Company Law Board
Mrs. Sushma Harish Sharma And Shri Gagan ... vs Hotel Horizon Pvt. Ltd. And Ors. on 20 December, 2006
Equivalent citations: [2007]139COMPCAS261(CLB)
ORDER
S. Balasubramanian, Chairman
1. M/S Hotel Horizon Private Limited (the company) is a private company in which the 1st petitioner and her 3 sons the 2nd petitioner, 2nd and 3rd respondents collectively hold majority shares. The company owns a 5 star hotel in Juhu Beach, Mumbai, which is not functioning for the past about 7 years. The petitioners have filed this petition with the following allegations:
(1) The 2nd and 3rd respondents are guilty of tempering with the Members' Register by transposing the name of the 1st petitioner from being first holder as the second holder, in substantial number of shares jointly held with each of her sons and thus her shareholding in the company has been reduced.
(2) The 2nd and 3rd respondents have issued and allotted 63000 shares constituting nearly 1/3rd of the paid up capital to themselves with the view to gain majority.
(3) The 1st petitioner who had been a director and MD for a long time has been removed as a director, only with the view to take complete control of the company by the 2nd and 3rd respondents.
(4) Properties owned by the company have been sold at gross under value and the consideration siphoned by the 2nd and 3rd respondents.
(5) Annual accounts of the company have not been prepared on time and have been fabricated in collusion with the auditors to show loss.
(6) The 2nd petitioner, who was appointed as an additional director was not confirmed in the AGM with the view to completely eliminate the petitioners' group from management.
(7) Meetings of directors and shareholders are being held without notice to the petitioners.
(8) The 2nd and 3rd respondents are trying to sell the only property of the company, namely the hotel.
2. With these allegations, the petitioners have sought for removal of the 2nd and 3rd respondents as directors; for a declaration that the first petitioner continues to be the CMD of the company and that her removal as director is illegal; for a declaration that the 2nd petitioner continues to be a director; for declaration that allotment of 63000 equity shares to the 2nd and 3rd respondents as illegal and invalid and also for rectification of the register of members to restore the position of the 1st petitioner as the first shareholder in respect of the impugned shares etc.
3. Shri Gopal Jain, Advocate, appearing for the petitioners submitted: The 1st petitioner was holding 20,483 equity shares jointly with each of her 3 sons with her name entered in the register of members as the first holder. The annual returns filed with the ROC from 1996 to 2000 reflect this position and all these annual returns have been signed by the 2nd and 3rd respondents jointly with the 1st petitioner. However, the 2nd and 3rd respondents clandestinely transposed the names of the sons as the first holder in the annual return filed for the year 2002 in respect of 17266 equity shares each. The 1st petitioner had not signed any transfer instruments nor had authorized the 2nd and 3rd respondents in this regard to enable the 2nd and 3rd respondents to put themselves and the 2nd petitioner as the first holder in respect of these shares. Further, new share certificates had been issued in the year 2005 reflecting this position and even the folios numbers allotted on the certificates are factually incorrect. This was done by the these respondents only with a view to grab the shares at the cost of the 1st petitioner. Even though, the 2nd and 3rd respondents have alleged that they had signed the annual returns from 1996 to 2000 in good faith and without reading the same, it is their own admission that they came to know of the alleged fraud committed by the 1st petitioner in 2002 but they never objected to her continuing as a director. Therefore the shareholding position as is stood in 2000 should be restored.
4. The learned Counsel further submitted: Having manipulated the shareholding as above, the respondents have also removed the 1st petitioner as a director by applying the provisions of Section 283(1)(g) of the Act. No notices for the meetings which the 1st petitioner alleged to have not attended were ever received by her. It is to be noted that the respondents' claim that there was a board meeting on 26.5.2003 which the 1st petitioner did not reportedly attend. On that date, there was an annual general meeting at 10.00AM and the 1st petitioner entered the meeting at 10.20AM. Arguments were going on between the 1st petitioner and the respondents over the attendance register which resulted in her filing a police complaint on the same day. This being the position, no board meeting at 10.30AM on the same day as alleged by the respondents could have taken place. For the next meeting allegedly held on 5th July, 2003, no notice was received by the 1st petitioner. Likewise, for the alleged board meetings on 5th August 2003 and 5th September, 2003 also, the 1st petitioner did not receive any notice. Therefore, without issuing notice for board meetings and applying the provisions of Section 283(1)(g) of the Act, is a grave act of oppression against the 1st petitioner who has been associated with the company right from the beginning and who had also been the CMD from 1996.
