TMI Blog1991 (8) TMI 280X X X X Extracts X X X X X X X X Extracts X X X X ..... ting, any resolution passed thereat shall not be given effect to or acted upon until this court otherwise directs. It is also clarified, that by the holding of the general meeting and the passing of the resolution no equity will be built up in favour of respondents Nos. 2 to 6. Any claim by respondents Nos. 2 to 6, any commitment that may result by virtue of the passing of the resolution, financial or otherwise, shall be at the risk of respondents Nos. 2 to 6. The petitioner is free to attend the general meeting or absent himself if he so chooses or so advised. Accordingly, the said petition of the petitioner-applicant was disposed of." Pursuant to that a meeting was held on August 3, 1989. All the shareholders of the company were present. The petitioner was absent. It is averred that the company at its general meeting held on August 3, 1989, unanimously gave consent to the proposal to transfer 2,719 equity shares of Rs. 100 each, in favour of Mr. R.N. Shetty for a consideration of Rs..7,031 per share. The extract of the minutes of the extraordinary general meeting held on August 3, 1989, has been annexed to the application. It is further averred that the action taken by the resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o him, to obstruct the transfer of shares of the respondents in favour of Mr.R.N. Shetty, who has offered the highest price of the share value. The petition is motivated by mala fide conduct. If the resolution is not permitted to be given effect to, the respondents are likely to suffer irreparable loss and injury, which cannot be adequately compensated in terms of money. The company is facing grave financial crisis and with the passage of every day the liability of the company is increasing enormously in addition to the defaults being committed in fulfilling the statutory liabilities owing to want of finances. This application was resisted by the petitioner by filing his objection statement, wherein he has contended, inter alia , that the respondents hold 85 per cent, of the equity shares of respondent No. 1-company and have indulged in several acts of oppression and mismanagement detrimental to the petitioner and also to the interests of respondent No. 1-company including using physical violence against the petitioner's son. The respondents have also indulged in several acts of malversation besides misappropriating more than Rs. 16 lakhs from the funds of respondent No. 1-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... N filed along with the main petition reveals that the respondents in total violation of article 37( v ), have first offered the shares available for transfer to a third party and then turned around and made a show of offering the same to the petitioner. The petitioner further submits that the respondents, without making a proper valuation of the said shares, have sought to coerce the petitioner into paying an exorbitant amount for the said shares by holding out that the third party has offered such an amount. Further, the respondents have called upon the petitioner to pay the entire consideration for the 2,719 shares, amounting to Rs. 1.91 crores within ten days of the offer being made, whereas the third party, Sri R. N. Shetty, has been permitted to pay for the purchase of the said shares in instalments over a period of time. It is further stated that these acts of the respondents, as described above, apart from being oppressive to the petitioner, are also unjust and inequitable, and the petitioner has sought in the main petition that this court direct the respondents to offer the shares available at a price to be fixed by this court. It is further stated that if the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he petitioner prays to dismiss the company application of the respondents. The petitioner has filed the company petition under sections 397 and 398 of the Companies Act and sought for removing the oppression and to pass such an alternative affairs of the company ( sic ) . The main ground urged by the petitioner is that the mutual trust and confidence has been lost between the parties and there has been a deadlock. All the respondents have got together and are refusing to see reason and are refusing to permit the applicant to rectify the affairs of the company. There has been total lack of probity in the conduct of the affairs of the company by respondents Nos. 3 and 4, who are managing the affairs of the company. The company is, therefore, liable to be wound up on the just and equitable ground. In the alternative it is stated that the affairs of the company are being conducted in a manner prejudicial to the public interest and also in a manner oppressive to the petitioner. It is averred in the petition by the petitioner that the company was mainly incorporated for purposes of acquiring the factory land and premises at Yeshwanthpur, belonging to Standard Tile and Clay Works Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. After the administration was taken over by the third respondent, the financial position of the company has deteriorated. The respondents started underinvoicing the products of the. company and started making money on the side and the total amount thus siphoned off by respondents Nos. 3 and 4 ran into over Rs. 10 lakhs, and they are liable to reimburse the amount. Respondents Nos. 3 and 4 sold a lot of raw materials and some sales have not even been accounted for and the amount of loss sustained by the company as a result of the amount thus siphoned off by the third respondent in this manner is over Rs. 5 lakhs which they are liable to make good to the company. It is also alleged in the petition that respondents Nos. 3 and 4 have also sold some of the machinery of the company, which was not properly accounted for in the books of account of the company. The loss sustained by the company as a result of the sale of machinery is