Company Law Board
Kobian Pte Limited vs Kobian India Private Limited, Sunil ... on 8 November, 2004
Equivalent citations: [2005]126COMPCAS675(CLB), [2005]59SCL608(CLB)
ORDER
K.K. Balu, Member
1. This petition is filed under Sections 397 and 398 read with Sections 111, 402 and 403 of the Companies Act, 1956 ("the Act") alleging that the affairs of M/s Kobian India Private Limited ("the Company") are being conducted in a manner oppressive to the petitioner and prejudicial to the interests of the Company and claiming the following reliefs:-
(a) to declare that the resolution to increase the authorised share capital from Rs. 30,00,000/- (Rupees Thirty Lakhs Only) to Rs. 1,00,00,000/- (Rupees One Crore Only) passed at the annual general meeting on 30.09.2003 is null and void;
(b)to declare that the allotment of 1,60,000 (One Lakh Sixty Thousand) equity shares made in favour of the second respondent on 03.05.2004 is hull and void;
(c) to order for the forfeiture of 75,750 (Seventy Five Thousand Seven Hundred Fifty) shares of Rs. 10/- (Rupees Ten Only) each held among the second and third respondents;
(d)to impose penalty of Rs. 1,00,00,000 (Rupees One Crore Only) on the second and third respondents;
(e) to impose damages of Rs. 1,00,00,000 (Rupees One Crore Only) on the second and third respondents; and
(f) to order appropriate criminal action for tampering with the official records and prosecute the second and third respondents.
2. The main acts of oppression and mismanagement relate to non-issue of notices for the meetings of members of the Company; non-issue of share certificate; illegal allotment of shares in exclusion of the petitioner; exclusion of the petitioner from the management of the Company; manipulation and tampering of records of the Company etc.
3. Shri B.C. Thiruvengadam, learned Counsel for the petitioner, while seeking indulgence of this Bench for appropriate reliefs with a view to bringing to an end the acts complained of in the company petition submitted as under:-
The petitioner, a body corporate incorporated in Singapore owning the brand name "KOBIAN" and "MERCURY" is engaged in the manufacture of mother-boards and other accessories used in computer hardware and introduced several products all over the world including India. Kobian ECS India Private Limited, an associate company of the petitioner is manufacturing "MERCURY" brand mother-boards and other computer accessories in India. The petitioner employed the second respondent in order to set up a subsidiary company in India for the purpose of servicing its products and of its other associates as borne out by the e-mail exchanged between them (Annexure-A28 to A30) and the corporate profile of the petitioner (Annexure-A2) Accordingly, after taking the professional advice from M/s Krishnananda Nayak & Co., Chartered Accountants, the Company was incorporated on 23.06.1999, with an authorised capital of Rs.30,00,000 divided into 3,00,000 equity shares of Rs. 10/- each, by the second respondent, his wife, the third respondent who subscribed to the Memorandum and Articles of Association of the Company, but did not make any material investment of their own. However, the petitioner had transferred a sum of Rs. 7,50,000 by way of gift to the second respondent, which was invested by him towards his share capital, thereby allotting 75,500 equity shares of Rs. 10/- each in his favour. The respondents 2 & 3 are mere name lenders and functioning as not more than as trustees to the interest of the petitioner.
The petitioner had invested a sum of Rs. 22,42,500 towards the allotment of shares in the Company, upon which 2,24,250 equity shares of Rs. 10/- each were allotted on 30.03.2000 in favour of the petitioner constituting 74.75 per cent of the paid-up capital of the Company, thereby the Company became a subsidiary of the petitioner. The second respondent failed to take any action to send the share certificate or furnish shareholding structure or induct the nominees of the petitioner on the Board of the Company, in spite of repeated requests made by the petitioner as seen from a series of e-mail exchanged between the parties, viz., Annexure-A8 to A10, wherein the second respondent categorically admitted that the Company is a subsidiary of the petitioner and promised to induct the nominees of the petitioner on the Board of the Company. Furthermore, the order dated 27.02.2003 made by the Additional Commissioner of Customs, Bangalore (Annexure-A39) confirms that the Company is a subsidiary of the petitioner. When the respondents failed to furnish the requisite information, the petitioner was constrained to correspond with the statutory auditor of the Company, who provided a very bald and vague certificate on shareholding structure, upon which the petitioner came to know the allotment of 1,60,000 shares made exclusively in favour of the second respondent on 03.05.2004 gaining controlling interest of 51.25 per cent and simultaneously reducing the petitioner to a minority of 48.75 per cent. The respondents committed criminal breach of trust and acted unfairly. The petitioner on verification of records of the Company at the office of Registrar of Companies realised that Form No. 5 was filed on 30.04.2004 disclosing the enhancement of the authorised capital from Rs. 30,00,000/- to Rs. 1,00,00,000/- purportedly approved at the fourth annual general meeting held on 30.09.2003. However, copy of the notice dated 30.06.2003 received by the petitioner from the Company convening the fourth annual general meeting on 30.09.2003 (Annexure-A12) did not contain any agenda of the resolution under Section 173 of the Act enhancing the authorised capital of the Company. Similarly, copy of notice of the fourth annual general meeting filed by the Company with the Income Tax Authorities, Bangalore did not contain such an agenda, as borne out by Annexure-A25, a certified true copy issued by the Income Tax Officer, Bangalore. The notice of the fifth annual general meeting of the Company dated 30.06.2004 (Annexure-R2) is on similar lines of the notice dated 30.06.2003 sent convening the fourth annual general meeting of the Company, without details of timing of the meeting, business relating to profit and loss account; name of the Auditor etc. Though the fifth annual general meeting of the Company was reportedly held on 30.07.2004, yet the annual return was filed with the Registrar of Companies subsequent to the visit of the Commissioner appointed by this Bench to authenticate the statutory records of the Company. The certificates of posting on record to support service of the notice of annual general meetings (Annexure-R13) do not give any presumption as to the content of material. The certificates of posting said to