TMI Blog1982 (10) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... d company to be held by the Swedish company and 40% by the Indian shareholders. 5. In anticipation of a company being incorporated in India, an agreement was entered into on September 23, 1964, between A.B. Kanthal on the one hand and Jagdiswar Singh and others being the partners of petitioner No. 5 on the other. This agreement, inter alia, provided for the authorised capital, the issued capital, the respective shareholding, the number of directors, quorum of board meetings, etc., the details of which need not detain us. Suffice it to say that some of these provisions were incorporated in the articles of association of the company, which was formed later on, as will appear from what is stated hereinafter. Similarly, another agreement was entered into on the same date between A.B. Kanthal and the partners of petitioner No. 5 which was known as the shareholders' agreement . 6. The Government of India, by its letter dated April 18, 1964, approved of the formation of a company with foreign capital participation on condition that the foreign collaborators would be entitled to only 49% capital participation. 7. In pursuance of the agreement between the Swedish company an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in below : 3. The company being a private company, the following provisions shall have effect, namely :-- (a) the number of members of the company (not including persons who are in the employment of the company and persons, who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased) is not to exceed fifty, but where two or more persons hold one or more shares in the company jointly, they shall for the purpose of this paragraph, be treated as a single member ; (b) an invitation to the public to subscribe for any shares in, or debentures of, the company is hereby prohibited ; (c) the right of transfer of shares of the company shall be restricted in the manner, hereinafter in these articles provided. 34. Subject to the provision of Section 111 of the Act, the board may, in its absolute and uncontrolled discretion, refuse to transfer any proposed transfer of shares and shall not be required to give any reasons for such refusal but subject thereto with the prior consent of all the other members of the company, shares may at any time be transferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n receipt of the purchase money the company shall cause the name of the purchasing member to be entered in the register as the holder of the share and shall hold the purchase money in trust for the proposing transferor. The receipt of the company for the purchase money shall be a good discharge to the purchasing member and after his name has been entered in the register in purported exercise of the aforesaid powers, the validity of the proceedings shall not be questioned by any person. If the proposing, transferor fails and neglects to hand over the share certificate after the purchasing member had paid in full the purchase money, the board shall have a right to issue a duplicate share certificate and to cancel the share certificate which the proposing transferor may have failed and neglected to hand over to the purchasing member. 38. The shares specified in any transfer notice shall be offered by the board to the members as nearly as may be in proportion to the existing shares of the company held by them. If a member should not be willing to accept the full number of shares offered to him within the time specified in the transfer notice, the offer shall elapse with regard to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation in India and to have non-resident share holdings in excess of 40%, inter alia, on condition that the Indian company was to earn foreign exchange by export of goods manufactured by it at ex-factory cost (less excise duty, if any) and the export in each year being not less than 10% of the ex-factory cost of the Indian company's total production during the relevant year. The export obligation would be in force till such time the non-resident's interest in the company would continue to be more than 30/40%. 13. On May 5, 1978, the Indian company in terms of the RBI's sanction executed an undertaking whereby it undertook to earn foreign exchange by export of goods manufactured by it. On January 9, 1981, the RBI informed the Indian company that it had failed to comply with the conditions contained in para. 2{iv) of its letter dated November 26, 1977, and called upon the Indian company to bring down the foreign equity capital to 40%. 14. On March 8, 1981, at a meeting of the board of directors of the Indian company, it was resolved to issue fresh equity shares of ₹ 20,00,000 and offer shares worth ₹ 4,41,000 to Bulten Kanthal A.B. so that together with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e board of directors, died on April 27, 1980, leaving his wife, a son and a daughter. He also left a will dated August 28, 1979, whereby and whereunder he appointed one Mr. Jagjit Singh as his sole executor. Under the will, which will be set out hereinafter in full, Mrs. Leila Daphtary, the widow of Mr. Daphtary, was to be the sole legatee in respect of his entire estate. 