Company Law Board
Mrs. Sheila Anne Mcfarlne vs Gaffino Resorts And Motels Pvt. Ltd. And ... on 16 May, 2007
ORDER
Vimla Yadav, Member
1. In this order I am considering Company Petition No. 23 of 2005 filed by Mrs. Sheila Anne McFarlane a British Citizen resident of U.K. alleging various acts of oppression and mismanagement in the affairs of the respondent company namely Gaffino Resorts and Motels Pvt. Ltd. by R-2 namely Mr. Anthony Gaffino and others under Sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as the Act).
2. The respondent company was incorporated under the Act on 9.5.1994 as a Pvt. Ltd. Company with registered office at Gaffino Building C/o Gaffino Beach Resort, Mobor, Cavelossim, Goa with an authorised capital of Rs. 10 lakhs divided into 10,000 equity shares of Rs. 100/- each to carry on the business of purchase, to take on lease or otherwise acquire lands and erect guest houses, hotels, motels, buildings with all the modern amenities and facilities...to carry on the business of running guest house. The petitioner's deceased husband - Mr. Colin McFarlane who was a Master Builder by profession joined hands with R-2 to be equal participants in the joint venture in the respondent company.
3. Shri Rahul Sharma, Counsel for the respondents raised the preliminary objection that tin. petitioner holding only 8% shares in the Respondent No. 1 company was not entitled to file the petition under Sections 397 and 398 of the Act. Further, raising the second preliminary objection it was contended that the petition deserves to be rejected at the threshold for the reason that the same has not been instituted by a person who is duly authorized to represent the petitioner herein and therefore fails to comply with provisions of Section 399 of the Companies Act. The petition is stated to have been instituted for and on behalf of the petitioner through her appointed attorney. The original power of attorney was not produced along with the petition at the time it was filed and a photocopy produced along with rejoinder was not duly attested and stamped as required under law. Subsequently at the fag end of the final arguments, a freshly attested power of attorney was produced by the Advocates representing the petitioner.
4. Responding to the preliminary objections raised by the respondents Shri Javed Gaya, Counsel for the petitioners argued that none of the objections have any merit whatsoever. As regards the preliminary objection that the petitioner is not entitled to file this claim as she holds less than 10% of the equity of the Company, it was pointed out that this issue is covered by the learned bench's ruling in Shrikishan Khariwal v. Gangadhar Industries Ltd. (2004) GLC 241 : (2004) 118 CC 626 (CLB, New Delhi) in which an exception is made in the situation where the petitioner at one time did hold more than 10% of shares and where the petitioner has challenged the further purported allotment of shares which has had the effect and consequence of reducing his shares; It was argued that as a matter of fact, the petitioner has challenged this purported allotment: as being void in law, for reasons referred to in paragraph 47 of the petition. As regards the other preliminary objection that the Power of Attorney was not notarized by the Indian High Commission or Consular Office, the petitioner stated that this is not required under Section 85 of the Indian Evidence Act. My attention was drawn to the Supreme Court's judgment directly on the point in the case of Jugraj Singh and Anr. v. Jaswant Singh and Ors. in which a power of attorney was authenticated before a notary public in California and the Supreme Court was satisfied that this authentication makes "this a document which is duly authenticated under our law" Further, it was argued that in any event, the Indian Evidence Act which insists on this notarization - which in any case was done - does not apply to proceedings before the Company Law Board. Rajinder Kumar Malhotra v. Harbans Lal Malhotra and Sons UC (1996) 3 Comp. LJ 101 (CLB). Refers. Furthermore, it was argued that the CLB's power to exercise jurisdiction under Section 397 or for that matter, under Section 398 cannot be defeated by mere technicalities, as observed by the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries (Indian) Holding Ltd. .
5. I have considered the preliminary objections raised in this case. These are not tenable. The respondents first preliminary objection is based on the percentage of 8% calculated by the respondents on the share capital of the company after the issue of further shares impugned in the petition. This Board has always taken the view that if shareholding of the petitioners is reduced below 10% on account of further issue of shares and if the issue of further shares is also challenged in the petition, then, the petition will not be dismissed as not maintainable in terms of Section 399. Instead, the allegation relating to the issue of further shares would be examined first as to whether the same is an oppressive act and if it is found to be so, then only other allegations in the petition would be examined. In the present case as admitted by the respondents petitioners shareholding before further issue of shares in March, 2003 was 30% being 3074 shares in the company.
6. As regards the second preliminary objection that Power of Attorney was not notarised by the High Commission or Consular Office, in my view the mere technicality of getting it notarised, which ofcourse has been got done now, cannot stand in between the petitioner and the substantial justice prayed for in the petition on merits of the case. To do substantial justice between the parties if technical defects and substantial justice are pitted against each other preference must be given to substantial justice and hence the petition cannot be dismissed at the threshold.
