BEFORE THE COMPANY LAW BOARD
PRINCIPAL BENCH
NEW DELHI
Present: 1. Justice A.K. Banerji, Chairman
2. Shri S.
Balasubramanian, Vice Chairman
In the matter of Shri Ashok
Kumar Oswal & Another
Versus
M/S Panchsheel Textiles
Manufacturing & Trading Co. (P) Limited & others
PETITIONERS:
1.Shri Ashok Kumar Oswal
2. Calgary Investment &
Trading Co.(P) Ltd.
RESPONDENTS:
1. M/S Panchsheel
Textile Manufacturing & Trading Co.(P) Ltd.
2. Smt. Shakun
Oswal
3. Smt. Suchita
Jain
4. Shri S.P. Oswal
Present on behalf of
parties:
1. Shri U.K. Chaudhary, Sr.
Advocate
.. for petitioner No 1
2. Ms. Ranjana Roy, Advocate
.. for petitioner No 1
3. R Shawhney, Sr Advocate
.. for petitioner No 2
4. Shri S. Sarkar, Sr.
Advocate
.. for resp. 1
5. Shri S.N. Mookherjee,
Advocate
.. for resp. 2,3 &4
6. Shri K.K. Lahiri,
Advocate
.. for resp.1,2,3 & 4
7. Shri Gaurav Kejriwal,
Advocate
.. for resp.1,2,3 & 4
(Final Date of hearing:
11.1.2002)
S. BALASUBRAMANIAN:
1. The 1st
petitioner claiming to have held control over 68% shares in M/S M/S Panchsheel Textile
Manufacturing & Trading Co. (P) Ltd. ( the company) has filed this petition with the
allegation that by clandestine issue of 10,000 shares in the company to the respondents,
his controlling interest in the company has come down to about 30% and as such his
conversion into minority from majority is a grave act of oppression and therefore has
sought for canceling the issue/allotment of 10,000 shares in favour of the respondents.
2. Some relevant
facts of the case are that this company is a part of a group known as R.C. Oswal Group or
Vardhman group. The 1st petitioner ( the petitioner for short) and the 4th respondent are sons of Shri R.C. Oswal. Earlier, there had been some division in the
family and the companies and presently this Group consists of 3 manufacturing companies
– Vardhman Spinning & General Mills Ltd., Mahavir Spinning Mills Ltd. And
Vardhman Polytex Limited. During
the life time of Shri R.C. Oswal ( who expired on 6th January, 1998), the
petitioner became the Managing Director of M/
Vardhman while the 4th respondent
was the MD/Executive Director of other companies. He was also the Chairman of the company. Shri R.C. Oswal left behind a Will dated 2nd
April, 1996 in which it has been stated that an understanding had been reached between him
and his two sons that the ownership and control of the M/S Vardhman shall be with
the petitioner and the ownership and control of the other two companies shall be
with the 1st respondent. In addition to the 3 manufacturing companies, the
group has a number of investment companies, of which the respondent company is one. It
holds about 26.2% shares in M/s Vardhaman.
Originally, there were only two directors in
the company, Viz the petitioner and his wife. On 13.12.97, the 3rd and 4th
respondents were appointed as additional directors. The capital clause of the Memorandum
was altered in an EOGM on 31.1.98 by which the mix of equity and preference shares
were altered. The equity was enhanced from 10000 shares of Rs 10 each to 50000 shares of
Rs 10 each while the preference was reduced
from 48,000 shares of Rs 100 each to 44,000shares of Rs 100 each. The total authorized
capital remained as Rs 49 lakhs. In the Board
meeting on 6.2.1998, 10000 equity shares were allotted of which the 3rd
respondent subscribed to 1000 shares and the 2nd respondent to 9000 shares.
According to the petitioner, before the allotment of 10000 shares, of the 7995 issued
shares, his group held 68% shares in the company and therefore was in majority and with
the allotment of these shares to the respondents’ group, now this group is having
majority control over the company resulting in conversion of the petitioners group from a
majority into a minority and as such the respondents have acted in a manner oppressive to
the petitioner.
3. Shri Chaudhary,
Sr. Advocate appearing for the petitioner
submitted: The petitioner is the youngest son of Shri R.C. Oswal and the 4th
respondent being the elder son, the petitioner had reposed complete faith and confidence
in him. In view of this, even though his
client and his wife were the only directors of the company, they willingly appointed the 4th
respondent and his daughter as additional directors of the company. The affairs of the company were being conducted on
mutual trust and confidence and it was the will of the
4th respondent which prevailed not only in this company but also in all
the companies in the group. The petitioner
trusted his brother and therefore was in the habit of signing documents/papers presented
to him by his brother. The petitioner used to
abide by the decision of his brother. In
other words, the normal rules of company management/corporate governance cannot be applied
in facts of this case and therefore the participation of the petitioner in the decision
making cannot be held against him as an estoppel. Till
around May, 2001, the petitioner was under the impression that everything was fine with
the affairs of the company. However, when the
4th respondent proposed for appointment of himself as the Chairman and Managing
Director of the company in M/S Vardhman on 24th May 2001, the
petitioner apprehended that his brother was trying to throw him out from the post of
Managing Director in M/S Vardhman. When the petitioner brought to the notice of the 4th
respondent that his appointment as Chairman
and Managing Director was not in accordance with the Articles of M/S Vardhman the 4th
respondent withdrew the proposal. However,
when he mooted the same proposal again on 11.8.2001, the petitioner suspected some foul
play and accordingly took an inspection of the records of the Registrar of Companies from
which he found that Form No.2 indicating allotment of 10000 shares in the company, in a Board Meeting held on 6.2.1998, had been filed.
Of these 10000 shares, 1000 shares
were reportedly allotted to the 2nd respondent who is the wife of the 4th
respondent and 9000 shares to the 3rd respondent who is his daughter. The petitioner was never aware of any such Board
Meeting. The petitioner never had the
opportunity of knowing that the share capital had been increased since he did not sign any
Annual Report after 1998. Even though the
petitioner signed the Annual Report as on 21.9.1998, he had not signed any of the
enclosures to the same. In the enclosure indicating the details of shares held on that
date, there are manipulations which should have been carried out after the petitioner had signed the Annual Report. While the complete
format is computer printed, the date of the meeting is written by hand. As against 10 shares shown against the 3rd
respondent, an addition of the figure 90 is found written in ink, thus, making the
shareholding as 9010. Likewise, as against
2500 shares held by the 2nd respondent, the
figure of “ 2 “ has been altered by ink as “3” indicating her holding as 3500. Likewise in the total also as against 7995 shares,
the number “ 1” has been inserted in ink to show as if the total number of
shares was 17995. This would indicate that without the knowledge and consent of the
petitioner, the shares had been issued and with a view to keep him in dark, manipulation
has been done after he had signed the Annual Report.
