TMI Blog1982 (2) TMI 236X X X X Extracts X X X X X X X X Extracts X X X X ..... It may be mentioned that broadly the shareholders are divided into two groups known as Bali group (appellant) and Sodhi group (respondent) who had moved the application for winding up the company. The company was incorporated on May 14, 1949, with an authorised capital of Rs. 5 lakhs divided into one thousand ordinary shares of Rs. 100 and 200 cumulative preference shares of Rs. 2,000 each. The memorandum of association was signed by the appellant, Bali, and the respondent, Sodhi, who had initially each one cumulative preference share. Shortly, thereafter, further preference shares were issued making a total of 50. The dispute is as to the division of these shares between two groups. It is also a common case that eight preference shares are held by Sinha and Kapur, who are not apparently taking sides either with Sodhi or Bali. The broad fact that Bali group holds 21 preference shares is also not disputed. That Sodhi holds four shares in his own name and one is held by his wife is also not disputed. There is also no dispute that four shares were held by R. C. Sodhi, the brother of the respondent, Sodhi. There the agreement ends. According to Bali other 12 shares were owned by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares so held by Shri Dina Nath Sodhi and the members of his family. According to me, Sri Dina Nath Sodhi and the members of his family own 5 shares and not 21 as contended by him. This question alone may be decided in this and the concerned applications by this court. Till this question is decided, I undertake not to alienate or in any manner subject the company to any commitment or liability except for ordinary day-to-day transactions without taking the express orders of the court". On the same date the learned judge passed the following order: "The statements of Shri Dina Nath Sodhi and Shri S. L. Bali are recorded. Shri Bali will file a detailed affidavit concerning the returns stated to have been filed before the Registrar for the years ending 1966, 1967 and 1968, mentioning the details of the shares held by the petitioner and the members of his family. He will also cover the points mentioned in the Government's report which has been filed today by Shri Rishikesh for Shri Davinder K. Kapur. The petitioner will also file a detailed affidavit of shares of himself and the members of his family and how and when they were acquired". The matter was then heard and disposed of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e wound up. This C. P. No. 39/1973 was admitted by Rangarajan J. on April 30, 1975. Against this, Company Appeal No. 8/1975 was filed. All these appeals, namely, Company Appeals Nos. 10,11,13 of 1972, Company Appeal No. 4/1973 and Company Appeal No. 8/1975, were heard and disposed of together by a Division Bench on March 18,1977, dismissing all the appeals. Thereafter, the matter was tried by the company judge on merits who framed the following issues: (1)Whether the issue of 1,000 equity shares of Rs. 100 each by Sri Bali to himself, his wife, daughters and minor children, Sood and Mehta Kartar Singh, was at the back and without the knowledge and concurrence of the petitioner and amounted to an act of oppression? (2)Whether the annual general meetings held in December, 1969, and April, 1970, were, invalid as they had been held without notice to the petitioner and the members of his family? (3)Whether the respondents ousted the petitioner from the board of directors of the company and brought about a material change in its management and control? (4)Whether the company in the present case was really in the nature of a partnership between two groups, one of the petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aj, Mulakh Raj and Chandok would be more available to Sodhi because Des Raj and Mulakh Raj (who are brothers) were his relations (their sister being married to Sodhi's brother). Thus, we agree with the finding of the learned single judge that no notices were sent by the company to Sodhi and his wife who were admittedly members for the meetings held in December, 1969, and April, 1970. Now, sections 171 and 172 provide for the calling of a general meeting only after giving notice for the requisite period and containing the contents and manner of service. It is not suggested that these requirements do not apply to the company. In the present case, our finding is that no notices of the meeting were sent to Sodhi and his wife. There is no excuse of accidental omission. The stand taken was that notices were sent, which we have disbelieved. Thus, deliberately and designedly Sodhi and his wife were not given notice for the holding of the meeting allegedly held in December, 1969, and April 29, 1970. In such circumstances it is the law that if the time of holding the meeting and other essential particulars required by the section are not specified in the notice, the meeting will be invalid, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share Sodhi and his family members were willing to transfer these shares to Bali within a fortnight of the passing of the order. Rangarajan J. had thereupon passed an order directing the parties to file there statements to show when the shares were transferred and how and when they were acquired. A reference to the order of P. N. Khanna J. dated May 23, 1972, in C.P. No. 32/1971 will show that the question posed before him squarely was