7. Coming to the arguments on the merits of the case Shri Javed Gaya, Counsel for the petitioners argued that there are four separate issues which the petitioner has raised in its petition and these all constitute serious acts of 'oppression' and 'mismanagement'. It was pointed out that the respondents have offered no sensible response to any of these issues. Regarding the issue of balance shares, it was argued that prior to the purported increase in capital in March 2003, the petitioners were only issued a 30% of the shares, notwithstanding the fact that the original agreements, Reserve Bank permissions and correspondence spoke of the petitioners having 50% of the shares of the company. According to the petitioners, they did not raise the issue until 2002, as they assumed they were 50% shareholders, and they got some share certificates which were not valid. According to the respondent No. 2, the RBI prevented issuing of shares as there was insufficient funds remitted for respondent No. 1 to issue 50% of the capital. Drawing my attention to the pleading at para 12 page 9 of the petition, and annexure C1, C2 and C3, the counsel pointed out that the admitted position is that there was a Board meeting of the company held on 22nd of November 1995 and a resolution was passed to issue 5000 equity shares at a premium of Rs. 3900 per share. The respondent accepted this position. Respondents' excuse for not issuing all the balance shares is that there was allegedly insufficient subscription monies. It is no one's case that the petitioner's husband did not remit Rs. 1 crore 92 lakhs in accordance with annexures C1.C2 and C3, but the respondent argued that only 1 crore and 23 lakhs was deposited in the Bank Account of the company, (page 25 of the reply paragraphs A and B refers). The petitioner referred to the rejoinder at page. 3 paragraph 4 and the exhibit B to the rejoinder (which is a letter addressed by respondent No. 2 to the RBI at Panjim in which a specific reference is made by respondent No. 2 to the remittances referred to at C1, C2 and C3 as being "the subscription"). On the basis that the RBI only insists that the foreign monies come through proper banking channels, the petitioner argued that there was no requirement that the subscription monies should be immediately deposited in the company account. It suffices that it was received through proper banking channels. In this case this was the joint NRO account maintained by the Petitioner's husband and the Respondent No. 2. The petitioner further argued that the monies remitted were spent for the benefit of the company as work was in. progress. In fact the bank records indicate that it was the Gaffinos who were drawing most of the cash monies which were presumably spent on the project. In the aforesaid circumstances, it was argued, it is evident that respondent No. 2 manipulated the position with the RBI in Panjim by crediting only 1 crore 23 lakhs into the company account and disregarding the balance of funds all of it spent on the project and thus capable of being treated as equity - falsely claiming that this was the amount for subscription, contradicting his own letter at Exhibit B of the Rejoinder. The petitioner contended that the respondent No. 2 has no sensible explanation as to the two share certificates which were only signed by him without the company stamp, (these share certificates are annexed at page 97 and 98 of the petition, marked as exhibits E3 and E4). He does not dispute the signatures, and falsely claims at paragraph 19 of the reply, that these shares "have been removed in the office of the company and have been fabricated by the petitioner". It was argued that this argument is patently absurd in view of the stated position of the Respondent No. 2 that the petitioner never came to India after 1996. Then where was the question of being able to steal these certificates particularly when the respondent admits that they bear respondent No. 2's signature. The petitioner contended that these certificates support the entitlement of the petitioner to the 50% interest and, furthermore, establish the respondent No. 2's fraud and malafide intention. Further issue of the purported increase in capital from Rs. 10,00,000/- to 40,00,000 effectuated in March 2003, reducing the petitioner shareholding to only 8% of the company. According to the petitioner the first she learnt of it was when it was uncovered in the Registrar of Companies search. According to the respondent, the petitioner was given notice and stated that they did not want to subscribe. The petitioner has set out its arguments on this at paragraph 47, page 29 of the petition. It was argued that "the purported increase of the authorized share capital of the company from Rs. 10 lakhs to Rs. 40 lakhs is illegal and null and void and the shares issued pursuant to the said alleged increase are illegal, invalid and confer no rights to purported allottees thereof and the purported allotment thereof is liable to the cancelled". The consequence of issuing the further shares was to reduce the petitioner and her husband to 8% of company from the 30% which the respondent Nd.2 had already proposed to reduce them to by failing to issue the balance shares. The petitioner stated that no notice was served to them regarding this further purported issue of capital which was only issued to respondents 2 and 3 and their children, who until then were not even shareholders of the company. Referring to the respondents reply at paragraph 47 page 22 of the reply in which it is , inter alia, argued that the petitioner and her husband were already in a minority and that the share capital of the company was increased in March 2003 in the interest of the Company with the knowledge of the petitioner and her husband. In fact a paragraph 4 of the reply, the respondent states that the petitioner and Mr. Colin MacFarlane "refused to subscribe to the increased share capital", and that the respondent No. 2 in its reply at paragraph 48 at page 20 wherein it was stated that the loan taken by the company from the Economic Development Corporation, Goa was a drain on other resources of the company and in order to retire the loan and avail of a cheaper loan from the Bank of India Margao, die Bank of India informed the company that it would have to improve its debt equity ratio in order to avail of the loan facility, it was argued by the counsel for the petitioners that-
a. The explanatory statement pursuant to Section 173 of the Companies Act does not record the allegations made by Respondent No. 2.
b. No premium was Fixed, if the intent was to discharge the debt then a premium should have been fixed.
c. The monies collected at the time of the subscription from the purported increase in capital could not have paid off the loan as the respondent No. 2 stated that the loan was paid off on March 7,2003 when the monies were only collected after 31st March.
d. Vivek Vaz's letter shown as exhibit C to the Rejoinder states that the respondent No. 2 had discharged the liability from his own funds, the respondent No. 1 had not discharged such a liability even in part.
