BEFORE THE COMPANY LAW BOARD

PRINCIPAL BENCH

NEW DELHI

 

C.P.No.63 of 1998

 

                Present: 1. Justice A.K. Banerji, Chairman

2. Shri S. Balasubramanian, Vice Chairman

In the matter of Companies Act, 1956-Sections 397/398

AND

In the matter of M/S Bombay Cable Car Co. Private Limited

PETITIONER:

       B.M. Jain & Sons Co.Pvt.Ltd.

RESPONDENTS:

1.     The Bombay Cable Car Co.Pvt.Ltd.

2.     Shri Sabir Rashid

3.     Ms. Dilshad S. Rashid

4.     Shri Faisal Rashid

5.     Shri Zain Ali Rashid

6.     Pune City Municipal Corporation.

Present on behalf of the parties:

    1. Shri Sudipto Sarkar, Sr. Advocate                         .. for petitioner

    2. Shri Ranjan K. Pandey, Advocate                         .. for petitioner

    3. Shri Jay Savla, Advocate                                            .. for resp. 1 to 6

    4. Shri P.A. Kabaoi, Advocate                                  ..           -do-

    5. Ms. Meenakshi Ogra, Advocate                                  ..            -do-

O R D E R

(Date of  final hearing: 17.8.2000)

 

S. BALASUBRAMANIAN:

 

1.     The petitioner company claiming to hold 50% shares in The Bombay Cable Car Co. Private Limited ( the company) has filed this petition through one of its directors Shri Mahendra Kumar Jain, alleging acts of oppression and mismanagement in the company,  in terms of Sections 397/398 of the Companies Act, 1956 (the Act).

2.     The brief facts of this case are that the company was incorporated in 1983 with an authorized capital of 50,000 shares of Rs 100 each by one Rashid Group, the respondents.  In 1988, the 6th respondent awarded a contract to the company to set up a project for a passenger ropeway system in Pune.  The project cost was estimated at about Rs.6.5 crores.  To finance this project, the Rashid Group entered into an agreement in 1993 with one Lokhandwala Group by which the later was to invest certain amount of money for the project and it also was allotted 19,170 shares of Rs.100/-each in the company.  Since Lokhandwala could not mobilize sufficient funds, an agreement was entered into between Lokhandwala Group, the petitioners group known as Jain Group and Rashid Group and the company  on 28.11.1995 by which the entire shareholding of Lokhandwala Group was transferred to Jain Group.  At that time, Rashid Group was also holding equal number of shares of 19,170. Thus, both Rashid Group and Jain Group held 50% shares each in the company. There remained  11,660  unissued shares out of the authorized capital and the agreement provided that Jain Group would subscribe to 50% of these shares, ie., 5830 shares. As per the agreement,  the Jain Group was to have 3 directors in the company of which one was to be the Chairman and Rashid Group was to have 4 directors including Vice Chairman cum Managing Director.  The agreement provided for the Jain Group funding the project to the tune of Rs. 1.6 crores ( including the consideration for acquisition of the shares from Lokhandwala Group).   In  January, 1994, the 6th respondent had issued a stop work notice because of which the entire project came to a standstill.    In view of the stop work notice,  the company went in for an  arbitration in regard to the disputes with the 6th respondent and the arbitrator has awarded an amount of Rs.2.97 crores in favour of the company.  Presently, this arbitration award is under challenge. Certain disputes had started between the parties resulting in two parallel Board functioning in the company. The Rashid Group have filed a suit in Bombay High Court for a direction to the Jain Group to transfer all their shares to the Rashid Group in terms of Clause 20 of the Agreement, on account of their failure to invest the amount of Rs 1.6 crores as per the agreement and the suit is pending. In the same suit, the High Court has restrained the Jain Group from styling themselves as directors. One of the shareholders of Jain Group has filed a civil suit in Calcutta seeking to restrain the company from utilizing the amount of the Arbitration award and also for a declaration that the Board has become defunct and this suit is pending.   The allegations of the petitioner in this petition  are that the company had issued 11,660  shares behind the back of the Jain Group to Rashid Group, thus reducing the Jain Group into a minority  and that the directors belonging to this Group have been removed as directors.  On the basis of these  allegations, the petitioner has sought for a declaration that the allotment of additional shares as null and void and also for a declaration that the proceedings of General Meetings and Board Meetings  as void for want of notice to the Jain Group.

