Kerala High Court
Late Hashmukh V.Patel vs Kantilal Pranalal Patel on 10 July, 2008
Bench: P.R.Raman, T.R.Ramachandran Nair
IN THE HIGH COURT OF KERALA AT ERNAKULAM
Co.Appeal.No. 42 of 2007()
1. LATE HASHMUKH V.PATEL,
... Petitioner
2. MR. PATEL V.JAYANTILAL,
3. MR.PATEL V.NATWARLAL,
4. MR. PATEL V.RAJESH,
5. MR. NARESH MAGANLAL DOSHI,
6. MR. SATHISH M.DOSHI,
7. MR. SHAILESH M.DOSHI,
8. MR. JAYESH M.DOSHI,
Vs
1. KANTILAL PRANALAL PATEL,
... Respondent
2. MITESH KANTILAL PATEL,
3. BHARATH KANTILAL PATER,
4. N.P. PATEL,
5. JAGRATH N.PATEL,
6. MANHAR J.SANGHARAJKA,
7. MUKESH SHAH,
8. JITENDRA M.SHAH,
9. PREMAL M.PATEL,
10. CHETNA B.PATEL,
11. B.P. PATEL,
12. VINOD B.PATEL,
13. KRISAHA BEN K.PATEL,
14. PATEL CARS PRIVATE LIMITED,
For Petitioner :SRI.A.M.SHAFFIQUE (SR.)
For Respondent :SRI.PREMJIT NAGENDRAN
The Hon'ble MR. Justice P.R.RAMAN
The Hon'ble MR. Justice T.R.RAMACHANDRAN NAIR
Dated :10/07/2008
O R D E R
P.R. RAMAN &
T.R. RAMACHANDRAN NAIR, JJ.
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COMPANY APPEAL NOS. 42, 43 & 44 OF 2007
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DATED THIS, THE 10TH DAY OF JULY, 2008.
J U D G M E N T
Raman, J.
While the appellants in Co.A. 42 are the petitioners in C.P. 25/2006 before the Company Law Board, Additional Principal Bench, Chennai, the appellants in Co.A.Nos. 43/2007 and 44/2007 are the respondents in the said petition. Since all these appeals arise out of the same judgment, we dispose of them by this common judgment.
2. The appellants in Co.A. 42/2007 are late Hashmukh V. Patel, represented by his wife Mrs. Saroj Hashmukh Patel and others. The appellants in Co.A. 43/2007 are K.P. Patel and others. In Co.A. 44/2007, the appellant is M/s. Patel cars Private Limited.
3. Petitioners in the company petition, alleging oppression and mismanagement in the affairs of the Company by co-share holders and invoking the provisions of Sections 397, 398 and 402 of the Companies Act, 1956, had approached the Company Law Board, collectively claiming 18% of the paid up capital of M/s. Patel Cars Private Limited (hereinafter referred to as "the Company"). They specifically sought for a declaration COA. NOS. 42, 43 & 44/2007 :2: that the allotment of 50,000 equity shares made on 4.7.2003 in favour of Respondent No.12, 1,80,000 equity shares made on 18.6.2004 (1,20,000 shares to Respondent No.13, 50,000 shares to Respondent No.12 and 10,000 shares to Respondent No.9) and the induction of Respondents 12 and 13 on the board of the Company are null and void. They also sought to reconstitute the board of the Company on the basis of proportional representation, to restore the board of directors of the Company as at 31.3.2001 and for other consequential reliefs.
4. The Company Law Board, by the impugned order, ordered that the Company shall register the transmission of shares of late Hashmukh V. Patel to his legal heirs who are petitioners 1 to 4 in the Company Petition and to rectify the register of members and in the event of the petitioners not subscribing to the additional shares already offered by the Company, after commencement of the then proceedings, within 30 days of receipt of the order, allot such unsubscribed shares in favour of the remaining shareholders in proportionate to their shareholding in the Company and within 30 days of receipt of the order, to reconstitute the board of directors, providing proportional representation to each of the families of late Hashmukh V. Patel, Naresh Mangalal Doshi, (5th petitioner) K.P. Patel COA. NOS. 42, 43 & 44/2007 :3: (Respondents 1 to 5,& 9 to 11 & 13) and Vinod B. Patel (Respondent No.12) on the basis of the existing shareholding, which shall appropriately be incorporated in the articles of association. It was also directed that the board of directors reconstituted in terms of the said order shall manage the day-to-day affairs of the Company as per the memorandum and articles of association of the Company.
5. The appellants in Co.A. 42/2007 seeks to quash the entire order of the Company Law Board including certain directions, some of which, in our opinion, are in their favour. So however, by seeking an interim relief, they limited their prayer for a stay of operation of direction No.2 in the order passed by the Company Law Board. This Court, as per order on I.A. 2820/2007 extended the time by three weeks from 23.11.2007 (already granted by the Company Law Board) for accepting the allotment of shares by the appellants in Co.A. 42/2007. The prayer made in Co.A. 43/2007 is to set aside the order of the Company Law Board to the extent to directs the Company to re-constitute its Board to include Respondent No.5 and the nominee of Respondents 1 to 4. Co.A. 44/2007 is filed by the Company as the sole appellant and the respondents are parties in the other two company appeals. The only relief claimed is against the direction issued COA. NOS. 42, 43 & 44/2007 :4: by the Company Law Board to reconstitute the Board including the 5th respondent and the nominee of Respondents 1 to 4.
