TMI Blog2006 (6) TMI 519X X X X Extracts X X X X X X X X Extracts X X X X ..... closely held company was neither in compliance with the legal requirements (except the allotment on 11.12.2002 though it suffered from on illegality and no proper procedure was followed)nor ensured the fair play and probity in corporate management, resulting in the enhancement of the shareholding of the second respondent, which would constitute an act of oppression, as held in Praful M Patel v. Wonderweld Electrodes P. Ltd [ 2001 (9) TMI 1154 - COMPANY LAW BOARD, NEW DELHI] , Akbarali A Kalvert v. Konkan Chemicals P. Ltd. [ 1994 (5) TMI 270 - COMPANY LAW BOARD] and M.K. Haridas v. Asal Malabar Beedi Depot P. Ltd. [ 2002 (2) TMI 1345 - COMPANY LAW BOARD, CHENNAI] .The member who holds 50% hares in the company is entitled by virtue of his position control, manage and run the affairs of the company. This is a benefit or advantage which the member enjoys and is entitled to enjoy in accordance with the provisions of company and in the matter of administration of the affairs of the company by electing his own members to the Board of Directors of the company. The facts on record show that holding of meetings, increasing share capital, allotting additional shares and removing the petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to give him confidence for the funds he promised to bring in for the project. The company purchased lands from private parties and Gujarat Industrial Development Corporation (GIDC) for its Drive in Cinema project and the said purchases were financed through unsecured loan of ₹ 42.39 lakhs from the petitioner; ₹ 18.85 lakhs from the respondent (Respondent No. 2); from borrowing of ₹ 44 lakhs from one Shri Nalinbhai Patel and ₹ 4.64 lakhs from Jaivant Shah both of them being NRI. All lands of the company were purchased before 30th Nov. 1997 and payments were completed by June, 1998. On 11.12.2002 Respondent No. 2 issued 8800 shares exclusively to himself and his wife (Respondent No. 4) jointly and on 8.1.2003 out of 2,90,000 shares further 2,89,520 shares were issued jointly to Respondent No. 2 and his father (Respondent No. 5) by conversion of unsecured loan of ₹ 17,90,200 standing in the name of Respondent No. 2 and by depositing the balance fund required amounting to ₹ 11,05,000 by way of deposit in the bank on 10.1.2003 (i.e. after the date of allotment and filing of return of allotment on 9.1.2003). By issue of shares on 11.12.2002 and 8.1.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were never ever received by the petitioner. It was argued that the undated notices and the UPC certificates show that the notices were subsequently generated by forgery and fraud to show that notices were sent to the petitioner and his family members on the Board of Directors. It was pointed out that the respondents plea that the petitioner was reluctant at the alleged Board meeting held on 25.9.2002 to subscribe for further shares by conversion of his unsecured loans to take care of statutory requirement of issuing of 8800 shares is unbelievable and ludicrous. It was argued that since when the petitioner had brought in ₹ 42,39,324 as unsecured loans as on 31.3.1999 vis-a-vis ₹ 18,85,000 brought in as unsecured loan by Respondent No. 2 on that date, and further that the petitioner had brought in further amount of ₹ 32,39,324 thereafter till date, it is completely inconceivable that the petitioner was not ready to risk ₹ 44,000 for 4400 shares on 25.9.2002. Further, it was pointed out that on 8.1.2003 by issuing of 2,89,520 shares jointly to Respondent No. 2 and his father (Respondent No. 5) was again an illegality of converting unsecured loans in a single na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Company - earlier auditor who resigned on 22.9.2003 due to non production of books of accounts by Respondent No. 2 to the auditor for conducting the audit for the year ended on 31.3.2003. It was emphasized that the respondent acted in a most oppressive manner and against the interest of the company and the petitioner group. The respondent No. 2 extended the financial year 2002-2003 to 15 months (until 30.6.2003) after ensuring that the statutory auditors M/s B.T. Shah resigned out of frustration. It was alleged that Respondent No. 2 did not produce the books of accounts and other documents before the first auditor only to avoid the first auditor getting knowledge of the illegal share issues; introduction of 48 new members and removals under Sections 283 (1)(g), etc indulged by Respondent No. 2 during December, 2002 and January, 2003 by forgery and fraud. The extension of financial year 2002-2003 to 15 months after the resignation of the first auditors, it was pointed out, was malafide. Further, the petitioner relied on the case of Jagjit Singh Chawla and Ors. v. Tirath Ram Ahuja Ltd. and Ors. (2002) 2 Comp LJ 72 (CLB); Dale and Carrington Investment P. Ltd. v. P.K. Prathapan (20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rebutting the preliminary objections to the petition, the petitioner argued that as regards the objection that in terms of Section 399 of the Companies Act the petitioner does not have 10% shares on the date of filing the petition, that from 29.1.1997 to 11.12.2002 both the petitioner and Respondent No. 2 had equal number of shares and no other person was holding any shares in the company until 11.12.2002. The exclusion of the petitioner from the issue of 8800 shares on 11.12.2002 and further issuance of 2,90,000 shares on 8.1.2003 again to the exclusion of the petitioner was illegal and ab initio void as it was done malafide to marginalize and reduce the petitioner to a hopeless minority from holding of 50% of issued share capital as on 10.12.2002. Hence, it was argued, that the increase in the share capital made on 11.12.2002 and 8.1.2003 cannot be taken into consideration for considering the 10% limit for maintainability under Section 399 of the Act. The petitioner relied on the ratio in paragraph 10 of the case reported as Navin B. Patel and Or. Bhoomi Builders P. Ltd. and Ors. (2005) 5 Comp