Present: 1. Shri S. Balasubramanian, Vice-Chairman.
2. Shri K.K.Balu, Member.
IN THE MATTER OF COMPANIES ACT, 1956 (1 OF 1956)
AND
IN THE MATTER OF M/S FIREBRICKS
& POTTERIES PRIVATE LIMITED
PETITIONER:
RESPONDENTS:
1. M/s Firebricks & Potteries Private Limited
2. D. Balakrishnan
3. D. Vasudevan
4. D. Sampath
5.
D. Gopinath
6. R.N. Shetty
7. Satish R. Shetty
8. Sunil R. Shetty
9. Naveen R.Shetty
PRESENT ON BEHALF OF PARTIES:
1. Shri Arvind P. Datar, Sr. Advocate … for
Petitioner.
2. Smt. Chitra Narayan, Advocate … for Petitioner.
2. Shri K.G. Raghavan, Advocate … for Respondents 1 to 6.
3. Shri A. Murali, Advocate … for
Respondents 7 to 9.
O R D E R
(DATE
OF FINAL HEARING: 10.07.2001)
S. BALASUBRAMANIAN:
1.
The petitioner holding 15 per
cent shares in M/s Firebricks and Potteries Private Limited (“the Company”) has
filed this petition under Section 397/398 of the Companies Act, 1956 (“the
Act”) alleging various acts of oppression and mismanagement in the affairs of
the Company and has sought for
consequential reliefs. The facts
of the case are that the company is a private limited company previously
closely held by the petitioner and respondents 2 to 5 who are his real brothers
and his mother. The Company was
incorporated in 1943 by the father of the petitioner. The subscribed capital of the Company is Rs.3,25,000 consisting
of 3,250 shares of Rs.100/- While the
petitioner held and still holds 15 per cent shares in the company, balance
shares were held by the other family members.
In the year 1986, the petitioner was holding the office of Joint
Managing Director. The main object of
the Company was to manufacture tiles, firebricks, refractories, mosaic tiles
etc. The Company owns nearly 17 acres
of land. Due to failure of monsoon and
also competition from other manufacturers, the business of the Company was
affected during the year 1983-84 and 1984-85.
In view of the dire financial position of the Company, the shareholders
were exploring the possibilities of sale of the Company. Sometime in 1989, respondents 2 to 5 and the
mother decided to sell all their shares constituting 85 per cent to the sixth
respondent at a price of Rs.7,031 per share and this proposal to sell the
shares was to be considered by EOGM on
3.8.89. The petitioner filed a petition
under Section 397/398 of the Act before Karnataka High Court challenging the
proposal as being against the preemptive rights of the petitioner to acquire
the shares in terms of Article 37 of the Articles of Association of the
Company. The Court passed an interim
order to the effect that while the EOGM could be held, the decision taken there
at should not be implemented. Later on,
a single Judge of that Court permitted the Company to implement the decision of
sale of 85 per cent shares to the sixth respondent, the order of which was
taken on appeal to the Division Bench which upheld the order of the single
judge. On an SLP filed by the
petitioner before the Supreme Court, the same was dismissed. While the proceedings were pending before
the High Court, the petitioner filed an application seeking for permission
to withdraw the petition on the ground that subsequent to the filing of the
petition, there had been further acts of oppression and mismanagement and
seeking liberty to file a fresh consolidated petition before this Board. On considering this application, the Court
passed an order on 9.11.1998 allowing the withdrawal of the petition with liberty
to reinstitute the proceedings latest by 30.11.1998. Accordingly, this petition was filed before this Board on
27.11.1998. The main complaint in the
petition is that in transferring the 85% shares to an outsider, the Company had
acted in contravention of the provisions of the Articles. There are also allegations of
mismangement/misappropriation of the funds/assets of the Company by the
respondents.
2.
Before dealing with the
arguments of the Counsel, it is essential to extract Article 37 of the Articles
of Association of the Company, the interpretation of which would be essential
to adjudicate the main allegation in the petition. Article 37 reads as follows:-
“37 (i) No member shall transfer any of his shares to any
person except with the sanction of the company in general meeting, unless the
said person is already a member of the company and is approved by the
Directors. Shares may also be
transferable to an infant or minor provided either his or her father is alive
to represent him or her as guardian, or any person appointed by a competent
court of law to represent him or her as his or her guardian.
(ii) Shares may be
transferred at any time by a member to his or her father or mother or to any
lineal descendant of such father or mother, or to his wife or her husband and
any shares of a deceased member may be transferred by his executors or
administrators to the widow or widower or any such relative as aforesaid of
such deceased member, being a cestuique trust of special legatee thereof and
shares standing in the name of any deceased member may be transferred to or
placed in the names of the trustee of his will and upon any change of trustees,
may be transferred to the trustees for the time being of such will, subject to
the sanction of the company in general meeting and approval of the
directors. During the life time of a
member, he can nominate who the successor of his shares shall be and such
nomination shall be registered on the books of the company. These nominations shall be revocable.
