Company Law Board
Shri Rajesh Patil vs Moonshine Films Pvt. Ltd. And Ors. on 9 June, 2006
Equivalent citations: [2008]141COMPCAS482(CLB), (2006)6COMPLJ161(CLB)
ORDER
Vimla Yadav, Member
1. In this order I am considering Company Petition No. 90/2005 pertaining to M/s Moonshine Films Pvt. Ltd. and other respondents. M/s Moonshine Pvt. Ltd. was incorporated by the petitioner namely, Shri Rajesh Patil and respondent No. 2 namely, Shri Himanshu Gosai on 29.1.1997 as a private limited company having its registered office at 604B Building, President Plaza, Near RTO Ring Road, Surat. The main object of the company is to construct and operate a Drive in Cinema. This private limited company is nothing but a quasi-partnership formed by two individuals with equal shareholding and equal number of their family members as their nominees on the Board without any shares to their nominees. The respondent No. 3 namely, Shri Jaivant Virchand Shah was the only non-family director inducted into the Board without any shares only to give him confidence for the funds he promised to bring in for the project. The company purchased lands from private parties and Gujarat Industrial Development Corporation (GIDC) for its Drive in Cinema project and the said purchases were financed through unsecured loan of Rs. 42.39 lakhs from the petitioner; Rs. 18.85 lakhs from the respondent (Respondent No. 2); from borrowing of Rs. 44 lakhs from one Shri Nalinbhai Patel and Rs. 4.64 lakhs from Jaivant Shah both of them being NRI. All lands of the company were purchased before 30th Nov. 1997 and payments were completed by June, 1998. On 11.12.2002 Respondent No. 2 issued 8800 shares exclusively to himself and his wife (Respondent No. 4) jointly and on 8.1.2003 out of 2,90,000 shares further 2,89,520 shares were issued jointly to Respondent No. 2 and his father (Respondent No. 5) by conversion of unsecured loan of Rs. 17,90,200 standing in the name of Respondent No. 2 and by depositing the balance fund required amounting to Rs. 11,05,000 by way of deposit in the bank on 10.1.2003 (i.e. after the date of allotment and filing of return of allotment on 9.1.2003). By issue of shares on 11.12.2002 and 8.1.2003 the petitioner who was holding 50% of issued share capital as on 10.12.2002 was marginalized and reduced to a hopeless minority. Further, the petitioner and his nominees were removed from the Board of the company under Section 283(1)(g) on 30.1.2003. Hence, this petition under Sections 397/398 of the Companies Act, 1956.
2. The petitioner's case is that the alleged issue of further shares of 8800 on 11.12.2002 exclusively to Respondent No. 2 and his wife jointly in the guise of fulfilling the statutory requirement of minimum Rs. 1 lakh paid up share capital for private limited companies and further issue of 2,89,520 shares (out of 2,90,000) shares jointly to Respondent No. 2 and his father (Respondent No. 5) on 8.1.2003 were made only to marginalize and reduce the petitioner into a hopeless minority from holding of 50% of the issued share capital as on 10.12.2002. The issuing of shares on 11.12.2002 and 8.1.2003 amounted to acts of oppression against the petitioner as notices for such Board meetings wherein decision regarding such issuing of shares was taken were said to have been given only through UPC. No such notices were, infact, ever received by the petitioner and even the minutes for such meetings were forged. The justification given by the Respondents for issuing 8800 shares on 11.12.2002 was that issuing of further shares was necessitated for fulfilling the statutory requirement of minimum Rs. 1,00,000 paid up share capital for private limited companies in pursuance of Government's notification on 12.12.2000 through the company's Amendment Act, 2000. The petitioner's case is that for fulfilling this statutory requirement Respondent No .2 did nothing for 2 years and only on the penultimate day i.e. on 11.12.2002 the share capital was increased by alleged issue of 8800 shares by conversion of unsecured loans of R-2 and the return of allotment for the same was filed on 8.1.2003 with Registrar of Companies Gujarat after the petitioner left India on 25.12.2002. Further, it was pointed out that while converting unsecured loans of Rs. 18,85,000 lying in the exclusive name of Respondent No. 2 for joint allotment of shares to Respondent No. 2 and Respondent No. 4(Respondent No. -2's wife) was an illegality also. The undated notices said to have been sent through UPC for Board's Meetings held on 15.10.2002 and 11.12.2002 were never ever received by the petitioner. It was argued that the undated notices and the UPC certificates show that the notices were subsequently generated by forgery and fraud to show that notices were sent to the petitioner and his family members on the Board of Directors. It was pointed out that the respondents plea that the petitioner was reluctant at the alleged Board meeting held on 25.9.2002 to subscribe for further shares by conversion of his unsecured loans to take care of statutory requirement of issuing of 8800 shares is unbelievable and ludicrous. It was argued that since when the petitioner had brought in Rs. 42,39,324 as unsecured loans as on 31.3.1999 vis-a-vis Rs. 18,85,000 brought in as unsecured loan by Respondent No. 2 on that date, and further that the petitioner had brought in further amount of Rs. 32,39,324 thereafter till date, it is completely inconceivable that the petitioner was not ready to risk Rs. 44,000 for 4400 shares on 25.9.2002. Further, it was pointed out that on 8.1.2003 by issuing of 2,89,520 shares jointly to Respondent No. 2 and his father (Respondent No. 5) was again an illegality of converting unsecured loans in a single name (Respondent No. 2's) into