6. From the pleadings and on the basis of the arguments by either side, we find that neither party has got any grievance as against the first relief granted by the Company Law Board in the matter of registering the transmission of shares of late Hashmukh V. Patel to his legal heirs and to issue share certificates in the name of petitioners 1 to 4. Among the directions issued by the Company law Board in its order under appeal, the appellants in C.A. 42/2007 are aggrieved by the second direction contained therein whereas the appellants in Co.A.43/2007 44/2007 are aggrieved by direction No.3. Of course, the appellants in Co.A. 42/2007 would also challenge certain findings made by the Company Law Board including the finding that there is no oppression and mismanagement, based on which some of the reliefs sought for were declined.
7. In order to appreciate the contentions between the parties, we may state the facts in brief, as follows:
M/s. Patel Cars Private Limited was incorporated as a Public Limited Company on 10.6.1997 under the provisions of the Companies Act, 1956 and later on, it was converted into a Private Limited Company with effect COA. NOS. 42, 43 & 44/2007 :5: from 12.8.2001. C.P. 25/2006 was filed by the petitioners alleging oppression and mismanagement of the affairs of the Company. Among other things, the main acts of oppression and mismanagement pointed out are - allotment of 50,000 equity shares on 4.7.2003 to Vinod B. Patel who belongs to the majority group with the exclusion of minority shareholders, allotment of 1,80,000 equity shares on 18.6.2004 to the family members of the majority group with the exclusion of the minority shareholders and the non inclusion of a member of the family of late Hashmukh V. Patel on the Board of the Company, after his demise. According to the petitioners, all the above said allotments and change in the Board of Directors were made clandestinely, without the knowledge of any share-holders. Moreover, the allotments were made in violation of the equitable principles of giving opportunity to all shareholders to participate in the prospects of the Company and the allotments were made for cash at par to the detriment of the minority shareholders. According to the petitioners, most of the meetings of the Board of Directors and the General Meetings of shareholders were held with the exclusion of the minority shareholders and without giving any notice to them. The 5th petitioner, though was a Director on the Board, was not given any notice to the meetings of the COA. NOS. 42, 43 & 44/2007 :6: Board. The procedure adopted by the Company in the matter of issuance of shares were illegal and oppressive in nature.
8. On the other hand, the contention of the respondents were as follows: The Company was granted dealership in Honda Ceil Cars in the year 1997 and established its show room in Kochi. The Company needed funds for its business from time to time and therefore, it allotted shares after incorporation and as per the first two allotments made on 3.8.1998 and 10.12.1998, the family of Hashmukh V. Patel was allotted 3,70,000 shares and the family of Naresh Maganlal Doshi was allotted 1,00,000 shares out of 9,15,000 shares. The Company was not working satisfactorily due to the teething problems in the formative years because of huge capital investments and credit facilities availed and incurred loss during the year ending March, 1999 as also in the succeeding year ending in March, 2000 as a result of which 40% of the capital was eroded. It was pointed out that the respondents in the Company Petition had already held 71.75% of the shares in the Company as on 31.3.1998 and by further allotment they presently held 88.28%. The shares of Manhar J. Sangharjka and Mukesh Shah were transferred to Kantilal Pranalal Patel and others who are respondents in the company petition on 21.5.2001 pursuant to the Board's approval held on COA. NOS. 42, 43 & 44/2007 :7: 21.5.2001 in which late Hasmukh V. Patel and Naresh Maganlal Doshi were present in their capacity as Directors. Since the company was making losses, Bankers were not ready to finance it and except Patel family there was none to extend financial support to the company. The loan provided by K.P. Patel Group of Companies was an Interest Free Loan for about 50 lakhs and during that time, three Directors - Mr. Jitendra M. Shah, Mr. Mukesh M. Shah and Mr. Chandrakant N. Sangani wanted to resign from the Company because of the continuous losses made and offered their shares for sale to the other existing shareholders. None other than Patel Family came forward to purchase the same and at that time it was a public limited company and shares were freely transferable and transfer of shares was approved at the meeting of the Board of Directors held on 21.5.2001 where all the directors were present. By that transfer, shareholding of K.P. Patel family went up to 71% of the paid up capital and they provided their personal guarantees to the Bank and financial institutions apart from providing requisite securities. In these situation, the Board in their meeting held on 21.5.2001 decided to convert the Company into a Private Limited Company. For more than five years the petitioners had not raised any objection regarding the transfer of those shares. They COA. NOS. 42, 43 & 44/2007 :8: denied that there was any understanding or arrangement between the subscribers of the Company that the shareholders would be classified into groups and that the composition of the Board would be one directorship for every 1,20,000 shares held. They also denied that there was any requisition by petitioners 1 to 4, for transmission of the shares in the name of late Hasmukh v. Patel in their favour whereas a requisition was received to appoint one among them as a director. Due to the non-availability of funds in the Company for construction of Mangalore Show room, they approached Kotak Mahindra Bank who insisted for personal guarantees of the chairman and managing director. It was then that the Company opened an account with that Bank and they took over the facilities enjoyed by the company with the Bank of India on condition that the company increase the paid up capital at least by 25 lakhs, landed properties belonging to the Patel group worth Rs. 7 to 8 crores should be pledged failing which the Company must arrange margin money of 30% of the working capital and term loan. The matter was discussed in the Board meeting but none of the directors were ready to invest any more funds. Mr. Vinod B Patel offered to invest in the Company and accordingly, the Company decided to increase the paid up capital by allotting 1,00,000 equity shares of Rs. 10/- each to him and COA. NOS. 42, 43 & 44/2007 :9: inducted him as a Director. The wife of Kantilal Pranalal Patel had also agreed to invest in the Company for increasing the share capital who was alloted 1,20,000 equity shares of Rs. 10/- each and inducted as a Director. Though these matters were discussed in the Board Meeting and the Extra- ordinary General meeting nobody raised any objection. Late Hasmukh V Patel and Naresh Maganlal Doshi were also present in that meeting. The allegation of manipulation of minutes books, books of accounts etc. was denied and pointed out that so long as the names of the legal heirs of late Hasmukh V. Patel were not entered in the registry of members of the Company, they were not entitled to any notice. The company is not a family company and the claim for directorship based on proportional representation was also denied, especially in the absence of any explicit clause in the Article of Association in that regard. During the pendency of the matter before the Company Law Board, the board authorised a further issue of 7,22,500 shares of Rs. 10 at a premium of Rs. 30 thereby increasing of the paid up capital of the company by Rs. 72,25,000, to which the petitioners had no objection. But when the board decided to issue new shares in the ratio of 1 share for every 2 held by the shareholder, petitioners objected before the Company Law Board; but the Company Law Board COA. NOS. 42, 43 & 44/2007 :10: permitted issue of shares on condition that shares to be allotted to petitioners should not be allotted to anyone else but be kept in reserve. An extra ordinary General Body Meeting was held as permitted by the Company Law Board; but it stayed implementation of any decision taken therein.
