Orissa High Court
K.K. Roller Flour Mills (P.) Ltd. vs Utkal Flour Mills (P.) Ltd. on 5 November, 2004
Author: A.K. Patnaik
Bench: A.K. Patnaik
ORDER A.K. Patnaik, J.
1. This is petition under Section 203 of the Companies Act, 1956 with a prayer to issue orders/directions for restraining the opposite party Nos. 2 and 3 from acting as the Directors of opposite party No. 1 company (for short "the company").
2. The case of the petitioner is that the company had an authorised share capital of Rupees 2.5 crores comprising of 2,50,000 number of shares and the nominal value of each share is Rs. 100. Out of the said 2,50,000 shares, the petitioner held 20,000 shares and opposite parties 2 and 3 held 6,200 and 1,700 shares respectively in the company. Opposite party No. 2 is the Managing Director of the Company and opposite party No. 3 is the wife of opposite party No. 2 and is a Director of the company.
3. Certain disputes arose between Shri Sachikanta Routray who held 1,64,560 shares in the company and his other brothers including the opposite party No. 2 relating to various businesses, namely, Rourkela Roller Flour Mills, Utkal Flour Mills (Rourkela) Pvt. Ltd., petrol pump, two foreign liquor outlets along with bonded warehouse at Rourkela, Lingaraj Roller Flour Mills, Gauri Shankar Food Processing, A.B. Tea wholeselling for Orissa. Utkal Motors Pvt. Ltd., Kiln bricks manufacturing, Potato cold storage industry, S.K. Exports Pvt. Ltd., Utkal Udyog (Export Unit), Paradip Ice Factory, Hindustan Marine Industries etc.
4. Because of these disputes, the authorised representative of the petitioner inspected the records of the company in the office of the Registrar of Companies, Orissa, Cuttack and found that opposite parties 2 and 3 have increased the authorised share capital of the company and have allotted the increased share capital to themselves and their relatives and associates from time-to-time as stated hereunder :
(i) An EGM of the company is alleged to have been held on 14-8-2003 and Form Nos. 5 and 23 have been filed on 12-9-2003 with the Registrar of Companies, Orissa, Cuttack. At the said EGM the opposite parties 2 and 3 have increased the authorised share capital of the company from 2.5 crores to 3 crores and have allotted the increased share capital to themselves and their associates as indicated in the Return of Allotments as follows :
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Sl.No. Name Number of shares
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1. Nirmal Chandra Routray (opp. party No. 2) 29,800 2. Gourimohan Routray 100 3. Prasant Kumar Routray 100 4. Pyari Mohan Routray 100 5. Khusboo Routray 300 6. Pratap Chandra Routray 100
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(ii) On 19-9-2003 opposite parties 2 and 3 have allotted 25,000 shares in the company to each of themselves as per the Return of Allotments.
(iii) On 29-9-2003, another EGM of the company is alleged to have been held where the authorised share capital of the company was further enhanced from Rupees 3 crores to Rupees 3.70 crores and Forms 5 and 23 have been filed on 30-9-2003 with the Registrar of Companies, Orissa, Cuttack.
(iv) On 1-10-2003, opposite parties 2 and 3 have allotted shares to themselves and to their associates including their children and their H.U.F. as per the Return of Allotments as follows :
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Sl.No. Name Number of shares
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1. Nirmal Chandra Routray (opp. party No.2) 39,000
2. Rashmita Routray (opp. party No. 3) 20,000
3. Khusboo Routray 3,000
4. Sivanada Routray 5,000
5. Nirmal Chandra Routray (HUF) 3,000
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(v) On 15-10-2003, an EGM is alleged to have been held enhancing authorised share capital from Rupees 3.70 crores to Rupees 4.25 crores and Forms 5 and 23 have been filed on 11-11-2003 with the Registrar of Companies, Orissa, Cuttack.
