TMI Blog2009 (7) TMI 1314X X X X Extracts X X X X X X X X Extracts X X X X ..... in a number of cases that if the shareholding of the petitioner in a petition u/s 397 and 398 got reduced to below 10 per cent, on issue/allotment of further shares and if the said issue/allotment is the very act which is challenged as oppressive in the said petition, the maintainability of the petition would be decided after determining the validity of the issue of allotment. The requirement of share qualification is relevant and material for maintaining the petition. The prima facie evidence to the shares could be either the share certificate(s) or even the register of members. However, even in the absence of share certificates or entry in the register of members, if a person could establish that certain shares have been allotted to him, then, for the purposes of Section 399 of the Companies Act, 1956, he could be treated as a member. In the case of Navin Ramji Shah v. Simplex Engineering and Foundry Works P. Ltd.[ 2006 (9) TMI 574 - COMPANY LAW BOARD NEW DELHI] , it has been held that in family companies any reduction in the percentage of shareholding irrespective of quantum of percentage, the affected parties can always allege oppression as his position vis -a -vis oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equitable proceedings u/s 397. In Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises P. Ltd.[ 1989 (4) TMI 268 - HIGH COURT OF KARNATAKA] , it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petition would constitute a gross abuse of the process of the court, and the petitioner is not entitled for any relief u/s 397. It also held that the conduct of the parties in other proceedings could also be taken into consideration. The settled Principle of law is that when a person seeks equity he must come with clean hands . In the present case the instances of unclean hands of the respondents are with respect to the affairs of the company and even otherwise the instances of unclean hands are enumerated. The entire action of the respondents of removal from directorship and issue of additional shares was only to oust the petitioner and his wife from the company to illegally gain control and management of the company and is indisputably amenable to the jurisdiction of the Company Law Board. The petitioners are not seeking to enforce the family settlement dated September 26/27, 1987. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed office at Baghat Barzulla, Srinagar, Jammu and Kashmir. The initial authorised capital of respondent No. 1 company was ₹ 5 lakhs while the issued subscribed and paid -up capital was ₹ 10,000 comprising of 100 shares of ₹ 100 each. The first promoter/directors and subscribers to the issue were petitioner No. 1 and respondent No. 2; holding 50 shares each of face value of ₹ 100. The control and management of the company was divided equally between petitioner No. 1 and respondent No. 2. It has an authorised share capital of ₹ 18,00,000 divided into 18,000 equity shares of the value of ₹ 100 each. The main objects of respondent No. 1 company are to carry out the business of running hotels. Counsel for the petitioners pointed out that Shri Prabhjit Singh Johar (petitioner No. 1) who is the younger brother of Shri Amarjit Singh Johar (respondent No. 2) upon the death of their father Shri Surinder Singh Johar in 1961, when he died intestate were aged 13 years and 20 years, respectively. My attention was drawn to the family properties and business which were as under: (i) Residential House at Baghat Barzulla, Srinagar with land measuring 15 kana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Financial Corporation and other financial institutions for the purpose of raising loans for its project of establishing and running a five star hotel. ( 4. ) My attention was drawn to a memorandum of settlement (MoS) dated September 27, 1987, between late Shri Surinder Singh Johar, the two branches of late Shri Surinder Singh Johar's family headed by petitioner No. 1 and respondent No. 2 broadly provided that: (a) properties with respect to which an amicable agreement had been arrived at were divided as per the terms agreed between the two branches; these were clubbed as group A properties; and (b) properties with respect to which there was no agreement were classified separately as group B properties and consequently it was agreed that they would be owned and managed jointly. As per Clause 6.1 of the 1987 memorandum of understanding, respondent No. 1 was agreed to be managed jointly by the two branches of petitioner No. 1 and respondent No. 2. It was also agreed that respondent No. 1 will continue to be their joint property and responsibility. It was agreed that both of them will operate the bank account jointly. The house at Jammu which was pledged to the financial inst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on April 1, 1999. It was pointed out that petitioner No. 1 or his wife had no notice of any board meeting and hence; the ostensible ground for removal, i.e., failure to attend the board of directors' meeting is not made out, there are no details set in the