TMI Blog1998 (2) TMI 605X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 but including respondent No. 2 at which there was an agreement to the effect that all allotments made by the company after it became public in July, 1985 (originally the company was incorporated as a private company) are not valid, and, therefore, a redistribution of such shares among the original shareholders was agreed upon. The Rajasthan State Mineral Development Corporation (RSMDC) which got allotment of about 50.4 per cent, of the shares after the company became public was also agreeable for reallotment of their shares and also suggested a settlement in the process as is evident from the communication from that institution. At the hearing held on April 7,1992, it appears from the records that a settlement was arrived at by which all allotments, after the company became public, in contravention of Section 81(1A) of the Act, are to be cancelled excepting the allotments made to RSMDC, respondent No. 3 and one Shri Rohit Bohra, director of the company. It was also agreed, inter alia, to redistribute the shares wrongfully allotted along with the shares allotted to RSMDC. Though it appears that no formal shape to this settlement was given, there is a reference to this settlement i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interim relief is required by any party they may apply to the Company Law Board. It was concluded that it is not appropriate to observe anything with regard to the interim order of the Company Law Board or the compliance or non-compliance of orders. It was left to the Company Law Board to pass necessary orders which it may deem proper. 4. After the above final orders, the petitioners filed an affidavit dated May 1, 1995, being C. A. No. 126 of 1995 seeking issue of fresh directions to dispose of the matter since the Company Law Board had stayed the proceedings by an order dated October 22, 1992, in view of the pending appeal before the Rajasthan High Court. 5. In the interregnum respondent No, 3 through an application in September, 1994 (C. A. No. 156 of 1994), had prayed for early hearing in view of the interim order of the Rajasthan High Court clarifying that the Company Law Board is free to proceed so far as the main petition is concerned. Around this time an affidavit was also filed by the petitioner narrating additional instances of acts of oppression and mismanagement. However, before a final decision on this interim application for resumption of hearings and the addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than High Court, the petitioners filed an amended petition on December 20, 1995, seeking to amend the original petition on the ground that after the original petition, the respondent-company and its directors were not supplying any information and not allowing the applicants to inspect the records of the company. However, subsequently, the petitioner had come to know more details about acts of oppression and hence preferred the amending application, along with an amended petition. The respondents though formally objected to the amendments subsequently tacitly conceded since they filed their replies to the amended petition though under protest. We were however convinced that since the petitioners were denied inspection of the statutory records as already alleged in the original petition and hence, we had allowed the inspection in early 1992, all the further material on facts are relatable to the broad allegations in the petition and have arisen out of inspection granted to the petitioners by us. Accordingly, the amended petition was taken on record along with replies which were filed subsequently. This entire process to reach the main stage of hearing took up to March, 1997, when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directors' report, auditors' report, etc. The notice also was signed by respondent No. 2 though the chairman as well as the managing director personally informed the petitioner that the meeting does not have their consent. (g) General meetings were held without quorum and the appointment of auditor is irregular since no proper notice stating that a special resolution is necessary for this purpose has been given and no representative of the RSMDC was present which is a requirement as per the articles of association. 11. It was the conclusion of the petitioners that in view of the above, the affairs of the company are being managed in a manner oppressive to the minority shareholders and completely mismanaged to the detriment of all the shareholders of the company. 12. In addition to the above, further allegations are made that: (a) despite the existence of a managing director the affairs of the company were being managed de facto by an official of the RSMDC in his personal capacity, (b) no disclosure of interest as well as appropriate approval of the board has been obtained as per the requirements of Sections 297 and 299 of the Act, for the joint sector agreement w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tocopies of the postal certificate as well as the relevant entry of the despatch register have also been enclosed with the reply. It is further contended that the petitioners had been perhaps sending letters to the wrong address since the registered office has been already shifted. It is further stated that the petitioner in collusion with respondent No. 3 has been sending the letters to the address of the latter which correspondence also is a concoction inasmuch as registered letters written on a particular day were shown to be received by respondent No. 3 on the same day. It is further contended that even remittance for obtaining copies of registers, etc., were perhaps sent to the above wrong address which is also described as concoction. All these acts are described as joint ventures between the petitioner and respondent No. 3 to grab control of the company. 17. In the reply to the amendment application, the following preliminary objections have been raised: (a) The amendment application is a surreptitious attempt to move a fresh company petition on back date. In this petition not less than 33 new respondents who are not even shareholders as on the date of the moving of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporated in the amended petition. 