[1970]
40 Comp. Cas. 491 (Cal)
SANKAR PRASAD MITRA, J.
COMPANY PETITION NO. 213 OF
1965
July 25, 1967
A. K. Basu and S. Chatterjee for
the petitioner.
S.C.
Sen and G. Bysack for the respondent.
Sankar
Prasad Mitra, J.—This is an application of the
United Breweries Ltd., under section 186 of the Companies Act, 1956, inter
alia, for a direction for calling an extraordinary general meeting of Ruttonjee
& Co. Ltd. The petitioner holds 3,52,800 equity shares (out of 40,00,000
equity shares) of Ruttonjee & Co. Ltd. Section 186 of the Act runs thus:
"186.
Power of court to order meeting to be called.—(1) If for any reason it is impracticable to call a
meeting of a company, other than an annual general meeting, in any manner in
which meetings of the company may be called, or to hold or conduct the meeting
of the company in the manner prescribed by this Act or the articles, the court
may, either of its own motion or on the application of any director of the company,
or of any member of the company who would be entitled to vote at the meeting,—
(a) order a meeting of the company to be called,
held and conducted in such manner as the court thinks fit; and
(b) give such ancillary or consequential
directions as the court thinks expedient, including directions modifying or
supplementing in relation to the calling, holding and conducting of the
meeting, the operation of the provisions of this Act and of the company's
articles.
Explanation.—The
directions that may be given under this sub-section may include a direction
that one member of the company present in person or by proxy shall be deemed to
constitute a meeting.
(2) Any meeting called, held and conducted in accordance
with any such order shall, for all purposes, be deemed to be a meeting of the
company duly called, held and conducted."
It
is to be observed at the outset that under section 186 the court in the
exercise of its discretion calls a meeting of the company. Secondly, the court
must be satisfied that it is for any reason "impracticable" to call a
meeting in any manner in which meetings of the company may be called. Thirdly,
the court has no power to call an annual general meeting. Bearing these
principles in mind we have first to consider the facts of this case. On the
12th March, 1958, the Government of West Bengal gave permission to a
partnership firm called Ruttonjee & Co. to start a brewery in West Bengal.
About a year later on January 5, 1959, the Commissioner of Excise wrote to the
Director of Industries regarding grant of permission to the said firm to
establish a brewery. On the 17th January, 1959, the Government of India wrote
to the firm enclosing the terms and conditions which were usually attached to a
licence granted under the Industries (Development and Regulation) Act, 1931,
and asking if the firm was agreeable to the terms. Thereafter, the West Bengal
Government granted to the firm a piece of land at Kalyani.
On
the 4th July, 1959, there was a tentative agreement between the firm and
Phipson & Co. (Private) Ltd. The relevant terms of the agreement were: (a)
a company called Ruttonjee & Co. (Private) Ltd. would be formed as a
subsidiary of Phipson & Co. (Private) Ltd., (b) the articles of association
of Ruttonjee & Co. (Private) Ltd. would provide that H. Bhesania and F.R.
Bhesania of Ruttonjee & Co. would be permanent directors out of the total
of six directors of Ruttonjee & Co. Private Ltd.; (c) the firm will have
the right to appoint one more director of Ruttonjee & Co. (Private) Ltd.;
and (d) the firm and its nominees would purchase 2,000 shares in Phipson &
Co. (Private) Ltd., at the rate of Rs. 150 per share and another 1,000 shares
would be kept reserved for them till the 31st August, 1959.
In
January, 1960, the Government of India issued a manufacturing licence to this
firm. On the 22nd February, 1963, H.R. Bhesania and F.R. Bhesania formed and
incorporated Ruttonjee & Co. (Private) Ltd. They became permanent
directors. On the 1st March, 1960, the certificate of incorporation was issued
to the company. Thereafter, the Government of West Bengal made actual allotment
of the land at Kalyani to the firm.
Some
time after incorporation one B.K. Roy also became a director of Ruttonjee &
Co. (Private) Ltd. On the 23rd November, 1960, one lakh shares of the company
were allotted. A further allotment of three lakhs shares was made on the 16th
November, 1961. On September 20, 1961, Vittal Mallya became a director of the
company. In the same year Phipson & Co. (Private) Ltd. as well as Ruttonjee
& Co. (Private) Ltd. became public companies and the shares of Ruttonjee
& Co. (Private) Ltd., due to be taken by Phipson & Co. (Private) Ltd.,
were allotted to the present petitioner, the United Breweries Ltd.
In
1962, with the consent of the said partnership firm (which was the allottee of
the land at Kalyani), Ruttonjee & Co. Ltd. became the lessee thereof.
Between 1961 and 1964 the company's factory was constructed and its machinery
was installed. In 1962, there was cash credit arrangement between the Bank of
India and Ruttonjee & Co. Ltd. for Rs. 21,00,000. The guarantors were the
United Breweries Ltd., H.R. Bhesania and F.R. Bhesania. The facility for the
entire sum of Rs. 21,00,000 was taken by the company. That is why in 1963
another arrangement was entered into between the bank and the company for a
cash credit facility of Rs. 5,00,000 with F. Bhesania, H. Bhesania and Vittal
Mallya as guarantors. (In this second account a sum of Rs. 4,76,809.92 was due
by the company to the bank on the 20th October, 1965).
On
the 23rd August, 1963, Dali Ruttonjee, a director of R.D. & Sons (Private)
Ltd., holding 7,000 shares in Ruttonjee & Co. Ltd., was appointed a
director of Ruttonjee & Co. Ltd. In 1964, F.M. Bhesania and Sookamal Kanti
Ghose became directors of the company; on the 10th August, 1964, Vittal Mallya
ceased to be a director.
It
appears from the above facts that the Bhesanias through their partnership firm
were trying originally to set up a brewery in West Bengal. They succeeded in
obtaining the necessary permission both from the Government of India and the
Government of West Bengal. They even secured a plot of land. Apparently they
did not have the requisite financial resources and they had to approach Phipson
& Co. (Private) Ltd. for raising the necessary funds. Ultimately, the
company, with which we are concerned in this application, came into existence
but the Bhesanias made it a condition that two of them shall be permanent
directors of the company. The financial interest of the Bhesanias in the company
was not large; but the parties agreed that they would have substantial control
over the management of the company, presumably because they were instrumental
in securing governmental sanction for starting a brewery and making preliminary
arrangements therefore. Up to August, 1964, all the projects undertaken by the
two groups, namely, the Bhesania group and the other group principally
represented by Vittal Mallya, were going on smoothly. In December, 1964, Vittal
Mallya sent to Dali Ruttonjee and F.R. Bhesania a draft agreement between
Ruttonjee & Co. Ltd. and R.D. & Sons (Private) Ltd. I do not intend to
discuss the terms of the agreement. It is enough to observe for our purposes
that the draft was rejected.
Then,
on the 27th March, 1965, Vittal Mallya wrote to Dali Ruttonjee suggesting,
inter alia, payment of royalty by Ruttonjee & Co. Ltd. to the United
Breweries Ltd., in respect of the labels of the latter which the former would
be using on bottles of beer that would be marketed by Ruttonjee 6c Co. Ltd. The
differences of opinion between the two groups started with this suggestion.
In
April, 1965, the Commissioner of Excise, West Bengal, allowed the company's
brewery to start manufacturing beer under an ad hoc permission granted in
favour of the firm of Ruttonjee & Co. in whose name the original Government
permission to start the brewery stood. Pursuant to this ad hoc permission the
manufacture of beer commenced.
On
the 24th June, 1965, Vittal Mallya, on behalf of the United Breweries Ltd.,
wrote to F.R. Bhesania suggesting certain terms for manufacture of beer. It was
suggested for instance that Ruttonjee & Co. Ltd. will be given one-third of
the production up to 24,000 dozen per month and one-fourth of the production in
excess of 24,000 dozen per month and supplies would be made under the
"Blue Label Export Lager" and "Beer Brand Lager Labels".
The price structures of different varieties of beer or Lager was also
suggested.
On
the 5th July, 1965, F.R. Bhesania replied to Vittal Mallya's letter of the 24th
June accepting some of Mallya's terms and suggesting modifications of certain
other terms said to be in the common interest of all concerned.
The
next important date is the 24th July, 1965, when the Government of West Bengal
gave its approval to the grant of a brewery licence at Kalyani jointly in
favour of "the partnership known as M/s. Ruttonjee & Co. and the
public limited company known as M/s. Ruttonjee & Co. Ltd." On the 29th
July, 1965, H. Bhesania as director of Ruttonjee & Co. Ltd. circulated a
proposed resolution amongst the other directors suggesting, inter alia,
approval of the draft application to the Additional District Magistrate, Nadia,
for grant of the joint licence. The resolution was eventually signed by H.
Bhesania, F.R. Bhesania, F.M. Bhesania, B.K. Roy, Sookamal Kanti Ghose and Dali
Rattonjee who were admittedly the directors of the company on that date. This
resolution also suggested that B.K. Roy and F.M. Bhesania, two of the directors
of the company, shall apply for the licence along with the said partnership
firm and they would represent the company before the excise authorities in all
matters connected with the licence.
The
application for the joint licence was made on the 29th July, 1965. H. Bhesania
and F.M. Bhesania signed this application as partners of Ruttonjee & Co.
and F.R. Bhesania and B. K. Roy signed as directors of the company. The
Government granted the joint licence on the 3rd August, 1965, and three days
later beer was released.
On
the 20th August, 1965, the United Breweries Ltd. gave a notice under section
257 of the Companies Act, 1956, that they intended to propose the appointment
of A.K. Thakur as a director of the company at the next annual general meeting
which was to be held on or before September 30, 1965, for the year ended March
31, 1965.
On
the 30th August, 1965, notice was given for the 5th annual general meeting of
the company to be held at its registered office at P-19, Ganesh Chandra Avenue,
Calcutta-13, at 4-30 p.m. on the 28th September, 1965.
On
the 28th September, 1965, the annual general meeting, according to the
Bhesanias, could not be held due to lack of quorum: the required minimum of
five shareholders in person were not present. It is common case that the
attendance on this date was as follows:
Shareholders
present:
1. H.
R. Bhesania
2. United
Breweries Ltd. by their representative, H. P. Bhagat.
3. R.
D. & Sons Pvt. Ltd. by their representative, D. Ruttonjee. Present by
proxy:
1. Vittal
Mallya—by his proxy, A. K. Thakur.
2. Jagannath
Muchhal—by his proxy, P. Y. Navalkar
Directors
present:
1. B.K.Roy
2. Sookamal
Kanti Ghose.
Now,
under section 174(4) of the Companies Act, 1956, if in an annual general
meeting within half an hour from the time appointed for holding the meeting, a
quorum is not present, the meeting shall be adjourned to the same day in the
next week, at the same time and place, or to such other day and at such other
time and place as the board may determine. The Bhesanias say (vide paragraph 5
(P) of the affidavit-in-opposition of Dali Ruttonjee affirmed on the 10th
December, 1965), that since the annual general meeting could not be held on the
28th September, 1965, for lack of quorum, it was decided that the adjourned
meeting would be held at such time, date and place as the directors might
determine.
On
the 29th September, 1965, a notice was issued for a meeting of the board of
directors on the 30th September, 1965. Sookamal Kanti Ghose, one of the
admitted directors, wrote to H. Bhesania on the 6th October, 1965, complaining
that this notice of the board's meeting was not in accordance with article 101 of
the company's articles which requires ten days' notice. He says: "I had
hardly any time left to attend the meeting."
According
to the Bhesanias this meeting of the board of directors was held on the 30th
September, 1965, and it was decided that as Tuesday, the 5th October, 1965
(which was the date on which the adjourned annual general meeting should have
been held under section 174(4) unless the directors determined otherwise), was
the Vijaya Dasami day, that is, a public holiday, the adjourned annual general
meeting would be held on Saturday, the 6th November, 1965, at 12-30 p.m. at the
company's registered office at P-19 (26), Ganesh Chandra Avenue; and notices
dated the 30th September, 1965, were accordingly issued to the shareholders on
or about the 1st October, 1965: vide paragraph 5(P) of the said
affidavit-in-opposition.
According
to the Mallya group the adjourned 5th annual general meeting was held at the
company's registered office in accordance with the provisions of section 174(4)
on October 5, 1965, and was adjourned till the next day at the residence of
Sookamal Kanti Ghose. The Mallya group says that on the 6th October, 1965, at
the residence of Mr. Ghose, B. K. Roy retired from directorship and A. K.
Thakur was elected a director in his place and the other usual business of an
annual general meeting was transacted. On behalf of the Bhesania group a
contention is raised that, assuming that the meetings of the 5th and 6th October
were validly held, A. K. Thakur could not have been elected a director at the
residence of Sookamal Kanti Ghose: the election should have taken place at the
registered office of the company where the meeting which failed for want of
quorum was called.
On
the 12th October, 1965, H. Bhesania replies to Sookamal Kanti Ghose's letter of
the 6th October, 1965. In this reply Bhesania explains why the board's meeting
was called on short notice on the 30th September, 1965, and adds: "In view
of the objection stated in your letter regarding such short notice, a meeting
of the board of directors would be held on Tuesday, the 26th October, at 5-30
p.m. at the registered office of the company………A copy of the notice dated the
12th October, 1965, is being forwarded to you separately."
On
the basis of this letter it is contended before me on behalf of the petitioner
that admittedly there was no proper meeting of the board of directors on the
30th September, 1965. The annual general meeting called for the 6th November,
1965, was not, therefore, validly convened.
The
Mallya group asserts that the board of directors was duly reconstituted at the
annual general meeting held on the 5th and 6th October, 1965, as aforesaid. And
at a meeting of the board on the 18th October, 1965, Sukumar Roy was co-opted as a
director pursuant to article 95 of the company's articles read with section 260
of the Companies Act, 1956.
On
the 19th October, 1965, Sookamal Kanti Ghose replied to H. Bhesania's letter of
the 12th October, 1965. In this letter Ghose upholds the validity of the annual
general meeting and the proceedings thereof held on the 5th and the 6th
October, 1965. He contends that no directors' meeting could be held on the 30th
September, 1965, pursuant to the notice of the 29th September, 1965, and if any
such meeting was held, the same was bad in law and any proceedings thereat were
void and inoperative. His further contention is that H. Bhesania, F. R.
Bhesania, F. M. Bhesania and Dali Rattonjee have all ceased to be directors of
the company with effect from the 17th June, 1965, for contravention of section
295 of the Companies Act, 1956. We shall examine this last contention of
Sookamal Kanti Ghose in detail later in this judgment.
On
the same date, namely, the 19th October, 1965, Vittal Mallya, as a director of
the United Breweries Ltd., addressed a letter to the manager of the Bank of
India Ltd. In this letter he informs the bank that the Bhesanias (incidentally,
Dali Ruttonjee is also a Bhesania) have vacated their respective offices as
directors with effect from the 17th June, 1965, owing to contravention of
section 295 of the Companies Act, 1956. Mallya states that on the date of this
letter there were three directors of this company, namely, Sookamal Kanti
Ghose, A. K. Thakur and Sukumar Roy. He states further that the registered
office of the company has been shifted to premises No. 6, Old Court House
Street. The Bank of India on the 20th October, 1965, forwarded to Ruttonjee
& Co. Ltd. at its Ganesh Chandra Avenue address a copy of Mallya's letter
of the 19th October.
On
the 23rd October, 1965, H. Bhesania, F. R. Bhesania and B. K. Roy describing
themselves as directors of Ruttonjee & Co. Ltd. wrote to the manager of the
Bank of India Ltd. disputing all the statements in Mallya's said letter of the
19th October and stating that the annual general meeting of the 5th and 6th
October was illegal and void.
The
next interesting event occurred on the 3rd November, 1965: a suit was
instituted in the name of the company against H. R. Bhesania, F. R. Bhesania,
F. M. Bhesania and Dali Rattonjee, inter alia, for a declaration that these
defendants have ceased to be directors of the company from June 17, 1965, or in
any event from July 31, 1965; the plaint in the suit was verified by A. K.
Thakur.
On
the same day the interlocutory court was moved and an interim order was
obtained in the said suit prohibiting the holding of any general meeting or
meeting of directors of the company till the disposal of the application.
On
the 6th November, 1965, the Commissioner of Excise, West Bengal, addressed a
letter to Ruttonjee & Co. Ltd. of 26, Ganesh Chandra Avenue. In this letter
the Commissioner says that one P. Y. Navalkar, describing himself as a
constituted attorney of the company, had written to him, inter alia, that the
name of Messrs. Ruttonjee & Co. (i.e., the partnership firm) should be
deleted from the aforesaid joint licence granted to the firm and the company.
The Commissioner wanted to see the documents of authorisation to Navalkar. On
the 11th November, 1965, a reply was sent to the Commissioner that Navalkar's
power-of-attorney stood revoked and he was never the holder of any office
mentioned in the Excise Rules.
On
the 9th November, 1965, F. R. Bhesania and Dali Rattonjee made an application
in the said suit for certain orders and the interlocutory court directed on
that application that the company's minute books would be kept with the
Registrar for safe custody.
On
the 15th November, 1965, the court reopened after the long vacation and the
present application was moved on the following day. Certain interim orders were
obtained on the application on the 17th November, 1965, which are not material
for our purposes at present. On the 8th December, 1965, the learned
interlocutory judge vacated the interim injunction in the suit and directed
that board meetings of the company might be held; but no effect was to be given
to the board's resolutions until the disposal of the present application. The
company has been functioning since then under interim arrangements made by
orders of this court obtained from time to time.
It
is clear from the facts set out above that the company was initially started at
the initiative of the Bhesanias with the financial backing of the Mallya group.
For some time the company was functioning smoothly as the two groups were
working in cohesion. From August/September, 1965, disputes and differences
between the two groups started arising on various matters including payment of
royalties to the United Breweries Ltd. These disputes and differences were not
settled through dialogues or negotiations and the breach gradually appeared to
be final. The annual general meeting that was to be held on the 28th September,
1965, failed, due to want of quorum. It is not alleged, however, that any one
deliberately kept himself away from the meeting with a view to create any
difficulties. Thereafter the two groups wanted to have their annual general
meetings in their own ways and the present position is that the Mallya group is
contending that the Bhesanias have ceased to be directors and the Bhesania
group says that A. K. Thakur and Sukumar Roy are not duly elected directors.
Sookamal Kanti Ghose has, it is alleged, in paragraph 17 of the petition,
tendered his resignation on the 9th November, 1965.
It
is against this background that the petitioner invites this court to exercise
its powers under section 186 of the Companies Act and to call a general meeting
with the following agenda—
1. Removing
all existing directors and/or persons claiming to be directors, namely:
(a) Mr.
H. R. Bhesania.
(b) Mr.
F. R. Bhesania.
(c) Mr.
F. M. Bhesania.
(d) Mr.
Dali Ruttonjee.
(e) Mr.
A. K. Thakur.
(f) Mr.
Sukumar Roy.
2. Accepting the resignation tendered by Sookamal
Kanti Ghose by his letter dated November 9, 1965.
3. Electing
and appointing new directors.
4. To consider the situation arising out of the
litigation between rival claimants for the office of the directors of the
company and to pass necessary resolution for the proper management of the
business of the company.
5. To consider and
decide where the registered office of the company should be maintained or
located. Obviously, the court before it exercises its discretion has to enquire
into the petitioner's motive. The court also has to examine the respective
contentions aforesaid of the two groups as to who the present directors of the
company are with a view to ascertain whether it is, in fact,
"impracticable" to call a meeting of the company. It was conceded by
learned counsel for both the parties that if the court came to the conclusion
that any of the rival contentions aforesaid is unacceptable or there are some
persons who are still directors of the company, the power under section 186
should not be exercised.
We
have seen above that the very first agenda which is suggested for the general
meeting this court has been invited to call under section 186 is:
"Removing
all existing directors and/or persons claiming to be directors……."
Learned
counsel for the petitioner has urged that under article 87 of the company's
articles read with section 284 of the Companies Act, 1956, a resolution for
removal of all the directors would be a perfectly valid resolution. Learned
counsel argues further that in view of the disputes between the Mallya group and
the Bhesania group the only course open for a proper functioning of this
company is to remove all its directors and elect a new set of directors and the
court should accede to this request to solve the deadlock which exists.
Now,
article 87 of the company's articles provides:
The
number of directors shall not be less than two or more than six. The first
directors shall be the promoters of the company, namely:—
1. Mr. F. Bhesania.
2. Mr.
H. Bhesania.
These
directors are permanent directors and not liable to removal unless they are
otherwise disqualified from continuing as directors under the provisions of the
law.
Mr.
Basu, learned counsel for the company, says that there is no difficulty in
removing these permanent directors. He relies on section 284 of the Act. Under
this section a company may, by ordinary resolution, remove a director before
the expiry of his period of office.
Assuming
that by virtue of section 284 even permanent directors may be removed, it is to
be observed that the power which is given to a company under this section is
not an absolute or an unrestricted power. The legislature has provided for
adequate safeguards against arbitrary or unreasonable exercise of this power.
Sub-section (2) of section 284 provides that special notice shall be required
of any resolution to remove a director under this section or to appoint
somebody instead of a director so removed at the meeting at which he is
removed. Sub-section (3) of section 284 says that on receipt of notice of a
resolution to remove a director under this section, the company shall forthwith
send a copy thereof to the director concerned, and the director (whether or not
he is a member of the company) shall be entitled to be heard on the resolution
at the meeting. Sub-section (4) of section 284 prescribes that where notice is
given of a resolution to remove a director under this section and the director
concerned makes with respect thereto representations in writing to the company
(not exceeding a reasonable length) and requests their notification to members
of the company, the company shall, unless the representations are received by
it too late for it to do so: (a) in any notice of the resolution given to
members of the company, state the fact of the representations having been made;
and (b) send a copy of the representations to every member of the company to
whom notice of the meeting is sent (whether before or after receipt of the
representations by the company); and if a copy of the representations is not
sent as aforesaid because they are received too late or because of the
company's default, the director may (without prejudice to his right to be heard
orally) require that the representations shall be read out at the meeting;
provided that copies of the representations need not be sent out and the
representations need not be read out at the meeting if, on the application
either of the company or of any other person who claims to be aggrieved, the
court is satisfied that the rights conferred by this sub-section are being
abused to secure needless publicity for defamatory matter, and the court may
order the company's costs on the application to be paid in whole or in part by
the director notwithstanding that he is not a party to it.
