Company Law Board
Mrs. Aruna Suresh Mehra vs Jifcon Tools Pvt. Ltd. And Ors. on 31 July, 1998
Equivalent citations: [1998]94COMPCAS329(CLB)
ORDER
1. The petitioner hereinabove holding 45 per cent, equity shares in Jifcon Tools (P.) Ltd. (company) has filed this petition under Section 397/398 and 402 of the Companies Act alleging acts of oppression and mismanagement in the affairs of the company. Respondent No. 2 and his wife collectively hold 45 per cent, shares in the company and respondent No. 7 held the balance 10 per cent, shares. Presently, respondent No. 5 holds 10 per cent, after respondent No. 7 transferred his holdings to this respondent.
2. A summary of the petition is that the company was incorporated in 1977, and the husband of the petitioner and respondent No. 2 along with a third person were the first directors. In 1979, the third person left the directorship and respondent No. 7 joined the company as production manager and later became a director with 10 per cent, shares in the company. The husband of the petitioner, Shri S. K. Mehra, was the chairman from the beginning till he died in an accident in 1985. On the death of her husband, the petitioner was inducted into the board as a working director and the business was carried on under the directions of the petitioner, respondent No. 2 and respondent No. 7. However, the relationship between respondents Nos. 2 and 7 was not very cordial and when in the year 1994, respondent No. 2 wanted his son who had completed engineering in electronics to be appointed as an employee in the company, the same was objected to by respondent No. 7. However, with the assistance of the petitioner, the son was appointed as an employee in 1994. Since the relationship between respondents Nos. 2 and 7 was not cordial, the second respondent influenced the petitioner to have respondent No. 7 removed from the board, which was done in December, 1994. After the exit of respondent No. 7 who still held 10 per cent, shares in the company, respondent No. 2 started procuring undue benefits for his son by which in less than three years, his remuneration was increased three fold and his personal expenses were charged to the company. In spite of protest by the petitioner, this practice was not stopped and with a view to gain a larger control of the company, respondent No. 2 paved the way for induction of his son as a director of the company which was done in an extraordinary general meeting held on November 14, 1997. The legality of the meeting as well as the appointment of the son, respondent No. 4, have been impugned for various reasons in the petition. It is also alleged that respondent No. 2 was trying to acquire the shares held by the seventh respondent against the provisions of the articles. In addition to the above, some of the other specific allegations are that respondent No. 2 is operating the bank account with single signature as against joint signature with the petitioner, 'he is drawing money from the bank for his own benefits, inflated expenditure is charged in the accounts of the company, by delaying/stopping payment of wages to the employees, the morale of the employees is affected, quality materials are not being purchased leading to reduction in the turnover of the company, no stock records are maintained and the respondents have removed a computer belonging to the company.
3. The petitioner also filed two other applications alleging that the company had allegedly increased the share capital after the petition was filed in spite of the protest by the petitioner and that payment of salary as working director has been withheld and that in violation of the order passed by the Company Law Board that 10 days notice should be given to the petitioner for any board meeting/general body meetings, the company has not been giving the requisite notice.
4. Respondent No. 2 in his reply to the petition as well as application has denied all these allegations. According to him, the petitioner, with a view to go out of the company desired exorbitant consideration which was not agreed to by the respondents and as such this petition has been filed to harass and force the respondent to submit to the exorbitant demand made by the petitioner.
5. Considering the fact that the petitioner and respondent No. 2 have been carrying on together for over 10 years and that the husband of the petitioner was one of the promoters of the company and that the shareholding of the respondent's group and the petitioner was 45 per cent. each. (without considering acquisition of 10 per cent, shares by the respondents' group), we suggested that the parties may attempt an amicable settlement. The petitioner demanded a sum of Rs. 45 lakhs for her 45 per cent, shares which was not agreeable to the respondents and in turn, the respondents were prepared to sell their 55 per cent, shares to the petitioner for the same sum of Rs. 45 lakhs the offer of which the petitioner was not prepared to accept. Accordingly, the matter was heard and this order is being issued.