9. After referring to the respective pleadings of the parties and after referring to the materials placed on record, the Company Law Board entered a finding that the entire sequence of events would show that the impugned allotments are in the interest and benefit of the Company and therefore, the resultant reduction in percentage of shareholding of the petitioners, in the facts of the present case, cannot constitute an act of oppression, more so in view of the acquisance on the part of late Hashmukh v. Patel and the fifth petitioner. The issue of additional shares is found to be for the financial needs of the Company and therefore, even when the respondents group is incidentally benefited, the petitioners group cannot complain of oppression. Furthermore, petitioners are already holding in excess of 75% of the capital and the Company is already in control of the respondents group. There is no material to show that the action of the respondents in having allotted the impugned shares in exercise of their power under Article 5 suffered from COA. NOS. 42, 43 & 44/2007 :11: lack of probity and fair play and they acted in a malafide manner. The various allotments of shares in favour of Respondents 9,12 and 13 not being oppressive, there is no need to direct them to transfer such shares in favour of the petitioners. The proposal mooted during the pendency of this proceedings, for raising the capital from Rs. 148 lakh to Rs. 223 lakh, and issue of additional shares in the interest of the Company falling within the domain of the collective wisdom of the shareholders/board of directors, does not warrant any interference and it is left to the petitioners to subscribe towards additional shares as offered.
10. The transfer of 1,20,000 shares belonging to the 6th respondent in favour of the first respondent and the contention that it is oppressive was considered with reference to Clause 23(e) of the articles of association of the Company. It was held that since the shares belonging to the 6th respondent are admittedly transferred to the first respondent who is already a member of the Company Article 23(e) is not attracted and therefore, need not be adhered to before effecting transfer by the 6th respondent in favour of the first respondent. Even if the argument of the petitioners are to be accepted, it is on record that the sixth respondent by his communication dated 29.9.2005 is found to have intimated the board of directors of the COA. NOS. 42, 43 & 44/2007 :12: Company of his intention to sell the shares held in his name with a request to inform him the members willing to purchase the shares at a reasonable price that may be fixed by the board. At the board meeting held on 3.10.2005 as borne out by the minutes, none of the members of the board present was keen in buying the shares offered by the 6th respondent upon which the board nominated the first respondent to purchase 1,20,000 shares from the 6th respondent at a mutually agreed price, which shall not be less than Rs.5/- per share. The board in its wisdom and in exercise of the powers vested in clause 23(e), selected the first respondent to acquire the shares of the 6th respondent. The contention of the petitioners that no intimation was ever sent to any one of the members before the transfer of impugned shares in favour of the 6th respondent is misconceived. The transfer of 1,20,000 shares by the 6th respondent to the first respondent was approved on 24.10.2005 in terms of the board minutes, wherein it was found that the 6th respondent approached all the directors for purchase of his shares and only the first respondent came forward to acquire the same. The copy of the communication dated 3.11.2005 of the 6th respondent addressed to the board of directors, which has not been disputed by the petitioners also supports this. The cumulative effect of these events COA. NOS. 42, 43 & 44/2007 :13: supported by documentary proof establishes the fulfilment of requirements of Clause 23(e) of the articles of association of the Company, even if it were applicable.
