TMI Blog2005 (1) TMI 409X X X X Extracts X X X X X X X X Extracts X X X X ..... held on 17-12-1987, and the resolution of the Board of Directors dated 8-1-1988 shall be treated as valid and effective except the allotment of 3000 shares in favour of Pratapsinh S. Gaekwad and Priyadarshiniraje S. Gaekwad and 500 shares in favour of Respondent No. 12 herein. The register of the members and other records of the company will stand rectified accordingly. The Board of Directors shall consider the question as regard shifting of the office of the Company to Surat from Baroda. The records of the company, if any, in possession of any of the members or any other director shall be restored to the Registered Office of the Company with defined meeting will be conducted under the Chairmanship of a nominee of the Registrar of the Companies. All the shareholders will be entitled to vote by themselves or through their proxies at the said meeting for appointment of the directors of the company. The Registrar of the Companies shall for the purpose of holding the said meeting shall issue notices thereof to the shareholders and may get the said notice published in newspapers one in English and one in Gujarati having circulation in the area. Costs of publication and issuanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Director with effect from 1st January, 1970. He in the same year became Joint Managing Director. In April 1976, he became the Managing Director of BRC. He was reappointed as Managing Director for two periods of five years each with effect from 19th February, 1980 and 19th February, 1985. FRG passed away on 1st September, 1988, whereafter he was appointed as Chairman and Managing Director on 23-9-1988. 3. GIC was a small investment company. Its equity capital consisted of 425 shares of ₹ 100 each. The said shares were mainly held by the family members. A large chunk of shares was held by Jaisingh Ghorpade Trust of which FRG was a trustee. The beneficiaries of this Trust are said to be outsiders. Some shares of GIC were held by outsiders also. The share- holding pattern of the Company was as under : Sr. No. Name No. of Shares 1. Shrimant Fatesinghrao Gaekwad 301 2. H.H. Maharani Shantadevi Gaekwad 7 3. H.H. Maharani Padmavatidevi Gaekwad 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch, 1988 as a result whereof substantial parts of the equity and reserves were wiped out. It could not even pay off the loans and credits. It had no funds to subscribe for the rights issue made in 1989 by BRC. Its shareholding in BRC was likely to fall with which its forged fortunes were closely linked as the dividend from the shares of BRC was the major source of income of the company. GIC came into financial trouble when BRC did not declare dividend in 1986-87. The value of BRC shares also declined and, thus, it became difficult to avail of an overdraft facility from the Banks. It was then decided to raise funds from the existing members. The Board of Directors of GIC in a meeting held on 10-11-1987 decided to broad-base the company whereafter an extraordinary general meeting was convened on 17-12-1987. In the said FGM a decision was taken to increase the capital by issuing 25000 equity shares of ₹ 100 each. The matter was again placed in a Board Meeting of GIC on 8th January, 1988. In the said Board Meeting presided over by Appellant No. 1 and attended by Mr. P.U. Rana and Mr. P.H. Chinoy, a resolution was passed that 15000 equity shares of ₹ 100 each be issued at pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing members. Allegedly, on instructions of Appellant No. 1 herein, the Company Secretary gave first option to the other family members to subscribe for shares according to their request and the remaining were put in the name of Appellant No. 1 and his family pursuant whereto only two persons. Mrs. Puar asked for allotment of 500 shares and Mrs. Shubhanginidevi Gaekwad for 25 shares respondent and, thus, the remaining 6475 shares were allotted to Appellant No. 1 and family. 6. It is further alleged that FRG became disinterested in the 8000 shares allotted to him. The contention of the Appellants herein is that the balance 7500 shares were renunciated by FRG in his favour and in favour of his children in June, 1988 as the same remained unallotted as other members specifically refused to take up any share. His sons and daughters applied for further 3000 shares through Appellant No. 1 as guardian and the same was allowed. The remaining 4500 shares, however, remained unallotted. The issue is said to have been closed on 10-12-1988. 7. Respondent No. 12 Mrs. Puar who was the Managing Director of Alaukik in a meeting held on 12-10-1989 which was chaired by her issued to herself 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Secretary It, however, stands admitted that the said letter was not circulated. 10. The Appellants herein were allegedly under a belief that the said notice had been circulated and as no response thereto was received, they transferred 9415 shares out of 9481 shares to Indreni. Questioning the said transfer, three suits came to be filed by different shareholders marked as Suit Nos. 305/90, 867/90 and 872 of 90. Suit No. 305/90 was filed by Pramilaraje Khacchar on 28-11-1990 in the Rajkot Civil Court wherein inter alia following reliefs were sought for: A. it be declared that the purported sales and transfers by the defendants Nos. 3 to 7 of the 9415 equity shares owned by them in the first defendant company in favour of the second defendant company are ultra vires their powers, illegal null and void ab initio and that the said shares continue to be of the ownership of the respective defendant Nos. 3 to 7 as if no such sale or transfer was ever made. B. a decree for permanent mandatory injunction be passed in favour of the plaintiff and against the first defendant directing it to offer and transfer the said 9415 equity shares in the first defendant company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in favour of Indreni Holdings Pvt. Ltd. 13. The Respondents herein, however, contend that the said resolution was a fabricated one as no Board Meeting was held on the said date. On or about 20th July, 1990, the Appellant No. 1 issued a letter to the Board of Directors that if the transfer of shares was found to be irregular, he should be permitted to remove transfer notice as per articles. On 9-8-1990, allegedly, a Board meeting was held and the shares transferred to Indreni were rescinded. The Respondents contend that the said plea is by way of an afterthought inasmuch as dividend had been paid to Indreni and TDS on the amount of dividend was deposited in State Bank of India after 9-8-1990. 14. The said suits are still pending. 15. Indisputably, Respondent Nos. 1 and 12 herein took inspection of the Registers of Members and other documents on 10-12-1996 and the relevant extracts were taken and notarised. 