Bombay High Court
Shree Anupar Chemical (India) Private ... vs Dipak G. Mehta & Others on 7 May, 1999
Equivalent citations: AIR1999BOM349, 1999(3)BOMCR790, (1999)2BOMLR712, AIR 1999 BOMBAY 349, (1999) 35 CORLA 68, (1999) 4 COMLJ 474, (1999) 3 BOM CR 790, 1999 (2) BOM LR 712, 1999 BOM LR 2 712
Author: S.S. Nijjar
Bench: S.S. Nijjar
ORDER S.S. Nijjar, J.
1. This order will dispose of Appeal Lodging Nos. 1, 2 and 4 of 1999. For the sake of convenience, the facts have been taken from Appeal Lodging No. 1 of 1999. These appeals have been filed against the order dated 22nd March, 1999, hereinafter referred to as "the impugned order"; passed by the Principal Bench of the Company Law Board (hereinafter referred to as "the C.L.B."), at New Delhi in Company Petition No. 46 of 1998. The aforesaid Company Petition was filed by respondent Nos. 1 to 5 herein being petitioners therein under sections 397 and 398 of the Companies Act, 1956, hereinafter referred to as "the Act". The facts leading to the filing of the present appeals may briefly be noticed.
2. Appellant No. 1 Company was incorporated on or about 26th July, 1994 with an authorised and paid up share capital of Rs. 5 lakhs. Sometime in March, 1995, respondent No. 1 along with appellant No. 2 and respondent Nos. 6, 7 and 8 purchased 100 per cent shareholding of the Company (respondent Nos. 1 to 5 hereinafter will be referred to as "Group A". The other shareholders will be hereinafter referred to as "Group B"). Respondent No. 1 held 20 per cent shareholding of the subscribed capital as he was holding 10,000 shares out of 50,000 shareholding of the Company of Rs. 10/- each. On 8th March, 1995 Dipak Mehta (respondent No. 1) and Laxman N. Godbole (respondent No. 7) were appointed as Additional Directors. On 21st May, 1995 first respondent resigned as a Director. In the Board meeting, appellant No. 2 Shri Bardeskar was appointed as Director. On 30th September, 1995 Bardeskar and Godbole were appointed as Directors at the Annual General Meeting of the Company. Members of the Kasargod family who were the original shareholders of the Company resigned from the Directorship during May, 1995 and December, 1995. Associates of first respondent gave a loan of Rs. 22 lakhs on interest to the Company. On 7th December, 1995 the authorised share capital of the Company was increased to Rs. One crore pursuant to a Resolution passed by EOGM. On 8th December, 1995 the Board of Directors resolved to issue further shares and to accept the share application moneys. On 15-1-1996 by a Board Resolution, Dipak Mehta, Mrs. Bhanu Mehta, Devan Mehta and Kunal Mehta along with Wandrekar were appointed as Additional Directors. During the period January to March, 1996, appellant No. 1 Company received share application moneys aggregating to Rs. 54,30,000/-. Out of the share application moneys, Group A had deposited Rs. 29 lakhs. This contribution was made by converting loan of Rs. 22 lakhs and payment of Rs. 7 lakhs. The balance Rs. 25,30,000/- was contributed by Group B. Even though the authorised share capital was enlarged and amounts were received towards share application moneys, no allotment of shares was made and paid up capital of the Company continued to be Rs. 5 lakhs till 7th May, 1998. The balance-sheet for the year ending 31st March, 1996, 31st March, 1997 and 31st March, 1998 records the share capital of the Company as Rs. 5 lakhs and share application moneys were shown as Rs. 52,50,000/- as on 31st March, 1996 and Rs. 54.30 lakhs as on 31st March, 1997 and 31st March, 1998. The aforesaid facts were reflected in the returns filed by the Company with the Registrar of Companies for the aforesaid three years. At the Annual General Meeting of the appellant No. 1 Company held on 30th September, 1996, respondent Nos. 2 to 4 belonging to Group A who were appointed as Additional Directors ceased to be Directors as they were not confirmed as Directors. Thus, with effect from 30th September, 1996 the following persons were appointed as Directors on the Board of the Company.
i) P.P. Bardeskar.
ii) P.V. Wandrekar.
iii) L.N. Godbole.
iv) Dipak Mehta.
v) Devan Mehta.
