TMI Blog2009 (11) TMI 651X X X X Extracts X X X X X X X X Extracts X X X X ..... mes 2256 and this is to be distributed equally amongst all the then 8 shareholders that is, at 282 shares each and on the same terms. The shareholders who are getting these shares for the first time to pay the amount within four weeks from today by means of a cheque or draft in favour of the company. The Company to transfer such additional shares in favour of all members within a further 10 weeks from the date of receipt of the amount by the Company. - COMPA NOS. 8, 16 & 18 OF 2005 - - - Dated:- 11-11-2009 - D.V. SHYLENDRA KUMAR AND L. NARAYANA SWAMY, JJ. S.S. Naganand for the Appellant. M. Dhyan Chinnappa for the Respondent. JUDGMENT D.V. Shylendra Kumar, J. These three appeals presented under section 10-F of the Companies Act, 1956 [for short 'the Act'] are all directed against the common single order dated 7,4.2004 passed in company petition No. 63 of 2002 before the Company Law Board, Additional Principal Bench, Chennai, Company Petition presented under the provisions of sections 397, 398, 402 and 403 of the Act was by the appellants in company appeal No. 8 of 2005 in their capacity as shareholders of the first respondent-company by name Prakash Coach B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anagement and administration of the company. In fact, the company was incorporated by all the 8 shareholders as promoters, each, of them agreeing to subscribe to one share and the 4 male members being the 1st Director of the company. A copy of the Memorandum and Articles of Association of the company is produced herewith and marked as Annexure-I. II. Particulars of Petitioners: The 1st petitioner's father and the 2nd respondent's father were brothers. The 4th petitioner is the elder sister of 2nd respondent. The 3 other shareholders of the 1st respondent-company are also closely related to each other. The 5th respondent's elder brother Ashish Manchanda is married to Ms. Uma the eldest sister of 2nd respondent The 4th respondents is the wife of the 2nd respondent, the 5th respondent is the nephew of 1st petitioner, and 2nd respondent and the 6th respondent is the wife of 5th respondent. Respondents 3 7 are outsiders having no shareholding in the company. The company's Directors are respondents 2, 3 7, A copy of the latest audited balance sheet of 1st respondent company as at 31.3.2002 is produced as Annexure-2. There is no dispute about the above shareholding pattern of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the manner of management of the affairs of the first respondent-company also and the main allegation for the purpose of this appeal and presentation of the company petition before the company law board was that the shareholders-respondents of the first respondent - company had acted in a manner to abuse their powers in the management of the company to act unevenly in the matter of distribution of additional shares amongst the members of the company. 6. The main grievance of the petitioners before the company law board was that while the first respondent - company which was required to issue additional shares in favour of its members to ensure compliance with the requirements of section 318 of the Act, namely, to retain its character as a private company by having a minimum paid-up capital of rupees one lakh in the wake of the amendment to the companies Act by the Companies [Second Amendment] Act 2002 with effect from 1.4.2003 and with the paid-up capital of the company in favour of eight shareholders was only one share each of the face value of Rs. 100/- whereas the authorized capital of the company was rupees five lakhs to be spread over five thousand equity shares of face ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holders and on such understanding had tendered payment for the subscription of additional shares. 10. It was alleged in the Company Petition that notwithstanding the petitioners' willingness to subscribe to the additional shares and in spite of tendering payment for such subscription, the company had allotted shares only in favour of respondents 2 and 4 at 1500 numbers each and more importantly to the exclusion of the petitioners in getting such additional shares and this had been done by the management of the company with mala fide motive to upset the equilibrium that had been maintained hitherto in the shareholding pattern of the company and with an ulterior motive on the part of the respondents 2 and 4 to rest for themselves the control and management of the company by their superior shareholding in the company, as while respondents 2 and 4 would thereafter become shareholders with a holding 1501 shares each, petitioners in particular, will be languishing with their erstwhile holding of only one share; that bringing about such changes in the shareholding pattern of the company by a design or scheme of respondents, particularly, respondents 2 and 4 was an act prejudicial not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of any shares by 1st Respondent Company without prior consent/approval of this Hon'ble Board: ( b ) stay the exercise of voting rights and grant of corporate benefits on newly allotted shares in the event of any shares having been allotted by the Ist Respondent Company to any person other than the Petitioners pursuant to the offer letter dated 11.11.2002 ( c ) appoint Petitioners 1 and 3 as Directors of the Ist Respondent Company during the pendency of this petition; ( d ) direct that no decision shall be taken by the Board of Directors of the Ist Respondent at a meeting or by circulation without the concurrence of the Petitioners 1 and 3: and ( e ) direct that no General Body Meeting shall be convened or held by the 1st Respondent Company without leave of this Hon'ble Board to consider the increase in the authorised/issued/paid up share capital of the Company or to amend the Articles of