Company Law Board
Mrs. Uma Pathak And Shri Rajat Pathak vs Eurasian Choice International Pvt. ... on 15 April, 2004
Equivalent citations: [2004]122COMPCAS922(CLB), (2004)3COMPLJ452(CLB), [2004]54SCL60(CLB)
ORDER
S. Balasubramanian, Chairman
1. The petitioners collectively holding 610 equity shares of Rs. 100/- each and claiming to be entitled for further 2455 equity shares, have filed this petition challenging the allotment of further shares by the company on the ground that by the fresh issue of shares they have been reduced to a minority.
2. The facts of the case are that the company was incorporated in 1981. The paid up share capital of the company as on 31.3.2001 consisted of 4135 equity shares of Rs. 100/- each. The husband of the 1st petitioner, namely, Shri Vinod Kumar Pathak who was the Managing Director of the company held 2455 shares and the petitioner among themselves held 610 equity shares. Thus the petitioners' group held majority shares in the company. Shri Vinod Kumar Pathak expired on 10th December, 2001. He had left a Will dated 24.11.1994 which was registered with Superior Court of Justice, Ontario, Canada on. 1.3.2002. As per the said Will, the 1st petitioner has been appointed as sole executor and trustee to administer the estate of late Shri Vinod Kumar Pathak. As a legal heir, the 1st petitioner requested the company by a letter dated 28.12.2001 to effect transmission of 2455 shares in her favour. However, the company refused to transmit the shares in her favour. In November, 2001, the company had issued 3200 equity shares to respondents group. The petitioners have questioned the refusal to transmit the shares and the further allotment on the ground that by these oppressive acts, the respondents have reduced the petitioners' group into a minority and have created a new majority.
3. When this petition was heard on 19.4.2002, the, 2nd and 3rd respondents who were present agreed to transmit the impugned shares on a proper application being made by the petitioners together with a copy of the Will of late Shri Vinod Kumar Pathak. Accordingly, this Bench directed the company to effect transmission within 10 days of receipt of application together with a copy of the Will. When the matter was considered on 23.8.2002, it transpired that the company had not complied with the undertaking regarding transmission of shares given on 19.4.2002 and as such the company was given further 15 days time to effect the transmission. It was reported later that the transmission had been effected.
4. Shri Ganda appearing for the petitioners submitted: The company is a family company. Shri Vinod Kumar Pathak was running a business in the name of M/S Expo Impo Linkers as a sole proprietorship and the main object of the company was to take over the business of M/S Expo Impo Linkers. The company was carrying on the business of manufacturing and disposing of leather goods and garments till 1998 when it diversified into real estate business, in addition. The company owns a property consisting of 9 flats in Mangolpuri, Delhi. Since late Vinod Kumar Pathak migrated to Canada along with his family, he handed over the management of the company to his father and brothers (respondents 2 to 4 ) giving them a nominal shareholding. Late Vinod Kumar Pathak expired on 10th December, 2001. He executed a Will dated 24.11.1994 by which the 1st petitioner being his wife was appointed as sole Executrix and Trustee to administer his estates. As a sole legal heir, the 1st petitioner requested the company to effect transmission of 2455 shares standing in the name of her late husband in her favour. However, the company refused to effect the same. In the meanwhile the petitioners came to know that during November, 2001, the company had allotted 1600 shares each to the wives of the 3rd and 4th respondents. No offer was made to the petitioners even though, they collectively held more than 75% shares in the company. Even though, the allotment was purportedly made in November, 2001, Form No. 2 was filed only on 25th January, 2002 clearly indicating that the respondents have manipulated the records to show as if the allotment was made during the life time of late Shri Vinod Kumar Pathak. By making this allotment, the petitioners group have been reduced to minority which is a grave act of oppression. The purpose of creating a new majority in favour of respondents was only to enjoy the benefit of the 9 flats owned by the company. Therefore, the allotment should be cancelled and status quo ante should be restored.
5. Shri Taran Dua appearing for the respondents submitted: The allegation regarding non transmission of shares held in the name of late Vinod Kumar pathak in favour of the 1st petitioner no longer survives as the company has already effected the transmission and the petitioners have also been taken on the Board of the company now. As far as the allotment of further shares is concerned, it was done with the knowledge and consent of late Vinod Kumar pathak. In a Board Meeting held on 2nd Feb. 2001 which was attended by Vinod Kumar Pathak, the financial position of the company was discussed. Late Vinod Kumar Pathak informed the Board his inability to infuse further capital into the company and requested 3rd and 4th respondents to contribute in the equity share capital either by themselves or through their relatives. Accordingly, a resolution was passed authorizing these two respondents to mobilize funds for the share capital. In a Board Meeting held on 15th July, 2001, which was also attended by late Vinod Kumar Pathak, it was resolved to issue the equity shares to the 3rd and 4th respondents or their relatives. In view of the approval given by the Board, in the meeting held on 5th November, 2001, 1600 shares each were allotted to the wives of 3rd and 4th respondents. The Board also rioted that both of them have remitted Rs. 10,000 each towards allotment of shares. Thereafter, both of them remitted a sum of Rs. 4.5 lacs each on 24.1.2002 by way of cheques and the same were credited into the books of account on 28.1.2002. Therefore, when the shares have been allotted with the consent and knowledge of late Vinod Kumar Pathak, the petitioners cannot question this allotment.
