Company Law Board
A. Arumugam, M. Rajagopal And T. ... vs Pioneer Bakeries Private Limited And ... on 7 March, 2007
Equivalent citations: [2008]141COMPCAS391(CLB), [2007]80SCL190(CLB)
ORDER
K.K. Balu, Vice-Chairman
1. The petitioners in C.P. Nos. 50, 51 & 52 of 2003 collectively holding in excess of 10% of the issued share capital of (a) M/s Pioneer Bakeries Private Limited (PBPL); (b) M/s Milka Bakers Private Limited (MBPL); and (c) M/s Pioneer Bake House Private Limited (PBHPL) respectively, aggrieved on account of a series of purported acts of oppression and mis-management in the affairs of PBPL, MBPL and PBHPL ("the Companies"), namely, (a) non-sending of notice of the board meetings to the first petitioner; (b) improper conduct of the board meetings; (c) illegal appointment of the respondents 3 to 6 (C.P.No.50 of 2003); respondents 3 & 4 (C.P.No.51 of 1003) and respondents 3 to 5 (C.P.No.52 of 2003) as additional directors of the Companies; (d) illegal appointment of the second respondent as managing director of the Companies; (e) illegal ousting of the respondents 7 to 9 (C.P.No.50 of 2003); respondents 5 to 9 (C.P.No.51 of 2003) and respondents 6 to 10 (C.P.No.52 of 2003) from the office of directors of the Companies; (f) misappropriation of funds; incurring of advertisement expenses disproportionate to the turnover and other financial irregularities on the part of the respondents 2 to 5 (C.P.No.50 of 2003); respondents 2 to 4 (C.P.No.51 of 2003) and respondents 2 to 5 (C.P.No.52 of 2003); (g) illegal disposition of the fixed assets, plant and machinery and improper management of the assets and funds of the Companies; (h) illegal convening of the annual general meeting of the Companies; (i) illegal acquisition of a large number of shares from other shareholders in violation of the relevant articles of association of the Companies and Section 108 of the Act; (j) abuse of fiduciary position by the second respondent by illegal transfer of shares and improper reconstitution of the boards to usurp control over the Companies and secure control over the trade mark; and (k) improper maintenance of accounts of the Companies; and (1) a large scale suppression of turnover by the Companies, have invoked the equitable jurisdiction of the CLB under Sections 397 and 398 of the Companies Act, 1956 ("the Act"), seeking the following reliefs:
(i) to declare that all the resolutions passed at and all actions taken in pursuance of the board meetings of the Companies held after January 2003 are illegal, null and void;
(ii) to declare that the respondents 3 to 6 (C.P.No.50 of 2003); respondents 3 & 4 (C.P.No.51 of 2003) and respondents 3 to 5 (C.P.No.52 of 2003) are not directors of the Companies;
(iii) to nullify and declare invalid the transfer of shares effected by the Companies after January 2003 and the corresponding entries made in the register of members thereof;
(iv) to remove the second respondent from the office of managing director of the Companies;
(v) to restrain the Companies from holding the annual general meeting proposed to be held on 15.12.2003;
(vi) to declare the proposal to remove the present statutory auditor from the post of director and auditor of the Companies as illegal, null and void;
(vii) to appoint an Administrator for the conduct and management of the affairs of the Companies; and
(viii) to appoint one or more competent persons as inspectors to investigate the affairs of the Companies with effect from January, 2003.
2. PBPL, MBPL and PBHPL are closely held group companies and promoted mainly by the contesting parties, who are common in all the company petitions. The acts of oppression and mismanagement complained of and the reliefs claimed are in relation to PBPL, MBPL and PBHPL, which are similar in nature. Hence, all these company petitions were heard together and are being disposed of by this common order.
3. Shri R. Vidhya shankar, learned Counsel, while initiating his arguments submitted:
• a PBPL, MBPL and PBHPL" were conceived and incorporated by the first petitioner (C.P.Nos.50, 51 and 52 of 2003) and seventh respondent (C.P.No.50 of 2003), who is fifth respondent in C.P.No.51 of 2003 and sixth respondent in C.P.No.52 of 2003. These Companies are engaged in the related business of bread and confectionery manufacture and distribution. The second respondent being a friend of the first petitioner and seventh respondent (C.P.No.50 of 2003) was also invited to subscribe to the memorandum of association of the Companies. The Companies were managed as quasi-partnership based on mutual trust and confidence and with more or less equal shareholding among the first petitioner and respondents 2 & 7 (C.P.No.50 of 2003); first petitioner and respondents 2 to 5 (C.P.No.51 of 2003) and first petitioner and respondents 2 & 6 (C.P.No.52 of 2003). There was also equal participation by these persons in the management of the Companies. In 1996 M/s New Hope Food Industries Private Limited (NHFIPL) was incorporated by the petitioner along with seventh respondent (C.P.No.50 of 2003) and certain others for manufacture of cakes. In 1998 M/s Milka Nutriments Private Limited (MNPL) was promoted for manufacture of biscuits by the promoters of PBPL and of NHFIPL. In 2000 M/s Milka Industries Private Limited was promoted in association with all the promoters except the second respondent, of MNPL. The seventh respondent (C.P.No.50 of 2003) was managing director in charge of the day-to-day management of the affairs of these Companies. These Companies have been marketing the products under the trade mark "Milka", registered in the name of PBPL, on payment of royalty as per the understanding between the promoters. All the Companies were doing extremely well till the seventh respondent (C.P.No.50 of 2003) fell ill during 2000-2001 for some time, resulting in re-organisation of the management which led to differences of opinion between the parties on scope of the management by various promoters and ultimately culminated in a Memorandum of Understanding (MOU) dated 19.06.2003. The MOU envisages that MNPL would go to the seventh respondent (C.P.No.50 of 2003) and two others; NHFIPL to the first petitioner and another; PBHPL and MBPL to the respondents 2, 8 and 9 and another. PBPL, being the parent Company owning the trade mark, no division was contemplated, with a view to ensure that all the promoters would continue to hold their stake therein. Pursuant to the MOU, a licence agreement was executed on 04.07.2003 by PBPL in favour of all other group companies permitting use of the trade mark "Milka" in perpetuity by the Companies for manufacturing and marketing of their respective products. However, the second respondent neither signed the MOU nor completed any of the formalities as contemplated therein, but resorted to clandestine transfer of shares impugned in the petitions with a malafide motive to create a majority in the Companies exclusively for his group and cornered use of the valuable trade mark, which is agreed to be enjoyed by all. The MOU does not envisage control of PBPL, being vested in the second respondent group. However, the second respondent taking advantage of his position as director, started creating disputes among the shareholders and directors with a view to assume sole control and management of the Companies and oust all other shareholders and directors by resorting to a series of illegalities.
