TMI Blog2002 (1) TMI 1317X X X X Extracts X X X X X X X X Extracts X X X X ..... o GmbH, Germany. During his visit to Germany, the 2nd respondent had discussions with the 1st petitioner for providing technology by Kero GmbH for a company to be set up in India for manufacture of monolithic ceramic refractories. In pursuant to the discussions, an MOU was entered into by which it was agreed that a company would be set up in India with Kero GmbH holding 40 per cent shares and that the petitioners would have 25 per cent of the total strength in the Board of the company and the Kero GmbH was to supply technical know-how to the company. Accordingly, the company was incorporated in 1990 with an authorized capital of ₹ 1 crore divided into 10 lakh shares of ₹ 10 each. The 1st petitioner and the 2nd respondent were the first directors along with 2 other directors. The 1st petitioner was the chairman of the Board. The company entered into an MOU with Kero GmbH for supply of technical know-how and raw materials and Kero GmbH was to buy back 50 per cent of the products of the company. As per this MOU, Kero GmbH would have 40 per cent shares and NRIs 2 per cent shares. This foreign collaboration agreement was approved by the Central Government. Pursuant to this a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of the share application money with the company from the petitioners' group, it constituted the majority. Even though, the relationship between the parties was cordial till end of 1996, due to the mismanagement of the 2nd respondent as the managing director of the company, some of the petitioners issued a special notice on 17-5-1997 in terms of Section 284(2) of the Act (Annexure A-15) to remove the 2nd respondent as the managing director. However, the company did not proceed to call for an EOGM as called for by the petitioners to remove the 2nd respondent as the managing director. With a view to defeat the resolution, the 2nd respondent had issued further shares on 12-6-1997, 27-7-1997, 1-9-1997. By these allotments, the shareholding of the respondents' group went up from 40.55 per cent as on 31-3-1997 to 61.45 percent as on 1-9-1997 and the petitioners holding from 52.5 per cent went down to 34.45 per cent. No shares were allotted against the share application money in the name of the petitioners and other NRIs while shares were allotted to the respondents' group against the share application money. In all, the company had issued and allotted 5,83,937 shares dur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to remove him as the managing director by a notice dated 30-6-1997. On the same day, the 2nd respondent, in his capacity as the managing director, issued a notice convening a Board meeting on 26-7-1997 (Annexure A-16) in which one of the items of the agenda was allotment of shares. The petitioners filed a suit in the court of 2nd Assistant District Judge at Barasat seeking to restrain the company from acting on the notice dated 30-6-1997 on various grounds inter alia including that the company was trying to dilute the holding of the petitioners by issue of further shares. The court passed an order directing the company not to give effect to the notice dated 30-6-1997 till 13-8-1997, the order of which was communicated to the company on 25-7-1997 (Annexure A-21). However, the company issued another notice on 25-7-1997 (Annexure A-22) convening a Board meeting or 27-7-1997 to transact practically the same businesses as were to be transacted by the notice dated 30-6-1997. In this notice also there was a proposal to allot shares against pending share application money and a proposal to appoint additional directors. Two of the petitioner directors had already given a notice dated 6-7-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were allotted to 75 persons. The petitioners undertook to implead all these persons which was permitted and copies of the petitions were sent to all these persons. Even though, 39 of these persons accepted personal service, none has filed any affidavit in reply. 16 persons received the notices as per the acknowledgements received from them but none has filed any reply except that one person to whom the company had reportedly allotted 20,000 shares has stated that he does not hold any shares in the company. Therefore, there seems to be fictitious allotment of shares which is also evident from the fact that no details of payment of money by these persons has been disclosed. From the list furnished, it is seen that in these allotment of shares, it is the 2nd respondent and his family members who were the major beneficiaries. Further, the number of shares allotted as per the returns of allotment does not tally with the shares indicated in the list given by the company indicating very clearly that there is some hanky panky in the entire allotment. Some of the names shown in the list do not find a place in the return of allotment. Even though 3 shareholders made an application for implea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure A-2) adopted on 16-12-1995, 6 weeks notice is to be given for Board meetings. The manner and the haste in which this meeting was convened, that too after the civil court had restrained the company from holding the meeting on 26-7-1997, clearly indicates that the purpose of holding the meeting was only to hijack the company both in terms of the shareholding and the directorship, Having inducted 4 directors in the illegally held Board meeting, the 2nd respondent had ensured, by virtue of issue of further shares, the removal of two directors of the petitioners' group from the Board in the AGM held on 30-7-1997. The notice for this meeting was not received by most of the NRI shareholders as the same was posted only on 23-9-1997 i.e., only with six days notice. By letters dated 30-9-1997 and 1-10-1997 (Annexures A-29 and A-30), some of the petitioners including the 1st petitioner being the Chairman of the company had brought this to the notice of the company. Therefore, not only the appointment of 4 additional directors and their confirmation in the AGM and the removal of two directors is illegal but also oppressive to the majority petitioner shareholders. 