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Dr. Kamal K. Dutta And Anr. vs Ruby General Hospital Ltd. And Ors. on 29 October, 1999

Equivalent citations: (2000)2COMPLJ289(CLB)

ORDER

S. Balasubramanian, Vice-Chairman

1. The first petitioner (hereinafter referred to as the petitioner), Dr. Kamal K. Dutta, a medical doctor by profession and a nonresident Indian ('the NRI'), claiming himself as the chief promoter of Ruby General Hospital, Calcutta, has filed this petition under Section 397/398 of the Companies Act, 1956 ('the Act'), alleging various acts of oppression and mismanagement in the affairs of the company. This company was incorporated in 1991 for establishment of a hospital-cum-advanced diagnostic facility at Calcutta. The company made an application to the Department of Industrial Development, Government of India (SIA) for approval of NRI investment for establishment of the hospital indicating therein that the cost of the project would be about Rs. 11 crore out of which the share capital would be Rs. 9 crore and that Rs. 8 crore of the share capital would be by way of NRI participation. The Department of Industrial Development approved the NRI investment by Dr. Kamal K. Dutta and his other NRI associates of Rs. 8 crore of which Rs. 4 crore was to be by way of equity and other Rs. 4 crore by way of preference shares. Thus, the project envisaged 88.88% NRI investment in shares and balance by residents. The petitioner was named as one of the first directors of the company in the articles. As on 31.3.1995, the petitioners held 52.74% of the equity shares in the company. The company was sanctioned a loan of Rs. 4.6 crore by the Industrial Development Bank of India ('the IDBI') towards the project. The second respondent is the younger brother of the petitioner. In addition to the investment in the shares allotted to him, the petitioner had also contributed about Rs. one crore in cash as share application money and had also financed about Rs. 3 crore for import of medical equipments (hereinafter referred to as 'equipments') for the hospital. The hospital was inaugurated by the Chief Minister of West Bengal on 25.4.1995. The petitioner claims that shares towards the value of equipments should be allotted to him, while the respondent contends that the same could not be done for various reasons including that they were second hand equipments. In the meanwhile, certain number of shares were allotted to certain companies under the control of the respondents and that both the petitioner-directors were informed that they had vacated the office of directors in terms of Section 283(1)(g) of the Act. The Reserve Bank of India ('RBI') gave its permission to allot shares to the petitioner against the cost of imported second hand equipments vide its letter dated 22.3.1997. On a representation made by the company, the RBI withdrew its approval on 20.5.1998. Again, on a representation made by the petitioner, the RBI restored its approval on 6.3.1999. On this, the company filed a writ petition before the Calcutta High Court which directed the RBI to give personal hearing to the company and the petitioner and decide the issue. After the hearing was concluded in the proceedings before us, the respondents have filed a set of documents from which we find that after hearing the parties, the RBI has once again approved allotment of shares to the petitioner and the company has again challenged the same before the Calcutta High Court. Thus, the issue relating to allotment of shares to the petitioner against the cost of second hand imported equipment is before the Calcutta High Court.

2. Now this petition has been filed challenging the allotments made, the stand of the company that these two petitioner-directors had vacated their office as directors and the refusal of the company to allot shares towards the value of the imported second hand equipments.

3. Shri U.K. Chaudhary, advocate for the petitioners, initiating his arguments, submitted that the brain behind the venture of establishing the hospital was the petitioner. With a view to provide medical facilities to the poor and the down-trodden in the city of Calcutta, the petitioner conceived the project to be financed by himself and his NRI associates. Since he was based in USA, he associated his younger brother --the 2nd respondent (hereinafter referred to as the respondent), to look after the interest of the petitioner as the respondent was residing in Calcutta. Till the end of 1995, nothing moved in the company without the knowledge/approval of the petitioner. However, by his mala fide and illegal acts, the respondent has now hijacked the company/hospital. The learned counsel pointed out that this act of hijacking was done by removing the petitioners from the Board and by allotment of shares to the respondents' group by which the respondent now controls majority both in the Board as well as in the shareholding. He submitted that by doing so, the basic premises under which the hospital was conceived as NRI hospital no longer exists. He pointed out that not only the application to the Department of Industrial Development mentioned that the hospital will be an NRI hospital, even the approval by that Department indicates that the shareholding in the company by the NRIs more particularly, of that of the petitioner would be 88.88%. Any change in the shareholding pattern would mean that the company has not complied with the approval given by the Department of Industrial Development. He also pointed out that besides investing in cash of over Rs. 1 crore, the petitioner has also imported equipments worth around Rs. 3 crore for use in the hospital with the understanding that shares would be issued towards the investment made in the equipments. However, the company is refusing to allot shares on the ground that the equipments were second hand equipments and that they were substandard or over priced. Thus, he submitted that the petitioner having conceived and brought into operation the hospital has now beer completely sidelined. He also complained that this hospital meant for poor and down-trodden has now been made a corporate hospital by the respondent, which is against the basic foundation on which the hospital was conceived.

4. To stress his point that the petitioner is the chief promoter and that he along with his associates are to hold majority shares in the company, he referred to the application made to the Department of Industrial Development and the approval (Annexure-N) given thereon wherein the petitioner has been styled as the chief promoter and that NRIs are to hold 88.88% shares in the company. He submitted that without adhering to the stipulation, shares had been issued to the associate companies of the respondent on two occasions, without the knowledge and approval of the petitioner, the chief promoter. He also pointed out that the company being a public company, provisions of Section 81(1)(a) of the Act should have been followed. He also pointed out that even though the respondents have taken a stand that such a resolution was passed in an extraordinary general meeting ('EGM') held on 17.2.1996, no such EGM was actually held, and even if it had been held, it was without notice to the petitioners -- the majority shareholders at that point of time. He pointed out that in a purported Board meeting held on 12.3.1996, 1,22,000 equity shares were allotted, all to three associate companies of the respondent. Likewise, in a purported Board meeting held on 24.7.1996 further 2,00,000 shares were allotted again to two companies. He complained that no notice for these Board meetings were received by the petitioners, who were on these days admittedly directors of the company. He also challenged the stand of the company that notices were issued for these meetings on the strength of the certificates of posting. Even assuming that notices were issued, he pointed out that these notices had been issued to the addresses of the petitioners in India while the respondents were fully aware that the petitioners reside in USA. Referring to Article 121(a), he submitted that notices are to be issued to the directors in writing to their usual addresses which means notices to the petitioners should have been given to their USA addresses. He also submitted that the stand of the company that as per Section 286(1) of the Act, notices are to be issued at the usual address in India and as such, notices were so issued to their addresses in India -- is not correct inasmuch as the articles have been consciously framed, in view of NRI directors being in the company, to provide for issue of notices to their usual address omitting the word 'India'. Since the petitioner-directors reside in USA, their usual addresses in USA, being known to the company, notices should have been sent to USA address only and not to their addresses in India. He also referred to Article 121(b), according to which no notice of the meetings need be given to directors for the time being away from India, he submitted that this is not applicable to the petitioners as both of them live in the USA. He also pointed out with reference to Annexure-S, that the first item of the agenda used to be grant of leave of absence and the petitioners used to be granted leave of absence. He further submitted that even assuming that the stand of the respondents is legally correct that notices are to be sent to their addresses in India, yet, since the petitioner-directors are first directors of the company and one of them being the chief promoter, equity demands that they should have been given notices addressed to their address in USA. This argument, he submitted, would hold good for all the meetings at which the petitioners reportedly absented themselves on account of which they had reportedly ceased to be in office in terms of Section 283(1)(g).

5. In regard to the EGM in which the resolution in terms of Section 81(1)(a) was reportedly passed, the learned, counsel pointed out that this meeting was purportedly held on 17.2.1996 in which the petitioner was shown to be present. Since the petitioner was admittedly the Chairman of the company and also shown to have presided over the EGM, the minutes of the meeting should have been signed by him, since, as per Section 193(1A)(b) of the Act, the minutes of the general meeting are to be signed by the Chairman of the same meeting. However, the minutes are found to have been signed by the respondent, which itself shows that the minutes arc fabricated. Further, he pointed out, since the minutes are not signed by the Chairman of the meeting, the question of the minutes being evidence of the proceedings recorded therein in terms of Section 195 of the Act does not apply. However, he submitted that the petitioner never attended this meeting for want of notice. He also pointed out that the respondents have not produced any evidence to show as to when the notice for the EGM was issued or in which Board meeting was it decided to convene the EGM. He also refuted the stand of the respondents that in a Board meeting held on 19.4.1995, the petitioner agreed for passing a resolution under Section 81(1)(a). According to him, the minutes are fabricated since the petitioner being the chief promoter would have never agreed for the same when as per the Government approval, he was to, along with his NRI associates, have 88.88% shares in the company. He also submitted that these minutes record that extension of time to hold the annual general meeting ('the AGM') by 2 months from 1.10.1995 was considered by the Board. It is highly improbable that the Board would have considered this issue five months in advance when the AGM was to be held only after finalisation of accounts by 30.9.1995. Therefore, he contended that the purported approval given by the Board for passing a resolution under Section 81(1)(a) is completely false and fabricated. If it is so, then, the question of the proposal being passed in the EGM does not arise. In this connection, he also pointed out the letter, dated 28.8.1996 received from IDBI at Annexure-K in which even the IDBI had questioned the allotment of shares to the associate companies of the respondent. He submitted that by illegally allotting shares to his own associate companies, the respondent has reduced the majority holding of the petitioners into minority which is a grave act of oppression. Accordingly, he prayed that the allotment of shares to the three companies of the respondent should be declared as null and void.