(iii)
The Directors may in
their discretion refuse to sanction or to register transfer of any share to any
person who in their opinion is undesirable in the interest of the company to be
admitted to membership; but such right of refusal shall not be exercisable in
the case of any transfer made pursuant to clauses (i) and (ii) of this Article,
except for the purpose of ensuring that the number of members does not exceed
the limit prescribed by Article No.3.
The directors may refuse to register any transfer of shares on which the
Company has a lien.
(iv)
In order to ascertain
whether any member is willing to purchase the shares, the person whether a
member or his legal representatives in case of his death or insolvency
proposing to transfer the same shall give notice in writing to the company that
he desires to sell the same. No sale
notice shall be withdrawn except with the sanction of the directors.
(v)
Shares which are available
for transfer shall, except in the cases noted above, be offered in the first
instance to the other members pro-rata of their respective holdings and on
their refusal to take the same to any other member and on his refusal to a
third person.
3.
Shri Arvind P.Datar, appearing
for the petitioner submitted:- The sale of shares by respondents 2 to 5 had
been done in a clandestine manner to deprive the petitioner of his right under
the Article 37. As per Article 37(v)
all shares available for sale should be offered to other members pro-rata
meaning thereby that every shareholder has a pre-emptive right to acquire shares
which are offered for sale. Therefore,
without such an offer even the general
body cannot approve of the sale to an outsider in terms of Article 37(i). In other words, Article 37(i) does not
override the provisions of Article 37(v).
No sale of shares could be made without following the procedure
prescribed under Article 37(iv).
Eventhough, the respondents, in the reply admitted the position as
above, yet now they are taking the stand that if the general body approves the
sale of shares to an outsider in terms of Article 37(i) there is no need to
comply with the provisions of Articles 37(iv) &37(v). This stand is not supported by the terms of
Articles. The right of preemption
provided in the Articles is a superior right. Even Palmer’s Company Law Vol.I,
this superior right has been recognized.
It has been held in Shanta Genevieve Pommeret and another Vs.
Sakal Papers Pvt. Ltd. and others – (1990) 69 CC 65 that transfer of
shares to an outsider in contravention of the preemptive rights of a shareholder
is null and void and this Board itself has held in Indiana Dairy and
Allied Services Private Limited (1994 3 CLJ 529 CLB) that transfer of
shares in contravention of the preemptive rights in the Articles constitute
oppression. On the same proposition, he
relied on a few other cases also. Eventhough, the Karnataka High Court in
dealing with interlocutory application has held that the Company had complied
with the provisions of Articles, he submitted that, the decision is not binding on the CLB. Referring to the decisions in Arjun Sing Vs. Mohindra Kumar
(AIR 1964 SC 993 ), State of Andhra Pradesh Vs. Kokkoligada Meeraiah (AIR 1970
SC 771), and Vishnu Traders Vs. State of Haryana (1995 SUPP (1) SCC 461), he submitted that findings on an
interlocutory application are not res
judicata in other proceedings and as such the findings of the Karnataka
High Court are not binding on the CLB.
4. He
further submitted that in those proceedings the respondents had completely
suppressed the fact that even before the shareholders had issued a notice of sale to the Company on 19.6.1989,
they had already entered into a agreement with the sixth respondent on
9.6.1989, in which the complete
modalities relating to transfer, the price at which they were to be transferred,
the closure of the Company, retrenchment of workers etc. had already been
agreed to. This agreement was not disclosed to the High Court and as a matter
of fact when the petitioners filed an application before this Bench seeking for a copy of this agreement, in the
reply, the Company had denied existence of any agreement. However, the petitioners have filed a
copy of the agreement on 14th
February, 2001. A reading of the
agreement would indicate that the transferor
shareholders had practically sold the Company itself to the sixth
respondent as early as on 9.6.89. As
per terms of paragraph 3.2 of the agreement, the transferor shareholders had
also undertaken not to enter into any agreement for sale of the shares to
anyone else. Further, they had also
agreed to take an advance of Rs.25 lakhs to be kept in escrew with the Vijaya
Bank, Race Course Road, Bangalore.
Therefore, having fully completed the sale agreement, the notice issued
to the petitioner giving him option to purchase the shares is nothing but a
sham notice which has no legal validity at all. If this agreement had been produced before the High Court, there
is every possibility that the High Court would have taken different view in
giving its finding. In short, the
respondents had played a fraud on the High Court and any order obtained by
means of fraud is a nullity as held United
India Insurance Company Limited Vs. Rajendra Singh - (2000 3 SCC 581) and State of Maharashtra Vs. Dr.Budhikota Subba Rao (1993 1 Crimes 1120).