5. In so far as issue of 63000 shares to the 2nd and 3rd respondents is concerned, the learned Counsel submitted: On two occasions in 2004, the 2nd and 3rd respondents had issued and allotted shares to themselves. First they allotted to 27500 shares to each of them and again 4000 shares to each were allotted. Thus, a total of 63000 shares were issued to themselves, only with the sole object of gaining complete control over the company. By transposing the names and by these allotments, the holding of the 1st petitioner has come down from 45% to about 5%. It is an admitted fact that at the time of issue of the impugned shares, the company had ho activities and as such there was no genuine need to increase the share capital. Even assuming, as contended by the respondents, that the company needed to mobilize funds for availing the amnesty scheme introduced by the Government of Maharashtra to pay off the luxury/gales tax liabilities, the same could have been done either by taking unsecured loans or by offering the shares to all the existing shareholders. The impugned shares constitute nearly 1/3rd of the paid up capital of the company and by allotting the shares at par, the 2nd and 3rd respondents have enriched themselves by over Rs. 100 crores as the value of the property of the company is over Rs. 300 crores. The respondents have not given any reason as to why the shares could not have been offered proportionately to other shareholders considering the fact that the company is a closely held family company. Such issue of shares to themselves is in clear breach of the fiduciary duties of the 2nd and 3rd respondents. In Rashmi Seth v. Chemon (India) Pvt. Ltd. 82 CC 563, this Board has held that if the shares are issued by directors not for the benefit of the company but simply and solely for the purpose of consolidating and improving their voting power to the exclusion of ' the existing majority shareholders, then, the same is a grave act of oppression. Likewise, in M.K. Haridas v. Asal Malabar VD Depot Pvt. Ltd. 110 CC 31, this Board has held that in a family company any disturbance in the long held shareholding would amount to an act of oppression. Since in the present case, by the fraudulent issue of 63000 shares, the 2nd and 3rd respondents had disturbed the long held shareholding position and also had issued the shares in their favour solely to enrich themselves, the allotment of these shares should be held as illegal and invalid and therefore should be cancelled.
6. Shri Subramanian, Sr. Advocate appearing for the 2nd respondent submitted: The claim of the 1st petitioner that she was the first holder of 20483 shares each with her sons as second holders is not supported by statutory records. The husband of the 1st petitioner, being the father of the 2nd petitioner and 2nd and 3rd respondents, created a Trust in the name of "Ekta Trust". The 1st petitioner is a Trustee and also a joint signatory of the bank accounts of the Trust. In March, 1995, the Trust transferred a sum of Rs. 51,80,000 out of the Trust funds to the 2nd, 3rd respondents and the 2nd petitioner as is evident from the bankers' certificate at Exhibit R-9. From the said money, the 2nd and 3rd respondents and the 2nd petitioner applied through their guardian/father, for allotment of 17266, 17266,17268 shares respectively and the shares were allotted on 31st March, 1995 jointly in the names of each of the applicants with their mother as the second holder. On allotment of shares as above, the father of the applicants filed the return of allotment signed by him with the ROC, a copy of which is enclosed at Annexure R-10. No annual return for the year ended 31st March, 1995 was filed till the demise of the father on 18th September, 1996. The annual return for the year ended 31st March, 1995 was filed only on 26th March, 199V which was prepared by the 1st petitioner along with her brothers - 4th and 5th respondents and in good faith, the 3rd respondent signed the same. In this return, either by mistake or deliberately, the name of the 1st petitioner was shown as the first holder of these shares. Subsequent annual returns for the next four years were also filed with the same information. Only in 2002, when the 2nd and 3rd respondents verified the records, they came to know of the mistakes/deliberate fabrication and filed the correct returns showing the 1st petitioner as the second holder not only in respect of the shares of the 2nd and 3rd respondent but also of the 2nd petitioner. Even though the 1st petitioner is a Trustee of Ekta Trust, now she denies knowledge about the existence of the Trust. Considering the fact that funds for acquisition of the shares had gone from the bank accounts of the 2nd and 3rd respondent and the 2nd petitioner and that the return of allotment clearly indicates their names as the first holder, the 1st petitioner cannot claim to be the first holder of these shares. Even otherwise, since the money had gone from the Trust funds, in terms of Section 14 of Indian Trust Act, the 1st petitioner being a Trustee, could not have got the shares allotted in her name against the interest of the beneficiaries. The petitioners have not challenged the validity or the factum of the return of allotment filed by the father. When the annual return filed on 26th March, 1997 clearly mentions that from the date of last AGM i.e. on 21st March, 1994, no share transfer in that year had taken place, the question of interposing the name of the 1st petitioner as the first holder in the Annual Returns does not arise. Therefore the claim of the petitioners that the 2nd and 3rd respondents had manipulated the members register has no basis. As a matter of fact, it is the 1st petitioner who has come with unclean hands. Since she was the joint signatory to the bank accounts of the Trust, she must have been aware of the transfer of funds from the Trust to the accounts of the 2nd and 3rd respondent and the 2nd petitioner and without disclosing the said fact, she has alleged malafide on the part of the 2nd and 3rd respondents. The suppression of this material fact alone would suffice to dismiss the petition with cost as held in SP Chengalvaraya Naidu v. Jagan Nath .