(vi) On 4-11 -2003, opposite parties 2 and 3 have allotted further shares to themselves and their relatives and associates out of such increased share capital as per the Return of allotments as follows:
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Sl.No. Name Number of shares
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1. Nirmal Chandra Routray (HUF) 27,000
2. Rashmita Routray (opp. party No. 3) 14,700 3. Pyari Mohan Routray 100 4. Pratap Ch. Routray 100 5. Prasant Ku. Routray 100
6. Sivanada Routray 3,000
7. Nirmal Chandra Routray(Ind.)(opp.party No.2) 10,000
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5. The petitioner has alleged that increases of share capital and allotments have not been reflected in the annual return of the company filed with the Registrar of Companies, Orissa, Cuttack on 1-12-2003 and the allotments have been subsequently made and clandestinely and dishonestly introduced into the records of the company. The petitioner has further alleged that no notice of the aforesaid EGMs were even served and the EGMs were not actually held. The petitioner has further stated that Article 9 of the Articles of Association of the company provides that where the company decides to increase the capital of the company by issue of further shares, such shares shall be offered to members and such offer shall be made by a notice specifying the number of shares to which the member is entitled, but in violation of the said Article 9 of the Articles of Association of the Company the opposite parties 2 and 3 have dishonestly and fraudulently allotted the increased authorised share capital of the company to themselves and to their relatives and associates and by the such manipulative action reduced the majority shareholders of the company to a minority and enhanced their position from minority shareholders to majority shareholders of the company. According to the petitioner, such action of the opposite parties 2 and 3 who were Directors of the company amount to breach of fiduciary duty of opposite parties 2 and 3 to the company and the Court should under Section 203 of the Companies Act, 1956 (for short, "the Act") order that the opposite parties 2 and 3 have disqualified themselves to be Directors of the company.
6. Mr. Bijay Anand Mohanty, learned Counsel for the petitioner, submitted that the aforesaid facts stated in the petition would show that within a period of two months from 14-8-2003 to 4-11 -2003 opposite parties 2 and 3 have increased the authorised share capital of the company and allotted the shares out of such increased share capital to themselves, their relatives and associates so as to reduce the majority shareholders to a minority and enhance their position as majority shareholders. He submitted that flour mills business do not require this kind of immediate expansion of capital and the sole object of the opposite parties 2 and 3 in ensuring this increase in authorised share capital and allotment of shares was to reduce the majority shareholders to a minority and gain control over the company. He submitted that this action of opposite party No. 3 was contrary to the mandate of Article 9 of the Articles of Association of the company inasmuch as no specific notice has been issued to the petitioner and to other members of the company offering the allotment of shares to them and the allotments have been made clandestinely to the opposite parties 2 and 3 and their relatives and associates behind the back of the petitioner and other members of the company.
7. Mr. Mohanty cited the decision of the Chancery Division In re, Looe Fish Ltd. [1993] Butterworths Company Law cases 1160, in which it has been held that allotment of shares by a Director to himself and his supporters in order to maintain his control over the company constitutes evidence of unfitness and constitutes good grounds for making a disqualification order under Section 8 of the Company Directors Disqualification Act, 1986. He also relied on the decision of the Supreme Court in Dale and Carrington Invt. (P.) Ltd. v. P.K. Prathapan [2004] 7 Supreme 209, wherein allotment of additional equity shares of a company in favour of its Managing Director without a meeting of the Board of Directors has been held to be wholly unauthorised and invalid.
8. He submitted that the language of Section 203(1) of the Act would show that an order under Clause (b)(ii) can be passed by the Court if "in course of winding up a company" it appears to the Court that a person has been guilty while an officer of the company, of any fraud or misfeasance in relation to the company or of any breach of his duty to the company. He argued that the expression "in course of winding up" would mean at any time after presentation of the petition for winding up before the Court and not at any time after the winding up order is passed. He referred to the provisions of Section 441(2) of the Act which states that in case of winding up of a company by the Court, such winding up shall be deemed to have commenced at the time of presentation of the petition for winding up. He submitted that whenever the Legislature intended that a particular consequence will follow only after the winding up order is passed, it has expressly stated so in the specific provision of the Act. In this context, he referred to the provisions of Section 446(1) of the Act which provides that "when a winding up order has been made" or the Official Liquidator has been appointed as Provisional Liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of winding up order, shall be proceeded with, against the company, except by leave of the Court and subject to such terms as the Court may impose. He submitted that the language of Section 203(1)(b) is different from the language of Section 446 and once a winding up petition in respect of a company is presented before the Court, the Court will have jurisdiction to pass orders under Section 203(1)(b). He submitted that petitions for winding up of the company have already been presented by S.K. Exports Private Limited on 4-12-2003 (COPET No. 51 of 2003) and by K.K. Roller Flours Private Limited on 7-1 -2004 (COPET No. 1 of 2004) and, therefore, the Court has jurisdiction to pass orders under Section 203 of the Act against the directors of the company.