5. He
further submitted: Even though, the Company was doing well, it closed down the
factory in the year 1985-86 due to failure of monsoon, severe competition from
other tile manufacturers and strike resorted to by the employees. At this point of time, the third respondent
who was the Joint Managing Director took over the management of the Company
with the active support of the other family shareholders which resulted in
further deterioration in the financial position of the Company. These respondents misappropriated the funds
of the Company by not properly accounting for sale of raw-materials as well as
machinery belonging to the Company aggregating Rs.7 to 8 lakhs. They also indulged in financial impropriety
by utilizing Employees Gratuity Fund for paying income tax and other
liabilities of the Company.
Notwithstanding the dire financial position of the Company, they drew
huge amounts of money towards perks and remuneration and they did not convene
Annual General meetings as well as Board meetings. In spite of these
allegations of fraud against these respondents, they have not chosen to take
part in these proceedings and as such these allegations should be deemed to
have been established against them. On
this proposition, he relied on Express Newspapers Private Limited Vs.
Union of India ( AIR 1986 SCC 872) and Lohia Properties(P)Limited
Vs. Atmaram Kumar–(1993 4 SCC 6).
6.
Shri Datar further submitted:
After the respondents 6 to 9 took over the Company after the purchase of the
majority shares, they have been indulging in various acts of mismanagement by
diverting funds and properties of the Company.
They have stopped the business of manufacture of tiles and ceramics and
have converted the use of the property from industrial use to residential and
commercial uses at an exhorbitant cost of Rs.76 lakhs. The respondents have constructed a show-room
at a substantial cost on the land belonging to the Company and leased out the
same to an entity belonging to them in breach of their fiduciary duties as
directors. It has been held in Elgindata
Limited (1991) BCLC 959 that use of company’s assets for personal
benefit is an act of oppression.
Further the respondents have not established that the Company derived
any benefit by such an act which is incumbent on them in terms of the decision
in M/s Pierce Leslie and Co. Ltd. and others Vs. Miss Violet Ouchterlong
Wapshare and others (AIR 1989 SC 849). The
expenses incurred for this purpose are unrelated to the object of the
Company. They did not obtain the
approval of the Board for any of these decisions. Further, they have also removed stock and machinery and other
assets belonging to the Company during the period between 1989-90. Presently, respondents 6 & 7 are taking
steps to construct buildings on the land of the Company which is contrary to
the main object of the Company and as such the basic structure of the business
has changed. They have also taken steps
to sell a portion of the land located on the main Bangalore-Tumkur Road which
is very valuable. Further the petitioner
holding 15 per cent shares as director of the Company has been completely
excluded from decision-making.
7. Accordingly, Shri Datar prayed for a declaration that the
transfer of 2,719 shares by the respondents 2 to 5 to the other respondents is
illegal and void that these shares
should be directed to be transferred to the petitioner and that an
investigation into the affairs of the Company should be ordered for the period
1989 onwards and that the respondents 2 to 9 should be surcharged for
misappropriation of funds of the Company.
8. Shri K.G.Raghavan, Counsel appearing for the respondents,
while reiterating the averments made
in counter statement, pointed out that
prior to disputes between the parties, the entire share holding of the Company
was held by the petitioner with his brothers-respondents 2 to 5, mother and
other family members. The Company was
constrained to suspend its business operations in the year 1985 – 86 on account
of inter-alia recession in the
market, labour problems and accumulated statutory and other liabilities. Consequently the Company was looking for a
prospective purchaser to take over the assets in the interest of all the
members. He drew our attention to the
negotiations and proposals made with one Shri. B.V. Satyanarayana and M/s
Sanmar Financial Services Limited as early as in the year 1987 and 1988. He pointed out that the petitioner was also
actively involved in the negotiations for sale of the assets of the Company. Against this background, sixth respondent
came forward in June 1989 to purchase the
impugned shares from respondents 2 to 5 and accordingly he sent a letter
of offer dated 01.06.1989, which was followed by an agreement dated 09.06.1989
between the respondents 2 to 5 and respondent No. 6. The said agreements were subject to certain terms and conditions
which included compliance with Article 37 of the Articles of Association of the
Company. He further pointed out that
article 37(1) prohibits transfer of shares by a member to an outsider unless
such transfer is sanctioned by the Company in general meeting. If the shareholders in general meeting
accord sanction, a member is empowered to transfer his holdings to
outsiders. He urged that the second
part of clause (i) and Clause (ii) is
not relevant to the present case.
Clause (iii) of article 37 speaks of discretion of the Board of
Directors to refuse sanction or register transfer of any share. Clause (iv) details the procedure to be
followed to ascertain whether any member is willing to purchase the share. This clause according to Shri. Raghavan will
apply only when the offer by an existing member is made and there is no
sanction by the share holders in general meeting for transfer in favour of a
non member. Under clause (v) shares which are available for transfer save
mentioned under clauses (i) and (ii) should be offered at the first instance to
other members pro-rata of their respective holdings and upon their refusal to
accept the shares to any other member and on his refusal to a third person. This clause gives pre-emptive right to a member.
