Sections 285
to 289
BOARD
MEETINGS
[1934] 4 comp. cas. 176
(mad.)
High court of
United India Life Assurance Co.
Ltd.
v.
S. Krishna Rao
Madhavan nair and
jackson, jj.
O. S. No. 918 of
1933
December 19, 1933
S. Sreenivasa Ayyangar, V.V. Sreenivasa Ayyangar, K.S. Rajagopala Ayyangar and K.S. Venkatramani for the Appellants.
T.R. Venkatrama Sastri, C. Brooke Elliot, S. Venkatramier, C. Somasundaram Chettiar, S. Parthasarathy, V.K. Thiruvenkatachari, T.P. Gopalakrishna Ayyar and K. Sankara Sastri for the Respondents.
Madhavan Nair, J. — Defendants 1, 2, 4, 5, 6 and 9 are the appellants. The 1st plaintiff is a shareholder and the 2nd plaintiff a policyholder in the United India Life Assurance Company, Limited, the 1st defendant. Defendants 2 to 9 are the directors of the said company, of whom the 9th defendant Mr. M.K. Srinivasan is the Managing Director.
This
appeal arises out of a suit instituted by the plaintiffs for an injunction
restraining the United India Life Assurance Co. Ltd., and its directors from
spending the money of the policyholders on the construction of a building on a
site purchased by the Company at
In
September 1932 the United India Life Assurance Co. bought at
The question raised in the marginal note referred to above has obviously reference to Rule 116-A (1-i) of the rules relating to the administration of the Policyholders' Trust Fund. This rule says that " the moneys, funds and assets of the Policyholders' Trust Fund shall be invested by the directors from time to time in any or all of the following investments and subject to the conditions or limitations mentioned herein below : (a) by a unanimous resolution of all the directors for the time being of the company (1) in the purchase of (i) "house property." As the resolution passed on the 2nd August was not the resolution of all the directors owing to the absence of Mr. P.N.S. Ayyar it was communicated by the Managing Director on the 14th September to the absentee director by letter Exhibit H in which his opinion in respect of the resolution aforesaid was solicited. On the 16th September, 1933, Mr. P.N.S. Ayyar replied, giving reasons, "that the proposition does not appeal to me and I am therefore unable to agree to the Board resolution No. 2370 dated 2nd August, 1933." In consequence of his objection the Building Committee on the 27th September, 1933, resolved (that the scheme should be re-arranged so as to make the total expenditure in all within the original sanctioned limit of 3 lakhs, and (2) that Messrs. Ballandie, Thompson and Mathews, architects, should be requested "to have the matter re-planned in such a way that the construction is to be proceeded with as far as the limit of 3 lakhs will allow (the said sum to include the architects' fee) but that the foundations and steel stanchions be so planned and laid as to eventually make the building, by further additions, a six-storeyed building as per the architects' design." (See Exhibit K.) On the same date the Managing Director wrote to the architects authorising them "to have the foundation prepared as for a six-storeyed building and also the steel stanchions for the portions which can be constructed within the present limit of cost but of such strength as should eventually be capable of supporting a six storeyed building." The committee also asked them for detailed suggestions and views as to the kind of building and accommodation that could be provided within the revised limit of 3 lakhs (See Exhibit L.) On the 5th October the architects telegraphed that the report would follow in a few days (See Exhibit M.) On the 7th October, 1933, referring to Exhibit M., the Managing Director telegraphed authorising Messrs. Ballandie, Thompson & Mathews to proceed with the foundation (See Exhibit N.) On the 10th October, 1933, a meeting of the full board of directors was held to examine the situation. At this meeting Mr. P.N.S. Ayyar delivered a note for consideration in which he stated "it is not within the powers of the committee to sanction the erection of a three-storeyed building at a total cost of 3 lakhs. The building contemplated by the relative Board resolution was one of five-storeys." This objection was overruled by the Board by a majority of 6 to 2 and the action of the committee was approved.
The two dissenting members at the meeting were Messrs. P.N.S. Ayyar and R. Rangachariar, another director.
This suit by the plaintiffs was instituted on the 23rd of October, 1933. In support of their suit the plaintiffs alleged two grounds (1) that the resolution of Board of Directors to invest money of the Policyholders' Trust Fund in house building is ultra vires as it contravenes Rule 116-A (1-i) of the Policyholders' Trust Fund Deed, read with Articles 105-G and 175 of the Articles of Association; and (2) that while the original proposal was to construct a building for 3 lakhs of rupees, the subsequent proposal of the Board by a majority to construct a building with foundations for a building costing 4 lakhs and odd of which 3 lakhs ought to be spent for the present, is wholly improper and illegal. The 3rd defendant Mr. P.N.S. Ayyar supported the plaintiffs. Defendants 2, 4, 5, 6 and 9 oppose this suit stating that the resolution of the Board is intra vires and that the action of the directors in ordering the construction of a building with foundations as for a building which would ultimately be a six-storeyed building costing Rs. 4,10,000 is proper. Defendants 7 and 8 filed affidavits supporting neither party.
On the above contentions two issues were raised before the City Civil Judge.
(1) Whether the resolution of the Board of Directors passed on the 12th day of October, 1932 sanctioning the construction and equipment of a building at a total cost not exceeding 3 lakhs is ultra vires ? This issue, shortly stated, raises the question whether it is competent to the Board of Directors even by their unanimous resolution to invest money belonging to the Policyholders' Trust Fund in constructing a building when the Articles of Association authorised them to invest money only in the purchase of house property.
(2) If the resolution if not ultra vires, is the action of the majority of the Board of Directors to put up a building at a cost of 3 lakhs but with foundations and steel stanchions as for a building that would ultimately cost Rs. 4,10,000 illegal and improper ? This issue raises the question whether the original scheme as modified at the last meeting of the directors can be accepted having regard to the fact that two of the directors did not approve of the modification. On both the issues the learned City Civil Judge found against the appellants and in the result the plaintiffs' suit was decreed as prayed for.
In order to succeed in the appeal the appellants must obtain a decision in their favour on both the above points. If either of the points is decided against them the appeal will have to be dismissed.
I propose to deal with the 2nd issue, first. According to Rule 116-A (1-i), money of the Policyholders' Trust Fund can be invested in the purchase of house property only by a unanimous resolution of all the directors. The original resolution was that a suitable building be constructed and equipped at a total cost not exceeding 3 lakhs out of the company's Policyholders' Trust Fund. This no doubt had the approval of all the directors and would be infra vires of their powers under Rule 116 (1-i) if constructing a building would amount to "purchasing house property". The next resolution of the Board of Directors was to put up a building with foundations as for a six-storeyed building which would ultimately cost 4 lakhs and odd though for the time being it restricted the amount to 3 lakhs, that is, the amount sanctioned in the original resolution. This resolution, as already observed, did not have the unanimous support of the entire body of directors inasmuch as two of them, Messrs. P.N.S. Ayyar and R. Rangachariar, dissented. The question is whether the later resolution can be enforced having regard to the fact that it was not supported by the unanimous consent of the directors. On behalf of the appellants it is argued that inasmuch as the amount of expenditure with respect to the building is restricted to 3 lakhs and their resolution sanctioning the construction of a building spending that amount had the approval of the entire Board of Directors, it is not necessary to secure the approval of the full Board once again for putting up a building within that amount. On behalf of the respondents it is argued that though the later resolution restricts the expenditure to 3 lakhs, the building that will be erected in pursuance of that resolution must necessarily be different from the building that was contemplated by the original resolution and this being so, it cannot be said that that there was unanimous opinion for the purchase of house property amongst the directors to make their resolution legal within Article 116. Shortly stated, the argument of the respondents is that there must be unanimity of opinion among the directors not only as regards the amount that should be invested but also as regards the form and shape of the building and unless there is such unanimity no building should be put up. It is clear that the building that will be put in pursuance of the later resolution is bound to be different in various respects from the building that was contemplated to be put up under the original resolution. This was clear to the minds of the directors who passed the later resolution, for the committee requested the architects to have the matter re-planned, that the foundations and steel stanchions should be so planned and laid as to eventually make the building by further additions a six-storeyed building. (See Exhibit K, para. 2). What the difference between the two schemes would be when given effect to though the amount of expenditure for both the schemes was restricted to 3 lakhs is clearly stated in Exhibit K itself. In para. 1 the Committee state : "The only question therefore for consideration is whether the building should straightaway be constructed on that basis (that is, on the plan involving the expenditure of 3 lakhs and odd) or whether, the building should now be finished half-way, the remaining being left over for completion at a later time. It was hoped that the former course would still be feasible after discussion with Mr. P.N.S. Ayyar. If however, such a course should not be feasible, the latter course be adopted and the building be proceeded with within the total cost originally sanctioned of 3 lakhs." This statement in the resolution makes the distinction clear beyond any doubt. If it is decided by the unanimous resolution of the directors that a house should be bought for a definite amount, can it be said that the objection of some of the directors to the specific house selected for purchase by the majority can be overlooked and that the selection of the house is validly supported by the unanimous opinion of the directors, because there was their unanimous support to the decision that a house should be bought investing on it a certain amount? I think not. In our opinion there must be unanimity of opinion amongst the directors not only with regard to the expenditure of money but also with regard to the item of property that is sought to be bought. It is not enough to say by a unanimous decision that a house should be bought investing a certain amount of money, but there must be unanimity with regard to the house also that is to be bought. In other words, there should be unanimity of opinion both with regard to the amount of money that should be spent and also with regard to the house that should be purchased by the expenditure of that amount; if not, it cannot be said that there was unanimity of opinion of the directors for purchasing house property as contemplated by Rule 116 of the rules relating to the Trust Fund.
In this connection I must refer to another argument of Mr. Srinivasa Ayyangar that, it having been decided by the full Board of Directors that, the building should be erected at a cost of 3 lakhs, the duty of deciding which kind of building should be constructed may well be delegated to a committee as it has been done in this case and their decision cannot be questioned on the ground that it has not proved acceptable to the entire body of the directors. That this argument cannot be accepted is made clear by Section 47 of the Trusts Act. The duty of buying property which has been selected by the entire body of directors can be delegated, but not the duty of deciding which house in question should be purchased.
Having regard to my view on issue 2, it is not necessary to decide the question raised in issue 1. However, as the question was argued, I shall record my opinion on it very briefly. The question is whether under Article 116-A (1-i) the purchase of house property would include within its meaning laying out money in building houses. If the meaning that the framers of the articles of association intended to put on the expression "purchase of house property" in Article 116 can be found out clearly from the language used by them in some of the other articles of association, i.e., if the articles of association read as a whole make the meaning of the expression clear, then I think effect should be given to that meaning, and we should not allow ourselves to be influenced by decisions which may have a general bearing on the point. In fact, in such a case there can be no room to look for guidance to decisions unless, of course, there are express decisions which have interpreted the meaning of this particular expression. The question is not to be treated as an abstract proposition of law if there is clear indication that the company intended that the expression should be understood in a particular manner. Exhibit B. is the Memorandum and Articles of Association of the United India Life Assurance Co. Ltd. It cannot be disputed that it draws a distinction between the money of the shareholders and that of the policyholders. Article 105-G dealing with the shareholders' money empowers the directors specifically to acquire or erect houses or buildings for the offices of the company or for transaction of its business etc. Article 116 dealing with the money of the policyholders empowers the directors by a unanimous resolution to purchase house property. Is there no distinction between the powers given to the directors as regards investment under this rule? I think there is. If the erection of houses was contemplated as an object of investment with regard to the money of the Policyholders' Trust Fund, why did not those people who drew up the Articles use the same expression in Article 116-A (1-i). They were quite alive to the distinction between acquiring and erecting houses as may be seen from Article 105 and yet they used only the expression 'purchase of house property' when they drew up Article 116. Under Article 105-G the directors may either buy house property or build a house; an alternative is allowed to them for the exercise of their discretion, but under Article 116 no such alternative is allowed to the directors. By a unanimous resolution they may invest money only in the purchase of house property. People conversant with building houses know that in actual practice house building is more speculative than buying houses. Apparently those who drew up the Articles wanted to safeguard the money belonging to the Policyholders' Trust Fund with greater care than the money belonging to the shareholders. In this connection attention may also be drawn to Rule 175 of the Articles which says that "the moneys and assets of the company other than those relating to the Policyholders' Trust Fund shall be employed or invested in such manner and in such investments as the directors may, in the interests and for the purpose of the company, from time to time determine." I am satisfied that a clear distinction between building houses and buying house property is indicated in the Articles and that we should give effect to it in interpreting Article 116-A (1-i).
In support of this contention that building house is the same as buying house property Mr. Srinivasa Ayyangar relied upon Drake v. Trefusis. That was a case under the Settled Estates Act, 1882. In that decision, speaking about the cases in which moneys arising under the Settled Estates Act and the Land Clauses Act have been applied in what is not strictly a purchase of land, Sir W.M. James, L.J., observed "we never intended, however, to go further than this, that expending money in building a house on a vacant piece of ground forming part of the settled property is in substance the same thing as buying a house; and that money to be invested in the purchase of real estate may therefore be properly applied in the erection of new buildings." This observation no doubt supports the appellants; but it must be remembered that it was made with reference to cases under the Settled Estates Act in which the question was what was meant by investing money in the purchase of land under the Act. And further, to understand the true scope of this observation the case has to be considered in relation to a few other cases which arose under the Settled Estates Act, Land Clauses Act, etc. In Re Newman's Settled Estates, under the Settled Estates Act (19 & 20 Vict. c. 120) Section 23, money arising from timber cut under an order of the Court was ordered to be expended in erecting new farm buildings and other permanent improvements of the property. Whether it can be so held being a matter of some doubt to Sir George Jessel, M.R., he referred the matter to be heard by the Lords Justices. Sir William James pointed out that "the cases proceed on the principle that the erection of a building is substantially the same thing as the purchase of a new estate. No mischief can result from following these decisions" Sir G. Mellish, L.J., held "I think the authorities are too strong to be departed from. It would be mischievous to overrule such a course of decisions though I am not prepared to say that, in the absence of authority I should have decided the point in the same way." It will be observed that it appeared doubtful whether on the language of the Act erection of a building would amount to the purchase of a new estate to the master of the Rolls and Sir George Mellish; and further, Mellish, L.J., in the absence of authority was not prepared to say that he would have decided that both mean the same thing. In In re Bethlem Hospital, Jessel, M.R., had to consider a case under the Land Clauses Consolidation Act, and in that case he again referred to In re Newman's Settled Estates and pointed out that the Lords Justices held, following numerous decisions which they thought ought to be followed, "that expenditure in building was a purchase of real estate within the meaning of the Act, though not so according to the ordinary use of language." The next case is the one in Drake v. Trefusis already referred to, a case strongly relied on by the appellants. In Venour v. Sellon, Jessel. M.R., referring to Drake v. Trefusis and Newman's Settled Estates, In re, said that those cases decided "that as regards money in Court under the Settled Estates Act and other Acts, the Court will not allow it to be laid out otherwise than in the purchase of land except in one case, viz., the building of a house; and it is difficult to see how that exception arose." The decisions appeared to the learned Judge to be anomalous but he thought that they should be followed without being extended any further. In Vine v. Raleigh the decision in Drake v. Trefusis was followed. These cases read together show that but for the principle of stare decisis which the learned Judges thought they should act upon, not one of them was prepared to hold on the language of the Act that purchase of land and building of a house mean substantially the same thing. It may be said that these cases generally support the assumption that house building and buying house property are virtually the same. But this assumption was arrived at in construing the meaning of the term purchases of land appearing in the Settled Estates Act; and so far as I understand the judgments the opinion is not based upon any general principle of construction but on the expressions of opinion found in various judgments which the learned Judge thought they were bound to follow. That the conclusion was anomalous having regard to the language was clear to the minds of all the Judges and it was also stated : (See Drake v. Trefusis) that the principal should not be extended any further. Having regard to these considerations, with very great respect I do not think that these decisions should be relied on to show that house building means the same thing as the "purchase of house property" mentioned in Article 116 of the Articles of Association of the company. It may also be observed that it does not appear from the judgments referred to above that there were other provisions in the Acts which threw any light on the interpretation of the terms "purchase of land." In the case before us I have already referred to the fact, which is very important, that Articles 105-G and 175 throw considerable light on the question we have to decide and that Article 116 should be read along with these rules. That being so, there is no need to refer to any decisions at all in understanding the intention of those who drew up this Article of Association. For these reasons I agree with the opinion of the lower Court that the resolution of the Board of Directors passed on the 12th October, 1932, is ultra vires.
In the result, the appeal is dismissed with costs.
Jackson, J. — I agree that the appeal must be dismissed. The purchase of house property must be by the unanimous consent of the directors, and it is not sufficient compliance with that provision, if they delegate to a sub-committee the duty of buying "a suitable house." It is the duty of the directors to decide whether the house in question is suitable, and a subcommittee can only be employed to ascertain property, the purchase of which is to be sanctioned unanimously by the directors. The main duty cannot be delegated, as made clear by Section 47 of the Trusts Act, II of 1882; but in the regular course of business the subsidiary duty of purchasing a property which the directors have already decided to be suitable can be delegated to a sub-committee.
It was argued that so long as the suitability could be subsequently ascertained by the sub-committee that suitability was sufficiently certain when the directors passed their general resolution to purchase suitable property within 3 lakhs. But the maxim cerium est quod cerium reddi potest cannot be extended so far. The certainty must be on the face of the document and easily ascertained, One might purchase a house of which A holds the deeds. That is certain enough. But not a house which A thinks suitable: Cf. Broom's Legal Maxims, Ed. 9 at p. 400.
Therefore, assuming that building a house is the same as purchasing a house, even then the action of the majority of the directors cannot be justified, because it requires a unanimous decision to purchase any specified house property.
In this view of the case it is really unnecessary to consider whether building house property is the same as purchasing it. I would observe that 'purchase' is not a term of art (except in the context of purchase as opposed to inheritance) and it means no more than the acquisition of house property. There is no real distinction between acquiring by building and acquiring by buying. One need not be more speculative than the other, and the requirement of the trust is satisfied if its funds are invested in this class of property. The directors have been specifically authorized to erect buildings out of the company's funds apart from the trust, but the succint phrase 'purchase of house property' in the trust provisions does not necessarily imply that they may not erect buildings, with trust funds, so long as 'purchase' includes both building and buying.
The point has never directly come up for decision: but a question has often arisen in the English Courts whether funds which under the Settled Estates Act (19 & 20 Vict. c. 120) can only be applied to the purchase of land can be devoted to purchasing new or repairing old buildings. In 1874 in Re Newman's Settled Estates the trustees petitioned under the Act to be allowed to cut and sell timber and apply the proceeds to improving the property, . . . . . to building new granaries and to repairing farms. Sir W.M. James, L.J., ruled "The cases proceed on the principle that the erection of a building is substantially the same thing as the purchase of a new estate. The order may be taken as asked." Mellish, Lord Justice, demurred; but considered the authorities too strong to be departed from.
In In re Bethlem Hospital on 27th February, 1875 the Master of the Rolls comments upon in Re Newman's Settled Estates and says: "The opinion of the Lords Justices was that these numerous decisions ought to be followed, and they held that expenditure in building "was a purchase of real estate within the meaning of the Act, though not so according to the ordinary use of language." Something to that effect may have fallen from the Bench when Re Newman's Settled Estates was heard, but it is not in the report, and when this same case was cited before Sir W.M. James, L.J., in Drake v. Trefusis on March 22, 1875, he confined himself to saying "We never intended to go further than this that in substance building a house on vacant ground forming part of the settled property is the same thing as buying a house and money to be invested in the purchase of real estate may be properly applied in the erection of new buildings. Repairs and permanent improvements do not come within this principle.''
Next year, in 1876, in Venour v. Sellon the Master of the Rolls had to consider whether under the Act funds could be applied to drains. He thought it anomalous to allow the building of a house as a purchase, but not the building of a part of a house. However, he was bound by Drake v. Trefusis and followed that ruling.
Evidently the Master of the Rolls took personal exception to building a house being treated as buying a house. It is not clear to what Mellish, L.J., demurred in Re Newman's Settled Estate—it may have been the inclusion of drainage which was negatived in Drake v. Trefusis, or he may have been in agreement with the Master of the Rolls.
In 1891, Chitty, J., observed in Vine v. Raleigh that the fund which is liable to be invested in land may not be laid out in improvement except in cases where the improvement is in the erection of buildings, in accordance with the principle finally settled in Drake v. Trefusis, and when this judgment came upon appeal, Kay, L.J. also said Drake v. Trefusis has decided that spending money in erecting new buildings is the same thing as buying land.
Therefore, this much is clear that English authority has consistently proceeded on the general assumption that building and buying house property are substantially the same; and by light of that assumption the Settled Estates Act has been administered. The authorities have not interpreted some clause of the Act to mean that building and buying are the same, but confronted with the terms of the Act, they have found independently of the Act itself that buying includes building. If the same authorities had been confronted with the terms of the present trust they would presumably have followed the same independent line of thought and would have come to the same conclusion.
With that conclusion I respectfully agree, because I think there is no real difference between commissioning a contractor to build a house, and promising to buy it from him after it is built. If the directors had obtained a definite plan and estimate from their architects and unanimously approve it, and ordered the work to proceed, I do not think the Court need have interfered.
[1998] 16 SCL 1 (AP)
HIGH COURT OF ANDHRA PRADESH
v.
G. BIKSHAPATHY, J.
COMPANY PETITION NO. 27 OF 1987
SEPTEMBER 29,1997
Section
53(2) of the Companies Act, 1956 - Service on documents on members by company -
Whether presumption of service of notice contemplated under section 53(2)
cannot be said to be absolute or irrebuttable but burden is on party alleging
that he did not receive notice - Held, yes
Section
286 of the Companies Act, 1956 - Board meetings - Notice of - Whether
telephonic invitation/oral invitation could amount to notice within meaning of
section 286 - Held, no - Whether convening of meetings and taking decisions in
board meetings and sending intimations to shareholders is a purely in-house
procedure regulated by articles of association of company and it would not be
proper for courts to interfere with internal administration of company, unless
contrary is established including contravention of articles of association or
statutory provisions - Held, yes
Section
81 of the Companies Act, 1956 - Further issue of capital - Whether if member
did not respond to offers made by company, it has to be necessarily held that
he was not inclined to subscribe to additional shares, thereby impliedly
consenting for allotment of shares to others - Held, yes - Whether enhancement
of capital is a purely an internal administration of company and courts do not
interfere in normal course - Held, yes
Section
397/398 of the Companies Act, 1956 - Oppression and mismanagement - Whether if
it is found that apparent structure of company is not real structure and it is
in substance a partnership, principle of dissolution of partnership may be
applied in adjudicating petition - Held, yes - Whether shareholding pattern in
another company (sister concern) can form basis for determination of
shareholding in company which is subject matter of petition under section
397/398 for purpose of application of principles of partnership - Held, no
-Whether oppression is core element to be proved and nature of oppression is to
be tested in context of 'cause of winding up' - Held, yes - Whether word
'oppression' is a chamelionic word and it changes its colour, content and form
from time to time, place to place, event to event, depending on circumstances
of case - Held, yes - Whether where a petitioner has alleged that he was
subjected to oppression not in his capacity as a shareholder but as director of
company it could be said there was oppression within meaning of section 397
-Held, no - Petitioner alleged non-invitation for board meetings and allotment
of additional shares by respondent to themselves without offer to petitioner
-Facts on record revealed that notices for board meetings were sent by
certificate of posting and in fact opportunity to subscribe additional shares
was given to petitioner - Whether though case of oppression and mismanagement
was not made out but on facts, petitioner could be directed to sell shares to
respondent and on failure of respondent to purchase he could be directed to
sell his shares to petitioners in interest of company - Held, yes
Section 398 of the Companies Act, 1956 - Mismanagement - Whether relief under section 398 is geared to save the company and it is in the interest of the company alone and not to any particular member/members - Held, yes -Whether section 398 aims at maintaining public interest and interest of company unlike section 397 which protects interest of shareholders - Held, yes - Whether in case of private limited company, public interest may not fall for consideration under section 398/397 - Held, yes - Whether there need be any oppression under section 398 - Held, no
It
was the case of the petitioners that P-1 and R-9 conceived the idea of setting
up of a personal business as a partnership in recognition of their close and
cardial relation with a view to provide opportunity to their children and
accordingly the R-1, the company, was promoted. R-3, the brother of R-9, was
brought on the board for looking after the affairs of the company. The
proportion of shareholdings in the company was in the ratio of one-third and
two-third in between 'K' group (belonging to P-1) and T group belonging to R-9.
The company also acquired joint venture project in ARIL in
The allegations of the petitioners were that, (z) no notices for board meetings were sent to him from the year 1983 onwards, (ii) K group was not given chance to subscribe to the further issue of share capital which itself was a decision taken in board meeting to which no notice was given to the petitioners and R-3 surreptitiously got allotted the entire further issue in the names of J group, (iii) decision to subscribe the additional share capital by meeting of the board of directors was not necessary as the company was having tremendous reserves and the additional share capital was brought into books only for the purpose of converting the minority shareholders represented by R-3 into majority shareholders; and (iv) that though there was no partnership firm earlier to the incorporation of the company, but if the corporate veil was pierced the company was in substance a partnership. Thus alleging that K group was oppressed by J group and the company was being mismanaged by R-3, the petitioners filed the petition under sections 397 and 398. R-9 supported the case of the petitioners.
R-9 and P-1 had been stating that no formal notices were sent and meetings were being held on informal intimation being neighbours. Their case was that notices were never sent by post much less under certificate of posting. On the other hand R-3 stated that notices for all the meetings were invariably sent along with agenda by post under certificate of posting and they were sent under registered post after specific instructions from R-9 and P-1. Section 286 mandates sending of notices in writing and omission attracts penalty. Article 49 of articles of association of the company clearly stipulated that the notices for the meetings shall be in writing. Even though P-1 and R-9 stated that there was no practice of sending the notices, yet the practice could not be in violation of statutory provision and articles of association. Such a practice even assuming was in existence, would be illegal Section 286 read with section 53 and article 67 leads to inevitable conclusion that the notices shall be in writing. Therefore, it had to be held that R-1 company had issued notices in writing in respect of all the meetings.
It was the case of R-1 company that prior to 1982 the notices were being sent under ordinary post, but after 1982, when a decision was taken to maintain the minutes of the board in Loose Leaf Papers, R-3 as a managing director took a decision to send the letters thereafter under certificate of posting. It was only on 25-3-1985, P-1 for the first time wrote a letter to R-1 company, stating that for the last 18 months, he did not receive any notices or agendas or invitations for any of the meetings. On the very same day he also addressed a letter to R-9 stating that he came to know that the board resolution withdrawing (P-3) his son's nomination to ARIL Board In the said letter there was no mention about the non-receipt of any notices for the last 18 months as mentioned in the letter on 25-3-1985. From letter dated 25-3-1985, it implied that P-1 knew that the meetings were held The articles of association also said that the Board meeting should be held once in a three months. It was not as if he was not aware of this position. No reasons were forthcoming as to why he kept quite beyond 3 months when he did not receive any notice after March, 1983. It was beyond any body's comprehension that a person of his status possessing vast knowledge of Corporate Law, could have kept quiet for such a long time. It was also not understood as to why he did not take up the matter with R-9 when he did not receive the minutes of various board meetings. When it was brought to his notice by R-3 that system of circulating the minutes was dispensed with P-1 did not take up the issue with R-9 and no information was forthcoming fromP-1 in this regard It was also worth-noticing that P-1 also wrote to R-9 on the same day, i.e., 25-3-1985. It was the case of R-9 that on 16-8-1985 he had sent two letters one relating to despatch of the minutes from 20-7-1983 to 8-7-1985 duly initialled by him and other relating to request to give minimum 10 days' notice for holding Board meeting. However, it is the case of P-1 that they never received letter dated 16-8-1985 sending the minutes of the Board meeting, but only a letter dated 16-8-1985 was received to the effect that the notices should be sent in advance. But, it was curious to note that R-9 did not file two registered postal receipts in which the 16th August letter for sending the notices in advance and also returning the photo copies of minutes initialled by him separately were sent. He also did not file the two acknowledgements in respect of two registered letters. The reasons for asking the minutes also were not explained in the evidence by R-9. Moreover, R-9 being a director, it could have been open for him to seek inspection of the records instead of indulging in correspondence. It was in he counter that in July 1985 K, the then General Manager had informed him that the R-3 was planning to issue and allot the unissued capital to himself and he nominees and thereby convert him and the petitioners from majority to minority. Therefore, he requested R-1 to send the certified true copies of the minutes of the Board meetings of the company. In pursuance of he request, R-2 sent him the unsigned minutes of the copies of the 12 Board meetings of the company held between 20-7-1983 to 8-7-1985 and that by letter dated 16-8-1985 he drew the attention of R-2 that these minutes were not certified by him and he sent photostat copies of the minutes duly initialled by him. As could be seen from letter dated 16-8-1985 R-9 earlier sent the letter requesting for furnishing certified copies of the Board meeting, but that crucial letter referred in the said letter was not forthcoming. Even the office copy covering letter dated 16-8-1985 alleged to have been sent to R-1 had not been filed by R-9 and only a true copy was filed When he said that he had sent two letters on 16-8-1985 he should have office copies of such letters. None of the office copies of these letters were filed by R-9. He also did not file the office copy of letter dated 16-8-1985 requesting for sending notice 10 days in advance. On the other hand it was the evidence of R-2 that they received the letter dated 16-8-1985 to the effect that the notices should be sent much in advance. Though R-9 submitted that this was referred to in letter dated 21-10-1985 and the said letter of dated 21-10-1985 was received by the Secretary, no objection was raised as to non-receipt of the alleged initialled minutes, but at the same time, it had to be seen that the non-mention will not ratify the action of R-9. It was for R-9 to establish that he had sent the letter dated 16-8-1985 which he failed to do so. There were number of inconsistencies in his statement and, therefore, his version that he had received the minutes of only 12 Board meetings could hardly be believed Further, when he received definite information from K that the plans were being moved by R-3 to allot the unsubscribed capital to his own persons, there was no reason why R-9 did not take steps to verify by taking inspection of records. Even P-1 in his letter dated 17-12-1985 stated that he apprehended on the basis of information received by him that the J group was attempting to change the pattern by unwarrantedly issuing the unsubscribed capital of the company and allotting it to the nominees of the J group. It was not known why P-1 resorted to brow beating instead of straightaway asking for the information about the issue of unsubscribed capital Even R-3 also could not be said to be plain. He also equally tried to shield the information. Obviously, everybody wanted to indulge in shadow fighting. It was also seen that the suit challenging the withdrawal of the nomination of P-3 from the Board of A.R.I.L. was filed in Calcutta High Court in May, 1985 and the correspondence started between P-1 and R-3 only in March, 1985. Thus, it showed that the entire gamut of litigation only started after/around March, 1985 and around that period the suit was filed in Calcutta High Court by P-1. The dates of some of the letters of P-1 and R-9 also strengthen the suspiciously collusive nature of litigation. On 16-8-1985 P-1 wrote letter to R-3. On the same day R-9 was alleged to have sent a letter R-2 to R-3 returning the minutes of meetings. There was no reason why P-1 did not endorse all copies of correspondence entered with R-1/R-2/R-3. Similarly R-9 could have endorsed the copies of letters exchanged by him with R 1/R-2/R-3 to P-1. The intention obviously appeared to keep the matters in haze. R-9 apparently tried to buttress the case of P-1 by means of invincible conduct, but when the veil was removed the very first document which he tried to introduce had shaken the entire edifice of his stand. Under these circumstances, letter dated 16-8-1985 suffered from inextricable disabilities and the efforts of R-9 to salvage the document to his advantage went in vain. Consequently, his evidence was not worth consideration being incredible. Accordingly, it must be held that the said letter of 16-8-1985 was not a genuine document.
The only requirement under section 53 and also the articles of association of the company is that the notice in writing may be given either personally or sent by post. There is a statutory presumption under section 53(2)(b) of the Act that the service is deemed to have been effected under certain conditions stipulated therein.
The presumption arises when the condition laid down in section 53(2) are complied with. Even the articles of association was to the same effect. If the facts establish the service of notice, then the question of drawing presumption does not arise. Thus, the presumption of service of notice as contemplated under section 53(2) cannot be said to be absolute or irrebuttable as there may be cases where the parties may collude with the postal authorities for procuring postal seals. But, at the same time the burden is on the party alleging that he did not receive the notice to rebut the presumption by adducing satisfactory evidence. Such issue has to be decided keeping in view the facts and circumstances of each case.
It was in evidence that the notices in writing were sent for various board meetings and also general meetings. Right from 1982, the notices issued for the board meetings, agendas and certificate of postings and also the minutes were filed on behalf of R-1 company. While it was the case of R-9 that he did not attend certain meetings and in respect of certain meetings, minutes were not properly recorded, it was the case of the P-1 that no notices were ever received by him at all It was also the case of P-1 and R-9 that the notices for the meetings and the certificate of postings were manipulated with a view to justify the validity of resolutions and consequential actions in conformity with the statutory procedures. As noticed from the minutes of the meetings, P-1 did not attend the meeting after 31-3-1983. The reasons for absence were non-receipt of the notices. On the other hand, R-9 attended most of the meetings. However, it was denied that two meetings dated 26-11-1984 and 5-1-1985 had taken place. It was also the case of R-9 that he attended meeting on 3-11-1985 and 25-2-1985 and the resolutions were not passed as reflected in the minutes produced by R-3 and they were approved as contained in the letter on 16-8-1985 sent by R-9 to R-1, which as held earlier was not a genuine document. The initial burden lay on the company to establish that the notices were sent in accordance with the articles of association keeping in view the statutory provision. Even though, R-9 and P-1 categorically stated that no notices were sent and the certificate of postings were fabricated, but at the same time, it had to be tested from the angle of statutory provision. Inasmuch as the notices have been sent, and the certificate of postings have been marked on behalf of the company, the presumption under section 53 comes into play and the said presumption is rebuttable. The onus thereafter fell on P-1 andR-9 to establish that the notices were never posted and that the certificate of postings were procured Except stating that they did not receive any notices no other evidence was forthcoming from P-1 and his supporters, R-9 and his family members. It was also in the evidence that when P-1 and R-9 gave specific instructions to send the notices under registered post, they were complied with and R-1 company had filed number of documents marking the postal registrations and other documents.
It was curious that P-1 being a person in a highly placed position could have kept quite if really he had not received the notices for board meetings. It was more so when he was sailing with R-9 in the company petition, who was his immediate neighbour. It was not the case of P-1 that R-9 was not in talking terms. On the other hand upto February, 1985, they were working in the same company ML in top, executive position-R-9 was President and P-1 was Vice-President. If the notices in fact had not been sent to any person, then R-9 also could not have attended any of meetings at all The fact that R-9 attended and participated in the meetings of course with certain objections in respect of minutes of certain meetings, would only go to establish that the notices were sent and it was also the case of R-3 that decision was taken by him as managing director to sent the notice under certificate of posting in 1982 when the board passed resolution to maintain the minutes of the board meetings in Loose Leaf Folders. It was also not understood as to why P-1 kept quite for nearly 18 months when he did not receive any notices or agendas, for board meetings or AGM. It was also not his case that he asked R-1 at any time during 1983 and 1984 that he was not receiving the notices for the board meetings, which should have been normal reaction of a human being in the ordinary course of events. It was also beyond anybody's comprehension that R-9 could not have inquired the P-1 for not attending the various meetings.
The contention of P-1 that R-1 company did not discharge the burden to prove that the notices were properly sent and it had filed only notices and certificate of postings and the connected postage stamp account were not filed This submission could not be accepted for the reason that R-1 company discharged the burden of proof placed on it, namely, sending of notices and the postal certificate of posting. When R-3 and R-2 were in witness box and subjected to cross-examination at length, it was not suggested that R-1 company did not file the postage account. It was also not the case of P-1 andR-9 that the addresses in the certificate of posting were incorrect and there were any other irregularity. The witnesses were offered for cross-examination only for the purpose of bringing out important and crucial matters which could be only ascertained by means of effective cross- examination. Except stating that these letters were not posted and the certificate of postings were manipulated, no other evidence worth considering had been brought on record. The conduct of the parties and the status held by them was also very relevant for the purpose of ascertaining whether they had acted in a bona fide manner or with an ulterior motive. The version of R-9 relating to letter dated 16-8-1985 was not accepted and as regards P-1, even though he had stated that he did not receive any notices for general meetings and the board of directors meetings, it could not be believed for the simple reason that out of two directors who were to participate in the meetings, R-9 had already attended number of meetings. If the notices had not been sent at all, then R-9 could not have also attended any meetings and chaired the meetings and it was also not possible to perceive that R-9 might not have brought to the notice of P-1 about these meetings. Moreover the trouble started not on account of non-receipt of the notices and minutes, but due to other reason i.e., scheme of J group to the total ouster of the K group which allegedly came to the knowledge of the K group in 1985.
The silence on the part of P-1 for such a long time without making any objection with regard to the notices of various meetings from 1983 till 1985, only established that he had notice of the meetings and that he deliberately did not attend the meetings for the reason that his son was not properly accommodated in R-1 company. He only initiated the correspondence in March 1985, but however, he did not proceed further. Then he filed a suit in May, 1985 in the Calcutta High Court challenging the withdrawal of nomination of his son on the Board of A.R.I.L. Again he took up the matter with R-1 company in August 1985 which also coincided with the initiation of correspondence by R-9. Further the 1st letter dated 16-8-1985 alleged to have been written by R-9 to R-1 company was not a genuine document. It was hard to believe that R-2 and R-3 had manipulated all the notices, agendas and minutes and also the certificate of postings from March 1983 to June 1985. But, coming to conduct of P-1, the grievance also did not appear to be not that of non-receipt of the notices of meetings, but the withdrawal of the nomination of his son from A.R.I.L. Board A person of a status of P-1 could not be expected to be non-vigilant. More especially when he had pursued the matter with R-1 company so vigorously after 16-8-1985. A person who is not vigilant cannot have any right to claim equity before the Court. The equity comes to the aid of the vigilant and not the slumbering (Vigilanti bus non dormienti bus Jura subveniunt). Therefore, theP-1 having remained intentionally dormant for a considerable length of time, could not complain that he had not received the notices. Further, he was a neighbour and it could not be said that the neighbours cannot have this information, more especially when they were very cordial and P-1 himself had categorically stated that R-9 was also being kept aloof by R-3 from the affairs of the company and that there were strained relations between R-3 and R-9. Therefore, it had to be presumed that the neighbour knows the neighbourhood as the maxim goes Vicini vicini-ora prae prae sammantur scire (neighbours are presumed to know things of the neighbourhood).
Admittedly, R-1 was a private limited company consisting of P-1, R-3 and R-9, with their respective members and they being immediate neighbours and it was beyond the comprehension of any person of ordinary prudence that P-J and R-9 were not aware of the meetings and minutes. It was also pertinent to note that statutory provision requires that the notice should be sent in writing either personally or by post. There is no provision for intimating on telephone. Therefore, the stand of the R-9 that he used to attend the meetings on telephonic information would not stand When the statute requires certain thing to be done in certain manner, it has to be presumed that the acts were done in furtherance of that statutory provision, unless it is proved to the contrary. Moreover, there was ample evidence that notices were sent to the parties under certificate of posting right from 1983 onwards.
Under these circumstances, it was to be held that notices were issued to the directors in the case of Board meetings and the shareholders in case of AGM in accordance with the statutory provisions and accordingly it was to be that P-1 and R-9 had received the notices for the board and general meetings.
The consequential crucial question that arose for consideration was whether any offer was made to P-1, R-9 or any other persons on their behalf and as alleged by R-3 whether they consented to the allotment of additional shares to other persons and if any had not consented to the above, whether allotment of shares as alleged by the petitioners was an act of oppression attracting the action under sections 397 and 398.
In pursuance of the decision taken in the minutes dated 26-11-1984, the company sent letters to all the shareholders on 26-11-1984 offering the additional shares. The said letter was sent by post under certificate of posting on 26-11-1984. There was no definite and specific pleading by P-1 in the company application to the effect the additional shares were issued without his knowledge and if any shares were issued that should be treated as illegal and invalid Thus, the P-1 was not at all sure of additional share capital and he had beer taking shelter by making general pleading that no notices were being sent and, therefore, he was not in a position to attend any meetings. In the instant case, the question of consent could not be directly established and only the circumstantial evidence had to be scrutinised meticulously. The main contention of P-1 was that he never received any notices, while the stand of R-9 was that he attended the meeting on 28-2-1985 and that he had no notice of Board meetings of 26-11 -1984 and 5-1-1985. As already held the company did issue the notices for various meetings. Therefore, it had to be necessarily held that the notices for the meetings dated 26-11-1984, 5-1-1985 and 28-2-1985 were issued to the directors. With regard to the offer made by R-1 company to the shareholders, it was in evidence that the letters were sent on 26-11-1984 and 5-1-1985 offering the additional shares to the shareholders and there was no response except from few. The parties tried to level allegations against each other stating that fraud was played and forged documents were pressed into service and that manipulations were made with regard to Certificate of Postings and postal registration receipts. But to ascertain whether they had consented for issue of additional shares, it was necessary to establish whether any notice was sent offering the shares. Though R-9 and P-1 in so many words stated that they had not received any notices, but except denying the receipt of the letters of offer, they did not lead any evidence on this aspect. The burden lay on P-1 to establish that he did not receive the notices at all, except making a bold statement to that effect. Equally the burden lay on R-9 to establish that the notices were not sent for the board meeting on 26-11-1984 and 5-1-1985 and that he attended the meeting on 28-2-1985 and that the minutes were not properly recorded on 28-2-1985. It was curious to note that in the letter dated 16-8-1985 Ex-R-2, he only referred to various Board meetings as having attended including 28-2-1985, but however, there was no mention about 16-11-1984 and 5-1-1985. In the said two meetings crucial decision was taken to subscribe to the additional share capital and now R-9 was coming out with his version that there was no meeting on 26-11-1984 and 5-1-1985 which version of R-9 could not be believed
When once it was held that proper notices were issued and the procedure as contemplated had been followed, it was not open for P-1 and R-9 to contend that no meetings took place. As already held that when R-9 attended number of meetings, of course excluding the Board meetings on 26-11-1984 and 5-1-1985, the contention of P-1 that he did not receive notices at all could not be believed P-1 and R-9 for the reasons best known did not elicit any information with regard to the postage account maintained by R-1 company nor was there any cross examination by R-9 in respect of the meeting which was held on 26-11-1984 and 5-1 -1985 wherein the leave of absence was granted to R-8 and R-9. He did not even elicit either from R-2 or R-3 that he did not make any request for leave of absence and that there was no evidence before R-1 company to that effect and the entry in the minutes that leave of absence was granted was false.
It is well established rule of evidence that a party should put to each of his opponent's witness so much of his case as concerns that particular witness. If no such questions are put the Court may presume that the witness's version has been accepted If it is in tended to suggest that a witness was not speaking the truth upon a particular point, his attention must first be directed to the fact by cross-examination, so that he may have an opportunity to give an explanation. It is also beyond controversy that if the witness is offered for cross examination, he should be cross examined on material point. Failure to cross-examine witness on certain points amounts to acceptance of truth of his testimony, except when the testimony itself is inherently improbable and incredible. Therefore, cross examination is powerful and valuable weapon for the purpose of testing the veracity of a witness and the accuracy and completeness of this story. Hence, when the witness was not tested by cross-examination, his evidence may be accepted subject to the above exception.
There was no cross-examination on this point. There was also no suggestion. Therefore, it had to be concluded that R-9 did seek for leave of absence, thereby establishing that he had the notice of meeting. Any resolutions passed in such meeting were valid unless properly challenged
According to P-1 and R-9 the burden placed on them was discharged by stating that they did not receive any notices and the burden shifted to R-3 to establish that notices were sent. In this regard it had to be noted that proof of burden on the respective parties paled into insignificance when they adduced the evidence at length. Yet, if they failed to elicit the necessary information, then it had to be taken note of. Suffice it to say that if the notices were issued properly and they failed to attend the meetings, the consequential resolutions passed in the said meetings could not be challenged nor could it be said that the minutes were manipulated. It is duty cast on the party to put his case in the cross-examination of the witnesses of the opposite party. This rule is of essential justice, not merely a technical one. The contention that the notices for offering the additional shares was never issued and certificate of postings produced by R-3 could not also be accepted, because in pursuance of the orders of the Court, an Advocate-Commissioner was appointed to take charge of the documents of the company and in pursuance of the said order, various documents were taken charge of by the Advocate-Commissioner by putting her initials on each and every document on 11-7-1987. The notice issued for the meetings dated 26-11-1984, 5-1-1985 and 28-2-1985 bore the signature of the Advocate-Commissioner and the certificate of postings also bore the signature of the Commissioner. That went to establish that these documents were in the files of the company as on the said date and it could not be said that they were manufactured or fabricated subsequently. It was also one of the circumstances which went to show that these documents were maintained during the course of the company's business.
For all these reasons, it must be held that proper notices were issued for the meetings dated 26-11 -1984, 5-1-1985 and 28-2-1985 and the minutes were recorded in those meetings could not be said to be irregular or manipulated When once it was found that the offers were made to all the shareholders if they did not respond to the offers it had to be necessarily held that they did not consent for subscribing to the additional shares.
In this regard, it has to be noted that convening of meetings and taking decisions in the Board meetings and sending intimations to the shareholders is a purely a in-house procedure regulated by the articles of association of the company and it would not be proper for the Courts to interfere with the internal administration of the company, unless the contrary is established including the contravention of the articles of association or the statutory provisions as contained in the Act.
So long as the company functions in accordance with the statutory provisions, its activities need not be probed further. Therefore, when R-9 andP-1 with their respective members did not respond to the offers made by R-1 company, it had to be necessarily held that they were not inclined to subscribe to the additional shares, thereby impliedly consenting for allotment of shares to the others.
AS REGARD'S BINDING NATURE OF FINDING IN INTERLOCUTORY APPLICATION FOR GRANTING INTERIM RELIEF
The finding in interlocutory application for interim relief as to genuineness of issue of additional share could not be binding on the Court while adjudicating the issue on merit.
The principle of res judicata is conceived in the larger public interest which requires that all litigation must sooner than later, come to an end The principle is also founded on basis of justice and good conscience, which require that a party which once succeeded on an issue should not be permitted to be harassed by a multiplicity of proceedings involving determination of the same issue. However, it is not in dispute that the finality of orders and their binding nature depends on the type of orders passed and the nature of relief granted in interlocutory orders.
In the instant case, the Company Application No. 184of 1988 were made by R-9 seeking reconstitution of the board represented by R-9 and P-1, for appointment of joint managing director, for declaring proceedings of AGM dated 5- 7-1985 for carrying out of the functions of joint managing director and managing director for conducting fresh audit. The Single Judge very clearly stated in the order on the interlocutory application that the examination of material was for appreciating the controversy raised for ascertaining the prima facie and balance of convenience for the purpose of interlocutory applications. Therefore, the Single Judge on the basis of such examination came to a prima facie conclusion. Even the Division Bench also confirmed the order of the Single Judge. It only establishes that the prima facie findings for this purpose of balance of convenience for appropriate orders shall be deemed to have confirmed The prima facie finding rendered by the Single Judge for purpose of granting interim relief could not be said to be binding in subsequent proceedings in the same case. Thus, any findings recorded by the Single Judge in the interlocutory application, could not be treated as res judicata in subsequent proceedings. In fact the Judge himself proceeded with the matter for ascertaining the existence of a prima facie case and balance of convenience. Therefore, findings given in that proceedings could not come in way of decision of the main petition.
AS REGARDS APPLICATION OF PRINCIPLES OF PARTNERSHIP
It is well within the competence of the Court to determine
the real structure of the company. It is open for the Court to pierce the veil
for such determination. If it is found that the apparent structure of the
company is not real structure and it is in substance a partnership the
principle of dissolution of the partnership may be applied in adjudicating the
petition for winding up.
In order to determine whether the company though incorporated under the Act, yet in substance it is a partnership, the following norms may create a possible inferential circumstances:
(a). There should have been pre-existing
business of partnership.
(b). An understanding to
convert the partnership into a limited company to be run on the same terms and
pattern as that of partnership.
(c). It should have been
formed among the relations or close friends with an understanding to run the
company with joint participation on the basis of personal relationship coupled
with mutual trust and confidence.
(d). An agreement and
understanding that all or some of the shareholders will physically participate
in the conduct of the business.
(e). There should have been
an understanding that the persons investing in shares in the company would be
appropriately remunerated by way of salary and perquisites with a right to
participate in the management of the company.
(f) The members should hold some
proprietary right,
(g) Shareholding should be equal with minor variation.
(h) A clause or clauses in the articles of association of the company signifying either expressly or impliedly that the business is run on the lines of partnership.
(i) Complete restriction on transfer of shares to outsiders to indicate the continuity of trust and confidence among the shareholders.
(j) To appoint the directors on the basis of shareholdings of members of each family or set of associates.
These are only illustrative and not exhaustive. The Court has to decide the matter on the particular facts and circumstances of each case.
There was no dispute that the company was found by the members of J and K families. The shareholding was not equal between J and K. As already noticed there was a split in the J group and R-3 stated that there was no partners hip formula in the instant case. It was only when the shareholding was equal, a possible inference could be drawn that there were symptoms of partnership. Further, it was not the case where prior to the incorporation of the company, the business was run on partnership basis. It was for the first time, the company was incorporated straightaway under the provisions of the Act nor it was the case of the parties that any of the parties were conducting the business analogous to the business of the R-1 company prior to the incorporation. Altogether it was a new business, not undertaken by any of the members previously. It was only established for the purpose of supply of rubber rings to HIL which was the main principal component for manufacture of A.C. Pressure Pipes. There was also no agreement which was forthcoming between the parties to the effect that the business shall be conducted on the lines of the partnership and no such understanding could be culled out from the facts of the instant case. The memorandum of articles of association of the company did not contain any clauses suggestive inference of partnership. Even the directors were not elected on the basis of shareholdings. Initially there was five directors out of which only one director was from K group. Even in 1987 when there were six, P-1 was only the director on behalf of K group. All that could be said was that the members of two families formed the private limited company. There was also no stipulation with regard to the representation of the directors from each family. Even in the articles of association, no such understanding was contained nor could it be inferred from the reading of the various clauses of the articles of association. Clause 9 of the articles of association empowered the board absolute and uncontrolled discretion to refuse to register any transfer of the shares and it shall not be required to give any reasons. Further under clause 10 any share may be transferred by any member to any other member or his wife or husband of another member, etc., by which it only went to show that a member was free to transfer the shares of any member or the relations of the members as stipulated therein and in such cases of transfer, the power of refusal given to the board under article 9 shall apply to any of such transfer. Therefore, even if a member wished to transfer his shares to other members, the decision of the board was final and uncontrolled discretion was vested with the company to refuse to register the transfer without giving any reasons. Under clause 7, the number of directors of the company shall not be less than two, not more than nine. Thus, it was seen that the power of a transfer by a member was not automatic and that there was no stipulation in the articles of association that a director should be appointed from K Group or J Group. There was also no stipulation with regard to the participation in the management of the company by the members of both families. Though, P-1 and R-9 were submitting that it was a partnership concern having joint participation in the management, no such evidence was forthcoming except stating that P-1 and R-9 used to guide the management of R-1 company and decisions were being taken after consulting them. P-1 and R-9 were the directors apart from the other directors. It was sought to be contended that there was always an implied understanding that the shareholding of K and J family should be in the ratio of one-third and two-third In the absence of any positive evidence, it was not possible to hold that the shareholding was in the ratio of one-third and two-third Of course, in the evidence, it was brought out that whenever the share capital was raised the shares were allotted in the ratio in which they were holding earlier, but that could not be construed as a determinative factor for treating R-1 company as a partnership firm. Evidence was also adduced to say that even other companies established by the K and J family, the shareholding was in the ratio of one-third and two-third; however, that could not be taken into consideration inasmuch as the holding in other companies could not form basis for the holding in the present company. Moreover, the evidence adduced on behalf of P-1 and R-9 did not indicate that there was an understanding or agreement to the effect that the shareholding of K should always be one-third at the level of incorporation and also at the points when the shareholdings were increased from time to time. Even assuming that the shareholding of the K family and J family was 30 per cent above and 60 per cent above respectively, that situation by itself was not a conclusive proof that it was a partnership concern. Having regard to the wide powers under section 402, very rarely would it be necessary to wind up any company in a petition filed under sections 397 and 3 98. The powers which are now exercised under section 402 of the Act were hitherto being exercised by the Courts and now they are being exercised by the CLB. Therefore, applying the principles settled in catena of decisions, the plea of the P-1 that the company was ostensibly incorporated under the provisions of the Company Law and that in substance it was a partnership, had to be rejected
AS REGARDS OPPRESSION/MISMANAGEMENT
The oppression is the core element to be proved and the nature of oppression to be tested in the context of 'cause for winding up'. But it has to be remembered that the provision is intended to avoid winding up and to mitigate and alleviate oppression. The relief under section 397 is geared to help the members who were oppressed The relief under section 398 is geared to save the company and it is in the interest of the company alone and not to any particular member/members. The right of members to apply under sections 397 and 398 is hedged in with certain restrictive conditions. This is to avoid frivolous applications from dissatisfied members approaching the Court (now the CLB). The provision regarding member/members having one-tenth share capital of the company alone can file applications under sections 397 and 398 is intended to avoid frivolous petitions. Of course, under section 399(4), it is provided that the Central Government may authorise any member or members of the company to apply to the CLB for relief, if in its opinion circumstances exist which make it just and equitable to do so.
The expression 'oppression' and 'mismanagement' which are the basic and foundational concepts in the section are left by the Parliament without defining them. When once it is left without definition, the task of the Court is difficult and more responsible. The word 'oppression' is a chamelionic word and it changes its colour, content and form from time to time, place to place, event to event, depending on the circumstances of the case. Therefore, no general frame can be made to this word confining its limits. Hence, the oppression has to be made out on the facts and circumstances of each case. The word 'oppression' denotes the exercise of authority or power in a burden-some, harsh and wrongful manner, or unjust, cruel treatment or the imposition of unreasonable or unjust burdens, in the circumstances, which would almost always entails some impropriety on the part of oppressor. Naturally, the Court will always incline to wade through precedents to find out and to assign the correct meaning of these two words 'oppression 'and 'mismanagement' in the context in which they are used Certainly, the Courts have to decide on the facts of each case as to whether there is a real cause of action under sections 397 and 398.
Under section 397, the court has to be satisfied that the affairs of the company are being conducted in a manner oppressive to any member or members. Therefore, the acts of oppression have not only to be alleged with sufficient precision, but they must be proved to the satisfaction of the Court. In a petition under sections 397 and 398, it is to be specifically pleaded and established by the party not only the existence of circumstances warranting winding up of the company under the 'just and equitable' clause, but also it should be further established that winding up order if passed would act adverse to the interest of the shareholders. Further, when this clause is invoked, there must be material to show that it is just and equitable not only for the persons applying for winding up but also to the company and all its shareholders. Even in certain cases, violation of statutory provisions was held to be not oppressive act warranting interference under section 402. In the instant case, it was already found that P-1 had notice of meetings, but deliberately he failed to attend the meetings. Therefore, the contention that P-1 had an interest in the company and that he was willing to purchase the shares had the offer for additional share issue had been made to him, could not be accepted R-9 did participate in the meetings and he was aware of the increase of the share capital and intentionally did not contribute. R-9 also accepted that after resignation from H.I.L. he started devoting his time for Nucon as it was in losses. It was also noticed that various powers were given to R-9 in respect of Nucon Company and also the documents and records were handed over after he took over. Even though his disinterestedness was not directly established, the fact remained that the decision for additional share capital was taken in the meeting held on 26-11-1985 and other meetings, he failed to respond Therefore, it was to be only presumed that he was not interested Moreover, the way in which he initiated the litigative process from the alleged letter dated 16-8-1985 it was established that he was not coming with true facts. Hence, the contention that R-9 would have purchased the additional shares had he been offered could not be swallowed with confidence.
Further enhancement of capital is a purely an internal administration of the company and Courts do not interfere in the normal course. When the resolution was held to be valid, it would not be in the fitness of things to construe that there was no genuine requirement. It could not also be said that R-1 company could have taken a decision to go for loan from the financial institutions or sold some of its assets rather than increasing the capital because, the decision vested with the board of directors which could not be scrutinised when it was found that valid resolution was passed in accordance with the provisions of the Companies Act and also the articles of association. It was found that proper notices were given for Board meetings and minutes were properly drafted. When there was no response for the offer for additional shares from P-1 andR-9, the shares were allotted to R-3 and his family members. Therefore it could not be said that subscription of additional capital was mala fide. According to, P-1 and R-9 that whatever was brought by R-3 as an additional share-capital did not remain with the company for two days and the amount came back to their hands within two days of the transaction. It was also their case that extention of time granted to the shareholders to subscribe to the additional share capital upto 15-12-1984 was only imaginary as by 1-12-1984 R-3 and his family members had already sent the cheques for Rs. 5 lakhs for additional shares and the amount was brought into the accounts of R-1 company and the amount was also paid to D.P.P.L. for purchase of machinery and part of amount was also sent to the bank towards the liquidation of the over-draft amount.
It was not in dispute that R-3 and his family members had paid the amount of Rs. 5 lakhs which he obtained from Poddar Company and it came to the records of R-1 company on 30th November and again on 1st/2nd December, cheques were issued to R-3, and his family members on the directions of D.P.P.L. It was also in evidence that R.M. Trading Company wanted to advance the amount to R-3 and since they had no account in Hyderabad, it requested D.P.P.L. to advance the money as D.P.P.L. had to receive the amounts from R-1 company, it directed the R-1 company to issue cheques in favour of R-3 and his family members and finally it was in evidence that the amount was also paid by R.M. Trading Company to D.P.P.L. company and R-3 and his family members also paid to R.M. Trading Company. By this transaction, P-1 and R-9 tried to submit that it was purely a bogus transaction and the company did not receive any physical benefit and it was only a paper transaction. Though the contention appeared to be appealing at the first blush, but a deeper scrutiny would reveal that the contention had no merits. It had been the case of R-3 throughout that the amount brought in by him towards the share capital was most insufficient for purchasing the various machineries. Only part of the share capital was paid to D.P.P.L. towards the purchase of Extruder, etc. But on the other hand, the machineries were more than Rs. 15 to 20 lakhs were purchased from other companies in the country. It was his case that machinery worth more than Rs. 20 lakhs was purchased during that period This statement was never contradicted by P-1 or R-9. Thus, it was to be held that not only the machinery from D.P.P.L. was purchased, but also various other machineries was purchased from outside agencies with the funds raised by R-3. Therefore, it was not as if only one transaction of purchase was made from D.P.P.L., but the several other transactions were made with regard to the purchase of machinery from other companies. Therefore, it could not be heard to say that the capital alleged to have been brought by R-3 was only on paper and there was no real transaction in substance. It was also the case of P-1 and R-9 that when once the company had already been contributed by R-3 and his family members, there was no necessity to extend the date in the guise of extended offer dated 5-1-1985 to the shareholders and it made a belief that arrangement was purely planned by R-3.
The contention that since the capital had already been subscribed by R-3 and his family members, by 30-11-1984 and the same was utilised, there could not have been any further offer to any other member, could not be accepted In fact, in spite of another offer given to the members and in the absence of response the decision was taken on 24-2-1984 only to allot the shares to R-3. The contention on behalf of R-3 was that if there had been any subscription of the capital by P-1 or R-9 and their respective family members, then the value of the shares that would have been purchased by P-1 and R-9 could have been returnedtoR-3. The other contention was also raised to the effect that the alleged family settlement was a farce and no such family settlement had taken place and the documents were introduced by R-3 in a most suspicious circumstances and that R-3 had manipulated these documents to suit his convenience. It was true that number of documents were introduced by R-3 stating that there was a family settlement and that P-3 also had written to P-1 for settlement of the accounts and that there was private agreement between P-3 andR-9 to the effect that K Group will support R-9 in their efforts to fight against R-3. One thing was clear, that P-1 had reconciled to settle his accounts and P-1 and J family submitted to the mediation and arbitration of KT. It was also evident from the letter of KT that a settlement was arrived and payment schedule was to be finalised At this point of time, entire exercise was blown off. Therefore, it had to be seen that there was some steps towards the settlement of the accounts between K and J families. But, that was not a much relevant factor for deciding the issue. Therefore, in view of the findings recorded above, it could not be said that R-3 acted in a manner oppressive to other shareholders. Normally oppression is alleged against majority shareholders by the minority shareholders. But, in the instant case it was turned to be otherwise. The oppression was now being alleged by majority shareholders (prior to additional share capital) namely P-1 andR-9. As already stated the genesis appeared to be not that the meetings were not being conducted, notices were not being issued, but P-3 was not properly accommodated after his return in 1982 from Saudi Arabia. Even this was confirmed by R-9.
The company had been running right from 1987 after the company petition had been filed and the issue of lack of probity had not been established by any proper evidence. It was also not established that the company had been not functioning in accordance with the provisions of the Companies Act and that the situation warranted the winding up of the Company on just and equitable ground It is not open for the court to interfere with the management and administration of the company in each and every issue, but it could only interfere when the company has been acting to the detriment of the interest of the shareholders in general Further, it had to be seen whether R-3 had acted in a manner detriment to the interest of the other shareholders or he changed the set up of administration after he became the majority shareholder. Admittedly, P-1 andR-9 continued to be the directors even after the majority shareholders and they were being invited to participate in all the meetings and affairs of the company. It was not as if they were completely excluded from the management of the company. On the other hand, P-1 never attended meetings after 31-3-1983. Therefore, even after the additional allotment of shares in favour of R-3, it could be said that the position of P-1 and R-3 changed in a manner prejudicial to their interest or their members. The genesis took place when P-3 was not properly accommodated in 1982 when he returned back from Saudi Arabia and the crisis which was brewing from 1982 took its deep route in 1985 when P-3 was withdrawn from the Board of A.R.I.L. This lead to the filing of the suit by P-1 and exchange of letters between P-1 and R-3 and simultaneously the correspondence was started by R-9 with R-3. Even though the additional issue was never focal issue, yet it was made the basic issue in the Company Petition, for sustaining the alleged acts of oppression. Even otherwise what was sought to be established was that P-1 and R-9 in their capacities as directors and not as shareholders were subjected to oppression. That is not the requirement of law. Hence grounds urged for establishing oppression on the part of R-3 had not been made out. AS REGARDS WHETHER AFFAIRS OF THE COMPANY WERE CONDUCTED IN A MANNER PREJUDICIAL TO THE INTEREST OF THE COMPANY.
The company being a private limited company, public interest may not fall for consideration. If it found that the affairs of the company are being conducted prejudicial to the interest of the company, the Court may with a view to bring an end or preventing the matters complained of or apprehended make such an order as it thinks fit. Therefore, section 398 aims at maintaining the public interest and the interest of the company unlike section 397 which protects the interest of the shareholders. The section is very clear that the Court is vested with the power to make orders as it thinks fit in order to bring an end to the dispute or preventing the matter complained of or apprehended
In the instant case, the petitioner had categorically stated that the R-3 had been misusing his position and mismanaging the affairs of the company and that it was a fit case where appropriate directions should be issued directingR-3 to sell his shares to P-1 andR-9. On the other hand, it was the case of R-3 that there was no misuse whatsoever and that P-1 andR-9 had been creating hurdles in the proper running of the company. They subjected the company and R-3 to unending litigation. It was also the case of R-3 that if this type of attitude was adopted by P-1 and R-9 the affairs of the company would not be conducted in the best interest of the company. Admittedly, there was no public interest involved in the instant case. The only issue that had to be considered was whether the affairs of the company were being conducted in a manner prejudicial to the interest of the company. As narrated in the preceding paras, P-1 ignited an issue alleging oppression and mismanagement under sections 397 and 398 andR-9 came to the support of P-1 by stating in his counter that he was supporting P-1.
The principal participants in the dispute were P-1, R-9 and R-3. But, now in view of the support which was being extended to P-1 by R-9, there remained only two participants in the field namely P-1 and R-9 on one side and R-3 on the other side. On account of personal differences between P-1, R-9 and R-3, the interest of the company could not be allowed to be sacrificed even though it was a private limited company. The way in which P-1 had conducted himself in initiating the matter in the guise of non-receipt of notices of board meetings, general meetings and minutes after a silence of 18 months and that too after filing a suit before the Calcutta High Court, only established that he had no bona fide interest in the affairs of the company. Similarly, R-9 could not be said to evince any interest as he had been devoting full time in another company, after his resignation from the H.I.L. in February, 1985.
It was also clear case of P-1 and R-9 that R-1 company was conceived by them for benefit of their sons namely P-3 and 'HJ' after their education. The case of P-1 was that his son was not properly fixed after 1982 in R-1 company and that son of R-9 was suitably accommodated in and therefore P-3 had to eke out his livelihood and hence P-3 established A.P.P.L. andalso RE. It was also in evidence that A.P.P.L. had been producing rubber rings and supplying to H.I.L. which was hitherto being supplied by R-1 company P-1 was also holding a very highest position in the H.I.L. as President. Therefore, under these circumstances, it could not be said that P-3 and R-9 could the function themselves in the interest of the company. It was also in evidence that criminal cases erupted between R-3 and R-9. It was also in evidence that K family represented by P-1 and P-3 and J family represented by R-3 and R-8 consented for arbitration of 'K' for settlement of the accounts. It was also noticed from the letter which was written by R-3 to P-1 in response to the letter of the letter dated 17-12-1985, wherein R-3 had not only expressed dissatisfaction about the fake allegations made against him including non-receipt of various notices, but also stated that P-1 had utilised some of the information from the company for his personal benefit to the detriment of the interest of the R-1 company by assisting his son P-3 to establish a rival business.
It was manifest from the records that P-1 and R-9 were agreeable for settlement of their respective shares, but the dispute was with regard to the value of the shares. In those circumstances, it could be safely concluded that P-1 and R-9 were not prepared for participation in the affairs of the company. But on the other hand, an unending litigation was created by P-1 having the blessings of R-9. Every notice, minutes, certificate of posting and postal registration was being sought to be subjected to unending correspondence and the relations between P-1 and R-3 were strained as could be seen from the various letters exchanged between the parties. So also R-9 could not be relied on that he would play safe game with the company in view of the conduct which he had exhibited before the Court.
The position of directors in the company is one of trust and confidence. They stand in a fiduciary capacity and they are duty bound to conduct the affairs of the company in the best interest of not only of the shareholders, but also the company as well, which is manifest from sections 397 And 398. Lack of probity in the conduct of the affairs of the company by the shareholders in control may be a suggestive inference of functioning of such shareholders to the prejudice of other shareholders or company. But, at the same time the directors are to devote their efforts and exercise their powers, in the interest of the company and the shareholders within the framework of Memorandum and articles of association. Otherwise their actions are ultra vires. They cannot usurp the powers not vested in them nor can they misuse the powers for personal aggrandisements. Thus in Company Law the directors enjoy a very important responsible position making themselves answerable to the shareholders and the company. Therefore they are not only expected to exhibit trust and transparency as directors while managing the company, but also it is all the more necessary to maintain the same position among the directors themselves. Developing suspicion on one director(s) or counter suspicions are not conducive in the general interest of the Company, which ultimately leads to allegation of oppression and mismanagements.
Section 402 has been engrafted with wide discretionary powers to ensure smooth functioning of the companies. The Court is entitled to grant the relief as it thinks fit in the interest of the shareholders and company. That is the reason for both ailments under sections 397 and 398, the treatment is common under section 402. The Court is empowered to pass order both as a curative and preventive measures if it finds that the affairs of the company are being conducted detrimental to the interest of the company, for bringing an end or for preventing the matter complained of or apprehended
The Court is interested in the affairs of the company as a whole and the personal quarrels are wholly irrelevant. The interest of the company cannot be at the altars of bickerings among the directors for their personal ends. It was also understood that in later years, R-9 resigned the directorship of the company. The company had already faced litigation for over a decade for the reasons as set out earlier. The affairs of the company had not been conducted nor would be conducted in future in the interest of the company. Apprehension of stalemate was writ at large. Consequently, the situation had arisen that company could not function in the hands of P-1, R-9 and R-3 jointly. Three powerful horses yielding strength in different directions cannot bring the chariot safely to the destination. Therefore, the company should be run either by R-3 or by P-1 and R-9 jointly. It could be safely concluded that a quietous could not be brought in the company unless the matters complained of or apprehended were resolved once for all and the Court is fully empowered to meet such a situation in the interest of the company.
In sub-section (2) of section 398 it is clearly stated that if the Court finds that the affairs of the company are being conducted as contemplated under clauses (a) and (b) of sub-section (1), or likely that the affairs of the company will be conducted in a manner prejudicial to the interest of the company, the court may pass orders curative, preventive and prohibitive in respect of existing and apprehended acts prejudicial to the interest of the company. There need not be any oppression under section 398.
The directors are expected to function in the best interest of the company and lack of probity inter se directors is cancerous element for the phased destruction of company. Though, in the instant case, the oppression by one group of shareholders, to the other group of shareholders, was not established and the lack of probity was not established among the shareholders, but, yet, it was a case where the conduct of parties could not put the company on safe rolls. Therefore, when the affairs were not being conducted by the parties in the interest of the company, it is also open for the Court to pass appropriate orders. The company had been running throughout by R-3 and after Company Petition had been filed, for some time by the Interim Administrator and now it was again being run by R-3 as managing director. Though the P-1 did not ask for direction for selling of shares of R-3 to him it was only after filing of affidavit by R-3 reply to the counter affidavit of R-9, a further affidavit was filed by P-1 in which he had stated that P-1 was ready and willing to purchase the shares so as to save R-1 company from the clutches of R-3. R-9 also in his counter did not say that he was willing to purchase the shares, but only in his rejoinder to the counter of R-3, he stated that direction may be issued to R-3 and his family members to share their shareholding at a price as may be determined by the Court. Thus, P-1 and R-9 never expressed their readiness to purchase the shares. R-3 had been managing the company for several years and also presently he was managing the company, it was desirable to offer the management of the company to R-3 by passing appropriate directions.