have been issued by the post office on 30.06.2003 and 30.06.2004 bear similar seal of the issuing post office, contrary to the guidelines of the postal department, which alone cannot prove service of the notice for the relevant annual general meetings. At the same time, the original notice of the fourth annual general meeting filed by the Company with the Registrar of Companies (Annexure-A24) does contain the special business for increasing the authorised capital from Rs. 30,00,000/- to Rs. 1,00,00,000/-. The respondents have tampered the Company's records by substituting the original copy of the notice with a fabricated document and attached the same to the original set of the returns filed in the Registrar of Companies. The notice dated 30.06.2003 (Annexure-A24), forming part of records of the Company in the Registrar of Companies is a fabricated and interpolated document. Moreover, the annual return as at 27.10.2003 and the balance sheet for the year ended 31.03.2004 do not reflect the purported increase in the authorised share capital of the Company. The increase in the authorised capital is not only without the knowledge and consent of the petitioner but also contrary to the understanding between the parties, as borne out by Annexure-A30, according to which at no point of time, the stake of the respondents could exceed 25 per cent of the paid-up capital of the Company. While the second respondent sought permission of the petitioner for increasing his salary, he never even kept informed the petitioner about the increase of the authorised share capital of the Company. Though the second respondent was allotted 1,60,000 shares of Rs. 107- on 03.05.2004, the cheque issued by the second respondent towards consideration of shares was realised only on 22.05.2004. However, an amount of Rs. 16,00,000 was subsequently withdrawn by the second respondent by way of housing loan availed from the Company, as reported by the Commissioner. The conduct of the directors in excluding the petitioner while allotting the impugned shares with ulterior purpose of converting the petitioner's majority into a minority and without notice of such allotment lacks probity and fair play warranting interference of this Bench, in support of which, Shri Thiruvengadam, learned Counsel relied on the following decisions:
* Mrs. Uma Pathak v. Eurasian Choice International (P) Ltd. - (2004) 3 Comp LJ 452 - to show that the power of Board of Directors to allot shares must be exercised in the interest of the Company and not for any ulterior purpose.
* IT Cube INC v. IT Cube India (P) Ltd - (2004) 3 Comp LJ 441- to show that the any allotment of further shares in violation of the articles of association of a company and without a notice of issuance of further shares is not tenable.
* P.K. Prathapan v. Dale and Carrington Investments Pvt. Ltd.- (2002) Vol. 111 CC 410 - to show that the allotment of shares in exclusion of the petitioners would constitute an act of oppression.
* Rashmi Seth v. Chemon (India) Pvt. Ltd. 1995 Vol. 82 CC 563- to show that any allotment of shares in violation of the articles of association and misuse of the fiduciary powers of directors is oppressive.
* Akbarali A. Kalvert v. Konkan Chemicals Pvt. Ltd. 1997 Vol. 88 CC 245 - to show that the issue of additional shares without offering them to other members in violation of the articles of association and without notice of the meeting for allotment of shares would constitute an act of oppression.
* PIK Securities (P) Ltd. v. United Western Bank (P) Limited- (2001) 4 Comp LJ 81 - to show that the issue of shares, by which the percentage of holding of a person comes down, even though it is a single act has continuous effect and therefore amounts to an act of oppression.
* Kshounish Chowdhury v. Kero Rajendra Monolithics Ltd - (2002)1 Comp LJ 552 - to show that if further shares are issued only with a view to convert a majority into a minority or for creation of a new majority, then, the same is a grave act of oppression, and if the shares are issued for the benefit of the Company which incidentally increases one's shareholding, it need not be considered to be an act of oppression.
* Tarlok Chand Khanna v. Raj Kumar Kapoor -1983 Vol. 54 CC 12 - to show that any allotment of additional shares without notice of such allotment is not valid in law.
There is no need for increase of the capital, as the Company achieved growth without additional capital over the past five years in terms of Annexure-R16, produced by the Company. The Company has maintained adequate reserves and surplus. The additional capital infusion on account of the reported expansion of UPS business is only on paper and never implemented by the second respondent.
The share certificate ought to have been issued to the petitioner within a period of three months from the date of allotment of shares, viz., 30.03.2000. However, the share certificate was not ready for issue even as late as on 24.10.2000, thereby the Company violated the provisions of Section 113 of the Act. The share certificate in favour of the petitioner was reportedly executed on 30.03.2000. The challan was issued on 04.07.2000 by the Reserve Bank of India towards payment of stamp duty on issue of shares and the application to the stamping authorities was made on 06.09.2000. The revenue seal of Government of Karnataka was embossed on 24.10.2000. It is clear that the share certificate was stamped after its execution, i.e., after 30.03.2000, which is prohibited under Section 17 of the Karnataka Stamp Act, 1957. Admittedly, the share certificate was presented after two months of the date of its execution, in which case, no exemption from the applicability of Section 17, as envisaged under Section 10A is applicable. The respondents are guilty of manipulation and fabrication of records of the Company and of counterfeiting the stamps and seals of the Government of Karnataka and are liable to be prosecuted under the various provisions of the Indian Penal Code. There are sufficient materials to form prima-facie opinion that affairs of the Company require investigation, as held in Rohinton Mazda v. Hypoids (India) (P) Ltd - (2004) 3 Comp LJ 449.
The respondents reportedly chose to send the share certificate of high value representing 74.75 per cent of equity of the Company through courier service, but the shipment details do not contain the purported share certificate. While the petitioner is the shareholder, the share certificate was found to be despatched to Rajesh Bothra. The correspondence (Anenxure-A11) exchanged between the parties indicate that the share certificate was not traceable at Bangalore. The respondents have produced a fabricated copy of the share certificate before this Bench.