9. Shri Mookherjee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sement of transfer on the share certificates. It is true that the share transfer forms as at Exhibit-3 were incomplete but after the RBI gave the approval, fresh transfer deeds were submitted duly completed in all respects where after they were transferred in favour of the 1st petitioner. Now the 2nd respondent claims that the shares still are in the name of Kero GmbH notwithstanding the fact that they had already been registered in the name of the 1st petitioner. Having entered the name of the petitioner in the list of members, if the company had deleted the same, then, it is beyond the powers of the company as a company cannot rectify its own register. Since the Board had held in Tin Plate case, a share certificate has primary evidential value than the shares register and since the share certificates had been endorsed in favour of the petitioner, he is the rightful owner of the shares notwithstanding the fact that his name does not appear in the register of members. Further, the NRIs have invested over ₹ 20 lakhs in the company for which in spite of repeated requests, no shares have been allotted notwithstanding the fact that approval of the RBI had been received as is evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iance with the provisions of Section 108 is mandatory and since in this case the instruments of transfer were not valid on account of non-cancellation of the stamps, the registration in the name of the petitioner cannot bestow any right of a shareholder in respect of these 4 lakh shares. This principle has been followed by the Board also in Subhash Chandra v. Vardhman Spg. General Mills Ltd . [1995] 83 Comp. Cas. 641. As a matter of fact, in a Board meeting held on 1-9-1997, the Board had resolved to cancel the transfer of shares in favour of the 1st petitioner. The reliance of the learned counsel for the petitioners on Tin Plate case is not relevant in this case in as much as in that case the Board took only a prima facie view but in the present case in facts of this case, such a prima facie is not possible. A company, In re 1986 BCLC 391 , it has been held that if the name of a person is not entered in the Register of Members, he has no locus standi to file a petition alleging oppression. It has also been held in Ved Prakash v. Iron Traders (P.) Ltd. [1961] 31 Comp. Cas. 122 (Punj.) that non-members cannot file a petition. The CLB has also held in Mahendra Singh Rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cent amounting to ₹ 20 lakhs and NRI equity was to be 2 per cent, amounting to ₹ 1 lakh indicating very clearly that the balance equity contribution has to come from Indian promoters. Further, when this approval was amended on 28-8-1991 by the Govt. of India, the same percentage was kept intact except that the amount was increased to ₹ 40 lakhs and ₹ 5 lakhs as foreign equity contribution and NRI equity contribution respectively. Thus, on no account the petitioner could claim majority in the company to allege that there has been a conversion of the majority into a minority. 16. Shri Mitra further submitted: The 1st petitioner was fully aware of the financial needs of the company and he did approve mobilization of funds by issue of shares to resident Indians. The issue relating to raising of funds within the country was being discussed right from 1995 as is evident from the Board minutes dated 7-3-1995 wherein it was decided to go in for public issue and in a Board meeting held on 15-4-1995 presided over by the 1st petitioner, the Board adopted a resolution in terms of Section 81(1A) to issue equity shares for a sum of ₹ 2.5 crores to general publ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the authenticity of the minutes as the xerox copy of the minutes containing the signatures of Shri Sircar and also the attendance register which has been signed by the two NRI directors in token of having attended this meeting, produced during the hearing, would establish the authenticity of the minutes. Therefore when they do not or cannot challenge this allotment which had reduced their percentage shareholding below 50 per cent, challenging further allotments has no bearing on their claim of conversion of the majority into a minority. 