TMI Blog2000 (12) TMI 912X X X X Extracts X X X X X X X X Extracts X X X X ..... dwala Group by which the later was to invest certain amount of money for the project and it also was allotted 19,170 shares of ₹ 100 each in the company. Since Lokhandwala could not mobilize sufficient funds, an agreement was entered into between Lokhandwala group, the petitioners group known as Jain Group and Rashid Group and the company on 28-11-1995 by which the entire shareholding of Lokhandwala Group was transferred to Jain Group. At that time, Rashid Group was also holding equal number of shares of 19,170. Thus, both Rashid group and Jain group held 50 per cent shares each in the company. There remained 11,660 unissued shares out of the authorized capital and the agreement provided that Jain group would subscribe to 50 per cent of these shares, i.e., 5,830 shares. As per the agreement, the Jain Group was to have 3 directors in the company of which one was to be the Chairman and Rashid Group was to have 4 directors including Vice Chairman-cum-Managing Director. The agreement provided for the Jain Group funding the project to the tune of ₹ 1.6 crores (including the consideration for acquisition of the shares from Lokhandwala Group). In January, 1994, the 6th respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fforts in the 6th respondent's reconsidering the notice of stop work and a proposal to this effect was put up before the general body of the 6th respondent in December, 1995. In October, 1996, the company referred the dispute with the 6th respondent to arbitration. The Rashid Group did not inform the Jain Group about the stop work notice when they entered into the said agreement in November, 1995. However, they pressurized the Jain group to invest the entire ₹ 1.6 crores notwithstanding the fact that the project had come to a standstill. Since the petitioner had agreed to provide funds only for the execution of the project and since the project had come to a standstill, other than spending a substantial amount on behalf of the company in getting certain clearances, the petitioner did not invest further funds. However, the petitioner asked for details of the requirements of funds but the company did not provide any details. Through a letter dated 15-7-1997 (Annexure A-6), the petitioner conveyed its willingness to provide funds for the project provided all the formalities in this regard were completed. There was no response from the company in this regard. However, it tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Board in which being a 50 per cent shareholder, the petitioner had 3 representatives on the Board. 4. Referring to his allegation relating to increasing the share capital of the company, he pointed out that the company had 11,660 unissued shares out of the authorized capital at the time when his client entered into the said agreement with the respondents. This agreement provided that 50 per cent of the unissued shares would be allotted to the petitioner as and when further issue of shares was made. Notwithstanding the terms of the agreement, the petitioner being a 50 per cent shareholder, with a view to maintain party in the shareholding, the company should have allotted proportionate shares to the petitioner as and when further issue of shares was made. However, the respondents, without any notice or knowledge of the petitioner allotted all the 11,660 unissued shares to themselves with a view to disturb the present parity and also become majority shareholder. Any change in the equality in the shareholding by issue of further shares, he contended would be an act of oppression. He also pointed out, that the company was not in need of any funds, and as a matter of fact, furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Mehta v. Shree Anupar Chemicals (India) (P.) Ltd. [1999] 2 CLJ 539 (CLB-New Delhi) wherein the CLB has held that principles of partnership can be applied to a company in facts of a particular case. He further pointed out that in C.N. Shelly v. Hilliock Hotels (P.) Ltd. [1997] 1 CLJ 84 (AP), the court has held that where the shareholding is more or less equal and that there is participation in the management by both the groups, then, the principles of partnership could be applied in respect of such a company. He also cited Vaijay Krishna Jaidka v. Jaika Motors Ltd. [1997] 1 CLJ 268 (CLB-New Delhi) wherein the CLB has held that in examining whether a company is in the nature of a partnership, the status of the relationship between the parties at the time when the petition is filed has to be taken into account to find out whether the relationship is that of a quasi partnership and not the status of the company at the time of incorporation. He urged that in a corporate management, a shareholder holding 50 per cent shares with joint management cannot be converted into a minority and thrown out from the management and if it happens then it is a grave act of oppression. Any breach of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fide intent. Therefore, he contended that, there is no bar in the CLB examining the issue relating to directorship of the petitioner's group. He also referred to the contention of the respondents that the petitioners' group had put up one of the persons to whom they had transferred the shares to file a suit in the Calcutta High Court and as such the present proceeding is a parallel proceeding and submitted that those proceedings have no connection with the present proceeding inasmuch as what is challenged in the present proceedings are not in that suit. He further pointed out that in the present petition, his client is not seeking enforcement of the agreement but is agitating its rights as a shareholder. He contended that the Rashid Group has excluded the Jain Group both in the allotment of shares and in the management only with a view to get the full benefit of the arbitration award. In regard to the complaint of the respondents that the petitioner has transferred 1,060 shares to 3 other persons in violation of the pre-emption right provided in the articles, he pointed out, that all the 3 persons belong to the Jain Group itself and this article is applicable only when shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more or less identical facts, the CLB had declined to give any relief since the petitioners in that petition did not comply with the terms of the agreement while entering the company. Further, he also pointed out that the relief sought for by the petitioner in the present proceedings run against the relief sought by the respondents in their suit in Bombay High Court and since the suit was filed prior in time CLB cannot consider granting of any of the reliefs in the petition. He also pointed out that directorial complaints cannot be entertained in a 397/398 proceeding as has been held in Krishnaprasad Jwaladutt Pilani v. Colaba Land Mills Co. Ltd. AIR 1960 Bom. 312. 