reply of respondents as to the meetings with respect to which notice was given which, petitioner No. 1 and his wife failed to attend, there are no documents whatsoever attached evidencing dispatches of notice. Further, it was noted that on March 22, 1999, respondent No. 2 has increased the authorised capital of respondent No. 1 company from ₹ 18 lakhs to ₹ 35 lakhs. In the annual return of even date petitioner No. 1 and his wife are shown as holding 50 per cent, of the shares in respondent No. 1 which in number is 6,264 and 2,523 shares, respectively. Furthermore, the issued, subscribed and paid -up capital is ₹ 16,62,400 comprising of 16,624 shares of ₹ 100 each. ( 7. ) Further , it was noted that respondent No. 1 convened an extraordinary general meeting on March 22, 1999, at Delhi of which, petitioner No. 1 or his wife had no notice, in which the shareholders which could only be respondent No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se law in Joseph Antony Lazarus v. A.J. Francis : [2006] 9 SCC 515, wherein it has been held that (page 521): Having regard to the peculiarity of the explanation sough to be given, we examined the photocopy of the Will which was in the records and to the naked eye it is quite evident that the two signatures are entirely different and have little or no likeness whatsoever. It was pointed out that between September 18, 1996 to November 30, 2002, there was turmoil in the State of Jammu and Kashmir and no major activity was going on. It was contended that there was no question of removing petitioner No. 1 and his wife stating that they were not interested in the company. Further, petitioner No. 1 could not be removed as a director as he had given personal guarantee and collateral security for the loans taken from SFC and SIDCO. In view of the instability in the affairs of the family because of dislocation from the Valley; and due to litigation with respondent No. 2 group and certain people outside the family who had attempted to usurp the property of the family, petitioner No. 1 was unable to closely monitor the affairs of respondent No. 1 company which admittedly were lying in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leged removal of petitioner No. 1 and his wife would not have been passed at the annual general meeting if proper notice had been given to petitioner No. 1 and his wife who together were holding 50 per cent, shares in the company. This is no mistake in the eyes of law. Further, it was pointed out on March 22, 1999, an extraordinary general meeting was held wherein resolution was passed (a) for increase in the authorised capital from ₹ 18 lakhs to ₹ 35 lakhs, (b) allotment of additional shares numbering 16,336 shares amongst the members of respondent No. 2 group. It was pointed out that admittedly prior to the extraordinary general meeting, respondent No. 1 had only four (4) shareholders, i.e., respondent No. 2, petitioner No. 1 and their respective wives. Along with the reply of respondents no notice of the extraordinary general meeting has been placed on record. It was contended that there is no meeting held in the eye of law. The self serving decisions by the remaining two shareholders, i.e., respondent No. 2 and respondent No. 3 have been made. It is a settled position of law that principles analogous to Section 81 of the Companies Act, 1956, are applicable even to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tand, the directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders. It was argued that the additional documents filed by respondent No. 2 on November 20, 2007, are fabricated, false and have been created only to cause further delay, confusion and mislead the Company Law Board. No relevance of the documents have been explained. The documents filed do not support the averments made in the reply. The balance -sheet for the year ended Inarch 31, 1998, ostensibly has been drawn up to show that the directors, namely, Amarjit Singh Johar his wife Kiran Kaur Johar and his son K.S. Johar have lent to respondent No. 1 a sum of ₹ 19,36,661. The entry is contended to be false because as per the extraordinary general meeting dated March 22, 1999 (pages 45 -46 of compilation) K.S. Johar the son of respondent No. 2 was inducted into the company only in March, 1999, to show that a sum of ₹ 3,02,905.55 out of ₹ 19.36 lakhs was owed by respondent No. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he share certificates show signatures of Smt. B.K. Johar, i.e., the mother, who at the relevant point in time was not the director of respondent No. 1. ( 12. ) Further , it was contended that respondent No. 2 group's statement that petitioner No. 1 group sold its share for a consideration on April 11, 2001, is a completely false statement because: (i) between March 28, 2001 to April 10, 2001, petitioner No. 1 and his son visited Srinagar to settle the dispute with respect to suit filed by Kiran Kaur Johar against the petitioners before the District Judge, Budgam but had left on April 10, 2001, my attention was drawn to the air ticket, and the hotel bill. It was reiterated that there is no way that transfer deeds could have