However this pre-emptive right will not be available, if the shares are
transferred to a non member with approval of the share holders in a general
meeting and also in the case of transfer by a member to the persons specified
in clause (ii). He emphasized that
there is no ambiguity on account of article 37 if it is read as a whole and in
the same sequence as it is framed. Even
if there is ambiguity, he pointed out the courts are inclined to interrupt the
articles giving the share holders freedom to transfer and in support of his
view he placed reliance on Pennington’s Company Law, 5th
edition page 372. Accordingly,
respondents 2 to 5 had every right to transfer their shares as they deemed
fit. He further submitted that
notwithstanding the fact that Article 37(v) is not applicable, yet, the
Company, by way of abundant caution gave notice to the petitioner in terms of
this Article, but, instead of accepting the offer, he approached the High
Court. Shri Raghavan invited our
attention to the following sequence of the events to show that the Company had
complied with the requirements of article 37, both in letter and spirit:-
a.
An offer was made by the 6th Respondent by a letter dated
01.06.1989 (annexure R-15) to respondents
2 to 5 and other family members to buy impugned shares at rate of Rs. 7031 per
share.
b.
Respondents 2 to 5 addressed
a letter dated 19.06.1989 (annexure R
–16) to the Company to find out buyers
for their shares and notifying the offer made by the 6th Respondent.
c.
The Company had convened a
board meeting on 03.07.1989, and considered the request made by the respondents
2 to 5 to sell their shares and resolved to convene a general meeting on
03.8.1989 for obtaining sanction of the general meeting to transfer the shares
to the outsiders.
d.
The Company by letter dated
03.07.1989 (annexure R – 18) made an offer to the petitioner giving him the
first option to purchase all or any part of the impugned shares at a rate of
not less than Rs. 7,031 per share, within 10 days.
e.
The petitioner by his letter
dated 13.07.1989 (pages 54 and 55 of Vol – II) sought for certain clarifications/particulars and sought for some more time to accept the offer.
f.
The Company by its letter
dated 19.07.1989 clarified the issues raised by petitioner and extended the
time till 31.07.1989 for communicating the petitioner’s acceptance.
g.
The petitioner by his letter
dated 24.07.1989 (pages 58 & 59 of Vol – I) advised Company that the price
of Rs.7,031 per share offered by the 6th respondent did not reflect the true value of the assets of
the Company or market value and sought for further details.
h.
Without waiting for a response
to this letter, the petitioner approached the High Court of Karnataka on
27.07.1989, and failed to exercise the right of pre – emption to purchase the impugned shares.
9. Shri. Raghavan pointed out that the Company had not only
offered the shares to the petitioner to purchase them at the rate of Rs 7031
per share under article 37 (v) but also obtained sanction of members in the
general meeting for transfer of share
in favour of respondent 6 to 9, being non members, in terms of Article 37(i).
He further pointed out as and when the members accorded sanction in
terms of article 37 (i) the right of pre – emption under article 37 (v) becomes
redundent and the Company was empowered to register the transfer in favour of
an outsider. According to him, the
right of pre–emption is a weak right in support of which he relied upon following
decisions:-AIR 1958 Supreme Court, 838; AIR 1960 SC 1368 – Radhakishan
Lakshminarayan Toshniwal Vs. Sridhar Ramchandra Alshi. And 1971
(I) S.C.C 12 – Bhagwandas (dead) by LRS Vs. Chet Ram.
10. Shri Raghavan pointed out that the single Judge and Division
Bench of the High Court of Karnataka have already given a categorical finding that the Company had complied with
the procedures laid down in the Articles of Association of the Company in the
matter of transfer of shares and the SLP filed on this finding had been
dismissed by the Apex Court. This categorical finding would bar the petitioner
on the principle of res judicata to reagitate the same issue and would
also mean that there is an estoppel by order or judgment.
11. Shri Raghavan denied the acts of the oppression alleged
prior to the year 1989 and urged they have become irrelevant especially when the business activities of
the Company remained suspended since the year 1985. Shri Raghavan emphasized
that agreements dated 09.06.1989 were not required to be disclosed to the
High Court, especially when the petition was
not concerned with the said agreement, in view of the fact that the
petitioner has no right of pre – emption under article 37. He urged that non
production of the agreements with the transferee-respondents does not amount to
a fraud played by them, more so the letter of offer dated 19.06.1989 of the
share holders did contain the price offered by the 6th Respondent
and also the said agreement was produced pursuant to the order of the Company
Law Board. The agreement dated
09.06.1989 contained the basic terms
and conditions of the letter of offer dated 01.06.1989 of respondent No 6. He further pointed out that the agreement
dated 09.06.1989 was subject to, among other things, obtaining the sanction of
the share holders of the Company under article 37 before effective transfer of
shares.
