Company Law Board
Khounish Chowdhury vs Kero Rajendra Monolithics Ltd. on 22 January, 2002
ORDER
Balasubramanian, Vice-Chairman
1. The principal complaints of the petitioners in relation to the affairs of Kero Rajendra Monolithics Ltd., (the company) are that by issue of further shares in the company, the petitioners group has been converted from a majority into a minority, that there has been change in the composition of the Board of directors by which the respondents' group has gained majority on the Board and that there have been acts of gross mismanagement in the affairs of the company.
2. The admitted facts in the case are that all the petitioners are NRIs of whom some of them are shareholders and some of them have remitted money as share application money for allotment of shares. The 1st petitioner was in control of one Kero GmbH, Germany. During his visit to Germany, the 2nd respondent had discussions with the 1st petitioner for providing technology by Kero GmbH for a company to be set up in India for manufacture of monolithic ceramic refractories. In pursuant to the discussions, an MOU was entered into by which it was agreed that a company would be set up in India with Kero GmbH holding 40 per cent shares and that the petitioners would have 25 per cent of the total strength in the Board of the company and the Kero GmbH was to supply technical know-how to the company. Accordingly, the company was incorporated in 1990 with anauthorized capital of Rs. 1 crore divided into 10 lakh shares of Rs. 10 each. The 1st petitioner and the 2nd respondent were the first directors along with 2 other directors. The 1st petitioner was the chairman of the Board. The company entered into an MOU with Kero GmbH for supply of technical know-how and raw materials and Kero GmbH was to buy back 50 per cent of the products of the company. As per this MOU, Kero GmbH would have 40 per cent shares and NRIs 2 per cent shares. This foreign collaboration agreement was approved by the Central Government. Pursuant to this approval, 4 lakh shares of Rs. 100 each were allotted to Kero GmbH. In 1993, the 1st petitioner disassociated himself from Kero GmbH which subsequently went into liquidation. The petitioner purchased the shares held by Kero GmbH in the company and the company had endorsed all these shares in favour of the 1st petitioner. As on 30-3-1997, the 1st petitioner, with these 4 lakh shares, along with other NRI shareholders held 52.5 per cent shares in the company and the petitioners group also had 4 directors out of 7 directors, thus constituting the majority on the Board.
3. The disputes between the parties have arisen due to the following: Now the company claims that the transfer of 4 lakh shares acquired by the petitioner from Kero GmbH in the company has been cancelled as the same was not in compliance with the provisions of Section 108 of the Companies Act, 1956 ('the Act'), that further shares to the extent of 5,83,937 shares had been issued to Indian shareholders due to which the petitioners' holding in the company as on the date of filing the petition was only 9.95 per cent and that two directors from the petitioners group were not elected in the AGM held on 30-9-1997 and that 4 more directors from the respondents group were appointed to the Board, first as additional directors on 27-7-1997 and confirmed as directors in the AGM held on 30-9-1997.
4. Shri Mookherjee, Advocate appearing for the petitioners submitted: This company was a joint venture between Kero GmbH and the 2nd respondent. Since the 1st petitioner was in control of Kero GmbH, it was at his instance that the collaboration agreement was entered into. The 1st petitioner was associated with the company right from its incorporation as is evident from the fact that he was one of the first directors and he was also Chairman of the company. When Kero GmbH went into liquidation, the 1st petitioner acquired all the 4 lakh shares which constituted 37.17 per cent of the paid up capital as on 30-3-1997. In addition, his group held another 15.3 per cent. Thus, as on 30-3-1997, the petitioners' group held 52.5 per cent shares in the company, thus, constituting the majority. This is notwithstanding the fact that substantial amount of money had been remitted by the petitioners and other NRIs as share application money for further shares. Thus, both in terms of shares allotted and in terms of the share application money with the company from the petitioners' group, it constituted the majority. Even though, the relationship between the parties was cordial till end of 1996, due to the mismanagement of the 2nd respondent as the managing director of the company, some of the petitioners issued a special notice on 17-5-1997 in terms of Section 284(2) of the Act (Annexure A-15) to remove the 2nd respondent as the managing director. However, the company did not proceed to call for an EOGM as called for by the petitioners to remove the 2nd respondent as the managing director. With a view to defeat the resolution, the 2nd respondent had issued further shares on 12-6-1997, 27-7-1997, 1-9-1997. By these allotments, the shareholding of the respondents' group went up from 40.55 per cent as on 31-3-1997 to 61.45 percent as on 1-9-1997 and the petitioners holding from 52.5 per cent went down to 34.45 per cent. No shares were allotted against the share application money in the name of the petitioners and other NRIs while shares were allotted to the respondents' group against the share application money. In all, the company had issued and allotted 5,83,937 shares during this period. The main object of allotment of these shares was only to convert the petitioners' group into a minority and to create a new majority which in a number of cases has been held to be an act of oppression by various courts including the Company Law Board (Board). The company could not claim that by allotment of these shares, the company had benefited by way of receipt of funds inasmuch as all the allotments had been made against share application money already available with the company. Some of the petitioners who had remitted funds as share application money complained to the RBI by a letter dated 5-7-1997 (Annexure A-17) regarding non-allotment of shares to the NRIs by the company notwithstanding the approval given by the RBI on 17-1-1997 for an amount of about Rs. 78 lakhs with repatriation benefits. The very fact of exclusion of the petitioners in the allotment when share application money was with the company for which the RBI approval had also been received very clearly indicates that the allotment to the respondents' group was only with a view to create a new majority. The fact of allotment of further shares came to be known to the petitioners only on 16-11-1997 when in a Board meeting on that day a list of shareholding as on 30-9-1997 was handed over to the 20th petitioner stating that the petitioners group was in minority. According to that list, 6,69,167 shares had been issued after 31-3-1997, of which 5,20,435 shares had been allotted to the 2nd respondent, his friends/associates and companies under his control. It appears that the shares were allotted against loans taken from these persons at exorbitant rates of interest. Further the company being a public company, shares should have been offered on proportionate basis to all the existing shareholders which has not been done by the company to allot the further shares. There is nothing on record to show that the provisions of Section 81 (1 A) of the Act had been complied with to allot shares other than by way of right shares. Even if such an approval had been taken, no notice for the general body meeting in which the approval was taken was received by the petitioners enabling any of them to attend the said meeting.
5. In view of the mismanagement of the affairs of the company by the 2nd respondent in his capacity as the managing director, some of the petitioners sought to remove him as the managing director by a notice dated 30-6-1997. On the same day, the 2nd respondent, in his capacity as the managing director, issued a notice convening a Board meeting on 26-7-1997 (Annexure A-16) in which one of the items of the agenda was allotment of shares. The petitioners filed a suit in the court of 2nd Assistant District Judge at Barasat seeking to restrain the company from acting on the notice dated 30-6-1997 on various grounds inter alia including that the company was trying to dilute the holding of the petitioners by issue of further shares. The court passed an order directing the company not to give effect to the notice dated 30-6-1997 till 13-8-1997, the order of which was communicated to the company on 25-7-1997 (Annexure A-21). However, the company issued another notice on 25-7-1997 (Annexure A-22) convening a Board meeting or 27-7-1997 to transact practically the same businesses as were to be transacted by the notice dated 30-6-1997. In this notice also there was a proposal to allot shares against pending share application money and a proposal to appoint additional directors. Two of the petitioner directors had already given a notice dated 6-7-1997 under Section 169 of the Act for convening an EOGM to appoint 7 directors from the petitioners' group (Annexure A-26). By proposing allotment of shares and also appointment of additional directors in the meeting convened on 27-7-1997, the respondents had ensured that the petitioners' notice for removal of the 2nd respondent as the managing director and also for appointment of 7 directors had become infructuous, Since transacting the same businesses which had been stayed by the court amounted to contempt of court, the petitioners moved an application to the court in Barasat but the same was dismissed on the ground that since the notice was a fresh notice which has not been incorporated in the plaint, no order could be passed on the application. The holding of the said emergency meeting to transact the same business which had been restrained by the court shows that the very idea of holding the meeting was to allot shares and to appoint additional directors with a view to create a new majority and to gain absolute control of the Board. Further, by giving such a short notice, that too for a meeting on a Sunday, to the NRI directors is a clear act of oppression. As per the Regulations of the company as approved by the Board, NRI directors are to be given 6 weeks notice for the Board meeting. Neither of the notices dated 30-6-1997 and 25-7-1997 satisfied this requirement. In that meeting, the Board purportedly had allotted 3,72,552 shares. The Board had allegedly allotted further 20,000 shares in a meeting held on 1 -9-1997. The petitioners were kept in the dark over the number of shares allotted as minutes of neither of these two meetings had been disclosed nor the directors' report signed on 1-9-1997 disclosed the said allotment. Further, the return of allotment in respect of both the allotments were filed with the ROC only on 19-2-1998, which incidentally, is the same date on which the reply to the petition was also signed by the 2nd respondent as is evident from Page 39 of his reply. It is quite possible that the claim of the respondents about the allotment itself may not be true in view of the late filing of the returns after this petition was filed.