whether Sodhi and the members of his family owned 5 shares as said by Bali or 21 shares as claimed by Sodhi? Des Raj and Mulakh Raj are brothers and their sister is married to Sodhi's brother. Des Raj, Mulakh Raj and Chandok were originally allotted 4 preference shares each in 1951, which Sodhi claimed were his nominees. He also claimed that the price of these shares had been paid by him. Four shares were allotted in 1953 to Sodhi's brother. There was no dispute so far as the 4 shares which stood in the name of Sodhi, and 4 shares which stood in the name of his deceased brother, R.C. Sodhi, and one share in the name of Sodhi's wife. The dispute only was with regard to the 12 shares (four each in the name of Des Raj, Mulak Raj and Chandok). Sodhi's ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e names of Des Raj, Mulakh Raj and that Sodhi and the members of his family, i.e. , his wife, his two sons and daughter, are the owners of 21 shares as claimed by Sodhi. A direction was given that the company will take steps to have the said twenty-one cumulative preference shares transferred to Bali at the agreed price of Rs. 7,500 for each such share. Against this order of Khanna J. of May 23, 1972, three appeals, namely Company Appeal No. 10/1972 by Bali, Company Appeal No. 11/1972 by Shakuntala Bali and Company Appeal No. 13/1972 by the company were filed. The Division Bench also posed the question: Whether D. N. Sodhi and the members of his family held 21 shares as alleged by him or whether they held 5 shares, as alleged by Bali? It may be mentioned that Chandok is said to be the son of a friend of D. N. Sodhi. The Division Bench, after going through the whole matter, also came to the conclusion that the entries relied upon in the register of members by Bali could not prevail over the entries in the annual returns which showed the sons and daughter of D. N. Sodhi as the holders of these 12 shares. The Division Bench also agreed with the finding of Khanna J. that the claim o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the alleged meetings said to have been held on April 29, 1970, as well as the earlier meeting of December, 1969, were not validly called and held. At the meeting of April 29, 1970, Sodhi, who was purported to have been elected as director in December, 1969, meeting was not elected and in his place Mrs. Shakuntala Bali was instead elected. On issue No. 2, therefore, it has to be held that the meetings held in December, 1969, and April, 1970, were invalid, as they were held without notice to D. N. Sodhi and members of his family. Thus, it comes to this that Sodhi and his family who were entitled to attend the meetings, being members were never given notice of the meetings. These meetings were, therefore, held invalidly. Issue No. 1: The allotment of these 1,000 equity shares was purported to have been made in a meeting of the board of directors held on November 12,1970. Prior to that date the issued capital of the company was Rs. 1 lakh consisting of 50 preference shares of Rs. 2,000 each and on the findings given earlier 21 shares of Rs. 2,000 each were held by Sodhi group; 21 shares of Rs. 2,000 each were held by Bali group and 8 shares were held by Mehta and Kapoor. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p. 46, and approved by the Supreme Court in Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp. Cas. Reference in this connection may also be made to the observations made in Needle Industries ( India ) Ltd. v. Needle Industries Newey ( India ) Holding Ltd. [1981] 51 Comp. Cas. 743, 844 (SC), which is as follows: "The meeting of 2nd May, 1977, was unquestionably illegal for reasons already stated. It must follow that the decision taken by the board of directors in that meeting could not, in the normal circumstances, create mutual rights and obligations between the parties". As the said allotment was made by a director who was purported to have been elected at an invalid meeting, the said action lacked in validity. Mr. Talwar, however, sought to invoke section 290 of the Companies Act to say that any act done by or purported to be done by a director is valid notwithstanding that it may afterwards be discovered that his appointment was invalid by any reason of defect or disqualification. The argument is that it is only subsequently during the present proceedings that it has been found that the meeting of April, 1970, which elected Mrs. Bali as director was inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany in a transaction in which he had no authority. Can he then say that he was entitled to assume that all was in order ? My Lords, the old question comes into my mind: Quis custodiel ipsos custodes ? It is the duty of directors and equally of those who purport to act as directors, to look after the affairs of the company, to see that it acts within its powers and that its transactions are regular and orderly. To admit in their favour a presumption that that is rightly done which they have themselves wrongly done is to encourage ignorance and condone dereliction from duty. It may be that in some cases, it may be that in this very case, a director is not blameworthy in his unauthorised act. It may be that in such a case some other remedy is open to him, either against the company or against those by whose fraud he was led into this situation, but I cannot admit that there is open to him the remedy of invoking this rule and giving validity to an otherwise