Bombay High Court
Shah Pulp & Paper Mills Ltd vs Pravinchandra Hirji Shah on 17 May, 2013
Author: S.J. Kathawalla
Bench: S. J. Kathawalla
KPP 1 Co. Appeal No. 1 of 2011
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
Company Appeal No. 1 of 2011
In
CLB Company Petition No. 60 of 2006.
1. Shah Pulp & Paper Mills Ltd., )
a company incorporated under the Companies Act, )
1956, having its Registered Office at Angeline )
Apartment, B/202, 2nd floor, Junction of Old Police )
Station & Sarojini Road, Vile Parle (West), )
Mumbai-400 056. )
2. Mahendra H. Shah )
Opp. Gyamdham High School, GIDC Residence Area, )
Gunjan Area, Vapi-396 195, District Valsad. )
3. Hirji T. Shah )
Opp. Gyamdham High School, GIDC Residence Area, )
Gunjan Area, Vapi-396 195, District Valsad. )
4. Amritlal K. Shah )
Plot No. 207/208, GIDC Area, Behind to Gunjan )
Cinema, Vapi-395 195, District Valsad )
5. Ashok Z.Shah )
Para Apartment (S-2), Unit No.2, )
Opp. Ami Apartment,GIDC (Residence Area) )
Vapi 396 195, District Valsad. )
6. Ms. Hansa A.Shah )
Plot No. 207/208, GIDC Area, Behind to Gunjan )
Cinema, Vapi-395 195, District Valsad )
7. Divyesh A. Shah )
Plot No. 207/208, GIDC Area, Behind to Gunjan )
Cinema, Vapi-395 195, District Valsad )...Appellants
(Orig. Respondents)
versus
1. Pravinchandra Hirji Shah )
21, Shanker Dhara, Vithalbhai Road, )
Vile Parle (West), Mumbai-400 056 )
::: Downloaded on - 09/06/2013 19:53:19 :::
KPP 2 Co. Appeal No. 1 of 2011
2. Shantilal K. Shah )
21, Shanker Dhara, Vithalbhai Road, )
Vile Parle (West), Mumbai-400 056 )
3. Ramesh K. Shah, )
353/354, Pushpakunj, GIDC Residential Area, )
Gunjan, Opp. Lions Uppasana School, )
Vapi-396 195, District Valsad )
4. Jigna Ketan Shah )
353/354, Pushpakunj, GIDC Residential Area, )
Gunjan, Opp. Lions Uppasana School, )
Vapi-396 195, District Valsad )
5. Mrs. Pushpaben K. Shah )
353/354, Pushpakunj, GIDC Residential Area,
ig )
Gunjan, Opp. Lions Uppasana School, )
Vapi-396 195, District Valsad )
6. Ketan K. Shah (HUF) )
353/354, Pushpakunj, GIDC Residential Area, )
Gunjan, Opp. Lions Uppasana School, )
Vapi-396 195, District Valsad )
7. Keshavji Shah )
353/354, Pushpakunj, GIDC Residential Area, )
Gunjan, Opp. Lions Uppasana School, )
Vapi-396 195, District Valsad )
8. Keshavji Shah (HUF) )
353/354, Pushpakunj, GIDC Residential Area, )
Gunjan, Opp. Lions Uppasana School, )
Vapi-396 195, District Valsad )
9. Ketan K. Shah )
353/354, Pushpakunj, GIDC Residential Area, )
Gunjan, Opp. Lions Uppasana School, )
Vapi-396 195, District Valsad )
10. Ramesh K. Shah, HUF )
353/354, Pushpakunj, GIDC Residential Area, )
Gunjan, Opp. Lions Uppasana School, )
Vapi-396 195, District Valsad )
11. Rohit Plasto Pack Pvt. Ltd. )
::: Downloaded on - 09/06/2013 19:53:19 :::
KPP 3 Co. Appeal No. 1 of 2011
a Company incorporated under the Companies )
Act, 1956, having its Registered Office at 243, )
Tulsiwadi, Matan Pukhudi Road, Mazgaon, )
Mumbai-400 010 )..Respondents
Mr. Nitin Thakkar, Senior Advocate, along with Mr. Rohan Rajadhyaksha, instructed
by M/s. Desai & Chinoy, for the Appellants.
Mr. Rishab Shah along with Mr. Varun Paberia, instructed by M/s. Rajani Associates,
for the Respondents.
CORAM : S. J. KATHAWALLA, J.
Judgment reserved on : 19
November, 2012
th
Judgment
pronounced on: 17
May, 2013
th
JUDGMENT:
1. The above Appeal is filed under Section 10F of the Companies Act, 1956 ("the Act"). By the above Appeal, the Appellants (Original Respondents) have impugned the order dated 6th October 2010, passed by the Learned Member, Ms. Vimla Yadav, of the Company Law Board, Principal Bench, New Delhi ("CLB"), in Company Petition No. 60 of 2006. By the impugned order the Learned Member has:
(i) directed the Appellant No. 1 Company to alter/modify its Memorandum and Articles of Association to provide for proportional representation to the Respondents (original Petitioners) on the Board and till this is done directed that the Respondent No.1 himself or through his nominee continue to attend the Board Meetings along with two more Directors from that Group; (ii) directing that the quorum in the Board Meeting of Appellant No. 1 shall not be complete without the presence of at least one of the Directors from the Respondents' Group; and (iii) further directing that the Respondents' Group shall also nominate one of the ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 4 Co. Appeal No. 1 of 2011 Directors from their Group who is resident in India who shall be a joint signatory to the transactions with Banks and other organizations. The Learned Member of the CLB has passed the said directions against the Appellants on the ground of oppression of the Respondents who are the minority shareholders of the Company.
2. This Court (Coram: S.C. Dharmadhikari, J.) by an order dated 2 nd December 2011, admitted the above Appeal and framed the following questions of law:
(I) Whether the Company Law Board made an order and issued a direction to the appellant-original respondent No.1 in penultimate para of the judgment (Para 57) so as to deal with a situation which is summarized in para 47 of the impugned judgment?.
(II) In other words, the contesting respondents to this appeal having stated before the Company Law Board that they do not wish to press for reliefs in terms of prayers (f) and (g) of the Company Petition and that they would be contented with reinstatement of the original petitioner-member as a Director on the Board of the original 1 st respondent, could the Company Law Board have issued directions as referred to above and particularly as contained in para 57 of the impugned judgment.
(III) What is the ambit and scope of the powers conferred on the Company Law Board under section 402 of the Companies Act, 1956 and particularly clause (g) thereof?
(IV) Whether in exercise of these powers, can the Company Law Board ignore pleadings and the submissions of the parties and make any order or direction so as to deal with a situation of alleged deadlock because of the infighting and disputes between the parties, despite no material to prove such a situation is placed before it?"
Since the hearing of the Appeal is expedited, the Company Appeal is now taken up ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 5 Co. Appeal No. 1 of 2011 for hearing and final disposal.
3. Briefly set out, the relevant facts as narrated in the pleadings are as under:
4. In the year 1993, Appellant No. 1 - Shah Pulp and Paper Mills Pvt. Ltd. was founded by Appellant Nos. 2 and 4, with the main object of carrying on the business of manufacturers, importers, exporters, merchants and dealers in paper, board and pulp including writing paper, printing paper, newsprint paper, tissue paper, cover paper etc. In the year 1995 the name of the Appellant No.1 was changed to Shah Pulp and Paper Mills Ltd. (hereinafter referred to as "the Company"). All initial investments were made by Appellant Nos. 2 and 4 who also provided the required expertise. The other Appellants joined the Company and provided investments from time to time, as also their personal guarantees and also pledged their respective shares as security against loans from Banks and Financial Institutions for the functioning and expansion of the business of the Company. The Appellants have also provided the corporate guarantee of Shah Paper Mills Ltd. in which they and their family members are major shareholders.