19. In or about September, 1980, Mr. M.T. Shah was nominated by the Swedish company as the chairman of the board of directors of the Indian company in place and stead of Mr. Daphtary, since deceased. At the instance of the Swedish company, the board of directors of the Indian company was also reconstituted. This was done consequent upon the change in the control of the Swedish company in Sweden. 20. The board of directors of the Indian company met on June 23, 1981, in Bombay and transacted various items of business. In the minutes of the meeting, the following statement appears : Shares of late Mr. A.C. Daphtary : G. Hildingson reported that Mrs. L. Daphtary had met him in Europe recently and offered to sell the shares of the late Mr. A.C. Daphtary to Mr. M.T. Shah on the transmission of the shares in h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of the company by Mr. M.T. Shah as its chairman. 25. These two resolutions precipitated the situation and was followed by a series of correspondence between the parties inter se and between Singh group of shareholders and their advocates-on-record and the RBI. Ultimately, the Swedish company by their telex dated September 15, 1981, declined to sell 9% shares to the petitioners and expressed their desire to sell the shares to Mr. M.T. Shah only. 26. The only other factual aspect to be noted before I come to the controversy between the parties is that, according to the petitioners, at the instance of the nominee directors of the Swedish shareholders, M/s. S. R. Batliboi Co., chartered accountants, were appointed to make a special review of the accounts of the Indian company for the accounting year ended December, 1979. In the report which was submitted to the Indian company, there are certain adverse remarks against Mr. B. Singh regarding the Indian company's transactions with Beni Ltd., Pratap Development Co. P. Ltd. and Kantilal T. Garach Co. According to the petitioners, these findings are totally baseless. In support of this, the petitioners caused a report ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contained the following paragraphs : ''I would be most grateful if the request for transmission can be granted. I shall send the share certificate for appropriate endorsements and the same can be returned to me. 32. Admittedly, no probate has yet been granted of the will of Mr. Daphtary. 33. According to the petition, this letter of Mrs. Daphtary although dated March 14, 1981, forwarding the copy of the will was never placed before the board of directors of the Indian company until the controversial board meeting held on August 25, 1981, when none of the nominees of the Singh group were present. From the minutes of the board meeting dated August 25, 1981, it appears that the letter of Mrs. Daphtary was with Mr. Subramanyam, an alternate director of the Indian company, who produced the letter. 34. At an earlier meeting of the board held on June 23, 1981, the board took note of a report of Mr. G. Hildingson, a Swedish director of the Indian company, who reported that Mrs. Daphtary had met him in Europe and offered to sell her husband's share to Mr. M.T. Shah, on transmission of the said shares in her favour. It is the petitioner's apprehension that there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of such shares, or may subject to the regulations as to transfer hereinbefore contained, transfer such share. This article is hereinafter referred to as the transmission article . 37. According to Mr. S.B. Mukherjee, who appeared on behalf of the petitioners, in the present case, Article 48 squarely applies to the facts of the present case. According to Mr. Mukherjee, Articles 48 and 49 are mutually exclusive. According to this contention, since Article 48 applies, Article 49 can have no application to the present case. It was submitted on an analysis of Article 48 that upon the death of a shareholder, only the executor, the administrator and the holder of a succession certificate are the persons who can be recognised by the company and brought on its register of members in place and stead of the deceased shareholder. Before it recognises such an executor, etc., the board may require the executor to produce a grant of probate or letters of administration, as the case may be. The board, however, has absolute discretion to dispense with the production of such a grant of probate on such terms as to indemnity as it may think fit. But the principal provision of Article ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e board meeting of August 25, 1981, with regard to the transmission of shares in favour of Mrs. Daphtary. Such action on the part of the nominee directors of the Swedish group, it was submitted, lacked in probity and was not bona fide. 42. According to the petitioner, incentives were given to Mrs. Daphtary for transfer of the shares of the late Mr. Daphtary in favour of M.T. Shah by paying her a sum of ₹ 42,000. Such payment was made without any resolution of the board of directors and was at the instance of Mr. M.T. Shah. It was submitted that it will appear from the record that the petitioners' group objected