TMI Blog1999 (5) TMI 480X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 5 lakhs. Sometime in March, 1995, the respondent No. 1 along with the appellant No. 2 and the respondent Nos. 6, 7 and 8 purchased 100 per cent shareholding of the company (respondent Nos. 1 to 5 hereinafter will be referred to as 'group A'. The other shareholders will be hereinafter referred to as 'Group B'). The respondent No. 1 held 20 per cent shareholding of the subscribed capital as he was holding 10,000 shares out of 50,000 shareholding of the company of Rs. 10 each. On 8-3-1995 Dipak Mehta (Respondent No. l) and Laxman N. Godbole (Respondent No. 7) were appointed as Additional Directors. On 21-5-1995 first Respondent resigned as a director. In the board meeting, the Appellant No. 2 Shri Bardeskar was appointed as Director. On 30-9-1995 Bardeskar and Godbole were appointed as direc-tors at the annual general meeting of the company. Members of the Kasargod family who were the original shareholders of the company resigned from the directorship during May and December, 1995. Associ-ates of first respondent gave a loan of Rs. 22 lakhs on interest to the company. On 7-12-1995 the authorised share capital of the company was inereased to Rs. One crore pursuant to a Resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a view to convert the share moneys into share capital, these facts were placed on the record by letter dated 9-4-1997. Respondent Nos. 1 to 5 are stated to have fabricated the Board Resolution and purported to file return in form No. 2. A meeting of the Board of directors was held on 18-4-1997 but no business was transacted. This fact was also recorded by letter dated 19-4-1997 ad- dressed by group B to group A. On 12-4-1997 the respondent No. 1 lodged a police complaint making several false allegations. A statement was made before the police signed by the Respondent and the second appellant. In April, 1998 the respondent Nos. 6 to 8 decided to transfer their shareholding in favour of appellant Nos. 7 to 20. Notice of the intended transfer of the shares was given to the company. On 13-4-1998 notice of the extraordi-nary general meeting to be held on 29-4-1999 was sent to all the sharehol-ders. The board at its meeting held on 13-4-1998 gave its approval in principle for the proposed transfer. On 29-4-1998 the board duly approved the transfer in favour of Appellant Nos. 7 to 20. At the same Extraordinary general meeting, i.e. 29-4-1998, the Respondent Nos. 1 to 4 (Group A) were re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oting as pleaded by the respondents. In fact, the articles of association provided on the contrary that the shares can only be transferred to a person named by the directors. In other words, shares can only be transferred to a person whom the directors nominate. Furthermore, this was a pre-existing company which had been acquired. Thus, the memo- randum of articles of association in existence continued to hold the field. Therefore, group A is only 20 per cent shareholder. If a quota of shareholding was to be provided, the same could have been done only by amendment of the articles of association. It is submitted that the CLB has wrongly set aside the transfer of the shares in favour of the appellant Nos. 7 to 20. Even then the shareholding of the first respondent remained at 20 per cent at all material times. According to Mr. Dwarkadas, the CLB has committed serious factual errors which would amount to errors of law. Admittedly, the petition No. , i.e. the respondent No. 1 alone was a shareholder of the company. Petitioner Nos. 2 to 5 admittedly did not hold any shares in the company and could not have complained and did not have any locus standi to file a petition by virtue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of illegality by the majority cannot be termed as an act of oppression. It is further submitted that the CLB has wrongly held that there was an agreement as pleaded. The finding of equality of shareholding and majority of group A on the Board is stated to be perverse. It is further submitted that no relief could have been granted to non-members. According to Mr. Dwarkadas, paras 2,4 and 7 of the operative part of the order beside being incorrect findings in law are wholly inconsistent. On the one hand, the CLB has held that the petitioner No. 1 alone was the shareholder of the company and the Petitioner Nos. 2 to 5 were not shareholders. On the other hand whilst passing the final order, the CLB has granted relief to the very same parties. This, according to Mr. Dwarkadas, discloses total non-application of mind on the part of the CLB. Granting of relief to any non-member renders the order without jurisdic-tion or in excess of jurisdiction. According to Mr. Dwarkadas, the correct position in law is that any private agreement which is contrary to the articles of association is not binding either on the shareholder or on the company. Since the oral agreement has not been incorpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent-Group A 4.Sixth respondent-Group B 5.Seventh respondent-Group B Hence, on and after 30-9-1996 Group A had only 2 Directors whereas group B had 3 directors which position remained unchanged. Relying on the events from June, 1996 the CLB has come to the conclusion that there was always an agreement of equal shareholding. This, according to Mr. Dwarkadas is contrary to the pleadings of the respondents where it is pleaded that the agreement have been implemented in January 1996. It is submitted that the CLB ought to have considered these events in order to discern the intention of the parties. These events are intrinsic evidence that there was no evidence of agreement/understanding as construed by the CLB. In the present case, there is said to be only an oral agreement. Therefore, it has to be tested by the conduct of the parties. The two additional directors from group A not having been made permanent the CLB wrongly came to the conclusion that there must have been 7 directors. If that had been so, according to Mr. Dwarkadas, then these Directors would have acted as such. There is no resolution