Company Law Board
Dr. T.N. Raghunath And Smt. ... vs Lake Side Medical Centre Private ... on 2 March, 2006
Equivalent citations: [2007]137COMPCAS741(CLB)
ORDER
K.K. Balu, Vice-Chairman
1. In this company petition filed under Sections 397 and 398 read with Sections 111, 402 and 403 of the Companies Act, 1956 ("the Act") relating to the affairs of M/s Lake Side Medical Centre Private Limited ("the Company"), the main grievances of the petitioners, claiming together 17% of the paid-up capital of the Company, which is under dispute, are - (a) non-transmission of shares in the name of the second petitioner and her nominees; (b) allotment of 750 equity shares of Rs. 100/- each in favour of the second respondent in exclusion of all other shareholders; and (c) certain acts of mismanagement. Against this background, the petitioners are claiming the following reliefs:
(i) to declare that the allotment of 750 equity shares of Rs. 100/- in favour of the second respondent is illegal and bad in law;
(ii) to direct the Company to effect the transmission of 500 equity shares of Rs. 100/- each in the name of the second petitioner and her nominees and rectify suitably its register of members (as per CA 150/2005);
(iii) to order forfeiture of all shares standing in the name of the second respondent;
(iv) to order forfeiture of 1000 shares standing in the name of the third respondent;
(v) to impose penalty of Rs. 25 lakhs each on the respondents 2 & 3; and
(vi) to restrain the respondents 2 & 3 from participating in the affairs of the Company as directors of the Company.
2. Shri BO. Thiruvengadam, learned Counsel appearing for the petitioners, before initiating his arguments on the merits of the company petition submitted that Shri Udaya Holla, senior partner of M/s Holla & Holla had initiated certain proceedings, viz. C.P. Nos. 21/92 and 21/92 before the Karnataka High Court on behalf of the first petitioner against the respondents 1 to 3 herein and others. Shri Udaya Holla, learned Senior Counsel, having had received confidential information from the first petitioner and filed under his instructions the petitions before the High Court against the respondents herein, ought not to have subscribed the name of his firm for and on behalf of the respondents in the present proceedings, contending that the company petitions (CP 21/92 and 22/92) filed by him as Counsel for the first petitioner are collusive and sham proceedings. The act of Shri Udaya Holla, Senior Counsel, by referring to the earlier proceedings initiated on behalf of the first petitioner, caused him immense prejudice in the CLB proceedings. The Supreme Court in Chandra Shekhar Soni v. Bar Council of Rajasthan held that it is not in accordance with professional etiquette for an advocate while retained by one party to accept the brief of the other. It is unprofessional to represent conflicting interests except by express consent by all concerned after a full disclosure of the facts. The Orissa High Court held in State v. LalitMohan Nanda that an advocate is guilty of misconduct when he acts, appears for, or advises the opposite party in a subsequent legal proceedings which are directly connected with, or in continuation of the former litigation. Thus, the respondents and their counsel are guilty of adopting the unethical practice, which deserves to be condemned.
Shri Thiruvengadam, learned Counsel while dealing with the merits pointed out that the Company has been promoted in January, 1980 with the main objects to establish and maintain hospitals for rendering medical and health services by Nanjundiah, father of the petitioners and father-in-law of the second respondent and Mohanlal Khariwal, the fourth respondent herein, each subscribing to 10 shares of Rs. 100/- each. The authorized share capital of the Company is 5,000 equity shares of Rs. 100/- each. The undisputed subscribed and paid-up capital comprising of 4250 equity shares of Rs.100/- each are held by Nanjundiah group (8/17th share) consisting of the petitioners, the second respondent and his family members; Kincha group (3/17th share); Ganesh group (4/17lh share); and others (2/17th share). The allotment of 750 unallotted equity shares in favour of the second respondent, without offering any shares to other shareholders, is impugned in the company petition. According to the petitioners, Nanjundiah group, Kincha group and several others had formed as early as in November, 1979 a partnership firm under the name and style of "Lake side Medical Centre" for the purpose of "purchasing lands or taking lands on lease, to construct the building including the nursing homes and let them out on rental basis". The partnership firm constructed a building on the land owned by it, which was given on lease in April, 1981 to the Company for running the hospital under the name and style of "Lakeside Medical Centre and Hospital". The partnership came to be reconstituted from time to time and finally in July, 1984 with Nanjundiah group maintaining 8/17th share, Kincha group 3/17th share, Ganesh group 4/17th share and others 2/17th share. The profit sharing of the partners has been maintained among the shareholders of the Company in the same ratio from time to time. Accordingly, shares were allotted to members of certain groups in November 1989, thereby the shareholding pattern in the Company became identical to the profit sharing ratio of the partners in the partnership firm, which was maintained till the impugned allotment made on 16.05.2005. The petitions in CP 21/1992 and 22/1992 filed by the first petitioner before the High Court of Karnataka would reveal the group concept among the shareholders of the Company. The petitioners have ascertained the shareholding pattern from the statements filed in the company petitions before the High Court on behalf of the respondents, which have been verified by the second respondent. Nanjundiah was the Managing Director during the period between 1980 and 1990 and thereafter, the second respondent became the Managing Director of the Company. In the meanwhile, Dr. K. Balaram, the other representative of Nanjundiah family on the board of the Company until 1991 was forced to quit the Company. When Dr. Balaram holding 500 equity shares died in December, 2001, the second petitioner, his wife requested the Company in April, 2002 and October, 2002 to effect the transmission of those shares in her name, pursuant to which the Company advised her (Annexures - A15 and A16) to obtain and produce a succession certificate from a competent court of law to recognize her as a legal heir of the deceased member, notwithstanding the fact that the board of directors is aware of the legal heirs of the deceased Dr. Balaram. This would constitute an act of oppression, as held in Mrs. Nandita Bhardwaj v. Sapphire Machines Pvt. Ltd. (2000) 100 CC 529. Nevertheless, the second petitioner obtained a succession certificate from the Court of Additional Civil Judge, Bangalore and forwarded a copy of the order dated 03.07.2004 in terms of her communication dated 28.07.2004 (Annexure - A17), followed by her communication dated 21.03.2005 together with a copy of the succession certificate. It is beyond doubt from the petition made for succession certificate that the second petitioner's daughters relinquished their rights over the shares in her favour. The Company by its communications dated 03.08.2004 and 04.03.2005 (Annexures - A19 & A21) assured the second petitioner to effect the transmission, but failed to act in terms of its assurances. The order dated 03.07.2004 of the Court of Additional City Civil Judge, Bangalore empowered the second petitioner and her daughters to get the transfer of shares in their favour. However, the succession certificate issued to the second petitioner empowered her to collect the amount in respect of the shares and deal with the same. Later, by an order dated 18.07.2005 of the Court of City Civil Judge, Bangalore, the succession certificate came to be amended, thereby authorizing the second petitioner to get the shares transferred in her name and in the name of her two daughters, a copy of which was forwarded to the Company by the second petitioner in her communication dated 27.07.2005, with a request to transmit the shares of deceased Dr. Balaram in terms of the amended succession certificate. The succession certificate was further amended as per the court order dated 03.01.2006, by which the second petitioner has been empowered to get the shares transferred in her name. The succession certificate cannot be questioned and is binding, on the Company. Thus, the first petitioner holding 250 shares and second petitioner empowered to obtain the transfer of 500 shares of the deceased Dr. Balaram constitute 17% of the issued and paid up capital of the Company, satisfying the requirement of Section 399 of the Act. Moreover, the legal representatives of a deceased member whose name is in the register of members are entitled to maintain a petition in respect of oppression and mismanagement in the affairs of the company under Sections 397 and 398, as held in M/s World Wide Agencies Pvt. Ltd. v. Mrs. Margarat T. Desor and Kamala Rani Pandit v. Kalitara Glass Moulding Works (P) Ltd. (1995) 3 Comp LJ 218 (CLB). The validity of a petition must be judged on the facts as they were at the time of its presentation and if the petition was valid when it was presented, it did not cease to be maintainable by reason of events subsequent to its presentation as held in Sayedabad Tea Co. Ltd. v. Samarendra Nath Ghattak (1995) 83 CC 504 and