I
have elaborately set out the above provisions just to show that to remove a
director under section 284 certain essential requirements are to be fulfilled.
The director concerned must be given a reasonable opportunity to make
representations against the proposal for his removal and the shareholders of
the company should also have adequate opportunities of being acquainted with
such representations before they subscribed to a resolution for removal. That
is precisely why in clause (b) of the prayers in the present petition
directions have been asked for dispensing with the giving of the special notice
and the circulation thereof. The point is whether the court should go to this
exent on the facts of this case.
It
is manifest that the Mallya group wants to eliminate the Bhesania group from
the board altogether although at the inception it was solemnly agreed that two
of the Bhesanias would be permanent directors. It may be that, if the two
permanent directors were indulging in activities injurious or prejudicial to
the interests of the company, there was no reason why they should be retained
on the board: but before a court is asked to exercise its powers under section
186 and to dispense with the special notice provided for in section 284, the
court should at least be told what the specific charges against these two permanent
directors are. I have gone through the petition but have not discovered any
such charges against them, apart from the statement that some persons are
contending that they have ceased to be directors for contravention of section
295 of the Companies Act, 1956. We shall consider the charge of contravention
later; but the court should not, in my opinion, be a party to removal of
permanent directors (or of any director) of a company by exercising its
discretion under section 186 and dispensing with the said special notice in the
absence of concrete, precise and specific charges against these directors with
relevant evidence in support thereof. I have said that the motive of a
petitioner is an important factor for the court's consideration in using the discretion
under section 186. The manner in which the petitioner has asked the court to
remove the permanent directors does not, in my opinion, reveal a laudable
motive. I would have occasion to discuss the petitioner's motive again later in
this judgment. Mr. Basu, arguing for the petitioner, referred to In re El
Sombrero Ltd in which the court exercised its powers under
section 135(1) of the English Act, which was similar to section 186 of our Act;
but it was proved that the directors were neither calling annual general
meetings nor were they complying with requisitions for general meetings. The
facts, to my mind, were entirely different.
The
next argument of the petitioner's counsel is based on paragraph 5(k) of the
affidavit-in-opposition of Dali Ruttonjee. Learned counsel contends that the
averments in this sub-paragraph should convince me that the four Bhesanias who
are all directors of the company, are anxious for a joint licence in the name
of the company and the partnership firm of which admittedly two of the
Bhesanias are partners and the two others are the partners' brothers. These are
not persons, according to the petitioner's counsel, who can be said to have a
real concern for the company's welfare and an attempt at their removal cannot
be stamped with bad motive.
It
is embarrassing for me to examine this contention as this point has not been
taken in the petition. I find from the facts, however, that the excise
authorities, presumably upon considering all the facts of this case, had
granted a joint licence to the partnership firm and the company. And the Mallya
group accepted that position. I have been told by counsel for the respondents
(who were not contradicted by the petitioner's counsel) that after the present
dispute had started an attempt was made to obtain the licence in the name of
the company alone; the then Excise Minister of West Bengal was approached; and
the Government passed an order for issue of the licence only to the company.
The order was challenged under article 226 of the Constitution and D. Basu J.
had set it aside. The company thereupon represented by A. K. Thakur preferred
an appeal against the judgment of Basu J. The State Government also preferred a
separate appeal. I understand that the company's appeal has been withdrawn and
the State Government's appeal is pending. In these premises it would not be
proper for me to infer that the Bhesanias have a mala fide intention as suggested
by the petitioner's counsel especially in the face of a judgment of this court
(which has not yet been reversed on appeal) that a licence only to the company,
on the facts of this case, should not have been granted.
Learned
counsel for the petitioner then argued that the Bhesanias have taken up an
obstructive attitude making it impossible for the company's board of directors
to function under the articles inasmuch as they do not want to pay any royalty
to the United Breweries Ltd. for (a) the use of their (that is, the United
Breweries Ltd.) label and trade mark of Sunagar and King Fisher, and (b) for
surrendering territories for sale of 24,000 bottles per month. It is submitted
that these are reasonable demands particularly having regard to the sacrifices the
shareholders of the United Breweries Ltd. have made for Ruttonjee & Co.
Ltd. It is stated that the United Breweries Ltd. has purchased 3,52,800 shares
out of 4,00,000 equity shares of the company by paying Rs. 600 per each share;
it has also agreed that its label and trade mark with respect to the two
varieties of beer mentioned above would be used by Ruttonjee & Co. Ltd.;
and unless this royalty is realised the directors of United Breweries Ltd.
would not be able to justify their conduct before their own shareholders.
This
is a matter concerning the internal management of the company. The court ought
not to express any views on it except in so far as it is necessary to do so to determine the impracticability of
calling a general meeting. With this end in view I intend to look into the case
of the Bhesanias on this question of payment of royalty to the United Breweries
Ltd. Dali Ruttonjee in his said affidavit-in-opposition says that Vittal Mallya
by his letter dated the 21st August, 1965, addressed to F. R. Bhesania (a copy
whereof was sent to Dali Ruttonjee) again raised the question of royalty: vide
paragraph 5(o). He says further that Vittal Mallya is anxious that the company
should pay a royalty to the petitioner; but if such royalty is paid, the total
amount would come up to about Rs. 16,00,000 a year on the basis that the
brewery works in one shift only. (Mallya in paragraph 7 of his
affidavit-in-reply affirmed on the 17th January, 1966, states that the royalty
would come up to Rs. 13 lakhs approximately). According to Dali Ruttonjee the
result will be that the company will never be able to pay off its debts or to
give any dividend to its shareholders. He charges that in order to achieve this
object Vittal Mallya is anxious to have a board of directors of his own choice
and to remove the Bhesanias: vide paragraph 6.
In the board of directors
of a company it is not at all unlikely that there would be differences of
opinion on various matters between two individual directors or two sets of
directors. These differences may be settled by mutual discussions or majority
of votes. They may, by adopting the appropriate procedure, be also brought
before the shareholders for a decision; but I do not think that on this
application I can hold that the Mallya group is justified in asking for a
royalty or the Bhesania group is unreasonably objecting to it. It is possible
that the Bhesania group honestly considers that payment of a huge sum as
royalty every year to the petitioner is not in the interest of the company and
its future prospects would be seriously affected if such an arrangement be
agreed to. The forum for settlement of this dispute is, in my opinion, not this
court trying an application under section 186 of the Companies Act, 1956. I do
not think that the court should either be a party to or instrumental in the
removal of all the Bhesanias from the company's board of directors simply
because they do not want to pay royalties to the petitioner. I am of the view
that section 186 of the Companies Act was not introduced into the statute book
to help the majority of shareholders to achieve objects of this kind.
Let us now examine the
contention that the Bhesanias have ceased to be directors under section 295 of
the Companies Act, 1956. Section 295, inter alia, provides that no company
(hereinafter called the lending company) without obtaining the previous
approval of the Central Government in that behalf shall, directly or
indirectly, make any loan to, (a) any director of the lending company or any
partner or relative of any such director; and (b) to any firm in which any such
director or relative is a partner.
[Then
after discussing the facts of the case, his Lordship proceeded:]
On
these slender materials I cannot assume that the Bhesanias have ceased to be
directors. I wish to make it clear that I am not. expressing any views on the
merits of the suit now pending before this court. On proper evidence to be
adduced in the suit the court may come to a different conclusion; but at the
moment for the purpose of the present application the materials available to me
do not justify the conclusion that there has been in the instant case a
contravention of section 295 of the Companies Act, 1956. It naturally follows,
therefore, that unless the court is satisfied that there are no directors who
are capable of functioning legally or there is reasonable doubt as to who the
directors are the court would find it difficult to hold that it is
"impracticable" to call a general meeting of the company.
Learned
counsel for the petitioner has contended before me that if there is a prima
facie case for loan the directors concerned, that is, all the Bhesanias, have
vacated the office under section 295 read with section 283(h) of the Companies
Act, 1956. To my mind even a prima facie case requires better materials to be
placed before the court. How the merits of the dispute would be decided in the
suit is not my concern; but prima facie I must be satisfied that the Bhesanias
are no longer directors and they are not in a position to call a general
meeting.
It
is true that there are serious disputes between the parties as to whether the
adjourned annual general meeting of the company was held on the 5th and 6th
October, 1965. If this meeting has been held then A. K. Thakur and Sukumar Roy
are now directors of the company; and B. K. Roy is no longer a director. If the
meeting has not been validly held, B. K. Roy is still a director and neither A.
K. Thakur nor Sukumar Roy can claim to be directors. As regards the resignation
of Sookamal Kanti Ghose also, there is a dispute. The Bhesanias group says that
Ghose's letter of resignation was addressed to a non-existent secretary of the
company and is of no effect.
In
the context of these facts we have to consider the "impracticability"
of calling a general meeting to bring the case within the scope of section 186
of the Companies Act. Learned counsel for the petitioner refers to annexure
"E" to the affidavit-in-reply of Hari Prem Bhagat affirmed on the
14th January, 1966. This is a copy of a letter dated the 12th October, 1965,
which H. Bhesania addressed to Sookamal Kanti Ghose "for Ruttonjee &
Co. Ltd." and as a director thereof. In this letter, as we have already
observed, Bhesania has explained why notice for an emergency meeting of the
board of directors to be held on the 30th September, 1965, was issued on the
29th September, 1965. Then Bhesania goes on to say that:"
“In view of the
objection stated in your letter regarding such short notice, a meeting of the
board of directors would be held on Tuesday, the 26th October, at 5-30 p.m. at
the registered office of the company at P-19, Ganesh Chandra Avenue,
Calcutta-13. A copy of the notice dated the 12th October, 1965, is being
forwarded to you separately."
The
petitioner's counsel contends that from this letter of H. Bhesania it is clear
that a fresh annual general meeting has to be called by the board of directors.
In the alternative, a requisitioned meeting under section 169 of the Companies
Act has to be called. In that event a requisition has to be addressed to the
board of directors so that the requisitionists may call such meeting in case of
failure to do so on the part of the board. According to the petitioner's
counsel there are no directors to whom the requisition can be addressed. In any
event, there is no certainty as to the persons who constitute the board as the
matter depends on (a) whether the Bhesanias have vacated office and (b) whether
the 5th annual general meeting was validly held on the 5th and 6th October,
1965.
I
have already held that there is no prima facie case that H.R. Bhesania, F.R.
Bhesania, F.M. Bhesania and Dali Ruttonjee have ceased to be directors of the
company. I can understand that the positions of B.K. Roy, Sookamal Kanti Ghose,
A.K. Thakur and Sukumar Roy are disputed; but with regard to the four
Bhesanias, I cannot hold on the averments in the petition and in the affidavits
before me that they are no longer directors of the company. The company's
articles provide that the number of directors shall not be less than two or
more than six and the quorum for meetings of the board of directors shall be
one-third of its total strength (any fraction contained in that one-third being
rounded off as one) or two directors, whichever is higher: vide articles 87 and
102. In these circumstances, I am not satisfied that a requisition meant for
the four Bhesanias (who according to the contesting respondents are admittedly
directors of the company) shall be an invalid requisition. Moreover, on the
facts of the instant case, the court cannot also ignore the provisions of
section 167 of the Companies Act, 1956. This section is as follows:
"167.
Power of Central Government to call annual general meeting.—(1) If default is
made in holding an annual general meeting in accordance with section 166, the
Central Government may, notwithstanding anything in this Act or in the articles
of the company, on the application of any member of the company, call, or
direct the calling of, a general meeting of the company and give such ancillary
or consequential directions as the Central Government thinks expedient in
relation to the calling, holding and conducting of the meeting.
Explanation.—The
directions that may be given under this sub-section may include a direction
that one member of the company present in person or by proxy shall be deemed to
constitute a meeting.
(2) A general meeting held in pursuance of sub-section (1)
shall, subject to any directions of the Central Government, be deemed to be an
annual general meeting of the company."
In
the present case there is a dispute as to whether the 5th annual general
meeting has been validly held and admittedly no annual general meeting has been
held thereafter. Under the Companies Act, 1956, the Central Government appears
to be a competent authority to call an annual general meeting in cases of
default. Section 186 gives power to the court to call a meeting of the company
other than an annual general meeting. I am told that no attempt has yet been
made by any member of the company to approach the Central Government. If the
result of that attempt had been known, it would perhaps have been easier for me
to entertain this application under section 186.
Let
us again go back to the practicability of requisitioning a meeting. Learned
counsel for the petitioner has urged that in this application the court should
not enter into the controversy relating to the Bhesanias' vacating office under
section 295 as that is the subject-matter of the suit. I do not accept this
contention. The court cannot be expected to exercise its discretionary powers
under section 186 without even ascertaining whether there is a prima facie case
against the Bhesanias. A mere allegation that certain persons are not directors
of a company does not create a ground for an application under section 186. I
do not think that is or can be the object of the section. The court, to my
mind, must test the basis of the allegation before it decides upon calling a
meeting under section 186.
The
next contention of the petitioner's counsel is that there appears to be two
registered offices of the company, one at the office of the partnership at No.
26, Ganesh Chandra Avenue, and the other at No. 6, Old Court House Street,
Calcutta. Under section 169 a requisition has to be deposited at the company's
registered office; but in view of the contentions of the parties herein, it is
not at all certain where the registered office is.
From
a letter of A. K. Thakur to Messrs. Fowler & Co. dated October 20, 1965 (a
copy whereof has been annexed to Mallya's affidavit-in-reply) it appears that
according to the Mallya group or the Thakur group the registered office of the
company was transferred from 26, Ganesh Chandra Avenue to 6, Old Court House
Street, Calcutta-1, "from October 19, 1965". The case of the petitioner
is that on the 18th October, 1965, a meeting of the company's board of
directors was held. At this meeting Sukumar Roy was co-opted as a director and
it was decided that the company's registered office would be transferred as
aforesaid. The Bhesania group, in my view, rightly contends on the facts placed
before me that the decision to transfer the registerd office is of no effect
inasmuch as no notice of the meeting of the board was sent to or received by
any of the Bhesanias. Article 101 of the company's articles clearly provides
that 10 days' notice of every meeting of the board of directors 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, provided that a meeting of the board
may be called at less than 10 days' notice with the consent of all the
directors.
There
is no prima facie case that the Bhesanias have ceased to be directors. In the
premises a meeting of the board of directors could not be convened without
notice to the Bhesanias. If a meeting was held without such notice and in that
meeting it was resolved that the registered office should be transferred, the
resolution, to my mind, on the facts at present available, is of no effect.
Moreover, admittedly, this meeting of the board was not held at the company's
then registered office at No. 26, Ganesh Chandra Avenue, Calcutta. The
registered office of the company, therefore, still continues to be at 26,
Ganesh Chandra Avenue.
Learned
counsel for the petitioner then says that it is also not clear to whom the
notice of the requisition is to be given. It is common case that before the
disputes started H.R. Bhesania was the chairman of the company's board of
directors. The notice of the requisition may be addressed to him at No. 26, Ganesh
Chandra Avenue, and after getting this notice if the board fails to convene the
requisitioned meeting, the consequences prescribed by section 169 of the
Companies Act would, in my opinion, follow. Learned counsel appearing for all
the contesting respondents have repeatedly assured me in the course of the
hearing upon instructions that a notice of requisition addressed as aforesaid
to H.R. Bhesania would be duly received.
The
next argument of the petitioner's counsel is that by reason of section 174 of
the Companies Act a requisitioned meeting would fail for want of quorum if the
Bhesanias do not attend the meeting. This is a hypothetical problem and the
court cannot be expected to solve it at the moment.
On
these facts the position appears to be that unless the result of an attempt to
convene a requisitioned meeting is known, I do not think it would be proper for
the court in the exercise of its discretion to call a meeting under section
186. My view is that to reach the conclusion that "it is impracticable to
call a meeting of the company…….in any manner in which meetings of the company
may be called" as contemplated by section 186, it is necessary for the
court to know, on the facts of this case, that the shareholders made an attempt
to call a requisitioned meeting but that attempt had failed.
The petitioner's counsel
has also invited me to take into consideration certain other facts of this
case. He says that if the 5th annual general meeting of the company has not
been validly held there may be prosecutions. Secondly, another year has ended
on the 31st March, 1966, which means that the 6th annual general meeting should
have been called by the 30th September, 1966. Thirdly, no balance-sheet can be
prepared unless the auditors are asked to do so by a resolution of the board:
no dividend can be declared or paid; and a young company which has started
production for about a year only cannot be killed by the greed of only 12% of
the shareholders. Learned counsel submits that in circumstances such as these the
only remedy is to have an annual general meeting under orders of the court.
It is true that the 6th
annual general meeting has not been called; but in view of the interim orders
of this court I have already mentioned, I do not think any prosecution ought to
succeed. Secondly, if there are serious difficulties in holding the annual
general meeting or default is made in holding it, the Central Government may be
approached under section 167 to solve the problem, but up-till now no such
attempt has been made. I am not impressed by the argument that the greed of a
minority of shareholders is holding back the normal functioning of this
company. The minority group tells me in rebuttal of this allegation that the
trouble has arisen owing to the greed of 88% of the shareholders headed by
Vittal Mallya who claims a royalty of Rs. 16,00,000 a year according to Dali
Ruttonjee (paragraphs 5(o) and 6 of Dali Ruttonjee's affidavit-in-opposition)
and about Rs. 13,00,000 a year according to Vittal Mallya (paragraph 7 of Mallya's
affidavit-in-reply). I have said, I would not enter into the merits of the
dispute and pronounce my opinion as to which group is justified in taking up
its attitude; but on the materials at present available to me, I am reluctant
to accept the proposition that a meeting should be called by this court because
a minority of shareholders is unreasonably causing obstructions.
Learned counsel for the
petitioner argued further that the deadlock has reached such a stage that, if
Sukumar Roy and A.K. Thakur called a meeting, the Bhesania group would file
suits. If, on the other hand, the Bhesania group called a meeting, the Thakur
group would file suits. The pending suits, says the petitioner's counsel, would
be taken up on appeal; from the suits that may be filed there would be appeals;
and it is exactly to prevent such a situation that the court assists the
shareholders in expressing their wishes at a meeting called by the court.
I am not saying that this
point is altogether without substance; but one should also consider that suits
and appeals could be filed as a matter of right whether there was any
foundation for them or not; but when pending suits or appeals and the possibility of further suits
and appeals form the basis of an application under section 186, the court, to
my mind, has a duty to see if there is a prima facie case. In the present
application I can see that there are disputes which are not perhaps frivolous
regarding the positions of B.K. Roy, Anil Thakur, Sukumar Roy and Sookamal
Kanti Ghose vis-a-vis the board of directors of the company; but I have not
found a prima facie case against H.R. Bhesania, the chairman of the board of
directors, F.R. Bhesania, F.M. Bhesania and Dali Ruttonjee that they have
ceased to be directors. I do not want to repeat what I have said earlier on
this point. This company requires a minimum of two directors only to constitute
a Board. And there are at least 4 directors against whom, in my opinion, no
prima facie case exists at this moment. If I could come to the conclusion on
the facts stated before me that there were doubts as to whether the Bhesanias
also were still the directors of the company, I might have been inclined to
exercise my powers under section 186; but no materials have been placed before
me to reach that conclusion except that certain persons are contending that
they have ceased to be directors. Contentions alone would not do if the facts
stated by Dali Ruttonjee in paragraph 5(k) of his affidavit-in-opposition go
practically unchallenged.
In
concluding my views on the facts of this case, I intend to reiterate that from
the relevant paragraphs in the petition and the various affidavits in these
proceedings, it seems to me that the Mallya group is determined to throw out
the Bhesania group who took the initiative in bringing this company into
existence without any positive complaint against them or without giving them an
opportunity to answer the charges, if any, against them by a brute majority of
votes in the general meeting. The court has a discretion under section 186 and
that discretion, in my opinion, should not be used in favour of the petitioner
with these facts in the background.
Numerous
decisions were cited at the Bar. I need not refer to all of them. I would only
discuss the cases decided by our court and an English case in which the facts
leading to impracticability of calling a general meeting were considered.
In
re Lothian Jute Mills Co. Ltd.
Sinha J., as he then was, had to consider the provisions of section 79(3) of
the Companies Act, 1913, which were the same as in section 186 of the new Act.
There were disputes between two rival groups of directors. His Lordship has
laid down certain general principles to be observed in applying section 79(3).
These principles are as follows:
"The
court would not ordinarily interfere in the domestic management of the company
which must be conducted in accordance with the powers contained in the
regulations of the company.
But
where the meeting can be called only by the directors and there are serious
doubts and controversy as to who are the directors and where there is
possibility that one or other or both the meetings called by the quarrelling
groups of directors may be invalid, the shareholders should not be exposed to
the uncertainties flowing from the situation and the consequent litigation and
it should be held that a position has arisen which makes it 'impracticable' for
the meeting being called in accordance with the articles.
The
court should exercise its powers where it cannot say with reasonable approach
to certainty, or even prima facie that the meeting called in exercise of the
powers contained in the regulations will be valid."