6. He further submitted: According to the company, as per the list of persons to whom shares were allotted (which was supplied to the petitioners as per the directions of the Bench) the shares were allotted to 75 persons. The petitioners undertook to implead all these persons which was permitted and copies of the petitions were sent to all these persons. Even though, 39 of these persons accepted personal service, none has filed any affidavit in reply. 16 persons received the notices as per the acknowledgements received from them but none has filed any reply except that one person to whom the company had reportedly allotted 20,000 shares has stated that he does not hold any shares in the company. Therefore, there seems to be fictitious allotment of shares which is also evident from the fact that no details of payment of money by these persons has been disclosed. From the list furnished, it is seen that in these allotment of shares, it is the 2nd respondent and his family members who were the major beneficiaries. Further, the number of shares allotted as per the returns of allotment does not tally with the shares indicated in the list given by the company indicating very clearly that there is some hanky panky in the entire allotment. Some of the names shown in the list do not find a place in the return of allotment. Even though 3 shareholders made an application for impleadment, yet, none of them has filed a reply. 20 of the letters sent by the petitioners were returned as 'not known, not found, incomplete address and left'. Such contradictions in the documents, silence of the shareholders etc. clearly shows that there has been fabrication in regard to the allotment of shares. By these allotments, the holding of the NRIs has come down substantially notwithstanding the fact that the Board of directors in a Board meeting held on 16-12-1995 (Annexure A-13) had expressed its view that reduction of NRIs holding jn the company would not be good for the company's present status.
7. Further arguing on thepoint of this allotment of shares, Shri Mookherjee contended that the entire allotment took place only with a view to perpetuate the control of the company by the 2nd respondent in view of the notices issued by the petitioners for removing him as the managing director and for appointment of directors from the petitioners' group. In other words, all the allotments were motivated, completely in breach of the fiduciary duties of the directors and with a view to create a new majority. It has been held in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. AIR 1981 SC 1298 and also in Gluco Series (P.) Ltd, In re [ 1987] 61 Comp. Cas. 227 (Cal.) that creation of a new majority is an act of oppression.
8. As far as the constitution of the Board of directors of the company is concerned, Shri Mookherjee submitted: As on 31-3-1997, there were 7 directors on the Board of which 3 were from the petitioners' group including the 1st petitioner who was the Chairman. One NRI director was neutral. One director resigned on 27-7-1997. The 2nd and the 3rd respondents were the remaining directors. Thus, the petitioners' group had majority on the Board as on 26-7-1997. In the meeting held on 27-7-1997, the respondents had appointed 4 new directors out of which two were the sons of the 2nd respondent. By this act, the 2nd respondent had hijacked the Board. As already indicated, the notice for this Board meeting on 27-7-1997 was issued only on 25-7-1997 i.e. just with two days notice notwithstanding the fact that the directors from the petitioners' group were residing abroad. This notice was not issued to/received by all the directors. As per the company's Rules and Procedures (Annexure A-2) adopted on 16-12-1995, 6 weeks notice is to be given for Board meetings. The manner and the haste in which this meeting was convened, that too after the civil court had restrained the company from holding the meeting on 26-7-1997, clearly indicates that the purpose of holding the meeting was only to hijack the company both in terms of the shareholding and the directorship, Having inducted 4 directors in the illegally held Board meeting, the 2nd respondent had ensured, by virtue of issue of further shares, the removal of two directors of the petitioners' group from the Board in the AGM held on 30-7-1997. The notice for this meeting was not received by most of the NRI shareholders as the same was posted only on 23-9-1997 i.e., only with six days notice. By letters dated 30-9-1997 and 1-10-1997 (Annexures A-29 and A-30), some of the petitioners including the 1st petitioner being the Chairman of the company had brought this to the notice of the company. Therefore, not only the appointment of 4 additional directors and their confirmation in the AGM and the removal of two directors is illegal but also oppressive to the majority petitioner shareholders.
9. Shri Mookherjee further submitted: The respondents are mismanaging the affairs of the company due to which the company has suffered heavy losses. As is evident from Annexure A-36, the company has been misusing the bill discounting facilities and has been committing irregularities in the banking operations due to which the bank had issued a letter to the 2nd respondent dated 10-6-1997 (Page 471 of Volume 3) that The bank also hold you equally responsible for any acts or misdeeds committed by the company found to be against the interest of the bank. You would also be held responsible on account of suppression of material facts since as late as your letter dated 19-4-1997, no mention was ever made by you about any financial irregularity being carried out by the company'. Further, the internal audit report at Annexure A-39 is full of adverse comments on various matters contained in that report. All these would exhibit that there has been gross financial mismanagement by the 2nd respondent.
10. The learned counsel further submitted that the respondents are harassing and oppressing the 1st petitioner by refusing to recognize his membership in regard to 4 lakh shares acquired by him from Kero GmbH. The 1st petitioner purchased 4 lakh shares held by Kero GmbH for valuable consideration and lodged the same with the company for registration. In the Board meeting held on 9-8-1995, the Board approved the transfer of shares (Annexure A-57). In his letter dated 17-7-1995, the 2nd respondent had informed Kero GmbH that after receipt of the RBI approval, the company had effected the transfer of 4 lakh shares to the 1st petitioner (Annexure A-58). In the list of past and present members of the company as on 30-9-1995 (Annexure A-59), these 4 lakh shares are shown against the name of the 1st petitioner. Further, the copies of share certificates at Annexure A-9 would also indicate that all these shares have been endorsed in favour of the 1st petitioner by the 2nd respondent himself on 10-8-1995. However, now the respondents, by fabricated minutes dated 2-3-1996 at Exhibit-I contend that the transfer deeds duly executed earlier were not valid and as such the 1st petitioner was to resubmit valid transfer deeds in this regard. This stand of the respondents is totally incorrect in as much as the shares had already been transferred in August, 1995 itself as is evident from the fact of endorsement of transfer on the share certificates. It is true that the share transfer forms as at Exhibit-3 were incomplete but after the RBI gave the approval, fresh transfer deeds were submitted duly completed in all respects where after they were transferred in favour of the 1st petitioner. Now the 2nd respondent claims that the shares still are in the name of Kero GmbH notwithstanding the fact that they had already been registered in the name of the 1st petitioner. Having entered the name of the petitioner in the list of members, if the company had deleted the same, then, it is beyond the powers of the company as a company cannot rectify its own register. Since the Board had held in Tin Plate case, a share certificate has primary evidential value than the shares register and since the share certificates had been endorsed in favour of the petitioner, he is the rightful owner of the shares notwithstanding the fact that his name does not appear in the register of members. Further, the NRIs have invested over Rs. 20 lakhs in the company for which in spite of repeated requests, no shares have been allotted notwithstanding the fact that approval of the RBI had been received as is evident from copies of the RBI's approval at pages 30 to 33 of the Rejoinder.