• The second respondent failed to send any notice of the board meetings of the Companies from January 2003 onwards, inspite of several written requests for issue of notices by registered post to the first petitioner. The respondents 3 to 6 (C.P.No.50 of 2003); respondents 3 & 4 (C.P.No.51 of 2003) and respondents 3 to 5 (C.P.No.52 of 2003) being close relatives of the second respondent came to be inducted as additional directors, thereby assuming overwhelming majority in the board of the Companies, against the concept of parity of shareholding and representation on the board, which formed the basis of functioning of the Companies from their inception and further the second respondent proclaimed to be managing director of the Companies from July 2003, without any notice of the board meetings to the first petitioner. The grievance of the petitioners is total absence of notice and not the mode of service of notice of the board meetings by hand delivery, as claimed by the respondents. If notice of the board meeting is not sent to a single director, the entire proceedings of the board meeting are vitiated. It was held in (a) Akbarali A. Kalvert and Anr. v. Konkan Chemicals Private Limited and Ors. (1997) Vol.88 CC 245 that (a) the company shall give notices of board/general meetings to directors/members so long as they continue to remain so; and (b) certificates of posting are not reliable since it is too well known that certificates of postings can be got hold of without actually putting the letters in the post; (b) Sikkim Bank Limited and Ors. v. R.S. Chowdhury and Ors. (2000) Vol. 102 CC 387 that any board meeting held without any notice and/or unreasonably short notice to the directors is bad and invalid and that the decision taken at the board meeting is invalid; (c) Parmeshwari Prasad Gupta v. Union of India (1974) Vo.44 CC 417 that any board meeting convened without notice to one director is not valid and that resolutions passed at such meeting is inoperative; and (d) Kamal Kumar Dutta and Anr. v. Ruby General Hospital Limited and Ors. (2006) 5 Comp LJ 511 that if the board meeting has been convened without proper service of notice on the directors, such board meeting cannot be said to be valid. The first petitioner never sought leave of absence to attend the board meetings, as falsely made out in the minutes of the board meetings produced by the Company. The second respondent procured the resignation of the respondents 7 to 9 (C.P.No.50 of 2003); respondents 5 to 9 (C.P.No.51 of 2003) and respondents 6 to 10 (C.P.No.52 of 2003) as directors of the Companies and never placed their resignations before the boards, in violation of Clause 49 of the articles of association of the Companies and are therefore, invalid.
• The second respondent has been disposing of the fixed assets, plant and machinery of the Companies and siphoning of the funds without any proper accounting and proper authorisation of the board of directors. The statutory auditor of PBPL has qualified the accounts for the year ended 31.03.2003 and pointed out that the shortfall on the disposal of the fixed assets could not be ascertained and that cash balance of more than Rs. 16 lakh, could not be verified by the auditor. The statutory auditor of PBPL is the statutory auditor of MBPL as well as PBHPL. The second respondent aggrieved by these qualifications hurriedly convened at shorter notice of seven days, the annual general meeting of the Companies on 15.12.2003 contrary to the requirements of Section 219, so as to get all his illegal acts ratified, remove the statutory auditor and elect all his close relatives as directors of the Companies. The petitioners were given only six clear days notice of the annual general meetings and such convening of annual general meetings at shorter notice is illegal, in the absence of consent from all the shareholders of the Companies. Clause 26 of the articles of association of the companies does not dispense with the obtaining of the consent from all the shareholders, as required under Section 171(2) of the Act.
• The Companies being private limited Companies have restrictions on the transfer of shares as contained in Clauses 17 to 25 of the articles of association. It was held in John Tinson and Compuny Private Limited and Ors. v. Mrs. Surjeet Malhan and Anr. (1997) Vol. 88 CC 750 that (a) the articles of association of a private company are a contract between the parties; (b) when the articles provide that "no transfer of any share in the capital of the company shall be made or registered without the previous sanction of the directors..." then previous sanction shall be obtained from the directors for transfer of the shares held by the members, which connotes that there should be a written resolution accepting the transfer from the transferor to the transferee and such previous sanction should precede the handing over of the shares. This legal position has been followed by this board in Radhe Shyam Tulsian and Ors. v. Panchmukhy Investments Limited and Ors. (2003) Vol. 113 CC 298. Clause 18 of the articles stipulates that "No member shall be entitled to transfer the shares in the company except with the previous sanction of the Board of Directors", which has not been satisfied in the present case. Article 18 does not permit any negotiated transfer as between members on their own or at the wish of any shareholder. A shareholder on deciding to transfer his shares loses the right to choose the transferee. Furthermore, no member is entitled to claim the rights of a transferee. Clauses 19 to 22 contain pre-emption rights in favour of the existing members, whenever shares are proposed to be transferred to non-members. By virtue of Clause 19, shares can be sold to outsiders, when the existing members are not willing to purchase the shares. The transferor, under Article 20, must give notice to the Companies of the intended sale of his shares, upon which, the Companies become the agents for the sale of shares. Before execution of the instruments of transfer as envisaged in Article 22, the requirements of Articles 18 & 21 should be complied with. Therefore, the boards are placed in a fiduciary position to act in a fair, transparent and bonafide manner in ascertaining a willing transferee. This would require due intimation in favour of all the members of the notice received from the transferor-member and pro-rata distribution of the transfer of shares among them who are evincing interest to purchase shares, at a mutually agreed value. No notice of the board meetings, approving the impugned transfer of shares was sent to the first petitioner despite the written requisitions sent by the first petitioner for issue of notices by registered post. The Companies have not chosen to produce any material to establish compliance with the relevant articles or proof of consideration, before effecting the impugned transfer of shares in favour of the second respondent and his family members. If a party withholds important documents in his possession, which can throw light on the facts at issue, the CLB may draw adverse inference even if the burden of proof does not lie on such party, as held in A.J. Coelho and Ors. v. South India Tea and Coffee Estates Limited and Ors. (2004) 5 Comp LJ 624. Furthermore, the impugned transfers in favour of the second respondent group were made disregarding the MOU according to which, the petitioners group, second respondent group and seventh respondent group (C.P.No.50 of 2003) would continue to hold control over the Companies in common, as has been existing all along. While the petitioners group along with seventh respondent group (C.P.No.50 of 2003) being 5th and 6th respondent groups in C.P.No.51 and 52 of 2003 respectively always constituted majority of shareholders of the Companies, second respondent group has only been a minority group. The impugned transfers have the effect of converting the existing minority of the second respondent group into majority and reducing the petitioners group to the status of minority in the Companies. The second respondent and his family members constituting the board approved the impugned transfers to themselves at the board meeting held on 25.08.2003, which can be nothing more than oppressive. This Board in (a) S. Varadarajan and Anr. v. Udhayem Leasings and Investments Private Limited (2005) Vol. 125 CC 853 held that any transfer of shares without exhausting the rights of pre-emption in violation of the articles amounts to oppression; and (b) MM. Dua and Ors. v. Indian Dairy and Allied Services Private Limited and Ors. (1996) Vol. 86 CC 657 that where there is a provision in the articles of association of a company for preemption by members in the matter of transfer of shares, a transfer in violation of such provisions constitutes oppression; and (c) Akbarali A. Kalvert and Anr. v. Konkan Chemicals Private Limited and Ors. (supra) that any transfer of shares in violation of the articles amounts to denying a privilege available to the shareholder. The fiduciary position of the board has been grossly abused by the second respondent in fabricating the transfer of shares and in creating a majority for his group. The Supreme Court held in (a) Dale and Carrington Investments Private Limited and Anr. v. P.K. Prathapan and Ors. (2004) Vol. 122 CC 161 that the directors act on behalf of a company in a fiduciary capacity and their acts and deeds have to be exercised for benefit of the company in accordance with the memorandum and articles of association of the company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent; and (b) Vaishnav Shorilal Puri and Ors. v. Kishore Kundanlal Sippy and Ors. (2005) I Comp LJ 407 that any person bound in a fiduciary character to protect the interests of another person should not put himself in a position where his interest and duty conflict. If by availing himself of this fiduciary character or by entering into any dealings under circumstances in which his interests are or may be adverse to those of such other person he gains for himself a pecuniary advantage, he must hold for the benefit of such other person the advantage so gained; and (c) Kamal Kumar Dutta and Anr. v. Ruby General Hospital Limited and other (supra) that the directors are in a position of a trust and must conform to the probity and their conduct should be above suspicion.