3.     Shri Sarkar, Sr. Advocate,  appearing for the petitioner submitted that the company was in fact a partnership between Jain and Rashid Groups arising out of the agreement dated 28.11.1995 ( Annexure A-4). As per this agreement  the petitioner not only acquired 50% shares in the company but was also entitled to get 50% of the un issued shares of the company. It was also to have  3 of its nominees as directors on the Board including the Chairman.  Shri Mahender Kumar Jain was inducted as an additional director in a meeting held on 28.11.1995 and was  also authorized to operate the bank accounts of the company with one of the 3 other directors of Rashid Group by a Board Resolution dated 28.2.1996.  The Jain Group took enormous efforts in the 6th respondent's reconsidering the notice of stop work and a proposal to this effect was put up before the General Body of the 6th respondent in December, 1995.  In October, 1996, the company referred the dispute with the 6th respondent to arbitration.  The Rashid Group did not inform the Jain Group about the stop work notice when they entered into the said agreement in November, 1995.  However, they pressurized the Jain Group to invest the entire Rs. 1.6 crores notwithstanding the fact that the project had come to a stand still.  Since the petitioner had agreed to provide funds only for the execution of the project and since the project had come to a stand still, other than spending a substantial amount  on behalf of the company in getting  certain clearances, the petitioner did not invest further funds.  However, the petitioner asked for details of the requirements of funds but the company did not provide any details.  Through a letter dated 15.7.1997 ( Annexure A-6), the petitioner conveyed its willingness to provide funds for the project provided all the formalities in this regard were completed.  There was no response from the company in this regard.  However, it transpired that the company had filed a Form No.32 with the Registrar of Companies indicating that the directors belonging to the Jain Group who had earlier been appointed as additional directors had ceased to be as such w.e.f. 27.12.1997.  Shri Sarkar referred to Article 7 of the Articles of Association to point out that none of the directors of the company is  liable to retire by rotation and  therefore the alleged vacation of the directors of the petitioner group is invalid.  He also referred to Section 252(2) of the Act to state that in case of a private company, there is no need for the directors to be appointed in a General Meeting.  He also pointed out that the claim of the respondents that the directors from the petitioner group were appointed as additional directors cannot be sustained in law in as much as the Articles do not provide for appointment of additional directors in terms of Section 260 of the Act. He also pointed out that the respondents never acted in a bona fide manner in relation to the Jain Group.  In this connection, he referred to Annexure-14 wherein the company had filed a  Form No.32 with the Registrar of Companies that Shri Mahender Kumar Jain had ceased to be a director in terms of Section 260 on 29.9.1996.  Even though, there was an AGM on 30.9.1996, his name was not proposed for appointment of a director.  Instead, on the same day, in a Board Meeting he was allegedly appointed as an additional director once again. He pointed out that in all fairness he should have been appointed as a director in the General Body Meeting on 30.9.1996. Even though, 2 other directors from his group were appointed as an additional directors in a Board Meeting held on 19.11.1996,  all the 3 directors from the petitioners' group were declared to have vacated their offices on 27.12.1997 in terms of Section 260 of the Act.  He pointed out that on the same day, there was an Annual general Body Meeting of the company in which these directors should have been appointed as regular directors since the petitioners' group held 50% shares in the company.  Shri Sarkar contended that exclusion of one group of shareholders from the management in a company in the guise of partnership is a grave act of oppression.  He pointed out that in making this allegation, he is not seeking the enforcement of the terms of the agreement but his grievance is only relating to disturbing the structure of the Board in which being a 50% shareholder, the petitioner had 3 representatives on the Board. 

