TMI Blog2007 (3) TMI 789X X X X Extracts X X X X X X X X Extracts X X X X ..... 2003) and respondents 6 to 10 (C.P. No. 52 of 2003) from the office of directors of the Companies; (f) misappropriation of funds; incurring of advertisement expenses disproportionate to the turnover and other financial irregularities on the part of the respondents 2 to 5 (C.P. No. 50 of 2003); respondents 2 to 4 (C.P. No. 51 of 2003) and respondents 2 to 5 (C.P. No. 52 of 2003); (g) illegal disposition of the fixed assets, plant and machinery and improper management of the assets and funds of the Companies; (h) illegal convening of the annual general meeting of the Companies; (i) illegal acquisition of a large number of shares from other shareholders in violation of the relevant articles of association of the Companies and section 108 of the Act; (j) abuse of fiduciary position by the second respondent by illegal transfer of shares and improper reconstitution of the boards to usurp control over the Companies and secure control over the trade mark; and (k) improper maintenance of accounts of the Companies; and (l) a large scale suppression of turnover by the Companies, have invoked the equitable jurisdiction of the CLB under sections 397 and 398 of the Companies Act, 1956 ( the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (C.P. No. 50 of 2003); first petitioner and respondents 2 to 5 (C.P. No. 51 of 2003) and first petitioner and respondents 2 6 (C.P. No. 52 of 2003). There was also equal participation by these persons in the management of the Companies. In 1996 M/s. New Hope Food Industries Private Limited (NHFIPL) was incorporated by the petitioner along with seventh respondent (C.P. No. 50 of 2003) and certain others for manufacture of cakes. In 1998 M/s. Milka Nutriments Private Limited (MNPL) was promoted for manufacture of biscuits by the promoters of PBPL and of NHFIPL. In 2000 M/s. Milka Industries Private Limited was promoted in association with all the promoters except the second respondent, of MNPL. The seventh respondent (C.P. No. 50 of 2003) was managing director in charge of the day-to-day management of the affairs of these Companies. These Companies have been marketing the products under the trademark Milka , registered in the name of PBPL, on payment of royalty as per the understanding between the promoters. All the Companies were doing extremely well till the seventh respondent (C.P. No. 50 of 2003) fell ill during 2000-01 for some time, resulting in re-organisation of the manage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of the petitioners is total absence of notice and not the mode of service of notice of the board meetings by hand delivery, as claimed by the respondents. If notice of the board meeting is not sent to a single director, the entire proceedings of the board meeting are vitiated. It was held in (a) Akbarali A. Kalvert v. Konkan Chemicals (P.) Ltd. [1997] 88 Comp. Cas. 245 (CLB) that (a) the company shall give notices of board/general meetings to directors/members so long as they continue to remain so; and (b) certificates of posting are not reliable since it is too well known that certificates of postings can be got hold of without actually putting the letters in the post; (b) Sikkim Bank Ltd. v. R.S. Chowdhury [2000] 102 Comp. Cas. 3871 (Cal.) that any board meeting held without any notice and/or unreasonably short notice to the directors is bad and invalid and that the decision taken at the board meeting is invalid; (c) Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp. Cas. 417 (SC) that any board meeting convened without notice to one director is not valid and that resolutions passed at such meeting is inoperative; and (d) Dr. Kamal Kumar Dutta v. Ruby General Hospita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e articles provide that no transfer of any share in the capital of the company shall be made or registered without the previous sanction of the directors.... then previous sanction shall be obtained from the directors for transfer of the shares held by the members, which connotes that there should be a written resolution accepting the transfer from the transferor to the transferee and such previous sanction should precede the handing over of the shares. This legal position has been followed by this board in Radhe Shyam Tulsian v. Panchmukhy Investments Ltd. [2003] 113 Comp. Cas. 298 (CLB). Clause 18 of the articles stipulates that No member shall be entitled to transfer the shares in the company except with the previous sanction of the Board of Directors , which has not been satisfied in the present case. Article 18 does not permit any negotiated transfer as between members on their own or at the wish of any shareholder. A shareholder on dmeciding to transfer his shares loses the right to choose the transferee. Furthermore, no member is entitled to claim the rights of a transferee. Clauses 19 to 22 contain pre-emption rights in favour of the existing members, whenever shares