Punjab-Haryana High Court
Col. Kuldip Singh Dhillon And Ors. vs Paragaon Utility Financiers P. Ltd. And ... on 15 May, 1986
Equivalent citations: [1986]60COMPCAS1075(P&H)
JUDGMENT Rajendra Nath Mittal, J.
1. This is a petition under sections 397 and 398 of the Companies Act, 1956.
2. Briefly, the facts are that the respondent is a private limited company having authorised capital of Rs. 10,00,000 divided into 1,000 equity shares of Rs. 1,000 each. The called up capital is Rs. 8,50,000 and the paid-up capital is Rs. 7,91,000. The calls in arrears amount to Rs. 59,000. It was incorporated on August 21, 1961, under the provisions of the Companies Act (hereinafter referred to as "the Act"). The petitioners hold 1.50 shares as detailed below :
Col. Kuldip Singh, petitioner No. 1 20 Hardev Singh Minhas, " No. 2 30 Maj. K. Gurdev Singh, " No. 3 20 Smt. Nasib Kaur, " No. 4 20 Iqbaljit Singh, " No. 5 20 Smt. Kirpal Kaur, " No. 6 20 Smt. Chanan Kaur, " No. 7 203. It is alleged that the affairs of the company are being conducted prejudicially to public interest and in a manner oppressive to the petitioners, who are in minority, as detailed below :
(i) The company had been allotted 490 equity shares of Punjab Iron and Steel Co. P. Ltd., Jalandhar Cantt. (hereinafter referred to as "PISCO"). The paid-up amount in respect of the above shares was Rs. 3.90 lakhs. They were transferred in the names of Pavittar Singh and his wife, Nasib Kaur (122 shares), Ravinder Singh, son of Pavittar Singh, and his wife (124 shares), Ramesh Inder Singh, son of Pavittar Singh (122 shares), and Swaran Singh, son of Milkha Singh, brother-in-law of Pavittar Singh (122 shares). These were transferred in a clandestine manner and without having been offered to any other shareholder including the petitioners, for a consideration of Rs. 3.90 lakhs in a meeting of the board of directors of the company held on December 30, 1978. No money in cash was paid by the purchasers to the company as the price of the shares. An amount of Rs. 2 lakhs alleged to be deposited with the company was adjusted towards the purchase price and the balance amount of Rs. 1,90,000 was given by the company as loan to the purchasers with interest at the rate of 15 per cent. per annum. The meeting in which the shares were transferred was illegal and void for want of quorum. Some other irregularities were also committed by the board of directors in calling and holding the meeting. Thus, the transfer of shares is not binding on the company.
(ii) Shri Ramesh Inder Singh was the managing director of the company in the year 1976 and he had been operating the bank account of the company maintained in the Central Bank of India, Civil Lines, Jalandhar City, without any authority. He issued cheques in fictitious names with the result that amounts to the tune of lakhs of rupees were misappropriated.
(iii) Mohinder Singh had been appointed as manager-cum-cashier of the company during the regime of Pavittar Singh, father of Ramesh Inder Singh. The books of account were maintained by Mohinder Singh. As a result, it is alleged, an amount of Rs. 2,68,000 had been defalcated by him in the year 1976. The board of directors decided to take action against him. The matter was taken in various meetings of the board of directors but no action was taken against him. Thus, the interest of the shareholders was not protected by the management.
(iv) The minutes book of the company relating to the meetings of the board of directors and shareholders was not kept properly from November, 1978, to September, 1979. Some of the proceedings have not been signed by the chairman. There are various violations of the provisions of Section 193 of the Act. Therefore, the business transacted in the meetings during that period is illegal and void ab initio.
(v) The company had been advancing loans to some persons without any documents. It is alleged that it advanced loan without interest and without getting executed any document to PISCO. An amount of Rs. 14,309.57 stands due from it to the company and an amount of Rs. 36,730.52 from Mohinder Singh as on December 31, 1978, but no action has been taken to recover the amounts from them.
4. The aforesaid allegations, it is pleaded, go to prove the mismanagement on the part of the management which is prejudicial to public interest and oppressive to the minority members of the company. Thus, the circumstances are such in which it would be just and equitable that the company can be ordered to be wound up. Consequently, it is prayed that action be taken under the aforesaid section. The respondents in the petition are : 1. Messrs. Paragaon Utility Financiers P. Ltd., 2. Late Pavittar Singh through his legal representatives, 3. Smt. Nasib Kaur, 4. Ramesh Inder Singh, 5. Ravinder Singh and 6. Swaran Singh. Later, the name of respondent No. 2, late Pavittar Singh, was ordered to be deleted.
5. The petition has been contested on behalf of respondent No. 1 and respondents Nos. 3, 4, 5 and 6. Two written statements have been filed, one on behalf of respondent No. 1 and the other on behalf of the latter respondents. Respondent No. 1 alleged that the affairs of the company were meticulously looked after during the (period when Col. P. S. Dhillon was the managing director. Col. Dhillon filed an application for rectification of the register of shareholders of PISCO under Section 155. The application was decided against him but an appeal is pending in this court against that order.
6. In the 'written statement on behalf of respondents Nos. 3, 4, 5 and 6, it is, inter alia, pleaded that the allegations in the petition do not make out a case of oppression and mismanagement of the affairs of the company and its winding up on just and equitable grounds. The petition is mala fide and had been filed at the behest of Col. P. S. Dhillon who had been the managing director till April 20, 1982, when he had been removed. Petitioners Nos. 1 and 3 are tne real brothers of Col. Dhillon and petitioner No. 4 is his real sister. The main allegation in the petition, it is stated, related to the transfer of 490 shares held by the company in PISCO. The matter had been decided in company petition filed by Col. P. S. Dhillon which had since been dismissed. It is further pleaded that rectification of the transfer of shares cannot be the subject-matter of a petition under Sections 397 and 398. The allotment cannot also be declared invalid in the absence of PISCO. The other allegations in the petition have been controverted by the said respondents.