to the proposed transfer of these 2% shares to Mr. Shah by a letter dated September 8, 1981, addressed by M/s. Rajesh Khaitan Co., advocates-on-record for the petitioners to the Indian company. The petitioners also offered to purchase the said 2% shares. It was pointed out with reference to certain documents annexed to the second interim application that a power of attorney has been executed by Mrs. Daphtary in favour of M.T. Shah wherein Mrs. Daphtary described herself as the executrix . In the power of attorney it has also been declared that Mrs. Daphtary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prejudice the interest of the public, the said company as well as your petitioner, but otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable. It is indeed of paramount interest to the said company that the hon'ble court be pleased to pass an order directing the said Swedish group to transfer their equity holding to the extent of the 9% to the aforesaid Singh group and to the extent of the 2% by the said Mrs. Leila Daphtary to your petitioners so that the continuing oppression by the majority over the minority cease for all times to come. 48. It is evident from these two paragraphs that the petitioners are expressing an unequivocal desire to purchase the 9% holding of the Swedish group, an aspect which will be dealt with hereinafter as also the 2% shares of the late Mr. Daphtary and are asking the court to direct such transfer and sale in favour of the petitioners. It will follow that on the basis of the above averments, I am entirely to come to the conclusion that the petitioners have not at any stage consented either expressly or impliedly to the transfer of the 2% shares of the late Mr. Daphtary either in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-member being made the transferee shareholder ; (iv) The proviso, which is the fourth limb of the article, is an independent provision. It authorises a body corporate, inter alia, to transfer its shares to its ' nominee ' unrestrained by the requirements of the third limb. 51. The second principal item of controversy between the parties was with regard to the sale of the 9% of the shares of the Indian company held by the Swedish company. The factual background to this controversy may be noted. 52. Prior to the incorporation of the Indian company, the Swedish company wanted to have 60% of the shares of the Indian company and the other 40% was to be held by the Indian shareholders. This will appear from a letter dated July 20, 1961, addressed by the Swedish company to the Ministry of Commerce and Industries, Government of India. The formation agreement dated September 23, 1964, between the Swedish company and the Singh group, however, provides that the Indian shareholders will have 51% of the shares and the Swedish company 49%. The matter was, however, set at rest by a letter of the Government of India dated April 18, 1964, by which the Swedish company was allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Controller of Capital Issues which, however, did not materialise. Ultimately, at the board meeting held on August 25, 1981, where the Singh group did not participate, the following resolution was passed : Resolved that, as previously decided in the last meeting of the company held on July 27, 1981, a proposal may be submitted to the RBI to divest Bulten Kanthal A.B. of 9% of the shares held by them in favour of Mr. M.T.Shah. 57. It is this decision of the board of directors of the Indian company to allow the transfer of all these 9% shares of the Indian company held by the Swedish company in favour of Mr. M.T. Shah which is challenged before ' me in this application. 58. The principal ground of challenge of Mr. S.B. Mukherjee on this aspect of the matter is founded on Article 34 of the articles of association of the Indian company which has been set out hereinabove. It is submitted by Mr. Mukherjee that these 9% shares of the Indian company held by the Swedish company could only be transferred to a non-member or an outsider with the consent of all the other shareholders. It was submitted that at the meeting of July 27, 1981, no consent of the other shareholders to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who appeared for the respondents, placed strong reliance on a decision of the English Court of Appeal in the case of Express Engineering Works Ltd., In re [1920] 1 Ch 466 (CA). In that case, a syndicate of five persons formed a private company, in which they were the sole shareholders, and sold to it for 15,000 in debentures of the company, property which they had, a few days before, acquired for 7,000. The contract for the sale and the issue of the debentures was carried out at a meeting of the five who and there then appointed themselves directors. This meeting was described in the minutes as a board meeting. At a subsequent meeting; the seal of the company was affixed to the debentures. The articles of the company provided that no director should vote in respect of any contract or arrangement in which he might be interested. In the winding up of the company, the liquidator claimed a declaration that the issue of the debentures was invalid and should be set aside. 