4.     Referring to his allegation relating to increasing the share capital of the company, he pointed out that the company had 11,660 un issued shares out of the authorized capital at the time when his client entered into the said agreement with the respondents.  This agreement provided that 50% of the un issued shares would be allotted to the petitioner as and when further issue of shares was made.  Notwithstanding the terms of the agreement, the petitioner being a 50% shareholder, with a view to maintain party in the shareholding, the company should have allotted proportionate shares to the petitioner as and when further issue of shares was made.  However, the respondents, without any notice or knowledge of the petitioner allotted all the 11,660 un issued shares to themselves with a view to disturb he present parity and also become majority shareholder. Any change in the equality in the shareholding by issue of further shares, he contended would be an act of oppression. He also pointed out, that the company was not in need of any funds, and as a matter of fact, further shares were issued in adjustment of certain loans and there was no fresh induction funds.  This itself, he pointed out, would indicate that the allotment of further shares to the Rashid group was with the view to disturb the equality in the shareholding. Relying on Ms. Pushpa Prabhu Das Vohra Vs. Vohra Exclusive Tools Pvt.Ltd.  he pointed out that CLB has held in this case that allotment of further shares without the knowledge and consent of all the shareholders, in a company in the nature of partnership is an act of oppression.  On the same proposition, he also relied on Gluco  Series Pvt.Ltd.  (61  CC  227 Cal.).  Referring to Tea Brokers Pvt.Ltd.  Vs. Hemendra Prosad Barooah  ( 1998  5   CLJ  463  Cal), he pointed out that in this case, the Calcutta High Court has held that conversion of a majority into minority by allotment of shares has to be termed as an act of oppression and even if it is a single act, since, it would have continuous effect depriving of such shareholders the rights and privileges as majority shareholders , such an act would be an act of oppression.  In the present case, he pointed out that from the position of an equal partner, the petitioner has been reduced to a minority by the allotment of new shares to Rashid Group. He also pointed out that the AGM which  was convened  on 30.9.1997  was adjourned to 27.12.1997.  During this period, the additional shares were issued on 16.12.97  only with a view to get majority before the  AGM.  He also pointed out that even though the company claims that it  had asked the petitioner to provide funds for the shares, yet, no formal offer indicating the number of shares offered and the amount to be paid was ever received by the petitioner. Further, he submitted that the Jain Group had spent, to the knowledge of the Rashid Group substantial amount of money to get various clearances and therefore it is not correct to say that the Jain Group has not invested more than 24 lakhs.  Therefore, he contended that the allotment of 11,660 shares to the respondents' group should be declared as invalid. 

