Company Law Board
Dipak G. Mehta And Ors. vs Anupar Chemicals (India) Pvt. Ltd. And ... on 22 March, 1999
Equivalent citations: [1999]98COMPCAS575(CLB)
ORDER
S. Balasubramanian, Chairman
1. The petitioners hereinabove, claiming to hold 50 per cent. of the subscribed capital of Shree Anupar Chemicals (India) Pvt. Ltd. (hereinafter "the company"), have filed this petition under Sections 397 and 398 of the Companies Act, 1956 (hereinafter "the Act"), alleging acts of oppression and mismanagement in the affairs of the company. The principal grievances of the petitioners are as follows :
(1) Even though petitioners Nos. 2 to 4 are shareholders of the company having been allotted certain number of shares by the board, yet the same is disputed by the respondents.
(2) Shares held by respondents Nos. 7, 8 and 9 have been transferred to certain respondents without following the provisions of the Act/articles.
(3) Even though petitioners Nos. 2 and 3 continue to be directors, yet the same is not admitted by the respondents on the ground that they were not appointed in the annual general meeting.
(4) Petitioners Nos. 1 and 4 have been removed from the board without following the provisions of the Act.
(5) Further shares have been issued to certain respondents in violation of the provisions of the Act and without the consent and knowledge of the petitioners holding 50 per cent. shares in the company.
(6) Respondents Nos. 2, 7, 8 and 9 have handed over the management and operation of the company to outsiders by appointing them as additional directors which is detrimental to the interest of the petitioners and the company.
2. A joint reply has been filed by respondents Nos. 1 and 2 and various applications have been filed by respondent No. 22. According to these respondents, petitioners Nos. 2, 3, 4 and 5 are not shareholders and in view of the increased subscribed capital of the company, the shares held by petitioner No. 1 do not entitle him to file this petition in terms of section 399. Even though the company has given an undertaking to the Bombay High Court that the maintainability of the petition under Section 399 will not be challenged before the Company Law Board yet respondent No. 22 has raised this objection. Whether anybody raises an objection on the maintainability in terms of Section 399 or not, fulfilment of the requirements of Section 399 being a pre-requisite to file a petition under Section 397/398, the Company Law Board itself is bound to examine this as a preliminary issue. However, in the present case, this issue cannot be decided without going into the merits of the case inasmuch as both transfers as well as further issue of shares have been challenged in this petition and the findings on these issues would alone decide the maintainability in terms of Section 399 of the Act and as such, the petition was heard on the merits.
3. The submissions of Shri Sarkar, senior advocate appearing on behalf of the petitioners, are as follows.
4. This company was incorporated in July, 1994, with an authorised capital of Rs. 5 lakhs by one Gopinath Parmeshwar and his four brothers for carrying on the business as manufacturers, dealers, etc., of bulk drugs and pharmaceutical chemicals. Around March, 1995, Shri Deepak Mehta petitioner No. 1, P. P. Bardeskar, P. P. Wandrekar, L. N. Godbole and S. S. Gulati, respondents Nos. 2, 7, 8 and 9, respectively, acquired 100 per cent. of the shares from the original promoters in the ratio of 20 per cent. each by contributing Rs. 1 lakh each. These four respondents (designated as group B for identification) approached the petitioners (group A) for jointly manufacturing the product "Imitazole" on a commercial scale envisaging an investment of Rs. 60 lakhs to Rs. 70 lakhs. Since group B was not in a position to invest this amount, group A agreed to bring in upto Rs. 50 lakhs by way of equity and lease of necessary equipment. It was also agreed that the share capital would be increased from Rs. 5 lakhs to Rs. 100 lakhs and the subscribed capital from Rs. 5 lakhs to Rs. 60 lakhs and that both the groups would have 50 per cent. shares each and that group A will have majority representation on the board. Accordingly, the board was reconstituted in January, 1996, with petitioner No. 1 as the chairman and petitioners Nos. 2, 3 and 4 and respondents Nos, 2, 7 and 8 as directors. The petitioners and associates brought Rs. 22 lakhs as share capital between May and December, 1995. Further sum of Rs. 7 lakhs was also brought in by group A as share capital by August, 1996. Further, to assist group B to bring in their 50 per cent. of the agreed share capital, group A advanced Rs. 8.2 lakhs to group B in around June, 1995. The amount brought in by group A between May and December, 1995, was utilised for purchasing various items of plant and machinery and towards working capital. In the board meeting held on April 18, 1997, shares were allotted to the members of both the groups by which all the petitioners were allotted shares for the money they had brought in and with the initial Rs. 1 lakhs share capital held by the group A, the total shares held by the group A was to the tune of Rs. 30 lakhs in April, 1997. The said board meeting was attended by all the seven directors as is evident from exhibit B-1 at page 47 of the petition which contains the signatures of all the seven directors. Draft minutes of the board meeting (exhibit B-2, page 48) was sent to respondent No. 7, for incorporating the same in the minutes book as he was in charge of all secretarial and administrative works of the company. Relevant return of allotment was also filed with the Registrar of Companies on July 9, 1997, as is evident from exhibits B-4 and B-5. It is incorrect to state that the moneys invested by the petitioners had been shown as application money in the annual accounts of the company, as these annual reports came to the knowledge of the petitioners only during the Bombay proceedings and the respondents have not been able to show in which annual general meetings these accounts were adopted. Obviously, these accounts have been manipulated after shares were allotted on April 18, 1997, to deny the benefits of the shares to the petitioners by not incorporating the minutes of the board meeting allotting the shares in the minutes book. However, group B is reported to have held an extraordinary general meeting on April 15, 1997, wherein certain resolutions were alleged to have been passed. One such resolution was that further allotment of shares could be made beyond Rs. 5 lakhs as then existed only with the prior approval of the shareholders by a special resolution. The other resolution declared that all allotments, if had been made by the group A directors beyond Rs. 5 lakhs then existing, then the same would be null and void. This resolution also disclosed that petitioners Nos. 2 and 3 had ceased to be directors since September 30, 1996. The alleged extraordinary general meeting had never taken place as no notice of the same was received by the petitioners and group B is also disowning the allotment of shares made on April 18, 1997, with an ulterior motive to deny the petitioners from holding 50 per cent. shares in the company. The agreement between group A and group B that each would hold 50 per cent. shares in the company has also been confirmed by respondent No. 7 in his note to respondent No. 2 (exhibit C, page 56). Now, group B claims that no such board resolution was passed on April 18, 1997, allotting shares and as such, petitioners Nos. 2 to 5 are not shareholders of the company. This is one of the gross acts of oppression against the majority shareholders, as at that time group A held 50 per cent. shares of the then subscribed capital of the company.