64. It was held by the English Court of Appeal that there being no suggestion of fraud, that the company was bound in a matter intra vires by the unanimous agreement of its members. Although the meeting was styled a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dish group of shareholders were so sanguine that consent had been given by the Singh group of shareholders to the transfer of the 2% and 9% of the shares of the Indian company, then why were the resolutions passed in an unseemly haste at the meeting of August 25, 1981, when these were not on the items of the agenda of the meeting and when no one representing the Singh group of shareholders was present at the meeting ? It was submitted emphatically that there can be no question of any waiver or acquiescence of the Singh group of shareholders in respect of the above-mentioned transfers at this meeting. 69. Coming to the articles of association of the Indian company on this aspect of the matter, Mr. Mukherjee submitted that the relevant articles are Articles 34 to 40 which have been set out hereinabove. It was submitted that these articles should be read together so that a harmonious construction may be arrived at by the court. 70. Mr. Mukherjee analysed the articles in a manner which may now be adverted to. 71. According to his submissions, Article 34 has four pArticles First, it confers a power on the board to refuse registration of transfers. Secondly, it provides that a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FERA. 75. Coming back to the article, it was submitted that Articles 35 to 45 provide the mechanics of transfer of shares by the members of the Indian company. The first condition is a notice of the intention of transfer to be given to the company which will constitute the company as an agent of the member for the purpose of finding out whether any other member is willing to purchase the shares. It was pointed out that, in the facts of this case, no such notice was given. It was pointed out that it is only, after such a notice has been given, that the company becomes an agent of the member for the purpose of transfer and the mechanics contemplated in Article 40 of the articles comes into play. If there is a dispute as to the fair value of the shares, it is to be resolved in terms of Articles 36 and 37. There may be a default by the selling member which is dealt with in Article 38. There may be a default by the company which is dealt with in Article 39. There may be a default by a purchasing member where the remedies are provided by Article 40. It was submitted that Article 40 must be read in conjunction with Article 35. It was pointed out by Mr. Mukherjee that there can be no qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s power or is otherwise guilty of burdensome, harsh and wrongful conduct that the provisions of Section 397 can be said to be attracted. Then there would be oppression so as to attract the provisions of Section 397 of the Act. In support of this proposition. Mr. Mridul relied on the decision of Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 (Guj) and the decision of the Supreme Court in Needle Industries' case [1981] 51 Comp Cas 743 which has been noted above. 80. It was submitted that one of the tests of what constitutes oppression within the meaning of Section 397 of the Act is to see whether the majority is taking an unfair advantage of its position as a majority. In support of this proposition, reference was made to the English case of Five Minute Car Wash Service Ltd., In re [1966] 1 All ER 242 ; [1966] 1 WLR 745 ; [1966] 36 Comp Cas 566 ; The second test, it was submitted, is to find out whether in exercise of its fiduciary power the group concerned was attempting to destroy the existing majority or to create a new majority which did not exist previously. In support of this proposition, reference was again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .T. Shah is the chairman of the company. There is no allegation that they cannot carry on the business of the company or that there is any friction in the management. There is no plea that any directors of the Singh group have been excluded from the management. There is no plea that Mr. B. Singh is prevented from functioning as the president of the company. 85. It was further submitted that the company is not a glorified partnership. 86. The relations between the Singh group and the Swedish group arose out of commercial transaction. There is no element of personal relationship. Hence, it was submitted that the principles of winding-up referable to a partnership are not available in the present case. Even assuming that these principles were applicable, there is no breach of faith or lack of probity in the conduct of the Swedish group. Thus, the preliminary requirement for the applicability of Section 397 of the Act is not fulfilled. 