Company Law Board
V.G. Coelho vs Silver Cloud Estates (P.) Ltd. on 20 April, 2001
ORDER
Balu
1. The petitioners together with the consenting shareholder constituting more than one-tenth of the total members of Silver Cloud Estates Private Limited ('the Company') as well as holding more than 10 per cent of the shares have filed this petition under section 397/398 of the Companies Act, 1956 ('the Act') alleging oppression and mismanagement in the affairs of the Company.
2. The main acts of oppression and mismanagement relate to the allotment of 9,900 equity shares and 36,000 preference shares made on 15-6-1991 in favour of respondent Nos. 2, 3 and 5 to 10 and non-election of the first petitioner as a director of the Company at the annual general meeting held on 26-3-1993.
3. Shri T. Raghavan, senior advocate appearing for the petitioners, while initiating his arguments submitted that a tea estate by name Silver Cloud Estate measuring 250 acres in the district of Nilgiris was owned by the deceased G,J. Coelho, father of the first petitioner and respondent Nos. 2 and 3. A partnership firm was constituted by the deceased G.J. Coelho under the name and style of Silver Cloud Tea Estates with the deceased G.J. Coelho and his eight children as partners. After the demise of Shri G.J. Coelho in March, 1965 the remaining members of the family jointly managed the business, Thereafter, the family of Coelho acquired 50 per cent undivided interest in a tea estate, namely, Barwood Tea Estate. In August, 1981, the Company as well as the eleventh respondent came to be incorporated taking over the management of the Silver Cloud Tea Estates and the 50 per cent undivided interest in Barwood Tea Estates on dissolution of the partnership firm. Silver Cloud Tea Estates. In the year 1985, the entire Silver Cloud Tea Estate was sold by the Company to the eleventh respondent for a sum of Rs. 111.93 lakhs which still remains unpaid. The first petitioner has been an equal partner of the erstwhile firm Silver Cloud Tea Estates and upon the incorporation of the Company and the eleventh respondent, the first petitioner has been a director on the Board of the Company as well as the eleventh respondent retaining the characteristic of a quasi-partncrship firm. The management of the Company and the eleventh respondent are based on mutual faith and trust as in the case of a partnership firm and the relationship governing the partners. The entire share capital of the Company was held by the children of the deceased G.J. Coelho equally, except the eldest son holding 10 extra shares. The Company did not have any outsider as shareholder except fourth respondent, being a chartered accountant, close to the Coelho family. Against this background, the respondent Nos. 2 to 4 sent a formal notice convening a board meeting on 15-6-1991, upon which the first petitioner sought for postponing of the board meeting. However, the board of directors in the board meeting held on 15-6-1991 allotted 9,900 equity and 36,000 preference shares in favour of respondent Nos. 2, 3 and 5 to 10 against the existing loans advanced by them excluding the petitioners. The minutes of the board meeting held on 15-6-1991 were not circulated. The minutes were not confirmed in the subsequent board meeting held on 11-7-1991. The Company has failed to produce the minutes book, but only filed copy of the minutes of the board meeting held on 15-6-1991. Shri Raghavan has further question the genuineness of the special resolution passed on 31-5-1986 authorizing the Company to accept deposits from directors and other members of the Company so as to issue shares in the Company in discharge of its obligations to repay such deposits. The Company never asked for deposits from the petitioners. According to the petitioners, the minutes are fabricated. The Company failed to produce the original minutes of the board soliciting deposits from its members and also allotting the impugned shares in favour of the respondents group. Shri Raghavan, has, therefore emphasised that adverse inference should be drawn against the Company for non-production of the original minutes of the board meetings. No attendance register of the board of directors has been produced. By allotment of the impugned shares, the shareholding percentage of respondent Nos. 2 and 3 was increased to 48 per cent from 36.2 per cent. The shares were allotted at par while the real worth of the shares arc far higher, especially when it involves 400 acres of land resulting in unlawful enrichment of the respondents group. The petitioners arc deprived of the opportunity to participate in the capital of the Company. The increase of share capital by allotment of shares in favour of the respondents group to the exclusion of the petitioners and other members was unfair and in breach of trust. By the allotment, the existing loans were converted into share capital and no fresh funds were infused. There were no bona fides in allotment of the impugned shares. The petitioners are willing to subscribe to the shares which may be allotted by the company. By virtue of the impugned allotment, shareholding of the petitioners has been reduced from 12 per cent to one per cent. Shri Raghavan further pointed out that the respondent Nos. 2 and 3 have leased out portions of Barwood Tea Estates at a throwaway price in favour of their own close relatives and caused monetary loss to the company, petitioners and other shareholders. In view of the strained relationship between the parties, the first petitioner was not elected as director at the annual general meeting held in March, 1993, contrary to the normal practice of the company to elect all the retiring directors, thereby the control of the company was vested with the respondents group. The removal from board of directors of the company will amount to an act of oppression. The company was earlier managed by four directors, out of which one director expired and the first petitioner was removed. The Company is now managed only by the remaining two directors, namely respondent Nos. 2 and 3. The affairs of the Company are being managed in a prejudicial and oppressive manner to the detriment of the Company and its shareholders. In view of these circumstances, Shri Raghavan sought for the reliefs made in the petition.
