Company Law Board
V.B. Gopalakrishnan vs New Theatres Carnatic Theatres (P.) ... on 21 November, 2000
Equivalent citations: [2002]111COMPCAS98(CLB)
ORDER
Balasubramanian.
1. The petitioners holding 19 shares in New Theatres Carnatic Private Limited ('the Company') have filed this petition under section 397/398 of the Companies Act, 1956 ('the Act') alleging oppression and mismanagement in the affairs of the company.
2. The brief facts of this case arc that this company was incorporated sometime in 1936 with an authorised capital of 100 shares of Rs. 1,000 each. The original promoters consisted of two brothers, one Shri V. Balusamy Naidu, father of the petitioners and Shri Guruviah Naidu, father of respondents 2 to 4. Each of the brothers held 25 shares out of the then paid-up capital of 50 shares. The remaining 50 shares remained unallotted till recently. The petitioners succeeded to the shares held in name of their father while respondents 2 to 4 succeeded to the shares held in the name of their father. Later, one Shri Selvaraj, a member of the petitioners group sold his shares to respondents 2 to 4 by which the shareholding of the petitioners came to 21 shares and that of the respondents to 29 shares. The transfer of these four shares was challenged on the ground that there was an agreement between the promoters of the company that each group would continue to have equal number of shares in the company and that no shares would be transferred from one group to other group. This matter went up to the Supreme Court which held that family arrangement, not being a part of the articles cannot bind the company and thus the transfer was upheld. The respondents herein filed a petition before Madras High Court under section 397/398 against the petitioners in 1981. By an order dated 12-12-1991, the High Court superseded the then existing board of directors and appointed respondents 2 to 4 herein as administrators. In the meanwhile, there was a dispute in relation to the land taken on lease on which the theatre has been constructed. This matter was decided by the Supreme Court by an order dated 27-4-1995 by which the Company was directed to pay a sum of Rs. 50.50 lakhs to the lessor of the land towards consideration for purchase of this land. On receipt of this order, the petitioners requisitioned a meeting to consider the ways and means to pay the consideration. The company itself issued notice requisitioning an EOGM proposing therein to increase the authorised capital of the Company from Rs. 1 lakh to Rs. 1 crore by an ordinary resolution. This notice was challenged by the petitioners in the Civil Court which restrained the company from considering this matter in the EOGM. Later on, the company issued notice for an Annual General Meeting (AGM) in which the same proposal had been made and on a challenge by the petitioners, the Court appointed a Commissioner to observe the proceedings of this meeting. In the meanwhile, the respondents had issued and allotted 50 shares, being the unissued share capital of the original 100 shares to themselves. Later, the resolution to increase the authorised capital having been passed in the AGM, the respondents had issued further shares to an extent of 4040 over a period of time to their own group. In this petition, the petitioners are challenging the issue of the unissued 50 shares as well as further issue of shares in exclusion of the petitioners group by which the petitioners have now been reduced to one per cent shareholders as against the 42 per cent that they held earlier.
3. Shri Ramani, Senior Advocate, appearing for the petitioners submitted that this company was incorporated by two brothers each having the 50 per cent shares in the company with the understanding that each group would continue to hold 50 per cent. He contended that by allotting shares to their own group, the respondents have reduced the petitioners to a negligible minority which amounts to an act of oppression. Referring to article 13 of the articles of association of the company, he pointed out that no new member could be inducted as a shareholder without the consent of the majority of the members meaning thereby that for allotment of shares to non-members, the matter should have been considered in a general body meeting. He pointed out that respondents 5 to 9 were not originally members of the company, but were allotted shares after the authorised capital of the company was increased. The very idea of inducting outsiders who all belong to respondents group was only with a view to get the benefit of the value of the land, which, in the current market price works out to more than Rs. 2.5 crores. He pointed out that this land was taken on lease by the petitioners while they were in management and it is they who instituted the proceedings before the Supreme Court and even the Special Leave Petition was signed by the first petitioners. While the petitioners fought for perfecting the title to the land without any assistance or contribution from the respondents, once the Supreme Court fixed the price at Rs. 50.5 lakhs, the respondents had decided to grab the land by converting the petitioners to negligible minority. He also contended that when the petitioners were in management for over 10 years, they could have got the unissued 50 shares allotted to themselves as had been done now by the respondents but they did not do so only to maintain the sanctity of the family arrangement. It was pointed out that once the petitioners challenged the EOGM convened by the respondents on the ground that the resolution to increase the authorised capital should have been through an extraordinary resolution meaning thereby a special resolution, to overcome this difficulty, the respondents with mala fide intention, allotted to themselves the unissued 50 shares on 24-8-1995. By this allotment they would be in a position to pass the special resolution. The fact of allotment of these shares came to the light of the petitioners only when the result of the Poll was announced when the petitioners came to know that the respondents held 79 shares as against 21 shares held by the petitioner. Thus, this allotment of 50 shares itself had reduced the petitioners to 21 per cent as against their earlier 42 per cent. He pointed out that after the authorised capital was increased, no offer was made to the petitioners to subscribe to the new shares and in various board meetings, the respondents had allotted shares to themselves and outsiders.
