TMI Blog1999 (3) TMI 648X X X X Extracts X X X X X X X X Extracts X X X X ..... oners Nos. 2 and 3 continue to be directors, yet the same is not admitted by the respondents on the ground that they were not appointed in the annual general meeting. (4) Petitioners Nos. 1 and 4 have been removed from the board without following the provisions of the Act. (5) Further shares have been issued to certain respondents in violation of the provisions of the Act and without the consent and knowledge of the petitioners holding 50 per cent shares in the company. (6) Respondents Nos. 2, 7, 8 and 9 have handed over the management and operation of the company to outsiders by appointing them as additional directors which is detrimental to the interest of the petitioners and the company. 2. A joint reply has been filed by respondents Nos. 1 and 2 and various applications have been filed by respondent No. 22. According to these respondents, petitioners Nos. 2, 3, 4 and 5 are not shareholders and in view of the increased subscribed capital of the company, the shares held by petitioner No. 1 do not entitle him to file this petition in terms of section 399. Even though the company has given an undertaking to the Bombay High Court that the maintainability of the petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further sum of ₹ 7 lakhs was also brought in by group A as share capital by August, 1996. Further, to assist group B to bring in their 50 per cent of the agreed share capital, group A advanced ₹ 8.2 lakhs to group B in around June, 1995. The amount brought in by group A between May and December, 1995, was utilised for purchasing various items of plant and machinery and towards working capital. In the board meeting held on April 18, 1997, shares were allotted to the members of both the groups by which all the petitioners were allotted shares for the money they had brought in and with the initial ₹ 1 lakhs share capital held by the group A, the total shares held by the group A was to the tune of ₹ 30 lakhs in April, 1997. The said board meeting was attended by all the seven directors as is evident from exhibit B-1 at page 47 of the petition which contains the signatures of all the seven directors. Draft minutes of the board meeting (exhibit B-2, page 48) was sent to respondent No. 7, for incorporating the same in the minutes book as he was in charge of all secretarial and administrative works of the company. Relevant return of allotment was also filed with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the machines, group B did not do so. Accordingly, group A lodged a complaint with the police April 12, 1997 (exhibit E, page 58). Legal notice was also issued in this connection (exhibit M, page 59). A statement of compromise (exhibit A, page 44) was recorded by petitioner No. 1 and respondent No. 2 in the police station by which it was agreed that till the disputes between the parties were settled in a court of law, neither party would remove any of the goods from the premises of the company. In this statement, there is a clear indication that on April 12, 1997, when this agreement was signed, there were seven directors in the company. Therefore, it is wrong to say that petitioners Nos. 2 and 3 had ceased to be directors from September 30, 1996. As per this agreement, the premises of the company were closed and kept under locks with one lock of group A and another lock by group B. The bank accounts of the company were also frozen (exhibit G, page 61). In view of the disputes, both the groups took a decision to jointly sell off the company and a concrete proposal was received from one Vipul Drug (P.) Ltd., for taking over the company at ₹ 65 lakhs (exhibit H, page 62) which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng transferors vide letter dated April 10, 1997, (exhibits Nos. 18, 19 and 20-pages 142, 143, 144 of the reply) the board considered these transfers (as per minutes at exhibit No. 21 page 145) on April 13, 1997. It could have never been done in the absence of any notice to petitioners Nos. 2 and 4, who were, according to the company admittedly directors at that time. As per Article 41,7 days notice is required to be given for any board meeting. Therefore, it is inconceivable that the transferors gave notices of transfer on April 10, 1997, and the board considered the same on April 13, 1997. As per the decision in Parmeswari Prasad v. Union of India, AIR 1972 SC 2389, if notice of a meeting is not given even to one director then, any resolution passed in that meeting is invalid. On this proposition learned counsel also relied on Akbar Ali A. Kalvert v. Konkan Chemical (P.) Ltd. [1997] 88 Comp Cas 245 (CLB). The company has not produced any evidence that notices for the meetings were sent to petitioners Nos. 1 and 4 as the onus to prove that notices were sent is on the company. 