been executed on April 11, 2001; (ii) respondent No. 2 in his reply has stated, the quantum, the form or the manner of payment of consideration for obvious reasons was not paid and no transfer deeds were executed by petitioner No. 1; (iii) it was contended that signatures of petitioner No. 1 and his wife Mrs. Satinder Kaur Johar are forged. My attention was drawn to the relinquishment deed dated December 2, 1996 and signatures attested by the bankers at pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gued that respondent No. 2 group has been running the company in a manner which is prejudicial to and oppressive to petitioner No. 1 group which has an equal stake in the company. Oppression is evident from the fact that no notices of any meeting whether the board of directors of the shareholders have ever been given to petitioner No. 1 group. The resolutions passed at the board of directors' meeting ostensibly on September 1, 1998, removing petitioner No. 1 and his wife from the board of respondent No. 1 company are clearly forged and fabricated. Furthermore, the purported increase in the authorised share capital of ₹ 18 lakhs to ₹ 35 lakhs and the allotment of shares to themselves by respondent No. 2 group on March 22, 1999, is illegal firstly, for the reason that no such meeting was ever held and if held no notices of the said meeting were ever sent or placed on record before the Company Law Board by respondent No. 2 group, by virtue of the additional allotment of 16,336 shares and the board meeting dated March 23, 1999, the minutes reveal that the directors proposed to allot shares to non members, however allotment of shares were due to themselves respondent No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he majority to minority, or, such issue is made in closely held company at the determent of the part of the shareholders, then regarding such further issue of shares the Calcutta High Court in Tea Brokers P. Ltd. v. Hemendra Prosad Barooah, [1998] 5 CLJ 463, has held that any single act done on one particular action if the effect of such an act will be of a continuing nature and the member concerned is deprived of his rights and privileges for all time to come in future it would be construed that the affairs of the company are being conducted in a manner oppressive to any member or members, as laid down in Section 397 of the Act. ( 14. ) It was pointed out that the Company Law Board in the case of Dinesh Sharma v. Vardaan Agrotech P. Ltd., [2007] 135 Comp Cas 133, was dealing with a similar issue as raised in the present petition. In that judgment the issue of removing petitioner No. 2 from directorship by taking self cognisance of Section 283(1)(g) although no such board meetings were held by giving any notice/communication to the petitioner was impugned. In that case the petitioners and respondents were holding 50 per cent, share each in the equity of the company, the responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of law provided in Section 283(1)(g) of the Act, fails in view of non service of proper notice.... It is well -settled proposition that the provision of Sections 397 and 398 of the Act, are to be invoked to get the grievances of oppression and mismanagement redressed. The petitioner has rightly invoked the provisions of these sections. If a member who holds 50 per cent of the shares in a company is reduced to the position of minority shareholder in the company by an act of the company or by its board of directors mala fide, the said act must ordinarily be considered to be an act of oppression to the said member. Therefore, the allotment of shares impugned in the company petition made for personal gains and with a view to gain advantage against the other shareholders of a closely held company was neither in compliance with the legal requirements (except the allotment on December 11, 2002, though it suffered from an illegality and no proper procedure was followed) nor ensured the fair play and probity in corporate management, resulting in the enhancement of the shareholders of the second respondent, which would constitute an act of oppression. ( 15. ) It was reiterated that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fide motive cannot be impugned in a petition under Section 111 and they have to be agitated as an act of oppression in the petition under Sections 397 and 398. It was held in the said case that if the holding of the petitioner is reduced below 10 per cent, due to further allotment of shares and the allotment itself is impugned in the petition under Sections 397 and 398 the petition should be held maintainable on the strength of the holding before the transfer and allotment of the shares. Similarly, in the case of Ammonia Supplies Corporation P. Ltd. v. Modern Plastic Containers P. Ltd. : [1998] 94 Comp Cas 310 : [1998] 7 SCC 105, it has been held that the civil court's jurisdiction will be impliedly barred if the company court (now Company Law Board) comes to the opinion that the court has power under Section 111 to adjudicate the dispute of rectification of register. In the case of Navin Ramji Shah v. Simplex Engineering and Foundry