This
is the first case of this court cited before me. Sinha J., on the facts of the
case, upon considering the disputes raised by the rival groups, did exercise
his powers under section 79(3) "in order to resolve the conflict and
uncertainty" which had arisen. With respect, I agree with the broad
principles enunciated by the learned judge; but by applying those principles to
the instant case, I am finding it difficult to invoke my powers under section
186. I cannot with reasonable approach to certainty or even prima facie say that
a meeting called in accordance with the articles of this company will not be
valid. There is no challenge here to the appointment of directors ab initio. So
far as the Bhesanias are concerned, the allegation is that by reason of some
specific act after a valid appointment they have ceased to be directors. Such
an allegation has to be examined to see if there is a prima facie case. The
Bhesania group's contention before me is that money was received for the
specific purpose of payment of excise duty; it was received entirely for the
benefit of the company; it would be realised by the company out of the sale
proceeds; and it was not repayable by any of the directors at all. As a matter
of fact up till now no suit has been filed for the recovery of any alleged loan.
It is also stated that the money did not belong to the company at all; it was
paid in cash by someone else as the company had no money. On these facts I
cannot prima facie hold that the four Bhesanias have ceased to be directors;
and then draw the conclusion that it is"impracticable" to call a
general meeting in the ordinary way.
The
next case to which my attention was invited was the case of Malhati Tea
Syndicate Ltd. Here also there were disputes as to whether
there was a valid board of directors. At page 655, Banerjee J. observed:
"It is difficult
for me on this application and it would be inexpedient having regard to the
pending suits to decide which of the directors have been validly appointed. I
am not satisfied on the facts of this case that there is a board of directors
who can call a meeting in the manner in which a meeting of the company may be
called. Meetings held otherwise than under the direction of the court under
section 79 in the circumstances of this case would lead to interminable
troubles and prejudice the interests of the company."
On
the same grounds which I have advanced in discussing the Lothian Jute Mills Co.
Ltd.'s case the judgment of Banerjee J. is also
distinguishable.
We
next come to the case of Indian Spinning Mills Ltd. v. M. S. J. Bahadur Rana .
This is a judgment of the appellate court by Harries C. J. sitting with
Banerjee J. The question there arose as to whether it was impracticable to hold
an extraordinary general meeting. The trial court made an order calling a
meeting under section 79(3) of the 1913 Act. One A.C. Roy Chowdhury had been
elected chairman of the board of directors but disputes arose and eventually
the other directors challenged his position on the board and he was requested
"to vacate from the board of directors………" Roy Chowdhury was
thereafter excluded from the board and another shareholder was co-opted in his
stead and a new chairman was appointed. The contesting respondents contended
that the entire proceedings excluding Roy Chowdhury and appointing a new
chairman were illegal and of no effect. The position of Roy Chowdhury also
became the subject-matter of two suits in which the contestants aforesaid tried
to assert their respective positions. In one of the suits there was a prayer
for a declaration that an extraordinary general meeting which had been called
on September 9, 1950, was improperly convened, and further that any directors
appointed at that meeting should be declared to have been invalidly appointed.
It appears that a requisition was served on the directors to call an
extraordinary general meeting but they did not comply with the requisition and
when the requisitionists themselves proceeded to call the meeting, the suit was
filed to defeat it.
The
facts of this case clearly point to the impracticability of calling a general
meeting in the usual way and the appellate court affirmed the decision of the
trial court calling a meeting under section 79(3). Harries C. J. observed in
paragraph 18 at page 356:
"The
learned judge rightly refused to decide the matters which are in issue in the
suit and I do not think it will be right for us to express any opinion upon
these matters. However, it is clear that there is a serious dispute between the
parties as to whether Mr. Roy Chowdhury was qualified to act as a director and
whether or not he was wrongly excluded from the board. If it transpired in the
suit that he was wrongly excluded from the board, difficulties might arise
concerning any meeting which the requisitionists might call under section
78(3). In fact it seems fairly clear that if such a meeting was called it would
be the cause of considerable litigation."
In
paragraph 19, at page 357, Harries C. J. says:
"If
the meeting was called, difficulties would undoubtedly arise as to the conduct
of the meeting. In an extraordinary general meeting the parties might elect
their own chairman, but the probabilities are that objection would at once be
taken to Mr. Roy Chowdhury either acting as chairman or even voting or being concurred
in the proceedings at all. It seems to me that if the requisitionists were
allowed to conduct this meeting endless difficulties would arise and,
therefore, I think the learned judge was right in holding that it was
impracticable to hold such a meeting.”
Harries
C. J. supports the meaning of the word "impracticable" given by
Banerjee J. in the case of Malhati Tea Syndicate Ltd. Banerjee J. adopted the meaning which the
Judicial Committee gave to the word "impracticable" in Commissioner,
Lucknow Division v. Deputy Commissioner of Partabgarh
According to the Privy Council "impracticable" means impracticable
from a reasonable point of view and Banerjee J. has added in the case of
Malhati Tea Syndicate Ltd, 6 that "the court takes a common-sense view of
the matter and acts as a prudent person of business".
I
have discussed this judgment of the appellate court slightly in detail with a
view to point out the meaning that should be given to the word
"impracticable" in section 186 of the Companies Act, 1956. The court
in every case has to look at the facts from a reasonable commonsense point of
view and act as a prudent person of business to decide whether it has become
"impracticable" to call a general meeting. That is one of the reasons
why I have been saying that a prima facie case against the Bhesanias should
have been established in the instant case to enable the court to decide upon
the impracticability of convening a general meeting in the ordinary manner.
I
would now come to a case recently decided in England. It is the case of El
Sombrero Ltd. The provisions of section 135(1) of the
English Companies Act, 1948, are similar to those of section 186 of our Act.
The applicant in this case held 90 per cent, of the shares of a private company
incorporated in March, 1956. There were two directors and each of them held 5
per cent. of the shares. The quorum for general meetings was two members
present in person or by proxy, and, if within half an hour from the time
appointed for a meeting a quorum was not present, the meeting, if convened on
the requisition of members, was dissolved. No general meeting of the company
had ever been held. On March 11, 1958, the applicant requisitioned an
extraordinary general meeting for the purpose of passing resolutions removing
the two directors and appointing two other persons as directors. The existing
directors failed to comply with the requisition. The applicant himself convened
an extraordinary general meeting for April 21, 1958. The directors deliberately
did not attend the meeting either in person or by proxy and, as a quorum was
not present, the meeting was dissolved. On April 29, 1950, the applicant served
a special notice, under section 142 of the Act of 1948 of his intention to move
the same resolutions, under section 142 and section 184, at the next
extraordinary general meeting of the company. On the same day he took out an
originating summons asking for a meeting to be called by the court, under
section 135(1), for the purpose of passing the resolutions and for a direction
that one member of the company should be deemed to constitute a quorum at such
meeting. The directors opposed the application. Wynn-Parry J. has held:
(i) as a practical matter, the desired
meeting of the company could not be conducted in accordance with the articles
of association and the court had jurisdiction under section 135(1) of the
Companies Act, 1948, to order a meeting to be held notwithstanding opposition
by the shareholders other than the applicant, and
(ii) an order for meeting to be held and
that one member present should constitute a quorum would be made because—
(a) to refuse the application would be to
deprive the applicant of his statutory right under section 184 to remove the
directors by means of an ordinary resolution, and
(b) the respondent-directors had failed to
perform their statutory duty to call an annual general meeting for the reason
that, if they had convened a general meeting, they would have ceased to be
directors.
It
is apparent that the facts of the case before Wynn-Parry J. were much stronger
than the facts here. In the English case the facts established that there was
an impracticability to which the directors themselves had contributed. In our
case it cannot be said that the directors have failed to call any annual
general meeting. In our case there has been no requisition as yet which the
directors have not complied with and it is also not yet in evidence that the
Bhesania group has deliberately refrained from attending any extraordinary meeting
so that the quorum may not be present. I do not think that the decision of
Wynn-Parry J. can be applied to the facts of the present case.
Reliance
was also placed on Stroud's Judicial Dictionary, third edition, volume 2, at
page 1377. It says:
"The
words ' impracticable to conduct a meeting ' in section 115(2) of the Companies
Act, 1929…….see now Companies Act, 1948, section 135……..covers the case where
it is impracticable owing to the terms of the articles and the state of
shareholding in the company to get a quorum present: In re Edinburgh Workmen's
Housing Improvement Co. "
Learned
counsel for the petitioner has urged that having regard to the state of the
shareholding in this company it is impracticable to get a quorum. I have
already said that on the facts of the case the proposition at present appears
to be hypothetical. In the case of El Sombrero Ltd. ,
as we have seen, the dissenting group deliberately chose not to attend the
meeting to frustrate the purpose of the meeting due to lack of quorum. We do
not yet know what the Bhesania group is going to do if an extraordinary general
meeting is requisitioned. Until that is known I do not see how the court, in
the exercise of its judicial discretion, can call a meeting under section 186.
I
would now come to the case of Bengal and Assam Investors Ltd. v. J. K. Eastern
Industries Private Ltd. P. B. Mukharji J. refused to call a general
meeting in this case under section 186. The facts, inter alia, were that a
notice had already been issued calling an extraordinary general meeting of the
company. The learned judge, in paragraph 5, at page 660, observed:
"The
resolutions that are intended to be passed at the meeting demanded by the
requisitionists are set out in the notice itself."
The
learned judge thought that there was, therefore, no impracticability in the
matter of calling the meeting. The ground on which the assistance of the court
was sought, was that one K. L. Jatia, the chairman of the board of directors,
might not act impartially because his removal was sought in one of the proposed
resolutions for the extraordinary meeting. P.B. Mukharji J., in paragraph 13,
at page 661, says:
"I
am satisfied that K.L. Jatia cannot decide on the resolutions proposed in that
meeting because the resolutions will have to be voted by the shareholders. It
is the shareholders who will be in control of the meeting.
If
the applicant has on its side 55 per cent. of the votes of the shareholders, I
do not see why they should be at all frightened. The chairman's power is very
limited. He has a vote as a shareholder and director. That gives him no special
position to control the meeting. He has, in the event of an equality of votes
between two rival groups, a casting vote. But on the applicant's own showing
there is no question of equality of votes in this case because the applicant's
group is much larger than the respondent's group."
It
is no doubt true, as the petitioner's counsel has contended, that the facts in
this case were entirely different from the facts we have to deal with. And this
case does not give us much assistance in deciding whether this application should be refused; but P.B. Mukharji J.,
in paragraphs 17 and 18 of his judgment, has discussed certain general
principles that are to be applied to section 186 of the Companies Act. The
petitioner's counsel says that these observations are in the nature of obiter;
but, to my mind, they are useful observations and some of them lay down the
basic principles that are to be followed by the courts while considering an
application under section 186. P.B. Mukharji J. has expressed his concurrence
with the meaning given to the word "impracticable" by Banerjee J. in
the case of Malhati Tea Syndicate Ltd. (Banerjee J.’s view, as we have already seen,
has also been accepted by the appellate court), and has developed the point still further in the case of
Bengal and Assam Investors Ltd.
Upon considering the
relevant authorities on this subject and examining the language of the statute
the main principles involved in trying an application under section 186 are, to
my mind, as follows:
1. The court would not ordinarily interfere with
the domestic management of a company which should be conducted in accordance
with its articles.
2. The discretion granted under section 186 should be used sparingly
and with caution so that the court does not become either a shareholder or a
director of the company trying to participate in the internecine squabbles of
the company.
3. The word
"impracticable" means impracticable from a reasonable point of view.
4. The court should take a commonsense view of the matter and must act
as a prudent man of business.
5. A prudent man of business has not a sensitive, officious view of
intervention in case of every rivalry between two groups of directors; prudence
demands that the court ordinarily keep itself aloof from participating in
quarrels of rival groups of directors or shareholders.
6. But where the meeting can be called only by the directors and there
are serious doubts and controversy as to who are the directors or where there
is a possibility that one or other or both the meetings called by the rival
groups of directors may be invalid, the court ought not to expose the
shareholders to uncertainties and should hold that a position has arisen which
makes it "impracticable" to convene a meeting in any manner in which
meetings of the company may be called.
7. The court should exercise its powers under section 186, when, upon
considering all the facts and circumstances of a case, it can say with a
reasonable approach to certainty or even prima facie that a meeting called in
the manner in which meetings are ordinarily called under the Act or under the
articles, would be invalid.
8. Before the court exercises its discretion under
section 186 the court must be satisfied, when a director or a member moves an
application, that it has been made bona fide in the larger interests of the
company for removing a deadlock otherwise irremovable.
When
I apply the principles enunciated above to the facts of this case it seems to
me that this is not a case which falls for the court's interference under
section 186 of the Companies Act, 1956.
Numerous
other points have been urged before me. Mr. S. C. Sen, learned counsel for one
of the contesting respondents, has also dealt with the history of company
jurisprudence in relation to the provisions of section 186; but having regard
to the conclusions I have already reached, I do not think it necessary to
consider any other point raised in this application.
The
result is that this application is dismissed. The petitioner will pay to the
respondents one set of costs. Certified for counsel.
[1974] 44 COMP. CAS. 1 (SC)
v.
Union of
k. k Mathew and M. H. Beg, Jj.
CIVIL APPEAL NO. 1333 OF
1967
August 2, 1973
V. S Desai, Senior Advocate (Ravinder Bam,O. P. Rana
and Miss Uma Mehta, Advocates, with him), for the appellants.
B. Sen, Senior Advocate (Suresh Sethi, R. K.
Maheshwari and B. P. Maheshwari, Advocates, with him), for the respondent.
Mathew, J.—This appeal by certificate is
directed against the decree of the High Court of Delhi, dated November 25,
1966, passed in Regular First Appeal No. 89-D of 1956 and No. 104 D of 1956,
both arising from Suit No. 282 of 1954 instituted by the plaintiff-appellant
for a declaration that he continued to be the general manager of the fire
insurance company in question and that the purported termination of his
services was inoperative, and claiming a sum of Rs. 37,352.30 from the
defendant on account of his arrears of pay, etc., or in the alternative, for a
sum of Rs. 1,63,820 as money due to hint by way of bonus, gratuity, etc., as
detailed in the plaint.
The respondent-company had filed a suit against the
appellant for the recovery of Rs. 1,10,000 being Suit No. 306 of 1954 in which
the company was granted a decree for Rs. 5,759-9-6 with proportionate costs.
First Appeal No. 88-D of 1956 before the High Court was the appeal by the
company against the rejection of the rest of its claim in Suit No. 306 of 1954.
We are not concerned with that appeal. Regular First Appeal No. 89-D of 1956
was the company's appeal against the award of decree for Rs. 73,936-15-9 passed
in favour of the appellant. Regular First Appeal No. 104-D of 1956 was the
appellant's appeal against the rejection of of his other claims in his suit.
The High Court dismissed First Appeals No. 88-D of 1956 and No. 104-D of 1956
but partially allowed First Appeal No. 89-D of 1956.
The appellant was appointed as the secretary of the
respondent-company on October 16, 1942. His pay was fixed at Rs. 1,000 p.m.
free of income-tax. Later on, he was promoted as the general manager of the
company. On November 21, 1953, the appellant sent an application for leave to
the chairman of the board of directors but no reply was received by him. He,
thereafter, sent another application for 8 months' leave on the 16th of
December, 1953. On December 17, 1953, the appellant received a telegram from
the chairman of the board of directors stating that the services of the
appellant had been terminated by the company and that he should stop attending
the office. A registered letter to the same effect from the chairman was also
received by him.
The allegation of the appellant in the plaint was
that his services had not been validly terminated by the respondent-company and
that he still continued as the general manager of the company and was entitled
to recover the sum already mentioned from the respondent. In the alternative,
the appellant claimed, among other things, 18 months' salary as due to him on
the basis that he was entitled to 18 months' notice before terminating his
services.
In the written statement, the respondent-company
contended that the chairman validly terminated the services of the appellant on
December 17, 1953, in pursuance of a resolution passed by the board of
directors on the 16th, and that, subsequently, that resolution and the action
of the chairman terminating the services had been confirmed by a meeting of the
board of directors held on December 23, 1953, and, therefore, the services of
the appellant were validly terminated. The respondent-company also contended
that the appellant was in no event entitled to 18 months' notice as claimed by
him but only to one month's notice and, therefore, he was entitled to get only
one month's salary in lieu of notice under that head.
The trial court found that the meeting of the board
of directors held on December 16, 1953, was valid, that the services of the
appellant were validly terminated by telegram and letter of the chairman dated
December 17, 1953, addressed to the appellant, that even if it be assumed that
the meeting of the board of directors held on December 16, 1953, was irregular,
the resolution of the board of directors terminating the services of the
appellant on the 16th and the action of the chairman in actually terminating
the services were ratified by the board of directors by its resolution of
December 23, 1953, and, therefore, the services of the appellant were legally
and validly terminated. It further held thai the rules framed by the company,
namely, exhibits D-3 and D-4, would govern the appellant and that he was
entitled, under clause (6) of exhibit D-3, only to one month's notice for
terminating his services although the court found that if the appellant was not
bound by the rules, he would have been entitled to 12 months' notice before the
termination of his services.
The findings of the trial court in these respects
were confirmed in appeal by the High Court.
In this appeal, only two points were argued by
counsel for the appellant: (1) that the services of the appellant were not
validly terminated and, therefore, he was entitled to a declaration that he
continued to be the general manager of the company and to claim the mount
specified in the plaint; and (2) that, in any event, the appellant was entitled
to 12 months' notice before his services were terminated and as only one
month's notice was given, he was entitled to 11 months' pay in addition to what
was awarded under this head.
An regards the first point, it was said that the
meeting of the board of directors dated December 16, 1953, was not properly
convened for the reason that notice of the meeting was not given to all the
directors. The trial court found that one of the directors, viz., Mr. B. P.
Khaitan, was not given notice of the meeting of the board of directors held on
December 16, 1953, and that he was not present at the meeting when the
resolution to terminate the services of the appellant was passed.
Now, it cannot be disputed that notice to all the
directors of a meeting of the board of directors was essential for the validity
of any resolution passed at the meeting and that as, admittedly, no notice was
given to Mr. Khaitan, one of the directors of the company, the resolution
passed terminating the services of the appellant was invalid.
Article 109 of the articles of association of the
company provides as followa :
"109. When meeting to be convened.—A director
may at any time summon meeting of the directors by serving every director with
at least 72 hours' notice in writing, through the officer of the company
authorized to issue such notice who shall arrange to convene the meeting".
In Halsbury's Laws of England, volume 9, page 46, it
has been stated that it is essential that notice of the meeting and of the
business to be transacted should be given to all persons entitled to
participate and that if a member whom it is reasonably possible to summon is
not summoned, the meeting will not be duly convened, even though the omission
is accidental or due to the fact that the member has informed the officer whose
duty it is to serve notice that he need not serve notice on him. In volume 6 of
the same book, at page 315, article 626, it is stated that a meeting of the
directors is not duly convened unless due notice has been given to all the
directors, and the business put through at a meeting not duly convened is
invalid.
To put it in other words, as the meeting of the board
of directors held on December 16, 1953, was invalid, so the resolution to
terminate the services of the plaintiff was inoperative.
Then the question for consideration is, what is the
effect of the confirmation of the minutes of the meeting of the board of
directors held on December 16, 1953, and the action of the chairman in
terminating the services of the appellant by his telegram and letter dated
December 17,1953, in pursuance of the invalid resolution of the board of
directors to terminate his services, in the meeting of the board of directors
held on December 23, 1953 ?
The agenda of the meeting of the board of directors
held on December 23, 1953, shows that one item of business was the confirmation
of the minutes of the meeting of the directors held on December 16, 1953. The
confirmation of the minutes of the meeting of the directors held on December
16, 1953, would not in any way show that the board of directors adopted the
resolution to terminate the services of the appellant passed on December 16,
1953. It only shows that the board passed the minutes of the proceedings of the
meeting held on December 16, 1953. But the resolution of the board of directors
to confirm the action of the chairman to terminate the services of the
appellant by his telegram and letter dated December 17, 1953, would show that
the board ratified the action of the chairman. Even if it be assumed that the
telegram and the letter terminating the services of the appellant by the
chairman was in pursuance of the invalid resolution of the board of directors
passed on December 16, 1953, to terminate his services, it would not follow
that the action of the chairman could not be ratified in a regularly convened
meeting of the board of directors. The point is that even assuming that the
chairman was not legally authorised to terminate the services of the appellant,
he was acting on behalf of the company in doing so, because he purported to act
in pursuance of the invalid resolution. Therefore, it was open to a regularly
constituted meeting of the board of directors to ratify that action which,
though unauthorized, was done on behalf of the company. Ratification would
always relate back to the date of the act ratified and so it must be held that
the services of the appellant were validly terminated on Decenv ber 17, 1953.
The appellant was not entitled to the declaration prayed for by him and the
trial court as well as the High Court was right in dismissing the claim.
The second point for consideration is whether the
appellant was entitled to 18 months' notice before his services were terminated
as, claimed by him. The trial court found that the rules of the company, viz.,
exhibits D-3 and D-4, were binding on the appellant and that rule 6 of exhibit
D-3 which provides for one month's notice in case of termination of services of
all employees would apply to the appellant as well. The High Court confirmed
that finding. The rules expressly purport to bind all the employees of the
respondent-company. There is no reason to hold that the appellant was
not an employee of the respondent-company. Besides, the appellant himself has
relied upon these rules for the purpose of computation of the amount due to him
on account of bonus, provident fund, etc. In these circumstances it is idle to
contend that the rules did not bind him In this view, it is quite unnecessary
to consider the question whether, apart from the rules, one month's notice was
reasonable in the circumstances of the case.
There is no merit in this appeal. We dismiss it but,
in the circumstances, we make no order as to costs.
Appeal dismissed.
[1956]
26 COMP. CAS. 431 (MAD.)
Al. Ar. Ar. Arunachalam Chettiar Firm
V.