5. In December, 1996, respondent No. 2, without the knowledge of group A removed certain quality control equipment worth about Rs. 5 lakhs to the premises of another company connected with group B and in spite of repeated requests by group A for restoring the machines, group B did not do so. Accordingly, group A lodged a complaint with the police April 12, 1997 (exhibit E, page 58). Legal notice was also issued in this connection (exhibit M, page 59). A statement of compromise (exhibit A, page 44) was recorded by petitioner No. 1 and respondent No. 2 in the police station by which it was agreed that till the disputes between the parties were settled in a court of law, neither party would remove any of the goods from the premises of the company. In this statement, there is a clear indication that on April 12, 1997, when this agreement was signed, there were seven directors in the company. Therefore, it is wrong to say that petitioners Nos. 2 and 3 had ceased to be directors from September 30, 1996. As per this agreement, the premises of the company were closed and kept under locks with one lock of group A and another lock by group B. The bank accounts of the company were also frozen (exhibit G, page 61). In view of the disputes, both the groups took a decision to jointly sell off the company and a concrete proposal was received from one Vipul Drug (P.) Ltd., for taking over the company at Rs. 65 lakhs (exhibit H, page 62) which was subsequently increased to Rs. 78 lakhs. However, this offer was not accepted being low and was rejected unanimously. Group A wrote to group B calling for various documents with a caution that no negotiation with any outside purchasers should be initiated by group B without consulting group A. However, none of the documents sought for by group A was given to them.
6. In around May, 1998, group A came to know that the members of group B, except respondent No. 2, had sold their entire shares to one Aarti Drugs Ltd. and its associates (respondents Nos. 10 to 23). It was also learnt that the production in the factory had commenced in spite of the agreement with group A before the police that no production shall be commenced. The transfer of shares without the consent of group A is in violation of law and Article 12(1) and 12(5) of the articles of association of the company. Group A has protested against these transfers through a letter by their advocate to all the members of group B (exhibit J, page 62). Group A received identical letters from respondents Nos. 2, 7 and 8 dated June 3, 1998, stating that there was none from group A on the board as petitioners Nos. 2 and 3 had ceased to be directors from September 30, 1996, and as petitioners Nos. i and 4 were removed as directors by the shareholders of the company on April 29, 1998. Group A was never aware of any board meeting or annual general meeting or extraordinary general meeting alleged to have been held on April 29, 1998, as no notice of these meetings was received by any one in group A. In the same alleged board meeting, respondents Nos. 3 to 6 were inducted as additional directors. The removal of the petitioners from the board and the induction of the new directors are against provisions of law and as such, null and void. Removal of the members of group A, holding 50 per cent. shares in the company is a gross act of oppression. Further, the petitioners also learnt that respondents Nos. 7 and 8 had resigned as directors of the company around the time they sold their shares.
7. The transfer of shares held by the respondents is in violation of the provisions of the articles according to which the intending transferors will have to give notice to the company and the board has to follow certain procedures in this regard. Even though it is alleged in the reply that notices were issued by the intending transferors vide letter dated April 10, 1997, (exhibits Nos. 18, 19 and 20-pages 142, 143, 144 of the reply) the board considered these transfers (as per minutes at exhibit No. 21 page 145) on April 13, 1997. It could have never been done in the absence of any notice to petitioners Nos. 2 and 4, who were, according to the company admittedly directors at that time. As per Article 41,7 days notice is required to be given for any board meeting. Therefore, it is inconceivable that the transferors gave notices of transfer on April 10, 1997, and the board considered the same on April 13, 1997. As per the decision in Parmeswari Prasad v. Union of India, AIR 1972 SC 2389, if notice of a meeting is not given even to one director then, any resolution passed in that meeting is invalid. On this proposition learned counsel also relied on Akbar Ali A. Kalvert v. Konkan Chemical (P.) Ltd. [1997] 88 Comp Cas 245 (CLB). The company has not produced any evidence that notices for the meetings were sent to petitioners Nos. 1 and 4 as the onus to prove that notices were sent is on the company.
8. Further, on April 29, 1998, additional shares were allotted to members of Aarti Drugs Ltd., without the knowledge of the members of group A. Even assuming that no shares had been allotted to the petitioners earlier, the admitted position is that, an amount of Rs. 29 lakhs was lying with the company as application money from the petitioners and as such before allotting any shares to outsiders, shares against Rs. 29 lakhs should have been first allotted to the petitioners which the company has failed to do. This way the petitioners who had financed the company, have been completely shunted out of the company by inducting outsiders to take control of the company which is again a grave act of oppression.
9. As far as the removal of petitioners Nos. 1 and 4 from the board is concerned they never received any notice of the board meeting in which the decision to hold the extraordinary general meeting was taken nor is there any indication in the notice of the extraordinary general meeting alleged to have been issued by the company (exhibit No. 24 page 149 of the reply) as to whether it was a requisitioned meeting or one convened by the company itself. If it had been called by the company itself then there should have been an explanatory statement in terms of Section 190 of the Act. However, it is seen from the statement of respondent No. 2 (at exhibit O page 174) that, in the capacity as a director, he had sent notices for the extraordinary general meeting to five shareholders. There is nothing on record to show that any board meeting was held authorising respondent No. 2 to issue the notices for the meeting. Further, the provisions of Section 284 of the Act have not been followed in the matter of removal of petitioners Nos. 2 and 4 from the board. The Bombay High Court itself has observed that there is substance in the complaint that petitioner No. 3 was removed from the board without following the provisions of Section 284.
