TMI Blog2006 (3) TMI 777X X X X Extracts X X X X X X X X Extracts X X X X ..... hares of ₹ 100/- each in the name of the second petitioner and her nominees and rectify suitably its register of members (as per CA 150/2005); (iii)to order forfeiture of all shares standing in the name of the second respondent; (iv)to order forfeiture of 1000 shares standing in the name of the third respondent; (v)to impose penalty of ₹ 25 lakhs each on the respondents 2 3; and (vi)to restrain the respondents 2 3 from participating in the affairs of the Company as directors of the Company. 2.Shri B.C. Thiruvengadam, learned Counsel appearing for the petitioners, before initiating his arguments on the merits of the company petition submitted that Shri Udaya Holla, senior partner of M/s Holla Holla had initiated certain proceedings, viz. C.P. Nos.21/92 and 21/92 before the Karnataka High Court on behalf of the first petitioner against the respondents 1 to 3 herein and others. Shri Udaya Holla, learned Senior Counsel, having had received confidential information from the first petitioner and filed under his instructions the petitions before the High Court against the respondents herein, ought not to have subscribed the name of his firm for and on beha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstruct the building including the nursing homes and let them out on rental basis . The partnership firm constructed a building on the land owned by it, which was given on lease in April, 1981 to the Company for running the hospital under the name and style of Lakeside Medical Centre and Hospital . The partnership came to be reconstituted from time to time and finally in July, 1984 with Nanjundiah group maintaining 8/17th share, Kincha group 3/17th share, Ganesh group 4/17th share and others 2/17th share. The profit sharing of the partners has been maintained among the shareholders of the Company in the same ratio from time to time. Accordingly, shares were allotted to members of certain groups in November 1989, thereby the shareholding pattern in the Company became identical to the profit sharing ratio of the partners in the partnership firm, which was maintained till the impugned allotment made on 16.05.2005. The petitions in CP 21/1992 and 22/1992 filed by the first petitioner before the High Court of Karnataka would reveal the group concept among the shareholders of the Company. The petitioners have ascertained the shareholding pattern from the statements filed in the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the second petitioner in her communication dated 27.07.2005, with a request to transmit the shares of deceased Dr.Balaram in terms of the amended succession certificate. The succession certificate was further amended as per the court order dated 03.01.2006, by which the second petitioner has been empowered to get the shares transferred in her name. The succession certificate cannot be questioned and is binding: on the Company. Thus, the first petitioner holding 250 shares and second petitioner empowered to obtain the transfer of 500 shares of the deceased Dr.Balaram constitute 17% of the issued and paid up capital of the Company, satisfying the requirement of section 399 of the Act. Moreover, the legal representatives of a deceased member whose name is in the register of members are entitled to maintain a petition in respect of oppression and mismanagement in the affairs of the company under sections 397 and 398, as held in M/s World Wide Agencies Pvt. Ltd. v. Mrs. Margarat T.Desor - AIR 1990 SC 737 and Kamala Rani Pandit v. Kalitara Glass Moulding Works (P) Ltd. [1995] 3 Comp LJ 218 (CLB). The validity of a petition must be judged on the facts as they were at the time of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was subsequently interpolated by canceling the entries made in the register of members of the Company with a view to continue to exercise control over the Company. The respondents 2 to 3 having tampered the minutes of the board meeting, register of members and other documents must be prosecuted by the CLB in the interest of justice. The minutes of the board meeting dated 16.05.2005 produced by the Company without carrying the signature of the fourth respondent and without reflecting a true and fair picture of the proceedings of the board meeting, especially when they do not reveal the resolution approving the transmission of shares; consequent entries made in the register of members; endorsement of the transmission on the share certificates and its subsequent cancellation, are not valid. Shri Thiruvengadam, learned Counsel pointed out that the second respondent in collusion with alternate director of the third respondent allotted 750 equity shares of ₹ 100/- each to the second respondent at the board meeting held on 16.05.2005, without offering to other shareholders and inspite of the stiff resistance from the fourth respondent. The fourth respondent being one of the