Company Law Board
D. Ramakrishna Rao And Ors. vs L.R.R. Hatcheries Pvt. Ltd. And Ors. on 26 April, 1999
Equivalent citations: [2000]99COMPCAS327(CLB)
ORDER
S. Balasubramanian (Chairman)
1. In this petition filed under Section 397/398 of the Companies Act, 1956, in the matter of L. R. R. Hatcheries Private Ltd. the main allegation of the petitioners is that the respondents, with a view to reduce the petitioners' group from majority into minority, have issued certain shares to the respondents in exclusion of the petitioners.
2. The facts of this case are that the company was incorporated in the year 1986, for carrying on the business of hatchery and related activities. Petitioner No. 1 and respondents Nos. 1 to 4 were signatories to the memo randum and articles of association each subscribing to five shares. Over a period of time, by issue of further shares/transfers, the petitioners' group happened to hold 6,900 shares as against the respondents' holding of 5,500 shares. The first petitioner was a director in charge of marketing while the third respondent has been the chairman and managing director of the company. In a board meeting held on May 11, 1997, the board allotted 2,600 shares to two respondent directors by which the petitioners group was reduced from majority into minority. This allotment, according to the petitioners, was done with a mala fide intention to reduce the petitioners' group from majority into minority. Later, the petitioners filed an additional affidavit alleging that, after the petition was filed, the petitioners came across many instances of large scale embezzlement of funds of the company by the respondents and they have also annexed with the affidavit, some documents to support this allegation.
3. When the petition was taken up for hearing, efforts were made to settle the disputes amicably and after a few attempts towards the same, we passed a consent order on January 22, 1999, by which the respondents wore to sell their original 5,500 shares held by the respondents at the rate of Rs. 250 per share and the additional issue of 2,600 shares at par to the petitioners. This was subject to the bank agreeing to substitute the collateral securities given by the respondents with that of the petitioners. However, UCO Bank to which the collateral securities have been given by the respondents has expressed its inability to substitute the same with that of the petitioners on the ground that the bank had already filed claims against the company in the Debts Recovery Tribunal, Bangalore and as such the parties may approach that Tribunal in this regard. In view of this, the consent order could not be acted upon.
4. Shri Rajan, advocate appearing for the petitioners submitted that since the petitioners were unsatisfied with the working of the board of directors, the first petitioner sent a letter dated April 28, 1997, to the board of directors for convening an extraordinary general meeting under Section 169 of the Act for removal of respondents Nos. 2, 3 and 4 from the board. However, no action was taken in this regard and accordingly, he again sent a letter on May 7, 1997, which was received by the company on May 12, 1997. In the meanwhile, the third respondent convened a meeting of the board on May 4, 1997, for which notice was received by the first petitioner. However, when he went to attend the meeting, no one was present and the third respondent advised petitioner No. 1 that the date of further board meeting would be intimated to him. However, without the knowledge and participation of the first petitioner, knowing well that he was out of station, the respondent directors convened a board meeting on May 11, 1997, and took the decision to allot 2,600 shares to respondents Nos. 2 and 3. He also pointed out, by reading out from the minutes book, which was produced during the hearing, that this allotment was being made in view of the first petitioner having acquired shares by transfer and as such no shares would be allotted to him. This, according to him, indicates that the purpose of issue of additional shares was only to reduce the petitioners from majority to minority. He further submitted that in a board meeting held on April 8, 1996, the board had taken a decision that the undistributed shares (2,600 shares) would be distributed equally among all on pro rata basis. When this decision had been taken as early as in April, 1996, on the suggestion of the first petitioner, in his absence, the shares were allotted to only two directors in the meeting held on May 11, 1997, only with an oblique motive, he submitted. Further, he also submitted that no funds were brought in by these two allottees and the shares were issued in adjustment of unsecured loans given by them to the company. Therefore, the respondents even cannot take a stand that the allotment of further shares was made for mobilising funds for the company. Relying on Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; [1981] 3 SCC 333, he submitted that if the shares are issued not for the benefit of the company but for some collateral purpose, then such allotment is void, He also submitted that the respondents have questioned the mode and manner of acquisition of shares by the first petitioner which they cannot lawfully do at this point of time since the first petitioner acquired the shares with the full knowledge of the respondents and the board consisting of the respondents approved registration of such shares in the name of the first petitioner. He further submitted that 1,800 shares were transferred to the petitioners' group in May, 1995, and at that time the members of the board knew that by this acquisition, the petitioners' group would become a majority and even then they approved the transfer. Therefore, he submitted that the acquisition of shares by the petitioner was transparent. Further learned counsel also pointed out that the respondents have not taken any steps to challenge the acquisition of shares by the first petitioner and, therefore, they cannot justify allotment of shares to respondents Nos. 2 and 3 on this ground.