Works P. Ltd., [2007] 136 Comp Cas 770 (CLB), it has been held that in family companies any reduction in the percentage of shareholding irrespective of the quantum of percentage, the affected parties can always allege oppression as his position v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to show their bona fides while preparing the minutes. The respondents cannot silence the petitioners by stating that if there is any contravention/omission in the affairs of the company there are regulatory authorities to look into the same and the petitioners have no right to interfere. Such a submission cannot be countenanced in the petition under Sections 397 and 398 of the Act. Even further issue of capital was not required. The respondents have admitted in the reply that the company was non functional and have also filed minutes in support of this case. If that be so, there was no requirement of increasing the authorised share capital of the company and altering memorandum and articles of association of respondent No. 1 company without the knowledge of the petitioners. The resolution of the extraordinary general meeting dated March 22, 1999, was placed before the Registrar of Companies and the petitioner challenged the same after inspecting the Registrar of Companies's records. The minutes of the alleged board meeting held on March 23, 1999, wrongly mentioned as March 22, 2009, was not to the knowledge of the petitioners at the time of filing of the petition and the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n was paid by the respondents to the petitioners except a bald statement that the petitioners were paid over a period of time which is highly improbable and impractical. In the fabricated transfer deed the shares of the petitioners have been shown differently by the respondents, the signatures of the petitioners on the alleged transfer deed are forged as is evident from the attested signatures of the petitioners from the banker, the share certificate have not been issued to them, therefore, the question of the petitioners handing over the share transfer deed to the respondents with genuine signature does not arise at all, the actual date on which the petitioners were shown to have transferred their shares to the respondents is also incorrect as is evident from the air ticket produced by the petitioner besides a documentary evidence to show that the documents of the hotel, airlines and the credit card payments, the petitioners were not in Srinagar on April 11, 2001. It was argued that the shares transfer cannot be presumed in law in the present case as the respondent in the control of the company were also in possession of the share certificate of the petitioners, the transfer of sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f SIDCO, Jammu and Kashmir, SFC and Union Bank of India. In fact the company acted only when Jammu and Kashmir SFC took over the possession of the hotel site under Section 29 of the State Financial Corporation Act. A writ was filed to stay the auction of the hotel site. During the pendency of the writ petition petitioner No. 1 filed an impleadment application in July, 2007. The application was allowed on March 1, 2008 and the hon'ble High Court of Jammu Kashmir at Srinagar allowed petitioner No. 1's request to deposit the cheque of ₹ 6 lakhs for getting the benefit of the one -time settlement of the scheme floated by the Jammu and Kashmir SFC. In fact the one -time settlement scheme was only initiated by petitioner No. 1 and accordingly he deposited a sum of ₹ 6 lakhs being 20 per cent, of the agreed amount of ₹ 30 lakhs under the scheme. Respondent No. 2 volunteered to deposit ₹ 6 lakhs only after petitioner No. 1 had paid the sum of ₹ 6 lakhs. It was contended that the allegation made by the respondent that the petitioners never care to attend to the loans of the company is false and incorrect. Similarly, the payment due to Jammu and Kashmi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing filed by the respondents for the periods March 10, 1994 to February 2, 1999, do not show that the army had taken over the hotel premises. The fact that the Army had taken over from March 10, 1994 to February 2, 1999, goes to show that there was no business activity in the company. The memorandum of understanding dated September 26/27, 1987, has a bearing on these proceedings as the memorandum of understanding clearly envisages that respondent No. 1 is to be run jointly between the respondent and the petitioner. The subsequent minutes of the meeting held June 24, 1989 and December 19, 1996, do not change or vary the intention of the parties of the memorandum of understanding dated September 26/27, 1987, specifically provided that the petitioner and respondent are jointly to run respondent No. 1 company. The petitioners were not even called upon by the respondents in the reply that there were further minutes of the meetings held after the memorandum of understanding was signed between the petitioners and respondents on September 26/27, 1987. ( 20. ) It was explained by counsel for the petitioner that the petitioners are not seeking to enforce the family