Thus, there were three Directors from Group B and 2 Directors from Group A. Disputes arose between Group A and Group B as a result thereof the plant of the Company was closed. It is further pleaded that the first respondent with a view to create deadlock submitted false Resolution to the bankers purporting to be the Resolution of the Board meeting thereby providing the first respondent to be one of the signatories to the Bank Account. By letters dated 5th April, 1997, 9th April, 1997 and 20th April, 1997, the first respondent asked the Bank to stop operations of the account and a sum of Rs. 12 lakhs of the Company has been blocked. Apprehending that the first respondent will fabricate the records with a view to convert the share moneys into share capital, these facts were placed on the record by letter dated 9th April, 1997. Respondent Nos. 1 to 5 are stated to have fabricated the Board Resolution and purported to file return in Form No. 2. A meeting of the Board of Directors was held on 18th April, 1997 but no business was transacted. This fact was also recorded by letter dated 19th April, 1997 addressed by Group B to Group A. On 12th April, 1997 respondent No. 1 lodged a police complaint making several false allegations. A statement was made before the police signed by the respondent and the second appellant. In April, 1998 respondent Nos. 6 to 8 decided to transfer their shareholding in favour of appellant Nos. 7 to 20. Notice of the intended transfer of the shares was given to the Company. On 13th April, 1998 notice of the Extraordinary General Meeting to be held on 29th April, 1999 was sent to all the shareholders. The Board at its meeting held on 13th April, 1998 gave its approval in principle for the proposed transfer. On 29th April, 1998 the Board duly approved the transfer in favour of appellant Nos. 7 to 20. At the same Extraordinary General Meeting i.e. 29th April, 1998, respondent Nos. 1 to 4 (Group A) were removed as Directors of the Company. Appellant Nos. 3 to 6 were appointed as Additional Directors. It was also decided to repay the share application moneys paid by various persons in 1995-96. Accordingly a sum of Rs. 18,10,000/- was refunded to respondent Nos. 6 to 8. Respondent Nos. 1 to 5 were also offered the share application money which was not accepted. On 8th May, 1998 and 20th May, 1998 appellant No. 1 further allotted 58,660 and 11340 shares respectively making a total of 7 lakh shares. Thus the first respondent was now holding only 10000 shares out of 1,20,000 shares. By an agreement dated 8th May, 1998 manufacturing of chemical Imidazole was being carried out by the Company for Aarti Drugs Limited, appellant No. 19. Another statement was recorded by the police on 4th June, 1998 wherein appellant No. 2 had stated that his statement before the police was not admissible since his mental condition at that time was not proper and the Board of Directors earlier consisted of appellant No. 2, Godbole, Wandrekar, Dipak Mehta and Devan Mehta. Group A filed Company Petition No. 515 of 1998 under section 433(f) of the Companies Act, hereinafter referred to as "the Act". In the pleadings before the High Court, Group A specifically admitted that Company had not allotted shares of the amount of Rs. 29 lakhs. It was further specifically admitted that respondent Nos. 2 to 5 were never shareholders of the appellant No. 1 Company. It was stated that the acts of mismanagement complained of were in their capacity as Directors of the Company who were not members. Therefore, it was stated that the remedy under sections 397 and 398 of the Act would not be available. This Court by order dated 24th July, 1998 dismissed the Company petition. It is pleaded that this Court came to the conclusion that respondent Nos. 6 to 8, appellants herein, were holding 60 per cent of the shares and were in majority. It was also held that respondent No. 1 had only 20 per cent shares and was in minority. After the dismissal of the Company petition, respondent Nos. 1 to 5 filed the petition before the C.L.B. under sections 397 and 398 of the Act. The petition has been allowed by the C.L.B. Hence two appeals by Group B and the third appeal by Group A.
3. Mr. Dwarkadas the learned Counsel has submitted that there can be no oral agreement which would supercede the Memorandum of Articles of Association. There is no provision that the shareholding are on equal footing as pleaded by the respondents. In fact, the Articles of Association provided on the contrary that shares can be only transferred to a person named by the Directors. In other words, shares can only be transferred to a person whom the Directors nominate. Furthermore, this was a pre-existing Company which had been acquired. Thus the Memorandum of Articles of Association in existence continued to hold the field. Therefore, Group A is only 20 per cent shareholder. If a quota of shareholding was to be provided, the same could have been done only by amendment of the Articles of Association. It is submitted that C.L.B. has wrongly set aside the transfer of the shares in favour of appellant Nos. 7 to 20. Even then the shareholding of the first respondent remained at 20 per cent at all material times. According to Mr. Dwarkadas, the C.L.B. has committed serious factual errors which would amount to errors of law. Admittedly petitioner No. 1 i.e. respondent No. 1 alone was a shareholder of the Company. Petitioner Nos. 2 to 5 admittedly did not hold any shares in the Company and could not have complained and did not have any locus standi to file a petition by virtue of section 397. Thus Group A consisted only of one individual i.e. petitioner No. 1. Majority shareholding i.e. 80 per cent was held by Group B. This group comprised of appellant No. 2 and respondent Nos. 6 to 8 prior to 29th April, 1998 and thereafter comprised of appellant Nos. 2 and 7 to 20. Except for a short period during January, 1996 and September, 1996 Group A never enjoyed a majority on the Board. Thus the findings of the C.L.B. to the contrary cannot be upheld. It is further submitted that there was no glorified partnership between members of Group A and Group B. This has been held to be so by Justice Deshmukh in the order dated 24th July, 1998 while dismissing the winding up petition. No appeal having been filed against the said order, the issue is clearly res judicata between the parties. Equally the finding that there was no deadlock and the petitioner No. 1 alone held shares in the Company representing 20 per cent of the paid up capita! was also conclusive final and binding and, therefore, res judicata. The finding to the effect that the petitioners had failed to make out a case of just and equitable winding up of the Company is binding not only on the parties but also on the C.L.B. In the face of the above, it is submitted that the C.L.B. has given completely perverse, erroneous and inconsistent findings. The C.L.B. has wrongly held that Group A held 50 per cent share capital and/or was entitled to 50 per cent share capital and a majority on the Board. The findings rendered by the