Company Law Board
Mrs. Nandita Bhardwaj vs Sapphire Machines Pvt. Ltd. And Ors. on 7 February, 2000
Equivalent citations: [2000]100COMPCAS529(CLB)
ORDER
S. Balasubramanian, Vice-Chairman
1. In this petition filed under Section 397/398 of the Companies Act, 1956 ("the Act"), alleging acts of oppression and mismanagement in the affairs of Sapphire Machines Private Limited ("the company"), the grievances of the petitioner are that the company has not transmitted to her all the shares held in the name of her father after his death and that further shares have been issued to the respondents' group in exclusion of the petitioner. Accordingly, she has prayed for directions to the company to transfer all the shares held in the name of her father to her and for a declaration that the further issue of shares is null and void.
2. The brief facts of the case are that the father of the petitioner, viz. Umakant G. Mandrekar, on the day of his demise on March 20, 1994, held 1,171 shares constituting 56.51 per cent. of the total shares issued by the company of 2,072 shares. He was the managing director of the company. In the meanwhile, the petitioner being the only daughter of the deceased, claiming herself to be his sole legal heir, requested the company in January, 1995, to transmit all the shares held by her father to her. The company informed her that her father held 511 shares in the company and accordingly transferred those shares in the name of the petitioner and sent her the relevant share certificates. The balance of 660 shares were not transferred in her favour. In the meanwhile, on May 18, 1994, the company allotted further 1,800 shares out of which none was allotted to the petitioner. In 1996, the petitioner filed a petition for grant of succession certificate. The father of the petitioner had divorced his wife--the mother of the petitioner some time in the middle of 1970s. After the divorce, he was reportedly living with the third respondent who is one of the directors of the company. According to the respondents, due to his love and affection towards the third respondent, the deceased had, through a will, bequeathed all his immovable and movable properties including his holding in the company to her. The alleged will came to surface in 1997, after which the third respondent filed a petition for a probate/letter of administration. In this background, this petition has been filed.
3. Sandeep Narain, counsel for the petitioner submitted that the business of the company was being carried on by the petitioner's father as a sole proprietorship. When this company was incorporated in 1973, as is evident from the objects clause in the memorandum, this business was taken over by the company. He, being an engineer, was the brain behind the entire business of the company as the managing director right from the beginning. The second and third respondents became shareholders only in 1975 and in 1977 respectively. They were appointed as directors in 1975 and 1980. Only when the father of the petitioner fell sick in 1993, an executive director was appointed to look after the affairs of the company. Since the petitioner was not aware of the number of shares held by her father in the company, she inquired from the company through a letter dated May 4, 1994 (exhibit A) about the shareholding of her father. The company, without disclosing the correct holding of her father of 1,171 shares, intimated that he held 511 shares and sent the share certificates to her which were later transferred in her name. Learned counsel contended that the first act of oppression against the petitioner arose when the company did not inform her of the correct shareholding of her father and transmitted only a part of his holding to the petitioner. Even the annual return for 1993, indicates her father's shareholding as 1,171 shares. Even though the respondents admit that the petitioner's father held 1,171 shares, they have taken three different stands for non-transmission of the balance 660 shares. First in the reply, they have taken a stand that the deceased desired to give 660 shares to the third respondent and that is why only 511 shares were transmitted. In the stay application it is stated that the share certificates in respect of 660 shares were not traceable as having been stolen by one Rege. The third stand is that since a probate suit had been filed by the third respondent and a petition for succession certificate has been filed by the petitioner, the balance 660 shares could not be transferred. Referring to exhibit B to the rejoinder, learned counsel pointed out that the third respondent, in a letter dated May 29, 1995, to the bank, had included the impugned 660 shares in her shareholding. If it is so, then, the company has not been able to produce any transfer instrument by which the transfer of these 660 shares was effected. He submitted that after discussions with the respondents, they had, in a board meeting held on September 3, 1996 (exhibit N), resolved to transfer these 660 shares in the name of the petitioner. Yet, the transfer was not effected in her name. In regard to the pending proceedings relating to probate and succession certificate, learned counsel pointed out that the instant petition before the Company Law Board was filed in December, 1996, while the probate petition was filed only in May, 1997. Therefore, the company cannot take the stand that in view of the probate proceedings, the transfer could not be effected. Further, even the alleged will surfaced only in 1997, while the father of the petitioner expired as early as in 1993. Even otherwise, he submitted that the probate proceedings cannot stand in the way of the company transferring the impugned shares to the petitioner. Relying on Ganshamdoss Narayandoss v. Gulab Bi Bhai 50 ILR 927, he submitted that till a probate is obtained, no reliance in defence can be taken on the will. For the same proposition, he relied on Ramdutta Sharma v. Krishna Dutta Sharma, AIR 1987 MP 192. He also referred to Section 213 of the Indian Succession Act, 1925, to state that no right as executor or legatee can be established in any court of justice unless probate of the will has been obtained from a competent court. Accordingly, he submitted that the petitioner being the sole heir of the deceased, notwithstanding the probate proceedings, she is entitled to be registered as the shareholder in respect of these shares and the company should be directed to transmit the balance 660 shares held in the name of the deceased in favour of the petitioner.