6. Shri R. K. Aggarwal, advocate, for the petitioners, initiating the arguments on the petition argued that the appointment of respondent No. 4 as a director on the board is null and void inasmuch as the same is in contravention of Article 29, according to which, only a person who holds shares of the aggregate nominal value of Rs. 10,000 could be appointed as a director. Respondent No. 4 was never a shareholder in the company and as such he could not have been appointed as a director as per the said article. Even though Article 30 states, learned counsel argued, that the directors need not hold any qualification shares, that Article is applicable only to the present directors. All future directors are governed by the provisions of Article 29. Relying on Rayfield v. Hands [1958] 2 All ER 194 and Holmes v. Keyes [1958] 2 All ER 129 (CA), he stated that when there is a conflict in the provisions of articles, the court observed that the articles of association of a company should be regarded as a business document and should be construed so as to give them reasonable business efficacy where a construction tending to that result is admissible on the language of the articles, in preference to a result which would or might prove and workable and that an Article ought not to be revalidated for the purpose of a case where it is perfectly easy to give effect to it, Therefore, he submitted that the only way by which the provisions of both these articles could be given effect to is that Article 30 applies to existing directors and Article 29 to future directors. If so applied, then the appointment of respondent No. 4 as a director would be against the provisions of Article 29. Further, he stated that respondent No. 3 gave a notice on October 25, 1997, for convening an extraordinary general meeting for appointment of respondent No. 4 as a director. Since the requisition was not considered by the board, the requisitionist herself convened a meeting which was held on November 14, 1997. The notice did not accompany any explanatory statement as required under Section 173 of the Act and, therefore, any resolution passed under that notice is invalid. Further, learned counsel submitted that even though the petitioner reached the venue of the meeting at 11.05 a.m. as against the scheduled time of 11 a.m., the meeting had ended passing the resolution of appointing respondent No. 4 as director. Thus, he submitted that without the participation of 45 per cent, shareholding, the appointment of director was decided in contravention of all accepted principles of propriety.
7. In regard to transfer of shares of respondent No. 7 to respondent No. 2 group, he stated that such a transfer is in violation of Article 9 of the articles of association of the company inasmuch as the procedure laid down therein had not been followed. Therefore, any transfer in violation of the provisions of the articles has to be declared as null and void. On this proposition, he relied on Mrs. Rashmi Seth v. Chemon (India) (P.) Ltd. [1992J 3 Comp LJ 89 ; [1995] 82 Comp Cas 563 (CLB) and Mrs. Rashmi Seth v. Tillsoil Farms Pvt. Ltd. [1992] 3 Comp LJ 126 ; [1995] 82 Comp Cas 409 (CLB). By this illegal transfer, now the respondents' group has gained control over the company by having 55 per cent, shares as against the earlier 45 per cent, shares.
8. Shri Athavale, the authorised representative of the respondents, with reference to the appointment of respondent No. 4 as director, stated that the provisions of the articles have not been violated in appointment of respondent No. 4 as a director. According to him, Article 30 overrides Article 29 since the provisions of this Article are ultra vires the provisions of Section 273, according to which share qualification is not applicable to a private limited company. Further, he stated, that as per Section 9 of the Act, the provisions of the Act shall prevail over the articles and memorandum of a company. He also drew our attention to Ramaiya's Guide to the Companies Act in regard to the scope of Section 9. Therefore, he submitted that the appointment of the fourth respondent as a director is perfectly legal. He also stated, in regard to the extraordinary general meeting in which the fourth respondent was appointed as a director, that the meeting was conducted as per law and that the petitioner came late to the meeting by which time the meeting had ended. Even otherwise, he argued that her attendance would not have in any way affected the ultimate result inasmuch as the resolution being an ordinary resolution could have been carried without any difficulty. He further stated that in the case of an extraordinary general meeting convened by requisitionists, there is no need to circulate an explanatory statement and further as per Article 23 of the articles of association, the applicability of the provisions of Section 173 has been specifically excluded. Accordingly, he submitted that due process of law has been followed in appointment of the fourth respondent as director.