11. Shri Mookherjee further submitted that the suit filed by his clients related to the Board meeting on 26-7-1997 and did not relate to any of the issues raised in the petition as acts of oppression and as such the present petition cannot be considered to be a parallel proceeding. He submitted that since the petitioners constituted the majority before the issue of further shares after 31-3-1991 which has been challenged in the petition, they cannot be ordered to sell their shares. To do justice between the parties, either all further shares issued after 31-3-1997 should be cancelled and the shareholders should be allowed the right to elect directors on the Board or else the company should be directed to refund all the monies invested by the petitioners immediately and the 1st petitioner should be relieved of his personal guarantees. Otherwise, the petitioners are willing to revive the company which is in dire financial difficulties provided the 2nd respondent indemnifies the company for all the claims against it from 1997 onwards and the shareholding is restored to the original position as on 31-3-1997.
12. Shri Mitra, Sr. Advocate for the respondents submitted: This petition is not maintainable in as much as the petitioners, without the support of 4 lakh shares, do not qualify to file the petition in terms of Section 399 of the Act. Even though shares were issued in the name of Kero GmbH, yet, its name was not entered in the register of members for want of the RBI's approval and therefore it could not have transferred the same to the 1st petitioner. Even though these 4 lakh shares were endorsed in favour of the 1st petitioner, yet, his name was not entered in the register of members since the transfer instruments were not valid and as such there was no compliance with the provisions of Section 108. That is the reason why in the Board meeting held on 2-3-1996, the 1st petitioner was requested to resubmit valid transfer deeds. Therefore when the name of the petitioner is not in the register of members, even if the shares had been endorsed in his favour, since there is violation of the provisions of Section 108, the petitioner cannot claim any right over these 4 lakh shares. The Supreme Court has held in Mannalal Khaitan v. Kedar Nath Khaitan AIR 1977 SC 536 that compliance with the provisions of Section 108 is mandatory and since in this case the instruments of transfer were not valid on account of non-cancellation of the stamps, the registration in the name of the petitioner cannot bestow any right of a shareholder in respect of these 4 lakh shares. This principle has been followed by the Board also in Subhash Chandra v. Vardhman Spg. & General Mills Ltd. [1995] 83 Comp. Cas. 641. As a matter of fact, in a Board meeting held on 1-9-1997, the Board had resolved to cancel the transfer of shares in favour of the 1st petitioner. The reliance of the learned counsel for the petitioners on Tin Plate case is not relevant in this case in as much as in that case the Board took only a prima facie view but in the present case in facts of this case, such a prima facie is not possible. A company, In re 1986 BCLC 391, it has been held that if the name of a person is not entered in the Register of Members, he has no locus standi to file a petition alleging oppression. It has also been held in Ved Prakash v. Iron Traders (P.) Ltd. [1961] 31 Comp. Cas. 122 (Punj.) that non-members cannot file a petition. The CLB has also held in Mahendra Singh Rathore v. Rajput Hotel & Resorts (P.) Ltd. [1998] 1 CLJ 160 that on the date of filing of the petition, the petitioners should satisfy their requirements of Section 399. If these 4 lakh shares are omitted, then the petitioners collectively would hold only 9.95 per cent. Further, the 11th petitioner holding about 42,000 shares has withdrawn his support by a letter dated 9-4-2001 thus bringing down the petitioners' holding to 7.37 per cent and as such this petition is not maintainable in terms of Section 399. Many of the petitioners are not registered shareholders of the company and they have only remitted money towards allotment of shares and therefore, not being members, they cannot maintain the petition.
13. Even otherwise, the learned counsel pointed out that in view of the petitioners having filed a civil suit with similar allegations in which they have also obtained interim orders, they cannot proceed with the present petition till such time the civil suit is finally disposed of. In other words, he submitted that the present proceedings should be stayed as the Board has itself done in similar cases like Sardar Iqbal Singh v. Sardar Gurbakash Singh [2000] 100 Comp. Cas. 504, Lopchu Tea Co. Ltd. and AP Jain v. Faridabad Metal Udyog (P.) Ltd. [1995] CC 76 (SIC).
14. He further submitted: The main reason why the company went into the financial difficulties was that Kero GmbH did not comply with its various obligations more particularly with reference to supply of full technical know-how and failure to buy back 50per cent of the production of this company. When the petitioner claims 4 lakh shares held by Kero GmbH, he is also bound to comply with the obligation of Kero GmbH, which he had failed. The whole responsibility of mobilizing funds and managing the company came to be thrust on the Indian promoters and therefore they had to issue additional shares.
15. He further submitted that the claim of the petitioners that they have been reduced from a majority into a minority by allotment of further shares is not borne in facts of this case. As per the MOU at Annexure A-3, Kero GmbH was to hold only 40 per cent snares in the company, NRIs 5 per cent while the Indian Promoters were to hold balance 55 per cent. Even as per the Government approval enclosed with Annexure A-7 dated 31-3-1991, the foreign equity participation was restricted to 40 per cent amounting to Rs. 20 lakhs and NRI equity was to be 2 per cent, amounting to Rs. 1 lakh indicating very clearly that the balance equity contribution has to come from Indian promoters. Further, when this approval was amended on 28-8-1991 by the Govt. of India, the same percentage was kept intact except that the amount was increased to Rs. 40 lakhs and Rs. 5 lakhs as foreign equity contribution and NRI equity contribution respectively. Thus, on no account the petitioner could claim majority in the company to allege that there has been a conversion of the majority into a minority.
16. Shri Mitra further submitted: The 1st petitioner was fully aware of the financial needs of the company and he did approve mobilization of funds by issue of shares to resident Indians. The issue relating to raising of funds within the country was being discussed right from 1995 as is evident from the Board minutes dated 7-3-1995 wherein it was decided to go in for public issue and in a Board meeting held on 15-4-1995 presided over by the 1st petitioner, the Board adopted a resolution in terms of Section 81(1A) to issue equity shares for a sum of Rs. 2.5 crores to general public including friends and relatives and NRIs. It was also resolved to allot fresh equity for a value of Rs. 78,11,600 to NRIs out of Rs. 2.5 crores. Accordingly, it was also resolved to amend the memorandum and articles of association of the company to increase the authorized capital to Rs. 3.5 crores. Accordingly, it was also resolved to convene an EOGM on 9-5-1995 to transact the above businesses. By a notice dated 15-4-1995, the said EOGM was convened on 9-5-1995 in which the resolutions relating to increase the authorized capital and also in terms of Section 81(1A) were passed. Relevant Form No. 23 was also filed with the ROC on 29-5-1995. The contention of the petitioners that there has been a violation of the provisions of Section 81 is not correct and that the 1st petitioner was fully aware that the shares had been issued to the Indian shareholders. He further submitted that the petitioners have challenged allotments made only after 31-3-1997 without assigning any reason as to why the earlier allotments are not challenged. In the Board meeting held on 22-11-1996 which was presided over by the 1st petitioner, 59,100 shares were allotted to Indian shareholders against the share application money already received by the company. In the same meeting, it was also resolved to raise Rs. 1 crore by allotment of shares on right basis to tide over the working capital crisis. These minutes were signed by Shri Sircar on 24-5-1997. From these minutes, it is evident that not only the petitioners were aware of the need of funds by the company but also they knew and consented to the issue of shares to the Indian shareholders.