S. Varadarajan v. Venkateswara Solvent Extraction (P.) Ltd. (1994) 80 CC 693. While the Company had effected the transmission in respect of the shares held by Dr. O. Ganesh on his death in favour of his legal heirs without a succession certificate or any other document, it failed to effect the transmission of shares owned by (late) Balaram, causing unfair prejudice to the second petitioner. By refusing to effect the transmission of shares, the second petitioner could not exercise her voting rights in respect of her shares constituting significant part of the capital of the Company. Thus, the act of non-transmission of shares in the name of the second petitioner, despite the succession certificate issued by the competent court constitutes an act of oppression. The Allahabad High Court held in Kumar Exporters P. Ltd. v. Naini Oxygen and Acetylene Gas Ltd. (1986) 60 CC 984 held that the continuous refusal by the persons who are in the management of the Company to register the shares with an ulterior motive of retaining the control over the affairs of the Company, it is a proper ground for the court to interfere and grant relief under Sections 397 and 398. The second respondent deserted his wife, leading to matrimonial disputes between them, encouraged a nursing staff and started living with her by converting a substantial portion of the hospital floor into his flat. This conduct of the second respondent, though personal in nature generates adverse repercussions in the affairs of the Company. The apprehension of the second respondent that his wife holding 1/17th share in the Company might align with the petitioners group is the sole cause for persistent refusal to effect the transmission of Shares in the name of the second petitioner. However, the board of directors at its meeting held on 16.05.2005 considered the agenda relating to the transmission of shares of (late) Dr. Balaram in favour of the second petitioner, which was approved and duly adopted, upon which necessary entries were effected in the register of members and suitable endorsement was made on the relevant share certificates. Nevertheless, the register of members was subsequently interpolated by canceling the entries made in the register of members of the Company with a view to continue to exercise control over the Company. The respondents 2 to 3 having tampered the minutes of the board meeting, register of members and other documents must be prosecuted by the CLB in the interest of justice. The minutes of the board meeting dated 16.05.2005 produced by the Company without carrying the signature of the fourth respondent and without reflecting a true and fair picture of the proceedings of the board meeting, especially when they do not reveal the resolution approving the transmission of shares; consequent entries made in the register of members; endorsement of the transmission on the share certificates and its subsequent cancellation, are not valid.
Shri Thiruvengadam, learned Counsel pointed out that the second respondent in collusion with alternate director of the third respondent allotted 750 equity shares of Rs. 100/- each to the second respondent at the board meeting held on 16.05.2005, without offering to other shareholders and inspite of the stiff resistance from the fourth respondent. The fourth respondent being one of the promoters has been the Chairman for 13 years, but, was forced to resign in the course of the board meeting on account of the illegal means adopted by the second respondent, as borne out by the former's communication dated 18.05.2005. The resolution allotting the shares was approved by the alternate director of the third respondent and the second respondent, who is the beneficiary and, therefore, there cannot be a valid quorum while allotting the impugned shares to the second respondent. The allotment in abuse of the fiduciary position of the second respondent increased his shareholding from 6.94% to 20.9% and disturbed the existing parity maintained among the shareholders. The allotment of shares is not for the benefit of the Company, but exclusively benefits the second respondent. The second respondent cannot be above law and the arrogance of power exercised by him constitutes an act of oppression. By virtue of non-transmission of the shares of the deceased Dr. Balaram and the impugned allotment of shares in favour of the second respondent, the latter consolidated his position so as to exercise control over the Company in exclusion of the petitioners and other shareholders, thereby establishing his ulterior motive and his conduct lacking probity. The Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. (1965) 35 CC351 held that the act of majority shareholders resolving to issue shares not proportionately but privately so that minority should not otherwise get control would amount to oppression within the meaning of Section 397 and in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. held that the directors of a company, who are in a fiduciary position vis-a-vis the company must exercise their power for the benefit of the company and if such power is exercised for their personal aggrandizement and to the detriment of the company, the court will interfere and prevent the directors from doing so. The different High Courts and the CLB held in (a) Mrs. Farhat Sheikh v. Esemen Metalo Chemicals Pvt. Ltd. (1996) 87 CC 290 that issue of additional shares without justification to reduce the member's shareholding is oppressive; (b) Rashmi Seth v. Chemon (India) Pvt. Ltd. (1995) 82 CC 563 that when the power to issue further shares is exercised by the 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, the court cannot allow exercise of such powers by the board of directors; (c) PIK Securities (P) Ltd. v. United Western Bank (P) Ltd. (2001) 4 Comp LJ 81 that when the increase in the share capital is with an ulterior motive and not for the bonafide needs of the Company, but, in the garb of raising capital, shares are issued either to consolidate one's position or with a view to create a new majority or to convert a majority into a minority, a petition under Section 397 or Section 398 can be maintained; (d) Mrs. Uma Pathak v. Eurasian Choice International (P) Ltd. (2004) 3 Comp LJ 452 that the board of directors must discharge the fiduciary responsibilities in the interest of the company and not for any ulterior purpose and that if the shares are issued with the sole object of creating a new majority or with the view to convert a majority into a minority, then the action of the board of directors is not only in breach of the fiduciary responsibilities, but also a grave act of oppression against the existing majority; (e) Kobian Pte Limited v. Kobian India Private Limited (2005) 126 CC 675 that further issue of shares in order to merely gain control is not permissible; (f) Kshounish Chowdhury v. Kero Rajendra Monolithics Ltd. (2002) 1 Comp LJ 552 that further issue of shares to convert a majority into a minority is a grave act of oppression and (g) Akbarali A. Kalvert v. Konkan Chemicals Pvt. Ltd. (1997) 88 CC 245 that issue of shares without offering to other shareholders with a view to increase the shareholding amounts to oppression. There is neither any necessity for issue of 750 shares nor any requirement for funds for the Company. These facts clearly make out a case for winding up of the Company on just and equitable grounds. Shri Thiruvengadam, learned Counsel pointed that the petitioner has to make out a case for winding up of a company on just and equitable grounds and that there is no requirement of the petitioner to plead that the facts would justify the making of a winding up order of the company on just and equitable grounds as held by the CLB in G. Govindaraj v. Venture Graphics P. Ltd. (2005) 128 Comp Cas 632. However, the Company herein is making profits. The reserves and surplus of the Company as at 31.03.2004 account for Rs. 17.75 crores. The Company owns huge fixed assets worth 12 crores and the book value of each share will be over Rs. 4,000/-. The Company while earning profits, with huge surplus and reserves to its credit, if ordered to be wound up, would prejudice its interests as well as its shareholders, including the petitioners. In such circumstances the court will not proceed to wind up a company merely, because it is just and equitable to do so, but has to consider whether the company's affairs could be" remedied under Section 397 or 398 against oppression and mismanagement as held in Bhaskar Stoneware Pipes Private Ltd. v. Rajinder Nath Bhaskar (1988) 63 CC 184 and Jose J.Kadavil v. Malabar Industrial Co. Ltd.; K.T.Mathew v. Malabar Industrial Co. Ltd. (1986) 59 CC 969. The grievances on account of mismanagement in the affairs of the Company are - (a) misuse of the official position by the second respondent as Managing Director; (b) failure to provide adequate services for the benefits of the constituents of the Company; (c) exhorbitant expenses on account of foreign tours undertaken by the second respondent with little benefit to the Company; (d) failure to credit any income earned by the second respondent in the Company's premises from private practice; (e) negligence in execution of the building contract; and (f) non-maintenance and attempted sale of the hospital property. These acts of mismanagement would show that the affairs of the Company are being conducted in a manner prejudicial to the interests of the Company and its shareholders, which warrant the intervention of the CLB, in exercise of the powers under Section 398.