7. On the pleadings of the parties, the following issues were framed :
1. Whether the petition is maintainable in view of the preliminary objections Nos. 1 to 9 in the written statement of respondents Nos. 3 to 6 and paragraph No. 6 of the written statement of respondent No. 1 ? [OppJ.
2. Whether the affairs of the company are being conducted in a manner prejudicial to the interest of the company and public ? [Opp].
3. Whether the acts of the majority are oppressive to the interest of the minority ? [Opp]. A. Relief.
Issue No. 1: The first preliminary objection raised by Mr. Sodhi is that the petitioners have no right to maintain the present petition as they did not own 10 per cent. shareholding on the date of filing the petition. On the other hand, Mr. Jain, counsel for the petitioners, has argued that the petitioners had 150 shares out of 1,000 shares on the date of filing the petition as given in the petition. Thus, they had the right to file the petition.
8. I have duly considered the arguments of learned counsel and find force in the contention of Mr. Jain, The petitioners, as given in the list of members, exhibit P-88, filed with the Registrar of Companies, Jalandhar, had 150 shares oat of 1,000 shares on June 30, 1982. Col. K.S. Dhillon, petitioner, in his statement, said that at the time of filing the petition, the petitioners were shareholders of the company. From the list, exhibit P-88, and statement of Col. Dhillon, it is evident that the petitioners had more than 10 per cent. shareholding in the company.
9. At this, Mr. Sodhi sought to urge that the position reflected in exhibit P-88 relates to the month of June, 1982, whereas the petition was filed in October, 1982. He argues that it was incumbent on the petitioners to show the total number of shareholding held by them on the date of filing the petition which they failed to do. He made reference to Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC) ; AIR 1956 SC 213, and the resolution of the board of directors dated October 29, 1978, wherein 20 shares held by Smt. Kirpal Kaur were transferred to Smt. Rattan Kaur, daughter of Dalip Singh and AmarjitSingh Bajwa, son of Rattan Singh.
10. I do not find any substance in this submission of learned counsel as well. The petitioners have shown that according to the latest list of members filed with the Registrar of Companies, they had 150 shares. Col. K. S. Dhillon, petitioner, affirmed in his statement that all the petitioners were shareholders of the company on the date of filing the petition. The proceedings of the board of directors dated October 29, 1978, however, show that 20 shares were transferred by Smt. Kirpal Kaur, petitioner. It cannot be ruled out that 20 shares might have been again transferred in the name of Smt. Kirpal Kaur, before June, 1982, the date of filing the list of shareholders, exhibit P-88. Even if it may be assumed that 20 shares had not been transferred to her subsequently, the remaining petitioners still had more than 10% shareholding on the date of petition and thus they were entitled to file the petition. In Rajahmundry Electric Supply Corporation Ltd.'s case. [1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, the facts were that the applicant after obtaining the consent of more than one-tenth in number of the members presented the petition under Section 153C of the Indian Companies Act, 1913 (section 397 of the Companies Act, 1956). Subsequent to the presentation of the petition, some of the members withdrew their consent. It was held that subsequent withdrawal of the consent could not affect the right of the petitioner to proceed with the petition or the jurisdiction of the court to dispose of it on merits. In my view, the observations in the above case are of no assistance to Mr. Sodhi. Consequently, I overrule this preliminary objection.
11. The second objection of Mr. Sodhi is that the allegations made in the petition should be such that a prima facie case for winding up of the company has been made out under Section 433(f), but from the allegations in the petition, no such case stands established. In support of his contention, he places reliance on Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC); AIR 1965 SC 1535, Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp Cas 543 (SC) and Hind Overseas P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC) ; AIR 1976 SC 565.
12. There is no dispute about the proposition that an action under Section 397 can be taken only if a prima facie case for winding up has been made out on the allegations in the petition. In the above observations, I find support from Rajahmundry Electric Supply Corporation's case [1956] 26 Comp Cas 91 (SC) wherein it is observed as follows (at page 95) :
" ...before taking action under Section 153C, the court must be satisfied that circumstances exist on which an order for winding up could be made under Section 162."
13. Sections 153C and 162 of the 1913 Act are equivalent to Sections 397 and 433 respectively of the 1956 Act. A similar view was taken in Shanti Prasad Jain's case [1965] 35 Comp Cas 351 (SC). It was further observed therein that the conduct of the majority shareholders must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression by the majority in the management of the company's affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.
14. It is now to be determined whether the allegations in the petition make out a prima facie case for the winding up of the company under Section 433(f). The section says that a company may be wound up by the court if it is of opinion that it is just and equitable to do so. The question arises what the words "just and equitable" mean. It has been held in Hind Overseas' case [1976] 46 Comp Cas 91 (SC) that the principle of "just and equitable" baffles a precise definition. It must rest with the judicial discretion of the court depending upon the facts and circumstances of each case. These are necessarily equitable considerations and may, in a given case, be superimposed on law. Whether it would be so done in a particular case cannot be put in the strait-jacket of an inflexible formula. Clause (f) is not to be read as being ejusdem generis with the preceding five clauses. Whether the five earlier clauses prescribe definite conditions to be fulfilled for the one or the other to be attracted in a given case, the just and equitable clause leaves the entire matter to the wide and wise judicial discretion of the court. The only limitations are the force and content of the words "just and equitable" themselves. In view of Sections 397, 398 and 443(2), relief under Section 433(f) based on the just and equitable clause is in the nature of a last resort, when other remedies are not efficacious enough to protect the general interest of the company. There must be materials to show when the just and equitable clause is invoked that it is just and equitable not only to the persons applying for winding up but also to the company and to all its shareholders. It is further observed that the court will have to keep in mind the position of the company as a whole and the interest of the shareholders and to see that they do not suffer in a fight for power that may ensue between the two groups. Similar observations were made in Seth Mohan Lal's case [1968] 38 Comp Cas 543 (SC). It was further held that in making an order for winding up on the ground that it is just and equitable that a company should be wound up, the court shall consider the interest of the shareholders as well as of the creditors. It is not necessary to dilate further on this matter. It is sufficient to observe that if the allegations in the petition are taken to be established, the petitioners are entitled to obtain an order of winding up under Section 433(f).