6. He further pointed out that after having increased his shareholding by allotment of shares to his associate companies, the respondent ensured the removal of both the petitioner-directors from the Board by which now the control of the management of the company is with the respondent. In the AGM on 30.12.1996, the second petitioner was purportedly shown to have vacated the office of director in terms of the provisions of Section 283(1)(g) of the Act. In the case of this petitioner also, no notices for any of the Board meetings were given, even though, according to the company, notices for the meetings were sent to him at his address in India. The learned counsel pointed out that the second petitioner is an NRI shareholder residing in USA, the fact of which was known to the company and, therefore, notices should have been sent to him in the address in USA. Even the notice for the EGM was not received by him. He also pointed out that from the copy of the notice for the AGM produced during the hearing, that there was a proposal for the reappointment of the second petitioner as a director. However, without considering the proposal, a different resolution was proposed indicating that for non-attendance of Board meetings and consequent vacation of office under Section 283(1)(g), this petitioner was not re-appointed. According to learned counsel, such a resolution means removal of the director for which provisions of Section 284 of the Act should have been complied with, according to which, a special notice in terms of Section 190 of the Act should have been given. Therefore, the resolution itself was defective and should not have been carried through. He submitted that a positive resolution was converted into a negative resolution, which is not permitted in law. He pointed out that, in that meeting, only the respondents and his associate companies were present and they had done whatever they wanted to do. He also questioned the need to include a resolution in the notice for re-election of the second petitioner as a director, if according to the company, he had already vacated the office by operation of law. He also pointed out that in the annual return up to 30.12.1996, filed on 13.3.1997, the second petitioner was shown as a director even though, according to the company, he has ceased to be a director on that day. Therefore, Shri Chaudhary contended that, minutes of the ACM had been fabricated after receipt of the approval letter, dated 27.12.1996 from the RBI (Annexure A-14) for allotment of shares to the petitioner against import of equipments. He also pointed out that on that day, there were only three directors and with the removal of the second petitioner as a director, the company had only two directors, which is against the provisions of law. He also contended that the removal of the second petitioner who was one of the promoter investors as well as first director, is an act of oppression. Accordingly, he prayed that the removal of the second petitioner as director should be declared as null and void.

7. In regard to the removal of the petitioner as the Chairman and director, Shri Chaudhary pointed out that with a view to oust the petitioner, the respondent had manipulated various records of the company to show that the petitioner had not attended Board meetings held on 12.3.1996, 27.3.1996, 13.4.1996, 25.4.1996, 24.7.1996, 5.9.1996, 2.12.1996 and 3.3.1997 without obtaining the leave of absence and as such, vacated the office of director in terms of Section 283(1)(g). It is a fact that the petitioner had not attended any Board meeting after February, 1996, since no intimation of any meeting had been given to him, as Board meetings used to be held whenever he was present in Calcutta. He submitted that the company was never in the habit of issuing notices by UPC. The Board meetings used to be convened after ascertaining the convenience of the petitioner through faxes till the dispute started. Even the UPCs produced by the respondents indicate that notices were sent to the address of the petitioner in India while the respondent is fully aware that the said petitioner was an NRI residing in USA. Even assuming that the petitioner had not attended three consecutive meetings or all Board meeting in a continuing period of three months, then, he would have ceased to be a director by July, 1996, itself. However, his cessation of office was noted as 24.2.1997 in a Board meeting held on 23.4.1997. Even though the respondent contends that a letter, dated 3.3.1997 was sent to the petitioner intimating him of his vacation of office on 24.2.1997, the same was never received by him. For the first time, the petitioner came to know of the vacation of office when he received the letter, dated 25.3.1997 from the third respondent. He contended that the respondents have chosen the date of 24.2.1997 as the date of vacation of office only, because the petitioner had convened the Board meeting on 3.3.1997, which was attended by all the directors including the IDBI nominee. There is no explanation from the respondent as to how the notice of the meeting issued by the petitioner was taken cognizance of by these directors if the petitioner had vacated the office. To stress his point that all the UPCs are fabricated, he referred to R-11, which is a copy of the UPC for notices for the EGM on 17.2.1996 in which it is shown that the said notice was sent to Smt. Pari Dutta, the mother of the petitioner and the respondent, who had expired three years earlier. This itself, according to the counsel, would show that the documents have been fabricated as an afterthought. Further, he also questioned as to why for over 10 months, the company had not taken any action in regard to the office of director held by the petitioner. According to the learned counsel, all these fabrications took place only to ensure that the petitioner was not allotted shares for the equipments that he had imported for use in the hospital. Therefore, he prayed that the petitioner should be declared to have continued as a director of the company.

8. He further submitted that the petitioner had imported, for use in the hospital, second hand equipments worth around Rs. 3 crore against which the company was to allot shares. However, the company is contending that as per the loan agreement with the IDBI, IDBI had refused to fund the second hand equipments and that all the equipments are old, obsolete and junk and as such, no share could be allotted against the cost of equipments. The learned counsel pointed out that the company was fully aware that equipments imported were second hand and as a matter of fact, it is the respondent, who was stationed at Calcutta, got all the equipments cleared from the Customs. Further, he pointed out that all the equipments were in working condition and were extensively used in the hospital. He also pointed out that when permission was sought from RBI by the petitioner for allotment of shares, RBI desired to have an inspection certificate from an authorised agency of the DGFT [Director General of Foreign Trade] and accordingly, all the equipments were inspected by Superintendence Company of India (P) Ltd., an authorised agency and this agency had certified the equipments being in good order as late as in March, 1997. He also produced a copy of the certificate, dated 7.3.1997. Referring to the annual accounts of the company for 1994-95, 1995-96 and 1996-97, he pointed out that during these years, the turnover of the company was going up and the investment in equipments during these years is negligible, indicating very clearly that the equipments imported by the petitioner were extensively used by the hospital. He also referred to copies of various faxes during 1995 annexed with the rejoinder, which were sent by the hospital to the petitioner wherein details of number of patients, surgery carried out, etc., had been given. Therefore, he submitted that the stand of the respondent that the equipments were unusable does not stand to scrutiny. He further pointed out to Annexure 'W' wherein both Indian as well as foreign consultants have given certificates about the worthiness of the equipments. He further stated that these equipments are sensitive in nature requiring constant care and maintenance. Now that disputes have arisen between the parties, the respondent has deliberately kept these equipments unmaintained and uncared for and thus takes a stand that these equipments are unusable. He further pointed out that, but for these equipments, the hospital could have never started functioning. He submitted that the equipments which were imported were received in the hospital during the last quarter of 1994 and first quarter of 1995. At the time when the hospital was inaugurated in May, 1995, most of the equipments had already been installed and were being used. The annual reports for the year ended 31.3.1995 and 31.3.1996 which was signed by the second respondent reflects this fact. He referred to directors' report of 1995 wherein it has been stated :

"The ultra modern equipments received from the chief promoter Dr. Kamal K. Dutta have mostly been commissioned. Almost all Departments of the hospital including Pathology, Radiology, Cardiology, Operation theatre, Intensive Care Unit, Cardiac Cath Lab are fully functional."

He also referred to the balance sheets as on 31.3.1995 and 31.3.1996 wherein 'under share application', the value of the equipments imported has been included indicating very clearly that the Board had decided to allot shares against the value of the equipments. He also pointed out that even though the Board had purportedly passed a resolution not to apply to the RBI for allotment of shares against the equipments in a Board meeting allegedly held on 13.4.1996, there is no mention about the same in the annual report for 31.3.1996 which was signed on 2.12.1996 clearly indicating that the alleged Board meeting on this day is a fabricated one. He also drew our attention to a letter written by one Shri Dipak Kumar Dey who had functioned as the bio-medical engineer in the hospital during 1995-96 wherein he has averred that all the equipments were in working condition and were being used. He also referred to a letter, dated 15.10.1997 by Raygem (P) Ltd. (Annexure V) who had reportedly installed all the equipments in the hospital, wherein they have mentioned that the hospital was only functioning with this imported equipments. Likewise, he also referred to a letter, dated 4.1.1998 from one Dr. Himansu K. Dasmahapatra who had worked as the Cardiac Surgeon in the hospital, wherein he has stated that all the equipments relating to his Department had worked very well during his time. With these documents on hand relating to the worthiness of the equipments, Shri Chaudhary submitted that the stand of the respondents that the equipments were unusable cannot be sustained.