to the effect that these Directors were ever made permanent. There is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at once the petition for winding up filed by Respondent Nos. 1 to 5 was dismissed by the High Court with a finding that it was not just and equitable to wind up a company, no relief could be granted to group A in the petition filed by virtue of section 397. He submits that before any relief can be granted under section 397, the petitioners therein had to establish that it was just and equitable to wind up the company. The facts pleaded in the company petition were the same as the fact pleaded before the CLB. The High Court had given a finding that it was not just and equitable to order winding up of the company. This finding was res judicata. The CLB committed an error of law in considering the whole issue de novo for coming to a contrary conclusion to the High Court. According to Mr. Mehta, the CLB was also not justified in holding that the High Court had suggested that the Petitioners therein had a remedy under section 397. The High Court merely held that the minority can approach the CLB for remedying their grievances. The High Court, therefore, merely stated the legal position. The winding up petition having been dismissed on merits, the alternative remedy under sections 39 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the majority shareholders, continuing up to the date of petition, showing that the affairs of the Company were being conducted in a manner oppressive to some part of the members. The conduct 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 of a minority by a 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.... (p. 366)": 5. In reply, Mr. Sarkar, the learned counsel, has submitted that there is no infirmity in the order passed by the CLB except to the extent that option ought not to have been given to the Appellant Nos. 1 and 2 to repurchase the shares from the appellant Nos. 7 to 20. Mr. Sarkar has submitted that in their submissions the counsel for the appellants have totally lost the focus of the controversy. According to him, the whole episode can be divided into three periods which he has described as Chapters 1, 2 and 3. According to him, Chapter 1 relates to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be illegal as the same has been done to preclude the allotment of shares to group A who had already invested a sum of Rs. 29 lakhs for the last three years. Mr. Sarkar has further submitted that the various contemporaneous acts would clearly show that the CLB has correctly come to the conclusion that there was an understanding. These factors may not be sufficient to establish rights in a civil suit but will be sufficient to establish equitable rights. He refers to the statement made before the police on 12-4-1997 which categorically states that there are 7 Directors. Thereafter the attendance sheet of the Board meeting dated 18-4-1997 also shows that 7 directors were present. He submits that the CLB has rightly relied upon the handwritten note where agreement was made to share the expenses. He submits that the resolution to the effect that in future shares will be allotted only with the consent of the shareholders would show that group B did not ever enjoy a majority on the Board. To get over the difficultly, it has been provided that the shares will be transferred with the approval of the shareholders. This would mean approval of 75 per cent of the shareholders. Since both th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the provisions of the Act. (5)Further shares have been issued to certain Respondents in violation of the provisions of the Act and without the consent and knowledge of the Petitioners holding 50 per cent shares in the company. (6)The Respondents 2, 7, 8 and 9 have handed over the management and operation of the company to outsiders by appointing them as additional directors which is detrimental of the interest of the Petitioners and the company. The CLB has noticed that the foundation of the petition is that there was an understanding/ agreement between the original 5 shareholders, in that group A would have 50 per cent in the shares of the company and majority on the Board of Directors. No formal written agreement had been produced before the CLB. The CLB relied on a hand-written note dated 2-8-1997 signed by the Respondent No. 6 wherein there is a statement that the shareholders would contribute for the expenses of the company in various proportions. This note has been held to give some credence to the stand of the Petitioners therein with regard to the understanding/agree- ment. The aforesaid notice has been placed on the record in the compila-tion of documents at page ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same are perverse and could not have been reached by any reasonable authority. Whilst it is true that the findings of fact are not accepted blindly, the Courts do not interfere with them also without real justification. The view taken by the Board is a possible view. Thus, it would call for no interference. In my view, the CLB has correctly come to the conclusion that there is substance in the stand of the petitioner No. 1 that his group was to have 50 per cent shares in the company and majority on the Board. With regard to the composi- tion of the Board, detailed reasons have been given in the impugned order. It was the stand of the respondents (group B) that in the annual general meeting held on 30-9-1996. Petitioner Nos. 2 and 3 (group A) who were additional directors were not appointed as Directors, while the other petitioners and respondent No. 5 who were Additional Directors were appointed as directors. On the other hand, it was contended by group A that in the meeting all the 7 directors would be made permanent directors not liable to retire by rotation. However, neither of them produced any return filed with the Registrar about the appointment of the directors. The CLB not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roup A directors from allotting the shares of themselves. Since shares were to be allotted only to the nominees of