TMI Blog2004 (11) TMI 601X X X X Extracts X X X X X X X X Extracts X X X X ..... or the forfeiture of 75,750 (Seventy Five Thousand Seven Hundred Fifty) shares of ₹ 10/- (Rupees Ten Only) each held among the second and third respondents; (d)to impose penalty of ₹ 1,00,00,000 (Rupees One Crore Only) on the second and third respondents; (e) to impose damages of ₹ 1,00,00,000 (Rupees One Crore Only) on the second and third respondents; and (f) to order appropriate criminal action for tampering with the official records and prosecute the second and third respondents. 2. The main acts of oppression and mismanagement relate to non-issue of notices for the meetings of members of the Company; non-issue of share certificate; illegal allotment of shares in exclusion of the petitioner; exclusion of the petitioner from the management of the Company; manipulation and tampering of records of the Company etc. 3. Shri B.C. Thiruvengadam, learned Counsel for the petitioner, while seeking indulgence of this Bench for appropriate reliefs with a view to bringing to an end the acts complained of in the company petition submitted as under:- The petitioner, a body corporate incorporated in Singapore owning the brand name KOBIAN and MERCU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A39) confirms that the Company is a subsidiary of the petitioner. When the respondents failed to furnish the requisite information, the petitioner was constrained to correspond with the statutory auditor of the Company, who provided a very bald and vague certificate on shareholding structure, upon which the petitioner came to know the allotment of 1,60,000 shares made exclusively in favour of the second respondent on 03.05.2004 gaining controlling interest of 51.25 per cent and simultaneously reducing the petitioner to a minority of 48.75 per cent. The respondents committed criminal breach of trust and acted unfairly. The petitioner on verification of records of the Company at the office of Registrar of Companies realised that Form No. 5 was filed on 30.04.2004 disclosing the enhancement of the authorised capital from ₹ 30,00,000/- to ₹ 1,00,00,000/- purportedly approved at the fourth annual general meeting held on 30.09.2003. However, copy of the notice dated 30.06.2003 received by the petitioner from the Company convening the fourth annual general meeting on 30.09.2003 (Annexure-A12) did not contain any agenda of the resolution under Section 173 of the Act enhancing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... point of time, the stake of the respondents could exceed 25 per cent of the paid-up capital of the Company. While the second respondent sought permission of the petitioner for increasing his salary, he never even kept informed the petitioner about the increase of the authorised share capital of the Company. Though the second respondent was allotted 1,60,000 shares of ₹ 107- on 03.05.2004, the cheque issued by the second respondent towards consideration of shares was realised only on 22.05.2004. However, an amount of ₹ 16,00,000 was subsequently withdrawn by the second respondent by way of housing loan availed from the Company, as reported by the Commissioner. The conduct of the directors in excluding the petitioner while allotting the impugned shares with ulterior purpose of converting the petitioner's majority into a minority and without notice of such allotment lacks probity and fair play warranting interference of this Bench, in support of which, Shri Thiruvengadam, learned Counsel relied on the following decisions: * Mrs. Uma Pathak v. Eurasian Choice International (P) Ltd. - (2004) 3 Comp LJ 452 - to show that the power of Board of Directors to allot sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner within a period of three months from the date of allotment of shares, viz., 30.03.2000. However, the share certificate was not ready for issue even as late as on 24.10.2000, thereby the Company violated the provisions of Section 113 of the Act. The share certificate in favour of the petitioner was reportedly executed on 30.03.2000. The challan was issued on 04.07.2000 by the Reserve Bank of India towards payment of stamp duty on issue of shares and the application to the stamping authorities was made on 06.09.2000. The revenue seal of Government of Karnataka was embossed on 24.10.2000. It is clear that the share certificate was stamped after its execution, i.e., after 30.03.2000, which is prohibited under Section 17 of the Karnataka Stamp Act, 1957. Admittedly, the share certificate was presented after two months of the date of its execution, in which case, no exemption from the applicability of Section 17, as envisaged under Section 10A is applicable. The respondents are guilty of manipulation and fabrication of records of the Company and of counterfeiting the stamps and seals of the Government of Karnataka and are liable to be prosecuted under the various provisions of the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e directors for life yet there is no bar for their removal, in the light of Section 284 of the Act, Accordingly, when the notice dated 16.08.2004 of the resolution removing the respondents from the office of