17. Again, in the Board meeting held on 24-5-1997, 1,91,385 shares were allotted to Indian shareholders and this meeting was attended by Shri S. Sircar and Shri S. Lahiri representing the petitioners' group and actually this meeting was presided over by Shri Sircar. In the petition, this allotment has not been challenged as the petitioners are aware that shares had been allotted with the consent of their own representatives. This allotment itself had brought down the percentage holding of the petitioners to about 45 per cent even assuming that the 4 lakh shares belong to the 1st petitioner. In other words, on their own volition they had got their percentage shareholding reduced below 50 per cent. The petitioners cannot doubt the authenticity of the minutes as the zerox copy of the minutes containing the signatures of Shri Sircar and also the attendance register which has been signed by the two NRI directors in token of having attended this meeting, produced during the hearing, would establish the authenticity of the minutes. Therefore when they do not or cannot challenge this allotment which had reduced their percentage shareholding below 50 per cent, challenging further allotments has no bearing on their claim of conversion of the majority into a minority.
18. He further submitted: On 27-7-1997, 3,72,552 shares were allotted to Indian shareholders against the application money received from them. It is not that the allotment was made behind the back of the petitioners. In the agenda for the meeting convened on 26-7-1997, allotment of shares was one of the businesses to be transacted and the petitioners obtained a restraint order on the ground that the allotment would reduce their share holding. Therefore, they were aware of the proposal of the Board to allot shares. In a Board meeting held on 1-9-1997, further 20,000 shares were allotted against share application money. None of the allotments was made with the view to affect the petitioners but only in the interest of the company.
19. As far as the allegation that no consideration for the shares has been received is concerned, the learned counsel referred to the balance sheet as on 31 -3-1998 and pointed out that the increase in paid up capital for the shares issued and allotted is reflected. Without verifying the receipt of money for the shares, the statutory auditors could not have certified the balance sheet. Producing the bank statements for the relevant period, the learned counsel pointed out the entries in the said statements indicate receipt of money to the tune of about Rs. 15 lakhs by account-payee cheques. The balance was received by way of cash in the same way as the company accepted cash from some of the petitioners. Therefore, there is no merit in the allegation that money had not been received for the shares allotted to the Indian shareholders. In regard to the various points raise about the identity of the shareholders made by the learned counsel for the petitioners, he submitted that the company need not have to find out whether these persons are real or not as long as money had been received by the company along with applications. He also produced applications received for shares and submitted many of these persons had attended AGMs and also have received dividends. If the shares had been allotted without receipt of money, then only there could be a cause for suspicion and not otherwise. The balance sheet of the company as on 31-3-1997 shows the share application money received both from NRIs and residents separately and shares had been issued against the share application money to the resident Indians.
20. The learned counsel further submitted: The company had issued a notice on 30-6-1997 for holding a Board meeting on 26-7-1997 to transact various businesses including allotment of shares. Instead of attending this meeting, the petitioner filed a civil suit and obtained a stay order. Instead of filing the suit, the petitioner directors could have attended this meeting, the failure of which and filing of the civil suit hardened the attitudes of the parties. Since the company urgently needed funds, an emergent meeting of the Board was convened on 27-7-1997 by a notice dated 25-7-1997 (Annexure A-22). This meeting was convened to transact the business relating to convening an EOGM as requistipned by the petitioners by two notices dated 30-6-1997 which were received on 6/24-7-1997, allotment of shares against pending share application money and to appoint additional directors. An explanatory statement was also attached with these notices detailing the reasons for transacting those businesses. The holding of the meeting was bona fide and not with a view to over reach the restraint order by the civil court. The civil court itself has dismissed the contempt application filed by the petitioners.
21. After the disputes started, in spite of notices issued for the general body meetings, the petitioners did not attend the AGM in 1998 and also the Board meetings thereafter.
22. Summing up his arguments, Shri Mitra submitted that not only this petition is not maintainable in terms of Section 399, it also deserves to be stayed in view of the pending civil suit. Even otherwise, on merits also the petition does not survive as all the allotments were made for raising funds for the company and there is no conversion of the majority into a minority nor creation of a new majority. To the proposition that when shares are issued for the benefit of the company there can be no case of oppression he relied on R. Khemka v. Deccan Enterprises (P.) Ltd. [2000] 100 Comp. Cas. 211 (AP), Needle Industries (India) Ltd. 'scase (supra) and Om Prakash Gupta v. Hicks Thermometer (India) Ltd. 97 [1999] 97 Comp. Cas. 356 (CLB). Further, when the issue and allotment of shares was with the knowledge and consent of the petitioners as revealed from the proceedings of the Board meeting already indicated, they cannot allege oppression. He also submitted that the company has been able to survive only due to the efforts of the 2nd respondent who has not only mobilized funds from his friends and relatives, but has also given personal guarantees and as such equity is in favour of the respondents and as such this petition should be dismissed.
23. Shri Mookherjee in rejoinder to the arguments of the learned counsel for the respondents submitted: As on 31-3-1997, the petitioners were not only majority shareholders but also were majority on the Board with the 1st petitioner as the Chairman. While the petitioners were kept informed of the affairs of the company till November, 1996, the 2nd respondent had completely marginalized the petitioners thereafter by not only reducing their shareholding into a minority but also by taking over the Board by appointment of new directors and removal of two of the directors from the petitioners' group. This is a very classic case of oppression against majority shareholders fully justifying this petition under Section 397. The mismanagement of the company is all pervasive attracting the provisions of Section 398 also.
24. The contention of the respondents that the 1st petitioner has no right on 4 lakh shares earlier held by Kero GmbH is nothing but an afterthought. When the RBI has given the approval for transfer and when the company itself has endorsed the shares in favour of the 1st petitioner simultaneously entering his name in the register of members, no one can contend now that the 1st petitioner has no title to the shares. Producing a copy of the register of members he pointed out at page 94 of the register to show that his name has been deleted on the ground that stamps had not been cancelled. This deletion was made on 1-9-1997 by which time the litigation had started between the parties and in the Board meeting held on that date wherein the decision to delete his name was taken, none from the petitioners' side was present. This is nothing but a mala fide action. Further, even though in the resolution, it is stated that intimation would be given to the 1st petitioner, no such intimation was received by him. He further pointed out that the company has fabricated the minutes dated 9-8-1995. While as per the minutes at Annexure A-57, the Board had approved the transfer of shares in favour of the petitioner, in the copy of the same Board minutes filed by the 2nd respondent along with his affidavit dated 18-5-2001, it is recorded that that the Board had approved the transfer in principle and had requested the 1st petitioner to re-submit valid deeds in this regard. This has been done only with a view to deny the petitioner the title to 4 lakh shares even though right from the beginning the contemplation of the parties was that these 4 lakh shares would vest in the 1st petitioner subject to the RBI approval which was also received as conveyed by the RBI videits letter dated 4-7-1995 (Annexure A-10). He further pointed out that as early as on 8-9-1993, the Board had approved in principle the transfer of shares of Kero GmbH to the petitioner and therefore the question of once again agreeing in principle in 1995 did not arise. This itself would show that the minutes produced by the 2nd respondent is a fabricated document. Further, a company does not have powers to rectify the register of members on its own without moving the CLB for permission. Even otherwise, since the petitioners have challenged all the allotments made after 31-3-1997, prior to the allotment, they held 17.43 per cent shares and as such they have locus standito maintain this petition. He referred to Rajahmundry Electric Supply Corporation v. A. Nageshwar Rao AIR 1956 SC 213 to contend that the maintainability of a petition is to be judged on the date of filing of the petition and subsequent change in the percentage holding cannot affect the maintainability. Relying on Om Prakash Gupta's case (supra), he submitted that locus standi of the petitioners would depend on the findings given on the allegations relating to allotment of shares.