12. He further submitted: There has been no plea of oppression
against respondents 6 to 9 subsequent
to the transfer of shares. On the other
hand after taking over the management by respondents 6 to 9, all the statutory
formalities were completed, statutory liabilities were paid and the dues of the
employees were settled. Board meetings of the company are being held regularly
with notice to the petitioner as also the AGMs and the petitioner continues as
a director not withstanding his being in minority. However the petitioner
has been a stumbling block for the progress of the Company. The Company could generate income by way of
lease rental after prolonged years of suspended activities of the Company. The
petitioner has been obstructing the
attempts made by the respondents for
development of company’s properties by objecting such proposals in the Board
meetings. The petitioner having failed
before the High Court of Karnataka as well as the apex court, has approached
the Company Law Board on the very same averments and for similar reliefs. The petitioner is indulging in forum shopping and hence the petition
should not be entertained as has been held by this Board in A.P.Jain
Vs Farthabath metal Udyog Private Limited – (95 C.C page 76.)
13.Summing
up his arguments, Shri Raghavan submitted that in view of the High Court
finding that the Company had complied with Article 37, no order relating to the
shares should be passed in regard to the shares. In so far other allegations
against the respondents 6-9, he submitted that in view of the Company having
ceased its operations, these respondents had to take some other activities to
keep the Company alive and as such these acts cannot be acts of mismanagement.
Accordingly, he sought for dismissal of the petition.
14.We
have considered the pleadings and arguments of the Counsel. Considering the fact that the disputes
between the parties have been going on
for over a decade, we suggested to the
parties to amicably resolve the disputes. Even though it was generally agreed by the parties that a certain
portion of the land could be transferred to the petitioner in proportion to the
shares held by him in consideration for the shares, yet due to differences in relation to the identification of the
portion of the land, the compromise efforts could not succeed and the
petitioner was not willing to sell his shares to the respondents for cash
consideration. Accordingly, the matter
was heard on merits.
15.The
first aspect to be noted with regard to
Article 37 is that, unlike the
Articles of a normal private limited company, this Article does not provide
for any mechanism for determining the
fair value of the shares and it appears that in the absence of such a provision,
the shareholder who proposes to sell the shares, could himself fix the
price for the shares. This aspect
becomes essential in deciding the issue before us. In interpretation of an
Article of a Company which has various sub-clauses, a harmonious and
meaningful construction has to be attempted at. From a reading of the Article 37 as a whole, it is evident that there is no
bar in transferring the shares among the
members and to the linear descendants of the members. It is also evident that when the shares are
transferred among the members, the selling member is entitled to decide the
member to whom the shares are to be sold.
Article 37(iv) would come into play only when a selling shareholder is
unable to decide the member to whom the share are to be sold. In that case, he has to issue a notice to
the company to ascertain as to which of the member is willing to purchase the
shares. Thereafter, as per Article 37(v), the Company has to
offer the shares to all the shareholders on a pro-rata basis and in case no
shareholder is willing, the shares could be offered to a third party. However, Article 37(i) provides for
exemption from the provisions of Article 37(iv) and (v) by getting a sanction
of general body for sale to an outsider.
The learned counsel for the petitioner vehemently put forward an
argument that Article 37(i) cannot have precedence over Article 37(iv) and
(v). We are unable to agree with this
contention. A reading of the Articles
would indicate that the supremacy of the general body has been recognized in
permitting a member to transfer shares to a non-member. The sequences of the various sub-clauses
also would indicate that the procedure prescribed in the Articles are to be
followed in the sequence as they are
framed. This is evident from the
fact that in Article 37(iii) which has been specifically provided that the
director shall not exercise to refuse admission of any one as a member if the
transfer had been effected in pursuant to Clauses (i) and (ii) of Article 37. Likewise in Article 37(v) also it has been
specifically mentioned that the pro-rata offer is to be made “except in
cases noted above.” Therefore, it is beyond doubt that the sub clauses in
the Article 37 have to be construed in the same sequence in which they have been
framed. Assuming for argument sake that the Article 37(v) has to have
precedence over Article 37(i), then the latter Article becomes infructuous, as,
Article 37(v) provides that if no one accepts the offer of sale, then, such
shares could be sold to an outsider.
Thus, once the shareholders approve the transfer of shares to a
non-member in terms of Article 37(i), the question of pro-rate offer does not
arise.