settlement dated Septem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that they were sending notices of the alleged board meetings to the Bagat Barzulla address is inconceivable specially when the said place was closed due to militancy admitted by the respondents themselves. It was pointed out that the personal guarantee by petitioner No. 1 to SFC and SIDCO was taken by the said financial institutions only because petitioner No. 1 is the 50 per cent, shareholder of respondent No. 1 company and is also one of the two promoter directors of the company. Further the land on which the hotel was built is also leased by the Government of Jammu and Kashmir jointly in favour of petitioner No. 1 and respondent No. 2. Therefore, the personal guarantee of petitioner No. 1 and he is acting as a director are not independent but dependent on each other. It was also clarified that the house of petitioner No. 1 in Jammu is mortgaged to SFC as a collateral for the loans obtained by the company. The public advertisement on July 31, 2004, was issued to place the correct perspective in respect of the land on which the hotel is situated to protect the innocent general public. It was pointed out that the contents of the advertisement would indicate that it was issued in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut any participation in the affairs of the company during this period. It was argued that the petition, therefore, suffers from large delays and laches besides callous attitude of the petitioners in invoking their rights, if any and is, barred by limitation and is liable to be dismissed. ( 24. ) My attention was drawn to the petitioners' lack of concern from the affairs of the company pointing out that (a) the petition mentions that the company was incorporated with an authorised share capital of ₹ 18,00,000 divided into 18,000 shares of ₹ 100 each whereas the company was actually incorporated with an authorised share capital of ₹ 5,00,000 (b) the petitioners have been making conflicting statements about the number of shares held: (i) at paragraph 11, page 15 of the rejoinder - number of shares mentioned is 7,837 ; (ii) at paragraph 1, page 9 of the rejoinder - 50 per cent, i.e., 8787 is the number of shares; (iii) at paragraph 28, page 33, ... have invested at least ₹ 8,78,700...constituting almost 50 per cent.... The use of word atleast by the petitioners reflects their confusing state of mind about their investment. Further, it was argued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has been filed at a fag end of the proceedings without obtaining the permission or leave of the Company Law Board with an only objective of misrepresenting and overreaching the authorities. It was argued that it is not understood as to why all of a sudden the petitioners have paid a sum of ₹ 3,96,000 to SIDCO along with certain post dated cheques. It was pointed out that the petitioners have neither maintained any contact with the company nor have they ever sent any communication with regard to the changes in their addresses. As per their own admission, the petitioners earlier shifted to Jammu House (up to 1996), then to Kalindi Colony, Delhi (1997)/Noida, UP (1997) and then to C.R. Park, New Delhi (2001). None of the changes in their addresses have ever been reported or communicated to the company. ( 27. ) It was argued that the petitioners have withheld the material documents and suppression of material facts and information: (a) the petitioners have heavily relied on the memorandum of understanding dated September 26/27, 1987, which, is an integral part and parcel of the further minutes of meetings held on June 24, 1989 and December 19, 1996. They have not come wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi in Rajinder Sehrawat v. Noida Fabricators and Engineers P. Ltd. : [2008] 144 Comp Cas 266 : [2008] 86 CLA 68, wherein it has been held that (page 275 of 144 Comp Cas): Though the petitioners have alleged that the minutes filed are created by respondent No. 2 at the time of filing reply to the petition, pages 130 to 163 of the minutes are of the period about which the petitioners have not raised any grievance and have no problem. These are the minutes when shares were allotted to petitioner No. 1 and his relations and proprietary rights in the plot of respondent No. 2 were transferred in the name of the company. Therefore, for their own convenience, the petitioners are raising such allegations quo other part of the minutes. Merely because there are some blanks left on page 153 in the resolution dated June 11, 1983, would not mean that the minutes are filed as it is had there been manipulations, respondent No. 2 would have filled in those blanks and only then filed the same and it was contended that the minor mistakes and errors in the minutes will have to be viewed in that perspective and do not support the petitioners' claim anyway. ( 30. ) Further , it was argued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioners have duly executed the share transfer deeds. It was explained that a bank certificate attesting the signatures of petitioners is not relevant as the share transfer deeds