4. He further submitted that the second and third respondents, in collusion with each other, not only denied the right on 660 shares to the peti-
tioner, they also issued 1,800 further shares to three shareholders at 600 shares each without offering any share to the petitioner who at the relevant time being the sole heir of the deceased was entitled to the major shares in the company. By denying her the 660 shares and by allotment of further 1,800 shares, the petitioner's entitlement in the company has been reduced from 56 per cent. to 12 per cent. There was no need for the company to have gone in for further issue of shares as the company was not really in need of any funds and the object of further issue was only with a view to convert the majority into minority. Therefore, he submitted that the petitioner should also be allotted equal number of shares of 600 in case the Company Law Board is not inclined to set aside the allotment. Viswanathan, advocate, appearing for the respondents submitted that the petitioner has not established that the respondents are guilty of acts of oppression or mismanagement. There are only two allegations--one relating to non-transmission of 660 shares and the other is on the issue of further shares. So far as the non-transmission of 660 shares is concerned, he contended that the company is in a helpless situation inasmuch as both the petitioner and the third respondent have initiated proceedings for succession certificate and probate/letter of administration, respectively. Therefore, with a view to maintain the status quo till those proceedings are completed, the company has kept the transmission of 660 shares in abeyance. This bona fide act of the company cannot be questioned. He also pointed out that even though the petitioner had initiated proceedings for succession certificate prior in time to the filing of the petition, the fact of the same has not been disclosed in the petition. Therefore, he contended that there was no default on the part of the company in this regard. He further submitted that the Company Law Board has been taking a consistent stand that it would not encourage parallel proceedings and, therefore, this petition should be stayed till the outcome of the other proceedings is known. In regard to the decision in Ganshamdoss Narayandoss v. Gulab Bi Bhai [1927] 50 ILR 927 ; AIR 1927 Mad 1054, by the Madras High Court, he submitted that this decision only lays down the position of law that in the case of a will, there should be probate/letter of administration and does not lay down the law that the legal heir would be entitled to the property of the deceased. He further submitted that even the action of the company to have transmitted 511 shares cannot be considered to be in order in view of the contesting claims. Therefore, he submitted that the Company Law Board should not pass any order in regard to the 660 shares and it should stay the proceedings.
5. As far as further allotment of shares is concerned, he submitted that it was done only for the purpose of mobilising funds for the company, that too, as per the requirements of the bank as is evident from exhibit 2 to the reply. He countered the arguments of counsel for the petitioner that further shares were allotted only for the purpose of converting the majority into minority. Referring to Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC) he submitted that when further issue of shares is made for the bona fide financial needs of the company, the same cannot be questioned even if it results in consequent reduction in the percentage holding of some shareholders. However, he fairly submitted that the company would not be averse to allotting the same number of shares, i.e., 600 shares that were allotted to the three other shareholders, to the petitioner at par if she is so willing, on payment of the consideration.
6. We have considered the pleadings and arguments of counsel. Considering the relationship between the parties, we suggested to counsel, that, pending the outcome of the other two proceedings and without prejudice to their contention on the merits of the case, they should attempt to settle both the issues complained of. We also prepared draft terms of consent for their consideration. Even though both the sides broadly accepted our suggestion, yet they could not come to an agreement on some finer details and as such the petition was heard on the merits.