11. Petitioners sought for a declaration that the appointment of Respondents 12 and 13 as directors is null and void. The Company Law Board found that the relevant clause (clause 39) of the articles of association of the Company would indicate that the number of directors shall unless otherwise determined by the Company in general meeting be not less than two and not more than twelve. The directors need not hold any qualification share as per clause 40(e). The minutes of the board meeting dated 4.7.2003 shows that Respondent No.12 was appointed as additional director of the Company to look after the show room at Mangalore. At the sixth annual general meeting of the members of the Company held on 30.9.2003 the 12th respondent came to be appointed as director of the Company. The compliance certificate dated 10.12.2004 confirms sending of proper notice to the directors for the board meeting held on 4.7.2003 and due notice to the members of the Company for the annual general meeting for the year ended 31.3.2003 held on 30.9.2003. The directors' report dated 20.12.2004 for the year ended 31.3.2004 speaks COA. NOS. 42, 43 & 44/2007 :14: of appointment of the 12th respondent as additional director at the board meeting and the subsequent approval of the members for his appointment as director at the annual general meeting held on 30.9.2003. His appointment as additional director on 4.7.2003 is found reflected in Form No.32 dated 5.7.2003 filed with the Registrar. Hence the appointment of the 12th respondent as additional director as well as director took place prior to the death of Hashmukh V. Patel. who never made any grievances on this account, as per the records. It was observed from the minutes of the board meeting held on 18.6.2004 that the financial institutions from which the Company has availed credit facilities asked for personal guarantee of the directors and that none of the existing directors was able to provide personal guarantee, which necessitated the increase of number of directors in the board. Consequently, the 13th respondent who gave consent to join the board was appointed as additional director. This also was prior to the death of Hashmukh V. Patel. The minutes of the Board meeting dated 18.6.2004 were confirmed at the board meeting held on 16.7.2004 wherein Hashmukh V. Patel and the 5th petitioner were present. No objection was found to have been taken by them on the appointment of Respondent No. 13 as director. The directors report for the year ended 31.3.2005 discloses the COA. NOS. 42, 43 & 44/2007 :15: appointment of Respondent No.13 as additional director and the proposal for her appointment as director at the annual general meeting. Respondent NO.13 was appointed as the director of the company at the eighth annual general meeting held on 30.9.2005. The compliance certificate dated 29.8.2005 indicates that the notice of the board meeting of 18.6.2004 was properly sent to the directors of the Company and the proceedings were properly recorded duly signed and entered in the minutes book maintained for the purpose. Form 32 dated 18.6.2004 filed with the Registrar also shows that Respondent No.13 was appointed as additional director by the board on 18.6.2004. On the basis of the above facts, it was concluded that it is not open to petitioners 1 to 4 who are legal representatives of Hashmukh V. Patel or the 5th petitioner to question the appointment of Respondents 12 and 13, which is found to be in the interest and for the benefit of the Company.
12. The Company Law Board then considered the claim of the petitioners for joint management of the affairs of the Company. In that regard, clause 41(1) of the Articles of association of the Company was referred to which is as follows:
"The first Directors of the Company will continue unless they resign from the Board COA. NOS. 42, 43 & 44/2007 :16: or are disqualified to act as Directors under the provisions of the Companies Act and are non-retiring Directors..." .
According to the Company Law Board, this is a clear departure from Article 106 which was in force, when the Company remained to be a limited company prior to its conversion as a private limited company. Petitioner, in spite of their reservation, had not challenged the transfer of shares effected by Respondents 7 and 8 in favour of Respondents 9 to 11. Their grievances on account of the impugned allotments in favour of Respondents 9, 12 and 13, as well as the disputed transfer of shares by the 6th respondent to the first respondent are unfounded for the reasons elaborated elsewhere. Consequently, the whole of 14,45,000 shares of the company, as on the date of the company petition are held among K.P. Patel & family (11,05,000 shares), Vinod V. Patel (1,00,000 shares), (late) Hashmukh V,. Patel & family (1,20,000 shares) and Naresh Maganlal Doshi & family (1,20,000 shares) in the ratio of 76.47%, 6.93%, 8.30% & 8.30% respectively. On 30.9.2004 the Board of the company consisting of 12 directors was constituted by Respondents 1 to 5, 9 to 11 & 13 representing K.P. Patil & Family, (late Hashmukh V. Patel, Naresh Maganlal Doshi being the 5th petitioner, representing their families and the 12th Respondent. Thus, K.P. COA. NOS. 42, 43 & 44/2007 :17: Patil & family with 1,20,000 shares and Naresh Maganlal Doshi & family with 1,20,000 shares had each one directorship. 12th respondent had one directorship with 1,00,000 shares. All his shares came to be entrusted in his legal heirs being petitioners 1 to 4, who have acquired indefeasible rights and contingent interest over such of those shares. Hashmukh V Patel was one of the promoters of the Company, who along with others are named as the first directors of the Company in the articles of association of the Company as adopted by the members, when the Company became a private company. The first directors are non-retiring directors, entitled to continue unless they resign from the board or disqualified to act as directors under the provisions of the Act. Hashmukh V. Patel continued to be a director till his death in December, 2004 and the 5th petitioner is still on the board of directors of the Company. The respondents have no case that the 5th petitioner suffered any disqualification as director under any of the provisions of the Act. Late Hashmukh v. Patel and the 5th petitioner along with the respondents' group have been participating in the affairs of the Company which has been under their joint management till Hashmukh V. Patel died in December, 2004. On the above premise, the Company Law Board found that "it is therefore beyond dispute that there has been some COA. NOS. 42, 43 & 44/2007 :18: tacit understanding among various groups of shareholders for joint management of the Company. The sequence of events will lead to a presumption of a legitimate expectation on the part of the legal heirs of late Hashmukh V. Patel and the 5th petitioner to be in the joint management of the Company as in the entire past, which is in consonance with clause 41(1) of the articles, treating them as non-retiring directors and entitling them to continue in the office of director until they resign from the board or are qualified as directors under the Act and therefore, the non-inclusion of any of the legal heirs of late Hashmukh V. Patel in the management and the attempted exclusion of the 5th petitioner from the management of the Company in contravention of Article 41(1) would constitute an act of oppression applying the theory of legitimate expectation.