9. According to the learned counsel, all the imported equipments in the hospital were in use till April, 1997, and fearing that the company would have to allot shares to the petitioner in terms of the RBI approval, dated 22.3.1997 (Annexure A-18) against value of the equipments, the respondent along with the third respondent started manipulating the records of the company relating to allotment of shares, vacation of office by the petitioner-directors, etc. He submitted that if the equipments were unusable as contended by the respondent, he has not explained as to why the same was not informed to the petitioner till 15.4.1997 when a letter was written to the petitioner in this regard (page 85 of vol. II) especially, when the Board had purportedly decided not to apply to the RBI for allotment of shares as early as on 13.4.1996. He submitted that in the Board meeting held on 25.4.1996 and 3.3.1997, it was decided to apply to the RBI for allotment of shares against the value of the equipments. However, since the respondent was in charge of the statutory records of the company, he did not record the minutes of these meetings in the minutes book. Referring to Annexure R-28, dated 4.4.1996, he pointed out that the company was in the knowledge of booking of accommodation for the petitioner for his stay at Calcutta from 14th to 23 April, 1996. However, without any notice to the petitioner, it is alleged by the respondents that a Board meeting was held on 13.4.1996 to resolve that no application need be made to the RBI. This, according to him, if the meeting had really taken place, then, it is a grave act of oppression against the petitioner as decision against his interest had been taken at this meeting without his presence one day before his arrival in Calcutta. However, he urged that he was still maintaining the stand that these minutes are complete fabrication.

10. As far as the legality of issuing shares other than for cash, he countered the arguments of the counsel for the respondents that there was no agreement/contract in writing in terms of Section 75(1)(b) of the Act by pointing out that such a contract is to be filed with the Registrar within 30 days of the allotment and as such, it is not a pre-condition before allotment. He also drew our attention to the approval given by the RBI which was later withdrawn and again restored. We have already indicated the factual position in this regard in paragraph 1 ante.

11. Summing up his arguments, Shri Chaudhary submitted that this is a clear case of the majority being converted into minority, and as such, the original position in regard to the shareholding should be restored for which the petitioner is prepared to purchase all the shares allotted to the associate companies of the respondent including that of the respondent. He further submitted that notwithstanding any decision taken on allotment of shares against the value of equipments, the petitioner being the chief promoter is prepared even now to bring in Rs. 3 crore by way of cash towards allotment of shares as he would like to fulfil his ambition of providing good hospital facilities to the poor and down-trodden.

12. He relied on the following case laws to substantiate his various arguments :

* Moorty v. Driver & Conductors Bus Service (P) Ltd. (1991) 1 Comp LJ 266 (Mad) : (1991) 71 Comp Cas 136 (Mad)--When notices for Board meetings have not been given to all directors, appointment of additional directors in such meeting is invalid.

* Gluco Series (P) Ltd., In re (1987) 61 Comp Cas 227 (Cal)--Board cannot issue shares in a manner by which an existing majority is reduced to minority and the court will not allow the existing balance of power in the company to be disturbed.

* R.N. Jalan v. Deccan Enterprises (P) Ltd. (1992) 75 Comp Cas 417 (AP)--Change in the pattern of shareholding by increasing the shares and subsequent changes in the Board of directors would prejudicially affect the interest of shareholders warranting action by the court.

13. Shri S.B. Mookherjee, senior advocate for the respondents, initiating his arguments, submitted that this company is not an NRI company, and the respondent had a major role in the formation of the company. To stress this point, he referred to the memorandum of association of the company wherein the name of the respondent is at Serial No. 1 and the petitioner at Serial No. 3 as signatories to the memorandum indicating that the respondent had a primary role in the formation of the company. He also pointed out that both had subscribed to 60 shares each. He further submitted that the respondent has given personal guarantee along with the petitioner for the loans taken from the IDBI. He further stated that the respondent is an MBA and has been managing other companies. There was no agreement between the parties that the petitioner would have majority shares in the company, and even if there had been one, the same is not binding on the company since the articles do not stipulate so. Even though originally, the hospital was conceived as an NRI hospital, yet, in the absence of any collaboration agreement having been entered into with the NRIs as stipulated by the SIA, in spite of various extensions given by it, the concept of the company being an NRI company no longer holds good. Further, he also submitted that as per the approval given by the SIA, NRIs could hold only 44% equity shares in the company, and as such, even the approval does not envisage majority with the NRIs. He submitted that the disputes between the parties should be viewed in this context.

14. Dealing with merits of the case, he submitted that additional shares were issued for mobilising funds, more particularly, for repayment of the instalments of loan to the IDBI which had become overdue. He pointed out that the petitioner himself had agreed for passing a resolution under Section 81(1)(a) of the Act in a Board meeting held on 19.4.1995 for allotment of 40 lakh equity shares of Rs. 10 each on private placement basis. Further, in the Board meeting held on 16.2.1996 in which IDBI nominee was present, the petitioner expressed his inability to mobilise further funds to invest in the company. The minutes of this Board meeting were confirmed in a meeting held on 12.3.1996 which was again attended by the IDBI nominee. In the EGM held on 17.2.1996 for which notices were issued on 22 January, 1996, a resolution in terms of Section 81(1A) was passed. This meeting was not attended by the petitioners in spite of notice. In a Board meeting held on 12.3.1996, 2,21,000 shares were allotted to three private companies and relevant Form No. 2 was filed with Registrar of Companies on 4.4.1996. All these allotments were made against cash and the cash so realised was utilised to pay the instalments of loan due to IDBI. Therefore, he submitted that not only the company followed legal provisions in this regard, but also mobilised funds only for the benefit of the company and not for the purposes of excluding the petitioners from allotments, especially, when the petitioner himself had expressed his inability to invest more funds. He also pointed out that by a letter, dated 13.4.1996, the advocate for the petitioner complained about change of shareholding and the management (Annexure R-1) for which a reply was sent by the advocate for the respondent (Annexure R-2). Later, by a letter, dated 30.4.1996, the advocate for the petitioner informed that the disputes between his client and the respondent had been amicably settled and resolved (Annexure R-3). Therefore, as on 13.4.1996, the petitioner had no complaint as far as the shareholding and management of the company were concerned even though now he takes a stand that the letter written by the advocate on 30.4.1996 was without his knowledge. He also pointed out that in a Board meeting held on 24.7.1996, further 2,00,000 shares were allotted out of which 25,000 shares were allotted to the petitioner as approval from the RBI had been received for such allotment. Relevant Form No. 2 was filed with the Registrar of Companies on 3.8.1996. He further pointed out that there was no objection from the IDB1 in regard to the minutes of the meeting of the Board on 16.2.1996, 12.3.1996 and 24.7.1996. Even though the IDBI issued a letter, dated 28.8.1996 (Annexure K) in this regard on receipt of a complaint from the petitioner, on receipt of a satisfactory reply from the company, the IDBI did not pursue the matter further indicating that the IDBI had no objection in the allotments so made. He also pointed out that the IDBI itself had informed the petitioner, vide its letter, dated 18.12.1996 (Annexure L) that it would not interfere in this matter. He further pointed out that the petitioners have not adduced any explanation for questioning the allotments nearly after a year. He summed up his argument on this issue reiterating that the allotment was lawfully done for the benefit of the company and not with a view to increase the shareholding of the respondent and as such, cannot be considered to be an act of oppression.

15. In regard to vacation of office by the second petitioner, Shri Mookherjee stated that the second petitioner had not attended even a single meeting after the incorporation of the company even though on a few occasions, he was granted leave of absence when the company was under the control of the petitioner. After the respondent became the managing director on 9.2.1996, no leave of absence was granted to the second petitioner as he had not applied for such leave in spite of notices for the meeting. Even though, as per law, Board meetings are to be held at least once in a quarter, the second petitioner, if his stand were that no notice had been received by him, should have inquired from the company about Board meetings, which he never did. For all the Board meetings, notices were being sent at his address in India in accordance with the provisions of Section 286(1) as is evident from Annexure R-11. All meetings held after 9.2.1996 were attended by the IDBI nominee and as such, the authenticity of these meetings cannot be questioned. He stated that even though as per Article 121(b), no notice need be given to directors who are away from India, yet, notices under UPCs were given to both the petitioner-directors for every meeting held after 9.2.1996. Regarding entry of the name of the second petitioner in the annual return made upto 13.12.1996, he submitted that it was an error committed by the person who prepared the report and as a matter of fact. Form No. 32 indicating the vacation of office by this petitioner was filed with the Registrar of Companies on 4.3.1997 (Annexure R-10). Therefore, he submitted that the second petitioner vacated office due to his own conduct of not attending the Board meetings in spite of notices and as such, cannot be considered to be an act of oppression.

16. In regard to the vacation of office by the petitioner, the learned counsel submitted that the petitioner did not attend Board meetings held on 12.3.1996, 27.3.1996, 13.4.1996, 25.4.1996, 24.7.1996, 5.9.1996 and 2.12.1996 even though notices for these meetings were sent by UPCs to his address at Calcutta. In view of this, in terms of Section 283(1)(g), he vacated his office. He further submitted that all the arguments that had been advanced in regard to vacation of office by the second petitioner are applicable in the case of petitioner also. He also pointed out that the vacation of office by the petitioner was communicated to him by a letter, dated 3.3.1997 and Form No. 32 was filed on 14.3.1997. Summing up his arguments on this issue, Shri Mookherjee submitted that directorial complaints cannot be agitated in a petition under Section 397/398 and that the petitioner, even though, knew about his vacation of office did not choose to initiate any legal proceedings in this regard till the petition was filed. Since vacation of office is by operation of law, it cannot be considered to be an act of oppression.