3. Shri Nandakumar, learned Counsel representing the respondents 1 to 3 at the outset contended that Sri Udaya Holla, senior partner of Holla & Holla, whom the first petitioner briefed in the earlier company petitions neither signed vakalat nor is he appearing against the petitioners in the present proceedings. The earlier company petitions were withdrawn in the year 1992 and, thereafter, Sri Udaya Holla has not been engaged by the first petitioner, including in the civil suit filed in the year 1993 against the Company. There is no bar under law for a counsel to appear on behalf of a party against whom he was appearing in a different set of proceedings. The petitioners have chosen their Counsel. Similarly, the respondents are entitled to engage their own Counsel. The Allahabad High Court in Saharanpur Grain Chamber Ltd. v. Maharaj Singh, Saharanpur A.LR. 1940 Allahabad 233 held that counsel consulted by one party is perfectly free to accept brief against him, if no information of confidential nature was received by him and which would be of use against that party. The onus of proving that confidential information was conveyed lies heavily on the applicants. The Madras High Court in Atchutaramiah v. Secretary of State A.LR. 1915 Madras 552 held that a pleader who has been retained for a party and who has drafted a written statement for that party is entitled to appear for the opposite side when the party originally retaining him does not seek to employ his services and engages other pleaders in the case. When another pleader is engaged, the presumption arises that the services of the pleader originally retained are not required and that he is free to appear for the opposite side. Thus, there is absolutely no impediment for the present Counsel to represent the respondents herein. Shri Udaya Holla, being a reputed senior advocate, cannot be guilty of any unethical practice in the absence of any proof of divulging any confidential information by him. Learned Counsel questioned the maintainability of the company petition on among other grounds that while the Company is consistently making profits under the management of the second respondent, the profits for the year ended 31.03.2004 accounted for Rs. 39 lakhs. The petitioners have not made out any ground, which would justify the making of a winding up order against the Company, in terms of Section 397(2)(b). The Supreme Court held in (a) Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd. that the petitioners in a petition under Section 397 and 398 have to make out a case for winding up of the company on just and equitable grounds. If the facts fall short of the case set out for winding up on just and equitable grounds, no relief can be granted to the petitioners; (b) Shanti Prasad Jain v. Kalinga Tubes Ltd. that it is not enough under Section 397 to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of Section 397; (c) Hind Overseas Private Ltd. v. Raghunath Prasad Jhunjhunwalla that there must be materials to show when "just and equitable" clause is invoked, that it is just and equitable not only to the persons applying for winding up but also to the company and all its shareholders; (d) In re. Thakur Hotel (Simla) Company Private Ltd.-(1963) 33 CC 1029 that an order under Section 397 granting relief against oppression on the application of some of the members of the company can be made only if the court is satisfied, that the company's affairs are being conducted in a manner oppressive to any member or members, and, secondly, that the facts of the case are such that it would be "just and equitable" to make an order for winding up of the company, but the making of such an order would unfairly prejudice the members. Unless both these conditions are satisfied an order under Section 397 should not be made; (e) Sayed Muhammed Mashur Kunhi Koya Thangal v. Badagara Jumayath Palli Dharas Committee that according to the cardinal principles of pleading facts must be pleaded, in the plaint and established. Any grant of relief dehors the pleadings in the plaint is impermissible; and (f) M. Chinnasamy v. K.C.Palanisamy that in a petition, material facts and particulars must be pleaded and that any evidence at variance with pleadings is neither admissible nor permissible.
The first petitioner holds 250 shares out of 5,000 shares issued by the Company. The second petitioner is not a shareholder. There are 14 shareholders. Consequently, the first petitioner does not constitute one-tenth of the total number of members so as to apply under Section 397 or Section 398. Dr. Balaram, husband of the second petitioner who died in December, 2001 held 500 shares in the Company. The succession certificate dated 03.07.2004 granted by the court originally empowered the second petitioner to collect the amount in relation to the shares of her deceased husband and was not explicit on her being given the shares of late Dr. Balaram and, therefore, the Company was constrained to advise her to get the succession certificate duly rectified. Thereafter, the succession certificate came to be amended as per the order dated 18.07.2005 of the court, authorizing the second petitioner to get the shares of her husband transferred in her name and in the name of her two daughters. In view of this, the shares could not be transmitted exclusively in the name of the second petitioner, which cannot be construed as an act of oppression. Nevertheless, the endorsement effecting the transmission on the share certificate was made in anticipation of the board passing the resolution. When the defect in the succession certificate came to light, the endorsement on the share certificate was struck off. While an endorsement was made in the register of members about non-transmission of shares, there is no corresponding entry for the actual transmission of shares in favour of the second petitioner. The shares of late Dr. Ganesh were transmitted by the Company in favour of the third respondent, being his widow on the strength of a will executed by him and, therefore, no comparison can be drawn by the petitioners in regard to the shares of late Dr. Balaram. However, during pendency of the company petition, the succession certificate was again amended on 03.01.2006, thereby empowering the second petitioner to get the transfer of shares of her deceased husband in her name. Any correction in an order, if material cannot be amended, as held in Re: Gagan Chandra Das . The order of the civil court dated 03.01.2006 amending the succession certificate is not produced before the Bench, which will throw light on the rights of the second petitioner in respect of the shares. By virtue of Sections 9 & 10 of the Hindu Succession Act, the shares of Dr. Balaram, upon his demise devolved on his legal heirs, being the second petitioner and two daughters, thereby became the joint owners, as claimed by them in the application No. 150/05. The object of the succession certificate in lieu of nomination is to recover interest or dividends and does not confer title on the holder and not a decree or order, taking away the right of succession as held in Employment Officer, Mandya v. S. Sevarinathan , The Supreme Court in Smt Sarbati Devi v. Smt. Usha Devi that a nominee of life insurance policy does not get absolute right to the amount due and that it only indicates the hand which is authorized to receive the amount on payment of which the insurer gets a valid discharge of its liability under the policy. The amount, however, can be claimed by the legal heirs of the assured in accordance with the law of succession governing them. The order produced before the Bench only empowers the second petitioner to obtain the shares of her deceased husband. The daughters have not relinquished their rights and the second petitioner does not become the sole shareholder of such shares, thereby the second petitioner is a trustee for her daughters. The second petitioner is, therefore, entitled to 1/3rd of the shares held by (late) Dr. Balaram, viz., 167 shares. Thus, the petitioners together hold only 417 shares, which do not constitute 10% of the issued and paid up capital of the Company. Consequently, the requirements of Section 399 are not satisfied.