4. The learned
counsel further submitted: The issue and
allotment of 10000 shares was done with a view to reduce the petitioner from a majority
into a minority as is evident from the fact that the amount of money collected by issue of
these additional shares is only Rs.1 lac which as per this company is concerned, is very insignificant. By converting themselves into a majority in this
company, the respondents have acquired control of 26.2% shares in Vardhman. Therefore,
this issue and allotment of shares is nothing but an
indirect way of controlling M/S Vardhman, which as per the Will of the father, should come
under the control and management of the petitioner. In spite of the fact that the 4th respondent and his daughter were taken on the
Board on mutual trust and confidence, they have acted behind the back of the petitioner
with a malafide intention in allotting these shares. As a matter of fact, if the contents
of the Will had been made known to the petitioner, immediately after the demise of the
father, he would not have appointed the respondents as additional directors. Further, it is doubtful whether any meeting was held on 6.2.1998 when the shares were allegedly
issued/allotted. As per the version of the
respondents, there was a Board Meeting on 4.2.1998. If
so, the shares could have been allotted in this meeting instead of holding another meeting
on 6.2.1998 for allotment of shares. The 4th respondent, without disclosing his
real interest, persuaded the petitioner for increasing the authorized capital from 10000
equity shares to 50000 equity shares and within a period of 6 days got 10000 shares
allotted to his own group. There is nothing
on record to show that other shareholders were offered the shares as there had been no
Board Meeting between 31st January, 1998 and 6th Feb. 1998 for the
Board to take a decision to make offers to the shareholders. Even otherwise, the petitioner never
received any notice for the Board Meeting on 6.2.1998.
Further, when the father expired on 6.1.1998, there could have been no meeting on 8th
January, 1998 i.e. within two days to hold a Board Meeting to decide alteration in the
authorized capital of the company. The
minutes of this meeting in which the presence of the petitioner and his wife is noted is
nothing but a fabricated document (Annexsure R-10).
Further, in the EOGM held on 31.1.1998, there were no resolutions to allot 10000
shares nor there was any proposal to allot the shares on a preferential/private placement basis. Even
Form No.32 was signed only by the 4th respondent
even though as per the alleged Board Resolution, the petitioner had also been
authorized to do so. From this time onwards, all subsequent documents were signed by the 4th
respondent only and the petitioner had not signed any document including the balance
sheet. Even though, the respondents contend,
on the basis of copies of attendance sheets, wherein the signatures of the petitioner are
found, contend that he had attended all the impugned Board Meetings, the petitioner did
not attend any meeting and the respondents have used the signatures of the petitioner
taken on blank sheets. The fabrication of the
minutes that the 1st petitioner had attended the meeting is evident from
Annexure R-4 – copy of the minutes for the AGM held on 21st Sept. 1998.
While the names of the shareholders are found
type written, the name of the petitioner has been inserted by ink. The fabrication of the signature of the petitioner
on the attendance sheets is evident from the fact that none of the copies of the
attendance sheets relied on by the respondents ( Annexure R-3 R-6, R-9, R-11) indicate the name of the company,
the time of the meeting and also the venue of the meeting.
Therefore, his signatures on the attendance sheets do not establish that the
petitioner had attended these meetings.
5. He further
submitted that the allotment of 10000 shares is not only oppressive to the petitioner but
also in violation of the provisions of SEBI Take Over Code.
By this allotment, the 1st respondent has taken control over the company
which holds 26.2% shares in M/S Vardhman which is a listed company. In terms of Regulation 2(b)(c), the 1st
respondent has indirectly acquired voting rights of M/S Vardhman beyond 15% which he could
not have done without making an open offer in terms of Regulation 10(4). Any acquisition in violation of Regulation 10 is
void and invalid. If the petitioner had
participated in the Board Meeting on 6.2.1998, as alleged, he would have brought this
violation to the notice of the Board.
6. Summing up his
argument Shri Chaudhary submitted: The
company was not in need of funds, that too this meager
amount of Rs.1 lac, for the 10000
shares allotted. No notice for this Board
Meeting on 6.2.1998 in which the allotment was made was received by the petitioner nor he
attended this meeting. Even his wife being
the other director did not attend this meeting for want of notice. If any one of them had attended this meeting,
he/she would not have committed harakari by
handing over a company which was to go to the petitioner as per the Will of the father. The rule of probability should be applied in
favour of the petitioner. The only document relied on by the respondents about the
petitioner’s knowledge is the Annual Return signed by him. In General Sales case,
considering the facts of the case that no one would hand over the control of a company on
a platter, the CLB declined to accept the veracity of attendance of a director simply on
the basis of his signature in the attendance register.
In Manu Property case, applying the rule of probability, the CLB held that the
petitioner therein could not have attended various Board Meeting allegedly attended by
him. Likewise, this Board has held in Tinplate case also.
In
Hathimal Pincha V Kettela Tea Company Pvt Ltd (CP No 17/1996) case, this Board has held
that when share capital is raised without any need for funds and if the issue creates a
new majority, the same is an act of oppression. In R.N Jalan V Deccan Enterrprises Pvt Ltd case ( 75 CC 417
AP ) and R Gluco Series Pvt
Ltd case ( 61 CC 223 Cal.),
the courts have held that conversion of a majority into a minority is an act of
oppression. Since such a conversion has
continuous effect, the oppression continues even on the date of filing of the petition, as
held in Tea
Brokers (P) Ltd V Hemmendra Prosad Barooah case
( 1998 5
CLJ 463 ). Therefore, considering the facts of the case that
the main motive for issue of 10000 shares in the company was with a view to gain indirect
control of M/S Vardhman which is to go to the petitioner in terms of his father’s
Will, the allotment of 10000 shares should be cancelled and since the respondents 3 and 4
have acted in an oppressive manner, they should be removed as directors of the company.
