Company Law Board
Shri Vijay Kumar Narang, Smt Neeta ... vs Prakash Coach Builders Private Limited ... on 7 April, 2004
Equivalent citations: [2005]128COMPCAS976(CLB)
ORDER
K.K. Balu, Member
1. The petitioners collectively holding fifty percent of the paid up capital of M/s Prakash Coach Builders Private Limited (the Company') and constituting not less than one-tenth of the total number of its members have filed this petition under sections 397,398,402 & 403 of the Companies Act 1956, ('the Act') complaining of the allotment of 1125 shares each in favour of respondents 2 & 4 in complete exclusion of the petitioners as illegal and oppressive.
2. Shri S.S. Naganand, learned Senior Counsel appearing for the petitioners, while elaborating the background of the Company as well as its group companies/ entities with a spate of litigations between the parties submitted that the first respondent-Company being a private limited Company was promoted in June 1982 by the petitioners and respondents 2, 4, 5 & 6 being close relatives, with main object of carrying on the business of bus body building, coach building and other allied activities. The authorised share capital of the Company is Rs. 5,00,000 divided into 5000 equity shares of Rs. 100/- each and the paid up capital of the Company is Rs. 800/- comprising of eight equity shares of Rs. 100/- each fully paid. The petitioners and respondents 2, 4, 5 & 6 each hold one paid up share. Learned Senior Counsel pointed out the parity maintained between the parties ever since incorporation of the Company till the impugned allotments in favour of the respondents. Though the first respondent-Company has been incorporated under the Act, yet in substance it is a quasi-partnership, functioning on the basis of mutual trust and confidence just as the case of a partnership and the relationship between them is that of partners with all the male members taking an active role in the management and administration of the Company. But the respondents acted unfairly by allotting shares in favour of respondents in exclusion of the petitioners. All the earlier proceedings before the various Courts/Forums, wherein the second respondent was a party establish the conduct of the respondent. The parties are at loggerheads and there is deadlock, which would lead to winding up of the Company, as made out in the Company Petition, which would prejudicially affect the Company and its members. The act of the respondents being prejudicial to the members entitle the petitioners to invoke the provisions of sections 397 and 398, While so, the Company by a letter dated 11.11.2002 (Annexures 11 & 12 of petition) informed the petitioners that it was to increase the paid up capital in statutory compliance of the provisions of the Companies Amendment Act, 2000. Further more, the Company was in need of funds and therefore, offered to allot shares at a premium of Rs. 140/- per share in favour of the existing shareholders and accordingly advised the petitioners to send the remittances on or before 30.11.2002. The respondents did not indicate the need for additional funds beyond Rs. one lakh. The Company neither forwarded any application nor disclosed the essential factors such as number of shares offered to the petitioners, proposed increase in the paid up capital; necessity for additional, funds; basis for the premium etc. According to Shri Naganand, Learned Senior Counsel, Article 4 of Articles of Association of the Company ought to have been complied with before the increase of the paid up capital by passing an ordinary resolution at the general meeting of members of the Company. Though the petitioners had by their letter dated 26.11.2002 (Annexure 13 of the petition) agreed to take additional shares and forwarded four Bank pay orders of Rs 1,49,760/-each, the Company had rejected the application of the petitioners on the ground that they did not fulfil the requirements of Section 41 of the Act. At the same time the Company had allotted on 13.12.2002, 1125 shares each to the respondents 2 & 4, increasing the paid up capital beyond the statutory limit, in breach of trust and good faith, which according to learned Senior Counsel is oppressive and constitutes an act of oppression in the affairs of the Company, especially when the petitioners have always been holding equal number of shares in the Company as those of the respondents 3, 4, 5 & 6. Shri Naganand, learned Senior Counsel pointed out that the directors are in a fiduciary position vis-a-vis the Company and must exercise their power for the benefit of the Company and ensure fair play in action in corporate management, but failed to act for the benefit of the Company and solely for their personal aggrandisement and to the detriment of the Company and, therefore, sought the intervention of the CLB. In this connection learned Counsel referred to decisions in Nanalal Zaver and Ors. v. The Bombay Life Assurance Co., Ltd. and Ors. AIR (37) 1950 Supreme Court 172, Jadabpore Tea Co. Ltd. v. Bengal Dooars National Tea Co. Ltd. 1984 (55) CC 160. Moreover, the action of the respondents suffers from lack of probity and fair play as evidenced by the impugned allotments made in exclusion of the petitioners holding 50 percent of paid up capital of the Company, entitling them for the relief claimed in the Company Petition in support of which reference has been made to Standard Industries Limited and Anr. v. Mafatlal Services Limited and Ors. 1994 (80) CC 764. By virtue of the impugned allotments there has been changes in the composition of shareholders, management and control of the first respondent-Company. In this connection learned "Senior Counsel gave a detailed account of similar conduct and attitude adopted by the respondents in gaining control of other group companies/entities and urged that even if the petitioners have not made out any case of oppression, the CLB is empowered to grant reliefs in the interest of the parties as held in the case of Needle Industries (India) Ltd. He, therefore, prayed for setting aside the impugned allotments.