The petitioner permitted the respondents to use the brand name "KOBIAN" at the time of incorporation of the Company and enjoying the corporate name of KOBIAN, which is a proprietary right of the petitioner and functioning under the limited licence granted by the petitioner. The products bearing the brand name "MERCURY" are sold by the petitioner and its other associates. The products are imported as well as manufactured in India by Kobian ECS India Pvt. Ltd., whereas the Company is only a service provider. The Company being a user of the brand 'KOBIAN' and 'MERCURY', by a communication dated 18.03.2002 (A-nnexure-R5) had assigned its rights over the trade mark in favour of Kobian ECS India Private Limited to use Mercury logo for the products being manufactured and traded by them, by which the Company lost its interest and title over the brand name 'MERCURY. The petitioner alone incurred huge amount of money on the brand house keeping and maintenance as borne out by the petitioner's corporate profile (Annexure-A2) and the reviews appeared in newspapers, periodicals etc. (Annexure-R20). The press reports given by the second respondent, projecting the petitioner and taking support from the petitioner for success of the Company reinforce the fact that the petitioner is owner of the brand name 'KOBIAN' and 'MERCURY'. The Company cannot claim any right over the brand name "KOBIAN" or "MERCURY". The object of increasing the stake of the respondents in the Company is to usurp the brand name 'KOBIAN' and 'MERCURY'.
Though the respondents 2 & 3 are directors for life yet there is no bar for their removal, in the light of Section 284 of the Act, Accordingly, when the notice dated 16.08.2004 of the resolution removing the respondents from the office of directors was served by the petitioner, it was not acted upon by the Company, compelling the petitioner to circulate the notices directly in favour of the respondents 2 & 3 addressed to the registered office, which were returned with postal endorsement that the addressees were not available at the said address, showing the fact that the respondents have not been functioning at the registered office of the Company.
The second respondent has been damaging the interest of the petitioner and its group by dismissing those employees who are loyal to the Company and the parent company, as borne out by Annexure- A32. He has been exerting undue influence on the employees of the Company by withholding salaries, threatening of taking criminal action for the alleged misappropriation, forcing them to leave the Company.
The above oppressive acts on the part of the respondents are continuing upto and beyond the date of the company petition, prejudicing the interests of the petitioner and the Company, entitling the petitioner for the reliefs claimed in the company petition.
4. Shri K.S. Ravi Shankar, learned Counsel appearing for the respondents opposed the company petition on the following grounds:
o There are no acts of omission or commission on the part of the respondents which are oppressive to the petitioner or prejudicial to the interests of the Company or public interest continuing upto the date of petition, as laid down by the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Limited - (1965) 1 Comp. JJ 193. None of the ingredients of Section 397/398 has been either alleged or made out by the petitioner. There are no pleadings to the effect that the facts of the present case would justify the making of a winding up order on just and equitable grounds, but such winding up of the company would unfairly prejudice the petitioner, as stipulated in Section 397(2)(b).
o There has been no mismanagement of the affairs of the Company or no material change in the management or the composition in the Board of directors as contemplated in Section 398 which would prejudice the interests of the Company. The facts and circumstances of the present case do not warrant any interference in the management under Section 397 or 398 and therefore the company petition is liable to be dismissed in limini.
o The Company was incorporated by the respondents 2 & 3, who are the promoter-directors and subscribers to Memorandum of Association and entitled by virtue of article 15 to hold the office of director for life or until they voluntarily resign and carry on the affairs of the Company. The second respondent is not an employee of the petitioner and he was not given the responsibility to start a subsidiary of the petitioner in India. There is no relationship of master and servant between the petitioner and the second respondent. As on the date of the company petition, the petitioner holds 48.75 per cent and the respondent group 51.25 per cent of the paid-up capital of the Company. The second respondent is solely responsible for the increase of profitability of the Company from year to year as seen from (Annexure R-16). The petitioner was neither persuaded at any point of time by the second respondent to transfer Rs. 7,75,000/- in his favour nor acted on the basis of the advice of M/s Krishnananda Nayak & Co., Chartered Accountants to receive any money from the petitioner. The transfer of Rs. 7,50,000/- made by way of gift was accepted by the second respondent and the petitioner cannot now make any claim, as otherwise the transaction would be hit by the provisions of the Benami Transactions (Prohibition) Act, 1988. The opinion dated 08,05.1999 was obtained from the Chartered Accountants by the second respondent in his personal capacity and the petitioner cannot place any reliance on the legal advice given by the Chartered Accountants. The communication between the second respondent and the Chartered Accountants is a privileged communication protected by the Indian Evidence Act, 1872. The second respondent alone met the per-incorporation expenses out of his personal savings and the investment made by the second respondent in the Company was not pursuant to the funds transferred by the petitioner. The respondents cannot be the name lenders or trustees of the petitioner. The Company is a not a subsidiary of the petitioner as on the date of the company petition, as borne out by the Memorandum of Association and the return of allotment filed before the Registrar of Companies. The petitioner having invested Rs. 22,42,500/- in the Company on "non-repatriation" basis, does not either hold a majority stake in the Company to claim that it is a subsidiary of the petitioner. The petitioner is bound by the Memorandum and Articles of Association of the Company as amended from time to time and estopped from questioning the directorship of the respondents 2 & 3. The shareholding pattern between the petitioner and the respondents 2 & 3 cannot remain all the time at the ratio of 75:25 per cent of the paid-up capital of the Company and there is no such stipulation in the Articles of Association of the Company. By virtue of article 4 the Company's shares are under the control of the Board of Directors and empowered to allot the shares to any person as they may think fit and the petitioner cannot question the discretion of the respondents 2 & 3 challenging the impugned allotment, more so when the Company duly complied with the requirements of the articles and Sections 94 & 97, before increasing the authorised capital of the Company with the object of particularly launching of UPS of the Company in the market. o Pursuant to the allotment of shares in favour of the petitioner, the respondents took up with the Department of Stamps and Registration for embossing the seal on the share certificate, upon which the Company remitted the cash towards stamp duty in terms of the receipt issued by the Reserve Bank of India dated 04.07.2000 and thereafter applied to the Sub-Registrar of Stamps on 06.09.2000 for stamping and effectually the share certificate was stamped on 24.10.2000. The share certificates issued to the respondents 2 & 3 bear the very same details and stamp embossing as in the certificate sent to the petitioner. There is no irregularity in the issue of share certificate in favour of the petitioner and the respondents are not guilty of any of the alleged offences.