5. Since 1997, Respondent Nos. 1 and 2, residents of Kenya, made financial investments in the Company and thereby acquired 20% of its shares. During the period 2002 to 2004, the Respondents from time to time increased their investments/shareholding in the Company and did not raise any grievance either with regard to the management of the Company or of any nature whatsoever. With the Respondents increasing their investments/shareholding in the Company, the ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 6 Co. Appeal No. 1 of 2011 Respondents together hold 40 per cent shareholding in the Company and the Appellants together hold the balance 60 per cent. None of the Respondents ever provided personal guarantee for the Company.
6. Respondent No. 1 was a Director in the Company from 23 rd December 1997 to 23rd January 2002 and Respondent No.2 was a Director in the Company from 23 rd December 1997 to 24th March 2006. However, Respondent Nos. 1 and 2 did not attend a single meeting either of the Board of Directors of the Company or any General Meeting of the Company, save and except the EGM held on 24 th May 2006.
Respondent Nos. 1 and 2 also did not take any direct interest in the working/functioning of the Company except gathering information on phone or by visiting the factory once in a year. However, Respondent No.3 was a Director of the Company from 19th October 2001 to 17th October 2003. Respondent No. 3 attended several meetings of the Board of Directors of the Company and was also a signatory to the audited annual accounts of the Company for the years ended 31 st March 2002 and 31st March 2003. He resigned on 17 th October 2003 but continued to work with the Company on a salary of Rs. 30,000/- per month.
7. According to the Appellants, in early 2006, after due consideration of the present and future market demands as well as technical reports, including the annual review of the paper industry published in Crisil Research and Information Services Ltd. and Dadhichi Consultants & Engineers Pvt. Ltd., an expansion of the Company was proposed, by upgrading the existing machinery for the production of better quality newsprint and colour print paper and also increasing the existing ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 7 Co. Appeal No. 1 of 2011 production capacity by installing an in-house power generator to bring down the cost of production. It was therefore necessary to procure extra funds by way of advances/loans from financial institutions and also raise additional funds by further issue of share capital. It was also decided that if the expansion plan failed, then it would be in the interest of the shareholders to sell the undertaking while the Company was still a profit making concern and had not run into a financial crunch.
8. Notices for convening an EGM on May 24, 2006, along with the requisite explanatory statement and the proposed resolutions for the same were sent to all the shareholders including the Respondents. In response, Respondent No. 1 wrote a letter dated 11th May 2006 to the Company raising queries which were answered by a letter dated 16th May 2006 and the information sought for was provided.
Admittedly this letter dated 11th May 2006 was the first communication ever received by the Appellants from the Respondents.
9. The EGM was accordingly held on 24 th May 2006 and attended by Respondent Nos. 1 to 3 and Respondent No. 10, when Respondent No.1 demanded to know why personal guarantees were proposed to be obtained from the major shareholders in order to procure finance from the Bank. Though this query was answered, Respondent Nos. 1 to 3 indicated that they were not willing to provide guarantees and pledge their shares in the Company as security to the Bank and that their protest should be noted. According to the Appellants, it was therefore clear that the Company would not be able to raise the necessary finance. Not a single vote was therefore cast in favour of expansion of plant and machinery. In the ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 8 Co. Appeal No. 1 of 2011 aforesaid circumstances, the alternate resolution for sale of the undertaking was taken up for voting. Respondent No.1 suggested an amendment viz. the offers received for the sale of the undertaking be placed before the shareholders and thereafter they should be given an opportunity to give a higher offer and purchase the undertaking. The amendment was put to vote and defeated. According to the Appellants, the amendment suggested by Respondent No. 1 was defeated because it was felt that this would prevent serious bids from being received. One Mr. Girish Shetty also proposed an amendment to the resolution for sale of the undertaking, which was to the effect that the Board of Directors of the Company shall not accept to sell the undertaking for consideration less than the paid up capital of the Company, without taking the consent of the General Body of the Company. This amendment was also put to vote and was passed by the majority. The alternate resolution (Resolution 2 i.e. the sale of undertaking) was also passed by the majority.
10. Pursuant to the Resolution passed at the said EGM, the Committee for Disposal of the Undertaking constituted by the General Body held meetings in relation to the modalities for the proposed sale of the undertaking of the Company, and on 8th June 2006 issued an advertisement for the sale of the undertaking of the Company in the newspapers. A copy of the advertisement was also forwarded to the Respondents. The Respondents having failed to obtain for themselves the right to better the best bid, and refusing to make a bid in the open auction for the undertaking, filed a Petition before the CLB being Company Petition No. 60 of 2006 invoking the provisions of Sections 397 and 398 of the Act.
::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 9 Co. Appeal No. 1 of 201111. Though the Petition is bereft of clear or specific allegations of oppression or mismanagement, the Petition appears to be primarily based upon the following allegations/grounds which are advanced by the Respondents:
(i) Respondent Nos. 3 to 11 have not been issued share certificates despite several requests;
(ii) No interest or dividend has been paid on the investments made by the Respondents;
(iii) Respondent No. 1 was removed as a Director some time in 2002 without passing any resolution informing Respondent No. 1, and that Respondent No.1 came to know only "recently in the year 2005 " about his "removal";
(iv) Balance-sheets for the years subsequent to 1998-1999 were not provided till date (i.e. till the filing of the present petition) to the Respondents;
(v) Appellant Nos. 2 to 7 sought further investments from the Respondents for improvement/addition of machinery for production of better quality paper but the Respondents were not interested in making any further investments, as they were not getting any return on their earlier investments;
(vi) For the first time, the Respondents received notice of the EGM that was to be held on 24th May, 2006;
(vii) Respondent No.1 vide his letter dated 11 th May 2006 acknowledged the EGM Notice and sought for clarifications therein and further requested for the records depicting services of notices of the General Meetings and Board Meetings of the Company, the Register of Charges of the Company, the ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 10 Co. Appeal No. 1 of 2011 Minutes of the Board Meetings of the Company, the Minutes of any Committee of the Board Members, the Minutes of General Meetings of the Company, the Share Transfer Register, the Register of Members, the Books of Accounts maintained by the Company as per section 209 of the Act, the Register of Directors maintained as per Section 303 of the Act and the records of all filings made by the Company with the Office of the Registrar of Companies. However, till date the said information has not been provided to the Respondents;
(viii) Even though the Respondents were agreeable for passing of the Resolution and investment of more money in the Company, the Appellant Nos. 2 to 7 defeated their own Resolution for expansion of plant and machinery and necessary increase in capital by way of rights issue and further borrowings;
(ix) The Respondents requested Appellant Nos. 2 to 7 to amend the resolution for sale by proposing that right to better the best offer received for the sale of the undertaking be given to Members of the Company a proposal which was rejected by Appellant Nos. 2 to 7;
(x) Appellant No. 4 offered to buy shares of the Respondents at Rs. 12.50 per share, which offer the Respondents refused and the Respondent Nos. 3 to 11 countered the offer of Appellant No. 4 by offering Rs. 18 per share to the Appellants;
(xi) Appellant No. 4 offered to sell the Company to the Respondents at Rs. 38 crores but raised the price to Rs. 50 crores when the Respondents agreed to the price of Rs. 38 crores;::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 11 Co. Appeal No. 1 of 2011
(xii) The Company has to repay 608.75 lakhs of term loan, Rs. 825.05 lakhs of working capital loans in addition to Rs. 830 lakhs outstanding on account of short term liabilities;
(xiii) Appellant Nos. 2 to 7 are misusing their position as majority shareholders and are running the Company contrary to the mandate of law and Articles of the Company to oppress the Respondents;
(xiv) Appellant Nos. 2 to 7 will use their "illegally gained" absolute majority to oppress the Respondent and further mismanage the Company, and alter the records; and
(xv) Records of the Company have not been made available to the Respondents despite several requests.