are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies. The second respondent and his family members constituting the board approved the impugned transfers to themselves at the board meeting held on 25-8-2003, which can be nothing more than oppressive. This Board in (a) S. Varadarajan v. Udhayem Leasings Investments (P.) Ltd. [2005] 125 Comp. Cas. 8531 (CLB - Chennai) held that any transfer of shares without exhausting the rights of pre-emption in violation of the articles amounts to oppression; and (b) M.M. Dua v. Indian Dairy Allied Services (P.) Ltd. [1996] 86 Comp. Cas. 657 (CLB) that where there is a provision in the articles of association of a company for pre-emption by members in the matter of transfer of shares, a transfer in violation of such provisions constitutes oppression; and (c) Akbarali A. Kalvert s case (supra) that any transfer of shares in violation of the articles amounts to denying a privilege available to the shareholder. The fiduciary position of the board has been grossly abused by the second respondent in fabri- cating the transfer of shares and in creating a majority for his group. The Supreme Court held in (a) Dale Carrington Investments (P.) Ltd. v. P.K. Prathapan [2004] 122 Comp. Cas. 1611 (S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a manner prejudicial to the interests of the Companies and their shareholders. This Board in S. James Fredrick v. Minnie R. Fredrick [2000] 24 SCL 181 (CLB) held that appointment of additional directors disturbing parity in the constitution of board of directors of a family company would constitute an act of oppression; and (b) Kshounish Chowdhury v. Kero Rajendera Monolithics Ltd. [2002] 36 SCL 497 (CLB - Delhi) that appointment of additional directors made to gain control of the board is neither bona fide nor in the interest of the company. PBPL owns the trademark Milka and the same is licenced to all other group companies and, therefore, by securing control over the parent Company, the second respondent gained control over the trademark and thereby cornered all the benefits arising out of the popular trade-mark. The Companies being private limited companies are managed on quasi-partnership principles and it is rather unjustifiable for a single shareholder to resort to a series of oppressive acts so as to take control of the Companies in gross violation of the articles of association. The respondents, being oppressors should not be awarded as observed by the Supreme Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econd respondent resorted to a large scale non-accounting of turnover and siphoning off funds, which came to light, pursuant to raid of the factory premises of the Companies conducted in June 2005 by the Central Excise Department. Furthermore, the Sales Tax Department found out that the Companies are engaged in a large scale unaccounted turnover. No audit of accounts has been done after 31-3-2003 and no board meetings have been convened for the past more than two years and no details concerning the affairs of the Companies have been placed before the boards. The Companies have been incurring extensive expenditure on advertisement without being backed by any board resolution and corresponding increase in turnover of the Companies. u The Companies were engaged, during the years 2003-2006, in the new line of manufacture of cakes, incurring extensive capital investment to install plant and machinery for manufacture of cakes and extensive expenditure on advertisement, without any board resolution. The second respondent, under the guise of advertisement expense, has been siphoning off funds of the Company. Dealers associated with the Company for several years have been replaced with n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hence it has been the regular practice of the Companies to send notice of any meeting to members and directors either through hand delivery or by post or courier. Section 53(1) permits the company to serve documents on the members personally. No grievance has been raised in this behalf for the last ten years. When the first petitioner was Chairman of the Companies, he had also followed the same procedure in regard to issue of notices for the board meetings and conduct of the same. However, the board of directors of the Companies decided to send the notice by courier for the meetings held on 30-10-2003 and adopted and approved the accounts. Though the first petitioner attended the board meetings on 30-10-2003, he failed to record his presence by not signing the attendance register. The first petitioner has been regularly attending the registered office and work premises of the various group companies and he is also aware of the day-to-day activities of the Companies. u The Companies are private limited companies and are not family companies. There are no groups of shareholders and there is nothing wrong in appointment of the relatives as additional directors espe- cially when suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the