87. The provisions of Section 398 of the Act, it was submitted, has no manner of application because there was no allegation of mismanagement or even any apprehension of mismanagement in the affairs of the Indian company or of any allegation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent shareholding cannot be permitted to continue beyond the limit laid down in the FERA and the result of such continuation would be a clear violation of the provisions of the FERA resulting in an automatic cessation of the COB licence. Even if the foreign non-resident shareholders be willing to take up more shares, they cannot be permitted to do so in view of the express provisions regarding the foreign shareholding in the FERA. It was submitted that the principles laid down in Needle Industries' case [1981] 51 Comp Cas 743 on this aspect of the matter applies in full force to the instant case. 91. It was submitted that when under the provisions of the Act, the RBI asked for or required disinvestment of foreign shareholdings, the Reserve Bank is not merely concerned with the repatriation of foreign exchange but it is also concerned with Indianisation in the sense that there should be bona fide participation by Indian shareholders in the equity capital of such a company. This, it was submitted, is evident from the preamble of the FERA, the provisions of Sections 19 and 29 and the guidelines issued under Section 29. It was submitted that the Supreme Court decision in Needle I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted, on behalf of the petitioners, that there was nothing wrong in this. The agency commission was payable in terms of the agreement between the Indian company and petitioner No. 5. Such agreement has not only been approved by the shareholders of the Indian company but it has also been approved by the Central Government. It was mentioned that it was only after Mr. Shah joined the board of directors that the payment of commission to petitioner No. 5 was temporarily stopped. There is no dispute, according to the petitioners, with regard to the quantum of commission payable to petitioner No. 5. This would be evident from the Indian company's balance-sheet which has been approved by the shareholders and all the directors of the Indian company. The last balance-sheet for the year ended December 31, 198'0, shows that a sum of ₹ 5,40,000 is still due and payable by the company to petitioner No. 5 on account of sole selling agency commission. 95. It was pointed out on behalf of the petitioners that para, 23(b) of the main petition, which was not referred to by the respondents, would go to show that the Swedish company has received a sum of ₹ 83 lakhs odd for basic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms part of the records of this case by virtue of my order dated January 25, 1982. It will appear from the minutes of the meetings that the board was fully aware of the actual position. As will appear from the language used in the board resolutions, the board considered , examined , scrutinised the transactions between the Indian company and Beni Ltd. and approved of such transactions at various board meetings. Pointed reference was made to the fact that notwithstanding the report of M/s. S. R. Batliboi Co., the board of directors of the Indian company at their meeting held on March 30, 1981, at which three directors representing the Swedish group were also present, resolved to support the scheme propounded by Beni Ltd. It was further pointed out that at the board meeting held on July 27, 1980, it was recorded that the amount due and payable by Beni Ltd. was considered good and realisable . 99. In so far as the adjustments of the sole selling agency commission with the claim of Kantilal T. Garach Co. is concerned, it was pointed out that it is the case of the petitioners that no money was received by petitioner No. 5 from M/s. Kantilal T. Garach Co. Since the above com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners, it will appear from the draft minutes of the board meeting dated September 25, 1981, as circulated by the secretary of the Indian company and as purported to have been corrected by the chairman, that the chairman, Mr. Shah, has manipulated the minutes and inserted an item therein for revival of the report of M/s. S.R. Batliboi Co. although this was not one of the items of the agenda for that meeting. 102. Mr. S.B. Mukherjee submitted that in the context of the above facts and circumstances, the petitioners had cause for genuine apprehension when they came to court regarding the termination of the sole selling agency agreement. This apprehension, according to Mr. Mukherjee, is fully justified by the extremely hostile attitude which is taken by Mr. M.T. Shah in his affidavit-in-opposition. It was submitted that the court should not allow the termination of the sole selling agency by the present board of directors in which the Swedish group have a majority particularly in view of the fact that the sole selling agency agreement is valid up to May, 1983. The agreement is renewable every five years and requires twelve months' notice in writing before termination. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur of Shah. (g) The meeting of the board of directors was held on August 25, 1981, notwithstanding the request for adjournment by Mr. Singhania by his letter dated August 10, 1981, and by Mr. Jalan in his telex dated August 18, 1981. Significantly, the most vital and important decisions regarding the transfer of 9% shares to Mr. Shah and the transmission of 2% shares in favour of Mrs. Daphtary were taken at this board meeting although none of these items featured in the agenda of this meeting. And although the agenda was circulated on August 21, 1981, none of the nominee directors of the Indian shareholders were present at the meeting. (h) At the meeting of the board of directors held on June 23, 1981, it was resolved that the report of M/s. S. R. Batliboi and Co. should not be pursued for the time being. This was sought to be revised at the instance of Mr. Shah by manipulating the minutes of the meeting of September 25, 1981. Mr. Shah tried to smuggle in a few lines regarding this matter. (i) The minutes of the meeting of the board of directors on September 25, 1981, were wrongfully manipulated and changed. 104. Mr. S.B. Mukherjee also catalogued the acts which, accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out that the affidavit filed, on behalf of the Swedish group, by Mr. Subramonium merely adopts the statements made in the affidavit of Mr. Shah. It was pointed out with reference to the main petition that initially there was complete confidence in M.T. Shah. It was submitted that this is not unusual in the case of companies which are really governed by the principles of partnerships that relations are founded on mutual faith and confidence. However, a point of time may arrive when such mutual faith and confidence is lost. It was submitted that the petitioners in the instant case are justified in losing, their confidence in Mr. Shah because of the hasty steps he took since the passing of the board resolution at the meeting held on August 25, 1981, regarding the transfer and transmission of shares which were entirely for the personal benefit of Mr. Shah. Reliance was placed in this connection on the well-known English case of H. R. Harmar Ltd., In re [1958] 3 All ER 689 ; [1959] 29 Comp Cas 305. The following passage was relied on by Mr. Mukherjee : (at p. 333 of 29 Comp Cas) : That being so, it seems to me that the question which arises in this case, as indeed in almost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject of the bequest of the legatee, unless the nature of the circumstances of the property require that it shall be transferred in a particular way. (2) This assent may be verbal, and it may be either express or implied from the conduct of the executor or administrator. 109. Although considerable arguments were advanced by Mr. Mridul which were sought to be repelled by Mr. Mukherjee, in my view, the legal position on this aspect of the matter is perfectly simple. Mr. Mridul's submission on this point is totally unacceptable for two reasons. In the first place, Section 333 of the Indian Succession Act can only be invoked when there is a question of the executor's assent to a specific legacy. As will appear from the will of the late Mr. Daphtary which has been set out in an earlier part of this judgment, the entire estate of the late Mr. Daphtary was bequeathed to his wife. In other words, there was no specific legacy which was the subject-matter of bequest under the will. To put it differently, the 2% shares of Mr. Daphtary cannot be said to be a specific legacy under the will to which the executor could have assented in favour of Mrs. Daphtary. Section 333 of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice of a board meeting need, not unless strictly otherwise provided, specify the nature of business to be transacted. 115. It was submitted by Mr. Mridul that the relevant articles of association of the Indian Company with regard to board meetings are Articles 113 and 114. Those articles are in the following terms : 113. The meetings of the board shall be held in accordance with the provisions of Section 285 of the Act and notice of such meetings shall be given to every director in accordance with the provisions of Section 286(1) of the Act provided notice of such meeting shall be sent to the directors residing out of Calcutta by registered air-mail post or by cable so as to reach the addressee thereof in the normal course at least twenty-one days before the date of the meeting unless by prior consent accorded in writing or by a cable all the directors agree to such meeting being held on shorter notice. Provided that where an alternate director has been appointed, it shall be sufficient for the purpose of this article to send a notice or to obtain the consent of such alternate director only. Unless otherwise determined from time to time and at any time by the consent of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clone; and to attend to that business whatever it is and I cannot now say for the first time that as a matter of law the business conducted at a directors' meeting is invalid if the directors have had no notice of the kind of business which is to come before them. Such a rule would be extremely embarrassing in the transaction of the business of companies. 