In addition to this there is a further contradiction in the Respondent position. The respondent 1 and 2's common position is that the company required funds. If that were the case what about the 36000 pounds sterling which was remitted by the petitioner in 2002. The petitioner stated this at paragraph 31 of the petition. The respondent No. 1 dealt with this at paragraph 31 page 17 of the reply in which the explanation offered was that the petitioner's husband remitted "to company's account through wire transfer, a sum of 36000 pounds or thereabout towards Share Application Money. However, shares were not issued to him equivalent to the said amount and at the premium earlier fixed of Rs. 3900 per share since he did not comply with the required legal procedure of obtaining RBFs approval in that behalf etc. The said amount is still lying with the company as Share Application Money". It was argued that if this statement which is repeated by the respondent No. 2 at page 13, paragraph 31 of his reply - is correct, then the respondent No. 1 was sitting on money which according to it was remitted as share subscription money which it had no use for. In 2002 a sum of 36000 pounds would amount to nearly 28 lakhs, three lakhs less than the monies raised through the unlawful increase in further capital. On this basis, it is evident that the increase in capital was plainly mala fide and done with the intent of reducing the petitioners to below the 10% norm by which these oppression and mismanagement proceedings can ordinarily be made. It was pointed out that the respondent furnished no evidence of any type in relation to the subscription and other than some reference to some courier nothing was furnished supporting the allegation that the petitioners were not only informed about this increase in capital, but they even refused to subscribe. This allegation is very strange when put in the context of the other allegation that the 36000 pounds remitted in 2002 by the petitioners was share subscription money which the respondent No. 1 had in its possession but could not do anything because allegedly there was no RBI consent. It was argued that in the aforesaid circumstances, it is evident that the respondents case is full of contradictions as to the reasons and bonafides of the purported shares subscription. Further, it was argued that the law on this point is very clear, that further shares can only be issued for the benefit of the company and not with a view to create a new majority or to reduce a majority even if the power to issue shares is vested in the board. If the purpose of issue of shares is for upsetting the existing shareholding to the detriment of one group, then such an allotment of shares is to be held as an act of oppression whether or not partnership principles are applied, B.M. Jain and Sons Co. Pvt. Ltd. v. Bombay Cable Car Co. Pvt. Ltd. and Ors. 2002 (108) Comp. Case 91 refers. Similarly, it was argued, in a Pvt. Company that either the allotment is malafide with the sole purpose of reducing one's shareholding or that a long standing practice of allotment on proportionate basis had been breached then a shareholder can complain. G. Ramaraju and Ors. v. South India Research Institute P. Ltd. and Ors. 2004 (118) Comp. Case 156 refers. As regards the issue of the purported transfer of interest in the hotel property by way of selling time shares from the Respondent No. 2 to Respondent No. 8 for a consideration of 93000 pounds sterling, it way argued, it was only when her son, Christian went to Goa in January 2004 that he met the respondent No. 8 who told him what had transpired between him and Respondent No. 2 and furnished certain documents shown in the petition. According to the respondent there is a denial but only in the Sur-rejoinder. Respondent No. 8 initially sought to be represented but had not participated in the proceedings. The petitioner set out from the pleadings and case law the true position as to these controversies. The counsel for the petitioners further argued that it was the admitted position that they were appointed Directors on the Board of the Respondent Company, but were removed in May 2003. According to the petitioners the company's search instituted by their lawyers in 2004 was the first intimation of this. According to the respondent, the petitioners were removed under Section 283(1)(g) of the Companies Act. It was pointed out that according search of the Registrar of Company's record, the petitioners resigned, as there is a reference to a form 32. The petitioner set out her case on her late husband's unlawful removal as director at page 36 of the petition at paragraph 50. The respondent Nos. 1 and 2 in their response set out the defence at paragraph 50 at page 25 where it was, inter alia, alleged that the petitioner and Mr. Colin Macfarlane ceased to be Directors of the Company with effect from 2.12.2002 since they absented from three consecutive meetings of the Board of Directors for a continuous period of three months without obtaining leave of absence from the Board. Reliance was placed by the respondent on Section 283(1)(g) of the Companies Act. Drawing my attention to page 10 of petitioners rejoinder it was argued that no proper notices were ever served by the Respondent No. 2 who treated the Company as his own personal property and at no time paid any heed to Company laws and procedures. The petitioner relied on the judgment of the Hon'ble Bench in Vijay Krishna Jaidka v. Jadka Motor Co. Ltd. I Comp LJ 268, the ratio of this order being that where a company was not able to furnish proper evidence of service of notice or of the holding of the meetings, the clause providing for automatic vacation of office would not be allowed to be used. It was argued that other than some reference to a courier, no evidence is adduced to show that the Respondent Company ever complied with the obligation to inform the petitioner and her husband about board meetings or anything else in relation to the company. At page 31 of the reply it is alleged by the Respondent No. 1 that the petitioner and her husband "were informed telephonically informed of the board meetings and affairs of the company and further through post sometimes." Thus on its own admission, the Respondent No. 1 accepts that no proper notice was ever given to the petitioner and her late husband. It was argued that in such circumstances, and bearing mind the ratio of the judgment referred to, it is evident that the Respondent No. 1 cannot rely on Section 283(1)(g) of the Companies Act as alleged. Further it was contended that neither has the respondent company offered any sensible explanation of the Registrar of Companies search shown in annexure U to the petition as that apparently represented that Colin MacFarlane and Shieila MacFarlane resigned as directors as per the Form 32 filed with the Registrar of Companies on 20.5.03. It is material that at paragraph 47 of the Respondents reply there is an admission that the search report dated 3.4,04 "is substantially correct". In these circumstances, it was pointed out that it is evident that there is: a contradiction in the Respondents own position as to the circumstances surrounding the removal of the petitioner and her late husband, it suffices to say that what is clear is that such a removal is grossly illegal and amounts to an act of oppression.