• There were six groups holding shares in the Companies and each group was having representation in the board of directors of the Companies and after the impugned transfers, there are only three groups, namely, the first petitioner, second petitioner and second respondent groups. The petitioners 1 & 2 collectively held larger shares in the Companies. The second respondent holding lesser shares had a lone representation in the board of the Companies. At the board meetings held on 26.06.2003 and 30.07.2003, the family members of the second respondent came to be appointed as directors. Thus, the second respondent group achieved illegal majority and assumed illegal control of the board of PBPL. Even after filing of the company petition, the first petitioner has not been receiving any notice of the board meetings, and at the same time, important decisions have been taken by the second respondent without the knowledge of the first petitioner. Similar is the situation in the case of MBPL and PBHPL. The Companies are presently being managed by the improperly constituted board of directors and mismanaging the assets as well as funds of the Companies. The second respondent has brought out material changes both in terms of shareholding and management by means of the impugned transfer of shares, thereby their affairs are being conducted in a manner prejudicial to the interests of the Companies and their shareholders. This Board in S. James Fredrick and Anr. v. Mrs. Minnie R. Fredrick and Ors. (2000) 1 Comp LJ 293 held that appointment of additional directors disturbing parity in the constitution of board of directors of a family company would constitute an act of oppression; and (b) Kshounish Chowdhury and Ors. v. Kero Rajendera Monolithics Limited and Ors. (2002) 1 Comp LJ 552 that appointment of additional directors made to gain control of the board is neither bonafide nor in the interest of the company. PBPL owns the trade mark "Milka" and the same is licenced to all other group companies and, therefore, by securing control over the parent Company, the second respondent gained control over the trade mark and thereby cornered all the benefits arising out of the popular trade mark. The Companies being private limited companies are managed on quasi partnership principles and it is rather unjustifiable for a single shareholder to resort to a series of oppressive acts so as to take control of the Companies in gross violation of the articles of association. The respondents, being oppressors should not be awarded as observed by the Supreme Court in Dale and Carrignton Investment Private Limited v. P.K. Prathapan (supra) especially when, it would amount to granting premium in favour of the oppressors. The transferors having evinced interest to transfer the impugned shares, this Bench may consider directing the transferors to transfer the shares proportionately in the name of all the shareholders in the ratio of their original shareholding, by which the transferors are in no way affected as observed by this Board in M.M. Dua and Ors. v. Indian Dairy and Allied Services Private Limited and Ors. (supra).
• The notice dated 18.08.2003 of PBPL, convening the board meeting on 25.08.2003 contains the agenda, which includes sanction of the transfer of shares in favour of the second respondent and his wife. However, the instruments of transfer are dated 22.08.2003 and bear the endorsement of the Registrar of Companies made on 19.08.2003. It is not, therefore, conceivable as to how the board meeting could have been convened on 25.08.2003 to approve the share transfers in favour of the second respondent and his wife. The board of directors first accorded its sanction at the board meeting for transferring the impugned shares and thereafter only for issuing the duplicate share certificates in favour of the transferees, which clearly indicates that on the date of execution of transfer deeds, no duplicate share certificates were in existence and that the transfer of shares came to be effected without the share certificates in existence. Therefore, the transfers are in clear violation of the mandatory provisions of Section 108 of the Act. If the mandatory requirements of Section 108 of the Companies Act, 1956, are not complied with, while registering the transfer of shares, the transfer is not valid, as held in Shailesh Rajnikant Parekh v. Starline Travels Private Limited and Ors. (2004) Vol. 118 CC 145. There is no witness nor is there attestation of signature of the transferor, in any of the instruments of transfer produced by the respondents. The transferees have not affixed specimen signatures, which should necessarily be affixed in the instruments of transfer. The folio number of the transferees has not been furnished in the relevant columns of the instruments of transfer. The seventh respondent (C.P.No.50 of 2003); fifth respondent (C.P.No.51 of 2003) and sixth respondent (C.P.No.52 of 2003) is questioning the genuineness of his signature in the instruments of transfer.
• The second respondent resorted to a large scale non-accounting of turnover and siphoning of funds, which came to light, pursuant to raid of the factory premises of the Companies conducted in June 2005 by the Central Excise Department. Furthermore, the Sales Tax Department found out that the Companies are engaged in a large scale unaccounted turnover. No audit of accounts has been done after 31.03.2003 and no board meetings have been convened for the past more than two years and no details concerning the affairs of the Companies have been placed before the boards. The Companies have been incurring extensive expenditure on advertisement without being backed by any board resolution and corresponding increase in turnover of the Companies.
• The Companies were engaged, during the years 2003-2006, in the new line of manufacture of cakes, incurring extensive capital investment to install plant and machinery for manufacture of cakes and extensive expenditure on advertisement, without any board resolution. The second respondent, under the guise of advertisement expense, has been siphoning of funds of the Company. Dealers associated with the Company for several years have been replaced with new persons to facilitate large scale unaccounted sales. The second respondent is unlawfully engaged in unaccounted sales, large scale diversion of sale proceeds and profits earned by the Companies. These series of action taken by the second respondent and his continuing conduct are harsh, unconscionable and oppressive to the rights of the petitioners as shareholders of the Companies. The actions complained of in the company petitions would justify the making of a winding up order of the Companies under the just and equitable clause. However, such winding up would unfairly prejudice the interests of the petitioners and the minority shareholders.
• The petitioners have been offered limited inspection to the statutory records and books of account of the Companies, which revealed the following irregularities:
PBPL (C.P.No.50 of 2003) • PBPL Company has franchised the trade mark "Milka" for all kinds of products to several entitles without any board resolution and in breach of the prohibitory order of this Bench.
• Consistent decrease in sales.
• Increase in advertisement expenses; liabilities, sundry debtors, accumulated losses, freight charges etc. • Loan obtained from ICIC1 Bank to the extent of Rs. 8.17 lakh (As on 31.01.06) without the knowledge of first petitioner • Assets unauthorisedly sold in the year 2005 to the extent of Rs. 5 lakhs (Gross Value) & purchased in the year 2005-06 to the extent of Rs. l 1.54 lakhs.
MBPL(C.P. No. 51 of 2003) • Consistent decrease in sales • Increases in liabilities, sundry debtors, accumulated losses, electricity charges etc. • Assets purchased in the year 31.03.05 to the extent of Rs. 1 lakh and Rs. 16,000/- in the year 31.01.06 without proper board resolutions PBHPL(C.P.No.52 of 2003) • Increase in advertisement expenses, accumulated losses, liabilities, unsecured loans etc. • Fixed assets (gross value) increased year after year without any valid board resolution authorising capital expenditure • Manufacture of MILKA mixture and other savouries without having power in the object clause of the memorandum of association
4. Shri P.H. Arvind Pandian, learned Counsel opposed the company petition on the following, among other grounds:
• All the respondents and erstwhile promoters live in the same vicinity and have been close individuals and hence it has been the regular practice of the Companies to send notice of any meeting to members and directors either through hand delivery or by post or courier. Section 53(1) permits the company to serve documents on the members personally. No grievance has been raised in this behalf for the last ten years. When the first petitioner was Chairman of the Companies, he had also followed the same procedure in regard to issue of notices for the board meetings and conduct of the same. However, the board of directors of the Companies decided to send the notice by courier for the meetings held on 30.10.2003 and adopted and approved the accounts. Though the first petitioner attended the board meetings on 30.10.2003, he failed to record his presence by not signing the attendance register. The first petitioner has been regularly attending the registered office and work premises of the various group companies and he is also aware of the day-to-day activities of the Companies.
• The Companies are private limited companies and are not family companies. There are no groups of shareholders and there is nothing wrong in appointment of the relatives as additional directors especially when such appointments have been made to fill the vacancies caused by resignation of some of the directors at board meetings after due notice sent to all the directors and after passing of necessary resolutions in this regard. The respondents 7 to 9 (C.P.No.50 of 2003); respondents 5 to 9 (C.P.No.51 of 2003) and respondents 6 to 10 (C.P.No.52 of 2003) sent their resignation letters to the Companies and requested for filing of Form 32 with the Registrar of Companies and the resignation letters of these directors were accepted by the boards at the duly convened meetings as contemplated in Clause 49 of the articles of association of the Companies. The second respondent never procured the resignation letters from the respondents 7 to 9 as claimed by the petitioners. The rule of majority of the board prevails, which cannot be questioned unless such appointment is made against the provisions of the articles of association of the Companies or any other provisions of law. The second respondent came to be appointed only on 30.07.2003 as managing director of PBPL by a majority of directors and therefore, it was not the duty of the second respondent prior to this period to ensure notice of the board meetings and he cannot be blamed for non-sending of notices of the board meetings. The first petitioner at no prior point of time questioned the appointment of the second respondent as the managing director of the Companies, except for the first time in the present company petition.