12. The Respondents also contended that it would be unfairly prejudicial to the Respondents, if the Company is wound up and prayed for various reliefs detailed in paragraph 8 (a) to (j) of the Petition, which are enumerated below for ready reference:
(a) Declare as void, all and every general meeting for which notice was not issued to the Respondents and all resolutions passed at such meetings;
(b) Declare as void every agreement/s that may have been executed by the Company without requisite authorization by the shareholders of the Company, including the Respondents;
(c) Pass an order appointing Respondent No.1 as a Director on the Board of Directors of the Company and direct the Company to reserve a permanent ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 12 Co. Appeal No. 1 of 2011 seat on the Board for a nominee of the Respondents;
(d) If the Appellant Nos. 2 to 7 dispose off the assets of the Company, the Respondents be given first preference to inspect and value the assets of the Company, in order to purchase the same;
(e) The Appellants be restrained from utilizing the bank account and all funds lying at the disposal of the Company;
(f) The Government recognized valuer or Chartered Accountant be appointed to value the shares of the Company;
(g) The Appellant Nos. 2 to 7 be ordered and directed to sell their shares of the Company to the Respondents; or Appellant Nos. 2 to 7 be ordered to buy all the shares of the Company held by the Respondents at such fair price as this Hon'ble Tribunal determines;
(h) That the Company be ordered and directed to issue the share certificates to Respondent Nos. 3 to 11;
(i) Such further and other reliefs as the CLB may deem fit and proper;
(j) Cost of the interim application and orders thereon.
13. In response the Appellant Nos. 2 to 7 submitted before the CLB as follows:
(i) Respondent Nos. 1 and 2 are residents of Kenya and apart from making financial investments in the equity of the Company during their association with the Company since 1997, have never participated in the management or the running of the Company. During their tenure as Directors or even thereafter, they have not attended a single Board Meeting or General Body meeting. The only meeting ever ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 13 Co. Appeal No. 1 of 2011 attended by Respondent No. 1 was the EGM held on 24 th May 2006, which he admittedly attended as a Shareholder and a Member. The Respondents have not attended any meeting of the Company even after the filing of the Petition. Not a single letter nor any communication has been addressed by the Respondents to the Company or any of the Appellants/Directors to make any enquiry about the schedule of the Board Meetings or accounts or with respect to any other affairs of the Company. None of the Respondent Nos. 1, 2 and 3 who have been Directors of the Company have ever provided their personal guarantee for the Company and in fact the reason for Respondent No.1 resigning from the Directorship of the Company was that he did not wish to furnish any personal guarantee for the Company, which financial institutions and Banks require from all the directors/promoters as per the practice and norm to advance loans.
(ii) Respondent No. 3 as Director of the Company attended several meetings and was also a participant in the decision making process at various meetings, as well as a signatory to the balance-sheets for the years ending 31 st March 2002 and 31st March, 2003. Even thereafter Respondent No.3 continued to remain in the employment of the Company and drew a salary of Rs. 30,000/- per month i.e. even after filing of the present Petition.
(iii) The Respondents have not cited a single instance of mismanagement of the Company. Except for the first year of operation, the Company has made profits till 2006. Respondent Nos. 1 and 2 have increased their investments from 1997 to 2002 and Respondent Nos. 3 to 11 have acquired shares between January 2002 and ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 14 Co. Appeal No. 1 of 2011 March 2004, which shows their approval with regard to the management of the affairs of the Company. Regulations pertaining to each applicable law, including the Company Law have been duly complied with. Production capacity is doubled from the original installed capacity. The profits which were ploughed back were utilized for reduction of the borrowings in order to save interest cost. There are no overdues/outstandings to any lenders.
(iv) The balance-sheets and annual reports have been given to the Respondents.
Notices of the meetings have been sent to the Respondents and since 1997 there is not a single letter received from the Respondents alleging that they have not received the balance-sheet or accounts or notices calling meetings, or any information/records called from the Appellants by the Respondents. A grievance in this regard is made for the first time by Respondent No. 1 vide his letter dated 11 th May, 2006.
(v) The Respondent No.1 has himself conveyed his resignation to the Appellants in the year 2002. Respondent No.3 has attended the meeting in which the resignation of Respondent No. 1 was accepted; that the Respondent No.1 is no more the Director of the Company is reflected in the balance-sheet for the year ending 31 st March 2002, which is signed by Respondent No.3. Respondent No.1 has alleged in the Petition that he came to know about him not continuing as a Director of the Company in the year 2005. However, no letter is written by him to the Company in this regard. In fact, in his correspondence dated 11 th May 2006 addressed to the Company, Respondent No.1 has stated that he will be attending the meeting as a ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 15 Co. Appeal No. 1 of 2011 Member of the Company.
(vi) The allegation of share certificates not being handed over to the Respondents is false and incorrect. The share certificates were handed over to Respondent No.3 who was a representative Director and was visiting the plant on a day to day basis.
Not a single communication or demand is made, until in the petition the allegation of non-receipt of share certificates is made for the first time. Share Certificates were found from the drawer of Respondent No.3 which have been admittedly handed over on 16th March 2007 to the Respondents before the CLB.
(vii) Resolution No.1 placed before the EGM convened on 24 th May 2006 pertained to the expansion of the plant and machinery and necessary increase in capital by way of rights issue and further borrowings and it was suggested that the shareholders holding more than 5000 shares should provide their shares as personal guarantees to the State Bank of India in order to secure a term loan of Rs. 11 crores.
This was objected to by Respondent No.1 as can be seen from the minutes of the EGM held on 24th May, 2006. In view thereof the Resolution for expansion remained only a formality and none of the shareholders voted in favour of the expansion of the plant and machinery and in the said circumstances the alternate resolution (Resolution No. 2) for sale of the undertaking was taken up. The Respondents had no objection for sale of the undertaking. However, an amendment to the said Resolution was proposed by Respondent No.1 to the effect that the members be given the right to better the price offered by the highest bidder. The amendment proposed by the Respondent No. 1 was defeated and the amendment suggested by ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 16 Co. Appeal No. 1 of 2011 one Mr. Girish Shetty, which was to the effect that the Board shall not accept to sell the undertaking for consideration less than the paid up capital of the Company without taking the consent of the General Body, was passed by majority voting.
(viii) The Appellants have not acquired any majority by illegal means as alleged by the Respondents. In fact, the Appellants were the 100 per cent owners at the beginning. Respondent Nos. 1 and 2 joined in 1997 and held 20 per cent of the shareholding in the Company. Respondents 3 to 11 gradually raised their investments and by 2004 the Respondents together held 40% shareholding in the Company. In view thereof, the holding of the Appellants 2 to 7 in the Company in fact gradually reduced to 60 per cent from the 100 per cent held earlier. The question therefore of the Appellant Nos. 2 to 7 acquiring shares illegally does not arise.
(ix) The allegations pertaining to the offers and counter offers between the Appellants and the Respondents have been denied.
(x) It was an established practice and law laid down in several cases that whenever the Court came to the conclusion that it was not in the interest of the Company for the two warring factions to remain together, it was the option of the majority to buy out the minority. Hence only the majority could be directed to buy out the minority. At the commencement of the proceedings on August 17, 2006, the learned counsel appearing for the Respondents stated that if the Appellants were going to insist on a valuation on the basis of the balance-sheet for the year ending ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 17 Co. Appeal No. 1 of 2011 31st March 2006, the Respondents did not wish to press reliefs (f) and (g) and were happy to remain in the Company with their current holding and that the Respondents were only pressing relief (c ) whereby they have sought the reinstatement of Respondent No.1 as a Director on the Board of the Company and reservation of a permanent place on the Board for the representative of the Respondents. The Respondents cannot seek modification of the relief by stating that the Respondents were now seeking a representation on the Board proportionate to their shareholding.