5.     Summing up his arguments, Shri Sarkar pointed out that the Jain Group holding 50% shares was also having Board representation and the company was jointly managed by both the groups. Thus this company was being managed in the nature of a partnership. In this connection he referred to Deepak G. Mehta Vs. Shree Anupar Chemicals (India) Pvt. Ltd. (1999  2  CLJ  539) wherein the CLB has held that principles of partnership can be applied to a company in facts of a particular case.  He further pointed out that in  C.N. Shetty Vs. Hilliock Hotels Pvt. Ltd. ( 1997  1  CLJ  84-AP), the court has held  that where the shareholding is more or less equal and that there is participation in the  in the management by both the groups,  then, the principles of partnership could be applied in respect of such  a company. He also cited Vaijay Krishna Jaidka  Vs. Jaika Motors Limited ( 1997  1  CLJ   268  CLB) wherein the CLB has held that in examining whether a company is in the nature of a partnership, the status of the relationship between the parties at the time when the petition is filed has to be taken into account to find out whether the relationship is that of a quasi partnership and not the status of the company at the time of incorporation. He urged that in  a corporate management, a shareholder holding 50% shares with joint management cannot be converted into a minority and thrown out from the management and if it happens then it is a grave act of oppression. Any breach of the balance in the shareholding and management has to be declared to be an act of oppression.  He pointed out that the grievances of Rashid Group is that his  clients have not brought in funds as agreed earlier.  This grievance has no basis in as much as the commitment to provide funds was for implementation of the project and once the project has come to a stand still, the question of providing funds as per the agreement did not arise.  In view of the project having come to a stand still, his clients had no obligation to invest further funds.  Even otherwise, he contended that once the company had initiated arbitration proceedings on 6.8.1996, the project itself had been given a go by and therefore the question of his client investing further funds for the project did not arise.  He also pointed out that the respondents have raised an issue that they had filed a suit in Bombay High Court for forfeiture of shares in terms of Clause 20 of the Agreement dated 28.11.1995 on the ground that the petitioners have not complied with the terms of the agreement and therefore no order can be passed by the CLB on this petition. The Suit, the learned counsel pointed out, has  nothing to do with the present petition in which the petitioner has sought to protect its interests as a share holder. . He further pointed out that  in the same suit the respondents have also sought and obtained an interim relief restraining the directors of Jain Group from claiming themselves as directors.  Referring to the order of the High Court at Annexure A-9, he pointed out that the Division Bench of the High Court itself has given liberty to the Jain Group directors to adopt necessary proceedings in regard to their directorship and accordingly in the present petition, they have raised this issue. He contented that not with standing the terms of the agreement, since the Jain Group held 50% shares in the company, its nominees should have been appointed as regular directors and not doing so itself is an act of oppression. He also pointed out that as per Article 7 none of the directors is liable for retirement by rotation which means that once a person is appointed as a director, then he continues as such. Therefore, to defeat the rights of the Jain Group, its nominees were only appointed as additional directors and even in the AGM they were not proposed for appointment as regular directors with a malafide intent.  Therefore, he contended that, there is no bar in the CLB examining the issue relating to directorship of the petitioner's group.   He also referred to the contention of the respondents that the petitioners' group had put up one of the persons to whom they had transferred the shares to file a suit in Calcutta High Court and as such the present proceeding is a parallel proceeding and submitted that those proceedings have no connection with the present proceeding in as much as what is challenged in the present proceedings are not in that suit. He further pointed out that in the present petition, his client is  not seeking enforcement of the agreement but is  agitating its  rights as a shareholder. He contended that the Rashid Group has excluded the Jain Group both in the allotment of shares and in the management only with a view to get the full benefit of the arbitration award. In regard to  the complaint of the respondents that the petitioner has transferred 1060 shares to 3 other persons in violation of the pre-emption right provided in the Articles, he pointed out, that all the 3 persons belong to the  Jain Group itself and this Article is applicable only when shares are transferred out side the group.    Accordingly he prayed for grant of the reliefs sought in the petition.  .

6.      Shri Jay Savla appearing for the respondents pointed out that this petition has not been filed in good faith and lacks bona fide for the reasons that the Jain Group which had committed to bring Rs.1.6 crores into the company and obtained 50% shares in the company on that understanding has failed to comply with that understanding and therefore cannot allege acts of oppression against them.  He pointed out that in Srikanta Datta Narasimharaya  Vs. Shri Venkateshwara Real Estate Enterprises Limited ( 1991  3  CLJ  336) , Karnataka High Court has held that before granting any relief under Sections 397/398 of the Act, the court has to examine as to whether the petition has been filed in good faith by looking into the conduct of the petitioner especially when he does not discharge the obligations imposed upon him by an agreement. He pointed out that the petitioner by seeking the relief sought for is trying to seek specific performance of the contract in spite of the fact that the respondents have already filed a civil suit in the Bombay High Court in terms of clause 20 of the Agreement.  He also pointed out that the Jain Group having filed a civil suit in Calcutta cannot initiate a parallel proceeding through this petition.  In this connection, he referred to Sardar Iqbal Singh Vs. Sardar Gurbaksh Singh ( 2000  2  CLJ  115  CLB) wherein in view of civil proceedings initiated earlier, the CLB had stayed the 397/398 proceedings.  In regard to the claim of the petitioner that the company is in the nature of quasi partnership, the learned counsel contended that the Supreme Court has held in Kipest Pvt Ltd V Shekar Mehra (JT 1996 9 SC 152) that in an incorporated company, the question of applying partnership principles does not arise. He pointed out that the company was originally incorporated by Rashid Group in 1983 and the Jain Group came into the company only in 1995 that too only as financiar.  Once they have committed breach of the financial undertaking on the strength of which they became shareholders, they cannot invoke the principles of partnership and seek the equitable remedy under Sections 397/398 of the Act.  In this connection, he referred to the decision of the CLB in Ador- Samia Ltd.  Vs. Indocan Engg.Systems Limited ( 1999  35  CLA  224) wherein in a case of more or less  identical facts, the CLB had declined to give any relief since the petitioners in that petition did not comply with the terms of the Agreement while entering the  company.  Further, he also pointed out that the relief sought for by the petitioner in the present proceedings run against the relief sought by the respondents in their suit in Bombay High Court and since the suit was filed prior in time CLB cannot consider granting of any of the reliefs in the petition.  He also pointed out that directorial complaints cannot be entertained in a 397/398 proceeding  as has been held in Krishna Prasad  Jwala, Pilani  Vs. Colaba Land & Mills Co. Ltd.( AIR 1960  Bom.  312). 

