TMI Blog1993 (7) TMI 357X X X X Extracts X X X X X X X X Extracts X X X X ..... is the son of respondent No. 2. Respondent No. 4, Smt. Sarda Devi Choudhry, is the wife of respondent No. 2. Respondent No. 5, Nirmal Choudhry, is the son of respondent No. 6 and has received shares out of the further shares issued by Ringtong. Respondent No. 6, Subhkaran Choudhry, is the brother of respondent No. 7 and is a shareholder and director of the company. Respondent No. 7 is described in the petition as the managing director of Ringtong and he and respondent No. 8, Registrar of Companies, are treated as pro forma respondents in the petition and no reliefs are claimed against them. Prior to the issue of further shares which is the subject-matter of the petition, the petitioner held 34.28 per cent. of the shareholding of Ringtong, respondents Nos. 2 to 4 and daughter of respondent No. 2 held 30.56 per cent. and respondent No. 7 and his wife held 31.93 per cent. The company is the owner of a tea estate known as Ringtong Tea Estate situated in Distt. Darjeeling. 3. It is alleged that in the early part of 1991, it came to the notice of the petitioners that serious irregularities and illegalities had been committed by respondents Nos. 2 and 3 in the matter of sale of tea as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of further 950 shares in favour of respondents Nos. 2 and 3 on May 2, 1991, was also filed on the same date, i.e., September 13, 1991. Form No. 32 alleging appointment of respondent No. 4 and one Smt. Triveni Devi Choudhry as directors of the company on August 9, 1991, was filed on August 28, 1991. Another Form No. 32, dated September 9, 1991, alleging the appointment of respondent No. 6 as director on September 2, 1991, was filed on September 12, 1991. It has been alleged that the representations contained in these forms are false and fictitious and these forms have been filed as an afterthought with a mala fide view to give the purported issue and allotment of shares the colour of authenticity. 4. On May 1, 1992, Shri S. Sarkar, senior counsel, appearing on behalf of the petitioners, submitted that the increase in the issued share capital of the company and allotment of further shares to respondents Nos. 2 to 6 were in violation of article 31 of the articles of association of the company and also in violation of the terms of settlement before the High Court in Suit No. 642 of 1991. He further stated that by the purported allotment of shares, the shareholding of the petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the respondents are likely to affect the interest of the petitioners and, therefore, requested for the following reliefs : (1) That cheques to be drawn by the company should be countersigned by the auditors of the company. (2) That sale of tea should be through public auction and no tea should be sold through private deals. (3) To restrain the directors from dealing with the assets of the company except in the normal course of business. (4) To restrain Shri Nirmal Kumar Bansal, son of respondent No. 6, who is alleged to have been appointed as director in the extraordinary general meeting held on April 16, 1992, to act as director of the company. 6. We heard Shri P. C. Sen, senior counsel, appearing for respondents Nos. 1 to 4, and Shri R. C. Nag, senior advocate, appearing for respondents Nos. 5 and 6. They volunteered that they would file all the replies by May 28, 1992, and as the case was scheduled to be heard on June 10, 1992, there was no necessity for passing any further interim orders at this stage. It was also agreed by the respondents that they would deal with the assets of the company only in the normal course of business and Shri Nirmal Kumar Bansa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of articles 7, 8 and 72 of the articles of association, a board resolution authorising respondent No. 2 to offer the unsubscribed portion of shares to such shareholders, family members and relatives as he may deem fit and proper, was passed. Pursuant to such second offer, applications were received from the following respondents for allotment of shares indicated against each : 1. Respondent No. 2 1,150 shares 2. Respondent No. 3 800 shares 3. Respondent No. 4 200 shares 4. Respondent No. 5 50 shares 5. Respondent No. 6 50 shares' 8. The consideration was duly received by the company and these shares were allotted to the respondents by a board resolution dated March 25, 1991. As a result of this, respondent No. 2 came to hold 1,750 new shares. The balance 950 shares were again offered to the remaining shareholders around May 2, 1991, and respondent No. 2 again applied for 750 shares and respondent No. 3 applied for 200 shares and these 950 shares were allotted by a board resolution dated May 2, 1991, The returns of such allotment were duly filed with the Registrar of Companies. The register of members of the company had been removed by the petitioners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present