10. Summing up his arguments, Shri Sarkar submitted that the Bombay High Court dismissed the winding up petition only on the ground that there was no deadlock in the management and that the said court itself had observed that the petitioners could approach the Company Law Board under Section 397/398. What was envisaged at the time when the company was taken over by groups A and B was that, there would be joint management and that the company would be a sort of a partnership. This understanding has been breached by members of group B by transferring certain shares to outsiders, allotting shares to outsiders, removing the petitioners from the board and finally handing over the control and management to outsiders. According to him, conversion of majority into minority and ousting them from the management are clear acts of oppression justifying winding up on the just and equitable ground. He submitted that right from January, 1996, there were seven directors on the board of which four were from group 'A' and three from group 'B'. However, the respondents are manipulating to show as if there was a change in the composition of the board of directors and that the board had only five directors from September 30, 1996, two from group A and three from group B. He also questioned the motive of the board to have allotted fresh shares to the Aarti group when a sum of about Rs. 29 lakhs of group 'A' was available with the company. Even assuming, as per the stand taken by the respondents that no shares were earlier allotted against this money, in all fairness the board should have allotted shares against this money first before allotting to outsiders against fresh subscription. This, he contended, shows lack of probity and unfairness on the part of group B. According to him, when the three shareholders transferred their shares to Aarti, in all fairness these shares should have been offered to group 'A' instead of to outsiders especially when the company was initially taken over by five individuals with equal shares. Therefore, he submitted that the allotment of shares to Aarti should be cancelled and the petitioners be declared as the majority shareholders of the company or else the shares allotted to the outsiders should be allowed to be purchased by the petitioners especially when they have invested only Rs. 10 lakhs in the shares while an amount of Rs. 29 lakhs of the petitioners is still with the company.
11. The submissions of Shri Jay Savla, advocate appearing for respondents Nos. 1 to 6, are as follows : The foundation for a 397/398 petition is that the affairs of the company are being conducted in a manner which would justify winding up of the company on the just and equitable ground. In a winding up petition filed by the petitioners for winding up of the company under the just and equitable ground with more or less similar allegations, the Bombay High Court held that there were no grounds for winding up of the company on the just and equitable ground. Therefore, the Company Law Board cannot come to a conclusion that the grounds on which the petition has been filed would warrant winding up of the company on the just and equitable ground and such winding up would be prejudicial to the interest of the petitioners and therefore relief sought for should be considered.
12. It is a fact that petitioner No. 1 and respondents Nos. 2, 7, 8 and 9 acquired the company from the promoters, each purchasing 20 per cent. shares in the company. It is also a fact that the board of directors, in a meeting held on December 8, 1995, decided to issue further shares and accept share application money consequent to increase in the authorised capital to Rs. 1 crore. From January to March, 1996, the company received Rs. 29 lakhs from group 'A' and Rs. 25.3 lakhs from group 'B' and this entire money was shown as share application money in the balance-sheets for the years 1995- 96, 1996- 97 and 1997- 98. However, there was no agreement or understanding that the company would be run on partnership principles and that group A would have equal shares and majority representation on the board. No shares were allotted against this application money at any time. As a matter of fact, apprehending that petitioner No. 1 was likely to fabricate records to show that allotment had been made, as an abundant caution, the eighth respondent wrote to the Registrar of Companies on April 9, 1997 (exhibit No. 9 page 122 of the reply) requesting him not to take on record any documents filed in this regard. In addition to this, in an extraordinary general meeting held on April 15, 1997, it was also resolved that if any allotments had been made by group A directors, the same shall be null and void and not binding on the company and this resolution was also filed with the Registrar of Companies. Even though the petitioners contend that shares were allotted against the application money in a board meeting held on April 18, 1997, no business was transacted in that meeting. The three directors of group 'B' wrote to petitioner No. 1, immediately after this meeting, on April 19, 1997, that after discussions on matters other than the agenda items, group 'B' directors had left the meeting even without approving the 1st item of the agenda and that no decision taken in that meeting shall be binding on them. Therefore, even if it is assumed that the resolution relating to allotment of shares was taken in the meeting, it is invalid and Form No. 2 filed with the Registrar of Companies has no legal validity especially when the agenda did not contain any business relating to allotment Of shares. The Bombay High Court has categorically, stated in its order that the petitioner was holding only 10,000 shares for a value of Rs. 1 lakh. Accordingly, the alleged allotment of shares against the application money and the claim that the petitioners Nos. 2 to 4 are shareholders of the company cannot be sustained.
13. It is also a fact that on January 15, 1996, the board consisted of seven directors, viz., petitioners Nos. 1 to 4 and respondents Nos. 2, 7 and 8.
However, all the four petitioners and respondent No. 7 were only addi tional directors inducted into the board on that day. In the annual general meeting held on September 30, 1996, petitioners Nos. 2 and 3 who came up for confirmation as directors, were not appointed as directors while the other three additional directors were appointed as directors. Thus, on Sep tember 30, 1996, the board consisted of Sarvashri P. P. Bardeskar, P. P. Wandrekar, L. N. Godbole, being respondents Nos. 2, 7 and 8 respectively and Shri Deepak Mehta and Shri Deva Mehta being petitioners Nos. 1 and
4. By the end of 1996, certain disputes and differences arose between the first petitioner and the respondents. Some time in April, 1997, petitioner No. 1 submitted a forged resolution of the board as if he had been made one of the signatories to the bank operations and he also asked the bank to stop operation of the bank account which still continues. Because of these difficulties, respondents Nos. 7 to 9 decided to transfer their shares and accordingly they gave notices to the company on January 10, 1997, in terms of the relevant articles. Even though these transfers were considered by the board on April 13, 1998, in which "in principle" approval was given, in a board meeting held on April 29, 1998, convened after due notice, transfer of the shares in favour of respondents Nos. 10 to 21 was approved (exhibit No. 22, page 146). Therefore, due compliance with the provisions of the articles was ensured in approval of transfer of the shares and as such cannot be impugned.
