PRINCIPAL BENCH
Dated: 22ndJanuary, 2002
Present: 1. Justice A.K. Banerji, Chairman
2. Shri S. Balasubramanian,
Vice Chairman
AND
In the matter of Shri
Khounish Chowdhury & Ors.
Versus
Kero Rajendra Monolithics
Ltd. And Ors.
PETITIONERS:
1. Shri
Kshounish Chowdhury
2. Sm. Maria
Chowdhury
3. Shri Stefan
Chowdhury
11. Shri Soumendra Lahiri
15. Shri Niharendu Bikash
Sarkar
17. Dr. Nabendu Sircar
RESPONDENTS:
1. Kero Rajendra
Monolithics Limited
2. Shri Amit
Kumar Roy Chowdhury
3. Shri Sambhu
Nath Mitra
4. Shri Arijit
Roy Chowdhury
5. Shri Nabajit
Roy Chowdhury
6. Shri Ajit
Mullick
7. 7. Shri L.N.
Premrajka
Present on behalf of
parties:
1. Shri S.N. Mookherjee,
Advocate
.. for petitioners
2. Shri R. Banerji,
Advocate
.. for petitioners
3. Shri A. Majumdar,
Advocate
.. for petitioners
4. Shri Sanjay Kumar
Gupta, Practising CS .. for petitioners
5. Shri Jayanta Mitra, Sr.
Advocate
.. for respondents
6. Shri Ranjan Bachawat,
Advocate
.. for respondents
7. Shri P.K. Mullick,
Advocate
.. for respondents
S. BALASUBRAMANIAN:
1.
The principal complaints of the petitioners in relation to the
affairs of M/s Kero Rajendra Monolithics Ltd, (the company) are that by issue of further
shares in the company, the petitioners group has been converted from a majority into a
minority, that there has been change in the composition of the Board of directors by which
the respondents’ group has gained majority on the Board and that there have been acts
of gross mismanagement in the affairs of the
company.
2. The admitted
facts in the case are that all the petitioners are non resident Indians of whom some of
them are shareholders and some of them have remitted money as share application money for allotment of shares. The first petitioner was in control of one M/S Kero GmbH, Germany. During his visit to Germany, the 2nd respondent
had discussions with the first petitioner for providing technology by Kero GmbH for a
company to be set up in India for manufacture of monolithic ceramic refractories. In pursuant to the discussions, an MOU was entered into by which it was agreed that a
company would be set up in India with Kero GmbH holding 40% shares and that the
petitioners would have 25% of the total strength in the Board of the company and the Kero
Gmbh was to supply technical know-how to the company.
Accordingly, Kero Rajendra Monolithics Limited ( the company ) was incorporated in
1990 with an authorized capital of Rs.1 crore divided in to 10 lakh shares of
Rsd.10/-each. The first petitioner and the 2nd respondent were the first
directors along with 2 other directors. The 1st
petitioner was the chairman of the Board. The
company entered into an MOU with Kero GmbH for supply of technical know how and raw
materials and Kero GmbH was to buy back 50%
of the products of the company. As per this
MOU, Kero GmbH would have 40% shares and NRIs 2% shares.
This foreign collaboration agreement was approved by the Central Government.
Pursuant to this approval, 4 lakh shares of Rs.100/- each were allotted to M/S Kero GmbH.
In 1993, the 1st petitioner disassociated himself from Kero GmbH which
subsequently went into liquidation. The petitioner purchased the shares held by Kero GmbH
in the company and the company had endorsed all these shares in favour of the the 1st
petitioner. As on 30.3.97, the 1st petitioner, with these 4 lakhs shares, along
with other NRI shareholders held 52.5% shares in the company and the petitioners group
also had 4 directors out of 7 directors, thus constituting
the majority on the Board.
3. The disputes
between the parties have arisen due to the following: Now the company claims that the
transfer of 4 lakh shares acquired by the petitioner from Kero GmbH in the company has been cancelled as the same was
not in compliance with the provisions of Section 108 of the Companies Act ( the Act), that
further shares to the extent of 5,83,937 shares had been issued to Indian shareholders due
to which the petitioners’ holding in the company as on
the date of filing the petition was only 9.95% and that two directors from the
petitioners group were not elected in the AGM held on 30.9.97 and that 4 more directors from the respondents
group were appointed to the Board, first as additional directors on 27.7.97 and
confirmed as directors in the AGM held on 30.9.97.
4. Shri
Mookherjee, Advocate appearing for the petitioners submitted: This company was a joint
venture between Kero GmbH and the 2nd respondent. Since the 1st petitioner was in control
of Kero GmbH, it was at his instance that the collaboration agreement was entered into. The 1st petitioner was associated with
the company right from its incorporation as is evident from the fact that he was one of
the first directors and he was also Chairman of the company. When Kero GmbH went into liquidation, the 1st
petitioner acquired all the 4 lakh shares which constituted 37.17% of the paid up capital
as on 30.3.1997. In addition, his group held
another 15.3% . Thus, as on 30.3.1`997, the
petitioners’ group held 52.5% shares in the company, thus, constituting the majority. This is notwithstanding the fact that substantial
amount of money had been remitted by the petitioners and other NRIs as share application
money for further shares. Thus, both in terms
of shares allotted and in terms of the share application money with the company from the
petitioners’ group, it constituted the majority. Even
though, the relationship between the parties was cordial till end of 1996, due to the
mismanagement of the 2nd respondent as the
Managing Director of the company, some of the petitioners issued a special notice
on 17.5.1997 in terms of Section 284(2) (Annexure A-15) to remove the 2nd
respondent as the managing director. However, the company did not proceed to
call for an EOGM as called for by the petitioners to remove the 2nd respondent
as the managing Director. With a view to defeat the resolution, the 2nd
respondent had issued further shares on 12.6.1997, 27.7.1997,
1.9.1997. By these allotments, the
shareholding of the respondents’ group went up from 40.55% as on 31.3.1997 to 61.45%
as on 1.9.1997 and the petitioners holding from 52.5% went down to 34.45%. No shares were allotted against the share application money in
the name of the petitioners and other NRIs while shares were allotted to the
respondents’ group against the share application money. In all, the company had
issued and allotted 583937 shares during this period.
The main object of allotment of these shares was only to convert the petitioners’ group into a minority and to
create a new majority which in a number of cases has been held to be an act of oppression
by various courts including the CLB. The
company could not claim that by allotment of these shares, the company had benefited by
way of receipt of funds in as much as all the allotments had been made against share
application money already available with the company.
Some of the petitioners who had remitted funds as share application money
complained to RBI by a letter dated 5.7.1997 (Annexure A-17) regarding non allotment of shares to the NRIs by the company
notwithstanding the approval given by RBI on 17th January, 1997 for an amount
of about Rs.78 lacs with repatriation benefits. The
very fact of exclusion of the petitioners in the allotment when share application money
was with the company for which RBI approval had also been received very clearly indicates
that the allotment to the respondents’ group was only with a view to create a new
majority. The fact of allotment of further shares came to be known to the petitioners only
on 16.11.97 when in a Board meeting on that day a list of shareholding as on 30.9.97 was
handed over to the 20th petitioner stating that the petitioners group was in
minority. According to that list, 6,69,167
shares had been issued after 31st March 1997, of which 5,20,435 shares had been
allotted to the 2nd respondent, his friends/associates and companies under his
control. It appears that the shares were allotted against loans taken from these persons
at exorbitant rates of interest. Further the company being a public company, shares should
have been offered on proportionate basis to all the existing shareholders which has not
been done by the company to allot the further shares.
There is nothing on record to show that the provisions of Section 81 (1A) had been
complied with to allot shares other than by way of right shares. Even if such an approval
had been taken, no notice for the general body meeting in which the approval was taken was
received by the petitioners enabling any of
them to attend the said meeting.