(xi) The Respondents have not made out any case against the Appellants for oppression and/or mismanagement and the Petition deserves to be dismissed with costs.
14. The Appellants have before this Court, repeated their submissions recorded hereinabove. They have submitted that the Learned Member of the CLB has set out the submissions of the parties in great detail. However the Learned Member of the CLB has without application of mind and without appreciating any of the submissions, passed an order which is totally perverse and which in fact will bring about a deadlock as regards the functioning of the Company. Though the Respondents failed to establish any oppression of the minority shareholders and/or mismanagement of the Company and have given up all their prayers save and except prayer clause (c ), whereby they sought reinstatement of Respondent No.1 as a Director on the Board of the Company, and reservation of a permanent place on the Board for the representative of the Respondents and though they had in the course of arguments (without there being any prayer in the petition) sought ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 18 Co. Appeal No. 1 of 2011 modification of the relief by stating that the Respondents were now seeking representation on the Board proportionate to their shareholding, in the Written Submissions dated 16th September 2010, tendered by the Respondents after the arguments were concluded, they have not pressed for any proportional representation on the Board of Appellant No.1 and have sought only relief in terms of prayer clause (c) of the Petition. The Learned Member has proceeded to grant reliefs as set out in paragraph 1 hereinabove which, as submitted by the Appellants, will create a deadlock qua the working/functioning of the Company where none existed. It is submitted that whilst the powers of the CLB under Section 402 of the Act are indisputably wide, the interest of the Company vis-à-vis the shareholders must be uppermost in the mind of the Court while granting relief. It is submitted that in the present case, by issuing the said unwarranted, drastic and extreme directions in the impugned order, the CLB has without any basis whatsoever placed the control of the Company in the hands of the minority i.e. the Respondent Group, thus enabling the Respondents to achieve indirectly a virtual veto right on all issues and the ability to paralyze the functioning of the Company. In support of this contention, the Appellants have relied on the decision of the Hon'ble Supreme Court in the case of Sangramsinh P. Gaekwad vs. Shantadevi P. Gaekwad1. It is therefore submitted that the order of the CLB dated 6 th October 2010 which is impugned herein be set aside.
15. The Respondents have taken 3 months to file their written submissions 1 (2005) 11 SCC 314 ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 19 Co. Appeal No. 1 of 2011 comprising of 11 pages. It is submitted on behalf of the Respondents "that the acts of oppression and mismanagement are clearly made out against the Respondents by the Appellants, who perceived lack of transparency in the manner of the purported sale of undertaking keeping the consideration for sale of the undertaking for a sum not less than paid up capital of the Company which the paid up capital of the Company is Rs.
11 crores while at the same time it is a matter of record that the counter offer by the Respondents to take over the Company was Rs. 38 crores, which figure was provided by the Appellant No.4 himself. This offer was turned down. The apprehension of the Respondents is that on the one hand the appellants were agreeable to mere return of capital of Rs. 11 crores but were not willing to allow the Respondents to take over the so-called unviable undertaking at Rs. 38 crores (being the price initially quoted by the Appellants themselves)".
16. It is further submitted by the Respondents that the CLB has rightly observed that with a substantial holding of 40 per cent and with no returns on their investment and looking at the non-transparent manner in which the sale was sought to be done, the Respondents had a valid apprehension as regards the conduct and management of the Company. In fact, by wanting to remove the Respondents, by buying out their shareholding at unfair rates and pushing them out of the Company, the Appellants were oppressing the minority shareholders of the Company viz. the Respondents. Even as regards the manner of dealing with the offers received from third parties, pursuant to the advertisement, on what basis the Board would accept or reject such offers and at what price such offers are made, was completely vague ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 20 Co. Appeal No. 1 of 2011 and unclear. It is submitted that the Respondents in fact suggested the mechanism of bringing the highest offer before the body of shareholders, who would then better the offer received from the highest bidder, was not accepted by the Appellants. It is submitted that it is clear that the actual motive of the Appellants in conducting the entire exercise of sale of the undertaking was to transfer the Company to the Appellant's sister concern viz. Shah Paper Mills Ltd., in which the Appellants and their family members are major shareholders, a motive which was identified by the Respondents and appreciated by the CLB and which led to the passing of the impugned order.
17. It is further submitted on behalf of the Respondents that as of today inspite of holding 40% of the shares of the Company, there is no representation of the Respondents on the Board of Directors of the Company. In fact there were three Directors from the Respondents' group on the Board, prior in point of time i.e. before proposing the purported expansion of the undertaking in the year 2006. Further, Respondent No. 1 was wrongfully shown as having resigned on the basis of an alleged oral resignation made over a phone call. The alleged resignation/removal of the Respondent No.1 as a Director is bad in law. Therefore, considering the conduct of the Appellants, the CLB was of the opinion that in the interest of justice, it was just and necessary to protect the interest of the Respondent group in the Company and to have proportional representation on the Board of the Company. In the facts and circumstances of the case, the CLB in exercise of its wide powers under sub-
section (g) of Section 402 of the Act, to do substantial justice, passed the impugned ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 21 Co. Appeal No. 1 of 2011 order, which was fit and proper and within the ambit of the aforesaid provision. The Respondents have in support of this contention relied on the decisions of (a) the Hon'ble Apex Court in the cases of (i) Needle Industries (India) Ltd. vs. Needle Industries Newey (India) holdings Limited 2(paras 171 and 172); (ii) M.S.D.C.Radharamanan vs. M.S.D.Chandrashekhar3 (paras 15 and 17); and Shanti Prasad Jain vs. Kalings Tubes Limited4, (b) this Hon'ble Court in the case of Bennet Coleman & Co. vs.. Union of India 5 (Paras 116 onwards) ; and (c )the Andhra Pradesh High Court in the case of Sri Ramdas Motor Transport Ltd. vs. Karedla Suryanarayana and others6 (Paragraph 116 onwards).
18. I have considered the submissions advanced on behalf of the parties and also the case law relied upon by them. From a perusal of the impugned order, I find that though the submissions of the parties have been recorded at length, the discussions qua the submissions made by the parties and the reasoning given in support of the finding that the minority (Respondents) have been oppressed by the majority is not adequate or satisfactory. In fact it is pointed out by the learned Senior Advocate appearing for the Appellants that in paragraph 55 of the impugned order, the Learned Member has discussed the settled proposition of law qua the fiduciary capacity of directors and their duty to make full and honest disclosure to shareholders, and the fact that equity prohibits directors who are akin to trustees, 2 AIR 1981 SC 1298 3 2008 (143) Comp. Cases 97 (SC): 2008 (1) UJ SC 0583 4 AIR 1965 SC 1535 5 1997 (47 Comp. Cases 92) 6 (2002) 110 Comp. Cases 193 ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 22 Co. Appeal No. 1 of 2011 from making any profit. It is submitted that the said paragraph does not consider or state as to how the principles enunciated therein are applicable to the facts of the present case. It is submitted that thus there is total non-application of mind on the part of the CLB. It is submitted that similar conduct of the Learned Member of the CLB was criticized by the Hon'ble Calcutta High Court in Dharam Godha v. Universal Paper Mills Ltd.7 which, according to the Appellants, is now pending before the Hon'ble Supreme Court. In view thereof, I have heard the learned Advocates appearing for the parties at some length and though the written submissions tendered on behalf of the Respondents are very brief and sketchy, I have gone through all the pleadings including the compilation of documents running into more than 2000 pages, which is also one of the reasons for the delay in pronouncement of this Judgment.