Association of the Company, 12. We notice from the order-sheet maintained by the Company Law Board that the following interim orders had been passed by the Board during the pendency of the Company Petition before it: "ORDER Petition mentioned seeking the interim reliefs soug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the meanwhile, the petitioners will file amended petition by 13,1,04 and the respondents are at liberty to file additional counter by 20.1.04. Adjourned to 21.1.04 at 2.30 PM for arguments of counsel for the respondents, 12.1.2004 ** ** ** ORDER Heard. The respondents have filed additional counter. For arguments of the respondents adjourned to 16.2.2004 at 10,30AM, 28.1.2004 ** ** ** ORDER Arguments concluded. Orders reserved, In the meanwhile, to the suggestion made by the Bench earlier for amicable settlement of the disputes, Counsel for the respondents submitted that the second, respondent is willing to purchase the shares of the petitioners. In response to this offer. Counsel for the petitioners expressed that the petitioners are either willing to sell their shares or purchase the shares of the respondents group, depending upon the price offered by the respondents group. However, the parties immediately could not agree to the modalities of arriving at the value of the shares. In these circumstances, both counsel for the petitioners and respondents will interact with each other and explore the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive role in the management and administration of the Company. Bui the respondents acted unfairly by allotting shares in favour of respondents in exclusion of the petitioners. All the earlier proceedings before the various Courts/Forums, wherein the second respondent was a ' party establish the conduct of the respondent the parties are at loggerheads and there is deadlock, which would lead to winding up of the Company, as made out in the Company Petition, which would prejudicially affect the Company and its members. The act of the respondents being prejudicial to the members entitle the petitioners to invoke the provisions of Sections 397 and 398. White so. the Company by a letter dated 11 11.2002 (Annexures 11 and 12 of Petition) informed, the petitioners that it was to increase the paid-up capital in statutory compliance of the provisions of the Companies Amendment Act, 2000. Furthermore, the Company was in need of funds, and therefore, offered, to allot shares at a premium of Rs. 140/- per share in favour of the existing shareholders and accordingly advised the petitioners to send the remittances on or before 30.11. 1.2002. The respondents did not indicate the need for additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anges in the composition of shareholders, management and control of the first respondent-Company. In this connection, learned Senior Counsel gave a detailed account of similar conduct and attitude adopted by the respondents in gaming control of oilier group Companies/entities and urged that even if the petitioners have not made out any case of oppression, the CLB is empowered to grant reliefs in the interest of the parties as held in the case of Needle Industries (India) Ltd. He, therefore, prayed for setting aside the impugned allotments. 3. Shri V. Ramakrishnan, learned Counsel appearing for respondents while contending that the petitioners have not made out any case to show that the affairs of the first respondent-Company are being conducted in a manner prejudicial to the public interest or in a manner oppressive to any member or members, satisfying the requirements of sections 397 and 393, every allegation made in relation to the affairs of the concerns other than the first respondent-company is quite relevant for the purpose of the Company Petition. The petitioners have failed to make out a case for winding up of the Company on just and equitable grounds and, therefore, no r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osed increase in share capital, price at which shares are offered to the shareholders and justification for the premium so arrived by the Company. Though the petitioners were to apply before 30.11.2002, they had deliberately responded. only on 26.11.2002 forwarding four pay orders Rs. 1,49,760/- each and raised certain legal issues. The' petitioners had neither asked for the allotment of shares nor indicated number of shares proposed to be subscribed by each of them. As the petitioners failed to comply with the requirements of section 41, the Board of Directors was unable to allot any shares to petitioners. Moreover, the Company was in receipt of the application of the petitioners just before the last date and therefore, could not advise the petitioners to comply with the requirements before 30.11.2002. Consequently, the Company was constrained to return the pay orders in favour of the petitioners, as resolved at the Board Meeting held on 30.11.2002. The Board of Directors at the meeting held on 13.12.2002 after considering the valid applications received from the shareholders had in exercise of their powers allotted 1125 shares each in favour of respondents 2 4, thereby increasi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rson holding equity share capital of company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the concerned company. By virtue of section 41(1), a subscriber to the memorandum of a Company, becomes ipso facto a member on incorporation. In the case of a subscriber, no application or allotment is necessary to become a member. For any other person to become a member, section 41(2) stipulates two conditions viz., that there is an agreement to become a member and that his name is entered in the register of members of a company. Section 41(3) is not relevant fur the present case. The word "in writing" for "agrees" in sub-section (2) have been added by Amendment Act (65 of 1960} to protect innocent persons