shareholders, for appointment of an auditor after expiry of the term of office of the present auditor under section 225 of the Act and therefore, any such change in the auditors of the Companies will be made in strict compliance with the principles of shareholders democracy and therefore, the proposed appointment cannot be questioned, unless the provisions of law are not duly followed. However, the present auditor continues to be auditor of the Companies, in view of the stay granted by this Bench in holding the annual general meeting for the year 2003. Consequently, the accounts of the Companies for the year 2003-04 could not be audited, since the auditor was appointed by the members of the Companies at the annual general meeting during the year 2002 to audit the accounts only for the financial year 2002-03. u Clause 26 of the articles of association empowers the Companies to call an annual general meeting at a shorter notice of not less than seven days. According to the petitioners, clause 26 of the articles of association does not dispense with the requirements of section 171(2) of the Act, whereas, section 170(1)(ii) provides that section 171, shall, unless otherwise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he articles prohibiting a member from identifying a willing member on his own and negotiating the price for the shares, any transfer cannot be said to be violative of the articles. If the share transfers are held invalid, still the shares would revert back only to the members who were holding the shares earlier. There has not been violation of the articles and no case of oppression has been made out by the petitioners. Even assuming that the first petitioner had attended the board meeting and voted against the share transfers, still the share transfers would have been approved by a simple majority. Furthermore, the Companies have duly recorded the share transfers in the minutes book of the board meetings, which is conclusive evidence of the proceedings recorded under section 194 of the Act. The Companies have produced the minutes of various board meetings substanting the approval of impugned transfers and appointment of additional directors. By a mere transfer of shares between the existing members, without issue of fresh shares, new majority could not be created in favour of the second respondent. The petitioners hold just 10 per cent of the paid up share capital of the Companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eneral meetings of a private company which is not a subsidiary of a public company. In the instant case, clause 26 contains a specific provision permitting convening of annual general meeting at a short notice of not less than 7 days and therefore, section 171 shall not apply. Nevertheless the Company did not convene the annual general meeting on account of the stay granted by this Bench and therefore, the grievances of the petitioners in this regard do not survive. u The issue relating to trademark of the Company is subject-matter of a civil suit which is already pending before the High Court of Madras. This grievance covered under the intellectual property law cannot constitute an act of oppression or mismanagement. All acts of mismanagement have been raised by means of filing an affidavit, only after filing of the company petition and must, therefore, be ignored. The Madras High Court held in Asoka Betelnut Co. (P.) Ltd. v. M.K. Chandrakanth [1998] 1 Comp. LJ 325 to show that the facts arising subsequent to the filing of the petition cannot be relied upon and that validity of the company petition will be judged on the facts alleged therein and existing at the time of presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 18 being in the negative form, it emphasises the insistence of compliance with the previous sanction of the board of directors, before the transfer of shares by any member in the Companies and therefore, in my considered view, the requirements of article 18 are mandatory in character and not merely directory, irrespective of the fact whether the transfer of shares is in favour of any member or non-member. By virtue of article 19, no share is transferable to a non-member provided any member is willing to purchase the same at a mutually agreeable value. It is, therefore, open to a member before transferring his shares in favour of a non-member, to ascertain the willingness of any member to purchase the shares so offered by any selling member, which is however subservient to article 20, according to which, any member intending to transfer his shares shall give notice as prescribed therein, appointing the company as his agent for the sale of shares, on which the board of directors has to decide, under article 21, regarding the transfer of such shares. Thus, it is left to the absolute discretion of the board of directors either to register or refuse to register the transfer of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Name of transferee No. of