13. The charges on account of non-holding of board meetings and non-sending of notices to the directors, manipulation of the books of account and fabrication of records do not merit any consideration in the light of the compliance certificates dated 27.6.2003, 10.12.2004 and 29.8.2005, reporting inter-alia, that notices were properly given for all the board meetings held during the period ended 31.3.2003, 31.3.2004 and 31.3.2005 respectively and that the proceedings of the board meetings held COA. NOS. 42, 43 & 44/2007 :19: periodically during the relevant financial years namely, for the period between 2002-03 and 2004-05 were properly recorded, duly signed and entered in the minutes book maintained for the purpose. The grievance merely based on the strength of the reports of the statutory auditors of the Company cannot be attributed towards the respondents exclusively, when (late) Hashmukh V. Patel till December, 2004 formed part of the board of the Company and the 5th petitioner still continues to be director. There are alternate remedies available under the Act for the complaints on account of the denial of copies of the annual reports and updated memorandum of association by the respondents. There is no adequate material to enable the Board to order recasting of the accounts through an independent Auditor, especially when the accounts of the Company have been periodically audited and adopted by the members, without any objection whatsoever raised by any one including the 5th petitioner and Sri. Hashmukh V. Patel, during his life time.
14. We have heard the arguments of the learned Senior Counsel Sri. C.M. Devan, appearing on behalf of the appellants in Co.A.. 42/2007, Sri. Joseph Vellappilly appearing on behalf of the appellants in Co.A.. 43/2007 and Sri.Shaji P. Chaly appearing on behalf of the appellants in Co.A. COA. NOS. 42, 43 & 44/2007 :20: 44/2007.
15. Learned Senior Counsel Sri. C.M. Devan contended that the finding of the Company Law Board that there is no act of oppression or mismanagement in the matter of allotment of shares to the 12th respondent and the further allotment of 1,80,000 shares as also the transfer of shares by the 6th respondent in favour of the first respondent is perverse. According to him, the various acts of oppression and mismanagement as narrated in the company petition ought to have been appreciated by the Company Law Board and granted all the reliefs prayed for. But the learned senior counsel Sri. Joseph Vellappilly, on the other hand would contend that Co.A. 42/2007 filed by the petitioners do not raise any question of law. So long as the Board had found on facts that there is no act of oppression or mismanagement, there arises no occasion to grant any relief to the petitioner and according to him, Co.A. 42/2007 is not maintainable for the simple reason that it does not raise any question of law. He, on the other hand, supported the plea raised in Co.A. 43/2007 and contended that the finding of tacit understanding among various groups for joint management of the Company is totally perverse and in the light of the specific provisions contained in the articles of association of the Company, the board has got COA. NOS. 42, 43 & 44/2007 :21: absolute right to transfer shares and the transfer of shares were made at a time when Hashmukh V. Patel and the 5th petitioner were in the board. Petitioners, as the legal representatives of Hashmukh V Patel cannot improve upon the case more than what Hashmuk V Patel could have been contended had he been alive and since he was already in the board and in the absence of any objection raised by him, there is absolutely no merit in the contention now raised by the legal representatives of Hashmukh V. Patel. Equally so, the 5th petitioner was also in the board and the board decision was taken with due notice. He also referred to some of the board decisions in this regard. According to him, the Company Law Board ought not have issued any direction before the reconstitution of the board contrary to the decisions of the articles of association of the Company and the theory of legitimate expectancy is totally inapplicable to the Company Law Jurisprudence and hence contended that the directions issued as No.3 are liable to be set aside.
16. That this Company Appeal has been filed under Section 10F of the Companies Act as per which a company appeal against an order of the Company Law Board is maintainable only if there is a question of law. While it is true that a finding of fact may not gave rise to a question of law, COA. NOS. 42, 43 & 44/2007 :22: it is equally true that a finding of fact which is totally perverse itself will give rise to a question of law. We have gone through the pleadings of the parties and also the findings of the Company Law Board and the relief granted. This Court admitted all these appeals as these are not matters which could be dismissed at the thresh-hold but require further consideration as to whether any of the findings are perverse and whether the inference drawn based on such facts are legal. Based on the pleadings and arguments raised, we formulate the following points of law for consideration:
1. Whether the finding of the Company Law Board that the entire sequence of events would show that the allotment of shares impugned in the company petition are in the interest and benefit of the Company and in the factual situation the resultant reduction in percentage of share holding of the petitioners cannot constitute an act of oppression, is perverse?
2. Whether the finding of the Company Law Board that there is no material to show that the action of the respondents in having allotted the impugned shares in exercise of their power under article 5 suffered from lack of probity and foul play and they acted in a malafide manner, is perverse?
3. Whether the finding that Clause 23(e) of the Articles of Association of the Company is not attracted when there is a transfer of shares from the 6th respondent, an existing member to the first COA. NOS. 42, 43 & 44/2007 :23: respondent, is correct in law?
4. Whether the finding that even if it has to be held otherwise, the cumulative effect of the events supported by documentary proof establishes the fulfilment of requirement of Clause 23(e) of the articles of association of the Company, is perverse?
5. Whether the finding that there are no irregularities in the matter of appointment of Respondent Nos. 12 and 13 as additional directors and subsequently as directors at the relevant Board meeting as well as Annual General Meeting respectively, which were not objected by Hashmukh Patel during his life time nor the 5th petitioner and as such petitioners 1 to 4 and the 5th petitioner cannot question the appointment of Respondent Nos. 12 and 13 which is found to be in the interest and for the benefit of the Company, give rise to any question of law and whether it is perverse?