from the demands of companies on the verge of going into liquidation, as borne out the suggestion of the Companies Act Amendment Committee. Thus, under this sub-section a person must give his consent in unequivocal terms by applying in writing for allotment of shares. This requirement, in my view, is as regards the first allotment made after the formation of the Company in the case of subsequent allotments to persons who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the Board of Directors held on 30.11.2002 (Page 40 41 of Counter-statement) assume relevance, from which it is quite clear that the directors were consciously aware of the fact that each of the petitioners had applied for 624 shares at the rate of Rs. 240/- per share and accordingly each remitted Rs. 1,49,760/- accounting for fifty per cent of the unsubscribed capital of the Company. The sequence of events clearly indicate that the petitioner gave their consent by applying in writing for allotment of the fifty per cent of the unsubscribed capital of the Company amounting to 624 shares for each of the petitioners and accordingly every petitioner remitted the requisite amount, which was within the knowledge of the Directors of the Company. The rejection of the application of the petitioners by the Board of Directors on account of non-fulfilment of the requirement of section 41 is misconceived, more so when the petitioners by a letter dated 10.12.2002 (Annexure 16 at page 113 of Petition) called upon the third respondent to furnish details of the requirement to be complied with by them and further cautioned that any allotment in favour of the other shareholders or third parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sider that any finding needs to be given on this allegation. Under these circumstances, the act of the Board of Directors of the Company, in having rejected the applications of the petitioners is no way justifiable. Accordingly, the fallowing order is made: ( a ) The second respondent would transfer out of his holding, 281 shares each in favour of the petitioners 1 2 within 15 days of receipt of the consideration at the rate of Rs. 240/ - per share from them and deliver the original share certificates and the instruments of transfer in favour of Petitioner 1 2. ( b ) The fourth respondent would transfer out of her holding 282 shares in favour of the third petitioner and 281 sharers in favour of the fourth petitioner within 15 days of receipt of the consideration from them at the rate of Rs.240/- per share and deliver the original share certificates together with the instruments of transfer in favour of Petitioners 3 , 4. ( c ) The Company will register the transfer of shares in favour of the petitioners within 30 days of due lodgement of the share certificates and the instrument of transfer by the petitioners and ( d ) The resolutions passed at the annual gener ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at a Board Meeting of the Company held on 13th December 2002 prior to the presentation of the Company Petition; that the opinion in this regard had been placed before the Registrar of Companies, Karnataka and that all averments contrary to the admitted position were all denied by the respondents; that the relationship between the parties is purely governed by the provisions of the Companies Act, rather than any other relationship including the blood relationship, which has nothing to do with the relief sought for by the petitioners in the Company Petition; that the petitioners were not in management of the Company for the past several years and it is only the respondents who were managing the affairs of the company; that the respondents were in no way responsible for the spate of the incidents referred to in the Company Petition against certain averments made about the developments in the context of the S.M. Kannappa Automobiles Private Limited were not either correct or relevant and such allegations were denied by the respondents; that the first respondent-Company which was earlier incurring losses had been converted into a profit making company by the efficient management of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,49,760/- without a response for seeking allotment and without indicating the number of shares the petitioners were wilting to subscribe, was an act without bonafides; that the petitioners did not comply with the requirements of Section 41 of the Act; that it was the petitioners' own making which prevented the Board of Directors from allotting any shares in their favour and as the management in the company was required to meet the statutory stipulation and in response to the applications received from respondents 2 and 4 applying for 1500 shares each, the Board after deliberations, had decided to allot 1125 numbers of shares each in favour of the second and fourth respondents and thus the paid-up capital of the company had been increased to meet the requirements of Section 3 of the Act. Respondents denied that such an act amounted to either oppression or illegal or an act of mismanagement; that the petition did not contain any worthwhile averment to elicit relief in terms of the prayer; that the petitioners were not entitled to equal reliefs sought for in law ; that the petition only a deserved to be dismissed and prayed accordingly. 