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Mrs. Saroj Hashmukh Patel And Ors. vs Kantilal Pranalal Patel And Ors. on 23 October, 2007

ORDER

K.K. Balu, Vice-Chairman

1. The petitioners collectively claiming 18% of the paid up capital of M/s Patel Cars Private Limited ("the Company"), aggrieved on account of certain acts of oppression and mismanagement in the affairs of the Company have invoked the provisions of Sections 397, 398 and 402 of the Companies Act, 1956 ("the Act") seeking the following reliefs:

a) to declare the allotment of 50,000 equity shares made on 04.07.2003 in favour of the respondent No. 12 and 1,80,000 equity shares made on 18.06.2004 (1,20,000 shares to the respondent No. 13; 50,000 shares to the respondent No. 12 and 10,000 shares to the respondent No. 9) as null and void;

b) to declare the induction of the respondents 12 & 13, on the board of the Company as null and void;

c) to reconstitute the board of the Company on the basis of proportional representation, by inducting the respondent No. 4;

d) to restore the board of directors of the Company as at 31.03.2001 by removing the respondents 9, 10 & 11;

e) to restore and register the properties acquired for the Company's use in the name of the individuals/firms of the respondents, in favour of the Company;

f) to recast the accounts of the Company through a reputed firm of auditors appointed by this Bench, as statutory auditors of the Company; and

g) to direct the reconstituted board to carry on the day-to-day operations and management of the Company.

2. Dr. K.S. Ravichandran, learned Authorised Representative, while initiating his arguments in support of the petitioners submitted:

• The Company incorporated in June, 1997 as a limited company with the main object of buying and selling automobiles such as cars, bikes etc., has been converted into a private company with effect from 14.08.2001 and changed its name to "Patel Cars Private Limited". The respondents 1 to 3, 6 to 8 and (late) Hashmukh V. Patel are the subscribers to the memorandum of association and promoters of the Company. When the Company became a private company, the respondents 1 to 4, 6, fifth petitioner and (late) Hashmukh V. Patel have been named as the first directors. At the time of incorporation of the Company, (late) Hashmukh V. Patel and respondents 1 to 3 & 6 to 8 were holding each 14% of shares in the Company, namely, 10,000 shares each out of the total 70,000 shares in the Company. As at 31.03.2001, the respondents 1 to 4 and Mr. Jagrath N. Patel of K.P. Patels' family constituting four groups were collectively holding 4,60,000 shares and had four directorship. The fifth petitioner together with his family members held 1,20,000 shares and had one directorship. Late Hashmukh V. Patel was holding 1,20,000 shares with one directorship. The respondents 6 to 8 and Mr. Chandrakant N. Sangani collectively held 4,85,000 shares and had four directorship. The understanding from the beginning is that each group or family will have one directorship for every 1,20,000 shares. The petitioners have also given personal guarantee securing dues of the Company, as borne out by the auditors' report dated 29.08.2005. During the period between 05.05.2001 and 12.07.2001, there were certain allotments in favour of, among others, the petitioners group and transfers in the name of the respondents group. The board minutes dated 21.05.2001 registering the transfer of shares effected by the respondents 7 & 8 have not been signed and authenticated by the Chairman, even after four years. The impugned transfers effected by the respondents 7 & 8 in the year 2001 are neither reflected in the annual returns made upto 29.09.2001 and 30.09.2002 nor in the compliance certificate, which throws doubts as to whether the transfers are supported by any transfer documents and approved by the board of directors. When the shares of the respondents 7 & 8 and Mr. Chandrakant N. Sangani were reportedly acquired by the respondents 9 to 11 in May, 2001 gaining more and more stake in the Company, the entire share capital came to be vested in the hands of mainly two groups, namely, the petitioners with 2,60,000 shares and respondents holding 9,55,000 shares out of 12,15,000 shares in the Company, constituting 21.4% and 78.6% of the shares with two and ten directorship respectively. The petitioners were aware of the transfer of shares by the respondents 7 & 8 but not the motive of the respondents to consolidate their holdings, detriment to the shareholders belonging to other groups, in which case they would have objected to the share transfers at that time itself. Therefore, the register of members must appropriately be rectified. As at 29.09.2001, after the Company became a private company in August, 2001, the petitioners group continued to hold 2,60,000 shares with two directorship, while the respondents groups belonging to various families 9,55,000 shares with ten directorship. While, the respondent No. 12 was arbitrarily allotted 50,000 shares on 04.07.2003, the Company's bankers advised only in April 2004 for increase of the paid up capital by infusion of Rs. 25 lakh during the year 2004-2005. The letter of the Company's Banker has been organized by the respondents to justify the impugned allotment of shares. Furthermore no notice has been received for the extra-ordinary general meeting purportedly held on 14.06.2004 for the increase of authorised capital from Rs. 1.30 crore to Rs. 1.48 crore. The minutes, which are fabricated, would show as if (late) Hashmukh V. Patel was present at the said board meeting. Article 5 empowers the board to allot or otherwise dispose of the shares, but at the same time, the directors are bound by fiduciary responsibilities and while exercising their powers they owe a duty to other shareholders and stakeholders. The Company had allotted clandestinely and without knowledge of the shareholders 1,80,000 shares on 18.06.2004 (1,20,000 to respondent No. 13; 50,000 shares to respondent No. 12 and 10,000 shares to respondent No. 9). The Company's financial needs have neither been established nor intimated to the shareholders. The board minutes dated 04.07.2003 and 18.06.2004 are silent on the need for funds. The impugned allotments have been made without any justification at par while the shares of the Company ought to have commanded a premium with a view to gain more and more control over the Company, in violation of the equitable principles of giving opportunity to all shareholders to participate in the prospectus of the Company and in breach of the principles of partnership. Section 81 does not apply to a private limited company. In view of Section 81(3), the board of directors cannot arbitrarily issue further shares and in the absence of any specific statutory powers, the board of directors is governed by Section 291 of the Act. The directors must ensure that the powers vested in article 5 in issue of shares are exercised in a bonafide manner and in good faith, which are however missing in the instant matter. There has neither been any notice of the purported meetings, wherein the impugned allotments of shares have been made in favour of the respondents 9, 12 & 13. By virtue of Section 172(2)(ii) of the Act, the Company is bound to serve notices upon the legal heirs of a deceased member in the manner provided in Section 53(5) of the Act. However, no notice of any such meeting was given to the legal heirs of (late) Hashmukh V. Patel. The respondents 12 & 14, belonging to the respondents group became directors of the Company in July, 2003 and June, 2004 respectively. There is nothing to suggest that the directors who constituted the board and their relatives disclosed their interest, while appointing the respondents 12 & 13 as additional directors and therefore, their appointment as additional directors ought to be declared as null and void. As at 30.09.2004, Hashmukh V. Patel, since deceased, fifth petitioner, respondents 1 to 4, 6, 9 to 13 were directors of the Company. When Hashmukh V. Patel, died on 31.12.2004, the respondents failed to take on the board any of the legal heirs of (late) Hashmukh V. Patel, inspite of repeated requests made by them and this rightful entitlement was deliberately denied by the respondents ignoring the scheme of proportional representation originally agreed to among the promoters. The impugned allotments and appointment of directors not having been made in accordance with the mandatory requirements of law, lacking probity and fairness are unlawful and oppressive in nature which must be set aside. The petitioners 1 to 4, on account of denial of copies of the annual reports of the Company, came to know of the impugned allotments and appointments only after the death of Hashmukh V. Patel in December 2004.

• The transfer of shares belonging to the sixth respondent in favour of the first respondent, which is reflected in the counter of the respondents, is yet another act of permanent oppression. The annual returns made upto 30.09.2004 and 30.09.2005 would show that the sixth respondent was holding 120000 shares in the Company. The compliance certificates dated 10.12.2004 and 29.08.2005 do not indicate any share transfer or transmission during the financial years 2003-2004 and 2004-2005. Furthermore, the transfer of shares by the sixth respondent is in violation of article 23(e) and there has been no intimation by the sixth respondent regarding his intention of transfer of shares to the board of directors of the Company so as to select a desirable person to be the transferee of shares, in terms of article 23(e). Hence, the transfer of shares by the sixth respondent is not valid.