6. The finding that it is beyond doubt that there has been some tacit understanding among various groups of shareholders for joint management of the Company and the sequence of events will lead to a presumption of a legitimate expectation on the part of the legal heirs of late Hashmukh V. Patel and the 5th petitioner to be in joint management of the Company as in the entire past which is in consonance with clause 41(1) of the articles, treating them as non-retiring directors and entitling them to continue in the office of director until they resign from the board or are qualified as directors under the Act and therefore the non-inclusion of any of the legal heirs of late Hashmukh V. Patel in the management of the Company in contravention of article 41(1) would constitute an act of COA. NOS. 42, 43 & 44/2007 :24: oppression, is sustainable in the eye of law?
7. Whether the Company Law Board has got any jurisdiction to grant any relief to the petitioners under Sections 397 & 398 of the Companies Act?
17. Point Nos.1 & 2.
Admittedly Hashmukh Patel and Respondents 1 to 3 and 6 to 8 were the promoters of the Company and it was a limited company which was converted into a private limited company in 2001. Respondents 1 to 4, 6, 5th petitioner and Hashmukh V. Patel were the first directors of the Company. It is found by the Company Law Board that all the shares of the Company are held by members of various families, belonging to Hashmukh Patel, represented by petitioners 1 to 4 and, Naresh Maganlal Doshi & Family, (being petitioners 5 to 8 on the one hand and K.P. Patel & Family on the other). Late Hashmukh V. Patel was on the Board since 1998 till his death. Respondent No.12 became a director in 2003. 5th petitioner also continued to be a director. The rest of the directors were from K.P. Patel & Family. In such circumstances, the allotment of 50,000 shares on 4.7.2003 to the 4th respondent, allotment of 10,000 shares to 9th respondent, 50,000 shares to the 12th respondent and 1,20,000 shares to the 13th respondent made on 18.6.2004 in relation to which the petitioners had a grievance . COA. NOS. 42, 43 & 44/2007 :25: The appointment of Respondents 12 and 13 as directors and transfer of 1,20,000 shares in respect of the 6th respondent in favour of the 1st respondent and the attempt to remove the 5th petitioner from the office of the director and the irregularities said to have been reflected in the audits of the company for the year 2003-2004 were specifically examined by the Board. The Company Law Board found that the allotment of shares was made as envisaged in Clause 5 of the articles of association since the entire shares are under the control of the Board of directors of the Company who may allot or otherwise dispose of the same to such persons on such terms and conditions as the Board may deem fit. It went on to consider whether the Board has acted in bona fide manner in view of their fiduciary duties in the matter of allotment of shares. The need for fund and mobilisation from time to time as borne out from the records produced before the Company Law Board was taken into consideration by the Company Law Board to adjudicate the issue. It was found that the authorised capital of the Company was increased from time to time and all that were during the life time of late Hashmukh V. Patel as evidenced by the minutes of the various extra ordinary meetings held between 1.8.1998 and 14.6.2004. In the course of the proceedings before the Board, the Company sought to further COA. NOS. 42, 43 & 44/2007 :26: increase in the capital from Rs.148 lakh to Rs. 223 lakh by issue of 7.50 lakh equity shares of Rs.10/- each to meet the capital expenditure. It was noticed that the Company had availed from its banker financial assistance to an extent of Rs. 200 lakh during 1998-99 which got increased to Rs. 400 lakh, pursuant to the extra ordinary general meeting held on 20.11.1998 for working capital and other requirements. The auditors reports of various dates reflected the unsecured loans taken by the Company from firms listed in the register maintained under Section 301 of the Act. The board, in its meeting held on 4.7.2003, recorded the need for funds towards the expansion programme, capital and capital expenditure for establishment of the Mangalore show room and granted approval for undertaking and completing the construction of show room of Mangalore at a cost of Rs. 120 lakh. At the board meeting held on 4.7.2003 the 12th respondent had been appointed as additional director in order to look after the affairs of the Mangalore Show room which was opened in the year 2003-04 and 50,000 equity shares of Rs.10/- were alloted in his favour. The minutes of the board meeting also discloses the "difficult financial position and tight liquidity situation of the company". Thus, on an overall consideration of the entire facts and circumstances based on which the Company Law Board COA. NOS. 42, 43 & 44/2007 :27: found that the company has been periodically mobilizing from various sources since 1998 and hence it cannot be said that there are no requirements for additional funds to meet its objectives and purposes. Thus it was found that the Company was justified in having augmented the funds by way of issue of further shares.