25. He further pointed out that the allotment of shares in the Board meeting held on 24-5-1997 itself is doubtful in as much as the alleged minutes of that meeting surfaced only after he had concluded his arguments on the petition. Even as per the decision in that Board meeting on 22-11-1996, shares were to be offered on right basis, No such offer was ever made and therefore no outsiders could have remitted money as share application money before 31-3-1997 for the company to allot shares. The minutes of 24-5-1997 is nothing but a fabricated document. The respondents have not so far produced the notice convening this meeting and even the alleged fax draft of the proceedings of that meeting surfaced only after the conclusion of his argument and as such no credence should be given to the fax copy of the alleged draft. The very purpose of the alleged issue is to defeat the proposal of the petitioners dated 17-5-1997 (Annexure A-15) to remove the 2nd respondent as the managing director. If as alleged by the respondents Shri Sircar and Shri Lahiri from the petitioners' side had attended the meeting on 24-5-1997, they would not have written the complaint to the CLB on 15-7-1997 (Annexure A-17) claiming to hold 53 per cent shares in the company. This itself would show that the presence of these two in the meeting is nothing but a fabrication. Further, even in the suit the petitioners have claimed majority and the respondents in their reply did not challenge this. In addition, no return of allotment relating to the allotment on 24-5-1997 was filed with the ROC. Only the allotment made on 12-6-1997 was filed with the ROC that too on 12-8-1997. On this day, over Rs. 20 lakhs remitted by the NRIs were available with the company as share application money. In regard to the contention of the respondents that there are parallel proceedings, he pointed out that the proceeding before the civil court was only relation to the Board meeting convened on 26-7-1997 and there is no allegation in that petition regarding conversion of the majority into minority, removal of directors, and mismanagement in the affairs of the company and as such the civil suit is not a bar in proceeding with the present petition before the Board. He also pointed out that none of the cases cited by the learned counsel for the petitioner is applicable in the facts of this case. Further, if the contention of the respondents is that money had already come to the company as share application money, by allotment of shares in such a hurry, the company did not get any further funds and the allotment was made only to protect the interest of the 2nd respondent who was sought to be removed by the majority shareholders. The very fact that when the NRI money was available with the company as share application money, no shares were allotted to them.
26. Shri Mitra in sur rejoinder submitted: The minutes of the Board meeting held on 24-5-1997 are very important in as much as the allotment made in this meeting reduced the petitioners into a minority and that is why they are challenging these minutes notwithstanding the fact two of the directors from the petitioners' group were present in that meeting. They cannot challenge their presence, as Shri Sircar has signed the minutes as Chairman of the meeting and Shri Lahiri also has signed the same as a director as is evident from the signature in the fax copy produced during the hearing. Further, these two persons have not come forward to file an affidavit denying their presence in that meeting. As per letter by the 1st petitioner dated 20-6-1997 (Annexure A-49), he himself has mentioned about the steering committee constituted in the meeting held on 24-5-1997 and as such now he cannot claim that there was no such Board meeting on that day. The need of funds for the company was known to the 1st petitioner as he himself wrote to the bank on 25-11-1996 seeking for additional bank facilities (page 512 of Vol. 2). As far as majority on the Board is concerned, as per the collaboration agreement, the respondents were to constitute the majority on the Board and by appointing new directors, the respondents have gained majority and as such this cannot be an act of oppression against the petitioners.
26.1 We have considered the pleadings and arguments of the counsel. Before dealing with the merits, it is essential to narrate certain events that took place during the proceedings. In the hearing held on 24-6-1998, the petitioners were represented by Shri S. N. Mookherjee, Advocate and Shri Sanjay Kumar Gupta, Practicing Company Secretary while the respondents were represented by one Shri J.K. Chattopadhyay, practicing Company Secretary. On that day, a hand written consent terms signed by Shri Sanjay Gupta and Shri Chattopadhyay were filed with the request that the petition be disposed of in terms of the consent terms. Accordingly, an order was issued on 29-6-1998 incorporating therein the terms of consent and disposing of the petition. Later, the respondents filed an application seeking for recalling the said order on the ground that Shri Chattopadhyay was not authorized to enter into any settlement with the petitioners. This application was heard in length and an order was passed on 24-6-1999 recalling the order dated 29-6-1998 for the reasons stated in that order. Thereafter, at our instance, further discussions took place in our presence to resolve the disputes amicably but without any result.
27. The respondents have questioned the maintainability of the petition in terms of Section 399 on the ground that on the day of filing of the petition.
the petitioners collectively held only 9.95 per cent shares in the company. To compute this percentage, according to the respondents, the 4 lakh shares allegedly held in the name of the 1st petitioner should be omitted for the various reasons indicated as part of the arguments. They have relied on the provisions of Section 108 to urge that even if the registration had taken place, since it was in violation of the provisions of this Section which have been held to be mandatory in Mannalal Khaitan's case (supra) by the Supreme Court, the 1st petitioner cannot rely on registration in his name. In this connection, it is relevant to refer to the decision of this Board on a similar objection in Radhe Shyam v. Panchmukhi (C.P. No. 46 of 1997) case wherein this Board observed 'Any way, as rightly pointed out by Shri Sen, that in between the share certificates and the Register of Members, the share certificate gets precedence over prima facie evidential value under Section 84 over prima facie evidence of the share register under Section 164, in as much as the later is under the control of the company and is susceptible to manipulation. This is what this Board has held in Tin Plate Co.'s case (supra) and in Rajendra Prasad Gupta v. Scientific Instruments Co. Ltd. [ 1999] 1 CLJ 121. Thus, taking into consideration our finding that the 2nd respondent had received the consideration for the shares and that these shares had been transferred and registered in the names of the petitioners/their group, and since the share certificates are in possession of the petitioners, we have no hesitation to come to the conclusion that the petitioners are validly registered legal owners of 3,19,200 shares in the company for valuable consideration'. Similar is the position in the present before us also.