Further, the counsel for the petitioners argued that the respondent No. 2 had sold time shares in the Hotel Property to respondent No. 8 for a consideration of 93000 pounds, these allegations were contained at page 40 of the petition and the petitioner relied upon annexure EE to the petition in which details of a payment to the respondent No. 2's account by respondent No. 8 is documented. It was argued that the respondent denied that any time share business was carried out and pointedly did not comment on the Exhibits annexed to the rejoinder shown at exhibit Document, this exhibit is clear evidence of the respondent No. 2's awareness of the time share business as well as the exhibit E in which the respondent No. 2 addressed an e-mail regarding the preparation of the time shares for all the customers, the preparation being done by respondent No. 2. It was pointed out that the respondent No. 2 did not respond to this serious charge in its reply at paragraph 53C. And did not deal with the allegation in the Sur-rejoinder. Neither did. respondent No. 8 who was served with proceedings and indicated to the Bench that he intended to be represented, deny these allegations, nor did respondent No. 8 represent. It was argued that in the aforesaid circumstances, where there is no specific denial of these serious charges, the rule is that the respondent No. 2 must be taken to have accepted these allegations as correct. As such, disposing off interests in the business without informing the other directors and appropriating these assets as your own resources amounts to a gross mismanagement of the business as well as oppression of the minority. It was further argued that the only appropriate remedy for this matter is the winding up of the company and the realization of the assets on the basis that the Hon'ble Bench recognized that she and her husband were 50% partners and shareholders in the said company, subject to further enquires which the petitioner is entitled to press against the respondent No. 2, 3 and 8 under company law for malfeasances and misfeasance. The counsel for the petitioners relied on a plethora of case laws to support his contentions.
8. The counsel for the respondents argued that besides their preliminary objections, the petition is further liable to be rejected as it fails to disclose or set out any act of mismanagement or oppression committed by the respondent. It was stated that admittedly the petitioner has never involved herself in the business of the respondent company and as per her own admission she last visited India in 1995. There was complete inaction on the part of the petitioner in involving herself in the business of the respondent company. It was argued that it is settled proposition that law comes to the aid of that vigilant alone and unless reasonable vigilance is shown in the prosecution of a claim to equitable relief, the Court, acting on the maxim "vigilantibus non dormeintibus subveniunt leges", will decline to interefere, It was contended that the allegation of oppression and mismanagement cannot be sustained in the facts as pleaded in the present petition and the allegations are, therefore, liable to be rejected. It was pointed out that the only allegation that has been stated in the present petition is that the shareholding held by the petition and her now deceased husband has been reduced to a minority by a mechanism of issuance of further share capital. It is submitted assuming (though incorrectly and not admitting) that the shareholding of the petitioner and her husband have been reduced to a minority by reason of further issue of share capital, the same per se cannot be regarded as an act of oppression. It is stated that where the issue of share is for bonafide and legitimate purposes of the company, the same cannot be considered to be an act of oppression, even if the same upsets the existing shareholdings/memberships. In the instant case imminent and urgent need of funds to retire the debt of the company is a matter of record and therefore if to meet the urgent requirement of funds, share capital is increased, the same cannot be considered to be an act of oppression or mismanagement. Apart from the allegations made with respect to increase in share capital, there; is no other instance alleged in pleading or otherwise which could by any stretch of interpretation considered as an act of oppression and mismanagement.
9. It was further argued that the present petition is a vexatious litigation instituted by and at the behest of the petitioner and her son to harass and arm twist the respondents to make payment of a substantial sum of money to the said petitioner and her son in order to resolve litigation. It was pointed out that since inception, the petitioner and her deceased husband were never intended to participate in day to day affairs and management of the company and the said understanding was adopted and followed in practice. No grievance or cause was ever agitated or heard to be agitated on the issue of participation in management from either the petitioner's now deceased husband or from the petitioner herself. It is only now that the petitioner has realized that there is an adjoining property to the hotel which forms part of the hotel premises and that the said adjoining property is of considerable Value today. It is on this presumption that the present proceedings have been instituted to pressurize and harass the respondents herein without realizing that the property which has caught the fancy of the petitioner does not belong to the respondent No. 1 company and therefore no justified claim can be made by the petitioner with respect to the said property.
10. As regards the shareholding it was argued that the petitioner and her husband held only 3074 shares as against the 5000 equity shares as is being claimed by the petitioner. It was stated that pursuant to an initial understanding as recorded in an agreement dated 22.9.1995, the respondent No. 1 filed an application dated 22.1.1996 with the Reserve Bank of India seeking permission under Section 29 of F.E.R.A. 1973 to sell 5000 equity shares at a premium of Rs. 3900/- per share plus the face value of Rs. 100 per share to the petitioner's/husband. The R.B.I granted an in principle approval, authorizing respondent 1 to issue 5000 equity shares of Rs. 100/- each to the respondent and her husband, for a cash premium of Rs. 3900/- per share, for a total consideration of Rs. 2 crores, on the conditions contained in the said approval letter. One of the conditions of the in-principle approval of RBI required the respondent No. 1 to issue the shares only after obtaining final approval from RBI's Regional Office at Panaji by submission of the F.I.R.C. The RBI was informed on 12.3.1996 that an amount of Rs. 1,23,-88,000/- only had been transferred as on 12.3.1996 from the 'NRO SB Account' to th Current Account opened on' 12.3.1996 of 'Gaffino MeFarlane Resorts and Motels Pvt. Ltd. (the company account). The petitioner's husband had remitted Rs. 1,92,00,000/- to the NRO SB Account but transferred only. Rs. 1,23,88,000/- into the company account. In the circumstances the RBI revised its approval and directed the Respondent Company to issue only 3074 equity shares to the petitioner and her husband out of the 5000 equity shares mentioned in the Agreement. It was argued by the petitioner that a sum of Rs. 1,9200,000/- had been remitted by her husband as subscription money into a bank account under the effective control of respondent No. 2 and the fact that only Rs. 1,23,88,000/- was transferred into the company's account is an example of dishonest and fraudulent dealings of the respondent No. 2 as he had control of this account and the petitioner's husband was not aware/informed that the entire sum of Rs. 1,92,00,000 had not been transferred from the NRO SB Account to the Company Account. The petitioner has stated that the Share Certificates No. 9 and 10 for 963 shares each were issued in the names of the petitioner and her husband but the said share certificates were signed by only one director of the company and did not bear the company seal.