5. In view of the
mismanagement of the affairs of the company by the 2nd respondent in his
capacity as the MD, some of the petitioners sought to remove him as the MD by a notice
dated 30.6.97. On the same day, the 2nd
respondent, in his capacity as the Managing
Director, issued a notice convening a Board
Meeting on 26.7.1997 (
Annexure A-16) in which one of the items of the agenda
was allotment of shares. The
petitioners filed a suit in the court of 2nd Assistant District Judge at
Barasat seeking to restrain the company from
acting on the notice dated 30.6.1997 on various grounds inter alia including that
the company was trying to dilute the holding of the petitioners by issue of further
shares. The court passed an order directing the company not to give effect to the notice
dated 30th June, 1997 till 13th August, 1997, the order of which was
communicated to the company on 25th July, 1997 (Annexure A-21). However, the company issued another notice on 25th
July 97 (Annexure A-22) convening a Board Meeting on 27th July, 1997 to
transact practically the same businesses as were to
be transacted by the notice dated 30.6.1997. In
this notice also there was a proposal to allot shares
against pending share application money and a proposal to appoint additional directors. Two of
the petitioner directors had already given a
notice dated 6.7.1997 under Section 169 of the Act for convening an EOGM to appoint 7
directors from the petitioners’ group (Annexure A-26).
By proposing allotment of shares and also appointment
of additional directors in the meeting convened on 27th July, 1997, the
respondents had ensured that the petitioners’ notice for removal of the 2nd
respondent as the Managing Director and also for appointment of 7 directors had become
infructuous. Since transacting the same
businesses which had been stayed by the court amounted
to contempt of court, the petitioners moved an application to the court in Barasat but the
same was dismissed on the ground that since the notice was a fresh notice which has not
been incorporated in the plaint, no order could be passed on the application. The holding of the said emergency meeting to
transact the same business which had been restrained by the court shows that the very idea
of holding the meeting was to allot shares
and to appoint additional directors with a view to create a new majority and to gain
absolute control of the Board. Further, by giving such a short notice, that too for a
meeting on a Sunday, to the NRI directors is
a clear act of oppression. As per the Regulations of the company as approved by the Board,
NRI directors are to be given 6 weeks notice for the Board meeting. Neither of the notices
dated 30.6.97 and 25.7.97 satisfied this requirement.
In that meeting, the Board purportedly had allotted 3,72,552 shares. The Board had allegedly allotted further 20,000
shares in a meeting held on 1.9.1997. The petitioners were kept in the dark over the
number of shares allotted as minutes of neither of these two meetings had been disclosed
nor the directors’ report signed on 1.9.1997 disclosed the said allotment. Further, the
Return of Allotment in respect of both the allotments
were filed with the ROC only on 19th Feb. 1998, which incidentally, is the same date on which the reply to the
petition was also signed by the 2nd respondent as is evident from Page 39 of
his reply. It is quite possible that the
claim of the respondents about the allotment
itself may not be true in view of the late filing of the Returns after this petition was filed.
6. He further
submitted: According to the company, as per the list of persons to whom shares were
allotted (which was supplied to the petitioners as per the directions of the Bench) the
shares were allotted to 75 persons. The
petitioners undertook to implead all these persons which was permitted and copies of the
petitions were sent to all these persons. Even
though, 39 of these persons accepted personal service, none has filed any affidavit in
reply. 16 persons received the notices as per
the acknowledgements received from them but none has filed any reply except that one
person to whom the company had reportedly allotted 20000 shares has stated that he does
not hold any shares in the company. Therefore, there seems to be fictitious allotment of
shares which is also evident from the fact that no details of payment of money by these
persons has been disclosed. From the list furnished, it is seen that in these allotment of
shares, it is the 2nd respondent and his family members who were the major
beneficiaries. Further, the number of shares allotted as per the Returns of Allotment does not tally with
the shares indicated in the list given by the company indicating very clearly that there
is some hanky panky in the entire allotment. Some of the names shown in the list do not find a
place in the Return of Allotment. Even though 3 shareholders made an application for
impleadment, yet, none of them has filed a reply. 20
of the letters sent by the petitioners were returned as “not known, not found,
incomplete address and left”. Such contradictions in the documents, silence of the
shareholders etc. clearly show that there has been fabrication in regard to the allotment
of shares. By these allotments, the holding
of the NRIs has come down substantially notwithstanding the fact that the Board of
Directors in a Board Meeting held on 16.12.1995 ( Annexure A-13) had expressed its view that reduction of NRIs holding in the company
would not be good for the company’s present status.
7. Further arguing
on the point of this allotment of shares, Shri Mookherjee contended that the entire
allotment took place only with a view to perpetuate the control of the company by the 2nd
respondent in view of the notices issued by
the petitioners for removing him as the Managing Director and for appointment of directors
from the petitioners’ group. In other
words, all the allotments were motivated,
completely in breach of the fiduciary duties of the directors and with a view to create a
new majority. It has been held in Needles
case (AIR 1981 SC 1298) and also in Re Glucose series case (61 CC 227 Cal) that creation of a new majority
is an act of oppression.
8. As far as the
constitution of the Board of Directors of the company is concerned, Shri Mookherjee
submitted: As on 31.3.1997, there were 7
directors on the Board of which 3 were from the petitioners’ group including the 1st petitioner who was the Chairman. One NRI director
was neutral. One director resigned on
27.7.1997. The 2nd and the 3rd respondents were the remaining
directors. Thus, the petitioners’ group
had majority on the Board as on 26.7.1997. In
the meeting held on 27.7.1997, the respondents had appointed 4 new directors out of which
two were the sons of the 2nd respondent. By
this act, the 2nd respondent had hijacked the Board. As already indicated, the notice for this Board
Meeting on 27.7.1997 was issued only on 25.7.1997 i.e just with two days notice notwithstanding the fact that the
directors from the petitioners’ group were residing abroad. This notice was not issued to/received by all the directors.
As per the company’s Rules and Procedures ( Annexure A-2) adopted on
16.12.1995, 6 weeks notice is to be given for Board Meetings. The manner and the haste in
which this meeting was convened, that too after the civil court had restrained the company
from holding the meeting on 26.7.1997, clearly indicates that the purpose of holding the
meeting was only to hijack the company both in terms of the shareholding and the
directorship. Having inducted 4 directors in the illegally
held Board Meeting, the 2nd respondent had ensured, by virtue of issue of
further shares, the removal of two directors of the petitioners’ group from the Board
in the AGM held on 30.7.1997. The notice for
this meeting was not received by most of the NRI shareholders as the same was posted only
on 23.9.1997 i.e. only with six days notice.
By letters dated 30.9.1997 and 1.10.1997 (Annexure A-29 and A-30), some of the
petitioners including the 1st petitioner being the Chairman of the company had
brought this to the notice of the company. Therefore,
not only the appointment of 4 additional directors and their confirmation in the AGM and
the removal of two directors is illegal but also oppressive to the majority petitioner
shareholders.
9. Shri Mookherjee
further submitted: The respondents are mismanaging the affairs of the company due to which
the company has suffered heavy losses. As is
evident from Annexure A-36, the company has been misusing the bill discounting facilities
and has been committing irregularities in the banking operations due to which the bank had
issued a letter to the 2nd respondent dated 10.6.1997 (Page 471 of Volume 3)
that “ The bank also hold you equally responsible for any acts or misdeeds
committed by the company found to be against the interest of the bank. You would also be held responsible on account of
suppression of material facts since as late as your letter dated 19.4.1997, no mention was
ever made by you about any financial irregularity being carried out by the company”. Further, the internal audit report at Annexure
A-39 is full of adverse comments on various matters contained in that report. All these would exhibit that there has been gross
financial mismanagement by the 2nd respondent.