• The sale of assets and vehicles of the Companies was duly made after obtaining the approval of the boards in their meetings. These sale transactions have been duly verified and audited by the auditors of the Companies in their reports in this regard.
• The petitioners have wrongly contended that the auditor of the Company is being removed at the annual general meetings of the Companies for the year 2003. Section 225 empowers the shareholders to appoint a person as auditor of the company other than the retiring auditor at the annual general meeting and such an act would not amount to removal of auditor as alleged by the petitioners, especially when removal of auditor means removal before the expiry of his term of office which is dealt by Section 224(7) of the Act. However, in the present case, it has been proposed at the annual general meeting, pursuant to a special notice received from some of the shareholders, for appointment of an auditor after expiry of the term of office of the present auditor under Section 225 of the Act and therefore, any such change in the auditors of the Companies will be made in strict compliance with the principles of shareholders democracy and therefore, the proposed appointment cannot be questioned, unless the provisions of law are not duly followed. However, the present auditor continues to be auditor of the Companies, in view of the stay granted by this Bench in holding the annual general meeting for the year 2003. Consequently, the accounts of the Companies for the year2003-2004 could not be audited, since the auditor was appointed by the members of the Companies at the annual general meeting during the year 2002 to audit the accounts only for the financial year 2002-2003.
• Clause 26 of the articles of association empowers the Companies to call an annual general meeting at a shorter notice of not less than seven days. According to the petitioners, Clause 26 of the articles of association does not dispense with the requirements of Section 171(2) of the Act, whereas, Section 170(1)(ii) provides that Section 171, shall, unless otherwise specified therein or unless the articles of the Companies otherwise provide, apply with respect to general meetings of a private company which is not a subsidiary of a public company. In the case of the Companies Clause 26 contains a specific provision permitting convening of annual general meeting at a short notice of not less than 7 days and therefore, Section 171 shall not apply. The Registrar of Companies, as per the request made by the Companies, extended time for holding the annual general meeting of the Companies till 15.12.2003.
• The impugned share transfers were effected by passing necessary resolutions at the board meetings in accordance with Clause 18 read with Clause 19 of the articles of association of the Companies. The share transfers were transparent and made only to the existing members and their family members alone and not to outsiders and not violative of the articles of association of the Companies. It is enough, if the board of directors approve the transfer of shares and there is no need to approve second time the transfer of shares. Article 18 to 21 will go together. If there are willing members, the requirements of Article 18 are satisfied. In the present case, the transferors had already identified the existing and willing members for transferring his/her shares and therefore, there was no necessity for the boards to act as agents to complete the transfers and follow the prescribed procedure. Under Article 20 notice is required to be sent to all the members only if the shares are offered to outsiders. Furthermore, no prejudice has been caused to any member on account of the impugned transfer of shares. There is no provision in the articles to show that pro-rata distribution of the shares should be made amongst all the members evincing interest to purchase shares of the Companies and under Article 21 any decision of the board shall be final. Thus, the impugned transfers are not violative of the articles of association and oppressive. This Board held in Cine and Supply Corporation Private Limited and In re: Palak Kumar Mondal and Ors. v. Satyabrata Jana and Ors. (2003) Vol. 115 CC 481 that (a) an illegal act need not be oppressive; (b) even if there is violation of the provisions of the articles of association, the same could not be considered an act of oppression, especially when, the aggrieved shareholder would have been entitled to only 23% of the shares; and (c) if there is nothing in the articles prohibiting a member from identifying a willing member on his own and negotiating the price for the shares, any transfer cannot be said to be violative of the articles. If the share transfers are held invalid, still the shares would revert back only to the members who were holding the shares earlier. There has not been violation of the articles and no case of oppression has been made out by the petitioners. Even assuming that the first petitioner had attended the board meeting and voted against the share transfers, still the share transfers would have been approved by a simple majority. Furthermore, the Companies have duly recorded the share transfers in the minutes book of the board meetings, which is conclusive evidence of the proceedings recorded under Section 194 of the Act. The Companies have produced the minutes of various board meetings substanting the approval of impugned transfers and appointment of additional directors. By a mere transfer of shares between the existing members, without issue of fresh shares, new majority could not be created in favour of the second respondent. The petitioners hold just 10% of the paid up share capital of the Companies both before and after the impugned transfer of shares in favour of the second respondent and his family members. Therefore, the impugned transfers in no way affect the shareholding of the petitioners, which remain unchanged. The petitioners have not established any acts of oppression or mismanagement and not made out any case to show that the affairs of the Companies are being conducted in a manner prejudicial to the public interest or in a manner oppressive to any member or members.
• There is no act which falls within the meaning of the term "oppression" or "mismanagement" or the facts justify the making of a winding up order on the ground it is just and equitable that the company should be wound up and such winding up would unfairly prejudice the petitioners. There is no material to show that the conduct of the respondents has been burdensome, harsh or wrongful or prejudicial or unfair to the petitioners justifying the course of action to main the petitions. The first petitioner even though a shareholder of the Companies has made all the allegations in his directorial capacity, which are not amenable to the jurisdiction of the CLB. In this connection reliance has been placed on Hillcrest Realty SDK BHD. and Anr. v. Hotel Queen Road Private Limited and Ors. (2006) 133 Comp Cas 742 to show that (a) when a member alleges oppression, he has to specifically plead on five facts: what is the alleged act of oppression, how it is oppressive, who committed the act of oppression, whether it is in the affairs of the company and whether the company is party to the commission of the act of oppression; (b) a transaction of transfer of shares by a member could never be considered to be in the affairs of a company; and (c) in the case of transfer of shares, the transaction was a private arrangement and the company comes into picture only for the purpose of recognition of the transferee as the new shareholder and therefore, the registration of transfer was not oppressive and against the provisions of articles or the act, in which case, the transfer of shares is not required to be declared invalid.
• The petitioners claim that Article 26 does not dispense with the requirement of Section 171(2) of the Act, whereas Section 170(1)(ii) provides that the provisions of Section 171 shall, unless otherwise specified therein or unless the articles of the company provide, apply with respect to general meetings of a private company which is not a subsidiary of a public company. In the instant case, Clause 26 contains a specific provision permitting convening of annual general meeting at a short notice of not less than 7 days and therefore, Section 171 shall not apply. Nevertheless the Company did not convene the annual general meeting on account of the stay granted by this Bench and therefore, the grievances of the petitioners in this regard do not survive.
• The issue relating to 'trade mark' of the Company is subject matter of a civil suit which is already pending before the High Court of Madras. This grievance covered under the intellectual property law cannot constitute an act of oppression or mismanagement. All acts of mismanagement have been raised by means of filing an affidavit, only after filing of the company petition and must, therefore, be ignored. The Madras High Court held in Asoka Betelnut Co. (P) Limited v. M.K. Chandrakanth (1998) 1 Comp LJ 325 to show that the facts arising subsequent to the filing of the petition cannot be relied upon and that validity of the company petition will be judged on the facts alleged therein and existing at the time of presentation of the petition.
5. I have considered the pleadings and arguments advanced by learned Counsel. The main dispute raised by the petitioners is as to whether the transfers impugned in all the three company petitions are in compliance with the relevant articles of association of the Companies. Shri Vidhya Shankar, learned Counsel, placed reliance on a series of decisions cited supra, wherein the transfers made in violation of pre-emptive clauses contained in the articles of association have been held to be invalid and as such sought to nullify the transfer of impugned shares. The provisions governing transfer of shares in the Companies are enumerated in Articles 17 to 25, of which Articles 18 to 23 assume relevance for adjudicating the contentious issue, summary of which is as under:
• Article 18: No member shall be entitled to transfer his shares in the company save with the previous sanction of the board of directors.
