TMI Blog2010 (7) TMI 820X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the Company Law Board is upheld. However, in respect of refund of share application money of ₹ 16,00,000 is concerned, the amount outstanding and recoverable from respondent No. 2 by the first respondent-company in its audited books of account shall be deducted from the same and respondent No. 2 will also be given benefit of the amounts shown as due to respondents Nos. 2 and 3 from the first respondent-company in the audited books of account of the first respondent-company in calculating the audited amount refundable towards refund of share application money.The process shall be completed in seven months time from the date of the order. - C.A. NOS. 1 & 225 OF 2005 - - - Dated:- 28-7-2010 - N. KUMAR AND B.V. NAGARATHNA, JJ. Vivek Holla for the Appellant. S. Sriranga and Sundaraswamy Ramdas for the Respondent. JUDGMENT N. Kumar, J. These two appeals arise out of the order passed by the Company Law Board, Additional Principal Bench, Chennai Kobian (P.) Ltd. v. Kobian India (P.) Ltd. [2005] 59 SCL 608 under section 402 of the Companies Act, 1956. 2. For the purpose of convenience, the parties are referred to as they are referred to in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 51.25 per cent. and simultaneously reducing the petitioner to a minority of 48.75 per cent. Thus, the respondents committed criminal breach of trust and acted unfairly. On verification, the petitioner came to know that Form No. 5 was filed on April 30, 2004, disclosing the enhancement of authorised capital from Rs. 30,00,000 to Rs. 1,00,00,000 purportedly approved at the fourth annual general meeting held on September 30, 2003. However, copy of the notice dated June 30, 2003, received by the petitioner from the company convening the fourth annual general meeting on September 30, 2003, did not contain any agenda of the resolution under section 173 of the Act, to enhance the authorised capital of the company. Similarly, copy of notice of the fourth annual general meeting filed by the company with the Income-tax Authorities, Bangalore, did not contain such an agenda. The notice of the fifth annual general meeting of the company dated June 30, 2004, is on similar lines of the notice dated June 30, 2003, sent for convening the fourth annual general meeting of the company, without details of timing of the meeting, business relating to profit and loss account, name of the auditor, etc., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluding the petitioner while allotting the impugned shares with ulterior purpose of converting the petitioner s majority into minority and without notice of such allotment lacked probity and fair play warranting interference. According to the petitioner, there was no need for increase of the capital as the company achieved growth without additional capital over the past five years. The company had maintained adequate reserves and surplus. The additional capital infusion on account of the reported expansion of UPS business was only on paper and never implemented by the second respondent. The company had violated provisions of section 113 of the Act in so far as issue of share certificate to the petitioner was concerned and in the body of the petition, they have clearly set out the nature of violations and also how the share certificates were sent casually. 7. According to the petitioner, though respondents Nos. 2 and 3 are directors for life, yet, there is no bar for their removal in the light of section 284 of the Act. Accordingly, when the notice dated August 16, 2004, of the resolution for removing the respondents from the office of directors was served by the petitioner, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... promoter-directors and subscribers to the memorandum of association and were entitled by virtue of article 15 to hold the office of director for life or until they voluntarily resigned from carrying on the affairs of the company. The second respondent is not an employee of the petitioner and he was not given the responsibility to start a subsidiary of the petitioner in India. As on the date of the company petition, the petitioner held 48.75 per cent. and the respondent group held 51.25 per cent. of the paid-up capital of the company. The second respondent was solely responsible for the increase of profitability of the company from year to year. The petitioner was neither persuaded at any point of time by the second respondent to transfer Rs. 7,75,000 in his favour nor acted on the basis of the advice of M/s. Krishnananda Nayak and Co., chartered accountants to receive any money from the petitioner. The transfer of Rs.7,50,000 was made by way of gift and was accepted by the second respondent and the petitioner could not make any claim, as otherwise, the transaction would be hit by the provisions of the Benami Transactions (Prohibition) Act, 1988. The respondents were not the name le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by them after conclusion of the fifth annual general meeting held on July 30, 2004. Moreover, such a notice does not lie in view of the fact that respondents Nos. 2 and 3 are directors for life. The petitioner was interfering with the day-to-day affairs of the company by instigating the employees to disobey the official instructions of the respondents and spreading false propaganda that they had been removed from the office of directors. The allegations made against the statutory auditor was also scandalous. The petitioner was not the owner of the brand names "Kobian" and "Mercury". According to the respondents, in view of the strained business relationship, the petitioner and the respondents could no longer be together in the business of the company. The respondents stated that they were willing to part way with the petitioner provided they were adequately compensated for giving up the brand name of the company and further, that the respondents were allowed to retain the company to themselves. Therefore, they sought suitable directions. 