15. It is in the wake of such pleadings, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board of Management resolved on 13.12.2002 and by the uneven manner of allotment of shares, equally gave cause to the petitioners to seek relief before the Board and on such rationale, the Company Law Board passed orders on the petition in the following manner to grant relief in favour of the company: ( a ) The second respondent would transfer out of his holding, 281 shares each in favour of the petitioners 1 2 within 15 days of receipt of the consideration at the rate of Rs. 240/- per share from them and deliver the original share certificates and the instruments of transfer in favour of Petitioners 1 2. ( b ) The fourth respondent would transfer out of her holding 282 shares in favour of the third petitioner and 281 sharers in favour of the fourth petitioner within 15 days of receipt of the consideration from them at the rate of Rs. 240/- per share and deliver the original share certificates together with the instruments of transfer in favour of Petitioners 3 4. ( c ) The Company will register the transfer of shares in favour of the petitioners within 30 days of due lodgement of the share certificates and, the instrument of transfer by the petitioners and ( d ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or judgment to enable the parties to explore the possibility for an amicable settlement and to report by 20.10.2009. 20. Though the matter was thereafter listed on 21.10.2009, while certain memos were filed without consensus amongst the parties for any settlement, it was again directed to be listed on 28.10.2009 on which the day the following order had been passed: DVSKJ LNSJ: 28.10.2009 "In the wake of request to the parties to explore the possibilities of an amicable settlement of the disputes amongst them and time having been given to the parties to report any amicable settlement if had been arrived at the outcome as we noticed was that no such thing was forthcoming but as we again goaded the parties to still explore the possibilities of settlement a memo was filed on behalf of the appellant in Compa No. 8 of 2005 and respondents in Compa Nos. 16 18 of 2005 to the following effect: Without prejudice to the contentions in the aforesaid appeals, the appellants are agreeable for an order being made by the Hon'ble Court directing that the paid-up share capital of the 1st respondent company he held equally by all the original 8 shareholders." As this memo was one-si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Company Law Board set aside and the Company Petition should be dismissed and consequently Company Appeal No. 8/2005 should automatically be dismissed, that the appellants in Company Appeal No. 8/2005 are not entitled for any further relief as claimed, but in fact, are not even entitled to sustain the relief that had been granted by the Company Law Board under the impugned order and has prayed for disposing of the appeals in the manner as submitted. 23. Mr. Chinnappa, learned counsel has taken us through the factual details particularly the sequence of events as it developed starting from the letter of offer dated 11.11.2002 which was sent by the Company to its shareholders. Reply of the company petitioners in their letter dated 26.11.2002 in response to the letter dated 6.12.2002, the rejoinder by the petitioners in their communication dated 10.12.2002, the decision of the Board of Directors on 13.12.2002 resolving to allot 1125 shares in favour of Respondent No. 2 and like number in favour of Respondent No. 3, the appellants in Company Appeal No. 16/2005 and the affidavit of the company petitioners before the Company Law Board by the Company Petitioners in Appeal No. 20/20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs on such pleadings and supporting material and in support of the submissions learned counsel has placed reliance on the following authorities: ( i ) Shanti Prasad Jain v. Kalinga Tubes Ltd. AIR 1965 SC 1535 ( ii ) M.S.D.C. Radharamanan v. M.S.D. Chandrasekara Raja [2008] 83 SCL 451 (SC) ( iii ) Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 3 SCC 333 ( iv ) Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [2005] 57 SCL 476 (SC) ( v ) Hanuman Prasad Bagri v. Bagress Cereals (P.) Ltd. [2001] 33 SCL 78 (SC) ( vi ) V.B. Rangaraj v. V.B. Gopalakrishnan AIR 1992 SC 453 ( vii ) Nanalal Zaver v. Bombay Life Assurance Co. Ltd. AIR 1950 SC 172 24. Though Sri Naganand,, learned Senior Counsel had opened the case and had made submissions on behalf of the appellant in Company Appeal No. 8/2005 in the first instance, we have noticed the submissions made by Mr. Dhyan Chinnappa, as the scope for examination of the appeals is much greater in these two appeals, particularly as the appellants in these two appeals (Compa. 16 18/2005) had sought for dismissal of the Company Petition itself and if this could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndividual, be deemed in his insolvency to be a fraudulent preference; ( g ) any other matter for which in the opinion of the [Tribunal] it is just and equitable that provision should be made. Interim order by [Tribunal] "403. Pending the making by it of a final order under section 397 or 398, as the proceeding, make any interim order which it thinks fit for regulating the conduct of the company's affairs, upon such terms and conditions as appear to it to be just and equitable. It is submitted that the company petitioners were entitled for relief In total and undoubtedly to the extent granted by the Company Law Board as the manner in which the persons in Management of the Company had acted in the discriminatory manner of allotment of shares by choosing only two of the shareholders for patronizing and keeping out the other shareholders, particularly in denying the petitioners from getting any allotment in their favour was a clear misuse and abuse of the powers vested in the Management; that the power was not exercised in a proper and a bona fide manner and for the efficient management of the Company, but in a vindictive manner to deprive the company petitioners of their norm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... slate into action or reality; that even when the Company Law Board has been fully enabled to effectuate the relief granted on a petition u/s 397 and 398, the Company Law Board has not realized the real purpose and scope of Section 402 and has not moulded the relief in a manner productive to the company petitioners and therefore, the order passed by the Company Law Board insofar as granting of relief requires suitable modifications so that the company petitioners can really get the relief to which they are entitled to as otherwise, a relief which could be realized for their advantage and benefit and will be lost to them for even in support of such submissions Mr. Naganand has placed reliance on the following authorities: ( a ) M.S.D.C. Radharamanan case ( supra ). ( b ) Dale Carrington Investment (P.) Ltd. v. P.K. Prathapan [2004] 54 SCL 601 (SC). 