• Article 19: No share shall be transferred to a non-member so long as any member is willing to purchase the same at a mutually agreeable value between the transferor and transferee.
• Article 20: Any member intending to transfer his share shall give notice in writing to the company, specifying the number of shares proposed to be transferred together with the value and further appointing the company as his agent for the sale of shares mentioned therein. This is intended to ascertain the willingness of any member to purchase the shares offered by the transferor.
• Article 21: The board of directors, after receipt of any notice under Article 20, may decide regarding the transfer of such shares, which shall be final.
• Article 22: The intending transferor as well as the purchasing member shall execute the instruments of transfer as per Section 108 of the Act and complete the transactions.
• Article 23: The board of directors may in their discretion refuse to register the transfer of shares - (a) to any person who is not desirable to be admitted as member, in the interest of the company; (b) if the company has a lien on such shares; and (c) if the number of members exceeds the limit prescribed under the articles.
A careful analysis of the articles suggests that no shareholder is empowered to transfer his shares in the Companies except with the previous sanction of the board of directors. The language used in Article 18 being in the negative form, it emphasises the insistence of compliance with "the previous sanction" of the board of directors, before the transfer of shares by any member in the Companies and therefore, in my considered view, the requirements of Article 18 are mandatory in character and not merely directory, irrespective of the fact whether the transfer of shares is in favour of any member or non-member. By virtue of Article 19, no share is transferable to a non-member provided any member is willing to purchase the same at a mutually agreeable value. It is, therefore, open to a member before transferring his shares in favour of a non-member, to ascertain the willingness of any member to purchase the shares so offered by any selling member, which is however subservient to Article 20, according to which, any member intending to transfer his shares shall give notice as prescribed therein, appointing the company as his agent for the sale of shares, on which the board of directors has to decide, under Article 21, regarding the transfer of such shares. Thus, it is left to the absolute discretion of the board of directors either to register or refuse to register the transfer of shares and the decision of the board of directors is final. It is only on and after completion of these requirements, namely, (a) previous sanction of the board of directors (article 18); (b) issue of transfer notice to all the members (article 20); and (c) decision of the board of directors regarding the transfer (article 21), the intending transferor and the purchasing member, as stipulated in Article 22, shall execute the instrument of transfer in accordance with the provisions of Section 108 of the Act and complete the transactions. The expressions "complete the transactions" appearing in Article 22 connote that the execution of instrument of transfer shall necessarily be preceded by the requisites of Articles 18, 20 & 21. Article 23 deals with the circumstances under which the board of directors may refuse to register the transfer of shares in the Companies. Therefore, any transfer of shares in favour of either a member or non-member, without due compliance with the prescribed procedure, will not be in consonance with the letter and spirit of the relevant articles discussed supra. The articles do not envisage, as rightly pointed by Shri Vidhya Shankar, learned Counsel, any negotiated transfer of shares between the existing members, without adhering to the requirements of relevant articles. By virtue of Section 36, the articles of association of a company are a contract between the members as reiterated in John Tinson and Company Private Limited and Ors. v. Mrs. Surjeet Malhan and Anr. (supra) and any member in his capacity as a member can enforce rights given to him by the articles, such as the rights of pre-emption etc. Having found the binding nature of various articles, I shall proceed to consider as to whether the impugned transfers are in strict compliance with such articles, in view of the settled position of law that every transfer of shares of a private company has to be strictly in accordance with articles. The company shall always follow the terms of applicable articles in respect of any transfer of shares. It is observed from copies of the instruments of transfer and minutes of various board meetings of the Companies produced before the Bench that the second respondent and his family members and/or associates had acquired the impugned shares of the Companies as per the following details:
PBPL(C.P. No. 50 of 2006) S. Name of Name of No. of Date of Date of sanction No. transferor transferee shares transfer by the Board 1 K. Panner Selvam K. Jayakrishnan 250 22.08.2003 25.08.2003 2 R. Rajagopal Shanthini 200 22.08.2003 25.08.2003 Jayakrishnan 3 G.S. Revathy Shanthini 100 22.08.2003 25.08.2003 Jayakrishnan 4 S. Maheswari Shanthini 450 22.08.2003 25.08.2003 Jayakrishnan 5 M. Subramaniam Shanthini 500 22.08.2003 25.08.2003 Jayakrishnan 6 M. Subramaniam K. Jayakrishnan 300 22.08.2003 25.08.2003 7 G.D. Selvaraj Shanthini 1400 22.08.2003 25.08.2003 Jayakrishnan 8 Saly James K. Jayakrishnan 950 22.08.2003 25.08.2003 9 Thangamma Joseph K. Jayakrishnan 350 22.08.2003 25.08.2003 10 P.R. Manickam K. Jayakrishnan 250 22.08.2003 25.08.2003 11 G.D. Sekar K. Jayakrishnan 1590 22.08.2003 25.08.2003 12 V.M. Joseph K. Jayakrishnan 940 22.08.2003 25.08.2003 13 G.S. Latha K. Jayakrishnan 250 18.07.2003 30.07.2003 14 P.K. Krishnan K. Jayakrishnan 1190 18.07.2003 30.07.2003 15 G.S. Gayathri Shantini 250 18.07.2003 30.07.2003 Jayakrishnan TOTAL 8970 MPBL(C.P.No.51 of 2006) S. Name of Name of No. of Date of Date of sanction No. transferor transferee shares transfer by the Board 1 Meenakshi Anuratha Shantini 350 16.11.2003 29.11.2003 Jayakrishnan 2 N. Parameswaran Shantini 300 16.11.2003 29.11.2003 Jayakrishnan 3 P. Shanmugam K. Jayakrishnan 500 22.08.2003 25.08.2003 4 Ranganayagi Ammal N. Chellammal 500 22.08.2003 25.08.2003 5 A. Nazar K. Subbulakshmi 500 22.08.2003 25.08.2003 6 M. Subramaniam N. Chellammal 420 18.07.2003 30.07.2003 7 Gayathri Selvaraj K. Subbulakshmi 388 18.07.2003 30.07.2003 & Ajay 8 S. Suresh K. Subbulakshmi 367 18.07.2003 30.07.2003 9 P.K. Krishnan Shanthini 1155 18.07.2003 30.07.2003 Jayakrishnan 10 V. Bhuvaneswari Shanthini 500 18.07.2003 30.07.2003 Jayakrishnan 11 R. Venkatesan Shanthini 500 18.07.2003 30.07.2003 Jayakrishnan 12 Nimmi Joseph K. Jayakrishnan 350 18.07.2003 30.07.2003 13 Abilash Joseph K. Jayakrishnan 400 18.07.2003 30.07.2003 14 Thangamma Joseph K. Jayakrishnan 400 18.07.2003 30.07.2003 15 James Mathew K. Jayakrishnan 400 18.07.2003 30.07.2003 16 G.D. Selvaraj K. Jayakrishnan 900 18.07.2003 30.07.2003 17 Latha Sekar & K. Jayakrishnan 388 18.07.2003 30.07.2003 Abilash 18 G.D. Sekar K. Jayakrishnan 400 18.07.2003 30.07.2003 19 S. Ramesh K. Jayakrishnan 300 18.07.2003 30.07.2003 20 M. Subramaniam K. Jayakrishnan 500 18.07.2003 30.07.2003 21 K. Bhaskar K. Jayakrishnan 432 18.07.2003 30.07.2003 22 Joy John & K. Jayakrishnan 1500 18.07.2003 30.07.2003 Usha Joy 23 V.M. Joseph K. Jayakrishnan 2000 18.07.2003 30.07.2003 TOTAL 13450 PBHPL (C.P.No.52 of 2006) S. Name of Name of No. of Date of Date of sanction No. transferor transferee shares transfer by the Board 1 K. Panner Selvam K. Jayakrishnan 100 16.11.2003 29.11.2003 2 N. Parameshwaran J. Ajay 400 16.11.2003 29.11.2003 Shivakumar 3 G.S. Latha N. Chellammal 387 16.11.2003 29.11.2003 4 Ranganayakiammal N. Chellammal 500 22.08.2003 25.08.2003 5 P.R. Manickam K. Jayakrishnan 500 22.08.2003 25.08.2003 6 R. Murugan K. Jayakrishnan 500 22.08.2003 25.08.2003 7 G.L. Venkatesh K. Jayakrishnan 1000 22.08.2003 25.08.2003 8 M. Loganathan K. Jayakrishnan 500 22.08.2003 25.08.2003 9 G.S. Subramaniam K. Jayakrishnan 500 22.08.2003 25.08.2003 10 P. Shanmugam & K. Jayakrishnan 1000 18.07.2003 30.07.2003 S. Jayalakshmi 11 P.K. Krishnan K. Jayakrishnan 1150 18.07.2003 30.07.2003 12 R. Kumar N. Chellammal 500 18.07.2003 30.07.2003 13 S. Maheswari N. Chellammal 376 18.07.2003 30.07.2003 14 G.S. Gayathri N. Chellammal 387 18.07.2003 30.07.2003 15 M. Subramaniam N. Chellammal 500 18.07.2003 30.07.2003 16 G.D. Selvaraj N. Chellammal 750 18.07.2003 30.07.2003 17 G.D. Sekar K. Jayakrishnan 750 18.07.2003 30.07.2003 18 Jameskutty Mathew K. Jayakrishnan 500 18.07.2003 30 07.2003 19 Joy John K. Jayakrishnan 1000 18.07.2003 30.07.2003 20 Thangamma Joseph K. Jayakrishnan 300 18.07.2003 30.07.2003 21 V.M. Joseph K. Jayakrishnan 1100 18.07.2003 30.07.2003 22 K. Jayakrishnan J. Yuvana Rekha 50 10.07.2003 14.07.2003 23 Amirthavalli K. Jayakrishnan 500 10.07.2003 14.07.2003 Tamilselvan TOTAL 13250 It is clear from the above details that -