Kaleeswarar Mills Ltd.
SOMASUNDARAM AND RAMASWAMI, JJ.
AUGUST
14, 1956
RAMASWAMI GOUNDAR, J.-This is a petition filed under article 226
of the Constitution for a writ of mandamus or any other appropriate writ or
order, directing the respondents to forbear from enforcing in any manner the
resolution passed by respondents 2 to 9 on 7th April, 1956. There was a prayer
for a similar writ in regard to the convening of the annual general body
meeting of 29th June, 1956; but we are leaving that out of consideration,
because that date is now long past, and no meeting took place on that date. The
petitioners are a firm of Al. Ar. Arunachalam Chettiar, represented by four
partners whose names are set out in the petition. The first respondent is the
Kaleeswarar Mills Ltd., Coimbatore, and respondents 2 to 9 are its present
directors. The first respondent mills was incorporated as a limited liability
company on 1906, with the object of carrying on the business of spinning and
weaving of cotton yarn and cloth. In consideration of the services rendered by
the petitioner-firm in the promotion of the company, it was then agreed, and it
was also put into the memorandum of association as clause 6, which runs thus:
"In
consideration of the services rendered by the firm of M/s. Al. Ar. Arunachalam
Chettiar in promoting and starting the company, the firm of M/s. Al. Ar.
Arunachalam Chettiar and the firm of Deevan Bahadur P. Somasundaram Chettiar of
Devakottah, their heirs, executors, or administrators shall hereditarily be the
secretaries and bankers of the said company and the said firms as from time to
time constituted shall continue to be the secretaries and bankers of the
company and Mr. P. Somasundaram Chettiar shall be appointed the local agent of
the company by the said secretaries and bankers and shall continue to be such
local agent of the company until his life time, and his successor or successors
shall be appointed by the said secretaries and bankers. The secretaries and
bankers shall receive a commission of 2 1/2 pies per lb. on all yarn and cloth
manufactured by the company as their remuneration including that of the local
agent so appointed by them."
The hereditary
rights of being the secretaries and the bankers of the company under the
memorandum were also incorporated and detailed in the articles of association,
131 to 136. It will thus be seen that in conformity with the memorandum and
articles of association, the first respondent mills was being managed by the
two firms specified therein. The said Somasundaram Chettiar functioned as their
local agent till his death in 1929, leaving his adopted son, P.S. Sathappa
Chettiar. The latter acted as local agent for some time, and he died in March,
1950. But even earlier, as a result of the compromise decree obtained in some
suits filed in the Coimbatore District Court, Al. Ar. Kalairaja Chettiar, one
of the members of the firm, was finally appointed as the local agent.
That continued
till March, 1954, when certain important changes were introduced in the
management of the affairs of the company. All that is recorded in the minutes
of the proceedings of the board of directors held on 20th March, 1954. It took
note of the fact that the financial position of the mills was unsatisfactory
and that the mills was not working for more than a fortnight resulting in a
huge loss to the mills, as also the attachment of the properties of the mills
by the Income-tax Department, and the further fact that the mills could not
start work without adequate finance raised for that purpose. The local agent,
Kalairaja Chettiar, withdrew from his Kalairaja Chettiar, withdrew from his
office for a period of 2 years, agreeing not to exercise during the period of
his leave any of the powers, authority and duties pertaining to the office of
the local agent, though he was permitted to continue as the ex-officio director
of the company. It was further resolved that the offer of Sri P.S. Somasundaram
Chettiar, the adopted son of the said Sathappa Chettiar, to advance or to procure
the advance of 15 lakhs of rupees to the company on the simple mortgage of the
assets of the mills was accepted and he was appointed as the general manager of
the company entrusted with the whole administration and the management of the
affairs of the mills, subject, of course, to the control and directions of the
board of directors for a period of two years or until the loan to be advanced
or the advance of which is procured by him is repaid with interest. The result
was that in March, 1954, the petitioners' firm as well as their local agent,
Kalairaja Chettiar, a member of that firm, withdrew from their managing agency
and agreed to vest the entire management of the mills in the hands of
Somasundaram Chettiar as the general manager, because he agreed to finance the
mills and put it into working order. Accordingly, Somasundaram Chettiar was in
full management and control of the affairs of the mills not only for the period
of two years mentioned in the resolution, but he continues to hold that office
down to this date.
While so,
after the coming into force of the new Companies Act on 1st April, 1956, and on
the basis of some legal opinion which the company is said to have obtained as
to the definition of "managing agent" in section 2 (25) of that Act,
the board of directors met on 7th April, 1956, and passed a resolution to this
effect:
"Resolved
to record that with the coming into force of the Indian Companies Act, 1956,
the secretaries and bankers of the company have ceased to be entitled to the
office of secretaries and bankers of the company and that accordingly the said
office has become vacant by operation of law on and from 1st April, 1956.
That as a
consequence, the power and authority of the local agent of the secretaries and
bankers of the company have also ceased and determined that the said office has
become vacant on and from 1st April, 1956, and that the ex-officio director has
vacated his office."
The board of
directors have not taken any tangible action on that resolution. It is that
resolution that has given rise to this writ petition. On the facts alleged in
the writ petition, it would ap;pear that the petitioners had withdrawn from
their office as managing agents and surrendered the right of management to
Somasundaram Chettiar as general manager in accordance with the resolutions of
March, 1954. Since then, the said Somasundaram Chettiar has been in actual
management and control of the affairs of the company and not in the managing
agents. It may be that the rights as managing agents continue; but the point is
that they are not in actual enjoyment of those rights. The prayer in the
present petition is not for restoration to that office. It is to restrain the
respondents from enforcing that resolution. But if the petitioners are not in possession
of their office as managing agents, then, it is difficult to see how that
resolution can be enforced against them. There can be no question, in pursuance
of that resolution, of their being thrown out of the office hereafter. If so,
the object of this writ is reduced to one for a declaration that the resolution
of 7th April, 1956, was invalid and inoperative. No writ of mandamus can issue,
the object of which is to declare the rights of the parties. If authority were
needed for that proposition, it will be found in Naubat Rai v. Union of India,
and in Durbar Goala v. Union of India. In the latter case, at page 408, it was
observed:
"It is
inappropriate to grant a declaration in an application under article 226 that a
particular contract is illegal and therefore unenforceable because it contains
a provision for begar or forced labour."
We have not
entered into the merits of the rights put forward by the petitioners, that is
to say, whether the legal opinion on which the resolution of 7th April, 1956, was
passed was sound and whether the rights which the petitioners undoubtedly had
as managing agents were in any manner affected by the definition of
"managing agents" in the new Companies Act. We do not choose to
investigate into those questions for the reason that even assuming that the
petitioners had those rights intact and unaffected by the new Act, Mr. K. Rajah
Aiyar, for the respondents, contended as a preliminary objection that, in the
circumstances of this case, a writ of mandamus should not issue from this
court. Under section 30 of the Specific Relief Act of 1877 as it then stood,
neither the High Court nor any Judge thereof shall thereafter issue any writ of
mandamus. That section has now been superseded by the present section 50 which
is to the effect that nothing in that chapter shall affect the power conferred
on a High Court by clause (1) of articles 226 of the Constitution. As a first
impression, it would appear as if terms of articles 226 are of much wider
import and give almost unlimited power to issue a writ of mandamus against any
person and under any circumstances and for any purpose whatever. But as we
shall show presently, it is now well established that the seemingly wide powers
under that article ought to be exercised only according to well established
principles. Though under the Specific Relief Act, a writ of mandamus as such
was not permissible, orders and directions in the nature of mandamus could be
issued on applications made under section 45 of the Act. That section only
reproduces the general principles of English courts. Under the English law, the
grant of a writ of mandamus is, as a general rule, a matter for the discretion
of the court. It is not a writ of right and is not issued as a matter of
course. Some of the conditions precedent to the issue as a matter of course.
Some of the conditions precedent to the issue of a writ of mandamus appear to
be: (1) the applicant for a writ of mandamus must show that there resides in
him legal right to the performance of a legal duty by the party against whom
the mandamus is sought; (2) the court will not interfere to enforce the law of
the land by the extraordinary remedy of a writ of mandamus in cases where an
action at law will lie for complete satisfaction; in order, therefore, a mandamus
may issue to compel something to be done, it must be shown that the statute
imposes a legal duty; (3) the writ is only granted to compel the performance of
the duties of a public nature; and (4) the court will, as a general rule and in
the exercise of its discretion, refuse a writ of mandamus when there is an
alternative specific remedy at law, which is not less convenient, beneficial
and effective. We find that more or less the same principles are embodied in
section 45 of the Specific Relief Act. It enables the High Courts to make an
order requiring any specific act to be done or forborne by any person holding a
public office or by any corporation or inferior court of judicature. The
section contains a number of provisos, of which clause (a) is to the effect
that an application for such order shall be made by some person whose property,
franchise or personal right would be injured by the forbearing or doing (as the
case may be) of the said specific act. Of course, unless some personal right of
the applicant is interfered with, there can be no remedy by the writ of
mandamus. As stated in Halsbury's Laws of England, 3rd Edn. by Lord Simonds, at
page 105, the legal right to enforce the performance of a duty must be in the
applicant himself and the court will therefore only enforce the performance of
statutory duties of public bodies on the application of a person who can show
that he has himself a legal right to insist on such performance. In the present
case, it may be conceded that the petitioners have got such personal right.
Then there is the proviso (b) to section 45 of the Specific Relief Act, which
is to the effect that such doing or forbearing is, under any law for the time
being in force, clearly incumbent on such person or court in his or its public
character or on such corporation in its corporate character. Proviso (d) states
that the applicant should have no other specific and adequate legal remedy. The
contention against the maintainability of this writ petition advanced by Mr.
Rajah Aiyar was based on the principles formulated in the provisos (b) and (d)
of section 45 of the Specific Relief Act.
Before we
examine the scope and the applicability of those provisos to the facts of the
present case, it would be convenient to clear the ground on the question
whether, apart from the principles governing the issue of a writ of mandamus by
the English courts, that is to say, the principles formulated in section 45 of
the Specific Relief Act the court has got much wider powers under article 226
of the Constitution, and whether if in fact this court should possess such
unlimited powers, it would exercise such powers without regard to the well
established principles governing the issue of such writs. In In re
Nagabhushana, to which one of us was a party, an application was made for the
issue of a writ of prohibition against the Election Sub-Committee of the All
India Congress Committee, the Provincial Congress Committee and the District
Committee, the Presidents of the Taluk and Town Congress Committee, etc.,
prohibiting them from holding Congress Primary Panchayat Elections and to issue
directions to the various authorities to prepare the electoral rolls of the
primary Congress members as per the rules of the Constitution and circulars
issued by the various authorities. In support of the application, the learned
counsel relied on article 226 of the Constitution as giving this court power to
issue the several directions which he sought in the petition. He stressed on
the wide language employed in the article, and, in particular, referred to the
words "to any person or authority" and "for the enforcement of
any of the rights conferred by Part III and for any other purpose." As a
result of the construction sought to be placed by the learned counsel, he was
compelled to the logical result that the article would enable any person
aggrieved to obtain any relief by an application under the article. His
Lordship the Chief Justice pointed out that on such construction, even a claim
for money due on a promissory note could be enforced by means of a writ under
the said article, a result which would practically abrogate the entire judicial
system and the machinery set up for the administration of justice. His Lordship
the Chief Justice observed at page 1121:
"We do
not think that article 226 should be contrued in this manner in spite of the
wide language on which the counsel relied."
The case is
also instructive as showing that the writ is available only against inferior
courts, tribunals and bodies entrusted by the law of the land with powers to
affect the rights of parties, and not to a private organisation, however
widespread and powerful it might be. It was observed at page 1122:
"Nevertheless,
in law, it cannot be held to be a public body entrusted by the law of the land
with powers and duties relating to the rights of the people."
In Indian
Tobacco Corporation v. State of Madras, a writ of mandamus was asked for
against the State for preventing it from committing a breach of contract which
the State threatened to commit. In that case also, the learned counsel repeated
the contention that article 226 of the Constitution was wide enough to apply to
cases which would not fall within the scope of a prerogative writ of mandamus
as understood in England; and in repelling that contention. His Lordship the
Chief Justice observed at page 761:
"It is
undoubtedly true that the extent of the power conferred on the High Courts
under article 226 is much larger than ever possessed before. But we have no
hesitation in holding that it is not an unlimited power. In our opinion, the
words `to any person' means to any person to whom, according to well
established principles, writs like these mentioned in the article would lie;
and the words any other purpose must be read in the context in antithesis to
the words for the enforcement of any of the rights conferred by Part III."
In this
connection, reference may also be made to Kallmattam Thippaswami, In re, where
an application was made under article 226 of the constitution by a minor through
his guardian for directions in the nature of a writ of mandamus, directing the
respondents to forbear from cutting the trees standing on certain survey
numbers and removing the timber. Their Lordships rejected the application and
observed thus:
"In our opinion,
article 226 of the Constitution should not be construed so as to replace the
ordinary remedies by way of a suit and application available to the litigant
under the general law of the land. Directions in the nature of a writ of
mandamus should not, in our opinion, issue under this article, except to a
public or a quasi-public body or officer which is, under an obligation
statutory or otherwise to do or refrain from doing anything which is likely to
interfere with the rights of persons. In this case, it is admitted that
ordinarily the remedy of the petitioner would be by way of a suit and and an
application for injunction in the suit."
In the
decision in Carlsbad M.W. Mfg. Co. v. H.M. Jagtiani, MITTER J. stated at page
318:
"But once
the origin and history of high prerogative writs are remembered, it is clear
that the powers given to a High Court under article 226 are to be exercised in
accordance with the principles which governed the said writs. The power of the
High Court to issue such a writ to any person can only mean the power to issue
such a writ to any person to whom, according to well established principles, a
writ lay. That a writ may issue to an appropriate person for the enforcement of
any of the rights conferred by Part III is clear enough from the language used.
But the words `and for any other purpose' must mean for any other purpose for
which any of the writs mentioned would, according to well- established
principles, issue."
Thus it seems
to us to be clear that in spite of the apparently very wide language of article
226 of the Constitution, we can issue a writ of prohibition or mandamus only in
accordance with the well established principles and which are formulated in
section 45 of the Specific Relief Act. Mr. M.K. Nambiar, the learned counsel
for the petitioners, drew our attention to an observation by one of the learned
Judges of the Calcutta High Court in a Special Bench reported in Budge Budge
Municipality v. Mangru:
"Thus the
conditions appertaining to an application under section 45 of the Specific
Relief Act would not be strictly applicable to an application under article 226
of the Constitution. Under the said article, this court has inter alia power in
appropriate cases to issue to any person or authority any directions or orders
for any purposes. Thus, article 226 has conferred almost unlimited powers on
the High Court to make suitable orders or to give suitable directions which it
can exercise in appropriate cases. The present case is, in my opinion, an
appropriate case where the jurisdiction conferred by article 226 can be
exercised."
In this
connection, the following observation at page 144 in the decision in Naubat Rai
v. Union of India, seems pertinent:
"In my
opinion, the petitioner has not been able to bring his case within the
principles underlying section 45 of the Specific Relief Act which are the
principles which govern the issue of a writ of mandamus under article
226."
We will now
take up the proviso (b) to section 45 of the Specific Relief Act, whether under
the terms of that proviso the petitioners can ask his court for the issue of a
writ of mandamus. According to that proviso, the doing or forbearing should be
(1) under any law for the time being in force, clearly incumbent on such person
or corporation or court (2) on such person or court in his or its public
character or on such corporation in its corporate character. That is to say,
there must be a legal or a statutory duty imposed on the person, corporation or
court, and the person or the court should act in his or its public character
and the corporation in its corporate character. It will be seen that the
expression public character is tacked on to the person and court, whereas
corporate character to the corporation, for all corporations may not have a public
character. In the first place, we will consider whether in this case there was
any duty cast upon the first respondent company with reference to the
petitioners under any law for the time being in force. As we stated, the
dispute in this case centers on the managing agency rights conferred on the
petitioners under the memorandum and the articles of association already
referred to. Their learned counsel, Mr. Nambiar, drew our attention to some
sections of the Companies Act, in particular, sections 36 and 291. Section 36
provides that subject to the provisions of the Act, the memorandum and the
articles shall bind the company and the members thereof to the same extent as
if they respectively had been signed by the company and by each member and
contained covenants on its and his part to observe all the provisions of the
memorandum and articles of association. This section makes the memorandum and
the articles binding on the company and the members thereof as if they had been
signatories thereto. Section 291 of the Act defines the general powers and do
all such acts and things as the company is authorised to exercise and do. The
first proviso to that section directs that the board shall not exercise any
power or do any act or thing which is directed or required, whether by the Act
or the memorandum and the articles of the company to be exercised or done by
the company in a general meeting; and the second proviso directs that in
exercising any such power or doing any such act, the board shall be subject to
the provisions contained in the Act and in the memorandum and articles of the
company, that is to say, the board of directors shall exercise their powers and
do acts only in conformity with the memorandum and the articles of association.
It is therefore contended that, in the present case, the agency rights which
the petitioners claim and which are embodied in the memorandum and the articles
of association are binding upon the company, and, as such, under the law for
the time being in force, it is incumbent upon the company to respect the rights
of the petitioners within the meaning of clause (b) of section 45. No doubt,
the memorandum forms the constitution of the company, and the articles, the
rules regulating the conduct of the affairs of the company, and, as such, forms
part of the law so far as the company is concerned. Nevertheless, those
particular provisions in the memorandum and the articles of association were
the result of a contractual arrangement entered into between the company and
the petitioner with reference to their managing agency rights, and it is only
those contractual rights that are put into the memorandum and the articles of
association. It therefore seems to us that it is only because of the
contractual obligations the company would be bound to respect the rights of the
petitioner and not because they are enjoined to do so by any law or statute for
the time being in force within the meaning of proviso (b). We are of the
opinion that the duty sought to be enforced by the petitioners in the present
case, though embodied in the memorandum and articles of the company, cannot be
placed on a high footing than a contractual obligation, of which the articles
and the memorandum are only the documented evidence. it has been held in a
number of cases that a mandamus does not lie to enforce a contractual
obligation (vide P.K. Banerjee v. L.J. Simonds, and Dubar Goala, v. Union of
India). In Indian Tobacco Corporation v. State of Madras, already referred to,
at page 761, it was observed:
"We are
clearly of the opinion that the appellants are not entitled to a writ of
mandamus to enforce their contractual rights."
It is
therefore clear that the duty imposed on the person, corporation or court must
be a duty imposed by any statute or law for the time being in force, and we are
of opinion that in the present case there is no such statutory duty imposed on
the first defendant-company to recognise the agency rights of the petitioners.
An order of mandamus will be granted only for ordering that to be done which a
statute or rule of law requires to be done, and not for the enforcement of
contractual obligations.
It is also
important to notice with reference to the proviso(b) of section 45, the person
or court against whom the writ is asked for must have functioned in his or its
public character, or, if it were a corporation, in its corporate character,
which appears to us necessarily to imply that what the person, corporation or
the court does must be in the nature of a public duty. In Halsbury's Laws of
England, Simonds Edition Vol.II, at page 84, this is what is stated:
"The
order of mandamus is an order of a most extensive remedial nature, and is, in
form, a command to any person, corporation, or inferior tribunal, requiring him
or them to do some particular thing therein specified which appertains to his
or their office and is in the nature of a public duty."
Again at page
105, it is thus stated:
"The
order is only granted to compel the performance of duties of a public nature.
It will not, accordingly, issue for a private purpose, that is to say, for the
enforcement of a merely private right."
A Full Bench
of the Patna High Court observed in Surajmal v. Commissioner of Income-tax, at
page 539:
"It is
used principally for public purposes and to compel performance of public duties
though it may also be used to enforce private rights when they are withheld by
public officers."
In the present
case, the petitioners' complaint is that the first respondent-company, by its
resolution of 7th April, 1956, refused to recognise the managing agency rights
of the petitioner and declared that those rights had ceased to exist on and
from 1st April, 1956, by reason of the new Act coming into force. The passing
of that resolution was not in the nature of a public duty performed by the
company. It was a matter entirely between the company on the one hand and the
petitioners on the other in regard to certain private rights which the
petitioners claimed. There was nothing in the nature of a public duty to be
discharged by the company.
No doubt, as
contended by Mr. Nambiar, all corporations are in some respects public. He
relied on the following passage at page 498 in High Prerogative Writs, Vol. I,
by A.S. Chaudhri:
"All
corporations are in some respects public; that is they derive their very
existence and their franchise from the public and owe to the public the
performance of certain duties, which the public functionaries may enforce. They
are private in other respect, but with respect to the performance of duties
which relate to the private management or operation of the corporate affairs or
enterprise, the officers occupy a position analogous to that of trustees, as
respect the members of the corporation, and their duties as such may ordinarily
be enforced by mandamus."
But that does
not mean that whatever a corporation does would be in the nature of a public
duty. That would depend upon the circumstances in which the duties are
performed. In fact, it is observed in the same book at page 499:
"Such
duties, so far as they relate to the public, are in fact public duties or
duties which they owe to the public."
Here, what the
company did, did not relate to the public, nor was it a duty which it owed to
the public."
Here, what the
company did, did not relate to the public, nor was it a duty which it owed to
the public.
The case on
this point are numerous, but instructive. We have already referred to two Bench
decisions of our High Court, namely, In re Nagabhushana, and Indiana Tobacco
Corporation v. State of Madras. In both the cases, a writ of mandamus was
refused, under the earlier case, against the Congress Party, and in the latter
case, against the Government. In the latter case, what was sought to be
enforced by means of a writ was a contractual right. We may also refer to
another Bench decision of our High Court reported in Ganpathi v. T.B.A. and P.