o The share certificate issued to the petitioner with distinctive Nos. 75751 - 300000 was dispatched through a courier agent at the registered address between the period 02.11.2000 and 07.11.2000, as borne out by copies of the invoice dated 30.11.2000 and delivery information report dated 07.12.2000 of the courier agent (Annexure R10), in fulfilment of the statutory formalities for the allotment of shares. Later, the petitioner had asked for re-issue of the share certificate by e-mail dated 27.07.2004 (Annexure-A11) which would show that the share certificate had been already been issued by the Company.
o Though the respondents had forwarded the letters dated 14.05.2001 (Annexure -A8) inviting the nominees of the petitioner to join the Board of the Company, no response was received from the nominees of the petitioner by the respondents.
o The respondents dispatched timely notices to the petitioner under Section 171 of the Act in respect of the meetings of the members of the Company, as borne out by the certificates of posting sent for the third and fourth annual general meetings. Though the petitioner has been the shareholder since March, 2000, they never complained about non-receipt of the notices at any earlier point of time. Copy of the notice dated 30.06.2003 of the fourth annual general meeting produced at Annexure-A12 and A25 are only draft notices. The actual notice is found at Annexure-A24 containing the requisite particulars for convening annual general meeting viz., time of the meeting, agenda in regard to the increase of the authorised capital, name of the Chartered Accountant to be appointed as the auditor of the Company and matters incidental thereto, which are absent in the draft notice. The documents filed with the Registrar of Companies, copies of which are enclosed to the paper book of the petitioner are public documents and have been subject to pre-acceptance scrutiny by the office of the Registrar of Companies. The respondents never filed the notice furnished at Annexure-A12 with the Registrar of Companies or the notice at Annexure-A25 with the Income Tax authorities. The respondents never tampered the records on the file of Registrar of Companies. By virtue of Section 610 (3) of the Act, a copy of or an extract from any document registered or kept at the office of the Registrar of Companies, certified to be a true copy by that authority, shall, in all proceedings, be admissible in evidence of equal validity with the original document and therefore the notice dated 30.06.2003 kept at the office of the Registrar of Companies and produced at Annexure-A24 cannot be challenged by the petitioner.
o The notice dated 16,08.2004 issued by the petitioner under Section 284 for removal of the respondents 2 & 3 as directors could not be acted upon, as the same was received by them after conclusion of the fifth annual general meeting held on 30.07.2004. Moreover, such a notice does not lie, in view of the fact that the second respondent and third respondent are directors for life.
o The petitioner is interfering with day-to-day affairs of the Company by instigating the employees to disobey the official instructions of the respondents and spreading false propaganda that they have been removed from the office of directors, which is sub-judice before the CLB thereby prejudicing their interest, as borne out by the affidavits filed by a number of employees of the Company and by the e-mail correspondence forming part of the records before this Bench.
o The allegations made against the statutory auditor being scandalous must be expunged and such averments without any proof cannot have any bearing on the company petition.
o The petitioner is not owner of the brand name "KOBIAN" and "MERCURY", especially when the Company had applied for registration of the trade mark under Indian law with the Trade marks authorities as early as on 07.03.2000, much prior to the application made by the petitioner on 22.07.2003 before the Singapore Trade Marks authorities. The manufacture of "Mercury" brand mother- boards/computer accessories in India was pursuant to the authorisation and no objection given by the Company for use of 'MERCURY' logo in favour of Kobian ECS India Private Limited. The petitioner cannot claim any proprietary right over the brand name "MERCURY".
o The Commissioner who was authorised to authenticate the statutory records of the Company exceeded his authority by conducting "a roving enquiry" and making "a fishing expedition" in the conduct of affairs of the Company. Learned Counsel further disputed the visit of the Commissioner as claimed by him. The reports are bald, without his address or seal or phone number. The reports contain incorrect particulars. No reliance can be placed on the reports submitted by the Commissioner.
o In view of the strained business relationship, the petitioner and the respondents can no longer be together in business of the Company. The respondents are willing to part way with the petitioner provided that they are adequately compensated for giving up the brand name of the Company and further that the respondents are allowed to retain the Company to themselves. Shri Ravi Shankar, learned Counsel, accordingly sought for suitable directions in the interests of the parties before this Bench.
5. Shri B.C. Thiruvengadam, learned Counsel in his reply pointed out that averments contained in the counter statement are rather silent on the consideration reportedly paid by the second respondent towards the allotment of impugned shares. The Communication of the Chartered Accountants (Annexure A-3) is not a privileged document, especially when the petitioner got copy of the communication from the second respondent himself. By virtue of Section 610(3), a certified copy of any document issued by the Registrar of Companies will be construed as a true copy of the original and nothing more. If the original record with the Registrar of Companies is a fraudulent document, certified copy cannot acquire any sanctity at all Furthermore, the Registrar of Companies does not authenticate the validity of any document, but merely certifies a copy to be a "true copy of the original". Shri. B.C. Thiruvengadam, learned Counsel, while concluding his submissions submitted that the petitioner is willing to purchase the shares held by the respondents 2 & 3 at face value, pay 20% dividend all these years and over and above a sum of Rs. l0,00,000/- by way of compensation so that the petitioner will takeover the Company with the brand name and accordingly sought for appropriate directions.