18. The compliance certificate dated 10.12.2004 also confirm issue of proper notices to the directors for all the seven meetings held during the period between 27.6.2003 and 16.2.2004, including the board meeting held on 4.7.2003 wherein 50,000 shares were allotted to the 12th respondent. The Company's banker Kotak Mahendra Primus Ltd. by their communication dated 4.4.2004 requested the Company to take immediate steps to increase its paid up capital by infusion of Rs. 25 lakh during the year 2004-05 in view of the substantial outstanding amounts. The bankers reasonings were also found to be a factor for increasing the paid up share capital. Additional shares had been allotted to Respondents 9,12 and 13 in the meeting held on 18.6.2004. The Company Law Board also found that the Chairman and the Managing Director approached the other directors and shareholders for taking capital of the Company who have expressed their inability to do so. They also expressed their unhappiness in not getting any COA. NOS. 42, 43 & 44/2007 :28: return on the existing investments by way of dividend. Thus, the Company was constrained to allot the impugned shares to Respondents 9, 12 and 13. In the subsequent meeting held on 16.7.2004, allotment of shares to those respondents as per the meeting held on 18.6.2004 was confirmed. It is observed that Hashmukh V. Patel and the 5th petitioner were also present in the said meeting and they did not raise any objection in the matter of allotment of shares. The compliance certificate of the company secretaries showed that an extra ordinary general meeting was held on 14.6.2004 approving the increase in authorised capital from Rs. 130 lakh to Rs. 148 lakh. Thus, it was found that it was not open to the petitioners to make any grievance on account of the allotment impugned in the Company Petition. The sequence of events showed that the impugned allotments were in the interest and benefit of the Company and therefore, the resultant reduction in percentage of the share held, in the circumstances, cannot constitute an act of oppression in view of the acquisance on the part of Hashmukh V. Patel and the 5th petitioner. It was also found that the materials placed on record did not support the plea that the impugned shares were allotted in any way suffered from lack of probity and fair play. Therefore, allotment of shares to Respondents 9,12 and 13 was found to be not oppressive. The above COA. NOS. 42, 43 & 44/2007 :29: findings is based on a thorough analysis of the entire factual situation supported by materials on record and therefore, not perverse as contended by the appellants in Co.A.42/2007. In the circumstances, we hold that no question of law arises based on the above finding.
19. Point Nos. 3 & 4.
Clause 23(e) of the articles of association provides that "no share shall be transferred to a person who is not a member and if a member wishes to transfer the shares he shall intimate his intention to the Board who may select a person including a member to acquire such shares and so long as any person selected by the Board, as one whom it is desirable in the interest of the Company to admit to membership is willing to purchase the same, the member proposing to transfer the shares shall sell the same to such person only and not to any other person, subject to the approval of the Board, at the fair value to be fixed by the board". Interpreting the above clause, the Company Law Board found that since the shares are allotted to an existing member, Clause 23(e) is not attracted. Shares are allotted to the 6th respondent who has admittedly transferred the same to the first respondent who is a member of the Company. Further, even if for argument's sake it is held that Clause 23(e) is attracted, even in such case, it COA. NOS. 42, 43 & 44/2007 :30: was found, based on evidence, that the 6th respondent by his communication dated 29.9.2005 is found to have intimated the board of directors of the Company his intention to sell the shares held in his name with a request to inform him the members willing to purchase the shares at a reasonable price. The minutes of the board meeting held on 3.10.2005 shows that none of the members of the board present was keen in buying the shares offered by the 6th respondent and hence the board nominated the first respondent to purchase 1,20,000 shares from the 6th respondent at a mutually agreed price and therefore, the board in its wisdom exercised the power vested in it under Clause 23(e) selected the first respondent to acquire the shares of the 6th respondent. Though it was contended that there was no intimation sent to any one of the members before such transfer, it was found that the said contention is misconceived. The board minutes also shows that the board has approved the transfer of shares to the 6trh respondent in its meeting held on 24.10.2005 where there is a finding by the board that the 6th respondent approached all the directors for purchase of his shares and only the first respondent was ready to acquire the same. This is also reflected in the communication dated 3.11.2005 of the 6th respondent to the board of directors, which was not disputed by the COA. NOS. 42, 43 & 44/2007 :31: petitioners. Therefore, the cumulative effect of these events supported by documentary evidence establish the fulfilment of requirement of clause 23
(e) of the articles of association of the Company. We find that as per clause 23(e) transfer of shares to a non-member is a matter which required to be intimated to the board. But that restriction, however, does not extent to the transfer of shares by a member to any existing member. Therefore, we agree with the interpretation placed by the Company Law Board on Clause 23(e). Even on facts, it has been rightly found that Clause 23(e) has been strictly complied with. The finding of the Company Law Board on the interpretation of Clause 23(e) is therefore perfectly correct and the finding that Clause 23(e) even assuming it applies, the condition thereunder has been fulfilled, is based on appreciation of the evidence on record and hence not perverse. Points are answered accordingly.