over Rs. 2.3 lakhs and they are liable to make good the same to the company. In fact, the fourth respondent had written a letter on February 8, 1988, falsely claiming to be the joint managing director of the company offering to sell the refractory and ceramic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the company is a private limited company and since the articles of association of the company forbid sales of shares in favour of third parties, without offering the same to the existing shareholders the respondents cannot sell the shares in favour of Sri R. N. Shetty. Further, the petitioner has also requested the respondents to show him the offer made by Sri R.N. Shetty. The respondents, however, refused to show the offer made by Sri R.N. Shetty ( sic ) . However, the respondents informed the petitioner that if he wishes to know the contents of the offer made by Sri R.N. Shetty. The respondents further informed the petitioner that they are, however, willing to sell the shares in favour of the petitioner provided he pays the value of the shares of the respondent at the rate of Rs. 7,031 per share within a period of ten days. It is stated that on July 6, 1989, the petitioner received a sale notice under the signature of the third respondent dated July 3, 1989, wherein the petitioner was again informed of the offer made by Sri R. N. Shetty to purchase the entire shareholding of the respondents at the negotiated price of Rs. 7,031 per share. The said letter specifically indicate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... troverting all the allegations of the petitioner. In the counter it has been stated that the facts alleged by the petitioner do not entitle the petitioner to ask for an order of winding up of the first respondent-company under section 433( f ) of the Act and consequently, the petitioner is not entitled to any relief under the provisions of sections 397 and 398 of the Act. The allegation that after 1969, the petitioner was solely in charge of running the factory of the company situated at Yeshwanthpur is absolutely false, and incorrect. All the directors of the company are whole time directors except the sixth respondent, namely, wife of late V.L. Dhanram Mudaliar, and mother of the petitioner and respondents Nos. 2 to 5. Respondents Nos. 2 to 5 have been taking active interest not merely in the management of the company as directors of the board but also in the day-to-day running of the factory. The directors were attending to the specific responsibilities assigned to them from time to time by the board. At the board meeting held on February 7, 1970, the following assignment of work was agreed to between the directors namely, respondent No. 3, staff, labour and mosaic department, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd no other expense is being reimbursed. It is stated that the averments made in para 9 of the petition are baseless and untenable. Since the company was not in a position to meet various statutory obligations, viz. , payment towards taxes, payment to workers, payment towards ESI, gratuity, provident fund, etc., and put all of them to great hardship and it also exposed the respondents and the petitioner to criminal prosecution under various laws. In fact, on account of the crisis faced by the company, it became inevitable for the company to dispense with the services of forty-seven workers and thereby compelled to incur large additional financial burden by way of terminal benefits. It is in the context of this deteriorating situation that the respondents set about to find ways and means not merely to relieve themselves of the burden but also to reduce the hardships that the workers and others who had dealings with the company were compelled to face on account of the financial crisis. While the respondents were making a constructive approach towards finding a solution to the vexed financial crisis the company was going through, the petitioner revelled in being non-co-operative an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llect the personal correspondence of the petitioner lying in the factory of the company and that he was assaulted by respondents Nos. 3 and 4 and by the son of the fourth respondent which resulted in the filing of a police complaint by the petitioner is absolutely false. It was the petitioner's son who at the instigation of the petitioner sought to create a law and order situation in the factory by instigating the workers to rebel against the management. In order to avoid any untoward incident within the factory the respondent protested against such unwarranted interference by the son of the petitioner. Taking advantage of this protest made by respondents Nos. 2 to 5, against the unwarranted and unlawful interference and the exercise of extra legal powers by the son of the petitioner, the petitioner filed a false police compliant. The allegation that the fourth respondent started taking part in the business of the company along with the third respondent, is wholly uncalled for and all through respondents Nos. 2 to 5 have been in the management and administration of the company. It is further averred that the other allegation regarding under invoicing of the products and regardi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the trading and profit and loss account and the balance-sheet could not be completed on account of the hostile attitude of the petitioner towards the chartered accountant of the company resulting in the chartered accountant refusing to associate himself with the company. Thereafter, it became necessary for the respondents to persuade the chartered accountant to continue and now accounts are under finalisation. The letter of the Registrar of Companies referred to in the petition, has been suitably replied to by the petitioner himself by his letter dated October 3, 1988. The grievance of the petitioner regarding the non-completion of the accounts is wholly uncalled for, and the petitioner