petition initiated in breach of the said agreement. The family arrangement has been acted upon by the respondents and the petitioners were allotted other family properties and businesses by virtue of the said agreement and pursuant thereto the petitioners gave up their interests in the respondent-company and the respondents are managing the affairs of the company. Respondents Nos. 4 and 6 were co-opted as directors at the board meetings held on August 9, 1991, and September 2, 1991, and returns in Form No. 32 were duly filed with the Registrar of Companies, Calcutta, and they are since then lawfully acting as directors. Smt. Triveni Devi Choudhry ceased to be a director pursuant to the said terms of settlement put in the Calcutta High Court on September 24, 1991, and the fact of cessation of such director was duly recorded in Form No. 32 filed with the Registrar of Companies, Calcutta, on October 28, 1991. 9. Shri P. C. Sen, senior advocate for respondents Nos. 1 to 4, raised preliminary objections regarding the maintainability of the petition under Section 397 of the Act pointing out that the jurisdiction of the Company Law Board under Section 397 is a discretionary j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out that the main allegation in the petition is only regarding the issue of further shares. In this context, Shri Sen argued that if an alternative remedy is available the petitioner cannot seek winding up on the just and equitable ground. Shri Sen pointed out that in this case relief could be obtained by way of an application under Section 111. Shri Sen referred to the decision in Gover Rustom Irani v. Property Company Pvt. Ltd. [1976] Tax LR 1682 (Cal), wherein recourse to a discretionary relief under Section 397 by a petition was not allowed in view of an alternative remedy being available under Section 186. 11. Referring to Pennington's Company Law, page 715, Shri Sen pointed out that, for obtaining a relief under Section 397 which is on the same lines as Section 210 of the English Companies Act, the petitioners must show good faith on their part and there should not be any delay in approaching the Company Law Board under Section 397. Shri Sen pointed out that the petitioners have not come with clean hands, as the family settlement is suppressed in the petition. Mentioning of the family settlement was important as the petitioners were supposed to go out of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petition, he has assumed the role of a co-petitioner, which, in law, he is not entitled to do. The petitioner should have filed a proper consent letter from respondent No. 7 to make an application under Section 399(3) on behalf, and for the benefit, of respondent No. 7. An action under Section 398 is a derivative cause of action giving locus standi to a member ; and under Section 397/398 a member's right as a shareholder could be agitated but a complaint regarding a right as director is not actionable. Similarly, disputes about a family settlement are not actionable under these provisions as the company is not a party to the family settlement and in support of this, he referred to the decision in Shanti Prasad Jain v. Kalinga Tubes Ltd., AIR 1965 SC 1535 ; [1965] 35 Comp Cas 351. Shri Nag further stated that respondent No. 7 is claiming to represent the company and a company can never be the supporter of a petition under Section 397/398. 14. Rebutting the arguments of counsel for the respondents on the maintainability of the petition, Shri Sarkar argued that, so far as the contention that no case has been made out for the winding up of the company on the just and equitab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat in a suit the court cannot order rectification of the register of members or reduction of capital or grant a scheme for the management of the affairs of the company. Shri Sarkar also pointed out that in proceedings under Section 397, reliefs are not confined only to the pleadings and reliefs which are even contrary to the provisions of the Act and articles of association can also be granted. Shri Sarkar also pointed out that there is no proceeding pending in which the subject-matter regarding the issue and allotment of shares is being agitated. 17. Shri Sarkar also challenged the arguments advanced by counsel for the respondents that this is a matter arising purely out of a family dispute and that the petition is apparently filed by Santosh Kumar and Sajjan Kumar, with the ulterior motive of achieving control over Ringtong Tea Estate. He vehemently contested the arguments advanced by the respondents that the petitioners have not taken any interest in the management of the company and, therefore, are not entitled to any relief. Shri Sarkar submitted that this contention is belied by the averments made in the affidavit filed on behalf of respondents Nos. 1 to 4 where reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... airs of the company. As regards the absence of good faith and suppression of the family settlement, it is no doubt true that the settlement is not mentioned in the petition but neither has any interim order been obtained by the petitioner nor is this Bench deceived by concealing this fact. Regarding the other preliminary points of maintainability of the petition, we do not think that such threshold part adjudication of the petition is warranted by the facts of the case. We, therefore, hold that the petition is maintainable. 