• The Company has purchased landed properties in several places such as Calicut, Trivandrum and Mangalore, in the name of K.P. Patel's family members or associate firms and those properties have been leased out at exorbitant rent in favour of the Company, after constructing buildings thereon by the Company for setting up its branches, thereby ensuring perennial income for themselves. The assets that would appreciate in value are in the personal names of the respondents and the assets that would depreciate have been booked in the name of the Company. The decision to purchase the landed properties in the name of the directors have been taken in the presence of the interested directors, in contravention of the relevant provisions of the Act, thereby not acting in good faith but in breach of fiduciary duty cast on them.

• All the minutes of the meetings of the Company save those conducted after filing of the company petition are fabricated to suit the respondents. The respondents have manipulated the books of account and other records of the Company in order to suppress its real value and profits, as borne out by the annual report for the year 2004-05 and are occupying the prime positions in the Company remunerating themselves without, however, complying with the statutory and mandatory disclosures. The respondents at no point of time ever permitted the petitioners to verify the books of account maintained by the Company and denied their right of inspection of the books of account and other statutory records of the Company. The petitioners are unable to get an updated copy of the memorandum of association. The respondents have not even filed a printed copy of the altered articles of the Company with the Registrar of Companies. The profit and loss account for the year 2004-2005 would show that the increased selling expenses are not proportionate to sales. They have not been holding board meetings properly and no notices are issued to directors for board meetings. The board has arbitrarily fixed the managing director's remuneration without concurrence of all the directors. The managing director has been paid huge amounts, when the Company is not making profits. The reports of the statutory auditors for the year 2002-2003, 2003-2004 and 2004-2005 disclose several of the deficiencies in the management, non-compliances by the Company, financial irregularities in the affairs of the Company. The statutory auditors have not reported anything about related party transactions and preferential allotment in their report, which require a change in the audit firm. The Company is keeping large cash balances. There is no internal control measure or internal audit department for efficient management of the affairs of the Company. There has been no compliance of the provisions of Section 58A, with regard to unsecured loans given by related parties to the Company. The Company has neither complied with Section 314 of the Act in regard to appointment of the relatives to the office of directors. There are large unrealised debtors and no steps are being taken to recover the outstanding debts. There is a fall in the commission or incentive received despite increase in sale of cars and warranty charges. There is increase in administrative expenses. The respondents are also guilty of fraud and misrepresentation. The affairs of the Company are not managed properly, which warrants an independent professional Chairman, failing which interests of the petitioners, as shareholders would be seriously prejudiced. The respondents are well aware of the death of Hashmukh V. Patel, as borne out by the directors' report dated 20.04.2005 and the advertisement released by the Company mourning on his demise. Nevertheless, while the Company declared dividend in the year 2005, it chose to send the demand drafts representing the dividend amount in the name of deceased Hashmukh V. Patel, which is quite unfair. Inspite of repeated personal requests made to the Chairman no initiative was taken to deliver the original share: certificates or transmit the shares of (late) Hashmukh V. Patel in the name of his legal heirs or induct in the board, the fourth petitioner as a representative of (late) Hashmukh V. Patel family, in terms of the original agreement for proportional representation, but at the same time, appointed the respondents 12 & 13 as directors without any justification.

• Article 41 contemplates that the first directors are non-retiring directors unless they resign from the board or disqualified to act directors under the provisions of the Act. The fifth petitioner is one of the first directors of the Company as per the articles of association filed by the Company in 2001. Therefore, any attempt to remove the fifth petitioner from the office of director is against the articles of association of the Company and cannot be allowed.

• At the suggestion made by the Bench, attempts were made to explore the possibility of any amicable settlement by sale of the shares of the petitioners, but the respondents were not willing to pay any fair price, as claimed by the petitioners. However, considering the Company's worth, the petitioners are willing to pay Rs. 300/- per share for the shares of the respondents, which aspect may be considered while granting appropriate reliefs for smooth running of the day-to-day affairs of the Company.

3. Dr. K.S. Ravichandran learned authorised representative in support of his legal submissions relied on the following decisions:

• Smt. Claude-Lila Parulekar v. Sakal Papers Private Limited and Ors. (2005) 65 CLA 317 SC - to show that non compliance of Section 108 in relation to transfer of shares is not a technicality but the requirements of Section 108 of the Act are mandatory.

• V.J. Thomas Vettom v. Kuttanad Rubber Company Limited and K.M.J. Thomas v. Kuttanad Rubber Co. Limited (1984) 56 CC 284 Kerala - to show that where the majority acts against the provisions of the articles of association of the company or of the statute governing it or unconscionable use of the majority's power resulting or likely to result in financial loss or where action which could be characterised as unfair and improper is made, the court will exercise its powers under s.397 or s.398 of the Companies Act.

• Dayaram Agarwal v. Ashok Industries P. Ltd. (2006) 66 SCL 328 CLB - to show that any transfer of shares not in consonance with the memorandum and articles of association of the company is bad in law.

• M.S. Madhusoodhanan and Ors. v. Kerala Kaumudi Private Limited and Ors. (2003) 117 CC 19 - to show that in the event of non-production of any primary records, relating to service of notice on the addressees concerned disputed meeting should be declared invalid.

• Gold Mark Enterprise Limited v. Pondy Metal and Rolling Mills Private Limited (2007) 74 SCL 259 (CLE) - to show that it is unsafe to place any reliance on mere certificate of posting, without any corroborative evidence such as despatch register, books of account etc. showing the expenses incurred in connection with sending of notices to the shareholders.

• D. Srinivasan v. H.S. Viswanath (2007) 75 SCL 59 (LB) - to show that notice to all the directors of a meeting of the board of directors is essential for the validity of any resolution passed at the meeting, without which any resolution passed at such meeting will be invalid. The attendance register maintained by the company will reveal the participation of the directors at such meeting.

• Hansraj Gokuldas Ved v. Nitin Dying and Bleaching Mills Private Limited (2005) 64 CLA 64 (CLB) - to show that in the absence of any notice to the members holding substantial shares is oppressive and the resolution passed at such meeting are invalid.

• Micromeritics Engineers Private Limited v. S. Munusamy (2003) 116 CC 465 - to show that when the minutes book does not contain page numbers and there are no initials as required under Section 193 of the Companies Act, presumption under Section 195 cannot be drawn.

• Navin Ramji Shah and Ors. v. Simplex Engineering and Fouldry Works Private Limited and Ors. (2007) 76 CLA 1 (CLB) - to show that in the matter of allotment of shares in a family company, it is not always necessary that the allotment should be impugned only if the status of a shareholder from majority into minority is affected. Any reduction in percentage shareholding, irrespective of the quantum of percentage, can be agitated as oppression, as position vis-a-vis other family members get altered due to non-allotment of shares. Any allotment without making any offer to all the shareholders and that too on par, while the share value was high, must be set aside.

• Needle Industries (India) Limited v. Needle Industries Neway (India) Holdings Limited (1981) AIR SC 1298 - to show that the court is empowered to grant relief under Sections 397 and 398, to do substantial justice between the parties even though no case of oppression is made out by them.

• Vasudev P. Hanji and Ors. v. Ashok Iron Works Private Limited and Ors. (2007) 77 CLA 222 (LB) - to show that in petition under Section 397, it is not the legality or illegality of an action which has to be examined, but it is the probity and fairness towards the petitioners in the matter of the proprietary rights as shareholder, with which the said decisions are taken must be considered.