4. Shri R. Vidhya Shankar, Advocate for the respondents, while refuting the allegations of oppression and mismanagement in the affairs of the Company, has submitted that the impugned shares were duly allotted on 15-6-1991 and that the first petitioner was not elected to the Board of directors of the Company in the normal course at the annual general meeting held on 26-3-1993. The petition has been filed in the year 1998, after a delay of 5 to 7 years, which remains unexplained. The petitioners were inactive for several years till the respondents filed company petition in the affairs of South India Tea and Coffee Estates Ltd. There are no bona fides on the part of the petitioners in filing the present petition. Shri Vidhya Shankar denied the theory of management of the Company based on mutual faith and trust and relationship governing partners. According to Shri Vidhya Shankar, the business and affairs of the Company are being conducted in accordance with the provisions of the Act and not on any partnership principles. At no point of lime, the Company was considered as a partnership concern and there is no such agreement among the parties of carry on the business of the Company on partnership basis. The theory of the partnership is not applicable by virtue of the fact that the petitioners were never having majority shareholding and there is no question of majority shareholding converted into minority holding. In this connection, he relied upon the decision in Kilpest (P.) Ltd. v. Shekhar Mehra [1996] 87 Comp. Cas. 615', wherein it has been held by the Apex Court that the promoters of a limited company having elected to avail of the advantages of forming a limited company, the plea that a limited company should be treated as a quasi-partnership should not easily he accepted. Shri Vidhya Shankar has, therefore, submitted that the plea of quasi-partnership made out by the petitioners should be rejected. Shri Vidhya Shankar invited our attention to the resolution passed on 31-5-1986 by the Board of directors authorising the Company to take deposits from directors and other members of the Company with liberty to issue shares in the Company in discharge of such deposits. Accordingly, the Company was accepting deposits from directors and other members of the Company from time to time which are reflected in the balance sheets for the years ended 31-3-1987 to 31-3-1991. As at 31-3-1992, the total loan amount advanced and the aggregate amount outstanding to the credit of the account of the director members inclusive of interest comes to Rs. 66,74,950. The Company made use of these deposits to run the business, especially when the equity of the Company is to the tune of only Rs. 4 lakhs. Mr. Vidhya Shankar pointed out that the debt equity ratio of the Company was rather unsatisfactory and that the company's banker was constantly pursuing the Company to raise the capital and in this connection he referred to a series of correspondence exchanged between the Company and its banker, (viz.) Exhibits R-8 to R-14. Consequently, the Board of directors of the Company was constrained to pass the resolution on 15-6-1991 to increase the capital base to Rs. 50 lakhs and issue new shares to the existing deposit holders at par on conversion of the outstanding balances to their credit on loans/deposits within permissible limits of the authorised capital of the Company. Pursuant to decision of the board to allot shares against the deposits outstanding in the name of the depositors, written consent was obtained from such shareholder-depositors. Accordingly shares were allotted proportionately to each of the shareholder-depositors upto the full extent of the authorised capital. The company was constrained to make the impugned allotments on account of the pressure from the bank to regularise the debt equity ratio by converting the amount of the credit of the shareholder-depositors towards loans advanced by them. There is nothing inequitable about the impugned allotment to the shareholder-depositors. In this connection Shri Vidhya Shankar relied upon the decision in New Carnatic Theatres (P.) Ltd. wherein the CLB has upheld the allotment of shares in favour of one group excluding the other group. In the present case the company could not allot shares to the petitioners as they have not contributed any money by way of deposit, Shri Vidhya Shankar brought to our notice that the company had allotted shares to every shareholder who had kept deposit with the Company including the 10th respondent who is supporting the petitioners. According to Shri Vidhya Shankar the Company did not discriminate while allotting the impugned shares. Moreover the minutes of the board meeting resolving allotment of the impugned shares was confirmed at the subsequent meeting of the board held on 11-7-1991, after recording the first petitioner's objection to confirmation of the minutes. Shri Vidhya Shankar has, therefore, urged that non-allotment of shares in favour of the petitioners is not an act of oppression. Articles 4 and 5 empower the Board of directors to allot the shares, in exercise of which the impugned shares were duly allotted in favour of the respondents. With regard to the claim of the first petitioner that his non-election as a director of the company at the annual general meeting held on 26-3-1993, Shri Vidhya Shankar contended that the provisions of section 397/398 cannot be invoked by a director and therefore it does not amount to an act of oppression. Shri Vidhya Shankar pointed out that the petitioners cannot claim any relief in respect of the 11th respondent, in view of the fact that the petitioners do not satisfy the requirements of section 399. The petitioners are not shareholders of the 11th respondent-company. Section 399 does not empower shareholders of a holding company with requisite qualifications to maintain any action against its subsidiary company. Shri Vidhya Shankar has therefore categorically submitted that the claim against the llth respondent should be rejected. While concluding his submissions, Shri Vidhya Shankar reported that the entire sale consideration in respect of Silver Cloud Estates stands paid by the company and that no amount is outstanding on account of sale consideration.