7. The learned Counsel further submitted: In so far as the allotment of 63000 shares to the 2nd and 3rd respondents is concerned, the allotment was necessitated to raise funds to clear the outstanding liabilities and not with a view to grab the company as alleged by the petitioners. The company had a liability of about Rs. 1.39 crores relating to sales tax and luxury tax in addition to levyable interest penalty etc. Since the dues had not been cleared, the hotel property of the company had been attached. In the year 2004, the Government of Maharashtra introduced an amnesty scheme by which the company was required to pay only Rs. 49.61 lacs as full and final settlement including interest and penalty. Since the company did not have sufficient funds, the 2nd and 3rd respondents brought in Rs. 55 lacs and the sales tax liabilities were settled by payment of Rs. 49.61 lacs, thus, saving a sum of Rs. 90 lacs to the company. The hotel property was also released from attachment. Against this amount of Rs. 55 lacs, the 2nd and 3rd respondents were allotted 27500 shares of Rs. 100/- each. Further, in 1999, the company had taken a loan of Rs. 15 lacs from a finance company at the rate of 24% per annum secured against lease hold flat owned by the company and also the personal guarantee given by the 1st petitioner. Cheques towards repayment were dishonoured for want of funds and the finance company threatened to pursue legal proceedings for winding up of the company. The 2nd and 3rd respondents negotiated with the finance company to pay the principal amount of Rs. 15 lacs provided the finance company agreed to waive the interest which amounted to Rs. 19.8 lacs. When the finance company agreed to the proposal of the 2nd and 3rd respondents, they brought in a further sum of Rs. 8 lacs to pay off the amount of Rs. 15 lacs to the finance company. As against this amount of R.8 lacs, each of them was allotted 4000 shares each. In view of the funding by these respondents of Rs. 63 lacs, the company saved over Rs. 1.1 crore. Therefore, the allegation of the petitioners that the allotment was malafide or with a view to create a new majority is unfounded. In terms of Article 12, the directors have full powers to allot shares as they deem fit and in the present case the shares were allotted only for the benefit of the company. Article 12 of the company was the subject matter of an earlier proceeding before the Bombay High Court wherein the 1st petitioner was the 3rd respondent. In that case the Bombay High Court did not accept the contention that the company was a glorified partnership and allotment was made with a view to reduce the percentage holding of the petitioners therein. The Court held that the directors were competent to allot the shares as they deemed fit in terms of Article 12. Therefore, the petitioners now cannot claim that company is a family company or a glorified partnership as the said judgment is binding on the petitioners. Further by not disclosing the judgment upholding the powers of directors under Article 12, the petitioners have played a fraud on this Board and have come with unclean hands. None of the cases cited by the counsel for the petitioners that in allotting shares, the 2nd and 3rd respondents had acted in breach of their fiduciary duties, is applicable to the facts of the present case. In Sangram Sinh P. Gaekwad case (supra), the Supreme Court has held that the sole test is to see whether the issue of shares is simply and solely for the benefit of the directors and if the shares are issued in the larger interest of the company, the issue of shares cannot be struck down on the ground that it incidentally benefited the directors. In the same case, it was also held that the provisions of Section 81 of the Act are not applicable to a private company and issue of shares governed by MOA & AOA of the company. Therefore, the petitioners have neither established that the shares were issued only to consolidate the position of the 2nd and 3rd respondents nor they have shown that the respondents had acted in violation of the Articles.