Ltd. In that case, the directors of a company who were duly elected filed an
application for a writ of mandamus for an order, directing the respondents who
were the company and its managing agents to deliver to them all the records and
documents and other properties in their possession. The mandamus was refused on
the ground that the application would be barred both under provisos (b) and (c)
of section 45 of the Specific Relief Act. It was observed:
"There
can then be no question of their being directed to do or forbear from doing
anything in their public character."
In that case,
reference was made to In re Albert Mills Co. Ltd., Nasarvanji Aspandarji Mandji
Homaji Goculdas Madaji v. Shivji Manikbhai, a case referred to by Mr. Nambiar.
In the Bombay case, it was held that the High Court had jurisdiction to enforce
by mandamus the right of duly elected directors by the company to exercise the
functions of directors if such rights are interfered with by the company acting
through its other directors. At page 444, we find the following observation:
"I am at
a loss to see by what other remedy the right of such persons could be enforced,
unless a writ of mandamus were grantable; and the absence of any other remedy
has been always regarded as a strong ground for the court to award such
writ."
So, the Bombay
case was explained in the Madras case on the ground that a mandamus was issued
in the Bombay case against the company as there was no other remedy. Decisions
of other High Courts were brought to our notice such as Carlsbad M.W. Mfg. Co.
v. H.M. Jagtiani, Dubar Goala v. Union of India, Union of India v. Elbridge
Watson, A.c. Gilbert v. Registrar, High Court, Allahabad, and Naubat Rai v.
Union of India, to all of which, however, a detailed reference is not
necessary. Mr. Rajah Aiyar also drew our attention to some of the English
cases. In The King v. The Governor and Company of the Bank of England, it was
held that the court would not grant a mandamus to a trading corporation at the
instance of one of its members to compel them to produce their accounts for the
purpose of declaring a dividend of their profits. ABBOTT C.J. observed:
"A mere
trading corporation differs materially from those which are entrusted with the
government of cities and towns and therefore have important public duties to
perform. No instance has been cited in which the court has granted a mandamus
to a corporation like the present, and I think ought not now to establish the
precedent."
BAYLEY J.
observed:
"The
courts never grant this writ except for public purposes and to compel the
performance of public duties. This is an application at the instance of one of
several partners in a trading company, to compel his co-partners to divide
their profits; but that is a mere private purpose and presents a fit subject
for enquiry on the other side of the Hall. There is no instance in which the
courts have granted a mandamus to a trading corporation; and that being so, I think
that we should not now grant it for the first time."
The above
observations are significant and show that ordinarily a writ of mandamus cannot
issue to a private trading corporation like the present one unless it acts or
fails to act in the discharge of a public duty, and so far as the rights
claimed by the present petitioners are concerned, we are unable to see how the
first respondent company owed a public duty which it failed to discharge. In
The King v. London Assurance Co., an application was made to the court for a
mandamus to the defendant company requiring them to permit a transfer to the
assignees of a bankrupt of 80 shares in the capital stock of the corporation.
The company refused to permit a regular transfer of the shares to the names of
the assignee to be made. The court held:
"We are
not aware of any instance of a mandamus like the present having even been
granted, and if we were to grant this, we should be called upon to interfere in
all cases of dispute between the members of private corporations. This company,
although carried on under a royal charter, is a mere private partnership. But
the writ of mandamus is a high prerogative writ, and is confined to cases of a
public nature. The rule, therefore, must be refused."
In Ex parte
Briggs it was held that an applicant for a mandamus to allow him to inspect and
take copies from the parish accounts must show some tangible public ground for
the application and that he cannot rest it upon his mere private right, as an
individual, to inspect. ERLE J. held that a parishioner's right to inspect the
parish rate books is a mere private right and that, therefore, in order to
entitle him to a mandamus to inspect, he must show, besides his private right,
some grounds of a public nature. Having regard to these decisions and to facts
of the present case, it seems to us that there are no grounds of a public
nature involved in this case and that in denying the petitioners' right as
managing agents, there is no question of any public duty involved, the matter
being purely a private right between the petitioners on the one hand and the
company on the other based upon contractual relations which are incorporated in
the memorandum and the articles of association. In this connection, it will be
relevant to note that Chapter VIII of the Specific Relief Act bears the heading
"Of the Enforcement of Public Duties" which gives an indication of
the intention of the legislature that unless something was done or forborne in
the discharge of a public duty either by the person or the court in his or its
public character or a corporation in its corporate character, it will not be
appropriate to issue any order or direction in the nature of a mandamus under
that section. As to the value of heading in interpreting statutes, reference
may be made to Eastern Counties and London and Blackwall Ry. Cos. v. Marriage.
Vide also Calcutta Corporation v. Sub- Postmaster, Dharamtola. In this
connection we may also refer to another English decision in The Queen v.
Government Stock Investment Co. In that case, two vacancies arose amongst the
directors of a company, and there were four candidates, of whom the prosecutor
was one. At the meeting for election, a show of hands was taken, when the
prosecutor obtained the largest number of votes. A poll was then demanded by
the Deputy Chairman who was the holder of 20 shares only, but who held proxies
for more than 2,000 shares. At the poll, the prosecutor was not elected. He now
claimed to have been elected by the show of hands on the ground that the poll
was illegally demanded as the holder of proxies was not, by virtue of them,
entitled to demand a poll. Their Lordships made the rule absolute for mandamus
against the defendant company to admit the prosecutor as a director of the
company. But the question whether it was a fit case for the issue of a mandamus
was not considered at all. The case was decided only on the ground that the
poll was illegally demanded.
We next
proceed to consider proviso (d) to section 45 of the Specific Relief Act.
According to that proviso, the applicant shall have no other specific and
adequate legal remedy. In Halsbury's Laws of England, Vol. II, 3rd Edn., it is
stated the purpose of mandamus is to supply defects of justice, and accordingly
it will issue to the end that justice may be done in all cases where there is a
specific legal right and no specific legal remedy for enforcing that right; and
it may issue in cases where, although there is an alternative legal remedy,
yet, that mode of redress is less convenient, beneficial and effectual. The
same proposition is stated at page 107 of the same book as follows:
"The
court will, as general rule, and in the exercise of its discretion, refuse an
order of mandamus, when there is an alternative specific remedy at law which is
not less convenient, beneficial and effective."
At page 108,
it is stated:
"The
court will not interfere to enforce the law of the land by the extraordinary
remedy of an order of mandamus in cases where an action at law will lie for
complete satisfaction."
At the same
time it is pointed out at page 109:
"Apparently,
the fact that an action for a mandamus will lie does not necessarily exclude
the remedy by order of mandamus."
These
propositions appear to be so well established that we are indeed reluctant to
refer to all the decisions, to which our attention was drawn during the course
of the argument. We may, however, refer to a passage at page 1122 of the
decision in In re Nagabhusana, which is to the following effect:
"In our
opinion, the general rule applied to the case of writs like mandamus,
prohibition and certiorari, namely, that these writs will not issue of there is
another adequate remedy, should apply to the issue of a direction, order or
writ under article 226(1) in spite of the apparently wide language employed. In
this case, the petitioners could well have filed a suit and obtained
immediately an urgent order of injunction thus obtained the same reliefs which
they seek from this court."
Reference may
also be made to In the matter of Bombay Fire Insurance Co. Ltd.: Ex parte R.
Gilbert where an application under section 45 was refused seeking for
directions against the directors of a company for registration as a shareholder
in respect of shares purchased by the applicant on the ground that section 58
of the Companies Act afforded the applicant a remedy, adequate and appropriate,
and recourse cannot therefore be had to the Chapter "of the Enforcement of
Public Duties." As stated in Halsbury's Laws of England, the fact that an
action for mandamus will lie does not necessarily exclude the remedy by order
of mandamus and it may issue in cases where, although there is an alternative
legal remedy, yet, that mode of redress is less convenient, beneficial and
effectual. As an instance, reference may be made to a recent decision of a
Bench of our court reported in Subramania Chettiar v. Revenue Divisional
Officer, Devakottah. Their Lordships observed:
"Normally,
it will not issue a writ where there is an alternative remedy. But it is well
settled now by decisions of the Supreme Court and the High Courts, that there
is no absolute bar to entertaining writ petitions and issuing a writ, even when
there are alternative remedies, when these alternative remedies are, in the
opinion of the court, not effective, speedy, adequate or sufficient, and the
facts of each case have to be considered before deciding whether the
alternative remedies are speedy, effective, sufficient or adequate."
The question
in the present case, therefore, is whether the normal remedy of a suit is not
available to the petitioners, as an adequate remedy. As stated already, the
object of the present writ is to direct the respondents to forbear from
enforcing in any manner the resolution passed by respondents 2 to 9 on 7th
April, 1956. It is for the petitioners to satisfy the court that they cannot
get that remedy in a regular action for mandamus. Ordinarily, it must be held
that such an action would lie. But their learned counsel, Mr. Nambiar,
contended that in the circumstances of the present case, a suit for that
specific remedy will not be maintainable, and, in support of his contention, he
relied on the following decisions: Mothey Krishnarao v. Anjaneyalu, Ramkumar
Potdar v. Sholapur Spinning and Weaving Co. Ltd., Boulton Bros. v. New Victoria
Mills, Gulab Singh v. Zamindara Bank Ltd., Ramachandra v. Chinubai. In the
Madras case, Mothey Krishna Rao v. Anjaneyalu, the plaintiff filed a suit for a
declaration that he was the secretary and treasurer of Krishna Jute Mills Ltd.,
Eluru, against four defendants who were the directors of the company and who
adopted a resolution for removing the plaintiff from the post of secretaryship.
The claim was based upon the memorandum and the articles, as in the present
case. It was held that the plaintiff had no cause of action against the company
on the basis of the articles, because it was pointed out that under section 21
of the Indian Companies Act, not only a third party, but even a shareholder
cannot sue the company on anything contained in the articles, treating them as
a contract by the company with him. That was the main ground on which the
plaintiff was non-suited; that is to say, he had no cause of action against the
company on the basis of the articles, though we are not sure whether that would
be the position even under the new section 36. Even so, it would not be a case
where the plaintiff had a regular right but without a legal remedy. That would
be a case where he had no legal right at all, and if he had no cause of action
for an action for mandamus, clearly he cannot ask for a writ of mandamus. In
that case, when the appeal was argued in this court, permission was granted to
amend the plaint for the following consequential relief, namely, an injunction
restraining the defendants from interfering with the plaintiff's exercise of
powers and duties as secretary and treasurer. But then, it was held that the
declaration sought by the plaintiff with the consequential relief would really
tantamount to specific performance of a contract of personal service, and
therefore hit by section 21(b) of the Specific Relief Act. The Bombay case,
Ramkumar Potdar v. Sholapur Spg. and Wvg. Co. Ltd., was a suit by the
shareholders of a company for a declaration that certain resolutions passed by
the directors were ultra vires and for an injunction restraining the company
from carrying out the said resolutions, the resolutions being that the
agreement for the employment of certain persons as managing agents of the
company be determined. It was observed in that case that no court will make an
order or grant an injunction the effect of which will be to compel specific
performance of a contract of personal service. It is therefore contended that
in the present case, if a suit were to be filed against the respondents to direct
them to forbear from enforcing in any manner the resolutions passed by them on
7th April, 1956, which is the same thing as restraining the company and its
directors from carrying out the said resolutions, as was the prayer in the
Bombay case, then, such an order or directing would in effect enforce a
contract of personal service, the managing agency being such service. In the
Law of Specific Relief by Agarwala, 1951 Edn., at page 450, it is pointed out
that the services of managing agent of a company involved doing of acts which
involved personal discretion, personal qualifications and confidence, citing as
authority the decision in Ramachandra v. Chinubhai. But then, the question is
whether, if an injunction which in effect would amount to specific performance
of a contract of personal service cannot be granted in an action for mandamus
on the ground that such a contract is dependent on personal qualifications or
volition of the parties as contemplated in section 21(b) of the Specific Relief
Act, a writ of mandamus can issue to effectuate the very same purpose. It is
our firm opinion that if a person cannot get a particular relief he cannot
certainly get over that difficulty by asking for a writ of mandamus and thereby
obtain that very relief which he would not be entitled to under the common law.
The object of mandamus is not to give a party what he is not entitled to under
the law. The object is to supply defects of justice, and that justice may be
done where there is a legal right but no specific legal remedy for enforcing
that right. If in respect of a right there is no particular remedy, such as
injunction or specific performance, the absence of such remedy could not be
rectified and a remedy created where none exists. For instance, if a right in respect
of which there is a legal remedy in the sense that it can normally be enforced
in an action, happens to be barred by the law of limitation, it cannot be
stated that the party claiming that right has no remedy and therefore he can
ask for a prerogative writ of mandamus to get over the bar of limitation. In
the present case nothing would prevent the petitioners from filing a regular
suit in a civil court for a declaration that the resolution of 7th April, 1956,
was invalid and inoperative and for consequential reliefs such as injunction
restraining the company from enforcing that resolution. It is true that there
is no guarantee that such a suit would succeed. It might fail for want of proof
or merits, or on the ground of limitation, or for some other defect. It cannot
be stated that the right of which the petitioners claim is one which has no
legal remedy and therefore a writ of mandamus should issue. In fact, there is
clause (h) to section 45 itself to the effect that nothing in that section
shall be deemed to authorise any High Court to make any order which is
otherwise expressly excluded by any law for the time being in force.
Further, a
right may carry with it more than one remedy, so that a person whose right is
invaded may sue for remedies such as (1) specific performance, (2) injunction,
and (3) damages. He may not succeed in getting the reliefs of specific
performance and injunction. That does not mean that he has no remedy for his
right. He has still the remedy of damages-such damages as would afford complete
satisfaction. In the present case, even if the petitioners may not get the
other reliefs such as specific performance or injunction, they may well seek
satisfaction in damages. Their right is not a right of such character as cannot
be compensated by money. But Mr. Nambiar contended that the remedy must be more
or less of the same character, if not identical with the one asked for under
the writ, and that when he asked for specific performance or injunction, he
cannot be told that damages would be adequate compensation. In support of his
contention he relied on a passage at page 369 of High Prerogative Writs by A.S.
Chaudhari, Vol. I, which is to this effect:
"Ordinarily,
the remedy must be such as will enforce the right or compel the performance of
the particular duty in question, in effect, specific performance, and not
merely a remedy which in the end saves the party to whom the duty is owed
unharmed by its non-performance."
We fail to see
how that observation supports the contention. What is important is that the
remedy must be such as will enforce the right. The enforcement of the right may
be in the form of various remedies. The question is whether the remedy that
would be available will not be proper and adequate. The petitioners' rights are
only the rights of managing agents with some remuneration attached to them. We
fail to see why, even if they should fail to obtain specific performance or
injunction, they should not be satisfied with adequate compensation in money.
Mr. Nambiar,
the learned counsel for the petitioners, did not allow the matter to rest
there. He further contended that even if it should be considered that the
normal remedies available to the petitioners would be adequate, the
circumstances of the present case would warrant the issue of a writ, because
there are certain well-recognised exceptions to that rule. In support of his
contention, he relied on a recent decision of the Bombay High Court in S.C.
Prashar v. Vasantsen Dwarkadas, where a writ of mandamus was asked for against
the Income-tax Officer, restraining him from proceeding further, pursuant to a
notice under section 34 of the Income-tax Act. It was held in that case that
the notice issued by the Income-tax Officer and challenged in the writ petition
was a notice that was issued out of time and therefore invalid. In the
circumstances of that case, the learned Judges found it difficult to accept the
contention that a suit would be an adequate remedy, because a notice would have
to be given under section 80 of the Civil Procedure Code and a suit usually
resulted in dilatory proceedings. The learned Judges then proceeded to consider
the exceptions to the ordinary rule that the court will not give relief by
means of a writ when the petitioner can get the same relief by ordinary legal
remedies available to him. They formulated the following exceptions: (1) if the
threat involves encroachment upon the fundamental right of the petitioner, the
court will interfere and will not compel him to exhaust his legal remedies; (2)
if the authority against whom a complaint is made has violated rules of natural
justice, the court will interfere and protect the petitioner and not insist
upon his going to a higher tribunal for relief; (3) when there is a complete
absence of jurisdiction and such absence of jurisdiction is apparent on the
face of the record, that in the case of administrative officer or Tribunal,
acting without authority or beyond his competence. In Himmatlal v. State of
Madhya Pradesh the applicant company, fearing that it might be subjected to the
payment of sales tax without authority of law, preferred to the High Court an
application for writ for protection from the impugned Act and its enforcement
by the State. It was held that the State evinced an intention to apply the
penal provisions of the Act against the applicant-company if it failed to make
the return or to meet the demand, and in order to escape from such serious
consequences threatened without authority of law and infringing fundamental
rights, relief by way of a writ of mandamus was clearly the appropriate relief.
Their Lordships pointed out that a threat by the State by using the coercive
machinery of the impugned Act to realise from the applicant is a sufficient
infringement of his fundamental rights under article 19(1)(g) and it was
clearly entitled to relief under articles 226 of the Constitution. It was
further pointed out that in that case, the remedy provided by the Act was of an
erroneous and burdensome character, because, before the applicant-company could
avail itself of the remedy, it had to deposit the whole amount of the tax, and
such a provision could hardly be described as an adequate alternative remedy.
In other words their Lordships of the Supreme Court recognised that the
principle that a court will not issue a prerogative writ then an adequate
alternative remedy was available could not apply where a party came to the
court with an allegation that his fundamental right had been infringed and
sought relief under article 226. But the question is whether that exception is
applicable to the present case, and for deciding that question it will be
necessary for the petitioners to establish that in the present case there has
been a violation of their fundamental rights. No doubt, to acquire, hold and dispose
of property is a fundamental right, guaranteed under article 19(1)(f) of the
Constitution, and the contention of Mr. Nambiar was that the managing agency
rights claimed by the petitioners was such a right. He maintained that the
petitioners, according to the memorandum of association, had hereditary rights
and therefore their rights were analogous to the rights of hereditary trustees
of temples or mutts or other religious institutions. In support of his
contention, he cited two decisions, Narayanan Nambudiripad v. State of Madras,
and Commissioner, Hindu Religious Endowments v. L.T. Swamiar. In the Madras
case, the incidents of hereditary trusteeship were discussed and the conclusion
reached was that there was ample authority for the view that trusteeship, where
hereditary, is in the nature of property. Their Lordships observed:
"We are
accordingly of opinion that hereditary trusteeship is within the protection
afforded by article 19 (1)(f), even though there was no emolument attached to
the office."
In the other
case, in discussing the rights of a Mahant, their Lordships of the Supreme
Court, at page 288, made this observation:
"There is
no reason why the word `property' as used in article 19 (1)(f) of the
Constitution should not be given a liberal and wide connotation and should not
be extended to those well-recognised types of interests which have the insignia
or characteristics of proprietary right. As said above, the ingredients of both
office and property, of duties and personal interest are blended together in
the rights of a Mahant and the Mahant has the right to enjoy this property or
beneficial interest so long as he is entitled to hold his office."
But we fail to
see what analogy there can be, and how any comparison can be made, between hereditary
trusteeship and managing agency. The managing agency, though it may be called
hereditary, is a right arising out of contractual relationship-a contract of
personal service-as was held in the cases already cited. The fact that it was
to be a hereditary managing agency may have a bearing on the duration of the
right and would not alter its nature or characteristics. It cannot possibly be
contended that the office of agency can be called property within the meaning
of article 19(1)(f) of the Constitution. The right of hereditary managing
agency conferred under the memorandum and the articles of the company was a
result of an arrangement entered into between the petitioner's firm and the
other firm on the one hand and the company on the other. We are also unable to
understand what the hereditary managing agency would mean with reference to a
firm. Sub hereditary rights were not conferred on the firm even as a joint
family firm. On the other hand, clause 6 of the memorandum shows that the right
shall be hereditarily vested in the said firms and their heirs, executors or
administrators and in the said firms as from time to time constituted; that is
to say, it contemplates even strangers, and not necessarily members of the
joint family, becoming members of the firm. Let us, however, assume that the
right claimed by the petitioners are in the nature of property within the
meaning of article 19(1)(f) of the Constitution. Even so, the question is
whether the writ prayed for should issue against the respondent-company and its
directors. It is true that even in a case where the violation of fundamental
right related to property, a writ of mandamus was issued by the Supreme Court
in State of Rajasthan v. Nathmal. But it will be seen that in all those cases,
the infringement of fundamental rights was by the State and the writ issued
against the State even though the remedy at law was available. Mr. Nambiar has
not been able to cite any decision in which a writ was issued for violation of
rights to property by individuals or companies. On the other hand, in
Shamdasani v. Central Bank of India Ltd. a petition was filed to the Supreme
Court under article 32 of the Constitution for the enforcement of the
petitioner's fundamental rights under articles 19(1)(f) and article 31(1)
alleged to have been violated by the Central Bank of India Ltd. The petitioners
held five shares in the share capital of the bank which sold those shares to a
third party in exercise of its rights of a lien for recovery of a debt due from
the petitioner. Their Lordships held that the petition must fail on a
preliminary ground. They pointed out that neither article 19(1)(f) nor article
31(1), on its true construction, was intended to prevent wrongful individual
acts or to provide protection against merely private conduct and that the
language and structure of article 19 and its setting in Part III of the
Constitution showed that the article was intended to protect those freedoms
against the State action and that the violation of rights of property by individuals
was not within the purview of the article. They further pointed out that
similarly, the words "save by authority of law" in clause (1) of
article 31 showed that it was a prohibition of unauthorised clause (1) of
article 31 showed that it was a prohibition of unauthorised governmental action
against private property. According to their Lordships, it was a fundamental
misconception that article 19 (1)(f) and article 31(1), which are great
constitutional safeguards against State aggression on private property, are
directed against infringement by private individuals for which remedies should
be sought in the ordinary law. It follows that the attempt of Mr. Nambiar to
bring this case within the terms of the first exception must fail.