28. The learned counsel for the respondents raised an issue that any transfer in violation of Section 108 which mandates cancellation of the stamps on the instruments of transfer is void if the stamps are not cancelled. When such a similar objection was taken in Panchamuki's case also, this Board observed 'The counsel relied on Mathrubhumi and Nudea Tea Company Cases. In both these cases, the challenge of non-cancellation of stamps was raised before registration was effected and accordingly the courts held that the Board of Directors of the companies had rightly decided to refuse registration in terms of Section 108. However, in the present case, registration had already been effected. In Kothari Industrial Corpn. Ltd. v. Lazor Detergent (P.) Ltd. [1994] 81 Comp. Cas. 617 (CLB) wherein when the petitioner company sought for rectification of its Register of Members on the ground that it had registered the transfer of shares lodged by the respondents even though the stamps had not been cancelled, this Board ordered rectification of the register of members on the ground that non-cancellation of the stamps was in violation of the mandatory provisions of Section 108. This order was challenged in the High Court of Madras which held that a company should not raise its own irregularity after a lapse of time and seek rectification of the register of members. Kothari Industrial Corpn. Ltd. v. Maxwell Dyes & Chemicals (P.) Ltd. [1996] 85 Comp. Cas. 79 (Mad.). Accordingly, it set aside the order of this Board. Therefore, while the non-cancellation of adhesive stamps could be a ground for refusal to register the transfer of shares, once the registration had been effected, such non-cancellation cannot be a ground for the company to seek rectification of the register of members. Therefore, in the present case, even though the stamps had not been cancelled, since the company had already registered the transfers, it cannot take a stand that the registration is invalid and therefore the petitioners are not legal owners of these shares. The same ratio applies in the present case also'. The admitted position in this present case before us is that the share certificates in respect of these 4 lakh shares have been endorsed in favour of the 1st petitioner as is evident from the copies of the share certificates in Vol. 2 and it is also on record that the list of shareholders as pointed out by Shri Mookerjee indicates the name of the 1st petitioner as the holder of these shares. Having registered the shares, endorsed the share certificates in favour of the 1st petitioner, entered his name in the register of members and having communicated the same to Kero GmbH, the company is estopped from challenging the transfer as being in violation of the provisions of Section 108 whatever might be the correct version of the minutes of the meeting on 9-8-1995. The learned counsel also took the plea that NRIs could hold only 5 per cent share in the company as per the approval of the Government and as such the 1st petitioner cannot hold these 4 lakhs. We are of the view that this plea cannot be accepted as the RBI has permitted the transfer. Therefore, these shares have to be included in computing the shares held by the petitioners and if it is done so even after the issue of further shares by the company, the petitioners held 34.45 per cent shares in the company, thus, fulfilling the requirements of Section 399. In view of this finding, the claim of the respondents that since of the shareholders has withdrawn the consent, the percentage holding has come down below loses its significance. Yet, even this argument does not survive as the maintainability of the petition is to be decided as on the date of filing the petition and subsequent changes in the shareholding cannot affect the maintainability of the petition as held in a number of cases. In L.RM.K. Narayanan v. Pudhuthotam Estates Ltd. [1992] 74 Comp. Cas. 30 (Mad.) it has been held that the requirement as to the share qualification is relevant and material only at the time of institution of proceedings and once there is a valid petition and a shareholder seeks to substitute himself in order to merely continue such a valid petition, such a shareholder need not hold 10 per cent of the share capital. It is not incumbent upon the court to dismiss a petition because the proceedings under Section 397 or 398 is a representative proceeding. Even the original petitioner does not want to continue the proceedings, the court cannot be compelled to dismiss the action. Even then, it is open to the court to consider the merits of the case without dismissing the petition. In Rajahmundry Electric Supply Corpn.'s case (supra) it has been held that the validity of a petition must be judged on facts as they were at the time of presentation and a petition which was valid when presented, cannot, in the absence of a provision to that effect in the statute cease to be maintainable by reason of events subsequent to its presentation. In S. Varadarajan v. Venkateswara Solvent Extraction (P.) Ltd. [1994] 80 Comp. Cas. 693 (Mad.) it has been held that the requirement of share qualification is relevant and material only at the time of institution of the proceedings.
Therefore, on none of the grounds of challenge, the respondents can claim that this petition is not maintainable in terms of Section 399.
29. Even otherwise, in this petition the petitioners have challenged all the shares issued after 30-3-1997 on which date they held 15.32 per cent shares even after excluding these 4 lakh shares. In such cases, this Board has been taking a view that if in a petition under Section 397/398, the allegations of oppression relate to removal as a member or conversion into a minority, then the petition could be heard, notwithstanding the fact that the conditions of Section 399 are not fulfilled, first to determine their entitlement (sic). In Dipak G. Mehta v. Shree Anupar Chemicals (India) (P.) Ltd [1999] 21 SCL 107 (CLB - N. Delhi), this Board took this view and considered the maintainability of the petition first in terms of Section 399. Reference may be made to the decisions of this Board in TNK Govindaraju Chetty v. Kadri Mills (CBE) Ltd. [1998] 16 SCL 701 (CLB - Chennai), Om Prakash Gupta's case (supra) and Dipak G. Mehta's case (supra) in this regard. Therefore, before getting into the merits of the case, we shall be first examining issue relating to further issues of shares to find out whether the petitioners have established the same to an act of oppression. One other aspect which has not been made clear to us is the number of shareholders in the company. Since, in terms of Section 399, 1/10th of the total members can also file a petition under Section 397/398, we would have examined this aspect also to find out as to whether 8 petitioner shareholders constitute 10 per cent of the total membership. Any way since we have held that the 1st petitioner is the rightful owner of the 4 lakh shares, even taking into consideration the issue of further shares, the petitioners group held more than 10 per cent shares and as such this petition is maintainable.
30. Another objection taken by the respondents relate to parallel proceedings. It is an admitted position that the 1st petitioner filed a suit TS No. 83 of 1997 in Barasat. According to the respondents since there are commonalities of allegations and prayers in the suit and this petition, the present proceedings should be stayed. They have cited a number of cases to support their stand. A perusal of the plaint indicates that there are no allegations relating to issue of further shares or relating to the change in the composition of the Board in the plaint, As a matter of fact the change in the composition of the Board took place after the plaint was filed. Further, the only relief that they have sought in the plaint relates to a decree of declaration that the purported notice dated 30-6-1997 was illegal and void and grant of perpetual injunction against the notice dated 30-6-1997. Therefore, we do not find any commonality in the suit and the present petition and as such the question of the petitioners' pursuing parallel proceedings does not arise.
31. Now that we have held that the 1st petitioner has a right to claim title to the 4 lakh shares acquired by him from Kero GmbH, the petitioner group held 52.46 per cent as on 30-3-1997. It is an admitted position that after allotment of further shares, the petitioners' group has been reduced to 34.03 per cent. The settled position of law is that if further shares are issued only with a view to either convert a majority into a minority or for creation of a new majority, then, the same is a grave act of oppression. It is also a settled law that 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. Keeping these principles in mind, we have to examine the allegation of the petitioners in relation to the further issue of shares. The stand of the respondents has been that, to the knowledge of the 1st petitioner who had been the Chairman of the company, the company needed funds for a long time and he was a party to the decision to mobilize the funds from all possible sources. We find substance in this stand of the respondents. In the Board meeting held on 2-3-1996 which was presided over by the 1st petitioner, the matter relating to increase in the share capital was discussed and the Board noted that the State Bank of India had sought the company to increase the paid up capital of the company to Rs. 1.5 crores. In that meeting, it was also decided that NRIs should contribute Rs. 15 lakhs and resident shareholders Rs. 3 lakhs. In the Board meeting held on 20-7-1996 which was presided over by Shri S. Sircar, the financial health of the company was discussed at length and it was decided that the only solution to solve the liquidity crisis was to go in for further issue of shares and the 2nd respondent has requested the members of the Board to mobilize funds from friends, relatives and associates etc. to collect at least Rs. 30 lakhs by September, 1996. In the Board meeting held on 17-8-1996 which was presided over by Shri S. Sircar, the Board decided to mobilize funds by private placement in view of paucity of funds due to which the company was not in a position to function smoothly. In the meeting held on 21-11-1996 which was presided over by the 1st petitioner (the minutes are found to have been signed by Shri S. Sircar on 24-5-1997), the Board, considering the persistent crisis of working capital, decided to raise fresh capital on right basis to the tune of Rs. 1 crore from Indians and NRIs by 31 -3-1997. We also find from the compilation of documents filed by the respondents at page No. 227, a letter from the State Bank of India on 18-5-1997 requiring the company to raise the paid up capital of the company to Rs. 2.15 crores before the bank could permit utilization of the full limits. From this sequence of events, it is evident that the company needed funds and that the same was in the knowledge of the 1st petitioner who was the Chairman of the company and also other NRI directors who had participated in some of these Board meetings.