himself is to be blamed for the defaults enforced on the respondents. The allegation that there has been any financial impropriety committed by utilisation of the employees' gratuity fund for the purpose of the company is a totally misleading and false statement. The fact of the matter is that the gratuity is payable to employees at the time of cessation of their employment. The company has a gratuity scheme operating through the Life Insurance Corporation of India and premiums are paid regularly by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absolutely false and incorrect. On the contrary, the petitioner not merely has been coming to the factory ; his activities in the factory, have not stopped with mere inspection of the records but have extended further, in that the petitioner has wrongfully taken away several books of the company including the minutes book of the board of directors' meetings. He has also retained in his hands several account books, vouchers, etc., and he has failed to return the same in spite of the request in that regard. The letter dated September 22, 1988, clearly discloses the conduct of the petitioner in this regard. In fact, the petitioner is liable to be proceeded against under section 630 of the Companies Act and appropriate action is being taken in this regard. The allegation that there has been any oppression of rights of the petitioner as member of the company is absolutely false and incorrect. On the other hand, it is the petitioner who has been instigating the workers of the company to revolt against the respondents. The allegation of the petitioner that there has been misappropriation or malversation of funds of the company by the respondents is absolutely false. It is not true to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company and on the other, the liabilities have mounted enormously and continue to mount every day. It is averred that over the last few years, efforts have been under way for transferring the shares held by the members of the company and several offers were received from an NRI group, USA., to take over the company and its assets. The petitioner himself has actively participated in the matter of negotiations with this group. The NRI group was represented by Mr. B. V. Satyanarayana. The board of directors approved a draft of the letter to be sent by the auditor of the company, viz. , T. Sriram and Co., on April 20, 1987. The petitioner also has approved of this action by a letter, approved by the board of directors to be sent by the chartered accountants to Mr. B.V. Satyanarayana, which is filed as annexure R-9. Though the petitioner at the meeting of the board of directors held on April 20, 1987, agreed for continuation of negotiations with Mr. B.V. Satyanarayana and also subscribed his consent to a resolution of the same date, that if a firm offer is not secured by Mr. Devaraj from others better than the offer from Mr. B.V. Satyanarayana within a period of one month fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to purchase the shares at Rs. 7,031 per share. The offer made discloses the following salient features: ( a )take over of the shareholding of the respondents, viz., 2,392 shares ; ( b )payment of Rs. 7,031 per share ; ( c )sale of shares with the approval of the general body of the company as required under article 37 of the articles of association of the company ; ( d )sale of shares to be free from charges, encumbrances, attachments or court proceedings ; ( e )payment of Rs. 50 lakhs as advance and the balance within a period of six months after the management of the company is placed in the control of R.N. Shetty or his nominee. For the balance price, R.N. Shetty has undertaken to give a bank guarantee ; ( f )that R.N. Shetty is willing to meet the requirements of the company to pay ESI., P.F. arrears, sales tax and settlement of workers dues (Rs. 20 lakhs approximately) ; ( g )offer is open till August 15, 1989 ; ( h )the said offer is also available to the petitioner. It is further stated that the petitioner for no good reason has not co-operated with the respondents in the matter of the offer received from Mr. R.N. Shetty. The respondents being exasperated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne a meeting of the company on August 3, 1989, thereby providing for a clear twenty-one days' notice as required by law. The contention of the petitioner that shares must be offered to the existing members including himself was noted and, as opined by the majority, it was decided to hold a meeting of the company as indicated by article 37( v ) as Mr. R.N. Shetty, to whom shares were proposed to be transferred in terms of offer dated June 19, 1989, was not an existing member of the company. Pursuant to the resolution passed by the board of directors on July 3, 1989, the third respondent as joint managing director of the company in terms of resolution passed, sent a letter to the petitioner giving a first option to purchase all or any part of the shares offered for sale at a rate hot less than Rs. 7,031 per share, and the petitioner was required to communicate his acceptance within ten days. The minutes of the meeting of the board of directors held on July 3, 1989, was well within the knowledge of the petitioner, who attended the meeting and has signed the draft minutes and the sale notice dated July 3, 1989, and the request of the petitioner for a copy of the minutes of the boar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the articles of association of the company or any other source. It is further submitted that there is no attempt on the part of the respondents to pressurise the petitioner to pay Rs. 7,031 per share. There is no compulsion. It is open to the petitioner either to accept the offer or not to accept it. Moreover, there is no intention on the part of the respondents to oppress the petitioner. The allegation of oppression is imaginary. The conduct of the petitioner is absolutely unfair and not vice versa. There is no case made out by the petitioner for winding up the company under section 433( f ) of the Companies Act. Learned counsel appearing for the respondents (application in C.A. No. 994 of 1989) has submitted that pursuant to the meeting held on August 3, 1989, all the shareholders present, except the petitioner, unanimously gave consent to the proposal of transfer of 2,719 equity shares of the respondents in favour of Mr. R.N. Shetty. The action taken is legal and in accordance with the provisions of the Act and the articles of association. The transfer of shares in favour of Mr, R.N. Shetty is not only beneficial to the shareholders but also to the company and the workers. