TMI Blog1981 (1) TMI 201X X X X Extracts X X X X X X X X Extracts X X X X ..... n of Khanna, was admitted to its membership. The entire issued capital has, by and large, been held by Khanna, his wife and his three sons and Kapoor and his wife. In September, 1975, Khanna fell seriously ill and was eventually incapacitated and almost lost his vision. It is then that Kapoor took advantage of his absence, as alleged by Khanna, or took over management under the adverse circumstance of the liability of Khanna, as alleged by Kapoor. Until 1976, out of the entire issued and paid-up capital of Rs. 1,25,500, Khanna, his wife and his three sons Ramesh Khanna, Kanwal Khanna and Ish Khanna held among them 133 shares of the value of Rs. 66,500. Kapoor and his wife, respondent No. 2 in C. P. No. 58/78, between them held 114 shares of the face value of Rs. 57,000. One Gaur held 4 shares of the face value of Rs. 2,000. In the years 1976 and 1977, 27 shares held by Ramesh Khanna, 10 shares held by Kanwal Khanna and 4 shares held by Gaur were shown as having been transferred in the records of the company to Kapoor and his nominees. This improved the position of the Kapoor group to 155 and reduced that of the Khanna group to 96. Khanna was removed from the board. In February, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the two returns were filed by Kapoor and if, having regard to all the circumstances, he is liable to be prosecuted for any offence. As regards the transfer of 10 shares held by Kanwal Khanna, according to the capital share account register of the company, these shares were transferred by Kanwal Khanna to Kapoor on March 30, 1976. Kanwal Khanna claims that he never transferred these shares and no transfer deed was executed. He further claims that the share certificates were with Kapoor and he misused the trust reposed in him. He further claims that by his letter of March 23, 1978, annex. P-2, he had sought the return of the share certificates from Kapoor but there was no reply. Kapoor claims that these shares were purchased by him from Kanwal Khanna because Kanwal Khanna was losing interest in the company and Kanwal Khanna had been paid for these shares. According to him, the transfer deed was duly executed but the relevant records were removed from the offices of the company by the Khannas. In support of the valid transfer and registration, Kapoor also relies on the fact that Ramesh Khanna, the brother of Kanwal Khanna, had attended the annual general meeting of the company hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purported transfer and one does not know whether he claims to be a shareholder of the company or has lost interest in it. In any event, in his absence and in the absence of any records relating to this transfer and the legal impediment to any such transfer, it is not possible to accept the contention that these shares were duly transferred in favour of Kapoor or that the transfer had been duly registered in the records of the company. The transfer and its registration must, therefore, be ignored until their existence and validity are determined in appropriate proceedings to which Gaur is a party. As for the shareholding of Ramesh Khanna, the transfer was based on a transfer deed admittedly executed by Ramesh Khanna but the contention of the Khannas is that this was a blank transfer deed, intended to be used for the transfer of shares to the wife of Khanna. It is alleged that the blank transfer deed, duly signed by Ramesh Khanna, had been delivered to Kapoor for registration and since the share certificates were already lying with him he misused the trust by transfer of shares in his favour or in favour of his nominee. This contention does not stand to reason. If the transfer was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rn on which Kapoor relies, whether of the year 1977 or earlier, do not appear to list his name as a member of the company. If the shareholding was transferred in 1974, and the challenge to the registration and transfer was not made until 1979, the plea of Khanna appears to find support from this circumstance. Kapoor was also unable to deny the charge of Khanna that this transfer had been duly effected and registered in the records of the company in 1974 itself. The petition of Parshu Ram, therefore, appears to have been filed at the instance of Kapoor as a measure of counter-blast and there is, therefore, no ground to interfere in that behalf. The transfer of shares and their registration in respect of the aforesaid four batches were sought to be voided on the ground that under article 8 of the articles of the company, a transfer of shares could be sanctioned by the Board only by a unanimous decision of the directors and that none of these were sanctioned by such a decision. This is what article 8 provides : "8. All transfer of shares shall be sanctioned only with the unanimous decision of the directors and the directors may refuse to register any transfer of a share without as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, vitiated on account of noncompliance with article 8, and it would be open to the transferees of these shares to seek the registration of these transfers in accordance with law. Until then, the transfers which are otherwise valid would not be given effect to by the company until they have been duly registered in accordance with the decision of the Board in terms of article 8 of the articles of the company. That takes me to the consideration of the contention of Kapoor that, in any event, the objection to the validity of transfers of shares of Kanwal Khanna and Ramesh Khanna and their registration was squarely met because both the transfers and their registration were duly reflected in the annual return, filed by the company for the year 1977 in the office of the Registrar of Companies, and