He also pointed out that these shares were allotted after the Supreme Court had decided on the value of the land. Since the market value of the land is five times more than the price specified by the Supreme Court, the respondents should have offered the snares at a premium, but allotted the same at par value. Summing up his arguments, he contended that the directors, while exercising fiduciary duties in allotment of shares should take care of interest of all the shareholders and should not confer the benefit to any select group. According to him, there was no need to issue further shares and the consideration for the land would have been arranged through loans. He further submitted that the petitioners, while they were in management for over 10 years never disturbed the family arrangement or parity in the shareholding between the two groups. Therefore, the respondents were also bound to maintain the same when they came into the management. He also contended that fairness and fair play demand that in a company like the respondent company, even in the absence of any family agreement, one group should not act in an oppressive manner against the other group in allotting further shares. Accord-
ingly, he submitted that the allotment of 50 shares as well as the allotment of further shares of 4040 should be declared as null and void. In the alternative, he submitted that his clients would be willing to sell their shares to the respondents on the basis of the paid-up capital being 50 shares as it existed at the time when the Supreme Court judgment was delivered on 27-4-1995. Later on, the petitioners filed an affidavit stating that the petitioners were willing to subscribe upto 42 per cent shares of the Company out of the additional shares issued so that the shareholding parity as it existed before the allotment of shares could be maintained. 4. Shri Raghavan, Senior Advocate, appearing for the respondents submitted that the petitioners holding merely one per cent shares cannot challenge the decision of the majority shareholders. He pointed out that the petitioners were in the management of the Company from 1978 to 1991, when the High Court superseded the Board and entrusted the management to respondents 2 and 3. After 1991, the petitioners never took any interest in the company. He pointed out that there is already a proceeding pending before the High Court, for surcharging the petitioners for the grass mismanagement of the company, when they were in management, with a claim of over Rs. 40 lakhs against them. He also pointed out that the petitioners, who claimed equality in the shareholding and management, kept the respondents out of the management for over 13 years between 1978 and 1991. Referring to Annexure R-9, he pointed out that even though the respondents were in management with two directors, yet with a view to provide for representation to the petitioners group, a resolution was moved for amending the articles in February, 1994 to give representation to the petitioners, but the petitioners defeated the resolution. The very fact that the respondents decided to offer the petitioners participation in the management would establish the bona fides of respondents and the action of the petitioners in this regard, the mala fides of the petitioners. Further, when the company issued a notice for an EOGM to be held on 4-6-1995, explanatory statement very clearly indicated that the shares were to be allotted on right basis. Notwithstanding this offer of the company to allot shares on right basis, the petitioners moved the civil court and obtained a restraint order. This itself would exhibit, he contended that the petitioners were not interested in the welfare of the company which had to pay the consideration for the land in a time-bound manner as per the direction of the Supreme Court. Their prime motive was to ensure that the company defaulted in complying with the order of the Supreme Court.
5. He pointed out that in the EOGM held on 4-6-1995, in view of the restraint order by the Civil Court, the item in regard to increasing the authorised capital was not considered. However, the resolution sought to be moved by the petitioners through a notice issued by them by a requisition dated 10-5-1995 was taken up for consideration. This resolution related to finding ways and means to mobilise funds for paying for land as per the Supreme Court order. The petitioners, even though present in the meeting, instead of moving the resolution, presented a letter seeking for adjournment and left the meeting. Since there was nobody to move the resolution, this resolution was not considered. He pointed out that the very fact that the petitioners did not evince any interest in mobilising further funds would indicate that the petitioners are not interested in the welfare of the company. In regard to the allotment of 50 shares, he pointed out that article 21 has no relevance inasmuch as the same is applicable only in case of allotment of shares out of the increased authorised capital and not allotment of shares within the existing authorised capital. The allotment of 50 shares was made not with a view to reduce the holding of the petitioners, but with a view to mobilise funds for the company for payment for the land. Moreover, since the petitioners never evinced interest in the affairs of the company and also insisted that a special resolution is necessary for increasing the authorised capital, the respondents, in the interests of the Company issued 50 shares to their own group. Therefore, when shares are allotted for the benefit and in the interest of the company, even if it affects some shareholders, such an allotment cannot be considered to be an act of oppression. As far as increasing the authorised capital in the meeting held on 4-6-1995 is concerned, the company had not acted in violation of the restraint order. When the notice for convening this meeting on 4-6-1995 was issued, the petitioners approached the Civil Court. It is the Civil Court which appointed a Commissioner to observe the proceedings in the meeting and in this meeting, the shareholders passed a special resolution increasing authorised capital of the company to Rs. 1 crore. Once the authorised capita] was increased and knowing well that the petitioners would not subscribe to any further shares, the board of directors allotted shares to those who were willing to subscribe to the additional shares. It was done only for the purpose of mobilising funds for paying for the land. Otherwise, the substratum of the company could have gone. He also pointed out that keeping the petitioners as 42 per cent shareholders in the company would not be in the interest of the company and other shareholders. He also pointed out that this allotment was made in 1995-96 and the petitioners knowing the allotment through the annual reports for subsequent years, chose to agitate about the issue only after a period of three years in April, 1999, that too only after the final instalment for the land was paid as per the Supreme Court order. Therefore, he contended that filing of the petition itself is mala fide. Regarding the contention of the petitioners that the family arrangement should have been adhered to in the allotment of shares, he pointed out that Supreme Court in relation to these specific company has held in V. B. Rangaraj v. V.B. Gopalakrishnan AIR 1992 SC 453 that private arrangements, not incorporated in the articles cannot bind the company. Further he contended that if a family agreement is against the interest of the company, the Board has full powers to ignore such an arrangement. Referring to Needle Industries case, he pointed out that if something is done in the interest of the company and even if it incidentally benefits a group of shareholders, the same cannot be considered to be an act of oppression.