C.L.B. that the transfer of the shares by respondent Nos. 7 to 9 in favour of appellant Nos. 7 to 20 being contrary to Article 12, is contrary to findings rendered by the High Court. Equally the findings with regard to removal of petitioner Nos. 1 and 4 as Directors at the Extraordinary General Meeting held on 29th April, 1998, the allotment of shares to appellant Nos. 7 to 20 at the Extraordinary General Meeting and the appointment of respondent Nos. 3 to 6 as Additional Directors at the Board meeting held on 29th April, 1998 are based on the earlier findings which are wholly inconsistent with the findings recorded by the High Court. He further submitted that the C.L.B. has erred in law in holding that violation of the statutory provisions would result in oppression if the actions result in tilting the balance in favour of any particular group. It is submitted that commission of illegality by the majority cannot be termed as an act of oppression. It is further submitted that the C.L.B. has wrongly held that there was an agreement as pleaded. The finding of equality of shareholding and majority of Group A on the Board is stated to be perverse. It is further submitted that no relief could have been granted to non-members. According to Mr. Dwarkadas, paras 2, 4 and 7 of the operative part of the order beside being incorrect findings in law are wholly inconsistent. On the one hand C.L.B. has held that petitioner No. 1 alone was the shareholder of the Company and petitioner Nos. 2 to 5 were not shareholders. On the other hand whilst passing the final order, the C.L.B. has granted relief to the very same parties. This, according to Mr. Dwarkadas, discloses total non-application of mind on the part of C.L.B.. Granting of relief to any non-member renders the order without jurisdiction or in excess of jurisdiction. According to Mr. Dwarkadas, the correct position in law is that any private agreement which is contrary to the Articles of Association is not binding either on the shareholder or on the Company. Since the oral agreement has not been incorporated in the Articles of Association it was not binding on the shareholders or on the Company. He has further submitted that the provisions of the Contract Act are incorporated in the Companies Act. Thus, unless there is an offer and acceptance there can be no allotment of shares. The relief which is granted by C.L.B. is in excess of its powers under section 402 of the Companies Act as it does not have any nexus with the object of sections 397 and 398 of the Act. Thus, it is submitted that the C.L.B. has exceeded its powers. The implication of the order is that instead of bringing to an end the conduct complained of in the petition, the majority has been reduced to a nominal minority. It is submitted that the majority has been punished for acts of oppression that may have been committed. Mr. Dwarkadas has submitted that in construing any agreement, the conduct of the parties is very important. Applying this test it is submitted that the agreement could not have been implemented without increasing the capital. Execution of an agreement and contents therein are sought to be justified by an agreement entered into at the Police Station on 12th April, 1997 and on the basis of a certificate issued by a Bank. The statement made before the police cannot he used as a foundation for establishment of an agreement. Similarly the certificate issued by the Bank cannot be relied upon as it is issued at the instance of the respondents herein. It is submitted that C.L.B. has committed errors at every step. He submits that the C.L.B. has ignored all the events which took place prior to 1998. The events of 1998 ought to have been judged by taking into consideration the entire circumstances. On 21st May, 1995 second appellant was appointed as an Additional Director at a Board meeting held on 21st May, 1995. On 30th September, 1995 respondent No. 7 and appellant No. 2 were elected as Directors at the Annual General Meeting. On 15-1-1996 first to fourth respondents and respondent No. 6 were appointed as Additional Directors by a Board Resolution. Thus from 21st May, 1995 to 15th January, 1996 none representing Group A was on the Board of Directors. On 30th September, 1996 AGM was held when respondent Nos. 2 and 3 were not re-elected as Directors and, therefore, they ceased to be Directors. Accordingly with effect from 30th September, 1996 the following 5 persons were Directors.
1. Second appellant- Group B
2. First respondent - Group A
3. Fourth respondent -Group A.
4. Sixth respondent- Group B.
5. Seventh respondent - Group B. Hence on and after 30th September, 1996 Group A had only 2 Directors whereas Group B had 3 Directors which position remained unchanged. Relying on the events from June, 1996 the C.L.B. has come to the conclusion that there was always an agreement of equal shareholding. This, according to Mr. Dwarkadas is contrary to the pleadings of the respondents where it is pleaded that the agreement have been implemented in January, 1996. It is submitted that the C.L.B. ought to have considered these events in order to discern the intention of the parties. These events are intrinsic evidence that there was no evidence of agreement/understanding as construed by the C.L.B.. In the present case there is said to be only an oral agreement. Therefore, it has to be tested by the conduct of the parties. The two Additional Directors from Group A not having been made permanent the C.L.B. wrongly came to the conclusion that there must have been 7 Directors. If that had been so, according to Mr. Dwarkadas, then these Directors would have acted as such. There is no resolution to the effect that these Directors were ever made permanent. There is no amendment to the Articles of Association. There is no challenge to the resolutions passed on 30th September, 1997. Now even the minutes of the meeting could not be permitted to be challenged. It is submitted that the petitioners had to succeed on the basis of the pleadings in the petition and not on the basis of the affidavits filed subsequently. It is submitted that the C.L.B. has wrongly come to the conclusion that the Resolutions purported to have been passed at the AGM in September 1996 must not have been passed. It is submitted that C.L.B. has wrongly applied the provisions of Article 25 to come to the conclusion that there ought to have been a Resolution. Mr. Dwarkadas has laid considerable stress on the fact that Group A having invited the findings from the High Court in the winding up petition, the petition under section 397 was not maintainable. It is submitted that the pleadings were identical. These facts are noticed also by the C.L.B.. The Company petition having been dismissed the C.L.B. could not have held that Group A has been oppressed. Acts of oppression have to be continuous leading to a conclusion that it would be just and equitable to wind up the Company. Since the High Court had already held that it would not be just and equitable to wind up the Company the C.L.B. could not have come to a contrary conclusion.