6. In the rejoinder, Shri Ganda submitted: The signature of late Vinod Kumar Pathak in the copy of the minutes filed by the respondents in their counter are forged. In the alleged minutes the signatures are "Vinod Kumar Pathak". However, he had been signing only as "Vinod Pathak" as is evident from his signatures in his passport, Will and Social Security Card. Therefore, his signatures on the minutes are forged and therefore should not be given any credence. Further, the purported minutes do not indicate the need for funds nor it quantifies the amount to be raised. Further no man of ordinary prudence would voluntarily agree to convert himself into minority. Therefore, there is no doubt that, the signatures of the deceased in the alleged meetings on 16.2.2001 and 15.7.2001 are forged.
7. The learned counsel for the respondents submitted that the deceased had the habit of signing in as Vinod, Vinod Kumar and Vinod Kumar Pathak. Even in the same style of signatures, there are variations. Therefore, just because he has signed in the Minutes as Vinod Kumar Pathak, it cannot be considered to be forged.
8. It is settled law that while issuing further shares, the Board of Directors discharge their fiduciary responsibilities. If the shares are issued with the sole object of creating a new majority or with the view to convert a majority into a minority, then the action of the Board is not only in breach of the fiduciary responsibilities but also a grave act of oppression against the existing majority. In the present case, the stand of the respondents is that further shares were issued with the knowledge and consent of the majority viz late Vinod Kumar Pathak, and to substantiate this, they have relied on the signatures of the deceased in the minutes dated 16.2.2001 and 15.7.2001. Since the petitioners questioned the genuineness of these signatures, I passed an order on 2.12.2003 directing the parties to submit the signatures for opinion from a handwriting expert. Both the sides desired to get the signatures verified by two different experts-one suggested by the petitioners and the other suggested by the respondents. Accordingly, I appointed Pt.Ashok Kashyap and Shri B. Lal, the former suggested by the petitioners and the latter by the respondents to give their opinion on the genuineness of the signatures of the deceased on the minutes of the Board meetings dated 16.2.2001 and 15.7.2001. Even though the respondents insisted that various signatures of the deceased available in the records of the company should also be taken into consideration for verification with those in the minutes, the counsel for the petitioners objected to the same on the ground that the petitioners had no way of knowing that they were the signatures of the deceased. Since I found justification in the objection of the learned counsel for the petitioners, I directed that only signatures on legal documents viz the ones in the Passport of the deceased, his Will and the Social Security Card in his name would be the basis for comparison purposes. Accordingly, they were submitted to the handwriting experts for verification with the signatures on the Minutes.
9. The hand writing experts have submitted their reports. While Pt. Ashok Kashyap has categorically opined that the signatures in the minutes dated 16.2.2001 and 15.7.2001 are forged, Shri Lal has opined that due to inadequate standard signatures for the purpose of comparison and due to the fact that certain similarities are also being found, it is not possible to give any definite opinion but he was definite in his opinion that the questioned signatures are not having any symptom of forgery. When the reports were made available to the parties, the respondents filed an application challenging the findings of Pt. Kashyap on various grounds.
10. Since I have a definite opinion by one expert that the signatures on the minutes were forged and by another an indefinite opinion, I have made my own comparison. On a visual comparison of his signatures on the minutes with the signatures in the various documents attached with the application, I find that there is no similarity in any of the words, Vinod, Kumar and Pathak. In other words, no part of his signature on the minutes is similar to the one found on the documents furnished even by the respondents and therefore, I am prima facie satisfied that the signatures of the deceased on the minutes may not be genuine. Even otherwise, to come to the conclusion that late Vinod Kumar Pathak expressed his unwillingness to infuse funds, there should have been proper material. The minutes dated 16.2.2001, in which the alleged decision to mobilize funds by issue of shares was taken, does not record any details of the financial needs of the company like the quantum of funds required etc for the deceased to express that he was not in a position to infuse any funds. Even the minutes of the next meeting on 15.7.2001 doest not record the quantum of money to be raised. The allotment was purportedly made on 5.11.2001, that is nearly 9 months after the need for funds was felt by the Board as recorded in the minutes of the purported Board meeting on 16.2.2001. There is nothing on the record to show as to how the Board computed the requirement of funds to the extent of Rs 3.2 lakhs to allot 1600 shares to the wives of the 3rd and 4th respondents. The very fact that the Return of allotment was filed only on 25th January 2002, that is after the demise of Vinod Kumar Pathak, would also raise a doubt as to whether the said allotment was made on 5.11.2001. While it is the prerogative of the Board to allot shares, the power should be exercised in the interest of the company and not for any ulterior purpose. In the present case, by this allotment, the existing majority has been converted into a minority and a new majority has been created in favour of the respondents, which is a grave act of oppression and is an act in breach of the fiduciary duties of the directors. Thus, taking into consideration all these aspects, I declare by allotting 3200 shares to the respondents group, the Board had acted in a manner oppressive to the majority shareholders and in breach of the fiduciary duties of the Directors. Therefore, I direct that the said allotment shall stand cancelled with immediate effect. The company shall refund the amount paid by these two allottees at the earliest and reduce its paid up capital to that extent. While canceling the allotment, I have noted that the two allottees are not parties to the proceedings. Since they are not third parties but are the wives of the directors who had allotted the shares, their presence is not considered necessary, especially when the allotment is cancelled on the ground that the directors had acted in breach of their fiduciary duties to the company and the members.
11. Before parting with this matter, it is necessary to record that I had made some attempts to settle the disputes amicably. Since the only assets of the company are the 12 flats, I had suggested that the petitioners could take 7/12th of the total area of the flats with the respondents taking the balance 5/12th area. While the respondents demanded 50% area, the petitioners were willing to give only 25% of the area. Thus the compromise efforts failed.
12. The petition is disposed of in terms of paragraph 10 ante with no order as to cost.