Mr. Nambiar
then endeavored to bring his case within the third of the exceptions stated
above, namely, complete absence of jurisdiction apparent on the face of the
record. He contended that the directors, namely respondents 2 to 9, had no
power to remove the petitioners as managing agents, because, under article 136,
the secretaries and bankers shall not be removed from office otherwise than by
their own resignation or except on fraud being established. There were no such
grounds in the present case. The learned counsel therefore contended that so
long as the memorandum and the articles of association remained unammended,
there was no power vested in the directors to terminate the services of the
managing agents. But it will be seen that by their resolution of 7th April,
1956, they did nothing of that kind. They merely recorded their opinion,
supposed to be based upon the opinion of their legal experts, that with the
coming into force of the Companies Act, 1956, the secretaries and the bankers
of the company had ceased to be entitled to the office, and accordingly, the
said office had become vacant by operation of the law as and from 1st April,
1956. Even otherwise, it cannot be stated that the want of authority was
apparent on the face of the record. That would depend upon the soundness of the
legal opinion on which that resolution was based. Then it was contended that,
notwithstanding the arrangement of march, 1954, Kalairaja Chettiar, though he
ceased to be the local agent, nevertheless, continued as ex-officio director of
the company, and for the director's meeting of 7th April, 1956, no notice was
issued to him, and that, therefore, the resolution of that date was wholly
invalid. In Halsbury's Laws of England, 3rd Edn., Vol. VI, at page 315, we find
the following statement of the law:
"A
meeting of directors is not duly convened unless due notice has been given to
all the directors, and the business put through at a meeting not duly convened
is invalid."
But in this
case, the respondents dispute the fact that Kalairaja Chettiar continued to be
the director on 7th April, 1956, for, their contention is that by reason of his
continuous absence from the meetings, he forfeited his right as a director.
That is a question of fact, which we cannot go into in this petition. Their contention
also was that by two resolutions of the board of directors in May-June, 1954,
it was decided that the director's meeting should be held on the first Saturday
of every month at 10-30 a.m., and that those resolutions were duly served on
Kalairaja Chettiar-a fact which Mr. Nambiar was not prepared to controvert. But
he contended that any such intimation of meetings for all times would not be in
conformity with the requirements of section 286 of the Companies Act. But that
section does not prescribe the form of the notice or the mode of its service,
and if the directors are duly informed that in future the meetings would be
held on the first Saturday of every month, we fail to see why it should not be
a sufficient compliance of the statute.
In our opinion,
therefore, the circumstances of this case do not call for the issue of a writ
of mandamus or any other writ or direction, and we accordingly dismiss this
petition with costs (separate sets).
[1980] 50 COMP. CAS. 555 (
HIGH COURT OF
v.
Southern Steel Ltd.
SALIL K. ROY CHOWDHURY, J.
COMPANY PETITION NO. 506 OF 1976
OCTOBER 30, 1979
R.C. Nag, R.K. Lala, Sudipta Sarkar and A.K.
Bose for the Petitioner.
S.B.
Mukherjee and U.B. Mukherjee for the Respondent.
Salil K.
Roy Chowdhury J.—This is
another application under ss. 397, 398, 402, 403, etc., of the Companies Act,
1956, in the series of litigations between Mohan Lal Mittal group and his
opposing group. These applications are the outcome of family disputes as all the
companies concerned in these applications are under the control and management
of the Mittal family as the directors are either the members of the Mittal
family or their relatives or nominees or stooges. They reveal a general pattern
of running parallel management, one group trying to oust the other group from
the companies in which the majority shares belong to the respondents. The
present application is by Mohan Lal Mittal, the eldest brother of the Mittal
family, and his sons as petitioners and the respondents are Indra Sen Mittal
and the group of brothers and persons supporting him and the other directors of
the company who are merely relatives, friends or stooges of the Mittal family.
The petitioners allege in para. 8 of the petition that they themselves along
with another son of Mohan Lal Mittal, Sri Laxmi Niwas Mittal, hold 1/10th of
the issued and subscribed capital of the respondent-company, Southern Steel
Ltd., and, therefore, they are qualified under s. 399 of the Companies Act,
1956.
The allegations
which are the basis of the present application under ss. 397 and 398 of the
Companies Act, 1956, are that the meeting fixed to be held on the 14th of May,
1976, could not be attended to by the petitioners and was not held due to want
of quorum. It is alleged that the said meeting was adjourned till 16th of May,
1976, and was held without any notice to the petitioners that the meeting was
fixed on the 16th of May, 1976, and the alleged meeting on the 16th of May,
1976, was held at
The respondent duly answered the said allegations
alleging that the petitioners have no right to ask for postponement of the
meeting to be held on the 14th of May, 1976. The said meeting was attended by
respondent No. 3, Indra Sen Mittal, and respondent No. 5, R.K. Mittal, but it
was adjourned due to lack of quorum till 16th of May, 1976, and the adjourned
board meeting was duly and lawfully held on the 16th of May, 1976. It was
further submitted by the respondents that no notice is required to be given for
any adjourned meeting either under the Companies Act or under the articles of
association of the company. The respondents denied the validity and legality of
the purported notice to convene a meeting of the board alleged to be held on
the 31st of May, 1976, issued by the alleged secretary, V.S. Modi. Respondent
No. 5, R.K. Mittal, also denied that any paper and document has been taken away
by him as alleged. The respondents, in my view, rightly submitted that the
company being financed by the Andhra Pradesh State Financial Corporation was
committed to shift its registered office from Calcutta to Hyderabad where
admittedly the company's factory is situate and the main business is conducted
and as the said Andhra Pradesh State Financial Corporation was insisting upon
the said transfer, the resolution was passed accordingly on the 16th of May,
1976. It is further alleged by the respondents that according to the resolution
of the said adjourned meeting dated the 16th of May, 1976, the accounts in
respect of the establishment at Calcutta was to be sent to Hyderabad. It is
also denied by the respondents that the accounts at
It appears from the facts of the case that on the
14th of January, 1976, the respondent-company was incorporated as a public
limited company having its registered office at No. 2, Brabourne Road,
Calcutta, and the main business of the company has been to manufacture and/or
get cold rolled, narrow strips and strapings from skelp and factory of the
company was situated at Hyderabad. It also appears that the respondent-company
is a public limited company and the shares are quoted in the stock exchange. On
the 3rd of May, 1976, by a notice, respondent No. 5, R.K. Mittal, as a director
called a meeting of the board of directors of the company at
Mr. R.C. Nag, appearing with Mr. R.K. Lala, Mr.
Sudipta Sarkar and Mr. A.K. Bose, for the petitioners, mainly challenged the
validity of the meeting held on the 16th of May, 1976, and also the correctness
of the said minutes of the meeting which is alleged to be subsequently
disclosed to the petitioners.
I have already set out the charges made by the
petitioners and the answers thereto by the respondents and, in my view, there
is no ground whatsoever substantiated by the petitioners which can constitute
an oppression or mismanagement within the meaning of s. 397 or s. 398 of the
Companies Act, 1956. Mr. Nag's submission is that the respondents have
suppressed the fact that the court in 1970 refused to transfer the registered
office of the company to Andhra Pradesh which is a material suppression and
which should be held to be an oppression and misleading the court. In my view,
such comment is not justified as we are in 1979 and the situation in 1970 and
in 1979 can never be the same and, on the other hand, it cannot but be admitted
that it is entirely different and the application for transfer of the
registered office which is now to be made before the Company Law Board may be
granted as admittedly the factory and main business of the company are in
Andhra Pradesh. It is only that all the companies belonged to the Mittal group
and, therefore, originally the registered offices of the companies were
situated in
Mr. S.B.
Mukherjee, appearing with Mrs. U.B. Mukherjee, quite rightly submitted that
after the arbitration between the members of the Mittal family proved abortive,
the series of applications were started by the said Mohan Lal Mittal and the
respondents have also made applications to prevent the said Mohan Lal Mittal
from doing mischief or acts detrimental to the companies belonging to the
Mittal group. It is the said Mohan Lal Mittal who has used the secretary, Mr.
Modi, for the purpose of convening the alleged meeting on the 31st of May,
1976, and pass some sort of resolutions, and practically tried to run a
parallel management of the company at
In that view
of the matter, the application is dismissed with costs. The Special Officer,
Mr. C.R. Dutt, Barrister-at-Law, will stand discharged. If any arrears of
remuneration is due to be paid to him it is to be paid out of the funds of the
company. The remuneration of the Special Officer is fixed at 100 gms.
The Special
Officer and all parties to act on a signed copy of the minutes.
[1978] 48 COMP. CAS. 110 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Lauls Private Ltd.
HARBANS SINGH C.J. AND BAL RAJ TULI J.
LETTERS
PATENT APPEAL NO. 189 OF 1972.
AUGUST 7, 1972
L.K. Gaur for the
Appellant.
B.S. Kamthania for the
Respondents.
The appellant, Suresh
Chandra Marwaha, filed a petition under sections 397 and 398 of the Companies
Act against the respondents which was dismissed by the learned single judge on
March 17, 1972, and this appeal under clause 10 of the Letters Patent has been
directed against that order.
The appellant is a
shareholder of M/s. Lauls Private Ltd.,
The company was
incorporated as a private company limited by shares in 1933 and its principal
promoter was ShriS. R. Laul, advocate. Articles 6 and 8 of the company provided
as under :
"6.
That no shares of this company shall be held by any person other than the
descendants of Mr. S.R. Laul except such shares as have been or are transferred
with the previous consent of the board of directors as laid down in article 6
or are allotted to any outsider hereafter by the board:
Provided that this article
shall not affect holding of shares by Shrimati Ishwara Devi Laul herself
personally.
7. That all shares presently held by the
shareholders on the death of Shrimati Ishwara Devi Laul or of any of the
descendants of Mr. S.R. Laul without any direct issue of such descendant and on
the extinction of the line, shall revert to Mr. S.R. Laul or in case of his
earlier death to his direct descendants and shall be divisible amongst them
according to Hindu law of inheritance subject always to the provisions of
article 6 above :
Provided that the
provisions of this article shall not apply to bona fide outsider transferees or
allottees or their representatives as are contemplated in article 6 above but
shall apply to all shares re-transferred to the original holder out of his
holding, the holder shall include his or her descendants.
8. The provisions of articles 6 and 7 shall also
be applicable to all shares hereinafter allotted to any person by way of gift
from or in consideration of money paid by Mr. S.R. Laul."
Article 9 makes a provision
for the transfer of shares by the board of directors who have been given the
right to decide to transfer shares without assigning any reason, etc.
From time to time many
relations of Shri S.R. Laul, other than his descendants, were allotted shares,
as is clear from annexure III, wherein two sons-in-law, two
daughters-in-law, one grand-daughter (daughter of a daughter) and one niece (brother's daughter) are mentioned.
The appellant is the son of Shrimati Shiv Chandrika Marwaha, a daughter of Shri
S.R. Laul.
M/s. India Iron Traders
Corporation, Motia Khan,
"Resolved
that Shri S.C. Marwaha, one of the directors of the company, be and is hereby
removed from the office of directors as he is guilty of activities prejudicial
to the interest of the company.
Resolved
further that the copyof the notice received from Shri Subodh Kumar Gupta, be
forthwith sent to Shri Suresh Chandra Marwaha to enable him to make his
representation, if any, to place before the general meeting.
Resolved
further that if any representation is received from Shri Suresh Chandra
Marwaha, the same be promptly circulated to all the shareholders and placed
before the general body meeting along with the notice of Shri Subodh Kumar
Gupta.
Resolved
further that the secretary of the company is strictly directed to comply with
the provisions of the law, including the despatch of notice and explanatory
note with other papers and all other matters relating to the meeting."
The
appellant was thus removed by a resolution of the company under section 284 of
the Companies Act.
On
November 6, 1970, the appellant filed a suit challenging the transfer of shares
in favour of respondents Nos. 2 to 26. That suit was withdrawn during the
pendency of the petition under sections 397 and 398 of the Companies Act. A
petition under section 155 of the Companies Act was, however, filed by Mrs.
Abha Kumar, a sister of the appellant, in this court for rectification of the
register of members on the ground that the transfer of shares in favour of
respondents Nos. 2 to 26 was contrary to law and the articles of association of
the company. That petition is still pending.
The
appellant prayed for the following reliefs in his petition under sections 397
and 398 of the Companies Act:
"(A)
Restraining respondents Nos. 2, 4 and 26
(all directors) from acting or conducting the affairs of the company and
day-to-day dealing of the company for and on behalf of the company in any way.
(B) Restraining respondent No. 1, the company,
from allowing respon dents Nos. 2, 4 and 26 from acting as its directcrs and
directing the com pany to elect new directors from the descendants of Shri S.R.
Laul, Advocate, who are its valid and legitimate members.
(C) Restraining respondents Nos. 2 to 26 from
voting for any business of the company or working of the company, for and on
behalf of the com pany, or representing themselves as the members of the
company or voting into power respondent No. 2 or his associates or in any way
entrusting the management or handing over the control of the company to
respondent No. 2 or his associates (benamis).
(D) Restraining all the respondents from
distributing, selling out, or transferring of their shares, assets,
machineries, fixtures, properties, or lands of the company, owned or possessed
by it or belonging to it, without the prior permission of this hon'ble court.
(E) Restraining all the respondents from
operating bank accounts, for and on behalf of the company, or incurring
expenditure, raising loans, in vesting the funds of the company, or in any way
appropriating the raw material, finished material or liquid cash taken from any
Government or repayment of any loans taken by them for and on behalf of the
company.
(F) Restraining the respondents from enjoying any
fringe benefits, privileges, or other facilities granted or afforded by the
respondent-com pany in any capacity.
(G) To remove the secretary, Shri Tirath Ram
Kundi, from the secre taryship of the respondent-company, and to appoint a new
impartial and qualified secretary for the company.
(H) Constituting a committee of management
consisting of the descendants of Shri S. R. Laul, Advocate, alone shown in
serial Nos. 26 to 31 in Annexure 'VIII' at page 82 of the petition to
supervise, control and manage all the affairs of the company including its
day-to-day affairs, correspondence, banking operation, business deals, and
other incidental activities.
(I) Costs
of the petition may also be awarded to the petitioner.
(J) Any other or further orders, which this Hon'ble
High Court may deem fit and proper, under the circumstances of the case, may
also be passed in favour of the petitioner and against the respondents."
The
petition was contested by the respondents and 22 issues in all were framed out
of which the following 7 issues were treated as preliminary issues :
"1. Whether the petition should be stayed on the
ground that two suits relating to the same subject-matter filed by the
petitioner in the Court of the Subordinate Judge, Ballabgarh, are pending ?
2. Is
the petition bad for misjoinder of parties ?
3. Whether the consent of Shrimati Shiv
Chandrika Marwaha in upport of the petition constitutes a valid consent as
contemplated by the Act and the Rules framed thereunder ?
4. Is the petition not maintainable on the
principle of internal management as alleged in paragraph 7 of the reply ?
5. Has the petitioner given sufficient
particulars of his allegations of activities oppressive to the petitioner and
prejudicial to the interest of the company ?
6. Was the change in management brought about
in May, 1969, in the interest of the creditors of the company and in the
interest of the company ?
7. If issues Nos. 4, 5 and 6 are decided against the petitioner, is
the petition maintainable under sections 397 and398 of the Act?"
The learned single judge
held issues Nos. 1 and 4 in favour of the appellant. Issues Nos. 2 and 3 were
not pressed by the learned counsel for the respondents and issues Nos. 5 and 6
were decided against the appellant with the result that the petition was
dismissed.
The learned single judge
has pointed out that the appellant has not made any specific allegations of
oppression of any member or members of the company and vague allegations have
been made with regard to the management of the affairs of the company by the
present management as being prejudicial to the interest of the company. We have
gone through the petition and find that the entire case of the appellant
depends on the validity of the transfer of shares effected on May 27, 1969, and
November 7, 1970, in the meetings of the board of directors which have been
challenged in the petition under section 155 of the Companies Act by the
appellant's sister, Mrs. Abha Kumar. Since the petition under section 155 of
the Companies Act is a better remedy, it is not proper to make investigation
into the same facts in the petition under sections 397 and 398 of the Companies
Act, particularly because the names of respondents Nos. 2 to 26 cannot be
removed from the register of members by an order passed in this case nor has
any such relief been claimed. For the purpose of this petition and appeal, it
will have to be presumed that all the members whose names are entered in the
company's register of members are valid members. The present board of
directors, having been constituted by the existing members, cannot be held to
be improperly constituted. It is, therefore, necessary that the petition under
section 155 of the Companies Act should be decided first. As long as the
present register of members of the company continues, those members cannot be
restrained from exercising their individual and corporate rights as
shareholders and most of the reliefs prayed for by the appellant cannot be
granted.
The appellant has not
adopted an above-board method. He has filed the petition under sections 397 and
398 of the Companies Act himself with the support of his mother without making
his sister a party, while the petition under section 155 of the Companies Act
has been filed by his sister, to which the appellant and his mother have not
been made parties. The counsel of the petitioner in each petition is the same
and the game seems to be quite clear that if the decision goes against the
petitioner in one case, the petitioner in the other will say that he or she is
not bound by that decision because he or she was not a party thereto. Unless
the transfer of shares in favour of respondents Nos. 2 to 26 is held to be
invalid, no relief can be granted to the appellant in the present case as it
cannot be said that the board of directors of the company is not properly
constituted at present.
The
whole case of the appellant is that, because of transfers of shares, a change
in the management of the company has taken place and the present board of
directors is managing or will manage the affairs of the company in a manner
prejudicial to the interests of the company and the minority shareholders
represented by himself, his mother and sister. Otherwise, no instances have
been stated in the petition as to the acts of mismanagement by the present
board of directors except that the appellant has been removed from the
directorship of the company and has been deprived of all the consequential
benefits as a director. That grievance is as a director and not in the capacity
of a shareholder. It is well settled that only oppression in the character of a
member has to be complained of and not in any other capacity. Reference in this
connection may usefully be made to the judgment of their Lordships of the
Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Cornp Cas
351; AIR 1965 SC 1535. In C.L. Joseph v. Jos [1964] 34 Comp Cas 931; AIR 1965
Ker 68, the learned judge held that a shareholder has two kinds of rights,
namely, individual rights and corporate rights. Every shareholder can enforce
his individual rights singly but corporate rights have to be enforced by the
majority. As I have said above, the appellant has not alleged the infringement
of any individual right of his as a shareholder. All that he has submitted is
that the shares should have been offered to him for purchase before the members
holding them had transferred them in favour of respondents Nos. 2 to 26, in
support of which no provision of law or the articles of association of the
company has been cited, and that he should not have been removed from the
directorship of the company. The matter with regard to the validity of the
transfer of shares is pending in this court in a petition filed under section
155 of the Companies Act and his removal from directorship was by the company
in a general meeting held in accordance with section 284 of the Companies Act.
It cannot, therefore, be said that any right of the appellant as a shareholder
has been oppressed by the present management.
The
learned counsel referred to In re H.R. Harmer Ltd. [1958] 3 All ER 689 ; [1959]
29 Comp Cas 305 (CA), In re Albert David Ltd. [1964] 68 CWN 163 (Cal),
Ramshankar Prasad v. Sindri Iron Foundry (P.) Ltd. [1966] 70 CWN 520 (Cal) and
Asansol Electric Supply Co. v. Chunnilal Daw, AIR 1972 Cal 19, which are all
distinguishable. In In re Albert David Ltd. [1964] 68 CWN 163 (Cal), it was
held that:
"The
right to appoint a director is a very valuable right of a shareholder and when
this right is infringed, his right qua shareholders is also affected. The shareholder
in such a case is entitled to apply under section 397 of the Act."
In the present case, the
appellant was a director and was removed by a resolution of the company as
provided in section 284 of the Companies Act and it has not been shown how the
resolution removing him from directorship was illegal. It is only improper or
illegal removal from directorship that may affect the right of a shareholder
but not the removal in accordance with the provisions of the Act. In Ramshankar
Prasad v. Sindri Iron Foundry (P.) Ltd. [1966] 70 CWN 520 (Cal), the facts were
that the minority of shareholders drove away the majority of shareholders and
thereafter usurped the functions of the majority. The learned judges held :
"What is it but
shameful and shameless ' departure from the standards of fair dealing' the
visibility of which is all too clear to all except to the blind ? What is it
but a gross and naked violation of 'the conditions of fair play' ? If the
Saraogi group are the directors, they are shareholders too by virtue of having
invested Rs. 5 lakhs. Did they entrust that much to the company relying on the
doctrine : might is right—a doctrine the Prosad group translated into practice
on March 13, 1963, after having made earlier preparations to that end by faked
meetings and faked resolutions ? Certainly not. They parted with such a heavy
sum in favour of the company in the sure belief that decency and probity would
rule the affairs of the company and that right would be might, not vice versa.
So, the Saraogi group are very much affected as well. Surely, it is no
disqualification for a shareholder too qua shareholder to be a director. And by
being a director he does not lose his separate entity as a shareholder."
Reliance was placed by the
learned judges on the judgment of the Court of Appeal in In re H.R. Harmer Ltd.
[1958] 3 All ER 689 ; [1959] 29 Comp Cas 305, 327. The following observations
of Jenkins L.J. were quoted with approval :
"It appears to me that
the sons as members, and not merely as directors, were oppressed by the
singular conduct of the father. The oppression must, no doubt, be oppression of
members as such, but it does not follow that the fact that the oppressed
members are also directors is a disqualifying circumstance when the question of
relief under section 210 (corresponding to section 397 of the Companies Act
subject to one exception) arises. I think there may well be oppression from the
point of view of member-directors where a majority shareholder (that is to say,
a shareholder with a preponderance of voting power) proceeds, on the strength
of his control, to act contrary to the decisions of, or without the authority
of, the duly constituted board of directors of the company."