7. Shri Sahwney,
Sr. Advocate appearing for the 2nd petitioner submitted: His client is one of
the largest shareholders of the company holding 31.27% shares and by allotment of 10000
shares to the respondents’ group, the shareholding of his client has come down to
about 15% and has thus lost the power to block any special resolution. Even assuming that the 1st petitioner
had consented to the allotment of the shares as contended by the respondents, yet, his
client being an independent shareholder should have been offered additional shares at the
time of allotment of 10000 shares. Article 5
of the company specifically provides that the provisions of Section 81(1A) of the Act is
to be followed for allotment of shares. Nothing
has been shown that the company had taken the general body’s approval for allotment
of shares on preferential basis only to the respondents.
Since as a principle, increase in share capital has to be only for the benefit of
the company and not for the personal benefit of the directors, which is actually the fact
of this case, this allotment should be cancelled. Further, it is an admitted position that
the company is a family company and this has
been recognized by the Delhi High Court itself in its order dated 12.8.1987 (Annexure
A-2). This being the case , one group of
shareholders cannot be denied the right to subscribe to additional shares.
8.
He further argued: No reliance should be placed on the various Board
Meetings as the company had not followed the provisions of Section 193, 194 and 195 of the
Act. As per Section 193, the minutes are to be recorded in bound books with pages consecutively numbered. However, the company is
maintaining the minutes book in loose leaf form which is not permissible. Section 183(1B)
specifically prohibits pasting or otherwise of the minutes. Further, according to Section
193(1A)(a), the minutes of the meeting are to be signed by the Chairman of the subsequent
meeting. However, all the minutes have been
signed by the 4th respondent in his capacity as a director. Therefore, there are no minutes before this Bench
which could be considered to be valid in law and as such should be ignored in addition to all being fabricated. Further even though the respondents contend that
in a Board Meeting held on 31.1.1998, a decision was taken to allot shares, yet, the
minutes of this meeting have not been disclosed and there are no details as to how was decided to make offers and to whom. Further no
details have been furnished as to when the allottees had applied for these shares and how
the consideration was paid. It is also to be
noted that there is a difference in the date of Form No.2 which is dated as 4th
March, 1998 while the covering letter addressed to ROC is dated as 16.2.1998 (Annexure
R-8). This would indicate that documents are fabricated.
Therefore, even the allotment of shares had not been conclusively established and
the documents have been fabricated only to show as if the allotment had taken place. Even
if the actual allotment had taken place, it is highly oppressive to his client as this
allotment has reduced his client’s shareholding from 31% to 15%. Therefore, this allotment of 10000 shares should
be cancelled.
9.
Shri Mookherjee appearing
for the respondents 2 to 4 submitted: The motive of the petition is to get the Will of
the father executed through this petition which is not permissible. The 3rd
and 4th respondents were
inducted into the Board with the full consent and knowledge of the petitioner during the life time of the father. As a matter of fact, in paragraph number X of the
petition, the petitioner has averred that
these respondents were appointed as additional directors with a view to avail the
experience and business acumen of the 4th respondent indicating very clearly
that the petitioner admits the need to
appoint the 4th respondent as a director. Simultaneously, the respondents were
also appointed as additional directors in five other companies also which hold shares in
M/s Vardhaman, with the view that the 1st respondent should have the control
over the shares held by these companies in M/s Vardhman. Therefore, the petitioner cannot
now seek removal of these respondents as directors.
10.
He further submitted: In regard to the allotment of 10000 shares, it
could not have been done without amending the Memorandum of the company. As admitted by the petitioner himself, the
Memorandum was altered in an EOGM held on 31.8.1998. While doing so, the company has not
altered the authorized capital. It only
altered the mix of equity and preference shares by which the preference share capital was
reduced and the equity capital was increased. This
equity was increased from 10000 shares to 50000 shares only with a view to issue further
shares to the respondents’ group. Once
the petitioner admits his knowledge of the EOGM held on 31.1.1998, his allegation relating
to the Board Meeting on 8.1.1998 that no such meeting could have taken place within two
days of the demise of his father loses significance.
Even otherwise, all the ceremonies relating to the demise of the father were completed on 7.1.1998 and not only the Board
Meeting of this company but also other companies also were held. The petitioner himself held Board
Meetings of the companies under his control as is evident from the documents produced
during the hearing. The company held a Board Meeting on 4.2.1998 exclusively to consider
bank operations and the petitioner has signed a copy of the minutes for forwarding the
same to the bank. The meeting on 6.2.1998 was
held exclusively for the purpose of allotting the shares and this meeting was also attended by the petitioner and his wife as is
evident from the fact that both of them have signed the attendance register. One
significant aspect to be noted is that on 2.2.1998, the sum of Rs.1 lac was deposited in
the bank account of the company on which date the company
had a balance of only Rs 29,490. On 4.2.1998, the petitioner issued a cheque for
Rs.50,000/- and encashed the same 6.2.98. But
for his knowledge that the money had come from the respondents towards the equity shares,
he could not have issued the cheque for this amount.
11.
The learned counsel
further submitted: The allegation of the petitioner that he was not aware of the allotment
of shares is absolutely false. The Annual
Return made as on 21.9.98 was signed by him and his claim that the annexures to the Annual
Report were fabricated can also not be accepted. Even
the main Annual Report indicates the increase in the paid up capital and also the
percentage holding of body corporate and directors. That
is the reason why the petitioner, in the petition, has not filed the full copy of the
Annual Report but filed only the annexures containing the details of shares. Further, the annual accounts of the company were
approved in a Board Meeting on 12.8.1998 and both the petitioner and his wife were present
in the meeting after which the annual general body meeting was held on 21.9.1998 adopting
the accounts and the petitioner signed the Annual Return.
Therefore to allege that the petitioner was not aware of the allotment of shares
cannot be accepted.
12.
The learned counsel
further submitted: The entire foundation of the petition is that the petitioner’s
group being in majority was converted into a minority.
This foundation itself is not correct. Before
issue of 10000 shares, Shri R.C. Oswal held 25 shares and his wife’s Will account had
2250 shares. Both together constituted 28.46%
shares. The 4th respondent and his group held 2520 equity shares constituting
31.52% shares. The 1st petitioner
and his family members held 700 shares constituting 8.76% shares. 2nd petitioner held 2500 shares
constituting 31.26% shares. As per the Will
of the mother, there were only two trustees, namely, the
petitioner and the 4th respondent and the Will provided for casting vote
for the senior most of the trustees. Thus,
the 4th respondent, being the senior of the two trustees had effective control
of around 60% shares as against about 40% shares held by the petitioner’s group. Thus
the claim that petitioner’s group was in the majority of the company is not correct.