shares with joint names of Respondent No. 2 and Respondent No. 5 besides the same amounting to oppression to the petitioner as no notice was ever given to the petitioner and his nominee directors for such Board meetings and further issuance of shares. The shares were issued jointly by conversion of unsecured loan of Rs. 17,90,200 standing in the name of Respondent No. 2; and the balance required funds amounting to Rs. 11,05,000 were deposited in the bank only on 10.1.2003 (i.e. after the date of allotment and filing of return of allotment on 9.1.2003). Further that on the date of alleged allotment on 8.1.2003 the company did not have even application money required funds in its hand and the return of allotment was filed on 9.1.2003 itself. It was pointed out that when the petitioner inspected the record of Registrar of Companies the fraudulent issue and allotment of further shares and removal of petitioner and his family members from the Board of the company came to the knowledge of the family members as late as in March 2004. It was argued that cessation as being directors of the company in respect of the petitioner and his family nominees was illegal and was an act of oppression against the petitioner. The notices said to have been sent under post certificates (UPC) are invalid as a proof of service as the UPC can be procured at any point of time as held in para 6 of Supreme Court's judgment in Shiv Kumar v. State of Haryana reported at . The said ratio was followed by the apex Court in the case under Companies Act reported as (2003) 9 ILD 95 (SC)-M.S. Madhusoodhanan v. Kerala Kaumudi Petition Ltd. (paragraph 23.17). The ratio in Shiv Kumar v. State of Haryana (Cited Infra) has been followed by the Honourable CLB in a long line of decision namely, Satish Chandra Sanwalka and Ors. v. Tinplate Dealers Association Petition Ltd and Ors.(2001) 3 Comp LJ 284 (CLB); S. Ajit Singh and Anr. v. DSS Entreprises Petition Ltd and Ors. (2001) 4 Comp LJ 421 (CLB); Deepak C Shriram and Ors. v. General Sales Ltd and Ors. (2001) 4 Comp LJ 450 (CLB) and Shankarlal Gilada v. Kapricon Sleeper Works (P) Ltd reported in (2005) 5 Comp LJ 280 (CLB). Further, it was pointed out that the respondents indulged in mismanagement by appointing M/s Kothari and Company as new auditor on 24.9.2003 within two days of resignation of M/s B.T. Shah and Company - earlier auditor who resigned on 22.9.2003 due to non production of books of accounts by Respondent No. 2 to the auditor for conducting the audit for the year ended on 31.3.2003. It was emphasized that the respondent acted in a most oppressive manner and against the interest of the company and the petitioner group. The respondent No. 2 extended the financial year 2002-2003 to 15 months (until 30.6.2003) after ensuring that the statutory auditors M/s B.T. Shah resigned out of frustration. It was alleged that Respondent No. 2 did not produce the books of accounts and other documents before the first auditor only to avoid the first auditor getting knowledge of the illegal share issues; introduction of 48 new members and removals under Sections 283 (1)(g), etc indulged by Respondent No. 2 during December, 2002 and January, 2003 by forgery and fraud. The extension of financial year 2002-2003 to 15 months after the resignation of the first auditors, it was pointed out, was malafide. Further, the petitioner relied on the case of Jagjit Singh Chawla and Ors. v. Tirath Ram Ahuja Ltd. and Ors. (2002) 2 Comp LJ 72 (CLB); Dale and Carrington Investment P. Ltd. v. P.K. Prathapan (2004)4 Comp LJ (SC) 1; and V.B. Thirumalai and Ors. v. Best Ventures Trading P, Ltd (2004)4 Comp LJ (CLB) 593 to prove its case that Respondent No. 1 company was nothing but a quasi-partnership formed by the petitioner and Respondent No. 2 as a private limited company to take advantage of the principles of limited liability. As regards removal of petitioner and his family members from directorship under Section 283(1)(g) the petitioner relied on the ratio of judgment in S.T. Ganapathy Mudaliar and Anr. v. S.G. Pandurangan and Ors. (1999) 1 Comp LJ 350 and it was further argued that the respondents reliance on Calcutta High Court's judgment in Ruby General Hospital reported in (2006) 126 Company Cases 1 (Cal) and the prayer for non restoration of the directorships of petitioners' group is illegal in view of the settled law of the land vide Apex Court's judgment in Dale and Carrington Investment P. Ltd. v. P.K. Prathapan(2004)4 Comp LJ (SC) 1 and in view of the judgment in Jagjit Singh Chawla and Ors. v. Tirath Ram Ahuja Ltd. and Ors. (paragraph 20-21) (2002) 2 Comp LJ 72 (CLB) wherein application of partnership principle by Allahabad High Court even to a listed company has been discussed by Company Law Board. The counsel also pointed out to the distinguishing features between Ruby General Hospital's case and petitioner's case. Further the petitioner specifically relied upon paragraphs 37,49, 79-81 of the judgment in Deepak C. Shriram and Ors. v. General Sales Ltd and Ors. (2001) 4 Comp LJ 450 (CLB) In view of the foregoing, the petitioner prayed that ;(i) the illegal share issue of 11.12.2002 be sustained only due to legal requirement of paid up capital of Rs. 1 lakh for private limited companies under the Companies Act subject to 4,400 shares being ordered to be transferred by respondent No. 2 to petitioner by conversion of his unsecured loans; (ii) 2,90,000 shares issued on 8.1.2003 be declared as null and void and the names of 48 persons be struck off form the register of members; (iii) the removal of petitioner and his family members from the Board under Section 283(1)(g) on 30.1.2003 be set aside and their directorship restored; (iv) costs of the petition be awarded to the