8. Further, on April 29, 1998, additional shares were allotted to members of Aarti Drugs Ltd., without t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p B by transferring certain shares to outsiders, allotting shares to outsiders, removing the petitioners from the board and finally handing over the control and management to outsiders. According to him, conversion of majority into minority and ousting them from the management are clear acts of oppression justifying winding up on the just and equitable ground. He submitted that right from January, 1996, there were seven directors on the board of which four were from group 'A' and three from group 'B'. However, the respondents are manipulating to show as if there was a change in the composition of the board of directors and that the board had only five directors from September 30, 1996, two from group A and three from group B. He also questioned the motive of the board to have allotted fresh shares to the Aarti group when a sum of about ₹ 29 lakhs of group 'A' was available with the company. Even assuming, as per the stand taken by the respondents that no shares were earlier allotted against this money, in all fairness the board should have allotted shares against this money first before allotting to outsiders against fresh subscription. This, he conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roup A would have equal shares and majority representation on the board. No shares were allotted against this application money at any time. As a matter of fact, apprehending that petitioner No. 1 was likely to fabricate records to show that allotment had been made, as an abundant caution, the eighth respondent wrote to the Registrar of Companies on April 9, 1997 (exhibit No. 9 page 122 of the reply) requesting him not to take on record any documents filed in this regard. In addition to this, in an extraordinary general meeting held on April 15, 1997, it was also resolved that if any allotments had been made by group A directors, the same shall be null and void and not binding on the company and this resolution was also filed with the Registrar of Companies. Even though the petitioners contend that shares were allotted against the application money in a board meeting held on April 18, 1997, no business was transacted in that meeting. The three directors of group 'B' wrote to petitioner No. 1, immediately after this meeting, on April 19, 1997, that after discussions on matters other than the agenda items, group 'B' directors had left the meeting even without approvin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such cannot be impugned. 14. In relation to the composition of the board, it is an admitted fact that all the four petitioners were appointed as additional directors on January 15, 1996, and their term was to expire in the next annual general meeting. In the annual general meeting held on September 30, 1996, the general body did not appoint petitioners Nos. 2 and 4 aS directors while it appointed petitioners Nos. 1 and 3 as directors. In law, additional directors can hold office only up to the date of the immediate next annual general meeting and since the two petitioners were riot appointed as directors by the general body, they ceased to be members of the board. After their exit, the board had only five directors. In regard to the statement of respondent No. 2 before the police (exhibit 0, page 172 of the petition), that when the statement was given on April 12, 1997, there were seven directors in the company, it is to be noted that respondent No. 2 has, in the statement dated June 4, 1998, stated that at the time when the statement was recorded on April 12, 1997, his mental condition was not proper. Therefore, no cognizance of the statement made on April 12, 1997, in regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and taking into consideration the judgment of the Bombay High Court, the Company Law Board should come to a conclusion that the petitioners have not been able to establish this ingredient and dismiss this petition. Learned counsel for the respondents stated that this petition has been filed for oblique motive with a view to extort huge amount from the respondents. Since the petition is for an oblique purpose, the same should be dismissed as held in Bellador Silk Ltd., In re 1965 1 All ER 667 (Ch D). Even assuming that there are certain omissions in giving proper notices for the meetings, then, he submitted, that such illegalities need not be considered to be oppressive meriting grant of relief. For this proposition, he relied on Chander Krishan Gupta v. Pannalal Girdhari Lal (P.) Ltd. [1984] 55 Comp Cas 702 ; [1996] 5 CLJ 565 (Delhi). He further submitted that it is not the respondents who have injured the company but petitioner No. 1, who tried to hijack the company by purported allotment of shares to members of group 'A'. It is petitioner No. 1 who has always acted against the interest of the company by resorting to various misdeeds of filing police complaints, stopping ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner No. 1 in regard to the understanding/agreement. Further, the fact that group 'A' has admittedly invested ₹ 29 lakhs as against ₹ 25.3 lakhs invested by group 'B' shows that equality in contribution seems to have been agreed to by the parties. This, taken together with the fact that in the board meeting held on January 15, 1996, as admitted by the respondents, petitioners Nos. 1 to 4 Were appointed as additional directors, shows that group A was to have majority on the board. There is no explanation from group B as to why a 20 per cent shareholder should have four representatives on the board while the respondents' side controlling 80 per cent shares should have only three directors. Further, we also note that the authorised capital of the company was increased to ₹ 1 crore on December 7, 1995, and in a board meeting held on December 8, 1995, the board also resolved to issue further shares and accept share application money and from January to March, all the five shareholders have invested money in the company as indicated elsewhere in this order--the contribution by group A to about 50 per cent and group