9. Mr. S.S. Das, learned Counsel appearing for the opposite parties 1,2 and 3, on the other hand, submitted that the Court does not have jurisdiction under Section 203(1)(b) of the Act to pass an order under Section 203 until a winding up order is passed as the expression "in course of winding up of a company" would mean "at any time after the winding up order is passed". He cited the decision of the Supreme Court in Punkaj Mehra v. State of Maharashtra AIR 2000 SC 1953 and the decision of the Delhi High Court in Official Liquidator, Security and Finance (P.) Ltd. v. Pushpa Wati Puri [1978] 48 Comp. Cas. 385 and submitted that Section 441(2) of the Act will apply only after the winding up order in respect of a company is passed and not before such winding up order in respect of a company is passed.
10. Mr. Das next submitted that Sub-section (3) of Section 203 of the Act further provides that a person intending to apply for making of an order under Section 203 by the Court shall give not less than 10 days' notice of his intention to the person against whom the order is sought, but in this case no such notice under Section 203(3) of the Act has been served on the opposite parties 2 and 3 and instead, another notice served under Section 434 of the Act is sought to be shown as the notice served under Section 203(3) of the Act. He submitted that the averment in para 12 of the petition that such notice has been served and all the annexures including the copy of the notice dated 12-12-2003 in Annexure-P/4 have been inserted on 27-11-2004 after the petition was filed in Court on 26-11-2004. He vehemently argued that in the absence of valid service of notice on the opposite parties 2 and 3 as provided in Sub-section (3) of Section 203 of the Act, the petition under Section 203 of the Act filed by the petitioner is not maintainable.
11. Mr. Das relied on the averments in the counter-affidavit and additional counter-affidavit filed on behalf of the opposite parties 1, 2 and 3 and submitted that the increase in the authorised share capital of the company and the allotment of such increased share capital of the company in favour of opposite parties 2 and 3 and their relatives and friends were not done with any dishonest and fraudulent intention but were done because of a family settlement under which Shri Sachikanta Routray and his associates were to transfer their shares in the company in favour of the opposite parties 2 and 3. He submitted that the increase of share capital and the allotment of the shares were not in any way detrimental to the interests of the company because fresh capital was required for expansion and diversification of the business of the company. He submitted that the decision of the Chancery Division In re, Looe Fish Ltd. 's case (supra) does not apply to the facts of the present case. He cited the decision of the Andhra Pradesh High Court in Salaam M. Bavazier v. Mohd. Azgaruddin [1998] 93 Comp. Cas. 609 in which it has been held that a restraint order should not be passed by the Court where there is no element of fraud in the conduct of a director.
12. The first issue to be decided in this case is whether the Court would have jurisdiction to pass an order under Section 203(1)(b) of the Act in this case when two winding up petitions in respect of the company are pending before the Court but the order for winding up of the company has not been passed. For answering this issue, a reference to the bare provisions of Sections 203 and 441 of the Act has to be made and the said sections are accordingly quoted hereinbelow:
"203. Power to restrain fraudulent persons from managing companies.--
(1) Where--
(a) a person is convicted of any offence in connection with the promotion, formation or management of a company; or
(b) in the course of winding up a company it appears that a person--
(i) has been guilty of any offence for which he is punishable (whether he has been convicted or not) under Section 542; or
(ii) has otherwise been guilty, while an officer of the company, of any fraud or misfeasance in relation to the company or of any breach of his duty to the company; the Court or the Tribunal, as the case may be, may make an order that, that person shall not, without the leave of the Court or the Tribunal, as the case may be, be a director of, or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company, for such period not exceeding five years as may be specified in the order.