8. The learned Counsel further submitted: In so far as the vacation of the office by the 1st petitioner is concerned, she did not attend board meeting held on 26th May, 2003 which was held immediately after the general meeting on that day. Even though, it was argued that board meeting could not have been held on that day, in the police compliant given by her at 6.30 in the evening, she herself had said that there was a board meeting and that she was not allowed to participate and therefore action should be taken against the respondents. In that board meeting on 26th May, 2003, it was resolved that future board meetings would be held on 5th of every month at 11.00AM at the registered office of the company and a copy of the minutes was sent to all the directors and therefore the 1st petitioner was aware that board meetings would be held on 5th of every month. The 1st petitioner was in custody of statutory registers, books of accounts, ledgers and other files. Since she was not handing over these records, it was decided to discuss the matter in the board meeting held on 5th July, 2003, to which notwithstanding the decision taken in the earlier board meeting, notice was given to her by registered post which was refused by her which is evident from the copy of the returned envelop at Exhibit R-25. She did not attend this meeting. The Board meeting held on 5th September, 2003 wherein also it was proposed to discuss the handing over of the record was also not attended by her. She also did not attend the board meeting on 5th October, 2003 wherein also the same proposal was discussed. In that meeting, it was also decided to reconstruct all records afresh by search of records from the ROC office. In the board meeting held on 5th December, 2003, the directors noted that all the required records has been reconstructed. This meeting was also not attended by the 1st petitioner. Therefore, Form No. 32 was filed with ROC on 5.9.2004 that the 1st petitioner had vacated her office as director in terms of Section 283(1)(g) of the Act. In so far as the non confirmation of the 2nd petitioner is concerned, the 2nd petitioner has no vested right for such confirmation. Further, he was not properly appointed as an additional director. According to the petitioners, the 2nd petitioner was appointed as an additional director on 7th October, 2002. No board meeting was held on that day. Form No. 32 regarding his appointment filed on 27.2.2003 was signed only by the 1st petitioner as an after thought. There was no understanding that all the sons of the 1st petitioner would be the directors of the company. Since there was no valid appointment of the 2nd petitioner as an additional director, the question of his confirmation in the AGM on 26th May, 2003 did not arise. Till filing of the petition, the 2nd petitioner never raised any grievance that having been appointed as an additional director, he was not confirmed in the AGM.
9. Summing up his arguments, Shri Subramanian submitted: The 4th and 5th respondents who are the brothers of the 1st petitioner and uncles of the 2nd and 3rd respondents, are trying to grab the hotel property of the company through the petitioners. After the death of the father, they not only manipulated the annual returns to gain majority but also created a lot of hurdles in the functioning of the company. The uncles filed a suit in Amritsar even though the registered office of the company is in Bombay to restrain the company from holding its AGM on 31.12.2005 on false and unsustainable grounds. The 1st petitioner has not handed over statutory records to the company and is illegally retaining the same. Further, they are also engaged in anti company activities by making various complaints to the banks, regulatory authorities etc. When the power supply to the hotel was disconnected in the year 2004, with the efforts of the 2nd and 3rd respondents, Tata Power had agreed to supply power and when they were laying the cables, the petitioners prevented the power supply by. representing to Tata Power that the property was in dispute. Only with great efforts by the 2nd and 3rd respondents, Tata Power resumed their work and started supplying power. The petitioners are also giving various public notices in newspapers against the company and the 2nd and 3rd respondents. Persons who are acting against the interests of the company cannot claim any equitable relief and therefore this petition should be dismissed.