13.
He further submitted: The
allotment of 10000 shares cannot be examined in isolation. During the life time of the
father, substantial shares of M/S Vardhman held by M/S Mahavir were transferred to the
company for a consideration of about Rs.10 crores. Since
the company did not have funds, the 4th respondent arranged for a loan of Rs.10
crores from GE Capital at an interest of 20.25% by giving his personal guarantee as also
corporate guarantees of the companies under his control.
Shares held by companies under his control were also pledged with the GE Capital. Since the company was not in a position to make
arrangements for repayment of the loan which would result in the fore closure of the
pledge of the shares by which the 4th respondent would loose control of the
other two companies, it was decided in consultation with the 1st petitioner
that the composition of the share capital of the company would be changed and accordingly
the Memorandum was altered. On this
understanding, it was decided that the 4th respondent would have control of the company by allotment of 10000
shares. As a package deal, the 4th
respondent invested about Rs. 5.41 crores towards preference shares through his finance
companies while the petitioner subscribed about Rs.1.72 crores towards the preference
shares. Therefore it is wrong to say that the
4th respondent had taken over the company with a mere investment of Rs.1 lac.
If it is the contention of the petitioner that he had never seen the balance sheets from
1997-98 to 1999-2000 to claim that he was not aware of the increase in the share capital,
then, he cannot claim that he was in control of the company. Further, if his claim that he came to know of the
increase in the capital only on inspection of the ROC records in May, 2001, he never
complained of the same till he wrote a letter to the company on 23.8.2001, on the same day when this petition was
filed.
14.
As far as the allegations
relating to the attendance of the petitioner
and his wife in various Board Meetings impugned in the petitioner are concerned, the
learned counsel submitted: It is not correct that the signatures of the petitioner and his wife were taken on blank
sheets. The company is maintaining an attendance register and the signatures are taken
in that register for every meeting attended by the directors. The petitioner has not alleged that any of the
signatures is forged. It is not that neither
of them had attended any Board Meeting. As a
matter of fact, as is seen from the minutes of the Board Meeting held on 11.7.1998 (
Annexure R-19), these minutes have been signed by the wife of the petitioner as Chairman of that meeting. Likewise, the Board Meeting held on 3.9.1998 was
chaired by her as seen from the minutes at Annexure R-20.
Therefore the allegation that the petitioner
and his wife have been excluded from the management is not borne on facts. Every decision
taken in the company was with the knowledge and consent of the petitioner and therefore he
is estopped now from challenging the allotment of shares which incidentally is also time
barred.
15.
Summing up his arguments,
Shri Mookherjee submitted: The petitioner has raised the issue of allotment of shares
belatedly only on account of certain developments that had taken place in respect of M/S
Vardhman. When the petitioner tried to go out
of the group, in the interest of M/S Vardhman, the 4th respondent got himself
appointed as the Chairman and Managing Director of the company. This has caused a sort of insecurity to the
petitioner and that is why he has filed this petition invoking the provisions in the Will
of the father. It is to be noted that
through a Will, control of the listed companies could never be bequeathed and even family
settlement cannot be a subject matter of a petition under Sections 397/398 of the Act. Since the challenge is on allotment of shares
which took place in February, 1998, it cannot be challenged belatedly in August, 2001 as has been held in Hungerford
Investment Limited Vs. Turner Morrison Limited ( ILR
1972 (1) Cal. 286 ). When in
this case the composite arrangement of allotment of equity shares and preference shares
has got the company out of debt trap and has benefited the company, the allotment cannot
be challenged as held in Re: Jermyn Street Turkish Baths Ltd. (1971 3 AER
184 ) wherein in facts of that case, the Court of Appeal held that in case of a
package deal of issue of shares and debentures made for the benefit of the company, issue
of shares alone cannot be looked into in isolation.
Further this challenge has been made on the ground that the control of M/S Vardhman
has been taken over by the 4th respondent.
The affairs of the two companies are different and this Board has held in Shankar
Sundram Vs. Amalgamations Limited ( 2001 2 CLJ 176
) that in a petition against the holding company, the affairs of a subsidiary
cannot be considered. In the present case,
even the relationship of holding and subsidiary companies does not exist. Since it has been fully established that the
petitioner was a party to the allotment of 10000 shares, he is estopped from challenging
the same as held in Maharani Yogeshwari Kumari Vs. Lake Shore Palace Hotel
Private Ltd. ( 1995 3 CLJ 418
). The petitioner has claimed that he
had signed the annual report without referring to the annexures. In Saunders Vs. Anglia Building Society ( 1970 3 AER 961 ), it has been held that carelessness
on the part of the person signing a document would preclude him from later pleading non est factum on the principle that no man may
take advantage of his own wrong. The same principle has been applied in United Dominions
Trust Limited Vs. Western ( 1975 3 AER 1017 ) stating that non est factum i cannot be pleaded on the ground of
negligence in signing a document. One of the
main contention of the petitioner is that there has been a breach of trust on the part of
the 4th respondent and that there has been a loss of confidence between the
petitioner and the 4th respondent. It
has also been alleged that there has been a breach of family understanding. It has been held in Shanti Prasad
Jain Vs. Kalings Tube Limited (
AIR 1965
SC 1535 ) and also in V.B.Rangaraj Vs.
V.B Gopalakrishnan ( 1992 1 SCC 160 ) that the provisions of Sections
397/398 cannot be used for enforcing any family arrangement. It has also been held in the former case that mere
loss of confidence cannot be a ground for a petition under Sections 397/398 of the Act. As
far as the cases cited by the learned counsel for the petitioner are concerned, none of
the case is applicable in the facts of the present case.
Therefore, this petition deserves to be dismissed.
16.
Shri Sarkar appearing for
the 1st respondent submitted: The stand of the petitioner that if he
had been aware of the Will, he would not have co-opted the 3rd and 4th
respondents as directors does not stand to scrutiny.