(2) In Sub-section (1), the expression "the Court",--
(a) in relation to the making of an order against any person by virtue of Clause (a) thereof, includes the Court or the Tribunal by which he is convicted, as well as any Court or the Tribunal having jurisdiction to wind up the company as respects which the offence was committed; and
(b) in relation to the granting of leave, means any Court or the Tribunal having jurisdiction to wind up the company as respects which leave is sought.
(3) A person intending to apply for the making of an order under this section by the Court or the Tribunal having jurisdiction to wind up a company shall give not less than ten days' notice of his intention to the person against whom the order is sought, and at the hearing of the application, the last mentioned person may appear and himself give evidence or call witnesses.
(4) An application for the making of an order under this section by the Court or the Tribunal having jurisdiction to wind up a company may be made by the Official Liquidator, or by the liquidator of the company, or by any person who is or has been a member or creditor of the company.
(5) On the hearing of any application for an order under this section by the Official Liquidator or the Liquidator, or of any application for leave under this section by a person against whom an order has been made on the application of the Official Liquidator or Liquidator, the Official Liquidator or Liquidator shall appear and call the attention of the Court or the Tribunal, as the case may be to any matters which seem to him to be relevant, and may himself give evidence or call witnesses.
(6) An order may be made by virtue of Sub-clause (ii) of Clause (b) of Sub-section (1), notwithstanding that the person concerned may be criminally liable in respect of the matters on the ground of which the order is to be made.
(7) If any person acts in contravention of an order made under this section, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both.
(8) The provisions of this section shall be in addition to, and without prejudice to the operation of, any other provision contained in this Act.
441. Commencement of winding up by Tribunal.--(1) Where, before the presentation of a petition for the winding up of a company by the Tribunal, a resolution has been passed by the company for voluntary winding up, the winding up of the company shall be deemed to have commenced at the time of the passing of the resolution, and unless the Tribunal, on proof of fraud or mistake, thinks fit to direct otherwise, all proceedings taken in the voluntary winding up shall be deemed to have been validly taken.
(2) In any other case, the winding up of a company by the Tribunal shall be deemed to commence at the time of the presentation of the petition for the winding up."
13. A bare reading of Section 203(f))(b) would show that where in course of winding up of a company it appears that a person has been guilty of an offence for which he is punishable under Section 542 or where he has otherwise been guilty while an officer of the company, of any fraud or misfeasance in relation to the company or of any breach of his duty to the company, the Court may make an order that such person shall not without the leave of the Court, be a Director of a company for such period as may be specified in the order. Hence, an order may be passed by the Court to prevent such a person from acting as a Director or from participating in the management of even the company in respect of which a petition for winding up has been presented in Court. In respect of such a company, once a winding up order is passed, the Official Liquidator by virtue of his office becomes the Liquidator of the company under Section 449 of the Act and the need to pass an order under Section 203(1)(b) of the Act in respect of a person who is a Director of such company or who is associated with the management of such company would not at all arise. On the other hand, to say that the Court would have no jurisdiction to pass an order under Section 203 before the order for winding up of the company is passed is to denude the Court before whom a winding up petition is pending of the power to prevent a Director or person who is guilty of the conduct described in Section 203(1)(b) from continuing to be associated with the management of the company. This certainly cannot be the intention of the Legislature.
14. Moreover, Sub-section (2)(b) of Section 203 makes it clear that "the Court having jurisdiction to wind up the company" is the Court which can pass an order under Section 203(1)(b) of the Act and Sub-sections (3) and (4) of Section 203 also make it clear that it is "the Court having jurisdiction to wind up the company" and not which has passed the winding up order before which the application under Section 203(1)(b) is to be filed. A plain reading of Section 441(2) would show that in case of a winding up by the Court, such winding up shall be deemed to commence at the time of presentation of the petition for winding up. Hence, even though it may be commonly understood that winding up of a company normally commences when the order for winding up is passed by the Court by virtue of the statutory fiction in Sub-section (2) of Section 441 of the Act, winding up in respect of a company by a Court commence at the time of presentation of the petition for winding up. This statutory fiction has been created with a view to ensure that as soon as a winding up petition is presented to the Court and the Court is seisin of the matter, the Court should be able to pass orders in respect of such company as contemplated under the different provisions of the Act and the Companies (Court) Rules, 1959 even before the winding up order is passed by the Court. Therefore, the Court having jurisdiction to wind up a company can at any time after presentation of the winding up petition pass an order under Section 203(1)(b) of the Act.