directors was served by the petitioner, it was not acted upon by the Company, compelling the petitioner to circulate the notices directly in favour of the respondents 2 3 addressed to the registered office, which were returned with postal endorsement that the addressees were not available at the said address, showing the fact that the respondents have not been functioning at the registered office of the Company. The second respondent has been damaging the interest of the petitioner and its group by dismissing those employees who are loyal to the Company and the parent company, as borne out by Annexure- A32. He has been exerting undue influence on the employees of the Company by withholding salaries, threatening of taking criminal action for the alleged misappropriation, forcing them to leave the Company. The above oppressive acts on the part of the respondents are continuing upto and beyond the date of the company petition, prejudicing the interests of the petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to receive any money from the petitioner. The transfer of ₹ 7,50,000/- made by way of gift was accepted by the second respondent and the petitioner cannot now make any claim, as otherwise the transaction would be hit by the provisions of the Benami Transactions (Prohibition) Act, 1988. The opinion dated 08,05.1999 was obtained from the Chartered Accountants by the second respondent in his personal capacity and the petitioner cannot place any reliance on the legal advice given by the Chartered Accountants. The communication between the second respondent and the Chartered Accountants is a privileged communication protected by the Indian Evidence Act, 1872. The second respondent alone met the per-incorporation expenses out of his personal savings and the investment made by the second respondent in the Company was not pursuant to the funds transferred by the petitioner. The respondents cannot be the name lenders or trustees of the petitioner. The Company is a not a subsidiary of the petitioner as on the date of the company petition, as borne out by the Memorandum of Association and the return of allotment filed before the Registrar of Companies. The petitioner having invested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnexure-A11) which would show that the share certificate had been already been issued by the Company. o Though the respondents had forwarded the letters dated 14.05.2001 (Annexure -A8) inviting the nominees of the petitioner to join the Board of the Company, no response was received from the nominees of the petitioner by the respondents. o The respondents dispatched timely notices to the petitioner under Section 171 of the Act in respect of the meetings of the members of the Company, as borne out by the certificates of posting sent for the third and fourth annual general meetings. Though the petitioner has been the shareholder since March, 2000, they never complained about non-receipt of the notices at any earlier point of time. Copy of the notice dated 30.06.2003 of the fourth annual general meeting produced at Annexure-A12 and A25 are only draft notices. The actual notice is found at Annexure-A24 containing the requisite particulars for convening annual general meeting viz., time of the meeting, agenda in regard to the increase of the authorised capital, name of the Chartered Accountant to be appointed as the auditor of the Company and matters incidental thereto, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uter accessories in India was pursuant to the authorisation and no objection given by the Company for use of 'MERCURY' logo in favour of Kobian ECS India Private Limited. The petitioner cannot claim any proprietary right over the brand name MERCURY . o The Commissioner who was authorised to authenticate the statutory records of the Company exceeded his authority by conducting a roving enquiry and making a fishing expedition in the conduct of affairs of the Company. Learned Counsel further disputed the visit of the Commissioner as claimed by him. The reports are bald, without his address or seal or phone number. The reports contain incorrect particulars. No reliance can be placed on the reports submitted by the Commissioner. o In view of the strained business relationship, the petitioner and the respondents can no longer be together in business of the Company. The respondents are willing to part way with the petitioner provided that they are adequately compensated for giving up the brand name of the Company and further that the respondents are allowed to retain the Company to themselves. Shri Ravi Shankar, learned Counsel, accordingly sought for suitable direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingredients of an application under Section 397/398, before granting any relief thereunder. Section 397 provides that on an application made by any members of a company having the right under Section 399, complaining that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members, the Company Law Board may with a view to bringing to an end the matters complained of, make appropriate order, if the CLB is of opinion- (i) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members; (ii) that