7. It is an admitted position that the deceased Umakant G. Mandrekar, the father of the petitioner was the original promoter of the company. Even though the petitioner has averred that the company/respondents dispute that the deceased held 1,171 shares, in the proceedings before us, the company/respondents do not dispute the same. Therefore, admittedly the deceased held 1,171 shares. The entire dispute relating to the shares appears to have arisen on account of the whereabouts of the physical custody of the share certificates. Normally, share certificates are with the shareholders. In the present case, it has not been made clear as to in whose custody the share certificates were kept--whether with the company, or the second or the third respondent. Since the company forwarded the share certificates for 511 shares on June 10, 1994, it would indicate that the share certificates were with the company. If it is so, then, the share certificates in respect of the remaining 660 shares also should have been with the company. The company/respondents have not been able to satisfy us as to why they informed the petitioner that the deceased had only 511 shares and sent the share certificates only in respect of these shares. When the company/the respondents admit the holding of the deceased as 1,171 shares, we do not find any reason as to why all these shares had not been transmitted in favour of the petitioner when the company admitted that she was the sole legal heir. In the case of transfer/transmission of shares, a company is to follow the provisions of the articles. This company has adopted the provisions of Table A. As per regulation 26(1) of Table A, the Board is empowered to call for production of such evidence as may be required by the Board before registration of transmission. In this case, the Board had, without any reservation transmitted 511 shares in favour of the petitioner since they were aware that the petitioner was the sole heir of the deceased. On this day, there were no proceedings pending. The only reason for the company/respondents not to have acted on the balance 660 shares could be on account of their stand that the deceased had decided to transfer 660 shares in favour of the third respondent. Mere possession of share certificates without any authority by way of transfer instruments or written authority cannot entitle a person to claim ownership of the shares. Therefore, we do not find any justification in the company's inaction to transmit the balance 660 shares in the name of the petitioner at the time when 511 shares were transmitted in her favour. Counsel for the respondent submitted, on the basis of the decision in World Wide Agencies P. Ltd. v. Mrs. Margaret T. Desor [1990] 67 Comp Cas 607 (SC) that the company can recognise a legal heir only when a succession certificate is obtained in his/her favour. We would have found substance in this argument if the company had, in terms of the article, asked the petitioner to submit a succession certificate. But it recognised the petitioner as the legal heir and transmitted a part of the shares. Having done so, they cannot take a different stand for the remaining shares. Therefore, there is justification in the claim of the petitioner that the company/respondents have acted in an oppressive manner against the petitioner. As far as the pending probate proceeding's are concerned, we are inclined to agree with the submissions made by counsel for the petitioner, relying on the judgment of the Madras High Court in Ganshamdoss Narayandoss v. Gulab Bi Bhai [19271 50 ILR 927 ; AIR 1927 Mad 1054, in which the Full Bench of the Madras High Court, interpreting the provisions of Section 213 of the Indian Succession Act, 1925, observed " ... . a defendant resisting a claim made by the plaintiff as heir-at-law cannot rely in defence on a will executed in his favour at Madras in respect of property situate in Madras, when the will is not probated and no letters of administration with the will annexed have been granted". In this case the petitioner has made a claim on the 660 shares and the respondents are resisting the same on the basis of a will for which no probate has been obtained. Therefore, the decision of the Madras High Court is directly applicable in this case and, therefore, pending probate proceedings cannot be a bar in our considering the prayer of the petitioner. As far as the proceedings relating to succession certificate are concerned, the company has recognised the petitioner as the sole heir by transferring 511 shares. Further we note that there is no order of injunction against the transmission in favour of the petitioner. Thus on no ground, the company is justified in denying the transmission of all the shares held by the deceased to the petitioner. Therefore, we direct the company to transmit the 660 shares in favour of the petitioner. Since the company has taken a stand that the share certificates have been lost, on the authority of this order, the company will issue duplicate certificate in respect of 660 shares after recording her name in the register of members, within 30 days from the date of this order. We also stipulate that the right to hold the shares by the petitioner will be subject to the outcome of the two pending proceedings.
8. As far as the additional allotment of shares is concerned, without going into the bona fides or otherwise of this issue, in view of the statement made by counsel for the respondents that the company would be willing to allot 600 shares to the petitioner at par, we direct the company to allot 600 shares to the petitioner at par in case she makes an application along with consideration within a period of 30 days from the date of this order.
9. Even though we have given our findings on both the allegations and consequent directions, we would also like to note, that, in disputes of this nature in a family company like this, we would have directed one of the sides to go out of the company by selling its shares to the other side. But in this case, in view of the contesting claims to the shares, we are not doing so. Since the other two pending proceedings alone could determine the claims of the petitioner/the third respondent, with a view to maintain balance in the control and management of the company in the interregnum, we give the following directions :
The petitioner will be taken as a director on the board and as she is a working woman, board meetings will be held on dates, as far as possible, after ascertaining her convenience.
Copies of all board minutes will be furnished to her within 15 days of approval of the same.
There will be no change in the composition of the board as is existing today including the petitioner.
No further shares will be issued without the unanimous approval of all the members of the board.
The petitioner will be entitled to all the dividends declared on the 1,171 shares and if any dividend remains unpaid on these shares, the same will be paid to her within 30 days from the date of this order. In case the other two proceedings are decided against the petitioner, then, she will refund all the dividends received by her.
10. The petition is disposed of in the above terms. No order as to costs.