RELIEF
Keeping in view the above factors, the situation prevailing as on the date of the filing of the Company Petition it was to be held—
(i) The value of the shares held by P-1, P-2 and R-9 and the members of his group viz., his wife and son and R-3 and members of his group viz.., R-4, R-5 and R-6 shall be assessed by competent Chartered Accountant.
(ii) The value of the shares possessed by P-1 and P-2 shall be assessed as on 30-6-1986 and the value of the shares possessed by R-9 and his members of family shall be valued as on 31-7-1986. The value of shares held by R-3 and members of his family viz., R-4, R-5 and R-6 shall be assessed as on l-l-1985 i.e., prior to the allotment of additional shares. Though the value of shares were to be normally reckoned on the date of presentation of Petition, since P-1 and R-9 were agreeable for settlement during respective periods, the dates were fixed accordingly.
(iii) The share held by P-1, P-2, R-9 and his wife and son after so valued as directed above shall be offered to R-3, who would give consent for purchase of the same within two weeks from the date of such offer. He would pay the amount to the respective shareholders within three weeks of consent and necessary transfer formalities would take place as per law.
(iv) In case R-3 failed to purchase the shares as offered above, the value of shares of R-3 and his family members namely R-4, R-5 and R-6 should be as assessed by the competent Chartered Accountant as on 1-1-1985. The said shares should be purchased by P-1, and R-9 either jointly or individually. The amounts should be paid to R-3, R-4, R-5 and R-6 within three weeks and other formalities should be completed as per law.
(v) The value of the shares of the parties referred to above should be assessed on the basis of paid-up share capital of Rs. 5 lakhs divided into 50,000 of Rs. 10 each.
(vi) The shares held by P-3 should not be disturbed as the matter relating to withdrawal of his nomination was sub judice before the Calcutta High Court.
Ramashankar Prosad v. Sindri Iron Foundry (P.) Ltd AIR 1966 Cal. 512, ShivKumarv. State of Haryana [1994] 4 SCC 445, Shoe Specialities (P.)Ltd v. Stridewell Leathers (P.) Ltd [1995] 82 Comp. Cas. 836 (Mad.), Smt. Kanak Lata Ghose v. Amal Kumar Ghose AIR 1970 Cal. 328, Mrs. Achamma Thomas v. E.R. Fairman AIR 1970 Mys. 77, Parmanand Choudhary v. Smt. Shukla Devi Mishra [1990] 67 Comp. Cas. 45 (MP), A.E.G. Carapiet v. AY. Derderian AIR 1961 Cal. 359, G.H. Hook v. Administrator General of Bengal AIR 1921 PC 11, Satyadhyan Ghosal v. Smt. Deorajin Debi AIR 1960 SC 941, Y.B. Patil v. Y.L. Patil AIR 1977 SC 392, Madugula Jermiah, In re AIR 1957 AP 611, Bahadur Singh v. MCD 1973 Punjab LR (D) 145, Mrs. Om Prabha Jain v. Abnash Chand AIR 1968 SC 1083, Ram Saurp Gupta v. Bishun Narain Inter College AIR 1987 SC 1242, Davuluri Venkata Hanumantha Rao v. Kasinaddhuni Chengalvarayudu AIR 1954 AP 25, Manchineni Venkayya v. Manchineni Seshayya AIR 1954 AP 29, Allam Gangadhara Rao v. Gollapalli Ganga Rao AIR 1968 AP 291, Ebrahimi v. Westbourne Galleries Ltd [1972] 2 All ER 492, Yenidje Tobacco Co. Ltd, In re [1916] 2 CL 426 (CA), Hind Overseas (P.) Ltd v. Raghunath Prasad Jhunjhunwala AIR 1976 SC 565, Loch v. John Blackwood Ltd 1924 AC 783 (PC) Baird v. Lee 1924 SC 83, D. Davis & Co. Ltd v. Brunswick (Australia) Ltd [1936] 6 Comp. Cas. 227 (PC), Rajahmundry Electric Supply Corpn. Ltd v. A. Nageshwara Rao AIR 1956 SC 213, Mohan Lal v. Grain Chamber Ltd AIR 1968 SC 772, Mrs. Bacha F. Guzdar v. CIT AIR 1955 SC 74, Bird Precision Bellows Ltd, In re [1984] 1 Ch. 419 Nourse, G. Kasturi v. N. Murali [1992] 74 Comp. Cas. 661 (Mad.), Kilpest (P.) Ltd v. Shekhar Mehra [1996] 87 Comp. Cas. 615 /10 SCL 233 (SC), C.N. Shetty v. Hillock Hotels (P.) Ltd [1996] 87 Comp. Cas. 1 /12 SCL 340 (AP), Elder v. Elder & Watson Ltd 1952 SC 49, George Meyer v. Scottish Co-operative Wholesale Society Ltd 1954 SC 381, Scottish Co-operative Wholesale Society Ltd v. Meyer [1959] 29 Comp. Cas. 1 (HL), H.R. Harmer Ltd, In re [1959] 29 Comp. Cas. 305 (CA), Shanti Prasad Jain v. Kalinga Tubes Ltd AIR 1965 SC 1535, Bellador Silk Ltd, In re 1965 (1) All. ER. 667, Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd AIR 1962 Cal. 127, Mohta Bros. (P.) Ltd v. Calcutta Landing & Shipping Co. Ltd [1970] 40 Comp. Cas. 119 (Cal.), Needle Industries (India) Ltd v. Needle Industries Newey (India) Holding Ltd [1981] 51 Comp. Cas. 743 (SC), Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton & Jute Mills Co. Ltd [1964] 34 Comp. Cas. 777 (Guj.), Thakur Hotel (Simla) Co. (P.) Ltd, In re [1963] 33 Comp. Cas. 1029 (Punj.), Tea Brokers (P.) Ltd v. Hemendra Prosad Barooah [Company Appeal No. 186 (Cal.) of 1971], Shooter, In re [Company No.00789 of 1987] and Broadhurst, In re [Company No. 3017 of 1987]
K. Srinivasa Murthy and Vedanatham Srinivasan for the Petitioner. S.B. Mukherjee, Y. Ratnakar, S.K. Kapoor, S. Ravi, and Mahmood Ali Raghunandan Rao for the Respondent
1. The petition is laid under sections 397 to 399 of the Indian Companies Act, 1956. It has been orbiting for over a decade. Final curtain was laid by this Court by hearing the matter on day-to-day basis. Voluminous documentary evidence and enormous oral evidence was pressed into service. The following reliefs were claimed in the company petition:
(i) Declare the induction of the Respondent No. 7 as additional Director on to the Board purported to have been made at the Board meeting held on 15-1-1987 as void and illegal and injunct the said respondent No. 7 from exercising any power or authority as a Director of the Respondent No. 1 company.
(ii) Declare that there were no Annual General Meetings held on 18-12-1985 or 18-10-1986 and the Board Meeting held on 9-11-1985, 11-11-1985 and 20-8-1986, 20-9-1986, if there were any such meeting or meetings and that each of the said meetings are illegal and the resolutions if any passed thereat are void and inoperative.
(iii) Declare that the purported allotment of further/fresh shares in the year 1985 or 1986 if any, by the Board of the respondent No. 1 is void, illegal and to injunct the respondent Nos. 2 and 3 as Secretary and Managing Director from permitting any rights of such allottee shareholders under such further/fresh allotment including the voting right in respect of such further/fresh allotted shares.
(iv) Declare that the respondent No. 3 is not the Managing Director of the Company and/or in the alternate to terminate his appointment as Managing Director on the ground that he has shown himself to be unfit to be entrusted with the management of the company.
(v) Declare that the respondent No. 2 is not the Secretary of the Company and in alternate to terminate his appointment as the Secretary on the ground that he has shown himself to be unfit to be entrusted with such functions.
(vi) Restrain the respondent Nos. 2 and 3 ie., Secretary and Managing Director by an injunction from giving effect to any resolutions of the Board of the company at the meeting purportedly to have been held on 11-11-1985 and restrain respondent No. 3 from acting pursuant to the power of Attorney said to have been executed in his favour based on the said illegal resolution dated 11-11-1985.
(vii) Give appropriate directions for the convening of the Annual General Meetings of the Company for the year ended March, 1985 and March, 1986 after due notice, and in accordance with the provisions of the Act so that the shareholders of the company may consider and transact such business as may be permitted by law to be transacted at that meeting including the appointment or reappointment or removal of the Directors.
(viii) Appoint a special officer or officers to take charge of the business and affairs of the company and to arrange for running the same till the Board is duly reconstituted.
(ix) A scheme be framed by this court for administration of the company with proportionate representation of the petitioners on the Board in the alternate the special officer be directed to convene and hold and conduct an extraordinary general meeting of the company for the purpose of appointment of Directors.
(x) Give such other directions as this Honourable Court may deem necessary to put an end to the matters of mismanagement and oppression referred above and to ensure the appropriate conduct of the affairs of the company in accordance with the understanding of the joint participation and management of the affairs of the respondent No. 1 and the foreign joint venture company and in accordance with the provisions of the Act and the Articles of Association of the Respondent No. 1 company.
2. The averments in support of the petition can be narrated in nut-shell for proper appreciation of the case:
The Deccan Enterprises Private Limited (D.E.P.L.) is the 1st respondent Company (for short R-1) was incorporated on 15-4-1966 under the provisions of the Companies Act with Registered Office at Rastrapathi Road, Secunderabad. The authorised capital of the Company was Rs. 10 lakhs and issue capital was Rs. 5 lakhs divided into 50,000 shares of Rs. 10 each. The petitioner No. 1 Shri R. Khemka (for short P-1) and Petitioner No. 2 possessed 11,320 of shares and thus they held more than l/10th share under the 1st Respondent Company. The 7th Respondent Shri S.G. Jalan (for short R-7) was sought to be inducted to the Board of Directors of the 1st Respondent Company in January, 1987 and the validity of such appointment is being questioned. P-1 and the 9th Respondent Shri R.N. Jalan (for short R-9) conceived the idea of setting-up of a personal business for himself and R-9 as a partnership in recognition of their close and cordial relations with a view to provide opportunity to the children of two families namely Khemka and Jalan families. During 1965 the son of P-1 and R-9 were students and they intended to hand over the business after they completed their studies. Therefore, the company was promoted in April, 1966 as a Private Limited Company, but in fact it is a partnership concern inter alia for manufacturing of rubber rings. Since its inception the P-1, R-9 were the Directors. Respondent No. 3 Shri O.P. Jalan (for short R-3) was brought on Board for looking after the affairs of the Company as P-1 and R-9 were already pre-occupied with the employment in the management of the large public limited company namely Hyderabad Asbestos Company Limited (later on re-named as Hyderabad Industries Limited) (for short HIL). It was the understanding that the R-3 will function under the guidelines of P-1 and R-9. All the major decisions like capital expenditure, increase of share capital, financial arrangement etc. were being done with the consultation of these two persons. Thus, it is the case of the petitioners that two groups namely Khemka Group and Jalan Group were to function as partners and reposed implicit faith in each other. It is the case of the petitioners that the proportionate of shareholdings in the company has always in the ratio of 1/3 and 2/3 as between Khemka Group and Jalan Group and it was maintained whenever the share capital was increased. The son of P-1 is the 11th Respondent Shri Mahesh Khemka in the Petition and subsequently he was transposed as Petitioner No. 3 (for short P-3). After completing the Engineering Degree he was appointed as Executive Director of the R-1 company for looking after the affairs of the company. It is the case of the petitioners that the P-1 and R-9 had rendered invaluable technical management and support for the improvement of the company. There was always mutual consultation whenever major decisions were being taken. The Company grew leaps and bounds and it bagged Export Awards continuously for Foreign Exchange earnings. The company had built-up large reserves and had been getting huge profits with the cooperative efforts of Khemkas and Jalans (for Short 'K' and 'J' group). However, this prosperous trend continued upto 1982-83. It is the case of the P-1 that he was regularly being furnished with the Agenda Minutes of the Board and A.G.M. of the company and he used to sign the balance sheet. However, this practice continued till J group conceived ways and means to pave the way for exclusion of K group in or around 1983. The scheme could not be understood by the petitioners till March, 1984. The Company had established good commercial links with the foreign buyers and has also been rendering technical know-how to the foreign companies. The Company acquired joint-venture project for the manufacture of similar products in Saudi Arabia by investing 20% equity interest in Amiant Rubber Industries Limited (for short ARIL) in Saudi Arabia. Thus, the P-1 and R-3 became directors of the Foreign Company ARIL and P-3 was the General Manager of ARIL in 1977. Accordingly, P-3 shifted the residence to Saudi Arabia for supervising construction and commission of the project till 1982. After P-3 returned in 1982 from Saudi Arabia, he was expecting that he would be associated with the management of the R-1 company as Executive Director, when the Company was in a very prosperous and sound state of affairs. However, the P-3 was not inducted on the Board on his return from Saudi Arabia. Thus, the disproportionate management took its seeds in the administration of the company. In March, 1985 in furtherance of the idea of J group to oust K group from the joint venture company informed the K group not to deal with any longer with P-3 on behalf of the R-1 Company. Thus the humiliation and harassment was being caused to P-3. It is the case of the petitioners that from about 1983, R-3 of J group unilaterally stopped sending the monthly reports, statement of affairs, notices, minutes of the meetings or AGM. They did not receive any such notices or the audited annual accounts from 1983 and thus the K group was completely kept in dark and it was being surreptitiously excluded from the management and participating in the affairs of the company for the benefit of the J group. The scheme of exclusion was known by March, 1985 when a resolution was passed on 21-8-1984 interfering with the Directorship of the P-3 on the Board of Joint venture company ARIL. Under the said resolution, nomination of the 3rd petitioner was withdrawn from the Board of joint-venture company, Saudi Arabia and the said company removed the P-3 in the middle of 1985. Thus, the expectation of K group that the 3rd petitioner would suitably accommodated in the R-1 company and also in the joint venture company became futile. Even then, the petitioners were made to sign the balance sheet and statement of accounts for 1982-83 on the assurance of proper management participation held out by R-9. But, however, the J group continued to work against the interest of P-3. Even though the son of R-9 was accommodated in a suitable management capacity in a position in another company, yet the P-3 was kept in lurch. During March, 1985 R-9 also left the employment in the Public Limited Company HIL. Under these circumstances, P-1 addressed a letter dated; 25-3-1985 expressing his anguish over the affairs of the company and filed a suit in Calcutta High Court challenging the resolution dated 21-8-1984 withdrawing P-3 from the Board of Joint venture company and the same is pending. It is stated that the said resolution is illegal and invalid and no notice of meeting dated 21-8-1984 was issued to K group. Thereafter, R-3 assumed the role of representation of the R-1 company on the Board of Joint Venture company in Saudi Arabia and continued to enjoy the extensive and rich benefits. During the year 1984 also it is the case of the petitioners that no notice of the Board meetings were sent to P-1, no AGM was held, no notices of the AGM which should be held statutorily in 1984 was sent to the petitioners. In effect it is their case that upto January, 1985 no notices were received by them. R-3 used unfair means and thereby lacked probity and thereby the affairs of the company were conducted in a manner prejudicial to the interest of K group. By letter dated 25-3-1985, the petitioners complained about the non-receipt of the notices etc. However, by letter dated 30-4-1985, the R-3 falsely alleged that the notices were sent. It is only along with the letter dated 30-4-1985, the annual statement and balance sheet of 1984-85 were sent to him. But, it was not disclosed as to when the balance sheet was placed before the Annual General Meeting and how the notices of the meetings were sent to all the shareholders. None of the K group shareholders received the notices. However, after a lapse of 18 months for the first time, notices for two board meetings scheduled to be held on 27-6-1985 and 8-7-1985 were sent. For 1984-85 Annual General Meeting no notices were received and there has been statutory violation of holding minimum four meetings of the Board for the year 1984-85. On account of the differences between R-3 and R-9, R-2 and R-3 started excluding R-9 of J group from the participation in the affairs of the company and thus R-9 and his wife and children isolated. R-9 also did not receive the notice of any Board in the year 1984-85 or Annual General Meeting. This was brought to the notice of the R-2 and R-3 by R-9 by letters dated 21-10-1985 and 29-10-1985. The petitioner also by letter dated 17-12-1985 hinted R-3 not to attempt to alter the pattern of shareholding. The petitioner also by letters dated 9-2-1986 and 22-10-1986 brought to the notice of R-1 company the violations of the provisions of the Companies Act. The Registrar of Companies (R.O.C.) issued a show-cause notice dated 6-11-1986 to the petitioner and other Directors alleging breach of the provisions of the Act and the petitioner by his letter explained the various developments in the company including wrongful exclusion. He also called upon the R-3 to intimate the action taken. It is also the case of the P-1 that even in the year 1986, he received certain notices for Board meetings, but they either reached on the date of the meeting or beyond the date of the meeting making it impracticable to attend the meetings. The Respondent No. 2 Shri V.K. Chemariya, Company Secretary (for short R-2) has also been conspiring with R-3 to keep the K group out of participation. The petitioner was not furnished with the minutes of the meetings nor the audited copy of the balance sheet and accounts. Though the R-2 and R-3 claimed to have held board meetings dated 8-11-1985 and 11-11-1985 at which the accounts and the balance sheet for the year 1984-85 was supposed to have been considered and that the Annual General Meeting was said to have been held in respect of the same on 18-2-1985, no such meeting took place and no notices were issued. Even though the requisition was made to R-3 for copies of the balance sheet and annual accounts for the year 1984-85 and 1985-86, they were not supplied. The notices for Annual General Meeting for the year 1984-85 and 1985-86 have not been issued to any members of the K group. One of the resolutions alleged to have been passed on 11-11-1985 relating to grant of Power of Attorney in favour of R-3 with regard to joint venture company was not passed and no notices of the meeting was issued to the petitioners. On account of calculated silence the petitioners seriously apprehended that fraudulent resolutions were brought on record and R-3 appears to have resorted to unauthorised and wrongful allotment of shares contrary to understanding of proportionate representation. The induction of R-7 as Director was illegal and unwarranted. The petitioner recorded his dissent for such induction. Thus, the petitioners stated that there was a systematic oppression of K group, although they were substantial shareholders of the company. Even R-9 and his relations were persistently excluded from the management. R-3 has been mismanaging the affairs of the company and flouted the provisions of the Act. In the balance sheet for 1983-84 it was shown as if the company had incurred a loss of Rs. 13 lakhs and it was not real and accounts were manipulated. The Company has been lending money to other concerns where R-3 had substantial interest. There was a systematic channeling out of funds by way of lending to related concerns. The income-tax arrears made the authorities to initiate compulsory recovery proceedings. Any further control in the hands of R-2 and R-3 would cripple the company and cause severe loss to the petitioners and other shareholders of both K group and R-9 group. There was a deliberate oppression of the petitioners. Therefore, the petitioners sought various reliefs referred to above.
3. In this regard, it is necessary to note the names of respective parties and relationship which is as detailed below:
P-1 Mr. R.Khemka
P-2 Mrs. Radha Devi Khemka (wife of P-1)
P-3 Mr. Mahesh Khemka (son of P-1)
R-1 Company
R-2 Mr. V.K. Chemariya, Company Secretary.
R-3 Mr. O.P. Jalan
R-4 Mrs. Sudha Jalan (wife of R-3)
R-5 Mr. Vikas Jalan (son of R-3)
R-6 Miss Kavita Jalan (daughter of R-3)
R-7 Mr. S.N. Jalan (brother of R-3 and R-9)
R-8 Mr. S.K. Jalan (father of R-3, R-7 & R-9)
R-9 Mr. R.N. Jalan (brother of R-3 & R-7)
R-10 Mr. Ajay Kumar Ghuwalewala.
R-11 Mr. Mahesh Khemka (Transposed as P-3)
R-12 Registrar of Companies.
4. To the said Company Petition, Counter Affidavit was filed by R-3 on behalf of R-1 and R-3 on 17-7-1987. While admitting that the authorised capital of R-1 Company was Rs. 10 lakhs, it was stated that issued paid-up capital of the Company was Rs. 10 lakhs divided into one lakh shares. The petitioners altogether were having 11,400 shares and not 11,320 shares. R-7 was validly appointed as director in the Board meeting held on 15-1-1987. It was denied that the idea of setting-up R-1 Company was conceived by P-1 and R-9. It was also denied that the Company was promoted though ostensibly private company, but in fact and in effect was a partnership, neither the law permits such arrangement nor the Memorandum and Articles of Association contained any clause suggestive such an arrangement. The 3rd respondent was one of five brothers including R-9 and R-7. R-9 was holding an important executive position in Birla Enterprise HIL. During consultations with Mr. G.P. Birla, he agreed for setting-up of a company for manufacturing of Rubber Rings at Hyderabad as ancillary to HIL. Then R-3 applied for availability of name to ROC on 6-1-1966. The draft Memorandum and articles of association were submitted through letter dated 25-1-1966 and they were approved in February, 1966. The petitioner No. 1 was working as Vice-President of HIL. On coming to know this venture, he approached R-3 and R-9 for investment in the new company and his request was accepted by the family members of R-3. Thereafter other procedures were complied with. There was no agreement that the R-3 should function under the guidelines of P-1 and R-9 and that they would be consulted on all major matters. It was also not true that there was a contemplation to induct son of P-1 (P-3) in the management after completion of his studies. P-1 and R-9 were preoccupied with their employment in HIL, and the question of their participation did not arise. Moreover they did not have business expertise in the products of the R-1 company. The decision of raising share capital was always taken by the board of directors. All other decisions regarding the financial arrangements, marketing were taken in accordance with the settled procedure. R-3 established his name and status in the business circle very soon. He was elected as Chairman of the Chemicals & Allied Products Export Promotion Council in 1984-85. He was the President of All India Rubber Industries Association in 1983-84. He was appointed to the Rubber Board by the Government of India in 1984. It was denied that there was an allotment of shares in the ratio of 1/3rd and 2/3rd to K and J group. There was no such practice with regard to the increase of share capital. It was stated that the petitioners did not subscribe to the further issues. P-3 was never inducted in furtherance of the concept of joint and equal participation in the management. He was inducted to the Board on 1-2-1970 and on 10-3-1973 he was appointed as Executive Director and he resigned the same on 2-4-1977. This was only made to appease the P-1 and P-3 never involved himself in the management of the company. It was denied that the P-1 was guiding the affairs of the Company and that he was advancing huge amounts to the Company. Whatever the amounts advanced were repaid at the request of the petitioner and the loans carried 18% interest. During 1981 the petitioners hatched conspiracy to start parallel competitive business and started withdrawing their monies and by March, 1982, all the monies advanced were withdrawn. In 1982 P-1 got incorporated a Company by name M/s. Andhra Polymers Private Limited (for short APPL) with the object of manufacturing and dealing in rubber products. P-3 and his wife were the Directors in that Company. All the shareholders were members of K family. They tried to entice the know-how of the R-1 company. They also employed the experienced staff of R-1 company in their company. When the R-9 resigned as President of HIL the P-1 was promoted as President. The APPL company floated by P-3 went into production in 1984 and taking advantage of the position of the P-1, the purchases from the R-1 company were diverted to APPL. Thus they were systematically operating to the detriment of the R-1 company. P-3 for some years was employed by the R-1 in its affairs at Saudi Arabia. During that process he gained acquaintances with the foreign companies and started offering the goods produced by Andhra Polymers at lower rates. Thus, they have been acting to the detriment of R-1. The R-1 company was solely managed by R-3 and it has been making strides in all fields. It developed business with various foreign companies in Kuwait, Saudi Arabia, Dubai, Behrain etc. The R-3 took initiative to start the joint venture with ARIL for manufacture of rubber rings and in effect he is responsible for approval of joint venture. P-1 never evinced any interest. The last meeting he has attended was 31-3-1983. Thereafter even though the notices were sent he did not attend the meetings. It was also denied that the company was promoted for the children of P-1 and R-9. It was denied that J group conceived ways and means to exclude the K group and in fact there were no groups at all. It is the case of R-3 that P-1 and R-9 never made any contributions for the joint venture company ARIL and it is the result of his sole efforts. Initially, the P-1 and R-3 were appointed as Directors in ARIL Board, but however, P-1 ceased to be the Director from April, 1978. R-3 was sent to Saudi Arabia in the capacity of Manager. He never upervised the project. He was only trained for a short period, and R-3 also made frequent visits in this regard. After return of P-3 from abroad he was in Board of the Foreign company for some time and there was no understanding that the P-3 will be the Executive Director of R-1 company after his return. It was denied that J group tried to ease out the K group by taking advantage of absence of P-3. In fact P-1 was very much in India. There was no understanding of any proportionate management. The alleged harassment by the R-3 was absolutely incorrect. The P-1 filed a suit in Calcutta High Court and could not succeeded in getting the interim orders. In fact after the return of P-3 to India, the family of the P-1 started two separate business concerns namely M/s Andhra Polymers Private Limited and M/s Ramak Enterprises Private Limited and they were designed to carry on the business as Competitors to R-1 Company despite the prohibition contained in Articles of Association of R-1 Company that no shareholder directly or indirectly concerned or interested in or associated with shall carry on the business in competition with the company. On the other hand, P-1 and P-3 have been committing various acts causing damage and loss to the R-1 company. They diverted the order meant for R-1 company to be supplied to the International Airport Authority. They also started manufacturing the same items as that of R-1 company in violation of the Articles of Association. The HIL started placing orders on Andhra Polymers instead of R-1 Company with the active connivance of the P-1. The allegations that the R-3 stopped sending the P-1 monthly reports, the statement of affairs of the Company or notices or minutes of the Board of Annual General Meeting from 1983 were denied. However, that there was a practice of sending the monthly accounts to all the Directors, but it was only for a short period and it was discontinued being not practicable. The notices of meetings and Annual General Meeting were sent to all the shareholders. As per written request of the P-1 dated 25-3-1985, notices of Board meetings were sent by Registered Post for the meetings held after 25-3-1985. In fact P-1 after starting the competitive business avoiding attending the meeting of the Board of Directors of the R-1 Company and after March, 1983 he did not attend any meeting at all. Petitioners did not choose to attend any meetings from 1983 and they ceased to take any interest as they were busy in the rival organisation. On 21-8-1984 the Board of the R-1 company passed resolution withdrawing the nomination of P-3 from Directorship of the Board of the Joint Venture Company ARIL, Saudi Arabia. The said meeting was held at Calcutta and notices were issued to all the Directors of the Board. Petitioner did not attend the meeting. Subsequently, when the joint venture company in its annual general meeting held on 7-5-1985 proposed to remove P-3 then the P-1 filed a suit in Calcutta High Court and sought for injunction and the same was rejected. Therefore, the joint venture company in its Annual General Meeting held on 7-5-1985 removed the P-3 from the Directorship. It was also denied that the resolution dated 21-8-1984 passed by the Board meeting of the R-1 Company came to the knowledge of the P-1 only in March, 1985. In fact he was aware of the said resolution. He did not choose to attend the meeting. In fact during the year 1983-84 seven meetings took place and notices were sent to all the Directors under Certificate of Posting. Even in respect of Annual General Meeting held on 28-9-1984 the notices were sent on 3-9-1984. Similarly during 1985, four meetings were held. Notices were sent in respect of meetings dated 5-1-1985 and 28-2-1985 under Certificate of Posting and in respect of the meetings dated 25-6-1985 and dated 26-7-1985 notices were sent under Registered Post as desired in his letter dated 25-3-1985 to send the letters by Registered Post. From March, 1983 to July, 1985 P-1 never protested in any manner about the conduct and affairs of the company. By letter dated 25-3-1985 for the first time, P-1 complained of the non-receipt of the notices etc. This itself showed that the P-1 was not interested in the affairs of the company. He could not have kept quite for such a long time. By letter dated 30-4-1985 it was made clear that all the notices of the Board meetings and Annual General Meeting were duly sent to all the shareholders. The Company did not violate any provisions of law. It was admitted that some differences arose between R-3 and R-9, but it was only a family dispute. There was no exclusion of R-9 at any point of time. It was also denied that the notices were not sent to R-9. When R-9 sent a letter dated 21-10-1985 the same was replied by the Company Secretary on 13-11-1985. So also to a letter written to R-3 by R-9 on 29-10-1985, the same was replied on 8-11-1985. P-1 was trying to exploit the strained relations between R-3 and R-9. The letter of P-1 dated 17-12-1985 was suitably replied on 16-1-1986. The show-cause notice issued by the ROC was suitably replied. In the meeting held on 11-11-1985, R-3 was appointed as Attorney to represent the R-1 company in the affairs of the foreign company and this was sent to all the Directors. Even during 1986, six board meetings were held and the notices were sent to the petitioners by Registered post, the allegation that the notices were not received by K group in respect of Annual General Meetings was denied. The draft annual accounts of the company were approved in the meetings held on 8-11-1985 and 11-11-1985. The allegation that the R-3 had manipulated the records was denied. It is the case of R-3 that company has issued further share capital of Rs. 5 lakhs in its board meetings held on 28-2-1985 and the notice for the said meeting was issued on 18-2-1985 and they were served on all the Directors. There was no understanding of proportionate holding of shares. P-1 had already started rival business and he stopped attending the Board meetings of the company. In the Board meeting held on 26-11-1984, it was decided to issue further share capital of Rs. 5 lakhs to meet its capital requirement. The notice for the said meeting was sent to all the Directors on 10-11-1984 and the Board in its meeting held on 26-11-1984 decided to issue further share capital of Rs. 5 lakhs and the notices for the said meeting were sent to all the shareholders on 26-11-1984 asking them to send their applications along with the application money before 30-12-1984. The Board again met on 5-1-1985 and granted extension of time upto 15-2-1985. The notices for the said meeting were sent to all the Directors on 28-12-1984. On 5-1-1985 notices were sent to all the shareholders fixing the last date for receipt of the applications upto 15-2-1985. In the Board meeting held on 28-2-1985 it was resolved to allot further shares to the shareholders who made applications. The notices for the said meetings were duly sent on 18-2-1985, allotment of shares was done in accordance with law. Shares were issued on 4-3-1985, and a return was filed before the ROC on 21-3-1985. The said issue was legal and valid. The allegations of sending unrelated matters in the covers sent by R-1 Company were denied. It is only to evade the receipt of the several communications sent by the R-1 company under Registered post. The Board meeting was held on 15-1-1987 and R-7 was validly appointed as Additional Director. Even though the P-1 indicated dissent, the majority resolution was carried out. The allegation of systematic oppression was denied. The R-3 with his wife and children have been holding 63,934 shares in the company which is 63.93 per cent. The allegations of mismanagement of the company was denied. The allegations of manipulation of books and records were also denied. The reasons for decrease in the profits during 1983-84 was on account of reduction of sales. The reason for reduction of sales was on account of unfair competition by the company put-up by the Petitioners and the worldwide recession in the Export Market. In 1984-85 and 1985-86 the Company incurred losses on account of increase in cost of production and unfair competition. The lending by the Company as on 31-3-1984 was about Rs. 63 lakhs. But, it was denied that the loans were given to the concerned in which R-3 had substantial interest. In fact Rs. 50 lakhs were given to the concerns in which the P-1 was substantially interested. Number of employees of R-1 company were made to resign and join the Andhra Polymers Private Limited. R-3 was never interested in keeping the management in his hands to the exclusion of K group.
5. The 2nd Respondent filed a Memo adopting the counter of the 1st Respondent.
6.
Respondents No. 4 and 5 adopted the Counter of the 1st Respondent.
7.
Respondents No. 6, 7 and 8 also adopted the Counter of the 1st
Respondent.
8. A reply was filed by P-1 to the Counter filed
by the R-3 on 21-9-1987. It was reiterated by P-1 that the Company was
established at the instance of P-1 and R-9. It was also reiterated that the P-1
and R-9 were always guiding R-1 company and they have always been attending the
board meetings regularly. It was also reiterated that it was agreed to have the
share holding in the ratio of 1 /3rd and 2/3rd between J and K groups and
whenever new shares were floated the allotment took place on the basis of the
said ratio only. The alleged share issue of Rs. 5 lakhs in 1985 was illegal.
Some of the instances were also quoted by the P-1 to the effect that he has
been responsible for the export business, on account of his acquaintance with
the foreign companies as he and R-9 held high position in HIL. It was stated
that the joint venture was promoted by them. Various events were narrated which
are not relevant for the purpose of this case. With regard to establishment of
rival business, it was stated that Andhra Polymers Private Limited was
originally intended to take-up the manufacturing of plastic package film. Upto
1984 there was no activities and its commercial activities started only in
1985, in view of the total exclusion of P-3. It was further stated that two
companies namely Andhra Polymers Private Limited and Ramak Enterprises Private
Limited were established with the knowledge of Jalan group and initially they
had their Registered Office in the premises of R-1 Company and subsequently
they were shifted to some other premises. After having excluded from the
participation of the R-1 company, P-3 was forced to seek an independent source
of living. On the other hand, it was stated that the R-3 established another
company by name Golconda Investments Limited, Deccan Polymers Limited with the
intention of diversifying the business of Andhra Polymers Private Limited. The
P-1 with the assistance of R-9 are claiming the credit for profits of the R-1
company upto 1983. The losses for 1983 onwards were only book manipulations.
The P-1 reiterated that K group did not receive any notices for the Board
meetings and that the Certificate of Postings were fabricated. The allegation
of disinterestedness of the P-1 was denied. Though a lengthy reply was filed,
the sum and substance of the reply which is relevant for the purpose of this
case is that the petitioners never received any notices for the Board meetings
and Annual General Meetings that the companies established by them have no
rival business and that the petitioners were subjected to oppression in the
hands of R-3, that the withdrawal of the son of P-1 namely P-3 was illegal that
the losses alleged to have taken place from 1984 onwards are only mere book
entries.
9. A further additional counter affidavit has been filed on behalf of R-1 and R-3 in effect reiterating same contentions raised in the counter except further elaborating the points referred to in the reply of the Petitioners.
10. There was exchange of affidavits and counter affidavits between the rival parties denying the contentions of each other.
11. A detailed counter affidavit was filed by the R-9 on 29-2-1988. He stated that purported allotment of shares in 1985 was illegal and only intended for the benefit of the R-3 to R-8 and their nominees. No offer was made. In the counter he traced out the background of his employment in Hyderabad Asbestos Company Limited now HIL and also the family business of the Jalan group. He was virtually supporting the P-1 in this regard. He admits that there was an understanding between him and P-1 as to the proportionate of allotment of shares in the ratio of 1/3rd and 2/3rd. In fact the company was started by mutual agreement between the P-1 and R-9. R-3 was inducted only in pursuance of the decision taken by these two persons. The Company went into commercial production in 1966 and it started earning huge profits with the assistance of R-9 and P-1. It also secured 20% shares in ARIL. In 1972 another private company was floated in the name of Nucon Industries Private Limited. Even in the said company, the Indian share-holding was divided between the K group and J group in the ratio of 1/3rd and 2/3rd. The Nucon was making huge losses and it was established by Jalan and Khemka families. Thus, the pattern of investment by Jalan and Khemka families was always in the ratio of 1/3rd and 2/3rd in all its ventures. Even in Deccan Polymers Limited, the pattern was same and even in Secunderabad Commercial Company (S.C.C.), a partnership firm the ratio of interest was always was 33% and 67%. R-9 claims that with the assistance of P-1 all these common joint ventures were established. The R-3 was only looking after the day-to-day management of the business of all the three companies namely R-1, Deccan Polymers and S.C.C. However in 1982, when P-3 who was deputed as General Manager, returned back to India, differences arose between R-3 and P-3. The efforts of the P-1 and R-9 to patch all the differences failed as a consequences of these differences, P-3 floated his own company Andhra Polymers Private Limited. Therefore, it was decided by J group that the nomination of P-3 on the Board of ARIL should be withdrawn and accordingly resolution was passed. But, this step on the part of Jalan group cannot be said to be a step to ease out Khemka group. Since Nucon was making heavy losses, R-9 had to resign from HIL in March, 1985 and started devoting full time to revive Nucon, which was not relished by R-3, differences arose between R-3 and R-9 and the relationship started straining. It is the case of R-9 that 12 Board meetings were held by R-1 company between March, 1983 to July, 1985 out of which he chaired all the meetings except the meeting dated 21-8-1984. The Minutes of the said meetings were duly prepared and signed by him as Chairman. One Mr. P.V. Subba Rao was the Secretary for some time and in the meeting held on 21-2-1985 R-2 was appointed as Secretary. It is his case that in July, 1985 one Mr. S.C. Kedia, General Manager of R-1 Company informed him that R-3 was planning to issue allotment of unissued capital of Rs. 5 lakhs in the company and to allot the shares to himself and his nominees converting the Petitioners from majority into minority. To ascertain the factual information, he requested R-2 to send the true copies of the Board meetings of the company and accordingly Minutes of 12 Board meetings were sent. But, they were unsigned. Therefore, on 16-8-1985, a letter was sent to R-2 stating that he had sent only unsigned copies of the Minutes Board Meetings from 28-7-1983 to 8-7-1985 and the same were not certified by him. Therefore, he sent the photostat copies of the meetings duly initialled by him for record. Although R-2 received the letter dated 16-8-1985 no reply was sent. He sent another letter dated 21-10-1985 to R-2 referring to letter dated 16-8-1985. Further he sent two other letters on 27-10-1985 and 29-10-1985 requesting the R-2 to send all the letters of the Board meetings and other communication by Registered Post. It is the case of the R-9 that R-3 embarked upon fabricating and antedating Minutes of the meetings. R-3 secured several certificate of postings to create evidence and these certificate of posting receipts are from a small post office Sanjiva Reddy Nagar which is 6 Kms. away from the Registered Office. On 29-10-1985 a letter was written stating that R-3 and his associates are changing the shareholding of the company to the detriment of the other Directors and Shareholders and requested to send all the notices of the Board meetings and other communication by Registered Post. Petitioners also requested similar letters. It is his case that except the 12 meetings, no other board meetings were held between March, 1983 to July, 1985. He also denies that the Board meeting was held on 26-11-1984 and 5-1-1985. He apprehended that the R-3 manipulated and fabricated the Directors Loose Leaf Minutes Book. The Minutes of the meetings held on 28-2-1985 was manipulated and fabricated. The Story of allotment in February, 1985 was false. He had chaired the Board meeting of 28-2-1985 and no resolution for allotment of any shares was passed in the said board meeting. R-9 and Petitioners would have contributed to the additional shares, had they been put on notice. The ROC also was not intimated of the increased share capital, and it is only in the September, 1985, the return was filed. It is the case of R-9 that the Board meetings and Annual General Meetings were not being conducted properly and there were statutory violations under the Act. Therefore, he called for meeting of the Board of Directors on 18-11-1985 and issued notice on 30-10-1985 to discuss the affairs of the company and it was intimated by R-2 that the meeting called by R-9 was illegal as he was not authorised to convene the Board meeting. The meetings alleged to have taken place on 8-11-1985 and 11-11-1985 were not at all held and no notices were sent for considering the annual accounts for the year 1984-85. The notice dated 11-11-1985 for Annual General Meeting was to be held on 18-12-1985 was not received. The minutes of meeting dated 8-11-1985 and 11-11-1985 were manipulated. The reply to his letter dated 30-10-1985 was sent only on 13-11-1985 after the alleged meetings of 8-11-1985 and 11-11-1985. After Board meeting dated 8-7-1985, for the first time, he received notices of board meetings. He did not receive the notices of Board meeting for 19-9-1986 and 20-9-1986. He states that he received the Annual General Meetings notice to be held on 31-10-1987 along with the final accounts for the year 1986-87 and for the first time he came to know that the share capital of the company was increased from Rs. 5 lakhs to Rs. 10 lakhs. He states that the resolutions passed in the Board meetings dated 8-11-1985, 11-11-1985, 19-8-1986 and 20-9-1986 and Annual General Meeting dated 18-12-1985, 18-10-1986 and 31-10-1987 wherein the accounts for the years 1984-85, 1985-86 and 1986-87 were passed were illegal and invalid. The purported issue was in violation of the understanding.
12. Affidavit was filed on behalf of the Respondents No. 1 and 3 in reply to the counter affidavit of the R-9 again reiterating the same averments. But, however, some more averments were pressed into service with regard to the necessity for increase of share capital. It was stated that R-1 company had lent substantial funds to Nucon and Secunderabad Commercial Corpn. etc. and the amounts were not returned by the said companies. The break-up value of the shares when the additional capital was inducted was 59 per cent. It was also brought out in the affidavit that during September/October, 1984, the R-9 proposed that he would take Nucon Industries along with son and that R-3 will take R-1 company. After several meetings and with the assistance of their father, the consensus was arrived at to the above effect and R-9 resigned the Chairmanship of R-1 company and simultaneously R-3 resigned as Managing Director of Nucon. Accordingly, R-9 was appointed as Managing Director of Nucon and wife of R-9 was co-opted as Additional Director. It was also agreed for disinvestment of shares held in R-1 company by R-9 at mutually agreed price and for non-renewal of personal guarantees for R-1 company. So also R-3 had withdrawn his financial exposure in Nucon and in pursuance of the understanding the R-9 and his family members also sent bills for the sale of their shares, claiming excessive amounts which was not agreeable. Thus, it is the case of R-3 that R-9 had no interest in fresh investment in the light of the settlement. Therefore, he did not choose to subscribe to the new share capital. R-3 again reiterated that proper notices were issued in respect of the meetings and the minutes were properly drafted.
13. It is the case of R-3 that since the P-1 has established rival business he had no face to take part in the board meeting of R-1 company.
14. Rejoinder was filed by R-9 to the Counter
affidavit filed by R-1 and R-3. Same contentions were reiterated in a more
elaborate and repetitive manner. So also the P-1 filed further affidavit in
relation to R-3's Counters to R-9's affidavit.
15. The affidavits, counter affidavits, reply
affidavits and additional affidavits would only disclose that the parties were
virtually engulfed in wordy battle and to each word and each sentence, there
was a reply and counter reply.
16. After considering the respective pleadings, this Court initially framed the following issues on 8-4-1988:
"1. Whether the petitioner No. 1 and Respondent No. 9 and members of their family and associates have been excluded from the joint management and participation and enjoyment of the benefit of the 1st respondent Company and of the foreign joint venture company from and by about 1983?
2. Whether
the allegations of oppression of the petitioner's and Respondent No. 9, their
family members and associates, shareholders and of mismanagement of 1st
Respondent Company, by Respondent No. 3 and his family members and associates,
prejudicial to the interests of the company, are made out?
3. Whether
the alleged issue of additional shares of Rs. 5 lakhs in the year 1985 of the
1st respondent Company, is valid, legal and binding on and/or is in the
interests of, the said company or were they issued solely for the benefit of
respondent Nos. 3-6, 7 and 10?
4. Whether
the Board and/or the Annual General Meetings of the 1st Respondent Company in
respect of the years 1984-85, 1985-86 and 1986-87 are validly held and the
Annual Accounts and Balance Sheet of the said years are validly approved and
passed by the Board and/ or the General Body of the 1st Respondent Company?
5. Whether
there has been any violation by Respondent 3 or respondent 2 of any of the
provisions of Companies Act in respect of the affairs of the 1st Respondent
Company for the years 1984-85, 1985-86, and 1986-87 as alleged in the petition
and reply affidavit?
6. Whether
the alleged resolution of the Board of the 1st Respondent Company dated
21-8-1984 withdrawing the nomination of respondent No. 11 from the Board of
Directors of Joint venture foreign Company is valid and binding on the 1st
Respondent Company and R-11?
7. Whether the affairs of the 1st Respondent Company are mismanaged and its assets and profits misappropriated and not duly accounted for by R-3 and members of his family and associates on the Board of the 1st Respondent Company or otherwise, in the years 1983-84, 1984-85, 1985-86 and 1986-87 as alleged in the petition?
8. Whether all or any, if so, which of the reliefs sought for in the petition, are allowable? What is the effect of the proceedings pending in Calcutta High Court on these proceedings?
9. Whether there exists just and equitable ground for winding up of the 1st respondent Company?
10. Whether any other or further relief or direction is just, equitable and necessary to be ordered by the Court in the circumstances of the case?"
However, the issues were reduced in subsequent proceedings when the certain appeals were filed against Interlocutory orders. The Division Bench in OSA SR No. 24892 of 1994 on the basis of the submissions made by the learned counsel for the petitioner observed as follows:
"Mr. K. Srinivasa Murthy, learned counsel for the petitioners in Company Petition No. 27 of 1987, has stated that the only issue, if at all the same can be called an issue, to be decided in the proceeding is - 'whether there are any acts of oppression of the minority shareholders of the company by any other group of shareholders or majority shareholders' - and relevant to the above is the issue - 'whether petitioner - R. Khemka and ninth respondent and/or any other person on their behalf, as alleged by the third respondent, consented to the allotment of additional shares to several other persons and if they have not consented to the above, whether allotment of shares, as alleged by the petitioners, is an act of oppression attracting action under section 397 and/or 398 of the Companies Act. The main issue, as stated by us above, it is obvious, is comprehensive enough to bring into its fold all questions as to maintainability of an action under section 397 of the Companies Act on the ground of oppression as well as any issues suggestive of the presence of any act of oppression leading to the instant petition - Company Petition No. 27 of 1987."
Thus, it is not necessary for this Court to decide all the issues which are framed earlier, but the relevant issues which are required now to be proceeded with are as follows:
(a). Whether there are any acts of oppression of the minority shareholders of the company by any other group of shareholders or majority shareholders?
(b). Whether petitioner - R. Khemka and 9th Respondent - or any other person on their behalf, as alleged by the 3rd respondent, consented to the allotment of additional shares to the several other persons and if they have not consented to the above, whether allotment of shares as alleged by the petitioners, is an act of oppression attracting action under section 397 and/or 398 of the Companies Act?
17. Enormous oral evidence and voluminous
documentary evidence was pressed into service by the parties. However, the
evidence which is relevant only for the purpose of deciding the issue are being
considered in this petition. Two witnesses were examined on behalf of the
petitioners P. W-1 is Mr. Mahesh Khemka and P. W-2 is Mr. R. Khemka. Five
witnesses were examined on behalf of Respondents. R. W-1 is Mr. R.N. Jalan, who
is R-9 in the Petition, R.W-2 is Mr. Hemanth Jalan (son of R-9), R. W-3 is Mr.
S.G. Jalan (son of R-8), R. W-4 is Mr. V.K. Chemariya (R-2 in the Company
Petition), R. W-5 is Mr. O.P. Jalan (R-3 in the Company Petition). Exs. A-1 to
A-308 were marked on behalf of the Petitioners and Exs. R-1 to R-110 were
marked on behalf of R-9 and Exs. B-1 to B-527 were marked on behalf of R-3.
Exs. C-1 to C-11 were marked by the Court. Learned counsel for the parties
objected for marking certain documents and their objections, wherever found
necessary, were adverted to.
18. Before referring to evidence and dealing with the same, it is necessary to note certain admitted facts. The 1st respondent company was incorporated in the year 1966. At the relevant time, the P-1 and R-9 were holding important positions in Hyderabad Asbestos Company Limited subsequently re-named as Hyderabad Industries Limited HIL as President and Vice-President of the company respectively. Though, it is claimed that P-1 and R-9 had conceived the idea of setting-up of R-1 company and claimed credit for bringing R-1 into lime-light these issues are not necessary to be considered, and the fact remains that it was incorporated under the provisions of the Companies Act. It is also admitted case of the parties that the principal ancillary item namely rubber rings which are required for the manufacture of A.C. Pressure Pipes by HIL are being produced apart from other products and the main source of supply of the products of the R-1 company was only to the HIL. It is also admitted fact that Khemkas family and Jalans family have also established certain other industries namely Nucon Industries, Deccan Polymers Private Limited, Secunderabad-Commercial Company Limited (partnership firm). The R-1 company also acquired 20% of equity in ARIL in Saudi Arabia. The R-3 was the Managing Director of R-1 company. He also functioned as Managing Director of the other companies held by these families, and these details are not necessary for the purpose of this case. The Company was incorporated with the authorised capital of Rs. 2,50,000 initially which was subsequently increased to Rs. 10 lakhs in the year 1979. It is also on record that initially issued capital was Rs. 50,000 divided into 500 shares of Rs. 10 each. However, the issued capital was increased in February, 1970, March, 1974, March, 1976 and March, 1982 by which time, the issued capital became 0000000Rs. 5 lakhs. It is the case of the petitioners and R-9 that there was no further increase of issued capital at any point of time after March, 1982 and no Board Meetings took place for consideration of the increase of the issued capital and no such resolutions were passed. However, it is the case of the R-9 that only 12 board meetings were held for the period from June, 1983 to July, 1985 and that no decision was taken with regard to the increase of the issued capital at any point of time. On the other hand, it is the case of R-3 that the board meetings were being held in accordance with the procedure prescribed under the articles of association and the notices were sent to the board of directors in case of board meetings and in case of Annual General Meetings to all the shareholders. The resolutions were passed in the Board meetings to increase the share capital to Rs. 10 lakhs and therefore, the claim put-up by P-1 and R-9 is completely baseless and mala fide.
Brief Summary of relevant evidence.
19. Before dealing with the relevant issue it is necessary to refer to the relevant evidence. As referred to elsewhere the evidence both oral and documentary is in extenso. This Court had to identify the real grain by eliminating chaff.
20. P.W-1 is Mr. Mahesh Khemka (P-3 and son of P-1). He narrated his assignments held in R-1 Company and also ARIL and he stated that R-1 company was established for the benefit of himself and son of R-9. He also stated that he did not receive any notices for Board meetings and annual general meetings and he did not make any complaint to the company directly and he only brought it to the notice of his father, who was looking after the affairs. He along with his father filed suit in Calcutta High Court when he was withdrawn from the Board of Foreign Joint Venture Company ARIL. He came back from Saudi Arabia in 1982 and that he was not given proper assignment in R-1 Company. It is only for the first time he received notice for the Annual General Meeting for the year 1986-87 and he did not get the copies of the balance sheets. Since he was not given proper assignment he decided to establish another company M/s Andhra Polymers Private Limited in 1982 and it commenced its production in the end of 1984. He accepted that the orders were diverted to APPL from R-1 Company by HIL. He was appointed as Director in the year 1970 and he was an Executive Director from 1973 to 1977. He was on the Board of ARIL for some time and finally he came back in 1982. When he was withdrawn from the Board of ARIL he filed a suit in Calcutta High Court and the resolution dated 21-1-1984 withdrawing his nomination to the Board of ARIL has been challenged before the Calcutta High Court. He specifically stated in the cross-examination that as far as he was concerned he had decided in 1984 itself not to do with Mr. R.N. Jalan or with Jalan group and wanted to do some business in spite of his father's dissuation. In 1984 he approached Mr. C.K. Birla for obliging some business to APPL by diverting the same from DEPL and he has accepted. There is also evidence with regard to the establishment of URIL company, which is competitor to ARIL and that APPL was supplying the material to URIL and that the ARIL also lost the business on account of competition. In the cross examination in respect of Ex. B-70, he stated that he admitted the signature, but denied contents. But, I feel that it is not relevant for the purpose of this case as discussed below. He also referred to mediation by Mr. Khaitan which was already spoken to him by P-1 and R-9. He stated that he did not pay anything to R-9 from APPL funds. Not because it was in loss, but because he did not want to deal with Jalans in any way after his experience with them. He has come to this conclusion since about 1984.
21. It is in the evidence of P-1 Mr. R. Khemka as P. W-2 that a resolution dated 21-8-1984 was passed by the Board of R-1 company withdrawing the membership of P-3 on the Board of foreign joint Venture company. Though he made efforts with R-9, but there is no meeting point. Therefore, he immediately wrote a letter to R-9, on 25-3-1985 regretting for the unfortunate development. On the very same day, he also wrote a letter to R-1 company and R-3 and sought for copies of the Board meetings and the Annual General Meetings since 1983. He also requested Annual Report for the year ended 31-3-1984. He also requested that future notices should be sent by Registered Post. As there was no response from R-9 with regard to the Directorship of his son to foreign company, he filed the suit before the Calcutta High Court in May, 1985. R-3 replied by a letter dated 30-4-1984 but the minutes were not furnished. But, only copy of the annual report and balance sheet for the year ending 31-3-1984 was furnished. He did not receive any notice for the meeting of the Board which held on 21-8-1984. It is only for the first time he received notice dated 13-6-1985 of the meeting of the board which was scheduled to be held on 25-6-1985. Subsequently also he received certain notices and he sought leave of absence on account of pre-occupation. He also states that R-9 was also being ignored by R-3 on account of certain differences between them. The telegraphic notice issued by R-3 dated 30-10-1985 he did not intend to attend. Under letter dated 1-11-1985, he received only the proceedings of Annual General Meeting held in 1983 and 1984. Prior to that neither he nor his family members or other shareholders received any notices of the meetings of 29-9-1983 or 28-9-1984. Even in the letters sent by R-3 on 6-3-1986 there was no mention about the board meetings held or Annual General Meeting upto July, 1985. However, during this period one Mr. Pintoo Khaitan was chosen as mediator for settling the issues between the parties and negotiations fell out finally. Under the registered letter dated 21-9-1986 he received a copy of the letter addressed by R-3 to R-9 and R-9's wife. The letter dated 16-9-1986 it was addressed by R-3 to R-9. The letter dated 22-9-1986 addressed by R-3 to R-9 was received by him in the registered cover and he informed R-3 accordingly. Thus, this witness only tried to establish that the unconnected letters were being sent in the registered covers, but, however, he was not furnished with the Minutes of the meetings prior to 25-3-1985. He also wrote number of letters to the Registrar of Companies, but there was no reply. He attended the board meetings on 31-10-1987 and opposed the voting strength on the basis of the alleged additional issue. It was only by then he learnt for the first time that the additional capital was allotted to R-3 and members of his family. Till then he was not aware of such issue. He also states that there were several lendings and there was no necessity for raising the capital for the purpose of more funds. Increase in the share capital is only to gain the control and majority in the R-1 company. If there had been a proper notice, they must have contributed to the additional shares to the extent of 33 per cent. He did not have any interest with Andhra Polymers either direct or indirect. It is his case that there is no necessity for purchase of machinery in 1984-85 for any diversification and there is no financial stringency and that the machinery was already available with R-1 company. There was several other assets in the company which could have been sold if real necessity arose. In effect he says that there was no necessity and the issue relating to additional share capital is nothing but a ruse to gain the majority in the company. He also said the sale of shares of HIL was illegal and contrary to the statutory provisions. He also narrated certain events subsequent to the filing of the company application inasmuch as the issues are very specific it would be a futile exercise to refer to the events which would not be relevant for the purpose of deciding the matters in dispute. He also states that R-3 had established other companies—Deccan Industrial Products Private Limited and Deccan Auto Sales Private Limited and they are being represented by benamidars who are the close associates. It is also his case in the cross examination that Shreyans Finance Private Limited is also established under benami name. R-3 brought about diversification of business with a view to favour his new companies to thrive. The events subsequent to the company petition are not much relevant. Among other notices, he stated that he did not receive the notice dated 21-5-1984 (Ex. B-85) for the meeting of the Board of Directors to be held on 4-6-1984. He also did not receive the notice dated 10-8-1984 (Ex. B-86) for the meeting of the board of directors to be held on 21-8-1984 at Calcutta. The notice dated 18-2-1985 (Ex. B-87) in respect of the Board meeting held on 28-2-1985 was also not received by him. He cannot remember whether he received Ex. B-88. By Ex. A-21, dated 25-3-1985 for the first time, he wrote a letter to the R-1 that he was not receiving the letter for the last 18 months. It is only after sending a letter requesting the R-1 to send the notices by Registered Post he has been receiving the notices. He did not attend the meetings because he did not receive the notices. He could not say how many meetings he attended in NUCON and DPL from 1983 onwards. In the year 1985 APPL started producing the items. He did not write any letter to R-9 prior to Ex. A-21 about the non receipt of the notices from the R-1 company as he was staying next door to him and he was daily contacting R-9. He became President of HIL in February, 1985. Till such time, R-9 was the President and he resigned. He stated that it may be possible that by the end of December, 1985 R-1 lost all its orders in HIL. He denied the suggestion that Ex. A-118 dated 25-3-1985 was written for settling all the matters with Jalan. He has been asking R-9 to accommodate his son in the board of R-1 company and there was no fruitful settlement. He was the Director of Ramak Enterprises. He came to know about the issue of additional share capital by R-1 company only when the company petition was filed. He did not receive any notice of Annual General Meeting for the year ended 31-3-1985. Ex. B-89 is the acknowledgement signed by Watchman Anjaiah. He could not remember whether Anjaiah, who received the registered letter handed over to him or not. Therefore, he cannot say the contents which were received under Ex. B-89. He cannot identify the signature of the person, who signed Ex. B-90. He did not receive Ex. B-91 relating to the year 31-3-1986. He says that from 1984 Khemkas were excluded from the affairs of R-1 company. The information that R-9 was also excluded from the affairs was passed on to him by R-9 himself some time in August, 1985. Between 1982 and 1985 himself and R-9 did not take any action on R-3 and from 1985 to 1987 also no action was taken. He denied the suggestion that the nomination of his son was withdrawn as they started APPL. He states that he did not see Ex. B-70 and the contents are false. The signature appeared to be that of Mr. Mahesh and he has no authority to sign on behalf of Khemkas. R-3 and R-9 had partitioned their house. He had received the notice for the Board Meeting on 28-6-1985 and 17-6-1985 and the Acknowledgement is Ex. B-92. He also received the notice of board meeting dated 27-6-1985 and acknowledgement is Ex. B-93. But, he took leave of absence. He had received the notice of Board meeting on 18-7-1985 and the acknowledgement was signed by his daughter-in-law under Ex. B-95. Ex. A-28 was addressed in connection with item No. 4 of the Agenda of the Board meeting held on 8-7-1985. He did not know that Board meetings were held on 8-11-1985 and 11-11-1985. He only confirmed that the Board meetings were held on 27-6-1985, 8-7-1985, 6-3-1986, 15-3-1986 and 16-10-1986. R-9 did not inform about the Board meetings dated 8-11-1985 and 11-11-1985. He only came to know about the additional share capital in 1986. Ex. B-89 is the acknowledgement received on 6-3-1986 and he cannot identify the signature. Ex. B-90 and B-98 also received by the same person who received Ex. B-98. He received the notice for the Board meeting for 16-10-1986 under Ex. B-99 and he cannot identify who signed the acknowledgement. Similarly he received the notice for Board meeting for 4-11-1986 and he cannot identify the signature who signed the acknowledgement. He could not say whether he attended the single Board meeting during 1983 to 1987. He did not receive the notice for Annual General Meeting dated 11-11-1985 Ex. A-125 and that he did not receive the annual accounts for the year ended 31-3-1985 Ex. B-126. He could not say whether he received the notice dated 18-2-1985 Ex. B-87 of the Board meeting to be held on 28-2-1985. He also could not say whether he received any notice of the Board of Directors meeting dated 5-1-1985. He agreed that Khemkas were aggrieved because they did not give the benefit of Directorship after Mr. Mahesh Khemka was removed from ARIL. There was cross examination with regard to the Ramak Enterprises and other companies which is not relevant for the purpose of this case. He denied the suggestion that he was aware of the issue of the additional shares in February, 1985 and deliberately he did not subscribe to the additional shares. He also denied the suggestion that he lost interest in R-1 company after establishing APPL and that the Company Petition was filed at the behest of the R-9.
22. R-9 Mr. R.N. Jalan was examined as R. W-1. It is in the evidence of R. W-1 that apart from other statements which are almost in tune with the counters and additional counters, that in 1982 P-3 returned from Saudi Arabia and he did not agree to work in Nucon as he was not agreeable to work under R-3, who was Managing Director. Therefore, differences arose between the P-3 and R-3 and on account of such differences, the P-3 floated his own company APPL. In such circumstances, it is decided by Jalan group that the nomination of P-3 on the Board of ARIL should be withdrawn. Accordingly, the resolution was passed in the Board meeting of the Directors on 21-8-1984. As the Nucon was running in losses and in order to improve its state of affairs he resigned from HIL in February, 1985 and started devoting full time to the Nucon. This was not relished by R-3. Therefore, differences arose between R-3 and R-9 and relations started straining. Between July, 1981 and June, 1983 ten Board meetings were held, out of which he chaired 7 Board meetings and between 20-7-1983, and 8-7-1985, twelve Board meetings were held and he chaired all the Board meetings except one held on 21-8-1984. In the Board meeting held on 20th February, 1984, R-2 was appointed as Secretary. In July, 1985 one Mr. S.C. Kedia, the then General Manager of R-1 company informed him that R-3 was planning to issue and allot unissued capital of Rs. 5 lakhs and distribute the same to himself and his nominees with a view to convert the Petitioners and R-9 into minority. It is his case that no resolution was passed for issue of additional shares. When he requested for copies of minutes, the Secretary R-2 sent the Minutes of 12 Board meetings, but unsigned copies were sent. Therefore, he had kept the originals with himself and sent the photostat copies with his initials. He says that they were sent under letter dated 16-8-1985 under Registered Post Ex. R-2. Again by letters dated 21 -10-1985 Ex. R-4,27-10-1985, Ex. R-5,29-10-1985, Ex. R-6, requested R-2 to send all the notices of the Board meetings and other communication by Registered Post. On 29-10-1985 a personal letter Ex. R-7 was sent by him to R-3 stating that R-3 was planning to change the shareholding of the company to the detriment and prejudice of the other directors and shareholders. The Certificate of Postings are all fabricated and they were introduced only to create evidence of having despatched notices of Board meetings under Certificate of Posting. Prior to June, 1985, no formal notices were given to any director and the meetings were held with the mutual consent of the parties. There was no decision in the Board meeting on 22-5-1982 to send the notices by Certificate of Posting. By letter dated 21 -10-1985 Ex. R-4 he reminded the R-2 to hold the Board meeting. Again on 27-10-1985 and 29-10-1985, he requested to send all the notices by Registered Post. No notices of Board meeting dated 8-11-1985 and 11-11-1985 to consider the annual accounts for the year 1984-85 were received by him. The Minutes of the said meetings were fabricated by R-2 and R-3. After Board meeting dated 8-7-1985, first notice is received for Board meeting was dated 3-3-1986. Thus, it is his case that he did not receive the notices for Annual General Meeting 1984-85 and 1985-86. He also referred to certain other meetings, some of that he attended, some of them he did not attend due to his personal inconvenience and details of these meetings are not necessary. The Minutes of Board meeting held on 3-11-1984 as disclosed by R-3 was not correct. He did not resign from the Chairmanship of the company. R-3 changed the minutes of 3-11-1985 with a view to fabricate and introduce the Board meeting dated 26-11-1984 and 5-1-1985. The Board meeting of 26-11-1984 was attended by R-3 and his wife and no Board meeting was held on that date. In none of the earlier Board meetings, the matter relating to issue of additional shares had come-up for discussion and there was no financial crisis. The allotment of additional shares was illegal. The purported purchase of machinery was also not real, and the documents were fabricated. Notice of Board meeting of 5-1-1985 was not given. The notice dated 18-2-1985 for convening the Board meeting on 28-2-1985 was not given to R-9. But, however, he attended the meeting on 28-2-1985 and minutes as disclosed by him were only drafted. No decision was taken to allot any additional shares. No resolution was passed to that effect. It was only with a view to convert the shareholding of R-3 to majority. There was no practice of sending the notices for Board meetings. It was started only in June, 1985 when a specific request was made to send the notices by Registered Post. There was no discussion with regard to family settlement in August/September, 1984 and no decision was taken in pursuance of the settlement. From July to November, 1985 he exchanged some correspondence relating to the fraudulent issue of unissued capital. On 8-11-1985 R-3 wrote a letter stating that the father would have to mediate and resolve the dispute. However, certain tentative proposals were made with regard to family settlement in 1985 with the assistance of the father. In 1986, R-3 approached him for partition and separate purchase of shares which was agreed and bills were sent and R-3 refused to honour the bills. It is his case that R-8 had always been supporting the R-3 in this case. He stated that he reposed the faith in R-3, and that he had given certain signed papers which R-3 had misused. In the cross examination the witness stated that his father and R-3 are the legal owners of the shares allotted to them before 1984 in R-1 company and he has no rights in those shares. He did not provide any funds for R-3 or father to acquire shares in R-1 company. But, there was large number of inter se transactions between the members of Jalan family. The witness stated that the request to send the certified copies of the minutes for the Board meeting of the R-1 Company mentioned in para 31 of the chief examination was oral. In Ex. R-2 letter written by him enclosing photo copy of the meetings of the board of directors initialled by him, he might have committed mistake in stating earlier that the request to supply the Minutes was oral. He must have written a letter earlier requesting for supply of Minutes. He denied the suggestion that he never made any request for supply of such copies. The unsigned copies of Minutes of D.E.P.L. referred to in para 31 of his chief examination were sent by R-2 to Mr. S.K. Jalan and Mr. S.K. Jalan had handed over those minutes to him (R-9). R-2 did not write to him any letters sending him a copy of the minutes. He denied the suggestion that R-2 did not hand over the copies of the minutes to Mr. S.K. Jalan. He also denied the suggestion that he did not send Ex. R-2 by registered post either by receipt cover by receipt No. 5802 or 5803. He did not have the acknowledgements. He admits that he attended 12 meetings conducted between 1983 and 1985 of R-1 company, out of 12 he chaired on 11 occasions. Between 1981 and 1983 he attended 10 meetings and he chaired 7 meetings. The minutes of the Board meeting dated 4-8-1982 Ex. B-156 and he attended the meeting. He cannot say whether he attended the Board meeting dated 28-2-1982. Ex. B-157 is in his handwriting and it does not represent the family settlement entered by Jalan family in August/September, 1984. He states that the document was prepared in August, 1985. The marked portion in Ex. B-157-b is not in his hand-writing, but the remaining portion is in his handwriting. The agreement entered on 25-4-1981 was implemented and that is the settlement of the disputes between the brothers. The blank signed papers were given to his father for income-tax proceedings and this practice was prevailing in the family and he also possessed certain blank papers signed by R-3. Ex. B-71 is not a genuine document. He did not receive the notices for Board meetings of 8-11-1985 and 11-11-1985 and he did not attend the same. He received Ex. R-11 cover by postal receipt No. 2688 dated 11-11-1985 and he denied the suggestion that he received Ex. B-125 under postal receipt No. 2466. He received Exs. R-11 and R-12 under postal receipt No. 2466. He denied the suggestion that he received the statement of accounts for the year 1984-85 of D.E.P.L. He did not write any letter to R-1 company that he has not received the accounts for the year 1984-85. But, he states that he called for a meeting of the Board of Directors to be held on 18-11-1985 to discuss the affairs of the company. He did not attend Board meeting dated 6-3-1986. He received notice for the Board meeting to be held on 15-3-1986. All Minutes in Ex. R-2 are correct. He admits that the contents in para 6 of the Minutes dated 8-7-1985 were approved. He did not receive Ex-B-165 Notice or Agenda. He did not also receive Ex. B-66 Notice for the meeting or agenda for the meeting dated 24-8-1982. He also did not receive the Notice for the Meeting dated 2-6-1983 and for the Meeting dated 20-7-1983 and 27-7-1983, 1-11-1983, 3-3-1984. He stated that there was no practice of sending the Notices by Certificate of Posting. He came to know only in the year 1987 about the additional share capital and this was in September/October, 1987. He heard the rumours from Mr. Kedia and thereafter he wrote a letter on 29-10-1985 to R-3. He came to know only after the receipt of the accounts for the year 1986-87 that the share capital was increased. He did not write to the company at that point of time. He sent the Proxy to attend Annual General Meeting for the year 1986-87 as he was not well.
23. R. W-2 is Mr. Hemanth Jalan
(Son of R-9). He stated that he did not receive any notices for Board Meeting
or Annual General Meeting and that he did not write to the company, he only
reported the matter to his father and his father must have taken action. He
also stated that he did not receive any notices calling upon him to subscribe
the additional shares. R. W-2 is son of R-9. Nothing is elicited in his cross
examination.
24. R. W-3 is son of R-8. It is
his case that he holds 1/5th share in all the business of Jalan family, that no
partition took place in the year 1984. He also stated that in February/March,
1985 there were differences and it was decided that all the members of the
Jalan family should prepare balance sheets of all the companies on 31-7-1985.
But, however, no partition took place. He says that in December, 1984 or
January /February, 1985 he did not receive any notice with regard to the
subscription for additional shares. No notice was also received in respect of
Annual General Meeting for 1984-85 and 1985-86. In the cross examination he
said that he did not implead himself in the Company Petition, yet he came to
give evidence in his own interest. He also said that he did not write any letter
to the D.E.P.L. after 4 years after he came to know increase in the share
capital. He states that he gave blank signed papers to his father and he did
not return even though he asked for return of the papers after 1984. Except
these related facts, other evidence is not relevant.