26. Drawing attention particularly to the manner of bias and mala fide way of allotment of shares by a Managing Director for his own benefit, that the directors of the company are in the position of Agents or Trustees or representatives and they act on behalf of company and in a fiduciary capacity and their acts deeds are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 002 clearly amounted to an act of oppression and therefore submitted that the petitioners had made out a clear case of oppression in the facts and circumstances of the case and Company Law Board was fully justified in granting relief but has only stopped short of a proper and effective 'relief and the order of the Company Law Board needs to he corrected by this court issuing necessary directions in this appeal. 27. It is significant to notice that of the case of Sangramsinh P. Gaekwad ( supra ) while it makes a reference to its earlier decision in Dale Carrington Investment (P) Ltd. ( supra ) and having not in any way disapproved by the earlier view taken in Dale's case to submit that even when there is justification for issue of additional shares, that by itself is no an end of the examination of the manner of allotment of such additional shares is also a test for examining the extent of acts of oppression and would submit that in the light of the view expressed by the decisions relied upon on behalf of the company petitioners there was a clear case of oppression by the management of the majority shareholders of the company was made out and therefore the relief was very m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ud, amongst the parties before all forums of dispute resolution, courts and non-courts, Company law Board, Arbitrators etc, etc, The simple complaint of the company petitioners bereft of all other aspects can be understood with when the company which was required to enhance its subscribed capital from a meagre Rs. 800/- represented by 8 equity shares of 100 face value of Rs. 1 lakh if it is a private company and Rs. 5 lakhs if it is a public limited company spread over 1000 or 5000 as the case may be and by allotting such additional shares in favour of the members of the company who are mailing to subscribe to the additional shares and could have been very satisfactorily resolved if all the shareholders should have been given a fair opportunity for subscribing an uniform number of shares that is, by distributing the additional shares in an equitable manner amongst all the shareholders and if some are not willing to subscribe, by adding that to the Company Account and distributing that also in an uniform manner amongst the willing members, has on the other hand turned out to be arena for legal battle as the Company in terms of its Resolution Dated 13.12.2002 resolving to allot as ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m from passing of winding up order should be avoided and instead the Company Law Board should come up with a solution to bring a satisfactory end to the situation by not only protecting the interest of the complaining members but also removing the oppressive acts and by ensuring that they are not henceforth subjected to further oppressive acts. 36. Human mind being roost of unpredictable, while no one can guarantee prevention of further oppressive acts, but by learning from the present experience one can devise ways and means to prevent recurrence of such a situation, If this is within the limits of law and within the innovative methods, that can be admitted in terms of the power vested on the Board u/s 402 of the Act. 37. Therefore, the touchstone for examining the correctness or otherwise of the impugned order in the present appeals is as to whether the Company Law Board has acted in a manner as to answer these requirements in passing the impugned order, it is in the context of such examination, learned counsel for the appellants as well as the respondents have placed reliance on a good number of authorities referred to and quoted above. 38. This Court had an occasion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te that it was inevitably a situation wherein the Court finds that it is just and equitable to pass an order to wind up the company and therefore unless a finding that it is a situation wherein it is inevitable to pass an order to wind up operation of the company is recorded and if it is just and equitable ground and in support of the submission, drawn our attention to Para - 19 of decision in Shanti Prasad Jain case ( supra ). 43. Countering the above submission, Mr. Naganand, learned Senior Counsel has drawn our attention to M.S.D.C. Radharamanan's case ( supra ) which makes a reference of Needle Industries and Shanti Prasad Jain case in Para-21 to submit that the interpretation to accept that the qualifying part of clause (b) can only be with reference to the former part of clause (a) and not necessarily with reference to later part of oppressing conduct for the reason that when once a case of oppression is made out, that in itself includes a situation of a company to be wound up on just and equitable grounds. This submission commends itself for an acceptance, as the proper understanding of the scope of section 397 of the Companies Act. 44. In the result, Company App ..... X X X X Extracts X X X X X X X X Extracts X X X X
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