the concurrence of Khanna to the registration be inferred from the fact that the return was signed by Kapoor as well as Khanna. This calls for an examination of the circumstances in which two returns for the same period were filed. In the affidavit in opposition filed by Kapoor in C.P. No. 58/78, Kapoor alleged that the return for the period ending December 31,1976, reflected the change in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .C. Khanna, the other director of the company." By this application (C.A. No. 605/79), the court was requested to summon the file of the Registrar so that the annual return for the year ending December, 1977, could be examined by the court. Notice of this was issued to the Registrar and when the file was produced, it was discovered that there were two returns for the period, Ex. P-A, which was originally filed, and Ex. P-B, which was sought to be substituted on November 12, 1979. Evidence of the officials of the Registrar has since been recorded and what appears to have happened is this. When Kapoor went to the office of the Registrar on or about 12th of November, 1979, he carried with him a fresh return for the same period incorporating certain changes which were required, but on a form which had apparently been signed by Khanna blank, because none of the entries is in his hand. This document, Ex. P-B, was filed on November 12, 1979, but the office of the Registrar put on it a stamp which had reference to the document filed earlier in that it gives the number and date under which the fee had been originally deposited when the return was filed in March, 1978. Below the stamp, howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, reasonable to infer that with a view to reinforce the validity and existence of these transfers, an attempt was perhaps made to substitute the annual return in the office of the Registrar of Companies and a false plea was sought to be raised in the affidavit that the only return for the year 1977, reflecting these changes, had been signed by no other person than Khanna. But for the vigilance of the Khannas, and perhaps, for the intervention of someone in the office of the Registrar of Companies, an impression could have successfully been created that the return filed in the office of the Registrar for the year 1977 reflecting these changes had been signed by Khanna. It also appears that such an attempt could not have been made without the active connivance of someone in the office of the Registrar of Companies. There may perhaps be another way of looking at the course of events. There may possibly be some loose ends needing to be tied up and some questions calling for explanation. In view, however, of the fact that I do not rely on this return, it is unnecessary to take this matter any further. In the circumstances, it cannot be said that the aforesaid transfers had the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f prosecution of Kapoor. The Khannas and the Kapoors, are, however, very closely related and any further proceedings between them or involving them is bound to cause further bitterness, which would not be conducive to their personal relations or to the conduct of the future business of the company. Kapoor has apparently acted rather indiscreetly in an attempt to establish a valid transfer of shares in his favour and was probably misguided into an attempt to use a blank form of return signed by Khanna to reinforce his case. No useful purpose would, therefore, be served by pursuing the matter any further in the peculiar circumstances of this case. The next question is as to the validity of the allotment of further shares by the Board of Directors of the company on February 24, 1978. In this meeting 102 equity shares of the value of Rs. 51,000 were allotted to the Kapoor group. The validity of the allotment is challenged on the ground that by virtue of the provision contained in art; 6 of the articles, the unallotted shares were put under the control and at the disposal of the Directors, who may allot the same at their absolute discretion, but "only with their unanimous consent". Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs of the Board and that in spite of this, out of regard, the company had been paying his salary regularly for a period of almost three years. According to Kapoor, Ramesh Khanna had been attending the meetings of the Board and the annual general meeting of the company as a representative of the Khanna Group even though the sons of Khanna had been carrying on independent business in competition with the business of the company. It is claimed that on a requisition from two shareholders for the removal of Khanna, a meeting of the Board of Directors was held on March 30, 1978, a notice of which had been sent to Khanna on March 27, 1978, and the Board resolved to convene an extraordinary general meeting to consider the question of removal. The extraordinary general meeting was convened for April 26, 1978, and a notice of it was sent to all the shareholders, including Khanna, on April 3, 1978, and the requisition for removal was enclosed with the notice. It is claimed that in the extraordinary general meeting held on April 26, 1978, Khanna was removed from the Board. It is alleged that the Khannas knew of this meeting because it was only after receipt of the notice of the meeting that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany so that the total number shall not at any time exceed five." It empowers the permanent directors to appoint a director of the company only by their unanimous decision but it is difficult to hold that there is anything in the language of the article which excludes the exercise of that power by the company in the general meeting. The expression "unanimous decision only" merely underscores that the decision of the permanent