18. He further submitted: On 27-7-1997, 3,72,552 shares were allotted to Indian shareholders against the application money received from them. It is not that the allotment was made behind the back of the petitioners. In the agenda for the meeting convened on 26-7-1997, allotment of shares was one of the businesses to be transacted and the petitioners obtained a restraint order on the ground that the allotment would reduce their share holding. Therefore, they were aware of the proposal of the Board to allot shares. In a Board meeting held on 1-9-1997, further 20,000 shares were allotted against share application money. None of the allotments was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n EOGM as requisitioned by the petitioners by two notices dated 30-6-1997 which were received on 6/24-7-1997, allotment of shares against pending share application money and to appoint additional directors. An explanatory statement was also attached with these notices detailing the reasons for transacting those businesses. The holding of the meeting was bona fide and not with a view to over reach the restraint order by the civil court. The civil court itself has dismissed the contempt application filed by the petitioners. 21. After the disputes started, in spite of notices issued for the general body meetings, the petitioners did not attend the AGM in 1998 and also the Board meetings thereafter. 22. Summing up his arguments, Shri Mitra submitted that not only this petition is not maintainable in terms of Section 399, it also deserves to be stayed in view of the pending civil suit. Even otherwise, on merits also the petition does not survive as all the allotments were made for raising funds for the company and there is no conversion of the majority into a minority nor creation of a new majority. To the proposition that when shares are issued for the benefit of the company ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... none from the petitioners' side was present. This is nothing but a mala fide action. Further, even though in the resolution, it is stated that intimation would be given to the 1st petitioner, no such intimation was received by him. He further pointed out that the company has fabricated the minutes dated 9-8-1995. While as per the minutes at Annexure A-57, the Board had approved the transfer of shares in favour of the petitioner, in the copy of the same Board minutes filed by the 2nd respondent along with his affidavit dated 18-5-2001, it is recorded that that the Board had approved the transfer in principle and had requested the 1st petitioner to re-submit valid deeds in this regard. This has been done only with a view to deny the petitioner the title to 4 lakh shares even though right from the beginning the contemplation of the parties was that these 4 lakh shares would vest in the 1st petitioner subject to the RBI approval which was also received as conveyed by the RBI vide its letter dated 4-7-1995 (Annexure A-10). He further pointed out that as early as on 8-9-1993, the Board had approved in principle the transfer of shares of Kero GmbH to the petitioner and therefore the q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondents in their reply did not challenge this. In addition, no return of allotment relating to the allotment on 24-5-1997 was filed with the ROC. Only the allotment made on 12-6-1997 was filed with the ROC that too on 12-8-1997. On this day, over ₹ 20 lakhs remitted by the NRIs were available with the company as share application money. In regard to the contention of the respondents that there are parallel proceedings, he pointed out that the proceeding before the civil court was only relation to the Board meeting convened on 26-7-1997 and there is no allegation in that petition regarding conversion of the majority into minority, removal of directors, and mismanagement in the affairs of the company and as such the civil suit is not a bar in proceeding with the present petition before the Board. He also pointed out that none of the cases cited by the learned counsel for the petitioner is applicable in the facts of this case. Further, if the contention of the respondents is that money had already come to the company as share application money, by allotment of shares in such a hurry, the company did not get any further funds and the allotment was made only to protect th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he respondents filed an application seeking for recalling the said order on the ground that Shri Chattopadhyay was not authorized to enter into any settlement with the petitioners. This application was heard in length and an order was passed on 24-6-1999 recalling the order dated 29-6-1998 for the reasons stated in that order. Thereafter, at our instance, further discussions took place in our presence to resolve the disputes amicably but without any result. 27. The respondents have questioned the maintainability of the petition in terms of Section 399 on the ground that on the day of filing of the petition. the petitioners collectively held only 9.95 per cent shares in the company. To compute this percentage, according to the respondents, the 4 lakh shares allegedly held in the name of the 1st petitioner should be omitted for the various reasons indicated as part of the arguments. They have relied on the provisions of Section 108 to urge that even if the registration had taken place, since it was in violation of the provisions of this Section which have been held to be mandatory in Mannalal Khaitan's case (supra) by the Supreme Court, the 1st petitioner cannot rely on re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the mandatory provisions of Section 108. This order was challenged in the High Court of Madras which held that a company should not raise its own irregularity after a lapse of time and seek rectification