10. Both the parties were content with production of documents in support of their respective contentions. No oral evidence was adduced. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the effect that the case of oppression and mismanagement is made out, calls for interference ? (2)Whether the directions issued are in accordance with law or do they call for any interference ?" 15. Regarding point No. 1 : From the aforesaid undisputed facts, with the allotment of 2,24,250 equity shares of Rs. 10 each on March 30, 2000, in favour of the petitioner, the petitioner was holding 74.75 per cent. of the paid-up capital of the company. The share of respondents Nos. 2 and 3 was 25.25 per cent. It is also not in dispute that the petitioner transferred a sum of Rs. 7,50,000 by way of gift to the second respondent, which amount was invested by the second respondent towards his share capital and consequently 75,500 equity shares of Rs. 10 each was allotted in his favour. Therefore, it is evident that the entire share capital of the company was borne by the petitioner. Though the petitioner was admittedly a majority shareholder, the management of the company was with respondents Nos. 2 and 3 who constitute only 25.25 per cent. of the share capital. The evidence on record shows that respondents Nos. 2 and 3, in the fourth annual general meeting, passed a resolution to en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital of a company could be issued, the same is not applicable 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. Any issue of shares solely to gain control over the company is not permissible. The Supreme Court in the case of Dale Carrington Investment (P.) Ltd. v. P.K. Prathapan [2004] 54 SCL 601 (SC), has laid down the legal position in this regard, as under (page 174) : "A company is a juristic person and it acts through its directors who are collectively referred to as the board of directors. An individual director has no power to act on behalf of a company of which he is a director unless by some resolution of the board of directors of the company specific power is given to him/her. Whatever decisions are taken regarding running the affairs of the company, they are taken by the board of directors. The directors of companies have been variously described as agents, trustees or representatives, but one thing is certain that the directors act on behalf of a company in a fiduciary capacity and their acts and deeds have to be exercised for the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thoritative pronouncement of law by the apex court, by applying the same to the facts of this case, it is clear that respondents Nos. 2 and 3 who are the directors of the company, though minority shareholders, were entrusted with the management of the company of the petitioner with a fond hope that they would act in such a manner as to serve the interest of the petitioner as well as the interest of the company. In fact, as admitted, the consideration for the share capital held by respondents Nos. 2 and 3 has also flown from the petitioner. The petitioner is the proprietor of the trade marks which are made available to the company. Under these circumstances, the respondents have kept the petitioner in dark without notice to it, clandestinely called the fourth annual general meeting without including in the agenda, the subject of increasing the share capital, passed a resolution to increase the share capital and allotted shares to themselves without even making payment on the date of allotment. The effect of it was to make the majority shareholders into minority shareholders and minority shareholders into majority shareholders overnight. This increase in the share capital was for sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e directors, still they would be liable to refund Rs.12,00,000. Under these circumstances, the direction to the petitioner to pay Rs. 16,00,000 to respondent No. 2 is unjustified. In the circumstances, the proper course would be to look into the accounts of the company and if any amount is paid by respondents Nos. 2 and 3 to the company, that amount would have to be given deduction and the loan could be set off against the said amount outstanding and only the balance amount be paid to respondents Nos. 2 and 3. In the facts of the case, the Company Law Board was justified in directing the respondents to go out of the company by selling their shares to the petitioner at par value with 15 per cent. simple interest from the date of investment till the date of payment. 20. It was contended that Rs. 25,00,000 which was directed to be paid by the petitioner to respondents Nos. 2 and 3 is illegal. It is not in dispute, as averred in the company petition itself, that there was no need for increase of the share capital as the company achieved growth without additional capital. Over the past four years, the company has maintained adequate reserves and surplus. It is also not in dispute that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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