(a) the transfer of 8970 shares of PBPL were made on 18.07.2003 and 22.08.2003, while the board of directors of PBPL accorded its sanction under Article 18, after effecting the transfers by the transferors on 30.07.2003 and 25.08.2003;
(b) the transfer of 13450 shares of MBPL were made on 18.07.2003, 22.08.2003 and 16.11.2003, while the board of MBPL accorded its sanction under Article 18, after effecting the transfers by the transferors, on 30.07.2003, 25.08.2003 and 29.11.2003;
(c) the transfer of 13250 shares of PBHPL were made on 10.07.2003, 18.07.2003, 22.08.2003 and 16.11.2003, while the board of directors of PBHPL accorded its sanction under Article 18, after effecting the transfer by the transferors, on 14.07.2003, 30.07.2003, 25.08.2003 and 29.11.2003.
All the board resolutions of the Companies save resolutions dated 14.07.2003 and 29.11.2003 of PBHPL, before according sanction pursuant to Article 18, to transfer the impugned shares, contain the following recitals:
The Share Transfer Deeds received from the members for transferring their shares as placed before the Board were gone through. The Board noticed that all the transferees as covered by the transfer deeds were the existing members of the Company. The Board further noted that transfers contemplated from the transferors to the transferees were in accordance with Article 19 of the Articles of Association and transfer deeds duly executed and stamped had been submitted to the Board for necessary approval. The Board after due consideration paused the following resolutions:-
It is unequivocally clear from the above observations of the board of directors of the Companies forming part various resolutions and the board resolution dated 29.11.2003 of PBHPL that "...the transfer deeds duly executed and stamped had been submitted to the Board for necessary approval". It is, therefore, beyond doubt that none of the transfer instruments including the one dated 10.07.2003 in relation to 50 shares of PBHPL reportedly gifted in favour of J. Yuvana Rekha, daughter of the second respondent, impugned in the present proceedings, is preceded by previous sanction of the board of directors of the Companies in tune with the mandatory requirements of Article 18. The respondents have not caused production of any material to establish that the transfers were made in favour of the second respondent and his associates, with previous sanction of the board of directors of the Companies in strict compliance with Article 18. The Supreme Court in John Tinson and Compan Private Limited and Ors. v. Mrs. Surjeet Malhan and Anr. (supra), while interpreting the articles which provided that "no transfer of any share in the capital of the company shall be made or registered with the previous sanction of the directors", categorically held that there should be a written resolution accepting the transfer from the transferor to the transferee and such previous sanction should precede the handing over the shares. This legal proposition has been adopted by this Board in Radhe Shyam Tulsian and Ors. v. Panchmukhy Investments Limited and Ors. (supra) thus: "Where the company is a public limited company and there is no specific provision in its articles that no transfer of any shares in the capital of the, company shall be made or registered without the previous sanction of the directors, the objection that the board of directors had not resolved to register the transfer of share and therefore there is no valid registration would not be tenable." In the present cases before me, the handing over of all the shares by the transferors to the transferees, without any doubt, preceded the sanction of the board of directors accepting the transfers, which is not in consonance with Article 18 and the principles enunciated by the Supreme Court. In Cine and Supply Corporation Private Limited and In re: Palak Kumar Mondal and Ors. v. Satyabrata Jana and Ors. (supra), while there are articles which are similar and identical to Articles 19 and 20 prevalent in the Companies before me, there is no article to the effect that "no member shall be entitled to transfer his shares in the company except with the previous sanction of the Board of Directors", which forms part of the articles of association of the present Companies. In this context, it was observed in that case that there is no provision in the article prohibiting a member from identifying a willing member on his own and negotiate the price. However, in view of Article 18, in the present cases, a member is prohibited from identifying a willing member on his own and negotiate the price for shares, without appointing the Company under Article 20, as his agent for the sale of shares. Furthermore, in that case the shareholders took a decision to transfer the shares with a view to protect the interest of the company, which was in financial difficulties. Thus, the decision cited by Shri Pandian, learned Counsel has no application to the cases on hand. The transfer of 400 shares of PBHPL by N. Parameshwaran in favour of J. Ajay Shivakumar, a non-member, as on the date of transfer, in terms of the instrument of transfer dated 16.11.2003, in the absence of any material showing the issue of any transfer notice by the transferor, is hit by Article 20. Any transfer of shares denying a privilege available to the member in violation of the articles has been disapproved in Akbaruli A. Kalvert and Anr. v. Konkan Chemicals Private Limited and Ors. (supra). This Board held in (a) S. Varadarajan and Anr. v. Udhayem Leasings and Investments Private Limited; and (b) M.M. Dua and Ors. v. Indian Dairy and Allied Services Private Limited and Ors. (supra) that any transfer of shares without exhausting the rights of pre-emption in violation of the articles would constitute an act of oppression. In this context, the assertion made on behalf of the respondents that all the impugned transfers would have been approved by the boards even with participation of the first petitioner does not merit any consideration. Shri R. Vidhya Shankar, learned Counsel, while placing reliance on M.M. Dua and Ors. v. Indian Dairy and Allied Services Private Limited and Ors. (supra) pointed out the spirit behind the pre-emptive provisions of the articles and urged that the equity of the transferors is no way affected if the respondents herein are directed to make an offer to the other shareholders in proportion to their shareholding in the Companies. However, considering the requirement of previous sanction and exclusive authority of the board of directors, bestowed on them by virtue of the articles, discussed supra, to decide regarding the transfer of shares, this decision sought to be relied upon by Shri Vidhya Shankar, learned Counsel, renders no assistance to the petitioners. The plea raised by the respondents, on the strength of Hillcrest Realty SDN. BHD. and Anr. v. Hotel Queen Road Private Limited and Ors. (supra) that any transfer of shares being a private arrangement between the transferor and transferee cannot be considered to be in the affairs of the company and consequently, the registration of such transfer by the company can neither be construed to be oppressive, must be viewed in the light of the observations of this Board in the said decision that any transfer of shares of a private company has to be strictly in accordance with the articles and therefore, the company should always follow the terms of applicable articles in respect of any transfer.