7.     Dealing with the merits of the case, Shri Savla submitted that  the Jain Group  was fully aware when it  entered into an agreement to finance the project, that there was already a stop work notice as is evident from clause  2 of the Agreement.  In spite of that Jain Group had agreed to invest a sum of Rs.1.6 crores which they did not do. He refuted the claim of the Jain Group that they have spent a substantial aount of money for the company and as a matter of fact, he pointed out, that in the petition, they have made a mention of only about Rs 35 lakhs as their investment. Actually, according to him, so far they have invested only about Rs.24 lacs which the Rashid Group is prepared to pay back to Jain Group.  Further, the Jain Group is guilty of violating the pre-emptive clause in the Articles by transferring 1060 shares to 3 other persons of which one  Rajesh Gupta  has filed the civil suit in Calcutta, which is obviously a collusive suit.  This fact of transfer of shares has not been disclosed in the present petition and as such the petitioner has not come with clean hands.

8.     In regard to the directorial complaints, Shri Savla pointed out that the company has adopted Table A of the Act and as per Article 72 of Table A, the Board has powers to appoint additional directors.  Therefore, the contention of the learned counsel for the petitioner that there are no provisions in the Articles for appointment of additional directors is not correct.  Since the intention of the parties was that till such time the amount committed by the Jain Group was invested in the company, they would not be appointed as regular directors, they were appointed as additional directors.  Therefore, the question of Jain Group being oppressed by non appointment as Regular Directors does not arise.  Since the nominees of Jain Group  appointed as Additional Directors were not appointed as Regular Directors in the General Body Meeting, they ceased to be directors in terms of proviso to Section 260 of the Act.  In this connection, he referred to the Division Bench Order  of  the  Bombay High Court dated 4.8.1998 ( Annexure A-9) wherein the Court has  held that the nominees of Jain Group who were appointed as Additional Directors no longer continued as Directors by virtue of Section 260 of the Act.  In view of this, Shri Chawla contended that the CLB cannot take a different view and order restoration of their directorship. 

9.     As far as allotment  of 11,660 shares is concerned, Shri Chawla pointed out that the company had repeatedly asked the Jain Group to bring funds into the company since the company needed funds for prosecuting the arbitration proceedings.  While Rashid Group provided funds by way of loans/advances, Jain Group did not evince any interest.  Therefore, these shares were allotted to Rashid Group against loans/advances given by them to  the company.  Since the allotment made was for bona fide business purposes and in the interest of the company, that too after the offer was made to the petitioners who had not responded to the offer, the allotment cannot be considered to have been made with a view to reduce the petitioner into a minority. Further, he also pointed out that the very shares on the strength of which this petition has been filed and relief sought are already under dispute in the Bombay proceedings and once the Bombay High Court declares that the petitioner had committed a breach of the Agreement, then, all the shares now held by the petitioner would come into the hands of the respondents.  Therefore, no relief in regard to this allegation should  be granted by the CLB.