32. Thus there are enough materials to show that the company needed funds and as such the next issue is whether the company could have allotted shares to resident shareholders which ultimately resulted in conversion of the petitioners from a majority into a minority. We find from the annual return as on 30-9-1996 that NRI shareholders had 61.88 per cent of the 10 lakh shares issued and paid up on that day. Obviously, there must have been further issue of shares to resident Indians after that date to bring down the NRI holdings to 52.46 per cent as on 30-3-1997 (It is seen from the minutes of the Board meeting held on 21 -11-1996 that 59,100 shares had been issued to resident shareholders). This reduction in the shareholding has not been challenged by the petitioners. Various issues were raised by the learned counsel of the petitioners inter alia including non-compliance with the provisions of Section 81 of the Act. We find from the minutes of the Board meeting held on 15-4-1995 which was presided over by the 1st petitioner himself that the Board had resolved to raise funds by issue of shares to general public including friends and relatives and NRIs as may be decided by the Board on such terms and conditions and that the general body approval in terms of Section 81(1A) would be obtained. It was also resolved in that meeting that out of Rs. 2.5 crores to be raised by way of public issue, equity worth Rs. 78.11 lakhs would be issued to NRIs on repatriation basis. Accordingly, in that meeting, the authorized capital was also proposed to be raised from Rs. 1 crore to Rs. 3.5 crores. It was also resolved to convene an EOGM in this regard on 9-5-1995. It is stated that subsequently the EOGM was held on 9-5-1995 and all the resolutions were carried through as is evident from Form No. 23 filed with the registrar. The petitioners have pointed out that the said EOGM was not held and even they had not received the notices for this alleged meeting. This plea cannot be accepted as fresh shares to the tune of 59,100 shares could not have been issued/allotted (which has not been challenged) without increase in the authorized capital which according to the respondents was done only in this EOGM. Thus it is clear that the provisions of Section 81 (1A) has been complied with to allot shares otherwise than on a right basis. If it is so and since we do not find any time limit within which the approval given by the EOGM was to be implemented as far as issue of further shares is concerned, we are of the view that the Board would be at liberty to allot shares as and when needed up to the amount of Rs. 2.5 crores including allotment to the NRIs.
33. Having held that the Board had been empowered, with the knowledge and consent of the 1st petitioner who was the Chairman, to issue and allot shares up to the extent of Rs. 2.5 crores to both resident and NRIs, the issue that arises for consideration, as repeatedly contended out by the learned counsel for the petitioners, whether the allotment of 3,72,552 shares on 27-7-1997 was only with a view to defeat the resolutions proposed by the petitioners for removal of the 2nd respondent as the managing director and to reduce the petitioners into a minority. The circumstances in which this meeting was held does throw a lot of suspicion about the motive of holding this meeting. It is on record that the meeting convened on 26-7-1997 by a notice dated 30-6-1997 has been stayed by the civil court and the order of the civil court was served on the company on 25-7-1997. One of the items in agenda for this meeting was allotment of further shares. One of the grounds on which this meeting was challenged was that by allotment of further shares, the petitioners would be reduced to a minority.
Even though, the civil court held that the company/respondents had not committed contempt by transacting the same business in the Board meeting convened on 26-7-1997, the ground on which that view was taken by the court, as is evident from the order of the court is that in plaint the notice dated 25-7-1997 was not an issue. However, when we look at this matter from the angle of oppression, it is quite clear that the haste with which this meeting was held with just two days notice when the majority directors were NRIs is nothing but an oppressive act. It is also on record that none of the directors from the petitioners' group notwithstanding their being the majority on the Board attended this meeting obviously for want of sufficient notice. It appears to us that the purpose of holding this meeting with such a short notice was only with a view to avoid the presence of the majority directors who happened to be from the petitioners' group and such avoidance of the presence of majority directors itself can be considered to be a grave act of oppression. A short notice with the view to avoid/prevent directors to attend a Board meeting can never be a valid notice in terms of Section 286 of the Act as has also been held in Homer District Consolidated Gold Mines, In re [1888] 39 Ch. D. 546. Normally when proper notices are not issued to all directors, the decisions taken in a Board meeting are null and void. Parmeswari Prasad Gupta v. Union of India [1974] 44 Comp. Cas. 1 (SC). Further, we also note that neither the agenda sent through the notice dated 30-6-1997 nor the one dated 25-6-1997 indicated the number of shares to be allotted. We find that only two directors out of 7 directors--both from the respondents group were present in this meeting. Therefore, this allotment of 3,72,552 shares suffers from various infirmities like allotment of shares exclusively to residents when over a sum of Rs. 20.8 lakhs remitted by NRI shareholders as share application money was available with the company, was done in a meeting without sufficient notice to the majority directors, the entire allotment was behind the back of the petitioners represented by the NRI directors. All these would establish very clearly that this allotment is nothing but an act of oppression against the petitioners. As far as the allegation of the petitioners that this allotment was made only to defeat the proposed removal of the 2nd respondent as the managing director, we would have found substance in this argument if on this day the petitioners constituted the majority which according to the respondents was not in view of allotment of shares having been made in the Board meeting held on 24-5-1997.
34. As far as the allotment of 1,91,385 shares claimed to have been made by the company in the Board meeting held on 24-5-1997 is concerned, the stand of the petitioners is that the minutes of the Board meeting on 24-5-1997 are fabricated. We note that even though as per the Board minutes the allotment of 1,91,385 shares was made on 24-5-1997, yet, in the return of allotment filed on 12-8-1997, these shares are shown to have been allotted on 12-6-1997. The learned counsel for the respondents did not clarify this discrepancy. The respondents in their compilation filed a copy of the minutes of the Board meeting on 24-5-1997 wherein it is indicated that Shri S. Sircar presided over this meeting and that Shri S. Lahiri also attended this meeting. These two are NRI directors. At the end of the minutes, it is also shown that Shri Sircar had signed these minutes as Chairman of the meeting and 5 other directors including Shri S. Lahiri, an NRI director had signed the same as 'Read and confirmed'. It was contended by the learned counsel for the petitioners that these directors had not signed the original minutes book and that the original minutes have been signed by Shri S.N. Mittra as Chairman of the meeting on 27-7-1997. Countering these arguments, the learned counsel for the respondents produced before us the attendance register for the meeting held on 24-5-1997 wherein we have seen the signatures of Shri Sircar and Shri Lahiri. He also produced before us a fax copy of the draft minutes originally signed by Shri Sircar as the Chairman of the meeting wherein he himself had signed for Shri Lahiri also and other directors have also signed as 'Read and confirmed'. The learned counsel for the petitioners urged that since this document was produced at the fag end of the hearing, no reliance should be placed on that. To this extent we agree that such late production of the document has placed the petitioners from rebutting the authenticity of the same, but in the compilation filed earlier, a copy of the minutes had been filed showing the presence of these two directors, but they have not chosen to file any objection to the same. However the counsel for the petitioners, as a part of the arguments, contended that if these two directors of the NRI group had attended this meeting wherein shares were allotted, they would not have taken a stand of their being in majority in the civil suit and they would not have complained to the Board claiming to be in the majority. Yet, we find that the 1st petitioner himself in his letter dated 20-6-1997 (Annexure A-49) referred to the constitution of the steering committee. This committee was constituted in the Board meeting held on this day.
Therefore, he cannot disown knowledge of this meeting. When the signatures of the NRI directors are found in the attendance register for having attended the meeting on this day and when the zerox copy produced shows the signatures of Shri Sircar without any challenge of the signatures and since these two NRI directors have not chosen to challenge their presence in the meeting, and when the 1st petitioner has recognized this meeting by his letter, we have to necessarily hold that this meetting took place and that these two NRI directors attended this meeting and were parties to the allotment of 1,91,385 shares. Therefore, as far as the allotment of these shares are concerned, we do not find any scope to intervene.
35. The 3rd allotment after 31-3-1997 was made in the Board meeting on 1-9-1998 of 20,000 shares. In this meeting, admittedly, none from the petitioners' side was present. On this day also, the share application money of over Rs. 20 lakhs remitted by the NRI shareholders was with the company and therefore without allotting any shares to them, the act of the Board to allot shares only to the resident shareholders could be considered to be an act of oppression.