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that if their shares are transferred to the third party, during the pendency of the petition, it would be difficult to bring them to book to cough up and thus to make good the loss caused to the company. He further submitted that there was no proper compliance with the provisions of article 37( v ) of the articles of association in passing the resolutions in the extraordinary general meeting of the company as the shares of the members of the respondent-company cannot be transferred to the outsider as the company is a private company, a quasi-partnership. The respondents have offered to sell their shares to the third party without offering their shares in the first instance to the petitioner which is in violation of the articles of association of the respondent-company. The respondents' counsel, Mr. Raghavan, has pointed out that the petitioner himself, had prior to the filing of the company petition under sections 397 and 398, taken steps to sell the shares of the company to a third party he cannot now contend that the respondents' shares cannot be transferred to a third party and that it is in violation of article 37( v ) of the articles of association. Let me now consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and the machinery was not sold at all and such question of causing loss of Rs. 2.3 lakhs does not arise. Except baldly stating that the machinery of the company was sold which in fact was denied, there is no material document produced or specific statements made by the petitioner as and when and to whom the machinery was sold. These bald allegations cannot be countenanced. It is the case of the petitioner that there was no general body meeting called after 1987 and the balance-sheet and profit and loss account and filed no returns with the Registrar of Companies. This inaction and failure to call the annual general meeting was attributed to the third respondent on the ground that he had taken now the management of the company. This is plainly uncharitable for the reason that there is no material placed by the petitioner how and when the third respondent had taken over the management of the company. The respondents have denied the allegations in entirety and stated that at no time the third respondent had taken over the management of the company. Further, in their objection statements they have stated that the annual general meeting was held in December, 1987 but the accounts co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally denied this by saying that there has been no thought of selling the lands of the company. Further, with reference to exhibit L, it is stated that what is envisaged in the said document is the transfer of shares belonging to the shareholders which has nothing to do with the property of the company as such. On a bare perusal of the said document it is obvious that it was not for the sale of land of the company as alleged by the petitioner. It was for the sale of their shares giving particulars of the property owned by the company giving a graphic picture as to the value of shares. The petitioner's allegation is very vague. There is no suggestion or any material particulars given by the petitioner to show that there had been sale of the company land. In view of this fact, I do not think that the petitioner has prima facie established oppression by the majority shareholders. Then coming to paragraphs 17, 18, 19, 20 and 21 of the petition, the allegations appear to be the principal grievance of the petitioner. It is the case of the petitioner that the respondents have found a transferee for their shares in Mr. R. N. Shetty, and the respondents convened the meeting on July 3, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s approved the draft of the letter to be sent by the auditor of the company, T. Sriram and company, on April 20, 1987. The petitioner has approved the said action. In response a letter was received from the said B.V. Satyanarayana on April 26, 1987, making a final offer, limited for acceptance within the stipulated period. The copy of the letter is annexure R-11. The petitioner suddenly wrote a letter on April 28, 1987, to the auditor of the company, having written to the said B.V. Satyanarayana on a false plea totally contrary to what he had agreed to on April 20, 1987. The copy of the letter is annexed as annexure R-12. As the petitioner has withdrawn from his commitment and adopted obstructive methods, the groups of B. V. Satyanarayana withdrew their offer. The respondents have further stated that there was another offer from Sanmar Finance Services Ltd. In the negotiation with that group, the petitioner was represented separately by his chartered accountant. From the letter dated August 18, 1988, of Sanmar Finance Services Ltd., it is clear that the petitioner has claimed special status in the company. The petitioner has withheld the title document illegally with a view to ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondents had assumed control of the company and had excluded the petitioner from involvement in the affairs, and the company accounts were irregular and defective. By way of defence the respondents have categorically denied each and every