5. He also submitted, referring to some of the documents in the additional affidavit to state that the respondents have been systematically siphoning off the funds of the company and, therefore, remedial relief should be granted. Summing up his arguments, he submitted that respondents Nos. 2, 3 and 4 should be removed as directors and should also be permanently injuncted from functioning as directors of the company ; the allotment of 2,000 shares should be declared as illegal and void ; that an extraordinary general meeting should be directed to be held for election of the directors after setting aside the allotment and an investigation should be ordered into the affairs of the company.
6. Sri Ramakrishna Prasad appearing for the respondents submitted that the petitioners have approached this Bench with unclean hands and that the first petitioner was guilty of misappropriation of funds of the company, fabrication of accounts and illegal acquisition of shares by forging the signatures of transferors with a view to acquire majority stake in the company. With a view to wreak vengeance on the chairman and managing director of the company, viz., respondent No. 3, petitioners Nos. 1 and 2, even made an attempt on his life after filing of the petition resulting in an FIR being filed against them. According to learned counsel, the first petitioner, being in charge of accounts and marketing was in the habit of diversion of funds of the company for his personal benefit by pocketing the difference in the price quoted and the money received. He was acting in collusion with the sixth respondent who is his brother-in-law and who was also in charge of marketing and siphoning off the funds of the company. He also submitted that with a view to gain controlling interest in the company, the first petitioner used the money siphoned off from the company for purchase of the shares. Referring to the reply to the petition, he stated that the petitioners' group was not in a majority originally but by acquiring shares by transfer by adopting various illegal ways and registering such transfers without the approval of the board, now he claims majority. There have been a number of instances of the first petitioner in collusion with the sixth petitioner, defrauding the company for his personal benefit. In view of this, the first petitioner was removed from being in charge of accounts and administration in February, 1996, and was later removed from the directorship. In view of this, the petitioner made various complaints to the Vigilance Commissioner and the Registrar of Companies and also the bankers of the company making various motivated allegations. Because of his complaints to the bank, it has initiated proceedings before the Debt Recovery Tribunal apprehending that all is not well with the company. According to learned counsel, the conduct of the petitioner in relation to the affairs of the company has been highly detrimental to the interests of the company. Therefore, he submitted that the petitioner has not come with clean hands and as such does not deserve to be heard. In this connection, he referred to the decision in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492, 493 (HL) wherein the court observed "a petitioner for an order who relies on the just and equitable grounds must come to the court with clean hands and if the break down in confidence between him and the other parties to the dispute appears to have been due to his misconduct, he cannot insist on the company being wound up if they wish it to continue". For the same proposition that requirement of good faith on the part of the petitioner is necessary, he relied on Srihanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (Pvt.) Ltd. [1991] 72 Comp Cas 211 (Kar) and Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; [1981] 3 SCC 333.
7. Regarding the allotment of shares, he submitted that the same was made in accordance with law and for the benefit of the company. He stated that for the purpose of availing of loans from financial institutions, the board desired to increase the paid up capital of the company and, therefore, the unissued 2,600 shares were allotted to respondents Nos. 2 and 3 by converting the unsecured loans given by them. Article 3 of the articles of association of the company vests with the board the power to allot shares as it deems fit. It is incorrect to say that the shares were allotted for the purpose of converting the majority into minority. Relying on Maharani Lalita Rajya Lahshmi v. Indian Motor Co. (Hazaribagh) Ltd. [1962] 32 Comp Cas 207 (Cal), he submitted that one single and solitary instance of any act is not sufficient to establish the oppressive continuity of conducting the affairs of the company implicit in the words "the affairs are being conducted" used in Section 397, to state that the entire petition is based on a single allegation of allotment of further shares and as such this solitary instance which was lawfully done cannot justify winding up of the company on just and equitable grounds. For the same proposition, he relied on C. K. Gupta v. Pannalal Girdhari Lal Pvt. Ltd. [1984] 55 Comp Cas 702 (Delhi) and Palghat Exports P. Ltd. v. T. V. Chandran [1994] 79 Comp Cas 215 ; [1994] 1 CLJ 469 (Ker).
8. As far as the allegations relating to siphoning off of funds of the company as contained in the additional affidavit filed by the petitioner, learned counsel submitted that there is no basis in these allegations as the company has been following, right from beginning the same mode of selling of goods and the petitioners are only trying to prejudice the Company Law Board with such allegations. He submitted that after the removal of the first petitioner as a director, the company has been doing fairly well and has discharged certain liabilities. He submitted that continuance of the dispute may only result in the bank's disposing of the assets of the company on a direction from the Debt Recovery Tribunal which would result in the company losing its substratum. Therefore, he submitted that whatever may be the findings on the allegation relating to allotment of shares, the Company Law Board should pass an appropriate order to pave the way for parting of ways between the petitioners and the respondents.