They were appointed as additional directors during the life time of the father and
the Will came to light only after his demise. The Will of the father itself indicates that
an understanding has been reached with the brothers about the division of the company and
if so, the petitioner must have been aware of this arrangement even in the absence of the
Will. Even assuming that he had the knowledge
of the Will only later, yet, he waited for 3 long years to agitate the same. Further, the
Will is dated April, 1996 at which time it was M/S Mahavir which was in control of M/S
Vardhman. Any way the provisions of the Will cannot be enforced through this petition. Further, since M/S Vardhman is not a party
to the proceedings, the CLB cannot pass any order in respect of M/S Vardhman. As far as the alleged violation of SEBI Take Over Code is concerned, the same is not
applicable when there is inter-se transfers within the group. If the SEBI Code were to apply, then, the transfer
of 25% shares from M/S Mahavir to this company will
also be hit by these provisions. As far as
the violation of Section 193 of the Act in regard to minutes book is concerned, keeping
minutes book in loose leaf form is permitted and the only provision is that they should be
got bound every six months. The CLB has held in VLS Finance Ltd.Vs. Sunair Hotels Limited ( 2001 4 CLJ 321 ) that a party to a decision cannot
complain of the same later and that conduct of the parties is relevant in a proceeding
under Sections 397/398 of the Act. Since the
petitioner was a party to the allotment of 10000 shares, he cannot complain of the same
and seek relief and as such this petition should be dismissed or else to put an end to the
disputes, the shares held by the company in M/S Vardhman may be divided in the ratio of 68
and 32 between the petitioner and the 4th respondent as these shares are the
only property of the company with the stipulation that the petitioner should take over the
liabilities of the company and also release the 4th respondent of all his
personal guarantees. Such a relief was granted by the CLB in James Fedrick V
Minnie R Fedrick ( 2000 36 CLA 371
).
17.
Shri Choudhary in
Rejoinder submitted: Probity means honesty,
integrity and fairness. Even in respect of lawful acts, if the same lack probity, CLB can interfere in exercise of its
equitable jurisdiction. It is beyond once
comprehension that a person would voluntarily allow himself to be reduced to a minority. Even assuming so, he would not hand over the
company with over Rs.250 crores turnover
without any consideration. When the father
had desired that the petitioner should have the control of M/S Vardhman and as such got
25% shares were transferred from M/S Mahavir
to the company under the control of the
petitioner, he would never hand over the company without any consideration. As all the companies are within the family, the
petitioner could have sought for 50% shares of all the
companies but yet he settled for a
small company having just Rs.250 crore turnover as against the companies having put
together over Rs.1500 crores turnover taken over by the 4th respondent.
18.
He further submitted:
There was no composite arrangement as claimed by the respondents. While the equity shares were allotted in Feb.
1998, the amount of Rs.5.72 crores towards preference shares came in only in September,
1999 and the petitioner himself had invested
about Rs.1.7 crores. Of the money brought in by the 4th respondent, he
had given Rs.1.7 crores as loan to his own company. There
was no proximity between allotment of equity shares and the preference shares to contend
that there was a composite arrangement. The 4th
respondent, for the purposes of pleasing the father transferred shares from M/S Mahavir to
the company and after the death of the father, he has once against taken control of the
shares and in the process got the company to pay Rs.10 crores taken as loan from GE
Capital to M/S Mahavir. Thus whatever he has done by alleged arranging of loans etc. was
to benefit only M/S Mahavir which is under his control.
His object has always been to regain the control of M/S Vardhman and that is the
reason why even though as per the Will of the father, he has to hand over 4 finance
companies holding 8% shares in M/S Vardhman to the petitioner, he has not done so. A careful consideration of the facts of the case
would show that the petitioner could have never handed over the control of the company by
consenting to the allotment of 10000 shares.
19.
He further submitted: The
mere fact that the petitioner has consented to the appointment of two directors from the
respondents’ group does not mean that he had handed over the company to them. At that point of time, the petitioner was
controlling 68% in the company and therefore the appointment of these directors was never
a threat to him. But these directors in
breach of their fiduciary duties have issued shares to themselves. If there was any bonafide need of funds, the
petitioner should also have been allotted
proportionate shares as was done in the case of preference shares. It is crystal clear that the respondents got 10000
shares allotted to them only with a view to gain control of the company. The only evidence produced by the respondents
about the attendance of the petitioner is his signatures in the attendance register which
was signed by the petitioner in good faith. If
the petitioner had consented to the allotment of shares, there was no reason why the
respondents did not take his signature on the balance sheet for the year ended 31.3.1998. They did not do so only with a view to hide the
fact of the allotment of shares from the petitioner.
If the petitioner had been present in the meeting, he would have definitely
protested as it would affect his interest. When
he came to know of his exclusion from operation of the bank account of the company, he
protested about the same as is evident from his notice in the copy of the minutes at
Annexure R-42. In the same way, when he came
to know about the allotment of shares only in May, 2001, he immediately moved the CLB.
20.
Producing before the Bench
the opinion of a handwriting expert on various handwritings in the Annual Report as on
21.9.1998, he pointed out that from the Report it is clear that not only the corrections
in the annexure relating to shareholding but also the entries in the main body of the
Annual Report indicating the authorized capital and the paid up capital as also the
percentage holding of directors and corporate have all been made in a different
handwriting to indicate that these are all fabricated after the petitioner had signed the
Annual Report. Likewise, the handwriting
expert has also opined that the insertion of the name of the 4th respondent in
Annexure R-2 being a letter dated 4.2.1998 to the Manager, Allahabad Bank had been
inserted subsequently. This would indicate
that the respondents are guilty of manipulation of the records of the company and as such
no reliance should be placed on any of the documents placed by them.
21.
Summing up his arguments,
Shri Choudhary submitted: His client is not agreeable for division of the shares of M/S
Vardhman held by the company in the shareholding ratio.
The petitioner is willing to purchase the shares held by the respondents in the
company as he was in majority before the
allotment of the impugned shares and he is also willing to assume all the liabilities of
the company. Therefore, either the allotment
of 10000 shares should be cancelled or the respondents be directed to sell their shares
held by them in the company to the petitioner.
22. Shri Mookherjee submitted
with reference to the opinion of handwriting expert that the same should be rejected on
various grounds. The letter through which the
opinion was sought has not been disclosed, the opinion is based on a photo copy of the
annual return and not on the original, there has been no pleading that the annual return
is fabricated, the handwriting expert has not
been called as a witness nor has he filed any
affidavit and has not been subject to any cross examination which is a must as held in Musstt Padma Priya Devy Vs. Darma Das Deb (
15 CWN 729
). Therefore no cognizance of the opinion of the handwriting expert should be
taken.
