TMI Blog2016 (11) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... d its conduct of the business of the company in a manner detrimental to the interest of the company, as discussed hereinabove, would make it extremely perilous to rely on the version available in the resolution of the Board for allotment of 3065 equity shares in place of the preference shares in question. In the above circumstances it would be just and proper to strike down the conversion of the 3065 preference shares into equity shares and revert the preference shares to its earlier status to be dealt with in the future in accordance with law. This is, of course, subject to the orders of the Delhi High Court in the appeal pending before it. - Civil Appeal No. 589 of 2010, Civil Appeal No. 599 of 2010 - - - Dated:- 7-10-2016 - Ranjan Gogoi And Prafulla C. Pant, JJ. JUDGMENT Ranjan Gogoi, J. 1. Both the appeals being against the common judgment and order of the High Court of Calcutta dated 14th September, 2005 were heard together and are being dealt with by this common order. 2. The appellant in Civil Appeal No. 589 of 2010 is a private limited company incorporated in the year 1948 with its registered office at Calcutta. The appellants 2 to 5 (hereinafter referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision taken on 5.7.1994, in August, 1995 the company issued 3065 equity shares to the holders of the preference shares (Gupta Group). In February, 1996, 25,000 ordinary equity shares were again issued to the members of the Gupta Group against which ₹ 40 per share was paid. The said issue was ostensibly to raise additional capital for the company. This allotment was, however, to the exclusion of the Sanwalka Group. Contending that the aforesaid acts had the effect of reducing the Sanwalka Group, which was otherwise in the majority, to a negligible minority in the company, the company petition alleging oppression was filed before the Company Law Board wherein the act of removing two members of the Sanwalka Group from the Board of Directors (w.e.f.1.7.1991) and inducting two others of the Gupta Group in their place was also called into question. 4. From the reply filed by the Gupta Group to the company petition it transpired that the 4132 partly paid shares held by the Sanwalka Group stood forfeited. The aforesaid forfeiture was therefore challenged in the company petition with a claim that the said shares be restored to the members of the Sanwalka group. During the subsisten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was claimed that in the Board Meeting dated 5.7.1994 proportionate allotment of bonus shares against the 4132 partly paid shares in which the Sanwalka Group held a beneficial interest was offered subject to payment of the dues against the said shares in term of the call notice dated 5.1.1991. Insofar as the issue of 25,000 ordinary shares is concerned, it was contended by the Gupta Group that the said shares were issued to infuse badly needed capital into the company. In view of the clear and expressed disinterest of the Sanwalka Group in the affairs of the company evidenced by their long silence and failure to respond to the call notice dated 5.1.1991 and also to participate in the Board meetings, it was understood by the Gupta Group that they would not be interested in allotment of any part of the newly issued share capital i.e. 25,000 shares. In any case, according to the Gupta Group, as the members of the Sanwalka Group had ceased to be members of the company (1995) by the time the 25,000 shares were issued/allotted (February, 1996) they were not entitled to allotment of any of the said newly issued shares. 8. Insofar as the lease in respect of the industrial plot is concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the EOGM held on 5.7.1994 in which decision was taken to raise the share capital of the company was, admittedly, not given to the Sanwalka Group though they were entitled to such notice. Insofar as correctness of the issue of 3065 ordinary equity shares against the preference shares is concerned, the Company Law Board felt that it would be inappropriate to go into the said question as a related issue was pending before the Delhi High Court with regard to the very same preference shares. In fact, the issue before the High Court involved the question as to whether the said shares did exist at all or stood extinguished prior to the date of conversion. Insofar as the lease of the industrial plot is concerned, the CLB felt that the same should be left open for an appropriate decision of the company in a General Body Meeting to be held on the basis of the revised share holding as ordered by the CLB. 11. Aggrieved by the aforesaid order of the CLB with regard to the maintainability of the company petition, issue of bonus shares and 25,000 ordinary equity shares and also the re-induction of the members of the Sanwalka Group in the Board of Directors, the Gupta Group moved the Calcu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share was paid against the first call made on 7.8.1986. Therefore, the share certificates, ex facie, do not support any of the contentions advanced on behalf of Gupta Group, details of which have been noticed hereinabove. If the shares were held by the members of the Sanwalka Group in their own right without any connection to the erstwhile/forfeited shares held by M/s. Gupta Brothers, the second question arising i.e. failure to respond to the call notice dated 5.1.1991 really does not arise. Be that as it may, the said notice required the members of the Sanwalka Group to pay the unpaid value of the forfeited shares (which coincidentally was also ₹ 55/- per share i.e. same as the unpaid amount of the shares at the time of forfeiture when held by M/s. Gupta Brothers) along with interest. In this regard it was found by the CLB as well as the High Court that even issue of notice of the call in terms of Section 53 of the Act had not been proved by the Gupta Group. That apart, the call notice dated 5.1.1991 and forfeiture of the shares held by the Sanwalka Group, upon alleged failure to comply with the said notice, does not appear to be inconformity with Clauses 14 to 18 of the Art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attachment of the shares passed earlier by the Civil Court. All these would demonstrate the apparent falsity of the claim now made that the forfeiture was due to failure of the Sanwalka Group to comply with the terms of the call notice dated 5.1.1991. 