25. The R-2 Mr. V.K. Chamariya
is examined as R. W-4, the Company Secretary of R-1 Company. According to him,
he joined the company around 1978. He was looking after the Company Law
matters, Taxation. He stated that the notices for General Body and Board of
Directors were being regularly sent by post. Upto 1981 Govindas was the Company
Secretary and till 1984, one Mr. Subba Rao was the Secretary. The Secretary was
consulting him in all the company matters. According to him, for the Board
meeting took place on 10-5-1982, Notice for the Board meeting was dated
3-5-1982, Ex. B-275. It was sent under Certificate of Posting Ex. B-274. Agenda
for the meeting is Ex. B-275-a. Similarly for the Board Meeting held on
4-8-1982, Notice was issued on 26-7-1982. Certificate of Posting is Ex, B-276
while the Notice is Ex. B-165, Agenda is Ex. B-165-a. For the next Board
meeting held on 24-8-1982, the Notice was issued on 16-8-1982 Ex. B-166 and the
Certificate of Posting is Ex. B-276 and Agenda is Ex. B-166-a. For Board
meeting dated 27-8-1982, the Notice dated 23-8-1982 was issued and Certificate
of Posting is Ex. B-278, Agenda is Ex. B-167-a. For the Board meeting held on
21-11-1982, Notice was issued dated 18-11-1982 were posted under Ex. B-279. For
the Board meeting dated 3-2-1982 the Certificate of Posting Notice dated
31-1-1983 is Ex. B-280. Similarly for the Board meeting held on 31-3-1983, the
Certificate of Posting for Notice dated 31-3-1983 is Ex. B-281. For the board
meeting dated 2-6-1983, the Certificate of Posting for the Notice dated
25-8-1983 was marked as Ex. B-282. Notice dated 25-8-1983 is Ex. B-67 for Board
meeting held on 2-6-1983. Agenda for Board meeting dated 2-6-1983 is Ex.
B-167-a. For Board meeting held on 20-7-1983 the Certificate of Posting Notice
dated 9-7-1983 is Ex. B-283. Notice for the Board meeting dated 9-7-1983 for
Board meeting dated 20-7-1983 is Ex. B-168. Agenda for the Board meeting dated
20-7-1983 is Ex. B-168-a. The Certificate of Posting for Notice dated 20-7-1983
for Board meeting held on 27-8-1983 is Ex. B-284. The Notice dated 20-7-1983 is
Ex. B-169. Agenda for the Board meeting is Ex. B-169-a. For Board meeting dated
1-11-1983, Notice Ex. B-170 was sent under Certificate of Posting Ex. B-285.
Notice dated 21-10-1983 is Ex. B-170. Agenda for the Board meeting dated
1-11-1983 is Ex. B-170-a. Certificate of Posting for Notice dated 2-1-1984 for
Board meeting held on 13-1-1984 is Ex. B-286. Notice is Ex. B-284, Agenda is
Ex. B-284-a. For Board meeting held on 3-3-1984 Notice is dated 24-2-1984 sent
under Certificate of Posting Ex. B-287. Notice is Ex. B-171 and Agenda is Ex.
B-171-a. For the Board meeting dated 4-6-1984, the Notice was sent under
Certificate of Posting Ex. B-288, Notice is Ex. B-85 and Agenda is Ex. B-85-a.
For Board meeting dated 21 -8-1984 Notice dated 10-8-1984 was sent under
Certificate of Posting Ex. B-289. Notice is Ex. B-86 and Agenda is Ex. B-86-a.
For the Board meeting dated 3-5-1984 Notice was sent under Certificate of
Posting on 28-4-184 Ex. B-290. The Certificate of Posting dated 23-10-1984 for
the Board meeting held on 3-11-1984 is Ex. B-291. Certificate of Posting dated
10-11-1984 for notice dated 10-11-1984 for the Board meeting held on 26-11
-1984. Minutes of the Board meeting dated 4-6-1984 are Ex. B-277-a, while
Minutes dated 21-8-1984 are Ex. B-227-b, Minutes dated 3-9-1984 are Ex.
B-227-a. Minutes of Board meeting dated 3-11-184 is Ex. B-227-c, Minutes of the
Board meeting dated 26-11-1984 is Ex. B-227-b, Minutes of the Board meeting
dated 5-1-1985 are Ex. B-227-e, and Minutes of the Board meeting dated
28-2-1985 are Ex. B-227-f. For the Board meeting dated 5-1-1985, the Notice was
sent under Certificate of Posting on 28-12-1984 under Ex. B-133. For the Board
meeting held on 28-2-1985, the Notice was sent under Certificate of Posting
dated 18-2-1985 under Ex. B-128, Notice dated 18-2-1985 is Ex. B-87, Agenda for
the Board meeting is Ex. B-87-a. Till March, 1985, no Director complained about
the non-receipt of the Notice for the Board meeting or General Meetings.. He
states that at the end of March, 1985, P-1 wrote a letter complaining of the
non-receipt of the Notice for the Board meeting and general meetings and
requested to send the future notices by Registered Post Acknowledgement Due. He
says that after incorporation of A.P.P.L. the substantial orders of R-1 company
were diverted. The witness further stated that after March, 1985 all the
Notices of the Board meetings and general meetings of the R-1 company were sent
to P-1 by Registered Post Acknowledgement Due. The postal receipt under
Registered Post of Notice dated 30-6-1985 is Ex. B-343. The acknowledgement is
Ex. B-92. Notice dated 13-6-1985 is Ex. B-344 and Agenda is Ex. B-344-a. The
meeting scheduled under Ex. B-344 was adjourned to 27-6-1985. Again the Notices
were sent on 18-6-1985 under Registered Post to P-1 under Ex. B-346 and Ex.
B-93 is the Acknowledgement for Ex. B-346. Notice is Ex. B-347. In respect of
Board meetings held on 8-7-1985, the certificate of Posting sent to all the
Directors except P-1 under Ex. B-348 and the postal receipt in respect of P-1
is Ex. B-349. Ex. B-94 is the Acknowledgement of Ex. B 349. Notice dated
28-6-1985 is Ex. B-350 and Agenda is Ex. B-350-a. Minutes of the Board meetings
are marked as follows:
|
Date of Minutes of Board Meeting/A.GM. Meeting/A.G.M. |
Exhibit No. |
||
|
(a) |
Board Meetings: |
|
|
|
|
2-6-1983 |
|
B-330-a |
|
|
20-7-1983 |
|
B-330-b |
|
|
27-7-1983 |
|
B-330-c |
|
|
1-11-1983 |
|
B-330-d |
|
|
13-1-1884 |
|
B-330-e |
|
|
3-3-1984 |
|
B-330-f |
|
|
27-6-1985 |
|
B-331-a |
|
|
8-7-1985 |
|
B-331-b |
|
|
8-11-1985 |
|
B-331-c |
|
|
11-11-1985 |
|
B-331-d |
|
|
6-3-1986 |
|
B-331-e |
|
|
15-3-1986 |
|
B-331-f |
|
|
19-9-1986 |
|
B-332-a |
|
|
20-9-1986 |
|
B-332-b |
|
|
16-10-1986 |
|
B-332-c |
|
|
4-11-1986 |
|
B-332-d |
|
|
15-1-1987 |
|
B-332-e |
|
|
29-9-1982 |
|
B-332-f |
|
(b) |
A.G.M. |
|
|
|
|
For the year |
Held on |
|
|
|
1982-83 |
29-9-1983 |
B-334-b |
|
|
1983-84 |
28-4-1984 |
B-334-c |
|
|
1984-85 |
18-12-1985 |
B-334-d |
|
|
1985-86 |
18-10-1986 |
B-334-e |
|
|
1986-87 |
31-10-1987 |
B-334-f. |
He stated that he never sent any unsigned copies of the Board meetings of R-1 Company to R-9 and that he never received any letter from R-9 stating that he had sent unsigned copies of the minutes. He also did not receive from R-9 any communication initiated by him pertaining to R-9. He did not receive any letter dated 16-8-1985 from R-9 containing any minutes of 12 Board meetings. He did not receive Ex. R-2 along with enclosures. Letter dated 16-8-1985 from R-9 addressed to him as Secretary of D.E.P.L. asking him to send the Notices of Annual General Meeting and Emergency General Meeting by Registered Post to all the shareholders is Ex. B-351. This letter was sent under envelope bearing No. 5802 which is Ex. B-352. Ex. B-351 is the only paper which is received under Ex. B-352. He had sent letter dated 21-10-1985 Ex. R-4. By letter dated 13-10-1985 Ex. R-11 he replied to R-9 (R-9's letter dated 21-10-1985). No reply was received from R-9 to the letter dated 13-10-1985. R-9 did not ask for any inspection of the records of R-1. He received letter dated 27-10-1985 Ex. R-5 from R-9 asking him to send all the letters, Notices of Board meetings and shareholders to his address at Nucon factory by Registered Post Acknowledgement Due. He also received similar letters from Smt. Satyabhama Jalan, Mr. Hemanth Jalan. He received telegram dated 3-10-1985 issued by R-9 proposing to call the Board meeting of R-1 company on 18-11-1985. He stated that the relationship between the directors was very much strained. Two groups were formed, 1st group consisted of R-9 and P-1 and the 2nd group consisted of R-3. As a company Secretary he was being put to harassment by various letters and phone calls from the Directors particularly from R-9. He informed the telegram dated 30-10-1985 to R-3 by that time Notice was already sent calling for the Board meeting on 8-11-1985 and 11-11-1985. As the director is not entitled to call for the Board meeting under the Article 48 of articles of association, he was asked by R-3 to reply suitably explaining the position, which he did under Ex. R-12 dated 13-11-1985. Notice dated 31-10-1985 for Board meeting dated 8-11-1985 and 11-11-1985 is Ex. B-353 and the Notice sent under the Registered Post to P-1 is Ex. B-97. Acknowledgement of the Notice from P-1 is Ex. B-95. Similarly the Notice sent to R-9 under Registered Postal receipt is Ex. B-354. Both P-1 and R-9 did not attend the meeting of 8-11-1985 and 11-11-1985. Mr. S.K. Jalan was granted leave of absence. In the meeting held on 8-11-1985, the draft annual accounts for the year 1984-85 were approved. In the meeting held on 11-11-1985 the annual accounts for the year 1985-86 along with the directors report and Auditors report prepared and approved and it was also decided to call for 19th Annual General Meeting on 18-12-1985. The Certificate of Posting dated 11-11-1985 along with the Audited accounts for the year 1984-85 sent to all the shareholders for Annual General Meeting to be held on 18-12-1985 as Ex. B-127. Notice of Annual General Meeting was sent by Registered Post and Postal Receipt is Ex. B-355, Ex. B-258 is the Registered Post Receipt. Similarly for R-9 was sent under Postal Receipt Ex. B-356. For notice of Annual General Meeting dated 18-12-1985 was sent to Mrs. Hemalatha Jalan. Ex. B-256 is the Registered Post sent to Mr. S.B. Jalan. Ex. B-257 is the Acknowledgement for Ex. B-256. Ex. B-125 is the Notice of Annual General Meeting, Ex. B-126 is the Audited Accounts of R-1 company for the year 1984-85. The Notices were sent to all those persons who requested for sending the Notices by Registered Post and the accounts were sent to all the shareholders under Certificate of Posting. None of the persons complained. Similarly for the Board meeting held on 8-11-1985 and 11-11-1985 the Notice dated 31-10-1985 is Ex. B-96. Agenda for the Board meeting dated 8-11-1985 is Ex. B-96-a, and Agenda for the Board meeting dated 11-11-1985 is Ex. B-96-b. The annual returns of R-1 company dated 18-12-1985 for the year 1984-85 was filed with the Registrar of Companies under Ex. B-357. The letter of the Company is Ex. B-358. Similarly for 1984-85 for filing the Audited accounts is Ex. B-359 and money receipt is Ex. B-360. The Certified Copy of the Annual Return upto 18-12-1985 is Ex. B-361. It is in evidence that he received a letter on 12-2-1986 Ex. A-44 from Mr. Subba Raju, the Secretary of P-1 stating that while going through the correspondence, he found the copies of the settlement of accounts of Mahesh Trading Company received by him in November, 1985. A similar letter dated 12-2-1986 was received from Mahesh Trading Company under Ex. A-43. He did not send any letter to P-1 pertaining to accounts of Mahesh Trading Company. On 5-3-1986 under Ex. A-3 he sent letter to P-1 denying sending of any such statement of Mahesh Trading Company and copy of the said letter was also sent to Mahesh Trading Company under Ex. A-46. In respect of the Board meetings held on 6-3-1986, the Notices were sent under Ex. B-362. In respect of P-1 its Registered Post Receipt is Ex. B-363 and Acknowledgement is Ex. B-98. In respect of R-9 it is Ex. B-364 and B-365. R-9 and P-1 did not attend the meeting. Similarly in respect of the Board meetings held on 15-3-1986, the P-1 sought for leave of absence, R-9 did not attend. For Board meeting dated 19-9-1986 and 20-9-1986 even though the Notices were acknowledged, P-1 and R-9 did not attend. The draft Annual Accounts of R-1 company for the year 1985-86 were approved in the meeting held on 18-9-1986 and in the meeting held on 20-9-1986 the Audited Accounts of R-1 Company for the year 1985-86 along with the Directors and Auditors Report were approved and it was also decided to hold 20th Annual General Meeting on 18-10-1986. Notices were sent as per the instructions of the parties and Acknowledgements were also received and they were marked. R-9 and P-1 did not attend the meetings held on 18-10-1986. R-1 wrote a letter on 31-12-1986 to the Registrar of Companies for filing the annual return upto 18-10-1986 under Ex. B-382, and under Ex. B-383, the audited accounts were filed before the Registrar of Companies. Certified Copy of the annual return of R-1 as Certified by the R.O.C. is Ex. B-384. Board meeting was held on 4-11-1986. The Notice sent under Registered Post was acknowledged by P-1. So also though notice was sent under Registered Post to R-9 he did not attend. Next meeting was held on 15-1-1987. Notices were sent under Registered Post as directed by R-9. But, they did not attend the meeting. Subsequent meeting dated 6-6-1987 also they did not attend. In the cross examination, the witness stated that Notices for meetings were sent under Registered Post to R-9 and P-1 and the accounts were sent under Certificate of Posting as usual along with other shareholders. He denied the suggestion that the audited accounts were not sent to P-1 and R-9. He also denied the suggestion that the Minutes of Annual General Meeting dated 18-12-1985 were fabricated and that no Notices were sent. They also denied that the Notices for Annual General Meeting for the year 1985-86 not sent. In the cross examination he further stated that when the bank limits were sanctioned in 1981, the R-1 Company had undertaken to increase the capital upto Rs. 10 lakhs. In March, 1982 the capital was increased to Rs. 5 lakhs After 1981 the next proposal for renewal of limits was submitted by R-1 Company in 1984 and in between there was no occasion for the Bank to remand the capital. When the proposal submitted in 1984, the Bank had reminded for increase of the capital and to this extent there are some inter-departmental correspondence. He denied the suggestion that the typed matter in Ex. B-301 was filled later and that blank letter-head was signed by Mr. Kedia. The increase of the capital was informed to the Bank in April, 1985 by Mr. Kedia and enhanced limits were sanctioned by the Bank in December, 1985. He also denied that there was no diversification of the production after the installation of the new machinery in 1985. He further stated that apart from the machinery purchased from D.E.P.L. some more machinery for over more than Rs. 14 lakhs was purchased from other companies. He denied the suggestion that Ex. B-340 was obtained by influencing the then Branch Manager. He also denied the suggestion that capital brought by R-3 and his family was only a paper transaction. He also denied the suggestion that the sole purpose of issue of additional share capital was gained in majority and the reasons assigned were not genuine. He also denied the suggestion that the Notices for 20th Annual General Meeting were not sent at all. The witness stated that in the meeting held on 3-11-1984 R-9 expressed his inability to continue as Chairman. Therefore, R-3 was appointed as Chairman. There was no written letters from R-9. The company issued Notice and Agenda for the meetings dated 3-11-1984 and 26-11-1984. But, they were not filed by him. The minutes of the meeting dated 3-11-1984 were signed by R-3. He did not file the Notice and Agenda in respect of the meeting dated 26-11-1984. In the said meeting the decision was taken to increase the capital from Rs. 5 lakhs to Rs. 10 lakhs. He was present in the Board meeting held on 26-11 -1984. In the Board meeting held on 5-11 -1984 time was extended for subscription of new shares and Mr. Subba Rao was the Secretary till February, 1985. To a question that he deliberately failed to produce the Notices and Agenda for three meetings dated 3-11-1984, 26-11-1984 and 5-1-1985 the witness answered that from November, 1984 Mr. Subba Rao was not attending to his duties as he was under the threat of removal and in his absence R-3 was looking after the Secretarial work and the Board meetings were signed by R-3 in his absence. The Notices for the Board meeting dated 3-114984, 26-11-1984 and 5-1-1985 were available in the company. He admits that a sum of Rs. 5 lakhs was received towards additional share capital from R-3 and his members, but there was no response from other shareholders, even though offers were sent. He also denied the suggestion that all the Certificate of Posting receipts from Sanjeeva Reddy Nagar post office were got fabricated at a later date and in fact Notices were never sent under Certificate of Posting. He also denied that Ex. B-411, B-411-a, B-412, B-412-a, Ex. B-413 and Ex. B-413-a, were all fabricated. He further stated that Mr. Subba Rao was not attending the company and therefore, R-3 was looking after the secretarial work.
26. R-3 Mr. O.P. Jalan was examined as R. W-5. He filed lengthy affidavit in lieu of examination in chief. Most of the statements referred are not relevant for the purpose of deciding the issue under this Company Petition. However, to narrate certain important statements, he stated that the D.E.P.L. was started only for his benefit as a member of Jalan family and P-1 was only a investing shareholder and there was no understanding of any partnership. He made an application in 1965 to the Registrar of Companies for available of name. He prepared the draft Memorandum and articles of association and submitted to the Registrar. He was responsible for construction of factory building and also for recruiting necessary technical persons and also for opening the Bank accounts with various banks. He asserts that since inception Notices of the Board meetings along with the Agenda were being sent on ordinary post to all the Directors. He was appointed as Managing Director in the Board meeting held on 26-2-1969 and it was established only for his benefit and none-else. He was also Chairman of the Board from November, 1984. He was responsible for efficient management of the company and the company was developed by his efforts only with his contacts with various business circles. He also developed Export Market and narrated various events. He also held various posts as the President of All India Rubber Industries Association, Chairman of CAPACIL, Member of Rubber Board etc. He was also responsible for establishment of a Joint Venture Company ARIL in Saudi Arabia. He stated that the P-3 borrowed technical information from ARIL. P-3 returned to India in 1982 and intended to start a small plastic manufacturing company, but however it is his case that they started manufacturing rubber rings etc. From 1983 onwards P-1 also stopped attending the Board meetings in spite of Notices. R-1 was successful in getting Tenders in International Airport Authority, but APPL also submitted offer as competitor and 50 per cent orders were got diverted to APPL. The R-1 was set-up as an ancillary to HIL for supply of rubber rings which is an essential component for manufacture of A.C. Pressure Pipes. In the years 1982 and 1983 the orders were to the tune of about 80 lakhs and 60 lakhs respectively, but showed downward trend in 1984 which was Rs. 38 lakhs, in 1985 which was Rs. 12 lakhs and in 1986 it was only Rs. 2 lakhs and it was nil subsequently. These orders were being diverted to APPL. It is his case that the P-1 is responsible for exit of R-9 from HIL which is not relevant for the purpose of this case. As Mr. Khemka started rival business clashing with the interest of R-1, Jalan family decided to withdraw nomination of P-1 as director of ARIL on behalf of R-1 company and accordingly resolution was passed on 21-8-1984 to the effect and against this the P-1 and P-3 also filed suit in Calcutta High Court which is pending. After return of P-3 in 1982 Khemka intended to sell their holdings in DEPL, DPL, Nucon and SCC. They initially approached R-9 who declined to interfere. They also approached Mr. Pintu Khaitan for arbitration. He was a party to the conciliation with his father Mr. S.K. Jalan. He was negotiating on behalf of Jalan family. The negotiations went about upto May, 1986. A settlement was in the offing, but however, P-1 backed out of the settlement. Till February, 1985, P-1 did not correspond with R-1 on any matters, it is only after they filed suit in Calcutta High Court they corresponding, they could not get injunction before the High Court. The letters written by P-1 to R-3 were replied suitably. Taking advantage of the correspondence entered between Jalan family with Khaitan and P-1 they filed the Company Petition. The allegations that the P-1 did not receive Notice from 1983 is denied. On the other hand Khemkas stopped attending these meetings from 1983. In 1986, the settlement between Khemkas and Jalan also fell through and Khemkas backed out because P-1 and R-9 entered into a private agreement with Khemka under Exs. B-70 and B-71. It was reiterated that the Notices were sent to all the Directors and shareholders in case of general body meetings which is required to be held under the Companies Act. It is his case that in the Board meeting held on 22-3-1982 which was attended by P-1, R-9 and R-3, a decision was taken at the instance of R-9 to maintain the minutes of the Board meetings, General body meetings and Attendance Registers under the Loose Leaf Register. Ex. B-142 is the minutes of the Board meeting. After the said meeting, all the Notices were being sent under Certificate of Posting instead of ordinary post. Notices for Board meeting dated 4-6-1984 along with Agenda for approval of accounts for the year 1983-84 was sent to P-1. He did not attend, but R-9 attended. Ex. B-227-AA are the original minutes held on 4-6-1984. The office copy of the Annual Report of R-1 for the year 1983-84 made upto 28-9-1984 was filed with the Registrar of Companies under Ex. B-488. In July, 1982, another company was set up by him in the name of Nucon. The request of P-1 for investment in shares was accepted by Jalan family. Son of R-9 was appointed as Manager and in subsequent family settlement in 1989, Nucon was taken over by R-9. DPPL was incorporated as Public Limited Company and P-1 was not allotted any shares from the Promoters quota, they applied for shares in Public subscription and were allotted 1130 equity shares. He also incorporated Golconda Investments Company, a Public Limited Company. Petitioners applied for shares in Public Issue and they were not granted in Promoters shares. He stated that there was an understanding between the family of Jalans in or around August/September, 1984. In the said understanding DEPL went to R-3 and Nucon went to R-9. In furtherance of the said understanding he resigned from Managing Director of Nucon on 15-12-1984 and R-9 became Managing Director in the said meeting. He also nominated his wife as Additional Director in the said meeting. Mr. P.V. Subba Rao, Company Secretary was removed and Mr. Beemal was appointed as Company Secretary of Nucon. The Registered Office, which was in the DEPL premises was shifted to the residence of R-9. All the records of the Nucon were handed over to them. In the Board meeting held on 28-12-1984 excessive powers were given to R-9 and R-9 was also given power to operate Bank account individually. The share capital of Nucon was increased in August, 1984 which was contributed by Mr. R.N. Jalan and his family. The personal guarantees extended by R-9 to the Bank institutions was withdrawn and he has substituted the same. With regard to R-1 company meeting was held on 3-11-1984 in which R-9 resigned as Chairman and he took over under Ex. B-227-c the minutes of the said meeting. In the Board meeting held on 3-9-1984 he was given additional powers similar to that of powers given to R-9 in Nucon, on 28-12-1984 calling for the independent control of the companies. New Bank of Account of DEPL was opened on 3-9-1984 and thus complete control was given to him while the control of Nucon was given to R-9. Similar other companies were also allotted to other brothers. Thus, he says that there was a family understanding in which the DEPL was allotted to R-3 and Nucon was allotted to R-9. Thus, they have been running the companies with their own individual skills and abilities. The State Bank of India has been insisting for increase of share capital for consideration of renewal-cum-enhancement limits of working capital. In view of the business being diverted by HIL to APPL instead of DEPL and it had suffered set-back and therefore diversification was thought for which funds were necessary and therefore in the Board meeting held on 26-11-1984 it was decided to issue further share capital of Rs. 5 lakhs. Notice of Board meeting was sent to all the Directors by Certificate of Posting on 10-11-1984 as per normal practice. Ex. B-292 is the Certificate of Posting. Ex. B-304 is the leave of absence of Mr. S.K. Jalan. R-9 and P-1 did not attend and P-1 stopped attending since 1983. Pursuant to the family settlement, R-9 also became disinterested and he did not attend the meeting on 26-11-1984. Ex. B-227-D is the minutes of the Meeting and item No. 4 related to the increase of the share capital. On 26-11-1984 itself Notices were sent to the shareholders asking them to send applications along with the application money before 15-12-1984. Ex. B-130 is the Office copy of the Notice. Ex. B-131 is the Certificate of Posting. Against the said Notice, applications were received only from R-3, Mrs. Sudha Jalan, Ms. Kavitha Mittal and Mr. Vikas Jalan and cheques were also sent by them, and they were credited to DEPL share application money account on 30-11-1984, subsequently transferred to share capital account on 4-3-1985. This was also certified by the Chartered Accountants. The Board meeting was again held on 5-1-1985 and the Notice was sent by Certificate of Posting on 28-12-1984 Ex. B-133. P-1 and R-9 did not attend Ex. B-227 is the minutes of it. In the Board meeting held on 5-1-1985 it was decided to extend the date for receipt of the applications for additional shares upto 15-2-1985. Ex. B-132 is the copy of Notice. Ex. B-133 is the Certificate of Posting. To the Notice dated 5-1-1985 Mr. S.N. Jalan and his wife, son and daughter sent letter expressing their unwillingness. His father and mother also followed the suit. His father informed that R-9 and P-1 and Mr. S.G. Jalan declined to subscribe to the new share capital. P-3 also wrote a letter on 16-1-1985 to R-9 declining to subscribe. It is Ex. B-64. R-9 also wrote a letter on 21 -1 -1985 to Mr. S.K. Jalan's father declining to subscribe. In the said letter he also forwarded Ex. B-61. Ex. B-201 is the letter dated 21-1-1985 from R-9 to Mr. S.K. Jalan. Ex. B-64 and B-205 were given by his father. Board meeting was called on 28-2-1985 for allotment of further capital. Notice dated 18-2-1985 for the Board meeting was sent under Certificate of Posting, Ex. B-87 is the copy of the notice. Ex. B. 87-A is the Agenda, Ex. B-128 is the Certificate of Posting. Ex. B-321 is the leave of absence of Mr. S.K. Jalan. P-1 and R-9 did not attend, R-9 also confirmed that he received Notices of Board meetings held on 28-2-1985, Ex. B-227-F is the minutes, R-2 was appointed as Company Secretary in place of Mr. Subba Rao. In March, 1985, P-1 wrote a letter to him to send Notice of Board meetings by Registered Post and they were complied-with. 21st Annual General Meeting was held on 31 -10-1987, R-3, his wife, P-1 and P-3 and Mr. Bimal Aggarwal as Proxy of R-9 and Mr. S.B. Jalan attended. Two Agendas regarding the adoption of accounts for the year 1986-87 and 1985-86 were carried by show of hands. Ex. B-334-F is the original Minutes of meeting of 21st Annual General Meeting. P-1 sent a letter on 31 -10-1987 and his spn also sent on 9-11-1987. They were suitably replied by the Company Secretary. Audited Accounts of the Company for the year 1986-87 were filed before the Registrar of Companies on 24-11 -1987 and Annual returns of the company for the year 1986-87 upto 31-10-1987 was filed before the Registrar of Companies on 27-11-1987. The additional share capital was utilised to the extent of Rs. 4.55 lakhs for purchase of machinery from DPL. Apart from that R-1 company also purchased further plant and machinery for over Rs. 16 lakhs during 1984-85, and from November to March, 1985 plants and machinery for over Rs. 14 lakhs were purchased for diversification. The then General Manager Mr. S.C. Kedia in his letter dated 5-4-1985 informed the SBI of having increased the capital. Ex. B-301 is the said letter which is in the files of the Bank and Ex. B-335 is the office copy in the files of the company. The provisional balance sheet as on 31-3-1985 was filed with the Bank on 16-7-1985, Ex. B-302 is the Certified copy. They have also filed certain other documents with the Bank. R-9 wrote a letter on 23-7-1985 asking for the latest balance sheet of R-1 company vide Ex. B-503 and the same was sent. Thereafter on 27-10-1985 he sent a note in respect of certain provisions in the balance sheet, Ex. B-160 is the note. R-9 wrote a letter dated 29-10-1985 as a counter-blast and the same was suitably replied on 8-11-1985. Thereafter certain incidents took place between R-9 and R-3, wherein some criminal cases appear to have been initiated which were not concerned. He did not give any copies of the minutes of 12 Board meetings held between 20-7-1983 to 28-8-1985 to his father Mr. S.K. Jalan. He also did not give copies to R-9. He did not see the letter dated 16-8-1985 addressed to R-3. In the Board meeting held on 3-11-1984, R-3 resigned from the Chairmanship and thereafter he has been functioning as Chairman and there was no objection from any quarters. R-9 valued the shares of DEPL in the wealth-tax returns. P-1 showed the value at Rs. 10 per share in his wealth-tax return. Since the amount which is due to R-1 company was not paid by Nucon, he filed C.P. No. 67 of 1987 for creditors winding-up. Though elaborate cross examination was conducted on behalf of R-9 and P-1 it is not necessary for the purpose of this case. The evidence regarding formation of the company is not relevant. The evidence with regard to the issue of Notices and conduct of meetings to ascertain the consent of the parties for additional issue is only relevant for the purpose of this case and they are only referred to. It is also in the cross examination that R-3 was looking after the accounts of P-1 for certain period and in that process he used to send the cheques for signature of members of Khemkas family. He denied the suggestion that P-1 and R-9 were responsible for Export of R-1 products. The suggestion that till the exclusion of Khemkas in 1983, the monthly reports of working of R-1 company was sent to P-1 was denied and it was stated that P-1 stopped speaking with R-1 company since they were setting up of rival business. When Mr. Mahesh Khemka returned from Saudi Arabia in 1982, there was no contemplation for his appointment as director of R-1 company and in fact he was already planning to set-up rival company. He denied the suggestion that he excluded Khemkas in 1983. He also admits that the commercial production of the APPL was started some time in December, 1984. He stated that Ex. B-65 was handed over by one of the Committee members of HIL staff union, who came to met Mr. P. Janardhan Reddy, Labour Leader. He denied the suggestion that Ex. B-65 was fabricated. He denied the suggestion that Ex. B-70 and B-71 were typed on the same Typewriter. To a suggestion put on behalf of P-1, the settlement talks through Mr. Khaitan is not merely for sale of Khemkas shares to Jalan but for the purpose of finding a solution to the disputes that had arisen between them as to who should remain in R-1 company. The witness stated that mediation through Mr. Pintu Khaitan was for selling of Khemkas shares in all Jalan group companies because Khemkas had already established APPL and also in order to. avoid action under Article 26. The settlement reached before Khaitan could have been in 1986. He received Ex. B-478 and no payment was made to Khemkas in pursuance of the settlement. On behalf of Jalan family Mr. Shree Narayan Jalan, elder brother was required to make payments. By that time he came back from Amarnath pilgrimage, the settlement was backed out by P-1. It was around in July, 1986. He also denied that he had misused the blank signed letter-heads of P-3. He denied the suggestion that R-1 company did not issue any Notices to P-1 from July, 1983 to June, 1985. With regard to Ex. A-203, witness stated that it bore his signature and explained that some times P-1 and R-9 used to say that they would sign the Attendance Registers at the end of the meeting, but after the meeting they used to leave suddenly, in such cases, the Attendance Register was sent to the residence of the Directors for signature. In this context, he signed Ex. A-203. This was done whenever R-9 and P-1 were attended, but failed to sign the Attendance Register. Similarly Ex. A-193 was written in the same circumstances as Ex. A-203. Ex. B-330-A, Ex. B-330-B, and Ex. B-330-C are the minutes of the Board meetings held on 2-6-1983,20-7-1983 and 27-7-1983. As per the instructions of R-9, Chairman of the meetings directed the Company Secretary to remove the name of P-1 shown as present as he refused to sign the Attendance Register. As per the procedure in the company, the draft minutes were first required to be approved by the Chairman and finally they are to be typed in the Minutes book. R-9 must have directed the Company Secretary to delete P-1's name at the time of approval of draft minutes. He denied the minutes of Board meeting dated 2-6-1983, 20-7-1983, 27-7-1983 were fabricated. He also denied the suggestion that minutes dated 26-10-1983, 5-1 -1985,25-1 -1985 are fabricated. He also denied the suggestion that the losses shown by the Company were false. He also denied the suggestion that Ex. B-128 to B-133 and B-87 and B-87-A were fabricated. Similarly, he denied the suggestion that Ex. B-411, B-411-A, B.-412, B-412-A, B-413 and B-413-A were fabricated. He denied the suggestion that he diverted the funds of R-1 company to his own concerns and claiming financial stringency. He admitted that two sheets covered by Ex. B-227-C and Ex. B-227-D have different texture and colour compared to Ex. B-227-A, B-227-B, B-227-C, B-227-F, he denied the suggestion that these sheets are fabricated. He denied the suggestion that note Ex. B-401 related to 1983-84, as the Balance Sheet for the year 1983-84 was already signed on 3-9-1984. He stated that Ex. R-43 and R-44 are not signed by him and he did not give any blank signed papers to R-9. To a suggestion that R-1 company had adequate and more than surplus reserves, liquidity, assets and was having larger transactions and therefore there was no necessity for increasing the capital and it was only with a view to gain wrongful majority, the witness replied that the company was started making losses from 1983 and it had given substantial loans to Nucon and SCC and they were not being paid, bankers were tightening the credit facilities and that the shares holding by foreign joint venture company was not readily saleable and that P-1 may not accept for sale of HIL shares and the valuable land was occupied by P-1 at Somajiguda and therefore the company required much more than Rs. 5 lakhs for the purpose of diversification plans and in fact he brought Rs. 21 lakhs of additional funds by way of loans from him. It was also increased in pursuance of the promise made to the Bank earlier. The machinery of Rs. 5 lakhs was not only purchased, but other machinery worth Rs. 20 lakhs was purchased from others during that period. He denied that there was no practice of sending the Notices and that the meetings were held informally as P-1 and R-9 were being neighbours. He also denied the suggestion that there was no decision to send the Notices by certificate of posting in 1982. He added that it was his personal decision as Managing Director of R-1 company. He denied that all the Certificate of Postings were bogus. Except that Ex. B-157 is a draft proposal and denies that it was not acted upon. He stated that whatever the amounts were invested by Khemkas were withdrawn by 31-3-1982.
27. It would be convenient to decide
the Issue No. 2 as to whether there was any consent by the P-1 and his group
and R-9 and his group for additional share issue. As already stated the P-1 is
only representing the group of Khemkas family while the Jalan family is being
represented by two persons namely R-9 representing by himself and his family
members while R-3 representing himself, his family members and other Respon
dents.
28. Let us now consider the procedure in general relating to issue of Notices and the conduct of the Board of Directors and Annual General Meetings. It is the case of the P-1 and R-9 that the meeting of the Board of Directors were being held on intimation over telephone and the Notices some times were being sent by the messengers as the P-1, R-3 and R-9 were staying as neighbours. It is also the case of P-1 and R-9 that these Notices were never sent by post much less under Certificate of Posting. It is also his case that the Minutes of the meetings of the Board of Directors were being circulated after the Minutes were finalised and this practice was not continued from the year 1983 onwards. Having waited for considerable time and having noticed that the P-1 was not being sent with any Notices for the meetings of the Board of Directors nor Annual General Meetings and the accounts were not being circulated to him, he sent letter to Managing Director of R-1 company dated 25-3-1985 Ex. A-21 stating that the various Board meetings and General meetings of the Company were held for the last 18 months and no Notice, Agenda or Invitation were received for these meetings. He did not also receive the annual report, balance sheet for the year ending by 31-3-1984 for his signature and he has also not been receiving the monthly reports of the company. Therefore, he requested R-3 to send various Minutes of Board of Directors and General meetings held since June, 1983 for his perusal and record and also a copy of the Annual Report and Balance Sheet for the year ending 31-3-1984. Further, he also requested to send all the Notices to reach one week before the date of the meeting. To the said letter R-3 sent a reply on 30-4-1985. Ex. A-22 controverting the allegations that the Notices, Agendas and other documents in connection with the meetings of the Board of Directors and Shareholders of the company were not being sent. However, a copy of the Annual Report and the Balance Sheet was enclosed. It was also stated in the said letter that the practice of sending the monthly Reports was discontinued. It is in evidence of P-1 that the subsequent Notices were received by him and in respect of certain Notices he also sought for leave of absence. Later after about four months on 16-8-1985 again another letter was sent by P-1 to R-1 under Ex. A-28 requesting to send the Minutes as per the practice. On the very same day another letter under Ex. A-29 was written to R-1 in reply to latter's letter dated 30-4-1985. Apart from other issues he also requested the Minutes of various General meetings since June, 1983 may be despatched to him. To the said letter a reply was sent on 1-11-1985 Ex. A-31 by R-3 sending the Minutes of various General meetings held since June, 1983 while reiterating the contents of letter dated 30-4-1985 and Ex. A-32 dated 1-11-1985 is also to the same effect while reiterating the contents of letter dated 2-5-1985. To a letter dated 30-10-1985 of R-9 it was informed by the Secretary R-2 of R-1 company vide Ex. A-33 and all meetings of the Board were held upon proper Notice and under Article 48 of the Articles of Association and R-9 cannot convene the meetings of the board of directors. This letter was endorsed to P-1. Hence, the request of R-9 for holding the meeting was not accepted. To the said letter another letter was sent by P-1 dated 17-12-1985 Ex. A-34 stating that the Minutes of the meetings dated 27-6-1985 and 8-7-1985 were not sent apart from the papers requested in letter dated 16-8-1985. He expressed certain apprehensions that the Jalan group was attempting to change the pattern of shareholding of the Company viz. issue of unsubscribed capital and allotting to the nominees of the Jalan group. On the same day another letter was sent to R-3 under Ex. A-3 5. In this letter he sent a draft for Rs. 100 requesting the R-3 to send the Notices, Agenda and relevant materials and all other communication by Registered Post with Acknowledgement due. Again on 17-12-1985 another communication was sent under Ex. A-36 requesting certain documents. On 16-1-1986 Ex. A-37 a reply was sent by R-3 expressing concern about the false allegations made against him including the non-receipt of the various Notices of meetings and that in fact he has not been attending any meetings since about 1983. He also expressed that he did not wish to go into this matter as the negotiations are in progress with regard to various pending matters. Ex. A-38 is the Telegram received by R-3 from Mr. Khaitan to the effect that the talks with regard to resolving the disputes between Jalan group and Khaitan would be held from 24th to 26th January, 1986. By Ex. A-41 dated 6-2-1986 in confirmation of telegram was sent in that connection. It is his case that till date he has not received any Notice of Directors meeting or General meeting after 8-7-1985. By Ex. A-42 dated 9-2-1986 he also sent another letter stating that he had not received the Notices of Board meeting dated 8-7-1985. Two letters dated 6-2-1986 and 9-2-1986 written by P-1 to R-3 reply was sent on 6-3-1986 under Ex. A-48 stating that he was unwilling to enter into any controversy or settlement in view of the negotiations for the settlement and requested him to resolve various pending matters amicably. P-1 also received certain other Notices for other meetings but sought for leave of absence. Mr. Khaitan by letter dated 3-7-1986 Ex. A-52 wrote to R-3 it was mentioned that Mr. Shree Narayan may kindly arrange for payment within next week. From this it appears that some settlement was arrived between the parties with the intervention of Mr. Khaitan and the amount appears to have been assessed and the payment was directed to be made to Khaitan in reply to the letter of R-3 as written to Mr. Pintu Khaitan vide Ex. A-53 stating that Mr. Shree Narayan was leaving for Amarnath and Contacting him in the first week of August, 1986. The letter of Mr. Khaitan and reply letter of R-3 was endorsed to Mr. Mahesh Khemka P-3. On 18-10-1986 Ex. A-59 R-2 has written as a Secretary of R-1 Company to P-1 stating that the time stipulated in the Notice was in accordance with the Companies Act and that the P-1 had not been attending any Board meeting since 31-3-1983 including the meetings which were held on 16-10-1986. To this a detailed letter was written by P-1 to R-3 vide Ex. A-60. In the subsequent events there was exchange of various Notices and letters between R-3 and P-1, but they are not relevant for the purpose of this case as we are only on the issue as to what was the practice with regard to sending the Notices.
29. As far as the R-9 is concerned, who was examined as R.W-1 it is in evidence that he has been attending all the Board meetings. But, there was no practice of sending the Notices by post or under Certificate of Posting. The Directors were being informed either orally or on telephone and the meetings were taking place. He also says that the Certificate of Posting are not genuine and they are fabricated for the purpose of establishing that the Notices were sent under Certificate of Posting. The board of directors passed resolutions in 1982 to the effect that Minutes of the Board of Directors should be maintained in Loose Leaf Papers and subsequently It appears that they were got bound for safe custody in view of the pendency of the case. Exs. B-156, B-332, B-227, B-333 are the copies of the Minutes of the Board of meetings from April, 1982 to March, 1983. From the said Minutes it is seen that the following persons attended the meeting:
|
Date of Meeting |
Persons
attended |
|
Ex. No. |
|
10-5-1982 |
O.P. Jalan
(R-3) |
|
A-14 |
|
|
Smt. Sudha
Jalan (R-4) |
|
|
|
|
Leave of absence
was granted to R.N. Jalan (R-9), R. Khemka (P-1), and S.K. Jalan (R-8). |
|
|
|
4-8-1982 |
R.N. Jalan
(R-9) |
|
B-156 |
|
|
R. Khemka
(P-1) |
|
|
|
|
O.P. Jalan
(R-3) |
|
|
|
|
Smt. Sudha
Jalan (R-4) |
|
|
|
24-8-1982 |
R.N. Jalan (R-9) |
|
|
|
|
R. Khemka (P-1) |
|
A-12 |
|
|
O.P. Jalan (R-3) |
|
|
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
|
Leave of absence was granted to |
|
|
|
|
Mr. S.K. Jalan (R-8) |
|
|
|
27-8-1982 |
O.P. Jalan (R-3) |
|
A-11 |
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
|
Leave of absence was granted to R.N. Jalan
(R-9), R. Khemka (P-1) and S.K. Jalan (R-8) |
|
|
|
22-11 -1982 |
R.N. Jalan (R-9) |
|
R-102 |
|
|
R. Khemka (P-1) |
|
|
|
|
O.P. Jalan (R-3) |
|
|
|
|
Sudha Jalan (R-4) |
|
|
|
3-2-1983 |
R.N. Jalan (R-9) |
|
R-103 |
|
|
O.P. Jalan (R-3) |
|
|
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
31 -3-1983 |
R.N. Jalan (R-9) |
|
R-104 |
|
|
R. Khemka (P-1) |
|
|
|
|
O.P. Jalan (R-3) |
|
|
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
2-6-1983 |
R.N. Jalan (R-9) |
|
B-330-A |
|
|
O.P. Jalan (R-3) |
|
|
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
20-7-1983 |
R.N. Jalan (R-9) |
|
B-330-B |
|
|
O.P. Jalan (R-3) |
|
|
|
|
Sudha Jalan (R-4) |
|
|
|
27-7-1983 |
R.N. Jalan (R-9) |
|
B-330-C |
|
|
O.P. Jalan (R-3) |
|
|
|
|
Sudha Jalan (R-4) |
|
|
|
1-11-1983 |
R.N. Jalan (R-9) |
|
B-330-D |
|
|
O.P. Jalan (R-3) |
|
|
|
|
Sudha Jalan (R-4) |
|
|
|
13-1-1984 |
R.N. Jalan (R-9) |
|
B-330-E |
|
|
O.P. Jalan (R-3) |
|
|
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
3-3-1984 |
R.N. Jalan (R-9) |
|
B-330-F |
|
|
O.P. Jalan (R-3) |
|
|
|
|
Sudha Jalan (R-4) |
|
|
|
4-6-1984 |
R.N. Jalan (R-9) |
|
B-227-AA |
|
|
O.P. Jalan (R-3) |
|
|
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
21-8-1984 |
O.P. Jalan (R-3) |
|
B-227-B |
|
|
S.K. Jalan (R-8) |
|
|
|
|
Sudha Jalan (R-4) |
|
|
|
|
Leave of absence was granted to R.N. Jalan
(R-9) |
|
|
|
3-9-1984 |
R.N. Jalan (R-9) |
|
B-227-A |
|
|
O.P. Jalan (R-3) |
|
|
|
|
Sudha Jalan (R-4) |
|
|
|
3-11-1984 |
R.N. Jalan (R-9) |
|
B-227-C |
|
|
O.P. Jalan (R-3) |
|
|
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
26-11-1984 |
O.P. Jalan (R-3) |
|
B-227-D |
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
|
Leave of absence was granted to S.K. Jalan
(R-8) and R.N. Jalan (R-9) |
|
|
|
5-1-1985 |
O.P. Jalan (R-3) |
|
B-227-E |
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
|
Leave of absence was granted to S.K. Jalan
(R-8) and R.N. Jalan (R-9) |
|
|
|
28-2-1985 |
O.P. Jalan (R-3) |
|
B-227F |
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
|
Leave of absence was granted to S.K. Jalan
(R-8) and R.N. Jalan (R-9) |
|
|
|
19-9-1986 |
O.P. Jalan (R-3) |
|
B-332-A |
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
20-9-1986 |
O.P. Jalan (R-3) |
|
B-332-B |
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
16-10-1986 |
O.P. Jalan (R-3) |
|
B-332-C |
|
|
Smt. Sudha Jalan (R-4) |
|
|
|
|
Leave of absence was granted to R. Khemka
(P-1) and S.K. Jalan (R-8) |
|
|
|
4-11-1986 |
S.K. Jalan (R-8) |
|
B-332-D |
|
|
O.P. Jalan (R-3) |
|
|
|
|
Leave of absence was granted to Smt. Sudha
Jalan (R-4) |
|
|
|
15-1-1987 |
S.K. Jalan (R-8) |
|
B-332-E |
|
|
O.P. Jalan (R-3) |
|
|
|
|
Sudha Jalan (R-4) |
|
|
|
|
S.N. Jalan (R-7) on invitation. Leave of
absence was granted to R. Khemka(P-1) |
|
|
|
6-6-1987 |
S.K. Jalan (R-8) |
|
B-333 |
|
|
O.P. Jalan (R-3) |
|
|
|
|
S.N. Jalan (R-7) |
|
|
|
|
Leave of absence was granted to R. Khemka
(P-1) and Smt. Sudha Jalan (R-4) |
|
|
|
21-9-1987 |
S.K. Jalan (R-8) |
|
B-333 |
|
|
O.P. Jalan (R-3) |
|
|
|
|
S.N. Jalan (R-7) |
|
|
|
|
Leave of absence was granted to Smt. Sudha
Jalan (R-4) |
|
|
|
22-9-1987 |
S.K. Jalan (R-8) |
|
B-333 |
|
|
S.N. Jalan (R-7) |
|
|
|
|
O.P. Jalan (R-3) |
|
|
|
|
Leave of absence was granted to Sudha Jalan
(R-4) |
|
|
|
31-12-1987 |
S.K. Jalan (R-8) |
|
B-333 |
|
|
O.P. Jalan (R-3) |
|
|
|
|
S.N. Jalan (R-7) |
|
|
|
|
Leave of absence was granted to Smt. Sudha
Jalan (R-4) and R. Khemka (P-1). |
|
|
With regard to Annual General Meeting Ex. B-334 is the relevant document. It contains the Minutes of the Annual General Meeting from 1982 to 1990. The details of the Meetings are as follows:
|
Date of Annual General Meeting |
Persons attended |
Ex. No. |
|
29-9-1982 |
O.P. Jalan (R-3) |
B-334-A |
|
|
R.N. Jalan (R-9) |
|
|
|
Hemanth Jalan |
|
|
|
(R.W-2 & son of R-9) |
|
|
|
Satyabhama Jalan |
|
|
|
Sudha Jalan (R-4) |
|
|
|
Radha Devi Khemka (P-2) |
|
|
|
Kamla Devi
Khemka |
|
|
|
R. Khemka
(P-1) |
|
|
29-9-1983 |
R.N. Jalan
(R-9) |
B-334-B |
|
|
O.P. Jalan
(R-3) |
|
|
|
Satyabhama
Jalan |
|
|
|
Sudha
Jalan (R-4) |
|
|
28-9-1984 |
R.N. Jalan
(R-9) |
B-334-C |
|
|
O.P. Jalan
(R-3) |
|
|
|
Satyabhama
Jalan |
|
|
|
Sudha
Jalan (R-4) |
|
|
18-12-1985 |
O.P. Jalan
(R-3) |
B-334-D |
|
|
Sudha
Jalan (R-4) |
|
|
|
Sanjay Jalan |
|
|
18-10-1986 |
O.P. Jalan (R-3) |
B-334-E |
|
|
Sudha Jalan (R-4) |
|
|
|
Sanjay Jalan |
|
|
31-10-1987 |
O.P. Jalan (R-3) |
B-334-F |
|
|
Sudha Jalan (R-4) |
|
|
|
Sanjay Jalan |
|
|
|
R. Khemka (P-1) |
|
|
|
Mahesh Khemka (P-3) |
|
|
5-7-1988 |
O.P. Jalan (R-3) |
|
|
|
Sudha Jalan (R-4) |
B-334 |
|
|
R.N. Jalan (R-9) |
|
|
|
R. Khemka (P-1) and others. |
|
|
6-2-1990 |
O.P. Jalan (R-3) |
B-334 |
|
|
Sudha Jalan (R-4) |
|
|
|
R.N. Jalan (R-9) |
|
|
|
R. Khemka (P-1) and others. |
|
30. It is in evidence of R-9 and P-1 that the shares were being allotted among Khemkas and Jalan families in the ratio of 1:2 approximately in all the joint ventures established by these two families. They stated that there was implied understanding to this effect. Thus they say that R-1 company was essentially a partnership concern even though it was incorporated under the Companies Act. The tussle started only in August, 1985. Till such time, R-9 never put anything in writing either about the affairs of the company or about the other matters relating to the functioning of the company. According to him he wrote two letters on 16-8-1985. In the 1st letter Ex. R-2 which was alleged to have been sent under Registered Post Acknowledgement due to the Secretary of R-1 company stating that in response to his letter, he has received Minutes of 12 Board meetings but they were not certified by the Secretary. Therefore, the Minutes initialled by R-9 and photocopies were sent for the records. The Minutes of 12 Board meetings stating to have been received by him were 20-7-1983,27-7-1983,1-11-1983,13-1-1984,3-3-1984,4-6-1984,21-8-1984,3-9-1984,3-11-1984, 28-2-1985, 27-6-1985 and 8-7-1985. It has to be noted in this regard that according to the R-1, R-2 and R-3 apart from these meetings two more meetings were also held on 26-11-1984 and 5-1-1985. Vide Ex. R-4 letter dated 21-10-1985, R-9 wrote letter to the Secretary stating that he had sent on 16-8-1985, the photocopies of the Minutes from 20-7-1983 to 8-7-1985 after initialling and thereafter no Board meeting was held. In the same letter he has also stated that on 16-8-1985 he sent another registered letter requesting the Secretary to give him 10 days Notice for holding the Board meetings. Therefore, he requested for necessary action. On 27-10-1985 Ex. R-5 he again wrote to the Secretary requesting to send all communications by Registered Post Acknowledgement Due to the addressees care of Nucon Industries. On 29-10-1985 again he wrote another letter to the Secretary Ex. R-6 requesting to arrange delivery of Notice etc. to him in person either to him or to Hemanth Jalan at Nucon address and sent Rs. 50 towards postal charges. Ex. R-7 is a personal letter written by R-9 to R-3. Ex. R-8 is the letter dated 1-11-1985 written by R-3 to R-9 asking R-9 to remit a sum of Rs. 1,17,938.93 which is outstanding from Nucon Industries. Similarly another letter on the same day Ex. R-9 written asking R-9 to pay a sum of Rs. 26,36,931.17 ps. outstanding from the Nucon. To the personal letter Ex. R-7 written by R-9 it was replied by R-3 by his letter dated 8-11-1985 Ex. R-10 wherein he had stated that he did not wish to enter into any controversy in view of the conciliatory efforts being undertaken by his father to resolve the differences. On 13-11 -1985 the Secretary R-2 also wrote a letter to R-9 Ex. A-11 stating that he was unable to enter into any controversy in view of the factual position. Again on the same day, vide Ex. R-12 it was intimated in response to his letter dated 30-10-1985 that all the Board meetings are being held under proper Notice and that R-9 cannot convene a meeting of Directors. Some letters were exchanged between R-3 and R-9 with regard to the directorship in Nucon which we have no concern.
31. It is the case of R-3 and also R-2 that the Notices were being sent by post and also under Certificate of Posting after 1982. R-9 and P-1 did not attend the meetings deliberately being disinterested in the Company affairs. R-9 after resignation from HIL Post in February, 1985 started devoting his time to Nucon, in which his son Mr. Hemanth Jalan was suitably accommodated. P-1 also was equally disinterested as his son was not given suitable position after his return from Saudi Arabia in 1982 and his son started rival industry APPL in 1982. It went into commercial production in December, 1984. The said industry was patronised by HIL as P-1 became President of HIL and substantial orders were diverted from D.E.P.L. R-3 further stated that there was a family settlement in August/September, 1984 and as per the settlement Nucon went to R-9 and R-1 Company went to R-3. Keeping in view the settlement R-3 had resigned as Managing Director of Nucon and absolute powers were conferred on R-3 in respect of R-1 company. It is also his case that after the settlement R-9 took over Nucon and his wife was also taken on Board of Nucon as Additional Director. It is the case of R-9 that the Notices were never sent under Post at any time. Yet, it is the case of P-1 and P-3 that Notices were not sent at all from 1983 till 1985, and only when a specific request was made in March, 1985 to send them under Registered Post, they are being sent. The Secretary R-2 had filed various Notices right from 1982 and also the Certificate of Postings to say that they were sent under Certificate of Posting. It was also stated that under the provisions of the Companies Act and also the Articles of Association, the Notice of meeting required to be sent to the Directors in writing and a presumption has to be drawn as stated in the statute, if the Notices were sent under post and if the same Notice is exhibited it is sufficient compliance of the requirement under Articles of Association. For this purpose, it has to be considered whether the Notice in writing is necessary or oral Notice among the directors is sufficient and whether any such practice is in vogue and if so such practice is in accordance with the statutory provisions or in conformity with the Articles of Association. Under Article 40 of the Articles of Association, the powers and duties of the directors have been enumerated, which is extracted below:
"40. Subject to the provisions of the Act, the control of the Company shall be vested in the Board who shall be entitled to exercise all such powers and to do all such acts and things as the Company is authorised to exercise and do. Provided that the Board shall not exercise any power or do any act or thing which is directed or required, whether by the Act or any other statute or by the Memorandum of the Company or by these Articles or otherwise, to be exercised or done by the Company in General Meeting. Provided further that in exercising any such power or doing any such act or thing, the Board shall be subject to the provisions in that behalf contained in the Act or any other statute or in the Memorandum of the Company or in these Articles, or in any regulations not in consistent there with and duly made thereunder, including regulations made by the Company in General Meeting but no regulation made by the Company in General Meeting shall invalidate any prior act of the Board which would have been valid if that regulation had not been made."
Articles 49 to 56 relate to holding of Board meetings, which are extracted below:
"49.The Board shall meet together at least once in every three months and atleast four such meetings shall be held in every year for the despatch of business and may adjourn and otherwise regulate its meetings and proceedings as it thinks fit. Notice in writing of every meeting of the Board shall be given to every Director for the time being in India and at his usual address in India to every other Director.
50. The
Secretary and/or any other authorised officer of the Company shall from time to
time and also upon the request of a Director shall convene a meeting of the
Board.
51. At every meeting of the Board,
the Directors present shall choose some one of their members to be Chairman of
such meeting until a permanent Chairman of the Board is appointed by them.
52. The quorum necessary for
the transaction of the business of the Directors shall be one-third of its
total strength or two Directors whichever is high.
53. A meeting of the Board at which a quoram be present shall be competent to exercise all or any of the authorities, powers and discretions by or under these Articles for the time being vested in or exercisable by the Board.
54 The board may, subject to the provisions of the Act, from time to time and at any time delegate any of its power to a Committee consisting of such Director or Directors as it thinks fit and may from time to time revoke such delegation. Any Committee so formed shall, in the exercise of the powers so delegated, conform to any regulations that may from time to time be imposed upon it by the Board.
55. The
meetings and proceedings of any such Committee consisting of two or more
members shall be governed by the provisions herein contained for regulating the
meetings and proceedings of the Board as far as the same are applicable
thereto, and are not superseded by any regulations made by the board under the
last preceding Article.
56.
Acts done by a person as a Director shall be valid, notwithstanding that it may
afterwards be discovered that his appointment was invalid by reason of any
defect or disqualification or had terminated by virtue of any provisions
contained in the Act or in these Articles. Provided that nothing in this
Article shall be deemed to give validity to acts done by a Director after his
appointment has been shown to the Company to be invalid or to have
terminated."
32. The matters relating to service of Notices has been stipulated in Article 67 which is extracted below:
"67. (1) A Notice or other document may be given by the Company to any member either personally or by sending it by post to him to his registered address or (if he has no registered address in India) to the address, if any, within India supplied by him to the Company for the giving of Notices to him.
(2) Where a Notice or other document is sent by post:
(a) service thereof shall be deemed to be effected by properly addressing, prepaying and posting a letter containing the Notice or document, provided that where a member has intimated to the Company in advance that notices or documents should be sent to him under a certificate of posting or by registered post with or without acknowledgement due and has deposited with the Company a sufficient sum to defray the expenses of doing so, service of the notice or document shall not be deemed to be effected unless it is sent in the manner intimated by the member; and
(b) unless the contrary is proved, such service shall be deemed to have been effected:
(i) In the case of a notice of meeting at the expiration of forty-eight hours after the letter containing the same is posted; and
(ii) In any other case, at the time at which the letter would be delivered in the ordinary course of post."
Under Article 73 it is open for any member or other persons to have inspection of the documents and enter into the premises with the permission. The said Article is extracted below:
"73. No member or other persons (not being a Director) shall be entitled to enter upon the property, of the Company or to inspect or examine the Company's premises or properties of the Company without the permission of the Board, to require discovery of or any information respecting any detail of the trading of the Company or any matter which is or may be in the nature of a trade secret, mystery of trade, or secret process or of any matter whatsoever which may relate to the conduct of the business of the Company and which in the opinion of the Board it will be inexpedient in the interest of the members of the Company to communicate."
This Articles of Association was signed by R-9 and P-1. In this regard, a reference can also be made to sections 53 and 286 of Companies Act, with regard to service of documents on members by the Company. The said provisions are extracted below:
"53.Service of documents on members by company—(1) A document may be served by a company on any member thereof either personally, or by sending it by post to him to his registered address, or if he has no registered address in India, to the address, if any, within India supplied by him to the company for the giving of notices to him.
(2) Where a document is sent by post,—
(a) service thereof shall be deemed to be effected by properly addressing, prepaying and posting a letter containing the document, provided that where a member has intimated to the company in advance that documents should be sent to him under a Certificate of posting or by registered post with or without acknowledgement due and has deposited with the company a sum sufficient to defray the expenses of doing so, service of the document shall not be deemed to be effected unless it is sent in the manner intimated by the member; and
(b) such service shall be deemed to have been effected:
(i) in the case of a notice of a meeting, at the expiration of forty-eight hours after the letter containing the same is posted, and
(ii) in any other case, at the time at which the letter would be delivered in the ordinary course of post.
286. Notice of meetings.— (1) Notice of every meeting of the board of directors of a company shall be given in writing to every director for the time being in India, and at his usual address in India to every other director.
(2) Every officer of the company whose duty it is to give notice as aforesaid and who fails to do so shall be punishable with fine which may extend to one hundred rupees."
33. R-9 and P-1 have been stating that no formal
Notices were sent and meetings were being held on informal intimation being
neighbours. Their case was that Notices were never sent by post much less under
Certificate of Posting. On the other hand R-3 stated that Notices for all the
meetings were invariably sent along with Agenda by post under Certificate of Posting
and they were sent under Registered Post after specific instruc tions from R-9
and P-1. Section 286 mandates sending of Notices in writing and omission
attracts penalty. Article 49 clearly stipulates that the notices for the
meetings shall be in writing. Even though P-1 and R-9 stated that there was no
practice of sending the Notices, yet the practice cannot be in violation of
statutory provision and articles of association. Such a practice even assuming
was in existence, would be illegal. Section 286 read with section 53 and
Article 67 leads to inevitable conclusion that the Notices shall be in writing.
Therefore, I have to hold that R-1 Company had issued notices in writing in
respect of all the meetings.
34. The next question that falls for consideration is whether the Notices were sent by R-1 Company in accordance with the statutory provisions. As already narrated, it is the case of R-1 Company that prior to 1982 the Notices were being sent under ordinary post, but after 1982, when a decision was taken to maintain the Minutes of the Board in Loose Leaf papers, R-3 as a Managing Director took a decision to send the letters thereafter under Certificate of Posting. Before we refer to these letters and respective Certificate of Postings, it is necessary to refer to the correspondence which emanated from P-1 and R-9 in this regard which would be relevant for the purpose of the disposal of the issue. As far as the correspondence from P-1 was concerned, it is only in March, 1985, P-1 for the first time wrote a letter to R-1 company Le., on 25-3-1985 vide Ex. A-21 stating that for the last 18 months, he did not receive any Notices or Agendas or invitations for any of the meetings. On the very same day he also addressed a letter to R-9 Ex. A-1 18 stating that he came to know that the Board resolution withdrawing Mr. Mahesh Khemka (P-3) nomination to ARIL Board. In the said letter there is no mention about the non-receipt of any Notices for the last 18 months as mentioned in Ex. A-21. The relevant letters are extracted below. Ex. A-21 reads thus:
"The Managing Director,
M/s Deccan Enterprises Pvt. Ltd.
I am surprised to learn that various board meetings and general meetings of the Company have been held for the last 18 months whereas during this period I have received no notices, agenda or invitation for any of these meetings. I have also not received, as yet, the annual report and balance sheet for the year ending 31-3-1984 for my signature and records. Since last year I have also not been receiving the monthly reports of the company as was our usual practice.
I would, therefore, request you to please let me have copies of the minutes of various board and general meetings since June, 1983 for my perusal and record and also a copy of the annual report and balance sheet of the company for the year ended 31-3-1984.
In future I would request you to please send me the notice for the board and general meetings by "Regd. Post Ack. Due" at my above address so as to reach me a week before the date of the meeting. The monthly reports of the company may also be sent to me regularly as usual in future.
Sd/-R. Khemka"
To the said letter, the reply was sent by R-1 company under Ex. A-22 dated 30-4-1985 which is extracted as follows:
"Mr. R. Khemka
This is with reference to your letter dated 25th March, 1985.
At the outset we express our great surprise at the contents of your letter under reference. The notices, agendas and other documents in connection with the meetings of the Board of Directors and the Shareholders of the Company held during the period mentioned in your letter were duly sent to each of the Directors of the Company including yourselves as was being done in the past. The Annual Report and Balance Sheet of the Company for the year ending 31-3-1984 was placed before the meeting of the Board of Directors held on 3rd September, 1984 and was signed by all the Directors present at the said meeting. A copy of the said Annual Report and the balance sheet of the Company is enclosed.
As you are aware we had discontinued the practice of despatching monthly reports to each of the directors individually.
Save and except as stated herein we deny each and every allegation made in your letter under reference.
Sd/- O.P. Jalan."
By Ex. A-29, again P-1 addressed a letter dated 16-8-1985 to the R-1 in the following terms:
“M/s Deccan Enterprises Private Ltd.
Please refer to your letter dated 30-4-1985.
I reiterate the contents of my letter dated 25-3-1985. I see no reason for your feigned surprise expressed in your letter. I deny that during the last 18 months, notices, Agenda and other documents in connection with the meetings of the Board of Directors and Shareholders of the Company were being sent. It appears that unilaterally the earlier practice in this regard is given a go-bye for reasons best known to you. I now realise that this has been deliberately resorted to.
I acknowledge receipt of the Annual Report and Balance Sheet for the year ending 31-3-1984. However, you have failed to obtain my signature as the Director on the Annual report and Balance Sheet for this year as it has always been the practice hitherto. As you are aware this practice has been justifiedly in vogue having regard to our joint interest and management.
I find that you have not forwarded to me copies of the Minutes of various General Meetings since June, 1983 despite my specific request in my last letter. Please comply.
In view of the common interest and understanding of the joint management. I was being kept informed through these monthly reports of the working of the company, I was not aware that these reports are not being received by me pursuant to unwarranted decision solely of your own. Please, therefore, send me copies of earlier reports of past months since the discontinuance thereof and also ensure such information in future also regularly and without fail.
Sd/-R. Khemka."
In pursuance of the letter dated 16-8-1985, P-1 was furnished with the Minutes of various general meetings held since June, 1983 vide letter Ex. A-31 R-1 company also addressed one more letter Ex. A-33 (same is marked as Ex. R-12) dated 13-11-1985 to R-9 and a copy of the letter was endorsed to P-1 to the following effect:
"Sri. R.N. Jalan.
I refer to your letter dated 30-10-1985.
All meetings of Board of Directors are duly held upon proper notices. Under Article 48 of the Articles of Association of the Company, you cannot convene meeting of Board of Directors. There is therefore no question of complying with your request in your letter under reply. The purported meeting called by you if held, would be illegal, resolutions purported to be passed at such meeting if any, would be of no consequence.
For Deccan Enterprises Pvt. Limited
Sd/— Secretary."
No reply was given to this letter by R-9 while the same was replied by P-1 after 1½ months vide Ex. A-34 dated 17-12-1985 which is in the following terms:
"The Managing Director, Deccan Enterprises Pvt. Ltd. I refer to above cited letter addressed to Mr. R.N. Jalan and copied to me.
I have not received any notice(s) of Board meeting(s) beyond that of 8-7-1985.1 still await copies of Minutes of the meetings dated: 27-6-1985 and 8-7-1985, besides the other papers and matters sought for in my two letters of 16-8-1985.
On the basis of information received by me, I apprehend that the 'Jalan Group' is attempting to change the pattern of shareholding of the company by unwarrantedly issuing the unsubscribed capital of the company and allotting it to the nominees of the Jalan group only. I must reiterate that such an action would be contrary to the original understanding between the two groups. We call upon you to refrain from taking any such wrongful and illegal action.
Sd/- R. Khemka."
On 1-11-1985 a letter was sent to P-1 (Ex. A-31) to the following effect:
"Sri R. Khemka,
We refer to your letter 16-8-1985.
We reiterate the contents of our letter dated 30-4-1985 in this regard.
As a matter of cooperation, we are enclosing herewith copies of Minutes of various General Meetings held since June, 1983.
for Deccan Enterprises Pvt. Ltd.
Sd/—
O.P. Jalan,
Managing Director."
While so, on 17-12-1985, two communications were sent vide Exs. A-35 and A-36, which are extracted below:
"Ex. A-35, dated 17-12-1985. The Managing Director, Deccan Enterprises Pvt. Ltd.
I acknowledge with thanks the receipt of your letter dated 1-11-1985 enclosing therewith copies of Minutes of the Annual General Meeting dated 29-9-1983 and 28-9-1984.
I invite your kind attention once again to my two letters both dated 16-8-1985 of which several other requests remain still to be attended to and complied with.
I am particularly concerned that I have not still received Minutes of the Board meetings since June, 1983 including those of recent meetings and also copies of monthly performance reports, despite my repeated requests. This practice I reiterate has been justifiedly in vogue having regard to our joint interest in management. Please, therefore, adhere to the same.
Your contentions and claims in your letter dated 30-4-1985 are again denied as being incorrect and untenable. I reiterate my letter dated 16-8-1985.
You would please appreciate my anxiety in view of the unsatisfactory operating results reflected in the Audited Balance Sheet for the year ending 31-3-1984. You are also aware that these results of the year 1983-84 were got approved at the Annual General Meeting at which no member of the Khemka group including myself was present as no notice was received for such meeting. I am also unable to understand why no Annual General Meeting of the company has been called as yet to review the working results for 1984-85.
I once again request you to send me all notices, Agenda and relative minutes and all other communications of the company to me by Registered Post with Acknowledgement due. For this purpose I am sending herewith Banker's cheque No. 2489553 dated 17-12-1985 in your favour on State Bank of Hyderabad, Sanatnagar Branch for Rs. 100 to defray the expenses towards the postage and delivery etc. Please ensure that the notices for Board meetings are received by me at least 3 days prior to such meeting.
Thanking you and awaiting your compliance in the above regard.
Sd/- R. Khemka.
Ex.A 36, dated 17-12-1985
The Managing Director, Deccan Polymers Ltd.
I acknowledge with thanks the receipt of your letter dated 1-11-1985 enclosing therewith copies of Minutes of the Annual General Meetings dated 29-9-1984, 27-9-1985 and 4-10-1985.
I invite your kind attention once again to my letter dated 16-8-1985 of which several other requests remain still to be attended to and complied with by you. Please comply.
I request you to send me all notices, agenda and relative minutes and other communications in connection with meetings of the Board and shareholders of the company by Registered Post Acknowledgement due. I am sending herewith a pay order for Rs. 100 to defray the expenses towards such postage and delivery.
Sd/
R. Khemka."
and under Ex. A-37, the Company by its letter dated 16-1-1986 addressed P-1 in the following terms:
"Mr. R. Khemka
I am in receipt of your two letters both dated 17th December, 1985 addressed in my official capacity.
I take this opportunity to express my anguish at various false allegations made by you including non-receipt of various notices of meetings which in fact you are not attending since about 1983 for reasons best known to you. As a matter of fact, you have utilised some of the information taken from the company for your personal benefit directly against the interests of the company by assisting your son to establish a rival business.
In view of the negotiations taking place between us for resolving various pending matters, I am not dealing further with your letters. I am confident that the present negotiations would be successful and all of us should actively help each other in settling our differences.
I look forward to receive your kind co-operation in this matter.
Sd/- O.P. Jalan."
