TMI Blog1984 (6) TMI 192X X X X Extracts X X X X X X X X Extracts X X X X ..... Article 29. Number of directors shall not be less than two and more than seven until otherwise determined by general meeting. Article 30. The first directors of the company are ( a )Sri D. N. Bhattacharjee ( b )Sri D. K. Roy. The first directors of the company shall be permanent directors and shall not be subject to retirement by rotation. The directors shall have power at any time and from time to time, to appoint any person as an addition to the board so that the total number of directors shall not at any time exceed the maximum number fixed. Article 42. Sri D. N. Bhattacharjee shall be the chairman of the board of directors of the company and shall continue to act as such until he resigns voluntarily. He shall preside over all meetings of the board and all general meetings ordinary or extraordinary. The chairman shall have the authority to exercise all the powers of the managing director as mentioned in clause 44. The remuneration of the chairman shall be fixed by the board. Article 43. The business of the company shall be carried on by the managing director subject to the supervision and direction of the board. Sri D. K. Roy shall be the managing direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e registered in the name of one Darshanlal Jaggi; ( m )150 shares were registered in the name of Mohini Mohan Choudhury; ( n )50 shares each were registered respectively in the names of Mrs. Arati Mukherjee, Mrs. Anjali Mukherjee, Bikash Mukherjee, Hrishi-kesh Mukherjee and Chinta Haran Banerjee. Lokenath Bhattacharjee, Timirari Bhattacharjee, Batuk Nath Bhattacharjee, Chhanda Bhattacharjee and Sovana Bhattacharjee filed this petition under sections 397 and 398 of the Companies Act, 1956, on October 13, 1980, against the company, Deb Kanta Roy and Darshanlal Jaggi, respondents Nos. 1, 2 and 3 respectively. By an interim order passed in the proceedings on November 12, 1980, a special officer was appointed who was directed to make an inventory and initial the books of the company. By another order made on February 13, 1981, the petition in the main application was directed to be amended. Bibhuti Kanta Roy, Mrs. Pratima Roy, Ranjit Roy, Mrs. Sudha Roy, Avijit Roy, Mrs. Suguna Dutta Gupta, Mrs. Sarbani Neogi, Shris Kumar Gupta, Sujit Kanta Roy, Bani Kanta Roy, Mrs. Tapati Roy, Chitta Prasanna Sen, Charu Prosad Sengupta, Bhupendra Chandra Sen, Shivaji Sen, Kanak Kanti Das Gupt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of a partnership and has been run on the basis of personal relationship of the promoters, the members of their respective families and their friends on mutual trust and confidence. It was agreed or understood that the families of the promoters or their friends would be suitably represented in the board of directors of the company and would participate in the management of its affairs. ( d )Out of the 6,450 shares issued, the petitioners and the members of their group, namely, the said I.G. Gautam and British Electricals and Pumps P. Ltd., hold 2,200 shares. The respondent along with their friends and supporters hold about 1,800 shares. The petitioners have not been able to obtain mutation of the shares standing in the name of Debendra as clearance under the Estate Duty Act in respect of the estate of Debendra has not been obtained. ( e )Even without 2,150 shares standing in the name of Debendra, the petitioners and their group hold an absolute majority in the company having more than 66% of the total voting rights. ( f )Although the company was incorporated in 1955 and acquired assets in the shape of land, factory and modern machinery, it did not commence production. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per year by way of remuneration as managing director without rendering any service to the company. Such remuneration has been received up to the year ending on March 31, 1979. ( l )By reason of the aforesaid, it has become impossible to carry on the business of the company and on the facts it is possible to have the company wound up on just and equitable grounds. But such winding up would be prejudicial to the interests of the petitioners. The further case of the petitioners introduced by the amendment of the petition is, inter alia , as follows: ( a )At the time of the making of an inventory by the special officer, it transpired from the register of members, share ledgers and the directors' minute books of the company that at an alleged meeting of the board of directors held on October 3, 1980, 900 shares of the company of the face value of Rs. 100 each were issued to respondents Nos. 4 to 20. ( b )The said shares were issued wrongfully and illegally, in violation of the Companies Act and the articles of the company and in breach of the fiduciary duties of the persons in charge of the company. Such issue is void and not binding on the company and its shareholders. By iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvolved in a series of litigations, both civil and criminal, his health deteriorated and he failed to provide or arrange for finance for the company. ( f )Later, in 1974-75, Debendra, to solve his financial difficulties, attempted to withdraw his capital invested in the company. He pressed respondent No. 2 to buy his shares in the company or to find out buyers for the same. No one was ready to buy such shares at that stage but respondent No. 2 out of gratitude bought 1,150 out of the 2,150 shares held by Debendra in or about 1976 and promised to buy the balance 1,000 shares. Debendra executed a blank transfer deed in respect of the said 1,150 share and made over the same to respondent No. 2 but by mistake share scrips of the balance 1,000 shares were also made over along with the said transfer deed and as such the said transfer could not be registered as Debendra fell ill in 1977. ( g )Apart from subscribing for shares in the names of himself, his wife, sons and daughters-in-law between 1962 and 1964, Debendra did not take any interest in the company or the management thereof. ( h )Respondent No. 2 on his personal guarantee arranged loans to the company from the Corporation a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company used to be sent to all members by post. At no time there had been any complaint of non-receipt of such notices. The petitioners never attended any of the annual general meetings of the company from 1963. Debendra did not want the petitioners or any of them to participate in the affairs of the company and had no faith, trust or confidence in them. ( p )Benoy Kumar Das, deceased, in whose name 300 shares of the company stand registered had executed a transfer form in respect of the said shares. ( q )Respondent No. 2 was also responsible in alleging other unsecured loans to the company which, as on March 31, 1980, were as follows: Rs. ( i )B. C. Sen 9,718 ( ii )K. P. Das Gupta 2,500 ( iii )B. K. Roy 61,695 ( iv )M/s. D. K. Roy Co. 9,650 ( iv )M/s. Alloy Comp. Development Pvt. Ltd. 80,000 ( r )The remuneration of respondent No. 2 as the managing director of the company was fixed initially at Rs. 1,000 per month. Under a resolution dated October 12, 1965, the said remuneration was increased to Rs. 1,500 per month with annual increments. Respondent No. 2 was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )The petitioners have no right to interfere with lawful and bona fide exercise of power by the directors. The petitioners have alleged in reply as follows : ( a )Respondent No. 2 was and is not the sole guarantor of the loan agreement between the company and the West Bengal State Financial Corporation. ( b )By their letter dated July 29, 1974, the Industrial Reconstruction Corporation (India) Ltd. called upon the company to make arrangements for transfer to the former or their nominees shares of at least 76 per cent, of the total paid up value of all shares issued by the company. It was recorded further in the said letter that such shares would remain transferred till the repayment of the proposed loan of the Reconstruction Corporation in full. ( c )Pursuant thereto, Debendra and the two other shareholders, viz ., Indu Gautam, Benoy Kumar Das, Mohini Mohan Chowdhury and R. Mukherjee, had executed blank transfer deeds in respect of the shares held by them. Between September and November, 1976, the said transfer deeds and the share scrips had been handed over to respondent No. 2 so that the shares could be transferred to the Industrial Reconstruction Corporation (India) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n answer that under the articles of the company, respondent No. 2 was the permanent managing director. Debendra, the chairman of the company, had left the entire affairs of the company in charge of respondent No. 2, who had shouldered the entire burden during the difficult years of the company. There was no complaint of oppression or mismanagement during the lifetime of Debendra though the petitioners were registered shareholders. It was only after the death of Debendra and when the company was expected to tide over its difficulties that the petitioners are seeking to assert their majority to interfere with the affairs of the company. Learned counsel submitted that the said 900 shares were issued lawfully, validly and bona fide to settle the demands of the genuine creditors of the company. The accounts of the company were regularly audited and the same would show that the said creditors were genuine and that their respective loans were being carried over from year to year. Learned counsel next submitted that no case of oppression nor one of mismanagement having been made out, the petition was not maintainable. The main complaint on the allotment of the said 900 shares had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Nath Khetan [1977] 47 Comp. Cas. 185 ; AIR 1977 