9. We have considered the pleadings and arguments of counsel. The only substantive allegation alleged in the petition is the allotment of additional shares to the respondents' group, which according to the petitioners has reduced them from majority to minority. The admitted position is that the board of directors took a decision on the suggestion of the first petitioner on April 8, 1996, to the effect that the undistributed shares would be kept as it was till distributed equally among all. It is also an admitted position that in a board meeting held on May 11, 1997, the undistributed 2,600 shares were allotted to respondents Nos. 2 and 3 at 1,000 and 1,600 shares, respectively. Two issues arise for our consideration. One is, whether the board could have changed its decision taken on April 8, 1996, that shares should be allotted pro rata by taking a decision on May 11, 1997, to allot the shares only to two respondents and the other is whether such allotment could be oppressive to the other shareholders. As far as the first issue is concerned, any decision taken by a board in a particular meeting can always be altered, modified or rescinded in a subsequent meeting as long as there are valid reasons to do so as recorded in the minutes. Therefore, we do not find any infirmity in taking a decision to allot shares on May 11, 1997, against the decision taken on April 8, 1996, to allot shares on pro rata basis as, as per article 5, the board has the power to allot shares to such persons and on such terms and conditions as the board may think fit. However, we find that no notice of the board meeting had been given to the first petitioner even though at the relevant time he was a director of the company. The normal rule of law is that decisions taken in a board meeting to which notices have not been sent to all directors are invalid and if so, then, the decision to allot the shares taken in this meeting has to be declared as invalid. Further, we also note that the purpose for which the allotment was made was not on account of any need for funds for the company as it transpired that the shares were allotted in adjustment of certain loans given by these respondents to the company. From a reading of the minutes relating to this matter, we gained a distinct impression that the allotment of 2,600 shares was made only with a view to gain majority position in the company by the respondents, may be on the ground that the petitioners gained the majority by alleged unlawful means. If the reason for the allotment were to be what the respondents have alleged, then, the proper course of action for them should have been to initiate necessary proceedings to get the acquisition by the petitioners invalid and not to allot shares to themselves as a counter action. Therefore, we have to necessarily declare the allotment as invalid. However, we are not doing so for the reasons indicated hereinafter.
10. In regard to the allegations contained in the additional affidavit, we do not propose to express any opinion inasmuch as there are counter allegations against the petitioner also. As indicated by us during the hearing, the differences between the petitioners and the respondents are such that it is not possible for them to continue together. Even assuming that we declare the allotment of shares as invalid, the petitioners would gain majority control and as they had earlier issued a notice for convening an extraordinary general meeting to remove the respondents as directors, they would be at liberty to do it again which would pave the way for further litigation affecting the interests of the company. In a Section 397/398 petition, the interest of the company is paramount and the same can be protected especially when there are proceedings before the Debts Recovery Tribunal only by directing one of the groups to go out of the company by selling their shares to the other group. Even though, an agreement was reached before us, as recorded in our order dated January 22, 1998, that the respondents would go out of the company by selling their shares to the petitioners, yet, the same could not be materialised due to the stand taken by the bank in releasing the personal guarantees given by the respondents. It would be against the interests of the respondents to continue their personal guarantee when they would no longer be in control of the company. Therefore, the only way by which the parting of ways between the groups could be effected is that the petitioners' group should sell their shares to the respondents. The respondents offered a sum of Rs. 325 per share to the petitioners which was not acceptable to them. Since we are of the firm view, considering the facts of the case, that the petitioners should sell their shares to the respondents, and since the price offered by the respondents is not acceptable to the petitioners, we consider it appropriate that the shares of the company should be valued by an independent valuer so that there could be no dispute regarding the price payable by the respondents to the petitioners. Article 13 of the articles of association of the company provides for determination of fair value by the auditors of the company in case of transfer of shares. We consider that the provisions of the same article should be applied in valuation of shares now also. However, we give the option to both the petitioners and the respondents, in case it is not acceptable to either of them that the auditors of the company should value the shares, to suggest a valuer agreeable to both of them so that we could appoint him to value the shares. The parties will appear before us on May 11, 1999, at 4.30 p.m. to suggest the name of an agreed valuer failing which we shall appoint one on our own.
11. We, accordingly, dispose of the petition, however, reserving the right to issue an order on appointment of a valuer and determining the price for the shares. No order as to costs.