16.However,
this interpretation has become academic in facts of this case. From the sequence of events as elaborated by
the learned counsel for the respondents and noted at paragraph 8 ante, it is
seen that on 19th June, 1989, the respondents 2 to 5 addressed a
letter to the Board indicating therein that these respondents were desirous of
selling their shares for a price not less than Rs.7,031 per share and requested the Board to ascertain whether any other member was
willing to match this price. In that
letter, they have also mentioned that the sixth respondent was prepared to buy
the shares at that price. The tenor of
the letter indicates that it was a notice in pursuant to Article 37(iv). In the Board meeting held on 3.7.89, the
said letter was placed before the Board and this meeting was attended by the
petitioner. In that meeting, the proposal
to convene a general body meeting to get its sanction for sale to an outsider
in terms of Article 37(v) was discussed and it was decided to convene a meeting
for this purpose 3.8.89. It was also resolved that letters be addressed to all
the shareholders inviting offers for the purchase of the shares at a rate not
less than Rs.7,031 and that the offer was
to be kept open for a period of 10 days from the date of offer. We find from the minutes, that in spite of
the decision of the Board to make offer to the shareholders, yet the petitioner
had protested against the methodology adopted by the Board and had not thus
given his consent to the resolution. In
accordance with this resolution, a letter of offer was issued to the petitioner
on 3.7.89 giving him 10 days time for remitting the price in full for all the
shares that the petitioner desired to
buy. In that letter, it was also
specifically stated that in case the petitioner did not accept the offer, the
shares would be sold to the sixth respondent.
Thereafter, on 8.7.89, the Company issued a notice for convening a
general body meeting on 3rd August, 1989 to consider the sale of
shares to the sixth respondent. Along
with the notice, an explanatory statement in pursuant to the Section 173 of the
Act had also been enclosed, wherein it was
stated that in view of the dire financial situation of the Company, the
shareholders had been attempting to sell the shares for a good price for quite
some time but without any success and
that the sixth respondent had come forward to purchase the shares from the
shareholders for a sum of Rs.7031 per share and that the petitioner had also
been offered these shares for the same price and that in case the petitioner
did not exercise his option, the shares would be sold to the sixth
respondent. In response to this notice
dated 3.7.89, the petitioner sent a reply on 13.7.89. In this letter, the second para reads “I note that, in terms
of the Articles of Association of the Company, the Board of Directors has
offered me the first option to purchase all or any part of 2970 equity shares
of the Company, proposed to be sold by eight shareholders, at the rate of
Rs.7,031 per share.” Having thus
categorically admitted that the Company
had complied with the provisions of Article 37 (which now he vehemently
complains that it has not been done
so), he had sought certain clarifications/details to enable him “seriously
consider the very generous offer made to me by the Board and take suitable
action thereon.” He had also sought
for extension of the stipulated period of 10 days for accepting the offer. In response to this, the Company, while furnishing
some of the details sought for by the petitioner, also extended the
period the validity of the offer upto 31st July, 1989. By a letter dated 24.7.89, the petitioner
had expressed that the price of Rs.7,031/- as offered by the sixth respondent
did not reflect true value of the assets of the Company or the best market
value thereof and he had also complained that the Board had not accepted his
earlier suggestion of giving a wide publicity for sale of shares which could
have maximized the gains to the shareholders.
In that letter, he had also sought for various details regarding the
terms and conditions of the offer made by the sixth respondent. He has ended the letter with the caution
that pending making the details sought for by him, the Company should not take
any precipitate action to dispose of the
shares. Without waiting for any reply
to this letter, the petitioner filed company
petition 77 of 89 before the Karnataka High Court and obtained an interim order
by which the company was permitted to hold the EGM but was restrained from
taking further action in terms of the resolution passed in that meeting. Thereafter, in the EOGM held on 3.8.99, the
general body approved the sale of 2,719 shares to the sixth respondent at
Rs.7,031/- per share.
17.From
the sequence of events and on his own admission of the petitioner in his letter
dated 13.07.89, we find that the Company had fully complied with the terms of
the Article 37(iv) and 37(v) and had also
resorted to the provisions of
Article 37(i). In other words, the
shareholders/the Company had fulfilled the requirements of both Article 37(v)
and 37(i) in selling the shares to a non-member. In view of this, we find that the petitioner cannot have any
complaint that the provisions of Articles have not been complied with and as a
mater of fact, it had doubly complied with the provisions of the Articles. In this connection, it is also necessary to
mention that in addition to the compliance with the provisions of the Articles,
the sale had been effected with the approval of the High Court – both single judge Bench as well as Division Bench
and confirmed by the Supreme Court.
Even though, it was contended that interlocutory orders need not be
considered to be res judicata, in the present case, we find that the
order of the single judge was on a substantive application filed by the
respondent for vacation of the earlier interim order and that this order, on
challenge was upheld by the Division Bench with a detailed judgement and upheld
by the Supreme Court. It does not
appear to us that these orders were passed on a prima-facie view, considering
the manner in which both the single judge as well as Division Bench had
analysed the entire facts of the case,
and came to the conclusion that the shareholders/the Company had
complied with the provisions of the Articles. These findings rather being prima facie findings, appear to be categorical
findings. Thus, according to us, the
issue relating to the sale/compliance with the provisions of Article 37 had
reached a finality at the High Court level itself. Therefore, there would have been
nothing for us to adjudicate on the same issue now, but our findings are
similar to that of the High Court.
