TMI Blog2016 (9) TMI 716X X X X Extracts X X X X X X X X Extracts X X X X ..... o holds the majority of shares in a company is being reduced to the position of minority shareholder in the company by mala fide act of the company or by its Board of Directors, such act must ordinarily be considered to be an act of oppression against the said shareholder and what relief should be granted would depend on the facts of the case. The facts of the present case at hand are almost akin to the case referred to above. Allotment of additional shares to the respondent Nos.3 and 4 was made with the objective to gain control by becoming a majority shareholder. The said allotment is not in the interest of the Company and no legal procedure prescribed in the articles of association was followed. The Company Law Board although held that the removal of the petitioner Nos.1 to 8 as directors under Section 284 of the Act was done in contravention of the provisions of the Companies Act, 1956 and also against the principle of legitimate expectation dismissed the company petition. The allotment is also in violation of Article 6B of the Articles of Association. In view thereof the appeal succeeds. The Board Resolution dated May 31, 2013 and consequent allotment of shares in fav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alleged that by reason of the allotment of the aforesaid shares, the shareholding of the respondents has increased from 49.65% to 51% thereby reducing the petitioners from majority to minority. Moreover, the removal of the petitioners Nos. 1 to 8 from the Board of Directors of the Company and issuance of the shares in favour of the respondent No.3 are in violation of Article 6B of the Articles of Association of the Company. At the time of incorporation of the said Company on 24th January, 2005 the authorized share capital of the respondent No.1 was ₹ 50,00,000/- divided into 5,00,000 equity shares of ₹ 10/- each and prior to 31st May, 2013, the issued, subscribed and paid up share capital was ₹ 20,80,000/- comprised of 2,08,000 equity shares of ₹ 10/- each, out of which the petitioners together hold 1,04,750 equity shares. The respondent No.1 Company, since inception, has been carrying on the business of running a Nursing Home and the principal assets and/or fixed assets of the company is the land, structure and building situated at the premises of the Registered Office of the Company. Before the Company Law Board, the petitioners alleged that the peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice for the purpose of allotment of such shares was ever served upon the petitioners Nos.1 to 8, who are the Directors and also the shareholders of the respondent No.1 Company. It was pleaded that there was no need of raising any funds by way of share capital in the company at the relevant point of time. Inasmuch as no opportunity of acquisition of shares was granted to the petitioners, who are the shareholders of the company, before allotment of shares to the respondent No.3. No resolution was passed at any General Meeting of the Company either for the removal of the petitioners Nos.1 to 8 from the Board of the Company or for appointment of the respondents No.3 4 in the Board of Directors of the Company or for the aforesaid issue and allotment of shares in favour of the respondent No.3. It was alleged that the respondents Nos. 2 and 3 have colluded and conspired between themselves to make material changes in the shareholding and also, in the constitution of the Board of Directors of the respondent No.1 Company in order to oust the petitioners from the control of the company. The respondent No.2 thereby has acted in breach of his fiduciary duty towards the company and its shareho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 31st March, 2011. Since the company was running short of funds and requires additional fund to overcome financial difficulty, the company entered into a MOU dated 1st June, 2010 with the respondents No.2 3. Under the MOU, the respondent No.3 invested ₹ 45 lacs in the company. The Company with the aforesaid fund could come out of the difficulty. The said Balance Sheet was signed by the petitioners also. More so, such funds had been utilized by the Company is out of its financial difficulties. Now, once the Company to come out of its financial difficulties, the petitioners have racked up few issues which are non-existent in order to initiate the instant proceedings. The respondent justified allotment of 5776 shares in the Board Meeting held on 31st May, 2013 in favour of the respondent No.3 for the purpose of giving effect to the MOU dated 1st June, 2010. With regard to the other issues, it was contended that the Cafeteria let out to Mr. Milan Kumar and the said Milan Kumar had been paying rent to the Company since 2008. The company has also let out a shop for setting up a medicine shop to the respondent No.2 for which the said respondent is paying rent. The petitioners ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Ors. reported at (2005) 1 SCC 212 to emphasize that in absence of any resolution and disclosure of any materials in justification of allotment of shares in favour of the respondent No.3 are liable to be set aside and the Company Law Board should have declared such transfer as illegal and restored the majority of the petitioners in the Board. Mr. Mookherjee further submitted that the Company took loan from the Bank of India, Chirkunda Branch of about ₹ 245 lakhs and the Company had and still been paying regularly the monthly instalments and no default has been committed. In fact, prior to 2010, there were irregularities in paying monthly instalments when the Company was under active management of the respondent No.2, but subsequently, when the petitioners came in control of the Company, the