9. As far as transfer of shares held by respondent No. 7 to respondent No. 5, Shri Athavale submitted that in this matter also, the provisions of the articles have been strictly followed. Drawing our attention to various correspondence as annexed at R-1A, he stated that respondent No. 7 had been corresponding with the board, respondent No. 2, and the petitioner for sale of the shares held by him for quite some time. The company informed the petitioner vide a letter dated March 30, 1997 (R-1A-53), about the offer of sale by respondent No. 7 and this matter was also discussed in a board meeting held on June 4, 1997 (R-1A-56), in which the petitioner was present wherein it is recorded that respondent No. 2 had indicated that he was prepared to purchase the shares for Rs. 1 lakh while respondent No. 7 demanded Rs. 4 lakhs and that the petitioner wanted two days time to think over the matter. In the board meeting held on June 28, 1997, wherein respondent No. 2 indicated that he would purchase the shares of respondent No. 7 in his personal capacity which was not agreeable to the petitioner who wanted that the shares should be purchased by the company itself. Since there was no agreement between the directors, i.e., the only two shareholders, respondent No. 7 in his letter dated July 28, 1997 (R-1A-61), asked the company to value the shares by the auditor as provided in the relevant articles. He followed up the same by another letter on August 6, 1997. Since the company had not appointed the auditor to value the shares, respondent No. 7 transferred the shares to a person of his choice, i.e., respondent No. 5. Therefore, Shri Athavale submitted that the process of transfer of shares is in complete compliance with the provisions of the articles of the company and as such no interference is called for by the Company Law Board.
10. Shri Athavale further submitted that all other allegations are devoid of merit. The petitioner has not been cooperating with respondent No. 2 in signing of cheques and that is the reason why with a request to the bankers, cheques were signed singly for urgent payment. As far as her allegation that the company has violated the Company Law Board orders regarding duration of notices for the meeting, he stated that the notices were posted sufficiently in advance but perhaps they were delayed in the course of postal transmission. Even otherwise he stated that in pursuance of such notices, the petitioner had attended the meeting and as such cannot complain about a few days of delay in receipt of notices.
11. We have considered the pleadings and arguments of counsel. As we have already indicated the dispute between the parties should have been settled amicably in view of the shareholding pattern and in view of such strained relationship that has developed in the recent past. However, in spite of our best efforts it did not materialise. The two main allegations of the petitioner relate to transfer of shares and appointment of respondent No. 4 as director. As far as transfer of shares is concerned, as explained by the authorised representative of the respondents, we find that as per the articles, the offer of shares was intimated to the petitioner and the same was discussed in the board meeting also. In view of negative response from the shareholders, respondent No. 7 in accordance with Article 14, rightly transferred the shares to a non-member. Therefore, we are of the view that in the matter of transfer of shares, nothing irregular or in violation of the articles has been found.
12. In regard to the appointment of respondent No. 4 as a director, the complaint of the petitioner is that he does not possess qualification shares as specified in Article 29 and the answer to this complaint is that as per Article 30, directors need not hold qualification shares. The admitted position is that respondent No. 4 does not hold any shares in the company. There is definite conflict between the provisions of these two articles. Both the articles are found to have been in existence right from the incorporation of the company in 1977. The articles of association are reported to have undergone certain amendments in December, 1982, but as far as these two articles are concerned, they continue to exist. These two articles have to be interpreted in the background of the nature of the company. There were only three shareholders in the company of which two held 45 per cent each. There is restriction on transfer of shares to non-members. All the three shareholders were directors on the board. Article 29 talks of appointment of a director and it also specifically provides that the share qualification is not applicable in the case of persons nominated by financial institutions as directors on the board. We are, therefore, of the view that this Article would apply in the case of all new appointments and Article 30 would cover only the directors who were originally on the board as first directors as the question of any appointment in their case does not arise. This is the only way by which the conflict between the two articles could be resolved. The respondents took a plea that in view of the provisions of Section 9 and Section 273 of the Act, the stipulation in the articles regarding qualification shares is void and, therefore, cannot be given effect to. Section 270 states that if the articles provide for qualification shares, then a person appointed as director should obtain the qualification shares within two months and that the nominal value of the qualification shares shall not exceed Rs. 5,000. Section 273 states that the provisions of Section 270 are not applicable to a private company. Therefore, according to the respondents, in view of the provisions of Section 9, which states that the provisions of the Act would override the provisions of the memorandum and articles of association and when Section 273 exempts private companies from application of provisions of Section 270, the articles of this company providing for qualification shares is void. We do not agree with this proposition. The provisions of Section 270 are mandatory in nature. What Section 273 provides is that the mandatory provision is not applicable to a private limited company. However, if the shareholders of a private company, in their own wisdom, provide in the articles, qualification shares for a director, we are of the view that the same is not repugnant to the provisions of Section 273 and, therefore, the application of the provisions of Section 9 does not arise. Therefore, considering our finding on the implication of Article 29, we hold that the appointment of respondent No. 4 as a director is in violation of the Article and as such has to be set aside.