19. During the course of the proceedings, respondents Nos. 1 to 4, filed two applications, namely, C. A. No. 55 of 1992, on August 6, 1992, and C. A. No. 66 of 1992, dated September 7, 1992, on September 9, 1992. In C. A. No. 55 of 1992, the applicants, inter alia, prayed for the production of documents relating to the inspection taken on April 9 and 13 of 1992, and relating to receipts Nos. 72721 and 72763 issued by the Registrar of Companies, Calcutta. In the hearing held from August 5, 1992, to August 7, 1992, we directed that a copy of the application be served on the petitioners and the Registrar of Companies. But till the final hearing held on March 1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r stated that the resolution purported to have been passed at the board meeting on February 2, 1991, is illegal, inasmuch as article 31 required that, the unsubscribed portion of the shares can be offered only to the other shareholders and not to the family members and relatives at the complete discretion of respondent No. 2 as has been resolved, vide this resolution. He also pointed out that the resolution dated February 2, 1991, does not specify the quantum of the unsubscribed portion of shares. There is no mention either of the 600 shares already subscribed by and allotted to respondent No. 2. It will be seen from the board resolution dated March 25, 1991, that all the 2,850 shares were allotted to only one group and respondent No. 5 and respondent No. 6 who were also allotted shares were not the original shareholders and even the subsequent allotment of further 950 shares on May 2, 1991, was made to the same group. No application of respondent No. 2 for allotment of 600 shares referred to in para 24(b) of the reply of respondent No. 2 has been produced. Shri Sarkar further pointed out that in respect of the allotments made on March 25, 1991, in para 25(d) of respondent No. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llotment of shares, though the need of the company to have capital resources was established, on the ground that the primary object of such allotment was to destroy the existing majority and to create a new majority. Shri Sarkar pointed out that the directors' power is a fiduciary power and it has to be exercised for the benefit of the company. He then referred to the decision in Clemens v. Clemens Brothers Ltd. [1976] 2 All ER 268 (Ch D) in which in a dispute between the aunt who was a director holding 55 per cent. of shares and her niece who held the balance shares of the company, it was held that though the resolution passed by a majority for the issue of shares was legal, it ought to be set aside as it was considered oppressive because the issue of shares resulted in further reduction of the shareholding of the niece. Shri Sarkar argued that following this decision, even if a resolution allotting further shares is legal, if it results in oppression, it ought to be set aside as a majority shareholder was not entitled as of right to exercise the majority votes in any way and it is subject to equitable considerations, which might make it unjust to exercise it in a particular w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... porting the petition, has been converted into a minority by allotment of shares exclusively to one group without following the prescribed procedure and, therefore, relief should be given by cancelling the allotment of shares, restoring status quo prior to such allotment and ordering the calling of an annual general meeting to decide who should be in the management. 23. On behalf of respondent No. 7, Shri Mukherjee stated that respondent No. 7, father of the petitioner and respondent No. 2, is the founder of the company and by the allotment of shares which is under challenge, his shareholding has been reduced. He further pointed out that respondent No. 7 was the managing director of the company, but now he has been removed from the board of directors. Shri Mukherjee challenged the increase in the share capital on the grounds that no notice was given of the board meetings in which increase of share capital was considered, no board meetings were held and the calling of extraordinary general meeting was also done without following the due procedure prescribed under the Companies Act. He pointed out that the Supreme Court has already held that a resolution passed in a board meeting o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointed out that