directors shall be unanimous but it is difficult to read in the article a provision that the permanent directors alone are entitled, by unanimity or otherwise, to appoint additional directors. It is, therefore, not possible to void the appointment of the wife of Kapoor as a member of the Board of Directors of the company. The next question that, however, arises is whether Khanna had notice of the meeting of the Board of Directors held on March 30, 1978, and of extraordinary general meeting held on April 26, 1978, since it is claimed that these meetings had been duly held in the absence of the Khanna group and the decisions taken at the meetings were duly recorded in relevant minute books. According to Kapoor, a notice had been received from G. C. Khanna, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs almost always relies on a certificate of posting clearly pointing to the possibility that such meetings are invariably managed rather than held. This is because of the unfortunate circumstance that certificates of posting are readily available. If the meeting of the Board had, therefore, been held, I see no reason why a registered A. D. notice was not sent to Khanna even though that may not be the strict legal requirement. The so-called certificate of posting also does not appear to meet the requirement of law because, in the first instance, there is no averment that the postal covers had been duly posted and the certificate of posting had been duly issued and received. All that has been filed is a photo copy of a list of four names with postal stamp marking. I am not prepared to accept these as sufficient proof of the despatch of the notices to Khanna and in holding that they have been notified of the meeting of the Board scheduled to be held on March 30, 1978. What I have said above with regard to the meeting of the Board is equally true of the extraordinary general meeting said to have been held on April 26, 1978. The extraordinary general meeting was supposed to have been he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the management of the company's affairs, this section was designed to enable them to control the directors by their removal. The only exceptions are the directors appointed by the Central Govt. under section 408, and life directors holding office on April 1, 1952. The only other exceptions are nominee directors of financial institutions, with which we are not concerned. No doubt, article 14 empowers a permanent director to nominate a director to take his place after his death, but even that does not save the tenure from the operation of section 284. True, section 184 of the English Act specifically excludes the operation of articles which section 284 does not, but that was not necessary in view of the scheme of the Indian Act, because section 9 of the Act provides that the provisions of the Act would have effect, notwithstanding anything to the contrary contained in the articles of the company. No further provisions for exclusion of provisions in the articles to the contrary was necessary. Khanna could have, therefore, been removed, if the requirements of section 284 and of a valid meeting had been satisfied. This was, however, of no avail, because, as observed earlier, the proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioning of the company until Khanna has been paid. There was some controversy between the parties with regard to the opening of a new bank account in the name of the company by Kapoor in the Kamla Nagar Branch of the Canara Bank and as to the accountability of the management of the company with regard to the operation of the bank account. The opening of this account was an apparent sequel to the instructions by Khanna to the existing banker of the company with regard to the disputes that had surfaced between the two groups and which may have possibly led to the disruption of the normal banking channel for the conduct of the business of the company. In any event, whatever the compulsions for the opening of this account, it was nevertheless the account of the company and even though operated upon by Kapoor exclusively, he is answerable to the company for the various transactions reflected in this account. In any event, all the directors of a company who are conducting the business of the company on its behalf or in its name are always accountable to the company for the funds or property of the company that they deal with in the course of the discharge of their duties. There was als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the Board is void and he throughout continued to be a permanent director of the company as well as director-in-charge in terms of the articles. He would be entitled to be said the salary that was being drawn by him as director-in-charge but only for a period of 18 months. The amount would be paid within a period of six months by equal monthly instalments. The first instalment would be paid over before February 10, 1981. He would continue to be the permanent director until he resigns or is removed. He would, however, not be entitled to draw any salary in future and would be liable to be removed in accordance with law. ( iv )Khanna would have the option to be purchased out of the company by Kapoor on payment of the face value of the shares registered in the name of Khanna besides the arrears of salary referred to above and any amount that may be found due to any member of the Khanna group on the audit of the balance-sheet and profit and loss account for the period ending December, 1980. The option may be exercised by Khanna within 3 months and the payment would be made within 3 months of the acceptance of the offer by the Kapoors. The Kapoors would be bound to accept the offer w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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