23. We have considered the
pleadings and arguments of the counsel At
the out set, it may be mentioned that this Bench tried to resolve the disputes amicably
not only in relation to this company but also of M/S Vardhman by interacting with the
petitioner and the 4th respondent. Even
though, both of them were inclined to settle the disputes amicably, yet, they could not
arrive at mutually acceptable terms of
settlement. Thus, the efforts of amicable settlement failed.
24. The petition contains
certain allegations in regard to the affairs of M/S Vardhman on which extensive arguments
took place. Since all these allegations have
been covered in CP 48 of 2001 and since they are not relevant in adjudicating the
allegations in the present petition, we are not dealing with the same in this order. First
we shall deal with the issue as to whether the complaint on allotment of 10000 shares is
time barred and whether such a single act could give cause of action to file this
petition. Since the complaint of the petitioner is that his group has been converted from
a majority to a minority by the allotment of these shares, the same will have continuous
and perpetual effect notwithstanding being a single act.
This Board has held, on the basis of Tea Brokers’ case (supra), in a number of
cases, that even a single act of allotment of shares could be considered to be an act of
oppression within the meaning of Section 397 of the Act.
Further, in view of the continuous effect arising out of the allotment of shares,
we cannot apply time limit to file a petition to challenge the same.
25. Another issue raised is that
by allotting 10000 shares, the respondents’ group has gained control of 26% shares in
M/S Vardhman which is a listed company coming under the purview of SEBI Take Over Code,
according to which, in terms proviso to Regulation
3(k)even in case of indirect acquisition of shares of a listed company, compliance with
the provisions of the Take Over Code is necessary. It
is an admitted position and as a matter of fact one of the foundations of the petition is
that Vardhman group has 3 manufacturing companies and various other investment companies
holding shares in the manufacturing companies. Therefore, the proviso to Regulation 3(k)
has to be read in harmony with Regulation 3(e) of the
Take Over Code which specifically exempts inter-se transfers among the
promoters’ group from the provisions of the Take Over Code. Therefore, even assuming that by the allotment of
10000 shares, the respondents’ group has gained control over 26% of shares held by it
in M/S Vardhman, since the change in control is within the group, the provisions of SEBI
Take Over Code are not applicable. Further,
as rightly pointed out by the learned counsel for the respondents, the company itself had
acquired 25% shares from M/S Mahavir without complying with the provisions of SEBI Take
Over Code since the said transfer was also within the promoters’ group. Therefore,
the change in control of the shares within the promoters group is not hit by the
provisions of the Take Over Code.
26. Regarding the allegaions of
the 2nd petitioner, that, being the largest single shareholder in the company,
it should have been allotted proportionate shares in terms of Section 81(1A), we note that
there is no such allegation in the petition. Shri Shawhney referred to the Articles of the
Company to urge that proportionate shares should have been allotted to all the
shareholders. We find that, in line with Articles of any private company, Article 6
provides for absolute discretion with the Board in regard to allotment of shares. Further,
the 2nd petitioner is a company under the contro of the 1st petitioner and he seems to be representing that
company in the general meetings as evident from his signature in the attendance rigister
for the EOGM held on 31.1.98. Therefore, wharever findings are given on his allegations,
the same will apply to the 2nd petitioner
also. Shri Shawheny also alleged that none of
the minutes could be onsidered to be valid as they do not comply with the provisions of
Sections 193, 194 and 195. We agree with the submissions of Shri Sarkar in this regard as
recorder in paragraph 16 ante. Further, we also note that it is not the case of the
petitioners that the respondents had started a different practice in maintaining and
signing of minutes books than what was in
vogue when the Board consisted of only the petitioner and his wife.
27. The complaint of the
petitioner is that his group has been reduced from a majority to a minority by allotment
of 10000 shares. According to the respondent,
the petitioners’ group was not in majority since the 4th respondent had
the casting vote in respect of the mother’s trust then holding 28% and therefore
along with his group holding of 31.5%, the 4th respondent controlled majority
voting rights in the company and therefore there has been no conversion of majority into
minority. We are not able to accept this contention. Since the shares were held by the
Trust and since both the petitioner and the 4th respondent were the trustees,
on the basis of a right arising out a contingent event of disagreement between the
trustees, one of the trustees cannot, that too on the basis of such contigent right to
vote, claim over the shares for computation of percentage shares. As a matter of fact, as
per the terms of the Will these shares are to be divided equally between the two. In that
case, the petitionr’s group would control about 54% shares as against about 46% by
the respondents. Even other wise, excluding the Trust shares, the petitioners group held
40.01% and the respondents’ group 31.52. Therefore, if not the majority, the
petitioner’s group had a larger percentage of shares than the respondents. In any
event, this Board has been taking a
consistent view that any disturbance in the shareholding percentage in a family company,
irrespective of the percentage of the shares, could be considered to be an act of
oppression.
28. The main complaint of the
petitioner in relation to the allotment of 10000 shares is that it had been done behind
his back and without his consent and he came to know of the allotment only in August, 2001
on search of ROC records. He also alleges
that the trust and confidence that he had reposed in 4th respondent had been
belied and the 4th respondent has acted in a manner oppressive to the
petitioner by allotting 10000 shares to the respondents’ group. It is a case wherein, as seen from paragraphs 30
to 33 of the reply, the 4th respondent does not deny that the shares were
issued/allotted, in only with a view to
keep control of the company with him but he
claims that it was with the consent and the knowledge of the petitioner. Since there is an admission that the shares were
issued only for the purpose of getting control over the company, all issues as to whether,
the company needed funds, whether the respondents had acted in breach of their fiduciary
duties, and whether the majority was converted into a minority etc become irrelevant as
also the cases cited by the learned counsel in
this regard viz. Kattela Tea Company Private Ltd., Deccan Enterprises Private
Limited, Gluco Series Private Limited cases (Supra). Since, the respondents claim that the allotment
was made with the consent and knowledge of the petitioner, we have to only examine, in
view of the denial of the petitioner, as to whether the circumstances establish that the
allotment had been done with the knowledge and consent of the petitioner.