The first petitioner and his father unsuccessfully initiated several legal proceedings with a view to harass the respondents, which include the company petitions 21/1992 and 22/1992 on the file of the Karnataka High Court, for liquidation of the Company and the partnership, which were dismissed as withdrawn in December, 1992. The first petitioner and his father, disputed and challenged before the civil court in January, 1993 the leasing of the building by the partnership in favour of the Company and seeking dissolution of the partnership with a view to deprive the former of its use of the leased building, where in the hospital is being run by the Company. The petitioners' father instituted the company petition 33/1999 before the Karnataka High Court seeking liquidation of the Company, which came to be rejected with certain directions on payment of Rs. 1 Lakh by way of assistance to him. Apart from these vexatious litigations, the petitioners' father made a number of complaints against the second respondent in 1999 and 2000 to the Registrar of Companies and the other authorities, which were never proceeded with by the concerned authorities. The present company petition is one among the vexatious proceedings resorted to by the first petitioner causing serious prejudice to the Company. The various proceedings reveal the conduct of the first petitioner and his father and their destructive attitude towards the Company. The first petitioner was desirous of becoming the Managing Director, when his father had resigned from the office of Managing Director in the year 1990, but could not achieve his objectives. Apart from the conduct of the petitioners, they have come with unclean hands and, therefore, they are not entitled for any equitable relief from the CLB. The Karnataka High Court in Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (Pvt) Ltd. held that the relief under Sections 397 and 398 is an equitable relief, which is entirely left to the discretion of the court and mere proof of the allegations of oppression and mismanagement would not entitle the petitioner to the reliefs unless he approaches the court in good faith and must come with a clean record. In Nurcombe v. Nurcombe and another (1985) 1 All ER 65 it has been held that a court is entitled to look at the conduct of the plaintiff to satisfy itself that the plaintiff is a proper person to bring the action. If the plaintiffs conduct is so tainted as to bar equitable relief or if there has been an unacceptable delay in bringing the action, the plaintiff might well be held not to be a proper person to bring the action. In Desein Private limited v. Elektrim India Limited (2001) 3 Comp LJ 459, it has been held that the Company Law Board, in exercise of equitable jurisdiction has to take into consideration the conduct of the parties and if a person has been a party to the decisions he cannot impugn those decisions later on the ground that such decisions amount to acts of oppression. The present company petition filed with the ulterior motive of harassing the respondents lacks bonafides and is liable to be dismissed in limini.
The second respondent is a renowned authority in the medical field of children care, who had prestigious and lucrative employment in USA for over 11 years, earning US $ 145000 even during the year 1976. Thereafter, the second respondent returned to Bangalore and started in November 1979 the hospital in association with among others, Nanjundiah. The Company had purchased in the year 1983 the land adjacent to the hospital for the purpose of constructing the hospital building, which was subsequently acquired by the Government of Kamataka. However, the second respondent after taking over as the Managing Director in the year 1993 got the acquired land denotified from the Government of Karnataka and not only completed the construction of the hospital building after taking financial assistance from the Karnataka State finance Corporation to the tune of Rs. 1.25 crores, but also discharged the liability out of the earnings of the Company. At present the hospital with 150 beds and 152 employees is one of the leading hospitals of Bangalore, with the best medical facilities and equipments and is recognized by the Government of Karnataka conducting kidney transplantation. During the period of ten years of the Company functioned under the management of Nanjundiah, the Company never declared or paid any dividend. When the second respondent became the Managing Director, the Company on account of the best of efforts put forth by him, started making profits and declared dividends, as borne out by the statement of financial position of the Company (Annexure R-4). The second respondent is the sitting Chairman of the technical advisory committee of the Karanataka State Pollution Control Board and participated in various seminars inside and outside India on account of his contribution in the field of children health and environmental pollution, in terms of the certificates awarded and invitations extended to him and the right-ups in appreciation of his work (Annexure R-6). The research work done on environment, health alleviation of hardship of the traffic police and tobacco smoking by the second respondent has been recognized by the Government of India and Karnataka Government by implementing his recommendations and honouring him with "Karnataka Rajya Parisara Prashasthi - 2000" by the Karnataka Government. The hospital attracted many medical dignitaries and noble laureates from abroad under the stewardship of the second respondent. The Company could achieve national and international recognition, repute and accolades on account of the untiring efforts, contribution and selfless efforts made by the second respondent. The name and reputation of the Company are entwined with those of the second respondent. A number of organizations from India as well as abroad, in appreciation of the research work conducted in the hospital by the second respondent, have assigned research work, bringing laurels and glory to the hospital. The hospital, on account of the expertise and efficiency of the second respondent, is getting people for exchange training programme from other countries. The hospital has been recognised by the National Board of Examinations, Nursing Council of India, Rajiv Gandhi University of Health Sciences and Paramedical Board of Karnataka, all due to the efforts and involvement of the second respondent. The Indian Medical Association issued certificate in appreciation of the contribution made by the second respondent in the filed of Neprology and Kidney Transplant in Karnataka. The board of directors in recognition of the second respondent's contribution and selfless service for the past 15 years toward tremendous growth of the hospital allotted 750 shares at 100% premium in his favour mitigating his distrust and resurrecting his personal security in the set up, especially when other members of the Company were similarly allotted shares, without having been questioned by anyone including the second respondent. In this connection, Shri Nandakumar, learned Counsel pointed out that the board of directors at its meeting held on 30.11.1989, wherein the fourth respondent, the then director allotted 150 shares to his daughter and Nanjundiah, the then Managing Director allotted 100 shares to his wife; 250 shares to his son, the first petitioner therein; 100 shares to his son-in-law, the second petitioner's husband and 150 shares to his daughter and, therefore, the petitioners having availed material benefits by virtue of those allotments are estopped from challenging the impugned allotment made to the second respondent. No party shall be allowed to blow hot and cold simultaneously. Furthermore, the minutes of the board meeting do not reveal whether those allotments were made to maintain parity among the shareholders. The allotment of shares to different groups reportedly maintaining parity in line with the partnership firm is not borne out by any material. The Calcutta High Court in Krishna Das Paul v. Calcutta Chemical Company Limited (1998) 5 Comp LJ569 held that sale of one's shares to an outsider for a bonafide purpose, even if shares constitute majority percentage can never be termed as oppressive, as long as there is no pre-emptive clause in the articles in favour of other shareholders. Wrong participation and acquiescence in the proceedings preclude such a party from contending that the proceedings were without jurisdiction, as held in Prasun Roy v. Calcutta Metropolitan Development Authority (1987) 4 Supreme Court Cases 217. The Madras High Court held in Anugraha Jewellers Ltd. v. K.R.S. Mani (2000) 38 CLA 132 held that anyone who has participated in the wrong of which he complains, cannot maintain an action. He cannot take different stands at different points of time. His very conduct will demonstrate that his application under Sections 397 and 398 has been out of malafide intention. The allotment of impugned