promo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply and solely for the purpose of consolidating and improving their voting power to the exclusion of the existing majority shareholders, the court cannot allow exercise of such powers by the board of directors; (c) PIK Securities (P) Ltd. v. United Western Bank (P) Ltd. [2001] 4 Comp LJ 81 that when the increase in the share capital is with an ulterior motive and not for the bonafide needs of the Company, but, in the garb of raising capital, shares are issued either to consolidate one's position or with a view to create a new majority or to convert a majority into a minority, a petition under section 397 or section 398 can be maintained; (d) Mrs. Uma Pathak v. Eurasian Choice International ( P) Ltd. [2004] 3 Comp LJ 452 that the board of directors must discharge the fiduciary responsibilities in the interest of the company and not for any ulterior purpose and that if the shares are issued with the sole object of creating a new majority or with the view to convert a majority into a minority, then the action of the board of directors is not only in breach of the fiduciary responsibilities, but also a grave act of oppression against the existing majority; (e) Kobian Pte Limite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (d) failure to credit any income earned by the second respondent in the Company's premises from private practice; (e) negligence in execution of the building contract; and (f) non-maintenance and attempted sale of the hospital property. These acts of mismanagement would show that the affairs of the Company are being conducted in a manner prejudicial to the interests of the Company and its shareholders, which warrant the intervention of the CLB, in exercise of the powers under section 398. 3.Shri Nandakumar, learned Counsel representing the respondents 1 to 3 at the outset contended that Sri Udaya Holla, senior partner of Holla Holla, whom the first petitioner briefed in the earlier company petitions neither signed vakalat nor is he appearing against the petitioners in the present proceedings. The earlier company petitions were withdrawn in the year 1992 and, thereafter, Sri Udaya Holla has not been engaged by the first petitioner, including in the civil suit filed in the year 1993 against the Company. There is no bar under law for a counsel to appear on behalf of a party against whom he was appearing in a different set of proceedings. The petitioners have chosen their Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... walla - AIR 1976 SC 565 that there must be materials to show when just and equitable clause is invoked, that it is just and equitable not only to the persons applying for winding up but also to the company and all its shareholders; (d) In re. Thakur Hotel (Simla) Company Private Ltd.- [1963] 33 CC 1029 that an order under section 397 granting relief against oppression on the application of some of the members of the company can be made only if the court is satisfied, that the company's affairs are being conducted in a manner oppressive to any member or members, and, secondly, that the facts of the case are such that it would be just and equitable to make an order for winding up of the company, but the making of such an order would unfairly prejudice the members. Unless both these conditions are satisfied an order under section 397 should not be made; (e) Sayed Muhammed Mashur Kunhi Koya Thangal v. Badagara Jumayath Palli Dharas Committee [2004] 7 SCC 708 that according to the cardinal principles of pleading facts must be pleaded, in the plaint and established. Any grant of relief dehors the pleadings in the plaint is impermissible; and (f) M.Chinnasamy v. K.C.Palanisamy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the civil court dated 03.01.2006 amending the succession certificate is not produced before the Bench, which will throw light on the rights of the second petitioner in respect of the shares. By virtue of sections 9 10 of the Hindu Succession Act, the shares of Dr.Balaram, upon his. demise devolved on his legal heirs, being the second petitioner and two daughters, thereby became the joint owners, as claimed by them in the application No. 150/05. The object of the succession certificate in lieu of nomination is to recover interest or dividends and does not confer title on the holder and not a decree or order, taking away the right of succession as held in Employment Officer, Mandya v. S.Sevarinathan - AIR 1986 Karnataka 167. The Supreme Court in Smt.Sarbati Devi v. Smt. Usha Devi - AIR 1984 SC 346 that a nominee of life insurance policy does not get absolute right to the amount due and that it only indicates the hand which is authorized to receive the amount on payment of which the insurer gets a valid discharge of its liability under the policy. The amount, however, can be claimed by the legal heirs of the assured in accordance with the law of succession governing them. The