TMI Blog1986 (5) TMI 232X X X X Extracts X X X X X X X X Extracts X X X X ..... old 150 shares as detailed below: Col. Kuldip Singh, petitioner No. 1 20 Hardev Singh Minhas, No. 2 30 Maj. K. Gurdev Singh, No. 3 20 Smt. Nasib Kaur, No. 4 20 Iqbaljit Singh, No. 5 20 Smt. Kirpal Kaur, No. 6 20 Smt. Chanan Kaur, No. 7 20 It is alleged that the affairs of the company are being conducted prejudicially to public interest and in a manner oppressive to the petitioners, who are in minority, as detailed below: ( i )The company had been allotted 490 equity shares of Punjab Iron and Steel Co. P. Ltd., Jalandhar Cantt. (hereinafter referred to as "PISCO"). The paid-up amount in respect of the above shares was Rs. 3.90 lakhs. They were transferred in the names of Pavittar Singh and his wife, Nasib Kaur (122 shares), Ravinder Singh, son of Pavittar Singh, and his wife (124 shares), Ramesh Inder Singh, son of Pavittar Singh (122 shares), and Swaran Singh, son of Milkha Singh, brother-in-law of Pavittar Singh (122 shares). These were transferred in a clandestine manner and without having been offered to any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n has been taken to recover the amounts from them. The aforesaid allegations, it is pleaded, go to prove the mismanagement on the part of the management which is prejudicial to public interest and oppressive to the minority members of the compauy. Thus, the circumstances are such in which it would be just and equitable that the company can be ordered to be wound up. Consequently, it is prayed that action be taken under the aforesaid section. The respondents in the petition are: 1. Messrs. Paragaon Utility Financiers P. Ltd., 2. Late Pavittar Singh through his legal representatives, 3. Smt. Nasib Kaur, 4. Ramesh Inder Singh, 5. Ravinder Singh and 6. Swaran Singh. Later, the name of respondent No. 2, late Pavittar Singh, was ordered to be deleted. The petition has been contested on behalf of respondent No. 1 and respondents Nos. 3, 4, 5 and 6. Two written statements have been filed, one on behalf of respondent No. 1 and the other on behalf of the latter respondents. Respondent No. 1 alleged that the affairs of the company were meticulously looked after during the period when Col. P. S. Dhillon was the managing director. Col. Dhillon filed an application for rectification of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jalan-dhar, had 150 shares out of 1,000 shares on June 30, 1982. Col. K. S. Dhillon, petitioner, in his statement, said that at the time of filing the petition, the petitioners were shareholders of the company. From the list, exhibit P-88, and statement of Col. Dhillon, it is evident that the petitioners had more than 10 per cent, shareholding in the company. At this, Mr. Sodhi sought to urge that the position reflected in exhibit P-88 relates to the month of June, 1982, whereas the petition was filed in October, 1982. He argues that it was incumbent on the petitioners to show the total number of shareholding held by them on the date of filing the petition which they failed to do. He made reference to Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageswara Rao [1956] 26 Comp. Cas. 91 (SC), and the resolution of the board of directors dated October 29,1978, wherein 20 shares held by Smt.Kirpal Kaur were transferred to Smt. Rattan Kaur, daughter of Dalip Singh and Amarjit Singh Bajwa, son of Rattan Singh. I do not find any substance in this submission of learned counsel as well. The petitioners have shown that according to the latest list of members filed with the Registrar o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied that circumstances exist on which an order for winding up could be made under section 162". (p 95) Sections 153C and 162 of the 1913 Act are equivalent to sections 397 and 433 respectively of the 1956 Act. A similar view was taken in Shanti Prasad Jain's case [1965] 35 Comp. Cas. 351 (SC). It was further observed therein that the conduct of the majority shareholders must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression by the majority in the management of the company's affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. It is now to be determined whether the allegations in the petition make out a prima facie case for the winding up of the company under section 433( f ). The section says that a company may be wound up by the court if it is of opinion that it is just and equitable to do so. The question arises what the words "just and equitable" mean. It has been held in Hind Overseas' case [1976] 46 Comp. Cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5] 35 Comp. Cas. 351 (SC) and Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton Jute Mills Co. Ltd. [1964] 34 Comp. Cas. 777: AIR 1965 Guj 96. On the other hand, Mr. Jain