19. The Appellant No.1 Company was incorporated in the year 1993 by Appellant Nos. 2 and 4. The other Appellants subsequently joined the Company and together they held 100 per cent shareholding of the Company. In the year 1997, Respondent Nos. 1 and 2 being residents of Kenya made financial investments in the Company and since then held 20 per cent of the shares in the Company. Except in the first year of operation, the Company has regularly made profits (Annexure R5/Pg. 275-Vol. I). That the Respondents were totally satisfied with the progress of the Company is clear from the fact that Respondent Nos. 1 and 2 made additional investments in the Company till 2002 and Respondent Nos. 3 to 11 made 7 (2012) 172 Comp Cas 169 ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 23 Co. Appeal No. 1 of 2011 investments/additional investments upto 2004 (Annexure R1/Pg. 247 Vol. I). In view thereof the shareholding of the Appellants 2 to 7 in the Company in fact gradually reduced to 60 per cent from the 100 per cent held earlier. The Appellants were always in majority on the Board of Directors of the Company. The question of the Appellants therefore acquiring any majority by illegal means as shareholders or on the Board of Directors of the Company as alleged by the Respondents does not arise. Compliances of all statutory requirements, including periodic compliances with the Registrar of Companies have been duly made by the Company. The production capacity of the Company is now double that of its original installed capacity, as stated in the Affidavit-in-reply of the Company (Annexure R5/Pg. 257 Vol. I). Considerable profits have been made by the Company (Annexure R5/pg. 257 Vol. I) which have been ploughed back into the Company and utilized for reduction of borrowings in order to save interest thereon. There are no overdue secured loans or outstanding unsecured loans and the overall liabilities have been substantially reduced (Annexure R6/Pg. 258).
20. Despite the aforesaid facts being placed before the CLB, the Learned Member of the CLB has, without taking a note of the aforesaid facts submitted,and without taking the same into consideration, erroneously come to a completely bald finding that, " in the interest of the R-1 Company and in the interest of the petitioners and the Respondents, the R-1 Company cannot be left to be run in the manner being run at present".
::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 24 Co. Appeal No. 1 of 201121. It is alleged in the Petition that Respondent Nos. 3 to 11 have not been handed over their share certificates and the Respondents were not forwarded with copies of the balance sheet despite requests, nor were they forwarded any notices of meetings by the Company. Respondents Nos. 3 to 11 have until the filing of Petition on 1st July 2006 never protested about the alleged non-receipt of the share certificates at any stage. Respondent No. 3 was on the Board of Directors of the Company till September 2003 and even thereafter has continued to be in the service of the Company. It is inconceivable that if any of the Respondent Nos. 3 to 11 had any genuine grievance in this regard, they would not have made a request in writing or placed it on record before the Board of Directors of the Company. There is no reason to disbelieve the case of the Appellants that the share certificates were handed over to Respondent No.3 at the Office of the Company, who left the same there either negligently or deliberately. It is also correctly submitted on behalf of the Appellants that even if it is presumed, for the sake of argument, that the share certificates were not delivered to Respondent Nos. 3 to 11, no prejudice was caused to any of the Respondents vis-à-vis their rights as shareholders, so as to be a ground in a Petition alleging mismanagement and oppression of minority. In any case, the share certificates were handed over in the course of proceedings before the CLB to the learned Counsel appearing for the Respondents, who accepted the same and the said grievance was put to rest. No act of oppression is therefore established.
22. As regards the allegation pertaining to non supply of balance-sheets for years subsequent to 1998-1999 and not giving notice of meetings to the Respondents, it is ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 25 Co. Appeal No. 1 of 2011 pertinent to note that none of the Respondents have raised any grievance until 2006 that they have not received balance-sheets or notices of meetings. Respondent Nos.
1, 2 and 3 were all on the Board of the Company at different times but yet raised no complaints regarding balance-sheets or notices of meetings not being sent to them.
The contention regarding balance-sheet is belied by the letter dated 11 th May 2006 ( Annexure-D at pages 198-199 Vol. I) of the Respondent No.1 wherein it has been stated that he has not received balance sheets from the Company "lately" . This clearly implies that he was receiving them until recently. The contention of non-
receipt of balance-sheets especially in so far as Respondent No. 3 is concerned is demonstrably false and untenable, in view of the fact that Respondent No. 3 is himself a signatory to two of the balance sheets of the Company (viz. balance sheets for the years ending March 31, 2002 and March 31, 2003), which balance sheets the Respondents claim were not allegedly received by them. As correctly submitted on behalf of the Appellants, upon balance-sheets of any Company being duly filed by the Company with the Registrar of Companies,, the same becomes a public document available to the public at large. Thus the Appellants had absolutely nothing to gain by keeping back the balance-sheets from the Respondents. The only letter written to the Appellants by the Respondents is the letter dated 11 th May 2006 by the Respondent No.1 to the Chairman of the Company. In the said letter not a whisper is made about the Respondent No.1 or the other Respondents not having received any notices qua the meetings of the Company. The letter dated 11 th May 2006 written by the Respondent No.1 to the Chairman of the Company was immediately responded to by the Company in its letter dated 16 th May 2006. In ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 26 Co. Appeal No. 1 of 2011 paragraph 3 of the said letter, it is categorically recorded that the statement of accounts were provided to the Respondent No.1 from year to year and pursuant to the request of the Respondent No.1 the balance-sheets for the last five years were forwarded along with the said letter to the Respondent No.1. Not only has the Respondent No.1 not denied the fact of having received the statement of accounts by the Company from year to year, but has also not denied or disputed having received from the Company the balance sheets of the last 5 years under cover of the said letter. Respondent No. 1 for the first time alleged in the Petition filed in July 2006 that the copies of the balance-sheets of the last five years were not forwarded to him along with the letter of the Company dated 16 th May 2006. In view thereof no case of oppression or mismanagement is established by the Respondents. The Learned Member has also not taken into consideration the relevant submissions in this regard, before passing orders in the Company Petition on mere bald assertions.
23. As regards the allegation pertaining to removal of Respondent No. 1 from the Board of Directors of the Company, Respondent No. 1 was a Director on the Board of the Company from 23rd December 1997 to 23 rd January 2002. The Respondent No. 2 was a Director from 23rd December 1997 to 24th March 2006 and the Respondent No.3 was a Director on the Board of the Company for the period from 19 th October 2001 to 17th October 2003. It is not the case of the Respondents that there was any agreement between the Appellants and the Respondents to give proportional representation or any representation to the Respondents on the Board of Directors of the Company. There is no provision in the Memorandum and Articles of Association ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 27 Co. Appeal No. 1 of 2011 of the Company to provide proportional representation to the Respondents on the Board of Directors of the Company nor is there any Shareholders Agreement to this efffect. Despite that, the Appellants have from time to time taken some of the Respondents on the Board of Directors of the Company. However, admittedly, Respondent No.1 did not attend a single meeting of the Board of Directors of the Company during his five year tenure as Director of the Company. He did not make any suggestions or contribution towards the working of the Company. So is the case with Respondent No.2 who, as stated above, had a tenure of more than eight years as a Director of the Company. However, Respondent No. 3 during his tenure of two years as Director of the Company did participate in the meetings and also signed the balance-sheets of the Company for the years ending 31 st March 2002 and 31st March 2003. Even after he resigned he continued to work for the Company on a salary of Rs. 30,000/- per month. Admittedly the Respondents have at no time during their tenure of Directorship of the Company provided any guarantee to Banks and Financial Institutions from which monies were borrowed by the Company.