7. Dealing with the merits of the case, Shri Savla submitted that the Jain Group was fully aware when it entered into an agreement to finance the project, that there was already a stop work notice as is evident from clause 2 of [he agreement. In spite of that Jain Group had agreed to invest a sum of ₹ 1.6 crores which they did not do. He refuted the claim of the Jain Group that they have spent a substantial amount of money for the company and as a matter of fact, he pointed out, that in the petition, they hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness purposes and in the interest of the company, that too after the offer was made to the petitioners who had not responded to the offer, the allotment cannot be considered to have been made with a view to reduce the petitioner into a minority. Further, he also pointed out that the very shares on the strength of which this petition has been filed and relief sought are already under dispute in the Bombay proceedings and once the Bombay High Court declares that the petitioner had committed a breach of the agreement, then, all the shares now held by the petitioner would come into the hands of the respondents. Therefore, no relief in regard to this allegation should be granted by the CLB. 10. Summing up his arguments, Shri Savla submitted that the Jain Group has filed this petition only with a view to derive undue benefit out of the arbitration award. They came into the company only after all the efforts had been taken by the Rashid Group in getting the project awarded and the Jain Group never took any interest in prosecuting the arbitration proceedings. Further, as against ₹ 1.6 crores committed by them for investment in the company, they invested only ₹ 24 lakhs whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exercising their rights as a share- holder and it has not granted any interim reliefs in respect of these shares. Further, we shall appropriately provide for safeguarding the interests of the respondents pending final decision of the High Court. 12. There are two main complaints by the petitioners - one relates to the allotment of further shares and the other relating to representation on the Board. According to the learned counsel for the petitioners these two acts of denying further shares and representation on the Board are grave acts of oppression in a company wherein two groups of shareholders held 50 per cent shares in the company. It is the contention of the respondents that the Jain Group was admitted as a member only on the understanding that they would invest ₹ 1.6 crores in the company and all other rights as shareholders are subject to fulfilment of discharging their obligation of investment of ₹ 1.6 crores. In this connection, the learned counsel for the respondents referred to the suit in Bombay High Court wherein the respondents have sought for directions to the petitioners to transfer the shares held by them. It is an established principle of law tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so examine whether the directors have acted bona fide in the exercise of their fiduciary responsibilities in the further issue/allotment of shares. It is a settled proposition of law that further shares can be issued only for the benefit/interest of the company and not with a view to create a new majority or to reduce a majority into minority even if the powers to issue shares is vested in the Board. If the purpose of issue/allotment of shares is for upsetting the existing shareholding to the detriment of one group, then such an allotment of shares is to be held an act of oppression, whether or not partnership principles are applied. It is also a settled proposition of law that allotment of shares for the bona fide needs and in the interest of the company, even if affects a group of shareholders need not be considered as oppressive. The company had 11,660 unissued shares out of the authorized capital. These shares were issued/allotted exclusively to the respondents' group on 16-12-1997 against the loans/advances earlier given by that group. The reason for suddenly converting this loan into shares has not been explained especially when we find from clause 12 of the agreement bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares had been made only with the view to reduce the petitioner into a minority. 14. In regard to directorship, the contention of the petitioner is that Jain Group nominees could not have been appointed as Additional Directors since there is no provision in this articles to do so. As rightly pointed out by the learned counsel for the respondents, article 72 of Table A which the company has adopted authorizes the Board to appoint additional directors. Shri Sarkar contended that having appointed the nominees of his client, which held 50 per cent shares, as additional directors, the company should have appointed them as regular directors in the next AGM and not doing so itself is oppressive. According to the respondents, directorial complaints cannot be agitated in a 397/398 proceedings. On a similar contention, this Board observed in Indocan Engg. Systems Ltd.'s case (supra) Even though there is substance in the submission in this regard, the same cannot hold good in all circumstances. We have held, in many cases, that directorial complaints can he entertained in a 397 petition in cases of family companies and in companies in the guise of quasi partnership. Further, on equitab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the shares held by the Jain group including those earlier transferred by it to 3 other persons shall be transferred or encumbered in any manner till the disposal of the Bombay suit. As far as directorship is concerned, in a case of similar facts, this Board has decided in Indocan Engg. Systems Ltd. 's case (supra) that the petitioner holding 18 per cent shares should have at least one director on the Board. In the present case, the Jain Group held and will hold, as per our earlier direction, 50 per cent shares and therefore ordinarily they should have equal number of directors as that of the respondents. However, since, they themselves agreed to have only 3 from their group against 4 from Rashid group as per the agreement, they should have at least 3 directors. However, considering the strained relationship between the parties, their association in the Board would only further escalate the strained relationship and the same would not be in the interest of the company. Further we also note that the company is not doing any business and the only asset of the company is the arbitration award as and when received. One of the reliefs, which is normally granted, with the view to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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