36. The learned counsel for the respondents vehemently urged that by allotment of shares on 24-5-1997, the petitioners had already become minority with 44.6 per cent shares (including 4 lakh shares) and therefore allotment made thereafter can never be considered to be with a view to convert the petitioners into a minority and as such cannot be considered to be an act of oppression. Even though, we have given a finding that the allotment of shares made on 24-5-1997 was with the knowledge and approval of the directors from the petitioners' group which incidentally reduced the petitioners from a majority into a minority, yet, by further issue of shares, without the knowledge and consent of the petitioners, they have been further reduced to 34.45 per cent, which according to us is an oppressive act. It is to be noted that even though the company is a public company, yet there are only two identifiable groups and practically every shareholder belongs to either of the groups. Thus, when one group is allotted shares against the application money, the other group has been left out resulting in the change in the percentage holding. Such an act has to be viewed as oppressive. In this connection it is also worthwhile referring to the arguments of learned counsel for the respondents that as per Government approval the petitioners could have only 45 per cent shares in the company and not majority. If it is so, further shares should have been issued after 24-5-1997 by which the holding of the NRI shareholders had been reduced to 34.45 per cent. We are making this observation only because for needs of the company it had already collected share application money not only from the NRIs but also from resident Indians and therefore there was no urgency without proper notice to the directors from the petitioners' group to allot further shares in the meeting held on 27-7-1997 and 1-9-1997 that too completely omitting allotment to NRIs who had also remitted over Rs. 20 lakhs as share application money. Even assuming that the permission from the RBI (which according to the petitioners has been received) had not been fully received for allotment of NRIs, the company/directors should not have reduced the shareholdings of the petitioners by allotment of further shares.
37. The learned counsel for the petitioners contended that the allotment of shares had been made to fictitious persons pointing out various factors. We feel that when the money has come to the company, as seen from the bank statements, and the accounts having been audited, it is not necessary to get into this matter in detail, more so, in view of the final relief that we propose to give.
38. In regard to the appointment of 4 additional directors in the meeting held on 27-7-1997, we do not find these appointments to be boan fide and in the interest of the company. To us, it appears that it was done only with a view to gain majority control on the Board as is obvious from the following facts. In the notice dated 30-6-1997 for holding the Board meeting on 26-5-1997, there was no item relating to appointment of additional directors. The petitioners moved the civil court with the complaint of the attempted reduction in their shareholding. Only the agenda with the notice dated 25-7-1997 convening the meeting on 27-7-1999 contained the business relating to the appointment of additional directors. We have already noted in relation to the allotment of shares on this day that such a short notice could not be considered to be a valid notice especially to NRI directors. If proper notices had been given, since the petitioners' group comprised the majority, they would not have approved appointment of additional directors. Further, the notice did not specify the number of directors to be appointed. In addition, we also note from the minutes of that meeting that the purpose of appointment of additional directors was on the ground that NRI directors were not readily available in India and as such Board meetings were not always possible for want of quorum. We find that in none of the minutes of the earlier meetings, there was any mention about the inability of the NRI directors to attend the meeting. It is also to be noted that the notice dated 30-6-1997 did not contain the business of appointment of additional directors. How the respondents, in the gap of 25 days, could have suddenly realized the need to appoint additional directors and included the same in the notice dated 25-7-1997 has not been explained. The very fact that all the 4 persons who were appointed on that day as additional directors were present in that meeting shows that the idea of appointment of additional directors was only with the view to take control of the Board that too without proper notice to the NRI directors. In this connection, it is also pertinent to mention that even though NRIs were not to be the majority on the Board as per the MOU, yet, the fact is that they constituted the majority till 27-7-1997 and upsetting the majority without their consent and knowledge is an act of oppression. Further, even assuming that in the annual general body meeting on 30-9-1997, all these additional directors were appointed as regular directors, the very fact that proper notices had not been issued to the NRI shareholders, shows that these appointments had been made behind the back of these shareholders, who constitute the other group of promoters. The same observation holds good in respect of the non-election of the two directors belonging to the petitioners group, as by not appointing them, the petitioners group is now without any representative on the Board, after Shri Sircar also resigned from the Board. Thus, one of the promoters group, out of the two, has been completely excluded from the Board.
39. As far as the various allegations relating to mismanagement in the affairs of the company are concerned, we do not propose to examine the same in detail in view of the relief that we propose to grant other than noting that the turnover and profit which were going up upto 1997-98, started going down thereafter, whatever may be the reasons. As on 31-3-2000, the accumulated loss was to the tune of Rs. 8.33 crores.
40. In view of our findings that the petitioners' group has been marginalized both in terms of the shareholding and directorship in the company (now there is none from the petitioners' group on the Board), the petitioners have established acts of oppression against them. Normally, when there are only two groups in a company, and if one were to be marginalized, restoration of the status quo ante as it prevailed before the meeting on 27-7-1997 in respect of both the shareholding and the directorship, would only result in further litigation which would not be in the interest of the company. Therefore, the only way by which the disputes could be resolved, which would also be in the interest of the company is that one group should go out of the company by selling its shares to the other. Even during the settlement talks, the consensus that emerged was that one group should go out of the company. The respondents, in their without prejudice proposals dated 12-2-1999 and 1 -4-1999 indicated their willing-
ness to refund the share application money remitted by the NRIs and also purchase the shares registered in the names of the petitioners (1,65,340 shares) at Rs. 6.33 being the book value of the shares. They had also sought for a long time to do so after a period of moratorium. In regard to the 4 lakh shares, since they had not recognized the title of the 1st petitioner to these shares, they had given certain alternate proposals. They had also indicated that they would be willing to sell their shares also to the petitioners so that the latter could manage the affairs of the company. These proposals were not agreeable to the petitioners and they demanded their entire investment immediately and they were not interested in taking over the company. The admitted position is that the respondents are managing this company exclusively from September, 1997 onwards and the NRIs are living abroad. Under these circumstances, it would be appropriate that the respondents continue to manage the affairs of the company by purchasing the shares held by the petitioners and also refund the share application money remitted by the NRIs. Since we have given a finding that the 1st petitioner is the rightful owner of the 4 lakh shares, the respondents should purchase these shares also. As far as the valuation of the shares is concerned, the usual practice adopted is that it should be based on the balance sheet proximate to the date of filing of the petition. In this case, since the petition was filed on 9-12-1997, the valuation of the shares will be based on the balance sheet as on 31-3-1998. Since the company commenced commercial production only a few years earlier, we consider it appropriate that the share value should be based on the net worth of the company as on 31-3-1998. Accordingly, we direct the statutory auditors of the company to compute the fair value of the shares of the company on the basis of the net worth of the company as on 31-3-1998 within a period of 2 months from the date of receipt of this order by the company. This valuation, subject to verification by the petitioners, will be binding on both the groups. As far as the time frame for making payment is concerned, since the share application money has been with the company for over 5 years now, the same should be refunded at par in one or more instalments, on or before 31-8-2002. The consideration for the shares as computed on the basis of the fair value should be paid on or before 30-6-2003 in one or more instalments. The option to purchase the shares is either with the 2nd respondent and his group or with the company. In case the company chooses to purchase the shares, in terms of Section 402 of the Act, it is authorized to reduce the share capital to the extent of the face value of the shares so purchased. Since the remittance of both the application money and the consideration for the shares to NRIs may require the approval of the RBI, the company will approach the RBI along with a copy of this order and the RBI, taking into that this order is being passed in the interest of the company and the shareholders, will accord its approval at the earliest.
41. The petition is disposed of in the above terms without any order as to cost with liberty to the parties to approach this Bench in case of any difficulty in implementing the directions contained above.