3. Shri V Ramakrishnan, learned Counsel appearing for respondents while contending that the petitioners have not made out any case to show that the affairs of the first respondent-Company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members, satisfying the requirements of sections 397 and 398, every allegation made in relation to the affairs of the concerns ether than the first respondent-Company is quite irrelevant for the purpose of the Company Petition. The petitioners have failed to make out a case for winding up of the Company on just and equitable grounds and, therefore, no relief can be granted as held in Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd. - (2001) 4 SCC 420. There are no groups between the parties, though they are related to each other. There is no question of maintaining parity in shareholding between the parties. Though the petitioners and the respondents each subscribed one share equally among themselves under the Memorandum of Association of the Company, it cannot be presumed that the equal shareholding must be continued till winding up of the Company. The first respondent- Company is neither in form nor in substance a quasi-partnership and never functioned on the basis of mutual trust and confidence as in the case of partnership, The relationship between the parties are not as that of partners. While the second respondent the only family member is a director, the petitioners 1 & 3 are not directors. The remaining two directors being outsiders are on the Board since 1987, thereby the theory of partnership as propounded by the petitioners is negated. The principles of partnership must be applied in the rarest of rare cases as held in Kilpest Private Limited v. Shekhar Mehra - 87(1996) CC 615. The petitioners have not been evincing any interest in the affairs or attending the annual general meetings of the Company since the year 1995. The third petitioner is carrying on business at Hindpur in competition with the first respondent-Company. As there is no parity among the shareholders, it would not result in deadlock and therefore, there is no scope for winding up of the Company on just and equitable grounds. By virtue of Articles of Association of the Company the Board of Directors of the Company are within their power to allot shares of the Company as they deem fit. According to Shri Ramakrishnan, learned counsel the requirement of an ordinary resolution at the General Meeting of members, of the Company to increase its share capital as contemplated in Article 4 does not apply to the increase of its paid up capital. By virtue of Section 3 (3), the first respondent- Company, being a private Company was mandatorily required to increase its paid up capital from Rs. 800 to 1 lakh on or before 12.12.2002. Towards this end, the Company by a letter dated 11.11.2002 had advised the shareholders including the petitioners inviting them to apply for shares in the Company indicating therein the reasons for the proposed increase in share capital, price at which shares are offered to the shareholders and justification for the premium so arrived by the Company. Though the petitioners were to apply before 30.11.2002, they had deliberately responded only on 26.11.2002 forwarding four pay orders Rs. 1,49,760/- each and raised certain legal issues. The petitioners had neither asked for the allotment of shares nor indicated number of shares proposed to be subscribed by each of them. As the petitioners failed to comply with the requirements of Section 41, the Board of Directors was unable to allot any shares to petitioners. Moreover, the Company was in receipt of the application of the petitioners just before the last date and therefore, could not advise the petitioners to comply with the requirements before 30.11.2002. Consequently, the Company was constrained to return the pay orders in favour of the petitioners, as, resolved at the Board Meeting held on 30.11.2002. The Board of Directors at the meeting held on 13.12.2002 after considering the valid applications received from the shareholders had in exercise of their powers allotted 1125 shares each in favour of respondents 2 & 4, thereby increasing the paid up share capital in compliance with the provisions of Section 3 (3), which would not constitute an act of oppression. Thus, there is no illegality in the allotment of shares without bringing out any change in the management or control of first respondent-Company. Under these circumstances, the allotment is not oppressive, illegal or lacking in probity. The issue of shares is neither malafide nor vitiated by malice and therefore, the petitioners are not entitled for any relief as claimed in the Company Petition.