10. Summing up his arguments, Shri Savla submitted that the Jain Group has filed this petition only with a view to derive undue benefit out of the arbitration award.  They came into the company only after all the efforts had been taken by the Rashid Group in getting the project awarded and the Jain Group never took any interest in prosecuting the arbitration proceedings.  Further, as against Rs.1.6 crores committed by them for investment in the company, they invested only Rs.24 lacs which even now the Rashid Group is willing to refund along with suitable interest and therefore the appropriate order that could be passed on the petition  in terms of Section 402 of the Act, is that the petitioner should be directed to sell their shares to the Rashid Group. Otherwise, in view of the Bombay suit, wherein the shareholding of the Jain Group is under challenge, no order should be passed in the petition and the same should be dismissed.

11. We have considered the pleadings and arguments of the counsel. First we shall deal with the claim of the respondents that there are parallel proceedings- one the present proceedings and the other a civil suit in Calcutta. We have gone through the plaint in the Calcutta proceedings. We find that the allegations in the suit, even assuming that the same was instituted at the instance of the petitioner,  do not relate either to the claim of the petitioner for representation in the Board or allotment of shares as in the petition before us. In Sardar Iqbal Singh case, cited by the learned counsel for the respondents the allegations as well as reliefs were identical in both the civil suit and the proceedings before the CLB and hence, the CLB stayed its proceedings. Therefore, the facts of that case have application in the present case. Another objection raised by the learned counsel for the respondents is that, in view of the reliefs that they have sought in the Bombay suit, no relief can be granted by the CLB in the present proceedings. We are unable to accept this contention. Even though there are allegations in the present petition relating to non issue of notices for the Board meetings and General Body meetings etc, the two main allegations of the petitioner relate to issue and allotment of 11,660 shares and non appointment of the nominees of Jain Group as directors. In relation to the directorship, the Division bench of the High Court itself had given the liberty to the petitioner to agitate the grievance in this regard in appropriate proceedings and therefore,  this allegation can be entertained by the CLB. In regard to  the prayer relating to shares in the Bombay suit,  the main prayer of the respondents in that suit is that the shares held by the Jain Group  should be transferred to the respondents in view of the breach of the agreement by the Jain Group. The High Court has not restrained the Jain Group  from exercising their  rights as a share holder  and it has not granted any interim reliefs in respect of these shares. Further, we shall appropriately provide for safeguarding the interests of the respondents pending final decision of the High Court.

12.  There are two  main complaints by the petitioners- one relates to the allotment of further shares and the other  relating to representation on the Board.  According to the learned counsel for the petitioners these two acts of denying further shares and representation on the Board are grave acts of oppression  in a company wherein two groups of shareholders held 50% shares  in the company. It is the contention of the respondents that the Jain group was  admitted as a member only on the understanding that they would invest Rs. 1.6 crores in the company and all other rights as shareholders are subject to fulfillment of discharging their obligation of investment of Rs.1.6 crores. In this connection, the learned counsel for the respondents referred to the suit in Bombay High Court wherein the respondents have sought for directions to the petitioners to transfer the shares held by them.  It is an established principle of law that in a 397/398 petition, it is the shareholders' rights that could be agitated and not for the purposes of enforcing private agreements.  This was fairly admitted by Shri Sarkar also and he stated that he is not seeking to enforce the terms of the agreement.  Further, since in the Bombay proceedings, the issue relating to whether the Jain Group has committed any breach of the agreement is pending we do not propose to refer to the said agreement.  Now we have to see whether the allegations of the petitioner, de-hores the agreement, could be considered as  acts of oppression. No doubt the Jain Group became a shareholder of the company by virtue of the agreement, but once it has become a member it has  all the rights of a shareholder as provided in the Act and in the Articles.  It is an admitted position that they acquired 50% shares in the company on 28.11.95 and the balance 50% shares were held by Rashid Group.  Shri Sarkar contended that once his client became a shareholder and its nominees also appointed as directors, the respondents and the company had recognized the equal shareholding and joint management signifying that the company was to be managed as a quasi partnership. The counsel for the respondents relying on the decision of the Apex Court in Kilpest case pointed out that in an incorporated company, the question of partnership principles cannot apply. It is to be noted that in that case, the Apex court has only held that partnership principles should not be liberally applied and it has not held that such principles should never be applied. This  Board has,  in facts of a number of  cases, held that application of quasi partnership principles warranted in those cases and moulded the reliefs accordingly. Some of the cases decided by the CLB applying the partnership principles have been cited by Shri Sarkar.  However, in the present case, in view of the reliefs that we propose to grant, we are not examining whether or not those principles are applicable in this case.