10. Shri Haksar appearing for the 1st and 3rd respondents submitted: Not only the petitioners have come with unclean hands, during the proceedings also, they have committed perjury. The petition was fixed for hearing on 1.8.2006. On that day, adjournment was sought on the strength of a medical certificate indicating that the 1st petitioner was unwell and on that basis the matter was adjourned. Later it transpired that the doctor who had purportedly given the medical certificate had expired two years before the date of the certificate. This would indicate that the petitioners do not deserve any equitable relief from this Board. With the efforts of the 2nd and 3rd respondents extensive renovation is going on in the hotel at substantial cost. For raising funds the 2nd and 3rd respondents have pledged their shares. The renovation work is going on in spite of the various anti company activities by the petitioners including the present proceedings. The hotel became non functional from 1999 because of the mismanagement by the 1st petitioner. To ensure that the company functions without any hindrance, this petition should be dismissed.
11. In rejoinder, Shri Gopal Jain submitted: The 2nd and 3rd respondents have claimed that the shares in the joint names with the 1st petitioner were acquired out of the funds transferred from the bank account of the Trust. Even though, the 2nd and 3rd respondents have produced a certificate from the bank regarding transfer of funds from Trust account to the accounts of the 2nd and 3rd respondents and the 2nd petitioner, they have not disclosed the source of funds to the Trust. Since the bank accounts of both the companies and Trust are in the same bank, the hotel funds should have gone into the Trust account. Therefore, the bank should be directed to disclose the source of funds to the Trust and the ledger account of the company during the relevant period also should be examined. In so far as the decision of Bombay High Court regarding Article 12 is concerned, that decision is not applicable in the present case. While exercising the powers under Article 12, the 2nd and 3rd respondents should have acted in terms of Section 81 of the Act to offer proportionate shares to all the existing shares. The failure to do so would merit cancellation of the entire allotment. It is also wrong to contend that the 1st petitioner had not taken any interest in the company. She had settled the dues of Bombay Municipal Corporation for over Rs. 4 lacs and provident funds dues of the workmen. The petitioners were forced to issue public notices only because of their apprehension that the 2nd and 3rd respondents were likely to transfer the only property of the company, namely the hotel. The 1st petitioner has been associated with the company as a director right from 1979 and during the life time of her husband, the board consisted of her husband, her two brothers and the 1st petitioner. Therefore, with a malafide intention, the 2nd and 3rd respondents have applied the provisions of Section 283(1)(g) to eliminate the 1st petitioner from participating in the affairs of the company. Therefore, considering the fact that the company is a closely held family company, the petitioners should be restored as directors of the company. The shares of the company should be divided equally between the 1st petitioner and her three sons at 25% each by further allotment of shares, if need be.
12. I have considered the pleadings, arguments and the written submissions filed by the parties. It is very sad that there should have been this type of disputes between the mother and her children leading to her filing a police complaint against her own sons, and the sons ousting the mother from the affairs of the company. The disputes instead of being settled amicably, should have reached this Board.
13. Even though, a number of allegations have been made in the petition, the main allegations which require determination are the transposition of names in respect of shares held in joint names, further allotment of 63000 shares and directorship of the petitioners. In so far as the transposition of the names is concerned, I do not find any merit in the contention of the petitioners that the 2nd and 3rd respondents have transposed the names illegally or with a malafide intention. The basic document in relation to allotment of shares would be the board resolution, register of members, share certificates and the return of allotment. In the present case, neither side has produced the original share certificates, board resolution and register of members. The only other primary document available on record is a certified copy of the return of allotment signed by the husband of the 1st petitioner, who was at that relevant time was in charge of the management of the company as the MD. This return of allotment at Exhibit R-10 is found to have been dated 31st March, 1995 and signed by Harish Chander Sharma, Managing Director showing allotment of 51800 shares-17266 each in the name of the 2nd and 3rd respondents and 17268 in the name of the 2nd petitioner - each jointly with the 1st petitioner as the second holder. Even though in the rejoinder, the petitioners have alleged that the said return is a fabricated one, they have not substantiated the same. Shares are always allotted against consideration. The 2nd and 3rd respondents have filed a certificate from the bankers to establish that the funds of acquisition of shares came from the Trust. The petitioners have not challenged this except, now to say that the Trust must have obtained the money from the company. The issue before me is not how the Trust got the money but to find out who had paid the consideration for the shares. The petitioners have not claimed or established that the consideration for the shares was paid by the 1st petitioner to claim to be the first named holder of the impugned shares. When the basic available statutory document in the form of the return of allotment shows the name of the 1st petitioner as the second holder of the shares, and when the 2nd and 3rd respondents have established that the consideration for the shares came from the Trust to their bank accounts, their claim of title to the shares as first holder cannot be easily brushed aside and the claim of the 1st petitioner on the basis of the return of allotments during the years 1996 to 2000 cannot be upheld even assuming that the 2nd and 3rd respondents had signed these returns. It is on record that the first return of allotment, indicating the name of the 1st petitioner as the first holder was filed months after the demise of Harish Sharma and therefore, either manipulation or genuine mistake cannot be ruled out. One other aspect I would like to mention is that, the 2nd and 3rd respondents had not interposed the names only in regard to the shares in their names jointly with the 1st petitioner but had done so even of the shares in the name of the 2nd petitioner jointly with the 1st petitioner. Further, I also note that another set of shares is jointly held by the 1st petitioner with her name as the first holder with each of the sons as the 2nd holder and the respondents have not disturbed the same. Therefore, the contention of the petitioners in this regard has to fail and no relief as claim in this regard can arise or can be granted.