10. The learned counsel further
submitted that the respondents are harassing and oppressing the 1st petitioner
by refusing to recognize his membership in regard to 4 lakh shares acquired by him from
M/s Kero GmbH. The 1st petitioner
purchased 4 lakh shares held by Kero GmbH for valuable consideration and lodged the same
with the company for registration. In the Board
Meeting held on 9.8.1995, the Board approved the transfer of shares ( Annexure A-57). In
his letter dated 17th July, 1995,
the 2nd respondent had informed M/S Kero GmbH that after receipt of RBI
approval, the company had effected the transfer of 4 lakh shares to the 1st
petitioner (Annexure A-58). In the list of past and present members of the company as on
30th Sept.1995 (Annexure A-59), these 4 lakh shares are shown against the name
of the 1st petitioner. Further,
the copies of share certificates at Annexure A-9 would also indicate that all these shares
have been endorsed in favour of the 1st petitioner by the 2nd
respondent himself on 10.8.1995. However, now
the respondents, by fabricated minutes dated
2.3.1996 at Exhibit –I contend that the
transfer deeds duly executed earlier were not valid and as such the 1st
petitioner was to re-submit valid transfer deeds in this regard. This stand of the respondents is totally incorrect
in as much as the shares had already been transferred in August, 1995 itself as is evident
from the fact of endorsement of transfer on the share certificates. It is true that the share transfer forms as at
Exhibit –3 were incomplete but after the RBI gave the approval, fresh transfer deeds
were submitted duly completed in all respects where after
they were transferred in favour of the 1st petitioner. Now the 2nd respondent claims that the
shares still are in the name of M/S Kero GmbH notwithstanding the fact that they had
already been registered in the name of the 1st petitioner. Having entered the name of the petitioner in the
list of members, if the company had deleted the same, then, it is beyond the powers of the
company as a company cannot rectify its own register.
Since the Company Law Board had held in Tin Plate case, a share certificate has
primary evidential value than the shares register and since the share certificates had
been endorsed in favour of the petitioner, he is the rightful owner of the shares notwithstanding the fact that
his name does not appear in the register of members.
Further, the NRIs have invested over Rs.20 lacs in the company for which in spite
of repeated requests, no shares have been allotted notwithstanding the fact that approval
of RBI had been received as is evident from copies of RBI’s approval at pages 30 to 33 of the Rejoinder.
11. Shri Mookherjee further
submitted that the suit filed by his clients related to the Board Meeting on 26.7.97 and did not relate to any of the issues raised in
the petition as acts of oppression and as such the present petition cannot be considered
to be a parallel proceeding. He submitted that since the petitioners constituted the
majority before the issue of further shares after
31.3.91 which has been challenged in the petition, they cannot be ordered to sell their
shares. To do justice between the parties,
either all further shares issued after 31.3.97 should be cancelled and the shareholders
should be allowed the right to elect
directors on the Board or else the company should be directed to refund all the monies
invested by the petitioners immediately and the 1st petitioner should be
relieved of his personal guarantees. Otherwise,
the petitioners are willing to revive the company which is in dire financial difficulties
provided the 2nd respondent indemnifies the company for all the claims against
it from 1997 onwards and the shareholding is restored to the original position as on
31.3.97.
12. Shri Mitra, Sr Advocate for
the respondents submitted: This petition is
not maintainable in as much as the petitioners, without the support of 4 lakh shares, do
not qualify to file the petition in terms of Section 399 of the Act. Even though shares
were issued in the name of M/S Kero GambH, yet, its name was not entered in the Register
of Members for want of RBI’s approval and therefore it could not have transferred the
same to the 1st petitioner. Even
though these 4 lakh shares were endorsed in favour of the 1st petitioner, yet,
his name was not entered in the register of members since the transfer instruments were
not valid and as such there was no compliance with the provisions of Section 108 of the
Act. That is the reason why in the Board
Meeting held on 2nd March, 1996, the 1st petitioner was requested to resubmit valid
transfer deeds. Therefore when the name of
the petitioner is not in the register of members, even if the shares had been endorsed in
his favour, since there is violation of the provisions of Section 108 of the Act, the
petitioner cannot claim any right over these 4 lakh shares. The Supreme Court has held in Mannalal
Khaitan Vs. Kedar Nath Khaitan ( AIR 1977 SC 536 ) that
compliance with the provisions of Section 108 is mandatory and since in this case
the instruments of transfer were not valid
on account of non cancellation of the stamps, the registration in the name of the
petitioner cannot bestow any right of a shareholder in respect of these 4 lakh shares. This principle has been followed by the CLB also
in Subhash Chandra Vs. Vardhman
Spinning & General Mills Ltd. ( 1995 CC 641 ). As a matter of fact, in a Board
Meeting held on 1.9.1997, the Board had resolved to cancel the transfer of shares in
favour of the 1st petitioner. The reliance of the learned counsel for the
petitioners on Tin Plate case is not relevant in this case in as much as in that case the
CLB took only a prima facie view but in the present case in facts of this case, such a
prima facie is not possible. In Re A
company (1986 BCLC 391), it has been held that if the name of
a person is not entered in the Register of Members, he has no locus- standi to file
a petition alleging oppression. It has also
been held in Ved Prakash Vs. Iron Traders Private Limited (31 CC 122) that non members cannot file a
petition. The CLB has also held in Mahendra Singh Rathore Vs. Rajput Hotel &
Resorts Private Ltd. ( 1998 1 CLJ 160 ) that on the date of filing of the
petition, the petitioners should satisfy their requirements of Section 399 of the Act. If these 4 lakh shares are omitted, then the
petitioners collectively would hold only 9.95% %. Further, the 11th petitioner
holding about 42,000 shares has withdrawn his
support by a letter dated 9.4.2001 thus
bringin down the petitioners’ holding to 7.37%.
and as such this petition is not maintainable in terms of Section 399. many of the petitioners are not registered
shareholders of the company and they have only remitted money towards allotment of shares
and therefore, not being members, they cannot maintain the petition.
13.
Even otherwise, the
learned counsel pointed out that in view of the petitioners having filed a civil suit with
similar allegations in which they have also obtained interim orders, they cannot proceed
with the present petition till such time the civil suit is finally disposed of. In other words, he submitted that the present
proceedings should be stayed as the CLB has itself done in similar cases like Sardar
Iqbal Singh Vs. Sardar Gurbakash Singh ( 100
CC 504), Lopchu Tea Company Ltd. and APJain Vs.
Faridabad Metal Udyog Private Limited ( 1995 CC 76
).
14. He further submitted: The
main reason why the company went into the
financial difficulties was that M/S Kero GmbH did not comply with its various obligations
more particularly with reference to supply of full technical know how and failure to buy
back 50% of the production of this company. When
the petitioner claims 4 lakh shares held by M/S Kero GmbH , he is also bound to comply
with the obligation of M/S Kero GmbH, which he had failed.
The whole responsibility of mobilizing funds and managing the company came to be
thrust on the Indian promoters and therefore they had to issue additional shares.
15. He further submitted that
the claim of the petitioners that they have been reduced from a majority into a minority
by allotment of further shares is not borne in facts of this case. As per the MOU at Annexure A-3, M/S Kero GmbH was
to hold only 40% shares in the company, NRIs 5% while the Indian Promoters were to hold balance
55%. Even as per the Government approval
enclosed with Annexure A-7 dated 31st March, 1991, the foreign equity
participation was restricted to 40% amounting to Rs.20 lacs and NRI equity was to be 2%,
amounting to Rs.1 lac indicating very clearly that the balance equity contribution has to
come from Indian promoters. Further, when
this approval was amended on 28th August, 1991 by the Govt. of India, the same
percentage was kept intact except that the amount was increased to Rs.40 lacs and Rs.5
lacs as foreign equity contribution and NRI equity contribution respectively. Thus, on no account the petitioner could claim
majority in the company to allege that there has been a conversion of the majority into a
minority.
16. Shri Mitra further
submitted: The 1st petitioner was fully aware of the financial needs of the
company and he did approve mobilization of funds by issue of shares to resident Indians. The issue relating to raising of funds within the
country was being discussed right from 1995 as is evident from the Board Minutes dated 7th
March, 1995 wherein it was decided to go in
for public issue and in a Board Meeting held on 15.4.1995 presided over by the 1st
petitioner, the Board adopted a resolution in terms of Section 81(1A) of the Act to issue
equity shares for a sum of Rs.2.5 crores to
general public including friends and relatives and NRIs.