6. I have considered the pleadings and arguments of learned Counsel. The issues that arise for my consideration are whether the petitioner has made out a case under Section 397/398 of the Act and if so, whether the petitioner is entitled for the reliefs claimed in the company petition. While according to Shri B.C. Thiruvengadam, learned Counsel, exclusion of the petitioner from the allotment of shares as well as management of the Company, non-issue of share certificate, non-issue of notices to the meetings of members of the Company, manipulation and tampering of the records of the Company etc., by the respondents while conducting the affairs of the Company are oppressive to the petitioner and prejudicial to the interests of the Company, it is contended by Shri K.S. Ravi Shankar, learned Counsel for the respondents that the alleged acts of oppression and mismanagement, which are under serious dispute, do not satisfy the requirements of Section 397/398, denying the petitioner any relief. This contentious issue makes me to go into the ingredients of an application under Section 397/398, before granting any relief thereunder.
Section 397 provides that on an application made by any members of a company having the right under Section 399, complaining that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members, the Company Law Board may with a view to bringing to an end the matters complained of, make appropriate order, if the CLB is of opinion-
(i) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members;
(ii) that 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; and
(iii) that the winding up order would unfairly prejudice the members.
It is, therefore, clear that it is for the CLB to form an opinion on the facts alleged in the company petition whether the requirements of Section 397(2)(a) and (b) have been duly met before, making such orders as it thinks fit under Section 397.
Section 398 can be invoked in either of the two circumstances:-
(1) That the affairs of the company are being conducted in a manner which is (a) prejudicial to public interest; or (b) prejudicial to the interest of the company;
or (2) It is likely that the affairs of the company will be conducted in a manner (a) prejudicial to public interest; or (b) prejudicial to the interests of the company, due to a material change that has taken place in the management or control of the company. Such change may take place due to alteration in the company's Board of Directors or manager or in ownership of its shares or membership or in any other manner whatsoever.
The Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Limited (supra), while considering the provisions of Section 397 expressed the position: "that it is not enough to show that there is just and equitable cause for winding up the Company, though that must be shown as preliminary to the application under Section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing upto the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietory rights as a shareholder."
Whether the affairs of a company are being conducted in a manner oppressive to any member or in a manner prejudicial to public interest or the interests of the Company would depend upon the facts of a particular case. In the present case before me, it is on record that the Company has been promoted by the respondents 2 & 3, who are subscribers to the Memorandum and Articles of Association, each subscribing to 100 shares of Rs. 10/- each. They are the first directors, who shall hold office for life or until they voluntarily resign. The petitioner, a body corporate at Singapore made arrangements to transfer a sum of Rs. 7,50,000/- on 05.07.1999 as seen from Annexure-A4 in favour of the second respondent by way of gift which was purportedly invested towards his share capital, the fact of which is refuted by the respondents. The Board of directors had on 15.07.1999 allotted in favour of the second respondent 75,550 shares of Rs. 10/-. Thereafter, the petitioner had invested in the Company a sum of Rs. 22,42,500/- on repatriation basis, against which 2,24,250 shares of Rs. 10/- each were allotted on 30.03.2000 to the petitioner. As at 30.03.2000, the petitioner was holding 74.75 per cent and the respondent group 25.25 percent of the paid-up capital of the Company. At this juncture, e-mail sent on 30.08.2004 (Annexure-A30) by the second respondent in favour of the petitioner's nominee assumes importance, according to which the second respondent must be entitled to 25 per cent of the equity in the Company and the remaining 75 per cent must be left to the discretion of the petitioner. In the meanwhile, it is observed from copy of the notice dated 30.06,2003 of the fourth annual general meeting (Annexure-A24) that the Company proposed the increase of the authorised share capital from Rs.30,00,000/- to Rs. 1,00,00,0007- on 30.09.2003. This copy of the notice is seriously disputed, which is being dealt with elsewhere. The explanatory statement forming part of the disputed notice shows that "the growing expansion of the Company's business" necessitated the increase of the authorised capital from Rs. 30,00,000/- to Rs. 1,00,00,000/-. I do not see any other specific reason for enhancement of the authorised capital. Whereas, from the averments made in the reply statement filed on behalf of the Company, it is observed that the capital was sought to be increased for the purpose of "the launch of Uninterrupted Power Supply Systems (UPS) of the first respondent in the market", which remains without being substantiated by the respondents, especially when there is no material to show the launch of UPS in the market with the infusement of additional funds, in pursuance of the increase of the authorised capital of the Company. At the same time, the balance sheet as at 31.03.2004 shows reserves and surplus aggregating Rs. 41.48 lakhs, in which case, strictly speaking, there is no need for augmentation of additional capital. Moreover, the Company could achieve periodical growth for the past five years, as borne out by Annexure-R16, without requirement of any additional capital. The explanation offered by the respondents for increase of the capital does not appear to be realistic. While, according to the respondents, copy of the notice dated 30.06.2003 convening the fourth annual general meeting on 30.09.2003 (pages 293 & 295 of vol. II of the company petition) containing inter-alia the special business on the increase of the authorised capital was despatched to the petitioner under a certificate of posting dated 30.06.2003, it is vehemently contended that the petitioner was in receipt of the notice dated 30.06.2003 of the fourth annual general meeting without any agenda on the increase of the authorised capital produced at Annexure-A12, a copy of which was said to be produced by the Company before the Income Tax Authorities along with the income tax return, as borne out by a certified true copy of the notice obtained from the concerned Income Tax Officer (Annexure-A24). In view of the serious dispute raised by the Company that the notice dated 30.06.2003 which was said to be received by the petitioner is only a draft notice and that no such draft notice was filed with the Income Tax authorities along with income tax return by the Company, a direction was issued to the Income Tax Officer, Bangalore calling for his report. The office of the Income Tax, Bangalore by a communication dated 18.10.2004 forwarded certified copies of the notices dated 07.08.2000, 05.08.2001, 01.08.2002 and 30.06.2003 convening the annual general meetings of the Company filed along with the return of income from the assessment years 2000-2001 to 2003-2004. It is clear from the certified copies of the notices received from the office of Income Tax that the Company had filed copies of the notices convening the annual general meeting of the Company along with return of income and further that the notice dated 30.06.2003 convening the fourth annual general meeting on 30.09.2003 does not contain any agenda on the increase of the authorised capital of the Company. Hence, the plea of the respondents that the Company never filed copies of the notices of the annual general meeting along with return of income with the Income Tax Authorities must fail. Moreover, mere production of the certificate of posting dated 30.06.2003 (Annexure-R13) issued by the postal authorities would not be a conclusive proof of having served the notice upon the addressee and in the absence of posting the notice dated 30.06.2003 containing the agenda in relation to the increase of the authorised capital (page 293 & 295 of vol. II of company petition), there is no presumption of due delivery of the