17. In regard to allotment of shares against the imported equipments, he submitted that there is no agreement between the company and the petitioner for allotment of shares against imported equipments and that there was no Board resolution for doing so. Further, neither the SIA nor the RBI approval envisaged import of second hand equipments or allotment of any shares against such import. He pointed out that as per the SIA approval, funds have to be remitted to the company in cash, which could be utilised by the company for import of equipments. He also pointed out that even the RBI approval talks of funds being remitted to India through normal banking channel. He referred to the letter of IDBI, dated 4.4.1996 (Annexure R-18), according to which, second hand equipments were not to be financed by the IDBI. The respondent/the company were never aware that the equipments imported were second hand. Further, these equipments were found to be obsolete, difficult to install and are over-invoiced and spares were not available. He pointed out that the problems of these machines were noticed even when the petitioner was in control of the hospital. He referred to various letters received from suppliers of medical equipments which were written as early as in 1995 to show that some of the equipments were non-functional or required repairs that some of the equipments were over-invoiced, etc. He also referred to the letters issued by the doctors working in the hospital expressing dissatisfaction over the functioning of the equipments. He countered the arguments of the counsel for the petitioner that the letters from the doctors are, dated after 22.3.1997, i.e., after the receipt of the RBI approval inasmuch as the company came to know of the RBI approval only through a letter written by Shri Arun Saini, dated 6.4.1997. He also referred to the inspection report of SGS India Ltd., dated 6.4.1999, an agency suggested by the IDBI to carry out the inspection of the second hand equipments, to state that this agency has given a report that all these equipments were outdated, out of order and unusable. He also stated that many of the equipments are over-invoiced. He submitted that even though the allegation of over-invoicing with details was made, yet, the petitioner has not contested the same clearly indicating that some of the equipments were over-invoiced. Thus, the learned counsel contended that the petitioner is trying to enrich himself by getting allotment of shares in excess of the actual value of imported equipments. He also submitted that as per export/import policy of the Government, second hand machinery/equipments could be imported subject to their having a minimum of five years residual life, which in this case, has not happened. Therefore, he submitted that no shares could be allotted to the petitioner against the value of the imported equipments. He also submitted that the petitioner fraudulently showed that in an alleged Board meeting held on 25.4.1996, a decision was taken to apply to the RBI for allotment of shares and on the basis of his fraudulent resolution, the petitioner applied to the RBI for allotment of shares and obtained its approval, dated 27.12.1996. In this letter, RBI advised that since the equipments were second hand equipments, shares could be issued only on non-repatriation basis and, accordingly, advised the company to approach the Regional Office of the RBI in this regard. Since, the company had already decided not to apply to the RBI in its Board meeting held on 13.4.1996, the company wrote to the RBI pointing out this fact by a letter, dated 16.1.1997. However, the RBI through its letter, dated 17.3.1997 conveyed its approval for allotment of shares towards the value of second hand imported equipments on non-repatriation basis. He also" narrated the sequence of events that took place after receipt of the approval which we have already dealt with in para 1 ante. He further contended that the allotment of shares to the petitioner would be in violation of the provisions of Section 75(1)(b) as no agreement in writing has been entered into between the petitioner and the company for allotment of shares other than for cash.

18. Summing up the arguments on behalf of the respondents, Shri S.N. Mookherjee, Advocate, who later argued for the respondents, submitted that the petitioner being an NRI was only a visitor to Calcutta and was not taking adequate interest in the affairs of the company. He did not ensure compliance with statutory requirements resulting in the Registrar of Companies issuing default notices to the company. Further, during the tenure of the petitioner, debts were incurred by the company resulting in a winding up petition being filed against the company. He pointed out that many of the senior employees and executives resigned from the company during the tenure of the petitioner. He also pointed out that the petitioner started a new company in the name of Tanya Diagnostic (P) Ltd. at Delhi and that the petitioner has not provided any funds to the company after February, 1996. He further submitted that after the respondent took over the control of the company, there has been substantial increase in the turnover of the hospital and that the company has made substantial payments to the IDBI and that the respondent has equipped the hospital with new equipments both by purchase as well as by taking on lease and that, under his control, the company has earned tremendous reputation. He further submitted that when the advocate for the petitioner had written to the company on 30.4.1996 that the disputes between the parties had been settled amicably, the petitioner cannot now ventilate any grievance relating to the shareholding and the management. He further pointed out that in view of the strained relationship between the parties, the only way by which the interest of the company could be protected is that there should be parting of ways between the parties. Since the respondent is the majority shareholder, in line with the decision of the Company Law Board that the majority should purchase the minority, we should direct the petitioner to sell their shares to the respondent on a value to be determined by an independent valuer.

19. Shri Mookherjee relied on the following cases in furtherance of his arguments :

* Hemangini Dassee v. Smt. Sarnalatika AIR 1940 Cal 227.

* Smt. Kanaklata v. Amal Kumar Ghose AIR 1970 Cal 328.

* Harihar Banerji v. Ramsashi Roy 45 Indian Appeals 223.

* Steamship Belgia, In re AIR 1918 PC 338.

All the four cases are on the proposition that certificates of posting are recognised as valid modes of service and raising of presumption of service.

* Needle Industries India Ltd. v. Needle Industries Newey (India) Holdings Ltd. (1982) 1 Comp LJ 1 (SC): AIR 1981 SC 1298--If shares are issued in larger interest of a company, the decision to issue shares cannot be struck down on the ground that it has incidentally benefited the directors in the capacity as shareholders ;

* Scottish Co-operative Wholesale Society Ltd., In re (1958) 3 All ER 66 ;

* Ramashankar Prasad v. Sindri Iron Foundry (P) Ltd. (1966) 1 Comp LJ 310 (Cal) : AIR 1966 Cal 512 ; and * Sindhri Iron Foundry (P) Ltd., In re 68 CWN 118.

The above three cases are on the proposition that the oppressor should be directed to purchase the shares of the oppressed on a valuation to be made by an independent person.

20. We have considered the pleadings and arguments of the counsel. Before considering the merits of the case, it is essential to examine the status of the petitioner, whether he is a collaborator, or an NRI investor, or the chief promoter, as the determination of the same is necessary to decide the issues before us. We have on record the memorandum and articles of the company. The petitioner is shown as one of the signatories as well one of the first directors of the company. These documents are dated sometime in 1991. In the application made to SIA (A-12), dated 31.5.1993, it is stated that the hospital was to be established with the participation of the petitioner and that imported equipments worth Rs. 420 lakh would be purchased from the foreign exchange provided by the NRI doctor. The cost of the project was indicated as Rs. 1,100 lakh with Rs. 900 lakh as the authorised capital out of which Rs. 800 lakh would be by NRI participation. Under the heading 'Foreign Investment -- Financial Collaborator', the name of the petitioner is mentioned. In the abridged project report enclosed with the application, it is mentioned that the petitioner was the principal promoter, and the other promoter being the respondent, a resident Indian. Under 'means of finance', it is mentioned that NRI investment would be Rs. 800 lakh comprising of Rs. 400 lakh as equity and Rs. 400 lakh as preference shares. Under 'Financial Information', it is stated that to finance the project, shares would be issued by private placement and that the company would not go to the public. It is also stated that shares worth Rs. 800 lakh would be issued to NRI resident promoters and others on repatriable basis and the balance to resident Indian promoters and others. SIA gave its approval, dated 6.8.93 (A-11) in which the name of the foreign collaborator is shown as Dr. Kamal Kumar Dutta in para (i). In para (iv), it is stated that the foreign equity participation would be Rs. 800 lakh amounting to 88.88 % on repatriable basis out of the paid-up capital of the company of Rs. 900 lakh. It is also noted that the project envisaged import of capital goods worth Rs. 420 lakh to be financed out of the NRI investment. In para (vii), it is stated that the approval was to be made a part of the foreign collaboration agreement to be executed between the company and the foreign collaborator. In para (xi), it is stated that the approval would be valid for a period of two years within which the collaboration agreement was to be filed with the RBI. In the list of additional conditions, it is also stated that any change in the NRI investment or paid-up capital, an intimation was to be given to SIA, RBI, etc. It is also stated therein that import of capital equipments, etc., would be allowed as per the import policy prevailing from time to time. On receipt of this approval, the company sought for two amendments, vide its letter, dated 7.9.1993 (A-11) one relating to para (i) and the other relating to para (iv). In regard to para (i), the amendment sought was a confirmation that investment could be made by the petitioner and his other NRI associates on the ground that the petitioner being the principal promoter, he would contribute substantial portion of the NRI investment out of Rs. 800 lakh. In regard to para (iv), clarification/confirmation was sought that the foreign equity participation would cover both equity and preference shares at Rs. 400 lakh each. By a letter, dated 12.10.1993 (A-11), SIA amended the approval in relation to para (i) from 'name and address of foreign collaborator' to 'name of NRI investor'. Thus, this amendment appears to have made the status of the petitioner as an NRI investor and not a collaborator. In view of this amendment, perhaps, there may be no need for entering into any collaboration agreement since the petitioner is only an investor. It is further evident from the approval from the RBI, dated 4.11.1993, wherein it gave approval of NRI investment of Rs. 800 lakh. This approval also makes it clear that out of Rs. 900 lakh share capital the petitioner and his NRI associates would invest Rs. 800 lakh constituting 88.88% of the share capital. This means that the hospital would be an NRI investment hospital. In various documents of the company,, the petitioner has been styled as the chief/principal promoter. In regard to the contention of the counsel for the respondents that, since in the signatories to the memorandum, the name of the respondent appears at Serial Number 1, and as such, he is the principal promoter, we find that in Article 102, the name of the petitioner appears at Serial Number 1 in the list of first directors. Therefore, it would not be possible to treat the respondent as the principal promoter only, because his name finds a place at Serial Number 1 in the signatories to the memorandum. From various records of the company/and approval given by the SIA, it is apparently clear that the petitioner is the chief/principal promoter of the company. One other aspect that we would like to note, with reference to the stand of the company that it is no longer an NRI hospital in view of no collaboration agreement having been entered into, that, when the acts complained of took place, the approval of SIA was still in force up to March, 1998, and as a matter of fact, the company itself had asked for extension of time vide its letter, dated 17.10.1997 (Annexure A-7). Thus, if the complaint of the petitioner, being the chief promoter, that the company has been hijacked, is established, it would definitely merit grant of appropriate relief.