14. In relation to the composition of the board, it is an admitted fact that all the four petitioners were appointed as additional directors on January 15, 1996, and their term was to expire in the next annual general meeting. In the annual general meeting held on September 30, 1996, the general body did not appoint petitioners Nos. 2 and 4 aS directors while it appointed petitioners Nos. 1 and 3 as directors. In law, additional directors can hold office only up to the date of the immediate next annual general meeting and since the two petitioners were riot appointed as directors by the general body, they ceased to be members of the board. After their exit, the board had only five directors. In regard to the statement of respondent No. 2 before the police (exhibit 0, page 172 of the petition), that when the statement was given on April 12, 1997, there were seven directors in the company, it is to be noted that respondent No. 2 has, in the statement dated June 4, 1998, stated that at the time when the statement was recorded on April 12, 1997, his mental condition was not proper. Therefore, no cognizance of the statement made on April 12, 1997, in regard to the composition of the directors should be taken, in the same way, the attendance slip relied on by the petitioners (at exhibit No. B-1 at p. 47 of the petition) for the board meeting held on April 18, 1997, which contains the signatures of all the four directors from the petitioners' group cannot be relied upon as the signatures of petitioners Nos. 2 and 4 have been inserted later. The real position is that after September 30, 1996, petitioners Nos. 2 and 3 were not directors of the company. As far as petitioners Nos. 1 and 3 are concerned, on April 13, 1998, notices (exhibit No. 20 page 149) for holding an extraordinary general meeting to consider the removal of these petitioners were sent to all the members and this meeting was held on April 29, 1998. The resolutions to remove these petitioners were passed and a decision was taken to refund all the application money, both to group 'A' and group 'B'. While group 'B' has accepted the refund, group 'A' refused to do so. Therefore, from April 29, 1998, the petitioners were not represented on the board. In a board meeting on the same day, respondents Nos. 3 to 6 were appointed as additional directors.
15. In pursuance of the approval given by the general body in the extraordinary general meeting held on April 29, 1998, 70,000 shares were issued in the month of May, 1998, to various respondent shareholders against fresh subscription money. With the fresh allotment, the total issued share capital of the company is 1,20,000 shares out of which petitioner No. 1 holds only 10,000 shares. Since, fresh issue of shares was made with the approval of the general body, the same cannot be questioned.
16. Summing up his arguments, learned counsel lor the respondents submitted that except petitioner No. 1, other petitioners are not shareholders and as such they cannot maintain the petition as decided in T.J. Thomas v. Rev. C. S. Joseph [1988] 1 CLJ 22 (Ker). Further, according to him, one of the essential ingredients of a Section 397/398 petition is that the petitioners should establish that it is just and equitable that the company should be wound up and that such winding up would be prejudicial to their interests as held in Subhash Chander Agarwal v. Associated Limestone Ltd. [1998] 92 Comp Cas 525 ; [1998] 2 CLJ 329 (CLB). Since the grounds on which the petition has been filed and taking into consideration the judgment of the Bombay High Court, the Company Law Board should come to a conclusion that the petitioners have not been able to establish this ingredient and dismiss this petition. Learned counsel for the respondents stated that this petition has been filed for oblique motive with a view to extort huge amount from the respondents. Since the petition is for an oblique purpose, the same should be dismissed as held in Bellador Silk Ltd., In re 1965 1 All ER 667 (Ch D). Even assuming that there are certain omissions in giving proper notices for the meetings, then, he submitted, that such illegalities need not be considered to be oppressive meriting grant of relief. For this proposition, he relied on Chander Krishan Gupta v. Pannalal Girdhari Lal (P.) Ltd. [1984] 55 Comp Cas 702 ; [1996] 5 CLJ 565 (Delhi). He further submitted that it is not the respondents who have injured the company but petitioner No. 1, who tried to hijack the company by purported allotment of shares to members of group 'A'. It is petitioner No. 1 who has always acted against the interest of the company by resorting to various misdeeds of filing police complaints, stopping the bank accounts, etc. He also submitted with regard to transfer of shares held by respondents Nos. 7, 8 and 9 that the articles do not provide for any preemptive rights and if the prayers in the petition are allowed, then, these respondents will get back the shares and they can again transfer the shares. According to him, any relief granted in the petition would mean that the Company Law Board has given legal sanction to the wrongdoings of the petitioners. He further submitted that presently the company is doing extremely well after the new shareholders have been inducted and any favourable order on the petition would be against the interests of the company.
17. We have considered the pleadings and arguments of the counsel. Even though we have to first examine the maintainability of the petition in terms of Section 399, yet, in view of the peculiar facts of the case, we have, in a later part of this order, examined this issue and have held that this petition is maintainable and as such we have given our findings on each issue while examining the same. Before we deal with the merits of the case, it is essential to note that, at the initial stages of the hearing we advised the parties to sort out their differences amicably and we were later informed that the same did not materialise. We also passed certain interim order taking into consideration, the submissions of the counsel for the petitioners that the company was in the process of parting with the knowhow for the product "imidazol" to Aarti Drugs Ltd.
18. The foundation of the petition is that there was an understanding/ agreement between the original five shareholders that group 'A' would have 50 per cent. shares in the company and majority on the board. No formal written agreement has been produced before us other than a handwritten note at exhibit C, page 56, of the petition dated August 2, 1997, signed by respondent No. 7 wherein there is a statement that these five shareholders would contribute for the expenses of the company in various proportions. As per this note, petitioner No. 1 was to contribute 50 per cent. and respondents Nos. 2, 7, 8 and 9 at 14 per cent., 8 per cent., 14 per cent. and 14 per cent., respectively. This note, which is not disputed in totality, except to say that respondent No. 7 who has signed this note had no authority to do so, gives some credence to the stand of petitioner No. 1 in regard to the understanding/agreement. Further, the fact that group 'A' has admittedly invested Rs. 29 lakhs as against Rs. 25.3 lakhs invested by group 'B' shows that equality in contribution seems to have been agreed to by the parties. This, taken together with the fact that in the board meeting held on January 15, 1996, as admitted by the respondents, petitioners Nos. 1 to 4 Were appointed as additional directors, shows that group A was to have majority on the board. There is no explanation from group B as to why a 20 per cent. shareholder should have four representatives on the board while the respondents' side controlling 80 per cent. shares should have only three directors. Further, we also note that the authorised capital of the company was increased to Rs. 1 crore on December 7, 1995, and in a board meeting held on December 8, 1995, the board also resolved to issue further shares and accept share application money and from January to March, all the five shareholders have invested money in the company as indicated elsewhere in this order--the contribution by group A to about 50 per cent. and group B to about 50 per cent. of the total contribution. These contemporaneous/successive events, actual facts not disputed, lead us to believe that there is substance in the stand of petitioner No. 1 that his group was to have 50 per cent. shares in the company and majority on the board.