petitioner; and (v) any other consequential or incidental relief(s) be awarded to the petitioner as may be deemed fit in the facts and circumstances of the case. Rebutting the preliminary objections to the petition, the petitioner argued that as regards the objection that in terms of Section 399 of the Companies Act the petitioner does not have 10% shares on the date of filing the petition, that from 29.1.1997 to 11.12.2002 both the petitioner and Respondent No. 2 had equal number of shares and no other person was holding any shares in the company until 11.12.2002. The exclusion of the petitioner from the issue of 8800 shares on 11.12.2002 and further issuance of 2,90,000 shares on 8.1.2003 again to the exclusion of the petitioner was illegal and ab initio void as it was done malafide to marginalize and reduce the petitioner to a hopeless minority from holding of 50% of issued share capital as on 10.12.2002. Hence, it was argued, that the increase in the share capital made on 11.12.2002 and 8.1.2003 cannot be taken into consideration for considering the 10% limit for maintainability under Section 399 of the Act. The petitioner relied on the ratio in paragraph 10 of the case reported as Navin B. Patel and Or. Bhoomi Builders P. Ltd. and Ors. (2005) 5 Comp LJ 273 (CLB). As regards to the objection that criminal complaint No. 475 of 2005 filed by petitioner before JMFC Surat, being identical to the present petition, it was clarified that the Criminal Complaint was only against Respondent No. 2 and under the Indian Penal Code and further that the said criminal complaint is not for any other relief sought in the petition under Sections 397 & 398 of the Act. Further, with regard to the objection of filing of winding up company petition No. 149 of 2004 in the High Court of Gujarat it was pointed out that the said petition was filed due to incorrect legal advice and hence the same has been withdrawn. It was argued that the principle of res judicata with regard to winding up petition would not apply. For this, the petitioner relied on the following case laws : Devaraj Dhanaram v. Firebricks Potterres P. Ltd. and Ors. (2000) 1 Comp LJ 398 (karn); Deepak C. Shriram and Ors. v. General Sales Ltd. and Ors. (2001) 4 Comp LJ 450 (CLB) (paragraph 43); Namita Gupta v. Cachar Native Joint Stock Company Ltd. and Anr. (2002) 2 Comp LJ 88; and B.M. Jain & Sons Co P. Ltd. v. Bombay Cable Car P. Ltd. and Ors. (2001) 1 Comp LJ 468 (paragraph 11). As regards the ground of law of limitation being applicable for filing the petition under Section 397, petitioner emphasized that no time limit could be applied to the petition challenging allotment of shares allegedly made on 11.12.2002 and 8.1.2003 and the removal of the petitioner and his nominees from the Board under Section 283(1)(g) on 30.1.2003, as the oppressive effects arising out of the said allotment of shares and removal of directors are continuous and perpetual. The petitioner contended that the ratio in Tea Brokers' Case (1998) 5 Comp LJ 463 (Cal) relied upon and applied in paragraph 24 of Ashok Kumar Oswal and Anr. v. Panchsheel Textile Manufacturing and Trading Co P. Ltd (2002) 3 Comp LJ 224 (CLB) applied to his case as well. It was further pointed out that the admission of 48 Members each scattered as far as Gandhi Nagar to Mumbai with 10 shares to each of them on 8.1.2003 based on a stereo typed formatted application form printed from the same computer with the same date (10.12.2002) (evidenced by the application in pages 370-417 of exhibit of affidavit in reply) shows that the said 48 persons were introduced to reduce the petitioner into a hopeless minority in the event of voting by show of hands. The petitioner relied on the decision in Prabhu Dayal Chitlangia and Anr. v. Trinity Company Associates P. td and Ors. (1999) 4 Comp LJ 514 (CLB). Further it was pointed out that Sh. J.V. Shah was never involved in the formation of the company or its activities. He was inducted into the Board only because of he promised to bring substantial funds to the project and he was merely a sundry creditor for Rs. 4,64,000/- He was never involved in any work of the company, nor any Board Meetings were held during his visit to India. Further it was pointed out that leave of absence has always been granted to Sh. J.V. Shah even without any application in this regard while the same facility was denied to the petitioner and his family members. It was emphasized that the non production of any original records in regard to notices of meeting; minute books; leave of absence; attendance registers and dispatch registers clearly point to utter falsehood of the alleged meetings during 25.9.2002 to 30.1.2003. Further pointing to the affairs of the company, the petitioner drew my attention to the cash balance of the company running into nearly Rs. 7 lakhs being kept as "Cash in hand" since 31.3.2000 and a Rs. 12,000/- which has been kept in the bank account of the company showing that the company is being run as Respondent No. 2's personal fiefdom and hence mere non debit of air ticket fare to company account cannot prove that the petitioner's visit in London has not been in connection with company's work. As regards the Respondent plea that it was after Gujarat Government's notification dated 2.9.2004 regarding de-reserving the company's land that made the petitioner withdraw winding up petition filed against the company in July 2004 and file a company petition with the Company Law Board. The petitioner argued that the de-reservation of the land had already come vide Government's notification dated 17.5.2001. The Respondents objected to the petitioner reliance on the notification dated 17.5.2001 as the same had not been appended to the C.P. No. 90 of 2005.
