TMI Blog1994 (10) TMI 312X X X X Extracts X X X X X X X X Extracts X X X X ..... en constituting about 16.25 per cent of the subscribed and paid-up capital of the company and 116 equity shares of ₹ 100 each constituting about 23 per cent of the subscribed and paid-up capital of Detinners. The petitioner and the respondents are close relatives. Esemen was incorporated in 1968, whereas Detinners was incorporated in 1954. The background of the case in Esemen is as follows : The family of the late Sheikh Md. Nanvi was carrying on business in partnership under the name and style of Metallo Chemical Works under a deed of partnership dated January 1, 1959. In July, 1967, the partnership was reconstituted by which the two brothers, one sister and the mother of the petitioner became partners. In 1968, the company, namely, Esemen, was incorporated to take over the business of Metallo Chemical Works. According to the petitioner this object was not fulfilled. In 1984, the mother of the petitioner died intestate and the petitioner being a Mohammedean governed by the Hanafi School of Muslim law inherited, along with the other family members, her share in her mother's entitlement in the partnership firm. The grouse of the petitioner is that though she i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Another property at 212, Basant Lal Saha Lane, Tollygunj, Calcutta, which is a shed covering an area of 7,500 square feet has been handed over to a private company which is controlled by Mohammed Zaki and his sons. Even the electricity charges for consumption by that private company are being paid by the respondent-company. (v) The shed at the above Tollygunj property though shown to be let out to another private company is actually being used by the sons of Mohammed Zaki for personal warehouse purposes and for running a plastic factory. (vi) The company has a shop on monthly tenancy in Corotola locality which is being used by Mohammed Zaki and his sons. In the matter of Detinners, the main allegation is the issue of additional shares without any justification when the business has been lying closed for a long time and the company has not been carrying on any commercial activity. The increase was mala fide since prior to the issue the petitioner has obtained an order from the High Court to restore 116 shares in her name. It is further stated that the company being a private one no invitation could have been made to outsiders to subscribe to the share capital. Further, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... children of Mohammed Zaki on July 23, 1990. These shares of ₹ 100 each were paid up to the extent of ₹ 25 each. The increase in the capital has been made by the respondents only with the ulterior motive of diluting the shareholding of the petitioner and to take away her qualification under Section 399 of the Companies Act. The petitioner has, therefore, prayed in the application for restraining the respondents from giving effect to this increase and from exercising any right in respect of these 5,000 shares. While hearing the parties in respect of the interim prayer, Shri S. B. Mukherjee made a submission on behalf of Esemen that status quo ante will be maintained notwithstanding the allotment of additional 5,000 shares. We passed an interim order in respect of both the companies restraining the respondents from disposing of and/or transferring and/or alienating or selling the movable and immovable assets of the company. Shri S. B. Mukherjee, appearing on behalf of the respondents, questioned the maintainability of the petition as regards Esemen due to non-fulfillment of requirements under Section 399. He stated that the allegations in the petition and those in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f certain properties made in the petition are not before the High Court at all. He further stated that the oppressive act of issue of additional shares was discovered subsequent to the filing of the petition and hence has to be taken into consideration. He submitted that the jurisdiction of the Company Law Board is an equity jurisdiction and as such all the related facts have to be taken into account. Shri Sen further undertook on behalf of the petitioner to withdraw this suit before the Calcutta High Court to enable the Company Law Board to freely decide the case. This was also subsequently done by the petitioner and allowed by the High Court on July 4, 1994. He asserted that since he is questioning the issue of additional shares as an oppressive act, the same cannot be counted in reckoning the qualification under Section 399 of the Act. This apart, Shri Sen stated that the total number of members in Esemen is only eight and three more shareholders appeared to have come into existence in 1993 by means of transfer of insignificant lots of shares thereby increasing total number of members to 11. He cited Piyush Kanti Guha v. West Bengal Pharmaceutical and Phytochemical Development C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat intervention is necessary even if no new majority is created but there is dilution of the petitioner's percentage. He cited, in this connection, the decision of the Supreme Court in Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] 20 Comp Cas 179; AIR 1950 SC 172, to establish that even in a case where the directors have discretion with regard to allotment of shares, they should not discriminate among shareholders and directors are prevented from offering shares to outsiders before offering to the shareholders. He reinforced his arguments by citing the decisions of the English courts in Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821 and Piercy v. S. Mitts and Co. Ltd. [1920] 1 Ch 77. Reacting to the respondent's plea that past concluded transactions cannot be reopened and refuting the applicability of the decision in Sheih Mohan Lal Ganpairam. v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 54 Comp Cas 777 : AIR 1965 Guj 96, Shri Sen stated that past concluded transactions may not be questioned only as regards third parties. He further cited the same judgment that even if an act is legal but if it is oppressive the same can be questioned. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e substratum of the company is not gone. He stated that there has been a temporary set back in business but the company management has taken up alternative lines of business. Reacting to the issue of additional shares Shri Mukherjee stated that Section 81 of the Act is not applicable to the company as it is a private company. Further, the issue was made in 1990 and the petitioner has not questioned the same for a long time. Thus, the petition suffers from laches. Reacting to the contention that the respondents have not mentioned about the increase in capital in the legal proceedings, he stated that there was no intentional suppression and this was also not an issue before the High Court. Regarding the increase in the number of shareholders he stated that the transfers were within the provisions of the articles of the company. He stated that even the petitioner's shareholding was by means of transfer only. The petitioner has not made out a case for striking down the allotment of additional shares even in the rejoinder. He cited Article 5 of the articles to state that the prohibition for transfer is only for outsiders and not for transfer within the family. The petitioners hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r has got no right in the property of the company in a running business. Shri Mukherjee concluded that both the petitions, therefore, deserve to be dismissed. From the pleadings and arguments, the following issues emerged for our consideration : 1. Whether the petition as regards Esemen is maintainable ; 2. Whether we should stay our proceedings in Esemen because of the pendency of the suit instituted by the petitioners in the Calcutta High Court with regard to family properties ; 3. Whether the petitioner has established a case of oppression and mismanagement ; 4. Whether the petitioner is entitled to reliefs prayed for. The maintainability of the petition in Esemen has been questioned, consequent to the issue of additional 5,000 shares by the company in 1990 and the transfer of some shares by some of the respondents by which the total number of members has been increased to 11. It is a fact that the petitioners were not aware of these two developments one in 1990 and the other in 1993. As regards the issue of shares, it has become the subject-matter of the petition by means of a subsequent application taken out by the petitioner and is being considered as one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from 1987 to 1993. She has now come up under sections 397 and 398 of the Companies Act having firmed up her position as a member. The acts of oppression alleged by the petitioner in the case of both the companies relate to : (a) Non-issue of notice of general body meeting, non-maintenance of minute books of general body and board meetings, non-preparation of balance-sheets, and annual returns and non-filing of the same with the Registrar of Companies since 1985. (b) Continued harassment of the petitioner after wrongfully transferring her shares in the companies by misusing a power of attorney granted to respondent No. 2 some years back. (c) Issue of additional shares to the respondents and their relatives and transfer of small quantities of shares in Esemen to increase the number of members by both of which the petitioners' percentage holding and eligibility having been diluted. As regards the allegations contained in (a) above, these have not been satisfactorily established. On the other hand, the respondents have produced sufficient proof of the filing of annual returns and balance-sheet after 1985, The respondents have also been able to produce proof of despa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The date of the transfer deed, the date of registration, the proceedings of the board meeting for transfer were all considered to establish that the transfer was wrongfully done by exercising a power of attorney executed by the petitioner nearly ten years back and the transfer having been done when the petitioner was personally present in India. Though it is lawful to join issues in litigation the conduct of the respondents in continuing the agony even after the appellate court ordered rectification of the members' register in favour of the petitioner. The orders of the High Court are enough for us to come to this conclusion. As regards the third ground, on inspection of records at the office of the Registrar of Companies the petitioner became aware of the issue of additional 1,000 shares in Detinners. However, she was not aware of the additional issue in Esemen since in the entire litigations and even before us this fact had not come out from the respondents. The petitioner became aware of the additional share issue in Esemen only from the appeal filed by the respondents, against our interim orders. Even the increase in the number of members in Esemen from 8 to 11 was known ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a fide arrived at. But, when a dispute arises whether the directors of a company made a particular decision for one purpose or for another, or whether there being more than one purpose, one or another purpose was the substantial or primary purpose, the court is entitled to look at the situation objectively in order to estimate how critical or pressing or substantial an alleged requirement may have been. If it finds that a particular requirement, though real, was not urgent or critical at the relevant time, it may have reasons to doubt or discount the assertions of individuals that they acted solely in order to deal with the matter. The above observation in 1918 has been preceded by a more appropriate observation by the Chancery Division in Piercy v. S. Mills and Co. Ltd. [1920] 1 Ch 77 which better fits into the facts of the present case. The observation is reproduced below (headnote) : A power to issue shares in a limited company given to directors for the purpose of enabling them to raise capital when required for the purpose of the company is a fiduciary power to be exercised by them bona fide for the general advantage of the company, and when the company is in no need ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en retrenchment of workmen as is evident from the balance-sheet of Detinners. Under the circumstances, the apprehension of the petitioner about her share in the properties being diluted consequent to the additional issue of shares is not without substance. Normally a shareholder acquires a right to participate in the profits of a company, but when the business of the company is at a standstill and the worth of the company is not relatable to its operations but to the possession of valuable assets it has to be viewed accordingly. The observation of the Supreme Court in Bacha F. Guzdar v. CIT [1955] 25 Comp Cas 1 : AIR 1955 SC 74, cited by the respondents that the shareholder does not become entitled to a share in the assets of the company only is not relevant in the present context as that observation related to the tax implications on the value of a share. On the other hand valuation of shares based on net worth which in turn is based on the value of the assets is accepted as a principle of share valuation even in respect of going concerns. The dilution of the petitioner's percentage naturally dilutes her claim on the net worth of the company. In view of our finding that the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etails of the parties to whom the premises were let out and the amount of rental being charged in some of the cases. The corresponding market rent has also been set out to show as to how the actual rent charged is much less. The petitioner has also been able to establish the relationship between the respondents and some of the tenants to indicate the personal interests of the directors. Since the petitioners are denied access to the records of the company they cannot be expected to provide full details of the allegations. It is for the respondents to categorically establish that whatever facts are set out by the petitioners are not true and should have brought out the correct position. Instead, the respondents in their replies in both the companies cases have merely denied the allegations. As regards Esemen, the respondents have merely stated that the allegation with regard to properties were the same as contained in the petitioner's suit before the High Court, and these allegations have been duly dealt with in the written statement therein which was annexed to the reply of the respondents. We went through the replies of the respondents in the suit proceedings and we find that ..... 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