15. The third preliminary objection of Mr. Sodhi is that the oppression should continue up to the date of the petition. He contends that the petition in this case does not show that the oppression is continuous and, therefore, it is liable to be dismissed. To fortify his argument he made reference to Shanti Prasad Jain's case [1965] 35 Comp Cas 351 (SC) and Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 : AIR 1965 Guj 96. On the other hand, Mr. Jain has argued that if the effect of a single act is continuously oppressive, the court is entitled to pass an order under Sections 397 and 398. He refers to In re Sindhri Iron Foundry (P.) Lfd. [1964] 34 Comp Cas 510 (Cal).
16. I have duly considered the argument. The matter does not require any elaborate discussion as it has been settled by the Supreme Court in Shanti Prasad Jain's case [1965] 35 Comp Cas 351 that in order to file an application under Section 397, it must be shown that the conduct of the majority shareholders was oppressive to the minority members and this requires that events have to be considered not in isolation but as part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of the petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. Same view was expressed by P. N. Bhagwati, J. as he then was, in Mohanlal Ganpatram' case [1964] 34 Comp Cas 777 (Guj). It was observed therein that Sections 397 and 398 postulate that there must be at the date of the application a continuing course of conduct of the affairs of the company which is oppressive to any shareholder or shareholders or prejudicial to the interests of the company. I am in respectful agreement with the above observations. It is true that in Sindhri Iron Foundry's case [1964] 34 Comp Cas 510, it was held by a learned single judge of the Calcutta High Court that if the court is satisfied that a single wrongful act is such that its effect will be a continuous course of oppression and there is no prospect of remedying the situation by the voluntary act of the party responsible for the wrongful act, the court is entitled to interfere by an appropriate order under Section 397 of the Act. However, the above observations are not in consonance with those of the Supreme Court in Shanti Prasad Jain's [1965] 35 Comp Cas 351. Consequently, it is not possible for me to rely upon the view expressed by the Calcutta High Court.
17. It is clear from the facts that the petitioners have alleged oppression relating to the year 1978-79. Thereafter, Col. P. S. Dhillon was appointed as the managing director who remained as such for many years, but during that period, the petitioners remained quiet and took no action. Thus, it cannot be said that there are continuous acts of the majority shareholders which have been oppressive to the petitioners. Consequently, the petition is liable to be dismissed on this short ground.
Issues Nos. 2 and 3.--Though, in view of the above finding, it is not necessary to deal with the arguments of Mr. Jain on these issues, in order to avoid the possibility of remand in appeal, I consider it proper to deal with them.
18. In the first instance, counsel for the petitioners has challenged the resolutions passed in the meetings of the company held on November 30, 1978, December 30, 1978, January 15, 1979, and February 28, 1970. It was highlighted by him that several directors of the company, namely, Shri Pavitar Singh, Smt. Nasib Kaur, Smt. Gurbachan Kaur, Shri Rajinder Singh Johal, Shri Amar Singh, Smt. Mohinder Kaur, Shri Rameshinder Singh, Shri Ravinder Singh, Shri Swaran Singh and Smt. Inderjeet Kaur, were closely related. Smt. Nasib Kaur was wife, Smt. Mohinder Kaur and Smt. Gurbachan Kaur were sisters, Shri Rameshinder Singh and Shri Ravinder Singh were sons and Smt. Inderjit Kaur was daughter of Pavittar Singh. Shri Amar Singh is the husband of Smt. Mohinder Kaur and Shri Rajinder Singh Johal is the husband of Smt. Gurbachan Kaur. Shri Swaran Singh is the brother of Smt. Nasib Kaur. He submits that the matter is to be examined in this background. He has challenged the legality of the resolution dated November 30, 1978, exhibit P-1 on three grounds, firstly, that the quorum for the meeting in which the resolution was passed was incomplete ; secondly, no notice of the meeting was given to the directors and, thirdly, that, in fact, no meeting was held on that date.
19. The first question that arises for determination is as to whether the quorum for the meeting in which resolution, exhibit P-1, was passed was incomplete. Mr. Jain has contended that there were 32 directors of the company on November 30, 1978, and, therefore, the quorum for the meeting was 11. However, only 8 directors were present. Out of them Smt. Indarjit Kaur and Shri Pavittar Singh ceased to be directors on September 27, 1977, and January 30, 1978, respectively, as they failed to attend three consecutive meetings and thus they would be deemed to be not present in the meeting. In this way, only six directors would be deemed to be present.
20. On the other hand, Mr. Sodhi has argued that 8 out of 32 directors of the company, namely, Smt. Gurmej Kaur, Shri Gurcharan Singh, Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib Kaur, wife of Bakhtawar Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh and Shri Ravinder Singh, had ceased to be directors. Thus, the total number of directors on that date was 24. The number for determining the quorum will be deemed to be 24 and not 32. Therefore, the quorum would have been complete if eight directors were present. He further contends that Shri Pavittar Singh had been re-elected as director on June 30, 1978, and, therefore, he did not suffer from any disability on November 30, 1978.