29. A lot of arguments took
place as to whether a meeting of the Board of Directors could have been held on 8th
January 1998, i.e. within 2 days of the
demise of Shri R.C. Oswal. Normally, when the head of the promoters group expires, the
Boards of the companies with which he was associated, meet and pass a condolence
resolution. In the present case, we find from the minutes of the meeting on 8.1.98, that
such a resolution had been passed. In case there had been no such meeting on that day,
nothing has been produced before us that in any subsequent meeting, such a resolution had
been passed. Therefore, we do not doubt the holding of that meeting. Even otherwise, notwithstanding the fact that the respondents have produced sufficient materials
to show that not only a Board Meeting of this company
was held but also other companies in control of the petitioners, yet, according to
us, it is irrelevant to examine this issue in detail.
The petitioner questions the factum of this meeting only because it is in this
meeting that the proposal for altering the
authorized capital was approved. Since, no EOGM could be convened without an approval from the Board, the petitioner
must have questioned the authority of convening the EOGM on 31.1.98 before attending the
same when he participated in the general body meeting on 31st January, 1998.
The very fact he had not done so would indicate that he was aware of the Board meting on
8.1.1998. The petitioner doest not question the factum of the approval given in the EOGM
for altering the authorized capital except to say that he was persuaded by the respondent
to approve the increase.
30. The impugned shares were allotted in the Board
Meeting held in 1998. According to the
respondents, in a Board Meeting held on 31st January, 1998, it was decided to
increase the subscribed capital by 10000 shares. The
minutes of the Board Meeting of this date are not on our record and it has not been
possible for us to ascertain as to the nature of decision taken in this meeting. If the petitioner had attended this meeting and
had consented to the allotment of 10000 shares, he cannot have any grievance of
oppression. While the petitioner denies his
attendance in this meeting, the respondents have produced the attendance register wherein
the petitioner has signed his presence on this day.
The petitioner’s stand in regard to his signatures in the attendance register
is not consistent. While in the petition, he
has alleged that his signatures were obtained on blank sheets, in the rejoinder, he has
averred that he had signed the attendance register in good faith. When such a controversy regarding his attendance
exists, we have to go by the contemporaneous conduct of the parties to come to a
conclusion as to whether the petitioner could have attended this meeting wherein 10000
shares were allotted. It is on record that
the respondents had remitted the money for these shares on 2.2.98 as seen from the bank’s statement produced by the respondents. As per the version of the
respondents, and corroborated by the bank statement,
the credit balance of the company in
the bank on 1st February, 1998 was only about
Rs. 30,000 and the petitioner has issued a cheque for Rs.50,000/- on 4.2.98. But
for this amount of Rs 1 lac remitted by the respondent on 2.2.98, there would not have
been sufficient credit in that account for
issue of a cheque for Rs 50,000 on 4th Feb 1998.
When a person, that too, a director, singed
a cheque, he should have verified the balance available in the bank account and
should have known about the source of the immediate previous credit, especially when
without such a credit, there would not have been sufficient balance to cover the amount of
the cheque. It would indicate that the
petitioner was aware that the money had come from the respondents. When he knew that the
money had come from the respondents, he would have also been aware of the purpose of the
remittance. Therefore, the knowledge of the
petitioner regarding the allotment cannot be ruled out especially when, the stand of the
respondents on this issue has not been countered by the petitioner. Further, Shri
Mookerjee rightly pointed out that there was no reason to change the mix of the equity and
preference capital if there was no understanding for issue/allotment of equity shares.
31. According to the petitioner,
he came to know of the allotment only on inspection of the ROC records on 10th August, 2001 and he has annexed to the petition, a
list of shareholders forming part of the Annual Report as on 21.9.1998 in which allotment
of 10000 shares is indicated, which according to him is a fabricated document. In the petition, he has stated that at the time
when he signed the Annual Report, the shareholding of the 3rd respondent had
been shown as 10 shares and that of the 4th respondent as 2500 shares, which
after he had signed the Annual Report, had been fabricated by ink to show as if the
shareholding of the 3rd respondent as 9010 shares and that of 4th
respondent as 3500 shares. He has also alleged that the annexures had not been signed by
him and has been singed only by the 4th respondent only with the view to
suppress the fact of allotment of shares. We
have seen the full copy of the Annual Report filed by respondents in their reply.
(Annexure R- 14). In Part-II of the Annual Report, the number of equity shares is shown as
50,000 and the issued equity shares as 17995. It
also indicates the percentage of shares held by corporate entities and directors and
relatives of the directors. As rightly
pointed out by the learned counsel for the respondents, these figures are in the main body
of the Annual Report and not in the annexures and before signing the annual report, the
petitioner should have seen the same. If for
any reason, he has not done so, the plea of “non
est facum” is not available to the petitioner in terms of the cases cited by the
counsel for the respondents. However, on the basis of the opinion of the handwriting
expert, now the petitioner contends that even these figures have been subsequently
inserted with which we are not much impressed since this allegation that the figures had been inserted after he signed
the Annual Report had not been taken in the
rejoinder which was filed after the respondents had filed their replies enclosing
therewith a full copy of the Annual Report. Further, it is not possible to rely on the
hand writing expert’s opinion for the various reasons pointed out by the counsel for
the respondents as recorded as a part of their arguments and also in view of the fact that
this opinion was produced at the fag end of the hearings, that too, after the learned
counsel for the respondents had cited the cases on “non
est factum”. As far as his allegation that the annexures had been signed only by
the 4th respondent, we find that the annexures to the Annual Reports as on
28.9.1996 and 12.9.1997 had also been signed only by one director even though the main
Reports had been signed by two directors. Further,
being a director, he must have been aware that the Annual Report has to reflect the status
of the company as on the date of the Annual General Meeting. It is on record that the
petitioner had signed the Annual Report as on 21.9.98, being the date of the AGM. As per
law, it is in the AGMs, that accounts are adopted by the general body. Even
though he has alleged that he had not signed the annual accounts, we are sure, he would
not have signed the Annual Report if no AGM
had been held on that day in which the annual accounts should also have been adopted. The
balance sheet as on 31.3.98 indicates the paid up equity capital as Rs. 1,79,950 comprised
in 17,995 shares. Therefore, it is difficult for us to believe that the petitioner came to
know of the allotment of shares only in August 2001.
Further, the petitioner was a party to the appointment of the 3rd and 4th
respondents as additional directors and they could have held office only up to the date of the next AGM. If the
petitioner had not received any notice for the AGM on 21.9.98, he should have at least
found out as to how these respondents continued as directors after the due date of the
AGM. As a matter of fact, we find from the minutes of the meeting on 21.9.98, that the
wife of the petitioner had been reappointed to the Board in that meeting but for which she
would have retired by rotation.