are not required to be attested by the bankers and in a closely held private limited company, when the transferor(s) and transferee(s) are closely related, it is presumed that the petitioners would have handed over the share transfer deeds to the respondents with genuine signature(s) more so when the transfer signatures are attested by a notary public of Jammu and Kashmir High Court. ( 32. ) As regards, the air tickets the respondents argued that the so called travel of petitioner No. 1 are of no relevance as the actual take off/landing of flights on a particular day cannot be ascertained, there is no requirement of verification of identity of a passenger by the airlines on a particular ticket. Since the petitioners are not in possession of the original share certificates admitted in the petition and the same were handed over to the respondents along with the relevant share transfer deeds after receiving due consideration and the transfer of shares have been duly registered in the records of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (g) of the Act. It was pointed out that the provisions of Section 283(1)(g) of the Act will operate, whether or not any resolution to this effect had been passed. The board resolution dated September 1, 1998 and the resolution passed in an annual general meeting held on September 28, 1998, are, therefore, irrelevant and of no consequence as the petitioners have admittedly not attended any board meeting of the company nor have they obtained any leave of absence. Form No. 32 was accordingly filed rightly for cessation as directors' and not for removal as directors . ( 34. ) It was argued that judgment of S. Ajit Singh v. DSS Enterprises P. Ltd., [2001] 4 CLJ 421 :, [2002] 109 Comp Cas 597 (CLB), relied upon by the petitioner refers to the UPC, produced by the parties in support of the company's claim of notices having been sent, whereas in this case no such claim has been made by the respondents. Paragraphs 61 and 62 from the said judgment, reiterating its views expressed earlier in Vinod Kumar Mittal v. Kaveri Lime Industries Ltd., [2000] 100 Comp Cas 66 (CLB), itself supports the respondent's claim, i.e., (page 634 of 109 Comp Cas): ...we also note that the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Choudhary v. Smt. Shukla Devi Mishra : [1990] 67 Comp Cas 45 (MP); Mahendra Singh Rathore v. Rajput Hotel and Resorts P. Ltd., [1998] 1 CLJ 160 (CLB); T.N.K. Govindaraju Chetty and Co. v. Kadri Mills (CBE) Ltd. : [[1998] 3 CLJ 329 : [1999] 96 Comp Cas 871 (CLB); Hoshiarpur Azad Transporters P. Ltd. v. Hoshiarpur Express Transport Co.; A.P. Jain v. Faridabad Metal Udyog P. Ltd. : [1998] 5 CLJ 561 : [1999] 95 Comp Cas 76 (CLB); Gulabrai Kalidas Naik v. Laxmidas Lallubhai Patel : [1977] 47 Comp Cas 151 (Guj); Kanwarjit Toney Singh Bansi v. Dolly Farms and Resorts P. Ltd., [1999] 3 CLJ 456 (CLB); Ram Gopal Patwari v. Patwari Exports P. Ltd., [2008] 142 Comp Cas 8 (CLB) :, [2008] 85 CLA 208; Raj Kumar Gupta v. R. Gupta : [2008] 84 CLA 390 : [2009] 147 Comp Cas 690 (CLB); Suruchi Chand v. Mahalaxmi Glass Works P. Ltd. : [2008] 82 CLA 234 : [2009] 148 Comp Cas 496 (CLB); Ved Prakash v. Iron Traders P. Ltd. : [1961] 31 Comp Cas 122 (Punj); M. Gomathinayagam Pillai v. Sri Manthiramurthi High School Committee, Tirunelveli, [1963] 33 Comp Cas 346 (Mad) and A.N. Somasundaram v. Dr. Reddy's Laboratories Ltd. : [2008] 142 Comp Cas 472 (CLB) : [2008] 83 CLA 398. ( 36. ) I have considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Registrar of Companies's record on February 13, 2004, have been challenged in the petition besides their removal from management. The respondents' case is that the petitioners have grossly abused the process of the Company Law Board, they are neither shareholders nor are they members of respondent No. 1 company, which is a closely held private limited company, the petitioners have willingly and for a monetary consideration sold their entire shareholding to respondents Nos. 2 and 3 and, therefore, have no locus standi to file the present petition; the petition is liable to be dismissed for misstatement and concealment of material facts, the petitioners have intentionally not disclosed to the Company Law Board that they have already received monetary consideration in lieu of their shareholding sold to respondents Nos. 2 and 3 and signed the requisite forms and documents in this regard as per the statutory provisions and procedure, they have further not disclosed that they have willingly after receiving monetary consideration handed over the share certificates to respondents Nos. 2 and 3 in respect of the shares sold by them; the petitioners have failed to make out an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1956 . It is, therefore, far from doubt that Section 399 stipulates minimum qualifications which members should possess such as their numerical strength or the extent of their share capital. Section 399 engrafts an important exception to this rule of competence to make an application under Sections 397 and 398 of the Act, exception lies in the special dispensation, which the Central Government may give to any person to