TMI Blog2000 (5) TMI 1082X X X X Extracts X X X X X X X X Extracts X X X X ..... long with the second and fifth respondents were directors. Sometime in October 1998, the petitioners desired to sell their entire shareholding in the company for a consideration of US dollars 64,000. The board accorded its approval for the sale subject to obtaining the approval of the Reserve Bank of India. Pursuant to this permission, the petitioners resigned as directors. In the board meeting held on 15-4-1999, the board approved transfer of certain shares held by the second respondent to the seventh and eighth respondents who were not already members of the company. In an extraordinary general body meeting held on 5-6-1999, the authorised capital of the company was increased from ₹ 40 lakhs to ₹ 45 lakhs. Later, 1.5 lakh shares were allotted to the second respondent and his family members. In another extraordinary general body meeting held on 3-8-1999, the fifth respondent was removed as a director. The company had also noted in the register of members in the folio of the petitioners 'shares sold. All rights vested in the buyer pending legal formalities'. The allegations of the petitioners, in the first petition, are that by increasing the share capital and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners group and the fifth respondent's group. For this board meeting, even though the fifth respondent who was a director then, was given a notice of the board meeting, yet, the agenda for this meeting did not contain any business relating to splitting and transfer of shares, Therefore, according to him, the splitting and transfer of shares was done with the mala fide intention of increasing the number of membership in the company. He pointed out that by using the illegally enhanced number of members, they passed resolutions increasing the authorised capital of the company from ₹ 40 lakhs to ₹ 45 lakhs in the annual general meeting on 5-6-1999, and appointing the second and third respondents as consultants on exorbitant remuneration. He also pointed out that no notice for these meetings was received either by the petitioners or by the fifth respondent. The quorum for these meetings would not have been present in the absence of the petitioners and the fifth respondent but for the induction of the new members by transfer of shares. He also pointed out that after the increase in the authorised capital, without approval from the board, further shares had been iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor would result in the company having to pay over ₹ 50 lakhs as compensation to him. The respondents, unmindful of this huge claim by the fifth respondent which would be completely against the interest of the company, removed him only with a view to gain complete control of the company. 6. Summing up his arguments, Shri Seervai pointed out that the respondents had not annexed any documents in their reply to the first petition and were only producing the documents during the arguments and as such no cognizance of these documents should be taken. To make up this deficiency, they have annexed all the documents only along with their reply to the second petition. The act of clandestine splitting and transfer of shares and conversion of majority into minority and holding of meetings without due notice to all the members are all grave acts of oppression in a company in the nature of a quasi-partnership and as such the relief sought for in both the petitions should be granted. 7. He cited the following case law in support of his submissions : Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821: Issue of further shares with a view to converting a majority into minority w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of US dollars 1.16 lakhs and also non-negotiable promissory notes executed in connection with the sale as also the agreement of assignment. Non-disclosure of these documents, Shri Ajay Kumar contended, would be fatal to the petition. He also pointed out that the petitioners sought for permission from the company for sale of these shares in terms of the articles and accordingly at a board meting held on 11-12-1998, the permission was accorded. Thereafter, they resigned from the board. Producing a copy of a letter from Sterling Starr Inc. dated 14-6-1999, he pointed out that the purchaser of the shares has advised the company not to allow the petitioners to exercise their rights as members in view of the sale of their shares. Therefore, the petitioners having decided to part ways with the company are now agitating before the CLB only on account of the removal of the fifth respondent as a director and as such the petition itself is a motivated one and not with a view to exercising their statutory rights as members of the company. He pointed out that it is the petitioners and the fifth respondent who have acted against the interest of the company. At a board meeting held on 30-12- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors had been authorised to allot shares, there is no need that the board should allot the shares. He also pointed out that the company is a private company and, therefore, the provisions of section 81A of the Act do not apply and as per article 4, the board is empowered to allot the shares at their discretion. Since the shares were issued by the authority of the articles for valuable consideration and for the benefit of the company, the decision cannot be challenged especially in view of the fact that the petitioners had decided to part ways with the company. He further submitted that even though no formal letters of offers were sent to all the members, yet, informal discussions took place and other than the second respondent, no other member expressed any desire for further shares. He also pointed out that the money received consequent to allotment of further shares has already been utilised by the company and as such cancellation of the allotment would amount to reduction of share capital which is beyond the powers of the CLB as only the High Court has powers to do in terms of section 100 of the Act. In this connection, he referred to Bhupinder Rai v. S.M. Kannappa Automobiles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the words 'shares sold all rights vested in the buyer pending legal formalities' cannot be granted. He submitted that this noting was made in the register of members only to keep the register up to dale and not with a view to deny membership of the petitioners. He pointed out that not only notices of the shareholders' meeting were given to the petitioners but the constituted attorney was also allowed to participate at the general body meetings. 