11. The counsel for the respondent argued that the allegation made by the petitioner is entirely incorrect for the reason that the transaction of remittances from NRO SB Account, to the company account took place during the period the petitioner claims that her deceased husband was stationed in India and was allegedly personally supervising the construction of the hotel project. The NRO Account was jointly held by the petitioner's deceased husband and respondent No. 2. Therefore, the petitioner and her husband ought to have been aware of the manner in which and at whose behest and/or instructions the funds were transferred from NRO account to the current account of the company. The petitioner's husband withheld part of the amount remitted to the NRO SB account an.] transferred a sum of Rs. 1,23,88,000/- only from the NRO SB Account to the company account, against which 3074 shares were issued vide Share Certificates No. 5 and 6 jointly in the name of the petitioner and her husband The petitioner's allegation that balance shares were issued bearing signatures of only one director is denied as false and the respondent has submitted that the company issued no shares beyond 3074 shares to the petitioner. The respondent has stated that share certificates Nos. 9 and 10 alleged to be issued to the petitioner and her husband have not been issued by the respondent company and they are fabricated documents. It was argued by the counsel for the respondents that it has been contended and afgued on behalf of the petitioner that the petitioner's husband and the respondent No. 2 entered into an agreement to develop a property whereby the land with some construction on it was owned by the Respondent No. 2 and the petitioner's husband was to bring in investment to complete the construction. According to the petitioner the respondent No. 2 had already done any construction except built some minor foundation on the land, prior to their joint partnership in the project. The petitioner has stated that her husband had evaluated the project cost at around Pound Strerling 5,50,000 and that he was expected to invest around 3,65,000 Pound Sterling, leaving a balance of 1,85,000 Pound Sterling to complete the hotel project. The petitioner has relied on various emails to support her contention that the petitioner and respondent were joint partners in the venture, with equal shareholding i.e. 50% shareholding of the petitioner's husband had remitted monies, to the bank account held jointly in the names of Respondent and the Petitioner husband, which was to be expended on construction and completion of the hotel. It was contended by the petitioner that her husband entered into a Shareholder's Agreement dated 22nd September, 1995, with the respondent to the effect that respondent No. 2 and 3 would be jointly entitled to 50% share in the assets and liabilities in the company and the remaing 50% share would belong to the petitioner's husband. The counsel for the respondents disputed and denied the contentions and allegations of the petitioner. It was stated that the super structure of the hote building had alresdy been completed and the respondents had invested more than Rs. 1 crore when the petitioner and her husband were inducted as shareholders. The petitioner's reference and reliance upon e-mails were denied as the respondent is computer illiterate and does not know how to operate computers. The respondents contested and disputed the veracity of the e-mail correspondence produced. The respondent also denied that the agreement between the petitioner and the respondent dated 22.9.1995 is a shareholders' agreement since as on the date of the execution of the said agreement since as on the date of the execution of the said agreement no shares had been allotted to the petitioner or her husband. The respondent stated that the petitioner has deliberately suppressed vital .and material facts regarding, the said agreement. It was pointed out that though the initial understanding was that the participation of the petitioner and her deceased husband would be equal however the same was dependent upon the petitioner and her husband infusing agreed funds. As the petitioner and her husband failed to bring in the desired funds, accordingly they could not be allotted the 5000 shares as envisaged and their shareholding was limited to 3074 shares. It was argued that it is the case of the petitioner that with an intent to denude the shareholding of the petitioner and her husband and with an intent to reduce them to a minority, the respondents have reflected an increase in share capital of respondent. No. 1 company. The petitioner has contended that the share capital of the company was increased from Rs. 10,00,000/- to Rs. 40,00,000/- and the issued and paid up capital of the company was also shown to be increased from Rs. l0,00,000 to Rs. 3 9,70,400/-. The petitioner states that no prior notice was given to the petitioner's husband of any resolution to be moved at a Board meeting for increasing the authorized share capital, nor was any notice given of any General Meeting convened to approve the said increase, nor of any resolution to end the capital stating that they were not in a position to purchase any of the increased capital because of his illness. The allotment was carried out with a view to retire the debt/loan of EDC, Goa, invested more than Rs. 1 crore when the petitioner and her husband were inducted as shareholders. The petitioner's reference and reliance upon e-mails were denied as the respondent is computer illiterate and does not know how to operate computers. The respondents contested and disputed the veracity of the e-mail correspondence produced. The respondent also denied that the agreement between the petitioner and the respondent dated 22.9.1995 is a shareholders' agreement since as on the date of the execution of the said agreement since as on the date of the execution of the said agreement no shares had been allotted to the petitioner or her husband. The respondent stated that the petitioner has deliberately suppressed vital .and material facts regarding, the said agreement. It was pointed out that though the initial understanding was that the participation of the petitioner and her deceased husband would be equal however the same was dependent upon the petitioner and her husband infusing agreed funds. As the petitioner and her husband failed to bring in the desired funds, accordingly they could not be allotted the 5000 shares as envisaged and their shareholding was limited to 3074 shares. It was argued that it is the case of the petitioner that with an intent to denude the shareholding of the petitioner and her husband and with an intent to reduce them to a minority, the respondents have reflected an increase in share capital of respondent. No. 1 company. The petitioner has contended that the share capital of the company was increased