16. An Annual General Meeting was allegedly held on 20-12-1990 wherein except for appointment of auditors all other resolutions e.g. seeking appointment of Directors in favour of Appellant No. 1, his wife (Appellant No. 2) and his group were rejected. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany made beyond the original paid up capital consisting of 425 equity shares as existing on 23rd March, 1988 are null and void and illegal and of no legal effect whatsoever and be pleased to set them aside; A-2. In the alternative to prayer - A-1 and in any event, this Hon ble Court be pleased to declare that the allotments of 6475 equity shares to Respondent Nos. 1 to 5 and/or to their nominees or to the members of their nominee or to the members of their family is subject to the simultaneous allotment of 8000 equity shares to petitioner No. 1. 500 equity shares to Smt. Mrunalinidevi Puar, 25 equity shares to Smt. Shubhanginidevi Gaekwad and that the allotment of any further shares including the said 3000 shares to Respondent Nos. 4 and 5 is null and void and illegal and be pleased to set them aside. A-3. In the event that this Hon ble Court holds that the allotment of 6475 shares to Respondent Nos. 1 to 5 and of 3000 shares to Respondent Nos. 4 and 5 is valid, this Hon ble Court be pleased to declare that the said 9475 shares were transferred to M/s. Indreni Holdings Pvt. Ltd. and shall be offered and transferred by Respondent No. 6 to the shareholders holding pro rata o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, Respondent No. 4 herein was also appointed as a Director of GIC and the proceedings were stayed. Against the said order an appeal was preferred by Respondent No. 12 hereinbefore a Division Bench of the Gujarat High Court which was marked as Appeal No. 20 of 1992 wherein the following interim order was passed : Rule Returnable on 19-1-1993. Ad interim injunction restraining the company from raising its share capital, confirmed or undertake sale or purchase and/or mortgage fixed assets/investments of the Company by way of its shares in its holding or subsidiary company, start new businesses and decide the matters relating to policy decisions of material hearing, without placing the agenda to that effect before the Board of Directors and without holding a meeting presided over by an independent Chairman appointed by the Company Law Board by its order dated 28th September, 1992. 20. A question as regard the efficacy of simultaneous proceedings one before the High Court and another before the Company Law Board arose for consideration and by an order 9-3-1993 the Division Bench directed that in view of the nature of controversy it would be in the interest of the parties if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bombay although was questionable, no relief was granted on the ground that the same would amount to putting the clock back and would invalidate the entire AGM and subsequent events which would not be in public interest and furthermore would result in unnecessary expenditure to the parties. ( v )Shantadevi did not have a right to 8000 shares by inheritance. An ad hoc allotment of shares was merely an invitation which did not culminate in a right and, thus, no case could have been built thereupon. ( vi )On the question of mismanagement, it was opined there was hardly any mismanagement and only an apprehension that the change in control may amount to mismanagement would not be acts of mismanagement. Three appeals were filed against the said judgment before the Division Bench of the said High Court which came to be allowed by reason of the impugned judgment. Judgment of the Division Bench 23. The Division Bench, on the other hand, held that the allotment of both 6475 and 3000 shares was invalid. As far as 6475 shares are concerned, it was held that the allotment was solely motivated by self-interest and the minutes confirming such allotment were not acceptable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tober, 2000 at 11.00 A.M. at the Registered Office of the Company at Baroda, for appointing Directors of the Company on the basis of the existing shareholding of 425 shares of the members of the company, in accordance with the Articles of Association. 5. The aforesaid meeting scheduled to be held on 14th October, 2000 will be conducted under the Chairmanship of the Additional Registrar of the High Court Shri V.B. Gandhi. All the shareholders of 425 shares including the petitioner No. 1 as the sole heir of the deceased Shrimant Fatehsinhrao P. Gaekwad in respect of the shares which stood in his name in the register of the members of the company at the time of his demise out of the said 425 shares in respect of which he had voting rights, will be entitled to vote by themselves or through their proxies at the said meeting for appointing the Directors of the Company. No outsider will be allowed to remain present at the meeting except the Additional Registrar who will Chair and conduct the meeting with his official assistants. The Additional Registrar will be assisted by a Section Officer of the High Court of his choice in the said work. 6. All the shareholders who are parties to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by his brothers and sisters. Appellant No. 1 had been put in-charge of the BRC and GIC for a long time. It was urged that no dispute was ever raised as regard the decision of the Board of Directors to broad-base the company by floating 25000 shares out of which 15000 shares were to be allotted at the first instance. The pattern of share allotment pursuant to or in furtherance of the decision of the Board of Directors i.e., 8000 shares were allotted to FRG and 6475 shares were allotted to the Appellants stood admitted. It was urged that the Division Bench of the High Court committed a manifest error insofar as it failed to take into consideration the admission of Respondent No. 1 and Respondent No. 12 herein that 6475 shares were allotted pursuant to the Resolution of the Board during the life time of FRG. Such allotment was in fact admitted in the company petition filed by the Respondent No. 1. The learned counsel would contend that only at a later stage when the Respondent No. 12 herein filed a company petition before the Company Law Board, Delhi a challenge as regards allotment of 6475 shares was also made. In the Company Petition although the reliefs were later on amended, p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8000 shares. Before filing their respective company petitions both Respondent Nos. 1 and 12 were aware about the entire state of affairs and their purported ignorance about the internal affairs of the company is not borne out of records. In this connection, our attention has been drawn to paragraphs 7 and 8 of the statements made in the company petition by the Respondent No. 1. It was pointed out that identical statements were made by the Respondent No. 12 in her Company Petition before the Company Law Board, Delhi. 