has argued that if the effect of a single act is continuously oppressive, the court is entitled to pass an order under sections 397 and 398. He refers to In re Sindhri Iron Foundry ( P. ) Ltd. [1964] 34 Comp. Cas. 510 (Cal). I have duly considered the argument. The matter does not require any elaborate discussion as it has been settled by the Supreme Court in Shanti Prasad Jain's case ( supra ) that in order to file an application under section 397, if must be shown that the conduct of the majority shareholders was oppressive to the minority members and this requires that events have to be considered not in isolation but as part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of the petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. Same view was expressed by P. N. Bhagwati, J. as he then was, in Mohanlal Ganpatram's case ( supra ). It was observed therei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s daughter of Pavittar Singh. Shri Amar Singh is the husband of Smt. Mohinder Kaur and Shri Rajinder Singh Johal is the husband of Smt. Gurbachan Kaur. Shri Swaran Singh is the brother of Smt. Nasib Kaur. He submits that the matter is to be examined in this background. He has challenged the legality of the resolution dated November 30, 1978, exhibit P-1 on three grounds, firstly, that the quorum for the meeting in which the resolution was passed was incomplete; secondly, no notice of the meeting was given to the directors and, thirdly, that, in fact, no meeting was held on that date. The first question that arises for determination is as to whether the quorum for the meeting in which resolution, exhibit P-l, was passed was incomplete. Mr. Jain has contended that there were 32 directors of the company on November 30, 1978, and, therefore, the quorum for the meeting was 11. However, only 8 directors were present. Out of them Smt. Indarjit Kaur and Shri Pavittar Singh ceased to be directors on September 27, 1977, and January 30, 1978, respectively, as they failed to attend three consecutive meetings and thus they would be deemed to be not present in the meeting. In this way, only si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it may be assumed that Shri Pavittar Singh had been re-elected as director, the quorum was incomplete as only six directors were present. The second question to be determined is whether notice of the meeting was given to the directors and if not with what effect. Mr. Jain has argued that the copy of the despatch register of the company from October 16, 1978, to February 19, 1979, exhibit P-74, does not show that any notice was issued for the said meeting. On the other hand, Mr. Sodhi, has argued that the only requirement under section 286 is that the notice of the meeting should be in writing. It does not prescribe the manner in which it is to be served on the directors. The notice under article 82 of the articles of association can be served personally. He submits that notices were not sent by post but through a messenger. It is not disputed by Mr. Sodhi that the notices were not entered in the despatch register. There is no reliable evidence on record to prove that notices were sent through messenger and, therefore, it cannot be held that notices were given to the directors. It is essential that the notices of the meetings have to be sent to all the directors, otherwise, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri Pavittar Singh, 6. Shri Ravinder Singh, 7. Shri Swaran Singh, 8. Smt. Inderjit Kaur, 9. Shri Rameshinder Singh, and 10. Shri Amar Singh. The resolution was passed for transferring 490 shares of PISCO held by the company in favour of the following persons for full consideration: Shares 1.Shri Pavittar Singh and his wife, Smt. Nasib Kaur 122 2.Shri Ravinder Singh and his wife, Smt. Santosh 124 3.Shri Rameshinder Singh 122 4.Shri Swaran Singh 122 490 N.B. Out of 6 transferees, all except Smt. Santosh were directors of the company. Mr. Jain has contended that out of the ten directors present in the meeting, five directors were transferees. Out of them, Pavittar Singh, Smt. Nasib Kaur and Shri Ravinder Singh had also ceased to be directors. Smt. Inderjit Kaur had further ceased to be a director. If the presence of the five transferee-directors and that of Smt. Inderjit Kaur is not taken into consideration, then the quorum is incomplete. On the other hand, Mr. Sodhi has argued that S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor, take any part in the discussion or vote on any contract by or on behalf of the company, if he is in any way, whether directly or indirectly interested in the contract, nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote; and if he does vote, his vote shall be void. Sub-section (2)( a ), which is in the nature of a proviso