from Rs. 10,00,000/- to Rs. 40,00,000/- and the issued and paid up capital of the company was also shown to be increased from Rs. l0,00,000 to Rs. 3 9,70,400/-. The petitioner states that no prior notice was given to the petitioner's husband of any resolution to be moved at a Board meeting for increasing the authorized share capital, nor was any notice given of any General Meeting convened to approve the said increase, nor of any resolution to amend the capital clause in the Memorandum of Association, nor were any shares offered to the petitioner or her hausband. The petitioner has contended that the purported increase of the authouized share capital of the company from Rs. 10 lakhs to Rs. 40 lakhs is illegal and null and void. According to the petitioner she and her late husband together held 5000 equity shares of the company and not 3740 equity shares as shown in the said Annual Return. After the death of her husband the petitioner holds all the said 5000 shares. The petitioner has stated that the said further issue and allotment of shares was done not in the interest of the company, but solely for the purpose of reducing the shareholding of the petitioner and her husband from 50% to hat of a negligible minority. The petitioner has stated that no premium was charged for the new shares issued pursuant to the increase in the authorised capital while the petitioner and her husband were charged a premium of Rs. 3,900/- per share. The counsel for the Respondent denied that there was any systematic plan to drive the petitioner and her husband out of the company holding 30% of the shares before March, 2003 when the share capital was increased. It was pointed out that the share capital of the company was increased in the interest of the company and with the knowledge of the petitioner and her husband. The notice dated 1.3.2003 for holding Extraordinary General Body Meeting of the company on 2.3.2003 was sent to them by courier which was received by them. The petitioner's husband gave No Objection on his behalf and that of the petitioner for increasing the share capital stating that they were not in position to purchase any of the increased capital because of his illness. The allotment was carried out with a view to retire the debt/loan of EDC, Goa, amounting to Rs. 70 lakhs as the said loan carried a very high rate of interest of approx Rs. 10 lakhs per year which was a drain on the resources of the company. The company with a view to pay off the said loan approached Bank of India, Margao for availing Joan in order to pay off the EDC loan, which was at a much lower rate than EDC loan. Bank of India informed the company that it would have to improve its debts equity ratio in order to avail of the loan facility. It was in these circumstances that the company decided to increase its share capital from Rs. 10,00,000/- to Rs. 40,00,000/-. The increase in share capital was evidently bonafide and imminent. Further, the petitioner and her husband having declined to accept or subscribe to any further issue of share, cannot be heard today to complain about the increase in the share capital which was for a bonafide purpose.
12. It was pointed out that it is the petitioners case that the property on which the hotel was to be constructed was purchased in the name of the company from respondent 2 and 3 vide sale deed dated 7.10.1996, registered with the Sub-Registrar-cum-Civil Registrar of Salcete at Margao, Goa, under No. 2402 at pages 312 to 328 of book No. 1, Vol.663 dated 28.10.1996. the petitioner and her husband were residing in Goa at the respondent's house to personally supervise the construction of the hotel from 9.1.1996 to 11.12.1996 and from 10.6.2001 to 11.1.2002 and in Jan. 2002 the petitioner and her husband returned to England because of the ill health of her husband, till this time the company had not availed any external loans from any financial institution or lending body for the construction of the beach resort, sometime in early 2000 the lease deal that the petitioner's husband and the. respondent were negotiating in respect of the shops which were a part of the beach resort project fell through and on an alternate source of funds was required for the construction of the second phase of the project The petitioner's husband and the respondent considered various options to finance the remaining part of the project including the possibility of selling the project, also considered the possibility of taking a loan to complete the project and of converting the project into a timeshare scheme. The petitioner has stated that her husband sought to ameliorate the situation by setting up a timeshare company in UK for selling timeshares in the company and collected 40,000 Pund Sterling of which 36,000 Pound Sterling was remitted to the company. The petitioner has stated that sometime in early 2001 it was decided to avail of the loan offered by the Economic Development Corporation of Goa, Daman and Diu (EDC) and that the Respondent gave the petitioner's husband the impression theat he had given a personal guarantee for the aforesaid loan availed of by the company from the EDC, without any further security but the respondent had, in reality, mortgaged the said property and hypothecated the plant, machinery, fixtures, vehicle et to the EDC as security for a term loan of 70,00,000/-. The petitioner stated that the respondent at the time of taking this loan sought to foist an agreement on the loan and interest the petitioner's husband would be obliged to sell his shares to the Respondent for Rs. 2,50,000/- The respondent however denied that the petitioner came to India after 1995. It was pointed out that the Company had already availed of a loan sanctioned by EDC in January 2002 and the outstanding amount towards loan was approx. Rs. 70 lakhs. The respondent denied that the company ever considered selling the project. All correspondence that is relied upon by the petitioner in this regard was denied as false and fabricated. It was denide that the company ever authorized the petitioner's husband to negotiate with anybody for sale of the project or to set up a timeshare company in UK for the purpose of selling timeshares of the company. It was stated that sometime in 2002 the petitioner's husband remitted 36,000 Pounds to the Company towards share application money. However, the company could not issue shares equivalent to the said amount since he did not comply with the required legal procedure of obtaining RBI approval in that behalf and the said amount is still lying with the company as share application money. It was pointed out that Respondent No. 2 and 3 had to execute their personal guarantees for availing the loan of Rs. 70,00,000/- sanctioned by EDC since the EDC was not satisfied with the mortgage and hypothecation of Company's assets alone and the petitioner or her husband did not have any major assets in India.