28. Even therein no allegation as regard fabrication of document or any aggrandizement on the part of the Appellant was raised. Respondent Nos. 1 and 12, it was urged, prevaricated their stand from time to time and as such their plea should not have been accepted by the Division Bench. Submissions on behalf of the respondents 29. Mr. Ashok Desai and Mr. P.V. Kapoor, learned senior counsel appearing on behalf of Respondent Nos. 1 and 12 respectively, on the other hand, would submit : ( i )Appellant No. 1 being in fiduciary position as the Director of GIC as also a family member was required to act in utmost good faith, make full and honest disclosure to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or proved. The learned counsel furthermore urge that there was no factual foundation as regard the allegation of fraud or self-aggrandizement. He would contend that a distinction has to be borne in mind as regard fiduciary relationship with the company and with the shareholder. Points for consideration 31. ( i ) Whether the Appellant No. 1 in his capacity as Director of the Company had a fiduciary duty towards the shareholders. ( ii ) Whether there has been a valid decision to broad-base the company by issuing additional shares. ( iii ) Whether the allotment of 6475 shares and 3000 shares in favour of the Appellants herein was valid in law. ( iv ) Whether the Respondent No. 1 herein could claim title in respect of 8000 shares in the petition filed under sections 397 and 398 of the Companies Act. ( v ) Whether transfer of 9415 shares in favour of Indreni by the Appellants was valid and if not the effect thereof. ( vi ) Whether the issue of oppression and/or mis-management on the part of the Appellant No. 1 herein in running the affairs of the company towards the Respondent Nos. 1 and 12 have been proved. Fiduciary duty 32. Chapter IX of the Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eholders are concerned subject of course to any special arrangement which may be entered into or a special circumstance that may arise in a particular case. Each case, thus, is required to be considered having regard to the fact situation obtaining therein and having regard to the existence of any special arrangement or special circumstance. 36. The question came up for consideration as far back in 1901 in Percival v. Wright 1902 (2) Ch. 421. In that case, the shares of the company were in few hands which were transferable only with the approval of the Board of Directors. The shares did not carry any market price and were not to be quoted at the stock exchange. The plaintiffs therein intended to dispose of certain shares wherefor they offered 12/5s. per share purported to be based on a valuation which they had obtained from independent valuers a few months prior thereto. The said offer was accepted. The transaction pertaining to the said agreement was entered into but it was later on discovered by the plaintiffs that prior to and during their own negotiations for sale the Chairman and the Board were approached by one Holden with a view to the purchase the entire undertakin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be judged on the basis of any assumed fiduciary relationship existing between them and the Singhania group. In my opinion, the respondents 2 to 9 owed no duty to the Singhania group and, therefore, the motive to exclude them cannot be said to be mala fide per se . The Court further held that having regard to regulation 42 read with section105C of 1936 Companies Act vis-a-vis regulation 27 of 1882 Act, the directors exercise a larger power to issue additional capital shares. 38. It is true that while referring to Percival , the court used the expression ordinarily , but if a special situation arises, it would be for the person complaining to plead and demonstrate the same. 39. We, however, do not intend to put our seal of approval on Percival s case ( supra ) in its entirety. The situation may be different when a special contract, special relationship or special circumstances arise. Percival s case ( supra ) may not also be applicable in a case of takeover bid - Gelting v. Kilner 1972 (1) All ER 1166 or when the general body of shareholders is only two of them - Glavanies v. Brunninghausen [1996] 19 ACSR 204. 40. In Palmer s Company Law, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ciary duty to shareholders and in particular current shareholders with respect to the disposal of their shares in the most advan-tageous way as directors are not their agents and as such are not normally entrusted with the management of their shares. It was, however, observed that if the directors take it upon themselves to give advice to current shareholders they have a duty to act in good faith and not fraudulently nor can mislead the shareholders whether deliberately or carelessly, in which event, they may have a remedy. 43. A distinction, thus, has been carved out as regards the fiduciary duty of the directors with regard to the property and funds of the company as contra-distinguished from the duty of directors to current shareholders as sellers of their shares. In case of conflict between two interests, the company s interest must be protected. The directors, however, will have a fiduciary relation if they have taken unto themselves the burden of giving advice to current shareholders. 44. The aforementioned principles of law found favour with the Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 3 SCC 333 wherein it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustries (India) Ltd. s case ( supra ), Nanalal Zaver s case ( supra ) was affirmed stating the sole test is whether the issue of shares is simply or solely for the benefit of the Directors holding : If the shares are issued in the larger interest of the company, the decision to issue shares cannot be struck down on the ground that it has incidentally benefited the Directors in their capacity as shareholders. 45. Fiduciary duty of the Directors to the company should not be equated with the duty to the shareholders. 