119. Reference was made by Mr. Mirdul in this connection to Palmer's Company Law, 22nd edition, Volume I, at pages 661-62, where the following passage occurs : The articles usually provide that any one director may summon a meeting directly or by requesting the secretary to do so. Prima facie, due notice must be given convening a meeting of directors, and in default the meeting is irregular ; but this is not always necessary, for, by the articles, or by the determination of the directors, meetings may be held at fixed times, in which case no notice of each separate meeting need be given. Where notice has to be given, it may be given verbally unless the articles require it to be given in writing, and it must be given a reasonable time before the meeting. Notice of a board meeting need not, unless the articles o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by Mr. Mukherjee to the decision of Mallick J. in the case in Albert David Ltd., In re [1964] 68 CWN 163. Reference was placed to a passage at page 175 of the report which is as follows : According to Mr. Mukherjee, a shareholder is given the right to apply under Sections 397 and 398, when his right as shareholder is affected. If his right qua director is affected, that is, if he is improperly removed from the board or prevented from being appointed as a director, this infringement of a shareholder's right cannot be the foundation of an application under Sections 397 and 398 of the Act, I am unable to agree with Mr. Mukherjee. The right to appoint a director is a very valuable right of a shareholder and when this right is infringed, his right qua shareholder is also affected. The shareholder in such a case is entitled to apply under Section 397 of the Act, complaining that the affairs of the company are being conducted in the manner oppressive to himself. 125. With regard to the contention of Mr. Mridul that the acts of oppression must be continuous, Mr. Mukherjee referred to the well-known decision in In re Sindhri Iron Foundry (P.) Ltd. [1964] 34 Comp Cas 510; 68 C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diction of this court. The present case, according to Mr. Mukherjee, is of such a type. 128. Dealing with Mr. Mridul's submission as to an alternative remedy, Mr. Mukherjee pointed out that, according to Mr. Mridul, three alternative remedies were available to the present petitioner. The first is a suit for injunction. The second is an approach to the Reserve Bank under the FERA. The third is a rectification application under Section 155 of the Act. 129. As a proposition of law, Mr. Mukherjee submitted that the proceedings under Sections 397 and 398 being a remedy alternative to winding up, the court is not called upon to find out whether there is an alternative to an alternative. In any event it was submitted that a wrongdoer cannot complain that the person wronged might have chosen another remedy. Reference was made in this connection to the above-mentioned decision of H. R. Harmer Ltd., In re [1958] 3 All ER 689 at p. 704 ; [1959] 29 Comp Cas 305 at p. 327, wherein the following passage occurs : Fourthly, counsel for the father said that the acts complained of might have been restrained by injunction in so far as they were acts done without the authority of the boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mick [1980] 50 Comp Cas 771. At pp. 782-83 the following passage occurs : It should be borne in mind that when a court passes an order under Sections 397, 398 and 402 as has been done in the instant case, there could be no limitation on the court's power while acting under the sections. Instead of winding up a company, the court under the abovementioned sections has been vested with ample power to continue the corporate existence of a company by passing such orders as it thinks fit in order to achieve the objective by removing any member or members of a company or to prevent the company's affairs from being conducted in a manner, prejudicial to the public interest. The court under Section 398 read with Section 402 of the Act has the power to supplant the entire corporate management. Under the aforesaid sections, the court can give appropriate directions which are contrary to the provisions of the articles of the company or the provisions of the Companies Act. In the instant case, the court directed that the share register of the company would be in the custody of the special officer and also directed that the proxies should be filed at the residence of the special of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercise of powers under Section 402 thereof, reference was made by Mr. Mukherjee to the Supreme Court decision in the well-known case of Cosmosteels Pvt. Ltd. v. Jairam Das Gupta [1978] 48 Comp Cas 312. At p. 318 of the report, itis as follows : The scheme of Sections 397 and 402 appears to constitute a code by itself for granting relief to oppressed minority shareholders and for granting appropriate relief, a power of widest amplitude, inter alia, lifting the ban on a company purchasing its shares under court's direction, is conferred on the court. When the court exercises this power by directing a purchase of its shares by the company, it would necessarily involve reduction of the capital of the company. Is such power of the court subject to a resolution to be adopted by the members of the company which, when