order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CLB. The Karnataka High Court in Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (Pvt.) Ltd. - I.L.R. 1989 KAR 2603 held that the relief under sections 397 and 398 is an equitable relief, which is entirely left to the discretion of the court and mere proof of the allegations of oppression and mismanagement would not entitle the petitioner to the reliefs unless he approaches the court in good faith and must come with a clean record. In Nurcombe v. Nurcombe and another [1985] 1 All ER 65 it has been held that a court is entitled to look at the conduct of the plaintiff to satisfy itself that the plaintiff is a proper person to bring the action. If the plaintiffs conduct is so tainted as to bar equitable relief or if there has been an unacceptable delay in bringing the action, the plaintiff might well be held not to be a proper person to bring the action. In Desein Private limited v. Elektrim India Limited [2001] 3 Comp LJ 459 , it has been held that the Company Law Board, in exercise of equitable jurisdiction has to take into consideration the conduct of the parties and if a person has been a party to the decisions he cannot impugn those decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Karnataka Government by implementing his recommendations and honouring him with Karnataka Rajya Parisara Prashasthi - 2000 by the Kamataka Government. The hospital attracted many medical dignitaries and noble laureates from abroad under the stewardship of the second respondent. The Company could achieve national and international recognition, repute and accolades on account of the untiring efforts, contribution and selfless efforts made by the second respondent. The name and reputation of the Company are entwined with those of the second respondent. A number of organizations from India as well as abroad, in appreciation of the research work conducted in the hospital by the second respondent, have assigned research work, bringing laurels and glory to the hospital. The hospital, on account of the expertise and efficiency of the second respondent, is getting people for exchange training programme from other countries. The hospital has been recognised by the National Board of Examinations, Nursing Council of India, Rajiv Gandhi University of Health Sciences and Paramedical Board of Karnataka, all due to the efforts and involvement of the second respondent. The Indian Medical Associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me. His very conduct will demonstrate that his application under sections 397 and 398 has been out of malafide intention. The allotment of impugned shares in recognition of the services rendered by the second respondent is within the powers of the board of directors vested in article 6 of the articles of association of the Company. The board meeting which was to be convened on 04.05.2005 to consider, inter-alia, the agenda in relation to the allotment of shares in favour of the fourth respondent was adjourned at the instance of the fourth respondent to 16.05.2005. Thus, the fourth respondent was aware of the proposal of allotment of shares to the second respondent. The forth respondent who was appreciative of the second respondent at the board meetings, for his selfless services, showering accolades, had decided under influence of some vested interest to defer consideration of the second respondent's application for allotment of the unallotted 750 shares in the board meeting held on 16.05.2005, compelling the remaining directors to approve the proposal. There are neither groups among the subscribers to the partnership agreement nor shareholders; nor maintained parity among them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an application of the alleged acts of oppression or mismanagement. The court cannot proceed on vague and uncertain allegations and order roving investigation in the affairs of the Company. The court in a petition under sections 397 and 398 must see whether by reasonable standards, the consequences of the conduct complained of would be regarded as having unfairly prejudiced the petitioner's interest, as held in Devaraj Dhanram v. Firebricks and Potteries Pvt. Ltd. [1994] 79 CC 722. The board of directors at its meeting held on 21.03.2001, approved the transfer of 200 shares made by the daughters of the second respondent in his favour, which has not been challenged by the petitioners and, therefore, no relief can be granted in respect of those shares, in the light of a decision of the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. - AIR 1986 SC 1370, wherein it has been held that holding that the transfer is truly complete and the transferee becomes the shareholder in true and full sense of the terms with all the rights of the shareholder, when the transfer is registered in the company's register. Similarly, the prayer for forfeiture of 295 shares h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel pointed out that the certificate of posting belatedly produced by the second respondent along with additional statement of objections, after filing sur-rejoinder to show that notice was sent to the fourth respondent for the board meeting convened on 04.05.2005 to consider the request of the second respondent for allotment of impugned shares is a fabricated one and do not support the relevant recitals made therein. The Company has neither chosen to produce copy of the notice convening the board meeting held on 16.05.2005, for the purpose of, inter-alia, allotment of the impugned shares, nor does it contain the agenda relating to the allotment of shares. Hence, these must be ignored. 