there is no evidence given -regarding completion of several consequential steps, after the decision to increase the share capital was taken, like issue of letter of offer, letters of successive offers, payment of share application money, decisions of the board regarding successive offers, timely filing of return of allotment, etc. 24. Regarding the contention of the company and respondent No. 2 about removal of respondent No. 7 as director, he pointed out that the documents filed on behalf of Ringtong clearly show that respondent No. 7 signed the power of attorney as managing director on April 1, 1991, while the company now claims that he has been removed as director in August, 1990. He also pointed out that reliance of respondent No. 2 on the alleged family settlement cannot be taken into consideration as he has challenged the family settlement in the Calcutta High Court. 25. Shri P. C. Sen, appearing on behalf of respondents Nos. 1 to 4, stated that as per the petitioner, the provocation for the present petition was the newspaper advertisement dated April 20, 1992, but it is unbelievable that on the same date the petitioner obtained a certified copy of Form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resent at the board meeting held on April 24, 1990. He further stated that the question whether other board meetings were held or not and what resolutions were passed at these meetings can be resolved only by referring to the statutory records or by recording evidence. With regard to violation of the articles, Shri Sen mentioned that considering the language of article 7 and Article 31, Article 31 does not apply. Even if it is presumed that it is applicable, since the offers were not accepted by the existing shareholders, the matter goes to the domain of article 7. Shri Sen further pointed out that as held in Holmes v. Keyes (Lord) [1958] 28 Comp Cas 419 (CA) articles are to be regarded as a business document. In this connection, Shri Sen also referred to a clarification issued by the Department of Company Affairs, vide its letter No. 2(27)/ 56-PR, dated October 4, 1976, according to which any allotment of the unsubscribed portion of issued shares will not amount to an increase in the subscribed capital of the company by issuing new shares. According to Shri Sen, Article 31 applies to cases where the authorised capital is increased and it does not apply to further issue of capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1974] AC 821 (PC) and Clemens v. Clemens Brothers Ltd. [1976] 2 All ER 268 (Ch D), cited by Shri Sarkar were suit matters and are not squarely applicable to this case as the facts differ. As regards the decision in Parmeshwari Prasad Gupta v. Union of India, AIR 1973 SC 2389 ; [1974] 44 Comp Cas 1 cited by Shri Mookherjee, in respect of notice of the board meeting, Shri Sen pointed out that any subsequent meeting can ratify a decision taken in an earlier meeting. 28. With regard to the allegation about the illegal increase in share capital in violation of Article 31, Shri Nag, appearing on behalf of respondents Nos. 5 and 6, argued that issues, coming within the directorial, domain cannot be interfered with by members. According to him, the need for capital, mode, manner and timing of issue of capital are management activities, which cannot be challenged by members unless mala fides are proved and as alternate remedy is available under Section 111, the impugned issue of shares cannot be a just and equitable ground for winding up under Section 397/398 which is the extraordinary remedy. He pointed out that there is no pleading in the petition that there was any understanding/agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construction should be followed in order to resolve, if there is any apparent or otherwise inconsistency in the provisions. He argued that while considering the interpretation of two articles, the latter article should be ignored if there is any drafting defect in the articles leading to any ambiguity or inconsistency. He argued that the articles of association govern internal management and have to be treated like a business document and should be construed to give business efficacy. 29. In reply to the arguments advanced by S/Shri P. C. Sen and R. C. Nag, counsel for the respondents, Shri Sarkar referred to the rejoinder filed by the petitioners and contended that the documents relied on by the respondents with regard to the issue and allotment of further shares and co-option of directors are fabricated and this is clear from the pleadings filed in the suit instituted in the Calcutta High Court as there is no denial with regard to shareholding indicated therein or composition of the board of directors as on September 6, 1991, the date of institution of proceedings before the High Court. The respondents' claim that all the changes have taken place before September 6, 1991, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for by the petitioner can be