In H.R. Harmer's case
[1958] 3 All ER 689 ; [1959] 29 Comp Cas 305 (CA), the facts were that the
company consisted of the father and his two sons. The majority of shares were
held by the father but all three of them were the only shareholders and
directors of the company. The father went to Australia in January, 1948, and
decided to open a branch there against the wishes of his sons. In 1954, the
father purported to dismiss summarily a Mr. Edwards which was opposed by the
two sons as directors but the father exerted his authority as the majority
shareholder. On these facts, it was held by Jenkins L.J. that there may well be
oppression from the point of view of member-directors where a majority
shareholder (that is to say, a shareholder with a preponderance of voting
power) proceeds, on the strength of his control, to act contrary to the
decision of, or without the authority of, the duly constituted board of
directors of the company. It clearly shows that in that case the father was
acting against the interest of the company and contrary to the wishes of the
duly constituted board of directors. No such case has been made out in the
present case.
The learned counsel for the
appellant lastly submitted that the affairs of the company were not being
conducted in accordance with the provisions of the Companies Act or the articles
of association of the company. The instance given was that in the meeting of
the board of directors held on November 7, 1970, some shares were transferred
about which there was no mention in the agenda which was issued for the
meeting. No provision of law or the articles of association of the company has
been brought to our notice obliging the board of directors to only transact
that business for which agenda is issued. It is well known that every agenda of
a meeting has a residuary clause "to consider any other matter with the
permission of the Chairman". The matter with regard to the transfer of
shares was considered in the meeting of the board of directors held on November
7, 1970, with the permission of the Chairman. No illegality was committed thereby.
The learned counsel relied on Asansol Electric Supply Co. v. Chunnilal Daw, AIR
1972 Cal 19, for the proposition that no proceedings can be held with regard to
an item which is not in the agenda. That judgment has no applicability because
it related to a general meeting of the company and not to a meeting of the
board of directors of the company. For general meetings, specific provision for
issuance of an agenda has been made in sections 171 to 173 of the Companies Act
whereas no provision has been made as to the issuance of an agenda for the
meeting of the board of directors. The ratio of that decision is, therefore,
not applicable.
The learned counsel for the
appellant then relied on Rajahmundry Electric Supply Corporation Ltd. v. A.
Nageswara Rao [1956] 26 Comp Cas 91; AIR 1956 SC 213 and Mrs. Gajarabai M.
Patny v. Patny Transport (P.) Ltd. [1966] 36 Comp Cas 745; AIR 1966 AP 226 in
order to show what is just and equitable for the winding up of the company.
That question does not arise in the present case in view of the discussion made
above.
Lastly, the learned counsel
for the appellant submitted that the learned single judge erred in law in
holding that the change in the management was see ought about by and in the
interests of the company's creditor—Messrs. india Iron Tracers Corporation—and,
therefore, no grievance can be made by the appellant under section 398 of the
Companies Act in view of what is convened in section 398(1)(b) within brackets.
The argument is that a creditor is only concerned with the recovery or
realisation of the amount due to him and not with the management of the
company's affairs. We are of the opinion that the argument of the learned
counsel is clearly wrong. The legislature, while providing exception in clause
(b) of section 398(1) of the Companies Act, clearly visualized that cases might
occur in which financially hard-pressed companies might save themselves by
arranging with their creditors to become shareholders and directors in lieu of
remaining creditors for the whole or part of the amount due to them and that
such a change occurring in the management will not afford a cause of action to
any member under section 398 of the Companies Act. In the present case,
admittedly, the change in the management was brought about by and in the
interests of a creditor of the company and the decision of the learned single
judge on this point, with respect, is correct, which is upheld.
For the reasons given
above, we find no merit in this appeal, which is dismissed with costs.
[1988] 64 COMP. CAS. 19 (P&H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Paragaon Utility Financiers P.
Ltd.
COMPANY PETITION NO. 79 OF 1982
MAY 15, 1986
Arun Jain for the Petitioners.
N.K. Sodhi, H.S.
Rajendra Nath Mittal, J.—This is a petition under sections 397 and 398 of the
Companies Act, 1956.
Briefly, the facts are that
the respondent is a private limited company having authorised capital of Rs. 10,00,000
divided into 1,000 equity shares of Rs. 1,000 each. The called up capital is
Rs. 8,50,000 and the paid-up capital is Rs. 7,91,000. The calls in arrears
amount to Rs. 59,000. It was incorporated on August 21, 1961, under the
provisions of the Companies Act (hereinafter referred to as "the
Act"). The petitioners hold 150 shares as detailed below:
|
|
No.
1 |
20 |
|
Hardev Singh
Minhas," |
No. 2 |
30 |
|
Maj. K. Gurdev
Singh," |
No. 3 |
20 |
|
Smt. Nasib
Kaur," |
No. 4 |
20 |
|
Iqbaljit
Singh," |
No. 5 |
20 |
|
Smt. Kirpal
Kaur," |
No. 6 |
20 |
|
Smt. Chanan
Kaur," |
No. 7 |
20 |
It is alleged that the
affairs of the company are being conducted prejudicially to public interest and
in a manner oppressive to the petitioners, who are in minority, as detailed
below:
(i) The company had been allotted 490 equity shares of
Punjab Iron and Steel Co. P. Ltd., Jalandhar Cantt. (hereinafter referred to as
"PISCO"). The paid-up amount in respect of the above shares was Rs.
3.90 lakhs. They were transferred in the names of Pavittar Singh and his wife,
Nasib Kaur (122 shares), Ravinder Singh, son of Pavittar Singh, and his wife
(124 shares), Ramesh Inder Singh, son of Pavittar Singh (122 shares), and
Swaran Singh, son of Milkha Singh, brother-in-law of Pavittar Singh (122
shares). These were transferred in a clandestine manner and without having been
offered to any other shareholder including the petitioners, for a consideration
of Rs. 3.90 lakhs in a meeting of the board of directors of the company held on
December 30, 1978. No money in cash was paid by the purchasers to the company
as the price of the shares. An amount of Rs. 2 lakhs alleged to be deposited
with the company was adjusted towards the purchase price and the balance amount
of Rs. 1,90,000 was given by the company as loan to the purchasers with
interest at the rate of 15 per cent, per annum. The meeting in which the shares
were transferred was illegal and void for want of quorum. Some other
irregularities were also committed by the board of directors in calling and
holding the meeting. Thus, the transfer of shares is not binding on the
company.
(ii) Shri Ramesh Inder Singh was the managing director of the
company in the year 1976 and he had been operating the bank account of the
company maintained in the Central Bank of
(iii) Mohinder Singh had been appointed as
manager-cum-cashier of the company during the regime of Pavittar Singh, father
of Ramesh Inder Singh. The books of account were maintained by Mohinder Singh.
As a result, it is alleged, an amount of Rs. 2,68,000 had been defalcated by
him in the year 1976. The board of directors decided to take action against
him. The matter was taken in various meetings of the board of directors but no
action was taken against him. Thus, the interest of the shareholders was not
protected by the management.
(iv) The minutes book of the company relating to the meetings
of the board of directors and shareholders was not kept properly from November,
1978, to September, 1979. Some of the proceedings have not been signed by the
chairman. There are various violations of the provisions of section 193 of the
Act. Therefore, the business transacted in the meetings during that period is
illegal and void ab initio.
(v) The company had been advancing loans to some persons
without any documents. It is alleged that it advanced loan without interest and
without getting executed any document to PISCO. An amount of Rs. 14,309.57
stands due from it to the company and an amount of Rs. 36,730.52 from Mohinder
Singh as on December 31, 1978, but no action has been taken to recover the
amounts from them.
The aforesaid allegations,
it is pleaded, go to prove the mismanagement on the part of the management
which is prejudicial to public interest and oppressive to the minority members
of the compauy. Thus, the circumstances are such in which it would be just and
equitable that the company can be ordered to be wound up. Consequently, it is
prayed that action be taken under the aforesaid section. The respondents in the
petition are: 1. Messrs. Paragaon Utility Financiers P. Ltd., 2. Late Pavittar
Singh through his legal representatives, 3. Smt. Nasib Kaur, 4. Ramesh Inder
Singh, 5. Ravinder Singh and 6. Swaran Singh. Later, the name of respondent No.
2, late Pavittar Singh, was ordered to be deleted.
The petition has been
contested on behalf of respondent No. 1 and respondents Nos. 3, 4, 5 and 6. Two
written statements have been filed, one on behalf of respondent No. 1 and the
other on behalf of the latter respondents. Respondent No. 1 alleged that the
affairs of the company were meticulously looked after during the period when
Col. P. S. Dhillon was the managing director. Col. Dhillon filed an application
for rectification of the register of shareholders of PISCO under section 155.
The application was decided against him but an appeal is pending in this court
against that order.
In the written statement on
behalf of respondents Nos. 3, 4, 5 and 6, it is, inter alia, pleaded that the
allegations in the petition do not make out a case of oppression and
mismanagement of the affairs of the company and its winding up on just and
equitable grounds. The petition is mala fide and had been filed at the behest
of Col. P. S. Dhillon who had been the managing director till April 20, 1982,
when he had been removed. Petitioners Nos. 1 and 3 are tne real brothers of
Col. Dhillon and petitioner No. 4 is his real sister. The main allegation in
the petition, it is stated, related to the transfer of 490 shares held by the
company in PISCO. The matter had been decided in company petition filed by Col.
P. S. Dhillon which had since been dismissed. It is further pleaded that
rectification of the transfer of shares cannot be the subject-matter of a
petition under sections 397 and 398. The allotment cannot also be declared
invalid in the absence of PISCO. The other allegations in the petition have
been controverted by the said respondents.
On the pleadings of the
parties, the following issues were framed:
1. Whether the petition is maintainable in view of the preliminary
objections Nos. 1 to 9 in the written statement of respondents Nos. 3 to 6 and
paragraph No. 6 of the written statement of respondent No. 1? [Opp].
2. Whether the affairs of the company are being conducted in a manner
prejudicial to the interest of the company and public? [Opp].
3. Whether the acts of
the majority are oppressive to the interest of the minority? [Opp].
A. Relief.
Issue No. 1: The first
preliminary objection raised by Mr. Sodhi is that the petitioners have no right
to maintain the present petition as they did not own 10 per cent, shareholding
on the date of filing the petition. On the other hand, Mr. Jain, counsel for
the petitioners, has argued that the petitioners had 150 shares out of 1,000
shares on the date of filing the petition as given in the petition. Thus, they
had the right to file the petition.
I have duly considered the
arguments of learned counsel and find force in the contention of Mr. Jain. The
petitioners, as given in the list of members, exhibit P-88, filed with the
Registrar of Companies, Jalan-dhar, had 150 shares out of 1,000 shares on June
30, 1982. Col. K. S. Dhillon, petitioner, in his statement, said that at the
time of filing the petition, the petitioners were shareholders of the company.
From the list, exhibit P-88, and statement of Col. Dhillon, it is evident that
the petitioners had more than 10 per cent, shareholding in the company.
At this, Mr. Sodhi sought
to urge that the position reflected in exhibit P-88 relates to the month of
June, 1982, whereas the petition was filed in October, 1982. He argues that it
was incumbent on the petitioners to show the total number of shareholding held
by them on the date of filing the petition which they failed to do. He made
reference to Rajahmundry
Electric Supply Corporation Lid. v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, and the resolution of
the board of directors dated October 29,1978, wherein 20 shares held by
Smt.Kirpal Kaur were transferred to Smt. Rattan Kaur, daughter of Dalip Singh
and Amarjit Singh Bajwa, son of Rattan Singh.
I do not find any substance
in this submission of learned counsel as well. The petitioners have shown that
according to the latest list of members filed with the Registrar of Companies,
they had 150 shares. Col. K. S. Dhillon, petitioner, affirmed in his statement
that all the petitioners were shareholders of the company on the date of filing
the petition. The proceedings of the board of directors dated October 29, 1978,
however, show that 20 shares were transferred by Smt. Kirpal Kaur, petitioner.
It cannot be ruled out that 20 shares might have been again transferred in the
name of Smt. Kirpal Kaur, before June, 1982, the date of filing the list of
shareholders, exhibit P-88. Even if it may be assumed that 20 shares had not
been transferred to her subsequently, the remaining petitioners still had more
than 10% shareholding on the date of petition and thus they were entitled to
file the petition. In Rajahmundry Eleetric Supply Corporation Ltd.'s case.
[1956] 26 Comp Cas 91 (SC); AIR 1956 SC 213, the facts were that the applicant
after obtaining the consent of more than one-tenth in number of the members
presented the petition under section 153C of the Indian Companies Act, 1913
(section 397 of the Companies Act, 1956). Subsequent to the presentation of the
petition, some of the members withdrew their consent. It was held that subsequent
withdrawal of the consent could not affect the right of the petitioner to
proceed with the petition or the jurisdiction of the court to dispose of it on
merits. In my view, the observations in the above case are of no assistance to
Mr. Sodhi. Consequently, I overrule this preliminary objection.
The second objection of Mr.
Sodhi is that the allegations made in the petition should be such that a prima
facie case for winding up of the company has been made out under section
433(f), but from the allegations in the petition, no such case stands
established. In support of his contention, he places reliance on Shanti Prasad
Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC); AIR 1965 SC 1535, Seth
Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp Cas 543 (SC) and Hind Overseas
P. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 (SC); AIR 1976
SC 565.
There is no dispute about
the proposition that an action under section 397 can be taken only if a prima
facie case for winding up has been made out on the allegations in the petition.
In the above observations, I find support from Rajahmundry Electric Supply
Corporation's case [1956] 26 Comp Cas 91 (SC) wherein it is observed as follows
(at page 95):
".before taking action
under section 153C, the court must be satisfied that circumstances exist on
which an order for winding up could be made under section 162".
Sections 153C and 162 of
the 1913 Act are equivalent to sections 397 and 433 respectively of the 1956
Act. A similar view was taken in Shanti Prasad Jain's case [1965] 35 Comp Cas
351 (SC). It was further observed therein that the conduct of the majority
shareholders 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 by the 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.
It is now to be determined
whether the allegations in the petition make out a prima facie case for the
winding up of the company under section 433(f). The section says that a company
may be wound up by the court if it is of opinion that it is just and equitable
to do so. The question arises what the words "just and equitable"
mean. It has been held in Hind Overseas' case [1976] 46 Comp Cas 91 (SC) that
the principle of "just and equitable" baffles a precise definition.
It must rest with the judicial discretion of the court depending upon the facts
and circumstances of each case. These are necessarily equitable considerations
and may, in a given case, be superimposed on law. Whether it would be so done
in a particular case cannot be put in the strait-jacket of an inflexible
formula. Clause (f) is not to be read as being ejusdem generis with the
preceding five clauses. Whether the five earlier clauses prescribe definite
conditions to be fulfilled for the one or the other to be attracted in a given
case, the just and equitable clause leaves the entire matter to the wide and
wise judicial discretion of the court. The only limitations are the force and
content of the words "just and equitable" themselves. In view of
sections 397, 398 and 443(2), relief under section 433(f) based on the just and
equitable clause is in the nature of a last resort, when other remedies are not
efficacious enough to protect the general interest of the company. There must
be materials to show when the just and equitable clause is invoked that it is
just and equitable not only to the persons applying for winding up but also to
the company and to all its shareholders. It is further observed that the court
will have to keep in mind the position of the company as a whole and the
interest of the shareholders and to see that they do not suffer in a fight for
power that may ensue between the two groups. Similar observations were made in
Seth Mohan Lal's case [1968] 38 Comp Cas 543 (SC). It was further held that in
making an order for winding up on the ground that it is just and equitable that
a company should be wound up, the court shall consider the interest of the
shareholders as well as of the creditors. It is not necessary to dilate further
on this matter. It is sufficient to observe that if the allegations in the
petition are taken to be established, the petitioners are entitled to obtain an
order of winding up under section 433(f).
The third preliminary
objection of Mr. Sodhi is that the oppression should continue up to the date of
the petition. He contends that the petition in this case does not show that the
oppression is continuous and, therefore, it is liable to be dismissed. To
fortify his argument he made reference to Shanti Prasad Jain's case [1965] 35 Comp
Cas 351 (SC) and Sheth Mohanlal Ganpatram v. Sayaji Jubilee Cotton and Jute
Mills Co. Ltd. [1964] 34 Comp Cas 777: AIR 1965 Guj 96. On the other hand, Mr.
Jain has argued that if the effect of a single act is continuously oppressive,
the court is entitled to pass an order under sections 397 and 398. He refers to
In re Sindhri Iron Foundry (P.) Ltd. [1964] 34 Comp Cas 510 (Cal).
I have duly considered the
argument. The matter does not require any elaborate discussion as it has been
settled by the Supreme Court in Shanti Prasad Jain's case [1965] 35 Comp Cas
351 that in order to file an application under section 397, if must be shown
that the conduct of the majority shareholders was oppressive to the minority
members and this requires that events have to be considered not in isolation
but as part of a consecutive story. There must be continuous acts on the part
of the majority shareholders, continuing up to the date of the petition,
showing that the affairs of the company were being conducted in a manner oppressive
to some part of the members. Same view was expressed by P. N. Bhagwati, J. as
he then was, in Mohanlal Ganpatram' case [1964] 34 Comp Cas 777 (Guj). It was
observed therein that sections 397 and 398 postulate that there must be at the
date of the application a continuing course of conduct of the affairs of the
company which is oppressive to any shareholder or shareholders or prejudicial
to the interests of the company. I am in respectful agreement with the above
observations. It is true that in Sindhri Iron Foundry's case [1964] 34 Comp Cas
510, it was held by a learned single judge of the Calcutta High Court that if
the court is satisfied that a single wrongful act is such that its effect will
be a continuous course of oppression and there is no prospect of remedying the
situation by the voluntary act of the party responsible for the wrongful act,
the court is entitled to interfere by an appropriate order under section 397 of
the Act. However, the above observations are not in consonance with those of
the Supreme Court in Shanti Prasad Jain's [1965] 35 Comp Cas 351. Consequently,
it is not possible for me to rely upon the view expressed by the Calcutta High
Court.
It is clear from the facts
that the petitioners have alleged oppression relating to the year 1978-79.
Thereafter, Col. P. S. Dhillon was appointed as the managing director who
remained as such for many years, but during that period, the petitioners
remained quiet and took no action. Thus, it cannot be said that there are
continuous acts of the majority shareholders which have been oppressive to the
petitioners. Consequently, the petition is liable to be dismissed on this short
ground.
Issues Nos. 2 and
3.—Though, in view of the above finding, it is not necessary to deal with the
arguments of Mr. Jain on these issues, in order to avoid the possibility of
remand in appeal, I consider it proper to deal with them.
In the first instance,
counsel for the petitioners has challenged the resolutions passed in the
meetings of the company held on November 30, 1978, December 30, 1978, January
15, 1979, and February 28, 1970. It was highlighted by him that several
directors of the company, namely, Shri Pavitar Singh, Smt. Nasib Kaur, Smt.
Gurbachan Kaur, Shri Rajin-der Singh Johal, Shri Amar Singh, Smt. Mohinder
Kaur, Shri Rameshinder Singh, Shri Ravinder Singh, Shri Swaran Singh and Smt.
Inderjeet Kaur, were closely related. Smt. Nasib Kaur was wife, Smt. Mohinder
Kaur and Smt. Gurbachan Kaur were sisters, Shri Rameshinder Singh and Shri
Ravinder Singh were sons and Smt. Inderjit Kaur was daughter of Pavittar Singh.
Shri Amar Singh is the husband of Smt. Mohinder Kaur and Shri Rajinder Singh
Johal is the husband of Smt. Gurbachan Kaur. Shri Swaran Singh is the brother
of Smt. Nasib Kaur. He submits that the matter is to be examined in this
background. He has challenged the legality of the resolution dated November 30,
1978, exhibit P-1 on three grounds, firstly, that the quorum for the meeting in
which the resolution was passed was incomplete; secondly, no notice of the
meeting was given to the directors and, thirdly, that, in fact, no meeting was
held on that date.
The first question that
arises for determination is as to whether the quorum for the meeting in which
resolution, exhibit P-l, was passed was incomplete. Mr. Jain has contended that
there were 32 directors of the company on November 30, 1978, and, therefore,
the quorum for the meeting was 11. However, only 8 directors were present. Out
of them Smt. Indarjit Kaur and Shri Pavittar Singh ceased to be directors on
September 27, 1977, and January 30, 1978, respectively, as they failed to
attend three consecutive meetings and thus they would be deemed to be not
present in the meeting. In this way, only six directors would be deemed to be
present.
On the other hand, Mr.
Sodhi has argued that 8 out of 32 directors of the company, namely, Smt. Gurmej
Kaur, Shri Gurcharan Singh, Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib
Kaur, wife of Bakhtawar Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh
and Shri Ravinder Singh, had ceased to be directors. Thus, the total number of
directors on that date was 24. The number for determining the quorum will be
deemed to be 24 and not 32. Therefore, the quorum would have been complete if
eight directors were present. He further contends that Shri Pavittar Singh had
been re-elected as director on June 30, 1978, and, therefore, he did not suffer
from any disability on November 30, 1978.