15. In Pankaj Mehra's case (supra) cited by Mr. Das, the Supreme Court after referring to the provisions of the Act and in particular Sections 441 and 536 thereof, held in para 20 of the judgment at page 1958 as reported in the AIR that it is difficult to lay down that all dispositions of property made by a company during the interregnum between the presentation of a petition for winding up and the passing of the order for winding up would be null and void because if such a view is taken, the business of the company would be paralysed and the company will not be able to carry on its day-to-day transactions, make payment of salary to the staff and other employees and meet urgent contingencies once a petition for winding up is presented to the Court. These practical consequences will not follow if an order under Section 203(1)(b) of the Act is passed in relation to a Director or any other person of a company preventing him from participating in the management of the company whenever he is found by the Court to be guilty of any offence under Section 542 of the Act or of any fraud or misfeasance in relation to the company or any breach of his duty to the company because other persons or Directors in the management of the company can continue the day-to-day business of the company even after such an order is passed by the Court under Section 203(1)(b) of the Act. Rather, if such a person who is guilty of any offence under Section 542 of the Act or of any fraud or misfeasance in relation to the company or any breach of his duty to the company is allowed to continue during the interregnum from the date of presentation of the petition for winding up till the winding up order is passed, the company and its members and creditors arc likely to suffer serious prejudice and loss. In Pushpa Wati Puri's case (supra) cited by Mr. Das, the issue was as to when would the 'right to apply' under Sections 446(2)(b) and 542 of the Act be said to accrue for the purpose of Article 137 of the Schedule to the Limitation Act, 1963 and the Delhi High Court held on an interpretation of the provisions of the Act and in particular Sections 446 and 542 that the right to apply will arise only when the winding up order is passed and not before. The Delhi High Court was not considering in the said case as to what would be the meaning of 'in course of winding up of a company' in Section 203(1)(b) of the Act.
16. The next issue to be decided in this case is whether the petition under Section 203 is liable to be dismissed for non-compliance of the provisions of Sub-section (3) of Section 203 of the Act. Sub-section (3) of Section 203 of the Act provides that a person intending to apply for the making of an order under Section 203 shall give not less than ten days' notice of his intention to the person against whom the order is sought, and at the hearing of the application, such person against whom the order is sought may appear and himself give evidence or call witnesses. The object of this sub-section is to give an opportunity to the person against whom an order is sought under Section 203 of the Act to appear, give evidence or call witnesses and no order is passed against such person ex pane. In paragraph 12 of the petition, it is stated that a notice under Section 203 of the Act intending action against opposite parties 2 and 3 has been sent on 12-12-2003 by speed post/courier and a copy of the said notice has been annexed as Annexure-P/4. A reading of Annexure-P/4 would show that it is a notice dated 12-12-2003 sent by speed post/courier addressed to opposite parties 2 and 3. In the said notice, the grounds which have been narrated in the petition under Section 203 of the Act relating to the increase of authorised share capital and allotment of such increased shares by opposite parties 2 and 3 have been detailed. Xerox copies of the receipts dated 12-12-2003 given by the Department of Post of India and Dolphin Courier showing that notices dated 12-12-2003 have been sent to opposite party No. 2 at their address at Utkal Flour Mills (Rourkela) Pvt. Ltd., Industrial Area, Civil Township, Rourkela, have also been filed along with the rejoinder of the petitioner as Annexure-P/6.
17. In the counter-affidavit and additional counter-affidavit, however, the opposite parties 1,2 and 3 have disputed the receipt of such notices dated 12-12-2003. According to Mr. Das, the story of dispatch of such notice has been introduced in paragraph 12 of the petition on 27-11-2003 after the petition was filed on 26-10-2003. I need not go into this controversy as to whether or not the notices dated 12-12-2003 have in fact been received by opposite parties 2 and 3 because I am of the view that the petition under Section 203 of the Act is not liable to be dismissed for non-compliance of the provisions of Sub-section (3) of Section 203 of the Act as such a consequence of dismissal of the petition for non-compliance of Sub-section (3) of Section 203 has not been expressly provided for in Section 203 of the Act. As I have held above, the purport of Sub-section (3) of Section 203 of the Act is to ensure that no ex parte orders are passed against the person against whom an order is sought under Section 203 of the Act and in this case, the opposite parties 2 and 3 against whom orders under Section 203 of the Act have been sought have appeared in this case, filed their counter-affidavits and documents and had been heard. In the circumstances, the question of dismissing the petition for non-compliance of the provisions of Sub-section (3) of Section 203 of the Act does not arise.