5. Shri Raghavan in his reply while making a distinction between delay and laches has submitted that there has been delay on the part of the petitioners to approach the CLB but the petitioners are not guilty of laches in view of the fact that no prejudice has been caused to the respondents. He further emphasised that originally the family business was conducted by a partnership firm and subsequently the rights in the partnership firm were taken over by the company. It is, therefore, a family company wherein the principles of partnership should be applied. He further pointed out that the Company failed to produce the minutes book and no importance shall be attached to copy of the minutes of the board meeting produced by the company. In view of the decision of the High Court of Madras, adverse inference should be drawn for non-production of the original minutes book. Shri Raghavan further contended that there is no pre-existing rights for creditors for converting the loan amount into equity. It amounts to breach of trust by Company. In the present case there is no question of deadlock in the management of the Company and therefore the decision in Kilpest (P.) Ltd.'s case (supra) by the counsel for the petitioner is not applicable. The company ought to have utilised the unpaid consideration of Rs. 1.45 crores before allotting the impugned shares. In the process the petitioners never derived any benefit. No dividend was declared. The company ought to have ensured accrual of the benefit to both the groups by allotting the shares. More so the allotment should have been at the market value. It is for these reasons, Shri Raghavan pleaded for grant of reliefs prayed for in the petition.
6. We have considered the pleadings and arguments of the counsel for the petitioners as well as respondents.
7. The grievance of the petitioner is that by allotment of impugned shares, the shareholding percentage of the petitioners has come down from 12 per cent to one per cent. It is to be noted that the share capital of the Company consists of 10,000 equity shares and 40,000 preference shares.
Since no dividend has been declared so far on the preference shares these shares have voting rights. On the basis of this, the petitioners claim that their voting rights have come down from 12 per cent to one per cent. They also claim that in view of that the company being a family company, that too originally in the form of partnership firm, the business of which was taken over by the Company, the principles of partnership should be applied. According to the learned counsel for the respondents, principles of partnership should be applied only in case of deadlock and not otherwise. It is an admitted position that right from the beginning, the shares in the company were held more or less equally by all the family members and the four sons of the deceased Coelho were directors right from the inception. In the cases of family companies, wherein equal shareholding and equal participation have been in vogue, this Board has always taken a view that strict principles of company law need not be applied and equitable principles should be given equal weightage. Therefore the contention that application of partnership principles would arise only in case of deadlock cannot be accepted.
8. Regarding delay and laches as contended by the counsel for the respondents, we arc in general agreement with the submissions of Shri Raghavan in this regard and as such hold that the same does not bar the petitioner from prosecuting this petition.
9. In the present ease, the main argument of the counsel for the respondents has been that the share capital was increased to meet the requirements of the bank. It is a settled principle of law that as long as share capital is increased for the benefit of the Company, even if it indirectly benefits certain shareholders, then such increase in share capital cannot be construed to be an act of oppression. In the present case, according to the Company a board resolution was passed in a Board Meeting on 31-6-1986 for inviting loans from the shareholders with the provision for conversion to shares at a later date. The Company has not been able to produce the original of these minutes, even though a copy was furnished. In the absence of any conclusive proof that decision had been taken that the loans given by the shareholder would be converted into share capital, we are not in a position to hold that there was such a decision. Even assuming that there was a board resolution, there is nothing on record to show that the shareholders including the petitioners were informed of this resolution of the board requesting them to contribute towards loans. Unless and until it is established that the decision of the board was communicated to the members and that the petitioners did not choose to contribute towards loan, the grievance of the petitioners that when further shares were allotted, they had been excluded, seems justified. Even otherwise, the shares were allotted only in June 1991 even though the loans were taken much earlier in December 1986. Considering the family nature of the Company and that all the shareholders were partners in the erstwhile partnership firm, the business of which was taken over by the Company, equity demanded that when the loans were converted into share capital, the petitioners should also have been asked whether they were willing to acquire further shares. Since it has not been done, they have genuine grievance of oppression on the ground that as shareholder percentage has been reduced from what it was in existence earlier. Therefore, we are of the view that their prayer for proportionate allotment of shares should be granted. Accordingly, the Company will work out its entitled shares as on 15-6-1991 when the further shares were allotted and intimate the same to the petitioners within a month of this order. The petitioners should apply for that number of shares along with consideration at par value within a month thereafter. On receipt of the application and the consideration, the Company will ensure that these shares are transferred from other shareholders on a proportionate basis to the petitioners.
10. In regard to the grievance of the first petitioner about his non-election as a director, the company being a family company in which the first petitioner was a director right from incorporation, we would have held that his non-election is an act of oppression and would have restored his position. But, considering the fact that he has ceased to be a director for eight years and that his induction, in view of the strained relationship between the parties, would not be in the interest of the Company, we are not passing any order on this grievance.
11. The petition contains certain allegations in the affairs of the 11th respondent, which is wholly owned subsidiary of the Company. Since, Shri Raghavan neither argued on the allegations nor sought for any relief in respect of the 11th respondent, we are not dealing with the allegations in respect of the 11th respondent.
12. Petition is disposed of in the above terms with no order as to cost.