19. On the additional facts in the amended petition, it is stated by these respondents that : (a) As regards the allotment of shares allegedly in violation of Section 81 of the Act, all the allotments have been made by duly constituted board meetings. Further, the petitioner cannot be permitted to pick and choose certain allotments as illegal but approve certain other allotments. In fact allotments were made even to the two petitioners as well as to respondent No. 3. (b) Regarding allegation of allotment to benami/fictitious persons, the petitioner has failed to bring forth any proof about these shares being benami after the inspection of the records. (c) The petitioner has placed reliance on a wrong copy of the articles of association to state that for a general body meeting, the presence of a representative of the RSMDC is a must otherwise the meeting is invalid whereas the correct copy has been already provided to the petitioner. The correct copy has also been placed on the record of the High Court and still the petitioner is trying to mislead the Company Law Board. (d) As regards the joint venture agreement, it is stated th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d certain special facts relating to the company, namely, that the entire records of the company were stolen from the registered office by one Shri Ankit Sharma, an employee of the company, for which a first information report was lodged by him in his capacity as the managing director. Subsequently, he came to know that these records are with respondent No. 2. As such, respondent No. 2 is the only person who can deal with the contentions raised in the petition. It is also stated in the affidavit that in April, 1991, when he was also present at a board meeting the registered office of the company was purported to be changed, but actually no such decision was taken. Subsequently, respondent No. 2 commenced false propaganda stating that he (respondent No. 3) ,has been removed from managing directorship. Apart from these narration of facts all the contentions of the petitioner have been accepted by respondent No. 3. Arguments by counsel : 24. The hearings in this case were extended over nearly six months. The petitioner's counsel, Shri Vinod Kumar Jain, chartered accountant, narrated the facts in the amended petition and reiterated the instances of non-receipt of notices of ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were also considered by us. 25. Shri M. C. Mehta, advocate, appearing on behalf of respondents Nos. 1 and 2 laid stress on the non-maintainability since the petition does not comply with the fundamental requirement under Section 397, namely, that a case has to be made out for winding up on just and equitable grounds. In fact, in the original petition, there is no such averment to this effect at all. Even in the amended petition, it has not been substantiated as to how the company can be wound up on just and equitable grounds. According to him, this is a pre-condition for considering any petition under Section 397. In this connection, he cited the following cases : Albert David Ltd., In re [1964] 68 CWN 163 at 171 ; Laxmi Film Laboratory and Studios (P.) Ltd., In re [1984] 56 Comp Cas 110 at 131 (Guj) ; Nagavarapu Krishna Prasad v. Andhra Bank Ltd. [1983] 53 Comp Cas 73 (AP); Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp Cas 235 (Delhi) and Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 at pages 366 and 367 (SC). 26. Apart from this he also challenged the maintainability on the grounds of the consent not being given and that the consent shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 983] 54 Comp Cas 235 (Delhi). 30. Dealing with the merits, Shri Mehta submitted that the allotments were made as per the actual applications made by the existing shareholders. Further, he emphasised that the petitioners cannot be allowed to pick and choose a cut-off date for applicability of Section 81. This Section according to him deals with public limited companies only and the formation of a company is governed by Section 12 according to which a public limited company can be formed only by at least seven promoters and in the instant case five new members joined the existing three members only on May 31, 1985, and only thereafter the present public limited company was formed and the same was registered by the Registrar of Companies, vide certificate of incorporation dated July 24,1985, and hence the shares allotted after a period of two years from that date, i.e., after July 24, 1987, if at all may be alleged as in violation of Section 81. He further justified that in any case the allotment to the RSMDC is not in violation of Section 81 as it has been done under a joint venture agreement duly approved by the shareholders of the company in general meeting unanimously and hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he articles of association of the company and as per the correct version of the articles, there is no need for a nominee of the RSMDC to be present and hence the general meeting cannot be questioned on this ground of quorum. (c) Appointment of auditors at the annual general meeting is not invalid since there is a specific reference to Section 224A in the notice which clearly means that a special resolution is required and notice has been accordingly given. (d) Regarding the allegation of certain observations of the Director of Mines, Government of Rajasthan, in his letter dated September 25,1991, though no action was taken by respondent No. 3, who was in charge of the management at the time, the matter has been settled subsequently and the assessment has been finalised. He produced copies of the assessment orders in this connection. (e) As regards certain observations of the auditors on the accounts for the year ended March 31,1991, these relate to the period when respondent No. 3 was the managing director and as such he only was responsible, still, the board has given suitable replies to all the points raised by the auditors to their satisfaction. (f) As regards al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a decision of the Supreme Court in Nanalal Zaver v. Bombay Life Assurance Co. Ltd., [1950] 20 Comp Cas 179 ; MANU/SC/0003/1950MANU/SC/0003/1950 : AIR 1950 SC 172, that so long as the shares were issued bona fide in the interest of the company the allotment is not per se invalid, but the procedure being illegal it can be avoided by the company or any director or shareholder aggrieved and may be used as a weapon of defence when any right or liability arising out of such allotment is sought to be enforced. 