19. As far as the composition of the board as on September 30, 1996, is concerned, it is the stand of the respondents that in the annual general meeting held on that date, petitioners Nos. 2 and 3 who were additional directors were not appointed as directors while the other two petitioners and respondent No. 7 who were additional directors were appointed as directors. They have relied on the minutes of that annual general meeting at exhibit 13 at page 127. The contention of the petitioners is that in that meeting, all the seven directors were made permanent directors not liable to retire by rotation. Neither of them has produced any return filed with the Registrar about the appointment of directors whether three as contended by the respondents or five as contended by the petitioners. We would have rejected the contention of the petitioners that all the directors were made permanent if there is no enabling provision in the articles for appointment of permanent directors. But we find that Article 25(b) does provide for appointment of directors not liable for retirement by rotation by the general body which would mean permanent directors. If the contention of the petitioners is correct, then the resolutions in that meeting, a copy of which is annexed at exhibit No. 13 at page 127 of the reply should be a fabricated one. Whether it is the correct or a fabricated one has to be examined with reference to the contents of the minutes. In the minutes of the board meeting on January 15, 1996 (exhibit No. 12 at page 126), in which the petitioners were appointed as additional directors, in respect of each resolution of appointment there is another resolution authorising the chairman to file the particulars of the appointment with the Registrar. However the minutes of the meeting held on September 30, 1996, do not indicate whether any such resolution was passed and as we have observed earlier, nothing has been brought to our notice that requisite returns were filed with the Registrar. However, we ourselves collected a report from the Registrar as to whether any returns in terms Section 260 had been filed with him. From his report, we find that Form No. 32 was filed on April 3, 1997, i. e., nearly six months after the resolutions were passed, that is after the disputes among the parties had started. This Form only indicates about the appointment of three directors and does not indicate the cessation of petitioners Nos. 2 and 3 as directors. Further, the normal procedure in case of additional directors coming up for election in the immediate annual general meeting after their appointment as additional directors is that, the agenda itself would contain proposals for their appointment as regular directors. In this case, if their names had been proposed and the general body had not approved the same, then, there should have been resolutions to that effect. Nothing has been produced before us in this regard. One other circumstance which makes us believe the petitioners is that, when the board met on April 18, 1997, it is the version of the respondents that they left the meeting before any agenda item was taken up. In this meeting, as per the attendance slip at exhibit B-1, seven directors had attended the meeting and the respondents dispute the signatures of petitioners Nos. 2 and 3. If only five directors were on the board at that time and all had been present, then the group B directors being three, could have defeated any resolution and there was no need for them to leave the meeting. Further, if there were only five directors of which three belonged to group 'B', we do not understand as to why in the extraordinary general meeting held on April 14, 1997, the group 'B' shareholders decided that further allotment of shares should be only with the approval of the general body. The reason for this resolution, perhaps, was that at the time there were seven directors of which four were from group 'A' constituting majority on the board. Therefore, the circumstances show that there were seven directors on that day and if so, then, it is inconceivable that petitioners Nos. 2 and 3 were not appointed as directors in the annual general meeting on September 30, 1996. Further, respondent No. 2, in his statement before the police on April 12, 1997, had stated that on that day there were seven directors on the board, even though in his statement dated June 4, 1998, he has stated that when he signed the statement on April 12, 1997, his mental condition was not alright. When the second statement was made, further disputes between the parties had started and as such we would not like to give much credence to that statement. Another aspect to be considered is the averment of the respon dents at page 8 of the reply, wherein they have averred that disputes and differences between the parties arose some time by the end of 1996 and the beginning of 1997. If this be the case no reason has been adduced by the respondents as to why petitioners Nos. 2 and 3 were not appointed as directors in the annual general meeting on September 30, 1996, which was held just within six months after their appointment as additional direc tors. Thus from the circumstances as elaborated above, the only conclu sion that we can arrive at is that, petitioners Nos. 2 and 3 had also been appointed as directors on September 30, 1996, along with other additional directors who were Also appointed as directors. Since, for the appointment of the other three directors there is no indication in the resolution that they were not liable to retire by rotation, the same holds good in respect of petitioners Nos. 2 and 3 also.
20. Alleged allotment of shares against the money brought in by the respective groups is a bone of contention between the two groups. It is not that the respondents dispute the holding of the board meeting on April 18, 1997, but they question the alleged allotment on various grounds. One is that, the agenda for the meeting did not contain the business of allotment of shares and if any decision had been taken then it was without the consent and knowledge of the directors of group B as they had left the meeting before any agenda item was discussed. They also question the validity of the allotment in view of the decision of the extraordinary general meeting on April 15, 1997, that the board would not allot any shares without the approval of the general body. They even doubt whether any decision to allot shares was taken at all in that meeting as the return of allotment was filed much after the prescribed time. The petitioners contend that there was no extraordinary general meeting of April 15, 1997, and if there had been one, then the same is invalid as petitioner No. 1 did not get any notice for that meeting. Even otherwise, it is also contended that the respondents have not produced any minutes of the board meeting in which the decision to convene the extraordinary general meeting was taken. As far as the factum of the extraordinary general meeting and the decision taken thereat are concerned, the same is established by the returns filed with the ROC immediately on April 17, 1997, that is, before the holding of the board meeting on April 18, 1997. Even though we note that the copy of the return was filed only with the additional affidavit and not with the reply, yet, the same confirms the holding of the extraordinary general meeting. The only issue to be considered is, Whether the same was convened and held in accordance with the provisions of the Act/articles. Article 7 provides for at least seven days notjce to members for convening a general body meeting. While petitioner No. 1 who was admittedly a member at that time, denies having received any notice, the respondents are not in a position to place any evidence that notice was given, except that we find from the copies of Form No. 32 filed with the Registrar on April 17, 1997, that notices were issued on April 13, 1997, that is, the meeting had been held within two days of notice which is against the provisions of Article 7. Further, no general body meeting can be held without the board's approval. The respondents have not been able to show as to in which board meeting the decision to hold the general body meeting was taken. In the absence of evidence for these essential issues, we have to perforce come to the conclusion that the extraordinary general meeting was held without following the provisions of the Act and articles and as such has to be held as null and void. It is the right of every shareholder to receive and attend general body meetings and if he is denied this right, he can rightly claim such denial as an act of oppression.