12. Summing up his arguments, Shri Kumar contended that the petitioners have no real interest in the company as they had already sold their shares and they had voluntarily resigned from the board. Therefore, they can have no concern with the affairs of the company and all the complaints of the petitioners have to be viewed in this context. The petitioners arc actually acting for the fifth respondent who is not a shareholder of the company. Accordingly, he prayed for dismissal of both the petitions. 13. We have considered the pleadings and arguments of the counsel. At the outset it is necessary to record that the first petition was filed on 6-10-1999, and later the second petition was filed. The arguments on the first petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mere entering into an agreement to sell docs not deprive a member from exercising his rights as a member. Therefore, the non-disclosure of the fact of sale agreement cannot be fatal to the petition. Most of the complaints in the petition arise out of the decisions taken at the board meeting held on 15-4-1999. The agenda sent along with the notice for this meeting did not contain all the items transacted at that meeting. The agenda is at page 158 of the petition. At that board meeting, in addition to the agenda items, decisions were taken to appoint respondent Nos. 2 and 4 as consultants, to increase the authorised capital, to allot 1.5 lakh shares to the second respondent and his family members, to split and transfer certain shares held by the second respondent, to recover the loans given to the fifth respondent and to open a new bank account. In regard to increase in the authorised capital and appointment of consultants, it was decided to seek the shareholders' approval. Increase in the authorised capital would require amendment to the memorandum of the company and as such it is an important item which should be transacted only as an agenda item and cannot normally be tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in allotment of further shares by which the majority is converted into a minority, then such increase can be challenged. The petitioners have also complained that they did not receive notice of this meeting while the respondents rely on the certificate of posting. The certificate of posting was not disclosed in the reply to the petition but was produced during the hearing. The authenticity of the certificate is doubtful for the reason that when the petitioners demanded inspection of the documents of the company vide their letter dated 30-7-1999, the second respondent replied, vide letter dated 2-8-1999, that the petitioners having sold their shares, had no right of inspection (Annexures 16 and 17). In the same way, we find from the minutes of the extraordinary general body meeting on 3-8-1999, that the second respondent had objected to the presence of the constituted attorney of the petitioners on the ground that they had sold their shares. If the contention of the second respondent was that the petitioners had ceased to members, it is inconceivable that notices could have been sent to the petitioners for this meeting. Therefore, we find substance in the claim of the petitioners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttees. We do not propose to examine these allegations in view of our decision later. 17. In regard to the extraordinary general body meeting on 3-8-1999, in which the fifth respondent was removed as a director, the complaint of the petitioners is that they did not receive the notices for this meeting and that the requirements of section 284 had not been complied with. We do not propose to deal with the same for the reasons that the petitioners having come to know of this meeting exercised their votes through their constituted attorney and the fifth respondent was personally present in that meeting. However, we note that the meeting does not seem to have been validly convened. It is the contention of the respondents that the extraordinary general body meeting was a requisitioned one in terms of section 169 of the Act. As per this section, on receipt of the requisition, the board should proceed within 21 days and convene a meeting within 45 days. In the present case, we find from the requisition notice, that the requisitionist himself had sought for convening the meeting on a particular date, time and venue. He himself has signed the notice for the meeting as the chairman of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Once the increase in the authorised capital is invalid then the consequent allotment is also invalid. Even otherwise, it has been established that the allotment of further shares was only with the view to convert the majority into minority and to create a new majority. Therefore, the allotment of further shares has to be declared to be null and void and, consequently, the register of members has to be rectified by cancelling these shares. Shri Ajay Kumar contended that such a cancellation would amount to reduction in the share capital of the company and as such, the CLB has no powers to direct cancellation. In this connection he relied on Bhupinder Rai's case (supra). The observation in that case, that the CLB has no powers to order reduction of share capital was in connection with a section 111 petition. But in the present case, we are directing the cancellation of shares and consequent reduction of share capital in terms of the powers conferred under section 402 of the Act which is consequent to our finding that the respondents were guilty of oppressive acts. Further, Supreme Court has answered a similar objection in Cosmosteels (P.) Ltd. v. Jairam Das Gupta [l978] 48 Comp. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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