the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up; and (iii) that the winding up order would unfairly prejudice the members. It is, therefore, clear that it is for the CLB to form an opinion on the facts alleged in the company petition whether the requirements of Section 397(2)(a) and (b) have been duly met before, making such orders as it thinks fit under Section 397. Section 398 can be invoked in either of the two circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner, a body corporate at Singapore made arrangements to transfer a sum of ₹ 7,50,000/- on 05.07.1999 as seen from Annexure-A4 in favour of the second respondent by way of gift which was purportedly invested towards his share capital, the fact of which is refuted by the respondents. The Board of directors had on 15.07.1999 allotted in favour of the second respondent 75,550 shares of ₹ 10/-. Thereafter, the petitioner had invested in the Company a sum of ₹ 22,42,500/- on repatriation basis, against which 2,24,250 shares of ₹ 10/- each were allotted on 30.03.2000 to the petitioner. As at 30.03.2000, the petitioner was holding 74.75 per cent and the respondent group 25.25 percent of the paid-up capital of the Company. At this juncture, e-mail sent on 30.08.2004 (Annexure-A30) by the second respondent in favour of the petitioner's nominee assumes importance, according to which the second respondent must be entitled to 25 per cent of the equity in the Company and the remaining 75 per cent must be left to the discretion of the petitioner. In the meanwhile, it is observed from copy of the notice dated 30.06,2003 of the fourth annual general meeting (Ann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30.06.2003 which was said to be received by the petitioner is only a draft notice and that no such draft notice was filed with the Income Tax authorities along with income tax return by the Company, a direction was issued to the Income Tax Officer, Bangalore calling for his report. The office of the Income Tax, Bangalore by a communication dated 18.10.2004 forwarded certified copies of the notices dated 07.08.2000, 05.08.2001, 01.08.2002 and 30.06.2003 convening the annual general meetings of the Company filed along with the return of income from the assessment years 2000-2001 to 2003-2004. It is clear from the certified copies of the notices received from the office of Income Tax that the Company had filed copies of the notices convening the annual general meeting of the Company along with return of income and further that the notice dated 30.06.2003 convening the fourth annual general meeting on 30.09.2003 does not contain any agenda on the increase of the authorised capital of the Company. Hence, the plea of the respondents that the Company never filed copies of the notices of the annual general meeting along with return of income with the Income Tax Authorities must fail. More ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 30.09.2003 towards filing fee which remains unexplained. Any increase in the authorised share capital would come into effect immediately on passing of any valid resolution in this behalf and filing of the requisite forms (Form No. 5 and Form No. 23) being a ministerial act and procedural in nature would not influence the date of increase of the authorised share capital. It may be observed that non-filing of the returns, viz., Form No. 5 and Form No. 23 only attracts penalty against the Company and every officer in default, but will not make the resolution increasing the capital to be bad. Nevertheless, the balance sheet as at 31.03.2004 reveals the authorised capital of the Company of ₹ 30,00,000/- only, even though the resolution increasing the authorised share capital was passed as early as on 30.09.2003. The observations of the Auditor under Schedule 13 of the balance sheet for the year ended 31.03.2004 by way of notes to accounts to effect that 'As the prescribed fee to increase the Authorised Capital has been paid during April 2004, the Authorised Capital for the current year is same as that of last year', do not hold good in law. All these aspects give ris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o private limited companies, the directors in a private limited company are expected to make a disclosure to the shareholders of such a company when further shares are being issued. Any issue of shares solely to gain control over the company is not permissible. The legal position of directors as enumerated by Supreme Court in Dale Carrington Investment (P) Ltd. v. P.K. Prathapan - (2004) Vol. 122 CC 161 is reproduced here below: A company is a juristic person and it acts though its Directors who are collectively referred to as the Board of Directors. An individual Director has no power to act on behalf of a company of which he is a Director unless by some resolution of the Board of Directors of the Company specific power is given to him/her. Whatever decisions are taken regarding running the affairs of the company, they are taken by the Board of Directors. The Directors of companies have been variously described as agents, trustees or representatives, but one thing is certain that the Directors act on behalf