to sub-section (1), says that sub-section (1) shall not apply to a private company which is neither a subsidiary nor a holding company of a public company. A reading of the above provisions makes it clear that sub-section (1) applies to a public limited company and not to a private company which is not a subsidiary or a holding company of a public company. Therefore, it is in the case of a public company and a private company which is a subsidiary or a holding company of a public company, that if a director takes part in the proceedings of the board of directors and votes regarding any contract in which he is interested, his presence for the purposes of forming a quorum shall not be counted and his vote shall be void. However, it will not be so if the company is a private company. In the present case, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 30, 1978, it was decided that the shares be offered to the existing shareholders. Shri R. S. Johal was authorised to do so. However, he did not offer the shares to the other shareholders and, therefore, the transfer of shares to Pavittar Singh, etc ., amounts to oppression on the minority shareholders. I find substance in this submission. Before deciding to whom the shares should be sold, it was the duty of Shri Johal to make an offer of sale to all the shareholders. Those should have been transferred to one who made the highest offer. However, it was not done. It is true that Shri Johal says that he told orally all the shareholders in this regard. This part of the statement, however, cannot be accepted. Consequently, transfer of the shares to the transferees without offering the shares to the other shareholders in terms of the resolution dated November 30, 1978, exhibit P-1, is oppressive to the other shareholders. Mr. Jain has further argued that the consideration for the 490 shares purchased by Shri Pavittar Singh, etc ., was not paid in cash by them. The purchase price of the shares was Rs. 4,90,000, out of which an amount of Rs. 2,00,000 was got adjusted by them towa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the sale of 490 shares in favour of Shri Pavittar Singh, etc ., was approved. The first thing to be seen is as to whether the quorum of the meeting was complete. Eleven directors were present in the meeting. Out of them three, namely, Smt. Nasib Kaur, Shri Rameshinder Singh and Shri Pavittar Singh, were the transferees of the shares of PISCO. As already held, they ceased to be directors on December 30, 1978. Out of the remaining eight directors, Shri Ravinder Singh, Shri Avtar Singh and Smt. Inderjit Kaur admittedly, ceased to be directors. Thus, the names of six directors are to be excluded for the purposes of quorum. Consequently, five directors would be deemed to be present in the meeting. The quorum for the meeting was eight. I am, therefore, of the opinion that the resolution dated February 28, 1979, is also invalid. The second question is whether the resolution is invalid as the notices of the meeting were not sent to all the directors. In the despatch register, exhibit P-74, admittedly, the despatch of the notices of the meeting to the directors is entered. Therefore, I am of the view that this formality had been fulfilled by the company and the resolution cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng December 31, 1978, were passed. It is contended by Mr. Jain that 21 days' clear notice for holding the meeting was required to be iven to the shareholders under section 171, but that was not done. The notices were despatched on June 13, 1979, and thus 21 days' clear notice was not given to them. He also contends that the copies of the balance-sheet should have been sent with the notices but the same were not sent. Mr. Sodhi has not disputed that the notices given to the shareholders were of less than 21 days. Section 171 reads as follows: "171. Length of notice for calling meeting. (1) A general meeting of a company may be called by giving not less than twenty-one days' notice in writing. (2)A general meeting may be called after giving shorter notice than that specified in sub-section (1), if consent is accorded thereto ( i )in the case of an annual general meeting, by all the members entitled to vote thereat; and ( ii )in the case of any other meeting, by members of the company ( a ) holding, if the company has a share capital, not less than 95 per cent, of such part of the paid-up share capital of the company as gives a right to vote at the meeting, or ( b ) havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find any substance in the argument. In the meeting, eight directors were present. As already mentioned, there were only twenty-four directors of the company. Consequently, eight directors constituted the quorum. I am, therefore, of