4. Mr. Mehta, the learned Counsel, has reiterated the submissions made by Mr. Dwarkadas. He has stressed that the order passed by the C.L.B. does not have any nexus with the object sought to be achieved. Thus he submits that the order is contrary to law. He submits that the C.L.B. could only make such an order as it thought fit for the purpose of enforcing the agreement between Group A and Group B. Thus the C.L.B. could only have passed orders to ensure that the shareholdings of Group A and Group B in the Company were equal and that Group A would have 4 Directors and Group B would have 3 Directors on the Board of Directors of the Company. Instead of this, the C.L.B. has passed an order which is in total violation of the alleged agreement. The Board has increased the shareholding of Group A to 88 per cent and reduced the shareholding of Group B to mere 12 per cent. Thus Group A would have 6 Directors on the Board of Directors whilst Group B would have only one Director. Thus the C.L.B. has exceeded its jurisdiction under section 397 of the Act. He further reiterated that once the petition for winding up filed by respondent Nos. 1 to 5 was dismissed by the High Court with a finding that it was not just and equitable to wind up a Company, no relief could be granted to Group A in the petition filed by virtue of section 397 of the Act. He submits that before any relief can be granted under section 397 of the Act, the petitioners therein had to establish that it was just and equitable to wind up the Company. The facts pleaded in the Company petition were the same as the fact pleaded before the C.L.B. The High Court had given a finding that it was not just and equitable to order winding up of the Company. This finding was res judicata. The C.L.B. committed an error of law in considering the whole issue de novo for coming to a contrary conclusion to the High Court. According to Mr. Mehta, C.L.B. was also not justified in holding that the High Court had suggested that the petitioners therein had a remedy under section 397 of the Act. The High Court merely held that the minority can approach the C.L.B. for remedying their grievances. The High Court, therefore, merely stated the legal position. The winding up petition having been dismissed on merits, the alternative remedy under sections 397 and 398 was not available. It is further submitted that the C.L.B. has not at all understood the scope and meaning of the expressions "oppression" and "just and equitable". According to Mr. Mehta, in order to establish oppression, it must be shown that the conduct of the majority shareholders was burdensome, harsh and wrongful and that there were continuous act on the part of the majority shareholders showing that the affairs of the Company were being conducted in a manner oppressive to some part of the members. He further submits that such an oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. Even if these acts may amount to oppression, they do not necessarily make it just and equitable to wind up the Company. It is further submitted that the concept of "just and equitable" on the basis of a complaint about the ouster from the management and the principle of dissolution of partnership can only be invoked when shareholding is more or less equal and there is a complete deadlock in the Company. For this proposition the learned Counsel has relied upon Hind Overseas Pvt. Ltd. v. R.P. Jhunjhunwalla, A.I.R. 1975 S.C. 565 para 32. Thus it is submitted that oppression and the ground of just and equitable for winding up are separate and distinct and both have to be independently established before any relief can be granted under section 397 of the Companies Act. The ground of "just and equitable" to wind up the Company is to be established in addition to "oppression". Thus the finding of the Board that the oppressive conduct was itself a ground for winding up of the Company is erroneous. He submits that the C.L.B. has misunderstood the observations of the Supreme Court in the case of Shanti Prasad Jain v. Kalinga Tubes Ltd., 35 Company Cases 351 at 366. He submits that the C.L.B. has misunderstood the following observations of the Supreme Court.
"As has already been indicated, 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 of 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 proprietary rights as a shareholder."
5. In reply, Mr. Sarkar, learned Counsel, has submitted that there is no infirmity in the Order passed by the C.L.B. except to the extent that option ought not to have been given to appellant Nos. 1 and 2 to repurchase the shares from appellant Nos. 7 to 20. Mr. Sarkar has submitted that in their submissions the Counsel for the appellants have totally lost the focus of the controversy. According to him, the whole episode can be divided into three periods which he has described as Chapters - 1,2 and 3. According to him, Chapter 1 relates to take over of the Company and the arrangement between the partners until disputes started in 1996. Chapter 2 relates to the period from December, 1996 to April 1997 when the parties jointly decide to stop operations of the Company pending resolutions of the disputes. Chapter 3 being the efforts of Group B to try and resolve the dispute in the domestic forum by throwing out the existing Directors/shareholders, bringing in outsiders and creating a new and absolute majority in their favour by various oppressional and illegal acts by holding illegal Board Meetings and General Meeting contrary to the Articles and the Law. He submitted that 5 persons got together and bought the existing Company. Although petitioner No. 1 before the C.L.B. had only 20 per cent of the shares, he was the only member in the group having funds available at his disposal. It is for this reason that Group A petitioners advanced a loan of Rs. 22 lacs. The money was to be converted into share application money. Ultimately Group A had contributed Rs. 29 lacs plus the original One lac making a total of Rs. 30- lacs. Group B had contributed Rs. 29.30 lacs. Thus the petitioner No. 1's investment on his own became more than the whole of Group B. The petitioner had agreed to this investment on the basis of the oral agreement which has been discussed at length. Admittedly till 30th September, 1996, Group A had the majority on the Board of Directors. Thereafter Group B has tried to oust Group A as has been succinctly noticed by the C.L.B. He submits that the game to oust Group A from the management and control of the Company is made to begin by three letters purported to have been written by respondent Nos. 6 and 8 to the Company proposing to sell their shares to persons named therein, all being members of Aarti Group. The three letters dated 10th April, 1998 were produced before the C.L.B. and have been dealt with in para 22 of the impugned order. The first purported meeting was called on 13th April, 1998 to consider the sale of shares of respondent Nos. 6, 7 and 8 as per the letters dated 10th April, 1998. This meeting dated 13th April, 1998 has been held to be illegal by the C.L.B. on the ground that 7 days notice was not given. Similarly the E.O.G.M. dated 29th April, 1998 has been rightly declared null and void as no special notice was given of the E.O.G.M., thus violating section 284 of the Act. Fresh share allotment has been rightly held to be illegal as the same has been done to preclude the allotment of shares to Group A who had already invested a sum of Rs. 29 lakhs for the last three years. Mr. Sarkar has further submitted that the various contemporaneous acts would clearly show that the C.L.B. has correctly come to the conclusion that there was an understanding. These facts may not be sufficient to establish rights in a civil suit but will be sufficient to establish equitable rights. He refers to the statement made before the police on 12th April, 1997 which categorically states that there are 7 Directors. Thereafter the attendance sheet of the Board meeting dated 18th April, 1997 also shows that 7 Directors were present. He submits that the C.L.B. has rightly relied upon the handwritten note where agreement was made to share the expenses. He submits that the Resolution to the effect that in future shares will be allotted only with the consent of the shareholders would show that Group B did not ever enjoy a majority on the Board. To get over the difficulty, it has been provided that the shares will be transferred with the approval of the shareholders. This would mean approval of 75 per cent of the shareholders. Since both the groups held approximately 50 per cent of the shares, there could be not future transfer of shares. With regard to chapter 3, it is submitted by Mr. Sarkar that this commenced with a subsequent statement made to the police on 4th June, 1998 where appellant No. 2 tried to get out of the earlier statement. He submits that the C.L.B. has correctly appreciated the events of April, 1998. These were the steps which were taken to remove Group A from the Company altogether. He refers again to the proposal dated 10-4-1998 for transfer of the shares. All these proposals are identical having only one object i.e. to increase the number of shareholders. By their actions, according to Mr. Sarkar, Group B has permitted total strangers to take over the Company. So much so, now the Company is merely producing for Aarti. He submits that challenge to the events of April, 1998 is not dependent on respondent No. 1 being partner or 50 per cent shareholder or majority on the Board. All these acts are illegal in themselves and could not have given any right to any party. The transfer of the shares in accordance with Article 12 could only be to the nominee of the Director. Yet, no notice of transfer of shares was ever given to the Directors. He submits that C.L.B. has also correctly interpreted Article 25-A to hold that the Directors of Group A are also not liable to retire by rotation. Finally he submits that if the meetings held on 13th April, 1998 is held to be illegal, then the entire edifice of the case of Group B is destroyed.