14. In so far as the allotment of shares to the 2nd and 3rd respondents is concerned, before dealing with the factual aspect of this case, I shall deal with the contention of the respondents relating to the powers of the Board of Directors in terms of Article 12 and the import of the judgment of Bombay High Court. The respondents have relied on the decision of the Bombay High Court to contend that the power of the directors to allot shares as they deem fit in terms of Article 12 has been upheld and therefore the said decision being binding on the petitioners cannot be reopened. They have also contended that the Bombay High Court has rejected the claim of the company being a family company. On going through the decision of the Bombay High Court, I find that the stand of the respondents is not supported by the said decision. Originally, the said petition was filed as a composite petition under Sections 397/398 and Section 155 of the Act challenging certain transfers as well as an allotment of shares made at that time. Before the Single Judge, the petitioners therein made a submission that they were not pressing the petition on the grounds set out under Sections 397/398 of the Act and had restricted their case only to Section 155 of the Act. On dismissal of the petition by the learned Single Judge, the petitioners therein appealed to the Division Bench. The contention raised by the petitioner's therein was that there was no need for funds and that the allotment was made only with a view to reduce the petitioners to below 10%. While dealing with Article 12 of the AOA, the Division Bench found that the company had decided not to allot shares to certain members as the shares held by them were under attachment and therefore the company had decided to invite applications from relatives, friends, members etc. and that a number of such persons had applied for the shares and in exercise of powers under Articles, shares were allotted. It finally held that the petitioners had not established that the directors had acted with a malafide intention or contrary to the interest of the company in allotting the shares and accordingly dismissed the petition. Thus, it is evident that in that case, the powers of the Board under Article was upheld in the facts and circumstances of that case and therefore that decision cannot be universally applied in cases of all allotments. Further, the court had neither examined whether the company was a family company nor it had given any finding on the same. In Dale and Carrington case(supra), the Supreme Court has examined the Article of a private company vesting absolute discretion with the directors to allot shares. The court observed in paragraph 15 of the judgment "Even though Section 81 of the Companies Act which contains certain requirements in the matter of issue of further share capital by a company does not apply to private companies, the directors in a private company are expected to make a disclosure to the shareholders' of such a company when further shares are being issued. This requirement flows from the duty to act in good faith and make full disclosure to the shareholders regarding affairs of a company. The acts of directors in a private limited company are required to be tested on a much finer scale in order to rule out any misuse of power for personal gains or ulterior motive. Non applicability of Section 81 of the Companies Act in case of private limited companies cast a heavier burden on its directors. Private limited companies are normally closely held i.e. the share capital is held within members of a family or within a close knit group of friends. This brings in considerations akin to those applying in cases of partnership where the partners owe a duty to act with utmost good faith towards each other. Non applicability of Section 81 of the Act to private companies does not mean that the directors have absolute freedom in the matter of management of affairs of a company ". In the present case, the admitted position is that the company is a private company and invitation to public subscription is prohibited. I find from the annual return for the year 2002 that there are 24 shareholders in the company of which the 1st petitioner and her sons either solely or jointly with one another hold about 95000 of the total 1.26 lacs shares. In addition two private companies which are reportedly family companies, hold about 18000 shares. Thus, nearly 90% of the shares are held by the family of the 1st petitioner. Therefore, the company is not only a closely held private company but also for all practical purposes a family company. Therefore, the respondents cannot claim that the Board of Directors has absolute powers to a lot shares as they deem fit.
