TMI Blog2019 (11) TMI 1465X X X X Extracts X X X X X X X X Extracts X X X X ..... ok after the interests of the company - there are no merit in the argument that Board of Directors have failed in their fiduciary duty by converting the loans of Directors into equity shares. Whether the conversion of loan into 1,70,060 equity shares in favour of four respondent directors herein was valid in law? - HELD THAT:- T he said act of allotment of shares by conversion of unsecured loan to the four directors is an isolated act by the Board of Directors and not a continuous one. The judgement of NEEDLE INDUSTRIES (INDIA) LTD. VERSUS NEEDLE INDUSTRIES NEWEY (INDIA) HOLDING LTD. [ 1981 (5) TMI 89 - SUPREME COURT] and SHANTI PRASAD JAIN VERSUS KALINGA TUBES LTD. [ 1965 (1) TMI 17 - SUPREME COURT] inter alia reads 'that it has been held that the person complaining of oppression must show that they have been constrained to submit a conduct which lacks probity, conduct which is unfair to them and which cause prejudice to them in exercise of their legal and proprietary rights as shareholders. It was further held oppression should be a continuous act continuing till the date of filing the petition.' - the petitioner failed to prove the continuing oppressive acts conclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. 2. The Canning Industries Cochin Limited, was incorporated as a Public Limited company on 25th March, 1947 under the provisions of the Companies Act, 1913 (hereinafter referred as 'the company'). The Authorised Share Capital of the company presently is equity share capital of ₹ 1,98,00,000 comprising of 6,60,000 shares at ₹ 30 each. The subscribed and fully paid up share capital as on 31.03.2013 was ₹ 62,30,520 comprising of 2,07,684 equity shares of ₹ 30 each. Thereafter, the respondents allotted 1,70,060 shares of ₹ 30 each at a premium of ₹ 95 at a Board Meeting on 23.11.2013. The 1st petitioner had filed this petition along with the 2nd petitioner Mrs. Jaya. P on account of serious manipulation and mismanagement in the companies relating to the share allotments mentioned above which are the main contentions in TCP/23/KOB/2019 (CP/57/2014 and TCP/146/2016 of Chennai Bench). 3. The Registered Office of the Company is in the State of Kerala and is presently situated at C-234/32, CAICO Road, Thrissur- 680 006. 4. The petitioners had filed the above said petition under Sections 111, 111A, 397, 398, 402, 403 and 406 of the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y had amended its Articles of Association (Hereinafter referred as 'AoA') to include the provision regarding the same. 6. The learned senior counsel quoted that at the Annual General Meeting of the Company held on 24.09.2009, the shareholders had superseded a previous resolution and permitted the directors to borrow amounts; Permitted the issue of Fully Convertible Debentures and amended Articles to include :- The shares shall be under the control of the Directors who may allot or otherwise dispose of the same to such persons and on such terms and conditions either at par or at premium or at a discount and as such times as the Board shall think fit including by way of issue of shares on preferential basis and/or through Private Placement mode or through conversion of debt or debt instruments into equity or in any other permissible manner. 7. Thereafter, 80,000 debentures were issued at face value of ₹ 250 per debenture. The same were to be converted after 48 months or at the option of the company. The issue was not fully subscribed and the time was extended. Then the Board allotted the debentures to subscribers at their discretion. Accordingly, 1st and 2n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is. The board has proposed further 1,60,000 shares on preferential basis to be allotted to themselves. 11. The petitioner further submitted that by an individual group gaining control over the shareholding of the company, the group comes into having control of the valuable landed properties of 1st respondent company at Mangalore, Cochin and Thrissur. It was further submitted that the directors who had failed to subscribe properly during the debenture issue in 2009, have now sought to allot shares to themselves on preferential basis to the tune of 1,60,000 shares after illegally increasing their shareholding in the company. 