6. Having considered the arguments of the Counsel for the parties, I find no infirmity in the order of the C.L.B. The C.L.B. has noticed that the petitioners therein are claiming 50 per cent of the subscribed capital of the Company, The principal grievances of the petitioners therein were as follows:
(1) Even though petitioners 2 to 4 are shareholders of the Company having been allotted certain number of shares by the Board, yet, the same is disputed by the respondents.
(2) Shares held by respondents 7, 8 and 9 have been transferred to certain respondents without following the provisions of the Act/ Articles.
(3) Even though petitioners 2 and 3 continue to be Directors, yet, the same is not admitted by the respondents on the ground that they were not appointed in the A.G.M. (4) Petitioners 1 and 4 have been removed from the Board without following the provisions of the Act.
(5) Further shares have been issued to certain respondents in violation of the provisions of the Act and without the consent and knowledge of the petitioners holding 50% shares in the Company.
(6) The respondents 2, 7, 8 and 9 have handed over the management and operation of the Company to outsiders by appointing them as Additional Directors which is detrimental of the interest of the petitioners and the Company.
The C.L.B. has noticed that the foundation of the petition is that there was an understanding/agreement between the original 5 shareholders, in that Group A would have 50 per cent in the shares of the Company and majority on the Board of Directors. No formal written agreement had been produced before the C.L.B. The C.L.B. relied on a hand-written note dated 2nd August, 1997 signed by respondent No. 6 wherein there is a statement that the shareholders would contribute for the expenses of the Company in various proportions. This note has been held to give some credence to the stand of the petitioners therein with regard to the understanding/agreement. The aforesaid notice has been placed on the record in the compilation of documents at page 56. A perusal of this shows that the parties had agreed to contribute to the expenses individually as under:
D.G. Mehta : 50% S.S. Gulati : 14% P.V. Wandrekar : 14% P.P. Bardeskar : 14% L.N. Godbole : 8% Thereafter the note proceeds to say that "We will reimburse you with our respective shares". This note is dated 1-8-97 on the top of the right side and dated 02-08-97 in the bottom right side corner. In my view, the C.L.B. has come to the correct conclusion about the implication of the note to the effect that there was an underlying partnership principle operating. The C.L.B. also relied upon the investment of Rs. 29 lakhs by Group A as against Rs. 25.30 lakhs by Group B to show that equality in contribution seems to have been agreed to by the parties. The C.L.B. has further held that these facts taken together with the fact that in the Board meeting held on 15-1-1996, when 4 Directors were appointed as Additional Directors shows that Group A was to have majority on the Board. It is held that there is no explanation from Group B as to why 20 per cent shareholders should have 4 representatives on the Board while Group A controlling 80 per cent shares should have only 3 Directors. This conclusion of the C.L.B. also cannot be said to be perverse. It was reasonable for the C.L.B, to infer from the ratio of investment that the parties have intended to maintain a reasonable balance between the two groups. If Group A was not going to have a substantial share in the management of the Company it was not necessary to make investment of Rs. 29 lakhs. This group even advanced some money to Group B to make up the shortfall in their investment of Rs. 25.30 lakhs. It is also noticed by the C.L.B. that the authorised capital of the Company was increased to Rs. 1 Crore on 7th December, 1995. In the Board meeting held on 8th December, 1995 it was also resolved to issue further shares and accept share application money as indicated earlier. The C.L.B. held that these contemporaneous/successive events lead to the conclusion that there is substance in the stand put forward by the petitioners therein. I find no infirmity in the approach adopted by the C.L.B. It is a settled proposition of law that findings of fact recorded by quasi judicial authorities can only be interfered in appeal if the same are perverse and could not have been reached by any reasonable authority. Whilst it is true that the findings of fact are not accepted blindly, the courts do not interfere with them also without real justification. The view taken by the Board is a possible view. Thus it would call for no interference. In my view, the C.L.B. has correctly come to the conclusion that there is substance in the stand of the petitioner No. 1 that his group was to have 50 per cent shares in the Company and majority on the Board., With regard to the composition of the Board, detailed reasons have been given in the impugned order. It was the stand of the respondents (Group B) that in the A.G.M. held on 30th September, 1996, petitioner Nos. 2 and 3 (Group A) who were Additional Directors were not appointed as Directors, while the other petitioners and respondent No. 5 who were Additional Directors were appointed as Directors. On the other hand it was contended by Group A that in the meeting all the 7 Directors would be made permanent Directors not liable to retire by rotation. However, neither of them produced any return filed