6. Summing up his arguments, Shri Raghavan contended that the petitioners who were in management of the company for over 10 years in exclusion of the respondents and against whom there arc surcharge proceedings pending in the High Court and who never evinced any interest in the welfare of the company and who by instituting civil proceedings blocked resolutions being passed for increasing the authorised capita] with a provision to issue shares on right basis and who have approached the CLB nearly three years after the allotment was made, that too after the last instalment for the land has been paid, cannot claim any equitable relief and as such the petition should be dismissed. In regard to the suggestion of Shri Ramani that the petitioners would be willing to sell their shares to the respondents on the basis of 50 per cent shares in the company, Shri Raghavan submitted that the petitioners cannot have the benefit of the land value, which has been perfected by the respondents by raising money by themselves for payment of the consideration. He pointed out that the respondents are willing to purchase the shares of the petitioners on the basis of the total number of shares which are in existence at the lime of filing of this petition.
7, We have considered the pleadings and arguments of the counsel. The main thrust of the petitioners is that the respondents have upset the family arrangement of equality in shares. In view of the decision of the Supreme Court in respect of the very Company in V.B. Rangaraj's case (supra) that a family arrangement, unless the same is incorporated in the articles cannot bind the company, the stand of the petitioners is this regard has no substance. The only issue for our consideration is whether the allotment of 50 unissued shares and further allotment of shares to themselves, the respondents have committed an act of oppression against the petitioners. It is in the knowledge of the petitioners that as per the direction of the Supreme Court, the company had to pay around Rs. 50 lakhs to the lessor of the land on which the theatre has been constructed, within a set time frame. It is also to their knowledge that the company had to find the ways and means to raise this amount as is evident from the notice dated 10-5-1995 (Annexure P-3) issued by them to convene an EOGM. Therefore, the need of funds for the company has not only been established but the same was within the knowledge of the petitioners. It is on record that the company itself had convened an EOGM through a notice dated 22-5-1995 to be convened on 4-6-1995 to consider raising the authorised capital and in the explanatory note, the company has explained the need for raising the authorised capital with a view to allot shares to the shareholders on a right basis. The present claim of the petitioners is that their 42 per cent shareholding should be restored. If the petitioners had supported the said resolution proposed by the company, the shareholding would have been maintained at 42 per cent. Instead, they moved the Civil Court and obtained a stay order against this item being considered in the said EOGM. The ground taken by petitioners was that this item should have been considered as a special resolution instead of an ordinary resolution as proposed by the company, in terms of article 21. Admittedly on the date of the meeting, the petitioners held 42 per cent and the respondents 58 per cent shares in the Company. No special resolution could have been passed without the support of the petitioners. The very fact of their moving the Civil Court in this regard indicates that their idea was to block the resolution if the same was proposed as a special resolution, in which case, the company could not pass a resolution increasing the authorised capital. Further, in the same EOGM in which the petitioners' proposal for examining the ways and means of raising funds was also not moved by them, thus, blocking the company from raising funds for meeting the commitment arising out of the directions of the Supreme Court. Thus the petitioners had, by the strength of their shareholding tried to block the company from complying with the directions of the Supreme Court. The allotment of 50 unissued shares on 24-8-1995 to the respondents themselves has to be viewed in the background of the attitude of the petitioners blocking the company from raising funds. If we do so, then the respondents had no alternative, but to allot these shares to themselves, to ensure passing of a special resolution to increase the authorised capital in terms of article 21. We do not find much substance in the stand of the petitioners that instead of raising funds through issue of shares the company should have arranged for loans, as the method and manner of raising funds is in the domain of the board of directors, as tong as the same is for bona fide business purposes. The person who alleges oppression should come with clean hands. In this present case, being fully aware of the obligation of the company, arising out of the directions of the Supreme Court, the petitioners, instead of assisting the company in raising funds, put spokes in the efforts of the company, which forced the respondents to allot the 50 unissued shares to themselves. In this connection, we may beneficially refer to the decision of this Board in Athmaram Modi v. ECL Agrotech Ltd. [1999] 35 CLA 14 wherein this Board has held that if the alleged acts of oppression arise out of the conduct of the petitioner, then he cannot seek the equitable remedy provided under section 397/398. Therefore, allotment of 50 unissued shares to respondents themselves by which the respondents shareholding went upto 79 shares as against the petitioners holding of 21 shares, cannot be considered to be an act of oppression, but one brought about by the prejudicial acts of the petitioners themselves.