According to the Appellants, since the Respondents were not wanting to give any guarantee to Banks and Financial Institutions from which monies were borrowed by the Company, they were not keen on continuing as Directors of the Company. For this reason, Respondent No.1 informed the Appellant No.2 in the year 2002 that he is desirous of resigning as a Director from the Board of the Company and that he would also be sending a letter to this effect. Accordingly his resignation was accepted in the meeting of the Board of Directors held on 23 rd January 2002 and the same also featured in the balance-sheet for the year ending 31 st March 2002, which ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 28 Co. Appeal No. 1 of 2011 balance-sheet is admittedly signed by Respondent No.3. Though the Respondent No. 1 in July 2006 for the first time made a grievance in the Company Petition that he was removed without his knowledge as a Director of the Company in 2002, and that he came to know about it only in the year 2005, Respondent No.1 has failed to explain as to when he came to know of his alleged removal in the year 2005 and through whom. If the Respondent No.1 was admittedly aware of his purported removal in the year 2005, he has failed to explain as to why no grievance was made by him about his said removal until he filed a Petition in July 2006. Moreover it is also inexplicable as to why Respondent No.1 when he addressed a letter dated 11 th May 2006 to the Chairman of the Company making a grievance that he had "lately"
not received the balance-sheets of the Company, did not make any grievance about his alleged removal as a Director of the Company, and instead stated in his letter that he would be attending the EGM as a Member/Shareholder of the Company. This shows that the Respondent No.1 had of his own free will and volition stepped down as a Director of the Company in the year 2002 and only to make out a case of oppression and mismanagement, wrongly alleged for the first time in the year 2006, that he was removed as a Director of the Company in the year 2002 without his knowledge and that he came to know about the same only in the year 2005.
Therefore, again the Respondents have failed to make out any case of oppression and mismanagement by the Appellant Nos. 2 to 7.
24. The next and the main grievance of the Respondents pertains to the EGM of the Company called for and held on 24 th May 2006 and the Resolutions passed ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 29 Co. Appeal No. 1 of 2011 thereat. As set out by the Appellants in paragraph 19 of the Reply of the Company (Vol. 1 Pg. 217), after due consideration of the present and future market demands as well as technical reports, including the annual review of the paper industry published by Crisil Research and Information Services Ltd., an expansion of Appellant No.1 was proposed by upgrading the existing machinery for the production of better quality newsprint and colour print paper and increase in existing production capacity, by installation of an in-house power generator to bring down the cost of production. This was considered essential for survival in the competitive newsprint market. For the proposed expansion, it was necessary to procure funds. It appeared feasible to procure some funds by way of advances/loans from financial institutions and to raise additional funds by additional issue of share capital. It also appeared at that time that if the expansion plan failed then it would be in the interest of the shareholders to sell the undertaking while the Company was still a profit making concern and had not run into a financial crunch. Accordingly, an EGM was convened on May 24, 2006 and notices (along with the requisite explanatory statement and the proposed resolutions of the same) were sent to all the shareholders, including the Respondents. The said notice ( Annexure R7 Pgs. 259 to 266 Vol. I) was duly received by the Respondents and it was in response to this notice that Respondent No.1 addressed the letter dated May 11, 2006 to the Company ( Annexure-D at pg. 198 Vol. I). As can be seen from the explanatory statement appended to the notice, Resolution No. 2 for sale of the undertaking was to be considered and voted upon only if Resolution No. 1, for expansion of the Plant and Machinery and necessary increase in capital by way of Rights Issue and ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 30 Co. Appeal No. 1 of 2011 further borrowing, did not find support with the shareholders of the Company.
The EGM of the Company held on May 24, 2006 was attended by Respondent Nos. 1 to 3. The minutes of the said EGM of the Company are on record as Annexure R-10 (at pages 272 to 287 Vol. I). From the said minutes, it is apparent that Respondent No. 1, at the outset recorded his objection to the resolution whereby the Board of Directors was empowered to call upon shareholders holding more than 5000 shares to provide their shares in the Company along with their personal guarantees to the State Bank of India in order to secure a term loan of Rs. 11 crores (Annexure R-10 Pg. 274-275 Vol. I). In view of the objection raised by Respondent No. 1, the proposed plan for expansion of the Company, for which personal guarantees by major shareholders was absolutely necessary, seemed totally unfeasible and hence the voting in respect of the resolution for expansion remained only a formality. Not a single vote was cast in favour of Resolution No. 1 for expansion of the plant and machinery. In the circumstances, the alternate resolution for sale of the undertaking was taken up and was passed, while the amendment to this resolution proposed by Respondent No.1, for members being given the right to better the price offered by the highest bidder, was defeated. Therefore, it is clear that Respondent No.1 himself was not per se opposed to the sale of the undertaking. He only proposed an amendment to the said Resolution to the effect of giving a pre-emption right to the members of the Company to better the bids received for the undertaking. According to the Appellants, the amendment proposed by Respondent No. 1 was unreasonable and impractical and was correctly defeated. It is submitted that if the shareholders of the Company were to have a right to better any bids received by the Company, it ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 31 Co. Appeal No. 1 of 2011 was felt that no bid or at least no serious bids would have been received by the Company for the said undertaking. The intent of the Respondents appears to have been to drive the price that could be received for the sale of the undertaking down to as low a level as possible and then purchase it for a song themselves. According to the Appellants, this conduct was plainly not in the interest of the Company and was in fact oppressive to the Appellants. It is submitted that it was always open to the Respondents, if they genuinely wanted to bid for the said undertaking to bid in the public bidding that was to take place. It is submitted that there is no provision in the Articles of Association of Appellant No.1 or in any other document which entitles the Respondents to have a right of pre-emption on the assets/undertakings of Appellant No.1. It is submitted that the amendment with regard to sale not being made at less than the paid up share capital which was passed, was reasonable and adequately protected the interests of all the shareholders. I am of the view that the Appellants have therefore given cogent reasons as to why the proposal of Respondent No.1 to amend the said Resolution No. 2 was rejected upon being put to vote viz. that if the shareholders of the Company were to have a right to better any bids received by the Company, it was felt that no bid or at least no serious bids would have been received by the Company for the said undertaking. This appears to be a genuine apprehension on the part of the Appellants who have after considering the proposed amendment as suggested by Respondent No.1, rejected the same by majority. The said rejection of the proposal to amend Resolution No.2 after application of mind, by no stretch of imagination, as suggested by Respondent No.1, can be termed as an act of oppression on the part of Appellants against the minority ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 32 Co. Appeal No. 1 of 2011 shareholders, more so when all the shareholders were given a right to bid for the undertaking at the first instance i.e. along with other bidders so that the other bidders would not feel that the bids invited from them is a mere sham and ultimately the undertaking would be purchased by some of the shareholders thereby dissuading genuine bidders to come forward with their bids.
25. Thus, the entire process followed by the Company was totally open, fair and transparent. The Respondents have wrongly contended before this Court that there was lack of transparency qua the purported sale of the undertaking, since the Appellants provided that the consideration for sale of the undertaking would not be less than the paid up capital of the Company which was only Rs. 11 crores and such a low amount was fixed despite being aware of the purported offer of the Respondents to take over the Company for Rs. 38 crores and that it is this fact which made the Respondents seriously apprehend the manner in which the Company was going to be sold. This submission on behalf of the Respondent is untenable and baseless. Firstly the Appellants have denied receipt of any offers from the Respondents as alleged. Again, the Appellants had not decided to dispose of the undertaking for Rs. 11 crores. It was only agreed that the undertaking cannot be sold for less than Rs. 11 crores. Moreover, there was nothing which precluded the Respondents from responding to the sale advertisement and placing their bid in the open market for Rs. 38 crores or for any other sum if they were indeed serious about their intention to purchase the undertaking. By not doing so, it is established that the so-called serious apprehension of the Respondents is false and is only a ruse to ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 33 Co. Appeal No. 1 of 2011 allege oppression and file a Company Petition to get some relief or the other without establishing a case of oppression or mismanagement against the Company. The Respondents have also alleged that the actual motive of the Appellants in conducting the entire exercise of sale of undertaking was to transfer the Company to the Appellants' sister concern viz. Shah Paper Mills Ltd. in which the Appellants and their family members are major shareholders, a motive which was identified by the Respondents and appreciated by the Hon'ble CLB and which led to the passing of the impugned order. The motive is nowhere found in the Petition nor is the alleged motive which was allegedly appreciated by the CLB and which led to the passing of the impugned order, mentioned anywhere in the impugned order which runs into 27 pages.