15. Coming to the factual aspects of this case, originally in the petition, the petitioners had sought for annulment of the allotment on the ground that the shares were issued/allotted exclusively to themselves by the 2nd and 3rd respondents only to gain majority and they have also contended that the company was not in need of funds. I am fully convinced, from the facts revealed by the respondents, that the company was in need of funds, and out of the funds mobilized by the respondents, while clearing the liabilities, the company was also benefited to the tune of over Rs. 1 crore. By clearing the liabilities, the hotel property was also released from attachment. Therefore, I do not find any substance in the contention of the petitioners that the company, not being functional, was not in need of funds. The petitioners have contended that instead of the respondents giving' loans and converting the same into shares, they could have raised loans from outsiders. When the petitioners themselves have questioned the mobilization funds on the ground that the company was not functional, they have not explained as how a non functional company could have raised loans from outsiders. Further, the mode and manner of mobilizing funds is at the discretion of the Board of Directors and no shareholder can. demand a particular manner of raising funds. In Needles Industries case 1981 3 SCC 333, the Supreme Court has held "If shares are issued for the larger interests of the company, the decision cannot be struck down on the ground that that it has incidentally benefited the directors in their capacity as shareholders. So, if the directors succeed or also incidentally, in maintaining control over the company or in newly acquiring it, it does not amount to an abuse of their fiduciary power". In the present case, obviously, the company needed funds and in the process, incidentally, the 2nd and 3rd respondents also got shares allotted to them against the funds mobilized by them. Therefore, no ulterior motive or breach of fiduciary duties could be imputed against them to seek for annulment of the allotment.
16. However, after the respondents had established that the company was in need of funds, during the hearing and in the written submissions, relief has been sought in the form of allotment of proportionate shares to the petitioners on the ground that the company is a family company and therefore all the members should have been allotted proportionate shares. Even though, in the earlier paragraph, I have held that the company is a family company and therefore, in all fairness, proportionate shares should have been allotted to the petitioners, I have also held that in the facts and circumstance of this case, when the respondents had, by mobilizing funds, had not only cleared the liabilities, but also in the process benefited the company to the tune of over Rs. 1 crore, I am of the view that it would be inequitable now, to direct proportionate allotment to the petitioners, especially when I note that there is not even a single averment in the petition or rejoinder that if the shares had been offered to the petitioners at that time, they would have subscribed to the same. Conceding to the prayer of the petitioners for proportionate shares after the respondents had made the company liability free out of their own funds, would be highly inequitable to the respondents. However, I direct that in case of any future allotment/s, proportionate shares to the petitioners on the basis of the shareholding that existed before the allotment of 69,000 shares, should be offered to them in writing with 30 days notice.
17. In so far directorship of the 1st petitioner is concerned, the stand of the respondents that she had vacated the office by operation of law appears to be dubious. The respondents have contended that directorial complaints cannot be agitated in a proceeding under Sections 397/398. While it is normally so, in closely held companies/family companies, this Board has always entertained directorial complaints. Since I have, in an earlier paragraph held that this company is a family company, directorial complaints can be adjudicated in the present proceeding. If the respondents had felt that due to her anti-company activities, it would not be in the interest of the company to continue the 1th petitioner as a director, she could have been removed as a director in accordance with law, in which case she would have had an opportunity of defending her actions. Instead, the respondents appear to have achieved the same object by invoking the provisions of Section 283(1)(g). In closely held companies as in the present case, even without leave of absence, the same is normally granted, but the respondents had decided to invoke this provision in respect of the 1st petitioner. When the provisions of Section 283(1)(g) are invoked, it should be established that notices for Board meetings had been issued and that the concerned director absented himself/herself without leave of absence from 3 consecutive meetings or all the meetings held in a consecutive period of 3 months, whichever is longer. According to the respondents, in the Board meeting held on 26.5.2003, Which was not attended by the 1st petitioner, it was decided that future Board meetings would be held on the 5th of every month at 11 AM and a copy of the minutes was sent to the 1st petitioner and therefore, she was aware that Board meetings would be held on the 5th of each month. The respondents have produced the returned envelope sent by registered post containing the notice for the Board meeting convened on 5.7.2003 but no evidence that notices for the Board meetings on 5th September, 5th October and 5th December were sent to her, has been produced. Further, if the contention of the respondents is that in view of her absence in these Board meetings without leave of absence, she had vacated her office, there is no answer as to why Form 32 was filed only on 18.11.2004 recording that she had vacated her office on 5.9.2004. Therefore, I am of the view that the respondents were not justified in invoking the provisions of Section 283(1)(g) and by doing so, they had acted in a manner oppressive to the 1st petitioner.