3. Counsel for the Respondents raised preliminary objections stating that the petition is not maintainable. Firstly, because the petitioner holds only 600 shares from out of 3 lakhs equity shares of the company which amounts to only 0.2 % of the total issued, subscribed and paid up capital of the company. It was pointed out that the petitioner is only one of the said 50 share holders of the company. The petitioner holds less than 1/10 of the issued, subscribed and paid up capital of the company and is neither 1/10 of the total number of the shareholders of the company. Therefore, it was argued that the petitioner does not hold the required qualification under Section 399 of the Act to file petition under Sections 397 & 398 of the Act. Secondly, it was vehemently contended that the petitioner has concealed very material facts. It was pointed out that police complaint filed by the petitioner on identical grounds with Police Commissioner, Surat has not been disclosed to the Company Law Board. Thirdly, it was pointed out that the petitioner had filed a winding up petition against the company vide C.P No. 149 of 2004 in the High Court of Gujarat and Ahemdabad in July 2004 and the same was withdrawn subsequently when the Urban Development and Housing Department of the Govt. of Gujarat published a development plan for Surat whereby de-reserving the land vide their notification dated 2.9.2004. This fact of filing and withdrawing of the winding up petition was not disclosed to the Company Law Board. Fourthly, it was argued that a person who seeks winding up of a company cannot be allowed to file a petition under Sections 397 and 398 of the Act which is an equity jurisdiction. Fifthly, it was pointed out that the petition is also bad for non-joinder of necessary parties as there are 45 other shareholders of the company besides Respondent Nos. 2, 4, 5 & 6. On merits it was argued that issuing of 8800 shares on 11.12.2002 was necessitated to comply with the requirement of increasing the paid up capital of the company to Rs. 1 lakh from Rs. 12,000/- as required by the provisions introduced by the Companies (Amendment) Act, 2000 (53 of 2000). It was informed that since the petitioner was unwilling to contribute funds for further shares in the company as indicated in Board's Meeting dated 25.9.2002 by the petitioner and Respondent No. 3, further issue of 8800 shares is perfectly legal, bonafide and in the interest of the company. As regards further issue of 2,90,000 shares the respondent's pleaded that it is none of the concern of the petitioner as the petitioner had lost all interest in the company and did not want to commit or contribute anything further towards the capital of the company. It was pointed out that on 25.12.2002 the petitioner left India to permanently settle down in UK. He even withdrew Rs. 10 lakhs in April 2002 from his unsecured loans to the company (though he falsely contends that he withdrew the said huge funds to go to London for the company's work to scout for NRI funds for the company's project). The respondent also drew my attention to the school leaving certificates of the petitioner's children in India and their admission in govt. school in Scotland as well as petitioners opening of a Bank account in Scotland with Hong Kong and Sanghai Banking Corporation Ltd. and evidence regarding employment of the petitioner and his wife at a local Grocery/ Convenience Store in Scotland. All this was referred to for proving that the petitioner has left the company and by his conduct clearly evinced an intention not to make any further investment in the company and is only interested in realizing the value of his investment and that despite being offered shares, petitioner refused to subscribe the issue. As regards the petitioner ceasing to be Director it was pointed out that the petitioner has not been removed from the Directorship of the company rather he ceased to be Director of the company by operation of law under Section 283(1)(g) of the Act as he absented himself without obtaining any leave of absence in all the four meetings of Board of Directors held on 15.10.2002; 11.12.2002; 8.1.2003; and 30.1.2003. The notices for these meetings, it was pointed out, were sent to the petitioner and his other family members under certificates of posting. In any case, it was further argued, the petitioner's grievance of ceasing to be director of the company under Section 283(1)(g) of the Act has no cause of action under Sections 397 & 398 of the Act. For this grievance he ought to have filed a Civil Suit and not the petition under Section 397 & 398 of the Act. The Respondent relied on the decision in Ruby General Hospital and Ors. v. Dr. Kamal Kumar Dutta and Anr. reported at (2006) 129 Comp. cases p.1. As regards the petitioner's contention that the company is a quasi-partnership between the petitioner and his family and second Respondent and his family it was pointed out that the petitioner's contention is baseless as from the inception of the company there are outsiders involved in the company either by way of shareholders or direct investors. It was pointed out that during the entire period of the company's existence (except for a short period of five months) the Board of Directors of the company has always included person/persons other than from the family of the petitioner and Respondent No. 2. It was argued that the petitioner has failed to establish that there is any act of oppression or mismanagement and that in order to succeed in a petition under Sections 397 & 398 of the Act, the petitioner has to establish that (a) the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to him and (b) that to wind up the company would unfairly prejudice him but that otherwise the facts would justify making of a winding up order on the ground that it was just and equitable that the company should be wound up. It was argued that the petitioner has completely failed to establish any of the above conditions, both the conditions being concurrent should be established before any order can be passed in favour of the petitioner in a petition under Sections 397 & 398 of the Act.