13. First we shall consider the allotment of Shares. There are no provisions in the Articles of the company in regard to issue and allotment of shares. Even in the Articles in Table A which the company has adopted, there is no provision in this regard. In the absence of any provisions in the Articles, we have to only apply equitable principles and also examine whether the directors have acted bonafide in the exercise of their fiduciary responsibilities  in the further issue/allotment of shares.  It is a settled proposition of law that further shares can be issued only for the benefit/interest of the company and not with a view to  create a new majority or to reduce a majority into minority even if the powers to issue shares is vested in the Board.  If the purpose of issue/allotment of shares  is for upsetting the existing shareholding to the detriment of one group, then such an allotment of shares  is to be held  an act of oppression, whether or not partnership principles are applied. It is also a settled proposition of law that allotment of shares for the bonafide needs and in the interest of the company, even if affects a group of shareholders need not be considered as oppressive.  The company had 11,660 unissued shares out of the authorized capital. These shares were issued/allotted  exclusively to the respondents’ group on 16.12.97 against the loans/advances earlier given by that group.  The reason for suddenly converting this loan into shares has not been explained especially when we find  from Clause 12 of the agreement between the parties that on the day of agreement the Rashid Group had advanced a sum of Rs 8.6 lakhs to the company and it never chose to convert this into shares till Dec 1997. The respondents themselves had admitted in their letter dated 12.6.97 (Exhibit I) that a sum of Rs 3.7 lahks was standing in the credit of the petitioner in the book of the company. If there was any need to convert the loans into share capital, then, in all fairness, the petitioner, being a 50% shareholder,  should also have been allotted shares against its loans and advances. The circumstances in which the shares had been allotted indicate that it was mainly done with the view to marginalize the Jain Group. As rightly pointed out by Shri Sarkar, no documents have been placed before us to show that the company ever asked the petitioner specifically to subscribe to a particular number of shares  or for a particular amount.  All the letters by the company to the petitioner as  placed before us  indicate that the petitioners were being asked to comply with their financial commitment as per the agreement and had not required the petitioner to subscribe to any particular number of shares. ( letters dated 17.4.96, 12.6.96, 26.6.96, 17.11.97, 25.11.97). It is on record that the petitioner had issued a requisition notice on 8.12.97  for convening an EOGM to consider,  inter alia appointment of directors from Jain Group. This meeting should have to be convened within 45 days. The Jain Group directors were held to have vacated their office on 27.12.97. Thereafter, in a Board meeting on  9.1.98 the Board decided to convene the said meeting on 10.2.98. By this time, further shares  had been allotted and therefore, none of the resolutions moved by the Jain Group could have been  carried through. Further in its  letter dated 2/8/96 (Annexure 13), the company had informed the petitioner that till such time the equity share capital was fully paid, all payments made by the Jain as well as Rashid Group would be treated as Directors current account. If it is so, then the loans could not have been converted into share capital till all the shares were subscribed.   Thus the timing of the allotment, allotment of shares to one group against loans when  loans given by the other group was also outstanding, lead us to the inescapable conclusion that  the allotment of further shares had been made only with the view to reduce the petitioner into a minority.