said notice upon the petitioner. It is neither safe to trust such certificates of posting as reiterated by this Board in a number of cases. The Company has not chosen to produce either the despatch register or the books of account evidencing the expenses incurred for despatch of the notice, in which case, the plea of the Company that the notice for the fourth annual general meeting containing the agenda on the increase of the authorised capital was served on the petitioner remains merely as averments without being substantiated by the respondents, notwithstanding the serious dispute raised by the petitioner in regard to the genuineness of the notice dated 30.06.2003 (Annexure-A24) forming part of the Company's records in the Registrar of Companies. It is relevant to observe that while the second respondent was seeking permission of the petitioner for increase of his salary and perquisites, there is no material to show that the second respondent had kept informed the petitioner of the increase in the authorised capital of the Company. The Company cannot take shelter under the provisions of Section 610(3), which merely implies that a copy of any document kept by the Registrar, certified by him to be a true copy, is admissible in evidence in all legal proceedings and is required by law to be treated as having validity with the original documents. However, in the event of any document on the records of the Registrar of Companies is under dispute, a certified copy of such a disputed document does not carry any evidenciary value. Pursuant to the increase of the authorised capital made on 30.09.2003, the Company filed with the Registrar of Companies Form No. 5 intimating the increase of the authorised share capital and Form No. 23 enclosing a copy of the special resolution dated 30.09.2003 increasing the authorised capital only on 30.04.2004. It may be observed that Form No. 5 belatedly filed on 30.04.2004 was accompanied by the demand drafts dated 30.09.2003 towards filing fee which remains unexplained. Any increase in the authorised share capital would come into effect immediately on passing of any valid resolution in this behalf and filing of the requisite forms (Form No. 5 and Form No. 23) being a ministerial act and procedural in nature would not influence the date of increase of the authorised share capital. It may be observed that non-filing of the returns, viz., Form No. 5 and Form No. 23 only attracts penalty against the Company and every officer in default, but will not make the resolution increasing the capital to be bad. Nevertheless, the balance sheet as at 31.03.2004 reveals the authorised capital of the Company of Rs.30,00,000/- only, even though the resolution increasing the authorised share capital was passed as early as on 30.09.2003. The observations of the Auditor under Schedule 13 of the balance sheet for the year ended 31.03.2004 by way of notes to accounts to effect that 'As the prescribed fee to increase the Authorised Capital has been paid during April 2004, the Authorised Capital for the current year is same as that of last year', do not hold good in law. All these aspects give rise to serious doubt about bonafides of the Company. Thereafter, the Company had allotted on 03.05.2004 1,60,000 shares of Rs. 10/- each exclusively in the name of the second respondent. The consideration for the allotment of shares was made by the second respondent by way of a cheque dated 21.05.2004 of Rs. 16,00,000/- proceeds of which were realised by the Company only on 22.05.2004. Though Form No. 2 dated 18.05.2004 disclosing the allotment of shares was filed with ROC on 21.05.2004, consideration for the shares remained unpaid till 22.05.2004. The second respondent admittedly withdrew on 26.05.2004 a sum of Rs. 16,00,000/- by way of housing loan availed from the Company. There is no record to show that the Company utilised the increased paid up capital for the launch of UPS in the market, as contended by it. The sequence of events show that the increase of the authorised share capital, being not for the benefit of the Company and the subsequent allotment of shares exclusively in favour of the second respondent, in my view, are without disclosure to the petitioner and in violation of the provisions of the Act. It is true that by virtue of Article 4, the Company's shares shall be under the control and discretion of the Board of Directors who may allot or otherwise dispose of the same to such person or persons, whether he is a member of the Company or not, for such consideration and on such terms and conditions, as the Board may in their absolute discretion think fit. At the same time it shall be borne in mind that the directors are in a fiduciary position vis-a-vis the company and must exercise their power with utmost good faith for the benefit as well as interest of the company and ensure fair play in action in corporate management and further must act bonafide in exercise of their fiduciary responsibilities in further allotment of shares. While it is the prerogative of the Board to allot shares, it is not that law has given absolute liberty to the directors of private limited companies to deal with their shareholders in any manner as they wish. With regard to the issue of additional shares, the responsibility of the directors towards the members becomes more onerous in a private Company. Though Section 81 of the Companies Act which containing certain requirements in the matter of issue of further share capital by a company does not apply to private limited companies, the directors in a private limited company are expected to make a disclosure to the shareholders of such a company when further shares are being issued. Any issue of shares solely to gain control over the company is not permissible. The legal position of directors as enumerated by Supreme Court in Dale & Carrington Investment (P) Ltd. v. P.K. Prathapan - (2004) Vol. 122 CC 161 is reproduced here below:
"A company is a juristic person and it acts though its Directors who are collectively referred to as the Board of Directors. An individual Director has no power to act on behalf of a company of which he is a Director unless by some resolution of the Board of Directors of the Company specific power is given to him/her. Whatever decisions are taken regarding running the affairs of the company, they are taken by the Board of Directors. The Directors of companies have been variously described as agents, trustees or representatives, but one thing is certain that the Directors act on behalf of a company in a fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company. They are agents of the company to the extent they have been authorized to perform certain acts on behalf of the company. In a limited sense they are also trustees for the shareholders of the company. To the extent the power of the Directors are delineated in the Memorandum and Articles of Association of the company, the Directors are bound to act accordingly. As agents of the company they must act within the scope of their authority and must disclose that they are acting on behalf of the company. The fiduciary capacity within which the Directors have to act enjoins upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to the company. It follows that in the matter of issue of additional shares, the directors owe a fiduciary duty to issue shares for a proper purpose. This duty is owed by them to the shareholders of the company. Therefore, even though Section 81 of the Companies Act which contains certain requirements in the matter of issue of further share capital by a company does not apply to private limited companies, the directors in a private limited company are expected to make a disclosure to the shareholders of such a company when further shares are being issued. This requirement flows from their duty to act in good faith and make full disclosure to the shareholders regarding affairs of a company. The acts of directors in a private limited company are required to be tested on a much finer scale in order to rule out any misuse of power for personal gains or ulterior motives. Non-applicability of Section 81 of the Companies Act in case of private limited companies casts a heavier burden on its directors. Private limited companies are normally closely held, i.e., the share capital is held within members of a family or within a close knit group of friends. This brings in considerations akin to those applied in cases of partnership where the partners owe a duty to act with utmost good faith towards each other. Non-applicability of Section 81 of the Act to private companies does not mean that the directors have absolute freedom in the matter of management of affairs of the company".