invalid transaction. His duty as a director is to know; his interest, when he invokes the rule, is to disclaim knowledge. Such a conflict can be resolved in only one way". As explained in Morris' case [1946] 16 Comp. Cas. 186, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of shares is by a board of directors invalidly elected, the same cannot be upheld unless the party seeking the assistance of the courts acts bona fide. An innocent purchaser will be protected but the court will never come to the assistance of a purchaser who purchases the shares without good faith. Acting bona fide is considered to be essential to uphold the transaction in all cases in which the principle of section 290 of the Companies Act can be invoked. See observations in Albert Judah Judah v. Ramapada Gupta, AIR 1959 Cal. 715, para. 81; [1960] 30 Comp. Cas. 582 , at p. 626. In the present case, as the overwhelming majority of these one thousand shares were allotted to Bali, Mrs. Bali and their children, the question of even suggesting of their having acted bona fide does not arise. Mr. Talwar again repeated the apparently innocuous suggestion that the company was even willing to allot the same number of shares to the Sodhi group and this would show the bona fide of Bali group that they did not want to exclude Sodhi. But this suggestion cannot conceal the real motive behind the allotments made on November 12, 1970, in such a clandestine manner by having a meeting held wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was clearly to deprive Sodhi and his group of parity with Bali and to openly facilitate the overwhelming control of Bali against the existing position which had been continuing for decades. The benefit of section 290 is thus not available to Bali in the circumstances of this case and we, therefore, uphold the finding of the learned single judge on this issue. Issue No. 3 : This issue really stands concluded by our finding earlier that the meetings in December, 1969, and April, 1970, were invalid. That they were called without notice to Sodhi group and that 1,000 extra shares were issued without involving Sodhi in this decision making is also established. It is apparent that all this was done with the main, if not sole, purpose of excluding Sodhi from the control and management of the company. That Sodhi was undoubtedly associated right from the incorporation in 1949 to April, 1970, even on the showing of Bali group is without any challenge. This is in fact admitted by Bali in the purported notice allegedly issued for the meeting of April 29, 1970. In the explanatory statement it is clearly stated that Sodhi and Bali have been directors since 1953. Bali, by calling an invalid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto 100 ordinary shares of Rs. 100 each and 200 cumulative preference shares of Rs. 2,000 each. Originally both Bali and Sodhi held one cumulative preference share and were signatories to the memorandum of association of the company. Prior to December, 1969, there were 50 cumulative preference shareholders of Rs. 2,000 each. Out of these on the finding mentioned above 21 shares belonged to Sodhi group and 21 to Bali group. Both Sodhi and Bali have remained directors right up to April, 1970. Bali in his evidence given in C. P. No. 32/1971, on November 24, 1971, though he purported to claim that he was in-charge of the company in all respects and was looking after all details of the company had to admit that both he and Sodhi were getting Rs. 1,000 per month in addition to car allowance, though he mentioned that the remuneration to Sodhi was stopped in 1961-62. This statement was modified by him in his evidence on September 29, 1971, to say that no remuneration was credited to Sodhi's account after July 1, 1967. But then this stood contradicted by his further statement that the balance-sheet for the period ending June 30, 1970, showed that a sum of Rs. 2,10 ,575.64 was for remunerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was dropped as a director and Mrs. Bali was instead said to have been elected as a director. We have already held that this election was invalid because it was called without issuing proper and legal notice. The argument based on Sodhi playing no part in the running of the company prior to the controversy erupting seriously in 1970 is clearly against the facts and admissions of Bali himself and cannot be accepted. That for the day to day functioning of the board of directors it necessitated the presence of Sodhi is also clear from the said explanatory statement because his non-attendance at the meetings is being made a grievance for the reason to have only one director in future. Whatever the merits of this allegation against Sodhi be, the facts at least stands established that it was clearly understood that the management of the company was to be run jointly by Sodhi and Bali and was in fact run for all these years on an equal participation of responsibility as well as the enjoyment of equal remuneration and other benefits. On the basis of these findings, Mr. Parekh's contention is that this is a case which falls within the ratio laid down in Ebrahimi v. Westbourne Galleries Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the just and equitable clause to proved cases of mala fides would be to negative the generality of the words". (See Ebrahimi's [1972] 2 All ER 492, 502( d ); [1972] 2 WLR 1289, 1300. Mr. Talwar had sought to urge that it was not shown