21. At the outset, it is necessary to record that, there being only two large shareholders, viz., the petitioner and the respondent, the disputes are practically between the two ; and it is their conduct that has to be examined in this petition under Section 397/398 as to whether the same is oppressive -- being harsh, burdensome, lacks in probity and fair dealing and not so much as to whether the same is legal or illegal.

22. We shall first deal with notices for the Board meetings as the same have a bearing on practically every issue before us. The respondent contends that notices were issued in accordance with law, while the petitioner contends that the notices are fabricated. We shall consider both as to whether the notices are in accordance with the articles and whether the notices were actually issued. One of the contentions of the respondent is that, as per Article 121(b), notices need not be issued to a director for the time being away from India ; and in spite of this, notices were issued to the Indian address of the petitioners. Before examining this issue, it is to be noted that the petitioners are NRIs and this status they obtained only because they live away from India. Therefore, their normal residence has to be away from India. Therefore, the provisions of Article 121(b) do not apply in their case, as it would apply only when a director is temporarily away from India. Article 121(a) stipulates that notices in writing have to be given to every director for the time being at his usual address. The usual address of the petitioner is in USA as is evident from the application made by the company to SIA at page 54 of vol. 'M' and in the annual return made upto 31.12.1996, the addresses of the petitioner-directors have been indicated as in USA (Annexure-8). It is, therefore, evident that the respondents/the company were aware that the usual residences of the petitioners are in USA. Perhaps, as rightly pointed out by Shri Chaudhary, this article has been framed different[ly] from the provisions of Section 286 according to which notices are to be issued at the usual addresses of the directors in India. Therefore, we are of the view that the notices issued at the local address in India cannot be considered to meet with the provisions of Article 121(a). Even otherwise, we find from copies of notices at R-11, that in respect of the second petitioner, the address shown is 'P.O. Hirapur, District Dhanbad, Bihar' and in respect of most of the meetings, the time gap of alleged date of posting and the meeting did not exceed 3 days excluding the dates of posting and the dates of the meetings. Considering the nature of the address given, the transit time itself is likely to take a few days. [Date of meeting (DoM), 13.4.1996, date of posting (DoP) 8.4.1996 ; DoM 5.9.1996, DoP 5.9.1996 ; DoM 2.12.1996, DoP 28.1996 ; DoM 12.3.1996, DoP 8.3.1996 ; DoM 27.3.1996, DoP 22.3.1996]. In respect of the petitioner, the notices are addressed to a local address notwithstanding the fact that the company itself has attached various documents at Annexure R-28 indicating that the petitioner used to stay in some hotel or guest house during his visit to Calcutta. Thus, we find even assuming that the notices are to be sent to local addresses in India, yet, the company has not ensured that adequate time is given and that the notices are sent to proper addresses. In equity also, we find that the action of the company to have posted notices for the meetings to local addresses of the NRI directors lacks in probity and fair play as the petitioners being not only the first directors of the company, but also substantial holders of the shares, they should have been given notices to their addresses in the USA. Accordingly, we hold that no notices for the Board meetings should be deemed to have been given to the petitioners. In view of this finding, we do not propose to examine whether the notices were genuine or fabricated other than observing, in view of the contention of the counsel for the respondents, relying on various case laws that UPCs raise presumption of service, that in LMS Ummu Salema v. B.B. Gujral AIR 1981 SC 1191 and in Gadak Yaswantrao v. Balasahib Vikhe Patil AIR 1994 SC 678, the Supreme Court has held otherwise. Further, another aspect that we noticed in the notices requires to be mentioned. All the notices are alike in every respect, the spacing between words and lines being similar except that the dates noted are different. Even though we could draw an inference that they were all printed on the same day, yet, we do not propose to do so as the other possibility being that the format of the notice was kept stored in the computer memory and as and when notices were to be issued, the gaps in the format were filled [in] with relevant dates. In view of our finding that no notices should be deemed to have been served on the petitioner-directors for the Board meetings, the decisions taken in these Board meetings, granting that they had taken place, should be declared to be null and void, as the general proposition of law is that proceedings of Board meetings without notices to a director cannot be recognised. If so, then, the alleged vacation of office by the petitioner-directors as well as the allotment of shares as also the decision taken in the Board meetings for not applying to the RBI for allotment of shares, which are the main allegations in the petition, would also become null and void. However, since arguments were advanced in respect of all these allegations, we shall deal with the same.

23. Regarding vacation of office by the petitioner-directors, Shri Mookherjee argued to state that directorial complaints cannot be agitated in a Section 397/398 petition. While, as a proposition, it is so in normal circumstances, yet, in cases of family companies or companies in the nature of partnership, depending on the facts of the case, directorial complaints have been adjudicated by us in Section 397/398 proceedings. In the present case, the petition is a composite petition wherein not only directorial complaints are made, but also complaints relating to conversion of majority into minority. Further, when the principal promoter having high stake in the company complains of his exclusion from the management, we feel that equity demands that his complaint should be inquired into in the present proceedings. Shri Mookherjee also submitted that since the advocate for the petitioner had informed the company/ respondent by a letter, dated 30.4.1996 (R-3) that the disputes between the parties had been amicably settled, the petitioner cannot agitate, at this point of time, the issue of shares and change in the management. Even assuming that the petitioner had authorised this advocate to send that letter (which, is disputed by the petitioner), the circumstances have been changed afterwards. Further, additional shares were issued, the petitioner directors were declared to have vacated their offices and allotment of shares against the cost of imported equipments denied. In the changed circumstances, by which the petitioners have been completely ousted from the company, which was not the position when the letter from the advocate of the petitioner was written, we do not think that it would be right to bind the petitioner to the terms of the said letter.

24. Regarding vacation of office by the second petitioner, the company has applied the provisions of Section 283(1)(g) on the ground that this petitioner had never attended any Board meeting right from incorporation of the company in spite of notice. We have already held that neither in law nor in equity, could it be considered that due notices had been issued to this petitioner to invoke the provisions of Section 283(1)(g). Even otherwise, we find that the company had not taken the stand that he had vacated the office when notices for the AGM convened on 30.12.1996 was issued wherein re-election of this petitioner was an item in the agenda, wherein it was stated --To appoint directors in place of Dr. Binod Sinha and Dr. S.K. Ghoshal who retire by rotation and being eligible, offer themselves for re-appointment'. The resolution passed in that meeting reads :

"Resolved that Dr. Binod Sinha, who retires by rotation at this meeting, is not being re-appointed as his eligibility for re-appointment has already ceased for not attending any Board meeting of the company and his lack of active interest in the hospital project since incorporation, and the vacancy thereby created be not filled up and the number of directors be reduced accordingly."

Whether this resolution was passed at all has also become doubtful inasmuch as the annual return made up to 30.12.1996 which was filed on 4.3.1996, the name of the petitioner finds a place as a director. We are not convinced with the excuse given by the respondent that it was by mistake that his name was shown as a director as we find that this annual return has been signed by the two responsible officers of the company, namely, the managing director (the respondent) and the Financial Controller-cum-Secretary (the third respondent) and that the name of the second petitioner is written in capital letters within the boxes provided in the form at Serial Number 3 in the list of directors. Further, if the second petitioner had not been appointed as a director in this AGM, we find no reason for the Board to note in its meeting held on 23.4.1997 that this petitioner had vacated his office. Thus, the authenticity of the resolution in respect of this petitioner in the AGM seems highly doubtful. Further, we also note that even though the petitioner was informed on 3.3.1997 that he had vacated his office, yet, no such intimation seems to have been given to the second petitioner as no record to show that it was done has been produced before us. It is also relevant to point out that according to the respondent, while leave of absence was being granted to the second petitioner when the petitioner was in charge of the company, no such leave of absence was granted after the respondent became the managing director. If it is so, then, the second petitioner should have been informed that no leave of absence would be granted in future. If it had been done, perhaps, this petitioner would have applied for leave of absence in case he received any notice for Board meetings.