12. The senior counsel for the petitioners' stated that such an attempt by the respondent is oppressive and arbitrary. If the respondents are not stopped from carrying out this new act of oppression, it would make the company a closely held company when in fact the object of its incorporation itself was to serve the public at large through its business. The noble object of having a widely spread Public Limited Company has now been shattered by the respondents. The above detail of facts would warrant the winding up of the company on just and equitable gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tem no.6 in the Annual General Meeting notice dated 19.08.2014 without offering the shares to the other shareholders. The same was granted by the Hon'ble Company Law Tribunal, Chennai on 24.10.2014. The submissions made by the PCS for the respondents are as follows: 15. It was submitted that as per Register of Members of the company, the 1st petitioner became shareholder for the first time in July 2008 by holding 15 shares and not since 2006-07. But thereafter the 1st and 2nd petitioners were allotted 12,000 and 10,000 equity shares respectively in April 2011 by converting cumulative FCDs. 16. It was further submitted that Respondent 2 to 10 along with their related persons holds 39.78% of the paid-up capital of the company and not 8% of issued capital. It was also denied that the Board of Directors did not widely subscribe to the cumulative unsecured fully convertible debentures of the company. In fact, the Directors along with their related persons and persons acting in concert had subscribed to 36324 Fully Convertible Debentures out of 63842 debentures issued by the company, i.e., 56.90% of the issued FCDs of the company. 17. The counsel submitted that as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name of the company from the four directors. 20. The Learned PCS further submitted that the four allottees have been the shareholders and Directors of the Company for more than two decades. The directors made significant contributions by inducing funds into the company at a time when the company eroded its entire net worth which would have led it to bankruptcy and by utilizing the fund the Company is making a concerted effort to regain part of its lost market share. 21. The counsel for the respondents stated that as per Article 8 of the Articles of Association (AoA) of the Company, the shares are under the control of the Board of Directors. The petitioners cannot question the discretion of the respondent challenging the allotment, moreover the company duly complied with the requirements of the AoA and relevant provisions of the Companies Act. 22. The PCS appeared for the respondent submitted that the provisions of section 397 can be invoked only when the affairs of the company are being conducted in a manner oppressive to the members and a single act of allotment of shares, an isolated act, cannot be considered as an act of oppression. He further stated that there is no mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid down in the Companies Act and the despatch register of the respondent company was not a reliable proof for the same. The counsel for petitioners further claimed that the respondents have sought to concoct a story regarding the financial health of the company and in doing so are seeking to justify the acts of oppression committed by them. 29. The petitioner counsel submitted that a complaint has been filed against CAICO in respect of its subsequent issue of Fully convertible Debentures before the Securities and Exchange Board of India (SEBI). The SEBI undertook an enquiry to ascertain whether CAICO had made any public issue of securities without complying with the provisions of the Companies Act, 2013. The Board on 18.03.2019 decided that those Directors, who were directors at the time of issuance of FCDs are obliged to ensure refund of the money collected by the Company through the offer and would stand debarred till the repayment by the company. 30. The petitioners counsel mentioned that the allotment of shares to themselves on the premium decided by themselves for a rate of interest agreed by themselves and for loan taken by themselves is not only outrageous but shoot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (CAs) have been filed in the said company petition. The interim Orders, if any, passed in the said Company Applications are also mentioned along with the prayers for clarity: a. CA/1/2015 in CP/57/2014: This application was for restraining the respondents from taking up or passing any resolution on issue of unsecured FCDs, in any manner, listed under the head of special business in the notice dated 31.07.2015 for the 68th Annual General Meeting, which is to be held on 28.09.2015. The Hon'ble NCLT, Chennai Bench did not find any urgency for the same and applicant did not press for the same also. b. CA/30/2016 in CP/57/2014: This application was to implead the Legal Representative of the deceased 2nd Respondent. The above prayer was allowed on 26.10.2016 by the Hon'ble NCLT, Chennai Bench. Thereby, impleaded the Legal Representative as 17th Respondent. c. CA/19/2015 in CP/57/2014: This application was for restraining the respondents from alienating/disposing off the fixed assets of the company, including the property of the Company at Mangalore and to appoint an independent auditor to carry out investigative audit into the books of the 1st respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... X of the Indian