LJ 273 (CLB). As regards to the objection that criminal complaint No. 475 of 2005 filed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angia and Anr. v. Trinity Company Associates P. td and Ors. (1999) 4 Comp LJ 514 (CLB). Further it was pointed out that Sh. J.V. Shah was never involved in the formation of the company or its activities. He was inducted into the Board only because of he promised to bring substantial funds to the project and he was merely a sundry creditor for ₹ 4,64,000/- He was never involved in any work of the company, nor any Board Meetings were held during his visit to India. Further it was pointed out that leave of absence has always been granted to Sh. J.V. Shah even without any application in this regard while the same facility was denied to the petitioner and his family members. It was emphasized that the non production of any original records in regard to notices of meeting; minute books; leave of absence; attendance registers and dispatch registers clearly point to utter falsehood of the alleged meetings during 25.9.2002 to 30.1.2003. Further pointing to the affairs of the company, the petitioner drew my attention to the cash balance of the company running into nearly ₹ 7 lakhs being kept as Cash in hand since 31.3.2000 and a ₹ 12,000/- which has been kept in the bank ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o seeks winding up of a company cannot be allowed to file a petition under Sections 397 and 398 of the Act which is an equity jurisdiction. Fifthly, it was pointed out that the petition is also bad for non-joinder of necessary parties as there are 45 other shareholders of the company besides Respondent Nos. 2, 4, 5 6. On merits it was argued that issuing of 8800 shares on 11.12.2002 was necessitated to comply with the requirement of increasing the paid up capital of the company to ₹ 1 lakh from ₹ 12,000/- as required by the provisions introduced by the Companies (Amendment) Act, 2000 (53 of 2000). It was informed that since the petitioner was unwilling to contribute funds for further shares in the company as indicated in Board's Meeting dated 25.9.2002 by the petitioner and Respondent No. 3, further issue of 8800 shares is perfectly legal, bonafide and in the interest of the company. As regards further issue of 2,90,000 shares the respondent's pleaded that it is none of the concern of the petitioner as the petitioner had lost all interest in the company and did not want to commit or contribute anything further towards the capital of the company. It was pointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect investors. It was pointed out that during the entire period of the company's existence (except for a short period of five months) the Board of Directors of the company has always included person/persons other than from the family of the petitioner and Respondent No. 2. It was argued that the petitioner has failed to establish that there is any act of oppression or mismanagement and that in order to succeed in a petition under Sections 397 398 of the Act, the petitioner has to establish that (a) the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to him and (b) that to wind up the company would unfairly prejudice him but that otherwise the facts would justify making of a winding up order on the ground that it was just and equitable that the company should be wound up. It was argued that the petitioner has completely failed to establish any of the above conditions, both the conditions being concurrent should be established before any order can be passed in favour of the petitioner in a petition under Sections 397 398 of the Act. 4. I have considered the pleadings and arguments of the counsels for the Petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of further shares would be examined first as to whether the same is an oppressive act and it is found to be so, then only other allegations in the petition would be examined. In the present case, the petitioner's plea is that his holding was 50% of the issued share capital as on 10.12.2002 before the Respondents allegedly issued further 8800 shares on 11.12.2002 and 2,90,000 shares on 8.1.2003 illegally only to marginalize and reduce the petitioner into a hopeless minority. Therefore, this petition cannot be dismissed at the threshold before examining as to whether the issue of further shares would be considered to be an act of oppression against the petitioner. As regards the second preliminary objection that the petitioner did not disclose the criminal complaint filed under the Indian Penal Code before the Police Commissioner, Surat, I am inclined to accept the petitioner's contention that the said criminal complaint is not for any of the reliefs prayed in the petition under Sections 397/ 398 of the Act. It is true that the same cause of action may give rise to civil and criminal proceedings as per the law. Only because the petitioner chose to file a criminal compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an hands failing which he should be denied relief. The Respondents have not been able to substantiate their plea of unclean hands. The counsel for the petitioner contended that the instances of unclean hands have to be with respect to the affairs of the company and even otherwise the instances of unclean hand are unfounded. 