18.Shri
Datar vehemently argued that the respondents had suppressed very relevant
documents in the proceedings before the High Court. According to him, the agreement dated 9.6.89 that was entered into
between the shareholders and the sixth respondent was very relevant and if
these documents had been disclosed to the High Court, it would have given a
different finding on the compliance with Article 37. It is a settled law that if any order is obtained by suppressing
material documents or by fraudulent means, such an order has no validity and
can be recalled or set aside on a review by the Court which made the
order. However, we note that the
petitioner had filed an affidavit dated 28.8.95 in the proceedings before the
Karnataka High Court complaining that the agreement dated 9.6.89 had been
suppressed from him and he could know that only from another agreement dated
26.9.91 in which the agreement dated 9.6.89 had been referred to. In the affidavit, he had also sought the
permission of the Court to produce an agreement dated 26.9.91. There is nothing on record to show whether
this application was pressed by the petitioner during the period from the date
of filing and till he withdrew the said petition from the High Court. Anyway, in the present case, since the
proceedings before the High had been withdrawn with liberty to re-agitate the
same, it will not be appropriate for us to speculate what view High Court
would have taken if the documents had
been produced before it. Since the entire matter is before us and the documents
are placed before us, we shall examine as to whether this agreement could have
a bearing on our findings as recorded in
earlier paragraphs. By this
agreement, eight of the shareholders, including the respondents 2 to 5, entered
into an agreement on 9.6.89 for sale of 2,392 shares held by them to M/s R.N.
Shetty and Co. This is a comprehensive
agreement casting obligations on the
part of the transferors, the
transferees and the Company. As per
this agreement, a sum of Rs.25 lakhs was to be paid at the time of the
agreement to the transferors but to be kept in Vijaya Bank in Escrew till the
transferors arranged to have the sanction of the general body in terms of the
Articles of Association. The total
consideration payable was to be paid within a period of one year after
fulfillment of the obligations by the transferors within a period of six
months. According to the learned
counsel for the petitioner, in view of this agreement, there had been a
concluded contract between the transferors and transferees and therefore the
offer notice given to the petitioner was nothing but a sham notice. It is not
uncommon that agreements are entered into subject to fulfillment of certain conditions
and till those conditions are fulfilled, there cannot be a binding
agreement. In the present case, in
spite of the fact that various terms relating to the company had been
incorporated in the agreement, yet the agreement would have reached a finality
and would have become enforceable, only when the condition relating to getting
the general body consent in terms of Article 37 had been obtained for transfer
of shares as stipulated in Clause 7 of the agreement. Before passing the resolution, the petitioner was given an offer,
before the expiry of the period of which,
the petitioner moved the High Court.
We could have found some substance in the arguments of the petitioner if
he had accepted the offer even before the general body passed the resolution and
the other shareholders/the Company had, relying on this agreement, rejected the
acceptance of offer by the petitioner.
Now that the agreement is before us,
for reasons recorded above, our
finding on the compliance with the
provisions of the Article 37 would not have been different from what we have
already decided. In other words, in
interpreting the provisions of Article 37 and compliance thereof, the agreement
is not a relevant factor to be taken into account, in view of the very specific
provision in the agreement that the transferors had to comply
with the provisions of the Articles before the transfer of shares could be effective.
19.Even
though, it was not argued, the petitioner has raised an issue in the petition,
that in a family company, shareholders
could not have sold the shares to an outsider.
This stand of the petitioner, we find is not tenable in as much as there
is ample evidence by way of documents that even the petitioner was
interested in finding out a buyer for the Company, in view of the dire
financial position of the Company.
Further from the letters written by him in response to the offer made,
we find that the petitioner was questioning the quantum of consideration for
the shares. We have already indicated
earlier that the Articles has not
provided for any method of valuation of the shares and therefore, the
shareholders were at liberty to sell the shares at a negotiated price and if
the petitioner really felt that the price of Rs 7,031 was inadequate, he should
have jumped at the chance of acquiring of the shares in terms of the offer made
to him. Shri Datar pointed out that on
an inspection of the records in the Registrar’s Office, it was found that the
land price at the relevant period was much higher than the value at which the
price of Rs.7,031/- per share was arrived at.
As we have already noted the Articles do not indicate the method of
valuation of shares and for exercising the pre-emptive right, the valuation of
land has no consequence. No doubt, we
find some justification in his claim
that while the transferors had been given one year time to the sixth and ninth respondents for
paying the consideration for the shares, the petitioner was given only 10 days
time. Yet it is to be noted that when he sought for time in his letter dated
13.7.89, he had not specified the time he desired to have and rather he only requested for “somemore time”. In his
later letter dated 24.7.89 also, after the company had given time upto 31.7.89,
he had not sought for extension of time.