25. In regard to the vacation of office by the petitioner, the provisions of the same Section 283(1)(g) were invoked. As per Form No. 32 filed with the Registrar of Companies, the date of vacation of office by this petitioner was 24.2.1997 even though, if the contention of the respondent that the petitioner had not attended any meeting after 16.4.1996 is correct, he would have ceased to be a director much earlier. This Form No. 32 was filed on 14.3.1997. The company is purported to have informed the petitioner that he had vacated the office by a letter, dated 3.3.1997, the receipt of which is denied by the petitioner. It is on record that the petitioner had convened a Board meeting on 3.3.1997 at 11.00 a.m. and was attended by the directors. It is not clear as to at which time, on that day, a letter was issued indicating therein that the petitioner had vacated his office. If it had been written before 11.00 a.m., then, the respondent should have been aware of it and should have refrained from attending the said meeting. If the letter was written after the meeting, then, the only conclusion that we could come to is that it was only with a view to nullify the Board meeting on that day. Therefore, we do not believe that the said letter, dated 3.3.1997 was sent to the petitioner and that the stand had been taken only to nullify the validity of the meeting convened by the petitioner on the ground that he had no locus standi to convene and hold that meeting. The meeting held by the petitioner assumes importance in view of the fact that in this meeting, according to the petitioner, a resolution was passed to apply to the RBI for allotment of shares to all the NRIs whose contribution remained as share application money, including allotment of shares for the second hand equipments. Again, it is not clear to us as to why the date of 24.2.1997 was assumed as the date of vacation of office as he would have vacated his office by operation of law as early as in July, 1996. Therefore, we are inclined to agree with the contention of the counsel for the petitioner that the petitioner was shown to have vacated his office on 24.2.1997 only with a view to nullify the proceedings on 3.3.1997.

26. As far as allotment of shares is concerned, it is the contention of the petitioner that the allotment to the associate companies of the respondent was made with a view to reduce the petitioner from majority into minority and that the same was done without the knowledge of the petitioner and in violation of the provisions of Section 81(1)(a). The stand of the respondent is that it was done for the purposes of financial needs of the company and that the money so collected was paid to IDBI in discharge of due instalments. The respondent has relied on the minutes of the Board meeting held on 19.4.1995 at which the petitioner was present when the Board resolved to allot shares on private placement basis. This, according to the respondent, would indicate that the petitioner was aware that shares were to be allotted by private placement. Further, according to the respondent, the petitioner expressed his inability to invest further funds in the company in the Board meeting held on 16.9.1996. Accordingly, in the EGM held on 17.2.1996, a resolution under Section 81(1)(a) of the Act was passed for private placement of the shares and shares were allotted in two subsequent Board meetings and that the IDBI has also approved the allotment. We find that allotment of shares by private placement was envisaged even in the application made to SIA as indicated in paragraph 20 ante, the private placement being made to the petitioner/his associates and the respondent/his associates. However, the resolution passed in the EGM on 17.2.1996 is an omnibus resolution authorising the Board to allot shares to various entities including mutual fund, etc., which would not be possible in view of the stipulation in the SIA approval that any change in the NRI investment was to be approved by the SIA. Therefore, passing the resolution in the EGM does not give the authority to the Board to allot shares as it liked since the private placement has to be in line with the SIA approval which was current on that day. Even assuming, even though contested by the petitioner, that he had expressed his unwillingness to invest further funds in the company, there was the second petitioner, a shareholder, and two other NRIs who had contributed to the shares as application money. Therefore, the Board should have considered seeking their willingness or otherwise for subscribing to additional shares. One aspect which was not made clear to us, as pointed out by Shri Chaudhary, as to in which Board meeting, the decision to hold the EGM on 17.2.1996 was taken. Even though the presence of the IDBI nominee in this meeting was stressed, we are doubtful as to whether he had the authority to approve such resolution on behalf of the IDBI as the IDBI had questioned the allotment in its letter, dated 28.8.1996 (Annexure K). Even though the counsel for the respondent relied on the letter of the IDBI, dated 18.12.1996 (Annexure L) to state that the IDBI had no objection in the allotment of shares, we find that this letter only advises the petitioner to take any action, if necessary. In other words, the IDBI has only washed its hands off without taking any definite stand. It is to be noted that by the time when the further allotments were made, the NRI cash contribution with the company was about Rs. 1 crore including shares and share application money on the strength of SIA approval. We also note that after the EGM cleared the proposal to allot shares by private placement, there is nothing on record to show that the Board had decided to issue further shares on the basis of which the three companies to which shares were allotted, made applications for such allotment. Normally, the Board first takes a decision to issue certain number of shares and invites applications. In this case, in the Board meeting on 12.3.1996, the respondent mentioned that the company had received letters from three companies from promoters' group for allotment of shares and that requisite consideration had also been received from them. Accordingly, the Board allotted the shares. Even though the respondent contends that the company was in need of funds and that a sum of Rs. 21 lakh was paid to IDBI, Shri Chaudhary pointed out that in January, 1996, the petitioner had remitted a sum of Rs. 19 lakh to the company (which was not denied by the counsel for the respondent) and as such, it is doubtful whether the shares were issued for the purposes of payment to the IDBI. We feel that the company should have enquired from other shareholders, in writing, about their willingness to take further shares in the company. Further, we also note that even though the approval of the AGM on 17.2.1996 was there for allotment up to 40,00,000 shares, in the AGM held on 30.12.1996, a resolution was adopted to allot 16,00,000 shares. We do not find any reason as to why such a resolution was necessary in the AGM. We also note that when the allotment was made on 24.7.1996, the IDBI nominee director was not present and that the IDBI was represented by an observer. An overall assessment of this issue leads us to the conclusion that the allotment of shares was not completely bona fide, and as such, deserves to be set aside, However, we do not propose to set aside the allotment in view of our directions hereinafter .

27. In regard to allotment of shares against the value of imported equipments, the major objections of the respondent are : neither the approval of the SIA nor of the RBI covers allotment of shares against import of equipments ; the company was never aware that the equipments were second hand, as per import policy -- second hand equipments cannot be imported ; there is no contract or agreement in terms of Section 75(1)(b) for allotment of shares other than for cash ; the equipments were outdated, overpriced, and unusable and the IDBI had refused to finance the second hand equipments.

28. We shall examine each of these objections. It is true that there is no mention either in the application to the SIA or in the approval by SIA or the RBI that the NRI investment would be by way of supply of equipments. However, the application to SIA as well its approval specifically mention about import of equipments worth, Rs. 420 lakh to be funded out of foreign remittance made by the NRI shareholders. In such cases, it is normally for the company and the investor to decide whether the investment is to be by way of remittance of cash or by way of supply of equipments, especially, when there is no bar expressly stated in the approval given by the SIA/RBI for investment by supply of equipments. In this case, as is evident from the facts of the case, that it was decided to invest by way of supply of equipments as is apparent from the annual report for 1394-95 wherein not only in the directors' report but also in the balance sheet, it is recorded that the petitioner had supplied imported equipments. In this connection, reference may also be made to a fax, dated 31.1.1995 (page 81 of vol. III) from the third respondent to the petitioner wherein the petitioner was informed that two consignments of imported equipments had already been sent to the hospital and that on the basis of valuation made by the customs, further disbursement of about Rs. 80 lakh was expected from the IDBI. In the same fax, the petitioner was also asked as to whether he would make further investment by way of cash or by way of supply of equipments. Thus, both the company and the respondent were aware that the petitioner had supplied imported equipments and as a matter of fact, the company had treated the cost of the same as 'share application money'. We feel that the objection that the import of equipments was not envisaged in the SIA/RBI approvals cannot be raised nearly three years after the import and acceptance of the equipments and having treated the cost of the same as 'share application money'.

29. In regard to the complaint of the respondent that he and the company were not aware that the equipments were second hand, we are not able to accept this contention. According to his version, the respondent was the resident promoter of the company and that the petitioner being a resident in the USA was only a visitor to Calcutta. Being a director, we presume that he was visiting the hospital regularly to see the functioning of the hospital and, if it is so, then he should have known about the receipt of the equipments. Even otherwise, when the balance sheet was signed by him wherein the cost of equipments had been included and depreciation charged, being an MBA graduate and managing some companies, he would have definitely examined the documents connected with the import. According to him, he came to know that these equipments were second hand only in April, 1996, after being informed by the IDBI about the letter of the petitioner, dated 7.2.1996 to the IDBI that all the equipments except one were demonstration equipments and as such, could be considered as second hand equipments for funding purposes. According to the petitioner, the declaration before the customs indicated that these equipments were second hand while, according to the respondent, no such declaration was made. Even though in the reply, at page 23, the respondent has stated that relevant bills of entry would be produced, nothing was produced during the hearing. These are of the most relevant documents, in the possession of the company, which would have settled the issue as to whether the company/respondents were aware of that the equipments were second hand or not when the same were received by the company. The non-production of these documents lead us to presume that the respondent might have been aware that these equipments were second hand equipments, even before the receipt of the IDBI letter, dated 4.4.1996 at Annexure R-18. The other presumption is that the equipments were functioning so well that the respondent had no reason to suspect that they were second hand equipments. Further, we also note that even though the petitioner's letter was dated 7.2.1996, in none of the Board meetings held after this date, namely, meetings on 16.2.1996, 12.3.1996 and 27.3.1996, the IDBI nominee director seemed to have mentioned about this letter till 13.4.1996. Further, it is also to be noted that the respondent himself had purchased second hand equipments worth of about Rs. 20 lakh in 1997.