14. In regard to directorship, the contention of the petitioner is that Jain Group nominees could not have been appointed as Additional Directors since there is no provision in this Articles to do so. As rightly pointed out by the learned counsel for the respondents, Article 72 of Table A which the company has adopted authorizes the Board to appoint additional directors. Shri Sarkar contended that having  appointed the nominees of his client, which held 50% shares, as additional directors, the company should have appointed them as regular directors in the next AGM  and not doing so itself is oppressive. According to the respondents, directorial complaints cannot be agitated in a 397/98 proceedings. On a similar contention, this Board observed in Indocan case(supra) “Even though there is substance in the submission in this regard, the same cannot hold good in all circumstances. We have held, in many cases, that directorial complaints can be entertained in a 397 petition in cases of family companies and in companies in the guise of quasi partnership. Further, on equitable consideration also, depending on the facts of a case, directorial complaints can be entertained”. In the present case, the admitted position is that the nominees of the petitioner were appointed as additional directors and as per Section 260 of the Act , they could not have continued as directors beyond the date of the ensuing  AGM without being appointed as directors in the AGM. It appears that they were not proposed for appointment as directors in the AGM held on 27.12.97 and as such they ceased to be directors. Shri Sarkar claimed that appointing his clients as additional directors instead of regular directors, in view of the provisions of Section 255(2) according to which, in a  private company, there is no need to appoint directors in a general meeting, itself is an act of oppression and more so  that  their non appointment in the AGM itself  is an oppressive act. May be, he is right, but, when Shri Mahendra Kumar was appointed as additional director, he never protestd and when when the next AGM was held on 30.9.96, he did not seek appointment as a regular director. Again when he was appointed as an additional director on the same day, he again did not protest. Therefore, having agreed to be appointed as an additional director and having not insisted on being appointed as a regular director in the next AGM, now he cannot complain of oppression. Any way, one aspect that emerges is that, whether, at least one of the nominees of the petitioner was associated in the Board after it became a shareholder, which position does not exist now. To that extent, we feel that the petitioner, holding substantial stake in the company, is right in complaining of oppression.

15. Thus, in view of our finding that the allotment of shares exclusively  to the Rashid Group  is oppressive to the Jain Group, we direct that the Rashid Group should surrender to the company 5830 shares, being 50% of the shares of 11,660 shares issued/allotted to that group and these shares will be reissued to the petitioner on its paying the consideration for the shares after adjusting the amount of loans/advances standing to its credit in the accounts of the company. This should be done latest by 31.1.2001. The company is at liberty to refund to the Rashid Group the amount invested by them for these shares.  Since the share holding of the Jain Group is a subject matter of the  Bombay suit, we also direct that none of the shares held by the Jain group including those earlier transferred by it to 3 other persons shall be transferred or  encumbered in any manner till the disposal of  the Bombay suit. As far as directorship is concerned, in a case of similar facts, this Board has decided in Indocan case(supra) that the petitioner holding 18% shares should have at least one director on the Board. In the present case, the Jain Group held and will hold, as per our earlier direction, 50% shares and therefore ordinarily they should have equal number of directors as that of the respondents. However, since, they themselves agreed to have only 3 from their group against 4 from Rashid group as per the agreement, they should have atleast 3 directors. However, considering the strained relationship between the parties, their association in the Board would only further escalate the strained relationship and the same would not be in the interest of the company. Further we also note that the company is not doing any business and the only asset of the company is the arbitration award as and when received.  On of the reliefs, which is normally granted, with the view to put an end to the grievances, is that one group should sell its shares to the other group. In the present case, in view of the pendency of the Bombay suit in which the share holding of the petitioner is under challenge, we direct as follows: As and when the Bombay proceedings are concluded and if the same goes in favour of the Jain Group, the company will purchase the 50%  shares held by the Jain group at a valuation to be done by the statutory auditor of the company. The date of valuation will be 31.3.99 being the proximate date of the petition which was filed in November 1998. Once the shares are purchased by the company, we authorize the company, in terms of Section 402, to reduce the share capital to that extent. Till the Bombay  proceedings are completed and the valuation of the shares is made, the company will keep the amount to be received of the Arbitration award in a bank account and shall not draw any part of it,   except towards meeting its expenses  in the normal course of business. Since the petitioner has substantial stake in the company, one of the representatives of the Jain Group will be invited  for all Board meetings of the company to which due notices by registered post should be given at least 7 days before the meeting and he will be entitled to copies of all the  Board minutes. The petitioner will be given notices for all ensuing general body meetings, by registered post ack.due.

16. With the above directions we dispose of this petition. No order as to cost.

 

 

(S.Balasubramanian)                                                              (A.K.Banerji)

 

New Delhi, dated the 6th day of December 2000