On the whole, from the date of offer on 3.7.89 upto 31.7.89, the
petitioner had more than 25 days time and yet at no point of time he had even
indicated that he was interested in accepting
the offer and that he required further time in which case, we would have
found that there was justification in the petitioner’s claim that he had been
treated differently from that of respondents 6 to 9. We also note that even before the High Court, he did not seem to
have made any offer that he was interested in purchasing the shares, especially
when the Court had directed that resolution of EOGM should not be
implemented. Thus, as far as the
transfer of shares is concerned, we do not find any merit in the contention of
the petitioner that either the provisions of Article 37 had not been followed
or that the whole exercise of offer had
been done in a deceitful manner. While coming to this conclusion, we also note that even though, there
were eight transferors, the petitioner
impleaded four of them.
20.As
far as allegations of the petitioner in regard to the affairs of the Company
prior to 1989 and against the respondents 2 to 5, we do not find that any of
the allegations is substantial in nature.
Further it is on record that these respondents assumed control of the
Company only in 1986 by which time, the operations of the Company had come to
standstill. Further at this distant
point of time, without any documentary evidence on these allegations, it is not
possible to adjudicate on the same.
21.In
regard to the allegations relating to the period thereafter and against the
respondents 6 to 9, we find from the petition itself that between 1992 and
1996, in view of the various objections raised by the petitioner, the
Company/respondents 6 to 9 had not taken any decision in regard to properties
of the Company. In other words, the
petitioner knowing fully well that the Company was not doing any business right
from 1986 did not allow the respondents/major shareholders of the Company to
take any decision beneficial to the Company till 1996. Even the allegations relating to the
properties of the Company, the main allegation as per the petition is that
respondents 6 to 9 had not taken the approval of the Board or the shareholders
in dealing with the property of the Company.
When it is in the knowledge of the petitioner that the Company has
ceased its operation and the only valuable assets of the Company is the land in
possession, we do not consider that the attempts made by the respondents in
developing this land for alternative uses or leasing out of the same for
earning revenue to the Company could be considered by either mismanagement or
oppression. The petitioner has
questioned the leasing of land to R.N. Shetty & Co. by a lease deed dated
25.6.98 and also an agreement with the same firm dated 25.6.98 for establishing
a show-room on the ground that the sixth respondent has parted with the
property of the Company in favour of his own firm. As we have already pointed out that any action taken by the
Company for the purposes of earning revenue can never be considered to be an
act of mismanagement. But in the
present case since the agreement is between the Company and another entity of
the sixth respondent, the only aspect that has to be examined is whether the
lease rental is reasonable and market oriented. In the absence of details on comparable lease rentals, it is
difficult to adjudicate on this as to whether any undue benefit has been
bestowed on the firm. However, we do
not propose to deal with this issue in details on account of the final
directions that we propose to give.
22.The
disputes between parties have been going on for over a decade and our prolonged
attempts to settle the matter amicably have failed. Eventhough, our findings on the allegations reveal that the
petitioner has not established either acts of oppression or mismanagement in
the affairs of the Company, yet considering the fact that he is the only member
of the family which established the Company in 1944 and carried on the business
till 1986, his interest deserves to be protected. However, he is a minority shareholder holding only 15 per cent
shares and in spite of that he has continued as a director even after the
respondents 6 to 9 gained control of over 85 per cent of the shares. From the minutes of the Board Meetings, we
find that the petitioner is out-voted on most of the occasions. Therefore,
it would be in the interest of the petitioner himself that he goes out of the
Company on receipt of fair consideration for the shares held by him. Accordingly, we give the option to the
petitioner either to continue as a member of the Company or go out of the
Company on receipt of fair consideration.
In case he desires to go out of the Company on receipt of fair
consideration he should issue a notice to the Company/respondent by 28.3.2002
expressing his desire to go out of the Company. As far as assessment of the fair value is concerned, the
petitioner will have the option to compute the same on the basis of Rs.7,031/-
per share with interest at 12 per cent compounded annually from the date on
which the payment for the shares of other shareholders was made by the
respondents, up to 28th February, 2002. Otherwise, he has the option of having the fair value determined
by an independent valuer to be appointed by us on the basis of the value of the
Company as on 31st March, 1999 being the proximate date of petition
which was filed on 27.11.1998.
Accordingly, the following directions are given:
In case the
petitioner desires to go out of the Company, he should issue a notice to the
Company/respondents indicating as to whether he would like to have the fair
price determined on the basis of Rs.7,031/- per share with compounding interest
(annually) at 12 per cent or he would like to have the fair value determined by
an independent valuer to be appointed by us.
Once the petitioner exercises this option, the same will be binding on
the Company/respondents. In case the petitioner desires to determine the fair value
on the basis of Rs.7,031/-, the entire consideration should be paid within
three months from the date of receipt of communication from him. In case he desires to have the value
determined by an independent valuer, he should make an application to this
Bench after which this Bench will appoint an independent valuer.
23. With the above directions, the petition is disposed of.
(K.K.
BALU) (S. BALASUBRAMANIAN)
Dated this the 28th day of February 2002