passed with statutory majority, has to be submitted to court for confirmation ? No canon of construction would permit such an interpretation in which the statutory power of the court for its exercise depends upon the vote of the members of the company. This would inevitably be the situation if reduction of share capital can only be brought about by resorting to the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hunwalla [1976] 46 Comp Cas 91. Although that case related to the winding-up of a company, Mr. Mukherjee referred to Section 397, which, inter alia, provides that the court must be of the opinion that the facts in Section 397 application would justify the making of a winding-up order on the ground that it was just and equitable that a company should be wound up. 138. In that case, it was held that in a case where the shareholding is more or less equal and there is a case of complete deadlock in the company on account of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding-up on the just and equitable ground. In a given case, the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil, it is found that in reality it is a partnership. 139. Mr. Mukherjee submitted that the principle enunciated by the Supreme Court squarely applies to the facts of the present case. Here there is a complete deadlock because of the Indian group and the Swedish group holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e abovementioned articles with regard to the transfer. I accept the submission of Mr. Mukherjee that such consent, as mentioned above, would have to be the individual act of each shareholder and cannot be spelt out in a representative manner. It would follow that I reject the somewhat elaborate submission of Mr. Mridul on this aspect of the case. 142. With regard to the question whether a mere illegality or an action of the company contrary to the articles would by itself warrant the interference of the court under Sections 397 and 398, I am of the opinion that this legal proposition which was not disputed does not stand in the way of the petitioners obtaining relief in the present case. From the facts and circumstances of the instant case which have been elaborately set out hereinbefore, I am of the view that the Swedish group with the help of its nominee, Mr. M.T. Shah, is determined to oust the Indian group from the management of the Indian company. To avoid prolixity, I refrain from giving reasons for my conclusion which will appear from what has been stated hereinabove. 143. I am further of the opinion, in the light of the facts and circumstances stated hereinabove, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise valid up to May, 1983. It would follow that I am of the view that the petitioners are entitled to relief on this account also. 148. It should be evident from what I have stated hereinabove that the petitioners, in my view, have made out a case of oppression within the meaning of Section 397 and are entitled to appropriate relief. 149. In the result, this application succeeds. The resolution passed at the board meeting of respondent No. 1 held on August 25, 1981, purporting to transmit the 812 shares of the late A.C. Daphtary in favour of Mrs. Leila Daphtary is declared void and illegal and the same is directed to be delivered up cancelled. The resolution passed at the board meeting of respondent No. 1 held on August 25, 1981, purporting to sanction disinvestment, by respondent No. 2, of 9% shares held by it in favour of respondent No. 3 is declared void, illegal and not binding on the company and its shareholders and is directed to be delivered up cancelled. Respondent No. 2 is directed to transfer the shares to the extent of 9% of the paid-up capital of respondent No. 2 oat of the shares registered in the name of respondent No. 2 to the existing shareholders of the India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeting of respondent No. 1 is hereby cancelled. The new board of directors will take steps for convening and holding the annual general meeting in accordance with law. 154. The executives of the company including the chief executive are directed not to make any financial commitment in so far as the workers of the Pune and Varanasi factories are concerned save in the matter of bonus and for the payment of existing remuneration to the workers without an order from the committee of management. 155. There will be an order in terms of prayer(n) of the petition. There will also be an injunction restraining the present board of directors from functioning until the committee of management is appointed. After the election of the new board, the existing board shall stand superseded. 156. Respondent No. 1 and its existing shareholders are directed not to take any steps for the purpose of implementing the operative part of my judgment and order for a period of two weeks after the reopening and there will be a stay of the operation of my order with regard to the committee of management for the same period in regard to the transfer of shares. 157. I make it clear that the injunction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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