46. In Peskin v. Anderson [2001] 1 BCLC 372, Percival s case ( supra ) as also other decisions taking similar or contrary view were noticed by the Court of Appeal including the judgment of the Court of Appeal in New Zealand in Coleman v. Myers [1977] 2 NZLR 225 as also Court of Appeal of New South Wales in Brunninghausen v. Glavnics [1999] 46 NSWLR and held that the directors had no fiduciary duty to the shareholders in the facts and circumstances obtaining therein. However, observations were made therein that such duties may arise in special circumstances demonstrating the salient features and well-established categories of fiduciary relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the Directors have to act enjoins upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to the company. It follows that in the matter of issue of additional shares, the directors owe a fiduciary duty to issue shares for a proper purpose. This duty is owed by them to the shareholders of the company. Therefore, even though section 81 of the Companies Act which contains certain requirements in the matter of issue of further share capital by a company does not apply to private limited companies, the directors in a private limited company are expected to make a disclosure to the shareholders of such a company when further shares are being issued. This requirement flows from their duty to act in good faith and make full disclosure to the shareholders regarding affairs of a company. The acts of directors in a private limited company are required to be tested on a much finer scale in order to rule out any misuse of power for personal gains or ulterior motives. E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54. Proper purpose doctrine and the doctrine of fairness vis-a-vis the doctrine of bona fide was considered in view of its findings that the allotment of all additional shares was gained by Ramanujam through manipulations and commission of acts of frauds upon becoming the Managing Director of the Company with a view to gain sole control of the management thereof and to the exclusion of Prathapan. 55. The ratio in Dale Carrington Invt. (P.) Ltd. s case ( supra ), thus, must be understood to have been rendered in the fact situation obtaining in that case. It does not lay down a law that fiduciary duty of a director to the company extends to a shareholder so as to entitle him to be informed of all the important decisions taken by the Board of Directors. Such a broad proposition of law, if understood to have been laid down in Dale Carrington Invt. (P.) Ltd. s case ( supra ) would be inconsistent with the duty of a director vis-a-vis the Company and the settled law that the statutory duty of a direction is primarily to look after the interest of the company. 56. In Bajaj Auto Ltd. v. N.K. Firodia [1970] 2 SCC 550, the Court was concerned with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s potential gain, but also made misrepresentations tending to conceal the plan. In the aforementioned factual backdrop while holding that mere status of a company director would not create any responsibility towards a shareholder but it was observed that the standard of conduct required from a Director in relation to dealings with them will depend upon all the surrounding circumstances and the nature of responsibility which in a real and practical sense he has assumed. 58. In Pennington s Company Law , at page 609, on Coleman s case ( supra ), it is commented : It is uncertain whether this reasoning can be extended to other situations where directors owe duties to the company but the relevant decision has to be made by its members individually or collectively and the directors advise them as to the decision they should make. Such situations would include a proposed sale or disposal of the company s assets and undertaking, a proposed merger or division of the company, a proposed reorganization of the company s share capital affecting existing members and a proposal for the voluntary liquidation of the company. No law in absolute terms, thus, had been laid down the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mstances and the nature of the responsibility. 61. It is, thus, not possible to lay down a law which will have universal application. No authority has been brought to our notice which states that there exists a duty in a director to advise the shareholder as to whether they should purchase the shares of the company or avail the benefit of an offer. In an appropriate case, a fiduciary relationship may come into being having regard to the responsibility undertaken by the directors towards the shareholders by way of a special contract. 62. The law which emerges from the discussions made hereinbefore is that the directors do not have any fiduciary duty to advise shareholders as to when and in what manner they should enter with the transactions with the company including acceptance of offer of additional shares. Such a fiduciary duty would arise inter alia in exceptional situations when the directors take upon themselves the task of advising the shareholders who may be his family members or when a transaction of purchase or sale is entered into by and between the director and the shareholders wherein the former taking undue benefit or having ill or improper or ulterior motiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fendants to recover the amount specified therein towards profits made by them upon the acquisition and sale by them of shares in the subsidiary company formed by the Appellant. The said action was also brought against the company s solicitor for recovery of the amount specified therein being profits made by him in similar dealings in the shares. The action was based on claim for damages and misfeasance and for negligence on their part. It is in that situation, the doctrine of trust was applied. In the fact of the present matter neither a case of trust nor negligence nor misfeasance has been made out. 66. The ratio which can be carved out from this case is that the Directors must not derive personal profit from information acquired by them as Directors. Such is not the case here. 67. In Needle Industries (India) Ltd. s case ( supra ), this Court observed that section 397 warrants the court in looking at the business realities of the situation and does not confine them to a narrow legalistic view . For the said purpose, the test required to be adopted is the true character of the company. The initial burden was upon the Respondent No. 1 but nothing had been shown so as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the holders of the said preference shares shall not have any right to vote on any resolution placed before the company unless if directly affects the rights attached to their preference shares even if the dividend is not paid for any number of years, however, will have a right to vote only on those resolutions which will affect their interests. 69. However, on 8-1-1988, the Board decided to issue 15000 shares out of 25000 shares to its members at that time. On or about 12-2-1988, a notice was issued asking the members for acceptance and remit cheque covering the full amount as regard shares allotted to them in three weeks, i.e., by 10th March, 1988. 70. Issuance of the aforementioned notice is not disputed. The Appellant No. 1 herein in the company petition filed by Respondent No. 1 alleged that prior to the Managing Committee meeting a Board meeting was also held. Similar assertion was made in his affidavit dated 11-4-1992 in C.P. No. 7 of 1992. Reference to the Managing Committee meeting, however, was not made by the Appellant No. 1 in his affidavit dated 10-12-1992 in C.P. No. 13 of 1992, but it is of not much consequence as would appear from the discussions made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year ended on 31st March, 1989 were discussed at length and the following resolution was passed : Resolved that the Directors report and the Audited accounts of the company for the year ended on 31st March, 1989 placed before the meeting be and the same are hereby received and adopted. The minutes of this meeting were signed by Mr. P.U. Rana, Director of the Company. 