18. Coming now to the main issue in this case, Article 9 of the Articles of Association of the company is quoted hereinbelow :
"9. In case where the Company decides to increase the capital of the Company by the issue of further shares or by further issue of shares out of unissued authorised capital such shares shall be offered to the members (irrespective of class) and such offer shall be made by notice specifying the number of shares to which the member is entitled and limiting at time within which the offer, if not accepted, will be deemed to be declined and after the expiration of such time or on receipt of an intimation from the member to whom such notice is given that he declines to accept the shares offered, the Directors may dispose of the same in such manner as they think most beneficial to the company."
It is clear from Article 9 of the Articles of Association of the company that where the company decides to increase the capital of the company by issue of further shares, such shares have to be offered to the members and such offers have to be made by notices specifying the number of shares to which the members are entitled. Opposite parties 2 and 3 as the Managing Director and Director of the company, therefore, were under a duty to offer to the members by notices specified number of shares out of the authorised increase share capital of the company but no such offers have been made by notice to the members of the company including the petitioner. Instead, opposite parties 2 and 3 have ensured that the increased authorised share capital of the company have been allotted to themselves, their relatives and their associates so as to enhance their position as majority shareholders and reduce the majority shareholders of the company to a minority.
19. The stand taken by opposite parties 1,2 and 3 for such increase of share capital of the company and for such allotment of shares to themselves, their relatives and associates is that a dispute arose between the family members in relation to their businesses in early 2000 after which a family settlement was arrived at in the presence of the elders in the family and as per this settlement Shri Sachikanta Routray was required to transfer his shares in the company to opposite party No. 2 and opposite party No. 2 was required to transfer the shares held by him in companies under the control of Shri Sachikanta Routray in favour of Shri Sachikanta Routray and Shri Sachikanta Routray was required to resign from the company and the opposite party No. 2 was required similarly to resign from the companies under the control of Shri Sachikanta Routray. The opposite party No. 2 also agreed to pay a sum of Rs. 45,00,000 (rupees forty-five lakhs) in consideration for such transfer of shares in the company held by Shri Sachikanta Routray as a special gesture as Shri Sachikanta Routray was in need of funds for his company S.K. Exports Pvt. Ltd. In fact, the opposite party No. 2 paid the sum of Rs. 45,00,000 (rupees forty-five lakhs) by way of demand drafts to Shri Sachikanta Routray and Shri Sachikanta Routray and his wife resigned from the Board of Directors of the company. Some blank documents including blank returns were signed by the opposite parties 2 and 3 and handed over to Shri Sachikanta Routray for completing the transfer and filing of necessary returns and transfer of the shares held by Shri Sachikanta Routray in the company to opposite parties 2 and 3, therefore, was just a formality. It is also pleaded in the additional counter-affidavit filed on behalf of the opposite parties 1,2 and 3 that when there was need to increase the share capital of the company, opposite party No. 2 had meetings with Shri Sachikanta Routray who informed the opposite party No. 2 that as he has severed his interest in the said business, he was not going to contribute to the said business either by equity or in any other manner and the opposite party No. 2 could bring in his own funds in whichever manner he deemed appropriate. Accordingly, the authorised share capital of the company was increased and such increased shares were allotted from time-to-time and no allotment was made in favour of Shri Sachikanta Routray.
