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12. The facts regarding the issue of the debentures and shares have to be appreciated in the light of certain surrounding circumstances commencing with the date, July 11, 1977, when the Company Law Board, in exercise of the powers under s. 408 of the Companies Act, appointed 8 persons to hold office as directors of the company from the date of the order in order to prevent the affairs of the company from being conducted in a manner prejudicial to it. At that point of time, the two plaintiffs held about 26,000 shares in the company. On September 1, 1977, the plaintiffs field against the company suits in the Bombay City Civil Court for declarations that transfer applications made to the company by the plaintiffs in respect of the company's shares should be deemed to have been accepted and for orders that the company's share register as transferees and owners of those shares. On September 20, 1977, the plaintiffs field against the company in this court a petition under s. 155 of the Companies Act requiring the rectification of the register of shares of the company in respect of 27,183 shares (which were some of the shares in the aforesaid suits). A similar petition was later filed in respect of the other shares in the aforesaid suits. On September 21, 1977, this court passed an interim order in the petition wherein it was directed that the annual general meeting of the company scheduled for September 23, 1977, should proceed as scheduled but the item on the agenda thereof to elect a director in place of a retiring director should not be considered until the petition was heard and disposed of. An agreement was arrived at on December 8, 1977, between the Berlias and the company, whereunder the company agreed to transfer 2,633 equity shares of the company lodged by the Berlias to their names and the Berlias agreed to withdraw the aforesaid suits and petitions. The agreement also provided that it would be open to the company to refuse the transfer of further shares the at may be lodged by the Berlias and that it would be open to the Berlias to challenge and contest such refusal. Accordingly, the aforesaid suits and petitions were withdrawn.

13. It appears that the company had moved the Central Govt. for the issuance of directions under s. 108D of the Companies Act in respect of the acquisition of shares in the company by the Berlia group. The application is not on record. On March 15, 1978, the company was informed that it had not submitted adequate grounds for the Central Govt. to issue such directions. On April 26, 1978, a meeting was held under the Chairmanship of the Secretary, Dept. of Company Affairs, to consider steps to be taken to prevent the Berlia group from acquiring shares to gain a controlling interest in the company. The minutes of the meeting are on record. They show that the chairman explained that the Berlias had already registered in their names 68,853 equity shares and they had also got transferred some 6,000 preference shares; that there was a strong suspicion that most of the transferees of 23,113 equity shares which had been lodged with the company for registration were nominees of the Berlia group; that according to reports received by the committee, the Berlia group had obtained a total of 1,74,127 proxies as against 1,08,000 mustered by the institutions; that the Berlias had filed nominations for the appointment of 2 directors on the company's board. In view of the large number of proxies obtained by the Berlias it was obvious to the committee that the Berlias were trying to gain controlling interest in the company and this would be prejudicial to the company's board they would be able to gain knowledge of all the happenings in the company to further their interests. It was decided by the committee that directions should be given to the company either under s. 108D or under s. 408 not to effect transfers of shares exceeding a block of 50 shares lodged by any individual or body corporate. In order to protect the interests of persons who wanted to transfer shares for genuine reasons, it was suggested that shares exceeding a block of 50 should be purchased by the institutions. It was also decided that the Dept. of Company Affairs would examine whether the directions to the company should be issued under s. 108D or under s. 408.

16. On June 6, 1978, UTI's and GIC's chairman wrote a confidential letter to the chairman, CLB, stating that they were given to understand that the chairman of the company had by its letter dated April 28, 1978 (which is not on record) advanced cogent reasons why the Company Law Board should take action, inter alia, under s. 108A. The letter stated that the Berlia group had participated in the malpractices of the earlier group in management, the Kapadias. The letter stated that the Berlia group had a large quantity of shares which they had got transferred in their own names or in the names of their nominees. The annual general meeting (AGM) of the company was now scheduled to be held on June 29, 1978. After April 3, 1978, the Berlia group had lodged several transfer applications in respect of equity and preference shares of the company in their names and in the names of their nominees. The shareholders of the company had been issued a circular purported to have been signed by R. M. Goculdas, Chairman of M/s. Dharamsi Morarji Chemical Co. Ltd., R. V. Ramani, Managing Director of Mettur Chemicals and Industrial Corporation Ltd., and S.C.L. Jain, managing director of M/s. Punjab National Fertilisers and Chemicals Ltd. They had been told by Gokuldas that he had not signed the circular. They were awaiting replies from the other two gentlemen. The circular recommended to the shareholders that they issue proxies in favour of one or the other of the plaintiffs or their father. The circular had been posted by the Berlia concerns. From this it was obvious that the Berlias were trying to get the control of the company and if they were allowed to control the company it would be most harmful to the interests of the company and to the public interest at large. If they were allowed to appoint a director, he would obtain knowledge of what was happening at the board meetings. For these reasons the signatories asked that directions be given to the company not to give effect to transfers of the blocks of shares listed in the annexure thereto; where the transfer of such shares had already been registered, not to permit the transfer or any nominee or proxy of the transferee to exercise any voting or other rights attached to such shares; where the transfer of such shares had not been registered, not to permit any nominee or proxy of the transferor to exercise any rights attached to such shares; and, regardless of whether transfers of such shares had taken place or not, the voting rights in respect of the shares listed in the annexure should be frozen so as to disbar the registered holders thereof, whoever they may be, from exercising the registered holders thereof, whoever they may be from exercising them. This would prevent the Berlias from gaining control of the company and from having any of their nominees on the board of directors either at the forthcoming AGM of the shareholders "on June 29, 1978, or at any other general meeting". The list annexed to the letter stated the folio number and the number of the shares, equity or preference, that had been forwarded to the company for transfer and the names and addresses of (apparently) the transferors. It is a long list. It is not clear upon what basis the letter stated that the transferees of these shares were Berlia nominees. It is clear that the list was supplied to the signatories of the letter by the company.

155. It was even submitted that the directors did what they did because they considered the Berlias undersirable people. Emphasis was placed upon the circular sent by the Berlia concerns to the company's shareholders recommending the Berlias, and upon the evidence of Goculdas, one of the purported signatories of the circular, that he had neither signed it nor authorised its issuance. It was also emphasised that a specific case of having given authority was put to Goculdas by plaintiffs' counsel but the plaintiffs did not give evidence to support that case. First, if the directors did what they did because they considered the Berlias undersirable persons, they did what they did with the intention that the Berlias should be outvoted. In para. 73(e) of the plaint it is alleged that it was obvious that continuous efforts were made by the company's directors for the time being to deprive the Berlias and other shareholders of voting power and to prevent the Berlias and others from acquiring voting power, and that the directors acted, in the manner they did, so as to acquire voting power for the institutions which they represented or were interested in. In para. 69 of the written statement of the company it is denied that an effort was made by the directors to deprive the Berlias or other shareholders of their voting power or to prevent the Berlias or other shareholders from acquiring voting power or that the directors acted so as to acquire voting power for the financial institutions. In view of this denial, the argument, that the directors did what they did because they considered the Berlias undesirable people, cannot be put forward to justify what the directors did. Secondly as will be evident from the authorities to which I shall presently refer, the directors of a company may not disfavour one group of the shareholders and favour another, it is a breach of their fiduciary duty to do so.