the view that the resolution cannot be said to be invalid. The next contention of Mr. Jain is that the shares which were transferred to Shri Pavittar Singh, etc ., had more value than that for which they were sold. In support of his contention, he places reliance on the balance-sheet ending December 31, 1976, exhibit R. 2/7, the balance-sheet ending December 31, 1977, exhibit R. 2/8 and the balance-sheet ending December 31, 1978, exhibit R. 2/9. I do not find substance in this submission. The shares were not quoted on the stock exchange. No reliable data has been provided by the petitioners showing that the value of the shares was more. In the first two balance-sheets, the company is shown to have suffered losses to the tune of several lakhs of rupees. In the balance-sheet ending December 31, 1978, some profit is shown to have been earned. After adjustment of the profit, the loss carried forward is Rs. 5 lakhs odd. The aforesaid figure shows that PISC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jain has further argued that Shri Rameshinder Singh operated the accounts on the basis of that resolution and advanced loans to the persons in the names of some fictitious persons and thus misappropriated the amounts. He submits that the cheque, exhibit P-7, was issued in the name of one Jagtar Singh, but there was no such person. On the other hand, Mr. Sodhi has placed reliance on the statement of Shri B. D. Sharma, accountant, P.W.-6, who stated that he knew Jagtar Singh who took a loan of Rs. 10,000 from the company. Mr. Sodhi has also referred to the cheque, exhibit P-7, of Rs. 10,000. The said cheque was a payee's account cheque and the payment of the cheque was made to the Punjab and Sind Bank. In view of the circumstances brought to my notice by Mr. Sodhi, it cannot be held that Jagtar Singh was a fictitious person. The next contention of Mr. Jain is that Shri Mohinder Singh who was appointed as a manager by the respondent had embezzled a huge amount of the company but no effective step was taken to recover the amount from him. In order to prove the aforesaid facts, Mr. Jain placed reliance on the resolutions of the board of directors, exhibit P-87, dated December 30, 197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed. Mr. Jain has also argued that interest-free loans were given to PISCO, Shri Mohinder Singh and one Shri Paramjit Singh. Even no document was got executed from them in token of having received the amounts. The act amounts to mismanagement. I find substance in this submission. The argument regarding the payment of loans to the aforesaid persons and PISCO stands established from the copies of the ledger of the respondent-company, exhibits P-57 to P-66. In exhibits P-57 to P-59, several amounts are shown to have been advanced to PISCO and an amount of Rs. 14,309 is shown as due from it as on December 5, 1978. In exhibits P-60 to P-63, various amounts are shown to have been paid to Mohinder Singh. In exhibit P-63, an amount of Rs. 36,730.52 is shown as due from Mohinder Singh as on December 30, 1978. In exhibits P-64 to P-66, amounts are shown to have been advanced to Shri Paramjit Singh and an amount of Rs. 33,830 is shown to be due from him as on January 1, 1977. No amount of interest was debited to their account. No document was got executed from the said debtors. The aforesaid amounts have not been repaid by the said persons. Col. K. S. Dhillon, petitioner, deposed that Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, exhibits P-l, P-17 and P-18, were also held invalid on the ground that the quorum for the meeting was incomplete as some of the directors present there ceased to be so. But, in the facts and circumstances of this case, the section does not give protection to the resolutions passed in such meetings. The reason is that the resolutions in the present case have not been passed bona fide by the directors, as out of the six beneficiaries, five were directors of the company and the sixth was the wife of one of them. The sole object of the directors in passing the resolution was to promote their self-interest. Moreover, the benefit of the said section can normally be taken by a third person and not by the directors or their close relations. It is further noteworthy that some of the resolutions were oppressive to the minority shareholders. In Sunder Lal Jain's case [1986] 60 Comp. Cas. 77 (P. H.), it was observed by me that even if a director ceased to be so in view of section 283, the resolution of the board of directors could not be held illegal in view of section 290 which provided that the acts done by a person would be valid notwithstanding that it might afterwards be discove ..... X X X X Extracts X X X X X X X X Extracts X X X X
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