20. I am afraid that this plea of family settlement taken by the opposite parties 1 to 3 in the additional counter-affidavit cannot be a good defence for the opposite parties 2 and 3 increasing the authorised share capital and for allotting the shares out of the authorised increased share capital to themselves, their relatives and associates and for not offering the said shares in terms of Article 9 of the Articles of Association to the other members of the company including the petitioner. If, as is alleged in the additional counter-affidavit of the opposite parties 1 to 3, there was a family settlement under which Shri Sachikanta Routray was to transfer the shares under his control in the company to opposite parties 2 and 3, such family settlement could have been given effect to only by complying with the requirements of the Act and the Articles of Association of the company relating to transfer of shares and if Shri Sachikanta Routray and his associates refused to abide by the said family settlement, the remedy of opposite parties 2 and 3 was not to increase the share capitals and allot the increased authorized share capital to themselves and to their relatives and associates and not offer the same to the other members of the company in accordance with Article 9 of the Articles of Association but to move the appropriate Civil Court for relief against Shri Sachikanta Routray and his associates. Though it is mentioned in the additional counter-affidavit that sometimes in August, 2003 the company required further increase of funds for expansion/diversification of its business, no details of such expansion/diversification of the business of the company have been given in the counter-affidavit or the additional counter-affidavit. In the absence of any such details, the Court cannot accept the plea of opposite parties 2 and 3 that there was urgent need to substantially increase the authorised share capital of the company during August, 2003 to November, 2003 from 2.5 crores to 4.25 crores. The substantial increase of the authorised share capital of the company appears to have been made for the purpose of allotting shares to opposite parties 2 and 3 and their relatives and associates so that they could gain absolute control over the affairs of the company. Thus, the primary motive and object of the opposite parties 2 and 3 in increasing the authorised share capital of the company and in allotting the shares out of such increased authorised share capital to themselves, their relatives and associates is to gain control over the company and to reduce the majority shareholders of the company to a minority.
21. In Piercyv. S. Mills and Co. Ltd. [1920] 1 Ch. 77, Peterson, J. relying on the principles as laid down in Fraser v. Whalley [1864] 2 H. & M. 10, and Punt v. Symons and Co. [1903] 2 Ch. 506, held that the power to issue shares in a limited company given to Directors for the purpose of enabling them to raise capital when required for the purpose of company is a fiduciary power to be exercised by them bona fide for the general advantage of the company, and when the company is in no need of further capital, Directors are not entitled to use their power of issuing shares merely for the purpose of maintaining their control, or the control of themselves and their friends, over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders. Following the aforesaid decision in S. Mills and Co. Ltd.'s case (supra), Jonathan Parker, J. In re, Looe Fish Ltd.'s case (supra) held that the allotment of 24,000 shares by Mr. Soady in order to maintain his control of the company was in clear breach of his duty as Director to the company and for this reason, Mr. Soady was disqualified to act as the Director of the company. In the language of Jonathan Parker, J.:
"In my judgment there was a clear breach of duty by Mr. Soady in relation to each allotment;
As to unfitness, I find that in using the power to allot shares in the way he did, Mr. Soady displayed a clear lack of commercial probity. He allowed his concern to keep the Cairns group from obtaining control of the company to lead him to abuse his power as a director to allot shares in the company. It is not enough for him to say that he did what he did in the best interests of LFL as he saw them. A director who chooses deliberately to play fast and loose with his powers as Mr. Soady has done in this case, in order to remain in control of the company's affairs, is in my judgment unfit to be concerned in the management of a company, and it is expedient in the public interest that a disqualification order be made against him.
I therefore, conclude, on the material before me, that Mr. Soady has been shown to be unfit to be concerned in the management of a company and I propose to make a disqualification order accordingly."
22. In the recent decision in Dale and Carrington Invt. (P.) Ltd.'s case (supra), the Supreme Court after considering the English and Indian decisions on the point has held :
"23. The principle deduced from these cases is that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld."
23. I, therefore, hold that opposite parties 2 and 3 are guilty, while as the Managing Director and Director of the company, of breach of their duties to the company by substantially increasing the authorised share capital of the company between August, 2003 to November, 2003 from 2.5 crores to 4.25 crores and by allotting the shares out of such increased authorised share capital to themselves, their relatives and associates for the purpose of gaining control of the affairs of the company and I accordingly order that the opposite parties 2 and 3 shall not be Directors of the company for a period of two years.
24. It appears that opposite parties 2 and 3 were the only Directors of the company. This case will be listed for hearing on the point as to who will be in management of the company during these two years.