13. During the hearing it transpired that the company has taken a stand that the petitioner had ceased to be a director in view of her having to retire by rotation in the annual general meeting to be held for the year 1996-97 and since no annual general meeting was held by September 30, 1997, the last date on which the annual general meeting for that year was to be held, in the absence of her re-election, she ceased to be a director. Certain case laws were cited in support of this stand. Without adverting to the legal position, we are of the view that in such a closely held company where the petitioner holding 45 per cent, shares in the company, had been a director for over nearly 10 years, such a view that she has ceased to be a director on account of non-holding of annual general meeting by a stipulated date, should not have been taken. We are giving suitable directions on this later.
14. There is another allegation relating to increase in the share capital of the company. The company had proposed to increase the paid-up capital by Rs. 2 lakhs and this matter was discussed in a board meeting held on January 20, 1998. The shares were to be issued on rights basis. According to the respondents, the increase was proposed in view of a letter from the Bank of Baroda (annexure R-6-124). This letter is dated December 23, 1994, The company had informed the bank, vide their letter dated March 15, 1995, which has been signed by both the petitioner and respondent No, 2 indicating their inability to mobilise additional share capital. After this date, there is nothing on record to show the bank had made any further suggestion in regard to increase in share capital. As rightly pointed out by the petitioner there had been improvement in the performance of the company and even though the increase in the capital is by way of rights issue, we find that the time of initiating the proposal seems to be only to put some pressure on the petitioner either to subscribe or to reject the offer, in which case, her shareholding would come down. Therefore, we are of the view that as far as further issue of shares is concerned, unless otherwise the petitioner consents to any further issue of shares for which it should also be established that the company is in need of additional funds, no additional share capital shall be raised.
15. This is very unfortunate that parties who had been carrying on so well for a long period should have got themselves into this litigation. To put an end to the dispute, our efforts for an amicable settlement failed. While we do appreciate that for their continuing together unless otherwise both sides adopt a give and take attitude, the company is likely to suffer. At the same time, we also do not wish to pass any orders for any one of them going out of the company as the valuation of shares has been a bone of contention between the parties as revealed during the compromise attempt. With the hope that the parties will attempt to bring back the cordial atmosphere prevailing before the litigation started, we give the following directions ;
(1) The respondent shall cease to be a director with immediate effect.
(2) No share capital shall be increased without the consent of the petitioner.
(3) The articles relating to retirement by rotation of directors shall be deleted from the articles of association.
(4) There shall be only three directors on the board consisting of the petitioner, respondent No. 2 and any other person as may be elected by the general body, (5) The petitioner shall be entitled, as a working director, to all the emoluments and benefits that she has been enjoying so far.
(6) The board shall allocate such of the functions as may be considered appropriate to the petitioner and respondent No. 2 which shall be binding on all.
16. Notwithstanding the above directions, if the petitioner desires to part ways with the company, she shall be at liberty to do so on a proper price for her shares which may be fixed by a valuer to be appointed with mutual consent of the petitioner and respondent No. 2.