21. I have duly considered the arguments of learned counsel. It has been admitted by Mr. Jain that out of the 32 directors, eight directors, namely, Smt. Gurmej Kaur, Shri Gurcharan Singh, Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib Kaur, wife of Shri Bakhtawar Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh and Shri Ravinder Singh had ceased to be directors prior to November 30, 1978. Sub-section (2) of Section 287 provides that the quorum for a meeting of the board of directors of the company shall be one-third of its total strength or two directors, whichever is higher. In Clause (a) of Sub-section (2) of Section 287, the total strength of the board of directors of a company has been denned as the total strength of the board of directors as determined in pursuance of the Act, after deducting therefrom the number of directors, if any, whose places may be vacant at the time. It is thus evident that for constituting quorum, l/3rd of the total number of directors who do not suffer from any disability are to be taken into consideration. The effective number of directors who admittedly ceased to be so is 8. Thus, the number of effective directors was 24 and out of them 8 directors could constitute the quorum. The directors present in the meeting were eight, i.e., Smt. Inderjit Kaur, Shri Rameshinder Singh, Smt. Gurbax Kaur, Shri Ravinder Singh, Shri Rajinder Singh Johal, Shri Pavittar Singh, Shri Amar Singh and Shri Swaran Singh. Out of them, admittedly, Smt. Inderjit Kaur and Shri Ravinder Singh ceased to be directors. There is a dispute as to whether Shri Pavittar Singh was re-elected as a director or not. Even if it may be assumed that Shri Pavittar Singh had been re-elected as director, the quorum was incomplete as only six directors were present.
22. The second question to be determined is whether notice of the meeting was given to the directors and if not with what effect. Mr. Jain has argued that the copy of the despatch register of the company from October 16, 1978, to February 19, 1979, exhibit P-74, does not show that any notice was issued for the said meeting. On the other hand, Mr. Sodhi, has argued that the only requirement under Section 286 is that the notice of the meeting should be in writing. It does not prescribe the manner in which it is to be served on the directors. The notice under Article 82 of the articles of association can be served personally. He submits that notices were not sent by post but through a messenger.
23. It is not disputed by Mr. Sodhi that the notices were not entered in the despatch register. There is no reliable evidence on record to prove that notices were sent through messenger and, therefore, it cannot be held that notices were given to the directors. It is essential that the notices of the meetings have to be sent to all the directors, otherwise, the resolutions passed in such meetings are invalid. In this view, I am fortified by the observations of the Supreme Court in Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1 : AIR 1973 SC 2389, wherein it was observed that notice to all the directors of a meeting of the board of directors is essential for the validity of any resolution passed at the meeting and where no notice was even given to one of the directors, the resolution passed at the meeting of the board of directors is invalid. Consequently, I am of the opinion that the resolution dated November 30, 1978, is invalid on this ground.
24. The third question to be determined is whether the meeting was held on November 30, 1978, or the minutes were recorded without holding the meeting. Mr. Jain has argued that no meeting was held but the minutes were recorded subsequently by the eight directors in collusion with each other. In support of his contention, he brought to my notice the fact that the signatures of the chairman at the end of the minutes bear the date November 30, 1979, instead of November 30, 1978. The arguments have been considered by me but I do not agree with them. The proceedings book is page-marked and consists of several resolutions even after this resolution. This resolution cannot be said to have been incorporated therein subsequently merely because under the resolution, Shri Pavittar Singh purported to have signed on November 30, 1979. The year and the date might have been mentioned through an oversight.
25. Now, I advert to the resolution, exhibit P-2, passed in the meeting held on December 30, 1978. Mr. Jain has challenged the said resolution on four grounds, out of which three grounds are the same on which resolution, exhibit P-1, was challenged. The fourth ground is that 5 transferees of the shares of PISCO, namely, Smt. Nasib Kaur, Shri Ravinder Singh, Shri Rameshinder Singh, Shri Pavittar Singh and Shri Swaran Singh, took part in the meeting without disclosing their interest in the proposed transaction and, therefore, they ceassed to be electors on that date. The first question to be seen is whether the quorum for the meeting was complete or not. This meeting was attended by the following ten directors :
1. Smt. Nasib Kaur.
2. Smt. Mohinder Kaur,
3. Smt. Rajinder Singh Johal,
4. Smt. Gurbax Kaur,
5. Shri Pavittar Singh,
6. Shri Ravinder Singh,
7. Shri Swaran Singh,
8. Smt. Inderjit Kaur,
9. Shri Rameshinder Singh, and
10. Shri Amar Singh.
26. The resolution was passed for transferring 490 shares of PISCO held by the company in favour of the following persons for full consideration :
Shares
1. Shri Pavittar Singh and his wife, Smt, Nasib Kaur 122
2. Shri Ravinder Singh and his wife, Smt. Santosh 124
3. Shri Rameshinder Singh 122
4. Shri Swaran Singh 122 490 N.B. Out of 6 transferees, all except Smt. Santosh were directors of the company.
27. Mr. Jain has contended that out of the ten directors present in the meeting, five directors were transferees. Out of them, Pavittar Singh, Smt. Nasib Kaur and Shri Ravinder Singh had also ceased to be directors. Smt. Inderjit Kaur had further ceased to be a director. If the presence of the five transferee-directors and that of Smt. Inderjit Kaur is not taken into consideration, then the quorum is incomplete. On the other hand, Mr. Sodhi has argued that Shri Pavittar Singh, after he had ceased to be a director, was re-elected on June 30, 1978. However, he admits that Smt. Inderjit Kaur ceased to be a director. He further submits that the transferees did not cease to be directors at the time of passing the resolution and at the most they ceased to be so after the resolution had been passed.
28. First, it is to be seen whether Shri Pavittar Singh was re-elected as director on June 30, 1978, as argued by Mr. Sodhi. Exhibit R. 2/5 is the copy of the resolution of the shareholders dated June 30, 1978, from which it is clear that he was re-elected as director on June 30, 1978. Thereafter, it is not shown that he ceased to be so. Consequently, I am of the opinon that he was a director on December 30, 1978.