21. Now about the board meeting on April 18, 1997. There is no dispute in regard to the holding of this meeting, while, there is a dispute about the decisions taken in the meeting for allotment of shares against application money. According to the respondents, the group 'B' directors had left the meeting even before any item in the agenda was considered and that the business of allotment of shares was not included in the agenda. They also doubt whether the remaining directors did take a decision to allot shares on that date as the return of allotment was filed much belatedly. According to group 'B' directors, they left the meeting before any item in the agenda was discussed while, as per the draft minutes (exhibit No. 1} the group 'B' directors left the meeting after allotment of shares was decided. Since, we have already held that there was on extraordinary general meeting on April 14, 1997, in which decision was taken that shares against the application money would be allotted only with the approval of the general body, we doubt very much whether the group 'B' directors could have been parties to the decision to allot shares in the board meeting. However, as we have pointed out earlier on April 18, 1997, there were seven directors and even in the absence of the three group 'B' directors who attended the meeting and if they had left the meeting, the other four directors could have taken any decision as there was proper quorum. However, we note that the petitioners have not produced any evidence to show that the agenda for that meeting had the item of allotment of shares. Since it is a very important item of business, the decision to allot shares could not have been taken without proper notice to group 'B' directors who controlled, on that day, 60 per cent. shares in the company. Learned counsel for the respondents referred to the letter dated February 19, 1998, addressed by Vipul to petitioner No. 1 wherein it is indicated that at that time the contributions made by the petitioners group was still held as share application money as per the version of petitioner No. 1 himself. If we are to rely on the return of allotment filed with the Registrar on April 18, 1997, which is at least ten months prior in time to the letter from Vipul, then, the statement that the investment was still kept as application money has no relevance. The respondents have relied on the balance-sheets for the years 1996-97 and 1997-98, to prove their case that the investment by both group 'A' and group 'B' was shown as application money and as such no shares had been allotted on April 18, 1997. According to the petitioners they came to know of these balance sheets only in the proceedings before the Bombay High Court and as such a presumption should be drawn that these balance-sheets were prepared as an afterthought. Any way, no one disputes the fact that, when the investments were made, they were only in the form of application money as decided in the board meeting on December 8, 1995, and till allotment of shares is made, the same has to be shown as application money. Whatever it is, since petitioner No. 1 himself has relied on the principles of partnership, the allotment of shares without consulting other partners, even assuming that allotment was made on that day, has to be held as not . binding on the group 'B' shareholders since it would amount to reducing the majority into a minority without their consent even if there was a prior agreement that group 'A' would become majority.
22. The next issue is regarding transfer of shares held by respondents Nos. 7 to 9. It is the petitioners' case that the company has not followed the provisions of articles in transferring these shares. Article 12 deals with transfer of shares according to which the shares may be transferred to a person named by the directors and the consideration for the same would be either the paid-up value or at the fair price that may be agreed upon between the transferor and the directors. The member proposing to transfer the shares has to issue a notice to the company and the directors in turn, will indicate the name of the transferee to whom the member is bound to transfer upon receiving the consideration. In case the directors do not act within sixty days, the member proposing to transfer, is at liberty to transfer the shares to any person subject to the approval of the directors. In the present case, respondents Nos. 7 to 9 gave individual notices to the company expressing their intention to transfer the shares to respondents Nos. 10 to 21 on April 10, 1998 (exhibits Nos. 18 to 20 at page 142-144). On April 13, 1998, the board approved the same in principle and on April 29, 1998, the board gave approval for the transfer. The contention of the petitioners is that the board could not have considered these transfers on April 13, 1998, i. e., within three days from the date of notice from respondents Nos. 7 to 9 as the minimum notice that is required for any board meeting is seven days. The contention of the respondents is that, on that day only 'in principle' approval was given and actual approval for transfer was given only on April 29, 1998. Even a cursory glance at how the transfer has been effected would indicate that the provisions of the articles have not been complied with in this regard. While it is the directors whose prerogative it is to name the purchaser pf the shares, in this case, respondents Nos. 7 to 9 themselves chose the transferees. In addition, the respondents have not established through any document that notices for the board meetings either on April 13, 1998, or on April 29, 1998, were given to petitioners Nos. 1 and 3, who, even according to the respondents, were directors on those days, leave alone petitioners Nos. 2 and 4 who, we have already held, were directors on those days. Since, the articles provide a certain procedure for transfer for shares and only the board has the power to approve transfer of shares, even assuming that these transferors had majority shares in the company, they have to follow the procedure and, as rightly pointed out by Shri Sarkar relying on Parameswari Prasad v. Union of India, AIR 1972 SC 2389, resolutions passed in a board meeting held without notice to all directors are invalid, we also hold that these transfers are invalid.
23. In regard to removal of petitioners Nos. 1 and 4 as directors in the extraordinary general meeting held on April 29, 1998, the allegations of the petitioners are three-fold, viz., notices for the. extraordinary general meeting or the board meeting in which decision to hold extraordinary general meeting was taken was not given to the petitioners, there is no explanatory statement in terms of Section 173, and provisions of Section 284 have not been followed in removing the directors. Even though the contention of the petitioners is that explanatory statement should have been enclosed with the notice, we find from Article 18, that no explanatory statement needs to be attached and such a provision in the articles of a private company is valid in terms of Section 170(1)(ii) of the Act. According to the company, notices for the extraordinary general meeting as at exhibit No. 24 (page 149) were sent to all the five shareholders, the receipt of it, however is denied by the petitioner No. 1. The company has not been able to substantiate as to when and how the notices were sent. Further, it is not made clear by the respondents as to in which meeting of the board, it was decided to propose the resolutions to remove the petitioners (as it is not the stand of the company that there was a requisition from any member in this regard). It is the statement of respondent No. 2 (page 174 of the petition) that in his capacity as a director he had issued the notice for the meeting. If he had issued the same on his own without board approval, then the same is not in accordance with regulation 48 of Table A, which the company has adopted. It is also seen that the provisions of Section 284 of the Act have not been complied with, as also the requirements of Section 190 according to which special notices have to be issued in cases where the Act prescribes so. Section 284 specifically requires special notice in case of removal of directors. Thus we find that the removal of the petitioners has taken place in a meeting without proper notice, without following the provisions of Sections 284 and 190 and in violation of the provisions of Table A (regulation 48). While violation of statutory provisions per se may not be an act of oppression, but if the same results in certain representations given in the board by virtue of shareholding being defeated, then, it is ah act of oppression. Therefore, we are in full agreement with learned counsel for the petitioners that the illegal removal of the group 'A' directors from the board was an act of oppression.