make an application despite the fact that the person concerned is not eligible to make an application in terms of Section 399(1). The petitioner while applying under Sections 397 and 398 must hold the requisite number of shares at the time of filing of petition. Section 399(1) is not a procedural provision. The nature of provisions of Section 399(1) is not procedural but it is a part of substantive law and, therefore, the requirements of Section 399(1) should be construed as mandatory. The word shall used therein is considered to be imperative in nature and it has to be interpreted as mandatory having regard to the text and context of the statute irrespective of the fact whether any prejudice is caused. In terms of Section 399 of the Act the members fulfilling the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere never given to the petitioners or even to the respondents for that matter, no monetary consideration was received in lieu of shares, no document was produced to show the mode and manner of payment, the payment was to be made under the memorandum of understanding dated September 26/27, 1987, in respect of Johar Enterprises (and not Johar Hotels) which is independent and totally different of the sale consideration alleged to have been paid by the respondents to the petitioners. It is noted that there are no distinctive numbers given in the transfer deeds and in certain cases the folio numbers are also incorrect. In view of the above the respondents' case that the petitioners have not challenged the board meeting dated April 11, 2001, the petitioners are not in possession of the original share certificates admitted in the petition and the same were handed over to the respondents along with the relevant share transfer deeds after receiving due consideration and the transfer of shares have been duly registered in the records of the company as evidenced by the public documents available in the Registrar of Companies's records, the share transfers are presumed to have been eff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent showing their 50 per cent, shareholding as reduced to nil. Thus the respondents' contention that before filing a petition under Sections 397 and 398 of the Act the petitioners should seek the rectification of register of members under Section 111/111A of the Act is misplaced. In any case, this objection was not taken by the respondents in their reply. The petitioners have succeeded in making out a case that they held 50 per cent, shares in this closely held family company in the nature of quasi -partnership. The respondents' preliminary objection regarding non -maintainability of the company petition in terms of the requisite qualification under Section 399 is not tenable. The petition cannot be thrown out at the threshold. As regards the respondents' contention that this petition is not maintainable as it suffers from massive delays and laches (the actions challenged pertain to (a) enhancement of share capital on March 22, 1999, (b) deletion of the petitioners' name from the list of directors on March 22, 1999, and (c) transfer of the petitioners' shares on April 11, 2001, as per the annual return filed on November 28, 2002 and general meeting held on Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laints can be adjudicated by this Board in Section 397/398 proceedings when the petition is a composite petition wherein not only directorial complaints are made but also complaints relating to conversion of majority into minority. In cases of family companies or companies in the nature of partnership, depending on the facts of the case, directorial complaints may be entertained in Section 397/398 proceedings. Denial of legitimate representation could be a just and equitable ground for dissolution of a partnership. As regards removal of the petitioners, i.e., petitioners Nos. 1 and 2 as directors on September 1, 1998, it is the respondents' case that petitioners Nos. 1 and 2 ceased to be the directors as they did not attend any annual general meeting or board meeting of respondent No. 1 company since 1987 after the conclusion of the family settlement, the petitioners have admittedly neither obtained any leave of absence nor have they ever communicated any change in address, they ceased to be directors by operation of law under Section 283(1)(g) of the Act, the provisions of Section 283(1)(g) of the Act will operate, whether or not any resolution to this effect had been passed, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Therefore, the alleged removal both at the board meeting as well as in the annual general meeting is illegal. The company was lying closed since 1989. The respondents have admitted that the company is a family company which could not have used the provisions of Section 283(1)(g) of the Act knowing well that petitioner No. 1 is a guarantor of the loans given to the company by SIDCO, SFC and UBI. If the provisions of Section 283(1)(g) will automatically operate then the board resolution dated September 1, 1988 and the resolution passed in the annual general meeting held on September 28, 1988, need not have been passed. There are