It was also resolved to allot fresh equity for a value of Rs.78,11,600 to NRIs out
of Rs.2.5 crores. Accordingly, it was also
resolved to amend the Memorandum and Articles of Association of the company to increase
the authorized capital to Rs.3.5 crores. Accordingly,
it was also resolved to convene an EOGM on 9th May, 1995 to transact the above
businesses. By a notice dated 15th
April, 1995, the said EOGM was convened on 9th May, 1995 in which the
resolutions relating to increase the authorized capital and also in terms of Section
81(1A) of the Act were passed. Relevant Form
No. 23 was also filed with the ROC on 29th
May, 1995. The contention of the petitioners that there has been a violation of the
provisions of Section 81 of the Act is not correct and that the 1st petitioner
was fully aware that the shares had been
issued to the Indian shareholders. He further
submitted that the petitioners have challenged allotments made only after 31.3.1997
without assigning any reason as to why the earlier allotments are not challenged. In the Board Meeting held on 22.11.1996 which was
presided over by the 1st petitioner, 59,100 shares were allotted to Indian
shareholders against the share application money already received by the company. In the same meeting, it was also resolved to raise
Rs.1 crore by allotment of shares on right basis to tide over the working capital crisis. These minutes were
signed by Shri Sircar on 24.5.1997. From
these minutes, it is evident that not only the petitioners were aware of the need of funds
by the company but also they knew and consented to the issue of shares to the Indian
shareholders.
17. Again, in the Board Meeting held on 24th May, 1997,
191385 shares were allotted to Indian shareholders and this meeting was attended by Shri
S. Sircar and Shri S. Lahiri representing the petitioners’ group and actually this
meeting was presided over by Shri Sircar. In
the petition, this allotment has not been challenged as the petitioners are aware that
shares had been allotted with the consent of
their own representatives. This allotment itself had brought down the percentage holding
of the petitioners to about 45% even assuming that the 4 lakh shares belong to the 1st
petitioner. In other words, on their own volition they had got their percentage
shareholding reduced below 50%. The petitioners cannot doubt the authenticity of the
minutes as the zerox copy of the minutes
containing the signatures of Shri Sircar and also the attendance register which has been
signed by the two NRI directors in token of having attended this meeting, produced during
the hearing, would establish the authenticity of the minutes. Therefore when they do not
or cannot challenge this allotment which had
reduced their percentage shareholding below 50%, challenging further allotments has no
bearing on their claim of conversion of the majority into a
minority.
18. He further submitted: On
27.7.1997, 372552 shares were allotted to
Indian shareholders against the application money received from them. It is not that the
allotment was made behind the back of the petitioners. In the agenda for the meeting
convened on 26.7.97, allotment of shares was one of the businesses to be transacted and
the petitioners obtained a restraint order on the ground that the allotment would reduce
their share holding. Therefore, they were aware of the proposal of the Board to allot
shares. In a Board Meeting held on 1st September, 1997, further 20000 shares
were allotted against share application money. None of the allotments was made with the
view to affect the petitioners but only in the interest of the company.
19. As far as the allegation
that no consideration for the shares has been received is concerned, the learned counsel
referred to the Balance Sheet as on 31.3.1998 and pointed out that the increase in paid up
capital for the shares issued and allotted is reflected.
Without verifying the receipt of money for the shares, the statutory auditors could
not have certified the balance sheet. Producing the bank statements for the relevant
period, the learned counsel pointed out the entries in
the said statements indicate receipt of money to the tune of about Rs 15 lakhs by account payee cheques. The balance was received
by way of cash in the same way as the company
accepted cash from some of the petitioners.
Therefore, there is no merit in the allegation that money had not been received for
the shares allotted to the Indian shareholders. In regard to the various points raise
about the identity of the shareholders made by the learned counsel for the petitioners, he
submitted that the company need not have to
find out whether these persons are real or not as long as money had been received by the
company along with applications. He also produced applications received for shares and
submitted many of these persons had attended
AGMs and also have received dividends. If the
shares had been allotted without receipt of money, then only there could be a cause for suspicion and not
otherwise. The balance sheet of the company
as on 31.3.97 shows the share application money received both from NRIs and residents
separately and shares had been issued against the share application money to the resident
Indians.
20. The learned counsel further
submitted: The company had issued a notice on
30.6.1997 for holding a Board Meeting on 26.7.1997 to transact various businesses
including allotment of shares. Instead of
attending this meeting, the petitioner filed a civil suit and obtained a stay order. Instead of filing the suit, the petitioner
directors could have attended this meeting, the failure of which and filing of the civil
suit hardened the attitudes of the parties. Since the company urgently needed funds, an
emergent meeting of the Board was convened on 27.7.1997 by a notice dated 25.7.1997
(Annexure A-22). This meeting was convened to transact the business relating to convening
an EOGM as requisitioned by the petitioners by two notices dated 30th June,
1997 which were received on 6th
July and 24th July, 1997, allotment of shares against pending share application
money and to appoint additional directors. An
Explanatory Statement was also attached with these notices detailing the reasons for
transacting those businesses. The holding of
the meeting was bonafide and not with a view to over reach the restraint order by the
civil court. The civil court itself has
dismissed the contempt application filed by the petitioners. As far as the allegations relating to issue of
notices is concerned, even though the company
has been issuing notices properly, the
petitioners are not attending the meetings after the disputes started.
21. Summing up his arguments,
Shri Mitra submitted that not only this petition is not maintainable in terms of Section
399 of the Act, it also deserves to be stayed in view of the pending civil suit. Even otherwise, on merits also the petition does
not survive as all the allotments were made for raising funds for the company and there is no conversion of the majority into a
minority nor creation of a new majority. To
the proposition that when shares are issued for the benefit of the company there can be no
case of oppression he relied on R. Khemka Vs. Deccan Enterprises ( 100 CC 211
), Needles Industries case
and Hicks Thermometer (India) Ltd case ( 97 CC 356 CLB) Further, when the
issue and allotment of shares was with the knowledge and consent of the petitioners as
revealed from the proceedings of the Board Meeting already indicated, they cannot allege
oppression. He also submitted that the
company ahs been able to survive only due to the efforts of the 2nd respondent
who has not only mobilized funds from his friends and relatives, but has also given personal guarantees and as such
equity is in favor of the respondents and as
such this petition should be dismissed.
22. Shri Mookherjee in rejoinder
to the arguments of the learned counsel for the respondents submitted: As on 31.3.1997,
the petitioners were not only majority shareholders but also were majority on the Board
with the 1st petitioner as the Chairman. While
the petitioners were kept informed of the affairs of the company till November, 1996, the 2nd respondent
had completely marginalized the petitioners thereafter by not only reducing their
shareholding into a minority but also by taking over the Board by appointment of new
directors and removal of two of the directors from the petitioners’ group. This is a very classic case of oppression against
majority shareholders fully justifying this petition under Section 397. The mismanagement of the company is all pervasive
attracting the provisions of Section 398 also.
23. The contention of the
respondents that the 1st petitioner has no right on 4 lakh shares earlier held
by Kero GambH is nothing but an
after thought. When the RBI has given the
approval for transfer and when the company itself has endorsed the shares in favour of the
1st petitioner simultaneously entering his name in the Register of members, no
one can contend now that the 1st petitioner has no title to the shares. Producing a copy of the Register of Members he
pointed out at page 94 of the Register to show that his name has been deleted on the
ground that stamps had not been cancelled. This
deletion was made on 1.9.1997 by which time the litigation had started between the parties
and in the Board Meeting held on that date wherein the decision to delete his name was taken, none from the petitioners’ side
was present. This is nothing but a malafide action. Further, even though in the
resolution, it is stated that intimation would be given to the 1st petitioner,
no such intimation was received by him. He further pointed out that the company has
fabricated the minutes dated 9.8.1995. While
as per the minutes at Annexure A-57, the Board had approved the transfer of shares in
favour of the petitioner, in the copy of the same Board minutes filed by the 2nd
respondent along with his affidavit dated 18th May, 2001, it is recorded that
that the Board had approved the transfer in principle and had requested the 1st
petitioner to re-submit valid deeds in this regard. This
has been done only with a view to deny the petitioner the title to 4 lakh shares even
though right from the beginning the contemplation of the parties was that these 4 lakh
shares would vest in the 1st petitioner subject to RBI approval which was also
received as conveyed by RBI vide its letter dated 4.7.1995 (Annexure A-10). He further pointed out that as early as on
8.9.1993, the Board had approved in principle the transfer of shares of M/S Kero GamH to
the petitioner and therefore the question of once again agreeing in principle in 1995 did
not arise. This itself would show that the
minutes produced by the 2nd respondent is a fabricated document. Further, a company
does not have powers to rectify the Register of Members on its own without moving
the Company Law Board for permission. Even otherwise, since the petitioners have
challenged all the allotments made after 31.3.1997, prior to the allotment, they held
17.43% shares and as such they have locus standi to maintain this petition. He referred to Rajahmundry Eelectric Supply
Corporation Vs. A. Nageshwar Rao ( AIR 1956 213) to contend that the maintainability
of a petition is to be judged on the date of filing of the petition and subsequent change
in the percentage holding cannot affect
the maintainability. Relying on 97 CC 356, he
submitted that locus standi of the petitioners would depend on the findings given on the
allegations relating to allotment of shares.