36. On the interpretation of the joint sector agreement and distribution of shares upon unloading by the RSMDC it was contended that the term co-promoter does not cover only respondent No. 2 but his associates as well. A reading, of all the relevant clauses together as contained in the joint-sector agreement would go to show that it includes the co-promoter, his nominees and associates. The same interpretation has to be given for the same term in the buy back agreement also. This is also fortified by various communications from the RSMDC to respondent No. 3 expressing its desire to sell the shares in his capacity as constituent of co-promoter . Thus, it was argued on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers complained of, make such order as it thinks fit. 39. Sub-section (2)(b) clearly stipulates two tests, viz.; (i) that on consideration of the facts of the case, there should be justification for the making of a winding up order on just and equitable grounds ; and (ii) a conclusion that to wind up the company would unfairly prejudice the complaining member or members. The above two are essential for a petition under Section 397 seeking relief on the ground of oppression apart from the petition establishing that the company's affairs are in fact being conducted in a manner oppressive to any member or members. This requirement has a history behind it originating from the Cohen Committee Report in the UK before the amendment of the law in 1948. Before this amendment, the only alternative was winding up, and hence this remedy as an alternative is available as per the amendment only if such a situation is reached. The basic rule in corporate democracy is that the majority shall prevail, Section 397 proceedings being exception to this rule. Though the English law has undergone a sea change, thereafter, the Indian law being as it is, these tests are inevitable. Shri M. C. Mehta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in a manner prejudicial to public interest or in a manner oppressive to any member or members and that the facts would justify the making of a winding-up order on the ground that it was just and equitable so to do under Section 433(f) but if such an order is likely to unfairly prejudice any member or members, the court may exercise its power under Section 402 with a view to bringing' to an end the matters complained of. It is, therefore, an essential condition for the maintenance of a petition under Section 397 of the Act that facts and circumstances which would justify the making up of a winding up order on-just and equitable grounds should exist as required by Section 433(f) of the Act . This judgment once again has underlined that for maintaining a petition under Section 397 this is a condition which has to be fulfilled. In other words, in the absence of this condition, a petition under Section 397 cannot be maintained. We also considered the other case cited by Shri Mehta, namely, Naydvarapu Krishna Prasad v. Andhra Bank Ltd. [1983] 53 Comp Cas 73 (AP) , wherein a Division Bench of the Andhra Pradesh High Court, while considering an appeal in the matter of Sections 397 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mary condition under Section 397(2), namely, a justification for winding up on just and equitable grounds. 44. Apart from this, the advocate for the respondents has rightly contended that in accordance with the provisions of the Code of Civil Procedure, an amended petition cannot be allowed to make out a fresh case if the petitioner has failed to make out one in the original petition. As already noted, the petitioner has failed to bring out in the original petition that there is a justification for winding-up which he has tried to make up through the amended petition. Any consideration whether on account of maintainability or on allegations if an amended petition makes out a new case which is not originally made out, it would be unfair to admit such matters as part of the original proceedings. Hence, on this ground also, we cannot accept the petition under Section 397 of the Act. 45. The other preliminary issues raised by Shri Mehta, however, do not cut the petition at its root. These objections are more relating to form than relating to substance namely, that the affidavit signed by the petitioners is not strictly in accordance with our regulations. Further, there is no vali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oppression as mentioned in the petition. However, we may subject to the preliminary objections raised by the respondents regarding fresh cause of action not germane to the original petition, consider the allegations of mismanagement, i.e., acts prejudicial to the interest of the company or public interest. For this purpose, it is necessary to classify them into two categories, namely, oppression and mismanagement. How do we classify the allegations into acts of oppression and mismanagement ? Section 397(1) as it reads makes it abundantly clear that oppression has something to do personally with the complaining member or members. In other words actions of management which adversely affect the members in their proprietary and legal rights will fall under the classification oppression . This has been succinctly put by the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 at 782 : A conduct which lacks in probity, conduct which is unfair to and which causes prejudice to the petitioner in the exercise of his legal and proprietary rights as a shareholder . 