29. It is next to be seen whether Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran Singh, Shri Ravinder.Singh and Shri Rameshinder Singh had ceased to be directors on that date because they took part in the meeting at the time of passing the resolution, exhibit P-2. Relevant parts of Sections 283(1)(i) and 299 read as follows :
"Section 283. Vacation oj office by directors.--(1) The office of a director shall become vacant if--...
(i) he acts in contravention of Section 299.
Section 299. Disclosure of interests by director.--(1) Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the board of directors..."
30. From a reading of Section 283, it is clear that the office of the director becomes vacant when a director acts in contravention of Section 299. It is enjoined by Section 299 that a director, who is interested in a contract entered into by or on behalf of the company, should disclose the nature of his interest at a meeting of the board of directors. If he fails to do so, he ceases to be a director. In view of the aforesaid two sections, Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran Singh, Shri Ravinder Singh and Shri Rameshinder Singh ceased to be directors of the company.
31. Now, the question arises, whether the resolution, exhibit P-2, is invalid on this ground. Sub-section (1) of Section 300 provides that no director of a company shall, as a director, take any part in the discussion or vote on any contract by or on behalf of the company, if he is in any way, whether directly or indirectly interested in the contract, nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote ; and if he does vote, his vote shall be void. Sub-section (2)(a), which is in the nature of a proviso to Sub-section (1), says that Sub-section (1) shall not apply to a private company which is neither a subsidiary nor a holding company of a public company. A reading of the above provisions makes it clear that Sub-section (1) applies to a public limited company and not to a private company which is not a subsidiary or a holding company of a public company. Therefore, it is in the case of a public company and a private company which is a subsidiary or a holding company of a public company, that if a director takes part in the proceedings of the board of directors and votes regarding any contract in which he is interested, his presence for the purposes of forming a quorum shall not be counted and his vote shall be void. However, it will not be so if the company is a private company. In the present case, the company is a private company. Therefore, the presence of the aforesaid five directors for the purposes of quorum and their vote for the purpose of passing the resolution cannot be excluded. They shall, however, cease to be directors after the passing of the said resolution. Consequently, the resolution, exhibit P-2, cannot be held to be invalid on this ground. However, it may be reiterated that the shares were transferred in the names of some of the directors. Thus, the action of the directors in passing the resolution amounts to oppression of the minority shareholders in spite of the fact that it is not an invalid resolution. In the above observation, I find support |rom Mohanlal Ganpatram's case [1964] 34 Comp Cas 777 (Guj) wherein it was held that a resolution may be passed by the directors which is perfectly legal in the sense that it did not contravene any provision of law, and yet it may be oppressive to the minority shareholders or prejudicial to the interest of the company. Such a resolution can certainly be struck down by the court under Section 397 or 398.
32. Now, it is to be seen whether Smt. Nasib Kaur, wife of Pavittar Singh, Shri Ravinder Singh and Smt. Surjit Kaur were directors on the date of the meeting, i.e., December 30, 1978, and if not, with what effect. Smt. Nasib Kaur was re-elected as a director on June 30, 1978, vide resolution, exhibit R-2/5. It is not shown that thereafter she ceased to be so. Consequently, she was a director on the date of the meeting. Shri Ravinder Singh and Smt. Surjit Kaur admittedly ceased to be directors. If the presence of two directors, namely, Ravinder Singh and Smt. Inderjit Kaur, is not taken into consideration, eight directors were still present in the meeting. The total number of directors, as already mentioned, was 24. Thus, the quorum was complete.
33. Mr, Jain next submits that no notice of the meeting was sent to the directors and, consequently, the meeting was illegal. There is force in this submission. The copies of the despatch register from October 16, 1978, to February 19, 1979, exhibit P-74, show that no notice was sent regarding the meeting. A similar argument was raised earlier and was dealt with while determining the validity of the resolution dated November 30, 1978, For similar reasons, the resolution dated December 30, 1978, is also invalid.
34. Mr. Jain has then argued that in the resolution dated November 30, 1978, it was decided that the shares be offered to the existing shareholders. Shri R.S. Johal was authorised to do so. However, he did not offer the shares to the other shareholders and, therefore, the transfer of shares to Pavittar Singh, etc., amounts to oppression on the minority shareholders.
35. I find substance in this submission. Before deciding to whom the shares should be sold, it was the duty of Shri Johal to make an offer of sale to all the shareholders. Those should have been transferred to one who made the highest offer. However, it was not done. It is true that Shri Johal says that he told orally all the shareholders in this, regard. This part of the statement, however, cannot be accepted. Consequently, transfer of the shares to the transferees without offering the shares to the other shareholders in terms of the resolution dated November 30, 1978, exhibit P-1, is oppressive to the other shareholders.
36. Mr. Jain has further argued that the consideration for the 490 shares purchased by Shri Pavittar Singh, etc., was not paid in cash by them. The purchase price of the shares was Rs. 4,90,000, out of which an amount of Rs. 2,00,000 was got adjusted by them towards their deposits. An amount of Rs. 1,90,000 was taken as loan by them from the company for interest at the rate of 15% per annum and that amount has not been repaid till today.
37. I have duly considered the argument. The facts are not disputed by Mr. Sodhi. It is not disputed that some amount was shown payable to the transferees in the account books of the company. In case that amount was got adjusted by them towards the payment of consideration of the shares, no fault can be found therein. However, the act of advancing a loan by the company to the transferee-directors at the juncture when the company was not in sound financial condition was an oppressive act on the minority shareholders. It is also relevant to point out that they have not repaid the amount of loan or interest thereon up-to-date.