In the present case, by virtue, of the impugned allotment, the majority shareholding 74.75% held by the petitioner has been converted into a minority of 48.75%. In a number of cases, this Board categorically held that if further issue of shares results in conversion of a majority into a minority, or creation of a new majority, then such issue of shares is not only in breach of the fiduciary responsibilities but also a grave act of oppression against the existing majority. I am, therefore, of the view that the allotment of shares impugned in the company petition without any notice of issuance of further shares, made with a view to gain advantage against the petitioner being a majority shareholder of the closely held Company, in breach of the fiduciary obligations of the directors is neither in compliance with the legal requirements nor ensured the fair play and probity in corporate management would amount to an act of gross oppression, as held in a number of decisions cited by learned Counsel for the petitioner. The issue of shares, by which the percentage of holding of a shareholder comes down, may be a single act, but has continuous effect constituting an act of oppression as held in PIK Securities (P) Ltd. v. United Western Bank (P) Limited (supra), satisfying the criteria laid down by the apex court in Shanti Prasad Jain v. Kalinga Tubes Limited (supra). The Board of directors of the Company had admittedly allotted 2,24,250 shares of Rs. 10/- each on 30.03.2000 in favour of the petitioner, in which case the share certificates ought to have been issued within a period of three months from the date of allotment of shares. Though the share certificate is dated 30.03.2000, the same is presented after two months of the date of its execution and is stamped as late as 24.10.2000, thereby prima, facie not satisfying the requirements of Sections 17 & 10A of the Karnataka Stamp Act, 1957 and Section 113 of the Act, for which the competent authority is at liberty to take such action as may be deemed fit. The theory propounded by the respondents that the share certificates issued in their favour bear the very same details and stamp embossing as in the certificate issued in favour of the petitioner and exchange of the correspondence between the second respondent and the stamp authorities, copies of which are on record, cannot in any way remedy the irregularities. The e-mails exchanged between the petitioner and the second respondent produced before this Bench clearly show that the petitioner was persistently demanding from the respondent the shareholding structure of the parties in the Company and the original share certificate to meet the requirements of Singapore Statutory Authorities. The stand taken by the second respondent is that the original share certificate was sent to the petitioner as early as in November, 2000 by courier service as borne out by copies of the invoice dated 30.11.2000 and delivery information report dated 07.12.2000 (Annexure-R10) of the courier agent. The invoice contains three consignments, out of which two consignments dated 02.11.2000 and 07.11.2000 are addressed to Rajesh Bothra, who is on the Board of the petitioner, but not in favour of the petitioner. It could not be made out whether the subject matter of these consignments is the original share certificate of the petitioner. It is unknown as to which of these two consignments contains the share certificate. There is no covering letter forwarding the original share certificate, a valuable document worth several lakhs of rupees. Mere production of copies of the invoice and delivery information report without details of the share certificate procured from the courier agent and mere entries in the statutory register of the share certificate number in respect of the shares of the petitioner, in the absence of the despatch register of the Company or any other concrete evidence in support of delivery of the share certificate, it cannot be conclusively said that the share certificate was duly sent by the second respondent to the petitioner and received by the petitioner. At the same time, the second respondent in response to the e-mail sent by the petitioner categorically replied by on 27.07.2004 (Annexure-All) that "certificates are not traceable at our end". This reply of the second respondent apart from being contrary to the plea that the share certificate was despatched through courier service to the petitioner as early as in November 2000 remains unexplained. The second respondent, pursuant to the allotment of 2,24,250 shares in favour of the petitioner constituting 74,75 per cent of the paid-up capital of the Company, by his communications dated 14.05.2001 invited Rajesh Bothra and Nikhil Shah, nominees of the petitioner to join the Board of the Company. The exchange of e-mails between the petitioner and the second respondent (Annexure-A10) clearly shows that while the petitioner was pursuing with the second respondent for inducting their nominees on the Board of the Company, the second respondent was explicitly agreeable for the proposal put forth by the petitioner, but apprehended whether there would be any need to "surrender SVB licence in the light of parent & subsidiary having common directors" and treated the Company as a subsidiary of the petitioner. It is observed from the order dated 27.02.2003 of the Additional Commissioner of Customs, Bangalore (Annexure-A39), that "The Indian Firm (the Company) has declared that the Foreign Supplier (the petitioner) is the holding company of the Importer (the Company), and holds 74% of the equity share capital in the Importer (the Company)". When the petitioner wanted to hasten the process of inducting their nominees on the Board of the Company by an e-mail sent on 15,03.2004 (page 254 of vol. II of company petition), the second respondent never resisted the proposal. Thus, these facts and circumstances would show that there was some basic understanding between the shareholders that the Company would be in the joint management of the petitioner and the respondents and that the Company has been treated as a subsidiary of the petitioner and therefore the petitioner has justifiable claim of legitimate expectation of being on the Board of the Company. In spite of the explicit understanding between the parties, the nominees of the petitioner have not been inducted on the Board of the Company of which the petitioner has legitimate grievance. The events relating to the issue of notice of the fourth annual general meeting, enhancement of the authorised capital, allotment of the impugned shares, filing of several statutory forms after inordinate delay and absence of adequate proof for proper issue and delivery of