• Opera Global Private Limited v. Opera Hospital and Medical and Research Centre Private Limited (2007) 77 CLA 171 (CLB) - to show that the doctrine of laches is based on equitable consideration and depends upon general principles of justice and fair play. Any relief can be denied on account of laches provided there is gross negligence or inaction or for want of bonafide imputable to any aggrieved shareholder or that he has waived his right by acquiescence or by his conduct or neglect.

• Sangramsingh P. Gaekwad v. Shantadevi P. Gaekwad (2005) 57 SCL 476 (SC) - to show that if the conduct complained of is oppressive of a minority of the shareholders, then the court must grant remedy for every act of omission or commission on the part of board of directors of the company having regard to the exigencies of the situation.

• Anand Ram Sarangal v. Balwant Bros. Pvt. Ltd. (2007) 75 SCL 97 (CLB New Delhi) - to show that any further allotments of shares done with the sole object of gaining more control of the company, without following proper procedure would amount to an act of oppression.

• Dinesh Sharma and Anr. v. Vardaan Agrotech Private Limited and Ors. (2007) 135 CC 133 (CLB) - to show that the allotment of additional shares is done malafide with the sole object of gaining control of the company by becoming majority shareholder is clearly an act of oppression. Any holding of meetings, increasing share capital, allotting additional shares, appointing directors and removing the petitioners as directors without following proper procedure are wholly unauthorised and invalid and hence must be set aside. In the case of quasi-partnership, denial of any representation on the board, would constitute oppression.

• Vijay Kumar Narang and Ors. v. Prakash Coach Builders Private Limited and Ors. (2005) 128 CC 976 (CLB) - to show that when further issue of shares is found to be null and void, the CLB can give directions to transfer the allotted shares in favour of the aggrieved shareholders (?) • S.T. Ganapathy Mudaliar and Anr. v. S.G. Pandurangan and Ors. (1999) 96 CC 919 - to show that any transfer of shares without following the provisions of the articles must be set aside.

• Gurmit Singh and Ors. v. Polymer Papers Limited and Ors. (2005) 123 CC 486 - to show that if the facts reveal some basic understanding between the parties that the company would be managed on the partnership principles, then the same could be applied in a petition under Section 397/398.

• Jagjith Singh Chawla and Ors. v. Tirath Ram Ahuja and Ors. (2002) 47 CLA 276 (CLB) - to show that there is no readymade yardstick to determine as to when an incorporated company could be considered to be a quasi partnership for the purposes of a petition under Section 397/398, which would depend on the facts of a particular case. If the facts of a case reveal some basic understanding between parties that the company would be managed on partnership principles, then the same could be applied in a Section 397/398 petition.

• Narendra Kumar Jain and Ors. v. Ahimsa Mines & Minerals Limited and Ors. (2007) 78 CLA 98 (CLB) - to show that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Section 397/398 for the grant of relief against acts of oppression and mis-management.

• Scholastica Antorny v. Azhimala Beach Resorts Private Limited (2007) 78 CLA 224 (CLB) - to show that in order to do substantial justice the CLB directed amendment of articles providing proportional representation in the board of directors of the company.

• D. Ross Porter v. Pioneer Seed Co. Limited (1990) Vol. 68 CC 145 - to show that the director has a statutory right of inspection of books of account and other books and papers of a company.

• Sugrabai Alibhai and Ors. v. Amtee Properties Private Limited and Ors. (1984) Vol. 55 CC 734 - to show that a director is entitled to exercise his right to take inspection of the company's account and other books and papers of the Company.

• M.L. Thukral v. Krone Communications Limited (1995) Vol. 6 SCL 167 - to show that the inspection of documents of a company can be made with the aid of a chartered accountant, on undertaking by the latter that he would not disclose information obtained during inspection to any one else other than his principal.

4. Shri A.K. Mylsamy, learned Counsel opposed the company petition, on the following among other grounds:

• As at 31.03.1998, K.P. Patel family and Shah Family together held 71.57% of the total paid up capital of the Company. The shares held by the respondents 7 & 8 were transferred on 21.05.2001 to the respondents 9 to 11, which was approved at the board meeting held on 21.05.2001, where (late) Hashmukh V. Patel and fifth petitioner were present. Therefore, the petitioners are estopped from challenging the transfers approved by the board of directors as early as in 21.05.2001. These shares were freely transferable as the Company was then a public limited company and the board did not have any power to reject the impugned transfers, especially when they were in order. Furthermore, none of the petitioners raised any objection regarding the transfer of shares that have taken place in the year 2001, before approaching this Bench. Late Hashmukh V. Patel, was a director of the Company, till his death on 31.12.2004, while the fifth petitioner still continues to be on the board of the Company and were parties to the various other decisions of the Company, and therefore cannot impugn any of the proceedings of the board. There is no specific understanding or arrangement between the subscribers that the shareholders would be classified into groups. The composition of the board and the shareholding pattern furnished by the petitioners are incorrect. The petitioners 1 to 4 have not so far sent any requisition for transmitting the shares of (late) Hashmukh V. Patel, in their favour.

• The respondent No. 12 not being a relative of the first respondent as per Section 6 of the Act was appointed as a director at the board meeting held on 04.07.2003, to look after the Company's show room at Mangalore and was allotted 50,000 shares, augmenting funds towards capital of the Company. The Company's banker, who has been extending financial assistance, called upon the Company by its communication dated 01.04.2004 to increase the paid up capital by at least Rs. 25 lakh which ultimately led to the allotment of shares, namely, 1,20,000 equity shares to the respondent No. 13, wife of the first respondent; 50,000 equity shares to the respondent No. 12 and 10,000 equity shares to the respondent No. 9 at the board meeting held on 18.06.2004. When the Company's banker insisted the Company to increase its capital base, none of the shareholders save the first respondent and his family members advanced funds to the Company towards increase of the share capital of the Company and extended their personal guarantee to the tune of Rs. 700 lakh in favour of the bank apart from offering the landed properties belonging to the partnership firms as security for the borrowings. Therefore, the Company allotted shares to those persons who have brought in funds to meet its purposes. The minutes of the board meeting dated 18.06.2004 allotting 1,80,000 shares were confirmed by the board at the subsequent board meeting held on 16.07.2004, where (late) Hashmukh V. Patel and the fifth petitioner were present and did not raise any objection to the impugned allotments. The grievances on account of the impugned allotment of shares have been aired for the first time in the company petition. The impugned allotments are in the best interest of the Company. In terms of article 5, the shares shall be under the control of the board, which may allot or dispose of such shares to such persons and on such conditions that the board may deem fit. Section 81 is not applicable to private limited companies and therefore, the plea that the allotments were made in violation of giving equal number of shares to all shareholders, does not merit any consideration. After resignation of the respondents 7 and 8, additional directors were appointed in order to strengthen the board, who subscribed to the capital and gave their properties for the Company's use, and expanded the activities of the Company in other places within the state of Kerala and outside. The Company had teething problems in the formative years on account of the huge capital investment and credit facilities availed by it. The Company has been incurring losses from year to year and during the year 2004 the net loss amounted to Rs. 8.53 lakh during the year 2004. The Company was dependent upon the financial facilities extended by the banks as borne out by the balance sheets for the year ended 31.03.2003, 31.03.2004 and 31.03.2005. In view of this, the shares could not have commanded any premium, as claimed by the petitioners.

• The Company has been regularly sending notices for the board meetings to all the directors. The petitioners never complained of non-allotment of shares or non-induction of their nominees on the board. The legal heirs of (late) Hashmukh V. Patel are not entitled to receive any notice either for the board meeting or general meeting so long as their names are not entered in the register of members of the Company. K.P. family is already holding a majority of shares and there is no need for them to make further allotments to gain control of the Company. None of the petitioners was interested either in advancing loans to the Company or providing guarantee to secure the loans availed by the Company or subscribe to the capital of the Company.