of a company in a fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company. They are agents of the company to the extent they ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner has been converted into a minority of 48.75%. In a number of cases, this Board categorically held that if further issue of shares results in conversion of a majority into a minority, or creation of a new majority, then such issue of shares is not only in breach of the fiduciary responsibilities but also a grave act of oppression against the existing majority. I am, therefore, of the view that the allotment of shares impugned in the company petition without any notice of issuance of further shares, made with a view to gain advantage against the petitioner being a majority shareholder of the closely held Company, in breach of the fiduciary obligations of the directors is neither in compliance with the legal requirements nor ensured the fair play and probity in corporate management would amount to an act of gross oppression, as held in a number of decisions cited by learned Counsel for the petitioner. The issue of shares, by which the percentage of holding of a shareholder comes down, may be a single act, but has continuous effect constituting an act of oppression as held in PIK Securities (P) Ltd. v. United Western Bank (P) Limited (supra), satisfying the criteria laid down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... courier agent and mere entries in the statutory register of the share certificate number in respect of the shares of the petitioner, in the absence of the despatch register of the Company or any other concrete evidence in support of delivery of the share certificate, it cannot be conclusively said that the share certificate was duly sent by the second respondent to the petitioner and received by the petitioner. At the same time, the second respondent in response to the e-mail sent by the petitioner categorically replied by on 27.07.2004 (Annexure-All) that certificates are not traceable at our end . This reply of the second respondent apart from being contrary to the plea that the share certificate was despatched through courier service to the petitioner as early as in November 2000 remains unexplained. The second respondent, pursuant to the allotment of 2,24,250 shares in favour of the petitioner constituting 74,75 per cent of the paid-up capital of the Company, by his communications dated 14.05.2001 invited Rajesh Bothra and Nikhil Shah, nominees of the petitioner to join the Board of the Company. The exchange of e-mails between the petitioner and the second respondent (Annexur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther. It is on record that the petitioner founded in the year 1978 with the corporate name KOBIAN has been manufacturing MERCURY range of products with offices world-wide. The Company was promoted with the name KOBIAN on 23.06.1999 by the respondents 2 3 for servicing the products of the petitioner, before which the respondents ought to have obtained from the petitioner a No Objection Certificate for using the name KOBIAN , as per the advice of the Chartered Accountants (Annexure-A3) furnished to the petitioner. The Trade Mark Authorities have not so far registered the trade mark under the Indian law in favour of the Company. By virtue of Annexure-A5 (page 112 of vol.11 of company petition), Kobian ECS India Private Limited has been assigned and authorised to use MERCURY logo for the product being manufactured and trade by them . The communication of the Chartered Accountants though claimed to be a privileged document, in my view, does not become so in the light of Section 126 of the Indian Evidence Act, 1872 providing privilege only to the communications of barrister, attorney, pleader or vakhil. The Company has the registered office at A-703, Adarsh Gardens, Jaya Naga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support from the petitioner. It is relevant to observe that the second respondent in his e-mail sent on 19.07.2004 to the petitioner (Annexure-A31) indicated, among other things, his option to keep out of the Company subject to certain conditions. Having regard to these facts and circumstances, it would be more equitable in my view for the respondents 2 3 to part ways, by selling their stake in the Company to the petitioner. The petitioner shall adequately compensate the respondents group for all their efforts towards progressive growth of the Company, as borne out by Annexure-R16. Against this background, the compensation of ₹ 10,00,000/- offered by the petitioner, to my mind, is rather meagre. The respondents cannot claim any compensation for the brand name KOBIAN and MERCURY for the reasons stated supra. It is observed that the Commissioner who was authorised to certify that the statutory records are in due form of law, acted beyond the scope of his authority and therefore no reliance is placed on his reports submitted before this Bench. In view of the foregoing conclusions, and in exercise of the powers of the CLB under Section 402, the following order is passed:- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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