32. Another important aspect
that we have noticed is that the authorized
capital was altered from Rs. 49 lakhs to Rs. 2.1 crore on 16.10.98 reportedly in an EOGM
on that day. The petitioner has not challenged this alteration, as, in the prayers, he has sought for canceling the
increase in the authorized capital from Rs 2.10 crores to Rs 8.05 crores ( this increase
alteration was reportedly made in general meeting on
30.8.99). Since the petitioner has not challenged the meeting on 16.8.98, he must have
attended this meeting or this increase should have been with his consent. At least as on
16.10.98, the petitioner must have been aware of the issue/allotment of 10,000 shares.
33. According to the petitioner,
he and his wife have been completely excluded from the management and that all the
statutory records are signed only by the respondent directors and as such he has not been
aware of the happenings in the company. This stand of the petitioner is contrary to his
stand that his group was in majority of the company.
Being a majority in the company, it is very difficult for us to believe that he
would have never bothered about the affairs of the company.
The respondents have established that the wife of the petitioner chaired two
meetings of the Board and it is on record that the petitioner and his group companies have
subscribed over Rs.1.5 crores for the preference shares.
We do not believe that a person claiming to be the majority shareholder would not
bother to ascertain the affairs of the company for three long years, but would continue to
fund the company as is evident from the fact that he had subscribed to the preference
shares to the tune of about Rs 1.6 crores, substantial of which in late 1999. May be as
claimed by him, he had complete faith and confidence in the 4th respondent and
as such he never took the pain to look into the affairs of the company, yet, it would not establish that he has been completely
excluded from the affairs of the company and if at all he had been excluded, it must have
been at his own will.
34. On an overall assessment of
the facts of this case more particularly the appointment of the 3rd and 4th respondents as directors of the
company during the lifetime of the father, the silence of the petitioner for nearly 3
years in challenging the allotment of shares even though the circumstances establish that
he must have known of the same much earlier, his contribution of funds of over Rs.1.5
crores for subscription towards preference shares, a substantial portion of which was made
in August, 1999 etc., it appears to us that
there is substance in the contention of the 4th respondent that the petitioner
willingly allowed the allotment of 10000 shares to the respondents’ group. In spite of this, from his filing of this petition challenging the
allotment and the circumstances under which this
petition has been filed, we get a distinct impression
that this petition is the off shoot of the apprehension of the petitioner in regard
to his position in M/S Vardhman wherein the 4th respondent has got himself
appointed as the Chairman and Managing Director as is evident from the extensive narration of the same in the petition and that the
petitioner has chosen to question the allotment of 10000 shares in the company thereafter. Therefore, we are of the view that the petitioner
has not established that allotment of 10000 shares was without his knowledge and
concurrence or that he came to know of the same only in August 2001. The learned counsel
for the respondents rightly relied on Lake Shore Palace Hotel Private Ltd.
and Sunair Hotel Limited cases to urge that a party to a decision cannot
challenge the same later.
35. Even though, from the facts
and circumstances of the case, we have come to the conclusion that the allegations
relating to allotment of 10000 shares is an after thought after the disputes started in
respect of M/S Vardhman, yet, certain facts need to be referred to. The main asset of this
company is the shares held in M/s Vardhman. It
is on record that 25% shares of M/S Vardhman which were earlier held by M/S Mahavir were
transferred to this company in 1997, during the lifetime of the father. If it is the
contention of the 4th respondent that he had issued the shares with the
intention of controlling M/S Vardhman shares held by the company, there would have been no need for the transfer of
shares from M/S Mahavir to the company as M/s
Mahavir was/is under the control of the 4th respondent. By the process of
transfer, considerable amount of money
must have been spent towards stamp duty and
the company has been subject to heavy interest cost on the borrowing to fund the
acquisition of the shares from M/s Mahavir. Therefore, the only reason for the transfer
could be either to benefit M/S Mahavir with the consideration of nearly Rs.10 crores for
the shares or to keep the shares under the control of the petitioner. Taking into consideration the provision of the
Will of the father, the later seems to be the main reason for the transfer of the shares. Even though, no Will nor family arrangement could
be sought to be implemented through a proceeding under Sections 397/398 of the Act as has
been held in Kalinga Tube Limited
and V.B. Rangaraj cases as cited by the learned counsel for the respondents,
yet, in facts of this family company, equitable consideration will have to over weigh legal considerations. In facts of this case, that the company is a
family company with two brothers, equity
demands that the control of the company should go to the petitioner which proposition is
not opposed by the respondents also as revealed during the hearing. The only stipulation by the respondents for
handing over the control of the company to the petitioner is that, the shares of M/s
Vardhman held by the company should be divided between the petitioner and the 4th
respondent in the ratio of 68:32. We would
have supported this view, as this Board had done in James Fredric
case(supra) but for the fact that with the conversion of warrants in M/S Vardhman,
the shareholding of the respondents’ group in that company would go up considerably
and in such a situation, the distribution of the shares as suggested by the respondents
would be prejudicial to the interest of the petitioner. Therefore, notwithstanding the
merits of the case, purely on equitable grounds, we feel that the control of the company
should go to the petitioner along with all assets and liabilities of the company. Accordingly, we direct that as and when the
petitioner assumes/discharges all the liabilities of the company, more so the liability
towards ICICI and releases the 4th
respondent and his group companies from whatever guarantees they have given in respect of
this company, the 10000 shares shall stand cancelled and the share capital of the company
will be reduced to that extent on refund of Rs.1 lac that was received as consideration
for these shares to the respondents. Simultaneously, all the loans taken by the companies
under the control of the 4th respondent from this company will be repaid, and
the petitioner will also acquire the preference shares held by 4th respondent
and his group at the face value. Till that time the Board will continue as it is and notices for the board meetings to all the
directors will be sent by Registered post with at least 7 days clear notice and their
signatures taken in the attendance register. As and when all the obligations as per this
order on the petitioner are discharged, he will purchase the other shares held by the 4th
respondent and his group at face value and the 3rd and 4th respondents will
cease to be directors of the company. Till then, no voting rights held by the company in
M/s Vardhman shall be exercised in any matter which would affect the status of the petitioner or that of the 4th
respondent in that company.
36. With the above directions,
we dispose the petition without any order as to cost.
(S. Balasubramanian)
(A.K. Banerji)