• The respondents are holding more than 75% of the equity shares and they are entitled to appoint their nominees on the board. The Company was incorporated as a public limited company, which was later converted into a private limited company. The Company is not a family company. Hence, the principles of partnership are not applicable to the Company. The petitioners cannot claim directorship on the basis of proportional representation, in the absence of any explicit clauses in the articles. The respondent No. 13 was co-opted as a director by the board and not appointed as a director in the casual vacancy caused by the demise of Hashmukh V. Patel. There is no substance in the allegation that in the place of (late) Hashmukh V. Patel any of the members of his family is to be appointed as a director.

• The Company starving for funds, did not have sufficient money to purchase lands to put up show rooms at different places. Therefore, the first respondents' family and the family partnership firms out of their own funds purchased lands in their individual names and in the partnership firm's names and made them available to the Company on lease to construct show room at reasonable rent below the rate prevailing in the market. All the disclosures have been made as required under Sections 299, 297 and 300 of the Act. The Company is now reasonably doing well with strong financial position as borne out by the balance sheet for the year 31.03.2005 and the unaudited accounts as at 31.03.2006, under the control and management of the respondents. The petitioner's interference with the smooth functioning of the Company is unwarranted.

• The fifth petitioner, as a director and not any shareholder is entitled to inspect the books of account of the Company. However, none of the petitioners, sought any information in regard to the functioning of the Company or found any irregularity in the management of the Company or asked for amended copy of the memorandum and articles of association of the Company, before making frivolous allegations in the present proceedings. The Company has been regularly sending, to the petitioners, notice of the annual general meetings along with the balance sheet, non-receipt of which has never been complained of by the petitioners. The compliance certificates dated 27.06.2003 and 10.12.2004 clearly indicate that notices were sent to the directors for the board meetings and notices to the members for the annual general meetings held for the period specified therein. The compliance certificate dated 10.12.2004 further speaks of the allotment of 50000 equity shares in compliance with the provisions of the Act.

• The sixth respondent in his communication dated 29.09.2005 informed the board of directors that he wanted to sell his 1,20,000 shares, on which the board of directors at the meeting held on 03.10.2005, nominated the first respondent, to purchase the shares from the sixth respondent, since none of the members of the board who was present ever keen in buying the shares. The transfer of shares in favour of the first respondent, was duly approved at the board meeting dated 24.10.2005. The letter dated 31.11.2005 of the sixth respondent addressed to the Company shows that no shareholder other than the first respondent was willing to buy his shares. Thus, article 23(e) has been duly satisfied before sale of the shares by the sixth respondent.

• The board appointed the second respondent as the managing director on 10.12.1998 for a period of five years, whose remuneration was approved at the general meeting held on 29.09.1999, in accordance with Schedule XIII of the Act. Thereafter, the second respondent came to be reappointed for a further period of five years with effect from 10.12.2003 on a salary of Rs. 25,000/- per month together with perquisites thereon. Consequent upon the Company becoming a private company, the provisions of Section 269 of the Act dealing with appointment of managing director are inapplicable.

• The petitioners and respondents do not see eye to eye. The petitioners are passing on the business secrets to the competitors and if any of the petitioners is brought on the board, the Company will be closed. Hence, let the petitioners continue to be shareholders. The price demanded by the petitioners towards their shares, being exorbitant is not found favourable with the respondents.

5. Shri A.K. Mylsamy, learned Counsel cited the following case laws:

• Laxmi Narayan Rawat and Ors. v. R.T. Udyog Private Limited and Ors. (2005) 127 CC 687 (CLB) - to show that if shares are issued to meet the financial needs of the company, even if one group is incidentally benefited, the other group cannot complain of oppression until it is established that the sole motive for issue of the shares was with a view to disturb the existing shareholding or there exists a special relationship.

• Bagree Cereals Private Limited v. H.P. Bagri (2001) Vol. 105 CC 465 - to show that if a director removed from directorship by outvoting of the majority, and the case is not a case of quasi-partnership, then the company cannot be wound up on just and equitable grounds, the expulsion notwithstanding. Termination of directorship or stopping of directorial remuneration of a single director, if remediable by a suit, cannot ordinarily found a petition for just and equitable winding up.

• Hanuman Prasad Bagri v. Bagree Cereals Private Limited (2001) 33 SCL 78 (SC) - the Supreme Court while affirming the decision of the Calcutta High Court held that the termination of directorship would not entitle a person to ask for winding up on just and equitable grounds in as much as there was an appropriate remedy by way of company suit which could give him full relief if such action had been taken by the company on inadequate grounds.

• G. Govindaraj v. Venture Graphics Private Limited (2005) 57 SCL 141 (CLE) - to show that mere illegal, invalid or irregular acts by themselves, unless they are oppressive to any shareholder or prejudicial to interests of company or to public interest, cannot support a petition under Section 397.

• Pye Lend Lease Private Limited and Anr. v. Jewel Brushes Private Limited and Ors. (1998) 4 CLJ 363 (CLE) - to show that in the absence of any documentary evidence either in the form any written agreement or provision in the articles of a company, it cannot be conceived that a company has been incorporated on partnership principles.

• Karedla Suryanarayana and Ors. v. Sri Ramadas Motor Transport Limited and Ors. (1999) 3 CLJ 422 (CLE) - to show that in a Section 397 petition, directorial complaints cannot generally be agitated, except in case of closely held companies, wherein the right to hold directorial position has been provided in the articles or the principles of quasi-partnership with right to participate in management is established.

• V.M. Rao v. Rajeswari Ramakrishnan (1987) Vol. 61 CC 20 - to show that the conduct of the majority shareholders must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholder and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of a company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.

6. I have considered the pleadings and arguments of learned Counsel. The issue that arises for my consideration is whether the petitioners are entitled for the reliefs as claimed in the company petition, by virtue of the provisions of Sections 397, 398 read with Section 402 of the Act. The relevant facts, in brief, are that the respondents 1 to 3, 6 to 8 and (late) Hashmukh V. Patel promoted the Company in June, 1997 as a limited Company with the main object of carrying on the business of buying and selling automobiles, and are subscribers to the memorandum and articles of association of the Company, each subscribing to 10,000 shares of Rs. 10/- each. The respondents 1 to 3, 7 & 8, as envisaged in Article 93, are the first directors. The Company has been changed to a private limited company with effect from 14.08.2001, as borne out by the fresh certificate of incorporation issued by the Registrar of Companies, Kerala. By virtue of Clause 41(1) of the articles of association of the private limited company, the respondents 1 to 4, 6, fifth petitioner and (late) Hashmukh V. Patel are named as the first directors of the Company. Notwithstanding the controversies involved in the allotments and transfer of shares, it will be suffice to point out that the entire shares of the Company are now held by members of various families belonging to (late) Hashmukh V. Patel represented by the petitioners 1 to 4 and Naresh Mangalal Doshi and family being, petitioners 5 to 8 on one hand and K.P. Patel and family, being respondents 1 to 5, 9 to 11 & 13 and the respondent No. 12 on the other hand. Late Hashmukh V. Patel has been on the board, since the year 1998 till his death. The fifth petitioner (kontinues to be a director on account of the intervention of the Bench by an order dated 25.08.2006. The respondent No. 12 who became a director in July 2003, continues to be on the board. The rest of directors are from K.P. Patel family. Against this background, the main grievances of the petitioners in relation to (a) allotment of 50,000 shares made on 04.07.2003 to the respondent No. 12; (b) allotment of 10,000 shares to the respondent No. 9; 50,000 shares to the respondent No. 12; and 1,20,000 shares to the respondent No. 13 made on 18.06.2004; (c) appointment of the respondents 12 & 13 as directors of the Company; (d) transfer of 1,20,000 shares made by the sixth respondent in favour of the first respondent; (e) attempted removal of the fifth petitioner from the office of director; (f) non-induction of any of the legal heirs of (late) Hashmukh V. Patel in the board of the Company; and (g) irregularities reflected in the reports of the auditors of the Company for the years 2002-2003, 2003-2004 and 2004-2005 are being examined here below:

While according to the petitioners, the disputed allotments of shares are unlawful and oppressive for the reasons already elaborated elsewhere, the respondents are justifying the allotments on various accounts. Form No. 2 dated 05.07.2003 reveals that 50,000 equity shares of Rs. 10/- have been allotted on 04.07.2003 in favour of the respondent No. 12. Similarly, Form No. 2 filed on 21.06.2004 discloses the allotment of 1,80,000 equity shares of Rs. 10/- each made on 18.06.2004 in favour of the respondent No. 9 (10000), respondent No. 12 (50000) and the respondent No. 13 (120000). It may be observed that the shares as envisaged in Clause 5 of the articles of association 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 and at such times as the directors may deem fit. No doubt, the board of directors has absolute powers over the shares of the Company, but at the same time the directors, keeping in view of their fiduciary duties, are expected to act in a bonafide manner and not arbitrarily, while allotting the shares of the Company in favour of any person. The need for funds and mobilization thereon from time to time as borne out by records before the Bench assume relevance to adjudicate the issue raised by the petitioners. The authorised capital of the Company has been increased from time to time, namely, from Rs. 50 lakh to Rs. 100 lakh on 01.08.1998, from Rs. 100 lakh to Rs. 120 lakh on 29.05.1999, from Rs. 120 lakh to Rs. 125 lakh on 22.06.2001, from Rs. 125 lakh to Rs. 130 lakh on 01.11.2002 and from Rs. 130 lakh to Rs. 148 lakh on 14.06.20004, all during the life time of (late) Hashmukh V. Patel, as borne out by the minutes of various extra-ordinary general meetings held between 01.08.1998 and 14.06.2004, to meet, inter-alia, the capital and other expenditure, which are followed by issue of additional shares and shall include the impugned allotments in favour of the respondents 9, 12 & 13. The Company, in the course of the present proceedings, sought to further 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. The Company availed from its banker financial assistance to an extent of Rs. 200 lakh during 1998-1999, 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 dated 30.08.1999, 04.09.2000, 07.09.2001 and 31.12.2004 reflect the unsecured loans taken by the Company from firms listed in the register maintained under Section 301 of the Act. At the board meeting held on 04.07.2003, the board of directors recorded the need for funds towards the expansion program, capital and capital expenditure for establishment of the Mangalore show room. The board further granted the approval for undertaking and completing the construction of show room of Mangalore at a cost of Rs. 120 lakh. The directors' report dated 20.12.2004 for the year ended 31.03.2004 reports that the Mangalore show room has been opened during the year ended 31.03.2004, enabling the Company to improve its turnover. At the board meeting held on 04.07.2003 the respondent No. 12 has been appointed as additional director in order to look after day-to-day affairs of the Mangalore show room and simultaneously allotted 50,000 equity shares of Rs. 10/- in his favour. The minutes of the board meeting disclose the "difficult financial position and tight liquidity situation of the company". In this situation, where the company has been periodically mobilizing funds from various sources, since the year 1998, it cannot be said that there are no requirements for additional funds to meet its objectives and purposes. It is thus found that the Company is justified in having augmented the funds by way of issue of further shares, which is however disputed by the petitioners. The Compliance Certificate dated 10.12.2004 of M/s Gopimohan, Satheesan & Associates, Company Secretaries, would confirm the issue of proper notices to the directors for all the seven meetings held during the period between 27.06.2003 and 16.02.2004 which include the board meeting held on 04.07.2003, wherein 50,000 equity shares of Rs. 10/- each were allotted in favour of the respondent No. 12. This allotment has been reflected in the compliance certificate dated 10.12.2004. The Company's banker, namely, Kotak Mahendra Primus Ltd. by its communication dated 04.04.2004 requested the Company while offering the credit facilities, to take immediate steps to increase the paid up capital of the Company by infusion of Rs. 25 lakh during the year 2004-05, in view of the substantial outstanding amounts. In the light of the reasons given by the banker, its request for increase of the paid up capital cannot be brushed aside. At the board meeting held on 18.06.2004, 1.80 lakh shares have been allotted to the respondents 9, 12 and 13. The minutes clearly show 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 take up further shares in the Company. They further expressed their unhappiness in not getting any return on the existing investments in the Company by way of dividend. Therefore, the Company was constrained to allot the impugned shares in favour of the respondents 9, 12 and 13. The minutes of the board meeting dated 18.06.2004 approving inter-alia the allotments of 1,80,000 shares were confirmed at the board meeting held on 16.07.2004, wherein (late) Hashmukh V. Patel and the fifth petitioner were present, without raising any objection to the allotment of shares in favour of the respondents 9, 12 and 13. The Compliance Certificate dated 29.08.2005 of the Company Secretaries, would confirm, among other things, that an extra ordinary general meeting was held on 14.06.2004 approving the increase in authorised capital from Rs. 130 lakh to Rs. 148 lakh and further that the board meeting was held on 18.06.2004, allotting the impugned shares, namely, 1,80,000 shares in favour of the respondents 9, 12 & 13, after due and proper notices to the members as well as directors of the Company. The Compliance Certificate further confirms the allotments of share made in favour of the respondents 9, 12 and 13. All the impugned allotments were made as early as on 04.07.2003 and 18.06.2004, prior to the demise of Hasmukh V. Patel, from whom there was no complaint whatsoever till his death regarding these allotments including the price of such shares. It is not therefore, open to the petitioners at this belated stage to make any grievances on account of the allotments impugned in the company petition. 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 and, therefore, the decision in Navin Ramji Shah and Ors. v. Simplex Engineering and Fouldry Works Private Limited and Ors. (Supra) will not go in aid of the petitioners. 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 as held in Laxmi Narayan Rawat and Ors. v. R.T. Udyog Private Limited and Ors. (Supra). Furthermore, in the present case, the petitioners are already holding in excess of 75% of the capital and the petitioners are aggrieved of the first respondent has always been only asking all the shareholders for more and more money" (para kk page 17 of company petition). This runs parallel to the claim of the petitioners that the impugned allotments are violative of the equitable principles of giving opportunity to all shareholders to participate in the prospects of the Company, arbitrary and in violation of the relevant articles and various provisions of the Act. The Company is already in control of the respondents group and therefore, the impugned allotments cannot be for gaining control or gaining more control of the Company, in which case, the petitioners cannot derive any benefit from and out of the decisions in Anand Ram Sarangal v. Balwant Bros. Pvt. Limited (Supra) and Dinesh Sharma and Anr. v. Vardaan Agrotech Private Limited and Ors. (Supra). There is also no material placed before me 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 fair play and acted in a malafide manner. The various allotments of shares in favour of the respondents 9, 12 & 13 not being oppressive, there is no need to direct the allottees to transfer the allotted shares in favour of the petitioners as concluded by this board in Vijay Kumar Narang and Ors. v. Prakash Coach Builders Private Limited and Ors. (Supra). In these facts and circumstances of the present case, none of the decisions cited by Dr. Ravichandran in relation to service of notices on the members/directors, consequences of non-sending of notices and legal presumption as to the minutes book maintained by the Company, being distinguishable have no application, as borne out by the records before the Bench. The proposal mooted, during the pendency of present 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 of this bench. It is, therefore, absolutely left to the petitioners, to subscribe towards additional shares, already offered by the board of directors, in terms of the order dated 10.05.2007 made in C.A. No. 100 of 2007.

7. The transfer of 1,20,000 shares belonging to the sixth respondent in favour of the first respondent claiming to be oppressive must be seen in the light of Clause 23(e) of the articles of association of the Company. Clause 23(e) reads thus:

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.