shares in recognition of the services rendered by the second respondent, is within the powers of the board of directors vested in Article 6 of the articles of association of the Company. The board meeting which was to be convened on 04.05.2005 to consider, inter alia, the agenda in relation to the allotment of shares in favour of the fourth respondent was adjourned at the instance of the fourth respondent to 16.05.2005. Thus, the fourth respondent was aware of the proposal of allotment of shares to the second respondent. The fourth respondent who was appreciative of the second respondent at the board meetings, for his selfless services, showering accolades, had decided under influence of some vested interest to defer consideration of the second respondent's application for allotment of the unallotted 750 shares in the board meeting held on 16.05.2005, compelling the remaining directors to approve the proposal. There are neither groups among the subscribers to the partnership agreement nor shareholders; nor maintained parity among them, as pleaded by the petitioners. Dr. Ramesh is holding 250 shares, but he is not a partner in the firm. The shareholding pattern in the Company is not identical to that of the shareholding pattern in the partnership. The proceedings earlier initiated by the first petitioner, do not make any reference to any grouping among the shareholders. The statements filed by the second respondent in C.P. nos. 21/1992 & 22/1992, on the file of High Court of Karnataka must be considered in entirety and does not accept any group among the shareholders. The Company was incorporated with Nanjundiah and the fourth respondent as subscribers, promoters and the first directors, but the articles of association does not speak of any group among the shareholders. The concept of Nanjundiah Group or Khincha Group, being fictious never existed either before or after the incorporation of the Company. There is neither any agreement to maintain parity among the shareholders. The shareholding pattern furnished by the petitioner in A-32 does not reflect the present position of the holdings in the Company in terms of Annexure R-l. Any family arrangement pleaded is not proved, it is not binding on the parties as held in V.M. Rao v. Rajeswari Ramakrishnan; V.M. Rao v. V.L. Dutt (1987) 61 CC20. Shri Nandakumar, learned Counsel pointed out that the allegations against second respondent about his illicit relationship and unauthorized use of the hospital premises for residential purpose are not supported by any documentary proof. The alleged acts of mismanagement apart from being vague lack material facts and neither are proved. The Bombay High Court in P.S. Offshore Inter Land Services Pvt. Ltd. v. Bombay Offshore Suppliers and Services Ltd. (1992) 75 CC 583 held that in a petition for relief from oppression or mismanagement made under Sections 397 and 398, the aggrieved person must set out all material facts and allegations in the petition itself and that any grounds of challenge evolved in course of arguments will not be considered by the court. There is nothing to show that the acts complained of cause unfair prejudice to the petitioner's interest. In Mohta Bros. (P.) Ltd. v. Calcutta Landing and Shipping Co. Ltd. (1970) 40 CC 119 it is held that in & petition for relief from oppression or mismanagement made under Sections 397 and 398, the complainant must give full particulars in such an application of the alleged acts of oppression or mismanagement. The court cannot proceed on vague and uncertain allegations and order roving investigation in the affairs of the Company. The court in a petition under Sections 397 and 398 must see whether by reasonable standards, the consequences of the conduct complained of would be regarded as having unfairly prejudiced the petitioner's interest, as held in Devaraj Dhanram v. Firebricks and Potteries Pvt. Ltd. (1994) 79 CC 722.
The board of directors at its meeting held on 21.03.2001, approved the transfer of 200 shares made by the daughters of the second respondent in his favour, which has not been challenged by the petitioners and, therefore, no relief can be granted in respect of those shares, in the light of a decision of the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. , wherein it has been held that holding that the transfer is truly complete and the transferee becomes the shareholder in true and full sense of the terms with all the rights of the shareholder, when the transfer is registered in the company's register. Similarly, the prayer for forfeiture of 295 shares held by the second respondent, without assigning any reason does not arise. There are no pleadings or allegations against the third respondent supported by any material for granting any relief in terms of the company petition. In view of the yeoman service rendered by the second respondent, the prayer for damages against him is wholly unjustified and so also the respondents 2 & 3 cannot be restrained from participating in the affairs of the Company in the absence of any valid ground made out by the petitioners. The first petitioner is not a doctor, but Ph.D. holder and the second petitioner is home maker. The fourth respondent is a Chartered Accountant. Therefore, the petitioners and the fourth respondent cannot run the hospital. For these reasons, no relief as urged by the petitioners would arise.
4. Shri M. Muthukumaran, learned Counsel reiterated that the fourth respondent opposed the allotment of impugned shares in exclusion of all other shareholders, resulting in his resignation and, therefore, he is not a party to the resolution approved by the remaining directors towards allotment of the shares in favour of the second respondent and liable to be aside.
5. Shri Thiruvengadam, learned Counsel in his rejoinder submitted: The company petitions in 21/1992 and 22/1992 before the High Court of Karnataka instituted by the first petitioner herein, seeking the liquidation of the Company and the partnership were, however, withdrawn, so as to settle the differences with the members of the Company. The company petition 33/1999 seeking for an order to wind up the Company came to be filed on account of its inability to pay the arrears of rentals. The civil suit filed before the City Civil Court, Bangalore by the first petitioner is to enforce the lease hold rights of the partnership firm. These proceedings are not in relation to the affairs of the Company and, therefore, no malafides can either be attributed to the first petitioner or denied any equitable reliefs to the petitioners. The second respondent cannot solely take credit for the achievements and progress made by the hospital. The second respondent does not undertake treatment of nephrology patients, but claims the responsibility for the arrangement entered into between Karnataka Nephrology and Transplant Institute and the Company, providing treatment of nephrology patients. Shri Thiruvengadam, learned Counsel pointed out that the certificate of posting belatedly produced by the second respondent along with additional statement of objections, after filing sur-rejoinder to show that notice was sent to the fourth respondent for the board meeting convened on 04.05.2005 to consider the request of the second respondent for allotment of impugned shares is a fabricated one and do not support the relevant recitals made therein. The Company has neither chosen to produce copy of the notice convening the board meeting held on 16.05.2005, for the purpose of, inter-alia, allotment of the impugned shares, nor does it contain the agenda relating to the allotment of shares. Hence, these must be ignored.
6. Before dealing with rival claims of the parties on the acts of oppression and mismanagement, it is necessary to consider the preliminary objections raised by learned Counsel. However, the charges of professional misconduct leveled against Shri Udaya Holla, senior partner of M/s Holla & Holla and the decisions cited in this behalf fall outside the domain of Sections 397 & 398 and therefore, not considered in the present proceedings.
The lawful entitlement of the petitioners as shareholders either for transmission of shares in favour of the second petitioner or for perseverance of the purported parity in shareholding, if remain established, cannot be denied merely on account of the litigious nature of the first petitioner and his father. The scope and object of Sections 397 & 398 are to provide relief in cases of oppression and mismanagement, thereby, regulating the conduct of the Company's affairs in future. The CLB's power to exercise jurisdiction under Section 397 or 398 cannot be defeated by mere technicalities. In this background, the decision in Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (Pvt) Ltd. and the other connected case laws cited by Shri Nandakumar, learned Counsel do not, in my view, lend support to the respondents so as to deprive the petitioners of their legal rights, if any, as shareholders of the Company.