4. I have considered the pleadings and arguments of the counsels for the Petitioner and the Respondents. Petitioner's case is that of "oppression" and "mismanagement", Increasing of authorized share capital and allotment of additional shares is alleged to be malafide besides not being in the interest of the company and being in violation of the proper and legal procedure prescribed. By manipulating the allotment of shares; by removal of Petitioner from the Directorship; the Respondents gained control of company and mismanaged the affairs of the company. According to the petitioner though this is a fit case of winding up, the winding up order would clearly prejudice the interests of the petitioner because of the fact of illegal reduction in his shareholding. Respondent's case is that the petitioner's entire case is for price of his shares and unsecured loans; the petitioner has not come with clean hands - having lost interest in the continuation of the company by shifting to UK for two years; cessation of petitioner and his family nominees from directorship cannot form the subject matter of a complaint under Sections 397 & 398 of the Act; no case has been made out for winding up; besides the preliminary objections of eligibility under Section 399 of the Act and the petition is barred by limitation.
5. On consideration of the facts and circumstances of the case, I find that the Respondents have failed to refute the allegations against them. Preliminary objections raised by the Respondents are not tenable. As regards the objection that the petitioner holds less than 10% of the total issued, subscribed and paid up capital of the company nor does he constitute 1/10 of the total number of shareholders of the company, the petitioner has claimed holding of 50% of issued share capital as on 10.12.2002 before issuance of 8800 shares on 11.12.2002 and 2,90,000 shares on 8.1.2003 allegedly made only to marginalize and reduce the petitioner into a hopeless minority. The percentage of 0.2% calculated by the Respondent is based on the share capital of the company after the issue of further shares impugned in the petition. This Board has always taken the view that if shareholding of the petitioners is reduced below 10% on account of further issue of shares and if the issue of further shares is also challenged in the petition, then, the petition will not be dismissed as not maintainable in terms of Section 399. Instead, the allegation relating to the issue of further shares would be examined first as to whether the same is an oppressive act and it is found to be so, then only other allegations in the petition would be examined. In the present case, the petitioner's plea is that his holding was 50% of the issued share capital as on 10.12.2002 before the Respondents allegedly issued further 8800 shares on 11.12.2002 and 2,90,000 shares on 8.1.2003 illegally only to marginalize and reduce the petitioner into a hopeless minority. Therefore, this petition cannot be dismissed at the threshold before examining as to whether the issue of further shares would be considered to be an act of oppression against the petitioner. As regards the second preliminary objection that the petitioner did not disclose the criminal complaint filed under the Indian Penal Code before the Police Commissioner, Surat, I am inclined to accept the petitioner's contention that the said criminal complaint is not for any of the reliefs prayed in the petition under Sections 397/ 398 of the Act. It is true that the same cause of action may give rise to civil and criminal proceedings as per the law. Only because the petitioner chose to file a criminal complaint also against Respondent No. 2, the Petitioner cannot be precluded from taking action under Sections 397 & 398 of the Act to protect his proprietary and personal interest affected due to the acts of Respondent Nos.2 to 6. As regards the Respondent's plea of application of principle of res judicata, the petitioner having filed Company Petition No. 149 of 2004 in the High Court of Gujarat seeking winding up of the company (this petition was subsequently withdrawn by the Petitioner), is not tenable in view of the petitioner's reliance on judicial precedents referred to above. As regards the Respondents preliminary objection that the petition is barred by limitation as the petitioner was aware of the acts challenged latest by September 2003 when he took inspection of the Registrar of Companies records is not tenable in view of the fact that the oppressive effects arising out of the allegedly illegal allotment of shares and removal of Directors are continuous and perpetual. Further, under the provisions of Companies Act, the Company Law Board would have powers under the Code of Civil Procedure only in respect of the matters specified in Sub-Section (4C), (a) to (f), of Section 10E of the Act. The Compnay Law Board is a quasi-judicial authority to be guided by the principles of natural justice in the exercise of its powers and discharge of its functions under the Act and it shall act in its discretion. On the plea of application of the Limitation Act to the proceedings before the Company Law Board it has been consistently held by the Company Law Board that the Limitation Act as applied by the civil court is not applicable to the proceedings before the Company Law Board, a quasi-judicial authority and not a court in the strict sense of the term. However, this does not preclude Company Law Board from rejecting/dismissing petitions on account of delay/latches in appropriate cases. The petitioner's reliance on the decision in Tea Brokers' Case (1998) 5 Comp LJ 463 (Cal) relied up and applied in paragraph 24 of Ashok Kumar Oswal and Anr. v. Panchsheel Textile Manufacturing and Trading Co. P. Ltd (2002) 3 Comp LJ 224 (CLB) is well placed. In the present case I have no hesitation in rejecting the Respondents plea of action being barred by limitation.