In the letter dated 6-2-1986 vide Ex. A-41 P-1 had stated that he had not received any Notice of board of directors meeting or Annual General Meetings after 8-7-1985. It is in evidence of R-2 that the Notice dated 31-10-1985 Ex. B-96 for Board meetings dated 8-11-1985 and 11-11-1985 were sent under Registered Acknowledgement Due. Ex. B-96 is the office copy of the Notice dated 31-10-1985 and Ex. B-96-A and Ex. B-96-B are the Agendas for the Board meeting held on 8-11-1985 and 11-11-1985. Ex. B-97 is the Registered postal receipt No. 3236 dated 31-10-1985. Ex. B-95 is the Acknowledgement for Ex. B-96. It is the case of P-1 that letter Ex. A-31 dated 1-11-1985 was sent under Ex. B-97 which is denied by R-2. As can be seen from Ex. A-31, it was not sent under Registered Post, whereas the Notice Ex. B-96 was sent under Registered Post Acknowledgement Due. With regard to 19th Annual General Meeting to be held on 18-12-1985, it is in evidence that Notice dated 11-11-1985 Ex. B-125 for Annual General Meeting to be held on 18-12-1985 were sent to all shareholders. Ex. B-355 is the Registered Postal receipt No. 1874, dated 11-11-1985 and Acknowledgement is Ex. B-89. The accounts were sent to all shareholders including P-1 under Certificate of Posting dated 11-11-1985. There is evidence also that for subsequent meetings Notices were sent under Registered Post by the company. Coming to the correspondence entered by P-1 with R-9 he wrote a letter for the first time to R-9 on 25-3-1985 in Ex. A-1 18 about the withdrawal of P-3 from the ARIL Board. In the said letter P-1 did not mention about non-circulation of Minutes and non-receipt of Notices for various meetings. But, there was no response from R-9 in reply. Further R-9 himself stated that he did not reply and further said that he did not know the reasons for not replying. Thereafter P-1 did not pursue the matter with R-9. It is thus seen that after long gap of 18 months P-1 started corresponding with R-1 and R-3 only from March, 1985 and no explanation is coming forth from him for not writing such a letter at the earliest possible opportunity. From letter dated 25-3-1985 Ex. A-21, it implies that P-1 knew that the meetings were held. The Articles of Association also says that the Board meeting should be held once in a three months. It is not as if he was not aware of this position. No reasons are forthcoming as to why he kept quite beyond 3 months when he did not receive any Notice after March, 1983. It is beyond anybody's comprehension that a person of his status possessing vast knowledge of Corporate Law, could have kept quiet for such a long time. It is also not understood as to why he did not take up the matter with R-9 when he did not receive the Minutes of various Board meetings. When it was brought to his Notice by R-3 that system of circulating the Minutes was dispensed with P-1 did not take up the issue with R-9 and no information is forthcoming from P-1 in this regard. It is also worth-noticing that P-1 also wrote to R-9 on the same day i.e., 25-3-1985.
Let us consider the action by R-9. He is alleged to have initiated correspondence with R-1, R -2 and R-3 for the first time in August, 1985. According to R-9 he wrote a letter on 16-8-1985 Ex R-2 which is extracted below:
"The
Secretary,
Company
Law,
Deccan Enterprises Pvt. Ltd.
In response to my letter I have received (twelve) copies of Board of Directors meetings from 20th July, 1983 to 8th July, 1985. You seem to have forgotten to certify them as requested. I have initialled these minutes. A photocopy of these minutes is being sent to you for your records.
Sd/- R.N. Jalan."
The reverse of Ex. R-2 is as follows:
"Deccan
Enterprises Private Limited
Annexure to Letter dated 16th August, 1985
(1) Board Minutes of Meeting held on:
(a) 20th July, 1983
(b) 27th July, 1983
(c) 1st November, 1983
(d) 13th January, 1984
(e) 3rd March, 1984.
(f) 4th June, 1984
(g) 21st August, 1984 (h) 3rd September, 1984
(h) 3rd November, 1984
(i) 28th February, 1985
(j) 27th June, 1985
(l) 8th July, 1985."
He did not also inform R-3 about letter Ex. A-118 dated 25-3-1985 written to him by P-1 and it reads thus:
"My dear Jalan Ji,
I am surprised to learn that Deccan Enterprises has submitted a Board resolution to Amiantit Rubber Industries Ltd. withdrawing Mahesh's nomination to ARIL's Board. It is all the more regretable that this issue was not discussed with me at any time during the last several months, even though I am sure you are fully aware of its implications.
When we decided that we would do further business independently, I had suggested to you that we should request a mutual friend to act as an arbitrator to help arrange an amicable separation between us in respect of our existing joint business i.e., Deccan enterprises, Nucon, Deccan Polymers, ARIL and Secunderabad Commercial Company. They mean as much to me as they mean to you and for both of us these businesses represent an entire life time's effort and savings. Besides, like you. I have always looked upon these businesses to provide working responsibilities for our children when they grow up and are capable of such responsibility.
Since our last talk, I have been waiting for some sort of response from you. There has been no response from you and unfortunately now the status quo is being seriously disturbed by the attempted withdrawal of Mahesh's nomination on ARIL's Board and that too, by keeping me completely in the dark.
We have known each other, and worked together for almost 30 years during which period we have been extremely close and I have reposed the utmost trust and confidence in you. You have yourself always said that an understanding of partnership between two people is far more binding than an agreement on paper and during the last 18 years we have been extremely business partners.
The attempted withdrawal of Mahesh's nomination has shaken my confidence. I had requested you to reverse certain loan transactions routed through accounts of my family members and in particular the entry of approximately Rs. 15 lacs being a loan from Deccan Polymers to Nucon but routed through Mahesh Trading Co. This has not been done as yet and I would request you to kindly get the needful done immediately.
I find that I have also not been receiving any Notices/Minutes of board and general meetings and monthly reports as was our normal practice nor being consulted in the usual manner.
I, therefore, request you to let me know your views in the matter and let me know if you are agreeable to discuss this matter with a view to finding a solution.
With best regards,
Sd/- R. Khemka."
As can be seen from this letter he only concentrated on the withdrawal of his son (P-3) from the Board of ARIL. Incidentally he stated that he has not been receiving the Notices/Minutes of Board and General Meetings. He wanted to know his views. To this letter there was no response from R-9. Even in his evidence he said that he did not know the reasons for not sending reply to Ex. A-118. There was no immediate reaction. It was incumbent on him to have expressed his views when his close associate had brought the issues before him. But he kept quiet for some time and started writing letters to R-1 and R-3. R-9 did not refer to Ex. A-118, in the Counters. It is also noted that on 25-3-1985, P-1 had written two separate letters. One to R-1 company (Ex. A-21) and another letter to R-9 (Ex. A-118), with regard to the affairs of the R-1 company. It is not understood why he had sent separate letters to R-1 and R-9 separately. He should have made known his correspondence to R-3 and R-9 as well since it is of common interest. At least P-1 could have endorsed the copy of Ex. A-21 to R-9 and similarly copy of Ex. A-118 could have been endorsed to R-3. Obviously it appears that P-1 wanted to keep them in dark and had been expecting some clues from them independently as R-3 and R-9 were admittedly not in a position to exchange all views on the business ventures. The tenor of letter dated 25-3-1985 Ex. A-1 18 speaks for itself. On 29-10-1985 again he wrote another letter under Ex. R-6 which is extracted below:
"To
The
Secretary,
Company
Law
Deccan Enterprises Pvt. Ltd.
I have already sent you a letter dated 27-10-1985 (copy enclosed) to send all communications to me by Regd. A/D at the following address:
Mr.
R.N. Jalan, Managing Director
C/o
Nucon Industries Private Limited,
88,
Cooperative Industrial Estate,
Expansion
Scheme,
Balanagar,
Hyderabad — 500017
You are further requested to arrange delivery in person a copy of all the communications mentioned above either to me or to Mr. Hemanth Jalan at the above address. A pay order No. 073482 of Andhra Bank of Rs. 50 is being sent to you along with the letter to defray the expenses towards such postage / delivery.
Please acknowledge the receipt of this letter.
Sd/- R.N. Jalan."
He also wrote another personal letter to R-3 vide Ex. R-7 dated 29-10-1985 in the following terms:
"My dear Omprakash,
I have already addressed a letter dated 21 st October, 1985 to the Secretary Company Law of Deccan Enterprises (P.) Ltd. that no Board meeting has been held after 8th July. I had further informed him that a Board meeting should have been held before 31st October, 1985 as per practice in the Company. I had further requested him to call a Board meeting immediately. I have not heard anything from him so far. I have therefore decided to call a Board meeting on 18th November at the Registered Office at 11 a.m.
In the meantime I sincerely believe that information received by me, that you and your wife in connivance with Secretary Company Law, with a view to change the shareholding of the Company to your benefit in detriment to the interests of other Directors have planned by wrongful and improper means to allot the unsubscribed Capital of the Company to you and your nominees by keeping either Directors and Shareholders totally in the dark by not issuing properly, notice of Board meetings and other communications notices, etc. are not true. However, you are advised to desist from such improper acts. It is needless to say that any such board resolution, notice to shareholders, allotment of shares, calls for payment, issue of share certificate against issue of new capital will be null and void will be of no effect.
I have already sent a letter dated 27-10-1985 and 29-10-1985 advising Secretary Company Law to send notices, resolutions and other communications by Registered A/D and have one copy delivered personally to myself or Hemanth Jalan. I have also sent a Pay Order of Rs. 50 to defray the expenses towards such postage/delivery. I regret to inform you that the Secretary Company Law refused to receive the above mentioned letter dated 29-10-1985. I have therefore sent the same by Registered Post and also sent a telegram and am writing again to him in the matter.
Sd/- (R.N. Jalan)
Chairman
Board of Directors,
Deccan Enterprises (P.) Ltd."
The said letter was replied by R-3 vide Ex. R-10 dated 8-11-1985 which is as follows:
"My Dear R.N. Bhaiya,
I am in receipt of photocopy of your letter dated 29-10-1985 by Registered post.
Your letters to the Secretary will be attended by him. As I do not wish to enter into any controversy with you at this stage in view of the efforts being made by respected Kakoji to resolve our differences, I am not dealing with your letter in detail. I am sorry, however, for the scandalous and untrue insinuation made against me and my wife involving the Secretary. For the rest I would depend upon the records of the Company.
Sd/- O.P. Jalan.
Sri R.N. Jalan,
Managing Director,
C/o Nucon Industries Pvt. Ltd. 88, Cooperative Industrial Estate Extension Scheme,
Balanagar,
Hyderabad 500037."
R-2 also wrote a letter under Ex. R-11. Therefore, it has to be seen that P-1 initiated correspondence in March, 1985 while R-9 initiated correspondence in August, 1985. It is the case of R-9 that on 16-8-1985 he had sent two letters one relating to despatch of the minutes from 20-7-1983 to 8-7-1985 duly initialled by him and other relating to request to give minimum 10 days Notice for holding Board meeting. However, it is the case of R-1 that they never received letter dated 16-8-1985 sending the Minutes of the Board meeting, but only a letter dated 16-8-1985 Ex. B-404 was received to the effect that the Notices should be sent in advance. The cover under which Ex. B-404 was sent was marked as Ex. B-405. The letter Ex. R-2 alleged to have been sent by Ex. R-9 containing the Minutes of the meetings was disputed by the Company. It has to be seen whether this letter Ex. R-2 is genuine letter which R-9 could establish. In the letter dated 16-8-1985 it was stated that in response to his letter he received the Minutes of the meetings, but what is the date of the said letter was not mentioned nor he filed the copy of the letter. Similarly in his letter dated 21-10-1985 Ex. R-5 he stated that he sent a letter on 16-8-1985 requesting for giving 10 days advance Notice for holding the Board meetings. That letter was not filed by R-9 for the reasons best known to him. It is un-understandable as to why R-9 had written a letter when he chaired all the meetings. Moreover, the Minutes are finalised immediately after the meetings are held. It is not understood why he retained original copy of the Minutes and sent photostat copies to the Company with him initially, while it is the case of the Company that he never sent such a letter Ex. R-2. It is stated by R-9 that he sent a letter under Registered Post and postal receipt No. 5805 is the relevant postal receipt under which the Minutes were sent and it is the case of the company that under the said posted receipt they received only a letter dated 16-8-1985 Ex. B-404 intimating the despatch of Notices in advance. But, it is curious to note that R-9 did not file two Registered postal receipts in which the 16th August letter for sending the Notices in advance and also returning the photocopies of Minutes initialled by him separately were sent. He also did not file the two acknowledgements in respect of two Registered letters. The reasons for asking the Minutes also are not explained in the evidence by R-9. Moreover, R-9 being a Director, it could have been open for him to seek inspection of the records instead of indulging in correspondence. It is in his counter that in July, 1985 Mr. S.C. Kedia, the then General Manager has informed him that the R-3 was planning to issue and allot the unissued capital to himself and his nominees and thereby convert him and the Petitioners from majority to minority. Therefore, he requested R-1 to send the certified true copies of the Minutes of the Board meetings of the company in pursuance of his request, the R-2 sent him the unsigned Minutes of the copies of the 12 Board meetings of the company held between 20-7-1983 to 8-7-1985 and that by letter dated 16-8-1985 he drew the attention of R-2 that these Minutes were not certified by him and he sent photostat copies of the Minutes duly initialled by him. Para 's' of his counter is extracted below:
"(s) In July, 1985 Mr. S.C. Kedia the then General Manager of Respondent No. 1 informed me that respondent No. 3 was planning to issue and allot the unissued capital of Rs. 5 lakhs in the company and to distribute the newly issued and allot shares to himself and his nominees and thereby convert me and the petitioners from majority into minority so as to oust us and to convert himself from minority to majority. Since no resolution had been passed until July, 1985 by the Board of Directors of the company for issue of further shares out of the unissued share capital, I requested Respondent No. 2 to send my certified true copies of the Minutes of the Board Meeting of the company. In pursuance of my request, the Secretary, Respondent No. 2 sent me unsigned copies of Minutes of the 12 Board Meetings of the Company held between 20th July, 1983 and 8th July, 1985. In the premises by a letter dated 16-8-1985,1 drew the attention of the Respondent No. 2 that he had sent me only unsigned copies of the Board Minutes from 20th July, 1983 to 8th July, 1985 and the same were not certified by him. I also sent a photocopy of the said Minutes to the Secretary duly initialled by me for his record. A copy of the said letter dated 16-8-1985 together with all the enclosures thereto ie., to say Board Minutes from 20th July, 1983 to 8th July, 1985 are hereto annexed and collectively marked 'B'. I say the copies of the Minutes sent by me under the cover of my letter dated 16th August, 1985 are all true and correct and any contrary and/or inconsistent recording in the purported directors Minutes book of the company, are wholly untrue and false. The said minutes show that the affairs of the company upto July, 1985 was being conducted in usual course of business and no further shares whatsoever had been issued by the company during the said period."
In his examination in chief, he did not refer to another letter of dated 16-8-1985 regarding the sending of Notices in advance. He only stated in his chief examination thus:
"I requested Respondent No. 1 to send me certified true copies of the minutes of the Board Meeting of the company. In pursuance of my request, the Secretary, Respondent No. 2 sent me unsigned copies of minutes of the 12 Board Meetings of the company held between 20th July, 1983 and 8th July, 1985. By a letter dated 16-8-1985, I drew the attention of the Respondent No. 2 that he had sent me only unsigned copies of the Board Minutes from 20th July, 1983 to 8th July, 1985 and the same were not certified by him. I sent photo copies of the said minutes to Respondent No. 2 duly initialled by me for his record. A copy of the said letter dated 16-8-1985 together with all the enclosures thereto ie., to say Board Minutes from 20th July, 1983 to 8th July, 1985 and postal receipt No. 5805 dated 16-8-1985 and are hereby annexed and marked Exhibit "R-9 Ex. 2, R-9 Ex. 3". The copies of the minutes sent by me under the cover of my letter dated 16th August, 1985 are all true and correct and any contrary and/or inconsistent recording in the purported directors minutes books of the company, are wholly untrue and false. The said minutes show that the affairs of the company upto July, 1985 was being conducted in usual course of business and no further shares whatsoever had been issued by the company during the said period."
In the cross examination he stated that these Minutes were handed over to him by Mr. S.K. Jalan (R-8) and he further added that they were handed over personally. He did not know how his father obtained these Minutes under Ex. R-2. He added that Mr. S.K. Jalan (R-8) was Director in the company and he was at Hyderabad in July/August, 1985. But, however, R-8 was not examined on this issue. The following is the relevant extract from his cross examination:
"The request to send certified copies of the Minutes of the Board meetings of DEPL mentioned at para 31 of my chief examination evidence is oral. It is true that Ex. R-2 is letter written by me enclosing photocopy of meeting of Board of Directors initialled by me. I might have made mistake in stating earlier that the request to supply minutes was oral. I must have written a letter earlier requesting for supply of minutes. I will look into my records and try to show the letter. It is not true to suggest that I never made any such request for supply of copies of minutes to R-2. The unsigned copies of minutes of DEPL referred to at para 31 of my chief examination evidence were sent by the respondent No. 2 to S.K. Jalan and Mr. S.K. Jalan has handed over his minutes to me. R-2 did not write to me any letter, sending to me copy of minutes, it is not true to suggest that R-2 has not handed over any copies of minutes referred to at para 31 to Mr. S.K. Jalan. It is not true to suggest that Mr. S.K. Jalan has not handed over to me any such minutes. It is not true to suggest that I have not sent Ex. R-2 by registered. Post either by receipt covered by Receipt No. 5802 or 5805. I do not have acknowledgements relating to the above registration numbers. Ex. R-3 does not indicate the person who registered the article as the rules do not require it. It is not true to suggest that Ex. R-3 is sent by Nucon. Ex. R-2 could have been sent either under registered No. 5802 or 5805."
Therefore, this statement is quite inconsistent with the tenor of letter Ex. R-2. Further R-9 filed counter only in February, 1988, by which time R-3 has already filed his counter on behalf of R-1 to R-3. Further P-1 had filed Reply to the R-3's counter and R-3 had filed additional counter. No reasons are forthcoming for not filing counter within reasonable time. Obviously he wanted to know the final stand of P-1 and R-3. Yet when he filed counter belatedly he did not even state that there was no practice of sending the written Notices, Agendas. Obviously he could not have stated since it is in evidence that he himself signed Agendas of the previous meetings and some of them are dated 24-7-1967, 5-8-1967 and 2-9-1968 (Ex. B-152 to B-154), and Ex. B-480 to B-485. Even P-1 had signed the Agendas as can be seen from Ex. B-82 and B-83. Moreover as can be seen from Ex. R-2, he earlier sent the letter requesting for furnishing certified copies of the Board meeting, but that crucial letter referred in Ex. R-2 is not forthcoming. Even the office copy covering letter dated 16-8-1985 alleged to have been sent to R-1 has not been filed by R-9 and only a true copy was filed. When he said that he had sent two letters on 16-8-1985 he should have office copies of such letters. None of the office copies of these letters were filed by R-9. He also did not file the office copy of letter dated 16-8-1985 requesting for sending Notices 10 days in advance. The witness admittedly is highly educated person and was in a top Executive position in HIL. When he stated that he received Minutes of 12 meetings in response to his letter, it is not understood why that letter was not filed. On the other hand, it is the evidence of R-2 that they received the letter dated 16-8-1985 to the effect that the Notices should be sent much in advance. Though the learned counsel for R-9 submits that this was referred to in letter dated 21-10-1985 and the said letter of dated 21-10-1985 was received by the Secretary, no objection was raised as to non-receipt of the alleged initialled minutes, but at the same time, it has to be seen that the non-mention will not ratify the action of R-9. It is for R-9 to establish that he had sent Ex. R-2 which he failed to do so. As already stated that there are any number of inconsistencies in his statement and therefore his version that he had received the Minutes of only 12 Board meetings can hardly be believed. We may also consider the issue from another angle. When he received definite information that Mr. Kedia has informed him that the plans are being moved by R-3 to allot the unsubscribed capital to his own persons, there is no reason why R-9 did not take steps to verify by taking inspection of records. Even P-1 in his letter dated 17-12-1985 stated that he apprehended on the basis of information received by him that the Jalan group was attempting to change the pattern by unwarrantedly issuing the unsubscribed capital of the Company and allotting it to the nominees of the Jalan group. It is not known why P-1 resorted to brow beating instead of straight away asking for the information about the issue of unsubscribed capital. Even R-3 also cannot be said to be plain. He also equally tried to shield the information. Obviously, everybody wanted to indulge in shadow fighting. It is also seen that the suit challenging the withdrawal of the nomination of P-3 from the Board of ARIL was filed in Calcutta High Court in May, 1985 and the correspondence started between P-1 and R-3 only in March, 1985. Thus, it shows that the entire gamut of litigation only started after/around March, 1985 and around that period the suit was filed in Calcutta High Court by P-1. The dates of some of the letters of P-1 and R-9 also strengthen the suspiciously collusive nature of litigation. On 16-8-1985 P-1 wrote letter to R-3 Ex. A-29. On the same day R-9 is alleged to have sent a letter Ex. R-2 to R-3 returning the Minutes of meetings. There is no reason why P-1 did not endorse all copies of correspondence entered with R-1/R-2/R-3. Similarly R-9 could have endorsed the copies of letters exchanged by him with R-1/R-2/R-3 to P-1. The intention obviously appears to keep the matters in haze. R-9 apparently tried to buttress the case of P-1 by means of invincible conduct, but when the veil was removed the very first document which he tried to introduce had shaken the entire edifice of his stand. Under these circumstances, I find that Ex. R-2 suffers from inextricable disabilities and the efforts of R-9 to salvage the document to his advantage went in vain. Consequently, his evidence is not worth consideration being incredible. Accordingly, I hold that Ex. R-2 is not a genuine document.
36. Let us now consider the
action taken by P-1 in respect of the alleged non-receipt of the Notices and
Agendas. As already stated supra, he initiated the proceedings only in March,
1985 after having waited for 18 long months.
37. The learned counsel for the
petitioner submits that P-1 could have definitely attended all the meetings had
notices been given to him more so when the decision was taken to increase the
capital and the shares were allotted. He was very much interested as the company
was in very prosperous state and its reserves were 15 times more than its share
capital. He relies on the judgment of the Calcutta High Court in Ratnashankar
Prosad v. Sindri Iron Foundry (P.) Ltd AIR 1966 Cal. 512 Para 50 is extracted
below:
"(50) If the case was such that it could be suggested that the petitioners had some motive in abstaining from attending the extraordinary general meeting one might have hesitated to come to a definite conclusion that the petitioners had not been served with notice of the meeting. A man may no doubt behave strangely on a particular occasion, but it is impossible to believe that a number of hardboiled business people will keep themselves away from meetings where their doom may be effectually sealed in their absence and where they have only to attend and win the day by their superiority in number and voting strength. The fact that no reference has been made in the petition either to the board meeting of January 22,1963 or the extraordinary general meeting of February 21,1963 is only consistent with the conclusion that the petitioners had no knowledge of them on March 14 and 15, 1963 when they moved this Court. The happenings at the extraordinary general meeting could have been made capital of by the petitioners as regards their case of oppression. If it had been the case of a particular share-holder or director not receiving the Notice sent through the Post, one might possibly take the view that it had gone astray, but it is impossible to believe that all the notices of the Board meetings as also those of the extraordinary general meeting should have failed to reach all the addressees. Leaving aside the shares which were alleged to have been issued after the extraordinary general meeting of February 21, 1963 the company had 16 shareholders those in the respondents' group being 4 while the number of members in the petitioners' group was 12. If any person in the petitioners' camp had received the notice, he or she would undoubtedly have made it known to the others, and although letters are known to lose their way in the post, I find myself unable to believe that the notices addressed to all these 12 persons in the petitioner' camp had gone astry. In my opinion the conclusion is irresistible that these notices had never been put in the post, although certificates of posting purport to have been obtained in respect thereof. It is only too well known that certificates of posting can be got hold of without actually putting letters in the post and the respondents must have adopted that course so far as the board meeting of January 22, 1963 or the extraordinary general meeting of February 21, 1963 was concerned." (P. 528)
38. The learned counsel for the P-1 also relied on the judgment of the Supreme Court in Shiv Kumar v. State of Haryana [1994] 4 SCC 445 to the effect that evidentiary value of the postal certificate cannot be construed as a conclusive proof as it is not difficult to get such a postal seals at any point of time. Para 6 is extracted below:
"We have not felt safe to decide the controversy at hand on the basis of the certificates produced before us, as it is not difficult to get such postal seals at any point of time. To assure our mind that the notices had really been sent out to the workmen concerned, we perused the application which had been filed by the management seeking permission. We did so because Rule 76A(2) requires that the application shall be made in triplicate and copies of the same shall be served by the employer on the workmen concerned and 'proof to that effect shall also be submitted by the employer along with the application.' But the application (Annexure A) has not mentioned anything about 'proof of service to the workmen concerned. The statement in the counter-affidavit that proof of service had been submitted to the specified authority has not satisfied our mind in this regard."
The matter arose under Industrial Disputes Act. The Workmen sought to be retrenched were required to be served with Notice and proof of service ought to be filed before the authority. What is relevant is the service of Notice which is mandatory. In the instant case service of Notice is not contemplated. The only requirement under section 53 and also the Articles of Association that the Notice in writing may be given either personally or sent by post. There is a statutory presumption under section 53(2)(b) of the Act that the service is deemed to have been effected under certain conditions stipulated therein. The reliance was also placed on the observations made by the Division Bench of Madras High Court in Shoe Specialities (P.) Ltd v. Stridewell Leathers (P.) Ltd [1995] 82 Comp. Cas. 836. While dealing with section 53(2), it held thus:
"...A presumption can be drawn only when there is no other evidence available. In this case, the primary evidence regarding the posting of the letter is not produced. The best evidence that can be produced in this case is the despatch register of the company, and the books of account showing the expenses incurred by the company for posting the letters, etc. None of these documents is produced. When the primary evidence is not produced, a presumption on the basis of section 53(2) of the Companies Act cannot be made use of since the posting of the letter is in dispute. Only if a document is sent by post, the presumption under section 53 of the Companies Act can arise. When there is no evidence regarding the posting of the letter, the document relied on by the appellant cannot be made use of.
We have also a doubt whether the paper in which the address is typed, can be construed as a certificate of posting. The paper bears the date May 2, 1992, whereas the postal stamp is dated May 3, 1992. There is also a discrepancy in the address of one of the addressees. The address of the first petitioner is not correct. In the certificate of posting, the pin code number of the first petitioner is mentioned as '110036' whereas the pin code number of the first petitioner is New Delhi -110035. So, it cannot be presumed that a letter was sent to the correct address." (P. 881)
39. The learned counsel for R-1 and R-3 submits that there is a presumption that all the Notices were sent by post and taking a clue from section 114 of the Evidence Act read with section 53 of Companies Act and also Articles of Association, it must be presumed that the Notices are genuine and the presumption must be drawn in favour of the company. In Smt. Kanak Lata Ghose v. Amal Kumar Ghose AIR 1970 Cal. 328, the Division Bench of the Calcutta High Court observed as follows:
"As to the posting of the letter written by Kalipada there cannot be any question of discrepancy, because the wife has said nothing about that letter. It is difficult to believe that all the three certificates of posting, Exts. F, F(1) and H dated respectively 16-7-1962,22-1-1963 and 22-7-1963 were obtained from the Post Office without actually posting the letters mentioned therein. The certificates having been given by the postal authorities in the ordinary course of business must be presumed to be genuine unless the presumption is rebutted by cogent proof. The contents of the certificates must be presumed to be true unless they are proved to be false. No evidence has been adduced on behalf of the husband that the certificates are forged or spurious. Therefore, it must be taken that the three letters, copies whereof have been marked as Exts. E, E(1) and G, were duly posted according to the tenor of the certificates Exts. F, F(1) and H. Under section 114 illustration (f) of the Evidence Act it must further be presumed that the three letters, two by the wife and one by Kalipada were received by the husband in due course. A reference may be made in this connection to the case of ChhayaDebi v. Lahoriram [1963] 67 Cal. WN 819 at P. 834, where under similar circumstances, their Lordships of the Division Bench held that the certificate of posting not only raised the presumption that the letter was duly posted but also the presumption that the letter was received by the addressee.
A presumption, however, may be rebutted. In the instant case no attempt has been made to rebut the presumption of posting....
24. No adverse inference can be drawn against the wife of Kalipada for not taking the precaution of sending these three letters by registered post. They might have acted imprudently by sending the said letters under certificate of posting, but from that it cannot be inferred that the story of sending the said letters by certificate of posting is a myth." (p. 332)
The learned counsel for R-3 also relied on the decision in Mrs. Achamma Thomas v. E.R. Fairman AIR 1970 Mys. 77, the High Court while considering section 27 of the Mysore General Clauses Act, 1899, which is to the following effect:
"27. Meaning of service by post—Where (any Mysore Act) (substituted by Act 12 of 1953) made after the commencement of this Act authorises or requires any document to be served by post, whether the expression 'serve' or either of the expressions 'give' or 'send' or any other expression is used, then, unless a different intention appears, the service shall be deemed to be effected by properly addressing, prepaying and posting by registered post, a letter containing the document, and, unless the contrary is proved, to have been effected at the time at which the letter would be delivered in the ordinary course of post.'
(Held) Service of notice by registered post, shall be deemed to be effected on the addressee if the letter is properly addressed, pre-paid and contains the document in this case the notice of termination of tenancy. It is contended by the respondent's counsel that in this case the very fact that the registered letter has come back with the endorsement as mentioned above, shown that the contrary has been proved, namely that there has been no due service effected on the tenant; on the other hand, it is submitted that the service should be deemed to be effected if the four conditions are fulfilled namely, sending the letter by registered post, it being properly addressed, prepaid and the letter contains the document; the contrary that is required to be proved to take away the presumption is with reference to the four requirements referred to above. It appears to me that this contention is not without force. It is only to meet the contingency of a person who is to be served with the notice trying to evade it, that the service shall be deemed to have been effected if the four conditions are fulfilled. If the contrary to be proved has reference to the actual service, then provision of section 27 could be rendered useless by the addressee avoiding to receive the letter or even refusing the registered letter. Therefore, it appears to me that in this case the notice having been sent by registered post complying with the four requirements referred to earlier, in law, it must be deemed that there is due service of the notice of termination of the tenancy." (p. 80)
Again he takes the assistance from Paramanand Choudhary v. Smt. Shulcla Devi Mishra [1990] 67 Comp. Cas. 45 (MP), wherein it was held that "sending of Notice by Certificate of Posting was proper service."
40. From the case law referred to above, it is clear that the presumption arises when the conditions laid down in section 53(2) are complied with. Even the Articles of Association is to the same effect. If the facts establish the service of notice, then the question of drawing presumption does not arise. Thus, the presumption of service of Notice as contemplated under section 53(2) cannot be said to be absolute or irrebuttable as there may be cases where the parties may collude with the postal authorities for procuring postal seals. But, at the same time the burden is on the party alleging that he did not receive the Notice to rebut the presumption by adducing satisfactory evidence. Such issue has to be decided keeping in view the facts and circumstances of each case.
41. From the point of view of the above perspective, let us consider, whether Notices for various Board meetings were sent by R-1 company? It is in evidence that the Notices in writing were sent for various Board meetings and also general meetings. Right from 1982, the Notices issued for the Board meetings, Agendas and Certificate of Postings and also the Minutes were filed on behalf of R-1 company. While it is the case of R-9 that he did not attend certain meetings and in respect of certain meetings, Minutes were not properly recorded, it is the case of the P-1 that no Notices were ever received by him at all. It is also the case of P-1 and R-9 that the Notices for the meetings and the Certificate of Postings are manipulated with a view to justify the validity of resolutions and consequential actions in conformity with the statutory procedures. As noticed from the Minutes of the meetings, P-1 did not attend the meeting after 31-3-1983. The reasons for absence were non-receipt of the Notices. On the other hand, R-9 attended most of the meetings. However, it was denied that two meetings dated 26-11-1984 and 5-1 -1985 had taken place. It is also the case of R-9 that he attended meeting on 3-11-1985 and 25-2-1985 and the resolutions were not passed as reflected in the Minutes produced by R-3 and they were approved as contained in the enclosures to Ex. R-2.1 have already held that Ex. R-2 is not a genuine document. The initial burden lies on the Company to establish that the Notices were sent in accordance with the Articles of Association keeping in view the statutory provision. Even though, R-9 and P-1 categorically stated that no Notices were sent and the Certificate of Postings were fabricated, but at the same time, it has to be tested from the angle of statutory provision. Inasmuch as the Notices have been sent, and the Certificate of Postings have been marked on behalf of the company, the presumption under section 53 comes into play and the said presumption is rebuttable. The onus thereafter falls on the P-1 and R-9 to establish that the Notices were never posted and that the Certificate of Postings were procured. Except stating that they did not receive any Notices no other evidence is forthcoming from P-1 and his supporters, R-9 and his family members. It is also in the evidence that when the P-1 and R-9 gave specific instructions to send the Notices under Registered Post, they were complied with and R-1 company has filed number of documents marking the postal registrations and other documents.
42. It is curious to observe that P-1 being a person in a highly placed position could have kept quite if really he had not received the Notices for Board meetings. It is more so when he is sailing with R-9 in the Company Petition, who is his immediate neighbour. It is not the case of P-1 that R-9 was not in talking terms, on the other hand upto February, 1985, they were working in the same company HIL in top Executive position— R-9 was President and P-1 was Vice-President. If the Notices in fact had not been sent to any person, then R-9 also could not have attended any of meetings at all. The fact that R-9 attended and participated in the meetings of course with certain objections in respect of Minutes of certain meetings which I deal latter, would only go to establish that the Notices were sent and it is also the case of R-3 that decision was taken by him as Managing Director to send the Notices under Certificate of Posting in 1982 when the Board passed resolution to maintain the Minutes of the Board meetings in Loose Leaf Folders. It is also not understood as to why P-1 kept quite for nearly 18 months when he did not receive any Notices or Agendas, for Board meetings or Annual General Meetings. It is also not his case that he asked Rs at any time during 1983 and 1984 that he was not receiving the Notices for Board meetings, which should have been normal reaction of a human being in the ordinary course of events. It is also beyond anybody's comprehension that R-9 could not have enquired the P-1 for not attending the various meetings.
43. The learned counsel for P-1 submits that R-1 company did not discharge the burden to prove that the Notices were properly sent. R-1 Company filed only Notices and Certificate of Postings and the connected postage stamp account were not filed. This submission cannot be accept ed for the reason that R-1 company discharged the burden of proof placed on it namely sending of Notices and the postal Certificate of Posting. When R-3 and R-2 were in witness box and subjected to cross examination at length, it was not suggested that R-1 company did not file the postage account. It is also not the case of P-1 and R-9 that the addresses in the
Certificate of Posting were incorrect and there were any other irregularity. The witnesses are offered for cross examination only for the purpose of bringing out important and crucial matters which could be only ascertained by means of effective cross examination. Except stating that these letters were not posted and the Certificate of Postings were manipulated, no other evidence worth considering has been brought on record. The conduct of the parties and the status held by them is also very relevant for the purpose of ascertaining whether they have acted in a bona fide manner or with an ulterior motive. The version of R-9 relating to Ex. R-2 was not accepted and as regards P-1, even though he had stated that he did not receive any Notices for General meetings and the Board of Directors meetings, it cannot be believed for the simple reason that out of two Directors who are to participate in the meetings one Mr. R.N. Jalan (R-9) had already attended number of meetings. If the Notices had not been sent at all, then R-9 could not have also attended any meetings and chaired the meetings and it is also not possible to perceive that R-9 might not have brought to the Notice of P-1 about these meetings. More over the trouble started not on account of non-receipt of the Notices and Minutes, but due to other reason. According To R-9 the dispute began as narrated in the counter in para 'o' which reads thus:
"(o) The beginning of disputes—In or about 1982, on return of Mahesh Khemka, the son of Petitioner No. 1 who was looking after the business of ARIL in Saudi Arabia as General Manager of the said company, difference arose between Respondent No. 3 & Respondent No 1. Respondent No. 9 being a senior member of the Jalan family and being a prime mover in setting up Respondent No. 1 and other companies along with Petitioner No. 1 tried to devise ways of reaching an amicable settlement and with this and in view attempted to start a steel cylinder pipe project in collaboration with Ameron, USA and a Gypsum Project with M/s Kauf of Germany with Respondent No. 11 being entrusted with the task of looking after the same."
According to R-1 also the reasons are same as can be discerned from paras 23,24,27,29 and 34 of the Company Petition and they are extracted below:
"23.After his return in 1982, it was expected that the respondent No. 11 (now P-3) would be again associated with the management and affairs of the company as Executive Director or in other similar important capacity.
24. This return of Respondent No. 11 (now P-3) however, signalled a change in the attitude of J-Group towards the K-Group. By 1982-83 the Respondent Company was very prosperous and sound with reserves amounting to 20 times of the capital and with assured foreign market and flow of funds from the joint venture company.
27. The J-group started the process of ousting the K-group from the Joint venture company by informing them in about March, 1984 not to deal any longer with Respondent No. 11 (now P-3) on behalf of Respondent No. 1. Simultaneously the Respondent No. 11 was also being subjected to harassment in many petty ways by denial of various facilities in Respondent No. 1 Company on the instructions of Respondent No. 3. Similarly Petitioner No. 1 and Respondent No. 11 are sought to be denied operational informations of vital importance concerning the working of Respondent No. 1 company or as to the major decisions like capital investments and senior appointments, contrary to the earlier established course of practice.
29. The scheme of exclusion came to be definitely known and realised in about March, 1985, by the Petitioner No. 1 and Respondent No. 11 when the J-group, brought into open alleged resolution dated 21-8-1984, interfering with the Directorship of Respondent No. 11 on the Board of the Joint Venture Company. Under the aforesaid resolution the respondent No. 1 Company purported to withdraw the 'nomination' of Respondent No. 11 on the Board of the Joint Venture Company, based on which the foreign company resolved and removed respondent No. 11 (now P-3) from its Board in middle 1985.
34. All hopes were totally belied,
when the alleged resolution dated 21-8-1984 came to light in March, 1985. It
also happened that almost simultaneously the 9th respondent left his employment
in the public limited company. The Petitioner No. 1 realised that during the
prior few years the J-group has been merely gaining time to facilitate the
total ouster of K-group. In this situation the Petitioner No. 1 besides
expressing his anguish to the respondent No. 9 under his letter dated 25-3-1985
is also forced to take recourse to legal proceedings before the High Court of
Calcutta for setting aside the alleged resolution dated 21-8-1984. These
proceedings are pending."
Therefore, the silence on the part of P-1 for such a long time without making any objection with regard to the Notices of various meetings from 1983 till 1985, only establishes that he had Notice of the meetings and that he deliberately did not attend the meetings for the reason that his son was not properly accommodated in R-1 company. He only initiated the correspondence in March, 1985, but however, he did not proceed further. Then he filed a suit in May, 1985 in Calcutta High Court challenging the withdrawal of nomination of his son on the Board of ARIL. Again he took up the matter with R-1 company in August, 1985 which also coincided with the initiation of correspondence by R-9.1 have already found that the 1st letter dated 16-8-1985 Ex. R-2 alleged to have been written by R-9 to R-1 Company is not a genuine document. It is hard to believe that R-2 and R-3 had manipulated all the Notices, Agendas and Minutes and also the Certificate of Postings from March, 1983 to June, 1985. But, coming to conduct of P-1, the grievance also did not appear to be not that of non-receipt of the Notices of meetings, but the withdrawal of the nomination of his son from ARIL Board. A person of a status of P-1 cannot be expected to be non-vigilant. More especially when he had pursued the matter with R-1 Company so vigorously after 16-8-1985. A person who is not vigilant cannot have any right to claim equity before this Court. The equity comes to the aid of the vigilant and not the slumbering (Vigilanti bus non dormienti bus Jura subveniunt). Therefore, the P-1 having remained intentionally dormant for a considerable length of time cannot complain that he has not received the Notices. Further, he was a neighbour and it cannot be said that the neighbours cannot have this information, more especially when they are very cordial and the P-1 himself has categorically stated that R-9 was also being kept aloof by R-3 from the affairs of the Company and that there were strained relations between R-3 and R-9. Therefore, it has to be presumed that the neighbour knows the neighbourhood as the maxim goes Vicini vicini-ora prae prae sammantur scire (neighbours are presumed to know things of the neighbourhood).
44. What is required to be seen in this case is whether the approach of the P-1 in alleging that he did not receive any Notice from 1983 and the approach of R-9 that he did not receive any Notice in respect of certain meetings only can be believed. Admittedly, it is a private limited company consisting of P-1, R-3 and R-9, with their respective members and they being immediate neighbours and it is beyond the comprehension of any person of ordinary prudence that P-1 and R-9 were not aware of the meetings and minutes. It is also pertinent to note that statutory provision requires that the Notice should be sent in writing either personally or by post. There is no provision for intimating on telephone. Therefore, the stand of the R-9 that he used to attend the meetings on telephonic information cannot stand. When the statute requires certain thing to be done in certain manner, it has to be presumed that the acts were done in furtherance of that statutory provision, unless it is proved to the contrary. More over, there is ample evidence before this Court that Notices were sent to the parties under Certificate of Posting right from 1983 onwards.
45. Under these circumstances, I have to necessarily hold that Notices were issued to the Directors in the case of Board meetings and the Shareholders in case of Annual General Meetings in accordance with the statutory provisions. Accordingly, I hold that P-1 and R-9 had received the Notices for Board and General meetings.
46. The consequential crucial question that arises for consideration is whether any offer was made to P-1, R-9 or any other persons on their behalf and as alleged by R-3 whether they consented to the allotment of additional shares to other persons and if they have not consented to the above, whether allotment of shares as alleged by the Petitioners is an act of oppression attracting the action under sections 397 and 398 of the Companies Act.
47. For the purpose of ascertaining the consent of Shareholders on the side of P-1 and R-9, the meetings which are relevant are 26-11-1984, 5-1-1985 and 28-2-1985. It is in the evidence that Notices were sent to all the Directors with Agendas. In respect of Board meetings held on 26-11-1984, the Notice dated 10-11 -1984 was sent to all the Directors under Certificate of Posting. The Notice was marked as Ex. B-412 and Certificate of Posting is marked as Ex. B-292. On 26-11-1984, R-3 and his wife were present, leave of absence was granted to Mr. S.K. Jalan and Mr. R.N. Jalan. The following is the extract of Notice:
"Ex. B-412, dated 10-11-1984
To
All Directors,
Mr. S.K. Jalan,
Mr. R.N. Jalan,
Mr. R. Khemka,
Mr. O.P. Jalan.
Mrs. Sudha Jalan,
Please take Notice that the meeting of the Board of Directors of the Company will be held on Monday the 26th November, 1984 at 11.00 A.M. at the Registered Office of the Company to discuss the matters as per the enclosed Agenda.
Please make it convenient to attend.
For Deccan Enterprises Pvt. Ltd.
Sd/- Managing Director."
Agenda Ex. B-412-A sent along with Notice reads thus:
"Agenda for the Board Meeting to be held on 26th November, 1984 at 11.00 A.M. at the registered office of the Company at 5-2-175/1, Rashtrapathi Road, Secunderabad — 500003
Andhra Pradesh
1. To
take note of or Election of the Chairman of the Meeting.
2. To
consider the approval confirmation of the Minutes of the Previous Meeting of
the Board of Directors of the Company held on 3rd November, 1984.
3. To
consider, about issue of further share capital of Rs. 5.00 lakhs.
4. General.
For Deccan Enterprises Pvt. Ltd.
Sd/-
Managing Director."
The Notice and Agenda were sent by post under Certificate of Posting. Ex. B-128 is the Certificate of Posting. The following Minutes were recorded:
"Ex. B-227-D.
Present: Mr. O.P. Jalan
Mrs. Sudha Jalan.
1. Mr.
O.P. Jalan took the Chair,
2. Leave
of absence was granted to Mr. S.K. Jalan and Mr. R.N. Jalan.
3. Minutes
of the Previous Meeting of the Board of Directors held on 3rd November, 1984
were read, confirmed, initialled and signed by the Chairman.
4. The
Managing Director informed the Board that presently Company is having recession
for the products presently being
manufactured by the company. It is therefore envisaged to diversify and start
producing new range of products for which additional capital equipments etc.
are required. The financial position of the Company is very tight. It was
therefore suggested to the Board to increase the paid up capital of the Company
by creation and issue of new shares and accordingly it was "Resolved that
in accordance with Article 6 of the Articles of Association of the Company and
other applicable provisions of the Companies Act, 1956 if any, the issued share
capital of the company be increased from Rs. 5.00 lakhs to Rs. 10.00 lakhs by
the issue and allot Rs. 10.00 lakhs by the issue and allotment of 50,000 equity
shares of Rs. 10 each for subscription for cash at par."
Further Resolved that the amount of Rs. 10 each per share shall be payable with application in full.
Further Resolved that the new shares shall be subject to the Memorandum and Articles of the Association of the Company.
Further Resolved that the new equity shares shall rank pan passu, with the existing shares.
Further Resolved to offer the new shares to the existing shareholders and invite applications for the same.
Further Resolved that a member shall have right to apply for additional shares if he so desires.
Further Resolved that the last date for receipt of application along with application money be 15th December, 1984.
The Managing Director was directed to send notice/intimations to all shareholders of the company and to place application along with the amount received in full before the Board for allotment.
"Further Resolved that for the purpose of giving effect to this resolution, Mr. O.P. Jalan, Managing Director of the Company be and is hereby authorised to do all such acts, deed, matters and things as he may in his absolute discretion deem necessary to settle any question, difficulty, or default that may arise in regard to the issue and distribution of new equity shares as he may think fit."
After General discussions, the meeting terminated with a vote of thanks to the Chair.
Sd/-
Chairman."
In pursuance of the decision taken in the Minutes dated 26-11-1984, the Company sent letters to all the shareholders on 26-11-1984 under Ex. B-130 offering the additional shares. The said letter was sent by post under Certificate of Posting on 26-11-1984. The Certificate of Posting is Ex. B-131. The share offer letter is extracted below:
"Ex. B-130, dated: 26-11-1984
All shareholders,
The Board of Directors of the Company have decided at the Board Meeting held on Monday, 26th November, 1984 to increase the Share Capital of the Company from Rs. 5 lakhs to Rs. 10 lakhs by the issue and allotment of 50,000 New Equity Shares of Rs. 10 each for subscription for cash at par. The amount of Rs. 10 each per share shall be payable with application in full.
The new Shares shall be subject to the Memorandum and Articles of Association of the Company and shall rank pari passu with the existing shares.
The Board of Directors have decided to offer the new shares to the existing shareholders and invite application for the same. The members shall have right to apply for additional shares, if they so desire. The last date of the receipt of the application along with application money is 15th December, 1984.
You are holding Shares of the Company as on date. You are requested to send your application along with application money for as many shares as you wish to apply and your application should reach our office by 15th December, 1984.
for Deccan Enterprises Pvt. Ltd.
Sd/-
Managing Director.
|
S. No. |
Name |
No. of Shares
|
|
|
1. |
Sri Ramniranjan Jalan |
7,030 |
|
|
2. |
Sri Rajkumar Khemka |
11,370 |
|
|
3. |
Sri Om Prakash Jalan |
7,080 |
|
|
4. |
Sri Shubhkaran Jalan |
5,730 |
|
|
5. |
Sri Mahesh Kumar Khemka |
370 |
|
|
6. |
Smt. Satyabhama Jalan |
4,690 |
|
|
7. |
Smt. Sudha Jalan |
5,154 |
|
|
8. |
Smt. Kamala Devi Khemka |
4,966 |
|
|
9. |
Sri Shree Gopal Jalan |
50 |
|
|
10. |
Smt. Bimla Devi Jalan |
50 |
|
|
11. |
Miss. Kavita Jalan |
1,650 |
|
|
12. |
Master Vikas Jalan |
50 |
|
|
13. |
Miss. Bela Jalan |
50 |
|
|
14. |
Master Pramod Jalan |
50 |
|
|
15. |
Master Bimal Kumar Ghuwalewala |
25 |
|
|
16. |
Mr. Hemanth Jalan |
50 |
|
|
17. |
Smt. Anandi Devi Jalan |
710 |
|
|
18. |
Sri Shree Narayan Jalan |
100 |
|
|
19. |
Smt. Manju Jalan |
50 |
|
|
20. |
Miss. Rita Jalan |
50 |
|
|
21. |
Mr. Sanjay Jalan |
400 |
|
|
22. |
Master Ajay Kumar Ghuwalewala |
25 |
|
|
23. |
Miss. Sumita Jalan |
50 |
|
|
24. |
Smt. Premlata Ghuwalewala |
25 |
|
|
25. |
Smt. Hemalata Khemka |
125 |
|
|
26. |
Smt. Radha Devi Khemka |
50 |
|
|
27. |
M/s Kohinoor Trading Company Pvt. Ltd. |
50 |
|
|
|
Total: |
50,000." |
|
48. Similarly for the Board meeting held on 5-1-1985 Notices were sent under Certificate of Posting. Ex. B-413 is the Notice and the Agenda is Ex. B-413-A, Ex. B- 133-B is the Certificate of Posting. R-3 and his wife only attended the meeting. Leave of absence was granted to Mr. S.K. Jalan and Mr. R.N. Jalan (R-9), the Notice reads thus:
"Ex. B-413, dated 28-12-1984
To
All Directors,
Mr. S.K. Jalan,
Mr. R.N. Jalan,
Mr. R. Khemka,
Mr. O.P. Jalan,
Mrs. Sudha Jalan.
Please take notice that the meeting of the Board of Directors of the Company will be held on 5th January, 1985 at 11.00 A.M. at the Registered Office of the Company as per enclosed Agenda.
Please make it convenient to attend.
for Deccan Enterprises Pvt. Ltd.
Sd/-
Managing Director."
The Notice and Agenda were sent by post under Certificate of Posting. Ex. B-133-B is the Certificate of Posting. The Agenda is extracted below:
"Agenda for the Board of Directors Meeting to be held on 5th January, 1985 at the registered office of the company at 5-2-175/1, Rashtrapathi Road, Secunderabad-500003, Andhra Pradesh
1. To
take note of or Election of the Chairman of the meeting.
2. To
consider the approval/confirmation of the Minutes of the previous meeting of
the Board of Directors held on 26th November, 1984.
3. To
consider and grant extension upto 15th February, 1985 for receipt of
application for further issue of share capital.
4. General.
for Deccan Enterprises Pvt. Ltd.
Sd/-
Managing Director."
The Minutes recorded were marked as Ex. B-227-E which reads thus:
"Minutes of the Meeting of the Board of Directors of M/s Deccan Enterprises Private Limited held on Saturday the 5th January, 1985 at 11.00 A.M. at the Registered Office of the Company at 5-2-175/1, Rashtrapathi Road, Secunderabad - 500003, Andhra Pradesh.
Present:
Mr. O.P. Jalan.
Mrs. Sudha Jalan.
1. Mr.
O.P. Jalan took the Chair.
2. Leave
of absence was granted to Mr. S.K. Jalan and Mr. R.N. Jalan.
3. Minutes
of the Previous Meeting of the Board of Directors held on 26th November, 1984
were read, confirmed, initialled and signed by the Chairman.
4. Extension
of last date for recall of application for further issue of share capital:
The Board reviewed the position regarding further issue of shares capital and noted that the last date fixed for the receipt of application for shares offered to them has expired on 15th December, 1984. To provide some more time to the shareholders to enable them to make necessary remittances, it is hereby decided that the last date fixed for the receipt of applications be extended from 15th December, 1984 to 15th February, 1985.
After general discussions the Meeting terminated with vote of thanks to the Chair.
Sd/-
Chairman."
For the Board Meeting held on 28-2-1985 Notices were sent under Certificate of Posting Ex. B-128. The Notice dated 18-2-1985 marked as Ex. B-87 is extracted below:
"To
All Directors,
Mr. S.K. Jalan,
Mr. R.N. Jalan,
Mr. R. Khemka,
Mr. O.P. Jalan,
Mrs. Sudha Jalan.
Please take notice that the meeting of the Board of Directors of the Company will be held on 28th February, 1985 at 11-00 A.M. at the Registered Office of the Company to discuss the matters as per the enclosed Agenda.
Please make it convenient to attend.
for Deccan Enterprises Pvt. Ltd.
Sd/-
Managing Director."
The Agenda Ex. B-87-A, for the meeting reads thus:
"Agenda for the Board meeting to be held on 28-2-1985 at 11.00 A.M. at the Registered Office of the Company at 5-2-175/1, Rashtrapathi Road, Secunderabad - 500003 Andhra Pradesh.
1. To
take note of or Election of the Chairman, of the Meeting.
2. To
consider the Approval/Confirmation of the Minutes of previous meeting of the
Board of Directors of the company held on 5th January, 1985.
3. To
take note of the resignation of Mr. P.V. Subba Rao as Secretary of the Company
and appoint Mr. V.K. Chamariya, ACA as Secretary of the Company.
4. To
consider and allot further issue of share capital of Rs. 5 lacs.
5. General.
for Deccan Enterprises Pvt. Ltd.
Sd/-
Managing Director."
The Notice and Agenda were sent by post under Certificate of Posting. Ex. B-128 is the Certificate of Posting. It was attended by R-3 and his wife. Leave of absence was granted to Mr. S.K. Jalan and Mr. R.N. Jalan. The following are the Minutes:
"Ex. B-227-F, dated 28-2-1985
Minutes of the Meeting of the Board of Directors of M/s Deccan Enterprises Private Limited, held on Thursday the 28th February, 1985 at 11.00 A.M. at the Registered Office of the Company at 5-2-175/1, Rashtrapathi Road, Secunderabad - 500003, Andhra Pradesh.
Present:1. Mr. O.P. Jalan
2. Mrs. Sudha Jalan.
Also Present Mr. V.K. Chamariya on Invitation.
1. Mr.
O.P. Jalan took the Chair.
2. Leave
of absence was granted to Mr. S.K. Jalan and Mr. R.N. Jalan.
3. Minutes
of the Previous Meeting of the Board of Directors held on 5th January, 1985
were read, confirmed, initialled and signed by the Chairman.
4. Mr.
O.P. Jalan put before the Board the resignation letter of Mr. P.V. Subba Rao,
Secretary of the Company. The Board considered the matter and decided to
relieve Mr. P.V. Subba Rao as Secretary of the Company with immediate effect.
Mr. O.P. Jalan further informed the Board that he has selected Mr. V.K.
Chamariya, B. Sc (Hons.) ACA, Finance Manager of the Company as Secretary of
the Company also. The Board considered and continued the appointment of Mr. V.K
Chamariya as Finance Manager and Secretary of the Company.
5. The
Secretary produced before the Board a statement showing the details of the
Shares applied by the Shareholders for further issue of the share capital of
Rs. 5 lakhs (Rupees five lakhs only).
The Board considered the same and decided that in case if the applications for further shares have not been received from any of the shareholders, the same may be allotted by the Board in its discretion to any of the shareholders who applied for more than the shares offered to them. Accordingly, the following resolutions have been passed.
"Resolved that 50,000 Equity Shares of Rs. 10 each (Distinctive Nos. from 50001 to 100, 000) be and are hereby allotted to the persons as per list placed before the Board and reproduced below and as shown against their respective name.
|
S.No. |
Name |
No. of shares allotted |
Distinctive Nos. |
||
|
|
|
From |
To |
||
|
|
|
|
|
(both inclusive) |
|
|
1. |
Mr. Om Prakash Jalan |
40,000 |
|
50001 |
90000 |
|
2. |
Mrs. Sudha Jalan |
6,000 |
|
90001 |
96000 |
|
3. |
Miss Kavita Jalan |
2,000 |
|
96001 |
98000 |
|
4. |
Master Vikas Jalan |
2,000 |
|
98001 |
100000 |
Further Resolved that the Share Certificate in respect of the shares allotted as aforesaid be issued to the aforesaid persons under the common seal of the Company and under the signature of any two directors of the Company and counter signature of the Secretary of the Company.
Further Resolved that for the purpose of giving effect to the above resolutions Sri V.K. Chamariya, Secretary of the Company be and is hereby authorised to do all such acts, deeds, matters and things as he may in his absolute discretion deem necessary.
6. The following statement placed before the Board were perused, noted and approved:
(a) Statement
showing the purchases/acquisitions/additions/sale of disposal of capital assets
from 1-11-1984 to 31-1-1985.
(b) tatement showing the borrowings as on
31-1-1985.
(c) tatement showing the Loans and Advances
given as on 31 -1 -1985.
After general discussions the meeting terminated with a vote of thanks to the Chair.
Sd/-Chairman."
In pursuance of the decision taken in the Minutes of the Board meeting dated 5-1 -1985 again the offer was sent to all the Shareholders on 5-1 -1985 under Ex. B-132. The said offer was sent by post under Certificate of Posting vide Ex. B-129. The letter extending the date for subscribing to the additional capital is extracted below:
"Ex. B-132:
All Shareholders,
We refer to our letter dated 26th November, 1984 inviting application for issue and allotment of Equity Capital of the Company. Please note that the Board of Directors of the Company at the Board Meeting held on Saturday 5th January, 1985 have extended the last date of receipt of application from 15th December 1984 to 15th February 1985. You are requested to send your application along with application moneylatestbyl5th February, 1985.
for Deccan Enterprises Pvt. Ltd.
Sd/-
Managing Director."
To
1. Sri
Ramniranjan Jalan
2. Sri
Rajkumar Khemka
3. Sri
Om Prakash Jalan
4. Sri
Shubhkaran Jalan
5. Sri Mahesh Kumar Khemka
6. Smt.
Satyabhama Jalan
7. Smt. Sudha Jalan
8. Smt. Kamala Devi Khemka
9. Sri Shree Gopal Jalan
10. Smt. Bimla Devi Jalan
11. Miss. Kavita Jalan
12. Master Vikas Jalan
13. Miss Bela Jalan
14. Master Pramod Jalan
15. Master Bimal Kumar Ghuwalewala
16. Mr. Hemant Jalan
17. Smt. Manju Jalan
18. Sri Shree Narayan Jalan
19. Smt. Manju Jalan
20. Miss Ritu Jalan
21. Mr. Sanjay Jalan
22. Miss Sumita Jalan
23. Master Ajay Kumar Ghulwalewala
24. Smt. Premlata Ghuwalewala
25. Smt. Hemlata Khemka
26. Smt. Radha Devi Khemka
27. M/s Kohinoor Trading Company Private
Limited.
It is thus the case of R-1 Company that meeting of the Board of Directors was held on 26-11-1984 wherein the decision was taken to subscribe the additional share capital of Rs. 5 lakhs and consequent on the said decision, offer was made to the Shareholders to send their offers on or before 15-12-1984. However, again the same was extended upto 15-2-1985. It is also the case of the Company that only few Shareholders responded namely Mr. O.P. Jalan (R-3), Smt. Sudha Jalan (R-4), Mr. Vikas Jalan (R-5), and Miss. Kavita Jalan (R-6). It is also the case of R-1 that they have also sent cheques. Further, it is also in evidence that some Shareholders sent intimations Exs. B-317, B-318, B-319 and B-320 that they were not interested to contribute to the additional share capital. The theory propounded by each Director namely P-1, R-3 and R-9 travel in different directions. It is the case of P-1 that he never received any intimation of Notices of meeting and therefore he did not attend any of the meetings from 1983. It is his case that had he known that the additional shares were issued and had an offer been made to him would he have definitely contributed to the shares as the Company was in a prosperous condition. He states that all Certificate of Postings and Notices and also the Minutes were manipulated to suit the convenience of R-3 so as to gain majority shareholding. He also submits that additional issue was manipulated and in fact there was real and substantial contribution towards the share capital. On the other hand the R-9 says that he attended some of the meetings and he did not receive any Notices for the Board meetings dated 26-11-1984 and 5-1-1985. However, he attended the Board meeting dated 28-2-1985, but the Minutes are different. He also submits that there was no information to him with regard to additional share capital. He also could have contributed had the intimation been sent to him. None of the family members received the letters offering the additional shares vide letters dated 26-11-1984 or letters dated 5-1-1985. He also says that the contribution of additional share capital is only artificial and in effect, no money was brought into the company. It is also the case of P-1 and R-9 that there was no necessity for additional share capital as the Company was having tremendous reserves and that contribution of Rs. 5 lakhs as additional capital is only a pittance. The Company had sufficient resources to mobilise this small amount instead of creating additional share capital. Therefore, they contend that the additional share capital was brought into books only for the purpose of converting the minority Shareholders represented by R-3 into majority Shareholders. On the other hand, it is the case of R-3 that P-1 and R-9 were very much disinterested in the affairs of the Company and they did not take any active role from 1983. P-1 did not evince any interest after his son returned from Saudi Arabia and when his son is not provided with appropriate position in R-1 company, he was not attending to the meetings even though Notices were sent for each and every meeting. In fact P-3 had already incorporated a Company in 1982 and commenced the production in end of 1984. The products are identical with the products of R-1 Company. After February, 1985 when R-9 resigned from HIL P-1 was promoted as President of HIL and using the said capacity, he had diverted the orders from R-1 Company to APPL Company. Thus, the Company was made to suffer heavy losses on account of non:purchase of its products by HIL P-1 used his influence and diverted the orders and therefore the sales which were to the tune of Rs. 70 to 80 lakhs in 1981 -82 slowly came down and by 1986-87 it became to nil It is also his case that the Company was required to diversify its products for various reasons including the competition put-up by P-3 and for that purpose it required machineries and finances for purchase of machineries. It is also his case that the financing bank has been insisting for increase of share capital from Rs. 5 lakhs to Rs. 10 lakhs so as to increase the credit limits. It is also his case that there was a family partition in August/September, 1984 and in the said family partition, R-1 Company fell to the share of R-3 and Nucon Company went to the share of R-9. Accordingly, R-9 became the Managing Director of Nucon and he started concentrating on this Company. Accordingly, extensive powers were conferred on R-9, as far as the Nucon was concerned and on R-3 as far as R-1 company is concerned. The cheque signing powers were also changed giving complete liberty to R-3 and R-9 in respect of R-1 company and Nucon respectively. It is also in evidence that P-1 was not at all interested in R-1 company and they were insisting on settlement of their shares in all the companies held in Jalan and Khemka families. P-1 also initiated conciliatory talks with the intervention of one Mr. P. Khaitan and ultimately when the matter was settled and when the payment was to be made by his brother Mr. S.G. Jalan, P-1 backed out. It is also the case of R-3 that since the Company is loosing orders from HIL from year to year and that Company requires diversification of products and it has been incurring heavy losses from year to year and also it requires various machineries for the purpose of diversification of products including the finances and that the Bank had been insisting from 1981 onwards to increase the share capital from Rs. 5 lakhs to Rs. 10 lakhs so as to consider the enhancement of credit limits, it was decided to subscribe to the additional share capital of Rs. 5 lakhs and accordingly Board meeting was convened on 26-11-1984 and a decision was taken to subscribe to the additional share capital of Rs. 5 lakhs. Accordingly, letters were sent on 26-11-1984 to all the Shareholders offering them additional shares and requesting them to apply for additional shares if they so desire on or before 15-12-1984 with the application money. In response to the said offer, only four Shareholders sent the application together with the application money by 30-12-1984. But, however in the Board meeting held on 5-1 -1985 one more chance was given to the Shareholders to apply for additional shares fixing the date of receipt of the application together with application money to 15-2-1985. Even in response to that letter of offer, there was no application from any Shareholders. However, some Shareholders declined to subscribe to the additional shares. Therefore, in the Board meeting held on 28-2-1985, a decision was taken to allot the shares to the Shareholders who responded and sent the application money. Thus it was submitted on behalf of R-3 that when the Notices were in accordance with the Articles of Association and when there is no response from the Shareholders, it has to be treated that they did not wish to contribute to the additional share capital and that it shall be presumed that they did not consent for additional share capital. In this regard, it has to be observed that there was no definite and specific pleading by P-1 in the Company Application to the effect that additional shares were issued without his knowledge and if any shares were issued that should be treated as illegal and invalid. Thus, the P-1 was not at all sure of additional share capital and he has been taking shelter by making general pleading that no Notices were being sent and therefore he was not in a position to attend any meetings. Enormous evidence was let in by P-1 and R-9 on the issue relating to the additional share capital saying that there was no requirement of additional capital at all and that all the Certificate of Postings, registered postal receipts and the Minutes were fabricated and that the letter written by Mr. Kedia, former General Manager, intimating the Bank that they had increased the share capital to Rs. 10 lakhs was also a manipulated letter. That the contribution of additional share capital by R-3 and his family members is only a paper transaction and in effect the Company did not get any physical benefit out of additional share capital, that there was no family settlement in Jalan family and that some of the documents introduced by R-9 namely Ex. B-64 letter written by P-3 to R-9, Ex. B-65 written by P-3 to P-1 and the agreement signed by P-3 Ex. B-70 and the letter of R-9 Ex. B-71 written to P-3 are all false and fabricated. Evidence was tried to be pressed into service saying that there was no contribution of additional share capital in fact as the return was filed with the ROC only in September, 1985. Had the additional share capital issue been real they should have immediately intimated to the ROC. This was refuted by R-3 by stating that on 25-3-1985 itself the ROC was intimated about the allotment of additional share capital, but it was not taken note of as necessary fee was not paid along with the papers. The ROC had intimated to resubmit the return by paying necessary fee, it was paid in September, 1985 and the return was accepted by the ROC. It is the case of R-3 that he had obtained the loan of Rs. 5 lakhs from Poddar Industries for payment of share capital for his additional share capital on his behalf and also on behalf of his family members and the same was credited to the Company Account. With the said money some used machinery was purchased from DPPL for a sum of Rs. 4,55,000 and the balance Rs. 45,000 was credited to the Bank towards the payment of over-draft amount. It is also his case that on instructions of DPPL who sold the machinery to R-1 Company, cheques were issued by R-1 company in favour of the R-3 and his family members within two days of subscribing to the share capital and that again the amount was paid to Poddar Industries. While it is seriously contested by P-1 and R-9 that this transaction is nothing but purely imaginery and that the money brought by R-3 did not remain with the Company for two days and again the money was returned to him. Evidence was adduced in-extenso on this aspect. It is also the case of R-3 that apart from the machinery purchased from DPPL for Rs. 4,50,000 he also purchased the machineries worth Rs. 20 lakhs from other firms through out the country by borrowing monies from various institutions.
49. I have given my serious and anxious consideration to the issue which is contested tooth and nail by all the parties. But, the question remains is whether the P-1 and R-9 consented for the additional share capital. In the instant case, the question of consent cannot be directly established and only the circumstantial evidence has to be scrutinised meticulously. The main contention of P-1 was that he never received any Notices, while the stand of R-9 was that he attended the meeting on 28-2-1985 and that he had no Notice of Board meetings of 26-11-1984 and 5-1-1985. I have already discussed the matter relating to the issue of Notices by R-1 Company in preceding paragraphs and after considering the evidence with reference to the clauses in the Articles of Association and also the statutory provisions in section 53 and section 286 and also the evidence adduced, held that the Company did issue the Notices for various meetings. Therefore, it has to be necessarily held that the Notices for the meetings dated: 26-11-1984, 5-1-1985 and 28-2-1985 were issued to the Directors. With regard to the offer made by R-1 Company to the Shareholders, it is in evidence that the letters were sent on 26-11 -1984 and 5-1-1985 offering the additional shares to the shareholders and there was no response except from few. It is sought to be contended by the learned counsel for P-1 and R-9 that the meetings were never held and that no Notices were sent at all and that the resolution passed on 5-1-1985 extending the time upto 15-2-1985 was nothing, but an empty formality of show that one more opportunity was given to the Shareholders, when in fact R-3 and his family members had already contributed to 50,000 shares and paid the money on 28-11-1984, and the machinery was purchased with the said money, the question of again sending another offer to the Shareholders is only an eye wash. I am inclined to observe that the parties tried to level allegations against each other stating that fraud was played and forged documents were pressed into service and that manipulations were made with regard to Certificate of Postings and postal registration receipts. But, to ascertain whether they have consented for issue of additional shares, it is necessary to establish whether any Notice was sent offering the shares. Though R-9 and P-1 in so many words stated that they have not received any Notices, but except denying the receipt of the letters of offer, they did not lead any evidence on this aspect. It is also seen from the Minutes dated 26-11-1984 that R-3 and Mrs. Sudha Jalan attended Board meeting. Leave of absence was granted to Mr. S.K. Jalan and Mr. R.N. Jalan (R-9). Similarly, in the Board meeting held on 5-1-1985 R-3 and Mrs. Sudha Jalan (R-4) only attended the meeting and leave of absence was granted to Mr. S.K. Jalan and Mr. R.N. Jalan (R-9). Again in the Board meeting held on 28-2-1985 Mr. S.K. Jalan (R-8) and Mr. R.N. Jalan (R-9) apart from R-3 and R-4 attended the Board meetings in which the resolution was passed and following shares were allotted:
|
Mr. O.P. Jalan |
40,000 |
|
|
Mrs. Sudha Jalan |
6,000 |
|
|
Miss. Kavitha Jalan |
2,000 |
|
|
Master Vikas Jalan |
2,000. |
|
I have already held that the version as narrated by R-9 in Ex. R-2 cannot be believed and therefore whatever the Minutes that were alleged to have been sent under R-2 letter cannot be Minutes as enclosed by him vide his letter dated 16-8-1985 Ex. R-2 were only the correct Minutes cannot be accepted. It is also to be noted in this regard that R-3 was examined himself as R. W-5. When he was offered for examination, it is for P-1 and R-9 to have elicited the relevant information from him. When he was offered for cross examination even though he was subjected to lengthy cross examination, the relevant points touching the issue in question were never raised. The burden lies on P-1 to establish that he did not receive the Notices at all, except making a bold statement to that effect. Equally the burden lies on R-9 to establish that the Notices were not sent for the Board meeting on 26-11-1984 and 5-1-1985 and that he attended the meeting on 28-2-1985 and that the Minutes were not properly recorded on 28-2-1985. It is curious to note that in the letter dated 16-8-1985 Ex. R-2, he only referred to various Board meetings as having attended them including 28-2-1985, but however, there was no mention about 26-11-1984 and 5-1-1985. In the said two meetings crucial decision was taken to subscribe to the additional share capital and now R-9 is coming out with his version that there was no meeting on 26-11-1984 and 5-1-1985 which version of R-9 cannot be believed. When once it is held that proper Notices were issued and the procedure as contemplated has been followed, it is not open for P-1 and R-9 to contend that no meetings took place. As already held by me that when R-9 attended number of meetings of course excluding the Board meetings on 26-11-1984 and 5-1-1985, the contention of P-1 that he did not receive Notices at all cannot be believed. P-1 and R-9 for the reasons best known did not elicit any information with regard to the postage account maintained by R-1 company nor is there any cross examination by R-9 in respect of the meeting which was held on 26-11-1984 and 5-1-1985 wherein the leave of absence was granted to Mr. S.K. Jalan (R-8) and Mr. R.N. Jalan (R-9). He did not even elicit either from R-2 or R-3 that he did not make any request for leave of absence and that there was no evidence before R-1 company to that effect and the entry in the Minutes that leave of absence was granted was false.