SC 536. This decision was cited for the proposition that the negative words in section 108 of the Companies Act, 1956, were prohibitory and such prohibition was mandatory as the form of language was in the negative. ( d ) H. R. Harmer Ltd., In re [1958] 3 All ER 689; [1959] 29 Comp. Cas. 305 (CA). This decision was cited for the following observations of Lord Clyde in Baird v. Lees [1924] SC 83, 92, which were quoted with approval (at p. 325 of 29 Comp. Cas.): "A shareholder puts his money into a company on certain conditions. The first of them is that the business in which he invests shall be limited to certain definite objects. The second is that it shall be carried on by certain persons elected in a specified way. And the third is that the business shall be conducted in accordance with certain principles of commercial administration defined in the statute, which provide some guarantee of commercial probity and efficiency. If shareholders find that these conditions or some of them are deliberately and consistently violated and set aside by the action of a member and official of the company who wields an overwhelming vot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the absence of oppression or similar impropriety, is entitled to prevail. Directors are of course entitled to offer advice, and bound to supply information, relevant to the making of such a decision, but to use their fiduciary power solely for the purpose of shifting the power to decide to whom and at what price shares are to be sold cannot be related to any purpose for which the power over the share capital was conferred upon them." Copies of the documents recording the issue and allotment of 900 shares had not been annexed to the petition. At the hearing, the relevant documents relating to the said issue and allotment were produced under the directions of the court and considered. The minutes of the meeting of the board held on October 3, 1980, revealed that at the said meeting only respondents Nos. 2 and 3 were present. The material portion of the said minutes are as follows: "The managing directors placed before the board eleven (11) applications for shares from the creditors of the company whose money had been lying with the company for several years in adjustment of their respective loan accounts against allotments of the company's shares to them. The applications wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e instance of respondent No. 2 in purported adjustment of a loan from respondent No. 2 to the company and also in adjustment of loans from M/s. D.K. Roy and Co. The said shares were issued against six applications placed before the meeting. None of the applicants was respondent No. 2 or M/s. D.K. Roy and Co. From the books of account of the company produced and considered at the hearing, it appeared that though the said 900 shares were issued and allotted by the board on October 3, 1980, there were entries in the journals of the company in September, 1980, showing some adjustment of the said loans. No final adjustment of the said loans was shown either in the journal or the ledger on October 3, 1980, or thereafter. There was no reference whatsoever in the account books of the board meeting held on October 3, 1980, or the issue or allotment of shares in adjustment of the loans. The loans against which the shares were issued came to the company in driblets by way of petty cash from time to time. There is no record when or how the company or its board decided to obtain such loans. There is no record of any agreement by and between the company and the said creditors under which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the issue of the said 900 shares on October 3, 1980, is illegal and void and not binding on the company and its share holders; ( b )Respondents Nos. 4 to 20 are restrained from exercising any rights whatsoever in respect of or under the said 900 shares; ( c )The present board of directors of the company is superseded; ( d )The special officer already appointed is directed to call a meeting of the shareholders of the company on the basis of the shareholding as on March 31, 1979, as recorded in the relevant annual return for the constitution of a new board of directors; ( e )The special officer will hand over charge of the company to the new board of directors after the same is constituted; ( f )The special officer will file a report after handing over charge of the company to the new board. Till the new board is elected, the special officer will be in charge of the affairs and the management of the company; ( g )The matter will appear in the list for further directions on August 20, 1984; ( h )The petitioners will pay to the special officer further 75 gms. towards his remuneration; ( i )The petitioners' costs to be paid by respondents Nos. 2 and 3. It is made ..... X X X X Extracts X X X X X X X X Extracts X X X X
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