24. He further pointed out that
the allotment of shares in the Board Meeting held on 24.5.1997 itself is doubtful in as
much as the alleged minutes of that meeting surfaced only after he had concluded his
arguments on the petition. Even as per the decision in that Board Meeting on 22.11.96,
shares were to be offered on right basis. No
such offer was ever made and therefore no outsiders could have remitted money as share
application money before 31.3.1997 for the company to
allot shares. The minutes of 24.5.1997 is
nothing but a fabricated document. The respondents have not so far produced the notice
convening this meeting and even the alleged fax draft of the proceedings of that meeting
surfaced only after the conclusion of his argument and as such no credence should be given
to the fax copy of the alleged draft. The
very purpose of the alleged issue is to defeat the proposal of the petitioners dated
17.5.1997 (Annexure A-15) to remove the 2nd respondent as the Managing
director. If as alleged by the respondents
Shri Sircar and Shri Lahiri from the petitioners’ side had attended the meeting on
24.5.1997, they would not have written the complaint to CLB on 15th July, 1997(Annexure
A-17) claiming to hold 53% shares in the company. This
itself would show that the presence of these two in
the meeting is nothing but a fabrication. Further,
even in the suit the petitioners have claimed majority and the respondents in their reply
did not challenge this. In addition, no
Return of Allotment relating to the allotment on 24.5.1997 was filed with the ROC. Only the allotment made on 12.6.1997 was filed
with the ROC that too on 12.8.1997. On this
day, over Rs.20 lacs remitted by the NRIs were available with the company as share
application money. In regard to the
contention of the respondents that there are parallel proceedings, he pointed out that the
proceeding before the civil court was only relation to the Board Meeting convened on
26.7.1997 and there is no allegation in that petition regarding conversion of the majority
into minority, removal of directors, and mismanagement in the affairs of the company
and as such the civil suit is not a bar in proceeding with the present petition before the
CLB. He also pointed out that none of the
cases cited by the learned counsel for the petitioner is applicable in the facts of this
case. Further, if the contention of the
respondents is that money had already come to the company
as share application money, by allotment of shares in such a hurry, the company did
not get any further funds and the allotment was made only to protect the interest of the 2nd
respondent who was sought to be removed by the majority shareholders. The very fact that
when the NRI money was available with the company as share application money, no
shares were allotted to them.
25. Shri Mitra in sur rejoinder
submitted: The minutes of the Board Meeting held on 24.5.1997 are very important in as much as the allotment made in
this meeting reduced the petitioners into a minority and that is why they are challenging
these minutes notwithstanding the fact two of the directors from the petitioners’
group were present in that meeting. They cannot challenge their presence,as Shri Sircar
has signed the minutes as Chairman of the meeting and Shri Lahiri also has signed the same
as a director as is evident from the signature in the fax copy produced during the
hearing. Further, these two persons have not
come forward to file an affidavit denying their presence in that meeting. As per letter by the 1st petitioner
dated 20.6.1997 (Annexure A-49), he himself has mentioned about the Steering Committee
constituted in the meeting held on 24.5.1997 and as such now he cannot claim that there
was no such Board Meeting on that day. The
need of funds for the company was known to the 1st petitioner as he himself
wrote to the bank on 25.11.1996 seeking for additional bank facilities (page 512 of Vol.
2). As far as majority on the Board is
concerned, as per the collaboration agreement, the respondents were to constitute the
majority on the Board and by appointing new
directors, the respondents have gained majority and as such this cannot be an act of
oppression against the petitioners.
26.
We have considered the
pleadings and arguments of the counsel. Before
dealing with the merits, it is essential to narrate certain events that took place during
the proceedings. In the hearing held on
24.6.1998, the petitioners were represented by Shri S. N. Mookherjee, Advocate and Shri
Sanjay Kumar Gupta, Practicing Company Secretary while the respondents were represented by one Shri J.K. Chattopadhyay, practicing Company
Secretary. On that day, a hand written
consent terms signed by Shri Sanjay Gupta and Shri Chattopadhayay were filed with the
request that the petition be disposed of in terms of the consent terms. Accordingly, an
order was issued on 29.6. 1998 incorporating
therein the terms of consent and disposing of the petition.
Later, the respondents filed an application seeking for recalling the said order on
the ground that Shri Chattopadhyay was not authorized to enter into any settlement with
the petitioners. This application was heard
in length and an order was passed on 24th June, 1999 recalling the order dated
29.6.1998 for the reaons stated in that order. There
after, at our instance, further discussions took place in our presence to resolve the disputes amicably but without any
result.
27. The respondents have
questioned the maintainability of the petition in terms of Section 399 of the Act on the
ground that on the day of filing of the petition, the petitioners collectively held only 9.95% shares in the company. To compute this percentage, according to the
respondents, the 4 lakh shares allegedly held in the name of the 1st petitioner should be omitted for
the various reasons indicated as part of the arguments.
They have relied on the provisions of Section 108 of the Act to urge that even if
the registration had taken place, since it was in violation of the provisions of this
Section which have been held to be mandatory
in Mannalal case by the Supreme Court, the 1st petitioner cannot
rely on registration in his name. In this
connection, it is relevant to refer to the decision of this Board on a similar objection
in Radhe Shyam V M/S Panchmukhi (C.P No 46/97)case wherein this Board observed “Any
way, as rightly pointed out by Shri Sen, that in between the share certificates and the
Register of Members, the share certificate gets precedence over prima facie evidential
value under Section 84 over prima facie
evidence of the Share Register under Section
164, in as much as the later is under the
control of the company and is susceptible to manipulation.
This is what this Board has held in Tin Plate Company case (supra) and in Rajendra Prasad Gupta V
Scientific Instruments Company Ltd ( 1999 1 CLJ 121). Thus,
taking into consideration our finding that the 2nd respondent had received the
consideration for the shares and that these shares had been transferred and registered in
the names of the petitioners/their group, and
since the share certificates are in possession of the
petitioners, we have no hesitation to come to
the conclusion that the petitioners are validly registered legal owners of 3,19,200 shares
in the company for valuable
consideration”. Similar is the position in the present before us also.
28. The learned counsel for the respondents raised an
issue that any transfer in violation of Section 108 of the Act which mandates cancellation
of the stamps on the instruments of transfer is void if the stamps are not cancelled. When
such a similar objection was taken in
Panchamuki case also, this Board observed “ The counsel relied on relied on Mathrubhumi
and Nudea Tea Company Cases. In both
these cases, the challenge of non cancellation of stamps was raised before registration
was effected and accordingly the courts held that the Board of Directors of the companies had rightly decided to refuse registration in
terms of Section 108 of the Act. However, in
the present case, registration had already been effected.