74. It appears that Balance Sheet as on 31-3-1989 clearly indicated the issue of additional equity share capital being 1,05,000 equity shares of ₹ 100 each. The amount of loan of ₹ 15 lakhs from Shantadevi is clearly shown under unsecured loans, remaining amounts have also been advanced to the company by way of loan. No dispute was raised in the said meeting as regard the aforementioned transactions. 75. Furthermore, Annual Return of this meeting held on 30th September, 1989 was filed before the Registrar of Companies, Gujarat at Ahmedabad on 30-11-1989. Mr. H.A. Shinde wrote a letter to Registrar of Companies. The Annual Return was signed by Mr. P.U. Rana and Mr. H.A. Shinde. The details of equity shareholding reflected in the Annual Return was as follows : Sr. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w being raised about the issue of additional capital of 10,500 equity shares cannot be raised since the allotment is confirmed/ratified in the said Annual General Meeting. We would, however, deal with the question as regard validity of allotment of 3000 shares in favour of the appellants and 500 shares allotted in favour of Respondent No. 12 separately. 76. Furthermore, taking a view of the admitted unequivocal stand taken by Respondent No. 1 as also by Respondent No. 12 in Company Petition No. 7 of 1992, the High Court was not correct in holding that the party should be relegated back to the same position as if no additional shares other than 425 shares were issued and in that view of the matter the reliefs granted by the Division Bench appear to be self-contradictory and inconsistent with each other. If the only relief to which the Respondent Nos. 1, 12 and 13 became entitled to that all additional shares over and above 425 original shares should be directed to be cancelled, the question of Respondent No. 1 s entitlement to further 8000 shares from the additional 15000 shares would not arise. Her claim in this behalf is not only wholly inconsistent but also self-destructive. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his position as had been opined by Division Bench of the High Court. 82. It is not necessary for us to dwell at length the question as to whether there had been an express renunciation by FRG in relation to 8000 shares allotted to him as the letter dated 11-6-1988 purported to have been written by Shri Khade to the Appellant No. 1 is disputed. Even if we proceed on the basis that there had been no express renunciation by FRG as regards 8000 shares allotted in his favour, there may not be any doubt whatsoever that in law, having regard to the fact that he acquired only a personal interest therein, the same came to an end with his death. 83. In absence of any documentary evidence, it is also difficult for us to accede to the contention raised on behalf of the Respondents herein that the Respondent Nos. 1 and 12 advanced a sum of ₹ 15 lakhs each without any interest and, thus, they were in a position to purchase 8000 shares. The fact remains that the same had not been done. The fact remains that advancement of loan by both Respondent Nos. 1 and 12 whether with or without interest stands accepted, which was done in November, 1988. However, the question as to whether an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter of offer dated 12-2-1988, did not opt for any share. As indicated hereinbefore, she had not claimed for allotment of any share even after the death of FRG which took place on 1st September, 1988. Even in November, 1988, she even did not subscribe for rights issue of BRC and in fact renounced such offer as had been admitted in her rejoinder affidavit filed in Company Petition No. 51 of 1991 to the reply filed by the Appellant No. 1 herein. In the said rejoinder, a story was made out for the first time that such renunciation was made so that BRC equity shares can be purchased by the family in the name of such persons as was decided. 88. In view of our findings that the Respondent No. 1 is estopped and precluded from questioning the allotment of 6475 shares to the Appellant herein. It may not be necessary for us to go into the details of alleged inconsistencies and contradictions in the three minutes of the meetings as also alleged three different versions of the Appellant No. 1 herein. Suffice it to point out that the Appellant No. 1 alone is not guilty if at all, of taking inconsistent plea. The contesting Respondents are also guilty to that effect in equal measures. The R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the shareholders to raise capital, a Board Meeting of the Company was held on 8-1-1988 wherein Appellant No. 1, Mr. P.H. Chinoy, Mr. P.U. Rana were present and after discussion, it was resolved that 15000 equity shares of ₹ 100 each be issued at par to the members of the company; ( iv )the issuance of a circular letter dated 12-2-1998 pursuant to or in furtherance of the said resolution to all members of the company. 94. But in para 10 of her reply to the said affidavit, Respondent No. 12 stated: What is stated in Paras II 2( ii )( iii )( iv ) ( v ) of the affidavit in reply is broadly true except that Shri Khade was not only then the Company Secretary of Respondent No. 6 Company but still continues to be the Company Secretary. 95. The Respondent No. 1, therefore, accepted and admitted the allegations made by the Appellant No. 1 herein by reason of non-traversal of the said pleadings. It is interesting to note that the Respondent No. 1 in her rejoinder categorically stated that everybody received the circular letter and even Appellant No. 1 did not apply for the shares pursuant thereto but the same had not been replied to. In the aforemention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived. As there was no other business the meeting terminated. 99. The second draft minutes of the meeting are as under: Total number of shares to be allotted worth ₹ 15 lakhs, i.e., 15000 at ₹ 100. Requisitions so far 1. Chairman 8000 shares ₹ 8,00,000 2. Maharani of Dhar 500 shares ₹ 50,000 3. Princess Subhangini Raje Gaekwad 25 shares ₹ 2,500 4. Sangramsinh P. Gaekwad and others 6475 shares ₹ 6,47,500 Total 15000 shares 15,00,000 The Shares will be allotted in the names asked for by the above parties. This is the purported first version. 