, supra, note 11, ¶12.

17. Schmenger GMBH and Company Leder v. Saddler Shoes Private Limited, 2010 SCC OnLine Mad 6539 (hereinafter "Schmenger GMBH").

18. K.N. Sankaranarayanan v. Shree Consultations and Services Pvt. Ltd., 1994 SCC OnLine Mad 29, ¶7.

19. State Bank of Travancore v. Kingston Computers (I) (P) Ltd., (2011) 11 SCC 524.

20. Bhushan Steel & Strips Ltd. V. Bhartiya Loha Udyog (P.) Ltd., (2010) 167 DLT 237 (Del)

21. Foss v. Harbottle, (1843) 2 Har 461.

22. See Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., (2021) 9 SCC 449, ¶140 discussing the concept of "functional deadlock", i.e., where the inability of members to cooperate in the management of the company's affairs leads to an inability of the company to function at board or shareholder level.

23. See ICP Investments (Mauritius) Ltd. v. Uppal Housing Pvt. Ltd. & Ors., 2019 SCC OnLine Del 10604, (hereinafter "ICP") where a derivative action was sought to be instituted on the ground that the company was deadlocked (although it was held, on facts, that there was no deadlock and the action was dismissed as not maintainable).

24. See B.N. Viswanathan v. Tiffin's Barytes, Asbestos and Paints Ltd., (1953) 66 LW 124.

25. ICP, supra, note 23.

26. Dr. Satya Charan Law v. Rameshwar Prasad Bajoria, AIR 1950 Federal Court 133. (hereinafter "Dr. Satya Charan Law")

27. Nirad Amilal Mehta v. Genelec Limited, 2008 SCC OnLine Bom 425. (hereinafter "Nirad Amilal Mehta")

28. Vikarmaditya Khanna & Umakanth Varottil, The Rarity of DAs in India: Causes and Consequences, The Derivative Action in Asia: A comparative and Functional Approach (Cambridge University Press, Dan W. Puchniak et al. (eds.), 2012).

29. Rajeev Saumitra v. Neetu Singh & Ors., 2016 SCC OnLine Del 512. (hereinafter "Rajeev Saumitra")

30. Darius Rutton Kavasmaneck v. Gharda Chemicals Limited 2014 SCC OnLine Bom 1851. (hereinafter "Darius Rutton")

31. Id.

32. PPN Power Generating Company Limited v. PPN (Mauritius) Company & Ors., 2004 SCC OnLine Mad 668. (hereinafter "PPN Power")

33. Onyx Musicabsolute com Pvt. Ltd. & Ors. v. Yash Raj Films Pvt. Ltd. & Ors., 2008 SCC OnLine Bom 636. (hereinafter "Onyx musicabsolute.com")

34. Section 19, ACA.

35. Sushma Arya & Ors. v. Palmview Investments Overseas Ltd. & Ors., 2022 SCC OnLine Bom 4335. (hereinafter "Sushma Arya")

36. Palmview Investments Overseas Ltd. v. Ravi Arya & Ors., Lodging No. COMAP/36947/2022(stamp) filed on 30.11.2022; Palmview Investments Overseas Ltd. v. Sushma Arya & Ors., Lodging No. COMAP/37275/2022(stamp) filed on 30.11.2022.

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