30. Having held that the respondents might have been aware that the equipments were second hand, the other issue is whether they were outdated and that (they) were unusable. Both the sides produced various documents to advance their respective stand as elaborated as a part of their arguments. For us to come to a conclusion on this, we think it is enough to refer to the minutes of the Board meeting, dated 13.4.1996 in which the Board allegedly resolved not to make any application to the RBI for allotment of shares to the petitioner against the second hand equipments. The first para of the second page of the minutes reads as follows :

"Resolved that Mr. Sajal Dutta, Managing Director, be and is hereby authorised to discuss with the IDBI the financial pattern of the second hand equipments, their maintenance, replacement if necessary, or viability of the project and to execute the related documents for the IDBI financing and with all Government Departments, Secretariat for Industrial Approvals, Ministry of Industry, Reserve Bank of India, Customs Authorities, etc., as and when necessary to comply with the legal procedural formalities for import of second hand medical equipments." (emphasis by us) A reading of the above would show that there is not even a whisper that the equipments were outdated or that they were unusable or junk. As a matter of fact, a careful reading of the above would reveal that what the Board had decided was to discuss with the IDBI the financial pattern of the second hand equipments and to take all steps to regularise the import of the second hand machinery and not to condemn the same. There is nothing on record to show that any action was taken by the respondent, as mandated by the Board, to discuss with the IDBI and to comply with procedural formalities for import of these second hand equipments. Thus, it is apparently clear to us that on the day when this Board meeting allegedly took place, the equipments were in working condition and those who attended the meeting had no grievance about the functioning of the equipments as it is stated in the resolution 'Replacement would be considered, if necessary'. Thus, there can be no dispute regarding the good working condition of the equipments at least up to April, 1996. Now, regarding the later period, the respondent has not produced any Board minutes where it was brought to the notice of the members of the Board that the equipments subsequently became unusable, even though, according to the company, Board meetings were held on 25.4.1996, 24.7.1996, 5.9.1996, 2.12.1996 and 3.3.1997. On 15.4.1997, the respondent wrote to the petitioner a letter (Annexure R-20) enclosing therewith a list of 32 equipments, asking the petitioner to take them back as they were lying unused being second hand, defective, outdated and beyond repair and this view was shared and confirmed by the doctors. Whether such a letter was written with the authority of the Board or not has not been clear to us. However the petitioner got the equipments inspected by an authorised agency of the DGFT, viz.. Superintendence Co. of India (P) Ltd. on 11.3.1997. According to its report, the petitioner demonstrated the equipments, that the second hand equipments were found to be in good condition and a few of them are yet to be installed and commissioned, that the residual life of the equipments to be about ten years on normal maintenance, that no reconditioning had been done, that the valuation of the medical equipments, as stated in the document and considered to be reasonable and that there is no technological gap. The respondent has questioned the correctness of this report on the ground that none from the hospital was associated when the inspection was carried on and that in respect of some of the equipments, the model and the serial number noted in the report are different from those which actually appear on the equipments. Therefore, according to the respondent, this report was a motivated one and as such, should not be relied upon. In this connection, we may also note that the petitioner complained that the respondents tried to influence one Shri H.B. Paul, who had signed the said certificate, from distracting from the same and a lot of arguments took place on this issue and Shri Paul himself being present in person, offered to give oral evidence against the respondents. Since we found that it was extraneous to the proceedings, we did not allow him to do so. We feel that the petitioner, in his own interest, should have associated the respondent or his nominee at the time of inspection so that correctness or otherwise of the report would not have become controversial. However, from the photographs produced by the petitioner during the hearing which were taken on 3.11.1997 (the date of photograph is imprinted on the photographs), we find them to be of good appearance and most of them connected to the power supply giving an impression that they were being used. We also find that the letters of complaint about the equipments received from the doctors are all dated between 25.3.1997 to 10.4.1997. We are not in a position to convince ourselves that all of a sudden, the equipments should have become non-functional and that doctors chose to complain at a single point of time. If these equipments had been malfunctioning, being medical equipments used for treating the patients, the doctors would have definitely complained as and when they found the equipments malfunctioning. This gives us an impression that at least till the doctors complained in March, 1997, the equipments were functioning properly which is also supported by the certificate given by Suprind. The respondents rely on the inspection report given by the authorised agency approved by the IDBI, viz., SGS India Ltd., dated 6.4.1999 wherein this agency has given a complete adverse report against the equipments. During this inspection, however, the petitioner was not associated as it happened when the petitioner had the equipments inspected by Suprind, none from the company was associated. In view of this report of SGS India Ltd., it is clear that by April, 1999, these equipments had become useless. This is, whether due to the deliberate neglect of the equipments by the respondents as alleged by the petitioner or due to inherent defects as alleged by the respondent is something which we cannot determine at this point of time. One aspect which we expressed during the hearing requires mentioning. We expressed our doubt as to whether the petitioner being not only the chief promoter, but also a medical doctor by profession would have supplied substandard equipments as he would be fully aware that these equipments, were being used for treating human beings and some of them being life saving equipments, any defect in these equipments could endanger the lives of patients. If at all, he had decided to play a fraud on the company, as alleged by the respondents, he could have over-invoiced the equipments, but very unlikely by supplying substandard equipments. Anyway, we do not propose to give any conclusive finding on the quality of the equipment, legality of import of second hand equipments in terms of SIA/RBI approval, nor express any opinion on the entitlement of the petitioner for allotment of shares against the value of imported equipments for the reason that this matter relating to allotment of shares is before the Calcutta High Court. The purpose of examining this issue has been with a view to analyse the facts placed before us since elaborate arguments were advanced on this issue.

31. In regard to the objection of the respondents that no shares could be issued in terms of Section 75(1)(b) in the absence of any agreement in writing for allotment of shares other than for cash, we do not find much substance in this objection. Firstly, such a contract is to be filed within 30 days after the allotment. In other words, it is not a pre-requisite for allotment of shares. Secondly, such a contract need not be always reduced in writing as is clear from Section 75(2). The Government itself has prescribed Form No. 3 (Companies (Central Government's) General Rules and Forms, 1956) to be filed with the Registrar of Companies in case the contract is not reduced in writing. Thirdly, we also find that the stand of the company in this regard is unsustainable at this point of time after having indicated the cost of the equipments as share application money in the balance sheets as on 31.3.1995 and 31.3.1996.

32. It is necessary to say a few words about certain Board meetings and the decisions taken thereat to examine the conduct of the respondent/directors as to whether they had acted fairly and in an unbiased manner. It is notwithstanding the fact that the petitioner questions the genuineness of holding of these meetings. First is the Board meeting on 7.2.1996 in which far reaching decisions were taken behind the back of the petitioner who was not present in that meeting. One was the appointment of the respondent as the managing director and the other was stripping the petitioner of all his powers. This meeting was held just a week before the arrival of the petitioner on 14.2.1996, the fact of which was known to the respondents as is evident from the Annexure R-28. On this day, excepting the respondent, none of the other directors had any personal stake in the company, and on that day, obviously, the respondent was a minority shareholder. When these decisions would vest all the powers with the minority shareholder director and making the majority shareholder director as a dummy, the other directors should have played a restrained role and should have waited till the next Board meeting which was to be held on 16.2.1996 after the arrival of the petitioner. Therefore, we feel that the action of the respondent and other directors reflect complete lack of probity on their part, in taking these decisions.

33. In regard to the meeting on 16.2.1996, even though the petitioner admits that he attended the meeting, his grievance is that the minutes do not reflect the correct proceedings in that meeting. In this meeting, the IDBI nominee is reported to have advised that the draft minutes of 7.2.1996 placed before this meeting should reflect correctly the appointment of the respondent as managing director. If such an important item was not included in the draft minutes, then, it becomes highly doubtful whether this item was discussed at all and decisions taken therein in the meeting held on 7.2.1996. We also note that the minutes of the meeting on 16.2.1996 were signed by the respondent even though it was presided over by the petitioner. Even though, as per Section 193, the Chairman of the succeeding meeting could sign the minutes of the previous meeting, yet, if these minutes had been signed by the petitioner himself, he cannot now allege that these minutes do not reflect the correct proceedings on that day.

34. The next crucial meeting is the one held on 13.4.1996. This meeting was held after receipt of the letter, dated 4.4.1996 from IDBI that it would not fund the second hand equipments. After considering the letter, the Board decided not to apply to RBI for allotment of shares to the petitioner against the cost of imported equipments. It has not been explained as to why such a resolution was suddenly passed since we do not find any record produced before us to show that the company was earlier intending to apply to the RBI for allotment of shares and as such, this resolution was necessary Further, in view of the later paragraph in the minutes in which it is stated that the company would further discuss the funding of second hand equipments with the IDBI and would also try to regularise the import of second hand equipments, the resolution not to apply to the RBI definitely seems to be a premature decision.