100. The third draft is said to be in the following terms: A Committee Meeting of Gaekwad Investment Corporation Pvt. Ltd. was held on 21-3-1988 at 3.00 PM at Hoechst House, Nariman Point Bombay- 400021 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the meeting with the said petition and further annexed allotment ratio discussed at the meeting. The draft minutes forwarded by Mr. M.N. Khade had also been annexed in the company petition. It may, therefore, be safe to opine that the purported family meeting was in fact a Board meeting of which the parties were fully aware of. The minutes of the said meeting clearly suggest that the shares were to be allotted if an offer to that effect was made together with the tender of value thereof whereupon the shares would be allotted in the names of the persons as asked by the above parties. Liberty, thus, was given to all the parties named in the said minutes of the meeting to either apply for shares in their own names or in the names of any other person of their choice. In that view of the matter, the words written by hand and others as contained in the first draft of the meeting may not be of much significance. Furthermore as noticed hereinbefore, the said draft minute as sent by Mr. M.N. Khade with a covering letter. In the company petition, the issuance of the said letter and the ratio of allotment having not been denied or disputed, we have to proceed on the basis that the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time of filing the said company petition concededly she had complete knowledge of the affairs of the company as reflected from the documents maintained at the Registered Office of the Company. On her own showing, Mr. P.U. Rana who was a director of the company had at her request gave her inspection of the registers including company registers, minute book, share registers, etc. Relying on or on the basis of the said documents, Respondent No. 1 herein categorically stated: (6.5) It was decided and agreed in the said family meeting and also subsequently in a meeting of the Company s Board of Directors, that out of the 15,000 equity shares, 8000 equity shares would be allotted to Shri Fatehsinhrao Gaekwad, 500 equity shares to Shrimati Mrunalini Devi Puar, the sister of Shri Fatehsinhrao Gaekwad, 25 shares to Princess Shubhangini Raje and 6475 shares for Shri Sangramsinh Gaekwad, the First Respondent herein. Despite such categorical admissions in the pleadings, a statement was made across the bar that at the time of filing of the Company Petition the Respondent No. 1 herein did not have all informations which came to light at a much later stage. It was urged that only wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... never been made out that FRG was guilty of commission of any acts of oppression or mismanagement had been committed while he was the chairman of the company. 109. We are, therefore, of the opinion that the Respondent No. 1 failed to substantiate the charge of oppression on the ground of issuance of 6475 shares in favour the Appellants. Claim of the first respondent in respect of 8000 shares 110. The first Respondent herein claimed 8000 shares evidently relying on or on the basis of such allotment on the sole ground that on the death of FRG, the same was inherited by her as a Class-I heir. She raised a grievance only as regards allotment of 3000 shares to the Respondent Nos. 3 and 4 herein, as would appear from a perusal of the allegations made in the company petition and on a reasonable construction thereof. 111. The allotments made to the parties including 8000 shares were provisional in nature and as such shares were to be allotted on payment, as is evident from the minutes of the meetings. No other person except the Appellants herein, Mrs. Puar and Mrs. Shubhangini Devi opted for allotment of shares to the extent of 6475, 1000 and 25 shares respec-tively. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... title, wherein allegedly a prima facie case was not found in favour of the Appellants herein but this Court is not concerned therewith as it has been accepted at the Bar that keeping in view of the fact that the question is subjudice, this Court would not go into the said issue. In fact, Mr. Desai, learned counsel appearing on behalf of the Respondent No. 1, has given up the same. 115. The finding of the Division Bench of the High Court to the effect that the Respondent No. 1 is entitled to get 8000 shares which was firm allotment made to FRG is, thus, not sustainable in law. 116. Moreover, the allotment in favour of the members of the Company was provisional in nature which would amount to invitation to offer and not an offer. A right to a share would fructify only when an offer made by the company is accepted. Only upon acceptance of such offer a binding contract comes into being. A right, as is well known, fructifies only upon conclusion of a contract and not prior thereto. When a share is allotted in favour of a person as a member of the company, it becomes his personal right. Such a personal right is not heritable. By reason of a mere provisional allotment without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er or to renounce it; it does not create any interest in the shares in respect of which the offer is made. (p. 410) The Division Bench of the High Court treated the allotment to be a confirmed one purported to be relating to regulation 28 of Table A of the Companies Act. The said provision has no application in the facts and circumstances of this case. Issue of 3000 shares 118. The allotment of 3000 shares, however stand on a different footing. The conduct of the Appellants in this regard would call for a closer scrutiny. 119. There is no proof of express renunciation of his 8000 shares by FRG in favour of the Appellant. 120. It is true that the Respondent No. 1 herein although questioned the allotment of 3000 shares given to the son and daughter of the Appellant Nos. 1 and 2 herein, no such challenge was made as regards 500 shares allotted to Respondent No. 12. It is also true that the dividend had been paid for the year ending 31-3-1991 at the rate of 10 per cent and 300 per cent respectively to both Respondent Nos. 12 and 13 in respect of 1000 shares and 25 shares held by them respectively. But this action on the part of the contesting respondents would n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the capital of the Company for the time being would be under the control of the Directors who may allot or otherwise dispose of the same to such persons in such proportion and on such terms and conditions and either at a premium or at par or at a discount. Article 6 provides that the transfer of shares shall be restricted in the manner to the extent provided in Articles 7 to 15 thereof. 126. Article 7 of the Articles of Association of the company provides for embargo in favour of a person who is not a member of a company and thus postulates the policy of transfer first to a member only. 127. Article 8 provides for a notice to transfer for a fair value A transfer notice is not revocable except with the sanction of the Directors. Upon receipt of such notice, if the company finds out a person who intends to purchase the same, a notice of the Proposing Transferor shall be issued. Article 10 provides for valuation of shares by the auditors in case of any difference between the Proposing Transferor and Purchasing Member Article 12, however, provides that if the company does not find a Purchasing Member and give notice in the matter stated in Article 9 with a period of 28 day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereof in favour of other members had been made. 135. The contents of the said circular letter appear to be vague inasmuch as how many shares are proposed to be transferred had not been stated therein. Furthermore no action having been taken within a period of 28 days from the date of issuance of such notice the proposed transferee is entitled to transfer the shares to any person of his choice. 