50. It is well established rule
of evidence that a party should put to each of his opponent's witness so much
of his case as concerns that particular witness. If no such questions are put
the Court may presume that the witness's version has been accepted. If it is
intended to suggest that a witness was not speaking the truth upon a particular
point, his attention must first be directed to the fact by cross-examination,
so that he may have an opportunity to give an explanation. It is also beyond
controversy that if the witness is offered for cross examination, he should be
cross examined on material point. Failure to cross-examine witness on certain
points amounts to acceptance of truth of his testimony, except when the
testimony itself is inherently improbable and incredible. Therefore, cross
examination is a powerful and valuable weapon for the purpose of testing the
veracity of a witness and the accuracy and completeness of his story. Hence,
when the witness was not tested by cross examination, his evidence may be
accepted subject to the above exception.
51. There is no cross
examination on this point. There is also no suggestion. Therefore, it has to be
concluded that R-9 did seek for leave of absence, thereby establishing that he
had the Notice of meeting. Any resolutions passed in such meeting are valid
unless properly challenged.
52. The learned counsel for P-1 and R-9 contended that the burden placed on P-1 and R-9 was discharged by stating that they did not receive any Notices and the burden shifted to R-3 to establish that Notices were sent. In this regard it has to be noted that proof of burden on the respective parties pales into insignificance when they adduced the evidence at length. Yet, if they failed to elicit the necessary information, then it has to be taken note of. I am for the purpose of this issue not considering the circumstances to establish that P-1 and R-9 was disinterested to contribute for additional share capital for various reasons as set out by R-3 nor am I inclined to consider that P-1 and R-9 was very much interested to contribute the additional share capital as the company was in a prosperous state. Suffice it to say that if the Notices were issued properly and they failed to attend the meetings, the consequential resolutions passed in the said meetings cannot be challenged nor can it be said that the minutes are manipulated. It is duty cast on the party to put his case in the cross-examination of the witnesses of the opposite party. This rule is of essential justice, not merely a technical one. The Division Bench of the Calcutta High Court in A.E.G. Carapiet v. A. Y. Derderian AIR 1961 Cal. 359, observed as follows:
"The law is clear on the subject. Whenever the opponent has declined to avail himself of the opportunity to put his essential and material case in cross examination it must follow that he believed that the testimony given could not be disputed at all. It is wrong to think that this is merely a technical rule of evidence. It is a rule of essential justice. It serves to prevent surprise at trial and miscarriage of justice, because it gives notice to the other side of the actual case that is going to be made when the turn of the party on whose behalf the cross examination is being made comes to give and lead evidence by producing witnesses. It has been stated on high authority of the House of Lords that this much a counsel is bound to do when cross-examining that he must put to each of his opponent's witnesses in turn, so much of his own case as concerns that particular witness or in which that witness had any share. If he asks no question with regard to this, then he must be taken to accept the plaintiff's account in its entirety. Such failure leads to miscarriage of justice, first by springing surprise upon the party when he has finished the evidence of his witnesses and when he has no further chance to meet the new case made which was never put and secondly, because such subsequent testimony has no chance of being tested and corroborated."
53. The contention that the
Notices for offering the additional shares was never issued and Certificate of
Postings produced by R-3 cannot also be accepted, because in pursuance of the
orders of this Court, an Advocate- Commissioner was appointed to take charge of
the documents of the Company and in pursuance of the said order, various
documents were taken charge of by the Advocate Commissioner by putting her initials
on each and every document on 11 -7-1987. The notice issued for the meetings
dated 26-11-1984 and 5-1-1985 and 28-2-1985 bears the signature of the
Advocate-Commissioner and the Certificate of Postings also bear the signature
of the Commissioner. That goes to establish that these documents were in the
files of the Company as on the said date and it cannot be said that they were
manufactured or fabricated subsequently. It is also one of the circumstances
which goes to show that these documents were maintained during the course of
the company's business.
54. For all these reasons, it must be held that proper Notices were issued for the meetings dated 26-11-1984, 5-1-1985 and 28-2-1985 and the Minutes were recorded in those meetings cannot be said to be irregular or manipulated. When once it is found that the offers were made to all the shareholders if they did not respond to the offers it has to be necessarily held that they did not consent for subscribing to the additional shares. In this regard, it has to be noted that convening of meetings and taking decisions in the Board meetings and sending intimations to the Shareholders is a purely a in-house procedure regulated by the Articles of Association of the Company and it would not be proper for the Courts to interfere with the internal administration of the company, unless the contrary is established including the contravention of the Articles of Association or the statutory provisions as contained in the Companies Act. So long as the Company functions in accordance with the statutory provisions, its activities need not be probed further. Therefore, when R-9 and P-1 with their respective members did not respond to the offers made by R-1 Company, it has to be necessarily held that they were not inclined to subscribe to the additional shares, thereby impliedly consenting for allotment of shares to the others. I accordingly, hold the issues against P-1 and R-9.
55. The learned counsel for R-3
submits that there is no obligation to compulsorily allot the shares to the
existing Shareholders under law and also the Articles of Association, it is
purely the discretion of the Board to allot to any member. I need not go into
this aspect as I found that P-1 and R-9 shall be deemed to have consented for
allotment of shares to other shareholders.
56. The learned counsel for P-1 and P-2 Mr. K. Srinivasa Murthy submits that the learned Single Judge Upendralal Waghray, J. while adjudicating certain Interlocutory applications recorded finding that the issue of additional share capital was not genuine and that it was a sham transaction. He also submits that the order of learned Judge was the subject matter before the Division Bench which confirmed the order of the learned Single Judge. Thereafter the matter was went upto the Supreme Court in a S.L.P. and the S.L.P. was dismissed. The learned Judge proceed ed on the footing that the Board meetings did take place and attended by R-3 and additional shares were allotted as per the resolution. But the validity of allotment was gone on the basis of the pleadings of the parties and that the learned Judge recorded a finding that the alleged additional allotment made by R-3 was a sham and not a genuine transaction. The said finding was arrived by the learned Single Judge after fullfledged arguments and after application of mind to full facts of the case duly consi dering the documents referred to in the respective pleadings. He submits that when there is a finding that the issue relating to additional share capital is fishy and clouded with great suspicion, the said finding has become final, even though it is a prima facie finding. Thus he submits the orders in the Interlocutory applications are not only binding in the separate proceedings, but also in various stages in the same proceedings and consequently they constitute res judicata. He takes the assistance of the judgment of Privy Council in G.H. Hook v. Administrator General of Bengal AIR 1921 PC 11. The Privy Council observed as follows:
"The learned Judge held that this matter had already been definitely settled and in addition gave reasons why he adhered to his former opinion. This was, in fact, superfluous. The question as to the perpetuity had been definitely and properly before him on the former hearing, and, was, in fact, decided without any reservation, as is made plain by the terms of the judgment itself, which show that the determination of the disputes as to the perpetuity was the foundation of the whole judgment and that the questions left over were those to which attention has been directed and which themselves are abundant to explain the meaning of the passage in the decree on which reliance is placed.
It is not, and indeed it cannot be, disputed that, if that be the case, the matter has been finally settled between the parties, for the mere fact that the decision was given in an administration suit does not affect its finality (See: Peareth v. Marriott [1882] 22 Ch. D. 182. The Court of Appeal, however, took a different view, and regarding the question as still open decided it against the appellant, but the error in their judgment is due to the fact that they regarded the question as completely governed by section 11 of the Code of Civil Procedure. That section prevents the re-trial of issues that have been directly and substantially in issue in a former suit between the same parties, and this question obviously arises in the same and not in a former suit, but it does not appear that the learned Judge's attention was called to the decision of this Board in Ram Kirpal Shukul v. Mt. Rup Kuari [l884] 11 LA. 37, which clearly shows that the plea of res judicata still remains apart from the limited provisions of the Code, and it is that plea which the respondents have to meet in the present case. In the words of Sir Barnes Peacock (at p. 41)—
'The binding force of such a judgment in such a case as the present depends not upon section 13, Act-X of 1877' (now replaced by section 11 of the Code of Civil Procedure), 'but upon general principles of law. If it were not binding there would be no end to litigation'." (p. 12)
This decision is not applicable to the contention as the issue was finally decided in an administration suit and rightly it was held that Section 11 of C.P.C. was applied. The said decision was referred to by the Supreme Court in Satyadhyan Ghosal v. Smt. Deorajin Debi MR 1960 SC 941. On the strength of this decision the learned counsel submits that the Principle of Res Judicata applies as between two stages in the same litigation. In paras 7 and 8 it is held:
"(7) The principle of res judicata is based on the need of giving a finality to judicial decisions. What it says is that once a res is judicata, it shall not be adjudged again. Primarily it applies as between past litigation and future litigation. When a matter-whether on a question of fact or a question of law - has been decided between two parties in one suit or proceeding and the decision is final, either because no appeal was taken to a higher court or because the appeal was dismissed, or no appeal lies, neither party will be allowed in a future suit or proceeding between the same parties to canvass the matter again. This principle of res judicata is embodied in relation to suits in section 11 of the Code of Civil Procedure; but even where section 11 does not apply, the principle of res judicata has been applied by courts for the purpose of achieving finality in litigation. The result of this is that the original Court as well as any higher Court must in any future litigation proceed on the basis that the previous decision was correct.
(8) The principle of res judicata applies also as between two stages in the same litigation to this extent that a Court, whether the trial court or a higher court having at an earlier stage decided a matter in one way will not allow the parties to re-agitate the matter again at a subsequent stage of the same proceedings. Does this however mean that because at an earlier stage of the litigation a Court has decided an interlocutory matter in one way and no appeal has been taken therefrom or no appeal did lie, a higher court cannot at a later stage of the same litigation consider the matter again?" (p. 943)
In this case, in an earlier proceedings the High Court on the basis of amendment to Calcutta Thika Tenancy Act, held that the respondent was Thika tenant and holding the Section 28 was applicable to pending proceedings, remanded the matter for fresh disposal. After the remand, the Munsiff rescinded the decree. Land Lord was unsuccessful before the High Court. The Land Lord tried to raise the question of applicability of Section 28 which was rejected as barred by res judicata. Allowing the appeal, the Supreme Court observed thus:
"(22) In our opinion the order of remand was an interlocutory order which did not terminate the proceedings and so the correctness thereof can be challenged in an appeal from the final order. We hold therefore that the appellant is not precluded from raising before us the question that section 28 of the original Thika Tenancy Act was not available to the tenants after the Thika Tenancy Amendment Act came into force. On this question we have already decided, as already, indicated above, in Mahadeolal Kanodia's case, Civil Appeal No. 303 of 1956 AIR 1960 SC 936, that section 28 after its omission by the amending Act is not available in respect of proceedings pending on the date of the commencement of the Thika Tenancy Ordinance of 1952." (p. 947)
Therefore, this decision is not applicable to the case on hand. He also takes the assistance of the judgment of the Supreme Court in Y.B. Patil v. Y.L. Patil MR 1977 SC 392. In the said case, the Supreme Court observed as follows:
"Principles of res judicatacan be in invoked not only in separate subsequent proceedings; they also get attracted in subsequent stage of the same proceedings. Once an order made in the course of a proceeding becomes final, it would be binding at the subsequent stage of that proceeding." (p. 392)
This case also does not apply to the facts of the present case. In that case A applied for restoration of land under the provisions of Bombay Hereditary Officers Act. The Assistant Commissioner allowed the application. B aggrieved party having been unsuccessful before the appellate authority moved the revision before the Tribunal, which allowed the revision. It held that the Watan was acquired by Basangouda-I. A filed Writ Petition and the same was allowed holding that it was not open for the Tribunal to reopen and set aside finding of fact in revision and accordingly remanded the matter. On remand, the Tribunal held against A holding that Watan was acquired by Basangouda-IInd, not Basangouda-I. Having been unsuccessful before the High Court, A carried the matter before the Supreme Court. It was contended that the High Court was in error in not interfering with the order of the Tribunal, whereby the Revision Petition filed by the Appellants had been dismissed. It was also urged that the Tribunal in affirming the finding of the Assistant Commissioner and Deputy Commissioner recorded question of Appellants being strangers qua, the law in dispute took a very restricted view of section 79 of the Act, dealing with the Revision. This contention was repelled. The Supreme Court observed "that the High Court at the time of the decision of the earlier Writ Petition, of the 18-12-1964, recorded a finding and gave directions to the Tribunal not to reopen the questions of fact in Revision. The Tribunal, while passing the order dated 12-9-1967 compared with those directions of the High Court. The Appellants are bound by the judgment of the High Court and it is not open to them to go behind that judgment in this appeal. No appeal was filed against that judgment and it has become final. In that context, the Supreme Court held that the principles of res judicata can be invoked not only in subsequent proceedings, but also they get attracted at the stage of subsequent proceedings." Therefore, the earlier order of the High Court become final and that could not be re-agitated in the subsequent proceedings. But, in the instant case, there is no such final order. Hence, this decision is not applicable to the facts of this case. He also relied on the decision of Patna High Court in Ramsarup Dass v. Pyare Das to say that the Interlocutory orders once confirmed in revision under section 115 operate as res judicata. On the other hand, the learned counsel for R-3 submits that the preliminary findings on the interlocutory orders cannot be treated as final orders, so as to bind parties by the principles of res judicata. If the order of the learned Judge Upendralal Waghray J. was understood to be final orders, nothing remains in the Company Petition and that finding itself would be sufficient to allow application. The principle of res judicata is conceived in the larger public interest which requires that all litigation must sooner than later, come to an end. The principle is also founded on basis of justice and good conscience, which require that a party which once succeeded on an issue should not be permitted to be harassed by a multiplicity of proceedings involving determination of the same issue. While, it is not in dispute that the finality of orders and their binding nature depends on the type of orders passed and the nature of relief granted in interlocutory orders, in the instant case, the Company Application Nos. 184 to 1988 were made by R-9 seeking reconstitution of the Board represented by R-9 and P-1, for appointment of Joint Managing Director, for declaring proceedings of Annual General Meeting dated 5-7-1988 for carrying out of the functions of Joint Managing Director and Managing Director for conducting fresh Audit. The learned Judge very clearly stated din the order that the examination of material was for appreciating the controversy raised for ascertaining the prima facie and balance of convenience for the purpose of interlocutory applications. Therefore, the learned Judge on the basis of such examination came to a prima facie conclusion. Even the Division Bench also confirms the order of the learned Single Judge. It only establishes that the prima facie findings for this purpose of balance of convenience for appropriate orders shall be deemed to have been confirmed. Therefore, I am not in agreement with contention of the learned counsel for P-1. The prima facie finding rendered by the learned single Judge for purpose of granting interim relief cannot be said to be binding in subsequent proceedings in the same case. Thus, any findings recorded by the learned single Judge in the interlocutory application, cannot be treated as res judicata in subsequent proceedings. In fact the learned Judge himself proceeded with the matter for ascertaining the existence of a prima facie case and balance of convenience. Therefore, I have to necessarily reject the contention of the learned counsel on this issue.
57. The learned counsel for P-1 and P-2 Mr. Srinivasa Murthy submits that the documents which are sought to be inducted by R-3 cannot be given any credence and no presumptions can be drawn under section 114 of the Evidence Act. Taking assistance from the decisions in Madugula Jermiah, In re AIR 1957 AP 611, Bahadur Singh v. MCD 1973 Punjab LR (D) 145 the learned counsel submits that when the documents were not proved they could not be relied upon and arguments could not have been advanced based upon other presumptions, which is not permissible under any statute or decisions rendered by the Courts. He submits that Ex. B-64 and B-201 were dated 16-1 -1985 and 21-11-1985 and they were only produced in 1993 by R-3 and they were never referred to in any counter filed by him. Even R-8 when he filed appeal against the orders of Upendralal Waghray, J. this was not brought out. I find that these documents were filed only to establish that there was a family settlement and that the parties reconciled to settle their respective accounts. Even though it is argued by the learned counsel for P-3 had no authority to enter into an agreement binding his father and other family members, that issue has now becomes redundant in view of my findings referred to above. Therefore, this Court is not taking any assistance from Exs. B-61 and B-201. Similar case is that Ex. B-70 and B-71. These documents are tried to press into service for the purpose of settlement alleged to have been entered between the parties which issue is not necessary to be gone into. The learned counsel further submits that the documents filed by R-3 implicating P-3 are wholly fabricated and they were not genuine documents. Suffice it to say that this Court is not entitled to go into the act whether there was a fraud or whether the documents were fabricated. Further these documents are not at all necessary to be considered for the purpose of deciding the issue. The learned counsel also submits that R-3 has been changing his version from time to time. The pleadings taken by him in the first counter in July, 1987 were changed in the next counter filed in December, 1987 and further changed in the counter filed in July, 1988. He submits that Order VII of C.P.C. is applicable to the pleadings. Therefore, he cannot develop the case, stage by stage contrary to the provisions of the C.P.C. Hence any evidence lead to sustain the contentions raised in the counter filed by R-3 in July, 1988 cannot be looked into. In Mrs. Om Prabha Jain v. Abnash Chand AIR 1968 SC 1083, the Supreme Court observed at para 11 which is extracted below:
"... The ordinary rule of law is that evidence is to be given only on a plea properly raised and not in contradiction of the plea. Here the pleas were made on two different occasions and contradicted each other. The evidence which was tendered contradicted both the pleas. The source of the information was not attempted to be proved and the witnesses who were brought were found to be thoroughly unreliable. In these circumstances we do not propose to refer to the evidence in this judgment any more." (p. 1086)
The Supreme Court in Ram Saurp Gupta v. Bishun Narain Inter College AIR 1987 SC 1242, observed thus:
"6. The question which falls for consideration is whether the respondents in their written statement have raised the necessary pleadings that the license was irrevocable as contemplated by section 60(b) of the Act and, if so, is there any evidence on record to support that plea. It is well settled that in the absence of pleading, evidence, if any, produced by the parties cannot be considered. It is also equally settled that no party should be permitted to travel beyond its pleading and that all necessary and material facts should be pleaded by the party in support of the case set up by it. The object and purpose of pleading is to enable the adversary party to know the case it has to meet. In order to have a fair trial it is imperative that the party should state the essential material facts so that other party may not be taken by surprise. The pleadings however should receive a liberal construction, no pedantic approach should be adopted to defeat justice on hair splitting technicalities. Sometimes, pleadings are expressed in words which may not expressly make out a case in accordance with strict interpretation of law, in such a case is the duty of the Court to ascertain the substance of the pleadings to determine the question. It is not desirable to place undue emphasis on form, instead the substance of the pleadings should be considered. Whenever the question about lack of pleading is raised the enquiry should not be so much about the form of the pleadings, instead the Court must find out whether in substance the parties knew the case and the issues upon which they went to trial. Once it is found that in spite of deficiency in the pleadings parties knew the case and they proceeded to trial on those issues by producing evidence, in that event it would not be open to a party to raise the question of absence of pleadings in appeal. In Bhagwati Prasad v. Shri Chandramaul AIR 1966 SC 735, a Constitution Bench of this Court considering this question observed (at p. 738 of AIR):
'If a plea is not specifically made and yet it is covered by an issue by implication, and the parties knew that the said plea was involved in the trial, then the mere fact that the plea was not expressly taken in the pleadings would not necessarily disentitle a party from relying upon if it is satisfactorily proved by evidence. The general rule no doubt is that the relief should be founded on pleadings made by the parties. But where the substantial matters relating to the title of both parties to the suit are touched, though indirectly or even obscurely in the issues, and evidence has been led about them, then the argument that a particular matter was not expressly taken in the pleadings would be purely formal and technical and cannot succeed in every case. What the Court has to consider in dealing with such an objection is: did the parties know that the matter in question was involved in the trial, and did they lead evidence about it? If it appears that the parties did not know that the matter was in issue at the trial and one of them has had no opportunity to lead evidence in respect of it, that undoubtedly would be a different matter. To allow one party to rely upon a matter in respect of which the other party did not lead evidence and has had no opportunity to lead evidence, would introduce considerations of prejudice, and in doing justice to one party, the Court cannot do injustice to another.'" (p. 1246)
Assistance was also taken from para 3 of the case in Davuluri Venkata Hanumantha Rao v. Kasinadhuni Chengalvarayudu AIR 1954 AP 25 which is to the following effect:
"3. The first question raised is that the surrender of the suit lands by Purnachandramma, the widow of Sadasivalingamurthi, was invalid as the plaintiffs were not the next reversioners to the estate of her husband. This argument is based upon the contention, that in regard to unenfranchised inams, the rule of succession is different from that which obtains in the case of other property and that in regard to the said property, neither the widow nor the divided brothers of Sadasivalingamurthi were heirs to his estate. The learned Judge rightly pointed out that this case was not set up in the pleadings, and on that ground rejected the contention.
In our view, the learned Judge was right in not allowing the defendants to raise a plea at the time of arguments, which was not specifically raised in the pleadings." (p. 26)
Further, the learned counsel relied on paras 5 and 6 of the case in Manchineni Venkayya v. Manchineni Seshayya AIR 1954 AP 29 which are extracted below:
"…..It is well settled that parties ought not to be permitted to raise new points not covered by the pleadings or the issues. In Eshan Chunder Singh v. Shama Churn Bhutto, 1 Moo Ind. App. 7 at p. 20 (PC) (A), Lord Westbury described it as an absolute necessity that the determination of a cause shall be founded upon a case to be found in the pleadings, or involved in or consistent with the case thereby made. And this decision was followed by Sir Lionel Leach who delivered the judgment of the Judicial Committee in - Kanda v. Waghu AIR 1950 PC 68(B). In this connection, it may be pertinent to quote the observations, of Viscount Dunedin in - Siddik Mahomed Shah v. Mt. Saran AIR 1930 PC 57(1) at p. 57(1)(c):
'...but that claim was never made in the defence presented, and the learned Judicial Commissioners therefore very truly found that no amount of evidence can be looked into upon a plea which was never put forward.'
In - Lala Hemchand v. Pearey Lal AIR 1942 PC 64 at p. 66(D), Sir Madhavan Nair in delivering the judgment of the Judicial Committee has condemned the practice of allowing parties to adduce evidence on points not raised in the pleadings in the following terms:
'Their Lordships desire to observe that, though the case has been decided on all the points which arose on the evidence led by the parties, the procedure adopted by the trial court of allowing the parties to adduce evidence on points not raised in the pleadings or issues was irregular and should not have been allowed without amending the pleadings and raising necessary issues.'
6. So in the present case, the lower appellate court was wrong in reversing the judgment of the trial court on the question of repudiation without the pleadings being amended and the necessary issues being raised." (p. 30)
He also relies on para 7 of the decision of our High Court in Allam Gangadhara Rao v. Gollapalli Ganga Rao AIR 1968 AP 291, which is extracted below:
"7. It is trite to say that a party is expected and is bound to prove the case as alleged by him and as covered by the issues framed. This is in accordance with the main principle of practice that a party can only succeed according to what was alleged and proved: secundum allegate et probata He should not be allowed to succeed on a case which he has failed to set up. He should not be permitted to change his case or set up a case which is inconsistent with what he had himself alleged in his pleading except by way of amendment of the plaint. It is pertinent in this connection to remember what Lord Westbury had to say in this connection, in Eshanchunder Singh v. Shamachurn Bhutto (1866-67) 11 Moo Ind. App. 7 (PC).
'This case is one of considerable importance, and their Lordships desire to take advantage of it, for the purpose of pointing out the absolute necessity that the determination in a cause should be founded upon a case either to be found in the pleadings or involved in or consistent with the case thereby made... It will introduce the greatest amount of uncertainty into judicial proceedings if the final determination of causes is to be founded upon inferences at variance with the case that the plaintiff has pleaded, and, by joining issue in the cause, has undertaken to prove... They desire to have the rule observed, that the state of facts and the equities and ground of relief originally alleged pleaded by the plaintiff shall not be departed from'." (p. 294)
58. The principles as
enunciated in the above cases cannot be disputed. The entire gamut of exercise
is to find out the truth or otherwise of the allegations made in the company
petition and that should come only in the first blush and the parties cannot be
allowed to improve their respective stands from time to time. In this case all
the parties have adduced evidence extensively fully knowing the issues. More
over the documents which are sought to be objected are not being considered in
the petition. Hence, I reject the contention of the learned counsel.
59. The next important issue that falls for consideration is whether the acts of R-3 amounted to oppression and mismanagement under the provisions of sections 397 and 398 of the Companies Act. Though the issue of oppression was compressed by the Division Bench, yet by observing that "the main issue, as stated by us above, it is obvious, is comprehensive enough to bring into its fold all questions as to maintainability of an action under section 397 of the Companies Act on the ground of oppression as well as any issues suggestive of the presence of any act of oppression leading to the instant petition-company Petition No. 27 of 1987", it acquired higher status. Consequently, it necessitated this Court to consider whether the ingredients as contained in the statutory provisions are present so as to maintain the Petition and if so the acts alleged in the given circumstances constituted oppression/mis-management under sections 397 and 398 of the Act. The counsel appearing for the parties addressed Marathon arguments and cited catena of case law.
60. The learned counsel for P-1 and R-9 argued with vehemence at length that R-3 and R-4 conducted themselves in a manner un-becoming of a Director under the Company Law. They acted oppressively to the interest of the other Shareholders. It is also the contention that R-2 also actively connieved with R-3 for successfully performing the oppressive activities. Therefore, they requested the Court to set aside the allotment of additional share capital and order appointment of Interim Administrator until the regular Board is constituted. Alternatively they also prayed for directions to sell the shares held by R-3 and his family members to the P-1 and R-3. On the other hand the learned counsel appealing for R-3 submits that there was no oppression at all, but it is only in order to cause humiliation and harassment to R-3 and his family members and also to destroy the R-1 Company, such a Petition has been filed with false and frivolous allegations. It is also contended that the Petition was filed by P-1 and his family members ostensibly, but in fact R-9 was the actual person who lead the litigation by joining the hands with P-1. The learned counsel also submits that there are no bona fides in the petition and the same should be dismissed.
61. It is to be noted that P-1 and R-9 are sailing together in this Company Petition. The P-1 throughout his case in the Company Petition contended that Jalan group has been acting to the detriment of the interest of the Khemka family, but in later stages of averments in the Petition, it is brought out that R-9 also been subjected to similar treatment as the relations between R-3 and R-9 were strained and thus the P-1 tried to make out a case that R-3 has been acting oppressively to the interest of the other Shareholders.
62. The learned counsel for P-1 and R-9 submit that the Company in fact is a partnership and it is only incorporated under the Companies Act for the purpose of various benefits. It is also contended that Khemka family and Jalan family have always been maintaining 1/3rd and 2/3rd share in all the ventures undertaken by both these families. Therefore, there was an implied understanding to run the business on partnership lines and that in effect it is a partnership firm, though it was ostensibly incorporated under the Companies Act. When there is mutual distrust among the partners and there is lack of probity in the functions discharged by the Managing Director, the just and equitable clause has to be invoked and the Company should be wound-up on the principles enunciated in the Partnership Act. But, however winding up of the Company would jeopardise the interest of the other members, the Petition was filed for appropriate directions. On the other hand, the learned counsel for R-3 submits that it is not a partnership firm as contended by the learned counsel for P-1 and R-9. There is no such understanding at any point of time. Moreover, the Articles of Association and Memorandum of Association do not speak of such a partnership and that it is purely a legal entity incorporated under the Companies Act. Hence, the contention that it is a partnership concern has to be rejected. It is true that the Company consists of the members of Jalan family and Khemka family and outside share-holding is very negligible. They possess the shares in R-1 company and other companies. P-1 also tried to depict that it was 1/3rd in all the other Companies. Even it was also sought to be established that whenever the capital was raised in R-1 company, the allotment of shares was also made on the basis of understanding that Khemka family will have 1/3rd share and Jalan family will have 2/3rd share. But, the question that arises for consideration is whether in the given facts and circumstances of the case, can R-1 company though incorporated under the Companies Act, can be treated as a partnership in substance. The argument advanced on behalf of P-1 was that there were only two promoter families namely Khemka family and Jalan family and they held 1/3rd and 2/3rd shares, the shareholdings were only among the relations. Since it was aimed at joint management the principles applicable to partnership were relevant. It was tried to be contended that even though there was no partnership firm earlier to the incorporation of the Company, but if the corporate veil is pierced the Company is in substance a partnership, and therefore the partnership is liable to be wound-up if it is found by the Court that it is just and equitable to wind-up as and when the confidence between the partners is lost and business cannot be carried on successfully. Hence, the same principle can also be invoked in the Company Law as contained in Section 433. Since the oppression is writ at large, it is necessary that appropriate directions should be passed by this Court.
63. As can be seen from the Company Petition, the case is sought to be made out that R-3 has been conducting in oppressive manner to the interest of other Shareholders which will be sufficient ground for winding up of the R-1 company under just and equitable clause on the analogous provisions contained in the Partnership Act. It is necessary to consider whether the case on hand in effect is a partnership firm or a Company incorporated under the Companies Act. The Counsel for P-1 relied on the judgment of House of Lords in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All. ER 492 and Yenidje Tobacco Co. Ltd In re [1916]2CL 426 (CA). The said judgments were referred by the Supreme Court in Hind Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwak. AIR 1976 SC 565. In Hind Overseas (P.) Ltd's case (supra), there was a petition filed for winding-up under section 433(f) of the Act. The learned company judge dismissed the petition holding that the principle of dissolution of partnership applied to companies either on the ground of complete deadlock or on the ground of being domestic or family companies. A complete deadlock would be created where the board has two real members or the ratio of shareholding is equal. In the case of domestic or family companies, the courts have applied the dissolution of partnership principle where shareholdings are more or less equal and there is ousting not only from management but from benefits as shareholders. Lack of probity has to result in prejudice to the company's business, affecting rights of complaining parties as shareholders and not as directors. If a deadlock can be resolved by the articles there is no deadlock to bring in winding up and if there are alternative remedies the company should not be wound-up. The learned company judge also held that he was unable to hold that the substratum of the company had gone. However, in the appeal, it was reversed and winding-up was ordered. The matter was taken to the Supreme Court. The question that arose before the Supreme Court related to the scope of Section 433(f) of the Companies Act, 1956 and in particular whether the principles applicable in case of dissolution of partnership could be invoked in the case of the Company. The facts of Ebrahimi's case (supra) were set out in Hind Overseas (P.) Ltd's case (supra) thus:
"18. In Ebrahimi s case 1973 AC 360, the Company which was first formed by the two erstwhile partners, Ebrahimi and Nazar, was joined by Nazar's son, George Nazar, as the third director and each of the two original shareholders transferred to him 100 shares so that at all material times Ebrahimi held 400 shares, Nazar 400 shares and George Nazar 200 shares. The Nazars, father and son, thus had a majority of the votes in general meeting. Until the dispute all the three remained directors. Later on an ordinary resolution was passed by the company in general meeting by the votes of Nazar and George Nazar removing Ebrahimi from the office of director. That lead to the petition for winding-up before the Court." (p. 571)
The Supreme Court noted the following features which were found in Ebrahimi's case (supra):
"(1) There was a prior partnership between the only two members who later on formed the company.
(2) Both
the shareholders were directors sharing the profits equally as remuneration and
no dividends were declared.
(3) One of the shareholder's son acquired shares from his father and from the second shareholder, Ebrahimi, and joined the company as the third shareholder-director with two hundred shares (one hundred from each).
(4) After that, there was a complete ouster of Ebrahimi from the management by the votes of the other two directors, father and son.
(5) Although
Ebrahimi was a partner, Nazar had made it perfectly clear that he did not
regard Ebrahimi as a partner but regarded him as an employee in repudiation of
Ebrahimi's status as well as of the relationship.
(6) Ebrahimi
though ceasing to be a director lost his right to share in the profits through
directors' remuneration relating only the chance of receiving dividends as a
minority shareholder.”
Bearing in mind the above features in the case, the House of Lords allowed the petition for winding-up by reversing the judgment of the court of appeal and restoring the order of Plowman, J. (p. 571)
The Supreme Court in Hind Overseas (P.) Ltd. 's case (supra) observed thus:
"31. Although the Indian Companies Act is modelled on the English Companies Act, the Indian Law is developing on its own lines. Our law is also making significant progress of its own as and when necessary. Where the words used in both the Acts are identical, the English decisions may throw good light and reasons may be persuasive. But, as the Privy Council observed long ago in Ramanandi Kuer v. Kalawati Kuer AIR 1928 PC 2.—
'It has often been pointed out by this Board that where there is a positive enactment of the Indian legislature, the proper course is to examine the language of that statute and to ascertain its proper meaning uninfluenced by any considerations derived from the previous state of the law— or of the English law upon which it may have been founded.'
If it was true in the twenties it is more apposite now that the background, conditions and circumstances of the Indian society, the needs and requirements of our country call for a somewhat different treatment. We will have to adjust adapt, limit or extend, the principles derived from English decisions, entitled as they are to great respect, suiting the conditions of our society and the country in general, always, however, with one primary consideration in view that the general interests of the shareholders may not be readily sacrificed at the altar of squabbles of directors of powerful groups for power to manage the company." (p. 574)
The Supreme Court further observed thus:
"32. When more than one family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who are sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. Besides, it is only when shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding upon the just and equitable ground. In a given case the principles of dissolution of partnership may apply squarely if the apparent structure of the company is not the real structure and on piercing the veil it is found that in reality it is a partnership. On the allegations and submissions in the present case, we are not prepared to extend these principles to the present company." (p. 574)
In Ebrahimi's case (supra), the House of Lords after reviewing all the earlier cases held:
"The foundation of it all lies in the words 'just and equitable' and, if there is any respect in which some of the cases may be open to criticism, it is that the Courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own; that there is a room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the Court to dispense him from it. It does, as equity always does, enable the Court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way ...
The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements:
(i) an association formed or continued on the basis of a personal relationship, involving mutual confidence— this element will often be found where a pre-existing partnership has been converted into a limited company;
(ii) an agreement, or understanding, that all, or some (for there may be 'sleeping' members) of the shareholders shall participate in the conduct of the business;
(iii) restriction upon the transfer of the members' interest in the company— so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere'." (p. 570)
The principles settled by the Supreme Court in Hind Overseas (P.) Ltd.'s case (supra), are very relevant for the purpose of solving the issue as to what are the considerations that would apply to the winding up Petition. In case where on piercing the veil, it is found that in reality it is a partnership, although constituted as Company, the management is more or less in the nature of a partnership, then the Company may be said to be in substance a partnership. The Supreme Court reversed the judgment of the Calcutta High Court saying that merely because the shareholding is between two family groups, it could not be said that the Company thereby takes the image of partnership. The Supreme Court also made reference to the principles laid down in Yenidje Tobacco Co. Ltd's case (supra). The Supreme Court narrated the facts of Yenidje Tobacco Co. Ltd's case (supra) as follows:
"24. This was a company of two shareholders and two directors who had earlier traded separately but amalgamated their businesses and formed a private limited company. The constitution of the company was such that under its articles of association for any case of difference or dispute between the directors there was a provision for arbitration. In fact in one of such disputes a reference was made to arbitration which resulted in an award to which one of the two shareholders declined to give effect. It was proved in that case that the two directors were not on speaking terms, that the so-called meetings of the board of directors had been almost a farce or comedy, the directors would not speak to each other on the board, and some third person had to convey communications between them which ought to go directly from one to the other. Under the above situation it was observed by the learned Master of the Rolls as follows:
'It is possible to say that it is not just
and equitable that this stage of things should not be allowed to continue, and
that the court should not intervene and say this is not what the parties
contemplated by the arrangement into which they entered?' Certainly, having
regard to the fact that the only two
** ** **
directors will not speak to each other, and no business which deserves the name of business in the affairs of the company can be carried on, I think the company should not be allowed to continue. I have treated it as a partnership and under the Partnership Act of course the application for a dissolution would take the form of an action; but this is not a partnership strictly, it is not a case in which it can be dissolved by action. But ought not precisely the same principles to apply to a case like this where in substance it is a partnership in the form or the guise of a private company? It is a private company, and there is no way to put an end to the state of things which now exists except by means of a compulsory order. It has been urged upon us .... that the just and equitable clause ... has ... been held .... not to apply except where the substratum of the company has gone or where there is a complete deadlock. Those are the two instances which are given, but I should be very sorry, so far as my individual opinion goes, to hold that they are strictly the limits of the "just and equitable" clause as found in the Companies Act'……
** ** **
If ever there was a case of deadlock I think it exists here; but, whether it exists or not, I think the circumstances are such that we ought to apply, if necessary, the analogy of the partnership law and to say that this company is now in a state which could not have been contemplated by the parties when the company was formed and which ought to be terminated as soon as possible." (p. 572)
The precise question posed by the learned Master of the Rolls was "I think it right to consider as the precise position of a private company such as this and in what respects it can be fairly called a partnership in the guise of a private company. The Supreme Court has then concluded:
"It is clear that although Yenidje Tobacco Ltd's case [1916] 2 Ch. 426 was a case of complete deadlock, that was not stated to be the sole basis for a conclusion to wind-up the company. The House of Lords in Ebrahimi's case [1973] AC 360 (HL) approved the decision in Yenidje Tobacco Co. Ltd 5 case [ 1916] 2 Ch. 426. We may also point out that the House of Lords did not approve of the undue emphasis put on the contractual rights arising from the articles over the equitable principles, derived from partnership law." (p. 572)
The Supreme Court also referred to the Privy Council decision in Loch v. John Blackwood Ltd [1924] AC 783, 793, wherein section 127 of the Companies Act, 1910, Barbados, identical with Section 433(f) of the Act was considered and in which, a passage from the case of Baird v. Lees [1924] SC 83 was quoted as follows:
" 'I have no intention of attempting a definition of the circumstances which amount to a 'just and equitable' cause. But I think I may say this. A shareholder puts his money into a company on certain conditions. The first of them is that the business in which he invests shall be limited to certain definite objects. The second is that it shall be carried on by certain persons elected in a specified way. And the third is that the business shall be conducted in accordance with certain principles of commercial administration defined in the statute, which provide some guarantee of commercial probity and efficiency. If shareholders find that these conditions or some of them are deliberately and consistently violated and set aside by the action of a member and official of the company who wields an overwhelming voting power, and if the result of that is that, for the extrication of their rights as shareholders, they are deprived of the ordinary facilities which compliance with the Companies Acts would provide them with, then there does arise, in my opinion, a situation in which it may be just and equitable for the court to wind-up the company'." (p. 572)
The Supreme Court also referred to another decision of the Privy Council in D. Davis & Co. Ltd. v. Brunswick (Australia) Ltd. [1936] 6 Comp. Cas. 227, which was from the decision of the full court of the Supreme Court of New South Wales. Section 84(3) of the New South Wales Companies Act, 1899, also provides for winding up, inter alia, on the just and equitable ground. In dealing with that clause, according to the Supreme Court, the Privy Council observed as follows:
"'The position of the court in determining whether it is just and equitable to wind up the company requires a fair consideration of all the circumstances connected with the formation and the carrying on of the company during the short period which had elapsed since 12th May, 1930: and the common misfortune which had befallen the two shareholders in the company does not, in their Lordships' view, involve the consequence that the ultimate desires and hopes of the ordinary shareholders should be disregarded merely because there is a strong interest in favour of liquidation naturally felt by the holders of the preference shares.'
** ** **
'Nor on the other hand can any general rule be laid down as to the nature of the circumstances which have to be borned in mind in considering whether the case comes within the phrase.'" (p. 573)
64. The Supreme Court while dealing with the 'just and equitable' clause under section 162(vi) of the Indian Companies Act, 1913 in Rajahmundry Electric Supply Corpn. Ltd v. A. Nageshwara Rao AIR 1956 SC 213, quoted with approval the following passage in Loch's case (supra):
"'It is undoubtedly true that at the foundation of applications for winding up, on the 'just and equitable' rule, there must lie a justifiable lack of confidence in the conduct and management of the company's affairs. But this lack of confidence must be grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company's business. Furthermore the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, wherever the lack of confidence is rested on a lack of probity in the conduct of the company's affairs, then the former is justified by the latter, and it is under the statute just and equitable that the company be wound-up.'" (p. 573)
Again in Mohan Lal v. Grain Chamber Ltd AIR 1968 SC 772 the Supreme Court held thus:
"'Primarily the circumstances existing at the date of the petition must be taken into consideration for determining whether a case is made out for holding that it is just and equitable that the company should be wound up.'" (p. 573)
In Mrs. Bacha F. Guzdar v. CIT'AIR 1955 SC 74, the position of a shareholder with respect to company assets was considered and it was held thus:
"That a shareholder acquires a right to participate in the profits of the company may be readily conceded but it is not possible to accept the contention that the shareholder acquires any interest in the assets of the company. A shareholder has not got a right in the property of the company. There is nothing in the Indian Law to warrant the assumption that a shareholder who buys shares buys any interest in the property of the company which is a juristic person entirely distinct from the shareholders. The true position of a shareholder is that on buying shares an investor becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to the articles of association, that the profits or any portion thereof should be distributed by way of dividends among the shareholders. He has undoubtedly a further right to participate in the assets of the company which would be left over after winding up but not in the assets as a whole [1924] 8 Tax. Cas. 704 (710), Exph AIR 1951 SC 41 (54,55)." (p. 74)
In Bird Precision Bellows Ltd. In re [1984] 1 Ch. 419 Nourse 2, it was held thus:
"The classical definition of partnership which subsists between persons carrying on a business in common with a view to profit. It seems to me that that is exactly what Mr. Armstrong, Mr. Bird, Mr. Nin, Mr. Rowden and Pipe-Chem were doing. More particularly, and with reference to the typical and important elements previously referred to, I find the following facts in relation to the company and the roles which Mr. Armstrong and Mr. Nin were intended and expected to play, and did play, in its affairs. First, the company represented an association which was formed on the basis of a personal relationship involving mutual confidence. Mr. Bird accepted in his evidence in chief that there was trust between himself and Mr. Armstrong and Mr. Nin, although he said that it was no more than in any other business connection. That is quite enough. The personal relationship involving mutual confidence does not have to be one which extends beyond the confines of business, for example into social life. Secondly, there was an agreement or understanding that Mr. Armstrong and Mr. Nin should participate in the conduct of the business. In my judgment that element is found where there is an agreement or understanding that a shareholder shall participate in all major decisions relating to the company's affairs, for example by acting as a director, even if not in the day-to-day conduct of the business. Thirdly, there were restrictions on share transfers. Fourthly, both Mr. Armstrong and Mr. Nin did provide capital for the company in substantial amounts.
In the circumstances, it seems to me to be clear that the company was a quasi-partnership within Lord Wilberforce's criteria or, indeed within any other criteria which might be material. Mr. Jacob sought to argue that there was a partnership only in relation to the company's premises, but there was nothing in that point. The proposition implicit in his submission that there can only be a quasi-partnership in a case where all the shareholders make similar contributions to the company is supportable neither on authority nor in principle. Further, to compare the roles of Mr. Armstrong and Mr. Nin with that of consultants to a partnership is most unrealistic. Each of them was intended and expected to play a central and regular part in the affairs of the company, and that is exactly what they both did."
The Supreme Court in Hind Overseas (P.) Ltd. case (supra), made it clear that it is not always necessary to follow the decisions of the English Courts, even though the Indian Companies Act is modelled on English Companies Act. The similar question was considered by the Division Bench of Madras High Court in G. Kasturi v. N. Murali [1992] 74 Comp. Cas. 661. Speaking for the Bench P.S. Mishra J. (as he then was) after surveying all the cases both English and Indian cases on the subject observed that "the members of quasi-partnership was founded on a personal relationship involving mutual confidence as between the members." It was also observed by the Division Bench that "the absence of an essential ingredients in the relationship of member and the character of the company to qualify it to answer the discretion of a quasi-partnership company was enough to hold that the petitioners had no justification to ask for interference by the Court on just and equitable grounds." The case considered by Division Bench related to a Public Limited company. The Supreme Court in Kilpest (P.) Ltd. v. Shekhar Mehra [1996] 87 Comp. Cas., 615/10 SCL 233, after referring to Ebrahimi's case (supra), and Hind Overseas (P.) Ltd's case (supra), observed:
"The promoters of a company, whether or not they were hitherto partners, elect to avail of the advantages of forming a limited company. They voluntarily and knowingly bind themselves by the provisions of the Companies Act. The submission that a limited company should be treated as a quasi-partnership should, therefore, not be easily accepted. Having regard to the wide powers under section 402, very rarely would it be necessary to wind up any company in a petition filed under sections 397 and 398." (p. 622)
The learned single Judge of this Court in C.N. Shetty v. Hillock Hoteb (P.) Ltd [1996] 87 Comp. Cas. 1/12 SCL 340, observed thus:
"Held (i) that the shareholding of the petitioner and the second respondent was equal till 1987, seven years from the formation of the company. The company was formed on the basis of the personal relationship involving mutual confidence between the petitioner and the second respondent. Outsiders held an insignificant minority of 9 per cent. of the shares. The petitioner and the second respondent being also directors were participating in the conduct of the business. Restrictions were imposed on transfer of shares by members under articles 2A, 4, 5 and 6 of the articles of association of the company. Therefore, the tests for determining whether the company was in substance a partnership were satisfied.
** ** **
(ii) That admittedly at the time of increase of capital in 1987 no shares were offered to the petitioner. Issuing additional shares to the respondents to the complete exclusion of the petitioner, the unfair conduct of the respondents and the construction of flats which meant that the construction of hotel project was abandoned, cumulatively showed that there was oppression of the petitioner by group of the second respondent. The complaint of the petitioner that the affairs of the company were being conducted by the majority shareholders in a manner oppressive to the interests of the petitioner was justified and there were sufficient grounds to wind up the company. There was, therefore, to be an order for purchase by the respondents of the petitioner's shares." (p. 2)
Held that in substance it was a partnership."
After holding that the affairs of the company were conducted by the majority shareholders in a manner oppressive to the interest of the petitioner and that there was sufficient ground to wind up the company, directed purchase of shares by the Respondents (majority shareholders).
65. It is well within the competence of the Court to determine the real structure of the company. It is open for the court to pierce the veil for such determination. If it is found that the apparent structure of the company is not real structure and it is in substance a partnership the principle of dissolution of the partnership may be applied in adjudicating the petition for winding up.
66. However, on consideration of both English and Indian cases, in order to determine whether the Company though incorporated under the Companies Act, yet in substance it is a partnership, the following norms may create a possible inferential circumstances:
(a) There should have been pre-existing business of partnership.
(b) An understanding to convert the partnership into a limited Company to be run on the same terms and pattern as that of partnership.
(c) It should have been formed among the relations or close friends with an understanding to run the Company with joint participation on the basis of personal relationship coupled with mutual trust and confidence.
(d) An agreement and understanding that all or some of the share holders will physically participate in the conduct of the business.
(e) There should have been an understanding that the persons investing in shares in the company would be appropriately remunerated by way of salary and perquisites with a right to participate in the management of the company.
(f) The members should hold some
proprietary right,
(g) should be equal with minor variation.
(h) clause or clauses in the articles of association of the Company signifying either expressly or impliedly that the business is run on the lines of partnership.
(i) Complete restriction on transfer of shares to outsiders to indicate the continuity of trust and confidence among the shareholders.
(j) To appoint the directors on the basis of shareholdings of members of each family or set of associates.
These are only illustrative and not exhaustive. The Court has to decide the matter on the particular facts and circumstances of each case.
67. Keeping the principles
enunciated in the aforesaid cases, it has to be considered whether the R-1
company is a partnership firm in reality even though it was incorporated under
the Companies Act.
68. There was no dispute that the Company was found by the members of Jalan and Khemka families. The shareholding is not equal between Jalan and Khemkas. As already noticed there is a split in the Jalan Group and R-3 states that there was no partnership formula in the instant case. It is only when the shareholding is equal, a possible inference could be drawn that there are symptoms of partnership. Further, it is not the case where prior to the incorporation of the Company, the business was run on partnership basis. It is for the first time, the Company was incorporated straightaway under the provisions of the Companies Act nor it is the case of the parties that any of the parties were conducting the business analogous to the business of the R-1 company prior to the incorporation. Altogether it is a new business, not undertaken by any of the members previously. It was only established for the purpose of supply of rubber rings to HIL which is the main principal component for manufacture of AC Pressure Pipes. There is also no agreement which is forthcoming between the parties to the effect that the business shall be conducted on the lines of the partnership and no such understanding could be culled out from the facts of this case. The Memorandum of Articles of Association of the Company did not contain any clauses suggestive inference of partner ship. Even the Directors are not elected on the basis of shareholdings. Initially there were five directors out of which only one Director was from Khemkas. Even in 1987 when there were six, P-1 was only the Director on behalf of Khemkas. All that can be said is that the members of two families formed the private limited company. There is also no stipulation with regard to the representation of the Directors from each family. Even in the Articles of Association, no such understanding is contained nor can it be inferred from the reading of the various clauses of the Articles of Association. Clause 9 of the Articles of Association empowers the Board absolute and uncontrolled discretion to refuse to register any transfer of the shares and it shall not be required to give any reasons. Further under clause 10 any share may be transferred by any member to any other member or his wife or husband of another member etc. by which it only goes to show that a member is free to transfer the shares of any member or the relations of the members as stipulated therein and in such cases of transfer, the power of refusal given to the Board under Article 9 shall apply to any of such transfer. Therefore, even if a member wishes to transfer his shares to other members, the decision of the Board is final and uncontrolled discretion is vested with the Company to refuse to register the transfer without giving any reasons. Under clause 7, the number of Directors of the Company shall not be less than two, not more than nine. Thus, it is seen that the power of a transfer by a member is not automatic and that there is no stipulation in the Articles of Association that a Director should be appointed from Khemka family or Jalan family. There is also no stipulation with regard to the participation in the management of the Company by the members of both families. Though, P-1 and R-9 were submitting that it is a partnership concern having joint participation in the management, no such evidence is forthcoming except stating that P-1 and R-9 used to guide the management of R-1 company and decisions were being taken after consulting them. P-1 and R-9 were the Directors apart from the other Directors. It is sought to be contended that there was always an implied understanding that the shareholding of Khemka and Jalan family should be in the ratio of 1/3rd and 2/3rd. In the absence of any positive evidence, it is not possible to hold that the shareholding is in the ratio of 1/3rd and 2/3rd. Of course, in the evidence, it is brought out that whenever the share capital is raised the shares are allotted in the ratio in which they were holding earlier, but that cannot be construed as a determinative factor for treating R-1 company as a partnership firm. Evidence was also adduced to say that even other Companies established by the Khemka and Jalan family, the shareholding is in the ratio of 1/3rd and 2/3rd, I am not inclined to go into those details in-as-much as the holding in other companies cannot form basis for the holding in the present Company. Moreover, the evidence adduced on behalf of P-1 and R-9 do not indicate that there was an understanding or agreement to the effect that the shareholding of Khemkas should always be 1/3rd at the level of incorporation and also at the points when the shareholdings were increased from time to time. Even assuming that the shareholding of the Khemka family and Jalan family is 30 per cent above and 60 per cent above respectively, that situation by itself is not a conclusive proof that it is a partnership concern. The Supreme Court also held in Kilpest (P.) Ltd. 's case (supra), that limited company should not be easily treated as a quasi-partnership. The Supreme Court observed "the promoters of a company, whether or not they were hitherto partners, elect to avail of the advantages of forming a limited company. They voluntarily and knowingly bind themselves by the provisions of the Companies Act. The submission that a limited company should be treated as a quasi-partnership should, therefore, not be easily accepted. Having regard to the wide powers under section 402, very rarely would it be necessary to wind up any company in a petition filed under sections 397 and 398". The powers which are now exercised under section 402 of the Companies Act were hitherto being exercised by the Courts and now they are being exercised by the Company Law Board. Therefore, applying the principles settled in catena of decisions, I have to necessarily reject the plea of the P-1 that the Company was ostensibly incorporated under the provisions of the Company Law and that in substance it was a partnership.
69. For proper appreciation of the case it is necessary to extract sections 397 and 398 of the Companies Act. Sections 397 and 398 as it stood prior to the amendment of the Companies Act, reads thus:
"397. Application to Court for relief in cases of oppression - (1) Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Court for an order under this section, Provided such members have a right so to apply in virtue of section 399.
(2) If, on any application under sub-section (1), the Court is of opinion:
(a) that
the company's affairs are being conducted in a manner prejudicial to public
interest or in a manner oppressive to any member or members; and
(b) that
to wind up the company would unfairly prejudice such member or members, but
that otherwise the facts would justify the making of a winding-up order on the
ground that it was just and equitable that the company should be wound up:
The Court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.
398. Application to Court for relief in cases of mismanagement— (1) Any members of a company who complain:
(a) that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or
(b) that a material change (not being a change brought about by, or in the interests of, any creditors including debenture holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its board of directors, or of its managing agent or secretaries and treasurers or manager, or in the constitution or control of the firm or body corporate acting as its managing agent or secretaries and treasurers, or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company;
may apply to the Court for an order under this section, provided such members have a right so to apply in virtue of section 399.
(2) If, on any application under sub-section (1), the Court is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Court may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit."
70. The aforesaid sections are in Chapter-VI of the Act which deal with prevention of oppression and mismanagement and also the remedial measures that can be imposed by the Court. Chapter VI of the Act is obviously intended for the purpose of giving protection to shareholders from oppression and mismanagement of the controlling shareholders. Though by the Amendment Act, 1988, the power to grant relief under section 397 of the Act is given to the Company Law Board with effect from May 31,1991, before the amendment, the power was vested with the court under the Companies Act, 1956. The parallel provision in the English Companies Act, 1948, since repealed is section 210. For the first time in the Indian Companies Act, 1913, protection to shareholders was made in section 153C by the Companies Amendment Act, 1951. This is a protection to avoid winding up in the case of mismanagement or oppression. Certainly, winding up is a drastic procedure. In many cases, it may not help the prejudiced and oppressed members who could seek for it, on account of mismanagement and oppression and so the courts were always circumspect and reluctant to grant the relief of winding up. If we trace the legislative history which resulted in a less drastic provision of giving wide powers to the court to pass appropriate orders in case of oppression and mismanagement, necessarily we have to refer to the Cohen Committee Report which recommended that "the court should have the power to impose upon the parties to the dispute whatever settlement the court considers just and equitable". On the report of the Cohen Committee section 210 was incorporated in the English Companies Act, 1948 and we followed in India by introducing section 153C in the Indian Companies Act, 1913. The recommendation of the Babha Committee in 1952 widened the scope and area still further. The remedy was extended by not confining it to cases of minority oppression, but also the cases of mismanagement of company affairs in a manner prejudicial to the interests of the Company. In 1963, the provision of the Companies Act, 1956, was amended extending the scope of the provision to include where the affairs of the Company were being conducted in a manner prejudicial to the public interest.
71. The oppression is the core element to be proved and the nature of oppression to be tested in the context of "cause for winding up". But it has to be remembered that the provision is intended to avoid winding up and to mitigate and alleviate oppression. The relief under section 397 of the Act is geared to help the members who were oppressed. The relief under section 398 of the Act is geared to save the company and it is in the interest of the company alone and not to any particular member/members.
72. The right of members to apply under sections 397 and 398 of the Act is hedged in with certain restrictive conditions. This is to avoid frivolous applications from dissatisfied members approaching the court (now the Company Law Board). The provision regarding member/members having one-tenth share capital of the company alone can file applications under sections 397 and 398 of the Act is intended to avoid frivolous petitions. Of course, under section 399(4), it is provided that the Central Government may authorise any member or members of the Company to apply to the Company Law Board for relief, if in its opinion circumstances exist which make it just and equitable to do so.
73. The expression "oppression" and "mismanagement" which are the basic and foundational concepts in the section are left by the Parliament without defining them. When once it is left without definition, the task of the Court is difficult and more responsible. The word 'oppression' is a Chamelionic word and it changes its colour, content and form from time to time, place to place, event to event, depending on the circumstances of the case. Therefore, no general frame can be made to this word confining its limits. Hence, the oppression has to be made out on the facts and circumstances of each case. The word oppression denotes the exercise of authority or power in a burden-some, harsh and wrongful manner, or unjust, cruel treatment or the imposition of unreasonable or unjust burdens, in the circumstances, which would almost always entails some impropriety on the part of oppressor. Naturally, the Court will always incline to wade through precedents to find out and to assign the correct meaning of these two words "oppression" and "mismanagement" in the context in which they are used. Certainly, the Courts have to decide on the facts of each case as to whether there is a real cause of action under sections 397 and 398 of the Act.
74. The learned counsel for the
parties have cited number of cases both English and Indian, on the question of
oppression. Let us consider these cases before applying the principles to the
facts of the present case.
75. The first of the Scottish
case is Elder v. Elder & Watson Ltd. 1952 SC 49. It was observed by Lord
Cooper thus:
"Where the 'just and equitable' jurisdiction has been applied in cases of this type, the circumstances have always, I think, been such as to warrant the inference that there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy. The phrase 'oppressive to some part of the members' acquires a certain colour from its collocation in section 165 with such stronger expressions as 'intent' to 'defraud', 'fraud', 'misfeasance' or 'other misconduct', and the essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely. This, broadly speaking, was the class of case which the draftsman of section 210 evidently had in mind, and the question is whether the petitioners have brought themselves within the scope of the section." (p. 55)
Lord Keith in his judgment stated:
"But, apart from this, the question of absence of mutual confidence perse between partners, or between two sets of shareholders, however relevant to a winding up, seems to me to have no direct relevance to the remedy granted by section 210. It is oppression of some part of the shareholders by the manner in which the affairs of the company are being conducted that must be averred and proved. Mere loss of confidence or pure deadlock does not, I think, come within section 210.
It is not lack of confidence between shareholders per se that brings section 210 into play, but lack of confidence springing from oppression of a minority by a majority in the management of the company's affairs, and oppression involves, I think, at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder." (P- 59)
Among the important considerations, which have to be kept in view in determining the section 402, the following matters were stressed in Elder's case (supra) as summarised at page 394 in George Meyer v. Scottish Co-operative Wholesale Society Ltd [1954] SC 381:
"(1) The oppression of which a petitioner complains must relate to the manner in which the affairs of the company concerned are being conducted; and the conduct complained of must be such as to oppress a minority of the members (including the petitioners) qua shareholders.
(2) It
follows that the oppression complained of must be shown to be brought about by
a majority of members exercising as shareholders a predominant voting power in
the conduct of the company's affairs.
(3) Although
the facts relied on by the petitioner may appear to furnish grounds for the
making of a winding up order under the 'just and equitable' rules, those facts
must be relevant to disclose also that the making of a winding up order would
unfairly prejudice the minority members qua shareholders.
(4) Although
the word 'oppressive' is not defined it is possible by way of illustration to
figure out a situation in which majority shareholders by an abuse of their
predominant voting power are 'treating the company and its affairs as if they
were their own property' to the prejudice of the minority shareholders and in
which just and equitable grounds would exist for the making of a winding up
order... but in which the alternative remedy provided by section 210 by way of
an appropriate order might well be open to the minority shareholders with a
view to bringing to an end the oppressive conduct of the majority.
(5) The
power conferred on the court to grant a remedy in an appropriate case appears
to envisage a reasonably wide discretion vested in the court in relation to the
order sought by a complainer as the appropriate equitable alternative to a
winding-up order."
76. The next case which is
quoted in all cases of oppression, mismanagement under the Companies Act is
Scottish Co-operative Wholesale Society Ltd v. Meyer [1959] 29 Comp. Cas. 1
(HL). The said appeal arose out of the order passed by the First Division of
Court of Sessions. It was a case in which a parent company was in control of a
subsidiary company which also had a minority of independent members. A time
came when trading conditions were such that it would be to the advantage of the
parent company to do away with the subsidiary company. The question before the
Court was whether the conduct of the parent company in seeking to achieve that
result amounted to oppression or oppressive conduct of the affairs of the
Company within section 210 and the court answered in affirmative, holding that
the affairs of the Company were conducted in oppressive manner.
77. As
to the meaning of oppression, Viscount Simmonds. J observed:
"... it appears to me incontrovertible that the society have behaved to the minority shareholders of the company in a manner which can justly be described as oppressive. It had the majority power and exercised its authority in a manner 'burdensome, harsh and wrongful' - I take the dictionary meaning of the word. But, it is said, let it be assumed that the society acted in an oppressive manner; yet it did not conduct the affairs of the company in an oppressive manner. My Lords, it may be that the acts of the society of which complaint is made could not be regarded as conduct of the affairs of the company if the society and the company were bodies wholly independent of each other, competitors in the rayon market, and using against each other such methods of trade warfare as custom permitted. But this is to pursue a false analogy. It is not possible to separate the transactions of the society from those of the company. Every step taken by the latter was determined by the policy of the former. I will give an example of this. I observed that, in the course of the argument before the House, it was suggested that the company had only itself to blame if, through its neglect to get a contract with the society, it failed in a crisis to obtain from the Falkland Mill the supply of cloth that it needed. The short answer is that it was the policy of the society that the affairs of the company should be so conducted, and the minority shareholders were content that it should be so. They relied - how unwisely the event proved - on the good faith of the society, and in any case they were important to impose their own views. It is just because the society could not only use the ordinary and legitimate weapons of commercial warfare but could also control from within the operations of the company that it is illegitimate to regard the conduct of the company's affairs as a matter for which it had no responsibility. After much consideration of this question, I do not think that my own views could be stated better than in the late Lord President Cooper's words on the first hearing of this case. He said ([1954] SC 381, 391):
'In my view, the section warrants the court in looking at the business realities of a situation and does not confine them to a narrow legalistic view. The truth is that, whenever a subsidiary is formed as in this case with an independent minority of shareholders, the parent company must, if it is engaged in the same class of business, accept as a result of having formed such a subsidiary an obligation so to conduct what are in a sense its own affairs as to deal fairly with its subsidiary.'"
The House of Lords affirmed the order directing the society (appellant) to purchase the shares of the minority. In this regard, it was observed as:
"Some criticism was made of the relief given by the order of the Court. It was said that only that relief could be given which had as its object and presumably its effect the 'bringing to an end of the matters complained of and that an order on the society to purchase the respondents' shares in the company did not satisfy that condition. This argument is without substance. The matter complained of was the oppression of the minority shareholders by the society. They will no longer be oppressed and will cease to complain if the society purchase their shares." (p. 9)
Lord Denning pointed out that, in such a situation, the most useful order is to order the oppressor to buy the shares of the oppressed at a fair price. Lord Denning observed:
"... The object of the remedy is to bring 'to an end the matters complained of that is the oppression, and this can be done even though the business of the company has been brought to a standstill. If a remedy is available when the oppression is so moderate that it only inflicts wounds on the company, whilst leaving it active, so also it should be available when the oppression is so great as to put the company out of action altogether. Even though the oppressor by his oppression brings down the whole edifice -destroying the value of his own shares with those of every one else - the injured shareholders have, I think a remedy under section 210.
One of the most useful orders mentioned in the section - which will enable the court to do justice to the inured shareholders - is to order the oppressor to buy their shares at a fair price: and a fair price would be, I think, the value which the shares would have had at the date of the petition, if there had been no oppression. Once the oppressor has brought the shares, the company can survive. It can continue to operate. That is a matter for him. It is, no doubt, true that an order of this kind gives to the oppressed shareholders what is in effect money compensation for the injury done to them, but I see no objection to this. The section gives a large discretion to the court and it is well exercised in making an oppressor make compensation to those who have suffered at his hands.
True it is that in this, as in other respects, your Lordships are giving a liberal interpretation to section 210. But it is a new section designed to suppress an acknowledged mischief...." (p. 33)
78. In H.R. Harmer Ltd. In re
[1959] 29 Comp. Cas. 305 (CA) the company was formed to acquire a business. Two
of the sons of the founder went into the business and the shares in the company
were held by the founder, his wife and the two sons. Under the articles of the
company the father was the governing director and each of the two sons became
life directors. The father was also appointed Chairman of the board of
directors with a casting vote. On the basis of the shares held by the parties,
the two sons had the major beneficial interest, but were in a minority in
voting rights. The father as the Chairman assumed power which he did not
possess, and exercised them against the wishes of the shareholders, namely, the
two sons, who had the major beneficial interest in the company. On these facts
the sons applied for an order under section 210 of the Companies Act, 1948,
alleging that the affairs of the company were being conducted by the father in
a manner oppressive to some part of the members, including themselves. It was
held that the affairs of the company had been conduct ed in a manner oppressive
to the sons as members of the company, and that, even if the father's acts
might have been done lawfully with the sanction with the general meetings, the
sons were entitled to require that proper procedure should be followed by the
father.
79. The nature of oppression to
be established under section 210 of the Companies Act stated thus:
"... This indicates that the oppression complained of must be complained of by a member of the company and must be oppression of some part of the members (including himself) in their or his capacity as members or a member of the company as such. Secondly, it is to be noted that the section does not purport to apply to every case in which the facts would justify the making of a winding up order under the 'just and equitable' rule, but only to those cases of that character which have in them the requisite element of oppression. Thirdly, the phrase 'the affairs of the company are being conducted' suggests, prima facie, a continuing process and is wide enough to cover oppression by anyone who is taking part in the conduct of the affairs of the company, whether de facto or de jure. Fourthly, the section gives no guidance as to the meaning of the word 'oppressive', although it does, as already mentioned, indicate that the victim or victims of the oppressive conduct must be a member or members of the company as such. Prima facie, therefore, the word 'oppressive' must be given its ordinary sense and the question must be whether in that sense the conduct complained of is oppressive to a member or members as such. Inasmuch as in the present case it is not in dispute that the facts would justify a winding up order under the 'just and equitable' rule and it is recognised that such an order would unfairly prejudice the complaining members, this would appear to be in effect the only question in issue." (p. 319)
As to the 'just and equitable' jurisdiction, the court quoted Lord Cooper's observations, part of which reads:
"…Where the 'just and equitable' jurisdiction has been applied in cases of this type, the circumstances have always, I think, been such as to warrant the inference that there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy. The phrase 'oppressive to some part of the members' acquires a certain colour from its collocation in section 165 with such stronger expressions as 'intent to defraud', 'fraud' 'misfeasance' or 'other misconduct', and the essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely. This, broadly speaking, was the class of case which the draftsman of section 210 evidently had in mind, and the question is whether the petitioners have brought themselves within the scope of the section….."(P-321)
The discussion, at page 324, shows that though the majority is entitled to use their voting power in what they believe to be in the interests of the company, the power should be used "in the only legitimate way".
80. In Shanti Prasad Jain v. Kalinga Tubes Ltd. AIR [1965] SC 1535 the Supreme Court after referring to Scottish Co-operative Wholesale Society Ltd.'s case (supra) and H.R. Harmer Ltd's case (supra), approved the broad and liberal interpretation given to the Courts power and while referring to analogous section in English Companies Act (section 210) observed:
"19. These observations from the four cases referred to above apply to section 397 also which is almost in the same words as section 210 of the English Act, and the question in each is whether the conduct of the affairs of the company by the majority shareholders was oppressive to the minority shareholders and that depends upon the facts proved in a particular case. As has already been indicated, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing upto the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders 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 the 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...." (p. 1543)
81. In Bellador Silk Ltd., In re [1965] (1) All E.R. 667 it was held that the presentation of the petition under section 210 in order to bring the pressure to bear to achieve the collateral purpose, was an abuse of the process of the Court and on the facts, it was held that the contributory's had no tangible interest in the liquidation that the consequences that the contributory would not be entered into a winding-up order of just and equitable grounds. It was pointed out that the cure might be worse than the disease owing to the prejudice likely to be inflicted on the petitioner as a result of compulsory liquidation and in that situation the Act empowers the Court in certain circumstances to afford relief by various methods falling short of extreme expedient of winding up. The condition on existence of which the jurisdiction of the Court depends, is that the facts would justify the making-up a winding up order on the ground that it is just and equitable that the company should be wound-up that is, that, if the petition had been presented as a contributory's petition for the winding-up of the Company, the Court could have made such an order.
82. The clause 'just and equitable' was again came up for consideration before the Supreme Court in Rajahmundry Electric Supply Corpn. Ltd. 's case (supra). It was observed as follows:
"The words 'just and equitable' in section 162 (vi) are not to be construed ejusdem generis with the matters mentioned in clauses (i) to (v) and, therefore, whether mismanagement of the directors is a ground for winding up order under section 162 (vi) becomes a question to be decided on the facts of each case. Where nothing more is established than that the directors have misappropriated the funds of the company, an order for winding up would not be just or equitable, because if it is a sound concern such an order must operate harshly on the rights of the shareholders. But, if, in addition to such misconduct, circumstances exist which render it desirable in the interests of the shareholders that the company should be would up, there is nothing in section 162 (vi) which bars the jurisdiction of the court to make such an order.