Trusts Act provides for certain obligations in the nature of trusts. By reason of Section 88 of the Indian Trusts Act, a person bound in fiduciary character is required to protect the interests of other persons but the heart and soul thereof is that as between two persons one is bound to protect the interests of the other and if the former availing of that relationship makes a pecuniary gain for himself; Section 88 would be attracted. What is sought to be prevented by a person holding such fiduciary benefit is unjust enrichment or unjust benefit derived from another which is against conscience that he should keep. When a person makes a pecuniary gain by reason of a transaction, the cestui qui trust created thereunder must be restored back. 39. The issue to be considered in the instant petition is the purported breach of trust on the part of Respondents 2 to 10, who are the Directors of the 1st Respondent Company, pertaining to conversion of loan to 1,70,060 equity shares. 40. To arrive at a conclusion on the first point of consideration, we have relied on the following case laws/judgements: Sangram Singh Gaekwad vs. Santadevi Gaewad (2005) 11 SCC 374, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est, the company have to convert the loan into shares. We are of the view that the company is merely discharging their contractual obligation of converting the loans into the equity shares to those four directors. This is in no way a violation of the fiduciary duties of the Directors. 43. We are firmly of the view of taking into consideration the financial health of the 1st respondent company during that period, the acts of the directors can be justified as taken in the best interest of the respondent company. The above conclusion is also substantiated in the judgement of M/s. Harinagar Sugar Mills Ltd. Vs. Shyam Sunder Jhunjhunwala Others [ (1962) 2 SCR 339]. 44. The counsel for the petitioner had mentioned the judgement in Dale and Carrington (Supra) in support of his averments as observed by the Hon'ble Supreme Court in Sangramsinh P. Gaekwad (Supra), that the rationale in Dale and Carrington (supra), thus, must be understood to have been rendered in the fact situation obtaining in that case. It does not lay down a law that fiduciary duty of a director to the company extends to a shareholder so as to entitle him to be informed of all the important decisions taken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusion that they are part of the same transaction, of which, the object is to cause or commit the oppression of persons against whom those acts are directed. 49. After going through the above case laws and points which are taken for consideration in the instant petition, we have come to the conclusion that the said act of allotment of shares by conversion of unsecured loan to the four directors is an isolated act by the Board of Directors and not a continuous one. The judgement of Needle Industries (India) Ltd vs. Needle Industries Newey (India) Holding Ltd (Supra) and Shanti Prasad Jain vs. Kalinga Tubes Ltd (Supra) inter alia reads 'that it has been held that the person complaining of oppression must show that they have been constrained to submit a conduct which lacks probity, conduct which is unfair to them and which cause prejudice to them in exercise of their legal and proprietary rights as shareholders. It was further held oppression should be a continuous act continuing till the date of filing the petition.' 50. In the instant case, the petitioner failed to prove the continuing oppressive acts conclusively and we cannot rely upon a single act of the direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the light of the above ground, we are of the view that there is no need to pass an Order under Section 59 of the companies Act, 2013 (Corresponding to sections 111, 111A of the Companies Act, 1956) for correctness to be made in the Register of Members. iii. Thereby, we are vacating the interim order passed by the Hon'ble Company Law Board, Chennai Bench on 20.10.2014, restraining the 1st Respondent company from proceeding with the implementation of the special resolution passed at the duly held Annual General Meeting on 26.09.2014. iv. As regards the Fully Convertible Debentures (FCDs) issue, as this matter is sub judice with Securities Appellate Tribunal (SAT) of Securities and Exchange Board of India (SEBI), we are not interfering with the aforesaid matter at this juncture. 55. By exercising powers conferred on the Tribunal under section 242 of the Companies Act, 2013 (Correspondence to sections 402, 403 and 404 of the 1956 Act), TCP. No. 23/KOB/2019 (CP/57/2016; TCP No.146/2016 of Chennai Bench) and all connected Company Applications' filed in the main petition is hereby dismissed. Dated this the 13th day of November 2019. - - TaxTMI - TMITax - Co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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