the Directors, there was no legal impediment to prevent group A from allotting the shares. Thus, power was sought to be transferred from the directors to the general body. Had group B been in majority, there would have been no need for such a move. There is sufficient material on the record to indicate that group B was acting as the minority group all along. Sometime after 5-12-1996 disputes started between the parties when Appellant No. 2 removed machinery from the company to his own concern. Thus, group A made a complaint to the police. In these circumstances a statement was made before the police on 12-4-1997 by Jitendraji Mehta and Pawalu Bardeskar belonging to groups B and A respectively. The statement is signed by both the parties. In this statement, it is admitted that there are in all 7 Directors. It is also admitted that since last June, 1996 a dispute has arisen in connection with the transactions of the company. It is stated that now the parties will approach the Court and duly get the decision thereon. It was undertaken that during the pendency of the proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the directors were the same as mentioned earlier. This letter also states that names of the Directors as mentioned remain the same. Taking all these facts into consideration I am unable to hold that the findings recorded by the CLB are either perverse or are based on conjectures and surmises. Thereafter coming to the allotment of shares by group A in the meeting held on 18-4-1997 the CLB has held the same to be null and void This decision has been held to be null and void on the basis of a number of factors. It was contended by Group B that there was an EOGM of the Board on 15-4-1997 wherein a decision has been taken that the Board would not allot any shares without the approval of the general body. It was also submitted that the necessary information about the allotment of shares was not filed within the prescribed time. On the other hand Group A had contended that there was no EOGM on 15-4-1997. If there was such a meeting it was invalid as no notice of the same was given to group A. It was also submitted that no minutes of the Board meeting have been produced in which a decision has been taken to convene the EOGM. The CLB held that a meeting seems to have been held on 15-4-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reasons and, therefore, do not call for any interference. Thereafter the CLB took up the matter with regard to transfer of shares held by Respondent Nos. 7 to 9. After examining the facts, the CLB came to the conclusion that even a cursory glance as to how the transfer has been effected would indicate that the provisions of the articles have not been complied with. It was for the Directors to nominate the transferees whereas the group B shareholders chose the transfersees themselves. It has been held that Group B shareholders have failed to prove that requisite notice was given for the Board meeting held on 13-4-1998 or on 29-4-1998. Thus, it is held that the Resolutions passed on the aforesaid dates are null and void. The allotment of additional shares to associates of Aarti was decided in the Board meeting dated 8-5-1998 and 25-5-1998, pursuant to the decision taken in the extraordinary general meeting of 29-4-1998. Since the holding of the meeting on 29-4-1998 was already held to be invalid, for the same reasons this resolution was also declared invalid. Thereafter, the CLB held that group B had not estab- lished the need for funds for the issue of further shares. In fact, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noticed that both the groups did not seem to have bothered about the interest of the company. The company was kept locked. The bank accounts were forzen and no activity was being carried on, except finding ways and means to oust the other group from the company. The CLB notices that the foundation of the petition is that the company was to be run on partnership principles and that there was an agreement relating to the shareholding and directorship. The CLB also noticed the submissions that the petitioners have not established that grounds exist for winding up of the company on 'just and equitable' grounds. Strong reliance was placed on the findings of the High Court in the order passed in the winding up petition. The CLB, however, differentiated between a winding up proceedings and a proceeding under section 397. It is held that in a winding up proceedings on 'just and equitable' grounds, the Court may order winding up once the grounds are established. However, in a 397 petition which is alternative to a winding up petition, first one has to establish that there is oppression. Without the element of oppression being established, the question of grant of relief does not arise. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng made such a submission before the High Court, it is hardly open to the appellants now to say that the petition under section 397 was not maintainable or that it was barred by principles of res judicata. 8. Although numerous authorities have been cited by both the sides, it is not necessary to make any reference to the same as, in my opinion, the CLB has applied the correct principles and gave the following directions : "1. The Board of Directors stands reconstituted with immediate effect with the Petitioners 1 and 4 and respondent 2 as Directors. 2. The reconstituted Board will meet within a week from the date of this order and allot share to Group A against their share application money of Rs. 29 lakhs. 3. Respondents 7, 8 and 9 will have the option to repurchase the shares transferred by them and the Respondent transferees are bound to retransfer the same at the same consideration at which the shares were originally transferred. For this purpose, the transferor respondents should indicate, in writing, their desire to purchase, within 15 days of the date of this order and the transfer should be effected within 15 days thereafter. 4. In case these respondents do ..... X X X X Extracts X X X X X X X X Extracts X X X X
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