with the Registrar about the appointment of the Directors. The C.L.B. noticed that the contention of the petitioners (Group A) would have been rejected but for the enabling provision contained in Article 25(b). Since the requisite material was not placed on record, the C.L.B. asked for a report from the Registrar as to whether any returns in terms of section 260 of the Act had been filed with the Registrar. From the report it transpires that Form No. 23 was filed on 3-4-97 i.e. nearly six months after the resolutions were passed. By that time the disputes had already arisen. This form indicated about the admission of the three Directors and does not indicate the cessation of the 2 Directors belonging to Group A. It is further observed that the names of the Additional Directors were never proposed for being appointed as regular Directors in the ensuing A.G.M. It is further held that if the names of the Additional Directors had not been approved there would have been Resolution to that effect. The C.L.B. came to the conclusion that Group A, therefore, had a majority on the Board. This conclusion is further supported by the events that took place on 18th April, 1997. On that date Group A wanted to allot shares to themselves which were in fact allotted. Group B although claiming to be in majority, however, left the meeting without participating in the proceedings. The C.L.B. has rightly come to the conclusion that if Group B had a majority on the Board they could have easily defeated any Resolution which was proposed by Group A. In fact the attendance slip showed that 7 Directors had attended the meeting although the signatures of petitioner Nos. 2 and 3 in the C.L.B. were disputed by the appellants herein. For the aforesaid conclusion the C.L.B. has also taken support from the action by Group B in the EOGM held on 14th April, 1997. In this meeting it was decided by Resolutions passed by Group B that henceforth further allotment of shares should be only with the approval of the General Body. The C.L.B. has come to the conclusion that the only reason for this Resolution was that at that time the Directors of which Directors from Group A enjoyed the majority. Thus, it is held that it is in-
conceivable that petitioner Nos. 2 and 3 before the C.L.B. were not appointed as Directors in the A.G.M. on 30-9-96. I find no infirmity in the findings recorded by the C.L.B. It is apparent that the Resolution dated 14-4-97 was passed with an intention to prevent Group A Directors from allotting the shares to themselves. Since shares were to be allotted only to the nominees of the Directors, there was no legal impediment to prevent Group A from allotting the shares. Thus power was sought to be transferred from the Directors to the General Body. Had Group B been in majority, there would have been no need for such a move. There is sufficient material on the record to indicate that Group B was acting as the minority group all along. Sometime after 5th December, 1996 disputes started between the parties when appellant No. 2 removed machinery from the Company to his own concern. Thus Group A made a complaint to the police. In these circumstances a statement was made before the police on 12th April, 1997 by Jitendraji Mehta and Pawalu Bhardaskar belonging to Group B and A respectively. The statement is signed by both the parties. In this statement, it is admitted that there are in all 7 Directors. It is also admitted that since last June, 1996 a dispute has arisen in connection with the transactions of the Company. It is stated that now the parties will approach the Court and duly get the decision thereon. It was undertaken that during the pendency of the proceedings both the parties will not remove any goods, machinery or any other things and articles from the Company. Appellant No. 2 has tried to retract the statement on 14th June, 1998. Much credence is not given to the second statement by the C.L.B. as by then the disputes had arisen between Group A and Group B. The disputes had arisen sometime in June, 1996. It is for this reason that Group B Directors were not appointed as permanent Directors on 30th September, 1996. The meeting was held hardly within six months of their appointment as Additional Directors. Taking into consideration all the circumstances, the C.L.B. has held that only conclusion possible is that petitioner Nos. 2 and 3 therein had also been appointed as Directors on 30th September, 1996 along with other Additional Directors. The C.L.B. further held that since for the appointment of the other three Directors there is on indication in the Resolution that they were not liable to retire by rotation, the same holds good in respect of the Directors of Group B. I find no infirmity in the finding recorded by the C.L.B. Mr. Sarkar has pointed to certain other documents which would independently show that Group A was in majority. He has pointed out to this Court a letter dated 26th June, 1996 written by the Union Bank of India to the Company. This letter has been written in response to the information sought by the Company. It is stated that Account C/D No. 95031 has been opened with the Bank on 5th December, 1996 on the basis of the letter written by the Company on the aforesaid date. The letter dated 5th December, 1996 has been signed by Devan Mehta and P.V. Wandrekar, both Directors of the Company. At the time of the opening of the Account following persons were listed as Directors of the Company.