13. The counsel for the respondents argued that the petitioner has disputed the resignation of the petitioner and her husband from the Board of Directors of the company. It is the petitioner's case that in or about mid. 2002, the petitioner's husband was diagnosed as having Motor Neuron Disease, which is a debilitating disease and that the petitioner's husband had informed the respondent that he was suffering from this fatal illness but the respondent became more assertive and unreasonable after learning of his illness. The petitioner stated that her husband died in England on 26.4.2003. Subsequently the petitioner's son, Mr. Christian Mc Farlane informed the respondent about his father's death and requested that his father's shares be transmitted to the petitioner. In January, 2004, Mr. Christian visited Goa and met the Respondent with a copy of his father's death certificate. In February 2004 the petitioner's lawyers in Mumbai sent a notice to the respondents on behalf of the petitioner, calling upon them to refrain from entering into any agreements with any persons whatsoever, regarding the sale/transfer of timeshares or any other like interest in the resort and to submit to the petitioner a copy of the last balance sheet together with the auditor's report in relation to the company. The respondent, by his letter dated 7.3.2004, informed the petitioner's lawyers in Mumbai that the petitioner's husband had acquired only a minority of the total shares in the company and that the petitioner has erroneously stated that the petitioner's husband and petitioner had collectively acquired 50% share. Subsequently the name of the Company was changed back from "Gaffino MacFarlane Resorts and Motels P. Ltd." to its original name. The explanatory statement pursuant to Section 173 of Companies Act, 1956, stated that the change in the name of the company was proposed since the foreign collaborators of the company had expressed their desire to exit from the company. The petitioner has submitted that at no time had the petitioner or her husband ever indicated their desire to exit from the company as alleged by the Respondent in the explanatory statement. It is the case of the petitioner that Form 32 had also been filed by the Respondent wit the ROC dated 12.12.2002 by which it is falsely alleged that the petitioner and her husband resigned/ceased to be directors on 2.12.2002. The petitioner stated that neither the petitioner nor her husband ever resigned as Directors of the company. It was pointed out that her husband ceased to be a director only on his death and she continues to be a director of the company. The purported removal of herself and her late husband as directors of the company without even informing the petitioner or her late husband was not only fraudulent, illegal and malafide but also amounted to an act of oppression against the petitioner and her late husband by the respondent. The petitioner has pointed out that although the respondent had signed Form 32 on 12.12.2002, it was filed with the ROC only on 20th May, 2003, which was after the death of the petitioner's husband. The Counsel for the respondents disputed and denied the allegations made by the petitioner. It was pointed out that the petitioner's husband was diagnosed as suffering from Motor Neuron Disease while in Goa in 2001-2002. The respondent had him treated by a doctor in Goa. The respondent company has till date not been officially informed of death of the petitioner's husband despite the company and the respondent having requested the petitioner and her attorneys to produce the death certificate of Mr. Colin MacFarlane. Sometime in June or July 2003 one Mr. Christian, who also claimed to be the sole heir of the deceased, informed the respondent telephonically of the death of Mr. Macfarlane. The respondent received a notice dated 4.8.2003 from petitioner's lawyer. In response to the notice it was duly stated that the petitioner and her husband hold 3074 shares in the respondent company and the petitioner is entitled to the said shareholding upon the death of her husband. It was accepted that the petitioner is the holder of 3074 shares in the company. The petitioner's attorneys were requested to provide the authorisation to act for and on behalf of the petitioner and her husband including the proof of Mr. Colin MacFarlane's death. Respondents denied that there has been any systematic plan to drive the petitioner and her husband out of the company and in any event to reduce them from the position of equality to a minor role. It was stated that the petitioner and her husband were always minor shareholders in the company holding 30% of the shares before March, 2003 when the share capital was increased. The share capital of the company was increased in the interest of the company and with the knowledge of the petitioner and her husband. It has been stated by the respondent that the notice dated 1.3.2003 for holding Extraordinary General Body Meeting of the company on 22.3.2003 was sent to them by courier which was received by them. The petitioner's husband gave No Objection on his behalf and that of the petitioner for increasing the share capital stating that they were not in a position to purchase any of the increased capital because of his illness. It was denied that increase of share capital of the company from Rs. 10 lakhs to Rs. 40 lakhs is illegal or null and void. It was denied that the petitioner and her husband held or hold 5000 equity shares as alleged. It was denied by the respondent that there has been an act of deceit in increasing the share capital of the company and subsequent allotment as alleged or at all. It is submitted by the respondent that the name of the company was changed with effect from 11.2.2003 and it was denied that the explanation given in the explanatory statement is false and fraudulent. It is submitted by the respondent that the petitioner and her husband ceased to be directors of the company wef 2.12.2002 since they absented from three consecutive meetings of Board of Directors for continuous period of three months without obtaining leave of absence from the Board. Petitioner and her husband were informed that their office as Director stood vacated by operation of law. The petitioner in her petition has referred to and relied upon various emails alleged to have been exchanged between the Colin MacFarlene (the husband of the petitioner) and R-2 and certain emails exchanged between petitioner's husband and some third parties. The respondent has denied the veracity of the said e-mails. The petitioner has while referring to an email dated 16th Jan. 2003 which was sent to an email address, viz. [email protected] and a reply thereto also having originated from the same address has stated that this email was not sent by the petitioner's husband but appears to have been drafted by the R-2 in order to allay the fears of the R-8. The petitioner stated that her husband never received any such email from R-8 nor did he send any reply to such an email. The petitioner stated that the said email address appears to have been created with fraudulent intent to give the impression that messages originating from there were sent by the petitioner's husband and the emails dated 16.1.2003 and 17.1.2003 sent to and from the email address [email protected] are forged and fabricated. The petitioner stated that the petitioner learnt that R-8 entered into an agreement dated 31.1.2003 with the R-2 in which R-2 purported to sell timeshares in the hotel to R-8 for a consideration of 93,000 Pound Sterling loan liable to be repaid by the sales of a new entity known as Vacation Ownership @ Mobor Beach Resort with a 10% interest on yearly basis. The petitioner further stated that the said R-8 acted upon this agreement and through his Jersey bank account remitted a sum of 93,000 pounds to R-2 at his personal bank account at ICICI Bank, Nariman Point, Mumbai. The respondent in reply has denied the petitioner's allegations as false and baseless. It was denied that any negotiations took place between R-2 and R-8 for the sale of the company as alleged or at all. R-2 has denied that any of the emails referred to in the petition have been issued by any of the Respondents as alleged. Respondent denied that he represented to R-8 that he was free to contact the petitioner's husband to gain assurance regarding his honesty or at all. The respondent disputed and denied the genuineness of the emails produced by the petitioner and stated that R-2 does not know how to operate the computer and therefore could not have corresponded with petitioner's husband on emails. Further, the analysis report produced by the petitioner alleging that the email had not been sent from the computer of petitioner's late husband is of no relevance as an email account can be accessed from any computer terminal and the fact that an email had not been sent from a particular computer does not canvass the case of the petitioner any further.