4. Considering the relationship of the parties, I have suggested to learned counsel to explore the possibilities of any amicable settlement of the dispute, pursuant to which Shri Ramakrishnan, learned Counsel expressed the willingness of the respondents to purchase the shares of the petitioners at a value of Rs. 240/- per share, which is said to be arrived on the business prospectus of the Company as a running concern and without taking into account the lease hold rights in respect of the landed property held by the Company. While this proposal was not acceptable to the petitioners, Shri Naganand, learned Senior Counsel made an offer across the bar to purchase the shares of the respondents at Rs. 480/- per shares, which was neither acceptable to respondents. Thus the parties could not arrive at any settlement among themselves. I, therefore, shall proceed to consider the pleadings and arguments of learned counsel. The issue that arises for my consideration is whether the allotment of shares impugned in the Company petition, made in favour of the respondents 2 & 4 in complete exclusion of the petitioners, would amount to an act of oppression, in the facts and circumstances of the present case. While according to the petitioners, they, had subscribed to shares of the Company by making the remittances, the respondents contended that the joint application made by the petitioners was not in compliance with the provisions of Section 41 of the Act, which reads as under:-
41 (1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members.
41 (2) Every other person who (agrees in writing) to become a member of a company and whose name is entered in its register of members, shall be a member of the company.
41(3) Every person holding equity share, capital of company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the concerned company.
By virtue of Section 41 (1), a subscriber to the-memorandum of a Company, becomes ipso facto a member on incorporation. In the case of a subscriber, no application or allotment is necessary to become a member. For any other person to become a member, Section 41 (2) stipulates two conditions viz., that there is an agreement to become a member and that his name is entered in the register of members of a company. Section 41 (3) is not relevant for the present case. The word "in writing" for "agrees" in Sub-section (2) have been added by Amendment Act (65 of 1960) to protect innocent persons from the demands of companies on the verge of going into liquidation, as borne out the suggestion of the Companies Act Amendment Committee. Thus, under this sub-section a person must give his consent in unequivocal terms by applying in writing for allotment of shares. This requirement, in my view, is as regards the first allotment made after the formation of the Company. In the case of subsequent allotments to persons who are already shareholders, the procedure prescribed in Sub-sections (2) does not apply. Even otherwise, assuming for the sake of argument, that the requirement of Sub-section (2) of Section 41 shall be satisfied in the case of every allotment of shares, the joint application made on 26.11.2002 by the applicants, (Annexure - 13), the relevant portion of which reading as under:-
"Please note that we wish to maintain the present parity of share holding. The present paid up share capital of the Company is- Rs. 800/- (Eight hundred only), consisting of 8 shares of Rs. One, Hundred each. Our group holds FOUR Shares, and, the group of Mr. Bharat Bhushan Narang and Mr. Sudershan Kumar Manchanda hold the balance FOUR Shares.
Although the number of share being offered and issued is not stated and also requires the approval of the General Body, we are enclosing herewith the below mentioned FOUR Bank Pay Orders/ Cheques of Rs. 1,49,760/- (One lakh forty nine thousand seven hundred sixty) each in order to protect our interest. This is without prejudice to our contention that the issue is illegal and malafide.
Pay Order No. 022943 dated 26.11.2002 drawn on Union Bank of India on account of Vijay Kumar Narang.
Pay Order No. 022944 dated 26.11.2002 drawn on Union Bank of India on account of Neeta Narang.
Cheque No. 706967 dated 26.11.2002 drawn on State Bank of Patiala on account of Geetha Rai.
Cheque No. 856807 dated 26.11.2002 drawn on State Bank of Patiala on account of Bhupinder Rai".