Company started regular payment of instalments to the Bank and till date no default has taken place and as on December, 2015, approximately a sum of ₹ 60 to ₹ 62 lacs is due and payable to the bank. The respondent No.3 was never a party to any MOU and no agreement was reached between the petitioners and the respondent No.3 at any point of time. It is submitted that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to the respondents Group without any offer being made to the petitioners, is an act of oppression . In addition, it has been held in Dale Carrington Investment Pvt. Ltd. (supra) that the act to convert a majority shareholder into a minority shareholder has been considered to be an act of oppression and mismanagement both within the meaning of Sections 397 398 of the Companies Act, 1956. Per contra, Mr. Jishnu Saha, learned Senior Counsel appearing on behalf of the respondent No.2 submitted that there are two distinct Groups in control of the Company. The Board of the Company was comprised of nine directors out of which eight directors from the Doctor Group and one director from the Sharma Group. Notwithstanding the fact that the respondent No.2 was only one of the nine directors of the respondent No.1 Company, the petitioners have all along acknowledged his contribution to the company and in this regard the learned Senior Counsel has referred to Paragraphs 6.2 and 6.4 of the Petition and Paragraph 6 of the rejoinder and submitted that the pleadings would show that the petitioners acknowledged the fact that at the time of inception and commencement of the company it was all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e signified an agreement by and between the Doctor Group and the Sharma Group with regard to the running of the Nursing Home. The said MOU provided that on and from the date of execution of the said document itself, the Sharma Group would take over the day to day management of the Nursing Home and their decision in this regard would be final and binding on the petitioners. The same further provided that the shareholding of the Sharma Group would be increased to 51%. The corresponding obligation on the part of Sharma Group was to invest and/or arrange sufficient funds to pay back bank term loans that were overdue and to subscribe for 5776 equity shares of and in the respondent No.1 Company. Under the said MOU, the Sharma Group shall take advice from Doctor Group for taking any major decisions on behalf of the respondent No.1 Company. The object of the said MOU was clearly to increase the shareholding of the Sharma Group from 49.65% to 51%, cessation of petitioner Nos.1 to 8 from the Board of the company and appointment of the respondent No.3 and 4 on the Board to give them majority control over the affairs of the company so as to prevent the Doctor Group from interfering with the da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the Sharma Group in the Company to 51%, and to appoint the respondent Nos.3 and 4 as directors upon removing the petitioners from the Board. That the Sharma Group was entitled to do so in terms of the MOU cannot be and has not been questioned. The Sharma Group was forced to take such steps in view of the wrongful and illegal refusal on the part of the petitioners to allow the Sharma Group to take over day to day functioning of the respondent No.1 Company without any interference from the petitioners, both by increasing its shareholding to 51% and by taking control of the Board of the Company. Although the said MOU was executed by the petitioners with the respondent No.3, the same signified an agreement by and between the Doctors Group and Sharma Group with regard to running of the Nursing Home and the object of the said MOU was clearly to increase the shareholding of Sharma Group, cessation of the petitioners No.1 to 8 from the Board of the Company and appointment of the respondents No.3 4 on the Board to give them majority and control over the affairs of the Company. In addition, despite being obliged to perform its obligation under the said MOU, the petitioners did n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to and it was understood and accepted by the parties that the said MOU had lost its force and stood terminated. The said paragraphs, according to the learned Senior Counsel, represent a deliberate attempt on the part of the petitioners to avoid the MOU of 1st June, 2010 with the conscious knowledge that the said MOU had not only been executed but also been given effect to. The petitioners realizing the implication of the said MOU with the mala fide object disclosed an alleged minutes of a meeting of the Board of Directors dated 27th November, 2010 which purports to record that the Board of Directors were surprised to find that a sum of ₹ 45 lacs have been injected in the Company. It was argued that the content of the said minutes are untrue and the document is forged as would be evident from the letter of the petitioner No.3 in the letter head of the company to the Manager of the Bank of India, Chirkunda Branch on 26th August, 2010 acknowledging the fact that the company had deposited a total sum of ₹ 45 lacs with the bank and on the basis thereof had prayed for a repayment holiday for a period of nine to ten months. On a comparison of the MOU dated 1st June, 2010 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercise of the power in question would conflict with the promises the parties had exchanged, and it was not necessary that such promises should be independently enforceable as a matter of contract. In view of the shareholding of the respondent No.1 company, even prior to the issuance and allotment of the said 5776 shares, there can be no doubt whatsoever that the company was in the nature of partnership between the Doctors Group, the