16. To overcome the aforesaid difficulties, an argument has been made on behalf of Gupta Group that even if the call notice dated 5.1.1991 is not to be relied upon, in the Balance Sheet dated 31.3.1992 the amounts due have been shown as calls-in-arrears. The said document was duly circulated. The Sanwalka Group, therefore, had full knowledge that unpaid call money is due. 17. Besides the fact that there is no co-relation between the amounts mentioned in the call notice dated 5.1.1991 and the Balance Sheet dated 31.3.1992, the members of the Sanwalka Group were removed from the Board of Directors on 1.7.1991 i.e. before the finalisation of the Balance Sheet dated 31.3.1992. In any case, the procedure for forfeiture of shares as a consequence of failure to respond to a call notice are unambiguously set out in details in the Articles of Association of the Company, extracted above. A balance sheet does not and cannot operate as an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under the Act would require incorporation in the Articles of a company. To the above effect the view of this Court in Para 25 of the Claude-Lila Parulekar (Smt.) Vs. Sakal Papers (P) Ltd. Ors . (2005) 11 SCC 73 is relevant 25. Section 36 of the Companies Act, 1956 makes the memorandum and articles of the company, when registered, binding not only on the company but also the members inter se to the same extent as if they had been signed by the company and by each member and covenanted to by the company and each shareholder to observe all the provisions of the memorandum and of the articles. The articles of association constitute a contract not merely between the shareholders and the company but between the individual shareholders also. The articles are a source of power of the Directors who can as a result exercise only those powers conferred by the articles in accordance therewith. Any action referable to the articles and contrary thereto would be ultra vires. 21. That apart, the resolution of the Board dated 5.7.1994 pursuant to which bonus shares were issued indicates that the real purpose for issue of the bonus shares is to raise funds which were badly needed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Sanwalka group is that if the equity shares issued against the said preference shares are allowed to remain alive and valid the balance would still tilt in favour of the Gupta Group. 24. It is not known whether the High Court had been requested by the parties to make an interim arrangement and if so the result thereof. However, before us, the Gupta Group has sought to contend that the above apprehension of the Sanwalka Group is unfounded. It is claimed that it is not correct that by virtue of the conversion of the 3065 preference shares into equity shares the Gupta Group has emerged in the majority for the first time. Even prior to such conversion, the Gupta Group was in a majority inasmuch as the preference shares always carried a right to vote. Therefore, even on the basis of the original share holding, the Gupta Group was in majority. 25. We cannot countenance the aforesaid submission advanced on behalf of the Gupta Group in view of the provisions of Section 87 of the Act particularly sub-section (2) thereof which is in the following terms: (2) (a) Subject as aforesaid and save as provided in clause (b) of this sub-section, every member of a company limited by share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have a right to vote except in matters which directly affects the rights attached to the preference shares. 27. Reliance has been placed on Articles 20, 21 and 22 of the Articles of Association of the Company to claim voting rights against the preference shares held by the Gupta Group. It will therefore be necessary to take note of the said Articles which are in the following terms: 20. The following rights are attached to these shares as regards dividends, voting rights and redemption (a) Preference shares shall carry a fixed cumulative free of Income-tax dividend @ of 6% per annum in preference to ordinary or any other class of shares. (b) Preference shares shall be redeemable at any time after a period of 5 or 10 years from the date of allotment at the option of Directors of the company or at the option of the holder thereof respectively, provided a notice of three months in writing is given by the company to the holders thereof or vice-versa as the case may be. (c) After payment cumulative dividend of 6% free of tax on preference shares, the balance of the net divisible profits (as may be recommended by the directors) shall be utilized for payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the preference shares in question. In the above circumstances it would be just and proper to strike down the conversion of the 3065 preference shares into equity shares and revert the preference shares to its earlier status to be dealt with in the future in accordance with law. This is, of course, subject to the orders of the Delhi High Court in the appeal pending before it. Lease of the Industrial Plot 29. If the forums below have left the above matter for a just determination in an Extra Ordinary General Meeting of the Company, in view of the directions hereinabove, we do not consider it necessary to deal with the said aspect of the case any further. 30. Before parting, certain subsidiary issues raised on behalf of the parties may be briefly noticed if only to make the discussion complete. The failure of the High Court to frame a substantial question of law to hear the appeal before it can hardly invalidate the order passed. The order of the High Court is an order of affirmation; further there is no provision in Section 10F of the Act which is akin to the provisions contained in Section 100 (4) of the Code of Civil Procedure, 1908. 31. The argument that having rega ..... X X X X Extracts X X X X X X X X Extracts X X X X
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