It may be observed that the first limb of the above clause to the effect that the "No share shall be transferred to a person who is not a member" cannot be read in isolation but in conjunction with the second limb of Article 23(e). Accordingly, no share shall be transferred to a person who is not a member and if any member desires to sell his shares to a non-member, the Requirements specified in this article must necessarily be complied with, which is apparent from the use of word "and" after the first part of clause, namely, "no share shall be transferred to a person who is not a member". In other words, the requirements of Article 23(e) do not arise for compliance, if shares are transferred to an existing member. The shares belonging to the sixth respondent are admittedly transferred to the first respondent herein, who is already a member of the Company and therefore, in my considered view, Clause 23(e) is not attracted and therefore, need not be adhered to before effecting the transfer by the sixth respondent in favour of the first respondent. Even if the arguments of the petitioners are to be accepted, it is on record that the sixth respondent by his communication dated 29.09.2005 is found to have intimated the board of directors of the 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 03.10.2005, as borne out by the minutes, none of the members of the board present was keen in buying the shares offered by the sixth respondent, upon which the board nominated the first respondent to purchase 1,20,000 shares from the sixth 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 sixth respondent. The arguments advanced on behalf 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 sixth respondent are mis-conceived. The transfer of 1,20,000 shares by the sixth respondent to the first respondent came to be approved on 24.10.2005, in terms of the board minutes, wherein it is found that the sixth respondent approached all the directors for purchase of his shares and only the first respondent was ready to acquire the same. It is further reflected from copy of a communication dated 03.11.2005 of the sixth respondent addressed to the board of directors, which has not been disputed by the petitioners, that no other shareholders other than the first respondent came forward to purchase his shares. The cumulative effect of these events supported by documentary proof, establishes the fulfillment of requirements of Clause 23(e) of the articles of association of the Company, even if it were applicable, before effecting the transfer of 1,20,000 shares by the sixth respondent in favour of the first respondent and therefore, the decisions in Dayaram Agarwal v. Ashok Industries P. Limited (Supra) and S.T. Ganapathy Mudaliar and Anr. v. S.G. Pandurangan and Ors. (Supra) will not go in aid of the petitioners. The sixth respondent had offered to sell his shares only on 29.09.2005, upon which the board selected the first respondent on 03.10.2005 to acquire the shares from the sixth respondent and further the board had approved the transfer on 24.10.2005. In these circumstances, the impugned transfer can never be reflected in either of the compliance certificates dated 10.12.2004 and 29.08.2005 or the annual returns made upto 30.09.2004 and 30.09.2005 as sought to be claimed by the petitioners. The plea of non-fulfillment of the requirements of Section 108, which are mandatory as emphasized in Smt. Claude-Lila Parulekar v. Sakal Papers Private Limited and Ors. (Supra) is an after thought on the part of the petitioners and in this connection it is relevant to point out that in a petition under Section 397/398 as held in Vasudev P. Hanji and Ors. v. Ashok Iron Works Private Limited and Ors. (Supra) it is not the legality or illegality of an action which has to be examined, but it is the probity and fairness in relation to the transaction must be considered.

8. The petitioners aggrieved by appointment of the respondents 12 and 13 as directors seek for a declaration that their appointment as directors of the Company is null and void. The relevant clauses 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 (Clause 39). The directors need not hold any qualification share [40(e)]. The minutes of the board meeting dated 04.07.2003 disclose that the 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 30.09.2003 the respondent No. 12 came to be appointed as director of the Company. The Compliance Certificate dated 10.12.2004 on record confirms, inter-alia, sending of proper notice to the directors for the board meeting held on 04.07.2003 and due notice to the members of the Company for the annual general meeting for the year ended 31.03.2003 held on 30.09.2003. The directors' report dated 20.12.2004 for the year ended 31.03.2004 speaks of appointment of the respondent No. 12 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 30.09.2003. The appointment of respondent No. 12 as additional director on 04.07.2003 is found reflected in Form No. 32 dated 05.07.2003 filed with the Registrar. It is needless to point out that appointment of the respondent No. 12 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, in terms of the available records before the Bench. It is observed from the minutes of the board meeting held on 18.06.2004 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 respondent No. 13 who gave her consent to join the board, was appointed as additional director. This also took place even prior to the demise of Hashmukh V. Patel. The minutes of the board meeting dated 18.06.2004 were confirmed at the board meeting held on 16.07.2004, wherein (late) Hashmukh V. Patel and the fifth petitioner were present. No objection whatsoever was found to have been taken by any of these two directors on appointment of the respondent No. 13 as director at the board meeting held on 18.06.2004. The directors' report for the year ended 31.03.2005 discloses the appointment of respondent No. 13 as additional director and the proposal for her appointment as director at the annual general meeting. At the eighth annual general meeting held on 30.09.2005, the respondent No. 13 was appointed as director of the Company. The Compliance Certificate dated 29.08.2005 would indicate that the notice of the board meeting of 18.06.2004 was properly sent to the directors of the Company and that the proceedings were properly recorded duly signed and entered in the minutes book maintained for the purpose. Form 32 dated 18.06.2004 filed with the Registrar shows that the respondent No. 13 was appointed as additional director by the board on 18.06.2004. There are, therefore, no irregularities in appointment of the respondents 12 and 13 as additional directors and subsequently as directors at the relevant board as well as annual general meeting respectively which were neither objected to by (late) Hashmukh V. Patel, during his life time nor by the fifth petitioner. It is not. therefore, open to either the petitioners 1 to 4 being the legal heirs of (late) Hashmukh V. Patel or the fifth petitioner to question appointment of the respondents 12 and 13, which is found to be in the interest and for the benefit of the Company. It is rather futile to go into the procedural irregularities concerning the transfer of shares belonging to the respondents 7, 8 and Shri Chandrakant N. Sangani effected in the year 2001 in favour of the respondents 9 to 11 and non-reflection of these transfers in the annual returns and the Compliance Certificate, in view of the fact that no reliefs are claimed in this regard, by the petitioners. The transfers may be irregular, but neither shown to be oppressive nor sought to be set-aside. Consequent upon the transfers, the respondents 7, 8 and Shri Chandrakant N. Sangani had resigned from the board and their resignations were accepted by the board of directors on 21.05.2001, which led to appointment of the transferees, namely the respondents 9 to 11, as directors of the Company so as to strengthen the board, in terms of the board minutes dated 21.05.2001. The petitioners have merely sought that the original board as existed on 31.03.2001 should be restored, without filling up of the vacancies caused by the resignation of the respondents 7, 8 and Chandrakanth N. Sanghani and thereby the respondents 9 to 11 must cease to be directors, is not based on any reason what so ever. The prayer for removal of the respondents 9 to 11 without any justification will not stand the test of law and is untenable.

9. The respondents are stoutly denying any representation to the petitioners in the board disregarding the theory of proportional representation, as claimed by the latter, mainly for the reasons that the Company was originally incorporated as a public limited Company, that the Company is not a family company! and that the principles of partnership not applicable to a company in the absence of any written agreement or provisions in the articles of association as held in Pye Lend Lease Private Limited and Anr. v. Jewel Brushes Private Limited and Ors. (Supra). Shri A.K. Mylsamy, learned Counsel placing reliance on the decision of the Calcutta High Court and also of Apex Court reported in Bagree Cereals Private Limited v. H.P. Bagri (Supra) and Hanuman Prasad Bagri v. Bagree Cereals Private Limited (Supra), respectively contended that the fifth petitioner cannot make any complaint on account of the termination of his directorship, in the present proceedings before the Company Law Board. Learned Counsel further pointed out that in a Section 397 petition, as held in Karedla Suryanarayana and Ors. v. Sri Ramadas Motor Transport Limited and Ors. (Supra), directorial complaints cannot generally be agitated except in case of closely held companies wherein the right to hold directorial position has been provided in the articles or the principles of quasi-partnership with right to participate in management is established. The issue of applicability of the principles of quasi-partnership to an incorporated company came to be exhaustively considered by this Board, which incidentally included all the contentions raised in the present proceedings by Shri Mylsamy, learned Counsel, in Jagjith Singh Chawla and Ors. v. Tirath Ram Ahuja and Ors. (Supra), from wherein, the following observations and findings are extracted herebelow:

There is no readymade yardstick to determine as to when an incorporated company could be considered to be a quasi partnership for the purposes of a petition under Section 397/398. It would depend on the facts of particular case. The cases cited by the counsel for the parties indicate some of the circumstances - where there is equality in the shareholding and there is a deadlock in the management, conversion of a pre-existing partnership into a company, where there is an agreement for equal participation in the company, etc., are some of the circumstances. The contention of the respondents is that there is no question of applying the principles of partnership on various grounds as indicated as part of the arguments of their counsel-there was no pre-existing partnership, there is no equality in the shareholdings, there is no deadlock in the management, there is no written agreement to the effect that the company would be jointly managed, there is no provisions in the articles stipulating joint management, Late J.S. Chawla was not a signatory to the memorandum nor was named as a first director, etc. Normally, when two or more persons form a company, the presumption is that they have decided to work within the framework of the articles and subject themselves to the discipline applicable to an incorporated company, viewing this manner, the respondents would be right in contending that in the absence of the provisions in the articles for joint management, a shareholder cannot demand a position on the Board. In this connection it is worthwhile referring to the Jaika Motor Case (Supra) wherein, after discussing various decided cases, practically all the objections as in this case were examined by this Board and it concluded that to treat a company as a partnership it was not necessary to have equal shareholdings, no need for deadlock, no need for pre-existing partnership, etc. It also observed that an analysis of various decisions showed that courts have been looking for some basic understanding written or unwritten between parties. Therefore, if the facts reveal some basic understanding between parties that the company would be managed on partnership principles, then the same could be applied in a 397/398 petition.

10. Further this Board, while reiterating the above principles in Gurmit Singh and Ors. v. Polymer Papers Limited and Ors. (Supra) concluded that to treat a company as a partnership it was not necessary to have equal shareholding, no need for deadlock, or conversion of a pre-existing partnership into a company or any agreement for equal participation in the company. However, if the facts reveal some basic understanding between parties that the company could be managed on partnership principles, then the same could be applied in a petition under Section 397/398. This Board further observed that even in Kilpest's case (1996) 87 CC 615, the Apex Court has not totally barred the application on partnership principles in a company, but has only cautioned the claim to do so cannot be easily accepted. This Board ultimately held that "...once the facts and circumstances of a case indicate that of a company, equitable consideration applicable to a partnership could be applied to that company". In the light of these later decisions, the principles laid down Pye Lend Lease Private Limited and Anr. v. Jewel Brushes Private Limited and Ors. (Supra) that in the absence of any documentary evidence either in the form any written agreement or provision in the articles of a company, it cannot be conceived that a company has been incorporated on partnership principles, will be of little assistance to the respondents. I may further point out that in Karedla Suryanarayana and Ors. v. Sri Ramadas Motor Transport Limited and Ors. (Supra), also it was only held that in a Section 397 petition, directorial complaints cannot generally be agitated, except in case of closely held companies and thus such an option has not been totally closed for any aggrieved person.

11. Against the above background, the claim of the petitioners for joint management of the affairs of the Company shall be considered in the peculiar facts and circumstances of the present case. The Company has been promoted in June 1997 as a limited company by the respondents 1 to 3, 6 to 8 and (late) Hashmukh V. Patel, being subscribers to the memorandum and articles of association of the Company each subscribing to 10000 shares of Rs. 10/- each. While the respondents 1 to 3, 7 & 8 are the first directors of the company, (late) Hashmukh V. Patel became a director of the Company in the year 1998. Article 106 contemplates that at every annual general meeting of the Company, one-third of the directors are liable to retire by rotation or if their number is not three or a multiple of three, the number nearest to one-third shall retire from office. The Managing Director, the Deputy Managing Director and the Executive Director, if any, shall not be subject to retirement. The first directors shall retire at the first annual general meeting. The Company became a private company with effect from 14.08.2001 and thereafter, the articles as adopted by the members assume utmost relevance to appreciate the claim of the petitioners. By virtue of Clause 41(1) of the article, the respondents 1 to 4, 6, fifth petitioner and (late) Hashmukh V. Patel are named as first directors of the Company. The first directors will continue unless they resign from the board or are disqualified to act as directors under the provisions of the Act. The first directors are non-retiring directors. Clause 41(2) provides that the directors appointed subsequently shall continue to be in the office till the conclusion of the annual general meeting held for the first time after the appointment. While the first directors under these articles are non-retiring directors, article 106, when the Company was a limited company provided that the first directors shall retire at the first annual general meeting. It is relevant to point out that the members of the Company, while adopting the memorandum and articles, on conversion into a private company, consciously decided that the first directors shall continue to remain in management of the Company, subject to the conditions specified in Clause 41(1) of the articles and that is why the language employed in the said article runs thus:

"The first Directors of the Company will continue unless they resign from the Board or are disqualified to act as Directors under the provisions of the Companies Act and are non-retiring Directors...." This is a clear departure from article 106, which was in force, when the Company remained to be a limited company. The petitioners, in spite of their reservation, are not challenging the transfer of shares effected by the respondents 7 & 8 in favour of respondents 9 to 11. Their grievances on account of the impugned allotments in favour of the respondents 9, 12 & 13 as well as the disputed transfer of shares by the sixth 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. At this juncture, it must be pointed out that the petitioners, while furnishing the shareholding pattern in annexure-9 (page 136 in Vol.1) have shown only 10,000 shares as against the fourth respondent, but in fact, he holds 30,000 shares and this difference of 20,000 shares are found to be reflected against the third petitioner as if he owns 45,000 shares, when he is actually holding only 25,000 shares. This minor discrepancy appears to be accidental on the part of the petitioners. It cannot therefore, be contended that the shareholders are not classified into groups of various families. It is reported that as at 30.09.2004 the board of the Company consisting of 12 directors was constituted by the respondents 1 to 5, 9 to 11, & 13 representing K.P. Patil & family, (late) Hashmukh V. Patel, Naresh Maganlal Doshi being fifth petitioner, representing their families and the respondent No. 12. Thus, K.P. Patil & family holding 11,05,000 shares has nine directorship; (late) Hashmukh V. Patel & family with 1,20,000 shares and Naresh Maganlal Doshi & family with 1,20,000 shares had each one directorship. The respondent No. 12 with 1,00,000 shares had one directorship. All his shares came to be entrusted in his legal heirs being the petitioners 1 to 4, who have acquired indefeasible rights and contingent interest over such of those shares. In the course of the present proceedings the board of directors of the Company, pursuant to a requisition dated 14.07.2006 received from the respondents 10 & 12, under Section 169, resolved to convene an extra ordinary general meeting on 17.08.2006 for the purpose of removing the fifth petitioner from the office of director of the Company. In the light of the decision of the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. AIR 1986 SC 1310 "Every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements, to call an extra ordinary general meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling a meeting and he is not bound to disclose the reasons for the resolutions proposed to be moved at the meeting. Section 173(2) of the Companies Act, 1956, does not require the shareholder requisitioning a meeting to disclose the reasons for the resolutions which he proposed to move at the meeting".