1. Dipak Mehta.
2. Devan Mehta.
3. P.P. Bardeskar.
4. P.V. Wandrekar.
5. Smt. B.D. Mehta.
6. Dr. L.N. Godbole.
7. Shri. K.D. Mehta.
The letter further states that till writing of the present letter, there is no change in the list of Directors. On page 47 of the compilation are the signatures of all the 7 Directors who attended the Board meeting held on 18th April, 1997. Mr. Sarkar has thereafter referred to a letter dated 11th September, 1998 written by Bank of India to the Company with regard to the Current Account No. 61064 in the name of the Company. This account was suspended on 10th April, 1997. This letter by the Bank states that the account was opened on 30-1-96. The names of the Directors were the same as mentioned earlier. This letter also states that names of the Directors as mentioned remain the same. Taking all these facts into consideration I am unable to hold that the findings recorded by the C.L.B. are either perverse or are based on conjectures and surmises. Thereafter coming to the allotment of shares by Group A in the meeting held on 18th April, 1997 the C.L.B. has held the same to be null and void. This decision has been held to be null and void on the basis of a number of factors. It was contended by Group B that there was an EOGM of the Board on 15th April, 1997 wherein a decision had been taken that the Board would not allot any shares without the approval of the General Body. It was also submitted that the necessary information about the allotment of shares was not filed within the prescribed time. On the other hand Group A had contended that there was no EOGM on 15th April, 1997. If there was such a meeting it was invalid as no notice of the same was given to Group A. It was also submitted that no minutes of the Board meeting have been produced in which a decision has been taken to convene the EOGM. The C.L.B. held that a meeting seems to have been held on 15th April, 1997 as the returns have been filed with the Registrar of Companies on 17th April, 1997. This was before the holding of the Board meeting on 18th April, 1997. The C.L.B. then considered as to whether the EOGM was held in accordance with the Articles of Association. It is noticed that Article 7 provides for at least 7 days notice to members for convening a General Body Meeting. After examining the material on the record, the C.L.B. has given a finding of fact that no notice as required was given. It was found from the copies of Form No. 23 filed with the Registrar of Companies on 17th April, 1997 that notices were issued on 13th April, 1997. Thus the meeting had been held within 2 days of the notice. I find no infirmity whatsoever in the findings of the C.L.B. on this issue also. With regard to the allotment of shares by Group A on 18th April, 1997 the C.L.B. has again given cogent findings. The C.L.B. held that since the petitioner No. 1 therein has himself relied on the principle of partnership, the allotment of shares without consulting the other partners, even assuming that allotment was made on that day has to be held as not binding on the Group B shareholders since it would amount to reducing the majority into minority without there consent even if there was a prior agreement that Group A would become majority. In my view no benefit can be derived by Group B on the basis of this finding against Group A. The C.L.B. has treated both the parties with an even hand. The actions which were illegally performed by Group A have been set aside as also the actions performed by Group B. Whilst coming to the aforesaid conclusions the C.L.B. took notice of the fact that Group B Directors had left the meeting even before any item in the agenda was considered. The C.L.B. did not find much merit in the submission of Group A that Group B Directors had left the meeting after the Resolution was passed with regard to the allotment of the shares. The C.L.B. has rightly come to the conclusion that a decision had been taken in the EOGM held on 15th April, 1997 not to allot shares without the approval of the General Body. It is doubtful whether Group B would have agreed to the allotment of the shares to Group A without the approval of the General Body. The C.L.B. was not also given any evidence to show that the agenda for the meeting had the item of allotment of shares. In my view, the findings returned by C.L.B. are based on evidence and cogent reasons and, therefore, do not call for any interference. Thereafter the C.L.B. took up the matter with regard to transfer of shares held by respondent Nos. 7 to 9. After examining of facts, the C.L.B. came to the conclusion that even a cursory glance as to how the transfer has been effected would indicate that the provisions of the Articles have not been complied with. It was for the Directors to nominate the transferees whereas the Group B shareholders chose the transferees themselves. It has been held that Group B shareholders have failed to prove that requisite notice was given for the Board meeting held on 13th April, 1998 or on 29th April, 1998. Thus, it is held that the Resolutions passed on the aforesaid dates are null and void. The allotment of additional shares to Associates of Aarti was decided in the Board meeting dated 8th May, 1998 and 25th May, 1998, pursuant to the decision taken in the Extraordinary General Meeting of 29th April, 1998. Since the holding of the meeting on 29th April, 1998 was already held to be invalid, for the same reasons this Resolution was also declared invalid. Thereafter the C.L.B. held that Group B had not established the need for funds for the issue of further shares. In fact, the Company had offered to refund the share application money to the Group A shareholders. An amount of Rs. 18 lakhs had in fact been refunded to Group B shareholders. The money collected through further allotment was only Rs. 7 lakhs. It is held by the C.L.B. that further issue was made only with a view to enhance the shareholding of the new shareholders who are part of M/s. Aarti Associates Limited. The C.L.B. further held that the Company had the benefit of the amount invested as share application money by Group A (Rs. 29 lakhs) for a period of 3 years, without allotting the shares. Instead of allotting the shares to Group A the Company decided to allot further shares against fresh subscription by outsiders. The C.L.B. held that this action lacks in probity and is in breach of their fiduciary duties. It is held that whilst the transfer of shares reduced the status of the petitioner from one amongst 5 shareholders, the further allotment reduced him from 20 per cent shareholder to less than 10 per cent. Thus applying the same principle for not upholding the allotment of shares by Group A Directors the further allotment by Group B has been declared null and void. The C.L.B. has also held the appointment of the Additional Directors being respondent Nos. 3 to 6 therein in the Board meeting held on 29th April, 1998 as null and void. The reason for holding the meeting dated 29th April, 1998 as illegal had been discussed at length by the C.L.B. as noticed earlier. In my view, the aforesaid conclusion cannot be said to be based on no evidence. The C.L.B. has arrived at reasonable conclusions which are drawn from the history of the events enacted by the parties. Thus it would not be possible to interfere with the findings of the C.L.B.