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 the equitable proceedings under Section 397/398. In Sri Kanta Datta Narasimharaja Wadiyar v. Venkateshwar Real Estates Private Ltd. (1991) 3 Comp. LJ 336 (Karn) : (1991)72 Comp Cas 211 (Karn), it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petitioner would constitute a gross abuse of the process of Court, and the petitioner is not entitled for any relief under Sections 397 and 398. It also held that the conduct of the parties in other proceedings could also be taken into consideration. However, it was held that the conduct of the petitioner before filing of the petition may not be a relevant factor. Regarding the principle of equity in Shrimati Abnash Kaur v. Lord Kr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a suit, and this would not justify winding up on just and equitable grounds. Normally, as a principle, directorial complaints cannot be a ground in a petition under Section 397/398 as the complaints in such a petition should be relating to the rights qua a member. While, as a proposition, it is so in normal circumstances, yet, in cases of family companies or companies in the nature of partnership, depending on the facts of the case, directorial complaints have been adjudicated by this Board in Section 397/398 proceedings. In the present case, the petition is a composite petition wherein not only directorial complaints are made, but also complaints relating to conversion of 50% shareholder into minority. Further, when the promoter having high stake in the company complaint of his exclusion from the management, I feel that equity demands that his complaint should be inquired into the present proceedings. However, in the present case, the claims of the petitioners are of their claim of quasi-partnership and by denying the petitioner and his nominees representation on the Board, they are being oppressed by the majority shareholders. In case of dissolution of a partnership, the just ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situation in which majority shareholders, by an abuse of their predominant voting power, are treating the company and its affairs as if they were their own property to the prejudice of the minority shareholders and in which just and equitable grounds would exist for the making of a winding up order...but in which the alternative remedy provided by Section 210 by way of an appropriate order might well be opened to the minority shareholders with a view to bring to an end the oppressive conduct on the minority. In the present case, the petitioner has established oppression and since the principles of partnership are applied in this case, denial of legitimate representation could be a just and equitable ground for dissolution of a partnership and, therefore, the company could be wound up on just and equitable grounds. In the present case winding up of the company would not be in the interest of the company and the shareholders. However, proceedings under Sections 397/398 are beneficial provisions to get grievances redressed without recourse to winding up of a company since such winding up would be prejudicial to the interests of the members. Therefore, the prayer of the petitioner and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther issue of 2,90,000 shares allegedly made on 8.1.2003 {2,89,520 shares jointly to Respondent No. 2 and his father (Respondent No. 5), and the balance 480 shares to 48 members(10 shares each) scattered as far as Gandhi Nagar to Mumbai based on a stereo typed formatted application form printed from the same computer with the same date (10.12.2002)}, the petitioner's contention is found to be correct that the said 48 persons were introduced to reduce the petitioner into a hopeless minority in the event of voting by show of hands. Besides, this allotment to Respondent Nos. 2 5 also suffered from illegalities and lack of proper procedure followed for allotments. The illegality of converting unsecured loans in single name in Respondent No. 2's into shares with joint names of Respondent Nos. 2 5 was again repeated as on 11.12.2002. Furthermore the shares were issued jointly by conversion of unsecured loan of ₹ 17,90,200 standing in the names of Respondent No. 2 and the balance required funds of ₹ 11,05,000 was deposited into bank only on 10.1.2003 (i.e. after the date of allotment and filing of return of allotment on 9.1.2003). It is noticed that on the date of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld. The conclusion is inevitable that neither was the allotment of additional shares in favour of respondents bonafide nor was it in the interest of the company nor was a proper and legal procedure followed to make the allotment. The motive for the allotment was malafide. On facts, impugned allotment of additional shares was done with the sole object of gaining control of company by becoming majority shareholder was clearly an act of oppression on the part of the respondents. Moreso, as the meetings passing such resolutions were held at the back of the petitioners without giving proper notices and without following proper procedure. Regarding service of notices, the respondents relied on certain certificates of posting issued by the postal authorities. I have not felt safe to decide the controversy of service of notice on the basis of the certificates. It is not difficult to get such postal seals at any point of time. Onus to prove posting of notices of meetings rests with sender who has to establish posting by sufficient corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LB) The member who holds 50% hares in the company is entitled by virtue of his position control, manage and run the affairs of the company. This is a benefit or advantage which the member enjoys and is entitled to enjoy in accordance with the provisions of company and in the matter of administration of the affairs of the company by electing his own members to the Board of Directors of the company. The facts on record show that holding of meetings, increasing share capital, allotting additional shares and removing the petitioner as directors without following proper procedure were wholly unauthorized and invalid and hence have to be set aside. 11. All the above go to show that the conduct of the respondents is burdensome and oppressive to the petitioner and prejudicial to the interest of the company. From the narration of the events as above, the only conclusion that I can come to is that the respondents have not been able to refute the charges of oppression and mismanagement in the affairs of the company, and, therefore, the petition deserves to be allowed. Relief to be granted depends on the fact of a particular case. The facts of the present case are so manifestly against respond ..... X X X X Extracts X X X X X X X X Extracts X X X X
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