24. The next issue is the allotment of additional shares to associates of Aarti (respondents Nos. 10 to 21). The allotment of additional shares to these respondents was decided in board meetings on May 8, 1998, and May 25, 1998, pursuant to the decision taken in the extraordinary general meeting on April 29, 1998. We have already held that the holding of this extraordinary general meeting was invalid for various reasons. If the holding of the meeting itself was invalid, then, the resolutions passed thereat relating to issue of further shares would also be declared as invalid. As held in Piercy v. Mills (S.) and Co. [1920] 1 Ch 77 the power to issue further shares should be in the interest of the company and not for benefiting any group. The respondents have not established the need for funds through the issue of further shares and as a matter of fact the company had even offered to refund the application money of about Rs. 60 lakhs paid in by the respondents and the petitioners and in fact Refunded about Rs. 18 lakhs to the respondents, (petitioners refused to accept the refund) while the money collected through further allotment is only Rs. 7 lakhs. Thus, it appears that the further issue was made only with a view to enhance the shareholding of the new shareholders, who are part of Aarti Drugs Ltd., which, incidentally has entered into certain manufacturing agreement with the company in May, 1998 (exhibit No. 23 of the reply). When the company had the benefit of the amount invested as application money by group A of Rs. 29 lakhs for a period of over two years, without allotting shares against this amount, the board decided to allot against fresh subscription by outsiders. This action of the board, according to us lacks in probity and is in breach of their fiduciary duties. While the transfer of the shares reduced the status of the petitioner from one among five shareholders, the further allotment reduced him from 20 per cent. shareholder to less than 10 per cent. Therefore we would be right in applying the same principles that we applied for declaring the allotment of shares against application money made by the group A directors in the board meeting on April 18, 1997, as null and void, in this further allotment of shares and declare this allotment as null and void. While doing so, we also note that both the transferees and the allottees are parties to the present proceedings and they have not chosen to file any reply to the petition wherein there are prayers to this effect and we also note that they were represented, in some hearings, by an advocate who did not argue on their behalf.
25. The last and final issue relates to appointment of respondents Nos. 3 to 6 as additional directors of the company in the board meeting held on April 29, 1998. Petitioners Nos. 1 and 4 who were undisputedly directors before that date, contend that they did not receive any notice for this meeting. Even though, according to the company, they were removed as directors in the extraordinary general meeting held on that date, yet, at the time when any notice for the meeting would have been issued, the company could not have presumed their removal and thus not issued any notice for this meeting to the two directors. Further, the appointment of the additional directors and simultaneous resignation of two group 'B' directors would automatically mean that the three additional directors become majority on the board, thus, completely taking the company out of the original five shareholders. Therefore, we have no hesitation to come to the conclusion that not only these appointments in a meeting without notice to the petitioner directors is invalid but also a grave act of oppression against the petitioners.
26. Now, we have to decide about the maintainability of the petition since the same could not have been decided without going into the merits of the case. As per Section 399, only members of a company have the right to apply under Section 397/398. In view of our finding that allotment of shares against application money in the board meeting held on April 18, 1997, is invalid, on this date there would have been only five shareholders--one from group 'A' and four from group 'B'. Thus only petitioner No. 1 is a shareholder and a member of the company having the right to file this "petition and not the other petitioners. This being the case, he should satisfy that he holds more than 10 per cent. shares or he constitutes one-tenth of the membership of the company. Since, we have also held that issue of further shares to various respondents is invalid, on the date of filing of the petition, petitioner No. 1 continued to hold 20 per cent. shares in the subscribed capital of the company and also constituted more than one-tenth of the membership and as such he can maintain this petition.
27. Before we proceed further, it is necessary to record that respondents Nos. 7, 8 and 9 who were the shareholders of group B did not choose to file any reply to the petition till the last minute, and filed their replies only when the arguments were about to be completed and as such we declined to take their replies on record. However, we allowed their counsel Shri Atul Sharma to argue. He submitted that his clients being members of group 'B', all along tried to sort out the problems with petitioner No. 1 and at one point of time they even offered to sell their shares to the petitioner No. 1, to which he did not agree. Even though due to the acts of petitioner No. 1, the company had to cease its operations, his clients desired to revive the company and since they were not in a position to do so, they transferred their shares to persons who could revive the company. He also submitted that, if the transfer of shares by his clients is set aside, it would only mean that his clients would once again become shareholders and this does not mean that they would transfer the shares to group 'A' since there is no pre-emptive provision in the articles. According to him, whatever has been done by the group 'B' members, it was for the ultimate benefit of the company and as such the petitioners cannot complain about the same.
28. It is a classic case falling squarely within the provisions of Section 397 brought about by the conduct of the parties. It is abundantly clear from the various issues that we have examined that, the one point programme for both the groups seems to have been to gain control of the company at the cost of the other, irrespective of the fact whether the provisions of the Act/articles are followed or not. Both the groups did not seem to have bothered about the interest of the company in the process. The company was kept locked, the bank accounts were frozen and no activity was being carried on other than finding ways and means to oust the other group from the company.
29. The foundation of the petition is that the company was to be run on partnership principles and that there was an agreement relating to the shareholding and directorship. It is always a legal issue as to whether any private agreement between the shareholders, without the company being a party, could bind a company. As a matter of fact, in the additional affidavit respondent No. 2 has taken the stand that the company records do not indicate any such agreement. While, in the normal course, the company should be a party or the articles should reflect such an agreement to bind the company, yet, if the company has taken benefit or has acted in terms of any such private agreement, then, we feel that the company is bound by the terms of the agreement, at least in relation to the terms that the company has acted upon or derived certain benefits. This is what the Full Bench of this Board has decided in Jitendra Nath Saha v. Shyamal Mondal [1995] 82 Comp Cas 638. It has been the contention of the petitioners that there was an agreement between the five shareholders that group 'A' would invest 50 per cent. shares and that they would have majority control on the board. The undisputed facts reveal that group 'A' did contribute 50 per cent. either in shares or in share application money and four directors from group 'A' constituting majority were appointed on the board. In other words, the two major points of the alleged agreement have been acted upon by the company and as such the same is binding on the company. This finding is necessary to consider certain other legal issues raised by the counsel for the respondents and to mould the relief.