18. In so far as non confirmation of the 2nd petitioner as a director is concerned, the respondents dispute the factum of his having been appointed as an Additional Director. According to the petitioners, he was appointed as an additional director on 7th October 2002, while according to the respondents, there was no Board meeting on that day. In the absence of any Board resolution, the only document that is available to substantiate his appointment is the Form 32 filed with the ROC on 27.2.2003. No reason has been given for the delayed filing of this Form. The AGM in which he was not allegedly not confirmed took place on 26.5.2003. There is no averment in the petition that the 2nd petitioner had attended any Board meeting during the intervening period. Further, in the notice for the AGM there was no agenda relating to his confirmation. If he had been appointed as an additional director as claimed, there is no letter of complaint from him protesting against the omission of this business in the agenda. Therefore, in the absence of concrete proof that he had been appointed as an additional director or that he had attended any Board meeting thereafter, it I difficult to conclude that the respondents had acted in a manner oppressive to the 2nd petitioner in not confirming him as a director. However, since I have held that the company is a family company and the 2nd petitioner is also one of the brothers holding equal number of shares as that of the 2nd and 3rd respondents before the allotment of the impugned shares, if the 2nd petitioner desires to be appointed as a director, the respondents cannot refuse to appoint him as such.
19. Now that I have given my findings on the main allegations in the petition, the nature of reliefs to be granted has to be considered. It is quite evident that the relationship between the 1st petitioner and the 2nd/3rd respondents has become so strained that any direction to put her on the Board on the ground that her removal was an act of oppression, is only likely to result in further disputes, which would not be in the interests of the company. Since the Hotel is yet to revive, she is also unlikely to get any dividend on her shares for some more years to come. Therefore, as far as the first petitioner is concerned, in the interests of both the sides, and the company, I consider it appropriate to direct her sell her shares to the respondents a fair valuation of the company as on 31st March 2006. Accordingly, I do so. Her shares would include those held in her own name and those in which her name appears as the first holder. I find some family companies hold shares. In these cases, her entitlement to the shares in the company shall be in proportion to the shares held by her in the family companies.
20. As far as the 2nd petitioner is concerned, it is an admitted fact, that he is one of the brothers, and before the allotment of the impugned shares, he was holding the same number of shares as that of the 2nd and 3rd respondents and there are no allegations that he had acted against the interests of the company. Therefore, I leave it to his option to decide whether to continue with his shareholding or sell the shares to the respondents on a fair valuation. In case, he decides to holds the shares, in case of all future allotment of shares, he shall be offered the same number of shares as may be offered to the 2nd and 3rd respondents, not withstanding the fact that after allotment of 63,000 shares impugned in the petition, his entitlement on proportionate allotment would be less than that of the 2nd and 3rd respondents. I am giving this direction on equitable grounds to ensure that the 2nd and 3rd respondents do not get benefits in perpetuity on account of allotment of 63,000 shares, which I have held was warranted at that point of time. Similarly, since I have held that the company is a family company and that the 2nd petitioner, being a bother, was holding equal number of shares before the allotment of the impugned shares and that he could not partake in the affairs of the company on account his studies abroad, I also direct that, in case, the 2nd petitioner opts to continue to hold shares in the company, he shall be appointed as a director in the company with the same remuneration/perks as that of the 2nd and 3rd respondents, even if he not entrusted with any responsibilities. Within a month from the date of this order, the 2nd petitioner will exercise his option of either to continue to hold his shares or sell the same to the respondents on a fair valuation. His decision will be binding on the respondents.
21. The parties will appear before me on 23rd January 2007 at 2.30 pm to suggest the name of a valuer mutually acceptable to both the sides failing which, I shall appoint one.
22. The petition is disposed of in the above terms, reserving the order relating to appointment of a valuer and giving consequential directions.