26. The Respondents have also alleged that they have not received any dividends on their shares in the Company. The Appellants have relied on the decision of the Calcutta High Court in the case of Maharani Lalita Rajya Lakshmi vs. Indian Motor Co.8 in support of their submission that it is well settled law that non-declaration of dividend does not amount to oppression of the shareholders. In any case as explained in the affidavit- in- reply of the Company before the CLB, it has ploughed its profits back into repayment of debt and acquisition of assets (Pg. 215 Vol. 1). By doing so, the Company has ensured that it has not defaulted on its obligations to Bankers in servicing its debt and has also reduced its debt (Pg. 258 Vol.1). A decision to this effect taken at various meetings, has also been supported by 8 AIR 1962 Cal 127 ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 34 Co. Appeal No. 1 of 2011 Respondent No.3 who was present at such meetings. Again it is not the case of the Respondents that the profits of the Company have been misappropriated and/or siphoned off by the Appellants. In view thereof, again the Respondents have not established any case of oppression.
27. The Appellants in view of the opposition and litigation initiated by the Respondents, decided not to sell the undertaking and in fact informed the CLB that in view of all the opposition and allegations the Appellants shall continue with the business as currently carried on and shall not sell the undertaking as decided earlier.
The Respondents who had claimed various reliefs as set out in paragraph 12 above, ultimately gave up all the reliefs and only pressed for prayer clause (c) viz. "Pass an order appointing Respondent No. 1 as a Director on the Board of Appellant No.1 and directing Appellant No.1 to reserve a permanent seat on the Board for a nominee of the respondents". Though the Respondents admittedly in the course of their oral submissions submitted that they should be given proportional representation on the Board of Directors of the Company, in the written submissions filed by the Respondents dated 16th September 2010, the Respondents gave up the said oral submission for proportional representation made before the CLB and concluded the written submissions as follows:
"6. In the light of above this Hon'ble Board may pleased to grant prayer 8 (c ) of the Petition and also record that the Respondents shall not sell the assets of the Company (Respondent No.1) which was stated by the Respondent".::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 35 Co. Appeal No. 1 of 2011
28. Despite the aforesaid, the Learned Member of the CLB has proceeded to pass directions set out in paragraph 1 hereinabove, which were never sought by the original Petitioners.
29. I shall now proceed to answer the questions of law raised by this Court at the time of admission of the above Petition.
Question No. 1:
(I) Whether the Company Law Board made an order and issued a direction to the appellant-original respondent No.1 in penultimate para of the judgment (Para 57) so as to deal with a situation which is summarized in para 47 of the impugned judgment?.
(i) As per paragraph 47 of the impugned order, the situation existing is as follows:
(a) The Respondents (Original Petitioners) allegedly felt oppressed on account of Resolution No.2 for sale of the undertaking passed at the EGM of the Company held on May 24, 2006;
(b) The Respondents who allegedly initially wanted to go out of the Company were now willing to stay in the Company on account of the fact that the Appellants were allegedly not willing to pay a fair value for their shares and therefore, were only seeking the relief of 'proportional representation on the Board' and prayer 'C' at para 8 at page 15 of the Petition; and (c ) The Appellants emphasized the non-participation of the Respondents in the affairs of the Company and questioned the right of the Respondents to stay on in the Company after initiating litigation with the Appellants. Further the Appellants ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 36 Co. Appeal No. 1 of 2011 questioned the legality of the Respondents orally changing/modifying the reliefs sought and submitted that it was the Respondents who ought to exit the Company and for the fair value of their shares. It is settled law that the valuation date has to be approximately close to the date of the filing of the Petition.
(ii) In paragraph 57 of the impugned order, the following directions were given to the Company:
(a) The Company was directed to amend its Memorandum and Articles of Association so as to give Respondents proportional representation on the Board of Directors of the Company. Till this was done, Respondent No. 1 (or his nominee) was to continue as a Director along with 2 more Directors from the Respondents' Group. This direction has been passed in complete disregard to the contention of the Appellants that those Respondents who were Directors of the Company had voluntarily resigned as they did not wish to provide personal guarantees for securing financial assistance from Banks and financial institutions, a contention which has not been refuted by the Respondents before the CLB.
(b) Quorum in a meeting of the Board of Directors of the Company shall not be complete without the presence of at least one of the Directors from the Respondents' Group. By passing the said direction, the CLB has placed the control of the Company in the hands of the minority, thus enabling the Respondents to achieve indirectly, a virtual veto right on all issues and the ability to paralyze the functioning of Appellant No.1. In other words, where there was no deadlock earlier, a situation of potential deadlock has been created by the CLB.
(c ) The Respondents' Group should nominate one of the Directors from their ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 37 Co. Appeal No. 1 of 2011 group who is a resident of India, to be a joint signatory to the transactions with Banks and other organizations. This direction is totally unjustified and untenable in the absence of any allegation whatsoever of financial irregularities in the Petition or the said relief ever being sought by the Respondents. Once again, this direction as submitted by the Appellants has the potential to paralyze the functioning of Appellant No.1 and create a deadlock where none existed earlier.
(iii) As set out hereinabove, far from being dissatisfied with the functioning of the Company, the Respondents increased their investment/shareholding in the Company from time to time during the period 2002 to 2004 and did not raise any issue of any nature whatsoever. At the EGM held on May 24, 2006, Respondent No.1 categorically stated that he was not willing to provide personal guarantees and pledge his shares. In fact, Respondent No. 1 requested that his objection in that regard be noted (Annexure R10 Pg. 274 and 275 Vol. I). It was therefore clear that it would not be possible for the Company to raise the finance required to expand and upgrade the plant as proposed by Resolution No.1. It was for this reason that Resolution No. 2 to sell the undertaking was taken up. Further, the proposed procedure for sale of the undertaking was totally transparent and was, in fact, not opposed by Respondent No.1 except that Respondent No.1 proposed an amendment (which was defeated for the reasons set out hereinabove) to the said Resolution giving a pre-emption right to the members of the Company to better the bids received for the undertaking. Therefore, it is clear that Respondent No. 1 himself, was not per se opposed to the sale of the undertaking. However, even after Resolution No. 2 was passed, no bids for the undertaking were received from the ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 38 Co. Appeal No. 1 of 2011 Respondents. Therefore, there was no question of the Respondents "feeling"
oppressed on account of the Resolution for sale of the undertaking having been passed at the EGM held on May 24, 2006.
(iv) In any event having specifically given up all the prayers in the Petition except prayer 'C', at the hearing before the CLB, in my view it was not open to the CLB to pass the aforementioned extreme and drastic directions. The said directions have the effect of creating a deadlock in the affairs of the Company where none existed earlier. Further, the said directions have no relation whatsoever with the alleged grievance (which, in any event, was totally specious and untenable) of the Respondents or with the submissions made by the Respondents before the CLB.
Question No.2:
(II) In other words, the contesting respondents to this appeal having stated before the Company Law Board that they do not wish to press for reliefs in terms of prayers (f) and (g) of the Company Petition and that they would be contented with reinstatement of the original petitioner-member as a Director on the Board of the original 1 st respondent, could the Company Law Board have issued directions as referred to above and particularly as contained in para 57 of the impugned judgment.