14. I have considered the pleadings and the documents filed therewith as well as the arguments of the counsels for the petitioners and the respondents. Preliminary objections raised in the case as said earlier are not tenable. Coming to the merits of this case I find that the respondents have not been able to meet even a single allegation against them. They have depended on mere denials. What they have stated is not borne out from the records. Most of the allegations have been met with stony silence. Chronology of events reveals a different state of affairs then what the respondents have tried to paint Even the case laws relied upon do not come to their support in the absence of reputation of the allegations against them. On the other hand the petitioners have succeeded in making their case of oppression and mismanagement. They have also succeeded in making a case of winding up though winding up of the company would prejudice their interests, hence no prayer has been made for winding up of the respondent company. The respondents have not denied that as per agreement dated 22nd September, 1995 the petitioners were to be 50% shareholders in the company holding 5000 shares. They did remit 1,92,00,000 for the purpose but only a sum of Rs. 1,23,88,000 was transferred to the company's a/c for allotment, of shares from the NRO a/c in the effective control of R-2 for the purpose. However, the respondents have not denied that the balance amount was utilized for the purpose of the company. Only certificate Nos. 5 and 6 giving 3074 shares were issued. Further certificate Nos. 9 and 10 for 963 shares bore only R-2's signatures without compnay's seal were conveniently said to be forged ones. Even the e-mails received in the normal course have been denied and stated to be manipulations and conveniently ignored on the ground that R-2 is not computer literate. It is difficult to believe respondents stories. The respondents have conveniently stated that the petitioners had not visited India after 1995 whereas the facts speak for itself that the petitioners were actively in the management and control of the company taking important decisions which culminated in negotiations to set up a timeshare company in U.K. On the one hand the respondents state that the petitioners did not visit India after 1995, on the other hand, they do not deny that it was R-2 who made the petitioner's husband consult a doctor in Goe, in 2002 who diagnosed him as having Motor Neuron Disease. Respondents' plans are clearly revealed from the chronology of events. Once the petitioner's husband left for England in 2002 (where he died on 26.4.2003), the respondents first reduced the shareholding of the petitioners from 30% to 8% by raising the share capital from Rs. 10 lakhs to Rs. 40 lakhs and by raising issued and paid up capital from Rs. 10 lakhs to Rs. 39,70,400/- by issuing shares to R-2, R-3 and their children in March 2003 without following due procedure as per the provisions of the Companies Act and conveniently stated that the petitioners refused to purchase shares. This statement is difficult to believe in view of the fact that on the date when the respondents issued shares to themselves the petitioners money nearly 28 lakhs (three lakh less than what was stated to be required for raising through the increase in share capital) was already lying with the company, till date it is admitted lying with the company as application money. The so-called proper purpose of issuing further share to pay off the EDC loan is also not made out by the respondents in that they have failed to meet the petitioner's argument pointing towards the fact that the monies collected at the time of the subscription from the purported increase in capital could not have paid off the loan as the respondent No. 2 himself has stated that the loan was paid off on 7.3.2003 whereas the share allotment monies were collected subsequently only after 31.3.2003. And the respondents have maintained stony silence as to why no premium was charged on these allotments whereas the petitioners had been earlier charged premium at the rate of Rs. 3900/- per share. All these circumstances only point out that the increase and allotment of shares was done with an ulterior motive of gaining further control on the company by reducing the petitioners to a minority of 8% from 30% and not in the interest of the company. This is a clear act of continuous oppression and apart from being oppressive is illegal and hence the increase and allotment of share in March 2003 is declared null and void.
15. As regards the petitioners removal as Directors allegedly under Section 283(1)(g) of the Act - there is a contradiction in what the respondents state in their reply to the petition and what Form 32 though dated 12.12.2002 but filed with the ROC only on 20.5.2003 subsequent to the petitioner's husband's death on 26.4.2003 mentions as resignation of the petitioners. Resignation is different (sic) removal. Respondents are not too sure which one to adopt for ousting the petitioners without following the due procedure as per provisions of the Act only if the situation so requires. They do not rebutt the petitioners contentions in this regard. Even after showing them as resigned on 12.12.2002 the respondents waited till the death of the petitioner's husband to file Form 32 with the ROC on 20.5.2003. Their removal as Directors was illegal. However, since the petitioners husband is dead now, his son in his place is required to be placed as Director besides his mother who continues to be a director as her removal as well was illegal.
16. As regards the sale of Time Shares at the back of the petitioners after reducing them to a minority of 8%, the absence of R-8 despite initially intending to represent before CLB only gives strength to the petitioner's contention in this regard. However, the petitioners when again on the Board are given liberty to review the transaction and take appropriate steps in the interest of the company.
17. In view of the foregoing, the petitioners' prayers at item (a) to (f) and (o) are hereby granted. The respondent company is directed to implement the same forthwith. With the above directions, I dispose of this petition. All CAs in this CP stand disposed off. All interim orders stand vacated. No order as to cost.