obtained by alternative remedy by filing a suit. Shri Sarkar pointed out that the reliefs contemplated in Section 397 like a scheme of management, etc., cannot be granted in a suit and the petitioner has not filed any suit in respect of the issue and allotment of shares. He also challenged the submissions made on behalf of the respondents that if at all any case for relief is made out, the relief to be granted would be by way of purchase of shares of the petitioner and in this respect the respondents have relied on the decision given in Ramashankar Prosad v. Sindri Iron Foundry (P.) Ltd., AIR 1966 Cal 512. Shri Sarkar pointed out that sale of shares is not the only remedy in such case, where oppression is proved. In the case of illegal issue and allotment which is oppressive, generally the relief that is granted is of cancellation of such allotment and then holding the meeting of the members on the basis of shareholding existing prior to such illegal allotment. Shri Sarkar also pointed out that the contention of the respondent, that by reason of the family settlement of October 18, 1991, no relief should be granted, is wholly misplaced as neither the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid proportion and, if any of the shareholders declines to acquire any of the shares thus offered to him, the company shall again offer the shares declined to the remaining shareholders in proportion to their respective holdings and in this way by successive offers when necessary the shares will be distributed. 32. Considering the language of both these articles, various court decisions cited by the learned advocates and following the rule of harmonious interpretation of apparently conflicting provisions, we are inclined to agree that Article 31 will apply to the cases where authorised capital is increased and further shares are allotted out of the increased authorised capital. It will not apply for further issue of capital within the existing authorised capital which is in the domain of Article 7. Articles of association are to be regarded as a business document and have to be given a meaningful interpretation considering the various provisions in the articles of association as well as in the Companies Act. In this connection, we find that Section 105C of the Indian Companies Act, 1913, which contained substantially all the provisions that are to be found in Section 81( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointly fighting this matter against respondents Nos. 2 and 3. The family settlement dated October 18, 1991, is signed by the petitioner, respondent No. 2 and respondent No. 7. This fact of signing and arriving at the settlement is not denied by the parties. However, respondent No. 7 has challenged the family settlement and while the trial court has dismissed it on July 3, 1992, an appeal against the order is filed before the Calcutta High Court on July 6, 1992. The arguments advanced by the respondents, to point out that the affidavits supporting the petition and the affidavit filed on behalf of respondent No. 7 are filed by persons who were not in the know of the affairs of the company but are filed by somebody who has nothing to do with the business of the company and for some other ulterior motive, are not effectively met by the petitioner. The petitioner was earlier in the management and according to respondent No. 7 he has signed the documents as managing director as late as April 1, 1991, i.e., after the allotment on March 25, 1991, for which the process was started as early as on April 24, 1990. The petitioners were unable to state what was the last occasion when they partic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany cannot function properly if these two warring groups continue to hold the shares and also share the management powers. The facts in this case also clearly point out that there is no chance of redressal of the grievances in the domestic forum of the company. While granting the reliefs under Section 397, the wide powers that are given to the Bench are to be exercised with the purpose of bringing to an end the matters complained of . The respondents have laid a great stress on the factum of family settlement arrived at between the parties according to which the shares belonging to the petitioner were to be transferred to the other parties to the dispute. During the hearing, respondents Nos, 2 and 3 have categorically stated that if ordered, they are ready to buy the shares of the petitioner. However, the petitioner was not willing to sell the shares and insisted on granting a relief for the cancellation and issue of allotment of 3,800 shares and calling a shareholders' meeting to elect a new board of directors to run the company. In our opinion, such a course of action would not result in putting an end to the dispute which cannot be settled in the domestic forum of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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