6. Next, it was contented that in a proceeding under Section 397/398 the petitioner should come with clean hands failing which he should be denied relief. The Respondents have not been able to substantiate their plea of unclean hands. The counsel for the petitioner contended that the instances of unclean hands have to be with respect to the affairs of the company and even otherwise the instances of unclean hand are unfounded. I agree that it is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Section 397/398. In Sri Kanta Datta Narasimharaja Wadiyar v. Venkateshwar Real Estates Private Ltd. (1991) 3 Comp. LJ 336 (Karn) : (1991)72 Comp Cas 211 (Karn), it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petitioner would constitute a gross abuse of the process of Court, and the petitioner is not entitled for any relief under Sections 397 and 398. It also held that the conduct of the parties in other proceedings could also be taken into consideration. However, it was held that the conduct of the petitioner before filing of the petition may not be a relevant factor. Regarding the principle of equity in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd 44 CC 390 the Division Bench of Delhi High Court has held that while exercising equity jurisdiction, which clothes the Court with discretionary powers "... the discretion cannot be exercised arbitrarily or according to one's own will or whim. It has to be regulated by law, allay its rigour advance the remedy and to relieve against abuse. The court, therefore, exercising equity jurisdiction, cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands..." I am inclined to agree with the counsel for the petitioner. The instances of unclean hands have to be with respect to the affairs of the company. In the present case the instances pointed out are not in the affairs of the company. Even otherwise, the instances of unclean hands are unfounded.
7. As regards respondents' reliance on the decision of the Supreme Court in Bagree's case (Hanuman Prasad Bagree Cereals P. Ltd (2001) 2 Comp LJ 392 (SC) to submit that unless the petitioners establish that the company is liable to be wound up on just and equitable grounds, and that such winding up would not be in the interest of the petitioners, no relief could be granted under Section 397 of the Act, this Board has been taking a view that this principle cannot be strictly applied in family companies. A reading of that judgment would show that the court, after observing that the petitioners had not established any act of oppression or mismanagement in the affairs of the company further observed (para 3 at page 394 of Comp LJ).
Therefore, we have to pay our attention only to the aspect that the winding up of the company would unfairly prejudice the members of the company who have the grievance and are the applicants before the court and that otherwise, the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. In order to be successful on this ground, the petitioners have to make out a case of winding up of the company on just and equitable grounds. If the facts fall short of the case set out for winding up petition on just and equitable grounds, no relief could be granted to the petitioners.
It found that the only substantive allegation relating to the removal of the petitioner as a director could be agitated in a suit, and this would not justify winding up on just and equitable grounds. Normally, as a principle, directorial complaints cannot be a ground in a petition under Section 397/398 as the complaints in such a petition should be relating to the rights qua a member. While, as a proposition, it is so in normal circumstances, yet, in cases of family companies or companies in the nature of partnership, depending on the facts of the case, directorial complaints have been adjudicated by this Board in Section 397/398 proceedings. In the present case, the petition is a composite petition wherein not only directorial complaints are made, but also complaints relating to conversion of 50% shareholder into minority. Further, when the promoter having high stake in the company complaint of his exclusion from the management, I feel that equity demands that his complaint should be inquired into the present proceedings. However, in the present case, the claims of the petitioners are of their claim of quasi-partnership and by denying the petitioner and his nominees representation on the Board, they are being oppressed by the majority shareholders. In case of dissolution of a partnership, the just and equitable grounds are wider than the just and equitable grounds applicable in the case of winding up of a company. Similar objection was examined by this Board in Anupar Chemicals case (Dipik G. Mehta v. Shree Anupar Chemicals P. Ltd. (1999) 2 Comp LJ 539 CLB), Supra, as follows (para 30 at pages 555 and 556 of Comp. LJ) -
The learned Counsel for the respondents submitted that the petitioners have not established that grounds exist for winding up of the company on just and equitable grounds. He also relied on the judgment of Bombay High Court that, on similar allegations, the court held that there was no ground to wind up the company on just and equitable grounds. We would like to differentiate between a winding up proceeding and a proceeding under Section 397. In a winding up proceeding on just and equitable grounds, the court may order winding up once the grounds are established. However, in a section 397 petition, which is alternative to a winding up petition first, one has to establish that there is oppression. Without the element of oppression being established, the question of grant of relief does not arise. This is what was decided by the CLB in Associated Limestone case. However, it is difficult, if not impossible to lay down specific instances alone would be considered to be acts of oppression. Whether an act is an oppression or not would depend on "the facts of a case. Since Section 397/398, proceedings are alternative to a winding up proceedings, it is not that only those in which are considered to be just and equitable in a winding up proceedings to be the grounds in a Section 397/398 petition. In the Bombay proceedings, the court held that since there was no dead lock in the management, the company could not be would up on just and equitable grounds. It did not examine whether allegations of oppression had been established. That is why the court itself suggested that the petitioners may initiate the present proceeding under Section 397/398. It is worthwhile referring to George Meyer v. Scottish Cooperative Wholesale Society (1954) Scottish Cas 381 - referred to in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1982) 1 Comp LJ (SUPREME COURT) : (1981) 51 Comp Cas 743 (SUPREME COURT), wherein it was held-
Although the words, 'oppressive' is not defined, it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are treating the company and its affairs as if they were their own property to the prejudice of the minority shareholders and in which just and equitable grounds would exist for the making of a winding up order...but in which the alternative remedy provided by Section 210 by way of an appropriate order might well be opened to the minority shareholders with a view to bring to an end the oppressive conduct on the minority.