By virtue of Section 397(2), the CLB has to form opinion as to whether the petitioners have made out any ground on the facts set out in the company petition, which would justify the making of a winding up order against the Company on just and equitable grounds, irrespective of any such specific averments in the company petition, as consistently held by this Board, including in G. Govindaraj v. Venture Graphics P. Ltd. (supra). The decisions in Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd.; Shanti Prasad Jain v. kaling Tubes Ltd. and Hind Overseas Private Ltd. v. Raghunath Prasad Jhunjhunwalla (supra) reiterate the principle that the petitioners in a petition under Section 397 must make out a case for winding up of the company on just equitable grounds, failing which no relief can be granted to the petitioners. Similarly, it has been held in In re: Thakur Hotel (Simla) Company Private Ltd. (supra) that any relief under Section 397 can be granted only when it is established that the company's affairs are being conducted in a manner oppressive to any member or members and if the facts prove that it would be "just and equitable" to make an order of winding up of the company, but the making of such an order would unfairly prejudice the members. Therefore, it has to be seen, without rejecting at the threshold, whether the facts pleaded in the company petition would justify the making of an order of winding up of the Company on just and equitable grounds. The claim of the respondents 1 to 3 that the petitioners do not satisfy the requirements of Section 399 must be examined in the light of the justification put forth by the petitioners. It is not under dispute that while the first petitioner holds 250 equity shares of the Company, Dr. Balaram held 500 equity shares and died intestate on 19.12.2001. The second respondent and (late) Dr. Balaram, being co-brothers, the former should be aware that the second petitioner and her two daughters are the legal heirs of the deceased Dr. Balaram, entitled for the shares left behind him. Nevertheless, the second respondent in his communication dated 20.05.2002, in response to the request made by the second petitioner for transmission of the shares of (late) Dr. Balaram, advised her, as per the decision of the board of directors, to take necessary steps and produce a succession certificate from a competent court of law, which was reiterated in his communication dated 11.12.2002. The reasons for insistence of the succession certificate are reflected in the minutes of the board of directors dated 04.12.2002, which read as under:
After deliberation, knowing the law suit by Dr. Raghunath at the instance of the father where Mrs. Balaram and her two daughters are made legal heirs and also there is no request from Dr. Balaram or any will of Dr. Balaram to execute the request. Board again unanimously decided that Smt. Balaram should be adviced to produce a succession certificate from a competent court of law at the earliest without delay in her favour so that the transmission of shares could be effected as may be empowered therein.
In terms of the requirement of the Company, the second petitioner and her two daughters, being the legal heirs of (late) Dr. Balaram, applied on 05.01.2004 before the Court of the City Civil Judge at Bangalore ("the Court") under Section 372 of the Indian Succession Act, for grant of succession certificate in favour of the second petitioner in respect of, inter-alia, the shares held by (late) Dr. Balaram. Accordingly, the Court by an order dated 03.07.2004 allowed the petition for issue of succession certificate in favour of the second petitioner. The succession certificate dated 03.07.2004 empowered the second petitioner to collect the amount in respect of the shares held by her deceased husband. In view of this, the succession certificate came to be amended, subsequent to filing of the present company petition, as per the Court order dated 18.07.2005, thereby authorizing the second petitioner to get the shares transferred in her name and in the name of her daughters. However, the succession certificate amended on 03.07.2004 got further amended by an order dated 03.01.2006 of the Court, by which the second petitioner has been authorized to get the shares in question transferred in her name. The amendments to the succession certificate in the case before me have been permitted by the Court of competent jurisdiction, and therefore, the decision in Re: Gagan Chandra Das (supra) that where an application for succession certificate is substantially defective, no certificate can be issued by allowing amendment to the application, will have no application to the facts of the present case. It shall be borne in mind that the Company had as early as on 20.05.2002 advised the second petitioner to take necessary steps and produce succession certificate, but the second petitioner and her daughters took the initiative for obtaining certificate after a lapse of two years in January, 2004 and obtained the latest amended succession certificate as late as in January, 2006. From this sequence of events, it is evident that (i) necessity of succession certificate as demanded is vindicated; (ii) delay complained of in effecting the transmission of shares is not wholly attributable to the Company; (iii) stand of the respondents 1 to 3 on recording the transmission of shares in the register of members without, however, opening a new folio in the name of the second petitioner; endorsement of transmission as well as cancellation of such endorsement on the share certificates remains justified; and (iv) accusation that the respondents 1 to 3 tampered the Company's records does not merit any consideration. In this connection, the decisions in Mrs. Nandita Bhardwaj v. Sapphire Machines Pvt. Ltd. and Kumar Exporters P. Ltd. v. Naini Oxygen and Acetylene Gas Ltd. (supra) dealing with different situations, are of little assistance to the petitioners. By virtue of Section 9 and Section 10 of the Hindu Succession Act, 1956, as rightly pointed out by Shri Nandakumar, learned Counsel, the shares held by Dr. Balaram, upon his demise, devolved upon his legal heirs, being the second petitioner and his two daughters, thereby each of them became entitled to one-third of the shares left by him, viz., 167 shares each, with an indefeasible right to get their names registered in the register of members of the Company and therefore, they could be treated to be members for the purposes of Sections 397, 398 and 399. This Board following the principles enunciated by the Supreme Court in M/s World Wide Agencies Pvt. Ltd. v. Mrs. Margarat f. Desor (supra) held in Kamala Rani Pandit v. Kalitara Glass Moulding Works (P) Ltd. (supra) that the legal representatives of a deceased member, whose name is on the register of members, are entitled to maintain a petition in respect of oppression and mismanagement in the affairs of the Company under Sections 397 and 398. The first petitioner admittedly holding 250 shares together with the second petitioner who is entitled to get her name registered in the register of members would, therefore, constitute one-tenth of the total number of members of the Company. It is on record that the succession certificate dated 03.07.2004 as amended by an order dated 03.01.2006 of the Court authorizes the second petitioner to get the shares of (late) Dr. Balaram, numbering 500, transferred in her name and deal with the same. A succession certificate does not confer absolute title and right on the holder and not a decree or order, taking away the right of succession as held in Employment Officer, Mandya v. S. Sevarinathan (supra), yet it shall be borne in mind that the second petitioner's daughters have relinquished their rights in respect of the shares of (late) Dr. Balaram in favour of the second petitioner, in terms of the averments contained in the memorandum of petition filed under Section 372 of the Indian Succession Act for grant of succession certificate thus:
It is submitted that 2nd and 3rd petitioners (daughters of second petitioner) have no objection in this Hon'ble Court granting Succession Certificate solely in favour of their mother 1st Petitioner herein (second petitioner). They have released their rights in respect of the Shares specified in Schedule 'A' in favor of 1st Petitioner and further have no objections for 1st Petitioner being inducted as Third Partner of firm mentioned in Schedule 'B'. They have filed separate affidavits to the above effect alongwith this Petition at Documents H and J. (para 6).