the share certificate to the petitioner in my view would be oppressive and prejudicial to the interests of the petitioner, warranting interference by this Bench. There is consensus among the parties that they could no more carry on together the business of the Company. While the petitioner is willing to purchase the shares of the respondents, the latter is desirous of retaining the Company. The question for the present is whether the petitioner or the respondents will continue to conduct the affairs of the Company in exclusion of one by the other. It is on record that the petitioner founded in the year 1978 with the corporate name "KOBIAN" has been manufacturing "MERCURY" range of products with offices world-wide. The Company was promoted with the name "KOBIAN" on 23.06.1999 by the respondents 2 & 3 for servicing the products of the petitioner, before which the respondents ought to have obtained from the petitioner a "No Objection" Certificate for using the name "KOBIAN", as per the advice of the Chartered Accountants (Annexure-A3) furnished to the petitioner. The Trade Mark Authorities have not so far registered the trade mark under the Indian law in favour of the Company. By virtue of Annexure-A5 (page 112 of vol.11 of company petition), Kobian ECS India Private Limited "has been assigned and authorised to use MERCURY logo for the product being manufactured and trade by them". The communication of the Chartered Accountants though claimed to be a privileged document, in my view, does not become so in the light of Section 126 of the Indian Evidence Act, 1872 providing privilege only to the communications of barrister, attorney, pleader or vakhil. The Company has the registered office at A-703, Adarsh Gardens, Jaya Nagar, Bangalore and the corporate office at 302, Sree Complex, St. John's Street, Bangalore. The advice of the Chartered Accountants covers, inter-alia, the procedure relating to obtaining name sanction, registration of the Company, induction of nonresident directors, investment by non-resident Indians and on the impact of accepting gift in India. (Annexure-A3). The second respondent had accepted a sum of Rs. 7,50,000/- by way of gift from the petitioner on 05.07.1999. The Company had on 15.07.1999 allotted, 75,550 equity shares of Rs. 10/- each in favour of the second respondent. Though the second respondent vehemently contended that he never utilised the gift amount received from the petitioner towards allotment of shares in his favour, yet he has not chosen to explain the source of funds for the allotment of 75,550 shares made in his favour. The second respondent neither divulged the purpose of having had accepted the amount gifted by the petitioner. Admittedly, the petitioner and the second respondent are strangers and there is no proof of any prior business dealings between them. The date of allotment of shares to the petitioner is proximate to the date of his acceptance of the gift from the petitioner. The admission of the second respondent before the Additional Commissioner of Customs (Annexure-A39) and the e-mail sent by the second respondent in favour of the petitioner on more than one occasion categorically treated the Company as a subsidiary of the petitioner and further used to seek permission for increase of his salary from the petitioner and other perquisites. The various press releases produced by the respondents clearly show the dependence of the Company on the petitioner for its business prospects. The petitioner claims, as borne out by its corporate profile (page 222 of vol.11 of company petition) that it has world-wide offices and one such office is "Kobian India Pvt. Ltd., 302 Sree Complex, 73, St. John's Street, Bangalore-560 042, India", which is undisputedly the corporate office of the Company. Though it is contended that the profile has been brought out by the petitioner, yet the respondents do not deny the veracity of the details furnished by the petitioner in its corporate profile. The cumulative effect of these events show that the respondents have been treating the Company as a subsidiary of the petitioner and drawing support from the petitioner. It is relevant to observe that the second respondent in his e-mail sent on 19.07.2004 to the petitioner (Annexure-A31) indicated, among other things, his option to keep out of the Company subject to certain conditions. Having regard to these facts and circumstances, it would be more equitable in my view for the respondents 2 & 3 to part ways, by selling their stake in the Company to the petitioner. The petitioner shall adequately compensate the respondents group for all their efforts towards progressive growth of the Company, as borne out by Annexure-R16. Against this background, the compensation of Rs. 10,00,000/- offered by the petitioner, to my mind, is rather meagre. The respondents cannot claim any compensation for the brand name "KOBIAN" and "MERCURY" for the reasons stated supra. It is observed that the Commissioner who was authorised to certify that the statutory records are in due form of law, acted beyond the scope of his authority and therefore no reliance is placed on his reports submitted before this Bench. In view of the foregoing conclusions, and in exercise of the powers of the CLB under Section 402, the following order is passed:-
(i) The resolution increasing the authorised capital of the Company from Rs. 30,00,000/- to Rs. 1,00,00,000/- passed at the fourth annual general meeting on 30.09.2003 is declared as null and void;
(ii) The allotment of 16,00,000 equity shares of Rs. 10/- made on 03.05.2004 in favour of the respondents 2 & 3 is set aside;
(iii) The Company shall refund the allotment money of RS. 16,00,000/- to the second respondent and reduce the paid-up capital to the tune of Rs. 16,00,000/-;
(iv) In view of the strained relationship between the parties and since the petitioner is the majority shareholder of the Company, viz. holding nearly 75% shares, I direct that the respondents will go out of the Company by selling their shares to the petitioner at par value with 15% simple interest from the date of investment till the date of payment,
(v) The petitioner shall further pay a sum of Rs. 25,00,000/- on account of the services rendered and contribution made by the respondents towards the promotion; progress and growth achieved by the Company;
(vi) The respondents 2 & 3 shall deliver the original share certificates together with the blank transfer forms in respect of their holdings to the petitioner within twenty one days on receipt of the amounts in terms of this order from the petitioner.
With the above directions, the company petition stands disposed of. All the interim orders passed by this Bench are made absolute.