136. It is now well-settled that only one pre-emptive offer is to be made which is otherwise to be accepted or not at all. The existing shareholders are not entitled to be given further pre-emptive rights in respect of those unaccepted shares. Even such a right can be waived or modified. 137. In any event, the transfer has been rescinded in terms of the resolution passed in a meeting dated 9-8-1990. At this stage, it is not necessary to consider the validity or otherwise of the said meeting as no sufficient materials except the factum of the payment to Indreni had been brought on records to show that the said resolution dated 13-7-1990/ 9-8-1990 adopted by the Board are forged and fabricated. In any event, it is not necessary to go into the details of the matter as the three su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ef in cases of mismanagement. -(1) Any members of a company who complain- ( a )that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or ( b )that a material change (not being a change brought about by, or in the interests of, any creditors including debenture holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its board of directors or manager or in the ownership of the company s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; may apply to the Company Law Board for an order under this section, provided such members have a right so to apply by virtue of section 399. (2) If, on any application under sub-section (1), the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made out for winding up for passing an order of winding up of the company but such winding up order would be unfair to the minority members. 147. The interest of the company vis-a-vis the shareholders must be uppermost in the mind of the court while granting a relief under the aforementioned provisions of the Companies Act, 1956. 148. Mala fide, improper motive and similar other allegations, it is trite, must be pleaded and proved as envisaged in the Code of Civil Procedure. Acts of mala fide are required to be pleaded with full particulars so as to obtain an appropriate relief. 149. The remedy under section 397 of the Companies Act is not an ordinary one. The acts of oppression must be harsh and wrongful. An isolated incident may not be enough for grant of relief and continuous course of oppressive conduct on the part of the majority shareholders is, thus, necessary to be proved. The acts complained of may either be designed to secure pecuniary advantage to the detriment of the oppressors or wrongful usurpation of authority. 150. In Halsbury s Laws of England, 4th Edition, Volume 7, para 1011, it is stated: 1011. Conduct amounting to oppressi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the jurisdiction of the High Court was ousted thereby and, thus, the allegations made in the Company Petition filed by the Respondent No. 12 being company petition No. 7 of 1992 could not have been the subject-matter of adjudication by the High Court. It is trite that what cannot be done directly cannot be done indirectly. The conduct and the status of the parties vis-a-vis the company also assume significance. Whereas the Respondent No. 1 herein claimed relief inter alia as a sole class I heir of the FRG, the Respondent No. 12 claimed her relief on the basis of being a person involved in protecting the affairs of the Gaekwad family as also in her own right as a shareholder. It is significant, however, that in Suit No. 675 of 1990 pending in the court of Baroda, Gujarat in her written statement the Respondent No. 12 claimed that if her mother had been issued the 8000 shares, her holding together with that of her mother s would exceed 60 per cent. 152. The Respondent Nos. 1 and 12 had initiated different proceedings in different forums to suit their own purposes. From the materials brought on records, it can safely be inferred that proceeding before the Company Law Board, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efined what oppression is for the purpose of the said section and it is left to court to decide on the facts of each case whether there is such oppression. 156. In Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 WLR 404 it was categorically held that the conditions precedents contained in section 210 of the Act of 1948 must be satisfied before any relief can be granted. 157. Yet again in H.R. Harmer Ltd., In re [1958] 3 All ER 689 (CA), the Court of Appeal held that the section does not purport to apply to every case in which the facts would justify the making of a winding up order under the just and equitable rule, but only to those cases of that character which have in them the requisite element of oppression . It was observed: ...It is not lack of confidence between shareholders per se that brings section 210 into play, but lack of confidence springing from oppression of a minority by a majority in the management of the company s affairs and oppression involved at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. In Needle Industries (India) Ltd. s case ( supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was observed: Those who are alleged to have acted oppressively must be shown to have acted at least unfairly towards those who claim to have been oppressed. In Scottish Co-operative Wholesale Society, Ltd. v. Meyer (a case under section 210) Viscount Simonds adopted a dictionary definition of the meaning of oppressive by, it is said, burdensome, harsh and wrongful . In Elder v. Elder Watson, Ltd., also a case under section 210, the Lord President (Lord Cooper) said: ...the essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing and violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely. Lord Keith said: ...oppression involves, I think, at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. 159. The Court in an application under sections 397 and 398 may also look to the conduct of the parties. While enunciating the doctrine of prejudice and unfairness borne in section 459 of the English Companies Act, the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rejudice to one party in an application under section 459 of the English Companies Act was answered in the affirmative. 165. When a decision is taken on a business consideration, it is tite, the court should not ordinarily interfere - See Maharashtra Power Development Corpn. Ltd. v. Dabhol Power Co. [2004] 52 SCL 224 (Bom.). 