7. Coming to the maintainability of the petition, it is held that only petitioner No. 1 could maintain the petition. This is held on the basis that the share allotment in favour of the other member of Group A has been held to be invalid. However, since the petitioner No. 1 therein was holding more than 10 per cent shares, the petition was held to be maintainable. On the relevant date the petitioner held 20 per cent of the shares. The C.L.B. has held that the one point programme of both the Group seems to have been to gain control of the Company at the cost of the other, irrespective of the fact whether the provisions of the Act/Articles are followed or not. The C.L.B. has noticed that both the groups did not seem to have bothered about the interest of the Company. The Company was kept locked. The Bank accounts were frozen and no activity was being carried on, except finding ways and means to oust the other group from the Company. The C.L.B. notices that the foundation of the petition is that the Company was to be run on partnership principles and that there was an agreement relating to the shareholding and directorship. The C.L.B. also noticed the submissions that the petitioners have not established that grounds exist for winding up of the Company on "just and equitable" grounds. Strong reliance was placed on the findings of the High Court in the order passed in the winding up petition. The C.L.B., however, differentiated between a winding up proceedings and a proceeding under section 397. It is held that in a winding up proceedings on "just and equitable" grounds, the Court may order winding up once the grounds are established. However, in a 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. The C.L.B. held that the High Court had decided against the petitioners on the ground that there was no deadlock in the management. Thus it was held that it would not be just and equitable to order winding up of the Company. The C.L.B. observed that the High Court did not examine whether the allegations of oppression had been established. Thereafter the C.L.B. examined the various issues to find out whether there has been oppression by Group B of Group A. Thereafter the C.L.B. has come to the conclusion that the grounds of oppression have been made out. In my view these findings cannot be overruled on the ground of res judicata as submitted by Mr. Dwarkadas and Mr. Mehta. A perusal of the order of the High Court clearly shows that the relief has been denied to the petitioners relying on the judgment of the Supreme Court in Hind Overseas Pvt. Ltd. v. R.P. Jhunjhunwalla, . The learned Judge has relied on the observations to the effect that winding up of the Company on the ground that it is just and equitable to do so, is to be done only when shareholdings were more or less equal and when there is a case of complete deadlock in the Company on account of lack of probity in the management of the Company and there is no hope or possibility of smooth and efficient continuance of the Company as a commercial concern. Having held so, the High Court has observed that under sections 397(2) and 402 of the Act, the C.L.B. has ample powers to make appropriate orders remedying the grievance of petitioner No. 1. In such circumstances it is not possible to hold that the C.L.B. was pre-
eluded from examining all the facets of the controversy. In fact, it was submitted by the Counsel for petitioner No. 1 that in view of the increase in the share capital the petitioner No. 1 does not hold 1/10th of the issued share capital of the Company and, therefore, his application under section 397 would not be maintainable before the C.L.B. In reply, the Counsel appearing for the respondents submitted that the tenability of the application filed by the petitioners before the C.L.B. will have to be decided on the basis of the averments made in the petition and according to those averments he holds 20 per cent of the shares of the Company. The learned Counsel further submitted that in any case, the respondents undertook not to raise an objection on this ground to the application that the petitioner may file before the C.L.B. Having made such a submission before the High Court, it is hardly open to the appellants now to say that the petition under section 397 was not maintainable or that it was barred by principles of res judicata.
8. Although numerous authorities have been cited by both the sides, it is not necessary to make any reference to the same as, in my opinion, the C.L.B. has applied the correct principles and gave the following directions.
"1. The Board of Directors stands reconstituted with immediate effect with the petitioners 1 and 4, and respondent 2 as Directors.
2. The reconstituted Board will meet within a week from the date of this order and allot share to Group A against their share application money of Rs. 29 lakhs.
3. Respondents 7, 8 and 9 will have the option to repurchase the shares transferred by them and the respondent transferees are bound to retransfer the same at the same consideration at which the shares were originally transferred. For this purpose, the transferor respondents should indicate, in writing, their desire to purchase, within 15 days of the date of this order and the transfer should be effected within 15 days thereafter.
4. In case these respondents do not exercise their option to repurchase, and the transferees, in view of the changed circumstances, wish to sell their shares acquired by transfer and allotment-the Group A will have the first option to purchase the shares at the same price at which the shares were transferred/allotted. Once the offer of sale is made, the Group A is bound to purchase the same within 15 days of the offer, to be made in writing.
5. Being the original shareholders, as long as they are shareholders, petitioner 1 and respondent 2 will continue as Directors on the Board and all other directors will be elected in accordance with Articles.
6. Within 15 days of allotment of shares to Group A, the Board will convene a general body meeting of the Company to elect not more than four more Directors, as the Board may deem fit.
7. In case the respondent 2 also desires to sell his shares then the first option to purchase shall be with Group A."
9. The only grievance raised in the appeal filed by Group A is with respect to the direction issued in para 3 of the said order. I do not find any justification for interfering in the aforesaid direction. The direction contained in 3 is sufficiently clarified by direction No. 4. In my view, the order passed by the C.L.B. is perfectly within the jurisdiction. In fact, it appears that the C.L.B. has taken pains to restore the balance between the two groups. It is a matter of fact that Group B had virtually walked out of the Company and introduced total strangers therein. Even then the C.L.B. has given an option to Group B to rejoin the Company on the basis of the original arrangement which has been held to be proved by the C.L.B. Similarly, no, harm has been done to Group A by giving an option to Group B to repurchase the shares which had been sold by Group B. I, therefore, do not find much substance in the submissions of Mr. Dwarkadas and Mr. Mehta to the effect that the order of the C.L.B. has reduced a majority into a minority nor do I find any substance in the submission of Mr. Sarkar to the effect that Group B having sold out their shares are not entitled to any relief under section 397 read with section 402 of the Companies Act. The C.L.B. has proceeded on the basis that strictly within the confines of law Group A had only 20 per cent shareholding. This has been also held by the High Court in the winding up petition. The C.L.B. has, however, also examined the arrangement and understanding to the effect that Group A and B will have 50 per cent shareholding and Group A will have majority on the Board of Directors. It has, therefore, correctly come to the conclusion that if the actions of either of the group are contrary to the understanding it would be just and equitable to order the winding up of the Company. This finding has not been arrived at on the ground that there is a deadlock between the two opposing groups. That was the limited sphere in which the High court had examined the controversy between the two groups. In fact, the petitioners had pleaded that they would not be able to get any relief from the C.L.B. As noticed earlier, the Counsel appearing for Group B at that stage had stated that this objection would not be raised before the C.L.B. Taking the aforesaid facts and circumstances in view, I am of the considered opinion that the order of the C.L.B. calls for no interference.
10. In view of the above all the three appeals and the applications are dismissed.
11. The minutes agreed upon between the parties on 8th April, 1999 and the further order of 15th April, 1999 shall continue for a period of eight weeks from today.
Certified copy expedited.
12. Appeals dismissed.