shares Date of transfer Date of sanction by the Board 1. K. Panner Selvam K. Jayakrishnan 250 22-8-2003 25-8-2003 2. R. Rajagopal Shanthini Jayakrishnan 200 22-8-2003 25-8-2003 3. G.S. Revathy Shanthini Jayakrishnan 100 22-8-2003 25-8-2003 4. S. Maheswari Shanthini Jayakrishnan 450 22-8-2003 25-8-2003 5. M. Subramaniam Shanthini Jayakrishnan 500 22-8-2003 25-8-2003 6. M. Subramaniam K. Jayakrishnan 300 22-8-2003 25-8-2003 7. G.D. Selvaraj Shanthini Jayakrishnan 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayagi Ammal N. Chellammal 500 22-8-2003 25-8-2003 5. A. Nazar K. Subbulakshmi 500 22-8-2003 25-8-2003 6. M. Subramaniam N. Chellammal 420 18-7-2003 30-7-2003 7. Gayathri Selvaraj Ajay K. Subbulakshmi 388 18-7-2003 30-7-2003 8. S. Suresh K. Subbulakshmi 367 18-7-2003 30-7-2003 9. P.K. Krishnan Shanthini Jayakrishnan 1,155 18-7-2003 30-7-2003 10. V. Bhuvaneswari Shanthini Jayakrishnan 500 18-7-2003 30-7-2003 11. R. Venkatesan Shanthini Jayakrishnan 500 18-7-2003 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Date of transfer Date of sanction by the Board 1. K. Panner Selvam K. Jayakrishnan 100 16-11-2003 29-11-2003 2. N.Parameshwaran J. Ajay Shivakumar 400 16-11-2003 29-11-2003 3. G.S. Latha N. Chellammal 387 16-11-2003 29-11-2003 4. Ranganayakiammal N. Chellammal 500 22-8-2003 25-8-2003 5. P.R. Manickam K. Jayakrishnan 500 22-8-2003 25-8-2003 6. R. Murugan K. Jayakrishnan 500 22-8-2003 25-8-2003 7. G.L. Venkatesh K. Jayakrishnan 1,000 22-8-2003 25-8-2003 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K. Jayakrishnan J. Yuvana Rekha 50 10-7-2003 14-7-2003 23. Amirthavalli Tamilselvan K. Jayakrishnan 500 10-7-2003 14-7-2003 Total 13,250 It is clear from the above details that - (a)the transfer of 8,970 shares of PBPL were made on 18-7-2003 and 22-8-2003, while the board of directors of PBPL accorded its sanction under article 18, after effecting the transfers by the transferors, on 30-7-2003 and 25-8-2003; (b)the transfer of 13,450 shares of MBPL were made on 18-7-2003, 22-8-2003 and 16-11-2003, while the board of MBPL accorded its sanction under article 18, after effecting the transfers by the transferors, on 30-7-2003, 25-8-2003 and 29-11-2003; (c)the transfer of 13,250 shares of PBHPL were made on 10-7-2003, 18-7-2003, 22-8-2003 and 16-11-2003, while the board of directors of PBHPL accorded its sanction under article 18, after effecting the transfer by the transferors, on 14-7-2003, 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its articles that no transfer of any shares in the capital of the company shall be made or registered without the previous sanction of the directors, the objection that the board of directors had not resolved to register the transfer of share and therefore there is no valid registration would not be tenable. In the present cases before me, the handing over of all the shares by the transferors to the transferees, without any doubt, preceded the sanction of the board of directors accepting the transfers, which is not in consonance with article 18 and the principles enunciated by the Supreme Court. In Cine Supply Corpn. (P.) Ltd. Palak Kumar Mondal s case (supra ), while there are articles which are similar and identical to articles 19 and 20 prevalent in the Companies before me, there is no article to the effect that no member shall be entitled to transfer his shares in the company except with the previous sanction of the Board of Directors , which forms part of the articles of association of the present Companies. In this context, it was observed in that case that there is no provision in the article prohibiting a member from identifying a willing member on his own and negoti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egistration of such transfer by the company can neither be construed to be oppressive, must be viewed in the light of the observations of this Board in the said decision that any transfer of shares of a private company has to be strictly in accordance with the articles and therefore, the company should always follow the terms of applicable articles in respect of any transfer. The whole purpose of article 20, appointing the board as an agent of the member intending to transfer the shares, for effecting the sale of shares and making the board, under article 21, the deciding authority on transfer of shares is to ensure that the shares are offered to all the members before transferring to non-members. The execution of instruments of transfer in respect of the impugned shares in compliance with section 108 of the Act by the intending transferor and purchasing member as contemplated in article 22, without due completion of the requirements of articles 18 and 21, is neither contemplated nor permissible under the articles. The second respondent and his family members reportedly held, prior to the impugned transfers, about 15 per cent of the paid up capital of each PBPL as well as MBP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d resigned from his