Under the above circumstances, the Company has to effect the transmission of 500 shares in the name of the second petitioner by virtue of the succession certificate as amended on 03.01.2006 and it will get a valid discharge in respect of the shares of (late) Dr. Balaram, in the light of the decision in Smt. Sarbati Devi v. Smt. Usha Devi (supra). Thus, the first petitioner holding 250 shares and the second petitioner havingbecome entitled for 500 shares account for 17% of the paid-up capital and constitute 10% of the total number of members of the Company, apart from constituting one-tenth of the total number of members, thereby satisfying the requirements of Section 399 of the Act. While according to the petitioners, the shareholding among various groups of members in the Company has been identical to the profit sharing ratio maintained from time to time in M/s Lake Side Medical Centre, a partnership formed in the year 1979, it is denied as fictitious by the respondents, viz. there are neither groups nor parity among the shareholders. In this connection, the stand taken by the respondents 1 & 2, in the earlier proceedings initiated by the first petitioner before the High Court of Karnataka assumes relevance. Accordingly, it was contended in the statement filed in CP No. 21/1992 and CP No. 22/1992 that the first respondent Company herein is not an extention of the partnership. There is absolutely no linkage financially or otherwise, taken on the basis of any relationship between the firm and the first respondent Company. The allotment of shares to members was not on uniform basis. There is no question of any permanent group or groups running the first respondent Company on partnership and permanent basis. The profit sharing ratio among the shareholders do not tally with the percentage of profits entitled under the partnership firm. No groups on partnership lines were involved in the first respondent company for the following reasons :
- there are only two signatories and directors in the Memorandum and Articles of Association of the said private company.
- two additional directors were co-opted only one and a half years later.
- Dr.Ganesh who is alleged to represent one group in the said private company was not made a director. Shares were allotted in his favour only in 1989 though he had invested at the inception and obtained clearance from RBI in 1987. He had to call an EGM thereafter to secure his appointment as a director.
- there are shareholders in the said private company and partners in the partnership who are in no way connected to any of the alleged five groups such as Dr. Balasetty and Dr. Ramesh.
The concept of groups and parity among the shareholders, as claimed by the petitioners herein, were under serious challenge even in the earlier proceedings. However, the above company petitions on the file of the High Court of Karnataka came to be withdrawn, without giving scope for any finding either on the concept of groups among the shareholders or on any parity on partnership lines. It is on record that in November, 1979 the partnership formed under the name of Lake Side Medical Centre stood reconstituted from time to time. It has to be borne in mind that during the year 1980, profits of the partnership were shared among Nanjundiah together with relatives, Mohanlal Khariwal with his relatives and Ganesh in the ratio of 50.00 : 16.66 : 33.33 percent which underwent changes in the year 1984 with the ratio of 47.05 : 17.65 : 23.53 percent respectively and Nirmala Ramesh and Balasetty came to hold 11.76 percent of profit sharing ratio, which remains without change. While Ganesh has been a partner since formation of the partnership, Nirmala Ramesh and Balasetty became partners only in the year 1984. The first respondent Company was incorporated in the year 1980 with Nanjundiah and Mohanlal Khariwal, each subscribing to 10 shares of Rs. 100/- each. However, in the year 1981 Nanjundiah and his relatives held 1400 shares constituting 70% and Mohanlal Khariwal and his relatives 600 shares accounting for 30% of the paid-up capital of the Company. During the year 1989, relatives of Nanjundiah got 600 additional shares, daughter of Mohanlal Khariwal 150 additional shares; Dr.Ganesh was allotted 1000 shares; Ramesh and Balasetty got each 250 shares. With these allotments in the year .1989, Nanjundiah and his relatives came to hold 47.05%; Mohanlal Khariwal with his relatives 17.65%; Ganesh 23.53% and Ramesh & Balasetty 11.76% of the paid-up capital of the Company, which has been disturbed on account of the impugned allotment in favour of the second respondent. Thus, while Nirmala Ramesh and Balasetty became partners in the year 1984, Ramesh and Balasetty became shareholders of the Company only in the year 1989. Similarly, while Dr.Ganesh has been a partner in the partnership ever since its constitution in the year 1979, but he was allotted 1,000 shares in the Company only in the year 1989. The profit sharing ratio as maintained among the partners since the year 1984, came to be introduced among the shareholders of the Company as late as in the year 1989, pursuant to the further issue of shares, in terms of the resolution of the board of directors made on 20.11.1989, which does not indicate that the shares were allotted on the lines of the profit sharing ratio of the partners. There is neither any explanation for the belated issue of further shares on such selective basis. Nevertheless, the second respondent cannot drawn any support from the decision in Anugraha Jewellers Ltd. v. K.R.S. Mani (supra) and justify the impugned allotment exclusively in his favour on the strength of the 1989 allotments, by which apart from family members of Nanjundiah, his wife was one of the beneficiaries. Thus, it is clear that the members of the Company never maintained the shareholding till the year 1989, keeping in line with the profit sharing ratio maintained in the partnership, but only thereafter, despite the fact that there is no material or arrangement or express agreement to establish that the members would maintain the shareholding in the Company in accordance with the profit sharing ratio as agreed among the partners in the partnership and further that the memorandum and articles of association do not make any reference to such arrangement on parity among the shareholders. At the same time, there is no doubt that Nanjundiah and Mohanlal Khariwal were holding shares of the Company since its incorporation, while Ganesh, Ramesh and Balasetty came to hold shares since the year 1989. I, therefore, find that the first respondent Company has been closely held by Nanjundiah and his relatives, Mohanlal Khariwal and his relatives, Ganesh and Ramesh & Balasetty since the year 1989 in the ratio of 47.05 : 17.65 : 23.53 and 11.76 percent respectively till the disputed allotment of 750 shares made in favour of the second respondent. Needless to add that among others, the second respondent, his wife, the petitioners form part of Nanjundaiah group, though there is now a fraction among themselves.