(i) It is trite law that the powers of the CLB under Section 402 of the Companies Act, 1956 are wide in nature. However, there must be some nexus between the complaint made and the relief granted. The exercise of the powers by the CLB cannot be divorced from the case for alleged oppression made out by the Petitioner before the CLB and other existing circumstances which may necessitate such directions being issued. It is equally trite law that there must be some basis for the ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 39 Co. Appeal No. 1 of 2011 CLB to issue directions in proceedings under Section 397 of the Companies Act. The Appellants are correct in their submission that in the present case, the following circumstances militate against the directions issued in the impugned order:
(a) The alleged case of the Respondent as regards 'oppression' was demonstrably false and untenable;
(b) There were no other circumstances whatsoever (pleaded or otherwise) which would have necessitated the grant of the said extreme and drastic directions by the CLB; and (c ) At the hearing before the CLB, all the reliefs sought in the Petition except prayer 'c' were expressly given up by the Respondents.
(ii) Therefore, once the Respondents expressly gave up all prayers in the Petition except prayer 'c', it was not open to the CLB to pass the aforesaid drastic and extreme directions which went far beyond the limited relief sought by the Respondents and which would have the effect of creating a deadlock in the affairs of the Company where none existed earlier.
Question No. 3:
(III) What is the ambit and scope of the powers conferred on the Company Law Board under section 402 of the Companies Act, 1956 and particularly clause (g) thereof?
(i) In Sangramsinh P. Gaekwad vs. Shantadevi P. Gaekwad (supra), the Hon'ble Supreme Court held as follows:
"181. The jurisdiction of the court to grant appropriate relief under Section 397 of the Companies Act indisputably is of wide amplitude. It is also beyond any controversy that the court while exercising its ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 40 Co. Appeal No. 1 of 2011 discretion is not bound by the terms contained in Section 402 of the Companies Act if in a particular fact situation a further relief or reliefs, as the court may deem fit and proper, are warranted. (See Bennet Coleman & Co. v. Union of India 9 and Syed Mahomed Ali v. R. Sundaramoorthy10). But the same would not mean that Section 397 provides for a remedy for every act of omission or commission on the part of the Board of Directors. Reliefs must be granted having regard to the exigencies of the situation and the court must arrive at a conclusion upon analysing the materials brought on record that the affairs of the company were such that it would be just and equitable to order winding up thereof and that the majority acting through the Board of Directors by reason of abusing their dominant position had oppressed the minority shareholders. The conduct, thus, complained of must be such so as to oppress a minority of the members including the petitioners vis-a-vis the entire body of shareholders which a fortiorari must be an act of the majority. Furthermore, the fact situation obtaining in the case must enable the court to invoke just and equitable rules even if a case has been made out for winding up for passing an order of winding up of the company but such winding up order would be unfair to the minority members. The interest of the company vis-a-
vis the shareholders must be uppermost in the mind of the Court while granting a relief under the aforementioned provisions of the Companies Act, 1956.
182. Mala fides, improper motive and similar other allegations, it is trite, must be pleaded and proved as envisaged in the Code of Civil Procedure. Acts of mala fides are required to be pleaded with full particulars so as to obtain an appropriate relief.
183. The remedy under Section 397 of the Companies Act is not an 9 (1977) 47 Comp Cas 92 (Bom) 10 AIR 1958 Mad 587: (1958) 2 MLJ 259: (1958) 28 Comp Cas 554 ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 41 Co. Appeal No. 1 of 2011 ordinary one. The acts of oppression must be harsh and wrongful. An isolated incident may not be enough for grant of relief and continuous course of oppressive conduct on the part of the majority shareholders is, thus, necessary to be proved. The acts complained of may either be designed to secure pecuniary advantage to the detriment of the oppressed or be a wrongful usurpation of authority".
(ii) In view of the above, the powers of the CLB of granting reliefs, in the event of there being a case made out under Sections 397 and 398 are of widest amplitude. Clause (g) of Section 402, therefore requires and empowers the CLB to mould appropriate relief outside clauses (a) to (f) to meet the exigencies of the case. But making out a case under Sections 397 and 398 is essential and the relief under clauses (a) to (f) or (g) must be relatable to the grievance made out under Sections 397 and 398. So also, whilst exercising powers under Section 402, including clause (g) thereof, the interest of the company vis-a-vis the shareholders must be uppermost in the mind of the Court while granting relief.
(iii) In the present case, by issuing unwarranted, drastic and extreme directions in the impugned order, the CLB has without any basis whatsoever placed the control of the Company in the hands of the minority i.e. the Respondent Group, thus enabling the Respondents to achieve indirectly a virtual veto right on all issues and the ability to paralyze the functioning of the Company. In this context, it may be reiterated that the Respondents have never participated in the management of the affairs of the Company and have at all times refused to provide personal guarantees or to pledge their shares in order to raise finances for the Company. Such a position ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 42 Co. Appeal No. 1 of 2011 would enable the Respondents to arm twist the Company on every issue and thereby ensure that there is a deadlock on every issue. In other words, by the impugned order, the CLB has created a situation for a potential deadlock where none existed earlier. It is once again reiterated that the aforesaid directions have been passed by the CLB in a case where (I) the allegations of the Respondents as regards alleged 'oppression' are demonstrably false and incorrect; and (ii) all the prayers except prayer 'c' in the Petition were expressly given up by the Respondent.
Therefore, far from being in the interest of the Company, the said directions of the CLB are extremely detrimental and prejudicial to the interest of Appellant No.1 Company and are therefore not permissible under Section 402 of the Companies Act, 1956.
Question No.4:
(IV) Whether in exercise of these powers, can the Company Law Board ignore pleadings and the submissions of the parties and make any order or direction so as to deal with a situation of alleged deadlock because of the infighting and disputes between the parties, despite no material to prove such a situation is placed before it?"
(i) At the outset, neither was there any deadlock in the functioning of the Company nor was any case of deadlock pleaded and/or proved by the Respondents. The present question of law is answered fully by the following observation of the Hon'ble Supreme Court in Sangramsinh P. Gaekwad vs. Shantadevi P. Gaekwad (supra):
"It has to be borne in mind that when a complaint is made as regard ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 43 Co. Appeal No. 1 of 2011 violation of statutory or contractual right the shareholder may initiate a proceeding in a civil court but a proceeding under Section 397 of the Act would be maintainable only when an extraordinary situation is brought to the notice of the court keeping in view of the wide and far- reaching power of the court in relation to the affairs of the company. In this situation, it is necessary that the alleged illegality in the conduct of the majority shareholders is pleaded and proved with sufficient clarity and precision. If the pleadings and/or the evidence adduced in the proceedings remains unsatisfactory to arrive at a definite conclusion of oppression or mismanagement, the petition must be rejected" . (emphasis supplied)
30. From the aforesaid facts it is clear that the Respondents' Petition is based on false and frivolous allegations and is without merit and the Petition deserves to be dismissed. The Learned Member of the CLB has, under the garb of doing substantial justice, granted extreme directions under Section 402 of the Act which as explained hereinabove places control of the Company in the hands of the minority i.e. the Respondents Group, thus enabling the Respondents to achieve indirectly a virtual veto right on all issues and the ability to paralyze the functioning of the Company. In view thereof the Appeal is allowed and the impugned order is set aside. However, in view of the fact that it would not be in the interest of the Company or its shareholders including the Respondents themselves for the Respondents to remain in the Company along with Appellant Nos. 2 to 7, the circumstances warrant that the Respondents be directed to sell their shares to Appellant Nos. 2 to 7 at a value to be ascertained by a Valuer on the basis of the balance-sheet for the year ending 31 st March, 2006. M/s. V.B. Haribhakti and Company having their office at 42, Free Press ::: Downloaded on - 09/06/2013 19:53:19 ::: KPP 44 Co. Appeal No. 1 of 2011 House, Nariman Point, Mumbai-400 021 are therefore appointed as Valuers to value the shares of the Company on the basis of the balance-sheet for the year ending 31 st March, 2006 and the Respondents are directed to sell their shares to Appellant Nos.
2 to 7 at the value ascertained by the Valuer.
31. The Appeal is accordingly disposed of.
(S.J. KATHAWALLA,J.) ::: Downloaded on - 09/06/2013 19:53:19 :::