38. The third resolution of the company, which has been challenged by the petitioners, is dated January 15, 1979, exhibit P-17. By this resolution, the minutes of the meeting dated December 30, 1978, were confirmed and the loans given to the directors for purchasing the shares of PISCO were confirmed. It is contended by Mr. Jain that there was no quorum in the meeting as Smt. Nasib Kaur, Shri Pavittar Singh, Sri Swaran Singh and Shri Rameshinder Singh ceased to be directors as they took part in the meeting dated December 30, 1978, without disclosing their interest in the resolution passed therein. Shri Ravinder Singh, Smt. Inderjit Kaur and Shri Avtar Singh admittedly ceased to be directors. The total number of directors present was eleven and in case the aforementioned seven directors are excluded, the number of directors present remained four. The quorum of the meeting should have been eight and thus the resolu-tion is invalid. I agree with the submission of learned counsel. It is not necessary to dilate (further) on the point as the matter has already been discussed above.
39. Mr. Jain has further challenged the validity of the resolution on the ground that the notices of the meeting were not despatched to the directors. He, in support of his contention, referred to the despatch register, exhibit P-74. I agree with this submission as well. The matter has already been discussed above. For similar reasons, this resolution is also invalid.
40. Mr. Jain has next challenged on similar grounds the resolution passed in the meeting held on February 28, 1979, exhibit P-18, by which the sale of 490 shares in favour of Shri Pavittar Singh, etc., was approved. The first thing to be seen is as to whether the quorum of the meeting was complete. Eleven directors were present in the meeting. Out of them three, namely, Smt. Nasib Kaur, Shri Rameshinder Singh and Shri Pavittar Singh, were the transferees of the shares of PISCO. As already held, they ceased to be directors on December 30, 1978. Out of the remaining eight directors, Shri Ravinder Singh, Shri Avtar Singh and Smt. Inderjit Kaur admittedly, ceased to be directors. Thus, the names of six directors are to be excluded for the purposes of quorum. Consequently, five directors would be deemed to be present in the meeting. The quorum for the meeting was eight. I am, therefore, of the opinion that the resolution dated February 28, 1979, is also invalid.
41. The second question is whether the resolution is invalid as the notices of the meeting were not sent to all the directors. In the despatch register, exhibit P-74, admittedly, the despatch of the notices of the meeting to the directors is entered. Therefore, I am of the view that this formality had been fulfilled by the company and the resolution cannot be held to be invalid on this ground.
42. Mr. Jain has further argued that the resolution was invalid as Shri R.S. Johal and ten other directors protested against the resolution and walked out of the meeting. He made reference to the letter dated February 28, 1969, exhibit P-76. There is force in this submission also. It is stated in the letter, exhibit P-76, that in the meeting of the board of directors held on February 28, 1979, the directors who signed the letter did not agree to the proposal for transfer of the 490 shares held by the company in PISCO to Sarvashri Pavittar Singh, Rameshinder Singh, Ravinder Singh and Swaran Singh and voted against the resolution. The resolution, therefore, stood defeated. The directors who signed the letter walked out of the meeting in protest against the overbearing, arbitrary, unconstitutional and illegal action, arrogant attitude and threatening behaviour of the directors interested in the transferees. The latter prevailed upon the managing director and, therefore, he refused to record their disapproval and vote of dissent. It was requested by them that the minutes be not recorded, contrary to the will and verdict of the majority of the directors. The letter is signed by 11 directors and addressed to the managing director. From the above letter, it is evident that eleven other directors were present in the meeting but neither their presence nor their vote of dissent against the resolution was recorded. Shri R. S. Johal appeared in the witness-box as P.W.-4 and affirmed the stand taken in the letter, exhibit P-76. He stated that in the meeting held on February 28, 1979, there was a dispute regarding the sale of shares in favour of Rameshinder Singh and his partymen and that some of the directors, namely, Shri N.S. Domeli, Shri Puran Chand, Smt. Beant Kaur, Shri Didar Singh, Smt. Ravinder Kaur, Smt. Rattan Kaur, Shri Puran Singh, Shri Hardev Singh, Smt. Nasib Kaur and Mrs. Vaneet, walked out of the meeting. There is no mention about the dispute in the minutes. Shri Domeli also admits his signature on the letter. I am, therefore, of the opinion that the resolution dated February 28, 1979, exhibit P-18, is invalid.
43. The petitioners have also challenged the resolutions passed in the annual general meeting held on June 30, 1979, exhibit R-2/6. In that meeting, the balance-sheet and the profit and loss account for the year ending December 31, 1978, were passed. It is contended by Mr. Jain that 21 days' clear notice for holding the meeting was required to be iven to the shareholders under Section 171, but that was not done.
44. The notices were despatched on June 13, 1979, and thus 21 days' clear notice was not given to them. He also contends that the copies of the balance-sheet should have been sent with the notices but the same were not sent.
45. Mr. Sodhi has not disputed that the notices given to the shareholders were of less than 21 days. Section 171 reads as follows :
"171. Length of notice jor calling meeting.--(1) A general meeting of a company may be called by giving not less than twenty-one days' notice in writing.
(2) A general meeting may be called after giving shorter notice than that specified in Sub-section (1), if consent is accorded thereto--
(i) in the case of an annual general meeting, by all the members entitled to vote thereat ; and
(ii) in the case of any other meeting, by members of the company (a) holding, if the company has a share capital, not less than 95 per cent. of such part of the paid-up share capital of the company as gives a right to vote at the meeting, or (b) having, if the company has no share capital, not less than 95 per cent. of the total voting power exercisable at that meeting :
Provided that where any members of a company are entitled to vote only on some resolution or resolutions to be moved at a meeting and not on the others, those members shall be taken into account for the purposes of this Sub-section in respect of the former resolution or resolutions and not in respect of the latter."
46. A reading of the section shows that 21 days' notice is necessary for convening the annual general meeting. However, a shorter notice for such a meeting can be given, if all the members who are entitled to vote in the meeting accord their consent for doing so. Previously, fourteen days' notice was provided but later the period of notice was extended to 21 days on the report of the Company Law Committee. The reasons for extension of period have been given in the report, the relevant portion of which reads as follows :
" We further recommend that twenty-one day's notice should be given of all resolutions to be passed at a general meeting--ordinary or special. The extension of the period of notice from fourteen to twenty-one days is necessary to enable shareholders to combine and canvass for proxies if they so desire. The present period of fourteen days is too short for all the processes that are involved before the shareholders canvass their opinion in favour of or against a particular resolution proposed to be considered at any meeting of the company."