48. This conclusion has been arrived at on a consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the petitioner as well as respondent No. 3. This specific aspect is already the subject-matter of a civil suit which in our opinion will take care of the grouse of the petitioner. Hence, we do not wish to burden the civil court with our findings on this matter. However, the interest of the company would not be adversely affected in the meanwhile as more than 50 per cent, is held by a State Government undertaking. 50. As regards the other fall out of the decision regarding violation of Section 81 of the Act on respondent No. 3 with regard to his continued entitlement to 500 shares which he is presently holding as well as his entitlement, if any, to any portion of the shares being off-loaded by RSM-DC, there are two civil litigations, namely, one which is already narrated-above and the other which is a challenge to the purported renunciation/ gift of 10 shares of Shri S. K. Singh in favour of respondent No. 3. Both these litigations would virtually sort out in effect the consequences if any of alleged violation of Section 81 as well as the vexed question of transfer of shares and renunciation of the rights of Shri S. K, Singh. In case respondent No. 3 is held to be the true owne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and strictly speaking may constitute additional facts but relating to periods before the , filing of the petition. The main allegations of mismanagement as contained in the amended petition relate to : (a) allotment of shares to benami/fictitious persons. (b)holding general meetings without quorum. (c) the affairs of the company are de facto managed by an official of the RSMDC in his personal capacity. (d) appointment of auditors not done by special resolution. (e) observations against the 'company in the report of the Director, Mines and Geology, Government of Rajasthan. (f) observations of auditors in their report for the year ended March 31, 1991. (g) non-disclosure of interest of respondent No. 2 under Sections 297 and 299. (h) burdening the company with taxes, dead rent, etc., relating to the mines which have to be borne by respondent No. 2. 52. We have examined all the above allegations with the documents filed by the respondents along with their replies. Regarding allotment to benami/ fictitious persons the respondent company has already made available the complete list of shareholders along with the register of members and these part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o into the allegation any further. 55. Regarding the deficiency in the appointment of auditors the allegation is that since the State Government undertaking is holding more than 25 per cent, of the capital, the appointment should be by means of a special resolution whereas the notice does not say so. In this connection, we are in agreement with the respondent-company that the indication in the notice that the appointment is in accordance with the provisions of Section 224A is itself sufficient to mean that the resolution was to be passed as a special resolution since this is the only requirement of this sub-section. In this connection, Shri Mehta also drew our attention to the practice followed by many leading companies in the corporate sector which is identical. It is also found from the minutes book that in fact the resolution has been passed as a special resolution. As such we do not find any substance in this allegation either. 56. As regards the allegation that there had been some adverse observation of the Director (Mines and Geology) with regard to the maintenance of records, the company has confirmed that the points raised have been settled to the satisfaction of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pportunity was afforded to the petitioners to inspect the same which has not been made use of by the petitioners. Similarly, regarding the allegation that the expenses relating to taxes, dead rent, etc., relating to the mines are being borne by the company instead of by respondent No. 2, these have also arisen out of the joint sector agreement and as such has to be linked with the previous allegation, this being a related matter. 59. In view of our findings as above, as regards acts of mismanagement, we find that there is no scope for giving any relief to the petitioner on this score as well. On the conduct of the, petitioners : 60. While disposing of this petition, we have also noted the arguments advanced on behalf of respondents Nos. 1 and 2 regarding the conduct of the petitioners and respondent No. 3, The following are relevant: (a) The petitioners took no interest in the affairs of the company for nearly seven years excepting to apply for some additional shares and did not complain about non-receipt of notices, etc. (b) The awareness as a shareholder has come to the petitioners only around the middle of 1991, when it appears that relationship between responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than 50 per cent, by the RSMDC and the company virtually falls within the definition of a Government company. In case the RSMDC shares are to be disinvested as per the joint sector agreement the shares would devolve upon those whom the civil court may decide as the proper person to get the shares. In any case, if the shares devolve on respondent No. 2 we may have to say something if at all we have any adverse findings against respondent No. 2. From the above consideration of the case, we have no adverse findings against respondent No. 2 and as such even if he gets the management we have no reason to believe that the company will be carried on detrimental to the interest of the company or public interest. As such, even on exercise of equitable jurisdiction, we have nothing to order with regard to the future governance of the company. 63. With regard to the prayer for ordering an investigation, we are in full agreement with the contention of counsel for the respondents that full and complete details of allegations of misappropriation, misapplication of funds, mismanagement or other improper conduct have not been set out. No order for investigation is to be made on the basis of vag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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