35. In regard to the Board meeting convened by the petitioner on 3.3.1997, the minutes book does not contain the minutes of the proceedings of this meeting. According to the respondent, the petitioner had brought video cameramen and other outsiders to this meeting, and as such, there was chaos and confusion and no proceedings in an orderly manner could be carried on. The respondent has relied on the fax by the IDBI nominee who came for the meeting, but reportedly left the meeting on account of the chaotic condition and also on the letter of the third respondent, dated 6.3.1997, wherein he had confirmed to the IDBI nominee that the atmosphere in the Board meeting on 3.3.1997 was not conducive to conduct any proceedings. In this letter, he has also stated that the proceedings of. the meeting could not be incorporated in the minutes book. In other words, it was the third respondent, who is not a director on the Board, seems to have assumed the authority to decide whether to minute the proceedings of the Board or not. Though in the Board meeting held on 23.4.1997, the Board had taken a decision not to record the proceedings on 3.3.1997, it appears that this decision was influenced by the letter of the 3rd respondent, dated 6.3.1997. Normally, whenever any Board meeting is held, the minutes of that meeting are drawn giving factual position of what transpired in that meeting, and it is very unusual to refuse recording the minutes of a Board meeting. This action of the Board gives credence to the complaint of the petitioner that the minutes were not recorded only with a view to nullify the stand by the petitioner that certain resolutions, including applying to the RBI were purportedly taken in that meeting.

36. Further, when the Board noted on 14.4.1996, the letter of the IDBI, dated 4.4.1996, fairness demanded that they should have taken up the matter with the petitioner. Not only was it not done, no correspondence seems to have been entered into with the petitioner in this regard for nearly a year till the letter, dated 15..4.1997 was written to him. In this connection, it is relevant also to note that no mention about the decision not to apply to the RBI is found in the annual report for 1995-96 even though it was signed only on 2.12.1996. It is the normal practice to note in the annual report important events occurring in between the date of the balance sheet and the date of the annual report. In this connection, it is worthwhile referring to annual report for 1997-98 wherein there is a mention about the return of second hand equipments to the petitioner, even though a letter to this effect was written only on 15.4.1997, i.e., after the date of balance sheet.

37. We sum up our findings as follows: The notices alleged to have been issued to the petitioner-directors for the Board meetings cannot be considered to be valid notices and as such the stand of the respondent that the petitioner directors had vacated the office of director under Section 283(1)(g) cannot be sustained ; that the various decisions in the Board meetings including that of allotment of shares in the absence of valid notice to the petitioner-directors could not be considered as valid and binding and that there is substantial evidence to show that at least up to March, 1996, most of the imported equipments were in working condition and that the conduct of the respondent/directors had been unfair to and biased against the petitioner and exhibits lack of probity.

38. Thus, on an overall assessment of the allegations and our findings, it is amply clear that the petitioner has established his case of oppression justifying grant of appropriate relief under Section 402 of the Act. Shri Mookherjee argued that the only way by which the disputes could be sorted out is, as held in the cases cited by him, that the petitioners should be directed to sell their shares to the respondent being the majority shareholders. No doubt, we have also, in many cases, adopted this method of resolving disputes. But, in the present case, admittedly, the respondent was in minority and he became the majority shareholder only after the first allotment of shares which we have already held was not legally sustainable and the second allotment also has been held to be so. In view of this, the respondent cannot claim majority status. The conduct of the respondent in allotting shares to himself at the back of the petitioner and in declaring that the petitioner-directors had vacated office, etc., and thus taking over the company is highly unfair and lacks in probity. If we were to accept the suggestion/contention of the counsel for the respondent that the petitioners should be directed to sell these shares, it would only mean putting premium on the conduct of the respondent. In case the High Court decision goes against the petitioner, he would cease to be the majority shareholder. Therefore, our reliefs would be confined only to matters relating to those which do not have any bearing on the second hand equipments. From the facts of the case, it is clear that neither the allotment of further shares nor the declaration that the petitioner-directors had vacated the office, has any thing to do with the second hand equipments. In regard to the allotment of further shares, the prayer of the petitioner is that the allotments should be cancelled or the respondent should be directed to sell all the shares held by his group to the petitioner. Cancellation of the allotments would adversely affect the financial position of the company which is not financially sound, and the direction to sell the shares would be against the approval of the SIA by which the resident Indians would have to have 11.12% shares in the company. However, we also note that it is essential that whatever relief that we grant should be equitable to both the sides, till the outcome of the proceedings before the Calcutta High Court.

39. Before considering the reliefs, one other aspect we wish to clarify. The counsel for the respondent contended that as per the SIA approval, NRIs cannot hold more than 44.44% equity shares in the company. This contention, according to us, is not sustainable. Originally, SIA approved contribution by NRIs of Rs. 800 lakh by way of share capital against the proposed Rs. 900 lakh share capital. This amount of Rs. 800 lakh would consist account for 88.88% in the share capital of the company. The SIA letter modified the approval on the basis of a request from the company to the effect that NRI contribution of Rs. 800 lakh would consist of Rs. 400 lakh by way of equity and Rs. 400 lakh by way of preference shares. In the same approval, it is also mentioned that in view of the amendment, the NRI would have 44.44% as equity and 44.44% by way of preference shares. This, according to the counsel for the respondent, would cap the investment in equity by NRIs to 44.44%. It only means that out of Rs. 800 lakh constituting 88.88% share capital, half of it is Rs. 400 lakh would be by way of equity and the balance of Rs. 400 lakh by way of preference shares each constituting 44%, 44% of the total of 88.88%. Thus, it, is clear that the amount of Rs. 400 lakh by way of equity would constitute 88.88% of the equity and the contribution towards preference shares of Rs. 400 lakh would constitute 88.8% of the preference shares. In other words, the petitioner could contribute upto Rs. 400 lakh as equity in the company and Rs. 400 lakh as preference shares.

40. Taking an overall view and the pending proceedings before the Calcutta High Court, we pass the following order :

1. Since we have held that the stand of the company that the petitioner directors had vacated office under Section 283(1)(b) cannot be sustained for various reasons, we declare that these petitioner directors will continue as directors of the company. To avoid any future controversy relating to issue of notices for the Board meetings, we also stipulate that notices for all Board meetings will be issued to all the directors by registered post with 21 days notice to the addresses of the NRI directors at their usual addresses in USA/other countries, and to the Indian directors at their addresses in India. We also stipulate that NRI directors will have the right to appoint alternate directors and if the right is exercised, then, the alternative directors will also be given notices as stipulated above.

2. The shares allotted, in the Board meetings on 12.3.1996 and 24.7.1996 will not have any voting rights till the outcome of the proceedings in Calcutta High Court is known. No further shares will be allotted against the share application money with the company either in the names of the NRI investors or in the names of the respondent's group.

3. The petitioner/respondents are at liberty to invest more funds in cash in the company towards share capital, but the same will be kept as share application money till the disposal of the High Court proceedings and subject to other approvals as may be necessary.

4. Since our object is to maintain the status quo till the disposal of the matter in the Calcutta High Court, there will be no change in the composition of Board other than that the two petitioner directors will function as directors in addition to the existing directors.

41. Before we part with this order, we feel that we should say a few words about the role of the IDBI and its nominee director on the Board of the company. Even though we are conscious that neither the IDBI nor the nominee director is a party to the proceedings, yet, since we feel that their positive role could have avoided the disputes, we are mentioning about the same. As far as the IDBI is concerned, its stand in the entire controversy seems to be unclear. By a letter, dated 4.4.1996, the IDBI indicated its unwillingness to fund second hand equipments even though we find that there is no stipulation in the loan agreement that only new equipments were to be brought. Having expressed its unwillingness to fund second hand equipments, in 1999, the IDBI asked the company to carry out an inspection of the second hand equipments by an authorised agent, which indicates that the IDBI had no reservation about funding second hand equipments. If it is so, it would have been prudent on the part of the IDBI to have carried out the inspection much earlier, so that the real condition of the equipments could have been found out. Likewise, the IDBI objected to the issue of allotments made by the company in 1996, but later, without taking any definite stand in this matter, advised the petitioner to take any action, if necessary, and thus washed its hand off. We feel that the stake of the IDBI being the highest in the company of Rs. 4.6 crore (excluding interest), it should have played a concrete role to find out some workable solution. It is on record that the company has not been able to pay its dues to the IDBI and that the IDBI has initiated legal proceedings. As far as the role of the IDBI nominee is concerned, he had a major role in the composition of. the management of the company. First it was he who proposed appointment of managing director in the meeting held on 9.2.1996, and it was he who expressed his reservation to the dismissal of the third respondent in the meting on 9.2.1996 ; and on his insistence, the third respondent was reinstated in the Board meeting on 17.2.1996. It was done without consulting the petitioner who was the Chairman and who had dismissed the third respondent. Thus, his role, instead of being constructive, led to the widening of the differences between the parties. Further, he also seems to have allowed allotment of shares without specific approval from the IDBI as is evident from the letter of IDBI at Annexure-K. Further, when the Board decided to take action to regularise the import of second hand equipment in its meeting on 16.2.1996, he did not seem to have followed up this decision. Being the nominee of the institution which had lent a substantial amount of money, his objective should have been to ensure proper functioning of the management which would enable the company to refund the loans but the facts reveal otherwise.

42. We dispose of this petition with the above directions and observations. No order as to cost.