47. After taking into consideration the provisions of the section and the reasons for incorporating the same, I am of the view that the period of notice cannot be curtailed except on the ground mentioned in the section itself. The provisions of the section are mandatory and if they are not complied with, the resolutions passed in such a meeting cannot be held to be valid. The members in this case admittedly did not agree for curtailing the period of notice. Therefore, the resolutions passed in the meeting dated June 30, 1979, are invalid.
48. The petitioners have further challenged the validity of the resolution of t,he board of directors dated June 2, 1979, exhibit P-20, confirming the balance-sheet and profit and loss account for the year ending December 31, 1978. Mr. Jain submits that the quorum in the meeting was not complete and, therefore, the resolution was invalid. I do not find any substance in the argument. In the meeting, eight directors were present. As already-mentioned, there were only twenty-four directors of the company. Consequently, eight directors constituted the quorum. I am, therefore, of the view that the resolution cannot be said to be invalid.
49. The next contention of Mr. Jain is that the shares which were transferred to Shri Pavittar Singh, etc., had more value than that for which they were sold. In support of his contention, he places reliance on the balance-sheet ending December 31, 1976, exhibit R. 2/7, the balance-sheet ending December 31, 1977, exhibit R. 2/8 and the balance-sheet ending December 31, 1978, exhibit R. 2/9. I do not find substance in this submission. The shares were not quoted on the stock exchange. No reliable data has been provided by the petitioners showing that the value of the shares was more. In the first two balance-sheets, the company is 'shown to have suffered losses to the tune of several lakhs of rupees. In the balance-sheet ending December 31, 1978, some profit is shown to have been earned. After adjustment of the profit, the loss carried forward is Rs. 5 lakhs odd. The aforesaid figure shows that PISCO was not faring well.
50. The respondents produced Arun Joshi, R-2/3. He deposed that no dividend was declared or paid to the shareholders during the aforesaid period. The face value of each share was Rs. 1,000. He further deposed that, according to the assets of the company, the value of each share was about Rs. 600 in the years 1976 and 1977 and about Rs. 625 in the year 1978.
51. After taking into consideration the circumstances, it cannot be accepted that the value of the shares was more than Rs. 1,000 per share when they were transferred to the respondents.
52. Mr, Jain then contends that the accounts of the company were not even operated by duly authorised persons. To fortify his argument he made reference to the copy of the resolution of the board of directors dated April 11, 1976, exhibit P-3, filed in the Central Bank of India and the resolution dated April 11, 1976, exhibit P-3/A, passed by the board of directors.
53. I have duly considered the matter. In the copy of the resolution, exhibit P-3, it is stated that Shri Pavittar Singh, managing director, would remain out of station for two months with effect from April 10, 1976. The accounts of the company with the Central Bank of India, Civil Lines, Jullundur, and Indian Overseas Bank, Jullundur, would be joiiltly operated by Shri Naranjan Singh Domeli, chairman of the company, and Shri Rameshinder Singh, director of the company in place of Shri Pavittar Singh, managing director. It was further stated that in future any two of the three persons, namely, Shri Naranjan Singh Domeli, Shri Pavittar Singh and Shri Rameshinder Singh, would jointly operate the accounts. It has been certified to be a true copy by Shri Mohinder Singh as the managing director. The original resolution purports to bear the signatures of Shri Bir Singh Johal, chairman. However, Mohinder Singh was not the managing director of the company nor was Bir Singh Johal its chairman. The resolution does not find a place in the original minutes book of the board of directors. Some resolutions dated April 11, 1976, are entered in the minutes book (copy exhibit P. 3-A). These resolutions are different from the resolution, exhibit P-3. Mr. Sodhi has not been able to show any other resolution in the minutes book, copy of which is exhibit P-3. In the circumstances, it is evident that the affairs of the company were mismanaged by the respondents.
54. Mr. Jain has further argued that Shri Rameshinder Singh operated the accounts on the basis of that resolution and advanced loans to the persons in the names of some fictitious persons and thus misappropriated the amounts. He submits that the cheque, exhibit P-7, was issued in the name of one Jagtar Singh, but there was no such person. On the other hand, Mr. Sodhi has placed reliance on the statement of Shri B. D. Sharma, accountant, P.W.-6, who stated that he knew Jagtar Singh who took a loan of Rs. 10,000 from the company. Mr. Sodhi has also referred to the cheque, exhibit P-7, of Rs. 10,000. The said cheque was a payee's account cheque and the payment of the cheque was made to the Punjab and Sind Bank. In view of the circumstances brought to my notice by Mr. Sodhi, it cannot be held that Jagtar Singh was a fictitious person.
55. The next contention of Mr. Jain is that Shri Mohinder Singh who was appointed as a manager by the respondent had embezzled a huge amount of the company but no effective step was taken to recover the amount from him. In order to prove the aforesaid facts, Mr. Jain placed reliance on the resolutions of the board of directors, exhibit P-87, dated December 30, 1976, exhibit P-67, dated April 16, 1977, exhibit P-68, dated May 25, 1977, exhibit P-69, dated June 25, 1977, exhibit P-70, dated July 6, 1977, exhibit P-71, dated September 27, 1977 and exhibit P-72 dated December 13, 1977. In the resolution, exhibit P-87, it was stated that a sum of Rs. 5,21,000 odd was due on May 31, 1975, from M/s. Sundeep Bus Private Ltd., Mansa, District Bhatinda. However, Shri Mohinder Singh reconstructed the record and showed an amount of Rs. 2,68,000 due from the said company. Thus, a benefit of Rs. 1,67,580 was given to the company. It is further stated that Shri Mohinder Singh had introduced false credits in the account books in favour of Sarabha Land and Motor Finance (P.) Ltd. in connivance with Shri Raghbir Singh of the said company. These entries were got fictitiously made by him. In the resolution, exhibit P-67, it was said that certain irregularities were committed by Shri Mohinder Singh and, therefore, his services had been terminated. It was resolved that a sub-committee consisting of the chairman and the managing director be appointed to go into the accounts and submit a report for taking appropriate action against him.