In the present case, the petitioner has established oppression and since the principles of partnership are applied in this case, denial of legitimate representation could be a just and equitable ground for dissolution of a partnership and, therefore, the company could be wound up on just and equitable grounds. In the present case winding up of the company would not be in the interest of the company and the shareholders. However, proceedings under Sections 397/398 are beneficial provisions to get grievances redressed without recourse to winding up of a company since such winding up would be prejudicial to the interests of the members. Therefore, the prayer of the petitioner and his nominees for a representation on the Board deserves to be granted.
8. As regards the act of oppression the act of issuing of 8800 shares exclusively to Respondent No. 2 and his wife jointly (Respondent No. 4) allegedly on 11.12.2002 in the guise of fulfilling the statutory requirement of minimum Rs. 1 lakh paid up share capital for private limited companies, the petitioner's contention is found to be correct that the said statutory requirement was notified by Government as early as 12.12.2000 through the Companies (Amendment) Act, 2000 and the Respondent No. 2 did nothing for two years and only on the penultimate day namely 11.12.2002 the share capital was increased by alleged issue of 8800 shares by conversion of unsecured loans of Respondent No. 2; and that the return of the allotment for the same was filed on 8.1.2003 with the Registrar of Companies, Gujarat after the petitioner left India on 25.12.2002. I find that this allotment was not only malafide but also done in violation of the proper and legal procedure prescribed. The petitioner is said to have been sent notice for this Board Meeting through UPC. The onus regarding proper service has not discharged by the Respondents. The Respondents plea that the petitioner was disinterested in subscribing to further shares is also unfounded. The unsecured loan standing exclusively in the name of Respondent No. 2 was converted into the share capital of Respondent No. 2 and his wife (Respondent No. 4) illegally into joint names. Further more, the alleged issue of 8800 share is said to have been issued on 11.12.2002 much before the petitioner left India for UK on 25.12.2002 but there is no justification provided for delay in filing the return of allotment with the Registrar of Companies on 8.1.2003 at the back of the petitioner who continued to be on the Board of the company even if Respondents own plea of his vacation of Office of Director by operation of law w.e.f. 30.1.2003 is accepted. However, this illegal issue of 8800 shares on 11.12.2002 is being sustained only due to legal requirement of raising the paid up capital to Rs. 1 lakh the Respondents being a private limited company under the Companies Act, with the directions that 4400 shares out of the total 8800 shares issued on 11.12.2002 be transferred by Respondent No. 2 to petitioner by conversion of his unsecured loans.
9. As regards further issue of 2,90,000 shares allegedly made on 8.1.2003 {2,89,520 shares jointly to Respondent No. 2 and his father (Respondent No. 5), and the balance 480 shares to 48 members(10 shares each) scattered as far as Gandhi Nagar to Mumbai based on a stereo typed formatted application form printed from the same computer with the same date (10.12.2002)}, the petitioner's contention is found to be correct that the said 48 persons were introduced to reduce the petitioner into a hopeless minority in the event of voting by show of hands. Besides, this allotment to Respondent Nos. 2 & 5 also suffered from illegalities and lack of proper procedure followed for allotments. The illegality of converting unsecured loans in single name in Respondent No. 2's into shares with joint names of Respondent Nos. 2 & 5 was again repeated as on 11.12.2002. Furthermore the shares were issued jointly by conversion of unsecured loan of Rs. 17,90,200 standing in the names of Respondent No. 2 and the balance required funds of Rs. 11,05,000 was deposited into bank only on 10.1.2003 (i.e. after the date of allotment and filing of return of allotment on 9.1.2003). It is noticed that on the date of alleged allotment on 8.1.2003, the company did not have even application money in its hand and the return of allotment was filed on 9.1.2003 itself. Thus allotment was made allegedly on 8.1.2003 and return of allotment was filed on 9.1.2003 itself without even having the required funds/ application money with the company. Besides the illegality and improper procedure followed for alleged allotment on 8.1.2003 no proper notice was given to the petitioner who had not vacated office as Director even by Respondent's own plea i.e. he vacated office w.e.f. 30.1.2003. The notice for the Board Meeting claimed to have been sent through UPC has not been received by the petitioner who claims that the notice as well the as minutes for such meetings were forged. Furthermore, in view of the doctrine of "proper purpose", it follows that in the matter of issue of shares, Directors owe a fiduciary duty to shareholders of the company to issue shares for a proper purpose. The fiduciary capacity within which Directors have to act enjoins upon them a duty to act on behalf of the company with utmost care and skill and due diligence and in the interest of the company. They have a duty to make full and honest disclosure to shareholders regarding all important matters relating to the company. Shares issued for maintenance and acquisition of control over the company is an extraneous purpose, and, therefore, cannot be upheld. In Needle Industries' case the Supreme Court referred to some old English decision with approval. Punt v. Symons was quoted at SCC p.394, para 105 in which it was held:
Where shares had been issued by the Directors, not for the general benefit of the company, but for the purpose of controlling the holders of the greater number of shares by obtaining a majority of voting power, they ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used.