It is no doubt the law that Courts will not, in general, intervene at the instance of shareholders in matters of internal administration, and will not interfere with the management of a company by its directors, so long as they are acting within the power conferred on them under the articles of association. But this rule can by its very nature apply only when the company is a running concern, and it is sought to interfere with its affairs as a running concern. But when an application is presented to wind up a company, its very object is to put an end to its existence, and for that purpose to terminate its management in accordance with the Articles of Association and to vest it in the Court. In that situation, there is no scope for the rule that the Court should not interfere in matters of internal management...." (p. 213)
83. Under section 397, the Court has to be satisfied that the affairs of the company are being conducted in a manner oppressive to any member or members. Therefore, the acts of oppression have not only to be alleged with sufficient precision, but they must be proved to the satisfaction of the Court. This was reiterated by the Division Bench of Calcutta High Court in Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. AIR 1962 Cal. 127. It was also observed in the said case that failure to give details as required by section 173(2) makes the case ipso-facto oppressive in conducting the affairs of the company. It was observed in para 5 as follows:
"5. It is also necessary to emphasis that the Court has to form an opinion on two essential points, that are set out in section 397(2) of the Act. These two points are first, the one that I have already stated, namely that the company's affairs are being conducted in a manner oppressive to any member or members of the company and secondly, that to wind up the company would unfairly prejudice such member or members but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up. It is imperative that the Court's opinion on both these points must be formed in the affirmative before any order could be made under section 397 of the Companies Act. If the Court is not satisfied on any one of these points and is of the opinion that either a company is not being conducted in a manner oppressive or that the facts do not justify the making of a winding-up order, then no further question can arise under section 397. It is also proper to emphasis that the power of the Court to make such order, as it thinks fit, under section 397(2) of the Act is expressly stamped with the purpose of 'bringing to an end the matters complained of.' Therefore, wide as the power of the Court is following from the words of the expression 'such order as it thinks fit.' It is nevertheless controlled by the overall objective of this section which must be kept strictly in view that the order must be directed 'to bringing to an end the matters complained of. The marginal note of section 397 of the Companies Act shows also that the purpose of the order of the Court in this section is to give 'relief in cases of oppression." (p. 128)
84. The learned counsel for R-3 submits that the petitioner has to plead and prove the allegations of oppression and vague and uncertain allegations cannot constitute a ground of oppression and therefore relief cannot be granted to the petitioner on such vague and uncertain grounds. He relied on the decisions in Mohta Bros. (P.) Ltd. v. Calcutta Landing & Shipping Co. Ltd. [1970] 40 Comp. Cas. 119 (Cal.)
In the said case it was held that:
"When dealing with a petition for relief from oppression or mismanagement made under sections 397 and 398 of the Companies Act, 1956, the Court must confine itself to the case as made out in the petition and to the allegations made therein and the supporting affidavits and not look at other evidence with regard to events that might have happened subsequent to the petition. Full particulars must be given by a petition in such an application of the alleged acts of oppression or mismanagement. Vague and uncertain allegations of oppression or mismanagement, although they may constitute grounds for suspicion, do not entitle a petitioner to ask the Court to embark upon an investigation into the affairs of a company in the hope that, in consequence of such investigation, something will turn up which will enable the Court to grant relief to the petitioner. The inability on the part of shareholders, who have no access to the books of the company, to furnish full particulars, is not a ground for directing an investigation into the affairs of a company or for giving any other relief. The petitioner must prove, prima facie, at any rate, that an investigation is called for. Negligence and inefficiency, even if they are proved, do not amount to mismanagement or oppression as contemplated by the Act.
It is easy for a shareholder to allege that the company has hidden assets and that the directors are manipulating the profits and dividends, etc., but such vague, uncertain and indefinite charges in the absence of proof, will not entitle the petitioner to relief under sections 397 and 398 of the Act. There is nothing illegal, not even improper, in a person acquiring the shares of a joint stock company in the market unless such transactions in shares are proved to have been effected by unfair manipulation of the share prices. Acquisition of shares by one group of persons is not one of the matters for which relief can be granted under these sections to a minority group of shareholders unless it is proved to be oppressive. Relief, under these sections, cannot be granted to a group of shareholders merely because it has been outvoted in the matter of business policy or management of the company's affairs." (p. 119)
85. Various other English cases were also referred by the Supreme Court in Hind Overseas (P.) Ltd's case (supra) in paras 26 and 27 which are extracted below:
"26. We may also refer to the Privy Council decision in Loch v. John Blackwood Ltd [1924] (AC) 783, wherein section 127 of the Companies Act, 1910 of Barbados, identical with section 433 (f) of the Act was considered. Lord Shaw of Dunfermline quoted in the judgment a passage from the case of Bairdv. Lees [1924] (SC) 83, which is as follows:—
'I have no intention of attempting a definition of the circumstances which amount to a 'just and equitable' cause. But I think I may say this. A shareholder puts his money into a company on certain conditions. The first of them is that the business in which he invests shall be limited to certain definite objects. The second is that it shall be carried on by certain persons elected in a specified way. And the third is that the business shall be conducted in accordance with certain principles of commercial administration defined in the statute, which provide some guarantee of commercial probity and efficiency. If shareholders find that these conditions or some of them are deliberately and consistently violated and set aside by the action of a member and official of the company who wields an overwhelming voting power, and if the result of that is that, for the extrication of their rights as shareholders, they are deprived of the ordinary facilities which compliance with the Companies Acts would provide them with, then there does arise, in my opinion, a situation in which it may be just and equitable for the court to wind up the company.'
27. We may also refer to an other decision of the Privy Council in D. Davis & Co. Ltd v. Brunswick (Australia) Ltd AIR 1936 (PC) 114 which was from the decision of the Full Court of the Supreme Court of New South Wales.
Section 84 (e) of the New South Wales Companies Act (1899) also provides for winding up, inter alia, on just and equitable ground. In dealing with that clause, the Privy Council observed as follows:—
'The position of the Court in determining whether it is just and equitable to wind up the company requires a fair consideration of all the circumstances connected with the formation and the carrying on of the company during the short period which had elapsed since 12th May, 1930; and the common misfortune which had befallen the two shareholders in the company does not, in their Lordships' view, involve the consequence that the ultimate desires and hopes of the ordinary shareholders should be disregarded merely because there is a strong interest in favour of liquidation naturally felt by the holders of the preference shares.'
** ** **
'Nor on the other hand can any general rule be laid down as to the nature of the circumstances which have to be borne in mind in considering whether the case comes within the phrase.'” (p. 572)
86. While dealing with the 'just and equitable' clause under section 162(vi) of the Indian Companies Act, 1913, in Rajahmundry Electric Supply Corpn. Ltd's case (supra) the Supreme Court quoted with the approval the following passage in Loch's case (supra):
"'It is undoubtedly true that at the foundation of applications for winding up, on the 'just and equitable' rule, there must lie a justifiable lack of confidence in the conduct and management of the company's affairs. But this lack of confidence must be grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company's business. Furthermore the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, wherever the lack of confidence is rested on a lack of probity in the conduct of the company's affairs, then the former is justified by the latter, and it is under the statute just and equitable that the company be would up.'" (p. 573)
87. One of the important cases dealt with by the Supreme Court on this aspect is Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd [1981] 51 Comp. Cas. 743 in which the Supreme Court once again went into the question as to what the word "oppression" may mean for the purpose of section 397 of the Act and what may provide just and equitable grounds for winding up a company and referred to several judgments including the one in Shanti Prasad Jain's case (supra) and the various judgments of the Privy Council and other courts of England and observed:
"Neither the judgment of Bhagwati, J. nor the observations in Elder's case [1952] (SC) 49 are capable of the construction that every illegality is perse oppressive or that the illegality of an action does not bear upon its oppressiveness. In Elder's case [1952] (SC) 49, a complaint was made that Elder had not received the notice of the board meeting. It was held that since it was not shown that any prejudice was occasioned thereby or that Elder could have bought the shares had he been present, no complaint of oppression could be entertained merely on the ground that the failure to give notice of the board meeting was an act of illegality. The true position is that an isolated act, which is contrary to law, may not necessarily and by itself support the inference that the law was violated with a mala fide intention or that such violation was burdensome, harsh and wrongful. But a series of illegal acts following upon one another can, in the context, lead justifiably to the conclusion that they are a part of the same transaction, of which the object is to cause or commit the oppression of persons against whom those acts are directed. This may usefully be illustrated by reference to a familiar jurisdiction in which a litigant asks for the transfer of his case from one judge to another.
An isolated order passed by a Judge which is contrary to law will not normally support the inference that he is biased; but a series of wrong or illegal orders to the prejudice of a party are generally accepted as supporting the inference of a reasonable apprehension that the judge is biased and that the party complaining of the orders will not get justice at his hands." (p. 780)
The Supreme Court has then said:
"It is clear from these various decisions that on a true construction of section 397, an unwise, inefficient or careless conduct of a director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder. It may be mentioned that the Jenkins Committee on Company Law Reform had suggested the substitution of the word 'oppression' in section 210 of the English Act by the words 'unfairly prejudicial' in order to make it clear that it is not necessary to show that the act complained of is illegal or that it constitutes an invation of legal rights (See Gower's Company Law, 4th edition, page 668). But that recommendation was not accepted and the English law remains the same as in George Meyer's case [1959] AC 324 (HL) and in H.R. Harmer Ltd., In re [1959] 29 Comp. Cas. 305 (CA), as modified in Jermyn Street Turkish Baths Ltd, In re [1971] 41 Comp. Cas. 999. We have not adopted that modification in India." (p. 782)
88. In Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton &Jute Mills Co. Ltd [1964] 34 Comp. Cas. 777 (Guj.) it was observed thus:
"This case has been referred to by the learned Company judge. It has to be noted that the Gujarat High Court held that (i) sections 397 and 398 apply to present continuous wrongs; (ii) the remedy is essentially preventive; (iii) there must exist on the date of the petition a continuous course of oppressive, or prejudicial conduct of the affairs of the company; (iv) there is no power in the court to set aside or interfere with past and concluded transactions between a company and third party. We do not want to emphasis the fact that the remedy envisages in section 397 of the Act is not intended to set at naught what has already been done by the controlling shareholders in the management of the affairs of the company."
89. In Thakur Hotel (Simla) Co. (P.) Ltd., In re [1963] 33 Comp. Cas. 1029, Teck Chand, J. of the Punjab High Court in plain language observed thus:
"Mismanagement or misconduct of directors during earlier years is no ground for winding up a company under the 'just the equitable' clause or for making an order under section 397 if the mismanagement had ceased at the time of application. The object of section 397 is not 'to rake up the past but to redeem the future'. The quote in the above observation of Teck Chand, J. is from H.R. Harmer Ltd. 's case (supra), wherein Roxburgh, J. said: 'The purpose of this section (section 210) is not so much to rake up the past as to redeem the future.'"
90. It was further held in Thakur Hotel (Simla) Co. (P.) Ltd. s case (supra) that merely on the conduct of Directors in misappropriating the funds of the company the order for winding up would not be just and equitable; it requires further clause that, in addition to such misconduct, circum stances exist which render it desirable in the interest of the shareholders that the company should be wound up.
91. In G. Kasturi's case (supra) which came up before the Division Bench by way of appeal against the interlocutory order passed by the learned Company Judge while referring to the scope of sections 397 and 398 read with section 402 of Companies Act, P.S. Mishra, J. speaking for the Bench held thus:
"The Court has power to make such orders under section 397, read with section 402 of the Companies Act, 1956, as it thinks fit, if it comes to the conclusion that the affairs of the company are being conducted in a manner prejudicial to public interest or in any manner oppressive to any member or members and that, otherwise, the facts would justify the making of a winding up order on the ground that it is just and equitable that the company should be wound up. Section 398 of the Companies Act speaks of the affairs of the company being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company. The first clause 'being conducted in a manner prejudicial to public interest' is common to both sections 397(1) and 398, the clause that the affairs of the company are being conducted prejudicially to the interests of the company being exclusive to section 398. The other ground to attract the provisions of section 398 requires proof of material change not being a change brought about by, or in the interests of, any creditors including debenture-holders or any class of shareholders of the company brought in the management or control of the company, whether by an alteration in the board of directors or of its managing agent or secretaries and treasurers or manager and proof that, by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to the interests of the company. The Court's power to make any interim order which it thinks fit, pending the making by it of a final order under section 397 or 398, as the case may be, for regulating the conduct of the company's affairs upon such terms and conditions as appear to it to be just and equitable, is recognised by section 403 of the Act. The words 'pending the making by it of a final order under section 397 or 398' in section 403 of the Act make it necessary first to test whether a prima facie case for an order under section 397 or 398 has been made out by the person invoking the Court's jurisdiction. The words 'for regulating the conduct of the affairs upon such terms and conditions as appear to it to be just and equitable' clarify that the Court is required to take, for the purpose of interim orders, only such steps as are necessary for regulating the conduct of the company's affairs and upon such terms and conditions as appear to it to be just and equitable. When and how a Court should grant an interim injunction may vary from fact to fact and case to case, but certain principles are universally accepted and applied. In no case does a Court grant an interlocutory injunction as a matter of course. In all cases of interlocutory injunction, the Court usually has to consider whether the case is so clear and free from objection on equitable grounds that it ought to interfere to preserve the property without waiting for the rights to be finally established. Section 397(1) of the Companies Act, 1956, talks of a complaint that the affairs of the company 'are being conducted in a manner prejudicial to public interest'. The words 'are being conducted' must mean several acts in continuity and not one isolated act. The expression 'interest' in this context also must receive a meaning different from interest of a reader of a news item who, as a member of the public, may have one or other opinion. Public interest cannot be allowed to be confused with public opinion. The expression 'a matter of public or general interest' does not mean that which is interesting or gratifies curiosity or love of information or amusement; but that in which a class of the community have a pecuniary interest, or some interest by which their legal rights or liabilities are affected.
That a company's affairs are being conducted in a manner oppressive to any member or members has always been read to mean acts quoted the member, that is to say, affecting any legal or proprietary right of a member of the company as a shareholder.
If a demand made by the minority shareholders to have more shares than held by them is not acceded to by the majority shareholders, this could not be described as an act of oppression.
The principles of quasi-partnership are applied to a small private company founded on a personal relationship involving mutual confidence as between the members, but not a public company." (p. 662)
92. However, the case which was dealt with by the Bench was not a Private Limited Company but it was a Public Limited Company. Yet, the same principles also are applicable when the private limited company does not possess the characteristics of partnership and it is already held in this case that the company is not a partnership in substance. It further held that the interest of shareholders and those of company must always be preferred over the interests of any one else irrespective of the position occupied by him.
93. Keeping the above principles in view, let us consider the case on hand. It is now beyond controversy that in a petition under sections 397 and 398, it is to be specifically pleaded and established by the party not only the existence of circumstances warranting winding up of the company under the 'just and equitable' clause, but also it should be further established that winding up order if passed would act adverse to the interest of the shareholders. Further, when this clause is invoked, there must be material to show that it is just and equitable not only for the persons applying for winding up but also to the company and all its shareholders. Even in certain cases, violation of statutory provisions was held to be not oppressive act warranting interference under section 402 of the Companies Act.
94. The learned counsel for P-1 and R-9 submit that the following acts on the part of R-3 and his family members constituted oppression:
(a) Subscription of additional capital was mala fide with a view to convert R-3 and his family members from minority to majority shareholders for the purpose of capturing the control and administration of R-1 company.
(b) The alleged additional issue is a sham transaction and there was no proper notice and the certificate of posting and minutes are fabricated.
(c) There was no bona fide requirement of additional share allotment and even otherwise there were other various measures which could have been taken.
(d) The so called capital brought by R-3 and his family members is only a paper transaction and the company did not get any real benefit.
(e) Withdrawal of P-3 from ARIL Board is illegal.
95. Before going into the above contentions, it may be stated that as far as withdrawal of P-3 from the Board of Joint-venture company is concerned the matter is seized of by the Calcutta High Court in suit O.S. No. 228/85. Admittedly, the suit was filed by P-1 and P-3 challenging the resolution dated 21-8-1984. Therefore, I am not inclined to express any opinion on the resolution passed by the Board of Directors in this regard and also with regard to the withdrawal of P-3 from the Board of ARIL.
96. With regard to the alleged oppression on the ground of (a) above, it is the case of R-3 that there was total dis-interestedness on the part of P-1 and R-9 in the management of R-1 company. P-1 never attended the meetings and he continued to patronise the company APPL set up P-3.
There is also evidence to the effect that APPL established by the P-3 has been supplying the same products which were hitherto being supplied by R-1 company and that the purchase of rubber rings by HIL from R-1 company slowly decreased from 1983 onwards and by 1986, the supply of R-1 company became nil. It is also in evidence that APPL company had been supplying the rubber rings to HIL I have already discussed the role played by P-1 in attending the meetings and I have held that P-1 has notice of meetings, but deliberately he failed to attend the meetings. Therefore, the contention that P-1 has an interest in the company and that he was willing to purchase the shares had the offer for additional share issue had been made to him, cannot be accepted. It is also held in the preceding paragraph that R-9 did participate in the meetings and that he was aware of the increase of the share capital and intentionally did not contribute. R-9 also accepted that after resignation from HIL he started devoting his time for Nucon as it was in losses. It is also noticed that various powers were given to R-9 in respect of Nucon Company and also the documents and records were handed over after he took over Nucon (Ex. B-300, B-243, B-296). Even though his dis-interestedness is not directly established, the fact remains that the decision for additional share capital was taken in the meeting held on 26-11-1984 and other meetings, he failed to respond. Therefore, it is to be only presumed that he was not interested. Moreover, the way in which he initiated the litigative process from the alleged letter dated 16-8-1984 it was established that he was not coming with true facts. Hence, the contention that R-9 would have purchased the additional shares had he been offered cannot be swallowed with confidence.
97. It was contended that there was no necessity for increase of the share capital as the Company was in a prosperous state, and that it reserves for over 15 times more the share capital and it was holding shares of other companies apart from other assets. Therefore, there was no necessity to increase the share capital. On the other hand, the Company could have sold out some of its assets or capitalise its reserves or issue bonus shares or could have obtained a loan from the financial institution. By resorting to increase in the share capital, the only intention of R-3 was to gain the majority shareholding and nothing else. On the other hand, it is in the evidence that from 1981 itself, the State Bank has been insisting for enhancement of share capital upto Rs. 10 lakhs, that a commitment was given to the Bank to enhance the share capital. That in the year 1984, the position of the company became very precarious and there was immediate necessity for diverting the products, to save the company from further losses. Therefore, a decision was taken to enhance the capital. It is also the case of R-3 that he had obtained loan of Rs. 5 lakhs from Poddar Company and paid towards the share capital to R-1 company, R-1 company purchased the machinery such as Extruder, Generator etc., for Rs. 4,45,000 and the balance was paid to the bank towards the liquidation of overdraft amount. It is also the case of R-3 that not only the machinery from DPPL for Rs. 4,55,000 was purchased, but also other machinery valued more than Rs. 20 lakhs was also purchased during the said period from other companies throughout the country. As can be seen from the correspondence of the Bank, in the year 1981 (Exs. 29 & 30) Bank had directed the R-1 company to raise its capital to Rs. 10 lakhs and a commitment was given by the Company to that effect (Ex. B-31). But, however, there was no subsequent reminder. In the meanwhile the company has been increasing the share capital from time to time and finally when the decision to increase the paid-up share capital from Rs. 5 lakhs to Rs. 10 lakhs was taken in November, 1984 (Exs. 227(d), 227(e), 227(f)) there was no letter from the Bank. But, by that it cannot be construed that direction of the Bank to increase the share capital had extinguished. On the other hand, it has been established by R-2 and R-3 that after the intimation was given to the Bank about the enhanced share capital upto Rs. 10 lakhs, they have further increased the financial limits in December, 1985.1 have already held that the notice was given to P-1 and also R-9, who participated in the proceedings in the earlier paragraphs. Therefore, the only question that arises for consideration is whether there was genuine need for enhancing the capital. It is to be seen that enhancement of capital is a purely an internal administration of the Company and Courts do not interfere in the normal course. When the resolution was held to be valid, it would not be in the fitness of things to construe that there was no genuine requirement. It cannot also be said that R-1 company could have taken a decision to go for loan from the financial institutions or sold some of its assets rather than increasing the capital because, the decision vested with the Board of Directors which cannot be scrutinised when it is found the valid resolution was passed in accordance with the provisions of the Companies Act and also the Articles of Association. It was found by me that proper notices were given for Board meetings and minutes were properly drafted. When there was no response for the offer for additional shares from P-1 and R-9, the shares were allotted to R-3 and his family members. Therefore it cannot be said that subscription of additional capital is mala fide.
98. Elaborate arguments were advanced on behalf of P-1 and R-9 to say that whatever was brought by R-3 as a additional share capital did not remain with the company for two days and the amount came back to their hands within two days of the transaction. It is also their case that extention of time granted to the shareholders to subscribe to the additional share capital upto 15-12-1984 was only imaginary as by 1-12-1984 R-3 and his family members have already sent the cheques for Rs. 5 lakhs for additional shares and the amount was brought into the accounts of R-1 company and the amount was also paid to DPPL for purchase of machinery and part of amount was also sent to the Bank towards the liquidation of the overdraft amount. It is not in dispute that R-3 and his family members had paid the amount of Rs. 5 lakhs which he obtained from Poddar Company and it came to the records of R-1 company on 30th November and again on lst/2nd December, cheques were issued to R-3 and his family members on the directions of DPPL. It is also in evidence that R.M. Trading Company wanted to advance the amount to R-3 and since they have no account in Hyderabad, it requested DPPL to advance the money as DPPL has to receive the amounts from R-1 company, it directed the R-1 company to issue cheques in favour of R-3 and his family members and finally it is in evidence that the amount was also paid by R.M. Trading Company to DPPL Company and R-3 and his family members also paid to R.M. Trading Company (Ref. Ex. B.300, B.305, B.306, B.307, B.308, B.337, B.337(a), B.313, B.316, B.338, B.402, B.499 and B.498). By this transaction, the learned counsel for P-1 and R-9 tried to submit that it is purely a bogus transaction and the Company did not receive any physical benefit and it is only a paper transaction. Though the contention appears to be appealing at the first blush, but a deeper scrutiny would reveal that the contention has no merits. It has been the case of R-3 throughout that the amount brought in by him towards the share capital was most insufficient for purchasing the various machineries. Only part of the share capital was paid to DPPL towards the purchase of Extruder etc. But on the other hand, the machineries were more than Rs. 15 to 20 lakhs were purchased from other companies in the country. It is his case that machinery worth more than Rs. 20 lakhs was purchased during that period. This statement was never contradicted by P-1 or R-9. Thus it is to be held that not only the machinery from DPPL was purchased, but also various other machineries was purchased from outside agencies with the funds raised by R-3. Therefore, it is not as if only one transaction of purchase was made from DPPL, but the several other transactions were made with regard to the purchase of machinery from other companies. Therefore, it cannot be heard to say that the capital alleged to have been brought by R-3 was only on paper and there was on real transaction in substance. It is also the case of P-1 and R-3 that when once the Company has already been contributed by R-3 and his family members, there was no necessity to extend the date in the guise of extended offer dated 5-1 -1985 (Ex. 132) to the shareholders and it is purely a make belief arrangement planned by R-3. Since the capital has already been subscribed by R-3 and his family members, by 30th November, 1984 and the same was utilised, there could not have been any further offer to any other member. This contention cannot be accepted for the simple reason that merely the capital was subscribed by R-3 and his family members, the decision to extend the time could not have been taken. Inspite of another offer given to the members and in the absence of response the decision was taken on 24-2-1984 only to allot the shares to R-3. The contention on behalf of R-3 is that if there had been any subscription of the capital by P-1 or R-9 and their respective family members, then the value of the shares that would have been purchased by P-1 and R-9 could have been returned to R-3. The other contention was also raised to the effect that the alleged family settlement is a farce and no such family settlement has taken place and the documents were introduced by R-3 in a most suspicious circumstances and that R-3 had manipulated these documents to suit his convenience. It is true that number of documents were introduced by R-3 stating that there was a family settlement and that P-3 also had written to P-1 for settlement of the accounts and that there was private agreement between P-3 and R-9 to the effect that Khemka family will support R-9 in their efforts to fight against R-3 (Ex. B. 157, 157-A, 157-B). I am not inclined to refer to any of these documents as their source is very much doubtful. Apart from that, I do not find it relevant to decide the issue as to whether there was any family settlement. But one thing is clear that P-1 had reconciled to settle his accounts and P-1 and Jalan family submitted to the mediation and arbitration of Mr. Khaitan. It is also evident from the letter of Khaitan Ex. A-52 that a settlement was arrived and payment schedule was to be finalised. At this point of time, entire exercise was blown off. Therefore, it has to be seen that there was some steps towards the settlement of the accounts between Khemka and Jalan families. But, that is not a much relevant factor for deciding the issue. Therefore, in view of the findings recorded above, it cannot be said that R-3 acted in a manner oppressive to other shareholders. Normally oppression is alleged against majority shareholders by the minority shareholders. But in the instant case it is turned to be otherwise. The oppression is now being alleged by majority shareholders (prior to additional share capital) namely P-1 and R-9. As already stated the genesis appears to be not that the meetings were not being conducted, notices were not being issued, but P-3 was not properly accommodated after his return in 1982 from Saudi Arabia. Even this was confirmed by R-9 in his counter as extracted earlier.
99. The company has been running right from 1987 after the company petition has been filed and the issue of lack of probity has not been established by any proper evidence. It is also not established that the company has been not functioning in accordance with the provisions of the Companies Act and that the situation warranted the winding up of the company on just and equitable ground. As already noticed by me that it is not open for this court to interfere with the management and administration of the R-1 company in each and every issue, but it can only interfere when the Company has been acting to the detriment of the interest of the shareholders in general. Further, it has to be seen whether R-3 has acted in a manner detriment to the interest of the other shareholders or he changed the set up of administration after he became the majority shareholder. Admittedly, P-1 and R-9 continued to be the Directors even after the majority shareholders and they are being invited to participate in all the meetings and affairs of the Company. It is not as if they are completely excluded from the management of the company. On the other hand, P-1 never attended meetings after 31-3-1983 for the reasons already set out above. Therefore, even after the additional allotment of shares in favour of R-3, it cannot be said that the position of P-1 and R-3 changed in a manner prejudicial to their interest or their members. As already found by me, the genesis took place when P-3 was not properly accommodated in 1982 when he returned back from Saudi Arabia and the crisis which was brewing from 1982 took its deep route in 1985 when P-3 was withdrawn from the Board of ARIL. Saudi Arabia. This lead to the filing of the suit by P-1 and exchange of letters between P-1 and R-3 and simultaneously the correspondence was started by R-9 with R-3. Even though the additional issue was never focal issue, yet it was made the basic issue in this Company Petition, for sustaining the alleged acts of oppression. Even otherwise what is sought to be established was that P-1 and R-9 in their capacities as Directors and not as shareholders were subjected to oppression. That is not the requirement of law.
100. For the foregoing reasons, I find that the
grounds urged by the counsel for P-1 and R-9 for establishing oppression on the
part of R-3 have not been made out.
101. The learned Counsel for P-1 and R-9 also relied on the judgment of Calcutta High Court in Tea Brokers (P.) Ltd v. Hemendra Prosad Barooah [Company Appeal No. 186 of 1971]. The Company Case was brought by Mr. Barooah alleging oppression. Two issues were considered by the learned Company Judge and held that the resolution passed by the Board of Directors declaring Mr. Barooah ceasing to be Director of the company under section 283(1)(g) of the Companies Act as illegal. The learned Company Judge also held that the issue of 1000 new shares by the Company to the 2nd respondent - Khound was highly oppressive act entitling Mr. Barooah necessary relief. The learned Company Judge also found that the 1000 shares were illegally allotted to Mr. Khound only with a view to reducing Mr. Barooah to a minority and that the allotment was not at all for the benefit of company and it was only for the gaining complete control and the management of the company turning the majority shareholder to a minority. Relying on the decision in Sindri Iron Foundary (P.) Ltd. 's case (supra), that a single act of oppression itself is sufficient for granting relief. The learned Company Judge also directed that shares of Barooah however should be purchased by Khound. The matter was carried in appeal by the Company and cross objections were also filed By Mr. Barooah. The Division Bench in appeal confirmed the findings of the learned Company Judge and on the question of oppression and also with regard to illegal allotment of 1000 shares for gaining majority. But, however, with regard to the direction of the learned Single Judge for purchase of shares of Barooah, the Bench set aside the finding and thus allowed the cross objections filed by Mr. Barooah. This decision does not help the petitioner inasmuch as the finding has been recorded in the case on hand it was found that notices were properly issued and minutes were properly drafted and shares were allotted in accordance with the procedure. The decision would only help for granting appropriate relief when only it is found that the oppression is made out.
In the instant case, I have already held that R-3 and his members did not act oppressively to the interest of P-1 or any other shareholders. The learned Counsel also relied on Chancery Division case reported in 1990 BCLC 384 in ex parte Shooter, In re [Company No. 00789 of 1987] and ex parte Broadhurst, In re [Company No. 3017 of 1987]. It was held in the said case that the repeated failure to hold Annual General Meetings and lay the accounts before the members deprived them of their rights and considered that the state of company was conducted unfairly prejudicial to the interests of the members and not to some part of the members.
103. This case also does not help the P-1 and R-9 inasmuch as there is no failure to hold that the General meetings or Annual General Meetings. It is also not established that the R-3 has acted himself in a unfit manner to control the Company.
Whether the affairs of
the company are conducted in a manner prejudicial to the interest of the
company?
104. After holding that the oppression as alleged by the P-1 and supported by R-9, was not established, the next question that arises for consideration is whether the circumstances exist for forming an opinion that the affairs of the company are being conducted in a manner prejudicial to the public interest or in a manner prejudicial to the interest of the Company or any material change was brought about and by reason of such change it is likely that the affairs of the Company will be conducted in a manner prejudicial to the public interest or to the interest of the Company. But in this case, the Company being a private limited company, public interest may not fall for consideration. If it is found that the affairs of the company are being conducted prejudicial to the interest of the Company, the Court may with a view to bring an end or preventing the matters complained of or apprehended make such an order as it thinks fit. Therefore, section 398 aims at maintaining the public interest and the interest of the company unlike section 397 which protects the interest of the shareholders. The section is very clear that the Court is vested with the power to make orders as it thinks fit in order to bring an end to the dispute or preventing the matter complained of or apprehended. In the instant case, that the petitioner had categorically stated that the R-3 has been misusing his position and mismanaging the affairs of the company and that it is a fit case where appropriate directions should be issued directing R-3 to sell his shares to P-1 and R-9. On the other hand, it is the case of R-3 that there was no misuse whatsoever and that P-1 and R-3 have been creating hurdles in the proper running of the Company. They subjected the company and R-3 unending litigation. It is also the case of R-3 that if this type of attitude is adopted by P-1 and R-3, the affairs of the Company will not be conducted in the best interest of the company. Admittedly, there is no public interest involved in this case. The only issue that has to be considered is whether the affairs of the company are being conducted in a manner prejudicial to the interest of the company. As narrated in the preceding paras, P-1 ignited an issue alleging oppression and mismanagement under sections 397 and 398 and R-9 came to the support of P-1 by stating in his counter that he is supporting P-1 in this case.
105. The principal participants in the dispute are P-1, R-9 and R-3. But, now in view of the support which is being extended to P-1 by R-9, there remains only two participants in the field namely P-1 and R-9 on one side and R-3 on the other side. On account of personal differences between P-1, R-9 and R-3, the interest of the company cannot be allowed to be sacrificed even though it is a private limited company. The way in which P-1 has conducted himself in initiating the matter in the guise of non-receipt of notices of Board meetings. General meetings and Minutes after a silence of 18 months and that too after filing a suit before the Calcutta High Court, only establishes that he had no bona fide interest in the affairs of the company. Similarly, R-9 cannot be said to evince any interest as he has been devoting full time in Nucon, after his resignation from the HIL in February, 1985.
106. It is also clear case of P-1 and R-9 that R-l company was conceived by them for benefit of their sons namely P-3 and Mr. Hemanth Jalan after their education. The case of P-1 was that his son was not properly fixed after 1982 in R-1 company and that son of R-9 was suitably accommodated in Nucon and therefore P-3 had to eke out his livelihood and hence P-3 established APPL and also Ramak Enterprises. It is also in evidence that APPL has been producing rubber rings and supplying to HIL, which was hither to being supplied by R-l company. P-1 is also holding a very highest position in the HIL as President. Therefore, under these circumstances, can it be said that P-3 and R-9 can function themselves in the interest of the company. It is also in evidence that criminal cases erupted between R-3 and R-9. This Court also found that the wholesale allegations that there was no notices, for meetings that the Minutes were manipulated and fabricated, that the Certificate of Postings were not genuine, postal registration certificates are not genuine, that the increase of capital was not genuine, the necessity for increase of capital was not genuine etc. are all found against P-1 and R-9. P-1 and R-9 who according to them have been nursing the R-1 company only for the benefit of their sons, is no more alive as for the reasons already stated above. It is also in evidence that Khemka family represented by P-1 and P-3 and Jalan family represented by R-3 and R-8 consented for arbitration of Mr. Pintu Khaitan for settlement of the accounts. It is also noticed from Ex. A-37 which was written by R-3 to P-1 in response to the letter of the later dated 17-12-1985, wherein R-3 had not only expressed dissatisfaction about the false allegations made against him including non-receipt of various notices, but also stated that P-1 had utilised some of the information from the Company for his personal benefit to the detriment of the interest of the R-1 company by assisting his son P-3 to establish a rival business. Lastly also he stated in the said letter as follows:
"In view of the negotiations taking place between us for resolving pending matters, I am not dealing further with your letters. I am confident that the present negotiations would be successful and all of us should actively help each other in settling our disputes."
Ex. A-3 is Telex sent by Khaitan to R-3, which is as follows:
"With reference to our conversation on phone, please be available at Calcutta for discussing matter from Friday 24th to Sunday 26th January, 1986 (both days inclusive) - Regards -
Pradeep P. Khaitan."
Again under Ex. A-39, R-3 sent Telex to Mr. Pintu Khaitan in reply to earlier Telex as follows:
"Myself will be available in Calcutta from 25th morning onwards to any date convening you for discussion - Regards -
O.P. Jalan."
However, in reply to Ex. A-3, dated 16-1-1986, P-1 wrote another letter on 6-2-1986 Ex. A-41 in which he had categorically stated as follows:
"I have been and I am still ready and willing to resolve my various pending matters with you."
Again in conclusion he stated "any how I don't want to enter into any controversy with you and it is right time that our disputes should be amicably resolved by sitting across the table instead of corresponding with each other. From the way your letter is worded it looks as if you are not interested in any settlement, but your intention appears to have prolong litigation". This manifests that P-1 was interested for settlement of his accounts with Jalan family and Mr. Khaitan was mediating the matter between both the families. While the mediation was in progress, P-1 and R-3 appears to have entered into an unending correspondence, yet created further vacuum in their relations. By letter dated 6-3-1986, R-3 again wrote letter to P-1 wherein among other things he stated thus:
"I am unwilling to enter into any controversy or correspondence with you at this stage in view of the negotiations for settlement now going on, but would depend on the records of the Company. I assure that I have no intention of involving you being involved in any litigation. I sincerely request you to resolve the various pending matters amicably. I hope to receive your kind cooperation."
To this letter there was no reply from P-1. Further as can be seen from Ex. A-52 dated 3-7-1986 letter written by Pradeep Kumar Khaitan, Advocate, Calcutta to R-3 with a copy to P-3. That the entire matter appears to have been settled and payment was directed to be made by June, 1986. The letter of Mr. Khaitan is reproduced below:
"My dear O.P,
Please refer to your letter of 25th June, 1986 and the conversation I had with you as well as with Shri Narayan. It was agreed that the payment for the shares would be made within June, 1986 although you would attempt to do so in April, 1986. Before I left for abroad in the last week of May, I had informed everybody that I would definitely be back on 22nd June, 1986.1 would therefore have been happy if the payment could have been completed within June, 1986.
As discussed with you and Shri Narayan, kindly arrange for the payment within next week on Shri Narayan's return from Hyderabad on Monday. The exact date convenient to you should be communicated to the Khemkas so that they may also be present to receive the money from you.
With regards,
Sd/-
Pradeep K. Khaitan
Mr. O.P. Jalan,
5-2-175/1, Rashtrapathi Road,
Secunderabad.
CC noo: Mr. Mahesh Khemka,
6-3-1089/A/3/7,
Gulmahar Avenue,
Raj Bhawan Road,
Somajiguda,
Hyderabad - 500 482"
This only show that the entire matter was settled, only the payment of money was required to be complied with. It is not known what are the terms of payment, neither the petitioner nor R-3 brought before this Court. But, suffice it to say that the mediator chosen by both the parties has assessed the amount to be paid by Jalans to Khemka in settlement of their accounts. But, however, on 21-7-1986, R-3 wrote to Mr. Pintu saying that his brother Mr. S.N. Jalan had been to Amarnath and that necessary action will be taken on his return. The following is the extract of the letter Ex. A-53:
"My dear Pinto,
I am in receipt of your letter dated 3rd July, 1986.1 tried to contact you on phone at your office but understood that you are indisposed and resting at home. Therefore, I did not want to disturb you.
Meanwhile, Shree Narayan had a sudden programme to go to Amarnath and will be returning by end July, 1986. He will, therefore, be contacting you by first week of August, 1986.1 am sorry for the delay.
With kind regards,
Sd-
O.P. Jalan
Mr. Pradip Kumar Khaitan,
9 Old Post Office Road,
Calcutta-700001."
and thereafter no further information is forthcoming from both the sides. Thus, it is established that the P-1 was not interested in the Company or Khemkas participation with Jalan families, So also Jalans were inclined to settle the accounts. But, however for the reasons best known to the parties that it did not come through. Moreover, the very person from whom P-1 wanted to have proper position in R-1 company is also not interested in any association with R-l company. The very purpose for accommodating P-3 and the beneficiary himself declares that he declined to associate any further with R-9, R-3 and Jalan family, it is his categorical assertions that he has decided not to have connection with the Jalan families. Thus, it is apparent that he is no more interested in the R-1 company.
107. Coming to the participation of R-9, as already stated earlier that he was not taking much interest and that he tried to introduce document Ex. R-2 which is found to be not genuine by this Court. He was also silent spectator to the enormous correspondence exchanged between P-1 and R-3 and that he also did not respond to the letter written by P-1 to him Ex. A-118 wherein allegations were levelled that the Jalan family has been attempting to exclude Khemka family. Even in the counter, he never denied that Jalan family did not exclude Khemka family. But, on the other hand, in no uncertain terms related that he is supporting P-1. It is also in his evidence that he was agreeable for the settlement of his shares with R-3 and that an understanding was reached between R-3 and R-9 for sale of the shares. In pursuance of the said understanding R-9 and his family members sent bills to R-3 towards the value of the shares as agreed between the parties. But, however, R-3 did not honour the bills i.e. Exs. B-240 to 242. R-3 has stated that the amounts were mentioned in the bills exorbitantly and this was not the amount agreed between the parties. Even though I do not like to go into the actual amount which was agreed between the parties, yet it is a clear indication that R-9 was also reconciled to sell the shares to R-3. In the wake of the above discussion, it is manifest that P-1 and R-9 were agreeable for settlement of their respective shares, but the dispute was with regard to the value of the shares. In those circumstances, it can be safely concluded that P-1 and R-9 was not prepared for participation in the affairs of the company. But, on the other hand, an unending litigation was created by P-1 having the blessings of R-9. Every Notice, Minutes, Certificate of Posting and Postal registration was being sought to be subjected to unending correspondence and the relations between P-1 and R-3 were strained, as can be seen from the various letters exchanged between the parties. So also R-9 cannot be relied on that he would play safe game with the company in view of the conduct which he had exhibited before this Court. The position of directors in the company is one of trust and confidence. They stand in a fiduciary capacity and they are duty bound to conduct the affairs of the company in the best interest of not only of the shareholders, but also the company as well which is manifest from sections 397 and 398. Lack of probity in the conduct of the affairs of the company by the shareholders in control may be a suggestive inference of functioning of such shareholders to the prejudice of other shareholders or company. But, at the same time the directors are to devote their efforts and exercise their powers, in the interest of the company and the shareholders within the frame work of Memorandum and Articles of Association. Otherwise their actions are ultra vires. They cannot usurp the powers not vested in them nor can they misuse the powers for personal aggrandisements. Thus in Company Law the directors enjoy a very important responsible position making themselves answerable to the shareholders and the company. Therefore they are not only expected to exhibit trust and transparency as Directors while managing the company, but also it is all the more necessary to maintain the same position among the Directors themselves. Developing suspicion on one director(s) or counter suspicions are not conducive in the general interest of the company, which ultimately leads to allegation of oppression and mismanagements.
108. Section 402 has been engrafted with wide discretionary powers to ensure smooth functioning of the companies. The Court is entitled to grant the relief as it thinks fit in the interest of the shareholders and company. That is the reason for both ailments under sections 397 and 398, the treatment is common under section 402. The Court is empowered to pass order both as a curative and preventive measures if it finds that the affairs of the company are being conducted detrimental to the interest of the company, for bringing an end or for preventing the matter complained of or apprehended.
109. This Court is interested in the affairs of the Company as a whole and the personal quarrels are wholly irrelevant. The interest of the Company cannot be at the altars of bickerings among the Directors for their personal ends. Moreover the ad infenitum wordy duel undertaken by the parties endless and unwarranted prolongation of trivial and insignificant issues coupled with serious personal difference have created formidable symptoms, where P-1 and R-9 cannot go hand in glove with R-3. It is also understood that in later years, R-9 resigned the Directorship of the company. The company has already faced litigation for over a decade for the reasons as set out earlier. Therefore, this Court is of the firm opinion that the affairs of the company have not been conducted nor will be conducted in future in the interest of the Company. Apprehension of stalemate is writ at large. Consequently, the situation has arisen that company cannot function in the hands of P-1, R-9 and R-3 jointly. Three powerful horses yielding strength in different directions cannot bring the charriot safely to the destination. Therefore, I find that the company should be run either by R-3 or by P-1 and R-9 jointly. It can be safely concluded that a quietous cannot be brought in the company unless the matters complained of or apprehended are resolved once for all and this Court is fully empowered to meet such a situation in the interest of the company. In sub-section 2 of section 398 it is clearly stated that if the Court finds that the affairs of the Company are being conducted as contemplated under clauses (a) and (b) of sub-section 1, or likely that the affairs of the company will be conducted in a manner prejudicial to the interest of the Company, the court may pass orders curative, preventive and prohibitive in respect of existing and apprehended acts prejudicial to the interest of the Company. There need not be any oppression under section 398. The Directors are expected to function in the best interest of the Company and lack of probity inter se Directors is cancerous element for the phased destruction of the Company. Though, in the instant case, the oppression by one group of shareholders, to the other group of shareholders, is not established and the lack of probity was not established among the shareholders, but, yet, it is a case where the conduct of parties cannot put the company on safe rolls. Therefore, when the affairs are not being conducted by the parties in the interest of the company, it is also open for the Court to pass appropriate orders. The Company has been running throughout by R-3 and after Company Petition has been filed, for some time by the Interim Administrator and now it is again being run by R-3 as Managing Director. Though the P-1 did not ask for direction for selling of shares of R-3 to him, it is only after filing of affidavit by R-3 reply to the counter affidavit of R-9, a further affidavit was filed by P-1 in which he had stated that P-1 was ready and willing to purchase the shares so as to save R-1 company from the clutches of R-3. R-9 also in his counter did not say that he was willing to purchase the shares, but only in his rejoinder to the counter of R-3, he stated that direction may be issued to R-3, and his family members to share their shareholding at a price as may be determined by the Court. Thus, P-1 and R-3 never expressed their readiness to purchase the shares. R-3 has been managing the Company for several years and also presently he is managing the company, it is desirable to offer the management of the Company to R-3 by passing appropriate directions.
110. Keeping in view the above factors, the situation prevailing as on the date of the filing of the company Petition and by exercising the powers under section 398(2), read with section 402 of the Companies Act, I pass the following orders:
(i) The value of the shares held by P-1, P-2 and R-9 and the members of his group viz. his wife and son and R-3 and members of his group viz. R-4, R-5 and R-6 shall be assessed by competent Chartered Accountant.
(ii) The value of the shares possessed by P-1 and P-2 shall be assessed as on 30-6-1986 and the value of the shares possessed by R-9 and his members of family shall be valued as on 31-7-1986. The value of shares held by R-3 and members of his family viz. R-4, R-5 and R-6 shall be assessed as on 1-1-1985 i.e., prior to the allotment of additional shares. Though the value of shares are to be normally reckoned on the date of presentation of Petition as per principle laid down in Scottish Co-operative Wholesale Society Ltd. 's case (supra), since P-1 and R-9 were agreeable for settlement during respective periods, the dates were fixed accordingly.
(iii) The shares held by P-1, P-2, R-9 and his wife Smt. Satyabhama Jalan and his son Hemanth Jalan after so valued as directed above shall be offered to R-3, who will give consent for purchase of the same within two weeks from the date of such offer. He will pay the amount to the respective shareholders within three weeks of consent and necessary transfer formalities will take place as per law.
(iv) In case R-3 fails to purchase the shares as offered above, the value of shares of R-3 and his family members namely R-4, R-5 and R-6 shall be as assessed by the competent Chartered Accountant as on 1-1-1985. Shall be purchased by P-1, and R-9 either jointly or individually. The amounts shall be paid to R-3, R-4, R-5 and R-6 within three weeks and other formalities shall be completed as per law.
(v) The value of the shares of the parties referred to above shall be assessed on the basis of paid-up share capital of Rs. 5 lakhs divided into 50,000 of Rs. 10 each.
(vi) The shares held by P-3 shall not be disturbed as the matter relating to withdrawal of his nomination is sub-judice before the Calcutta High Court.
111. For the purpose of carrying out the
directions as passed by this Court, this Court appoints Special Officers.
112. Accordingly, I appoint Sri P.S. Raju,
Advocate and Shri S. Urmila, Advocate, to carry to out the directions. R-3
shall make available necessary files/documents and information as may be
required by the Special Officers for the purpose.
113. The Special Officers shall first refer the
matter regarding the assessment of value of the shares of P-1, R-9 and R-3 and
their respective groups as indicated above to the Competent Chartered
Accountant before offering to the parties. It is also open for the Special
Officers to move this Court for further directions.
114. P-1, R-9 and R-3 shall deposit a sum of Rs.
15,000 each in R-1 Company for meeting the expenses and also the remuneration
of Special Officers. Out of the said sum a sum of Rs. 10,000 each shall be paid
to the Special Officers towards their remuneration tentatively. The fee of
Chartered Accountants and other expenses including the ministerial assistance
shall be paid by R-3 from the amount so deposited on intimation by the Special
Officers.
115. Before conclusion, I must say that the counsel for the parties not only argued their respective cases but also ably assisted the Court by referring to minutest details supported by catena of case law. This Court places on record the valuable assistance rendered by the learned counsel Mr. S.K. Kapoor, Mr. Vedantham Srinivasan, Mr. K. Srinivasa Murthy, Mr. S.B. Mukherjee, Mr. Y. Ratnakar, Mr. S. Ravi and Mr. Raghunandan Rao.
116. Company Petition ordered accordingly. No costs.
Ch. V. & SSB
L.R. Copy to be typed: Yes
The learned counsel for P-1 and P-2 submits that the order may be kept in abeyance to enable them to seek appropriate remedy before the appellate court.
Keeping in view the facts and circumstances of the case, that the orders shall be kept in abeyance for a period of three weeks from today.
[1986] 60 COMP. CAS. 77 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Sandeep Paper Mills P. Ltd.
R. N. MITTAL J.
C. A. NO. 126 OF 1981 IN C. P. NO. 191 OF 1980
SEPTEMBER 20, 1983
Sarat Chandra for the Petitioner.
Laxmi
Grover, C. P. Sapra and R. K. Chhibber for the Respondent.
R. K. Arora Official Liquidator.
JUDGMENT
Rajendraa
Nath Mittal J.—The
petitioner filed this application under section 531A of the Companies Act, 1956
(hereinafter referred to as "the Act").
The case of the petitioner
is that he is a creditor of M/s Haryana Rubber Industries (P.) Ltd.
(hereinafter called "the company"), against which the petition (C. P.
No. 191 of 1980) for winding up was presented on August 21, 1980, on which date
notice was issued to the company. It was ordered to be wound up on March 5,
1981, Mr. Gian Singh was its chairman who died in 1979. The company, after his
death, stopped functioning in January, 1979. R.K. Grover, respondent No. 2, in
collusion with the State Bank of
It is further averred that
respondent No. 2 started two concerns by the name of M/s Param Rubber
Industries, and M/s Param Rubber and Allied Industries, respondent No. 5. He,
along with some others, also floated another concern by the name of M/s Param
Rubber Industries P. Ltd., respondent No. 6. All the assets of the company are
now either in the name of M/s Param Rubber Industries or M/s Param Rubber and
Allied Industries or M/s Param Rubber Industries P. Ltd. Respondent No. 2 took
away the mixing mill and 1,500 mandrels of the company illegally and
unauthorisedly which are now with either M/s Param Rubber Industries or M/s
Param Rubber and Allied Industries or M/s Param Rubber Industries P. Ltd. He did
so in collusion with other shareholders of the company in order to defeat the
claims of the creditors, who now want to run the factory belonging to the
company. It is, therefore, prayed that the transfer of the boiler to respondent
No. 1 and that of the mixing mill and 1,500 mandrels to others, as stated
above, be declared to be null and void and the official liquidator, respondent
No. 4, be directed to take possession of the same forthwith.
The application has been
defended by respondents Nos. 1,2, 3, 5 and 6. Three written statements have
been filed, one by respondent No. 1, the second by respondent No. 3 and the
third by respondents Nos. 2, 5 and 6. Respondent No. 1 pleaded that he
purchased the
The State Bank of
Respondents Nos. 2, 5 and 6
supported the version of respondent No.3 and controverted the allegations of
the petitioner. They further denied that M/s. Param Rubber Industries or M/s.
Param Rubber and Allied Industries were started out of the illegal gains or
illegal sale of the assets of the company. Consequently, all of them prayed
that the application was liable to be dismissed.
The first question that
arises for determination is whether the transfer of the boiler was made in good
faith and for valuable consideration. First, I shall deal with the legal aspect
and thereafter with the merits of the case. Section 531A relates to avoidance
of voluntary transfer. It reads as follows:
"531A. Avoidance of
voluntary transfer.—Any transfer of property, movable or immovable, or any
delivery of goods, made by a company, not being a transfer or delivery made in
the ordinary course of its business or in favour of a purchaser or encumbrancer
in good faith and for valuable consideration, if made within a period of one
year before the presentation of a petition for winding up by or subject to the supervision
of the court or the passing of a resolution for voluntary winding up of the
company, shall be void against the liquidator."
It is equivalent to section
53 of the Provincial Insolvency Act. The reason for introducing the section in
the Companies Act, as given in the Notes on Clauses, was that there was no
provision in the Act in respect of voluntary transfer dealt with in section 53
of the Provincial Insolvency Act and, therefore, it was introduced by the Act
No. 65 of 1960. It is well-settled that the burden of proving that a transfer,
which is sought to be annulled under section 53, has not been made in good
faith and for valuable consideration is on the party seeking annulment of the
transfer: (see Lajje v. Lala Basheshar Nath, Official Receiver, Delhi [1936]
PLR 212 and N. Subramania Iyer v. Official Receiver, Quilon, AIR 1958 SC 1).
The same principle will apply in the case of an application made under section
531A of the Act. Now, the question arises as to how the burden of proof is to
be discharged by that party. The following observations of the Supreme Court in
N Subramania Iyer's case, AIR 1958 SC 1, as extracted in the headnote, may be
read with advantage :
"An application by the
Official Receiver under section 53 for annulment of transfer can be allowed on
proof either that there was no consideration for the transaction or that the
consideration was so inadequate as to raise the presumption of want of good
faith. Alternatively, the Receiver may also succeed on showing that though
there was valuable consideration for the transaction impeached, there was want
of good faith in the sense that the transferee knowing all the circumstances of
the transferor who had since been adjudged an insolvent entered into the
transaction with a view to screening the assets of the insolvent from the
Receiver in whom the insolvent's property vests for the benefit of the
creditors. Such will be mostly cases of benami transactions in favour of some
relative of the insolvent or a person in whom he has full confidence that he
will hold it ultimately for the benefit of the insolvent or persons in whom he
may be interested. Or it may be that a person finding himself over head and
ears in debts wishes to convert his assets into liquid assets with the
collusion or connivance of the transferee. In both cases, the intention clearly
is to shield the assets against the claims of creditors and in such cases,
though the transfer may have been for consideration, either adequate or
otherwise, but having been entered into with a view to defraud or delay the
creditors, the transferor and the transferee sharing the common intention, the
transaction must be annulled and the assets must be brought into the common
hotchpot for the benefit of the insolvent's creditors."
It is further observed by
their Lordships that it is not necessary in annulment proceedings to prove that
the transferor who has been subsequently adjudged an insolvent should have been
honest and straightforward in the matter of the transaction impeached. If he
was really so, there would not be much difficulty in coming to the conclusion
that the transaction as a whole was bona fide. Even if the transferors were
wanting in bona fides, the crucial question still remains to be answered. It is
further held that unless it is found that the transferee was wanting in bona
fides in respect of the transaction in question, he cannot be affected by the
dishonest course of conduct of the transferor. In the said case, section 53 of
the Provincial Insolvency Act was interpreted and the observations will apply
to the instant case as well.
Adverting to the facts of
the present case, it is not disputed that the sale of the boiler was effected
for Rs. 85,000 in favour of respondent No. 1 whereas it was purchased by the
company for about forty-one thousand rupees in September, 1974. After purchase,
it was used by the company till January, 1979. Thus, it was used for about five
years and thereafter from January, 1979, till the date of sale, it remained
idle as the factory was closed. It is true that the petitioner asserts that the
price of the boiler was about five lakh rupees but no reliable evidence has
been examined by him in this regard. The affidavit of the petitioner cannot be
relied upon as he is an interested person. It was incumbent upon him to produce
some independent evidence as the burden was upon him. Mr. Sharat Chander has
argued that respondent No. 1 spent a huge amount for renovating and installing
it and, therefore, it should be presumed that its value was much higher than
that for which it was sold. I, however, do not agree with the argument. Rather,
it shows that the boiler was not in a good condition, otherwise there was no
necessity for respondent No. 1 to spend so huge an amount on its renovation. It
is also advantageous to note that earlier, respondent No. 1 made an offer of
Rs. 60,000 for it. The company, after having received the offer, consulted the
branch manager of the bank who referred the matter to the regional manager. He
deputed a technical officer of the bank to examine the boiler and to submit his
report. The technical officer, after examining the boiler, prepared his report
dated January 28, 1980 (at page 257 of the paper-book), and opined that taking
into consideration its condition and the prices of boilers prevailing in the
market, its price was between Rs. 75,000 and Rs. 80,000. The regional manager
informed the branch manager accordingly. It may also be mentioned that M/s.
Northland Conveyors and Beltings P. Ltd., another intending purchaser, gave an
offer of Rs. 80,000 for it. When respondent No. 1 found that the company was
not ready to sell it for Rs. 60,000, it raised the offer to Rs. 85,000. In
these circumstances, it was sold to respondent No. 1 for the said price. No
relationship between the directors of the company and the directors of
respondent No. 1 has been established and, therefore, it cannot be expected
that they would have sold it for a lesser amount. The company has also not
retained the consideration but it has been utilised for repayment of its loan
to the bank. Thus, it cannot be held that the price of the boiler was five lakh
rupees or thereabout and it was sold for (a much) lesser amount. There is also
no evidence that respondent No. 1 entered into the transaction with a view to
screening the assets of the company from the liquidator or to defraud the
creditors. It also cannot be held that the transferee was lacking in bona
fides.
Mr.
Sharat Chander referred to Official Liquidator, Victor Chit Fund P. Ltd. v.
Kanhiya Lal [1972] 42 Comp Cas 396 (Delhi), and Official Liquidator Kerala High
Court v. Victory Hire Purchasing Co. (P.) Ltd. [1982] 52 Comp Cas 88 (Ker), wherein the transfers made by the company
were held to be invalid and void under section 531A of the Act. Both the cases,
however, are distinguishable on facts as in those cases the transferees were
relations of the directors of the transferor company. Therefore, the learned
counsel cannot derive any benefit from the observations made therein.
After taking into
consideration all the above circumstances, I am of the opinion that the
petitioner has failed to prove that the transfer of the boiler was not made in
good faith and for valuable consideration.
The second question that
arises for determination is whether the transfer was made within one year
before the presentation of the winding up petition. The transfer was made on
February 15, 1980, whereas the petition for winding up was filed on August 28,
1980. Thus, it is evident that the transfer was made within a period of one
year before the presentation of the winding-up petition.
The third question that
arises for determination is whether the transfer of boiler was made by the
company in the ordinary course of business. The learned counsel for the
respondents very fairly conceded that it was not in the ordinary course of
business. Consequently, I decide the question accordingly.
The last question that
requires determination is whether the transfer of the boiler was made by the
company. The sale has been made in pursuance of the resolution of the company
dated November 16, 1979. Mr. Sharat Chander has vehemently contended that
Messrs R. S. Dugal, Hoshiar Singh, S. K. Aggarwal and R. K. Grover, who passed
the resolution, were not directors of the company and it was not passed on the
said date. Thus, the two things which need to be gone into are whether the
aforesaid persons were directors of the company and whether the resolution was
passed on November 16, 1979. Reference has been made by Mr. Sharat Chander to
the letters dated November 15, 1978, and December 30, 1978, from Gian Singh to
the Branch Manager, State Bank of India, Bahalgarh, some other documents,
affidavits and oral evidence in order to prove that the above persons were not
the directors.
Article 29 of the articles
of association provides that Mr. Gian Singh will be the permanent managing
director and Mr. R. K. Grover, the permanent director of the company. No record
is available as to who were appointed as directors thereafter. Mr. Gian Singh
admittedly died in October, 1979. The statement of Mr. Grover is that the books
of the company were in the possession of Mr. Gian Singh. The books were
summoned from the official receiver and he did not produce the same on the
ground that no books were handed over to him. No record from the Registrar of
Companies has been got produced by either of the parties. It is evident from
the evidence that the dispute started among the directors inter se and the
company was in a very bad shape. It also stopped working in January, 1979. In
the circumstances, the only course open is to refer to the affidavits and
statement? of the parties.
The petitioner in his
various affidavits has stated that Messrs R. S. Dugal, Hoshiar Singh, S. K.
Aggarwal and R. K. Grover were not the directors of the company. He has,
however, not stated as to who else were the directors. On the other hand, the
categorical stand of Mr. Grover in his affidavits as well as in his statement
is that the above-said persons were the directors and they authorised him to
dispose of the boiler. It is true that in the letter dated November 15, 1978
(at page 225 of the paper-book), Mr. Gian Singh wrote to the manager of the
State Bank of India that in the annual general meeting, the number of directors
had been reduced to two, namely, himself and Hoshiar Singh. However, it was
also mentioned therein that the board was likely to be expanded with a few more
directors, including Mr. R. S. Dugal, shortly. In the letter dated December 30,
1978 (at page 227 of the paper-book), he again wrote to the branch manager that
Mr. R. S. Dugal was no longer a managing director since the last annual general
meeting held on October 18, 1978. It is difficult to reconcile the two letters
as in the first letter, Mr. Gian Singh said that Mr. R. S. Dugal would be
included in the board of directors whereas in the later letter, he said that he
had been removed on October 18,1978. If he had been removed on the said date,
why had he not mentioned that fact in his earlier letter ? He also did not
enclose a copy of the minutes of the meeting dated October 18, 1978, with
either of the letters. It is also not understandable that after removing Mr. R.
S. Dugal on October 18, 1978, what necessity was felt to include him again in
the board of directors on November 15, 1978, and what necessity arose to write
the letter dated December 30, 1978, when no information was sought from him.
The letter dated December 30, 1978, was not written in reply to any letter of
the bank. Therefore, the letters are of no help to determine the matter. Mr.
Grover is the person who had the knowledge as to who were the directors of the
company. In the circumstances, it cannot be held that the above said persons
were not the directors of the company.
Mr. Sharat Chander has
further argued that Mr. R. K. Grover ceased to be a director of the company as
he stopped working as a director in June, 1978, and thereafter he did not
attend the meetings of the board of directors till November 16, 1979. Under section
283 of the Act, if the director absents himself from three consecutive meetings
of the board of directors, without obtaining leave of absence from the board,
he ceases to be a director. Under section 285 of the Act, the board of
directors must meet once in three months. In view of the provision of law, from
June, 1978, to November, 1979, more than three meetings must have been held but
as he did not attend them, he ceased to be a director. He also urges that the
meeting dated November 16, 1979, was not a properly convened meeting.
I have duly considered the
argument. It is not necessary to go into the question as to whether Mr. R. K.
Grover ceased to be a director or not as section 290 of the Act validates the
acts of the directors in certain circumstances. It provides that the acts done
by a person as a director shall be valid notwithstanding that it may afterwards
be discovered that his appointment was invalid by reason of any defect or
disqualification or had terminated by virtue of any provision contained in the
Act or in the articles. Even if it may be assumed that Mr. Grover ceased to be
a director in view of section 283, the resolution dated November 16, 1979,
cannot be held to be illegal in view of section 290 ibid on that ground.
Now, I advert to the second
part of the argument, wherein it is stated that the meeting dated November 16,
1979, was not a properly convened meeting. Reference has been made by Mr.
Sharat Chander to the notice, annexure R-1 (at page 207 of the paper-book)
wherein Mr. Grover requested Mr. Dugal to attend the meeting on November 16,
1979, to discuss the future of the company and to pay tributes to the late Ch.
Gian Singh. He further requested Mr. Dugal to bring his wife and have lunch
with him. It is true that the notice appears to be of an informal type.
However, it has not been brought to my notice that the notice is to be served
in a particular form. Section 286(1) of the Act provides that notice of a
meeting of the board of directors of the company shall be given in writing to
every director. The purpose of sending a notice to a director is to inform him
about the time and date of the meeting. No grievance has been made by any of
the directors that they could not be present because of non-service of the
notice. In the circumstances, it cannot be held that the meeting dated November
16, 1979, was not a properly convened meeting.
There is another way in
which the matter may be examined. It is, that the boiler and other machinery
were pledged with the bank. It is well-settled that a secured creditor is
outside the winding up jurisdiction of the court. He can, if he desires,
realise the debt without the intervention of the court. In this regard,
reference may be made to Lallan Prasad v. Rahmat Ali, AIR 1967 SC 1322, wherein
it is observed that under section 176 of the Contract Act, in case of default
by the pawner, the pawnee has the right to sue upon the debt and to retain the
goods as collateral recurity or to sell the goods after reasonable notice of
the intended sale to the pawner. Thus, in the instant case, the bank, after
notice to the company, could sell the boiler itself. If the company had sold
the boiler with the consent of the bank, there should be no grievance to the
petitioner. The reason is that the bank had to recover several lakhs of rupees
from the company and the price of the boiler was only Rs. 85,000.
Mr. Sharat Chander has next
urged that the record of the company does not show any entry regarding the sale
of the boiler. He submits that even the sales tax recovered by it has not been
deposited with the Government. It is not necessary to go into this question as
admittedly the amount of Rs. 85,000 has been repaid to the bank and credited to
the account of the company and that the question of deposit of sales tax is not
relevant in this petition.
He has next challenged the
resolution of the board of directors dated February 7, 1980, and has submitted
that the date of sale of the boiler and some other dates had not been correctly
mentioned therein. In the circumstances of the case, it is also not necessary
to go into the contents of the resolution. Even if that resolution had not been
passed, the sale could not be assailed by the petitioner.
The petitioner also moved
C. A. No. 42 of 1982 in the abovesaid petition stating that Mr. Sudhma Ram, Mr.
R. K. Grover and Mr. S. K. Kalia have perjured and prepared false documents and
they should be ordered to be prosecuted. I have already dealt with the
affidavits. It is well-settled that a prosecution ought not to be directed unless
there is reasonable probability of conviction. After taking the facts and
circumstances of the case into consideration, I do not propose to order
prosecution of the aforesaid persons.
For the aforesaid reasons,
I do not find any merit in both the company applications and dismiss the same.
No costs.
Applications dismissed.
Supreme Court
Companies Act
[2003]
46 SCL 695 (sc)
Supreme
Court of
v.
Kerala Kaumudi (P.) Ltd.
Mrs.
RUMA PAL AND B.N. SRIKRISHNA, JJ.
CIVIL APPEAL
NOS. 3253 TO 3261 OF 1991
AUGUST 1,
2003
Section 290, read with section 108, of the
Companies Act, 1956 and section 29 of the Indian Contract Act, 1872 - Directors
- Validity of acts of - As a result of dispute, family companies controlling
interests in concerns were agreed to be divided among four brothers -
Accordingly, transfer of shares was effected in all family concerns -
Controlling interest in company in dispute was given to appellant and another
brother M and his children transferred their shares in company to appellant -
Subsequently, karar was entered into contemplating that effective control of
all family concerns were to be divided among four brothers - However,
subsequently, other brothers and mother held successive Board meetings and passed
special resolution by which powers of MD were assumed by mother followed by
decision to increase share capital - Additional shares were issued and said
shares were issued to other brothers - Extraordinary General Meeting (EGM) was
called wherein appellant was removed as MD and relevant articles of company to
that effect were deleted - All through that period, appellant was not given any
notice at all - Appellant filed application for rectification of company’s
share register under section 155 by cancellation of allotment of additional
shares to other brothers and for removal of name of M from company’s share
register - Whether where there was an immediate and unconditional transfer of
shares with stipulation for determination of consideration for transfer to be
mutually agreed on in future, it could not be said that agreement for transfer
of shares was conditional on determination of price of shares - Held, yes -
Whether it could not be said that, if there had been no such determination, no
transfer could have taken place - Held, yes - Whether transfer of shares by M
and his children should be held effected validly to appellant - Held, yes -
Whether since appellant was acting as MD at relevant time and no valid notice
as required either under article of association or under Companies Act was
given to him, holding Board meetings as well as EGM would be void and
subsequent alteration/deletion of article and removal of appellant would be bad
in law - Held, yes - Whether since appellant and his group, all of whom held
shares in company, were not given notice to apply for allotment of additional
shares, subsequent allotment of shares to appellant’s brothers at meeting was
invalid - Held, yes - Whether since requirement of 75 per cent voting to pass
special resolution was not fulfilled, special resolution passed would be
invalid - Held, yes
Section 10 of the Specific Relief Act, 1963 -
Cases in which specific performance of contract enforceable - Appellant’s suit
of specific performance of ‘karar’ as mentioned in facts under heading
‘Directors - validity of acts of’ was also decreed in his favour - Whether
where each of brothers had been given majority shareholding in respective
family concerns against their name in Karar and other three brothers had taken
benefit of said karar, they were bound to comply with all its terms - Held, yes
- Whether since appellant had transferred bulk of his shareholding in family
companies which were under majority control of other three brothers, appellant
was entitled to insist on performance of karar giving benefit to him - Held,
yes
Facts
Kerala Kaumudi, the company in dispute was a
publishing company promoted by the parents of four brothers, viz.,
Madhusoodhanan, Srinivasan,
According to Madhusoodhanan, Mani and his
children had already transferred their entire holding of 390 shares in Kerala
Kaumudi to Madhusoodhanan in May 1985, prior to the agreement for division. As
a result, Mani and his children had no shares in the company and he had the
controlling shareholding.
It was the case of the other three brothers
that a Board meeting of Kerala Kaumudi was held at which the mother; Madhavi,
assumed the powers of the managing director in purported ouster of
Madhusoodhanan. A second Board meeting, was held in which a decision was taken
to increase the paid-up share capital of Kerala Kaumudi by issuing additional
shares. At another Board meeting these additional shares were issued to Ravi
and Srinivasan and one share was transferred by
On appeal, by a common judgment, the Division
Bench reversed the findings of the Single Judge.
On appeal to the
Held
(A) Issue of transfer
of shares by Mani and his children to Madhusoodhanan
The documentary evidence relating to the
transfer showed without a shred of doubt that there was a valid transfer of
shares by Mani and his children. The intention of Mani and his group to
transfer their shareholding to Madhusoodhanan was evident from the minutes of
meeting held on 19-3-1985. Although the mode of transfer was subsequently
changed, that intention was affirmed at the Board meeting of Kerala Kaumudi
held on 23-4-1985. Resolutions as appearing in the minutes of the meeting were
also signed by Mani. The sixth resolution clearly envisaged three distinct
stages : an immediate and unconditional transfer of shares, then, the settlement
of Mani’s income tax liabilities by Kerala Kaumudi and, after both these
stages, the determination of the consideration for the transfer to be mutually
agreed on. [Paras 21.3 and 21.4]
The Division Bench, therefore, erred in
holding that the agreement for transfer of shares was conditional on the
determination of the price of the shares and in concluding that as there had
been no such determination, no transfer could have taken place. The express
intention was to effect an immediate transfer of the shares and to agree upon
the consideration later. Section 9 of the Sale of Goods Act, 1930 permits that.