Point No.5
20. It is contended that the appointment of Respondents 12 and 13 as directors of the Company is null and void and hence sought for a declaration in that behalf. As per clause 39 of the articles of association of the Company, the number of directors shall unless otherwise determined by the Company in general meeting be not less than two and not more than twelve COA. NOS. 42, 43 & 44/2007 :32: and there is no qualifying shares to be possessed by the directors. 12th respondent was appointed as additional director of the Company as per board meeting dated 4.7.2003 so as to look after the show room at Mangalore. At the 6th annual general meeting of the members of the Company held on 30.9.2003 the 12th respondent came to be appointed as a director of the Company. The certificate of compliance dated 10.12.2004 was produced on record and the Company Law Board found that such certificate of compliance inter alia confirms sending of proper notice to the directors of the board held on 4.7.2003 and due notice was also givien to the members of the Company for the annual general meeting for the year ended 31.3.2003 held on 30.9.2003. The directors' report dated 20.12.2004 for the year ended 31.3.2004 also refers to the appointment of the 12th Respondent as additional director at the board meeting and the subsequent approval of the members for his appointment as director at the annual general meeting held on 30.9.2003. Further, the appointment of 12th respondent as additional director on 4.7.2003 is found reflected in Form No. 32 dated 5.7.2003 filed with the Registrar. The appointment of the 12th respondent as additional director in the meeting of the board and subsequent appointment as director in the general body meeting were all prior to the COA. NOS. 42, 43 & 44/2007 :33: death of Hashmukh V. Patel who was very much in the board. Hence the Company Law Board found that Hashmukh V. Patel never made any grievance regarding the appointment of the 12th respondent as director as borne out by any records produced in the case. It is a fact that the financial institution from which the Company availed credit facilities asked for personal guarantee of the directors and none of the existing directors provided guarantee necessitating to increase the number of directors in the board. Consequently, the 13th respondent consented to join the board and hence she was appointed as an additional director, which was before the demise of Hashmukh V. Patel, ie. in the board meeting held on 18.6.2004. The same was confirmed in the subsequent meeting held on 16.7.2004. It was observed by the Company Law Board in its impugned order that Hashmukh V. Patel and the 5th petitioner were present in the said meeting and no objection was raised by them against the appointment of the13th respondent as director. Before us, nothing is placed on record to show that the said finding is perverse or contrary to the facts. Further, the director's report for the year ended 31.3.2005 discloses the appointment of the 13th respondent as additional director and the proposal for her appointment as director at the annual general meeting. At the 18th annual general meeting COA. NOS. 42, 43 & 44/2007 :34: of the Company the 13th respondent was appointed as director of the Company. Compliance certificate dated 29.8.2005 shows that the notice of the board meeting of 18.6.2004 was properly sent to the directors of the Company and the proceedings were properly recorded duly signed and entered in the minutes book. Form 32 dated 18.6.2004 filed with the Registrar also confirms this. It is based on the above detailed analysis of the facts as gathered by the materials produced in the case that the Company Law Board came to the conclusion that there are no irregularities in the appointment of Respondents 12 and 13 as additional directors and subsequently as directors. In so far as Hashmuh V. Patel during his life time nor the 5th petitioner had raised any objection and the petitioners, who were only stepping into the shoes of late Hashmukh V Patel as legal heirs, are estopped from raising any contentions, which, Hashmukh V Patel himself did not have. As such, we find no question of law arises from the above finding.
Point Nos. 6 & 7
21. The Company Law Board entered a finding of an act of oppression in non inclusion of the legal heirs of Hashmukh V Patel in the management of the Company and contravention of Article 41 of the COA. NOS. 42, 43 & 44/2007 :35: articles of association of the Company. This finding is challenged in Co.A.43/2007. We will examine the correctness of this finding in the light of the materials placed on record in the case. The Company Law Board held that the sequence of events will lead to a legitimate expectation on the part of the legal heirs of Hashmukh V. Patel and the 5th petitioner to be in the joint management of the Company. We may at once state that the principle of legitimate expectation is wholly inapplicable in view of the decision of the apex court in West Fort Hi Tech Hospital's case reported in [2008] 142 Comp. Cases 235 approving the decision of this Court in 137 Comp. Cas 151 and granting relief on the basis of legitimate expectation is unsustainable and is liable to be set aside.
22. As per the articles of association of the Company Respondents 1 to 4, 6 and 5th petitioner and late Hashmukh V Patel are named as the first directors of the Company and they will continue as lifetime directors unless they resigned from the Board or disqualified to act as such. As per clause 41(2) the directors appointed subsequently shall continue to be in office till the conclusion of the Annual General meeting held for the first time after their appointment. Article 106 (as the Company stood as a limited company) to the effect that the first director shall retire in the annual COA. NOS. 42, 43 & 44/2007 :36: general meeting, is relevant. No doubt there was some change brought out by clause 41(1) of the articles of association of the Company enabling the first directors named therein to continue as lifetime directors. But there is no provision enabling the legal heirs to be inducted automatically as directors of the Company or to give them the same status as lifetime directors. In other words, the right conferred under Article 41(2) of the articles of association merely guarantees a personal right to the nominated directors mentioned therein to continue as lifetime directors and hence it is a personal right and do not extend to the legal heirs of the nominated director. The conclusion that there was any tacit understanding that the legal heirs of late Hashmukh V. Patel or the 5th petitioner to be in the joint management of the Company is based on surmises and conjectures and not supported by any material on record. When the appointment of the board of directors are governed by the specific provisions contained in the articles of association of the Company, unless such articles confer any right to the legal heirs to become directors of the Company automatically on the demise of their father, such right cannot be conferred dehors the provisions contained in the articles of association of the Company. As a matter of fact, nothing prevented the promoters to agree either for induction of the legal COA. NOS. 42, 43 & 44/2007 :37: heirs automatically on their demise or to give them the same status of lifetime directors. On the contrary all the directors appointed subsequently which includes the legal heirs as well can only continue as provided for in the articles of association of the company namely till the next annual general meeting. Therefore, we find that the finding by the Company Law Board that there had been some tacit understanding between the promoters of the Company and that the legal heirs were having some legitimate expectation is absolutely wrong and we set aside the said finding. In the circumstances, we also hold that the Company Law Board has exceeded its jurisdiction in directing re-constitution of the board providing for proportional representation of the families as per Relief No.3 granted in the impugned order. Accordingly, the said direction is also set aside.
In the result, Co.A. 43 and 44/2007 are allowed. Co.A. 42/2007 is dismissed. In view of the above decision, we leave it open to the parties to move the Company Law Board for passing any consequential orders.
P.R. RAMAN,
(JUDGE)
T.R. RAMACHANDRAN NAIR,
knc/- (JUDGE)