Piercy v. S. Mills and Co. Ltd. applied the same principle while holding; All ER p.316 E-E. The basis of both cases is, as I understand, that Directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholding.
The principle deduced from these cases is that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld. The conclusion is inevitable that neither was the allotment of additional shares in favour of respondents bonafide nor was it in the interest of the company nor was a proper and legal procedure followed to make the allotment. The motive for the allotment was malafide. On facts, impugned allotment of additional shares was done with the sole object of gaining control of company by becoming majority shareholder was clearly an act of oppression on the part of the respondents. Moreso, as the meetings passing such resolutions were held at the back of the petitioners without giving proper notices and without following proper procedure. Regarding service of notices, the respondents relied on certain certificates of posting issued by the postal authorities. I have not felt safe to decide the controversy of service of notice on the basis of the certificates. It is not difficult to get such postal seals at any point of time. Onus to prove posting of notices of meetings rests with sender who has to establish posting by sufficient corroborative evidence. Mere production of the certificates of posting issued by the postal authorities would not be a conclusive proof of having served the communication upon the addressees. The onus to prove that notices were sent is on the company, which onus, the company has not discharged. The respondents' further contention that the petitioner vacated his office by operation of law provided in Section 283(1)(g) fails in view of non service of proper notice.
10. In a case of oppression, a member has to specifically plead on five facts - (a) what is the alleged act of oppression; (b) who committed the act of oppression; (c) how it is oppressive; (d) whether it is in the affairs of the company; (e) and, whether the company is a party to the commission of the act of oppression. In the present case all the five aspects of oppression stand proved. The acts of oppression in the affairs of the company have been listed in detail highlighting how these are oppressive. There is specific averment as to who committed the act of oppression and how the company is a party to the oppression. It is a well settled proposition that the provision of Sections 397 and 398 are to be invoked to get the grievances of oppression and mismanagement redressed. The petitioner has rightly invoked the provisions of these sections. If a member who holds 50% of the shares in a company is reduced to the position of minority shareholder in the company by an act of the company or by its Board of Directors malafide, the said act must ordinarily be considered to be an act of oppression to the said member. I am, therefore, of the view that the allotment of shares impugned in the company petition made for personal gains and with a view to gain advantage against the other shareholders of a closely held company was neither in compliance with the legal requirements (except the allotment on 11.12.2002 though it suffered from on illegality and no proper procedure was followed)nor ensured the fair play and probity in corporate management, resulting in the enhancement of the shareholding of the second respondent, which would constitute an act of oppression, as held in Praful M Patel v. Wonderweld Electrodes P. Ltd (2002) 6 Comp LJ 423, Akbarali A Kalvert v. Konkan Chemicals P. Ltd. (1994) 15 CLA 170(CLB (2002) 110 Comp. Cases 31 and M.K. Haridas v. Asal Malabar Beedi Depot P. Ltd. (2002) 48 CLA 10 (CLB) The member who holds 50% hares in the company is entitled by virtue of his position control, manage and run the affairs of the company. This is a benefit or advantage which the member enjoys and is entitled to enjoy in accordance with the provisions of company and in the matter of administration of the affairs of the company by electing his own members to the Board of Directors of the company. The facts on record show that holding of meetings, increasing share capital, allotting additional shares and removing the petitioner as directors without following proper procedure were wholly unauthorized and invalid and hence have to be set aside.
11. All the above go to show that the conduct of the respondents is burdensome and oppressive to the petitioner and prejudicial to the interest of the company. From the narration of the events as above, the only conclusion that I can come to is that the respondents have not been able to refute the charges of oppression and mismanagement in the affairs of the company, and, therefore, the petition deserves to be allowed. Relief to be granted depends on the fact of a particular case. The facts of the present case are so manifestly against respondents that two opinions are not possible on the aspect of relief. Relief has to be granted in the present case to undo the advantage gained by the respondents through their manipulations and fraud. To do substantial justice between the parties, I order as follows vacating the interim order dated 17.10.2005:
I. The issue of 8800 shares on 11.12.2002 is hereby sustained with the directions that 4400 shares out of the total 8800 shares issued on 11.12.2002 be transferred by Respondent No. 2 to the petitioner names -Sh. Rajesh Patil by conversion of his unsecured loans.
II. The issue of 2,90,000 shares on 8.1.2003 being totally malfide, only motive being to gain control of company is hereby declared null and void and all allotment are set aside with the directions that the name of 48 persons be struck off from the register of members.
III. Since I have held that the stand of the company that the petitioner and his nominees had vacated office of the director under Section 283(1)(g) cannot be sustained for the reasons given above, I declared that the petitioner and his nominees shall continue of directors of the company.
12. With the above directions, I dispose of this petition. No order as to cost.