is required to be examined. It is clear from the above recitals that the petitioners wanted to maintain the parity of shareholding as on the date of application, with the petitioners collectively holding four shares and the respondents 2, 4, 5 & 6 collectively four shares of Rs. 100/- each out of the paid up share capital of Rs. 800/- of the Company, while allotting shares in favour of the petitioners. If is relevant to observe that the offer letter dated 11.11.2002 made by the Company (Page 108 & 109 of petition) is silent about the number of shares offered to the petitioners. Against this background the petitioners had forwarded four pay orders of Rs. 1,49,760/- at Rs. 240/- per share which is inclusive of premium of Rs. 140/- in favour of the Company representing the fifty percent of the unsubscribed capital of Rs. 5 lakhs of the Company. In this context the minutes of the meeting of the Board of Directors held on 30.11.2002 (Page 40 & 41 of Counter-statement) assume relevance, from which it, is quite clear that the directors were consciously aware of the fact that each of the petitioners had applied for 624 shares at the rate of Rs. 240/- per share and accordingly each remitted Rs. 1,49,760/- accounting for fifty percent of the unsubscribed capital of the Company. The sequence of events clearly indicate that the petitioners gave their consent by applying in writing for allotment of the fifty percent of the un-subscribed capital of the Company amounting to 624 shares for each of the petitioners and accordingly every petitioner remitted the requisite, amount, which was with in the knowledge of the Directors of the Company. The rejection of the application of the petitioners by the Board of Directors on account of non-fulfillment of the requirement of Section 41 is misconceived, more so when the petitioners by a letter dated 10.12.2002 (Annexure 16 at page 113 of Petition) called upon the third respondent to furnish details of the requirement to be complied with by them and further cautioned that any allotment in favour of the other shareholders or third parties, excluding the petitioners would be illegal. In spite of the categorical statement of the petitioners, expressing their readiness to comply with the requirement, the directors of the Company at the meeting held on 13.12.2002 had allotted the impugned shares in favour of the respondents 2 & 4 in complete exclusion of the petitioners, thereby increasing the paid up capital to Rs. 2.25 lakhs, without assigning any justification for such additional funds, in breach of their fiduciary obligations and trust towards the Company and its shareholders, which would constitute an act of oppression in the affairs of the company against the petitioners, warranting winding up, of the Company on just and equitable grounds. Moreover, by virtue of the impugned allotments, the parity of shareholding between the parties maintained since the inception of the Company is found to be disturbed. Had there not been any parity of shareholding as contended by the respondents, they would not have at all offered shares to the petitioners. Moreover, when the petitioners by their letter dated 26.11.2002 (Page 110 of Company Petition) had insisted the third respondent to maintain the present parity of shareholding, there was no denial of any such parity of shareholding between the parties. Therefore, the plea of the respondents that there was no parity of shareholding must fail. Even though, in Kilpest Private Limited (supra), the apex Court held that only in rare cases the principles of partnership should be applied, the Court has not , completely barred application of the principles of partnership to a company and the principles of partnership cannot liberally be invoked. Therefore, the action of the respondents suffers from lack of probity & fair play to maintain the parity of shareholding between the parties. The directors are in a fiduciary position vis-a-vis the Company and must exercise their power for the benefit of the Company, but, in my view, acted to the detriment of the Company, warranting interference of the CLB as held in Nanalal Zaver and Ors. v. The Bombay Life Assurance Co., Ltd. and Jadabpore Tea Co. Ltd. v. Bengal Dooars National Tea Co. Ltd. (Supra). The petitioners have complained that, provisions of Article 4 have not been complied with. Even assuming, it is so, since the Company has been benefited by increase in the share capital, I do not consider that any finding needs to be given on this allegation. Under these circumstances, the act of the Board of Directors of the Company, in having rejected the applications of the petitioners is no way justifiable. Accordingly. the following order is made:
a) The second respondent would transfer out of his holding, 281 shares each in favour of the petitioners 1 & 2 within 15 days of receipt of the consideration at the rate of Rs. 240/- per share from them and deliver the original share certificates and the instruments of transfer in favour of Petitioner 1 & 2.
b) The fourth respondent would transfer out of her holding 282 shares in favour of the third petitioner and 281 sharers in favour of the fourth petitioner within 15 days of receipt of the consideration from them at the rate of Rs. 240/- per share and deliver the originalshare certificates together with the instruments of transfer in favour of Petitioners 3 & 4.
c) The Company will register the transfer of shares in favour of the petitioners within 30 days of due lodgement of the share certificates and the instrument of transfer by the petitioners and
d) The resolutions passed at the annual general meeting held on 26.12.2003, will become effective as and when the transfers are registered in favour of the petitioners in terms of this order.
With the above directions, the petition and the application in CA No. 7/2004 seeking to implement the resolutions passed at the annual general meeting held on 26.12.2003 are disposed, however, without any order is to costs.