petitioners and the respondent No.2, who represents the Sharma Group. As such, the consideration of equity clearly prevents the petitioners from relying on their strict legal right in opposing the issuance and allotment of the said 5776 shares in favour of the Sharma Group and in appointing Additional Directors to the Board of the company upon removing the petitioners therefrom, particularly as allowing the petitioners to do so would amount to allowing the petitioners to take advantage of their own wrong and further as the same would not effect to the petitioners to escape their obligations under the agreement entered into with the Sharma Group by questioning the acts of the Sharma Group, done with the object of giving effect to the MOU of 1st June, 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the respondent No.2 is clear and implicit. The dispute centres around a Memorandum of Understanding. There are two Memorandum of Understanding disclosed in the proceeding in which the surname Sharma is common but the first name is different, namely, Sanu Sharma in the first agreement and Shiv Kumar Sharma in the second agreement. The respondent No.2, both before the Company Law Board and before this Court, has relied upon the Memorandum of Understanding dated 1st June, 2010 and in no uncertain term unabashedly and without pretention submitted that the allotment of shares in favour of the respondent Nos.3 and 4 is to give effect to the said Memorandum of Understanding. The Doctor Group, on the other hand, has denied the existence of the said agreement and submitted that only a draft agreement was prepared in which Sanu Sharma of Durgapur was the first party and the petitioner along with the respondent No.2 are the second party. The said agreement, however, was not given effect to. The respondent No.2, in short, contended that the Doctor Group has acted in breach of the Memorandum of Understanding dated 1st June, 2010 and it was incumbent upon the Doctor Group as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standing, Shiv Kumar Sharma individually would hold 51% equity shares of the company and balance 49% shares would be held by the existing shareholders and their relatives. Shiv Kumar Sharma would take over the management from 1st June, 2010 and would also take over all existing liabilities of company as on 31st May, 2010. Shiv Kumar Sharma shall also be liable to pay liabilities in time as per term decided with creditors. Shiv Kumar Sharma shall invest sufficient fund to initially repay bank term loan overdue and other overdue liabilities. Moreover, Shiv Kumar Sharma shall invest sufficient fund for development of the company. There was no material placed before the Company Law Board as to the liability existing as on 1st June, 2010. It appears that on 16th June, 2010, the Bank of India wrote a letter to the Nursing Home seeking certain informations and details in order to enable the Bank to submit the proposal for sanction of further loan by competent authority. Prior thereto it appears that the Company between 1st June, 2010 and 10th June, 2010 deposited a sum of ₹ 45 lacs with a request for holiday period of nine to ten months. A further request was made to increase the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 till the impugned Board resolution that any further sum was invested by the respondent No.2 or its alleged Group. It is an admitted position that no notice was ever served upon any of the shareholders of the company before the impugned resolution was passed. Mr. Jishnu Saha, the learned Senior Counsel in this regard has submitted that no notice is required in such a situation when all the shareholder directors of the company have consented to and agreed to the terms contained in the Memorandum of Understanding by which they have unequivocally admitted taking over the control and management of the respondent No.1 by Shiv Kumar Sharma. Mr. Saha tried to draw inspiration from the two decisions of the Chancery Division, namely, Cane v. Jones Ors. reported at 1980 (1) WLR 1451 and In re Duomatic Ltd. reported at 1969 (2) Ch 365 that where the transactions are intra vires and honest, and especially if it is for the benefit of the company it cannot be upset if the assent of all the shareholders is given to it. It matters in the least whether the assent is given at different times or simultaneously. In that case absence of holding any meeting and passing any resolution would be unn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent No.2. The right to claim relief under Section 397 of the Companies Act, 1956 has been recognized in Ramashankar Prosad Ors. Vs. Sindri Iron Foundry (P) Ltd. Ors. reported at AIR 1966 Cal 512. The act of appointing new additional directors by altering the articles of association of the company with the object of completely upsetting the control and management of the company's affairs constitutes an act of oppression. It is settled law that it is not open to the directors of a company to issue and allot shares in a manner by which an existing majority of shareholders are reduced to a minority. The court will scrutinize with particular circumspection any such issue or allotment and unless it is satisfied beyond reasonable doubt that such issue was unavoidable and was resorted to as an express and emergency measure with an object of fundamental importance, e.g., saving the existence of the company, it will not allow the existing balance of power in the company to be disturbed. In Dale Carrington Invt. (P) Ltd. v. P.K. Prathapan reported at (2005) 1 SCC 212 their Lordships with regard to oppression held that if a member who holds the majority of shares in a company ..... X X X X Extracts X X X X X X X X Extracts X X X X
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