Applying the above principles enunciated by the Apex Court and on the strength of the arguments advanced by Shri A.K. Mylsamy, learned Counsel, that - (i) the Company incorporated as a limited company is not a family company; (ii) there has been no understanding for any proportional representation on the board from each group of the shareholders; (iii) the memorandum of association does not speak about any such understanding among the shareholders; (iv) no director has any vested right to continue as director forever; and (v) shareholders have prerogative to appoint directors of their choice, the resolution passed at the extra ordinary general meeting held on 17.08.2006 removing the fifth petitioner from the office of director, may perfectly be legal and yet shall not be oppressive. It is not under dispute that (late) Hashmukh V. Patel is one of the promoters of the Company, who along with, among others, the fifth petitioner 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. While (late) Hashmukh V. Patel continued to be a director till his death in December 2004, the fifth petitioner is still on the board of directors of the Company. It is not the case of the respondents that the fifth petitioner suffered any disqualification as director under any of the provisions of the Act. Late Hashmukh V. Patel as well as the fifth petitioner along with the respondents' group have been all the while participating in the affairs of the Company which has been under their joint management till Hashmukh V. Patel died in December, 2004, on which the fifth petitioner is in the joint management of the Company. It is, therefore, beyond doubt that there has been some 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 fifth 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, non-inclusion of any of the legal heirs of (late) Hashmukh V. Patel in the management and the attempted exclusion of the fifth 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 as propounded in Jagjith Singh Chawla and Ors. v. Tirath Ram Ahuja and Ors. and Gurmit Singh and Ors. v. Polymer Papers Limited and Ors. (Supra) followed by this Board in a number of decisions including the decision in Scholastica Antorny v. Azhimala Beach Resorts Private Limited (Supra). When the principles of partnership are applied in a matter, denial of legitimate representation could be a just and equitable ground for dissolution of a partnership, as held in Dinesh Sharma and Anr. v. Vardaan Agrotech Private Limited and Ors. (Supra) In view of this, the Company in the present case where the principles of partnership, are applied could be wound up on just and equitable grounds, which would not be in the interest of the Company and its shareholders. The grievances of the petitioners could however be remedied by invoking the alternate and beneficial provisions of Section 397/398, without resorting to winding up of the Company. The fifth petitioner continues to be director and the termination of his directorship at the instance of the respondents has been restrained by an order dated 25.08.2006, whereas in Hanuman Prasad Bagri v. Bagree Cereals Private Limited (Supra) directorship the person aggrieved was already terminated and therefore, the fifth petitioner can invoke, in the existing facts, the jurisdiction of Section 397. This conduct complained of, is found to be oppressive of the petitioners, being minority shareholders, in which case, the CLB shall grant remedy for every of omission or commission the part of the respondents, as held by the Supreme Court in Sangramsingh P. Gaekwad v. Shantadevi P. Gaekwad (Supra). The action of the respondents in denying the right of joint management of the Company in favour of the petitioners, apart from being harsh and burdensome as contemplated in V.M. Rao v. Rajeswari Ramakrishnan (Supra) is unfair for the reasons already elaborated and the CLB in exercise of its powers under Section 397/398 will remedy such grievances, as held in V.J. Thomas Vettom v. Kuttanad Rubber Co. Limited and K.M.J. Thomas v. Kuttanad Rubber Co. Limited (Supra). While, the petitioners by virtue of the theory of proportional representation, would like to be in the joint management of the Company, the respondents are accusing the petitioners of passing on the business secrets to the competitors, which, however, remained to be mere pleading, without any concrete proof. The respondents are not willing to purchase the shares of the petitioners at the price quoted by the latter, whereas, the petitioners are ready to acquire the shares of the respondents at Rs. 300/- per share. It is only the majority shareholders who are entitled to exercise the option of buying the shares of the minority shareholders at a fair price and, therefore, it is not open to the petitioners, collectively holding only 16.60% to acquire the shares of the respondents group constituting 83.40% of the shares in the Company.

12. The petitioners are aggrieved on account of the purchase of landed properties, by the respondents, which are being used, on payment of exorbitant rent, by the Company, to run its show rooms after putting super structures thereon. The complaint of the petitioners is not that the respondents have acquired the landed properties from and out of the funds of the Company. There is no material establishing the rent, which was prevalent at the relevant point of time, when the Company took on lease the properties belonging to the respondents. This becomes absolutely necessary, in the light of the justification put forth by the respondents that the properties have been rented out by them below the market rate. When there is neither any pleading nor documentary proof for acquisition of the landed properties in the name of the respondents from and out of the funds of the Company, the properties so purchased by the respondents cannot be restored in the name of the Company, as claimed by the petitioners. Where the petitioners could not establish any irregularities in leasing out the landed properties acquired by the respondents, in favour of the Company, the petitioners are not justified in complaining that the respondents are earning perennial income for themselves. 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 Compliance Certificates dated 27.06.2003, 10.12.2004 and 29.08.2005, reporting inter-alia, that notices were properly given i for all the board meetings held during the period ended 31.03.2003, 31.03.2004 and 31.03.2005 respectively and that the proceedings of the board meetings held 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 grievances 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 fifth 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 Bench 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 fifth petitioner and Shri Hasmukh V. Patel, during his life time. Mere non-reporting of related party transactions and preferential allotment of shares in the auditors' report do not warrant any change in the audit firm, as claimed by the petitioners. All the allegations in relation to - (i) decline in profitability, deficiencies in the management, financial irregularities, maintenance of large cash advances, absence of internal control measures, non-compliance of provisions of the Act, non-realisation of debtors, decrease in the commission or incentives, increase in administrative expenses, fraud and misrepresentation played by the respondents, decisions taken at the board meeting(s) in presence of the interested directors, respondents in occupation of prime position in the Company, payment of remuneration to managing director, improper management, etc. apart from lacking in details, are found to be raised for the first time before the CLB and never before by the petitioners. A number of these deficiencies are on account of the management decisions taken in the regular course of business of the Company and some of the grievances are not arising on account of their proprietary rights as shareholders. Moreover, mere irregular acts by themselves, without being oppressive, cannot maintain a petition under Section 397, as held in G. Govindaraj v. Venture Graphics Private Limited (Supra). The fifth petitioner being director of the Company, has a statutory right of inspection of the books of account and other books and other records of the Company as recognised in D. Ross Porter v. Pioneer Seed Co. Limited (Supra) and Sugrabai Alibhai and Ors. v. Amtee Properties Private Limited and Ors. (Supra) and the petitioners 1 to 4 having become entitled to the shares held by Hashmukh V. Patel, in consequence of his death, have every right to enforce their rights as shareholders in the manner provided in the articles as well as the Act. In view of the explicit provisions as contained in Section 172(2)(ii) of the Act, the petitioners are entitled for the notice of every general meeting of the Company in the manner provided in Section 53(5) of the Act, notwithstanding the fact that the register of members does not reflect the names of the petitioners. The respondents shall henceforth ensure strict compliance of the requirements of Section 172(2)(ii), by sending notice of every general meeting to the petitioners 1 to 4. Nevertheless, the grievances of the petitioners on account of non-sending of notice for the board meeting of 18.06.2004, wherein the impugned allotments have been made in favour of the respondents 9, 12, & 13, do not survive, in view of the fact that Shri Hashmukh V. Patel was alive by then and that the petitioners 1 to 4 were not entitled for any notice of that meeting conducted by the Company. The categorical assertion on account of non-issue of share certificates has not been repudiated by the Company, which has to be appropriately remedied.

13. In view of the foregoing conclusions and in exercise of the powers under Section 397 & 398 read with Section 402 of the Act, it is ordered asunder:

I. The Company shall register the transmission of shares of (late) Hashmukh V. Patel to his legal heirs, namely, the petitioners 1 to 4 herein and accordingly rectify the register of members within 30 days of receipt of this order and further issue share certificates in the name of the petitioners 1 to 4, apart from any other shareholder to whom share certificates remain unissued by the Company.

II. The Company will, in the event of the petitioners not subscribing to the additional shares already offered by the Company, after commencement of the present proceedings, within 30 days of receipt of this order, allot such unsubscribed shares in favour of the remaining shareholders in proportionate to their shareholding in the Company.

III. The Company shall, within 30 days of receipt of this order, reconstitute the board of directors, providing proportional representation to each of the families of (late) Hashmukh V. Patel; Naresh Mangalal Doshi (fifth petitioner); K.P. Patel (respondents 1 to 5, 9 to 11 & 13) and Vinod B. Patel (respondent No. 12) on basis of the existing shareholding, which shall appropriately be incorporated in the articles of association.

IV. The board of directors reconstituted in terms of this order shall manage the day-to-day affairs of the Company as per the memorandum and articles of association of the Company.

14. With the above directions, the company petition and the connected company applications stand disposed of. In view of this, all the interim orders are merged with the main order. Ordered accordingly. No order as to costs.