[
Section 4, read with section 2(10), of the
Sale of Goods Act, 1930 requires that the contract of sale must provide for the
payment of money as a consideration for the transfer of goods, or to put it
differently, that a price must be paid. But section 9 of the 1930 Act allows
the parties not to fix the price at the time of the transfer and to leave the
determination of the amount of consideration to a later date. An agreement
which provides for the future fixation of price either by the parties
themselves or by a third party is capable of being made certain and is not
invalid as provided under section 29 of the Contract Act, 1872. In view of such
categoric and clear statutory provisions, the submission of Mani that such a
contract was void for uncertainty because the price was not fixed, was
unacceptable. [
The minutes of the Board meeting held on
21-5-1985 were read and approved on 4-6-1985. Both meetings were attended by
Madhavi, Madhusoodhanan, Srinivasan and
It was evident from that that the share
transfer forms which were placed before the board meeting had been executed and
were otherwise duly completed or else the question of the approval of such
transfer would not arise. [
There were the minutes of the meeting held on
26-8-1986, when Madhusoodhanan, was already effectively removed from the
control of Kerala Kaumudi. It stated about transfer of shares by Mani to
Madhusoodhanan. [
In the annual return filed with the registrar
of companies, in the list of past and present members and debenture holders,
the names of all parties had been given including the names of Mani, and his
children. However, against their names it had been mentioned that they had
effected transfer of their shareholding to Madhusoodhanan. Particulars of the
transfer made by each as well as the date of registration of the transfer had
been given as 21-5-1985. [
On 1-3-1986 in keeping with the statutory requirement
relating to the ownership of newspapers, a statement was published in Form IV.
In the list of shareholders there was no mention of Mani or either of his
children as shareholders. There was no protest by Mani or any of the other
shareholders which would have naturally been made if the statements were
incorrect. Even after ouster of Madhusoodhanan from the Board, in the list of
shareholders filed with the Registrar of Companies as part of the annual Return
of Kerala Kaumudi, Mani was shown as holding only one share and Madhusoodhanan
as holding 612 shares in the company. That return had been filed under the
signature of Srinivasan and Ravi as Managing Director and Director of Kerala
Kaumudi, respectively, together with a certificate by
This was again done in the annual return of
Kerala Kaumudi filed under the signature of
The one share which was shown in Mani’s name
in the annual return for 1986 and 1987 was sold by Ravi to Mani at a meeting
held on 26-8-1986 which had been recorded in the minutes and affirmed in the
same affidavit of Madhavi on behalf of Ravi, Srinivasan, Mani and herself. Mani
was ‘admitted’ to membership and ‘inducted’ as a member of the company by the
transfer of one share on 26-8-1986 had been acknowledged by Mani himself in his
affidavit affirmed in the same proceedings on 28-11-1986. [Para 21.18]
The admission to membership was in terms of
article 24(a) of the articles of association of Kerala Kaumudi, which directed
that no share shall be transferred to a person who was not a member so long as
any member or any person selected by the Directors as one whom it was desirable
in the interest of the company to admit to membership, was willing to purchase
the same at fair value. In other words, a non-member of the company could be
sold a share of the company even. When a member wished to purchase it, provided
the directors selected him as ‘a person whom it was desirable in the interest
of the company to admit to membership’ and provided that such person was
willing to purchase the share. [Para 21.19]
If the transfer by Mani and his children of
their entire shareholding in Kerala Kaumudi to Madhusoodhanan had not been
effected, there was no question of ‘admitting’ Mani to the membership of the
company. The minutes of the meeting held on 26-8-1986 which had been admitted
by Srinivasan and the affidavits of Madhavi and Mani, thus, proved that Mani
and his family held no shares in the company until the single share was
transferred by Ravi to Mani under article 24(a) on 26-8-1986. [Para 21.20]
Under section 194 minutes of meetings kept in
accordance with the provisions of section 193 shall be evidence of the
proceedings recorded therein and, unless the contrary was proved, it shall be
presumed under section 195 that the meeting of the Board of Directors was duly
called and held and all proceedings thereat to have duly taken place. The onus
was on Mani to disprove that the transfers had not taken place as recorded in
the minutes of the Board meeting held on 21-5-1985, an onus that he had
singularly failed to discharge. [Para 21.22]
The articles of association of the company
(article 81) allowed Directors to regulate their meetings as they would think
fit. Also article 89 said that a resolution in writing circulated to all the
Directors and assented to by a majority of them would be as valid as a
resolution passed at a meeting of the Board of Directors. The minutes right be
prepared subsequently but they must be duly entered in the minute book and
initialled and it was nobody’s case that that was not done. Finally,
Madhusoodhanan had also said that formal meetings were held and that important
decisions were circulated to all members. In any event, the conclusion about
the transfer of shares by Mani and his children to Madhusoodhanan would stand
without the support of the statutory presumption under section 195. [Para
21.22]
Mani did not attend the Board meeting held on
21-5-1985 or any other till he was admitted to membership of Kerala Kaumudi on
26-8-1986. Apart from that telling circumstance supporting Madhusoodhanan’s
case, Srinivasan had attended and signed the minutes of the meeting on
21-5-1985. Claim that no such meetings were in fact held and that whenever he
signed the minutes of the meetings held during the managing directorship of
Madhusoodhanan, he did so at the instance of the latter without being aware of
the contents of the minutes, was hardly likely. The brothers were already at
daggers drawn and it was unbelievable that he would place such unquestioning
faith in Madhusoodhanan. Additionally, the entries in the attendance register
of Kerala Kaumudi also belied that assertion. Besides, the falsity of that
explanation was apparent from the minutes of the meeting held and the statutory
records submitted by Srinivasan after Madhusoodhanan was removed as managing
director of Kerala Kaumudi which continued to state that Mani and his children
had transferred their shares in the company to Madhusoodhanan. [Para 21.25]
The fact that all the parties, including Ravi,
Srinivasan and Mani himself, all hardened businessmen, not only proceeded on
the basis that there was effective transfer of Mani and his childrens
shareholding to Madhusoodhanan but also certified the same to the Registrar of
Companies, and additionally affirmed that such transfer had taken place on oath
in their affidavits could only lead to the conclusion that the transfer had
been legally effected on the basis of duly executed share transfer forms in
compliance with the provisions of the Act. [Para 21.26]
In examination, admittedly the case was that
Mani and his children had agreed to transfer their shareholding to
Madhusoodhanan. [Para 21.28]
Given the documentary evidence of completed
transfers, it was more than probable that the ‘real’ share transfer forms were
never produced by Mani and his group and that share transfer deeds which were
produced by Mani were prepared in 1984 as claimed by Madhusoodhanan. It was
improbable that share transfer stamps having been purchased by Mani and his
group for the share transfers which were recorded as effected four days later,
would not have been utilized. In that state of evidence it could not reasonably
be held that Mani and his group had been able to establish that the transfer of
the 390 shares by them to Madhusoodhanan was effected in violation of section
108 or any other provision. [Para 21.35]
All evidences indicated that there were in
existence duly executed share transfer forms prepared in conformity with the
provisions of section 108 which everyone had accepted and acted upon and which
were deliberately not produced. [Para 21.36]
The relevant share transfer forms must be
taken to have been duly executed. Although Mani and Madhusoodhanan had agreed
to determine the actual consideration later, clearly some consideration was
agreed to be shown on the share transfer forms. A voucher for the cost of share
transfer stamps was produced by Mani’s group. The stamps must have been
purchased on the basis of the consideration which was shown on the share
transfer forms at the prescribed percentage under the Stamp Act. [Para 21.40]
But it was also clear from the evidence on
record that that was not the ‘actual’ price which was to be determined
consensually by Mani and Madhusoodhanan. [Para 21.41]
The lawyer sent notice on behalf of Mani to
Madhusoodhanan threatening legal action unless Madhusoodhanan paid ‘the balance
sale consideration of Rs. 50 lakhs’ since Mani had positively asserted that he
must get a price between Rs. 50 and 75 lakhs, and that price negotiated was ‘in
between the said figures’. [Para 21.42]
It was apparent that ‘mani’ had received some
consideration for the transfers although the consideration may have moved from
Kerala Kaumudi to Mani.
Therefore, the transfers by Mani and his
children were effected validly to Madhusoodhanan. Their prayer for
rectification of the share register was therefore rejected and the decision of
Division Bench in the appeal was accordingly set aside. [Para 21.45]
(B) The removal of
Madhusoodhanan as managing director
Three conditions had to be fulfilled before
any alteration of the articles could take place;
(i) Notice specifying the intention to
propose the resolution as an extraordinary resolution must be given.
(ii) The resolution must be
passed by 75 per cent of the members present and;
(iii) Not less than 21 days notice of the
meeting must be duly given.
The requirements are cumulative
and mandatory. [Para 22.12]
Coming now to the facts of the instant case,
it was apparent that none of the three preconditions for effecting an
alteration in the Articles of Kerala Kaumudi by deleting Article 74 were
fulfilled. It may be recalled that at the Board meeting held on 23-7-1986 in
connection with Madhusoodhanan’s functioning as a Managing Director, only a
limited resolution was taken, namely, that Madhavi ‘shall assume the executive
powers of the managing director with immediate effect for effective running of
the organisation’. The resolution that an extraordinary general body meeting be
convened at a date suitable to the Chairman ‘to discuss and take decisions on
matters arising out of the above decisions’ was, therefore, confined to that
limited resolution. [Para 22.13]
In the notice dated 25-7-1986 purporting to
call an EGM, there was no mention whatsoever of any intention or proposal to
amend the articles of the company. [Para 22.14]
At the Extraordinary General Meeting held on
16-8-1986, when a special resolution was taken up for consideration. Madhavi
proposed that ‘another special resolution also be passed deleting article 74 of
the articles of association of the company’. [Para 22.15]
That acknowledged that there was no Earlier
Extraordinary General meeting deleting article 74 as Madhavi had claimed in the
meeting dated 23-7-1986. Furthermore, it showed that the special resolution which
was proposed in the notice was not the resolution which was ultimately passed.
In the garb of ratifying the resolution taken by the Board of Directors, what
was in fact ‘ratified’ was not only the proposal to remove ‘MD’ as the director
but also the immediate deletion of article 74 of the articles of association of
the company. The expression of intention in the notice under section 81(1) of
the Indian Companies Act, 1913 (corresponding to section 189(2)(a) of the 1956
Act) should be sufficiently specific so as to effectively inform each member of
the company of the actual resolution sought to be passed in the general
meeting. The notice must be frank, open, clear and satisfactory. If it is not,
the notice is bad and the special resolution is vitiated and cannot be acted
upon. If any attempt is made by the directors to get the sanction of the
shareholders, it must be made on a fair and reasonably full statement of the
facts upon which the directors are asking the shareholders to vote and special
resolutions obtained by means of a notice which did not substantially put the
shareholders in the position to know what they were voting about, cannot be
supported. [Para 22.16]
Since the further resolution to delete article
74 formed no part of the notice of the Extraordinary General Meeting, in all
fairness the special resolution on the basis of such defective notice was
insupportable in law could not be given effect to. That finding was sufficient
to hold that the deletion of article 74 of the articles of the association of
the company was invalid and that, therefore, Madhusoodhanan continued to be the
managing director of Kerala Kaumudi as claimed by him. [Para 22.17]
The two modes envisaged for service of notice
are personal service and service by post. There is no other mode envisaged.
That not satisfied that the service of the notice was effected either on
Madhusoodhanan or any other shareholder in his group, including KIPL by either
of the modes specified. [Para 22.18]
That was no ordinary general meeting, but a
meeting where a special resolution was to be passed. That had to be done under
section 81 of the 1913 Act, to which article 49 is expressly subject, and the
requirement for giving due notice under section 81 is mandatory. Furthermore,
article 49 speaks of an “accidental omission” to give notice not affecting the
proceedings. In other words the omission must be bona fide, and not an omission
which was wilful as in the instant case. [Para 22.19]
Furthermore, the third condition to be
fulfilled before the Articles can be amended under section 81(1) of the 1913
Act, (section 189(2)(c) of the 1956 Act) is that at least 75 percent of the
members entitled to vote and voting must support the resolution. That mandatory
need to have the special resolution passed by a statutory majority of 75 per
cent was also sought to be circumvented by the respondents by the purported
issue of additional shares to Ravi and Srinivasan.
Resultantly, the removal of the appellant
Madhusoodhanan was not proper. [Para 22.20]
(C) Issue of
additional shares
Madhavi assumed charge as managing director of
the company on 23-7-1986 with the object of ousting Madhusoodhanan from his
control over the affairs of Kerala Kaumudi. This needed to be ratified by the
general body of shareholders. So the notice dated 25-7-1986 was issued for
holding the extraordinary general meeting on 16-8-1986 with the requisite
statutory majority of 75 per cent. [Para 23.2]
A decision was taken by the respondents at the
meeting of the Board on 1-8-1986 to increase the share capital of the company
by issuing additional shares. At the same meeting, the Chairman (Madhavi) was
authorised by the two other directors present, namely, Ravi and Srinivasan “to
issue notices to the existing shareholders to apply for shares within seven
days”. What was noteworthy was that the last day for making an application for
allotment of any of the additional shares was fixed at seven days from the date
of the Board meeting so that Madhusoodhanan’ shareholding could be reduced to
25 per cent before the extraordinary general meeting to be held on 16-8-1986.
[Para 23.3]
None of the evidence produced by the
respondents, at all established that the notice dated 25-7-1986 of the Board
meeting to be held on 1-8-1986 was served on Madhusoodhanan. Apart from that
fatal legal flaw, the evidence merely recorded that an unknown or at least an
unnamed person handed over a sealed envelope to one Mohan Raj who then handed
it over to a peon, who was to hand it over to Mrs. Madhusoodhanan. No one had
come forward to say that the sealed envelope contained the notice dated
25-7-1986. Assuming it did, there was nothing to show that the envelope
ultimately reached Madhusoodhanan. The affidavit affirmed by Mohan Raj
contradicted the entry in the local delivery book. Apart from anything else,
Mohan Raj had himself admitted that he had not forwarded the notice to
Madhusoodhanan in several documents and in affidavit, besides also giving oral
evidence to that effect. There was no reason to disbelieve Mohan Raj’s oral testimony
as to the circumstances under which he had affirmed the affidavit relied on by
the respondents. [Para 23.6]
As far as the outward register was concerned,
it had not been proved as to who dispatched the notice nor did the register
show how the dispatch was effected. [Para 23.7]
So far as the outward dispatch register was
concerned, the mode of dispatch had not been mentioned nor was there anything
to show that the notice was in fact dispatched. In the circumstances, it could
be held that Madhusoodhanan was not given any notice of the Board meeting said
to have been held on 1-8-1986. [Para 23.8]
Since Madhusoodhanan did not know of the
meeting held on 1-8-1986, he was not aware, as the respondents were, either
that additional shares were being issued or that the application for additional
shares had to be made within seven days of the meeting. [Para 23.11]
As far as the certificate of posting was
concerned, it was not explained why it did not record the dispatch of notices
to any other shareholder. When the relationship between the parties was already
so embittered, proof of service of notice under certificate of posting must be
viewed with suspicion. [Para 23.17]
In the instant case, the certificate of
posting was suspect. Assuming that such suspicion was unfounded, it did not in
any event amount to conclusive proof of service of the notice on Madhusoodhanan
or on any of the other addresses mentioned in the certificate. Except for
producing the dispatch register and the certificate of posting, no one on
behalf of the respondents came forward to vouch that they had personally sent
the notice through the post to Madhusoodhanan and his group. Madhusoodhanan had
written two letters contemporaneously dated 4-8-1986 and 8-8-1986 to
Srinivasan, the General Manager of Kerala Kaumudi and to Madhavi complaining
that he was not receiving any mail at all. Those letters were admittedly
received but not replied to by the respondents. It was also apparent from a
perusal of those letters that Madhusoodhanan had no knowledge whatsoever of the
notice for application for allotment of additional shares. Had there been such
notice, it was improbable that Madhusoodhanan who was fighting for retaining
his control over Kerala Kaumudi, would have risked losing such control by abstaining
from applying for the additional shares. [Para 23.24]
In the circumstances, it could be held that
Madhusoodhanan and his group were not served with the notice dated 1-8-1986. It
was, therefore, unnecessary to decide whether the period prescribed in the
notice to apply for the shares was too short or contrary to the articles of
association of Kerala Kaumudi. [Para 23.25]
Once it was held that Madhusoodhanan and his
group, all of whom held shares in Kerala Kaumudi, were not given notice to
apply for allotment of the additional shares, it must be held that the
subsequent allotment of the shares to Ravi and Srinivasan at the meeting held
on 8-8-1986 and the affirmation of such allotment at the meeting allegedly held
on 16-8-1986, were vitiated thereby and invalid. [Para 23.26]
(D) Specific
performance of the Karar 16-1-1986
The basic fact is that each of brothers had
been given the majority shareholding of 52 per cent in the companies specified
against their names in the Karar. Since the other three brothers had taken the
full benefit of the Karar, they were bound to comply with all its terms. It was
not open to them to accept that portion of the Karar which was in their favour
and jettison the rest. The Karar which was in the nature of a family settlement
seeking to settle disputes between brothers, having been already acted upon at
least to the extent that the four brothers were each given the majority
shareholding in the different companies as mentioned in the Karar, should not
be lightly interfered with. [Para 24.7]
It was also on record that Madhusoodhanan had
transferred the bulk of his shareholding in the companies which were to be
under the majority control of the other three brothers. The Single Judge had
held that Madhusoodhanan had given evidence that he had taken steps for closing
down the companies not mentioned in the Karar. That finding had not been
questioned. All the clauses except that for the transfer of the ‘inherited
shares’ to Madhusoodhanan had been acted on. Madhusoodhanan was entitled to
insist on the performance of that clause as well. [Para 24.8]
It is settled law that shares are movable
properties and are transferable. As far as private companies like Kerala
Kaumudi were concerned, the articles of association restricted the shareholder’s
right to transfer shares and prohibit any invitations to the public to
subscribe for any shares in, or debentures of, the company. [Para 24.9]
Subject to that restriction, a holder of
shares in a private company may agree to sell his shares to a person of his
choice. Such agreements are specifically enforceable under section 10 of the
Specific Relief Act, 1963. The section provides that specific performance of
such contracts may be enforced when there exists no standard for ascertaining
the actual damage caused by the non-performance of the act agreed to be done;
or when the act agreed to be done is such that compensation in money for its
non-performance would not afford adequate relief. In the case of a contract to
transfer movable property, normally specific performance is not granted except
in circumstances specified in the Explanation to section 10. One of the
exceptions is where the property is ‘of special value or interest to the
plaintiff, or consists of goods which are not easily obtainable in the market’.
It had been held by a long line of authority that shares in a private limited
company would come within the phrase ‘not easily obtainable in the market’.
[Para 24.10]
There is a distinction between the issue of
new shares by a company and the transfer of shares already issued by a
shareholder. In the first case, it is the company which issues and allots the
new shares. In the second, the transaction is a private arrangement and the
company comes into the picture only for the purposes of recognition of the
transferee as the new shareholder. Therefore, while it is imperative that the
company should be a party to any agreement relating to the allotment of new
shares, before such an agreement for division can be enforced, it is not
necessary for the company to be a party in any agreement relating to the
transfer of issued shares for such agreement to be specifically enforced
between the parties to the transfer. [Para 24.11]
There was no restriction on the
transferability of shares in the Karar. It was an agreement between particular
shareholders relating to the transfer of specified shares, namely, those
inherited from the late Sukumaran and Madhavi, inter se. It was unnecessary for
the company or the other shareholders to be a party to the agreement executed
on 15-7-1985 several months prior to the Karar. The parties who had consciously
entered into the agreement regarding the transfer of their parent’s shares
were, therefore, obliged to act in terms of the Karar. Having regard to the
nature of the shareholding, on the basis of law as enunciated in S.P. Jain v.
Kalinga Tubes AIR 1965 SC 1535 and Bank of India Ltd. v. JAH Chinoy AIR 1950 PC
90 it must be held that the Karar was specifically performable. [Para 24.13]
As far as the question of consideration was
concerned, it was already held that parties could agree to subsequently
determine the price at which the shares were sold as section 9 of the Sale of
Goods Act, 1930 expressly provides that such contracts are perfectly legal.
Besides, the Karar in terms did not call upon parties to determine the
consideration. All it said was that once the consideration was determined by
Madhusoodhanan and Mani, it would be made known to the others. Since there was
no such determination, there was no question of informing anyone. The finding
that there was no determination of the consideration in respect of the
inherited shares as a ground for holding that the Karar was not specifically
performable was similarly incorrect as the determination of the price formed no
part of the Karar. [Para 24.14]
In view of clear averment, made in plaint and
the finding of the Division Bench regarding the contravention of section 16 of
the Specific Relief Act was perverse. On the question of delay, the cause of
action arose when Madhavi died in December, 1987. It could not reasonably be
said that filing of the suit ten months later was unreasonably delayed since
some time must be given to see whether the parties did what they were required
to do under the Karar after Madhavi’s death. [Para 24.17]
The Division Bench appeared to have relied on
clause (a) of section 20(2) to deny specific performance of the Karar by
holding that Madhusoodhanan had obtained an unfair advantage over others under
the Karar because he had been allotted the more ‘substantial’ companies. That
logic flies in the face of clause (a) of sub-section (2) to section 20 and the
Explanation thereto. [Para 24.18]
Section 20(2)(a) of the Specific Relief Act is
an instance of such legislative clarity that it needs no paraphrasing to
highlight its intent. The Division Bench was clearly wrong in its foray into
the question of the value of the assets allotted under the Karar. It had,
despite Explanation 1 to section 20(2) refused specific performance of the
Karar on one of the excluded grounds viz., inadequacy of consideration. [Para
24.18]
The parties was at loggerheads and it was
unlikely that they would mutually agree to a price to be paid for the 390
transferred shares or the ‘inherited shares’ as envisaged at the meeting held on
23-4-1985 or to a mutually acceptable third party in terms of clause 11 of the
Karar. Therefore, there should be specific performance of the Karar and
arbitrator should be appointed for estimating the value of assets. [Para 24.20]
Editor’s Note
Regarding application for rectification of
Register of members of company KIPL, it was held that since minutes recorded
that transfer deed had been placed before the Board, transfers were approved by
the Board, in presence of only witness for petitioners and since none of
documents which were duly maintained by company recording transfer of shares
was disproved, tranfer of share would be joint.
It was further held that where in evidence it
was proved that all communication to company KIPL was addressed to Kumudi Building;
even telephone and Post Box Nos. were also allotted in said address, it was to
be held that the company had an office in Kumudi Buildings to which members of
its management and staff had right of access.
Cases referred to
Baillie v. Oriental Telephone & Electric
Co. Ltd. [1914-15] All ER 1420 (para 22.16), N.V.R. Nagappa Chettiar v. Madras
Race Club AIR 1951 Mad. 831 (para 23.2), Hector Whaling Lt. In re [1936] 1 Ch.
208 (para 23.2), Mst. L.M.S. Umma Saleema v. B.B. Gujaral [1981] 3 SCC 317 (para
23.17), Shiv Kumar v. State of Haryana [1994] 4 SCC 445 (para 23.17), Izhar
Ahmad Khan v. Union of India AIR 1962 SC 1052 (para 23.20), Sodhi Transport Co.
v. State of U.P. AIR 1986 SC 1099 (para 23.21), Syed Akbar v. State of
Karnataka AIR 1979 SC 1848 (para 23.21), State of Madras v. A. Vaidyanatha Iyer
AIR 1958 SC 61 (para 23.21), Dahyabhai Chhaganbhai Thakkar v. State of Gujarat
AIR 1964 SC 1563 (para 23.22), K.K. Modi v. K.N. Modi [1998] 3 SCC 573 (para
24.7), V.B. Rangaraj v. V.B. Gopalakrishnan AIR 1992 SC 453 (para 24.9),
Jainarain Ram Lundia v. Surajmull Sagarmull AIR 1949 F.C. 211 (para 24.10),
Bank of India Ltd. v. Jamsetji A.H. Chinoy AIR 1950 PC 90 (para 24.10) and S.P.
Jain v. Kalinga Tubes AIR 1965 SC 1535 (para 24.11).
A.T.M. Rangaramanujan, Gopal Jain, Prateek
Jalan, Ms. Nandini Gore, Ashish Jha, Jasmine D., R.N. Karanjawala, Ms. Manik
Karanjawala, for the
Appellant. L. Nageshwar Rao, T.L.V. Iyer, P.P. Rao, Fazlin Anam, E.M.S. Anam
and P.A. Ahmed, for the Respondent.
Judgment
Ruma Pal, J. - An internecine dispute between the members of a family relating to
the controlling interests in companies has given rise to the nine appeals which
are being disposed of by this judgment. Given the number and nature of the
proceedings, to avoid any confusion, the parties are referred to by their names
and not in the capacity in which they have sued or been sued except when
describing the collective stand of all the respondents in these appeals, when
they are referred to simply as ‘the respondents’.
2. The
main protagonists in all the litigations are Madhusoodhanan, Srinivasan, Ravi
and Mani who are brothers, with Madhusoodhanan on one side and Srinivasan, Ravi
and Mani on the other. The parents of the four were one K. Sukumaran and
Madhavi both of whom are deceased. K. Sukumaran died before the litigations
between the parties erupted and Madhavi died during the pendency of the
litigation. While she was alive she supported Srinivasan, Ravi and Mani. The
four brothers are married and have children. It is unnecessary at this stage to
clutter the narration of facts with the names of the wives and children, who
will be referred to by name when the particular litigation in which they are
involved is considered. The dispute began with a struggle over the controlling interest
in a company by the name of Kerala Kaumudi (P.) Ltd. (hereinafter referred to
as Kerala Kaumudi).
3. Kerala
Kaumudi is a private company incorporated under the Indian Companies Act, 1913
which was promoted in 1955 by the parents of the four brothers. Besides Kerala
Kaumudi other “family” concerns were incorporated including Kaumudi Investments
(P.) Ltd., Kerala Exports (P) Ltd., Kaumudi News (P.) Ltd., Laisa Publications
(P.) Ltd., Shiv Printers & Publishers, Ravi Printers & Publishers (P.)
Ltd., Kaumudi Films Outdoor Unit, Electronic & Equipment Corporation and
Ravi Transports. However, the core of the controversy is the control of Kerala
Kaumudi.
4. The
business of Kerala Kaumudi (which was the flagship company ) is to own and
publish newspapers, journals and other literary works and undertakings. Its
authorised share capital is 20 lakhs divided into 2,000 shares of Rs. 1,000
each. The total number of issued and paid up equity shares in Kerala Kaumudi
was 1575. During the lifetime of K. Sukumaran each of the brothers along with
their parents had shares in Kerala Kaumudi and the shareholding was as follows
:
|
Sr. No. |
|
|
|
|
1. |
Mani |
222 |
shares |
|
2. |
Valsa Mani |
84 |
shares |
|
|
(Mani’s daughter) |
|
|
|
3. |
Sukumaran Mani |
84 |
shares |
|
|
(Mani’s son) |
|
|
|
4. |
Madhusoodhanan |
390 |
shares |
|
5. |
Srinivasan |
390 |
shares |
|
6. |
Ravi |
390 |
shares |
|
7. |
Madhavi |
3 |
shares |
|
8. |
Sukumaran |
9 |
shares |
|
9. |
Kaumudi Investments |
3 |
shares |
|
|
(P.) Ltd. |
|
|
|
|
Total |
1575 |
shares |
5. Sukumaran
died on 18th September, 1981. He was the Managing Director of Kerala Kaumudi
from 1955 to 1973 and its Chairman from 1973 till his death. He was succeeded as
Chairman by his widow Madhavi. Madhusoodhanan was appointed as Managing
Director of Kerala Kaumudi in 1973 immediately after Sukumaran died. On 25th
January, 1985, Madhusoodhanan was appointed as Managing Director and Editor of
Kerala Kaumudi for life. He was also empowered to exercise the powers given to
the Director under Article 79 of the Articles of Association. At the same time
Srinivasan was appointed as General Manager of Kerala Kaumudi for life and Ravi
was appointed as Director and Executive for life. To give effect to these
appointments, Article 69A and Article 74 of the Articles of Association of
Kerala Kaumudi were amended.
6. The
disputes between the parties started soon after the death of Sukumaran in
September 1981. When these reached ahead, on 29th November, 1984 a resolution
was taken at a meeting (Ex. P-190) of the company which was signed by the four
brothers and Madhavi by which the controlling interests in the different family
companies were agreed to be given to the four brothers on the basis of their
active interest in a particular concern. Kerala Kaumudi’s control was to be
with Madhusoodhanan. In implementation, Transfer of shares in these companies
were effected between the brothers and their respective families. The disputes
however did not abate. On 24th October,1985 an agreement was entered into
between the parties in an attempt to resolve their differences. This agreement
has been exhibited in the proceedings as Ext. P1. On 23rd December, 1985, a
second agreement (Ext. P-2) was entered into by which it was, inter alia,
agreed that all the various family- controlled companies and firms would be
divided among the four brothers.
7. On
16th January, 1986 a third agreement was entered into, which has been marked as
Ext. P.3. The parties to the third agreement were Madhavi, Mani,
Madhusoodhanan, Srinivasan and Ravi. Briefly speaking, Ext. P3 is about the
division of effective control of the “family” concerns amongst the four
brothers. It relates to the transfer of Mani’s shares in Kerala Kaumudi to
Madhusoodhanan. In addition, the parties’ agreement that Madhusoodhanan would
have the major shareholding in Kaumudi Investments (P.) Ltd., Kerala Exports
(P) Ltd. and Kaumudi News (P.) Ltd., Mani the majority shareholding of 52 per
cent in Laisa Publications (P.) Ltd. [which has subsequently changed its name
to Kala Kaumudi (P.) Ltd.], Srinivasan 52 per cent in Shiv Printers and
Publishers, and Ravi, the majority holding in Ravi Printers and Publishers (P)
Ltd., Kaumudi Films Outdoor Unit, Electronic and Equipment Corporation and Ravi
Transports, is also recorded.
8. According
to Madhusoodhanan, Mani and his children had already transferred their entire
holding of 390 shares in Kerala Kaumudi to Madhusoodhanan in May 1985, prior to
the third agreement. As a result, Mani and his children had no shares in Kerala
Kaumudi, Madhusoodhanan had 612 shares, and Sreenivasan and Ravi had 222 shares
each. Nine shares continued to stand in the name of the late K. Sukumaran and
three shares in the name of Madhavi. In addition, the two children of
Madhusoodhanan had 84 shares each, Sreenivasan’s daughter, Anju had 168 shares,
Ravi’s son, Deepu, had 168 shares and KIPL continued to hold 3 shares.
9. On
23rd July, 1986, a Board Meeting of Kerala Kaumudi was held at which Madhavi
assumed the powers of the Managing Director in purported ouster of
Madhusoodhanan. The meeting is disputed by Madhusoodhanan. He says that no such
meeting was in fact held and that the minutes were subsequently drawn up. A
second Board meeting, which is also disputed by Madhusoodhanan, was held on 1st
August, 1986 in which a decision was taken to increase the paid-up share
capital of Kerala Kaumudi by issuing 425 additional shares of Rs. 1,000 each.
At a Board meeting held on 8th August, 1986 these additional shares were issued
to Ravi and Sreenivasan and one share was transferred by Ravi to Mani. This
meeting as well as the allotment of the additional shares is not accepted by
Madhusoodhanan. On 16th August, 1986 at an Extraordinary General Meeting
Madhusoodhanan was removed as Managing Director of Kerala Kaumudi and Article
74 of the Articles of the company deleted.
10. In
this background, several proceedings were filed by the parties against each
other some of which may be taken up for consideration together. The first lot
consists of six matters relating directly to Kerala Kaumudi and the
shareholding in Kerala Kaumudi. The six are :
(i) C.P. No. 14 of 1986 filed by Madhusoodhanan for
rectification of the company’s share register under section 155 of the
Companies Act, 1956 by cancellation of the allotment of 425 shares to Ravi and
Sreenivasan and for removal of the name of Mani from the company’s share
register.
(ii) Company petition, C.P. No. 31 of 1988
filed by KIPL for similar reliefs.
(iii) A suit filed by Madhusoodhanan in the Munsif’s Court,
Trivandrum being O.S. No. 1329 of 1986 (subsequently re-numbered as C.S. No.
3/89, when withdrawn to the High Court) for a decree declaring that he
continued to be the Managing Director of Kerala Kaumudi and for a declaration
that the Board meetings held on 23-7-1986, 1-8-1986 and the meetings subsequent
thereto were illegal and ultra vires the Articles of Association of the
company.
(iv) A suit being O.S. No. 482/88 (subsequently re-numbered as C.S.
No. 5/89, when withdrawn to the High Court) filed by KIPL against Kerala
Kaumudi for similar reliefs.
(v) A suit filed by Madhusoodhanan for specific performance of
the third agreement, Ex.P.3.(O.S. No. 483/88, subsequently re-numbered as C.S.
6/89 when withdrawn to the High Court).
(vi) C.P. No. 26 of 1987 filed in 1987 by Mani and his children for
a declaration that the transfer of 390 shares by them to Madhusoodhanan
pursuant to the Board’s decision dated 21-5-1985 was illegal and void and for
rectification of the share register by recording them as the owners of 222, 84
and 84 shares respectively.
These six matters are now numbered
as CA Nos. 3253-3258 of 1991 before us.
11. The
second set of litigation being Company Petition No. 15 of 1986 was filed in
1986 by Mani’s wife Kastoori Bai, daughter Valsa, Ravi’s wife Shylaja, and
Sreenivasan’s wife Laisa as well as Madhavi for rectification of the share
register of KIPL. This is now numbered as CA 3260 of 1991.
12. The
third set consists of CP No.11 of 1987 ( now CA 3261 of 1991) filed by Vaishak,
the minor son of Madhusoodhanan, for rectification of the share register of
Kerala Kaumudi.
13. The
fourth set of proceedings originally consisted of two suits filed before the
Munsif’s Court, Trivandrum relating to the office premises of Kerala Exports
and KIPL. The suit filed by Kerala Exports, (numbered on transfer as CS No. 2
of 1989) was for a mandatory injunction to restrain Kerala Kaumudi,
Sreenivasan, Ravi and Madhavi from disturbing its functioning in Kaumudi
Buildings. O.S. No. 1569 of 1988 (subsequently numbered as CS 4 of 1989) was a
similar suit filed by KIPL before the Munsif’s Court for restraining the
defendants from preventing the peaceful functioning of KIPL’s administrative
office in Kaumudi Buildings.
14. All
the original suits were transferred to the High Court under the provisions of
section 446 of the Companies Act and were heard along with the several company
petitions noted earlier. About 296 documents were tendered in evidence by the
parties. Seven witnesses were examined. The four witnesses who deposed in
support of Madhusoodhanan were P.K. Kurien, Advocate (PW 1), Mohan Raj, former
Personal Assistant to Madhusoodhanan (PW 2) Vasudevan, former Company Secretary
(PW 3) and Madhusoodhanan himself (PW 4). As far as the opponents were
concerned, Mani (RW 1), Srinivasan (RW 2) and Laisa Srinivasan (RW 3) gave
evidence in support of their stand.
15. The
Single Judge decided CP No. 14 of 1986 in Madhusoodhanan’s favour. The
application for rectification was allowed and the allotments of shares made in
the meeting held on 8-8-1986 were set aside and rectification of the share
register of Kerala Kaumudi by deleting the further allotment of 425 shares each
to Sreenivasan and Ravi was directed. The prayer for cancellation of the
transfer of one share in favour of Mani was, however, disallowed. However, the
petition filed by KIPL (CP No. 31 of 1986) which had virtually asked for the
same reliefs as in CP No. 14 of 1986 was dismissed by the learned Single Judge
on the ground of delay. Madhusoodhanan’s suit (C.S. No. 3 of 1989) and KIPL’s
suit (CS No.5 of 1989), were decreed by holding inter alia that the meetings
held on 23-7-1986, 1-8-1986 and 17-8-1986 in so far as they affected
Madhusoodhanan and by which Madhusoodhanan had been removed as Managing
Director and Article 74 of the Articles of Association of the company was
deleted, were illegal and invalid. Madhusoodhanan was declared to be the
Managing Director of the Company. The suit filed by Madhusoodhanan for specific
performance of Ext. P3 (CS No. 6 of 1989) was also decreed. Mani and his
children’s application for setting aside the transfer of 390 shares (CP
No.26/87) was dismissed. An arbitrator was appointed for determining what
amount was payable by Madhusoodhanan to Mani for the shares transferred by Mani
to Madhusoodhanan.
16. The
second set of proceedings initiated by Mani’s wife and others viz. CP No. 15 of
1986, for rectification of the share register of KIPL and the third set filed
by Madhusoodhanan’s minor son, Vaishak for rectification of the share register
of Kerala Kaumudi (CP No. 11 of 1987) were dismissed.
17. The
two suits filed by Kerala Exports and KIPL (CS 2 of 1989 and CS 4 of 1989
respectively) relating to their continued possession in Kaumudi Buildings were
decreed.
18. The
aggrieved parties preferred appeals in each of the matters. By a common
judgment, the Division Bench reversed the findings of the learned Single Judge
in all of the appeals except in the appeal from CS 2 of 1989. Nine Special
Leave Petitions were filed in this Court in the separate proceedings on which
leave was granted on 27th August, 1991.
19. We
propose to deal with issues which can be said to be common to the different
sets of litigations before giving our conclusions on each appeal separately.
20. The
underlying question in the first set of litigations viz. who has the
controlling interest in Kerala Kaumudi has given rise in turn to the following
topics :
(A) The transfer of shares by Mani and his
children to Madhusoodhanan ;
(B) The removal of Madhusoodhanan as Managing
Director ;
(C) The issue of additional shares to Ravi
and Srinivasan; and
(D) Specific performance of the agreement
(Karar) dated 16-1-1986.
(A) Transfer of shares by Mani and his children to Madhusoodhanan.
21.1 In
C. P. 26/87, Mani and his group prayed for rectification of the share
register of Kerala Kaumudi by deleting the name of Madhusoodhanan as a
shareholder in respect of the shares which Mani and his group had transferred
to him in 1985. The prayers proceed on the basis that there was in fact a
transfer of shares in 1985 which was, after two years, sought to be set aside.
The grounds on which this was asked for were :
A. The
consideration for the transfer had not been agreed upon and no consideration
had in fact been paid.
B. No proper documents had been executed
effecting the transfer.
C. Neither
Valsa nor Sukumaran, Mani, a minor had any knowledge of the transfer and the
transfer of their shares was invalid.
D. Section
108 of the Companies Act, 1956 had not been complied with in respect of any of
the transfers.
21.2 The learned
Single Judge rejected all four contentions, and in our view, rightly. The
Division Bench held in favour of Mani and his group on grounds which are
legally and factually unsustainable for the reasons stated in the following
paragraphs.
21.3 The
documentary evidence relating to the transfer, shows without a shred of doubt
that there was a valid transfer of shares. To begin with the minutes of the
meeting held on 19th March, 1985 [Ex. R-62(a)] which were signed by Mani,
records:
“Shares of Sri
M.S. Mani. All the shares in Kerala Kaumudi owned by Sri M.S. Mani and family
would be pledged by him to Sri M.S. Madhusoodhanan who shall extend financial
facilities to Sri M.S. Mani. The loan will be paid with 22 per cent interest by
Sri Mani when Sri M.S. Madhusoodhanan shall release the shares of Sri M.S.
Mani. The modus operandi of the transaction shall be decided in consultation
with barrister P.K. Kurien of Menon and Pai.”
21.4 The
intention of Mani and his group to transfer their shareholding to Madhusoodhanan
is evident from this. Although the mode of transfer was subsequently changed,
this intention was affirmed at the Board meeting of Kerala Kaumudi held on 23rd
April, 1985. The fifth and sixth resolutions as appearing in the minutes of the
meeting [Ex.P.-62(b)] which were also signed by Mani read as under :
“Sri M.S. Mani
Letter of
resignation from the direct directorship of Kerala Kaumudi (P.) Ltd. effective
from 23-4-1985 afternoon submitted by Sri M.S. Mani was approved by the Board.
(6) Shares owned by Sri M.S. Mani and family in Kerala Kaumudi (P) Ltd.
“Shares owned
by Sri M.S. Mani and family in Kerala Kaumudi (P.) Ltd. will be transferred to
Sri M.S. Madhusoodhanan forthwith on a consideration to be mutually agreed
between the transferor and the transferee. The liabilities of Sri M.S. Mani to
the income tax department etc. up to 31st March,1985 should be settled by
Kerala Kaumudi (P.) Ltd. before finally deciding a consideration for the share
transfer. The Kerala Kaumudi (P.) Ltd. undertakes to discharge the liabilities
arising on account of personal guarantees given by Sri M.S. Mani for the
company.” [Emphasis supplied]
The sixth resolution clearly envisages three
distinct stages: an immediate and unconditional transfer of shares, then, the settlement
of the Mani’s income tax liabilities by Kerala Kaumudi and, after both these
stages, the determination of the consideration for the transfer to be mutually
agreed on.
21.5 The
Division Bench, therefore, erred in holding that the agreement for transfer of
shares was conditional on the determination of the price of the shares and in
concluding that as there had been no such determination, no transfer could have
taken place. The express intention was to effect an immediate transfer of the
shares and to agree upon the consideration later. Section 9 of the Sale of
Goods Act, 1930 permits this[t1].
21.6 Section
4 read with section 2(10) of the Sale of Goods Act, 1930 require that the
contract of sale must provide for the payment of money as a consideration for
the transfer of goods, or to put it differently, that a price must be paid. But
section 9 of the 1930 Act allows the parties not to fix the price at the time
of the transfer and to leave the determination of the amount of consideration
to a later date. An agreement which provides for the future fixation of price
either by the parties themselves or by a third party is capable of being made
certain and is not invalid as provided under section 29 of the Contract Act,
1872 [See : Illustration (e)]. In view of such categoric and clear statutory
provisions, the submission of learned counsel representing Mani that such a
contract is void for uncertainty because the price was not fixed, is
unacceptable. The passage from Benjamin’s Sale of Goods (1974 Edn.) relied on
which says :
“If the price
is left to be agreed upon subsequently between the parties, there will
ordinarily be no binding contract, on the grounds of uncertainty, unless and
until they later reach agreement on a price. Moreover, an agreement to leave
the price open to further negotiation will normally exclude any inference that
the price should be a reasonable price in accordance with the provisions of
section 8(2).”
may be an exposition of the law as it is in
England and cannot be seen as an authority on the interpretation of section
9(1) of the Sale of Goods Act. Besides, the same passage cited goes on to say :
“But in
accordance with the principle that the Courts will endeavour to uphold bargains
which the parties believe themselves to have concluded, especially in the case
of executed or partially executed contracts, it may sometimes be possible
either to infer an intention that at any rate a reasonable price should be paid
if no price is later settled, or to have regard to other circumstances, such as
the course of dealing between the parties.”
In this case, there can be no doubt that the
first stage of the agreement for the immediate transfer of shares was executed
and the Division Bench erred when it held to the contrary.
21.7 The
questions as to what would be the reasonable price for the shares, the mode of
its determination and whether any consideration has already been paid by
Madhusoodhanan to Mani are considered subsequently.
21.8 The
minutes of the Board meeting held on 21st May, 1985 (Exhibit P-62 (C)) of
Kerala Kaumudi record that the following share transfer deeds were placed
before the Board, namely, the deeds relating to the transfer of 222 shares by
M.S. Mani to Madhusoodhanan, 84 shares by Valsa Mani to Madhusoodhanan, 84 shares
by Sukumaran Mani to M.S. Mani and 84 shares by Mani to Madhusoodhanan. The
Board resolution goes on to record.
“After
discussion the share transfers were approved by the Board and the Managing
Director and any other Director was authorised to sign the relative new share
certificates to be issued in favour of Sri M.S. Madhusoodhanan and to affix the
common seal of the company in the share certificates in the presence of the
Company Secretary.”
21.9 The
minutes of the Board meeting held on 21st May 1985, were read and approved on
4th June, 1985. Both meetings were attended by Madhavi, Madhusoodhanan,
Srinivasan and Ravi and the minutes signed by Madhavi as Chairman. The transfer
of the shareholding of Mani and his children was also admittedly entered in the
Company’s Share Certificate Ledger (Ex. P-90).
21.10 It is
evident from this that the share transfer forms which were placed before the
Board had been executed and were otherwise duly completed, or else the question
of the approval of such transfer would not arise.
21.11 Apart
from these minutes, are the minutes of the meeting held on 26th August, 1986,
when Madhusoodhanan, was already effectively removed from the control of Kerala
Kaumudi. Item No. 4 of the minutes relates to the transfer of a share by Ravi
to Mani. Countering Madhusoodhanan’s objection to such transfer, the minutes
tellingly record :
“Smt. C.N.
Madhavi pointed out that the sale consideration of the shares held by Sri M.S. Mani
which was around 24 per cent of the total shares of the company at the time of
transfer had not been paid by Sri M.S. Madhusoodhanan. She pointed out Sri M.S.
Mani was the seniormost Director of the company and he is the eldest son of
late Sri Sukumaran, the founder of the company. She also pointed out that Sri
M.S. Mani is eligible for 1/5 of the shares held in the name of his father. She
further pointed out that it is prestigious for the company that Sri M.S. Mani,
the former senior Director and glorious editor of the newspaper to be a
shareholder of the company.”
21.12 In the
Annual Return of Kerala Kaumudi dated 27th June, 1985 filed under section 159
of the Companies Act, 1956 with the Registrar of Companies, in the list of past
and present members and debenture holders, the names of all parties have been
given including the names of Mani, and his children. However against their
names it has been mentioned that they had effected transfer of their
shareholding to Madhusoodhanan. Particulars of the transfer made by each as
well as the date of registration of the transfers have been given as 21st May,
1985. (Ex. P-128).
21.13 On 1st
March, 1986 in keeping with the statutory requirement relating to the ownership
of newspapers, a statement was published in Form IV. In the list of
shareholders the names of Madhusoodhanan, Ravi, Visakh Madhusoodhanan, Deepu
Ravi, M.S. Srinivasan, Julie Madhusoodhanan and Anju Srinivasan are mentioned.
There is no mention of Mani or either of his children as shareholders (Ex. P -
86). There was no protest by Mani or any of the other shareholders which would
have naturally been made if the statements were incorrect.
21.14 Even
after the ouster of Madhusoodhanan from the Board of Kerala Kaumudi, in the
Annual Return dated 26 September, 1986 [Ex. P.128 (a)], in the list of
shareholders filed with the Registrar of Companies as part of the Annual Return
of Kerala Kaumudi, Mani is shown as holding only one share and Madhusoodhanan
as holding 612 shares in the company. This return has been filed under the
signatures of Srinivasan and Ravi as Managing Director and Director of Kerala
Kaumudi respectively together with a certificate by Ravi and Srinivasan under
section 161(2) of the Companies Act, 1956. They certified that the return
states the facts as they stood on the day of the annual general meeting
correctly and completely and that since the date of the last annual return the
transfer of all the shares and debentures and the issue of all further
certificates of shares and debentures had been appropriately recorded in the
books maintained for the purpose.
21.15 This
was again done in the Annual Return of Kerala Kaumudi filed under the signature
of Ravi and Srinivasan dated 28th July, 1987 [Ex. P.131(a)]. Madhusoodhanan is
shown as holding 612 shares and Mani is shown as holding only one share. Under
section 164 of the Companies Act, 1956, the annual returns, the certificates
and statements therein, “shall be prima facie evidence of any matters directed
or authorised to be inserted therein” under the Act.
21.16 The
explanation given by Mani that he did not respond to the statutory declarations
although they did not show his name or the names of his children as
shareholders of Kerala Kaumudi because there was an agreement to transfer the
shares and because of the close relationship between parties, is specious.
According to Mani’s evidence, he had not agreed to transfer his shares at all
because the consideration had not been fixed. Furthermore, the relationship between
the parties was anything but cordial. It was only after Madhusoodhanan had
initiated proceedings in 1986, that Mani, more than two years after the
transfer for shares filed the application for rectification of the share
register.
21.17 Even
if there were any doubt on the issue, the fact which settles the matter
conclusively are the admissions in the counter affidavit filed by Madhavi in CP
No. 14 of 1986 on behalf of herself and on behalf of Ravi, Srinivasan and Mani
(wherein Mani is referred to as the “fifth counter petitioner” and
Madhusoodhanan as “the petitioner”) She has affirmed :
“(a) In fact the fifth counter
petitioner left the company in the year 1985 and has transferred all the 390
shares belonging to him and his children (major daughter and minor son) to the
petitioner, receiving only a miniscule part of a consideration and accepting
the promise of the petitioner to pay him the balance without even insisting on
formal documents to evidence the promise of the petitioner.
(b) Once Article 74 was amended
to the petitioner’s liking, his attitude started changing slowly. Even then we
did not take it seriously. That is why the fifth counter petitioner transferred
his shares to the petitioner, giving him literally a strangle hold on the
company.
(c) He (Mani) and his minor son
had held 306 shares in the company which he had transferred to the petitioner
in 1985.
(d) The petitioner holds 612 equity shares of Rs. 1,000 each of the
company.”
Mani has also said in an affidavit affirmed on
28th November, 1986 in Application 305/86 (arising out of CP No.14/86) :
“After the
meeting was over the petitioner and respondents 2 to 5 that is, the mother and
sons had informal talk in the same room. During the course of this, the second
respondent asked the petitioner why he has not paid the balance consideration
for shares transferred by me to him in 1985. The petitioner said that he would
pay the same as and when he had money. The second respondent thereupon
suggested that the petitioner may in that event transfer the shares back to
me.”
21.18 The
one share which is shown in Mani’s name in the Annual Return for 1986 and 1987
was sold by Ravi to Mani at a meeting held on 26 August 1986. As has been
recorded in the minutes [Ex P-62(N)] and affirmed in the same affidavit of
Madhavi in C.P. No. 14/86 on behalf of Ravi, Srinivasan, Mani and herself :
“The meeting
of the Board of Directors held on 26th August,1986 expressly considered the
question whether the fifth respondent (Mani) is to be selected as one whom it
is desirable in the interest of the company to admit to its membership. The
Board resolved that the fifth respondent (Mani) is not only a desirable person,
but his admission to the membership of the company will enhance its prestige
and strengthen its administration. The Board felt that in the circumstances it
was essential that the fifth respondent (Mani) was to be inducted as a member
of the company.”
That he was “admitted” to membership and
“inducted” as a member of the company by the transfer of one share on 26th
August, 1986 has been acknowledged by Mani himself in his affidavit affirmed in
the same proceedings on 28 November, 1986.
21.19 This
admission to membership was in terms of Article 24(a) of the Articles of
Association of Kerala Kaumudi, which directs that no share shall be transferred
to a person who is not a member so long as any member or any person selected by
the Directors as one whom it is desirable in the interest of the company to
admit to membership, is willing to purchase the same at fair value. In other
words a non-member of the company can be sold a share of the company even when
a member wishes to purchase it, provided the Directors select him as “a person
whom it is desirable in the interest of the company to admit to membership” and
provided that such person is willing to purchase the share.
21.20 If the
transfer by Mani and his children of their entire shareholding in Kerala
Kaumudi to Madhusoodhanan had not been effected, there was no question of
“admitting” Mani to the membership of the company. The minutes of the meeting
held on 26 August, 1986 which have been admitted by Srinivasan and the
affidavits of Madhavi and Mani thus prove that Mani and his family held no
shares in the company until the single share was transferred by Ravi to Mani
under Article 24(a) on 26th August, 1986.
21.21 We
have been unable to understand the logic of the Division Bench by which it
sidestepped this inevitable conclusion, when it said “It is open to a party to
take an extra precaution to ward off possible disconcerting experiences while
planning for the future”. Ignoring—or at least not giving sufficient weight—to
the wealth of evidence in favour of the submissions of Madhusoodhanan, the
learned judges of the Appellate Court sought to base their assessment of the
evidence on the absence of documents, such as income-tax returns of
Madhusoodhanan, which according to them would have shown the acquisition of the
additional shares by Madhusoodhanan from Mani, an exercise which was entirely
uncalled for in the face of the positive evidence already on record and the
repeated admissions of Mani and his group before the Court.
21.22 Furthermore,
under section 194 of the Companies Act, 1956, minutes of meetings kept in
accordance with the provisions of section 193 shall be evidence of the
proceedings recorded therein and, unless the contrary is proved, it shall be
presumed under section 195 that the meeting of the Board of Directors was duly
called and held and all proceedings thereat to have duly taken place. The onus
was on Mani to disprove that the transfers had not taken place as recorded in
the minutes of the Board meeting held on 21 May,1985, an onus that he has
singularly failed to discharge. Learned counsel for Mani submitted that the
statutory presumption was not available as Madhusoodhanan had admitted that no
formal meetings were held and that the minutes were prepared after informal
discussions by the Company Secretary and shown to Srinivasan who signed the
same after it was approved by Madhusoodhanan. The submission is unacceptable
for three reasons. First: The Articles of Association of the Company (Art.81)
allow Directors to regulate their meetings as they think fit. Also Art. 89 says
that a resolution in writing circulated to all the Directors and assented to by
a majority of them shall be as valid as a resolution passed at a meeting of the
Board of Directors. Second, section 193(1) of Companies Act, 1956 provides :
“Minutes of
proceedings of general meetings and of Board and other meetings. - Every company
shall cause minutes of all proceedings of every general meeting and of all
proceedings of every meeting of its board of directors or of every committee of
the Board, to be kept by making within thirty days of the conclusion of every
such meeting concerned, entries thereof in books kept for that purpose with
their pages consecutively numbered.”
Therefore, the minutes may be prepared
subsequently, but they must be duly entered in the Minute Book and initialled
and it is nobody’s case that this was not done. Finally, Madhusoodhanan has
also said that formal meetings were held and that important decisions were
circulated to all members. In any event, our conclusion that the transfer of
shares by Mani and his children to Madhusoodhanan would stand without the support
of the statutory presumption under section 195 of the 1956 Act.
21.23 Exhibit
P-3, the third agreement which was referred to at the outset has a clause which
relates to the sale of Mani’s shares in Kerala Kaumudi to Madhusoodhanan which both
sides have referred to and relied upon but there has been no consensus as to
the correct interpretation of the clause. This controversy is addressed in
detail in connection with Madhusoodhanan’s suit for specific performance of the
agreement.
21.24 Had
this clause been the only basis on which this Court were called upon to decide
whether there had been a transfer or sale of the shares of Mani’s group to
Madhusoodhanan, no doubt it would have been difficult to determine what had in
fact happened. However, the clause is only one of a series of documents, the
authenticity of which cannot be disputed, which clearly show that the transfer
had taken place although the exact consideration may not have been agreed upon
or paid.
21.25 Mani
did not attend the Board meeting held on 21st May, 1985 or any other till he
was admitted to membership of Kerala Kaumudi on 26th August, 1986. Apart from
this telling circumstance supporting Madhusoodhanan’s case, Srinivasan had
attended and signed the minutes of the meeting on 21st May, 1985. His claim
that no such meetings were in fact held and that whenever he signed the minutes
of the meetings held during the managing directorship of Madhusoodhanan, he did
so at the instance of the latter without being aware of the contents of the
minutes is hardly likely. The brothers were already at daggers drawn and it is
unbelievable that he would place such unquestioning faith in Madhusoodhanan.
Additionally, the entries in the Attendance Register of Kerala Kaumudi (Ex.
P-81) also belies this assertion. Besides, the falsity of this explanation is
apparent from the minutes of the meeting held and the statutory records
submitted by Srinivasan after Madusoodhanan was removed as Managing Director of
Kerala Kaumudi which continued to state that Mani and his children had
transferred their shares in the company to Madhusoodhanan.
21.26 The
fact that all the parties, including Ravi, Srinivasan and Mani himself,
hardened businessmen all, not only proceeded on the basis that there was
effective transfer of Mani and his childrens’ shareholding to Madhusoodhanan
but also certified the same to the Registrar of Companies, and additionally
affirmed that such transfer had taken place on oath in their affidavits can
only lead to the conclusion that the transfer had been legally effected on the
basis of duly executed share transfer forms in compliance with the provisions
of the Companies Act, 1956.
21.27 Nevertheless,
the respondents argue, there were in fact no share transfer forms which were
placed before the Board and the only transfer forms executed by Mani and his
children were invalid because of non-compliance with section 108 of the
Companies Act, 1956.
21.28 In his
examination in chief, in response to the question whether he and his children had
transferred their shareholding to Madhusoodhanan, Mani said :
“When I
decided to relinquish my directorship, the Secretary brought the required
letter, which I signed. Later the forms for transferring our shares to the
petitioner (Madhusoodhanan) were brought. But I found that the consideration
column in those forms were not filled. Petitioner told me that the
consideration can be fixed later and the transfer may be effected immediately.
But I said that I will sign it only after fixing the consideration. Even so, in
order to assure him that I will transfer the shares, I signed the forms and
handed it over to my wife for keeping them in safe custody. I knew that if the
matters were not finalised within 60 days the forms cannot be made use of
thereafter. So I requested the petitioner several times to fix up the
consideration. But he did not do so. I did not hand over the forms to the
petitioner.”
The admitted case therefore is that Mani and
his children had agreed to transfer their shareholding to Madhusoodhanan, but
according to them, such transfer never took place.
21.29 Mani
produced the share transfer deeds, presumably from the custody of his wife as
Exhibits R 9-12. Exhibit R 9 is signed on 11-5-1985. It is an unstamped
document and purports to record the transfer of 222 shares by Mani to
Madhusoodhanan. Similarly R. 10 is a share transfer form signed by Valsa on
11-5-1985 transferring 84 shares to Madhusoodhanan. The document bears stamps
of the value of 720 rupees on the reverse. R.11 is a share transfer form signed
by Mani’s wife as a transferee recording the transfer of 84 shares by Sukumaran
Mani to MS Mani. It is dated 11th May, 1985. It also bears stamps of the value
of Rs 720. R.12 is a share transfer form signed on 11th May, 1985 by Mani transferring
84 shares to Madhusoodhanan. The document is signed on 11th May, 1985. All the
share transfer forms bear the stamp of what appears to be of the office of the
Registrar of Companies dated 20-4-1985. All four exhibits show that they have
been entered in the Register of Transfers of Kerala Kaumudi on 23rd May, 1985
and bear the serial numbers 30, 33, 31 and 32 respectively.
21.30 There
is a controversy as to whether these share forms were the share forms which
were placed before, and approved by the Board of Directors of Kerala Kaumudi at
the meeting held on 21st May, 1986. Madhusoodhanan claims that these are not
the share transfer forms. Mani and his group contend to the contrary. The issue
would be of importance if one were to allow the respondents to resile from
their admissions. We are not minded to do so. Nevertheless, since the reasoning
of the Division Bench rests to a large extent on the question whether the
transfer was in accordance with section 108 of the Companies Act, it would be
appropriate to pronounce on this.
21.31 Section 108 of the Companies
Act, 1956 insofar as it is relevant provides :
“Transfer not
to be registered except on production of instrument of transfer. - (1) A
company shall not register a transfer of shares in, or debentures of, the
company, unless a proper instrument of transfer duly stamped and executed by or
on behalf of the transferor and by or on behalf of the transferee and
specifying the name, address and occupation, if any, of the transfer has been
delivered to the company along with the certificate relating to the shares or
debentures, or if no such certificate is in existence, along with the letter of
allotment of the shares or debentures;”
21.32 According
to Mani, the share transfer forms were not duly stamped and could not be given
effect to under section 108 of the 1956 Act. If Exhibits R9 to R12 are indeed
the share transfer forms, he would be correct. In our view they are, in all
likelihood, not the transfer forms which were placed before the Board of Directors
on 21st May, 1985.
21.33 It is
on record, that Madhusoodhanan had made an application for production of the
original share transfer forms from the custody of the company. It must be
remembered that from March 1986, Madhusoodhanan no longer had any control over
the affairs of Kerala Kaumudi. The papers, books and other records of the
company were in the custody and control of those who controlled Kerala Kaumudi
namely Srinivasan and Ravi. It is not improbable that the share transfer
certificates which had been placed before the Board meeting were deliberately
not produced.
21.34 The
Division Bench held that exhibits R.9 to R.12 were the “real” share transfer
forms because they were dated 23-5-1985 and the evidence of Madhusoodhanan was
that he had signed only one set of transfer forms in 1985. The Division Bench
also relied upon what appears to be an unsigned stamp of the office of the
Registrar of Companies dated 20th April, 1985 although no one has pledged his
or her oath to it. Having come to the conclusion that the share transfer forms
produced by Mani, exhibits R.9 to R.12, were the “real” transfer forms, the
Division Bench set about demolishing those documents as being invalid and not
legally effective.
21.35 In our
opinion, given the documentary evidence of completed transfers, it is more than
probable that the “real” share transfer forms were never produced by Mani and
his group and that exhibits R. 9 to R. 12 were prepared in 1984 as claimed by
Madhusoodhanan. Mani has himself stated :
“At that time
it was proposed to start Calicut edition of the paper. But the high technology
machinery required for what further increased the debts of Kerala Kaumudi. This
caused considerable financial strain. I put in some suggestions for rectifying
these matters. But mother and brothers were not able to appreciate my views.
Therefore, I even told them that I was prepared to relinquish all my shares,
1/3rd each to my brothers. In that connection some papers were also prepared.”
The Calicut edition of Kerala Kaumudi was
started in September 1984. It is possible “these papers” were Exhibits R-9 -
R-12. This inference is in keeping with the repeated admissions of the
respondents on oath and their conduct on the basis that the transfer had
legally taken place. An additional fact is Exhibit R-18 which is a voucher for
a cash payment of Rs. 2,370 issued to Kerala Kaumudi towards the “cost of share
transfer stamps purchased”. It is dated 16th May, 1985 and signed by
Madhusoodhanan, Srinivasan, Madhusoodhanan’s wife and Ravi’s wife as well as
the cashier, the clerk, the accountant, the manager and the Secretary of Kerala
Kaumudi. The corresponding entries in the expense account of Kerala Kaumudi
which form part of this exhibit, show that the accounts of Mani and Madhusoodhanan
have been debited with the amounts of Rs. 420 and Rs. 1,950 respectively. It is
improbable that stamps having been purchased for the share transfers which was
recorded as effected four days later, they would not have been utilised. In
this state of the evidence it cannot reasonably be held that Mani and his group
have been able to establish that the transfer of the 390 shares by them to
Madhusoodhanan was effected in violation of section 108 or any other provision
of the Companies Act, 1956.
21.36 The
Annual Returns signed by Srinivasan and Ravi [Exs. P-28, P-130 and P-131 (a)],
statutory declarations (Exhibits P.86 to P.88) for the years ending on 1st
March, 1986, 1st March, 1987 and 1st March, 1988 also signed by Srinivasan and
Ravi, the affidavit of Madhavi dated 25th November 1986, the affidavit of Mani
dated 28th November, 1986 and other documents in all of which repeated
admissions were made by Madhusoodhanan’s antagonists that Mani and his children
had transferred their shareholding to Madhusoodhanan were brushed aside by the
Division Bench on the very weak explanation given by Mani as to why these
repeated admissions had been made even after the filing of the litigation
between the parties. The Division Bench erred in ignoring the affidavits of Madhavi
and Mani by saying that it “would not be sufficient or strong enough to operate
as a transfer of shares”. Nobody can reasonably contend that a transfer of
shares can be effected by mere assertion in an affidavit. What the Division
Bench ought to have held was that all this evidence indicated that there were
in existence duly executed share transfer forms prepared in conformity with the
provisions of section 108 of the Companies Act, 1956 which everyone had
accepted and acted upon and which were deliberately not produced.
21.37 On the
question of the invalidity of the transfers of Valsa and Sukumaran Mani to
Madhusoodhanan, Valsa Mani was admittedly a major on 21st May, 1985. And yet
the Division Bench held that Mani continued to stand in a fiduciary relationship
with her and therefore “the transfer which purports to have been effected by
Valsa Mani on her own will clearly indicate the stamp of illegality and
invalidity”. The reasoning is incomprehensible and unacceptable. Valsa was an
adult and legally competent to enter into a contract of sale of her sharers to
Madhusoodhanan which she duly did.
21.38 As far
as the shares of Sukumaran Mani are concerned, in our opinion, the learned
Single Judge was right when he said that Mani’s group could not question the
transfer of the shares of Sukumaran Mani on account of his minority, as
Sukumaran Mani had not effected any transfer directly in favour of
Madhusoodhanan. As Sukumaran Mani was at the relevant point of time a minor,
his shares were transferred by his mother as guardian to his father, Mani, who
had in turn transferred the shares to Madhusoodhanan. The Appellate Court was
wrong when it held that the transfer of the shares of Sukumaran Mani was “an
absolute nullity in the eye of law” on the ground that the initial transfer by
Sukumaran Mani was invalid because it was sought to be effected by Sukumaran
Mani’s mother who was not his legal guardian and who “figured as a guardian
only as a ruse for getting over the statutory provision”. The transfer of Sukumaran
Mani’s share through his mother to Mani has not been challenged. Therefore the
issue of Sukumaran Mani’s minority and his mother’s competence to act as his
legal guardian, were not issues which could be relevantly raised before, or
decided by the appellate court.
21.39 Coming
now to the question of consideration, the Division Bench on an interpretation
of section 108 held that “the fixation of the price was a condition precedent,
even in relation to an important and mandatory procedural formality like the
payment of stamp duty to make the transfer lawful and proper”.
21.40 We
have already held that the relevant share transfer forms must be taken to have
been duly executed. Although Mani and Madhusoodhanan had agreed to determine
the actual consideration later, clearly some consideration was agreed to be
shown on the share transfer forms. As noted, Exhibit R.18 produced by Mani’s
group is a voucher for the cost of share transfer stamps. The stamps must have
been purchased on the basis of the consideration which was shown on the share
transfer forms at the prescribed percentage under the Stamp Act.
21.41 But it
is also clear from the evidence on record that this was not the “actual” price
which was to be determined consensually by Mani and Madhusoodhanan. On 19th
January, 1985, Mani wrote a letter to Madhusoodhanan which has been exhibited
as P-134. The letter states :
“This is in
continuation of discussion I had with you, regarding the sale of Flow line
machine, Sheet-fed offset and the Cutting machine to me. My offer is Rs 3 lakhs
for all the three machines. This amount may be deducted from the sale value of
shares you owe to me. Kindly let me know your decision so that I can arrange to
lift the machines.”
Then we have the paragraphs from the affidavits
of Madhavi and Mani quoted earlier which talk of the “balance consideration”.
21.42 Finally
is the lawyer’s notice dated 20-3-1987 (Ex.P-83) sent on behalf of the Mani to
Madhusoodhanan threatening legal action unless Madhusoodhanan paid “the balance
sale consideration of Rs. 50 lakhs”. “Since Mani had positively asserted that
he must get a price between 50 and 75 lakhs, and that price negotiated was in
between the said figures”.
21.43 Madhusoodhanan’s
claim in this regard is inconsistent. At one stage he claimed that the
consideration for the transfer was recorded in the transfer form. At another
stage he said :
“As far as
transferring the shares is concerned, it is already transferred at the face
value by fixing the proper stamps and the process have been completed. The
excess amount I will pay on the shares will depend upon finally when he
transfers the 3 shares to me; but I will not enter into a written agreement, I
will continue to pay as and when the 5th respondent required money.
The only agreement
was that whatever be and price paid for the shares, that should not be known to
anybody else including our wives.”
21.44 Madhusoodhanan
has claimed that he in fact paid Rs. 10 lakhs to Mani. In his letter dated 28-7-1986
written to Srinivasan. Madhusoodhanan had asserted (Exhibit P 11) that he had
paid Rs. 5 lakhs to M.S. Mani as part payment for his shares which had been
purchased by Madhusoodhanan and that this brought the total payment made on
this account to Rs. 10 lakhs. Mani contended that there was a total failure of
consideration, a contention which was accepted by the Appellate Court. The
truth appears to lie somewhere in between.
21.45 There
is no dispute that the machines were in fact lifted by Mani, pursuant to Ex.
P-134. Exhibit R-14 evidences payment by Kerala Kaumudi of Rs. 3 lakhs to
Madhusoodhanan for, ostensibly purchasing property at Cochin for Kerala
Kaumudi. The Division Bench holds that “It is this money that is utilised for
payment to Mani as part consideration of the shares to be transferred by Mani
and his group”. However the Division Bench discounts this payment because “The
very transaction itself may be open to serious challenge. The money of the
company cannot be appropriated for a personal purpose of a person having a
fiduciary capacity vis-a-vis the company”. As a statement of law this is a
doubtful proposition. Be that as it may, it is apparent that Mani received some
consideration for the transfers although the consideration may have moved from
Kerala Kaumudi to Mani. To sum up - the transfers by Mani and his children were
effected validly to Madhusoodhanan. Their prayer for rectification of the share
register is therefore rejected and the decision of Division Bench in the appeal
( MFA 347/90) arising from CP 26/87 is accordingly set aside.
(B) The removal of Madhusoodhanan
as Managing Director
22.1 That
Madhusoodhanan had been continuing for some time as Managing Director of Kerala
Kaumudi is evident from the minutes of the Board meeting held on 5th July, 1983
[Ex. P-62(g)]. The minutes of the Board meeting dated 25th January, 1985 [Ex.
P-62(H] records the presence of Madhavi, Mani, Madhusoodhanan, Srinivasan and
Ravi and the unanimous resolution to appoint Madhusoodhanan as Managing
Director and Editor of the company for life. It also records that
Madhusoodhanan had been working as the Managing Director of Kerala Kaumudi for
11 years as on that date, in other words since 1973. The decision to so appoint
Madhusoodhanan was secured by proposing an amendment to the Articles of
Association of the Company in the following manner:
“Mr. M.S.