6.Before dealing with rival claims of the parties on the acts of oppression and mismanagement, it is necessary to consider the preliminary objections raised by learned Counsel. However, the charges of professional misconduct leveled against Shri Udaya Holla, senior partner of M/s Holla Holla and the decisions cited in this behalf fall outside the domain of sections 397 398 and therefore, not considered in the present proceedings. The lawful entitlement of the petitioners as shareholders ei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondents 1 to 3 that the petitioners do not satisfy the requirements of section 399 must be examined in the light of the justification put forth by the petitioners. It is not under dispute that while the first petitioner holds 250 equity shares of the Company, Dr. Balaram held 500 equity shares and died intestate on 19.12.2001. The second respondent and (late) Dr. Balaram, being co-brothers, the former should be aware that the second petitioner and her two daughters are the legal heirs of the deceased Dr. Balaram, entitled for the shares left behind him. Nevertheless, the second respondent in his communication dated 20.05.2002, in response to the request made by the second petitioner for transmission of the shares of (late) Dr. Balaram, advised her, as per the decision of the board of directors, to take necessary steps and produce a succession certificate from a competent court of law, which was reiterated in his communication dated 11.12.2002. The reasons for insistence of the succession certificate are reflected in the minutes of the board of directors dated 04.12.2002, which read as under: After deliberation, knowing the law suit by Dr. Raghunath at the instance of the fathe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in January, 2006. From this sequence of events, it is evident that (i) necessity of succession certificate as demanded is vindicated; (ii) delay complained of in effecting the transmission of shares is not wholly attributable to the Company; (iii) stand of the respondents 1 to 3 on recording the transmission of shares in the register of members without, however, opening a new folio in the name of the second petitioner; endorsement of transmission as well as cancellation of such endorsement on the share certificates remains justified; and (iv) accusation that the respondents 1 to 3 tampered the Company's records does not merit any consideration. In this connection, the decisions in Mrs. Nandita Bhardwaj v. Sapphire Machines Pvt. Ltd. and Kumar Exporters P. Ltd. v. Naini Oxygen and Acetylene Gas Ltd. (supra) dealing with different situations, are of little assistance to the petitioners. By virtue of section 9 and section 10 of the Hindu Succession Act, 1956, as rightly pointed out by Shri Nandakumar, learned Counsel, the shares held by Dr.Balaram, upon his demise, devolved upon his legal heirs, being the second petitioner and his two daughters, thereby each of them became entitl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to effect the transmission of 500 shares in the name of the second petitioner by virtue of the succession certificate as amended on 03.01.2006 and it will get a valid discharge in respect of the shares of (late) Dr. Balaram, in the light of the decision in Smt. Sarbati Devi v. Smt Usha Devi (supra). Thus, the first petitioner holding 250 shares and the second petitioner having become entitled for 500 shares account for 17% of the paid-up capital and constitute 10% of the total number of members of the Company, apart from constituting one-tenth of the total number of members, thereby satisfying the requirements of section 399 of the Act. While according to the petitioners, the shareholding among various groups of members in the Company has been identical to the profit sharing ratio maintained from time to time in M/s Lake Side Medical Centre, a partnership formed in the year 1979, it is denied as fictitious by the respondents, viz. there are neither groups nor parity among the shareholders. In this connection, the stand taken by the respondents 1 2, in the earlier proceedings initiated by the first petitioner before the High Court of Karnataka assumes relevance. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge. While Ganesh has been a partner since formation of the partnership, Nirmala Ramesh and Balasetty became partners only in the year 1984. The first respondent Company was incorporated in the year 1980 with Nanjundiah and Mohanlal Khariwal, each subscribing to 10 shares of ₹ 100/- each. However, in the year 1981 Nanjundiah and his relatives held 1400 shares constituting 70% and Mohanlal Khariwal and his relatives 600 shares accounting for 30% of the paid-up capital of the Company. During the year 1989, relatives of Nanjundiah got 600 additional shares, daughter of Mohanlal Khariwal 150 additional shares; Dr.Ganesh was allotted 1000 shares; Ramesh and Balasetty got each 250 shares. With these allotments in the year .1989, Nanjundiah and his relatives came to hold 47.05%; Mohanlal Khariwal with his relatives 17.65%; Ganesh 23.53% and Ramesh Balasetty 11.76% of the paid-up capital of the Company, which has been disturbed on account of the impugned allotment in favour of the second respondent. Thus, while Nirmala Ramesh and Balasetty became partners in the year 1984, Ramesh and Balasetty became shareholders of the Company only in the year 1989. Similarly, while Dr.Ganesh has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue of shares. While the stand of the petitioners is that the board of directors made the impugned allotment of shares to the second respondent in exclusion of all other shareholders with a view to garner the management and the valuable property of the Company, it is forcibly contended by the respondents 1 to 3 that the allotment was in due recognition of the yeomen service rendered by the second respondent towards the phenomenal growth of the Company, thereby the allotment in favour of the second respondent is for the benefit of the Company. It is on record that the second respondent, a Pediatric Pulmonologist having had served in USA for over a decade, has been managing the hospital profitably, as the Managing Director of the Company since the year 1990. The hospital has been recognized under the management of the second respondent by the National Board of Examinations, Nursing Council of India, Rajiv Gandhi University of Health Services, Paramedical Board of Karnataka, Indian Medical Association and Karnataka State Pollution Control Board. The contribution and research work done by the second respondent on children health, environment, health alleviation of hardship of traffi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their personal aggrandizement, without caring for the future interest of the Company has been disapproved by the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. (supra). The directors, in the present case, utilized the fiduciary powers over the shares not for the benefit of the Company, but for the purpose of consolidating and improving the voting power of the second respondent in exclusion of the remaining shareholders and cannot be allowed, in the light of the decisions in Rashmi Seth v. Chemon (India ) Pvt. Ltd.; Pik Securities ( P) Ltd. v. United Western Bank (P) Ltd. and Akbarali A. Kalvert v. Konkan Chemicals Pvt. Ltd. (supra). Further, the shares were allotted at the rate of ₹ 200/- for each share, when the book value of each share reportedly exceeded ₹ 4,000/-, thereby the directors have acted in breach of the fiduciary responsibilities. This would constitute a grave act of oppression as held in Mrs. Uma Pathak v. Eurasian Choice International (P) Ltd. and Mrs. Farhat Sheikh v. Esemen Metalo Chemicals Pvt. Ltd. (supra). The directors who are empowered by article 6 of the articles of association of the Company to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny, which incidentally affected the shareholding pattern in the Company prevailing since 1989. It is an admitted fact that the second respondent would like to sell his shares along with his friend in USA . In such a situation, I am of the view that the consensus of the general body should have been obtained, especially when one of the three directors who is an independent person has expressed his reservation in the allotment of shares and who himself further advised obtaining consensus of the general meeting. This Board in Ashok Kumar Malpani v Malpani Food Products. Private Limited (CP No.22 of 2005 on the file of Principal Bench), while considering the issue of additional shares in a family company, on selective basis, by way of reward, categorically held that the same should have been done with the concurrence of all the members . This principle squarely applies to the facts and circumstances of the case before me, wherein the first respondent, being a private limited company, is closely held by family members of Nanjundaiah, Mohanlal Khariwal, Dr. Ganesh, apart from Ramesh and Balasetty. Therefore, considering the allotment from the view of fairness and probity, I find that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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