of the register of members. Kothari Industrial Corpn. Ltd. v. Maxwell Dyes Chemicals (P.) Ltd . [1996] 85 Comp. Cas. 79 (Mad.). Accordingly, it set aside the order of this Board. Therefore, while the non-cancellation of adhesive stamps could be a ground for refusal to register the transfer of shares, once the registration had been effected, such non-cancellation cannot be a ground for the company to seek rectification of the register of members. Therefore, in the present case, even though the stamps had not been cancelled, since the company had already registered the transfers, it cannot take a stand that the registration is invalid and therefore the petitioners are not legal owners of these shares. The same ratio applies in the present case also'. The admitted position in this present case before us is that the share certificates in respect of these 4 lakh shares have been endorsed in favour of the 1st petitioner as is evident from the copies of the share certifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been held that the validity of a petition must be judged on facts as they were at the time of presentation and a petition which was valid when presented, cannot, in the absence of a provision to that effect in the statute cease to be maintainable by reason of events subsequent to its presentation. In S. Varadarajan v. Venkateswara Solvent Extraction (P.) Ltd. [1994] 80 Comp. Cas. 693 (Mad.) it has been held that the requirement of share qualification is relevant and material only at the time of institution of the proceedings. Therefore, on none of the grounds of challenge, the respondents can claim that this petition is not maintainable in terms of Section 399. 29. Even otherwise, in this petition the petitioners have challenged all the shares issued after 30-3-1997 on which date they held 15.32 per cent shares even after excluding these 4 lakh shares. In such cases, this Board has been taking a view that if in a petition under Section 397/398, the allegations of oppression relate to removal as a member or conversion into a minority, then the petition could be heard, notwithstanding the fact that the conditions of Section 399 are not fulfilled, first to determine the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner has a right to claim title to the 4 lakh shares acquired by him from Kero GmbH, the petitioner group held 52.46 per cent as on 30-3-1997. It is an admitted position that after allotment of further shares, the petitioners' group has been reduced to 34.03 per cent. The settled position of law is that if further shares are issued only with a view to either convert a majority into a minority or for creation of a new majority, then, the same is a grave act of oppression. It is also a settled law that if the shares are issued for the benefit of the company which incidentally increases one's shareholding, it need not be considered to be an act of oppression. Keeping these principles in mind, we have to examine the allegation of the petitioners in relation to the further issue of shares. The stand of the respondents has been that, to the knowledge of the 1st petitioner who had been the Chairman of the company, the company needed funds for a long time and he was a party to the decision to mobilize the funds from all possible sources. We find substance in this stand of the respondents. In the Board meeting held on 2-3-1996 which was presided over by the 1st petitioner, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the NRI holdings to 52.46 per cent as on 30-3-1997 (It is seen from the minutes of the Board meeting held on 21 -11-1996 that 59,100 shares had been issued to resident shareholders). This reduction in the shareholding has not been challenged by the petitioners. Various issues were raised by the learned counsel of the petitioners inter alia including non-compliance with the provisions of Section 81 of the Act. We find from the minutes of the Board meeting held on 15-4-1995 which was presided over by the 1st petitioner himself that the Board had resolved to raise funds by issue of shares to general public including friends and relatives and NRIs as may be decided by the Board on such terms and conditions and that the general body approval in terms of Section 81(1A) would be obtained. It was also resolved in that meeting that out of ₹ 2.5 crores to be raised by way of public issue, equity worth ₹ 78.11 lakhs would be issued to NRIs on repatriation basis. Accordingly, in that meeting, the authorized capital was also proposed to be raised from ₹ 1 crore to ₹ 3.5 crores. It was also resolved to convene an EOGM in this regard on 9-5-1995. It is stated that subsequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue. However, when we look at this matter from the angle of oppression, it is quite clear that the haste with which this meeting was held with just two days notice when the majority directors were NRIs is nothing but an oppressive act. It is also on record that none of the directors from the petitioners' group notwithstanding their being the majority on the Board attended this meeting obviously for want of sufficient notice. It appears to us that the purpose of holding this meeting with such a short notice was only with a view to avoid the presence of the majority directors who happened to be from the petitioners' group and such avoidance of the presence of majority directors itself can be considered to be a grave act of oppression. A