allegation and pointed out with materials that the petitioner was not excluded from involvement in the affairs of the company and their approach were not irregular, they have been running the business and affairs of the company along with the petitioner. What the court is to see whether the respondents intended to harm the petitioner, but whether the "reasonable bystander" observing the consequences of the conduct complained of would regard it as having unfairly prejudiced the petitioner's interest. I do not think that the allegation or facts stated in the petition and the annexure to it do prima facie establish that the conduct of the respondents-the majority shareholders, was prejudicial as well as unfair to the petitioner. The petitioner has not made out a prima facie case to justify in holding that there is a cause of action for maintaining the petition under section 397 of the Act. That takes me to the application of the respondents se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it would be better to refer to article 37 of the articles of association which reads as follows : "( i )No member shall transfer any of his shares to any person except with the sanction of the company in the general meeting, unless the said person is already a member of the company and is approved by the director. Shares may also be transferable to an infant or minor provided either his or her father is alive to represent him or her as guardian, or any person appointed by a competent court of law to represent him or her as his or her guardian, ( ii )Shares may be transferred at any time by a member to his or her father or mother or to any lineal descendant of such father or mother, or to his wife or her husband and any share of a deceased member may be transferred by his executors or administrators to the widow or widower or any such relative as aforesaid of such deceased member being a cestui que trust or special legatee thereof and shares standing in the name of any deceased member may be transferred to or placed in the names of the trustees of his will and upon any change of trustees, may be transferred to the trustees for the time being of such will, subject to the sanctio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear that the shares available for transfer except the cases noted above, may be offered to the other members pro rata of their respective holdings and on their refusal to offer it to any other member and on his refusal to the third party. This article of the private company provided that any member interested in transferring his shares should inform the directors who should take the shares equally between them, the reference to the directors as a reference to the members, who constitutes as directors. It is argued by learned counsel for the petitioner that there was no offer to the petitioner, who constituted a minority shareholder, by the respondents before transferring the shares to a third party. Learned counsel for the respondents, Mr. Raghavan, has pointed out that the petitioner himself earlier had taken steps and negotiated for sales of shares of the company to outsiders and later he resiled from it for obvious reasons. In answer to the contentions of the petitioner that the respondents did not offer the shares to the petitioner before they were sold to the third party, the respondents have stated that in accordance with the requirement of article 37( iv ) they toget ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all or any portion of the shares of the respondents. But the petitioner did not exercise his right to purchase. On the contrary, he contended that the price offered by Mr. R. N. Shetty to purchase the equity shares is not a real value, they would have fetched more price, if the offer to sell the shares of the company had been given wide publicity. The contention of the petitioner that this pre-emptive right was defeated in not offering the shares to him and there has been violation of statutory mandate of article 37( v ) of the articles of association is unsustainable. The petitioner's counsel had relied upon the decision of the Supreme Court in Bishan Singh v. Khazan Singh, AIR 1958 SC 838. In the Supreme Court decision, it is observed that (at page 841) : "(1) The right of pre-emption is not a right to the thing sold, but a right to the offer of a thing about to be sold. This right is called the primary or inherent right. (2) The pre-emptor has a secondary right or a remedial right to follow the thing sold. (3) It is a right of substitution but not of re-purchase, i.e., the pre-emptor takes the entire bargain and steps into the shoes of the original vendee. (4) It is a ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal and proprietary right as shareholder, must be shown to exist. Refer to the decision in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., [1981] 3 SCR 698 ; [1981] 51 Comp Cas 743 . The Supreme Court in Hind Overseas P. Ltd. v . Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 also pointed out that(at p. 107): "There must be material to show when 'just and equitable' clause is invoked that it is just and equitable not only to the person applying for winding up but also the company and to all shareholders. The company court will have to keep in mind the position of the company as a whole and the interest of the shareholders and see that they do not suffer in a fight for power that comes between two groups." In my judgment, the petitioner has not established a prima facie case to a claim for relief under sections 397 and 398, read with section 402( f ) of the Act. When the petitioner has failed to establish a prima facie case to claim the relief for which he filed the petition, the injunction order obtained by him from this court in Application No. 868 of 1989 has to be vacated. It is true that in this case there is restriction on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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