B to about 50 per cent of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s report, we find that Form No. 32 was filed on April 3, 1997, i. e., nearly six months after the resolutions were passed, that is after the disputes among the parties had started. This Form only indicates about the appointment of three directors and does not indicate the cessation of petitioners Nos. 2 and 3 as directors. Further, the normal procedure in case of additional directors coming up for election in the immediate annual general meeting after their appointment as additional directors is that, the agenda itself would contain proposals for their appointment as regular directors. In this case, if their names had been proposed and the general body had not approved the same, then, there should have been resolutions to that effect. Nothing has been produced before us in this regard. One other circumstance which makes us believe the petitioners is that, when the board met on April 18, 1997, it is the version of the respondents that they left the meeting before any agenda item was taken up. In this meeting, as per the attendance slip at exhibit B-1, seven directors had attended the meeting and the respondents dispute the signatures of petitioners Nos. 2 and 3. If only five directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respective groups is a bone of contention between the two groups. It is not that the respondents dispute the holding of the board meeting on April 18, 1997, but they question the alleged allotment on various grounds. One is that, the agenda for the meeting did not contain the business of allotment of shares and if any decision had been taken then it was without the consent and knowledge of the directors of group B as they had left the meeting before any agenda item was discussed. They also question the validity of the allotment in view of the decision of the extraordinary general meeting on April 15, 1997, that the board would not allot any shares without the approval of the general body. They even doubt whether any decision to allot shares was taken at all in that meeting as the return of allotment was filed much after the prescribed time. The petitioners contend that there was no extraordinary general meeting of April 15, 1997, and if there had been one, then the same is invalid as petitioner No. 1 did not get any notice for that meeting. Even otherwise, it is also contended that the respondents have not produced any minutes of the board meeting in which the decision to convene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' directors, they left the meeting before any item in the agenda was discussed while, as per the draft minutes (exhibit No. 1} the group 'B' directors left the meeting after allotment of shares was decided. Since, we have already held that there was on extraordinary general meeting on April 14, 1997, in which decision was taken that shares against the application money would be allotted only with the approval of the general body, we doubt very much whether the group 'B' directors could have been parties to the decision to allot shares in the board meeting. However, as we have pointed out earlier on April 18, 1997, there were seven directors and even in the absence of the three group 'B' directors who attended the meeting and if they had left the meeting, the other four directors could have taken any decision as there was proper quorum. However, we note that the petitioners have not produced any evidence to show that the agenda for that meeting had the item of allotment of shares. Since it is a very important item of business, the decision to allot shares could not have been taken without proper notice to group 'B' directors who controlled, on tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name of the transferee to whom the member is bound to transfer upon receiving the consideration. In case the directors do not act within sixty days, the member proposing to transfer, is at liberty to transfer the shares to any person subject to the approval of the directors. In the present case, respondents Nos. 7 to 9 gave individual notices to the company expressing their intention to transfer the shares to respondents Nos. 10 to 21 on April 10, 1998 (exhibits Nos. 18 to 20 at page 142-144). On April 13, 1998, the board approved the same in principle and on April 29, 1998, the board gave approval for the transfer. The contention of the petitioners is that the board could not have considered these transfers on April 13, 1998, i. e., within three days from the date of notice from respondents Nos. 7 to 9 as the minimum notice that is required for any board meeting is seven days. The contention of the respondents is that, on that day only 'in principle' approval was given and actual approval for transfer was given only on April 29, 1998. Even a cursory glance at how the transfer has been effected would indicate that the provisions of the articles have not been complied with i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t No. 2 (page 174 of the petition) that in his capacity as a director he had issued the notice for the meeting. If he had issued the same on his own without board approval, then the same is not in accordance with regulation 48 of Table A, which the company has adopted. It is also seen that the provisions of Section 284 of the Act have not been complied with, as also the requirements of Section 190 according to which special notices have to be issued in cases where the Act prescribes so. Section 284 specifically requires special notice in case of removal of directors. Thus we find that the removal of the petitioners has taken place in a meeting without proper notice, without following the provisions of Sections 284 and 190 and in violation of the provisions of Table A (regulation 48). While violation of statutory provisions per se may not be an act of oppression, but if the same results in certain representations given in the board by virtue of shareholding being defeated, then, it is ah act of oppression. Therefore, we are in full agreement with learned counsel for the petitioners that the illegal removal of the group 'A' directors from the board was an act of oppression. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e parties to the present proceedings and they have not chosen to file any reply to the petition wherein there are prayers to this effect and we also note that they were represented, in some hearings, by an advocate who did not argue on their behalf. 25. The last and final issue relates to appointment of respondents Nos. 3 to 6 as additional directors of the company in the board meeting held on April 29, 1998. Petitioners Nos. 1 and 4 who were undisputedly directors before that date, contend that they did not receive any notice for this meeting. Even though, according to the company, they were removed as directors in the extraordinary general meeting held on that date, yet, at the time when any notice for the meeting would have been issued, the company could not have presumed their removal and thus not issued any notice for this meeting to the two directors. Further, the appointment of the additional directors and simultaneous resignation of two group 'B' directors would automatically mean that the three additional directors become majority on the board, thus, completely taking the company out of the original five shareholders. Therefore, we have no hesitation to come to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;A' since there is no pre-emptive provision in the articles. According to him, whatever has been done by the group 'B' members, it was for the ultimate benefit of the company and as such the petitioners cannot complain about the same. 28. It is a classic case falling squarely within the provisions of Section 397 brought about by the conduct of the parties. It is abundantly clear from the various issues that we have examined that, the one point programme for both the groups seems to have been to gain control of the company at the cost of the other, irrespective of the fact whether the provisions of the Act/articles are followed or not. Both the groups did not seem to have bothered about the interest of the company in the process. The company was kept locked, the bank accounts were frozen and no activity was being carried on other than finding ways and means to oust the other group from the company. 29. The foundation of the petition is that the company was to be run on partnership principles and that there was an agreement relating to the shareholding and directorship. It is always a legal issue as to whether any private agreement between the shareholders, withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possible to lay down specific instances which alone would be considered to be acts 6f oppression. Whether an act is an oppression or not would depend on the facts of a case. Since Section 397/398 proceedings are alternative to winding up proceedings, it is not that only those grounds which are Considered to be just and equitable in a winding up proceedings, could be the grounds in a Section 397/398 petition. In the Bombay proceedings, the court held that since there was no deadlock in the management; the company could not be wound up on the just and equitable ground. It did not examine whether allegations of oppression had been established. That is why, the court itself suggested that the petitioners may initiate the present proceeding under Section 397/398. It is worthwhile referring to George Meyer v. Scottish Co-operative Wholesale Society [1954] Scottish Cases 381 referred to in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC) wherein it was held : Although the word 'oppressive' is not defined, it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the ouster of group 'A' from the management and reduction in their percentage shareholding notwithstanding the fact that still their investment, being ₹ 30 lakhs, is the largest in the company compared to the outsiders who have invested only about ₹ 10 lakhs. The petitioners' case rests oh partnership, joint management and ouster, all of which have been established. In this connection it is worthwhile referring to the decision of R.N. Jalan v. Deccan Enterprises (P.) Ltd. [1992] 75 Comp Cas 417, 438 wherein the Andhra Pradesh High Court held that change in the pattern of shareholding and subsequent changes in the board of directors would prejudicially affect the interest of the shareholders and accordingly, since the company was running profitably, the court appointed an administrator to manage the company by superseding the board. Therefore, we are of the view that the grounds on which the petition has been filed fully merit winding up of the company on the just and equitable ground in these Section 397/398 proceedings and that winding up of the company is prejudicial to the interest of the shareholders. 32. Having held that the petition is maintai ..... X X X X Extracts X X X X X X X X Extracts X X X X
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