In M/S Kothari Industrial Corporation Ltd. Vs. Lazor Detergent Limited, ( 81 CC
617) wherein when the petitioner company sought
for rectification of its Register of Members on the ground that it had registered the
transfer of shares lodged by the respondents even though the stamps had not been
cancelled, this Board ordered rectification of the register of members on the ground that non cancellation of the stamps was in violation of
the mandatory provisions of Section 108 of the Act. This order was challenged in the High
Court of Madras which held that a company should not raise its own irregularity after a lapse of time and seek
rectification of the register of members. ( 85 CC 79). Accordingly, it set side the order of this Board. Therefore, while
the non cancellation of adhesive stamps could be a ground for refusal to register the transfer of shares, once the registration had
been effected, such non cancellation cannot be a ground for the company to seek
rectification of the Register of Members. Therefore,
in the present case, even though the stamps had not been cancelled, since the company had
already registered the transfers, it cannot take a stand that the registration is invalid
and therefore the petitioners are not legal owners of these shares. The same ratio applies in the present case
also.” The admitted position in this
present case before us is that the share
certificates in respect of these 4 lakh shares have been endorsed in favour of the 1st
petitioner as is evident from the copies of the share certificates in Vol. 2 and it is
also on record that the list of shareholders as pointed out by Shri Mookerjee indicates
the name of the 1st petitioner as the holder of these shares. Having registered the shares, endorsed the share
certificates in favour of the 1st petitioner, entered the his name in the
register of members and having communicated the same to M/s Kero GmbH, the company is estopped from challenging the
transfer as being in violation of the provisions of Section 108 of the Act whatever might
be the correct version of the minutes of the meeting on 9.8.95. The learned counsel also took the plea that NRIs
could hold only 5% share in the company as per the approval of the Government and as such
the 1st petitioner cannot hold these 4 laks. We are of the view that this plea
cannot be accepted as the RBI has permitted the transfer. Therefore, these shares have to
be included in computing the shares held by the petitioners and if it is done so even
after the issue of further shares by the company, the petitioners held 34.45% shares in
the company, thus, fulfilling the requirements of Section 399 of the Act. In view of this finding, the claim of the
respondents that since of the shareholders has withdrawn the consent, the percentage
holding has come down below loses its significance. Yet, even this argument does not
survive as the maintainability of the petition is to decided as on the date of filing the
petition and subsequent changes in the shareholding cannot affect the maintainability of
the petition as held in a number of cases. In L.RM.K.
Narayanan Vs. Pudhthotam Estate Limited ( 74 CC 30-
Mad ) it has been held that the
requirement as to the share qualification is relevant and material only at the time of
institution of proceedings and once there is a valid petition and a shareholder seeks to
substitute himself in order to merely continue such
a valid petition, such a shareholder need not hold 10% of the share capital. It is not
incumbent upon the court to dismiss a petition because the proceedings under Section 397
or 398 of the Act is a representative proceeding. Even
the original petitioner does not want to continue the proceedings, the court cannot be
compelled to dismiss the action. Even then, it is open to the court to consider the merits
of the case without dismissing the petition. In Rajahmundri
Electric Supply Corporation Vs. Nageshwar Rao (AIR 1956 SC 213
) it has been held that the validity
of a petition must be judged on facts as they were at the time of presentation and a
petition which was valid when presented, cannot, in the absence of a provision to that
effect in the statute cease to be maintainable by reason of events subsequent to its
presentation. In S. Varadarajan V Venkateswara Solvent Extraction (P)Ltd (80 CC 693)
it has been held that the requirement of share qualification is relevant and material only
at the time of institution of the proceedings. Therefore, on none of the grounds of challenge, the respondents can
claim that this petition is not maintainable in terms of Section 399.
29. Even otherwise, in this
petition the petitioners have challenged all the shares issued after 30.3.1997 on which
date they held 15.32% shares even after excluding these 4 lakh shares. In such cases, this
Board has been taking a view that if in a petition under Section 397/98, the allegations
of oppression relate to removal as a member or conversion into a minority, then the
petition could be heard, notwithstanding the fact that the conditions of Section 399 are
not fulfilled, first to determine their entitlement. In Dipak G. Mehta Vs. Shree
Anupar Chemicals India Private Limited, (1999 33 CLA 393 CLB), this Board took
this view and considered the maintainability of the petition first in terms of Section
399.. Reference may be made to the decisions of this Board in TNK Govindaraju Chetty
V Kadri Mills Ltd ( 1998 30 CLA 49); Om Prakash Gupta Vs. Hicks
Thermometer(India)Ltd. ( 1999 33 CLA 461
) and Dipak G Mehta Vs. Shree Anupar Chemicals (India) Pvt. Ltd. ( 98 CC 575 ) in this regard. Therefore, before getting into the merits of the
case, we shall be first examining issue relating to further issues of shares to find out
whether the petitioners have established the
same to an act of oppression. One other
aspect which has not ben made clear to us is the number shareholders in the company.
Since, in terms of Section 399, 1/10th of the total members can also file a
petition under Sections 397/98, we would have examined this aspect also to find out as to
whether 8 petitioner shareholders constitute 10% of the total membership. Any way since we
have held that the 1st petitioner is the rightful owner of the 4 laks shares,
even taking into consideration the issue of further shares, the petitioners group held
more than 10% shares and as such this petition is maintainable.
30. Another objection taken by the respondents relate
to parallel proceedings. It is an admitted position that the 1st petitioner
filed a suit TS No.83 of 1997 in Barasat. According
to the respondents since there are commonalities
of allegations and prayers in the suit and
this petition, the present proceedings should
be stayed. They have cited a number of cases
to support their stand. A perusal of the plaint
indicates that there are no allegations relating to issue of further shares or relating to
the change in the composition of the Board in the plaint.
As a matter of fact the change in the composition of the Board took place after the
plaint was filed. Further, the only relief
that they have sought in the plaint relates to a decree of declaration that the purported
notice dated 30th June, 1997 was illegal and void and grant of perpetual
injunction against the notice dated
30.6.1997. Therefore, we do not find
any commonality in the suit and the present
petition and as such the question of the petitioners’ pursuing parallel proceedings
does not arise.
31. Now that we have held that
the 1st petitioner has a right to claim title to the 4 lakh shares acquired by him from M/S Kero GmbH, the petitioner group held 52.46% as
on 30.3.1997. It is an admitted position that
after allotment of further shares, the petitioners’ group has been reduced to 34.03%. The settled position of law is that if further
shares are issued only with a view to either convert a majority into a minority or for
creation of a new majority, then, the same is a grave act of oppression. It is also a settled law that if the shares are
issued for the benefit of the company which incidentally increases one’s
shareholding, it need not be considered to be an act of oppression. Keeping these principles in mind, we have to
examine the allegation of the petitioners in relation to the further issue of shares. The stand of the respondents has been that, to the knowledge of the 1st petitioner
who had been the Chairman of the company, the company needed funds for a long time and he
was a party to the decision to mobilize the funds from all possible sources. We find substance in this stand of the
respondents. In the Board Meeting held on
2.3.1996 which was presided over by the 1st petitioner, the matter relating to
increase in the share capital was discussed and the Board noted that the State Bank of
India had sought the company to increase the paid up capital of the company to Rs.1.5
crores. In that meeting, it was also decided
that NRIs should contribute Rs.15 lacs and resident
shareholders Rs.3 lacs. In the Board
meeting held on 20.7.1996
which was presided over by Shri S. Sircar, the financial health of the company was
discussed at length and it was decided that the only solution to solve the liquidity
crisis was to go in for further issue of shares and the 2nd respondent has
requested the members of the Board to mobilize funds from friends, relatives and
associates etc. to collect at least Rs.30 lacs by September, 1996. In the Board Meeting
held on 17.8.1996 which was presided over by Shri S. Sircar, the Board decided to mobilize
funds by private placement in view of paucity of funds due to which the company was not in
a position to function smoothly. In the
meeting held on 21.11.1996 which was presided over by the 1st petitioner ( the
minutes are found to have been signed by Shri S. Sircar on 24.5.1997), the Board,
considering the persistent crisis of working capital,
decided to raise fresh capital on right basis to the tune of Rs.1 crore from
Indians and NRIs by 31st March, 1997. We also find from the compilation of
documents filed by the respondents at page no. 227, a letter from the State Bank of India
on 18.5.1997 requiring the company to raise the paid up capital of the company to Rs.2.15
crores before the bank could permit utilization of the full limits. From this sequence of events, it is evident that
the company needed funds and that the same was in the knowledge of the 1st
petitioner who was the Chairman of the company and also other NRI directors who had
participated in some of these Board Meetings.
