The old idea that general meeting alone is the company's primary organ and the directors are merely the company's agents or servants, at all times subservient to the general meeting, seems no longer to be the law as it is certainly not the fact.' How far do you agree with the above statement? Discuss with reference to decided cases and the case in which it cannot be invoked.

Question: The old idea that general meeting alone is the company's primary organ and the directors are merely the company's agents or servants, at all times subservient to the general meeting, seems no longer to be the law as it is certainly not the fact.' How far do you agree with the above statement? Discuss with reference to decided cases and the case in which it cannot be invoked. [BJS 1986]

Find the question and answer of Company Law only on Legal Bites. [The old idea that general meeting alone is the company's primary organ and the directors are merely the company's agents or servants, at all times subservient to the general meeting, seems no longer to be the law as it is certainly not the fact.' How far do you agree with the above statement? Discuss with reference to decided cases and the case in which it cannot be invoked.]

Answer

The above statement is generally agreed upon by legal scholars and practitioners. The idea that the general meeting is the primary organ of a company, and the directors are merely its agents or servants, at all times subservient to the general meeting, has been challenged and revised in light of changes in corporate governance and the increasing complexity of modern business organizations.

The aforesaid passage is based upon the decisions in the case of Pender v. Lushington, [1877] 6 Ch D 70 (Ch D),  in which the court referred to the directors as the primary organs of the company. It observed as follows:

“The directors have ceased to be mere agents of the company. Both they and the members in general meeting are primary organs of the company whom the company's powers are divided. The general meeting retain ultimate control, but only through its powers to amend the articles (so as to take away, for the future, certain powers from the directors) and to remove the directors and to substitute others more to its taste. Until it takes one or there of these steps the directors can, if they are so advised, disregard the wishes and instructions of the members in all matters not specifically reserved (either by the Act or the articles) to a general meeting. And, as we shall see in a later chapter, the practical difficulties in the way of effectively exercising even this measure of supervision are very great owing to the directors' control over the proxy-voting machinery.”

These observations, show that the power of management of the company is vested in the Board of Directors as a result of the Companies Act as well as the Articles of Association of the company and unless and until the general body by the policy of its Articles chooses to take them away, and substitute others more to its taste, the Board of Directors in its right continues to manage the affairs of the company. The decisions of the Board of Directors are to be taken by a majority.

In modern corporate law, the role of directors and the powers they possess have been expanded, and they are seen as playing a critical role in the management of a company. The Companies Act, 2013 and the case law surrounding it provide for a balance of powers between the general meeting and the directors, and the law recognizes that directors must be allowed to exercise their powers and discretion in the best interests of the company.

For instance, in the landmark case of Trevor v Whitworth, (1887) 12 App Cas 409, the House of Lords held that the powers of the directors of a company are not strictly limited by the articles of association, and they may exercise their discretion in a manner that is consistent with the objects of the company.

In other words, while the general meeting still retains certain powers and responsibilities, such as the appointment and removal of directors, the passage of resolutions, and the approval of the company's accounts, the role of the directors has been expanded and they are now seen as playing a critical role in the management of the company. The law recognizes that directors must be allowed to exercise their powers and discretion in the best interests of the company, subject to certain limits imposed by the Companies Act, 2013 and other applicable laws.

In which cases it cannot be the rule that the directors are the primary organs of the company?

The idea that directors are the primary organs of a company is subject to some limitations and exceptions. There are certain cases where this rule may not apply, and the directors may not be considered the primary organs of the company. These cases include:

Fraudulent Conduct: If the directors are found to be involved in fraudulent conduct or any illegal activities, their actions will not be considered the actions of the company and the rule may not apply.

Conflicts of Interest: In cases where directors have a conflict of interest, their actions may not be considered the actions of the company. For example, if a director has a personal financial interest in a transaction, their actions may not be considered to be the actions of the company.

Ultra Vires Actions: If the directors take actions that are beyond the scope of their authority as specified in the company's articles of association, those actions may not be considered the actions of the company.

Mismanagement: If the directors are found to be guilty of mismanagement or oppressive behaviour towards the company or its shareholders, their actions may not be considered the actions of the company.

Derogation of Duties: If the directors fail to perform their duties and responsibilities as specified by the Companies Act or the company's articles of association, their actions may not be considered the actions of the company.

While directors may generally be considered the primary organs of a company, their actions and decisions may not always be considered the actions of the company in certain circumstances, such as fraudulent conduct, conflicts of interest, ultra vires actions, mismanagement, or derogation of duties.

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