30. Learned counsel for the respondents submitted that the petitioners have not established that grounds exist for winding up of the company on the just and equitable ground. He also relied on the judgment of the Bombay High Court that, on similar allegations, the court held that there was no ground to wind up the company on the jusfand equitable ground. We would like to differentiate between a winding up proceeding and a proceeding under Section 397. In a winding up proceeding an the just and equitable ground, the court may order winding up once the grounds are established. However, in a Section 397 petition, which is alternative to a winding up petition, first one has to establish that there is oppression. Without the element of oppression being established) the question of grant of relief does not arise. This is what was decided by the Company Law Board in Subhash Chander Agarwal v. Associated Limestone Ltd, [1998] 92 Comp Cas 525. However it is difficult, if not impossible to lay down specific instances which alone would be considered to be acts 6f oppression. Whether an act is an oppression or not would depend on the facts of a case. Since Section 397/398 proceedings are alternative to winding up proceedings, it is not that only those grounds which are Considered to be just and equitable in a winding up proceedings, could be the grounds in a Section 397/398 petition. In the Bombay proceedings, the court held that since there was no deadlock in the management; the company could not be wound up on the just and equitable ground. It did not examine whether allegations of oppression had been established. That is why, the court itself suggested that the petitioners may initiate the present proceeding under Section 397/398. It is worthwhile referring to George Meyer v. Scottish Co-operative Wholesale Society [1954] Scottish Cases 381 referred to in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC) wherein it was held :
"Although the word 'oppressive' is not defined, it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are treating the company and its affairs as if they were their own property to the prejudice of the mino rity shareholders and in which just and equitable grounds would exist for the making of a winding up order, but in which the alternative remedy provided by Section 210 by way of an appropriate order might well be open to the minority shareholders with a view to bring to an end the oppressive conduct on the minority."
31. The normal test to examine whether there is depression or not, is to find out whether the majority shareholders, by the strength of their shareholding do things which are unfairly prejudicial, wrong, burdensome and harsh, and there is an element of lack of probity or fair dealing etc. in relation to the interests of the minority shareholders. If so, then the shareholders can complain of oppression. While a single act of oppression without having continuous effect may not fall within the ambit of just and equitable grounds, yet, successive acts of such oppression may fall under the purview of the same. In this connection reference may be made to the Supreme Court's observation in Shanti Prasad Jain v. Kalinga Tabes Ltd. [1965] 35 Comp Cas 351, the court observed likewise at page ,366. In the present case, there have been successive acts by the majority shareholders--first taking away the jpower of the board in which group 'A' had majority from allotting shares against the application money, approving allotment of shares to outsiders, against fresh subscriptions when about Rs. 29 lakhs from group 'A' was with the company, removing petitioners Nos. 1 and 4 as directors in a general body meeting are acts committed with the overwhelming shareholding strength, by group 'B', This has resulted in the company going out of the control of the original shareholders including the minority shareholder, namely, petitioner No. 1. Thus, we are of the view that these acts of oppression definitely fall within the purview of just and equitable grounds in these proceedings. In the present case, five shareholders took over the company with equal participation in the share capital of the company. Group 'A' has invested nearly 50 per cent. of the investment in the company and also had a majority on the board. The end result of the various actions taken by, the group 'B' members has resulted in the ouster of group 'A' from the management and reduction in their percentage shareholding notwithstanding .the fact that still their investment, being Rs. 30 lakhs, is the largest in the company compared to the outsiders who have invested only about Rs. 10 lakhs. The petitioners' case rests oh partnership, joint management and ouster, all of which have been established. In this connection it is worthwhile referring to the decision of R.N. Jalan v. Deccan Enterprises (P.) Ltd. [1992] 75 Comp Cas 417, 438 wherein the Andhra Pradesh High Court held that change in the pattern of shareholding and subsequent changes in the board of directors would prejudicially affect the interest of the shareholders and accordingly, since the company was running profitably, the court appointed an administrator to manage the company by superseding the board. Therefore, we are of the view that the grounds on which the petition has been filed fully merit winding up of the company on the just and equitable ground in these Section 397/398 proceedings and that winding up of the company is prejudicial to the interest of the shareholders.
32. Having held that the petition is maintainable and that the allegations of oppression have been established and that these acts of oppression justify winding up of the company on just and equitable grounds, the issue that arises is regarding relief to be granted. We would have, in the normal course, set aside the transfer and allotment of shares and would have also declared that group 'A' directors would continue to be directors of the company and that outside directors would cease to be directors of the company. Instead of doing so, with a view to bringing to an end the matters complained of, we pass the following order :
(1) The board of directors stands reconstituted with immediate effect with petitioners Nos. 1 and 4, and respondent No. 2 as directors.
(2) The reconstituted board will meet within a week from the date of this order and allot shares to group A against their share application money of Rs. 29 lakhs.
(3) Respondents Nos. 7, 8 and 9 will have the option to repurchase the shares transferred by them, and the respondent transferees are bound to retransfer the same at the same consideration at which the shares were originally transferred. For this purpose, the transferor respondents should indicate, in writing, their desire to purchase, within fifteen days of the date of this order and the transfer should be effected within fifteen days thereafter.
(4) In case these respondents do not exercise their option to repurchase, and the transferees, in view of the changed circumstances, wish to sell their shares acquired by transfer and allotment group A will have the first option to purchase the shares at the same price at which the shares were transferred/allotted. Once the offer of sale is made, group A is bound to purchase the same within fifteen days of the offer, to be made in writing.
(5) Being the original shareholders, as long as they are shareholders, petitioner No. 1 and respondent No. 2 will continue as directors on the board and all other directors will be elected in accordance with the articles.
(6) Within fifteen days of allotment of shares to group A, the board will convene a general body meeting of the company to elect not more than four more directors, as the board may deem fit.
(7) In case respondent No. 2 also desires to sell his shares, then the first option to purchase shall be with group A.
33. With the above directions/order we dispose of the petition, however without any order as to costs.