discrepancies in regard to the aforesaid two meetings. The respondents' subsequent contentions that Section 283(1)(g) will automatically operate irrespective of any resolution to this effect and that the case S. Ajit Singh v. DSS Enterprises P. Ltd., [2001] 4 CLJ 421 : : [2002] 109 Comp Cas 597 (CLB), does not apply are not tenable in the facts and circumstances of this case. The respondents' claim of having nurtured the company when the petitioners had not taken any interest in the affairs of the company is not made out in this case as was in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeting/annual general meeting/extraordinary general meeting held without any notice and/or unreasonably short notice to the directors is bad and invalid. There was no evidence to show the notices were issued for the meetings. Thus, the meetings held without notice to all directors are invalid. In the case of a family company and quasi partnership, exclusion of any shareholder from directorship would be considered as an act of oppression. The directors concerned cannot be held to have vacated office by operation of law, rather, they have to be held to have continued to be the directors on board of the company. ( 40. ) Directors act on behalf of a company in a fiduciary capacity and their acts and duties are to be exercised for the benefit of the company. The fiduciary capacity within which the directors have to act enjoins upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to the company. It follows that in the matter of issue of additional shares the director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot required, company was not functional. No money was paid to SIDCO and others from the money raised as capital. No such averment was made by the respondents in the reply and it has been submitted for the first time in the written submissions. In this case respondent No. 2 and his group have increased their shareholding without offering the shares to petitioner No. 1 and his wife. The shares have been issued to them with ulterior and improper motive. Even if it is assumed that the extraordinary general meeting dated March 22, 1999, was held validly and properly, that additional shares were issued in order to convert personal loans of the directors, i.e., respondent No. 2 group into equity on the say of financial investment, there are two meetings of the same date at two different places, there are 2 minutes dated March 22, 1999, one which is available on the Registrar of Companies's record, and another one filed along with the reply by the respondents. The meeting at page 45 is alleged to have been held at Vasant Kunj, Delhi and the meeting at page 49 is held at Srinagar. The minutes are totally contradictory. The reasons for increasing the capital are vague and contradictory. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .6 per cent, was shown to have been transferred to respondent No. 2 and respondent No. 3 without consideration and without following the prescribed procedure. It is the duty of the directors to make full and honest disclosure to the shareholders, inter alia, as regards issue of additional shares and they must be issued for a proper purpose. If further shares are issued to create a new majority or to convert the majority to minority, or, such issue is made in closely held company to the detriment of the shareholders, then regarding such further issue of shares the Calcutta High Court in Tea Brokers P. Ltd. v. Hemendra Prosad Barooah, [1998] 5 CLJ 463, has held that any single act done on one particular action if the effect of such an act will be of a continuing nature and the member concerned is deprived of his rights and privileges for all time to come in future it would be construed that the affairs of the company are being conducted in a manner oppressive to any member or members, as laid down in Section 397 of the Act. It has been held in the case of Dinesh Sharma v. Vardaan Agrotech P. Ltd. : [2007] 135 Comp Cas 133 (CLB), that increasing of authorised share capital and allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iction, cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands. I agree that it is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in equitable proceedings under Section 397. In Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises P. Ltd. : [1991] 72 Comp Cas 211 (Karn) : [1991] 3 Comp. LJ 336, it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petition would constitute a gross abuse of the process of the court, and the petitioner is not entitled for any relief under Section 397. It also held that the conduct of the parties in other proceedings could also be taken into consideration. The settled principle of law is that when a person seeks equity he must come with clean hands. In the present case the instances of unclean hands of the respondents are with respect to the affairs of the company and even otherwise the instances of unclean hands are enumerated. A careful analysis of Section 397 would show that once oppression ..... X X X X Extracts X X X X X X X X Extracts X X X X
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