directorship and the fifth respondent came to be co-opted as a director. The respondents have produced copies of the notices dated 21-7-2003 and 23-10-2003, purportedly sent by post, convening the board meetings of PBHPL on 30-7-2003 and 30-10-2003 respectively. The extracts of the attendance register indicate that leave of absence was granted to the first petitioner from attending the board meeting held on 30-7-2003 and further that the first petitioner refused to sign the attendance register at the board meeting held on 30-10-2003 of PBHPL. The board of directors of PBPL accorded sanction under article 18 to transfer the shares impugned in C.P. No. 50 of 2003 at the board meeting held on 30-7-2003 (1,690 shares in favour of the respondents 2 and 3) and at the board meeting held on 25-8-2003 (7,280 shares in favour of the respondents 2 and 3). Thus, 8,970 shares of PBPL were acquired by way of transfer by the respondents 2 and 3. The extracts of the attendance register indicated that leave of absence was granted to the first petitioner from attending these board meetings of PBPL. The transfer of shares impugned in C.P. No. 50 of 2003 was approved, apart from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... By virtue of section 53(1), a document may be served by the company on any member either personally, or sending it by post to his registered address. The first petitioner by his communications dated 1-2-2003, 15-4-2003 and 10-6-2003 had requested the managing director of PBPL, MBPL and PBHPL separately, to send the notice of board meetings only by RPAD. Though, the respondents have denied receipt of any such communications, yet it is obligatory on the part of the managing director to ensure proper service of the notice of board meetings on every one of the directors. It is observed that notices dated 25-10-2003 convening the board meeting of PBPL, MBPL and PBHPL held on 30-10-2003 were sent to the first petitioner by courier service, the fact of which is not under dispute. However, notices dated 22-11-2003 of the board meeting of PBPL, MBPL and PBHPL held on 29-11-2003 reportedly sent under certificate of posting are seriously disputed by the first petitioner. The respondents have produced copies of the certificates issued by the postal authorities only in respect of the first petitioner and not of any other director of the Companies and furthermore, no notice in respect of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case (supra), have not shown that they have acted with utmost good faith and for the benefit of and in the interest of the Companies, in accordance with the memorandum and articles of association of the Companies, as laid down in Dale Carrington Investment (P.) Ltd. s case (supra) and Vaishnav Shorilal Puri s case (supra). The impugned transfers disturbed the parity of shareholding maintained by the contesting shareholders, which resulted in the second respondent and his family members garnering the controlling interest in the Companies. The appointment of second respondent s family members as directors, with a view to control the board is neither bona fide nor in the interest of the Companies, as held in Kshounish Chowdhury s case (supra). The decision of the board of directors to oust the first petitioner from the managing directorship and to install second respondent in his place, in the absence of first petitioner, one of the promoters and without any valid notice to him constitutes an act of oppression, in view of the observations of the Supreme Court in Kamal Kumar Dutta s case (supra). I, therefore, do not hesitate to conclude that the required facts to sustain the alleg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, as already observed elsewhere, any valid service of notice of the board meetings at the relevant point of time. In the absence of any material substantiating the involvement of the first petitioner, being one of the promoter directors in the management of the Companies during the disputed period, the entire financial transactions are necessarily required to be looked into by an independent Chartered Accountant. The grievance of the petitioners that PBPL franchised the trade mark Milka in favour of other group companies for manufacturing and marketing of their products, without any board resolution, is said to be subject-matter of a civil suit pending before the High Court of Madras and cannot, therefore, be remedied in the present proceedings. The rival claims in relation to the irregularities in convening the annual general meeting of the Companies proposed in December, 2003, have not resulted in any grievances suffered by the aggrieved shareholders, on account of the prohibitory orders passed by the Bench. At the same time, it is proposed to issue appropriate directions in this behalf, safeguarding the interests of the shareholders. In view of my foregoing conclusions an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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