successfully that the conduct of Bali had been so objectionable and so inequitable that the company should be wound up. This argument assumes that unless there was a series of mala fide acts showing lack of probity, a company, even if it is in the image of partnership, should not be wound up. But this plea was negatived in Ebrahimi's case where it was said by Lord Cross that: "it is not a condition precedent to the making of an order under the sub-section that the conduct of those who oppose its making should have been 'unjust or inequitable ' (at p. 503( g ) of [1972] 2 All ER and at p. 1301 of [1972] 2 WLR). As a matter of fact Ebrahimi's case specifically approved Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch 426, which was a case of two equal share directors, between whom a state of deadlock came into existence, but it was emphasised by Lord Cozens-Hardy M.R. that: "whether there is deadlock or not... 'the circumstances are such that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the parties formed the scheme of a company managed by these two directors which should be worked amicably, and it would not justify the continuance of the state of things which we find here". Nor is it necessary for claiming relief under 'just and equitable' clause that the petitioner must prove oppression by majority, though in the present case there is ample evidence of the serious devices adopted by Bali to exclude Sodhi, because as Lord Cross said in Ebrahimi's case [1972] 2 All ER 492,505( e ); [1972] 2 WLR 1289, 1303: "But the jurisdiction to wind up under section 222( f ) continues to exist as an independent remedy and I have no doubt that the Court of Appeal was right in rejecting the submission of the respondents to the effect that a petitioner cannot obtain an order under that sub-section any more than under section 210 unless he can show that his position as a shareholder has been worsened by the action of which he complains". Of course, if the petitioner who relies on "just and equitable" clause is the one responsible for the breakdown of confidence between him and the other party, he cannot invoke this clause. Nothing has been shown in the present case that Sod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted under the signature of Bali showing the sons and daughters of Sodhi to be the holders of shares which originally belonged to Des Raj, Mulk Raj and Chandok. Even a purported register of members was produced by Bali which both Khanna J. and the appellate court found to be suspicious. The endorsement made on the shares belonging to Chandok in the handwriting of Bali were also commented adversely. Even after the agreement had been made before Rangarajan J. on January 8, 1971, and after the decision by Khanna J. and the appellate Bench (Co. Appeal No. (10/1973), execution of the transfer of the shares in the name of Sodhi's children was strongly resisted. The conduct of Bali for quite some time had been to exclude Sodhi from any further participation in the management which found its climax when he called the meeting in December, 1969, and April, 1970, without issuing notice to Sodhi, his brother and to the other shareholders. In his evidence he purported to deny that any remuneration was credited to the account of Sodhi but had to admit that the books do show this fact. The company being such a small company, out of 50 preference shares, 42 are held by 2 groups of 21 each. Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a company was in substance a partnership, and one director had irregularly sought to acquire control and exclude the other director, a winding-up order was made. (See Gore-Browne page 907, footnote. 80-83). All the circumstances justifying the winding up of the present company are present in this case and we hold accordingly. Mr. Talwar had sought to urge that as the earlier petition under sections 397 398 had been filed, i.e. , C.P. No. 32/1971, but no relief for winding up had been claimed, the present application for winding up is barred on the principles of res judicate or at least on the principles of O.2, r.2, CPC. The argument being that before an order can be passed under section 397, the court has to come to a conclusion that the company's affairs are being conducted in a manner prejudicial to public interest and that to wind up the company would unfairly prejudice such members but otherwise the facts would justify the winding-up order on the ground that it was just and equitable that the company should be wound up. Therefore, so runs the argument, that when the earlier application C.P. No. 32/1971 was filed under sections 397/398, grounds for asking for winding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was that as in C.P. No. 39/1973, the grievance was made that Bali had created difficulties in the payment of Rs. 1,57,500 for the alleged purchase of shares from Sodhi in terms of order of P. N. Khanna J., this was the only ground available to Sodhi, and that any controversy about the 21 shares belonging to Sodhi could not be the subject-matter of decision in C. P. No. 39/1973 and could not be relied upon for the purpose of deciding whether to order winding up or not. The argument is misconceived. When the application is moved for winding up on the ground that it is just and equitable to do so especially for the reason that the company is in substance a partnership, it is inevitable that the other details as to how many shares belong to each party