56. In the resolutions, exhibits P-68, P-69 and P-70, it was decided to adjourn the meetings as the report of the sub-committee had not been received. In exhibit P-71, it was said that Mohinder Singh had not rendered accounts and had handed over the cash. Consequently, it was decided to approach him for that purpose. In the resolution, exhibit P-72, dated December 13, 1977, the matter again came up before the board of directors and it was resolved that action against Shri Mohinder Singh be deferred. From the abovesaid resolutions, it is clear that taking of appropriate action against Shri Mohinder Singh was being deferred without any reason even though it stood established that he had misappropriated the funds of the company. It is true that Shri Naranjan Singh Domeli made a statement that a FIR was lodged against Shri Mohinder Singh but the particulars of the FIR have not been brought on the record. It has not been shown that any further action was taken by the directors to recover the amount. It appears that the FIR was lodged to complete the formalities and the directors were not serious in taking any action against him. Thus, the allegation of the petitioners that the company was mismanaged stands established.
57. Mr. Jain has also argued that interest-free loans were given to PISCO, Shri Mohinder Singh and one Shri Paramjit Singh. Even no document was got executed from them in token of having received the amounts. The act amounts to mismanagement. I find substance in this submission. The argument regarding the payment of loans to the aforesaid persons and PISCO stands established from the copies of the ledger of the respondent-company, exhibits P-57 to P-66. In exhibits P-57 to P-59, several amounts are shown to have been advanced to PISCO and an amount of Rs. 14,309 is shown as due from it as on December 5, 1978. In exhibits P-60 to P-63, various amounts are shown to have been paid to Mohinder Singh. In exhibit P-63, an amount of Rs. 36,730.52 is shown as due from Mohinder Singh as on December 30, 1978. In exhibits P-64 to P-66, amounts are shown to have been advanced to Shri Paramjit Singh and an amount of Rs. 33,830 is shown to be due from him as on January 1, 1977. No amount of interest was debited to their account. No document was got executed from the said debtors. The aforesaid amounts have not been repaid by the said persons. Col. K.S. Dhillon, petitioner, deposed that Shri Pavittar Singh was the managing director of PISCO and Shri Swaran Singh, Shri Ravindar Singh, Shri Rameshinder Singh and Amar Singh were its directors. It appears that the amounts were advanced to PISCO without interest because the said directors wanted to help their concern. After taking into consideration all the circumstances, I am of the view that the affairs of the company were conducted by the respondents in a manner oppressive to the petitioners.
58. Before parting with the judgment, an argument advanced by Mr. Sodhi may be noticed. It is that once the resolutions, exhibits P-1, P-2, P-17, P-18, R-2/6 and P-20, were passed by the directors, they could not be challenged in view of Section 290 of the Act. In support of this contention, he refers to Sunder Lal Jain v. Sandeep Paper Mills P. Ltd. [1984] PLR 165 ; [1986] 60 Comp Cas 77 (P & H).
59. I do not agree with the argument of Mr. Sodhi. Out of six resolutions challenged by the petitioner, five have been declared invalid and one, i.e., exhibit P-20, valid. Exhibits P-1, P-17 and P-18 have been declared invalid on the ground that the quorum at the meetings was incomplete and no proper notice of the meeting was given to the directors, exhibit P-2 on the ground that no proper notice was given to the directors and exhibit R. 2/6 on the ground that no notice of requisite period was given. Exhibit P-18 was declared invalid also on the ground that the resolution was opposed by the majority of the directors and, therefore, it could not be deemed to have been passed. Section 290 of the Companies Act provides that the acts done by a person as a director shall be valid notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in the Act or in the articles. It is evident from the language of the section that it gives protection to the acts of the directors if their appointments were invalid on account of any defect or disqualification or the same had come to an end. It does not give protection to their acts which are otherwise illegal. Thus, the resolutions passed in a meeting which had not been properly convened are not valid resolutions. Consequently the resolutions, exhibits P-1, P-2, P-17, P-18 and R 2/6, cannot be held valid under the said section.
60. It is true that the resolutions, exhibits P-1, P-17 and P-18, were also held invalid on the ground that the quorum for the meeting was incomplete as some of the directors present there ceased to be so. But, in the facts and circumstances of this case, the section does not give protection to the resolutions passed in such meetings. The reason is that the resolutions in the present case have not been passed bona fide by the directors, as out of the six beneficiaries, five were directors of the company and the sixth was the wife of one of them. The sole object of the directors in passing the resolution was to promote their self-interest. Moreover, the benefit of the said section can normally be taken by a third person and not by the directors or their close relations. It is further noteworthy that some of the resolutions were oppressive to the minority shareholders. In Sunder Lal Jain's case [1986] 60 Comp Cas 77 (P& H), it was observed by me that even if a director ceased to be so in view of Section 283, the resolution of the board of directors could not be held illegal in view of Section 290 which provided that the acts done by a person would be valid notwithstanding that it might afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in the Act or in the articles. The facts of that case were that a boiler was sold by the company after a decision had been taken in a meeting of the board of directors. The purchaser had no concern with the company. He took a plea that he was a bona fide purchaser for valuable consideration. The case is clearly distinguishable and, therefore, the observations therein are of no help in deciding the petition.
61. Consequently, in view of the finding that there were no continuous acts of the majority shareholders which had been oppressive to the petitioners, I dismiss the petition. However, the parties are left to bear their own costs.