32. Thus there are enough materials to show that the company needed funds
and as such the next issue is whether the
company could have allotted shares to resident shareholders which ultimately resulted in
conversion of the petitioners from a majority into a
minority. We find from the Annual Return as on 30.9.1996 that NRI shareholders had
61.88% of the 10 lakh shares issued and paid up on that day. Obviously, there must have been further issue of
shares to resident Indians after that date to bring down the NRI holdings to 52.46% as on
30.3.1997 ( It is seen from the minutes of the Board Meeting held on 21.11.1996 that
59,100 shares had been issued to resident shareholders).
This reduction in the shareholding has not been challenged by the petitioners. Various issues were raised by the learned counsel
of the petitioners inter alia including non compliance with the provisions of
Section 81 of the Act. We find from the
minutes of the Board Meeting held on 15.4.1995 which was presided over by the 1st
petitioner himself that the Board had resolved to raise funds by issue of shares to
general public including friends and relatives and NRIs as may be decided by the Board on
such terms and conditions and that the
general body approval in terms of Section 81(1A) would be obtained. It was also resolved
in that meeting that out of Rs.2.5 crores to be raised by way of public issue, equity
worth Rs.78.11 lacs would be issued to NRIs on repatriation basis. Accordingly, in that meeting, the authorized
capital was also proposed to be raised from
Rs.1 crore to Rs.3.5 crores. It was also
resolved to convene an EOGM in this regard on 9th May, 1995. It is stated that subsequently the EOGM was held
on 9th May, 1995 and all the resolutions were carried through as is evident
from Form 23 filed with the Registrar. The petitioners have pointed out that the said EOGM
was not held and even they had not received the notices for this alleged meeting. This
plea cannot be accepted as fresh shares
to the tune of 59,100 shares could not have been issued/allotted (which has not been
challenged) without increase in the authorized capital which according to the respondents
was done only in this EOGM. Thus it is clear
that the provisions of Section 81(1A) has been complied with to allot shares otherwise
than on a right basis. If it is so and
since we do not find any time limit within which the approval given by the EOGM was to be
implemented as far as issue of further shares is concerned, we are of the view that the
Board would be at liberty to allot shares as and when needed up to the amount of Rs.2.5
crores including allotment to the NRIs.
33. Having held that the Board
had been empowered, with the knowledge and consent of the 1st petitioner who
was the Chairman, to issue and allot shares up to the extent of Rs.2.5 crores to both
resident and NRIs, the issue that arises for consideration, as repeatedly contended out by the learned counsel for the petitioners,
whether the allotment of 372552 shares on
27.7.1997 was only with a view to defeat the resolutions proposed by the petitioners for
removal of the 2nd respondent as the Managing Director and to reduce the
petitioners into a minority. The
circumstances in which this meeting was held does throw a lot of suspicion about the
motive of holding this meeting. It is on
record that the meeting convened on 26.7.1997 by a notice dated 30.6.1997 has been stayed
by the civil court and the order of the civil court was served on the company on
25.7.1997. One of the items in agenda for this meeting was allotment of further
shares. One of the grounds on which this meeting was challenged was that by allotment of
further shares, the petitioners would be reduced to a minority. Even though, the civil court held that the company/respondents had not
committed contempt by transacting the same business in the Board Meeting convened on
26.7.1997, the ground on which that view was taken by the court, as is evident from the
order of the court is that the in plaint the notice dated
25.7.97 was not an issue. However,
when we look at this matter from the angle of oppression, it is quite clear that the haste
with which this meeting was held with just two days notice when the majority directors
were NRIs is nothing but an oppressive act. It
is also on record that none of the directors from the petitioners’ group
notwithstanding their being the majority on the Board attended this meeting obviously for want of sufficient
notice. It appears to us that the purpose of holding this meeting with such a short notice
was only with a view to avoid the presence of the majority directors who happened to be
from the petitioners’ group and such avoidance of the presence of majority directors
itself can be considered to be a grave act of oppression. A short notice with the view to
avoid/prevent directors to attend a Board meeting can never be a valid notice in terms of
Section 286 of the Act as has also been held in Re Homer District Consolidated Gold
Mines 1888 39 Ch D 546).Normally when proper notices are not issued to all
directors, the decisions taken in a Board
Meeting are null and void. ( Parmeswari Prasad Gupta V UOI 44 CC 1 SC).
Further, we also note that neither the agenda sent through the notice dated 30.6.1997 nor
the one dated 25.6.1997 indicated the number of shares to be allotted. We find that only two directors out of 7
directors- both from the respondents group were
present in this meeting. Therefore, this
allotment of 372552 shares suffers from
various infirmities like allotment of shares exclusively to residents when over a sum of
Rs.20.8 lacs remitted by NRI shareholders as share application money was available with
the company, was done in a meeting without sufficient notice to the majority directors,
the entire allotment was behind the back of the petitioners represented by the NRI
directors. All these would establish very clearly that this allotment is nothing but an
act of oppression against the petitioners. As
far as the allegation of the petitioners that this allotment was made only to defeat the
proposed removal of the 2nd respondent as the Managing Director, we would have
found substance in this argument if on this day the petitioners constituted the majority
which according to the respondents was not in view of allotment of shares having been made
in the Board Meeting held on 24.5.1997.
34. As far as the allotment of
191385 shares claimed to have been made by the company in the Board Meeting held on 24.5.1997 is concerned, the
stand of the petitioners is that the minutes of the Board Meeting on 24.5.1997 are
fabricated. We note that even though as per the Board minutes the allotment of 191385
shares was made on 24.5.1997, yet, in the Return of Allotment filed on 12.8.1997, these
shares are shown to have been allotted 12.6.1997. The
learned counsel for the respondents did not clarify this discrepancy. The respondents in
their compilation filed a copy of the minutes of the Board Meeting on 24.5.1997 wherein it
is indicated that Shri S. Sircar presided over this meeting and that Shri S. Lahiri also
attended this meeting. These two are NRI
directors. At the end of the minutes, it is also shown that Shri Sircar had signed these
minutes as Chairman of the meeting and 5
other directors including Shri S. Lahiri, an NRI director had signed the same as “
Read and confirmed”. It was contended by
the learned counsel for the petitioners that these directors had not signed the original
minutes book and that the original minutes
have been signed by Shri S.N. Mittra as
Chairman of the meeting on 27.7.1997. Countering these arguments, the learned counsel for
the respondents produced before us the Attendance Register for the meeting held on
24.5.1997 wherein we have seen the signatures of Shri Sircar and Shri Lahiri. He also produced before us a fax copy of the draft minutes originally signed by Shri Sircar as the
Chairman of the meeting wherein he himself
had signed for Shri Lahiri also and other directors have also signed as “ Read and
confirmed”. The learned counsel for the petitioners urged that since this document was produced at the fag end of the hearing, no
reliance should be placed on that. To this
extent we agree that such late production of the document has placed the petitioners from
rebutting the authenticity of the same, but in the compilation filed earlier, a copy of
the minutes had been filed showing the presence of these two directors, but they have not chosen to file any
objection to the same. However the counsel for the petitioners, as a part of the
arguments, contended that if these two directors of the NRI group had attended this
meeting wherein shares were allotted, they would not have taken a stand of their being in
majority in the civil suit and they would not have complained to the CLB claiming to be in
the majority. Yet, we find that the 1st petitioner himself in his letter dated
20.6.97 (Annexure A-49) referred to the constitution of the Steering Committee. This Committee was constituted in the Board
Meeting held on this day. Therefore, he cannot disown knowledge of this meeting. When the
signatures of the NRI directors are found in the Attendance Register for having attended
the meeting on this day and when the zerox copy produced shows the signatures of Shri
Sircar without any challenge of the signatures and since these two NRI directors have not
chosen to challenge their presence in the meeting, and when the 1st petitioner
has recognized this meeting by his letter, we have to necessarily hold that this meting
took place and that these two NRI directors attended
this meeting and were parties to the allotment of 191385 shares. Therefore, as far as the allotment of these
shares are concerned, we do not find any scope to intervene.
35. The 3rd allotment
after 31.3.1997 was made in the Board Meeting on 1.9.1998 of 20,000 shares. In this meeting, admittedly, none from the
petitioners’ side was present. On this
day also, the share application money of over Rs.20 lacs remitted by the NRI shareholders
was with the company and therefore without allotting any shares to them, the act of the
Board to allot shares only to the resident shareholders could be considered to be an act
of oppression.