and what has been the history of the company must necessarily figure in any determination. Therefore, the fact whether Sodhi has been ousted or not would very much form a part of the necessary determination of C.P. No. 39/1973, even on the basis of allegations as it stood in this very application alone. But that apart, this plea that the matters which were not mentioned in the Company Petition No. 39/1973, alone must be considered and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opposed to the winding up and that the attitude of Sodhi in insisting upon winding up was unreasonable. The application also mentioned that one Jaidev Chandok who was said to be associated with the company in a joint venture in A-Block Development Scheme had invested good part of money and was also interested that the company should not be wound up, for otherwise, it may affect the venture in which he was l/3rd partner. On this basis, a suggestion was given based on section 443(2) of the Companies Act which provides that where a petition is presented on just and equitable grounds the court may refuse to make an order of winding up if it is of the opinion that some other remedy is available to the petitioner and that they are acting unreasonably in seeking to have the company wound up instead of pursuing the other remedies. The remedy which was put forth as an alternative remedy in para 13 was to the effect that the applicant was prepared to purchase the shares of all the dissenting shareholders at a proper and reasonable price and that for this purpose a form of chartered accountants of repute or a valuer may be appointed to work out the value of shares and after hearing the partie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was called on April 29, 1970, was an invalid meeting; the allotment of 1,000 shares on November 12, 1971, by an illegal board could not confer any validity, and, thus, application by such shareholders can, therefore, hardly be considered to be an application by the contributories because the very claim of being a shareholder is not only in doubt but has been held by us to be of no consequence. The emphasis by counsel, Mr. Talwar and Mr. Veda Vyasa, of the interest of one Jaidev in a joint venture is hardly of any consequence because he cannot claim to control the rights of the respondents by the mere fact that he has a joint venture in the company. Whatever his rights are, will be taken note of and his rights protected under law even if the company is ordered to be wound up. Section 557 of the Act is equivalent to section 346 of the English Companies Act. The argument that if the majority of the creditors oppose the making of a winding-up order, that is an end of the matter was negatived and it was emphasised that though the court may and will have regard to the fact, it does not mean that the court has no function to perform. Vide Re Vuma Lid. [1960] 1 WLR 1283; [1960] 3 All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for winding up and take advantage of his own fault. It is true that if we had come to the conclusion that seeking execution of P. N. Khanna J.'s order in the circumstances is a proper alternative remedy available to Sodhi which would have given him full justice, we might decline the none too pleasant relief of winding up. But the facts here do not support the claim of Mr. Talwar. In C.P. No. 32/1971, an order had been passed by P.N. Khanna J. on May 31, 1972, holding that Sodhi and his group had rights over 21 shares and directing Bali to pay Rs. 1,57,500 to Sodhi in terms thereof. If this order had been accepted by Bali by depositing Rs. 1,57,500 in lieu of the transfer of these shares and if in spite of this Sodhi had insisted upon an order of winding up, his action may have fallen within the ambit of section 443(2) of the Act and Sodhi may not be able to establish his right to claim winding up of the company. Here, however, what happened was that Bali never accepted the order but went up in appeal, but without any success. After P.N. Khanna J. had decided the matter in favour of Sodhi, Shakuntala Bali filed a suit in this court being Suit No. 135/1973, claiming that she was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable. If at that time Bali had reciprocated the gesture, then, it may have been an argument that other remedy was available to Sodhi. But once the battles had been joined, the whole picture underwent a change. In that view, it is now too late in the day for Mr. Talwar to suggest that instead of winding up the company, Sodhi should be relegated to the remedy for claiming that amount. Too much water has flown under the bridge. A period of a decade has passed. The parties have fought bitter litigation. We may, however, note that we did ask Mr. Parekh, the counsel for Sodhi, whether the earlier bargain with some modification could be carried out. But he expressed his inability by pointing out that, in the interval, the assets have mounted up and he is hopeful that in winding up proceedings, the applicant will get much more than he can by the transfer of shares, apart from the uncertainty of valuation and a serious apprehension of further round of litigation. We may also note that Mr. Talwar had urged that originally Sodhi had stated that he was to get nothing out of the company and that is why he was claiming winding up, and that his present stand is contradictory. But this cannot be ..... 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