166. The burden to prove oppression or mismanagement is upon the petitioner. The Court, however, will have to consider the entire materials on records and may not insist upon the petitioner to prove the acts of oppression. An action in contravention of law may not per se be oppressive. Bhagwati, J. (as His Lordship then was) in Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton Jute Mills Co. Ltd. AIR 1965 Guj. 96 stated the law, thus: ...It may be that a resolution may be passed by the Directors which is perfectly legal in the sense that it does not contravene any provision of law, and yet it may be oppressive to the minority shareholders or prejudicial to the interests of the company. Such a resolution can certainly be struck down by the Court under section 397 or 398. Equally a converse case can happen. A resolution may be passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court held: ...Thus, applying the basic principle of rule of evidence which requires a party alleging fraud to give particulars of the fraud and having found no such particulars the Industrial Court came to the conclusion that the respondent could not be held guilty of fraud... It was observed: ...In the absence of any such particulars being mentioned in the show cause notice or at the trial, attributing some overt act to the respondent, we do not think the Board can infer that the respondent had a role to play in sending a fraudulent list solely on the basis of the presumption that since respondent got a job by the said proposal, said list is a fraudulent one... 171. In A.C. Ananthaswamy v. Boraiah [2004] 8 SCC 588, this Court held that the level of proof required for proving fraud is extremely high. See also Maharashtra Power Development Corpn. Ltd s. case ( supra ) 172. Order 6, Rule 17 provides for amendment of the pleading whereas Order 8, Rule 9 provides for subsequent pleadings by a defendant. The company petitioners did not raise a plea as regard the value of the company share or commission of fraud by the Appellant No. 1 herein and/or his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ..Admissions, if true and clear are by far the best proof of the facts admitted. Admissions in pleadings or judicial admissions, admissible under section 58 of the Evidence Act, made by the parties or their agents at or before the hearing of the case, stand on a higher footing than evidentiary admission. The former class of admissions are fully binding on the party that makes them and constitute a waiver of proof. They by themselves can be made the foundation of the rights of the parties. On the other hand evidentiary admissions which are receivable at the trial as evidence, are by themselves, not conclusive. They can be shown to be wrong. (p. 477) 176. See also Biswanath Prasad v. Dwarka Prasad AIR 1974 SC 117. 177. In Mrs. Viswalakshmi Sasidharan v. Branch Manager, Syndicate Bank [1997] 10 SCC 173, this Court held: ...On the other hand, it is admitted that due to slump in the market they could not sell the goods, realize the price of the finished product and pay back the loan to the Bank. That admission stands in their way to plead at the later stage that they suffered loss on account of the deficiency in service... Judicial admissions by themselves c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 680). In that case Ray, C.J., speaking for the Bench had to consider the question whether the defendant can be allowed to amend his written statement by taking an inconsistent plea as compared to the earlier plea which contained an admission in favour of the plaintiff. It was held that such an inconsistent plea which would displace the plaintiff completely from the admissions made by the defendant in the written statement cannot be allowed. If such amendments are allowed in the written statement plaintiff will be irretrievably prejudiced by being denied the opportunity of extracting the admissions from the defendants... It was also observed: 12. In our view, therefore, on the facts of this case and as discussed earlier, no case was made out by the respondents, contesting defendants, for amending the written statement and thus attempting to go behind their admission regarding 5 out of 7 remaining items out of 10 listed properties in Schedule-A of the plaint... ( See also ABL Ltd. v. Radha Gobinda Ghatak 1999 (1) CHN 645 and Krishna Gupta v. Madan Lal 2002 (96) DLT 829). In view of our findings aforementioned, it must be held that having regard to the admissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be liberally invoked. 185. In Kilpest (P.) Ltd. v. Shekhar Mehra [1996] 10 SCC 696, it was stated: 11. The promoters of a company, whether or not they were hitherto partners, elect to avail of the advantages of forming a limited company. They voluntarily and knowingly bind themselves by the provisions of the Companies Act. The submission that a limited company should be treated as a quasi-partnership should, therefore, not be easily accepted. Having regard to the wide powers under section 402, very rarely would it be necessary to wind up any company in a petition filed under sections 397 and 398. 12. The present was a petition under sections 397 and 398. The Division Bench exercised power under section 402 to appoint Mehra as a Director to protect his interest and guard against mismanagement. It required Dubey to return to the company the sum of ₹ 52,875 which he had wrongly appropriated to himself. It directed the Registrar of Companies to enquire into other allegations of misconduct in which it found, prima facie, substance; and we may say immediately that we have perused the report filed by the Registrar of Companies which shows that no substance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le and/or allotment of 8000 shares is not tenable in law. The alleged right of the Respondent No. 1 to claim title over the said shares as a class 1 heir of Fatehsinh Gaekwad cannot be determined in an application filed under sections 397 and 398 of the Companies Act and in particular having regard to the fact that the said question is pending adjudication in a duly instituted civil suit. ( v )Transfer of 9415 shares by the Appellants in favour of Indreni by itself was not an act of oppression keeping in view of the fact that the entire shares of the said company were held by the Appellants alone and in any event the notice of transfer having been rescinded, the Appellants continue to be the owner in respect thereof. Conclusion 188. For the reasons aforementioned, the impugned judgments of the Division Bench cannot be sustained which is set aside accordingly. The appeals are allowed in part and to the extent mentioned hereinbefore with the following directions: (A)It is hereby declared that the allotment of shares from the additional share capital had been increased pursuant to the resolution of the Extraordinary General Meeting held on 17-12-1987, and the resolutio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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