36. The learned counsel for the
respondents vehemently urged that by allotment of shares on 24.5.1997, the petitioners had
already become minority with 44.6% shares ( including 4 lakh shares) and therefore
allotment made thereafter can never be considered to be with a view to convert the petitioners into a minority and as such cannot
be considered to be an act of oppression. Even
though, we have given a finding that the allotment of shares made on 24.5.1997 was with
the knowledge and approval of the directors from the petitioners’ group which
incidentally reduced the petitioners from a majority into a minority, yet, by further
issue of shares, without the knowledge and
consent of the petitioners, they have been further reduced to 34.45%, which according to
us is an oppressive act. It is to be noted that even though the company is a public
company, yet there are only two identifiable groups and practically every shareholder
belongs to either of the groups. Thus, when one group is allotted shares against the
application money, the other group has been left out resulting in the change in the
percentage holding. Such an act has to be
viewed as oppressive. In this connection it is also worthwhile
referring to the arguments of learned counsel for the respondents that as per Government
approval the petitioners could have only 45% shares in the company and not majority. If it is so, further shares should not have been
issued after 24.5.1997 by which the holding of the NRI shareholders had been reduced to
34.45%. We are making this observation only
because for needs of the company it had already collected share application money not only
from the NRIs but also from resident Indians and therefore there was no urgency without
proper notice to the directors from the petitioners’ group to allot further shares in
the meeting held on 27.7.1997 and 1.9.1997 that too completely omitting allotment to NRIs
who had also remitted over Rs.20 lacs as share application money. Even assuming that the permission from the RBI
(which according to the petitioners has ben receive) had not been fully received for
allotment to NRIs, the company/directors should not have reduced the shareholdings of the
petitioners by allotment of further shares.
37. The learned counsel for the
petitioners contended that the allotment of shares had been made to fictitious persons pointing out
various factors. We feel that when the money has come to the company, as seen from the
bank statements, and the accounts having been audited, it is not necessary to get into
this matter in detail, more so, in view of the final relief that we propose to give.
38. In regard to the appointment
of 4 additional directors in the meeting held on 27.7.1997, we do not find these
appointments to be bona fide and in the interest of the company. To us, it appears that it was done only with a view to gain majority
control on the Board as is obvious from the following facts. In the notice dated 30.6.1997 for holding the
Board Meeting on 26.5.1997, there was no item relating to appointment of additional
directors. The petitioners moved the civil
court with the complaint of the attempted reduction in their shareholding. Only the agenda with the notice dated
25.7.1997 convening the meeting on 27.7.1999 contained the business relating to the
appointment of additional directors. We have
already noted in relation to the allotment of shares on this day that such a short notice
could not be considered to be a valid notice especially to NRI directors. If proper notices had been given, since the
petitioners’ group comprised the majority, they would not have approved appointment
of additional directors. Further, the notice
did not specify the number of directors to be appointed.
In addition, we also note from the minutes of that meeting that the purpose of
appointment of additional directors was on the ground that NRI directors were not readily
available in India and as such Board Meetings were not always possible for want of quorum. We find that in none of the minutes of the earlier
meetings, there was any mention about the inability of the NRI directors to attend the
meeting. It is also to be noted that the notice dated 30.6.97 did not contain the business
of appointment of additional directors. How the respondents, in the gap of 25 days, could have suddenly realized the need to
appoint additional directors and included the same in the notice dated 25.7.97 has not ben
explained. The very fact that all the 4
persons who were appointed on that day as additional directors were present in that
meeting shows that the idea of appointment of additional directors was only with the view
to take control of the Board that too without proper notice to the NRI directors. In this connection, it is also pertinent to
mention that even though NRIs were not to be
the majority on the Board as per the MOU, yet, the fact is that they constituted the
majority till 27.7.1997 and upsetting the majority without their consent and knowledge is
an act of oppression. Further, even assuming
that in the annual general body meeting on 30.9.97, all these additional directors were
appointed as regular directors, the very fact that proper notices had not been issued to
the NRI shareholders, shows that these appointments had been made behind the back of these
shareholders, who constitute the other group of promoters. The same observation holds good
in respect of the non election of the two directors belonging to the petitioners group, as
by not appointing them, the petitioners group is now without any representative on the
Board, after Shri Sircar also resigned from the Board. Thus, one of the promoters group,
out of the two, has been completely excluded from the Board.
39. As far as the various
allegations relating to mismanagement in the affairs of the company are concerned, we do not propose to examine the same
in detail in view of the relief that we propose to grant other than noting that the
turnover and profit which were going up upto
97-98, started going down thereafter, whatever may be the reasons. As on 31.3.2000, the accumulated loss was to the
tune of Rs 8.33 crores.
40. In view of our findings that
the petitioners’ group has been marginalized both in terms of the shareholding and
directorship in the company (now there is none from the petitioners’ group on the
Board), the petitioners have established acts of oppression against them. Normally, when
there are only two groups in a company, and if one were
to be marginalized, restoration of the status que ante as it prevailed
before the meting on 27.7.97 in respect of both the shareholding and the directorship,
would only result in further litigation which would not be in the interest of the company.
Therefore, the only way by which the disputes could be resolved, which would also be in
the interest of the company is that one group should go out of the company by selling its
shares to the other. Even during the settlement talks, the consensus that emerged was that
one group should go out of the company. The respondents, in their without prejudice
proposals dated 12.2.99 and 1.4.99 indicated their willingness to refund the share application money remitted by the NRIs and also
purchase the shares registered in the names of the petitioners (1,6,5,340 shares) at Rs
6.33 being the book value of the shares. They had also sought for a long time to do so
after a period of moratorium. In regard to the 4 lakhs shares, since they had not
recognized the title of the 1st
petitioner to these shares, they had given certain alternate proposals. They had also
indicated that they would be willing to sell their shares also to the petitioners so that
the later could manage the affairs of the company. These proposals were not agreeable to
the petitioners and they demanded their entire investment immediately and they were not
interested in taking over the company. The admitted position is that the respondents are
managing this company exclusively from September, 1997 onwards and the NRIs are living
abroad. Under these circumstances, it would
be appropriate that the respondents continue to manage the affairs of the company by
purchasing the shares held by the petitioners and also refund the share application money
remitted by the NRIs. Since we have given a
finding that the 1st petitioner is the rightful owner of the 4 lakh shares, the
respondents should purchase these shares also. As
far as the valuation of the shares is concerned, the usual practice adopted is that it
should be based on the Balance Sheet proximate to the date of filing of the petition. In this case, since the petition was filed on
9.12.1997, the valuation of the shares will be based on the Balance Sheet as on 31.3.1998.
Since the company commenced commercial production only a few years earlier, we consider it
appropriate that the share value should be based on the net worth of the company as on
31.3.1998. Accordingly, we direct the
statutory auditors of the company to compute the fair value of the shares of the company
on the basis of the net worth of the company as on 31.3.1998 within a period of 2 months
from the date of receipt of this order by the company.
This valuation, subject to verification by the petitioners, will be binding on both
the groups. As far as the time frame for
making payment is concerned, since the share application money has been with the company
for over 5 years now, the same should be refunded at par in one or more installments, on
or before 31.8.2002. The consideration for
the shares as computed on the basis of the fair value should be paid on or before
30.6.2003 in one or more installments. The
option to purchase the shares is either with the 2nd respondent and his group
or with the company. In case the company
chooses to purchase the shares, in terms of Section 402 of the Act, it is authorized to
reduce the share capital to the extent of the face value of the shares so purchased. Since
the remittance of both the application money and the consideration for the shares to NRIs
may require the approval of the Reserve Bank of India, the company will approach the
Reserve Bank of India along with a copy of this order
and the RBI, taking into that this
order is being passed in the interest of the company and the shareholders, will accord its
approval at the earliest.
41. The petition is disposed of
in the above terms without any order as to cost with liberty to the parties to approach
this Bench in case of any difficulty in implementing the directions contained above.
(S.Balasubramanian)
(A.K. Banerji)