short notice with the view to avoid/prevent directors to attend a Board meeting can never be a valid notice in terms of Section 286 of the Act as has also been held in Homer District Consolidated Gold Mines, In re [1888] 39 Ch. D. 546. Normally when proper notices are not issued to all directors, the decisions taken in a Board meeting are null and void . Parmeswari Prasad Gupta v. Union of India [1974] 44 Comp. Cas. 1 (SC). Further, we al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Chairman of the meeting on 27-7-1997. Countering these arguments, the learned counsel for the respondents produced before us the attendance register for the meeting held on 24-5-1997 wherein we have seen the signatures of Shri Sircar and Shri Lahiri. He also produced before us a fax copy of the draft minutes originally signed by Shri Sircar as the Chairman of the meeting wherein he himself had signed for Shri Lahiri also and other directors have also signed as 'Read and confirmed'. The learned counsel for the petitioners urged that since this document was produced at the fag end of the hearing, no reliance should be placed on that. To this extent we agree that such late production of the document has placed the petitioners from rebutting the authenticity of the same, but in the compilation filed earlier, a copy of the minutes had been filed showing the presence of these two directors, but they have not chosen to file any objection to the same. However the counsel for the petitioners, as a part of the arguments, contended that if these two directors of the NRI group had attended this meeting wherein shares were allotted, they would not have taken a stand of their being in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany, yet there are only two identifiable groups and practically every shareholder belongs to either of the groups. Thus, when one group is allotted shares against the application money, the other group has been left out resulting in the change in the percentage holding. Such an act has to be viewed as oppressive. In this connection it is also worthwhile referring to the arguments of learned counsel for the respondents that as per Government approval the petitioners could have only 45 per cent shares in the company and not majority. If it is so, further shares should have been issued after 24-5-1997 by which the holding of the NRI shareholders had been reduced to 34.45 per cent. We are making this observation only because for needs of the company it had already collected share application money not only from the NRIs but also from resident Indians and therefore there was no urgency without proper notice to the directors from the petitioners' group to allot further shares in the meeting held on 27-7-1997 and 1-9-1997 that too completely omitting allotment to NRIs who had also remitted over ₹ 20 lakhs as share application money. Even assuming that the permission from the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same in the notice dated 25-7-1997 has not been explained. The very fact that all the 4 persons who were appointed on that day as additional directors were present in that meeting shows that the idea of appointment of additional directors was only with the view to take control of the Board that too without proper notice to the NRI directors. In this connection, it is also pertinent to mention that even though NRIs were not to be the majority on the Board as per the MOU, yet, the fact is that they constituted the majority till 27-7-1997 and upsetting the majority without their consent and knowledge is an act of oppression. Further, even assuming that in the annual general body meeting on 30-9-1997, all these additional directors were appointed as regular directors, the very fact that proper notices had not been issued to the NRI shareholders, shows that these appointments had been made behind the back of these shareholders, who constitute the other group of promoters. The same observation holds good in respect of the non-election of the two directors belonging to the petitioners group, as by not appointing them, the petitioners group is now without any representative on the Boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are managing this company exclusively from September, 1997 onwards and the NRIs are living abroad. Under these circumstances, it would be appropriate that the respondents continue to manage the affairs of the company by purchasing the shares held by the petitioners and also refund the share application money remitted by the NRIs. Since we have given a finding that the 1st petitioner is the rightful owner of the 4 lakh shares, the respondents should purchase these shares also. As far as the valuation of the shares is concerned, the usual practice adopted is that it should be based on the balance sheet proximate to the date of filing of the petition. In this case, since the petition was filed on 9-12-1997, the valuation of the shares will be based on the balance sheet as on 31-3-1998. Since the company commenced commercial production only a few years earlier, we consider it appropriate that the share value should be based on the net worth of the company as on 31-3-1998. Accordingly, we direct the statutory auditors of the company to compute the fair value of the shares of the company on the basis of the net worth of the company as on 31-3-1998 within a period of 2 months from the da ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