The whole purpose of Article 20, appointing the board as an agent of the member intending to transfer the shares, for effecting the sale of shares and making the board, under Article 21, the deciding authority on transfer of shares is to ensure that the shares are offered to all the members before transferring to non-members. The execution of instruments of transfer in respect of the impugned shares in compliance with Section 108 of the Act by the intending transferor and purchasing member as contemplated in Article 22, without due completion of the requirements of Articles 18 and 21, is neither contemplated nor permissible under the articles.
The second respondent and his family members reportedly held, prior to the impugned transfers, about 15% of the paid up capital of each PBPL as well as MBPL and 7.23% of the paid up capital of PBHPL, which came to be enhanced by 8970 shares, 13450 shares and 13250 shares in PBPL, MBPL and PBHPL respectively, as borne out by copies of the minutes of various board meetings of the Companies produced before the Bench, which resulted in the second respondent and his family members acquiring the controlling interest in the Companies.
At the board meeting held on 26.06.2003, (a) approval for sale of the assets of PBPL was accorded; and (b) the respondents 4 and 5 were co-opted as directors of PBPL. While the respondents 8 and 9 had resigned from the post of managing director and director respectively, respondents 3 and 6 came to be appointed as directors at the board meeting held on 30.07.2003. The resignation of the seventh respondent from the office of the director was accepted by the board of directors at the meeting held on 18.08.2003. The respondents have produced copies of the notices dated 21.07.2003 and 09.08.2003, purportedly sent by post, convening the board meeting of PBPL on 30.07.2003 and 18.08.2003 respectively. There has been no copy of the notice of the board meeting produced before the Bench, said to have been held on 26.06.2003. The extracts of the attendance register indicate that leave of absence was granted to the first petitioner from attending these board meetings of PBPL.
At the board meeting held on 30.07.2003, while resignations of the respondents 5 to 9 were accepted, third respondent and one Smt. Meenakshi Anuradha came to be co-opted as directors of MBPL. Similarly, while Smt. Meenakshi Anuradha had resigned from directorship, the fourth respondent was co-opted as a director by the board of directors at the board meeting held on 25.08.2003. The respondents have produced copies of the notices dated 23.07.2003 and 18.08.2003, purportedly sent by post, convening the board meeting of MBPL on 30.07.2003 and 25.08.2003 respectively. The extracts of the attendance register indicate that leave of absence was granted to the first petitioner from attending these board meetings of MBPL.
At the board meeting held on 30.07.2003, resignations of the respondents 6 to 10 from the office of the director were accepted; second respondent was appointed as managing director and respondents 3 and 4 came to be appointed as directors of PBHPL. At the board meeting held on 30.10.2003, the third respondent had resigned from his directorship and the fifth respondent came to be co-opted as a director. The respondents have produced copies of the notices dated 21.07.2003 and 23.10.2003, purportedly sent by post, convening the board meetings of PBHPL on 30.07.2003 and 30.10.2003 respectively. The extracts of the attendance register indicate that leave of absence was granted to the First petitioner from attending the board meeting held on 30.07.2003 and further that the first petitioner refused to sign the attendance register at the board meeting held on 30.10.2003 of PBHPL.
The board of directors of PBPL accorded sanction under Article 18 to transfer the shares impugned in C.P.No.50 of 2003 at the board meeting held on 30.07.2003 (1690 shares in favour of the respondents 2 and 3) and at the board meeting held on 25.08.2003 (7280 shares in favour of the respondents 2 and 3). Thus, 8970 shares of PBPL were acquired by way of transfer by the respondents 2 and 3. The extracts of the attendance register indicate that leave of absence was granted to the first petitioner from attending these board meetings of PBPL. The transfer of shares impugned in C.P.No.50 of 2003 was approved, apart from respondents 7 and 9 by the respondents 2 to 6.
The board of directors of MBPL accorded sanction under Article 18 to transfer the shares impugned in C.P.No.51 of 2003 at the board meeting held on 30.07.2003 (11300 shares in favour of the respondents 2 to 4 and one Smt. N. Chellammal); at the board meeting held on 25.08.2003 (1500 shares in favour of the respondents 2, 3 and one Smt N. Chellammal); and at the board meeting held on 29.11.2003 (650 shares in favour of the fourth respondent). Thus, 13450 shares of MBPL were acquired by way of transfer by the respondents 2 to 4 and one Smt. N. Chellammal. The extracts of the attendance register indicate that leave of absence was granted to the first petitioner from attending the board meetings of MBPL held on 30.07.2003 and 25.08.2003 and further the first petitioner was absent for the board meeting held on 29.11.2003. The transfer of shares impugned in C.P.No.51 of 2003 was approved (on 30.07.2003) by the respondents 2 & 5 to 9; (on 25.08.2003) by the respondents 2 & 3 and one Smt. Meenakshi Anuradha, who is reportedly nominee of the second respondent; and (on 29.11.2003) by the respondents 2 to 4.
The board of directors of PBHPL accorded sanction under Article 18 read with 23 to transfer the shares impugned in C.P.No.52 of 2003 at the board meeting held on 14.07.2003 (550 shares in favour of the second respondent and one Ms. Yuvana Rekha); at the board meeting held on 30.07.2003 under Article 18 (8313 shares in favour of the respondents 2 and 4), at the board meeting held on 25.08.2003 under Article 18 (3500 shares in favour of the respondents 2 and 4); and at the board meeting held on 29.11.2003 under Article 18 (887 shares in favour of the respondents 2, 4 and 5). Thus, 13250 shares of PBHPL were acquired by way of transfer by the respondents 2, 4, 5 and one Ms, Yuvana Rekha. The extracts of the attendance register indicate that leave of absence was granted to the first petitioner from attending the board meetings of PBHPL held on 14.07.2003, 30.07.2003 and 25.08.2003 and further the first petitioner refused to sign the attendance register at the board meeting held on 29.11.2003. The transfer of shares impugned in C.P.No.52 of 2003 was approved (on 14.07.2003 and 30.07.2003) by the respondents 2 & 6 to 10; (on 25.08.2003) by the respondents 2 to 4; and (on 29.11.2003) by the respondent 2, 4 & 5.