Keeping in view the above state of affairs, I have to examine the grievances of the petitioners in relation to the further issue of shares. While the stand of the petitioners is that the board of directors made the impugned allotment of shares to the second respondent in exclusion of all other shareholders with a view to garner the management and the valuable property of the Company, it is forcibly contended by the respondents 1 to 3 that the allotment was in due recognition of the yeomen service rendered by the second respondent towards the phenomenal growth of the Company, thereby the allotment in favour of the second respondent is for the benefit of the Company. It is on record that the second respondent, a Pediatric Pulmonologist having had served in USA for over a decade, has been managing the hospital profitably, as the Managing Director of the Company since the year 1990. The hospital has been recognized under the management of the second respondent by the National Board of Examinations, Nursing Council of India, Rajiv Gandhi University of Health Services, Paramedical Board of Karnataka, -Indian Medical Association and Karnataka State Pollution Control Board. The contribution and research Work done by the second respondent on children health, environment, health alleviation of hardship of traffic police and tobacco smoking etc. have been recognized by Government of India and Karnataka Government, while the latter honoured him with "Karnataka Rajya Parisara Prashasthi - 2000", which undoubtedly enhanced the reputation and prospects of the Company within as well as outside India, thereby bringing laurels and glory to the hospital as borne out by the innumerable documents brought on record. The board of directors at the meeting held on 04.12.2002, 25.08.2003, 04.06.2004, 03.09.2004 and 04.03.2005 appreciated the efforts of the second respondent towards the national and international acclaims achieved by the hospital. The fourth respondent, being the Chairman was a party to the deliberations at the aforesaid board meetings. It is observed that the board of directors at its meeting held on 16.05.2005 was desirous of allotting 750 shares, which remained unallotted, to the second respondent on account of selfless service rendered by him, pursuant to his letter of request dated 04.04.2005, which was, however, opposed by the Chairman, leading to his resignation from the post of Chairman. The whole purpose of seeking the unallotted shares by the second respondent to himself is clear from his utterances made in the course of the board meeting held on 04.03.2005, which run thus:
This achievement would not have been possible without any commitment, sincerity, hard work, loyalty to the company. I have done my best to bring up this institution to this stage while compromising my personal interest. Now when the company is in a healthy state I would like to look into my personal interest and the future. I am grateful for this trust reposed on me by Dr. Ganesh, Mrs. Nisha, Pavanchandra, Dr. Ramesh, Dr. Balashetty and Sri. Mohanlalji. I am even thankful for Col. V.K.K. Nair for strongly fighting for the company since 1992 with commitment. All of my friends in USA would like to stand by me for the decision, which I take. MD mentioned that when the company is in a healthy state he would like to sell his shares along with his friend in U.S.A. The second respondent, having decided to look into his personal interest, in his own words, would like to sell all his shares, when the Company is in a healthy state, which of course could be achieved on account of his hard work and loyalty to the Company. The exercise of power to issue further shares by the directors solely for their personal aggrandizement, without caring for the future interest of the Company has been disapproved by the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. (supra). The directors, in the present case, utilized the fiduciary powers over the shares not for the benefit of the Company, but for the purpose of consolidating and improving the voting power of the second respondent in exclusion of the remaining shareholders and cannot be allowed, in the light of the decisions in Rashmi Seth v. Chemon (India) Pvt. Ltd.; Pik Securities (P) Ltd. v. United Western Bank (P) Ltd. and Akbarali A. Kalvert v. Konkan Chemicals Pvt. Ltd. (supra). Further, the shares were allotted at the rate of Rs. 200/- for each share, when the book value of each share reportedly exceeded Rs. 4,000/-, thereby the directors have acted in breach of the fiduciary responsibilities. This would constitute a grave act of oppression as held in Mrs. Uma Pathak v. Eurasian Choice International (P) Ltd. and Mrs. Farhat Sheikh v. Esemen Metalo Chemicals Pvt. Ltd. (supra). The directors who are empowered by Article 6 of the articles of association of the Company to allot the shares at their discretion, in my view, as held in Kobian Pte Limited v. Kobian India Private Limited (supra) ought to have (a) exercised their power with utmost good faith for the benefit and interest of the Company, (b) ensured fair play in action in corporate management and (c) acted bonafide in exercise of their responsibilities in further allotment of shares. The proceedings of the board meeting held on 16.05.2005 reveal that the fourth respondent, as Chairman opposed the allotment of shares on the premise that it has to be decided by all the members at the general body of the Company. However, the remaining two directors asserting that their discretion vested in Article 6, not being violative of the articles of association of the Company cannot be questioned in the general body and allotted the impugned shares to the second respondent for his services rendered to the Company. It has to be borne in mind that the respondents 2 to 4 participated in the board meeting on 16.05.2005, but the fourth respondent protested against the allotment of shares and left the meeting, according to his version, and out of the remaining two directors, the second respondent was the interested director, but participated in voting on the allotment of shares to himself. Section 300(1) stipulates that the interested directors cannot participate nor vote in any contract or arrangement entered into on behalf of the Company. However, by virtue of Section 300(2)(a), the directors of private companies can count for a quorum at a meeting which is considering the subject matter of their interest and can also participate in voting. Further, allotment of shares is not in the nature of a commercial contract. Therefore, strictly speaking the allotment of shares to the second respondent is not illegal. Yet, in a petition under Section 397, it is not the legality or illegality of an action has to be examined. But, it is the probity and fairness towards the petitioners in the matter of their proprietary right as shareholders, with which the said decision is taken must be necessarily considered. It is an admitted fact that the shares were not allotted either on account of need of funds or with a view to comply with the provisions of law. Admittedly, the shares were allotted as a sort of reward to the excellent service rendered by the second respondent for the development of the Company, which incidentally affected the shareholding pattern in the Company prevailing since 1989. It is an admitted fact that the second respondent "would like to sell his shares along with his friend in USA". In such a situation, I am of the view that the consensus of the general body should have been obtained, especially when one of the three directors who is an independent person has expressed his reservation in the allotment of shares and who himself further^ advised obtaining consensus of the general meeting. This Board in Ashok Kumar Malpani v. Malpani Food Products. Private Limited (CP No. 22 of 2005- on the file of Principal Bench), while considering the issue of additional shares in a family company, on selective basis, by way of reward, categorically held that "the same should have been done with the concurrence of all the members". This principle squarely applies to the facts and circumstances of the case before me, wherein the first respondent, being a private limited company, is closely held by family members of Nanjundaiah, Mohanlal Khariwal, Dr. Ganesh, apart from Ramesh and Balasetty. Therefore, considering the allotment from the view of fairness and probity, I find that the said allotment is definitely an act of oppression against the petitioners. The allotment of shares by the directors in breach of their fiduciary responsibilities and trust reposed on them as clearly borne out by the averments pleaded in the company petition, satisfying the cardinal principles of pleading, as enunciated in Sayed Muhammed Mashur Kunhi Koya Thangal v. Badagara Jumayath Palli Dharas Committee and M. Chinnasamy v. K.C. Palanisamy (supra), is an act of oppression against the minority shareholders, which would justify the making of a winding up order against the Company on just and equitable grounds. However, such an order of winding up of the Company would no doubt unfairly prejudice the members, including the petitioners in view of the fact that the Company is admittedly a profit making company with huge reserves and properties. In such circumstances, the CLB has to consider whether the genuine grievances of the petitioners could be remedied with a view to regulate the conduct of the Company's affairs as held in Bhaskar Stoneware Pipes Private Ltd, v. Rajinder Nath Bhaskar and Jose J. Kadavil v. Malabar Industrial Co. Ltd. (supra). However, several of the acts of mismanagement complained of by the petitioner remain without being established. The petitioners have neither made out as to how their interests have been unfairly prejudiced on account of the purported acts of mismanagement in the affairs of the Company, in which case the CLB cannot invoke the jurisdiction of Section 398, as held in Devaraj Dhanram v. Firebricks and Potteries Pvt. Ltd. (supra). Similarly, the claim for either forfeiture of the shares held in the name of the respondents 2 & 3 or for imposition of penalty on the respondents 2 & 3 does not merit any consideration, especially when the allegations apart from lacking material facts are quite uncertain and no reliefs on these accounts can be considered, as held in P.S. Offshore Inter Land Services Pvt. Ltd. v. Bombay Offshore Suppliers and Services Ltd. & Mohta Bros. (P.) Ltd. v. Calcutta Landing and Shipping Co. Ltd. (supra).
In the right of my foregoing conclusions and in exercise of the powers vested in Section 402, I order as under:
(i) The Company and its directors shall effect the transmission of 500 shares held by (late) Dr. Balaram in the name of the second petitioner within thirty days of receipt of this order;
(ii) The allotment of 750 shares made at the board meeting held on 16.05.2005 in favour of the second respondent is set aside;
(iii) The Company shall refund the price of shares paid by the second respondent in his favour, upon which its share capital will stand accordingly reduced; and
(iv) The Company shall appropriately rectify its register of members consequent to implementation of the directions contained at serial Nos. (i) & (ii) hereinabove.
With the above directions, the company petition and the connected application stand disposed of. In view of this, all the interim orders are vacated. No order as to costs.