8. After the authorised capital was increased in the general body meeting held on 24-8-1995, the company has allotted 4040 shares between the period 30-9-1995 to 24-10-1996. While, 3595 shares were allotted to the existing shareholders from the respondents group, 945 shares were allotted to four outsiders. The claim of the petitioners is that in accordance with articles 13 and 21 new shares ought to have been allotted to the existing shareholders at par in proportion to their shareholding and that no new member can be admitted without the consent of the majority of the members. Articles 13 and 21 read as follows:--
Article 13 : "No new member shall be admitted except with the consent of the majority of the members. On the death of any member, his heir or heirs, or nominee, shall be admitted as a member; if such heir, heirs or nominee, is/are unwilling to become a member, such share capital shall be distributed, at par, among the members equally or transferred to any new member with the consent of the majority of the members."
Article 21 : "The members may, subject to the statutory provisions in this behalf, at any lime alter the share amount and share capital and on such terms and conditions if the same are approved by an extraordinary resolution of the company. The new shares shall, however be subject to the same provisions with regard to transfer, transmission, lien and otherwise as the shares in the original share capital."
9. Article 21 deals with increase in the authorised capital and it also stipulates that the new shares shall be subject to the same provisions as in article 13. As per article 13, the share capital has to be distributed among the members equally. A combined reading of these two articles would indicate that shares in the company would have to be allotted equally (proportionately) and that no new members could be inducted without the approval of the majority of the members which means that there should have been a general body meeting which obviously has not been held before allotting 945 shares to outsiders. Considering the fact that the company consisted of only two group of shareholders, even if there is no private agreement binding on the company, equity demands that the petitioners should have been offered shares when further shares were allotted. Further we also note that the respondents themselves had proposed in the EOGM convened on 4-6-1995 while proposing the increase in the authorised capital to allot shares on a right basis. While we found justification in the allotment of 50 unissued shares to the respondents in exclusion of the petitioners, we do not find any justification to exclude the petitioners when new shares were allotted. The argument of the learned counsel for the respondents that keeping the petitioners as 42 per cent shareholders would not be in the interest of the company cannot be a valid one as the company is bound to follow the provisions of the articles. The company should have offered proportionate shares at 21 per cent to the petitioners when further shares were allotted. Therefore, we find that the petitioners are right in alleging oppression in respect of non-allotment of proportionate shares to their group when further shares were issued after the authorised capital was increased. Even though, the petitioners have sought for a declaration that the allotment made as null and void, we do not propose to do so since the consideration for these shares had been utilised to pay for the land as per the directions of the Supreme Court. Instead, we only direct that since we have upheld the allotment of 50 unissued shares to the respondents as valid, the shareholding of the respondents would be 79 shares and that of the petitioners 21 shares. Therefore, out of 4040 shares allotted after the increase in authorised capital, the petitioners group should be entitled to 21 per cent of the shares, which works out to roughly 850 shares. In case the petitioners are willing to acquire these shares, the respondents 5 to 8. Who were not shareholders earlier should transfer to the petitioners group these 850 shares at par, being the consideration paid by them when they were allotted shares by the company. The option to get the shares transferred should be exercised within 31-12-2000 by a notice to the company, together with a demand draft for the amount of consideration for these shares. Once the notice is received by the company along with the consideration as above, the company will arrange for getting the transfers effected by the 5th to 8th respondents within 15 days thereafter and register the transfers with further 10 days. Identification of the 850 shares to be transferred to the petitioners out of 945 shares allotted to the respondents 5 to 8 shall be the responsibility of the company.
10. With the above directions, we dispose of the petition without any order as to cost.