Madhusoodhanan, presently the Managing Director and Editor be and is hereby
appointed the Managing Director and Editor of the Company for life or until he
voluntarily retires on the existing remuneration, which remuneration may be
revised by the Board from time to time with the consent of Mr. M.S.
Madhusoodhanan. He shall also in exercise of his duties as Managing Director
exercise the powers given to the directors under Article 79.”
22.2 It
is not a dispute that an Extraordinary General Meeting was held which approved
this resolution and that the Articles of the company were duly amended by the
introduction of Article 74.
22.3 The
last meeting of Kerala Kaumudi attended by Madhusoodhanan was of 5th February,
1986. It does not appear from the minutes of the meeting [Exhibit P-2 (J)] that
anything of import relevant to the issues to be decided in these appeals took
place on that day. Then comes the first meeting, which, according to
Madhusoodhanan ,was illegal . This was held on 23rd July, 1986. The minutes of
the meeting [Exhibit P-62 (K)] show that Madhavi, Madhusoodhanan, Srinivasan
and Ravi were present. Several resolutions were taken by the Board on that day
which were opposed by Madhusoodhanan. Of the several, the relevant are quoted :
“Resolved that
Smt.C.N. Madhavi, Chairman shall assume the executive powers of the Managing
Director of the company with immediate effect for efficient running of the organisation.
Resolved that
an extraordinary general body meeting be convened at a date suitable for the
Chairman to discuss and take decisions on matters arising out of the above
decisions and that the Chairman be and is hereby authorised to issue notices to
all concerned.”
The fact whether any notices were at all
issued to Madhusoodhanan or to the other shareholders in his group including
his children or to K.I.P.L. is seriously disputed by them. According to Mani
and his group however, notices were duly issued of the meeting which was due to
be held on 1st August, 1986.
22.4 The
minutes of the meeting held on 1st August, 1986 [P-62 (L)] records that
Madhavi, Srinivasan and Ravi attended the meeting. Out of the various
resolutions which were taken regarding the administration of Kerala Kaumudi,
what is important is the resolution taken by the Board members unanimously to
the following effect :
“Resolved that
the issued share capital of the company be and is hereby increased to Rs. 20
lakhs by issuing additional shares worth Rs. 4.25 lakhs (for 25 shares of Rs.
1000 each) at par. The Chairman was authorised to issue notices to the existing
shareholders to apply for shares within seven days.”
Madhusoodhanan and K.I.P.L. say that since
they did not get any notice of the meeting and were not otherwise informed of
what had taken place, they did not apply for allotment of any part of the
additional shares which had been decided to be issued. As a result in the next
meeting which was alleged to have been held on 8th August, 1986,[Ex. P-62 (M)]
between 9 a.m. and 10 a.m. at Madhavi’s residence and attended only by Madhavi,
Srinivasan and Ravi, 425 shares were allotted to Srinivasan and Ravi on
applications dated 4th August, 1986 received from them — 212 shares being allotted
to Srinivasan and 213 shares to Ravi.
22.5 The
next meeting which is the subject-matter of challenge by Madhusoodhanan is the
meeting held on 26th August, 1986. It was attended by Madhusoodhanan, albeit,
according to the minutes [ Ex P - 62 (N) ], under protest. It was at this
meeting that Mani was admitted as a shareholder of Kerala Kaumudi by Ravi’s
sale of one share to him despite Madhusoodhanan’s objection.
22.6 However,
the unkindest cut was yet to come. Madhavi, as Chairman, proposed “that an
extraordinary general meeting of the company be convened to remove Sri M.S.
Madhusoodhanan from the directorship of the company for his actions against the
interest of the company and his misconduct”. Madhusoodhanan objected and said
that this could not be done without amending the Articles of Association. The
minutes go on to record that Madhavi pointed out that Article 74 of the
Articles of Association had already been deleted at an extraordinary general
meeting of the company held for that purpose and also that the legal opinion
was that the Board of the prescribed number of members could convene a general
body meeting for removal of a Director in exercise of the powers under section
284 of Companies Act, even if a person be appointed a Director for life. A
resolution was then taken to convene an extraordinary general meeting on 25th
September, 1986 to pass the following resolution :
“Resolved that
Sri M.S. Madhusoodhanan be and is hereby removed from being a Director of the
company with immediate effect in accordance with section 284 of Companies Act,
1956 and all other provisions in this behalf of the Companies Act, 1956 and
Articles of Association of the company.”
The Extra Ordinary General Meeting of Kerala
Kaumudi was held on 25th September, 1986 at its registered office. The
resolution to forthwith remove Madhusoodhanan as Director under section 284 of
the Companies Act, 1956 was passed taking into consideration the additional
shareholding of Ravi and Srinivasan. Madhusoodhanan and his group did not vote.
22.7 On
27th September, 1986 the Board of Directors of the Kerala Kaumudi held a
meeting attended by Madhavi, Srinivasan and Ravi, at which Srinivasan was
appointed as Managing Director of the company, Mani was appointed as additional
Director, Madhusoodhanan was removed from the post of editor and Mani was
appointed in his place and stead. Madhusoodhanan’s final ouster from the
control of Kerala Kaumudi was thus completed.
22.8 According
to Madhusoodhanan, resolutions quoted above removing him as Managing Director
of Kerala Kaumudi were illegal because in terms of Article 74 of the Articles
of Association of Kerala Kaumudi, Madhusoodhanan was appointed the Managing
Director and editor of the company for life. It is contended that in accordance
with the Memorandum and Articles, 75 per cent of the votes was required to
amend the Articles. Mani’s group (including Madhavi) held only 50 per cent of
the shares of Kerala Kaumudi. The remaining 50 per cent shares were held by
Madhusoodhanan and his family and KIPL. The second submission of Madhusoodhanan
and KIPL is that they were not given any notice of the Board meeting which was
purportedly held on 1st August, 1986 at which the decision was taken to offer
further shares for allotment and that they were not given any opportunity to
apply for the additional shares. It is also the submission of Madhusoodhanan
and KIPL that in fact no meeting was held on 8th August, 1986, at which the
further shares were allotted to Ravi and Srinivasan.
22.9 Madhusoodhanan
and KIPL’s application Nos. CP 14/86 and CP 31/88 were therefore filed for
rectification of the share register of Kerala Kaumudi as noted earlier and suit
CS No. 3/89 was filed by Madhu-soodhanan for a declaration that he is the
Managing Director of Kerala Kaumudi, KIPL’s CS No. 5/89 was filed for
cancellation of the impugned annual general meetings and extraordinary general
meetings of Kerala Kaumudi.
A. Alteration of Article 74 of the
Articles of Association of Kerala Kaumudi
22.10 Sub-section
(1) of section 31 of the Companies Act, 1956, provides that the company may
alter its articles only by special resolution subject to the provisions of the
Act and the conditions contained in its memorandum. Our attention has not been
drawn to any condition in the memorandum of Kerala Kaumudi which prescribes
something different from the provisions of the Act for effecting an alteration
of the articles. Article 49 of the Articles of Association of Kerala Kaumudi
provides :
“Subject to
the provisions of sub-section (2) of section 81 of the Indian Companies Act,
1913, relating to special resolutions, fourteen days’ notice at the least
(exclusive of the day on which the notice is served, or deemed to be served but
inclusive of the day for which notice is given) specifying the place, the day
and the hour of meeting and, in case of special business, the general nature of
that business, shall be given in manner hereinafter mentioned, or in such other
manner, if any, as may be prescribed by the Company in General Meeting to such
persons as are, under the Indian Companies Act, 1913 or the Regulations of the
Company, entitled to receive such notices from the Company, but the accidental
omission to give notice to or the non-receipt of notice by any member shall not
invalidate the proceedings at any General Meeting.”
22.11 The
corresponding section in the 1956 Act to section 81 of the Indian Companies
Act, 1913, is section 189. The relevant extract of section 81 of the 1913 Act
reads :
“81.
Extraordinary and special resolutions. - (1) A resolution shall be an
extraordinary resolution when it has been passed by a majority of not less than
three-fourths of such members entitled to vote as are present in person or by
proxy (where proxies are allowed) at a general meeting of which notice
specifying the intention to propose the resolution as an extraordinary
resolution has been duly given.
(2) A
resolution shall be a special resolution when it has been passed by such a
majority as is required for the passing of an extraordinary resolution and at a
general meeting of which not less than twenty-one days’ notice specifying the
intention to propose the resolution as a special resolution has been duly given
:
Provided that,
if all the members entitled to attend and vote at any such meeting so agree, a
resolution may be proposed and passed as a special resolution at a meeting of
which less than twenty-one days’ notice has been given.
** ** **
(7) For the
purpose of this section notice of a meeting shall be deemed to be duly given
and the meeting to be duly held when the notice is given and the meeting held
in manner provided by the articles, or under this Act.”
22.12 Therefore three conditions had
to be fulfilled before any alteration of the Articles could take place.
(i) Notice specifying the intention to
propose the resolution as an extraordinary resolution must be given;
(ii) The resolution must be passed by 75 per
cent of the members present ; and
(iii) Not less than 21 days notice of the
meeting must be duly given.
The requirements are cumulative
and mandatory.
22.13 Coming
now to the facts of this case, it is apparent that none of the three
preconditions for effecting an alteration in the Articles of Kerala Kaumudi by
deleting Article 74 were fulfilled. It may be recalled that at the Board
meeting held on 23rd July, 1986 [Ex.P.62(K)] in connection with
Madhusoodhanan’s functioning as a Managing Director, only a limited resolution
was taken, namely, that Madhavi “shall assume the executive powers of the
Managing Director with immediate effect for effective running of the
Organisation”. The resolution that an extraordinary general body meeting be
convened at a date suitable for the Chairman “to discuss and take decisions on
matters arising out of the above decisions” was therefore confined to this
limited resolution. Exhibit R -5 is the notice dated 25th July, 1986 purporting
to call an extraordinary general meeting of the shareholders of Kerala Kaumudi
on 16th August, 1986 at 11 AM to inter alia consider and if thought fit to pass
as a special resolution the following :
“Resolved that
the consent of the Company be and is hereby accorded in order to satisfy the
requirements of section 192 (c) and other applicable provisions, if any, of the
Companies Act, 1956, to ratify the following resolutions adopted by the Board
of Directors of the Company at its meeting dated 23-7-1986.
1. Resolved
that Smt. C.N. Madhavi, Chairman, shall assume the executive powers of the
Managing Director of the Company with immediate effect for efficient running of
the Organisation.”
22.14 There
is no mention whatsoever in the notice of any intention or proposal to amend
the articles of the company. The Explanatory statement annexed with the notice states
(in so far as it is relevant) “Special resolutions have been brought before the
General Body, since it is felt that the effect of the said resolutions taken by
the Board and being implemented may have the effect of curbing the powers of
the Managing Director vested with him by the General body”.
22.15 What
has been deliberately and completely glossed over is that Madhusoodhanan’s
power was not sought to be merely curbed, but completely denuded. At the
Extraordinary General meeting held on 16th August, 1986 [Ex. P-57 (a)], when
the special resolution was taken up for consideration, Madhavi said that she
would like to submit a report “in continuation of the Explanatory statement
mentioned in the notice” and then proposed that “another special resolution
also be passed deleting Article 74 of the Articles of Association of the
company”.
22.16 This
acknowledges that there was no earlier extraordinary general meeting deleting
Art.74 as Madhavi had claimed in the meeting dated 23-7-1986. Furthermore it shows
that the special resolution which was proposed in the notice was not the
resolution which was ultimately passed. In the garb of ratifying the resolution
taken by the Board of Directors on 23-7-1986 , what was in fact “ratified” was
not only the proposal to remove Madhusoodhan as Director but also the immediate
deletion of Article 74 of the Articles of Association of the Company. The
expression of intention in the notice under section 81(1) [corresponding to
section 189 (2)(a) of the 1956 Act] should be sufficiently specific so as to
effectively inform each member of the company of the actual resolution sought
to be passed in the general meeting. The notice must be frank, open, clear and
satisfactory. If it is not, the notice is bad and the special resolution
vitiated and cannot be acted upon. “If any attempt is made by the directors to
get the sanction of the shareholders, it must be made on a fair and reasonably
full statement of the facts upon which the directors are asking the
shareholders to vote...and special resolutions obtained by means of a notice
which did not substantially put the shareholders in the position to know what
they were voting about cannot be supported” - see Baillie v. Oriental Telephone
& Electric Co Ltd. [1914-15] All E.R.Rep. 1420.
22.17 Since
the further resolution to delete Art. 74 formed no part of the notice of the
Extraordinary General Meeting, which in all fairness it should have, we have no
doubt in our minds that the special resolution on the basis of such defective
notice is insupportable in law and cannot be given effect to. This finding is
sufficient to hold that the deletion of article 74 of the Articles of the
company was invalid and that therefore Madhusoodhanan continued to be the
managing director of Kerala Kaumudi as claimed by him in CS 3/89.
22.18 However
we may also indicate briefly here our additional reasons for reaching this
conclusion. The notice (Ex. R-35) was required to have been served on all the
members of the company either by post or personally in terms of Article 108 or
section 53 of the Act. The second imperative for a special resolution to be
validly passed is that notice of the general meeting must be ‘duly’ given. The
mode of service of notice on members has been provided for under Article 108 which
is similar to section 53 of the 1956 Act in all material respects. The two
modes envisaged are personal service and service by post. There is no other
mode envisaged. We are not satisfied that the service of the notice was
effected either on Madhusoodhanan or any other share holder in his group,
including KIPL by either of the modes specified.
22.19 The
submission of the respondents that under Article 49 of the Articles of
Association of the Company even if no notice were given of the Extraordinary
General Meeting, this would not vitiate the proceedings is misconceived. This
was no ordinary general meeting, but a meeting where a special resolution was
to be passed. This had to be done under section 81 of the 1913 Act, to which
Article 49 is expressly subject, and the requirement for giving due notice
under section 81 is mandatory. Furthermore, Article 49 speaks of an “accidental
omission” to give notice not officiating the proceedings. In other words the
omission must be bona fide, and not an omission which was wilful as it was in
this case.
22.20 Furthermore,
the third condition to be fulfilled before the Articles can be amended under
section 81(1) of the 1913 Act, (Section 189 (2)(c) of the 1956 Act) is that at
least 75 per cent of the members entitled to vote and voting must support the
resolution. This mandatory need to have the special resolution passed by a
statutory majority of 75 per cent was also sought to be circumvented by the
respondents by the purported issue of additional shares to Ravi and Srinivasan.
Both these aspects are dealt with in connection with the issue of additional
shares.
(C) Issue of additional shares
23.1 In
order to push through the so-called special resolution deleting Article 74 with
the requisite majority of 75 per cent, it was necessary from the respondents’
point of view to ensure that Madhusoodhanan’s shareholding which was more than
50 per cent of the paid-up share capital of the company was reduced to 25 per
cent. This was sought to be achieved by the respondents in two stages. First,
by taking a decision to increase the paid up share capital of the Company by
issuing an additional 425 shares. Second, by not giving Madhusoodhanan or any
of his group to any chance participate in the fresh allotment of shares and
ensuring that the shares were allotted to Ravi and Srinivasan. The evidence on
record amply bears this out.
23.2 As
we have seen, Madhavi assumed charge as Managing Director of the company on
23-7-1986 with the object of ousting Madhusoodhanan from his control over the
affairs of Kerala Kaumudi. This needed to be ratified by the general body of
shareholders. The minimum period of notice for a general body meeting under
Article 49 read with section 81 of the Act is “not less than 21 days”, that is
there should be a clear interval of 21 days and in computing the period the
date of the meeting and the date of service of the notice is to be excluded.
(See N.V.R. Nagappa Chettiar v. Madras Race Club AIR 1951 Mad 831] In re Hector
Whaling Lt. [1936] 1 Ch. 208]. So the notice dated 25-7-1986 (Ex. R-35) was
issued for holding the extraordinary general meeting on 16th August, 1986 with
the requisite statutory majority of 75 per cent.
23.3 A
decision was taken by the respondents at the meeting of the Board on 1st
August, 1986 [Ex. P-62(l)], to increase the share capital of the company to Rs.
20 lakhs by issuing additional shares worth Rs. 4.25 lakhs. At the same meeting
, the Chairman (Madhavi) was authorised by the two other directors present
namely Ravi and Srinivasan “to issue notices to the existing shareholders to
apply for shares within seven days”. What is noteworthy is that the last day
for making an application for allotment of any of these additional shares was
fixed at seven days from the date of the Board meeting so that Madhusoodhanan’s
shareholding could be reduced to 25 per cent before the Extraordinary General
Meeting to be held on 16th August, 1986.
23.4 According
to Madhusoodhanan and his group they neither knew of the meeting dated 1st
August, 1986 nor did they receive any notice with regard to the allotment of
additional shares nor of the meetings said to have been held on 8-8-1986 and
16-8-1986, in which the allotment of additional shares to Ravi and Srinivasan
were made and later confirmed.
23.5 The Learned
Single Judge held that no notice either of the Board meeting held on 1st
August, 1986 or for the issue of additional shares had been served on
Madhusoodhanan. He also referred to Articles 40, 41 and 18 of the Company to
hold that the notice period of seven days to apply for allotment of additional
shares was far too short. He upheld the contention of Madhusoodhanan that no
meetings were in fact held on 8-8-1986 or 16-8-1986 and that there was as such
no valid allotment of the additional shares to Ravi and Srinivasan.
Madhusoodhanan’s claim for rectification of the share register of Kerala
Kaumudi was accepted and a fresh allotment of the additional shares was
directed to be held. The Division Bench disagreed on all counts with the
learned Single Judge, in our view, erroneously. Let us consider in the first
place whether the notice of the meeting dated 1st August, 1986 was served on
Madhusoodhanan.
23.6 The evidence produced by the
respondents in this regard is as follows :
(i) an entry dated 25th July, 1986 in the local delivery book of
Kerala Kaumudi [Ex. R. 8(a)] which shows against the name and address of
Madhusoodhanan that “one letter regarding Board and General Body Meetings” was
acknowledged as having been received on behalf of Madhusoodhanan by one
Mohanraj, the then personal assistant of Madhusoodhanan (PW.2) who has written
that he “handed same over to Mrs. Madhusoodhanan through Mr. Raghunathan,
peon”. There is no remark under the column “By whom delivered”.
(ii) an entry in the outward register of Kerala Kaumudi [Ex. P-93
(p)] which shows that “one letter Board meeting on 1-8-1986. Gl. Body meeting
on 16-8-1986” was dispatched on 25-7-1986 to Madhusoodhanan with copies to
Srinivasan, Ravi and Mani.
(iii) an affidavit of Mohan Raj affirmed on 25th August, 1986 [in
O.S. 1329 of 1986 (Ex. R-7)] in which he has affirmed “sealed envelopes from
the Chairman, Kerala Kaumudi (P.) Ltd. was served on me on 25-7-1986 and
1-8-1986 and I have signed the local delivery book as a token of its
acknowledgement and I have duly forwarded the letters to Sri M.S.
Madhusoodhanan”.
Not one of these pieces of evidence at all
establish that the notice dated 25th July, 1986 of the Board meeting to be held
on 1st August 1986 was served on Madhusoodhanan. As far as item (i) is
concerned, it certainly does not amount to personal service on Madhusoodhanan
as required under the Articles or section 53 of the Companies Act, 1956. Apart
from this fatal legal flaw, the exhibit merely records that an unknown or at
least an unnamed person handed over a sealed envelope to Mohan Raj who then
handed it over to a peon, Raghunathan, who was to hand it over to Mrs.
Madhusoodhanan. No one has come forward to say that the sealed envelope
contained the notice dated 25th July, 1986. Assuming it did, there is nothing
to show that the envelope ultimately reached Madhusoodhanan. The affidavit
affirmed by Mohan Raj on 25th August 1986 (Ex. R-7) contradicts the entry in
the local delivery book. Apart from anything else, Mohan Raj has himself admitted
that he had not forwarded the notice to Madhusoodhanan in several documents
namely in Exhibits P.36, P.46, P.53 and in an affidavit exhibited as P.49,
besides also giving oral evidence to this effect. We find no reason to
disbelieve Mohan Raj’s oral testimony as to the circumstances under which he
had affirmed the affidavit relied on by the respondents.
23.7 As
far as the outward register is concerned, it has not been proved as to who
dispatched the notice nor does the register show how the dispatch was effected.
It is unclear on what material the Division Bench proceeded on the basis that
it was sent by post under certificate of posting. In any event, if this were
indeed so, where is the certificate? Its absence is significant.
23.8 Also
significant is the absence of the actual notice alleged to be dated 25th July,
1986 of the Board meeting held on 1st August, 1986. Why was it not produced by
the respondents? What did the notice say? Did it indicate the intention to
issue additional shares for the purposes of increasing the share capital
company as it should have? We do not know. But we can only observe that the
absence of the notice raises a presumption against the respondents. And in so
far as the outward dispatch register is concerned, the mode of dispatch has not
been mentioned nor is there anything to show that the notice was in fact
dispatched. In the circumstances, we have no doubt that Madhusoodhanan was not
given any notice of the Board meeting said to have been held on 1st August,
1986.
23.9 The
respondents have relied on Madhusoodhanan’s letter dated 8th August, 1986 to
Srinivasan (Ex. P.35) in which he complained that he had not been receiving his
personal mail or letters addressed to him as Managing Director since 4th
August, 1986 and that the usual method of handing over such mail to his
personal assistant was not been followed, to contend that the notice dated 25th
July, 1986 had been duly served on Madhusoodhanan and received by him.
23.10 The letter
is a complaint regarding the complete blocking of all mail both personal and
official by the respondents since 4th August, 1986. It cannot be construed as
an admission that all mail prior to that date had been duly received. In fact,
on the same date that exhibit P.35 had been written by Madhusoodhanan to
Srinivasan, he also wrote to Madhavi (Ex.P.24) that on 3rd August, 1986 he came
to know “while holding discussions with the Deputy Manager of Canara Bank,
Trivandrum, that you purported to hold a Board meeting on 1-8-1986. I have had
no notice of this meeting and consequently this was illegal. Any decision taken
there is invalid and not binding on the company or me. You purported to pass a
resolution regarding the operating of the bank accounts. My power to operate
bank accounts of the company on my own as managing director is not depended
(sic) on any resolution of the board. The board cannot take away those powers
or make it necessary that someone else who sign (sic) with me”. The letter was
admittedly received but not replied to. Apart from the categorical assertion of
lack of notice of the meeting held on 1-8-1986, it is clear from the contents
of the letter that Madhusoodhanan had no knowledge of what actually transpired
there.
23.11 Since
Madhusoodhanan did not know of the meeting held on 1st August, 1986, he was not
aware, as the respondents were, either that additional shares were being issued
or that the application for additional shares had to be made within seven days
of the meeting.
23.12 Exhibit
R. 26 is a Notice Dated 1-8-1986 issued under the signature of Madhavi. It
refers to financial difficulties faced by the company which made it necessary
for the Board by its Resolution dated 1-8-1986 to issue 425 equity shares of
Rs. 1,000 each for subscription to the existing shareholders. The notice which
appears to be addressed to Madhu-soodhanan, his two children, Srinivasan and
his daughter, Ravi and his daughter and finally to KIPL finally states: “You
are eligible to apply for additional shares within seven days”.
23.13 Article
40 of the Articles of the company requires all new shares to be offered to all
existing shareholders “in proportion, as nearly as the circumstances admit to
the amount of the existing shares to which they are entitled”. The offer is
required to be made by notice “specifying the number of shares offered, and
limiting the time within which the offer, if not accepted, will be deemed to be
declined. . . .”
The notice, exhibit R-26, is not
in this form at all.
23.14 However,
the respondents have sought to rely upon the following evidence in support of
their contention that Madhusoodhanan was given an opportunity to apply for the
additional shares by service of a notice dated 1-8-1986. :
(a) An entry in the local delivery book of Kerala Kaumudi [Ex.
R-8 (b)] which ostensibly records that on 1st August, 1986, Madhusoodhanan,
Managing Director, Kerala Kaumudi, Trivandrum was “Authorised to issue notices
to the existing shareholders & one letter for Board meeting”. There is an unidentified
signatory who has acknowledged receipt of this document on 1-8-1986. According
to Srinivasan’s oral testimony, the signature is that of Mohan Raj;
(b) Exhibit P. 93(a) is an entry in the outward register of
Kerala Kaumudi indicating the dispatch of the notice;
(c) A Certificate of Posting dated 1-8-1986 (Ex. R.25) which
purports to relate to service of the notice on Madhusoodhanan, his children and
KIPL.
23.15 Both
the learned Single Judge and the Division Bench accepted that the signature of
the person acknowledging receipt of the notice was Mohan Raj. Where they have
differed is whether this amounted to service upon Madhusoodhanan, his children
or on KIPL either in fact or in law. The learned Single Judge held it did not.
The Division Bench disagreed. Considering the facts, we have no hesitation in
holding the learned Single Judge was right.
23.16 We
have already held that service on Mohan Raj did not amount to personal service
within the meaning of Article 108 of the Articles of Association of the Company
or section 53 of the Companies Act, 1956. Even on the factual score, for the
reasons set out by us earlier in connection with service of the notice dated
25-7-1986, we are not satisfied that Madhusoodhanan was in fact served with a
notice through Mohan Raj. Besides, the relevant entry does not refer to the
notice.
23.17 As far
as the certificate of posting is concerned, it is not explained why it does not
record the dispatch of notices to any other shareholder. When the relationship
between the parties was already so embittered, proof of service of notice by
certificate of posting must be viewed with suspicion. Judicial notice has been
taken that certificates of posting are notoriously “easily” available. What was
seen as a possible but rare occurrence in 1981 (Mst. L.M.S. Ummu Saleema v.
B.B. Gujaral [1981] 3 SCC 317) is now seen as common. Thus in Shiv Kumar v.
State of Haryana [1994] 4 SCC 445, this Court said :
“We have not
felt safe to decide the controversy at hand on the basis of the certificates
produced before us, as it is not difficult to get such postal seals at any
point of time.”
Despite this
ground reality and on a misinterpretation of the provisions of section 53,the
Appellate Court came to the indefensible conclusion that “evidence regarding
dispatch of a communication under certificate of posting attracts the
irrebuttable statutory presumption under section 53 (2)(b) that the notice had
been duly served”, that “it is not open now to project a plea of absence of
service of notice and a substantiation thereof by evidence” and that even if it
were proved that the notice did not reach the addressee, the evidence could not
be “ formally accepted and formally acted upon by the court” such contrary
evidence “being necked (sic) out at the threshold”.
23.18 This
Court in Mst. L.M.S. Ummu Saleema’s case (supra) said that a certificate of
posting might lead to a presumption if the letter was addressed and was posted,
that it, and in due course, reached the addressee. “But, that is only a permissible
and not an inevitable presumption. Neither section 16 nor section 114 of the
Evidence Act, compels the Court to draw a presumption. The presumption may or
may not be drawn. On the facts and circumstances of case, the Court may refuse
to draw the presumption. On the other hand the presumption may be drawn
initially but on a consideration of the evidence the Court may hold a
presumption rebutted and may arrive at the conclusion that no letter was
received by the addressee or that no letter was ever dispatched as claimed”.
23.19 This
general rule regarding certificates of posting has not been changed under
section 53 of the Companies Act, although it does provide that if a document is
sent by post in the manner specified, “service thereof shall be deemed to be
effected”. The word “deemed” literally means “thought of” or, in legal parlance
“presumed”.
23.20 There
is a distinction between “presumption” and “proof”. A presumption has been
defined as “an inference, affirmative or disaffirmative of the truth or
falsehood of a doubtful fact or proposition drawn by a process of probable
reasoning from something proved or taken for granted” Izhar Ahmad Khan v. Union
of India AIR 1962 SC 1052. They are rules of evidence which attempt to assist
the judicial mind in the matter of weighing the probative or persuasive force
of certain facts proved in relation to other facts presumed or inferred (ibid).
Sometimes a discretion is left with the Court either to raise a presumption or
not as in section 114 of the Evidence Act. On other occasions, no such
discretion is given to the Court so that when a certain set of facts are
proved, the Court is bound to raise the prescribed presumption. But that is
all. The presumption may be rebutted.
23.21 While
construing section 28B of the U.P. Sales Tax Act which inter alia provides that
if a transit pass is not produced at the check post on entry and at the point
of exit, “it shall be presumed that the goods carried thereby have been sold
within the State”, the contention that the phrase “it shall be presumed that”
meant that “it shall be conclusively held” was negatived. After referring to
section 4 of the Evidence Act it was held by this Court in Sodhi Transport Co.
v. State of U.P. AIR 1986 SC 1099 :
“. . . The
words ‘shall presume’ require the Court to draw a presumption accordingly,
unless the fact is disproved. They contain a rule of rebuttable presumption.
These words i.e., ‘shall presume’ are being used in Indian judicial lore for
over a century to convey that they lay down a rebuttable presumption in respect
of matters with reference to which they are used and we should expect that the
U.P. Legislature also has used them in the same sense in which Indian Courts
have understood them over a long period and not as laying down a rule of
conclusive proof. In fact these presumptions are not peculiar to the Evidence
Act. They are generally used wherever facts are to be ascertained by the
judicial process.” (p. 1105)
It was accordingly held that the words “shall
presume” contained in section 28B of the U.P Sales Tax Act only require the
authorities concerned to raise a rebuttable presumption that the goods must
have been sold in the State if the transit pass is not handed over at the check
post at point of exit and that it was open to the transporter to still prove
that the goods had been disposed of in a different way. (See also Syed Akbar v.
State of Karnataka AIR 1979 SC 1848; State of Madras v. A. Vaidyanatha Iyer AIR
1958 SC 61).
23.22 Raising
of a presumption, therefore, does not by itself amount to proof. The result of
a mandatory requirement for raising a presumption cast on Court, as there is
under section 53(2) of the Companies Act, is that the burden of proof is placed
on the person against whom the presumption operates for disproving it. It is
only if such person is unable to discharge the burden, that the court will act
on the presumed fact. (See Dahyabhai Chhaganbhai Thakkar v. State of Gujarat
AIR 1964 SC 1563). A presumption however is of course not always rebuttable. But
the mere use of the word “shall” before the word “presume” or other like word
does not mean that the presumption is irrebuttable or conclusive. An
irrebuttable presumption is couched in different language, normally indicating
that proof of one set of facts shall be “conclusive proof” of a second set. An
example of this is Rule 3 of the Rules framed in 1956 under section 18 of the
Citizenship Act, 1955 which was the subject-matter of challenge in Izhar Ahmad
Khan’s case (supra). Section 53(2) contains no such language.
23.23 Consequently,
the words “shall presume” in section 53 sub-section (2) means a rebuttable
presumption which the Court must raise provided the basic facts namely the due
posting of the document is proved, the onus being on the addressee to show that
the document referred to in the certificate of posting was not received by him.
23.24 In the
present case, the certificate of posting is suspect. Assuming that such suspicion
is unfounded, it does not in any event amount to conclusive proof of service of
the notice on Madhusoodhanan or on any of the other addressees mentioned in the
certificate as held by the Division Bench. Except for producing the dispatch
register and the certificate of posting, no one on behalf of the respondents
came forward to vouch that they had personally sent the notice through the post
to Madhusoodhanan and his group. Madhusoodhanan had written two letters
contemporaneously dated 4-8-1986 and 8-8-1986 (Ex. P-24 and Ex. P-35) to
Srinivasan, the General Manager of Kerala Kaumudi and to Madhavi complaining
that he was not receiving any mail at all. These letters were admittedly
received but not replied to by the respondents. It is also apparent from a
perusal of those letters that Madhusoodhanan had no knowledge whatsoever of the
notice for application for allotment of additional shares. Had there been such
notice it is improbable that Madhusoodhanan who was fighting for retaining his
control over Kerala Kaumudi, would have risked losing such control by
abstaining from applying for the additional shares.
23.25 In the
circumstances we hold that Madhusoodhanan and his group were not served with
the notice dated 1-8-1986 . It is therefore unnecessary to decide whether the
period prescribed in the notice to apply for the shares was too short or
contrary to the Articles of Association of Kerala Kaumudi.
23.26 Once
we have held that Madhusoodhanan and his group, all of whom held shares in
Kerala Kaumudi, were not given notice to apply for allotment of the additional
shares, it must be held that the subsequent allotment of the shares to Ravi and
Srinivasan at the meeting held on 8-8-1986 and the affirmation of such
allotment at the meeting allegedly held on 16-8-1986 were vitiated thereby and
invalid.
23.27 Although
there appears to be substance in the submission of Madhusoodhanan, as accepted
by the learned Single Judge, that no meetings were in fact held on 8-8-1986 or
on 16-8-1986, in view of our finding relating to the non-service of the notice
dated 1-8-1986, we refrain from deciding the issue.
23.28 We, therefore,
set aside the decision of the Division Bench in MFA 330/90, AS No. 164/90 and
AS No. 165/90 and affirm the judgment and order of the learned Single Judge in
CP 14/86 and the decree in CS No. 3/89 and CS No. 5/89 including the directions
in connection with the allotment of the additional 425 shares.
23.29 KIPL’s
application CP 31/88 was dismissed by the Single Judge and the appeal therefrom
(MFA 559/90) also rejected. Since the subject matter of KIPL’s application is
covered by Madhusoodhanan’s application CP 14/86 and was for identical reliefs,
we merely dispose of the appeal in terms of this judgment without any further
observation.
(D) Specific Performance of the
Karar 16th January, 1986
24.1 The
last proceeding relating to Kerala Kaumaudi was CS 6/89 which was a suit filed
by Madhusoodhanan for specific performance of the Karar dated 16th January,
1986.
24.2 We
have already held that by May, 1985, Mani and his group had transferred their
shareholding in Kerala Kaumudi to Madhusoodhanan, and that as a result of such
transfer Madhusoodhanan and his group held more than 50 per cent of the shares
in the company. On 15th July, 1985, Madhavi is alleged to have executed two
agreements and a will transferring the 9 shares of the late Sukumaran and her
own 3 shares to Ravi and Srinivasan [Ex. R-59, Ex. R-59(a) and Ex. R-60].
24.3 It
is in this background that the agreement dated 16th January, 1986 must be read.
The original of which is in Malayalam and which has been described by the
parties as the Karar, has 11 clauses. It is admittedly written by Mani and is
signed by Madhavi, Mani, Madhusoodhanan, Srinivasan and Ravi. It seeks to
record the partition of assets by mutual consent. Clause 1 of the Karar
provides that Madhavi would be the Chairman of Kerala Kaumudi during her
lifetime. Clause 2 provides that there will be no change in the existing share
structure during the lifetime of Madhavi and that after the death of Madhavi,
the shares of Kerala Kaumudi should be so given that Madhusoodhanan gets 50 per
cent of the total shares of the company including the shares owned by Mani, and
Srinivasan and Ravi get 25 per cent each. It was also agreed that the shares of
the late Sukumaran and Madhavi should be divided according to this percentage.
The shares of KIPL in Kerala Kaumudi were also to be given to Madhusoodhanan,
Ravi and Srinivasan in the same ratio. Then comes clause 3. While there is no
controversy on the translation of clauses 1, 2, 4, 5, 6, 7, 8, 9, 10 or 11, the
translation of clause 3 is seriously in dispute. We give the three different
versions as put forward by Madhusoodhanan, the respondents and finally the
official translator of this Court.
(A) “Mr. M.S. Mani is selling some of his shares in Kerala Kaumudi
to Mr. M.S. Madhusoodhanan and the price of that share will be informed to the
other parties in time”.
(B) “the value of the shares of Kerala Kaumudi which is to be sold
by M.S. Mani to M.S. Madhusoodhanan will be informed to others at the
appropriate time”.
(C) “the price paid by M.S. Madhusoodhanan on the sale of Kerala
Kaumudi shares by M.S. Mani will be intimated to other parties as and when (it
is done)”.
24.4 Having
regard to our finding on the question of transfer of Mani’s 390 shares to
Madhusoodhanan in May, 1985, perhaps the appropriate translation is the one put
forward by the official translator which is set out above as (C). This
difference of opinion, however, is really of no moment, because the
subject-matter of Madhusoodhanan’s claim for specific performance is limited to
that part of the Karar which provides for the division of shares of the late
Sukumaran and Madhavi in the percentage of 50: 25: 25 between Madhusoodhanan,
Ravi and Srinivasan, on Madhavi’s death. Before considering the merits of this
claim, we may briefly refer to the remaining clauses of the Karar. Clauses 4 to
10 relate to the division of assets and shareholding in various family concerns
so that each of the brothers had 52 per cent shareholding in different concerns
as specified below :
|
Mani |
Laisa Publications (P.) Ltd. |
|
Madhusoodhanan |
Kaumudi Investment (P.) Ltd.; |
|
|
Kaumudi Exports (P.) Ltd.; |
|
|
Kaumudi News Service (P.) Ltd. |
|
Ravi |
Ravi Printers and Publishers (P.) Ltd.; |
|
|
Kaumudi Films Outdoor Unit; Electronics and
Equipment Corporation; Ravi Transport |
|
Srinivasan |
Srinivasan Printers and Publishers Private
Ltd. |
All other establishments were required to be closed
down and Madhusoodhanan was appointed for that purpose. Clause 9 provides that
if any shareholder in any of the concerns wishes to sell his shares, they must
be offered to the “52 per cent shareholders” at a price to be fixed by the
others. If the 52 per cent shareholders refuse to purchase the share, the
others would have to do so at the value fixed by the concerned company’s
auditors according to the Company’s balance-sheet for the previous year. Clause
10 provides that the agreement would bind the four brothers and their heirs in
the event of the death of any one of them before the agreement was completely
implemented. The last clause in the Karar is clause 11. It provides that all
pending litigation regarding the subject matter of the Karar, should be
withdrawn and that all disputes should be mutually settled, and if this is not
possible the matter should be referred to an acceptable third party whose
decision would be binding.
24.5 On
2nd December, 1987 Madhavi died and on 10th October, 1988, Madhusoodhanan filed
CS 6/89 for transfer of 50 per cent of the late Sukumaran and Madhavi’s shares
to him and the transfer of 50 per cent of KIPL’s shareholding in Kerala Kaumudi
to Ravi and Srinivasan in terms of the Karar. The defendants in the suit were Mani,
Srinivasan, Ravi, Kerala Kaumudi and KIPL. They first filed a four page written
statement in which they contended that the suit was not maintainable, that the
suit was bad for mis-joinder and non-joinder of parties, that the suit had been
improperly valued and proper court fees not paid, that the suit was barred by
limitation, that the Karar was barred by the provisions of the Specific Relief
Act, 1963 and that the court did not have the jurisdiction to entertain the
suit.
24.6 The
learned Single Judge decided each of the issues raised in favour of
Madhusoodhanan and decreed the suit. The Division Bench allowed the appeal (AS
211/9). The reasons which persuaded the Division Bench to allow the appeal were
first: no steps had been taken by Madhusoodhanan for determination of the price
of 390 shares or the ‘inherited shares’ or for making the same known to the
other parties or for carrying out the other provisions in the Karar - in
particular closing down of Blue Travels, Kaumudi Hotels and Blue Transports.
Second, there was no averment in the plaint regarding consideration and no
relief sought for in relation to the fixation or payment of consideration.
Third, in contravention of section 16 of the Specific Relief Act there was no
averment in the plaint about the preparedness of Madhusoodhanan to pay the
consideration; fourth, since there had been no transfer of the 390 shares, it
was not possible to enforce the Karar in respect of the bulk of shares
regarding which specific performance had been claimed. Fifth, Madhusoodhanan
could not claim specific performance of only that part of the agreement which
was in his favour without performing the obligations which were cast on him by
the other clauses. These clauses were inseparable and part performance of the agreement
was not possible. Sixth, there was an undue delay in filing the suit. Seventh,
compared to the assets owned by Kerala Kaumudi and KIPL, both of which were to
go to Madhusoodhanan in terms of the Karar, the worth of Kala Kaumudi (allotted
to Mani) and Ravi Printers (allotted to Ravi) was insignificant, the last fact
justifying the court’s refusal to grant specific performance of the Karar under
section 20 of the Specific Relief Act. The appeal was, therefore, allowed and
the suit dismissed.
24.7 We
have already said that except for clauses 1, 2, 3 and 11, all the other clauses
of the Karar related to the division of the several concerns among the four
brothers. In deciding whether the agreement should be implemented, the
Appellate Court overlooked the basic fact that each of brothers had been given
the majority shareholding of 52 per cent in the companies specified against
their names in the Karar. Since the other three brothers had taken the full
benefit of the Karar, they were bound to comply with all its terms. It was not
open to them to accept that portion of the Karar which was in their favour and
jettison the rest. And the Karar which is in the nature of a family settlement
seeking to settle disputes between brothers, having been already acted upon at
least to the extent that the four brothers were each given the majority
shareholding in the different companies as mentioned in the Karar, should not
be lightly interfered with. (See: K.K. Modi v. K.N. Modi [1998] 3 SCC 573).
24.8 The
Division Bench has not adverted to this all. It is also on record that
Madhusoodhanan had transferred the bulk of his shareholding in the companies
which were to be under the majority control of the other three brothers. The
learned Single Judge had held that Madhusoodhanan had given evidence that he
had taken steps for closing down the companies not mentioned in the Karar. This
finding has not been questioned. All the clauses except for the transfer of the
‘inherited shares’ to Madhusoodhanan had been acted on. Madhusoodhanan was
entitled to insist on the performance of this clause as well.
24.9 The
respondents cited Article 29 of the Articles of the company in support of their
argument that exhibits R. 59 and R. 60 overrode the Karar insofar as it
required that 50 per cent of the shares of the late K. Sukumaran and Madhavi
had to be transferred to Madhusoodhanan on Madhavi’s death. Article 29 says
that the executors or administrators of the deceased sole holder of a share
shall be the only persons recognised by the company as having any title to the
share. It was the contention of the respondents that insofar as the Karar
provided for the transfer of the shares of the late Sukumaran and Madhavi to
Madhusoodhanan, it was contrary to Article 29 of the Articles of Association of
the company and could not be enforced. This submission is made on the basis of
the decision of this Court in V.B. Rangaraj v. B. Gopalakrishnan AIR 1992 SC
453.
That decision must be understood and read after
enunciating certain basic principles relating to the transfer of shares and in
the background of earlier decisions on the subject. It is settled law that
shares are movable properties and are transferable. As far as private companies
like Kerala Kaumudi are concerned, the Articles of association restrict the
shareholder’s right to transfer shares and prohibit any invitations to the
public to subscribe for any shares in, or debentures of, the company. This is
how a “private company” is now defined in section 3 (1)(iii) of the Companies
Act, 1956 and how it was defined in section 2 (13) of the 1913 Act.
24.10 Subject
to this restriction, a holder of shares in a private company may agree to sell
his shares to a person of his choice. Such agreements are specifically
enforceable under section 10 of the Specific Relief Act, 1963, which
corresponds to section 12 of the Specific Relief Act, 1877. The section
provides that specific performance of such contracts may be enforced when there
exists no standard for ascertaining the actual damage caused by the
non-performance of the act agreed to be done; or when the act agreed to be done
is such that compensation in money for its non-performance would not afford
adequate relief. In the case of a contract to transfer movable property,
normally specific performance is not granted except in circumstances specified
in the Explanation to section 10. One of the exceptions is where the property
is “of special value or interest to the plaintiff, or consists of goods which are
not easily obtainable in the market”. It has been held by a long line of
authority that shares in a private limited company would come within the phrase
“not easily obtainable in the market” (See: Jainarain Ram Lundia v. Surajmull
Sagarmull AIR 1949 F.C. 211). The Privy Council in Bank of India Ltd. v.
Jamsetji A.H. Chinoy AIR 1950 P.C. 90 said: “it is also the opinion of the
Board that, having regard to the nature of the company and the limited market
for its shares, damages would not be an adequate remedy” specific performance
of a contract for transfers of shares in a private limited company could be
granted.
24.11 In
1965, this Court while dealing with proceedings rising out of sections 397,
398, 402 and 403 of the Companies Act, 1956 in the case of S.P. Jain v. Kalinga
Tubes AIR 1965 SC 1535, had occasion to consider the effect of an agreement
relating to the issue of new shares in a company between two shareholders and
an outsider. It may be noted at the outset that there is a distinction between
the issue of new shares by a company and the transfer of shares already issued
by a shareholder. In the first case, it is the company which issues and allots
the new shares. In the second, the transaction is a private arrangement and the
company comes into the picture only for the purposes of recognition of the
transferee as the new shareholder. Therefore, while it is imperative that the
company should be a party to any agreement relating to the allotment of new
shares, before such an agreement can be enforced, it is not necessary for the
company to be a party in any agreement relating to the transfers of issued
shares for such agreement to be specifically enforced between the parties to
the transfer.
24.12 In
S.P. Jain’s case (supra), the company was a private limited company to begin
with. An agreement was entered into between two shareholders and S.P. Jain, who
was not a member, which internally provided that S.P. Jain would be allotted
shares after the share capital of the company was increased equal to those held
by the said two shareholders. The company was not a party to it nor were the
other shareholders. In terms of the agreement there was an increase in the
share capital and shares were allotted to S.P. Jain. Some years later, after
the company had been converted into a public company, a decision was taken by
the company to issue fresh shares. The shares were not allotted to S.P. Jain.
Alleging oppression by the majority shareholders, S.P. Jain filed proceedings
in which it was contended that the subsequent allotment of the new shares was
in violation of the agreement between S.P. Jain and the two shareholders. In
this context, this Court rejected S.P. Jain’s plea on the grounds that S.P.
Jain was not a member of the company when the agreement was entered into; the
company was not a party to the agreement and was not bound by its terms; there
was no provision in the agreement as to what would happen if and when the share
capital was actually increased beyond the increase at the time of the
agreement. Therefore it was held that as far as the company was concerned, it
was free to dispose of shares as its directors or shareholders in a general
meeting considered proper without regard to the agreement.
The decision does not in any way hold that the
transfer of shares agreed to between shareholders inter se does not bind them
or cannot be enforced like any other agreement.
24.13 In
V.B. Rangaraj’s case (supra), relied upon by the respondents, an agreement was
entered into between the members of the family who were the only shareholders
of a private company. The agreement was that for all times to come each of the
branches of the family would always continue to hold equal number of shares and
that if any member in either of the branches wished to sell his share/shares,
he would give the first option of purchase to the members of that branch and
only if the offer so made was not accepted, the shares would be sold to others.
This was a blanket restriction on all the shareholders, present and future.
Contrary to the agreement, one of the shareholders of one branch sold his
shares to members of the second branch. Such sale was challenged in a suit as
being void and not binding on the other shareholders. This Court rejected the
challenge holding that the agreement imposed a restriction on shareholders’
rights to transfer shares which was contrary to the articles of association of
the company. It was therefore held that such a restriction was not binding on
the company or its shareholders. The decision is entirely distinguishable on
facts. There is no such restriction on the transferability of shares in the
Karar. It was an agreement between particular shareholders relating to the
transfer of specified shares, namely those inherited from the late Sukumaran
and Madhavi, inter se. It was unnecessary for the company or the other
shareholders to be a party to the agreement. As provided in clause 10 of the
Karar, Exhibits R-59 and R-60 did not obviate compliance with the Karar. Both
Ex. R-59 and R-60 were executed on 15-7-1985 several months prior to the Karar.
The parties who had consciously entered into the agreement regarding the
transfer of their parents shares are therefore obliged to act in terms of the
Karar. The defence of Ravi and Srinivasan based on Ex.R-59 and R-60 should not,
in the circumstances, have been accepted by the Division Bench. Having regard
to the nature of the shareholding, on the basis of the law as enunciated by the
Federal Court and Privy Council in the decisions noted above, it must be held
that the Karar was specifically performable.
24.14 As far
as the question of consideration is concerned, we have already held that
parties can agree to subsequently determine the price at which the shares were
sold and section 9 of the Sale of Goods Act, 1930 expressly provides that such
contracts are perfectly legal. Besides, the Karar in terms does not call upon
parties to determine the consideration. All it says is that once the
consideration was determined by Madhusoodhanan and Mani, it would be made known
to the others. Since there was no such determination, there was no question of
informing anyone. The finding that there was no determination of the
consideration in respect of the inherited shares as a ground for holding that
the Karar was not specifically performable is similarly incorrect as the
determination of the price formed no part of the Karar.
24.15 Coming
to the reasoning of the Division Bench with regard to non-compliance with
section 16 of the Specific Relief Act, 1963. The section provides :
“16. Personal bars to relief.—Specific performance of a contract cannot
be enforced in favour of a person—
** ** **
(c) who fails to aver and prove
that he has performed or has always been ready and willing to perform the
essential terms of the contract which are to be performed by him, other than
terms of the performance of which has been prevented or waived by the
defendant.
Explanation.- For the purpose of clause (c),—
(i) where a contract involves
the payment of money, it is not essential for the plaintiff to actually tender
to the defendant or to deposit in court any money except when so directed by
the Court;
(ii) the plaintiff must aver
performance of, or readiness and willingness to perform, the contract according
to its true construction.”
24.16 We
called for the plaint filed by Madhusoodhanan in order to verify whether the
Division Bench was correct in coming to the conclusion that section 16 of the
Specific Relief Act had not been complied with. We found that paragraph 14 of
the plaint reads :
“the plaintiff
was always ready and willing to perform his part of the agreement and is even
now ready to perform his part of contract. The transfer of shares in respect of
other companies have already taken place in accordance with the Karar dated 16-1-1986.”
In view of this clear averment, the finding of
the Division Bench regarding the contravention of section 16 of the Specific
Relief Act, was perverse.
24.17 On the
question of delay the cause of action arose when Madhavi died in December,
1987. It cannot reasonably be said that filing of the suit ten months later was
unreasonably delayed since some time must be given to see whether the parties
did what they were required to do under the Karar after Madhavi’s death.
24.18 Finally,
the exercise of discretion by the Division Bench purportedly under section 20
of the Specific Relief Act was contrary to the terms of the section itself.
Guidelines for the exercise of the Court’s discretion to decree specific
performance of an agreement have been statutorily laid down in sub-section (2).
The Division Bench appears to have relied on clause (a) of section 20(2) to
deny specific performance of the Karar by holding that Madhusoodhanan had
obtained an unfair advantage over others under the Karar because he had been
allotted the more ‘substantial’ companies. This logic flies in the face of
clause (a) of sub-section (2) to section 20 and the explanation thereto - which
say :
“20. Discretion as to decreeing specific performance.—
** ** **
(2) The following
are cases in which the court may properly exercise discretion not to decree
specific performance—
(a) where the terms of the
contract or the conduct of the parties at the time of entering into the
contract or the other circumstances under which the contract was entered into
are such that the contract, though not voidable, gives the plaintiff an unfair
advantage over the defendant;
** ** **
Explanation
1.—Mere inadequacy of consideration, or the mere fact that the contract is
onerous to the defendant or improvident in its nature, shall not be deemed to
constitute an unfair advantage within the meaning of clause (a) or hardship
within the meaning of clause (b).”
This section is an instance of such
legislative clarity that it needs no paraphrasing to highlight its intent. The
Division Bench was clearly wrong in its foray into the question of the value of
the assets allotted under the Karar. It has, despite Explanation 1 to section
20(2) refused specific performance of the Karar on one of the excluded grounds
viz., inade-quacy of consideration.
24.19 The parties are
at loggerheads and it is unlikely that they will mutually agree to a price to
be paid for the 390 transferred shares or the ‘inherited shares’ as envisaged
at the meeting held on 23rd April, 1985 [Ex. P.62(b)] or to a mutually
acceptable third party in terms of clause 11 of the Karar dated 16th January,
1986 (Ex.P-3). The solution to this impasse is available under sub-section 9(2)
of the Sale of Goods Act, 1930 read with Art. 25 of the Articles of Association
of Kerala Kaumudi. Under the first if the price is not fixed in the manner
agreed to in the contract of sale, the buyer shall pay the seller a reasonable
price and what would be a reasonable price would be dependent on the circumstances
of the case. Article 24 of the Articles of Association of the company speaks of
the ‘fixed price’ and the ‘fair price’. Both of these relate to the ostensible
price shown on the transfer deeds. Nevertheless for the purposes of this case,
Article 25 which lays down guidelines for the resolution of disputes between
the transferor and transferee, may be relied on. It says :
“Article 25 -
The fair value of a share shall be fixed by the Company by a resolution passed
by a majority of not less than three fourths of the holders of such shares
declaring the fair value. Such resolution shall remain in force for two years
from the date of its passing or until annulled whichever is earlier. If at the
time a transfer notice is given no resolution fixing the fair value is in
force: then any difference in regard thereto shall be referred to two
arbitrators, one to be appointed by each party and the provisions of the Indian
Arbitration Act, 1940, shall apply.”
Although the learned Single Judge in disposing
of CP 26/87 gave directions for the appointment of Arbitrators, to determine
the value of the shares, in our view it would be more appropriate to do so in
decreeing the suit for specific performance of the Karar. It is also not clear
from the material on record, in which of the brothers’ name 9 shares of the
late Sukumaran and the 3 shares of Madhavi now stand. Whoever is recorded as
the owner of the shares shall further transfer six of those shares to
Madhusoodhanan.
24.20 For
all these reasons, we have no hesitation in setting aside the decision of the
Appellate Court and restoring the decree as passed by the Trial Court as
modified below.
“Madhusoodhanan
will appoint one Arbitrator and Mani and his children, Sukumaran and Ravi will
appoint one Arbitrator within one month to decide the following matters.
Failing this any one of them may move this Court to appoint an Arbitrator to
decide :
(a) What was the fair value of one share of Kerala Kaumudi (P) Ltd.
on 21-5-1985?
(b) What amount was paid or
adjusted by or on behalf of M.S. Madhusoodhanan to M.S. Mani towards the value
of shares ? What is the balance amount due from Madhusoodhanan to Mani and his
children in respect of the transfer of the 390 shares transferred to M.S.
Madhusoodhanan.
(c) What would be the value of one share on the date of Madhavi’s
death ?
It will be
open to the parties entitled to the consideration as determined by the
Arbitrators to recover the sums due to them from Madhusoodhanan”.
Rectification of the Share
register of KIPL
25.1 The
application for the rectification of the share register of KIPL under section
155 of the Companies Act was filed by Mani’s wife and daughter - Kastoori and
Valsa respectively, Srinivasan’s wife - Laisa, and Ravi’s wife - Shylaja. Of
the 1000 shares issued of KIPL, Madhavi had 10, Kastoori had 240, Valsa had 10,
Madhusoodhanan’s wife, Geetha, had 250, Laisa had 250 and Shylaja had 240
shares in 1985. On 4th March, 1985, Laisa who, along with Geetha, was a
director of the company till then, resigned. She has admitted her resignation
in her evidence when she said “I became the director of the company in 1972. I
became a shareholder of the company in 1972. I’m not a director of the company
now. In March, 1985 I ceased to be a director. I resigned my directorship in
March, 1985".
25.2 According
to Madhusoodhanan, at the Board meeting held on 4th March, 1985, which was
attended by Geetha and Laisa, Laisa’s resignation was accepted and he was
appointed as additional director. At the same meeting, the Board approved the
transfer of shares by Laisa, Shylaja, Madhavi and Kasturi to Madhusoodhanan,
Ravi’s minor sons -Deepu and Darsan, Valsa (Mani’s daughter) and
Srinivasan so that the shareholding in KIPL became as follows :
|
Geetha |
250 |
shares |
|
Madhusoodhanan |
270 |
Shares |
|
Srinivasan |
160 |
shares |
|
Valsa |
160 |
shares |
|
Deepu Ravi |
80 |
shares |
|
Darsan Ravi |
80 |
shares |
25.3 According
to the four applicants for rectification, they had effected no such transfer. Of
the four, only Laisa came forward to give evidence in support of the case for
rectification of the share register of KIPL [Ex. P-123 (F)] by restoring the
position with regard to the shareholding as it existed prior to March 1985. In
her deposition Laisa admitted that she had signed the attendance register of
KIPL (Ex.P.-123) which showed that she had attended the Board Meeting on 4th
March, 1985. She also admitted that she had signed the minute books of the
company including the minutes of the meeting held on 4th March, 1985 as well as
blank share transfer forms . However she has come forward with this explanation
:
“I have given
blank share transfer forms and other papers signed when Sri Madhusoodhanan
brought them to me. I signed those blank transfer forms and papers because Mr
Madhusoodhanan was looking after the affairs of all sister concerns and my
husband told me to sign whatever papers be brought by Mr Madhusoodhanan.”
25.4 The
learned Single Judge dismissed the application for rectification. He held that
the 4 brothers had admitted their signatures in Exhibit P-190 which is a record
of decisions taken at a meeting held on 29-11-1984 when one of the decisions
taken was to entrust separate concerns to each of the brothers, depending upon
who was taking an active interest in the company. The decision was implemented
by the share transfers in the sister concerns of Kerala Kaumudi and it was not
disputed that in respect of Laisa Publications, Srini Printers, Ravi Printers
etc., the respective brothers who were in control of those concerns were given
52 per cent shares. As far as KIPL was concerned it was decided :
“3(b). In
Kaumudi Investments and Kaumudi Exports 52 per cent of shares will be held by
Shri M.S. Madhusoodhanan and family and 16 per cent each of shares will be held
by Shri M.S. Mani and family, Sri M.S. Srinivasan and family and Sri M.S. Ravi
and family.”
This was effected as far as KIPL was concerned
on 4th March,1985. It was held that the evidence showed clearly that all the
necessary steps had been taken to effect the share transfers and that it was
immaterial that the petitioners were not parties to exhibit P-190 because the
share transfer deeds had been signed and the signatories were bound by that,
particularly when they had not established that they had signed the share
transfer documents under any misrepresentation, fraud or undue influence or
mistake.
25.5 The
Division Bench reversed the decision of the learned Single Judge in MFA No. 312
of 1990. It was held that since exhibit P-3, or the Karar, had not been
accepted as a valid document, “the projected basis of the transfer disappears”
and “the further recording in the minutes of the company would not be
sufficient to give legal efficacy to the transfer of shares”.
25.6 Since
we have held that the Karar was a valid agreement, this reason of the Division
Bench will not stand. Besides, as observed by the learned Single Judge, all the
necessary documents had been duly executed to effect the transfers of the
shareholding as approved in the meeting held in March 1985. In the annual
return of KIPL in respect of the year ending on 30th September, 1985, this
shareholding is reflected (Ex.P-212). Further this is in keeping not only with
the Karar but also with Ex.P-190 according to both of which Madhusoodhanan and
his group were to have 52 per cent shareholding in KIPL and the remaining three
brothers - 16 per cent each.
25.7 The
explanation given by Laisa that she used to sign whatever papers had been sent by
Madhusoodhanan is unbelievable. The Division Bench by relying upon a narrative
in a biography of Norman Birkett (The Life of Lord Birkett of Ulverston by H.
Montgomery Hyde) chose to accept it. According to Laisa herself, she had been a
director of the company, operated the banking accounts and otherwise done
whatever was necessary in the discharge of her duties as a director since 1972.
As we have noted earlier, differences between the 4 brothers had been simmering
for a long time which manifested itself in 1984. This was also noted by the
Division Bench when it said, “in the year 1984, differences became somewhat
apparent”. In the circumstances, Laisa’s facile explanation, that she signed
every document in 1985 because of her faith and trust in Madhusoodhanan is
clearly false.
25.8 The
next reason given by the Division Bench for allowing the application for
rectification was that the original share transfer deeds had not been produced.
Madhusoodhanan had filed an application for production of the original share
transfer deeds. He said that he could not produce the share transfer deeds
because they were in the administrative office of KIPL and that he had been
prevented from entering that office. That the administrative office of KIPL is
within the Kerala Kaumudi premises in a separate room was also the finding of
the Division Bench. Madhusoodhanan and his group’s grievance that they were
being denied access to KIPL’s office since April, 1986 was not rejected by the
Division Bench as not genuine. But the Division Bench observed “A mere alibi of
inability to enter the office, cannot be accepted as a sufficiently strong
reason for their grievous omission”. This conclusion is as startling as it is
unreasonable. For the reasons given earlier in connection with transfer of
shares in Kerala Kaumudi, we are of the view that here also, the minutes and
the other records of the company, which prima facie raise a presumption of
their veracity, have not been sufficiently disproved by the evidence tendered
on behalf of the petitioners in the application for rectification.
25.9 Apart
from the provisions of the Companies Act, Article 41 of the Articles of
Association of KIPL (Ex. P-180) also provides :
“Where minutes
of the proceedings of any general meeting of the company or of any meeting of
the Board of Directors has been made and signed in accordance with provisions
contained in the preceding article 10 unless the contrary is proved, the
meeting shall be deemed to have been duly called and held and all proceedings
thereat to have duly taken place, and in particular, all appointment of
directors made at the meeting shall be deemed to be valid”.
The only evidence or “proof” to
the contrary in this case is Laisa’s unacceptable oral evidence. Therefore the
minutes of the meeting held on 4th March, 1985 must be taken to have correctly
recorded the transfer of shares resulting in the present shareholding, the
appointment of Madhusoodhanan as additional director and the resignation of
Laisa as a director of KIPL.
25.10 The
next reason given by the Division Bench for permitting rectification of the
share register of KIPL was that no price had been fixed for the shares and that
there were not even negotiations with parties regarding such fixation of price.
This is, for reasons already stated, an incorrect statement of the law.
Moreover in this case there is the additional factor which has persuaded us to
hold that the Division Bench was wrong, namely Article 16 of the Articles of
Association of KIPL which says :
“the Board of
Directors shall fix price at which the shares for the time being forming part
of the capital of the company may be purchased in pursuance of transfer notice
and the price thus fixed shall be known as the ‘fair value’. Until the ‘fair
value’ has been fixed as herein provided, a sum equal to the capital paid up on
any share shall be deemed to be the fair value of such share.”
The Division Bench’s final
conclusion that there had been a non-compliance with section 108 of Companies
Act because there was no indication about any purchase of stamps or about the
share transfer deeds having been duly stamped, is an exercise in speculation.
The Articles of Association of KIPL themselves require compliance with section
108 before any transfer can be effected. When the minutes recorded that share
transfer deeds had been placed before the Board, when the transfers were
approved by the Board in the presence of the only witness for the petitioners,
and when none of the documents which were duly maintained by the company recording
the transfers of the shares had been disproved, we cannot uphold a finding that
the share transfer deeds must have been improperly stamped or executed in
violation of the provisions of section 108 of Companies Act.
25.11 No
further reason has been given by the Division Bench for upholding the prayer
for rectification of the share register of KIPL. We have, therefore, no
compunction in setting aside the decision of the Division Bench and restoring
that of the learned Single Judge dismissing the application.
Rectification
of the Share Register of Kerala Kaumudi
26.1 The
next matter is the application for rectification of the Share Register of
Kerala Kaumudi filed by the minor son of Madhusoodhanan, Visakh (CP 11/87; MFA
No. 285/90; CA 3261/91). This appeal need not detain us as both the courts
below have concurrently held that the application had no merit.
26.2 In
keeping with the Karar, Mani and his family have the controlling interest in
the company. In June 1985, of the 500 issued shares, Mani and his family held
260, Madhusoodhanan and his children held 80 shares, Srinivasan and his
children held 80 shares and Ravi and his children held 80 shares after
effecting share transfers by the brothers and their respective groups inter se.
A decision was taken by the Board of Directors to increase the paid-up capital
of company from Rs 5 lakhs to Rs 10 lakhs by the issue of 500 equity shares of
Rs 1,000 each. Notice of this was given to the applicant who received it but
did not apply to be allotted any of the additional shares. Mani and his wife,
Kasturi, offered to purchase 279 shares each. The offer was accepted and
additional shares issued in the name of Mani and his wife. According to Visakh,
he had not been given notice of the offer of the additional shares. The trial
court considered the various exhibits tendered in evidence by Mani and his
group, including the local delivery book (Ex. R.-48), which was signed by
Madhusoodhanan, the father and guardian of Visakh, to negative the submission
of Visakh. We see no reason to interfere with this finding of fact. It is true
that the Division Bench proceeded on an erroneous basis when it held that the
learned Single Judge had dismissed the application on the ground of delay.
Since we have upheld the factual finding of the court of the first instance,
this misreading of the Trial Court’s judgment by the Division Bench is of no
consequence.
26.3 We
accordingly dismiss the appeal being C.A. 3261/91 without any order as to
costs.
Civil Suit
No. 4 of 1989
27.1 This
brings us to the remaining appeal which arises from a decree passed in a suit
filed by KIPL. The suit was originally numbered as OS 1569/88 when it was filed
in the Munsiff’s court in Trivandrum. After it was withdrawn on 16th February,
1989 by the order of the High Court, it was renumbered as C. S. 4/89. In the
suit, KIPL had prayed for a decree of permanent injunction restraining Kerala
Kaumudi or any of its Directors or staff or anyone claiming through or under
them or any of their agents from disturbing or preventing the peaceful
functioning of KIPLs administrative office or in any way obstructing the
peaceful possession and enjoyment of the said premises by the defendants until
KIPL was evicted under due process of law.
27.2 That
the administrative office of KIPL was in Kaumudi Buildings, Pettah, Trivandrum
cannot be in dispute in view of the categorical finding of the Division Bench
to this effect, as noted earlier. According to KIPL, the entire administration
of KIPL was carried on from this office. It has been further averred in its
plaint, that Geetha, Madhusoodhanan’s wife, had been denied access to the
administrative office when she went there along with a staff in August 1986.
She was informed by the reception office that the keys to the room were with
Srinivasan who refused to hand over the keys to Geetha.
27.3 Srinivasan
filed a written statement on behalf of Kerala Kaumudi in which it was denied
that KIPL had its administrative office in Kaumudi Buildings. According to
Srinivasan, Geetha used to sit in Madhu-soodhanan’s office when he was the
Managing Director of Kerala Kaumudi.
27.4 On
behalf of the plaintiffs, entries in the telephone directory (Ex.P-181),
notices and letters issued by the income tax office addressed to KIPL at
Kaumudi Buildings (Ex-P. 182, 184 and 185) as well as a letter from the
Commissioner of Income Tax (Ex.P. 183) similarly so addressed were proved by
Madhusoodhanan. Srinivasan has been unable to explain why the letters and
notices to KIPL by the concerned authorities should be addressed to Kaumudi
Buildings unless KIPL was functioning from that place. Additionally, Srinivasan
also said, in his evidence, “All the sister concerns of Kerala Kaumudi had post
box No. 99 and post office was instructed to put the correspondence addressed
to the sister concerns in that post box No.”. The post box number in question
was Kerala Kaumudi’s. He also said, “At the time when application for telephone
was given, applications were given in the name of all sister concerns as well
as Kerala Kaumudi, in order to get telephone easily. These telephones were
allotted. All the telephones are installed in Kerala Kaumudi Buildings” and
that for all the sister concerns the telex No. is the same. In view of all this
evidence, including the admission by Srinivasan, amply justifies the conclusion
reached by the Trial Court while decreeing the suit that KIPL had an office in
Kaumudi Buildings to which members of its management and staff have the right
of access.
27.5 A similar
suit had been filed by Kaumudi Exports which was decreed by the learned Single
Judge on substantially the same evidence. (C. S. No 2 of 1989). The appeal from
the decree was dismissed by the Division Bench (A S. No. 205 of 1990). No
further appeal has been preferred by the respondents.
27.6 Logically,
the Division Bench should have also rejected the appeal preferred from the
decree in CS No. 4/49. However the Division Bench rejected the appeal on the
sole ground that although KIPL had been denied access in 1986, the suit had
been filed only in 1988. According to the Division Bench “The inaction for a
period of two years can be taken to have resulted in the extinction of the
present possession. If the plaintiff does not have present possession, injunction
could not be an available relief”. This strange piece of reasoning appears to
proceed on the basis that the period of limitation for extinction of a
possessory right is two years which it is not. Besides the claim of KIPL was
that it was being denied access. The denial was a continuous one. It was
therefore open to KIPL to file a suit while such denial continued by seeking to
injunct the obstructers from continuing with the obstruction. Srinivasan’s
evidence and the documents referred to hereinabove prove beyond a shadow of
doubt, that the administrative office of KIPL was in Kaumudi Buildings. That is
also what the Division Bench has held. Having come to this conclusion, the
Division Bench erred grievously in denying KIPL the relief it claimed only on
the ground of delay, as if what was being dealt with by the Division Bench were
an interlocutory application for interim relief.
27.7 This
appeal, C. A. 3259/91, is therefore allowed.
28. To
sum up: Civil Appeals 3253-58 of 1991 from M.F.A 330/90 are allowed, and the
decision of the Trial Court affirmed with the directions earlier specified.
Civil Appeals 3260 and 3261 of 1991 are dismissed. Civil Appeal No. 3259 of
1991 is also allowed . The decision of the Division Bench is set aside and the
decree of the Trial Court is restored.
29. Before
concluding our judgment in all these appeals, we would like to record our
displeasure in the manner in which the paper books have been prepared.
Documents which are vital for decision on the several issues raised, continue
to remain in Malayalam without being translated , several exhibits as well as
the pleadings, such as plaints, written statements etc. are not on record.
Therefore, although our decisions in these nine appeals, except for two, are in
favour of Madhusoodhanan and his group, we make no order with regard to the
costs to which the appellants would otherwise have been entitled.
[t1] 1. Ascertainment of
price - (1) The price in a contract of sale may be fixed by the contract or
may be left to be fixed in manner thereby agreed or may be determined by the
course of dealing between the parties.
(2) Where the price is not determined in accordance with the
foregoing provisions, the buyer shall pay the seller a reasonable price. What
is a reasonable price is a question of fact dependent on the circumstances of
each particular case.