By virtue of Section 53(1), a document may be served by the company on any member either personally, or sending it by post to his registered address. The first petitioner by his communications dated 01.02.2003, 15.04.2003 and 10.06.2003 had requested the managing director of PBPL, MBPL and PBHPL separately, to send the notice of board meetings only by RPAD. Though, the respondents have denied receipt of any such communications, yet it is obligatory on the part of the managing director to ensure proper service of the notice of board meetings on every one of the directors. It is observed that notices dated 25.10.2003 convening the board meeting of PBPL, MBPL and PBHPL held on 30.10.2003 were sent to the first petitioner by courier service, the fact of which is not under dispute. However, notices dated 22.11.2003 of the board meeting of PBPL, MBPL and PBHPL held on 29.11.2003 reportedly sent under certificate of posting are seriously disputed by the first petitioner. The respondents have produced copies of the certificates issued by the postal authorities only in respect of the first petitioner and not of any other director of the Companies and furthermore, no notice in respect of any other board meeting of the Companies was sent under certificate of posting, which remain unexplained. It is quite unsafe to place any reliance on mere certificate of posting, as cautioned in Akbarali A. Kalvert and Anr. v. Konkan Chemicals Private Limited and Ors. (supra). While the respondents have produced copies of the notice of various board meetings of the Companies said to have been sent by post to the first petitioner, there is no material whatsoever, to substantiate either dispatch or service of any of such notices, as contended by them. The Companies have not chosen to produce the dispatch register or the books of account showing expenses incurred for sending the notice of board meetings by post. The appointment and/or resignation of directors and transfer of the impugned shares came to be considered by the board of directors of the Companies at as many as 12 meetings, out of which the first petitioner reportedly obtained leave of absence for 9 board meetings and further refused to sign the attendance register in respect of two of the board meetings and absented at one board meeting. In the absence of any material to substantiate the purported request from the first petitioner seeking leave of absence, it is quite improbable that the first petitioner had either knowledge of the board meetings or requested leave of absence from attending the board meetings and therefore, the extracts of the attendance register produced by the respondents, to my mind, are self serving documents, without advancing the case of the respondents. The settled legal proposition is that notice to every director of a meeting of the board of directors is mandatory, without which any resolution passed at such meeting is inoperative as held in Parmeshwari Prasad Gupta v. Union of India (supra). This shall equally apply to the resolutions passed by the board of directors of the Companies, appointing directors and sanctioning transfer of shares, impugned in the present proceedings.
By approving the transfer of 8970 shares of PBPL; 13450 shares of MBPL; and 13250 shares of PBHPL in favour of the second respondent and his family members and/or his associates, without however, affording any opportunity in favour of other shareholders in exercise of the right of pre-emption for purchase of the shares offered by the transferors, the directors, whose conduct should be above suspicion as observed by the Supreme Court in Kamal Kumar Dutta and Anr. v. Ruby General Hospital Limited and Ors. (supra), have not shown that they have acted with utmost good faith and for the benefit of and in the interest of the Companies, in accordance with the memorandum and articles of association of the Companies, as laid down in Dale and Carrington Investment Private Limited and Anr. v. P.K. Prathapan and Ors. and Vaishnav Shorilal Puri and Ors. v. Kishore Kundanlal Sippy and Ors. (supra). The impugned transfers disturbed the parity of shareholding maintained by the contesting shareholders, which resulted in the second respondent and his family members garnering the controlling interest in the Companies. The appointment of second respondent's family members as directors, with a view to control the board is neither bonafide nor in the interest of the Companies, as held in Kshounish Chowdhury and Ors. v. Kero Rajendera Monolithics Limited and Ors. (supra). The decision of the board of directors to oust the first petitioner from the managing directorship and to install second respondent in his place, in the absence of first petitioner, one of the promoters and without any valid notice to him constitutes an act of oppression, in view of the observations of the Supreme Court in Kamal Kumar Dutta and Anr. v. Ruby General Hospital Limited and Ors. (supra). I, therefore, do not hesitate to conclude that the required facts to sustain the allegations of oppression as envisaged in Hillerest Realty SDN. BHD. and Anr. v. Hotel Queen Road Private Limited and Ors. (supra) do exist in the present cases.
The apparent discrepancies pointed out by Shri R. Vidhya Shankar, learned Counsel, in relation to certain instruments of transfer produced in C.P.No.50 of 2003 would lead to the conclusion that the mandatory requirements of Section 108 of the Act, as emphasised in Shailesh Rajnikant Parekh v. Starline Travels Private Limited and Ors. (supra) have not been duly satisfied before effecting the transfer of some of the shares in favour of the second respondent and his family members. The impugned transfers having been found to be violative of the articles of association of the Companies, it is nothing but futile to go into various deficiencies appearing in the instruments of transfer produced in the present proceedings.
The charges levelled on account of the purported unaccounted turnover, consistent increase in liabilities, sundry debtors, accumulated losses, advertisement expenses without proper authority, diversion of profits, unauthorised sale of assets etc., in the affairs of the Companies have been merely brushed aside by the respondents on the sole ground, as held in Asoka Betelnut Company (P) Limited v. M.K. Chandrakanth (supra) that the facts arising subsequent to the petition cannot be relied upon. However, it has to be borne in mind that while validity of the company petition will be adjudicated on the facts existing at the time of presentation of the petition, the facts arising subsequent to the filing of the petition will always be taken into consideration for moulding the reliefs. It is on record that PBPL had convened 8 board meetings; MBPL convened 9 board meetings and PBHPL 9 board meetings between the period from 28.11.2002 to 15.03.2004, transacting, inter-alia, progress of the affairs of the Companies, approval of accounts, transfer of shares, co-option of directors, appointment of managing director, purchase and sale of assets, entering into contracts, royalty agreement, availing of bank loans and working capital facilities. The first petitioner never attended any of the board meetings and it is found that he was either granted leave of absence from attending the board meetings or absented or refused to sign the attendance register, thereby, the first petitioner at no point of time, involved in the day-today affairs of the management of the Companies, since November, 2002. I do not find, as already observed elsewhere, any valid service of notice of the board meetings at the relevant point of time. In the absence of any material substantiating the involvement of the first petitioner, being one of the promoter directors in the management of the Companies during the disputed period, the entire financial transactions are necessarily required to be looked into by an independent Chartered Accountant. The grievance of the petitioners that PBPL franchised the trade mark "Milka" in favour of other group companies for manufacturing and marketing of their products, without any board resolution, is said to be subject matter of a civil suit pending before the High Court of Madras and cannot, therefore, be remedied in the present proceedings. The rival claims in relation to the irregularities in convening the annual general meeting of the Companies proposed in December, 2003, have not resulted in any grievances suffered by the aggrieved shareholders, on account of the prohibitory orders passed by the Bench. At the same time, it is proposed to issue appropriate directions in this behalf, safeguarding the interests of the shareholders.
In view of my foregoing conclusions and (i) in exercise of the powers under Sections 397 and 398 read with Section 402; (ii) to make appropriate orders bringing to an end the matters complained of and (iii) to regulate the conduct of the future affairs of the Companies, the following order is passed:
(i) all the transfers effected after June, 2003 in respect of shares of the Companies, impugned in the company petitions, being violative of the articles of association, are hereby set aside and the Companies shall accordingly, rectify the register of members within a period of 30 days;
(ii) the members of the Companies shall reconstitute the board of directors; appoint the managing director by 30.04.2007; carry on the regular business in accordance with the articles of association of the Companies and meet the statutory obligations;
(iii) the Companies shall, hence forth give notice of the board meetings to every director by registered post with acknowledgment due.
(iv) Shri N.C. Sampath, Chartered Accountant [M/s N.C. Rajagopal & Co., Chartered Accountants of Erode (Tel. No. 0424 - 2212628)] is appointed to verify the books of account and other records of the Companies for the years 2003-2004, 2004-2005 & 2005-2006 and submit report on the financial transactions and irregularities, if any. The Chartered Accountant, after verification of the books of account and other records of the Companies and considering the submissions of the contesting parties will circulate a draft report among them. The parties are at liberty to offer their comments on the report of the Chartered Accountant, thereafter which, the latter will submit his final report, serving copies on the parties. The entire verification process shall be completed by 31.05.2007. The final report is binding on the petitioners as well as respondents. The parties responsible for the irregularities shall make good the loss suffered, if any, by the Companies. The remuneration of the Chartered Accountant shall be borne by the Companies;
(v) the Companies shall within two months finalise the accounts for the financial years 2003-04, 2004-05 and 2005-06, convene the annual general meeting and adopt the accounts for these financial years and appoint auditors in compliance with the requirements of relevant articles of association; and
(vi) the parties shall file an affidavit of compliance in terms of this order by15.06.2007.
With the above directions, the company petitions and connected applications stand disposed of. In view of this, the interim orders are vacated. No order as to cost.