I have duly considered the
arguments of learned counsel. It has been admitted by Mr. Jain that out of the
32 directors, eight directors, namely, Smt. Gurmej Kaur, Shri Gurcharan Singh,
Smt. Rattan Kaur, Shri Bakhtawar Singh, Smt. Nasib Kaur, wife of Shri Bakhtawar
Singh of Phagwara, Smt. Inderjit Kaur, Shri Avtar Singh and Shri Ravinder Singh
had ceased to be directors prior to November 30, 1978. Subsection (2) of
section 287 provides that the quorum for a meeting of the board of directors of
the company shall be one-third of its total strength or two directors,
whichever is higher. In clause (a) of sub-section (2) of section 287, the total
strength of the board of directors of a company has been denned as the total
strength of the board of directors as determined in pursuance of the Act, after
deducting there from the number of directors, if any, whose places may be
vacant at the time. It is thus evident that for constituting quorum, l/3rd of
the total number of directors who do not suffer from any disability are to be
taken into consideration. The effective number of directors who admittedly
ceased to be so is 8. Thus, the number of effective directors was 24 and out of
them 8 directors could constitute the quorum. The directors present in the
meeting were eight, i.e., Smt. Inderjit Kaur, Shri Rameshinder Singh, Smt.
Gurbax Kaur, Shri Ravinder Singh, Shri Rajinder Singh Johal, Shri Pavittar
Singh, Shri Amar Singh and Shri Swaran Singh. Out of them, admittedly, Smt.
Inderjit Kaur and Shri Ravinder Singh ceased to be directors. There is a
dispute as to whether Shri Pavittar Singh was re-elected as a director or not.
Even if it may be assumed that Shri Pavittar Singh had been re-elected as
director, the quorum was incomplete as only six directors were present.
The second question to be
determined is whether notice of the meeting was given to the directors and if
not with what effect. Mr. Jain has argued that the copy of the despatch
register of the company from October 16, 1978, to February 19, 1979, exhibit
P-74, does not show that any notice was issued for the said meeting. On the
other hand, Mr. Sodhi, has argued that the only requirement under section 286
is that the notice of the meeting should be in writing. It does not prescribe
the manner in which it is to be served on the directors. The notice under
article 82 of the articles of association can be served personally. He submits
that notices were not sent by post but through a messenger.
It is not disputed by Mr.
Sodhi that the notices were not entered in the despatch register. There is no
reliable evidence on record to prove that notices were sent through messenger
and, therefore, it cannot be held that notices were given to the directors. It
is essential that the notices of the meetings have to be sent to all the
directors, otherwise, the resolutions passed in such meetings are invalid. In
this view, I am fortified by the observations of the Supreme Court in
Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1: AIR 1973 SC
2389, wherein it was observed that notice to all the directors of a meeting of
the board of directors is essential for the validity of any resolution passed
at the meeting and where no notice was even given to one of the directors, the
resolution passed at the meeting of the board of directors is invalid.
Consequently, I am of the opinion that the resolution dated November 30, 1978,
is invalid on this ground.
The third question to be
determined is whether the meeting was held on November 30, 1978, or the minutes
were recorded without holding the meeting. Mr. Jain has argued that no meeting
was held but the minutes were recorded subsequently by the eight directors in
collusion with each other. In support of his contention, he brought to my
notice the fact that the signatures of the chairman at the end of the minutes
bear the date November 30, 1979, instead of November 30, 1978. The arguments
have been considered by me but I do not agree with them. The proceedings book
is page-marked and consists of several resolutions even after this resolution.
This resolution cannot be said to have been incorporated therein subsequently
merely because under the resolution, Shri Pavittar Singh purported to have
signed on November 30, 1979. The year and the date might have been mentioned
through an oversight.
Now, I advert to the
resolution, exhibit P-2, passed in the meeting held on December 30, 1978. Mr.
Jain has challenged the said resolution on four grounds, out of which three
grounds are the same on which resolution, exhibit P-1, was challenged. The
fourth ground is that 5 transferees of the shares of PISCO, namely, Smt. Nasib Kaur,
Shri Ravinder Singh, Shri Rameshinder Singh, Shri Pavittar Singh and Shri
Swaran Singh, took part in the meeting without disclosing their interest in the
proposed transaction and, therefore, they ceassed to be directors on that date.
The first question to be seen is whether the quorum for the meeting was
complete or not. This meeting was attended by the following ten directors:
|
1. |
Smt.
Nasib Kaur. |
|
2. |
Smt.
Mohinder Kaur, |
|
3. |
Smt.
Rajinder Singh Johal, |
|
4. |
Smt.
Gurbax Kaur, |
|
5. |
Shri
Pavittar Singh, |
|
6. |
Shri
Ravinder Singh, |
|
7. |
Shri
Swaran Singh, |
|
8. |
Smt.
Inderjit Kaur, |
|
9. |
Shri
Rameshinder Singh, and |
|
10. |
Shri
Amar Singh. |
The resolution was passed
for transferring 490 shares of PISCO held by the company in favour of the
following persons for full consideration:
|
|
Shares |
|
1. Shri
Pavittar Singh and his wife, Smt. Nasib Kaur |
122 |
|
2. Shri
Ravinder Singh and his wife, Smt. Santosh |
124 |
|
3. Shri
Rameshinder Singh |
122 |
|
4. Shri
Swaran Singh |
122 |
|
|
490 |
N.B. Out of 6
transferees, all except Smt. Santosh were directors of the company.
Mr. Jain has contended that
out of the ten directors present in the meeting, five directors were
transferees. Out of them, Pavittar Singh, Smt. Nasib Kaur and Shri Ravinder
Singh had also ceased to be directors. Smt. Inderjit Kaur had further ceased to
be a director. If the presence of the five transferee-directors and that of
Smt. Inderjit Kaur is not taken into consideration, then the quorum is
incomplete. On the other hand, Mr. Sodhi has argued that Shri Pavittar Singh,
after he had ceased to be a director, was re-elected on June 30, 1978. However,
he admits that Smt. Inderjit Kaur ceased to be a director. He further submits
that the transferees did not cease to be directors at the time of passing the
resolution and at the most they ceased to be so after the resolution had been
passed.
First, it is to be seen
whether Shri Pavittar Singh was re-elected as director on June 30, 1978, as
argued by Mr. Sodhi. Exhibit R. 2/5 is the copy of the resolution of the
shareholders dated June 30, 1978, from which it is clear that he was re-elected
as director on June 30, 1978. Thereafter, it is not shown that he ceased to be
so. Consequently, I am of the opinon that he was a director on December 30,
1978.
It is next to be seen
whether Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran Singh, Shri
Ravinder,Singh and Shri Rameshinder Singh had ceased to be directors on that
date because they took part in the meeting at the time of passing the
resolution, exhibit P-2. Relevant parts of sections 283(1)(i) and 299 read as
follows:
"Section 283. Vacation
of office by directors.—(1) The office of a director shall become vacant if—.
(i) he acts in
contravention of section 299.
Section 299. Disclosure of interests by
director.—(1) Every director of a company who is in any way, whether directly
or indirectly, concerned or interested in a contract or arrangement, or
proposed contract or arrangement, entered into or to be entered into, by or on
behalf of the company, shall disclose the nature of his concern or interest at
a meeting of the board of directors.".
From a reading of section
283, it is clear that the office of the director becomes vacant when a director
acts in contravention of section 299. It is enjoined by section 299 that a
director, who is interested in a contract entered into by or on behalf of the
company, should disclose the nature of his interest at a meeting of the board
of directors. If he fails to do so, he ceases to be a director. In view of the
aforesaid two sections, Shri Pavittar Singh, Smt. Nasib Kaur, Shri Swaran
Singh, Shri Ravinder Singh and Shri Rameshinder Singh ceased to be directors of
the company.
Now, the question arises,
whether the resolution, exhibit P-2, is invalid on this ground. Sub-section (1)
of section 300 provides that no director of a company shall, as a director,
take any part in the discussion or vote on any contract by or on behalf of the
company, if he is in any way, whether directly or indirectly interested in the
contract, nor shall his presence count for the purpose of forming a quorum at
the time of any such discussion or vote; and if he does vote, his vote shall be
void. Sub-section (2)(a), which is in the nature of a proviso to sub-section
(1), says that sub-section (1) shall not apply to a private company which is
neither a subsidiary nor a holding company of a public company. A reading of
the above provisions makes it clear that sub-section (1) applies to a public
limited company and not to a private company which is not a subsidiary or a
holding company of a public company. Therefore, it is in the case of a public
company and a private company which is a subsidiary or a holding company of a
public company, that if a director takes part in the proceedings of the board
of directors and votes regarding any contract in which he is interested, his
presence for the purposes of forming a quorum shall not be counted and his vote
shall be void. However, it will not be so if the company is a private company.
In the present case, the company is a private company. Therefore, the presence
of the aforesaid five directors for the purposes of quorum and their vote for
the purpose of passing the resolution cannot be excluded. They shall, however,
cease to be directors after the passing of the said resolution. Consequently, the
resolution, exhibit P-2, cannot be held to be invalid on this ground. However,
it may be reiterated that the shares were transferred in the names of some of
the directors. Thus, the action of the directors in passing the resolution
amounts to oppression of the minority shareholders in spite of the fact that it
is not an invalid resolution. In the above observation, I find support from
Mohanlal Ganpalram's case [1964] 34 Comp Cas 777 (Guj) wherein it was held that
a resolution may be passed by the directors which is perfectly legal in the
sense that it did not contravene any provision of law, and yet it may be
oppressive to the minority shareholders or prejudicial to the interest of the
company. Such a resolution can certainly be struck down by the court under
section 397 or 398.
Now, it is to be seen
whether Smt. Nasib Kaur, wife of Pavittar Singh, Shri Ravinder Singh and Smt.
Surjit Kaur were directors on the date of the meeting, i.e., December 30, 1978,
and if not, with what effect. Smt. Nasib Kaur was re-elected as a director on
June 30, 1978, vide resolution, exhibit R-2/5. It is not shown that thereafter
she ceased to be so. Consequently, she was a director on the date of the
meeting. Shri Ravinder Singh and Stnt. Surjit Kaur admittedly ceased to be directors.
If the presence of two directors, namely, Ravinder Singh and Smt. Inderjit
Kaur, is not taken into consideration, eight directors were still present in
the meeting. The total number of directors, as already mentioned, was 24. Thus,
the quorum was complete.
Mr. Jain next submits that
no notice of the meeting was sent to the directors and, consequently, the
meeting was illegal. There is force in this submission. The copies of the
despatch register from October 16, 1978, to February 19, 1979, exhibit P-74,
show that no notice was sent regarding the meeting. A similar argument was
raised earlier and was dealt with while determining the validity of the
resolution dated November 30, 1978. For similar reasons, the resolution dated
December 30, 1978, is also invalid.
Mr. Jain has then argued
that in the resolution dated November 30, 1978, it was decided that the shares
be offered to the existing shareholders. Shri R. S. Johal was authorised to do
so. However, he did not offer the shares to the other shareholders and,
therefore, the transfer of shares to Pavittar Singh, etc., amounts to
oppression on the minority shareholders.
I find substance in this
submission. Before deciding to whom the shares should be sold, it was the duty
of Shri Johal to make an offer of sale to all the shareholders. Those should
have been transferred to one who made the highest offer. However, it was not
done. It is true that Shri Johal says that he told orally all the shareholders
in this regard. This part of the statement, however, cannot be accepted.
Consequently, transfer of the shares to the transferees without offering the
shares to the other shareholders in terms of the resolution dated November 30,
1978, exhibit P-1, is oppressive to the other shareholders.
Mr. Jain has further argued
that the consideration for the 490 shares purchased by Shri Pavittar Singh,
etc., was not paid in cash by them. The purchase price of the shares was Rs.
4,90,000, out of which an amount of Rs. 2,00,000 was got adjusted by them
towards their deposits. An amount of Rs. 1,90,000 was taken as loan by them
from the company for interest at the rate of 15% per annum and that amount has
not been repaid till today.
I have duly considered the
argument. The facts are not disputed by Mr. Sodhi. It is not disputed that some
amount was shown payable to the transferees in the account books of the
company. In case that amount was got adjusted by them towards the payment of
consideration of the shares, no fault can be found therein. However, the act of
advancing a loan by the company to the transferee-directors at the juncture
when the company was not in sound financial condition was an oppressive act on
the minority shareholders. It is also relevant to point out that they have not
repaid the amount of loan or interest thereon up-to-date.
The third resolution of the
company, which has been challenged by the petitioners, is dated January 15,
1979, exhibit P-17. By this resolution, the minutes of the meeting dated
December 30, 1978, were confirmed and the loans given to the directors for
purchasing the shares of PISCO were confirmed. It is contended by Mr. Jain that
there was no quorum in the meeting as Smt. Nasib Kaur, Shri Pavittar Singh, Sri
Swaran Singh and Shri Rameshinder Singh ceased to be directors as they took part
in the meeting dated December 30, 1978, without disclosing their interest in
the resolution passed therein. Shri Ravinder Singh, Smt. Inderjit Kaur and Shri
Avtar Singh admittedly ceased to be directors. The total number of directors
present was eleven and in case the aforementioned seven directors are excluded,
the number of directors present remained four. The quorum of the meeting should
have been eight and thus the resolution is invalid. I agree with the submission
of learned counsel. It is not necessary to dilate (further) on the paint as the
matter has already been discussed above.
Mr. Jain has further
challenged the validity of the resolution on the ground that the notices of the
meeting were not despatched to the directors. He, in support of his contention,
referred to the despatch register, exhibit P-74. I agree with this submission
as well. The matter has already been discussed above. For similar reasons, this
resolution is also invalid.
Mr. Jain has next
challenged on similar grounds the resolution passed in the meeting held on
February 28, 1979, exhibit P-18, by which the sale of 490 shares in favour of
Shri Pavittar Singh, etc., was approved. The first thing to be seen is as to
whether the quorum of the meeting was complete. Eleven directors were present
in the meeting. Out of them three, namely, Smt. Nasib Kaur, Shri Rameshinder
Singh and Shri Pavittar Singh, were the transferees of the shares of PISCO. As
already held, they ceased to be directors on December 30, 1978. Out of the
remaining eight directors, Shri Ravinder Singh, Shri Avtar Singh and Smt.
Inderjit Kaur admittedly, ceased to be directors. Thus, the names of six
directors are to be excluded for the purposes of quorum. Consequently, five
directors would be deemed to be present in the meeting. The quorum for the
meeting was eight. I am, therefore, of the opinion that the resolution dated
February 28, 1979, is also invalid.
The second question is
whether the resolution is invalid as the notices of the meeting were not sent
to all the directors. In the despatch register, exhibit P-74, admittedly, the
despatch of the notices of the meeting to the directors is entered. Therefore,
I am of the view that this formality had been fulfilled by the company and the
resolution cannot be held to be invalid on this ground.
Mr. Jain has further argued
that the resolution was invalid as Shri R. S. Johal and ten other directors
protested against the resolution and walked out of the meeting. He made
reference to the letter dated February 28, 1969, exhibit P-76. There is force
in this submission also. It is stated in the letter, exhibit P-76, that in the
meeting of the board of directors held on February 28, 1979, the directors who
signed the letter did not agree to the proposal for transfer of the 490 shares
held by the company in PISCO to Sarvashri Pavittar Singh, Rameshinder Singh,
Ravinder Singh and Swaran Singh and voted against the resolution. The
resolution, therefore, stood defeated. The directors who signed the letter
walked out of the meeting in protest against the overbearing, arbitrary,
unconstitutional and illegal action, arrogant attitude and threatening
behaviour of the directors interested in the transferees. The latter prevailed
upon the managing director and, therefore, he refused to record their
disapproval and vote of dissent. It was requested by them that the minutes be
not recorded, contrary to the will and verdict of the majority of the
directors. The letter is signed by 11 directors and addressed to the managing
director. From the above letter, it is evident that eleven other directors were
present in the meeting but neither their presence nor their vote of dissent
against the resolution was recorded. Shri R. S. Johal appeared in the
witness-box as P.W.-4 and affirmed the stand taken in the letter, exhibit P-76.
He stated that in the meeting held on February 28, 1979, there was a dispute
regarding the sale of shares in favour of Rameshinder Singh and his partymen
and that some of the directors, namely, Shri N. S. Domeli, Shri Puran Chand, Smt.
Beant Kaur, Shri Didar Singh, Smt. Ravinder Kaur, Smt. Rattan Kaur, Shri Puran
Singh, Shri Hardev Singh, Smt. Nasib Kaur and Mrs. Vaneet, walked out of the
meeting. There is no mention about the dispute in the minutes. Shri Domeli also
admits his signature on the letter. I am, therefore, of the opinion that the
resolution dated February 28, 1979, exhibit P-18, is invalid.
The petitioners have also
challenged the resolutions passed in the annual general meeting held on June
30, 1979, exhibit R-2/6. In that meeting, the balance-sheet and the profit and
loss account for the year ending December 31, 1978, were passed. It is
contended by Mr. Jain that 21 days' clear notice for holding the meeting was
required to be iven to the shareholders under section 171, but that was not
done. The notices were despatched on June 13, 1979, and thus 21 days' clear
notice was not given to them. He also contends that the copies of the
balance-sheet should have been sent with the notices but the same were not
sent.
Mr. Sodhi has not disputed
that the notices given to the shareholders were of less than 21 days. Section
171 reads as follows:
"171. Length of notice
for calling meeting.—(1) A general meeting of a company may be called by giving
not less than twenty-one days' notice in writing.
(2)A general meeting may be
called after giving shorter notice than that specified in sub-section (1), if
consent is accorded thereto—
(i) in the case of an annual general meeting, by all the members
entitled to vote thereat; and
(ii) in the case of any other meeting, by members of the company (a)
holding, if the company has a share capital, not less than 95 per cent, of such
part of the paid-up share capital of the company as gives a right to vote at
the meeting, or (b) having, if the company has no share capital, not less than
95 per cent, of the total voting power exercisable at that meeting:
Provided that where any
members of a company are entitled to vote only on some resolution or
resolutions to be moved at a meeting and not on the others, those members shall
be taken into account for the purposes of this sub-section in respect of the
former resolution or resolutions and not in respect of the latter".
A reading of the section
shows that 21 days' notice is necessary for convening the annual general
meeting. However, a shorter notice for such a meeting can be given, if all the
members who are entitled to vote in the meeting accord their consent for doing
so. Previously, fourteen days' notice was provided but later the period of
notice was extended to 21 days on the report of the Company Law Committee. The
reasons for extension of period have been given in the report, the relevant
portion of which reads as follows:
"We further recommend
that twenty-one day's notice should be given of all resolutions to be passed at
a general meeting—ordinary or special. The extension of the period of notice
from fourteen to twenty-one days is necessary to enable shareholders to combine
and canvass for proxies if they so desire. The present period of fourteen days is
too short for all the processes that are involved before the shareholders
canvass their opinion in favour of or against a particular resolution proposed
to be considered at any meeting of the company".
After taking into
consideration the provisions of the section and the reasons for incorporating
the same, I am of the view that the period of notice cannot be curtailed except
on the ground mentioned in the section itself. The provisions of the section
are mandatory and if they are not complied with, the resolutions passed in such
a meeting cannot be held to be valid. The members in this case admittedly did
not agree for curtailing the period of notice. Therefore, the resolutions
passed in the meeting dated June 30, 1979, are invalid.
The petitioners have further
challenged the validity of the resolution of the board of directors dated June
2, 1979, exhibit P-20, confirming the balance-sheet and profit and loss account
for the year ending December 31, 1978. Mr. Jain submits that the quorum in the
meeting was not complete and, therefore, the resolution was invalid. I do not
find any substance in the argument. In the meeting, eight directors were
present. As already mentioned, there were only twenty-four directors of the
company. Consequently, eight directors constituted the quorum. I am, therefore,
of the view that the resolution cannot be said to be invalid.
The next contention of Mr.
Jain is that the shares which were transferred to Shri Pavittar Singh, etc.,
had more value than that for which they were sold. In support of his
contention, he places reliance on the balance-sheet ending December 31, 1976,
exhibit R. 2/7, the balance-sheet ending December 31, 1977, exhibit R. 2/8 and
the balance-sheet ending December 31, 1978, exhibit R. 2/9. I do not find
substance in this submission. The shares were not quoted on the stock exchange.
No reliable data has been provided by the petitioners showing that the value of
the shares was more. In the first two balance-sheets, the company is shown to
have suffered losses to the tune of several lakhs of rupees. In the
balance-sheet ending December 31, 1978, some profit is shown to have been
earned. After adjustment of the profit, the loss carried forward is Rs. 5 lakhs
odd. The aforesaid figure shows that PISCO was not faring well.
The respondents produced
Arun Joshi, R-2/3. He deposed that no dividend was declared or paid to the
shareholders during the aforesaid period. The face value of each share was Rs.
1,000. He further deposed that, according to the assets of the company, the
value of each share was about Rs. 600 in the years 1976 and 1977 and about Rs.
625 in the year 1978.
After taking into
consideration the circumstances, it cannot be accepted that the value of the
shares was more than Rs. 1,000 per share when they were transferred to the
respondents.
Mr. Jain then contends that
the accounts of the company were not even operated by duly authorised persons.
To fortify his argument, he made reference to the copy of the resolution of the board of
directors dated April 11, 1976, exhibit P-3, filed in the Central Bank of India
and the resolution dated April 11, 1976, exhibit P-3/A, passed by the board of
directors.
I
have duly considered the matter. In the copy of the resolution, exhibit P-3, it
is stated that Shri Pavittar Singh, managing director, would remain out of
station for two months with effect from April 10, 1976. The accounts of the
company with the Central Bank of India, Civil Lines, Jullundur, and Indian
Overseas Bank, Jullundur, would be jointly operated by Shri Naranjan Singh
Domeli, chairman of the company, and Shri Rameshinder Singh, director of the
company in place of Shri Pavittar Singh, managing director. It was further
stated that in future any two of the three persons, namely, Shri Naranjan Singh
Domeli, Shri Pavittar Singh and Shri Rameshinder Singh, would jointly operate
the accounts. It has been certified to be a true copy by Shri Mohinder Singh as
the managing director. The original resolution purports to bear the signatures
of Shri Bir Singh Johal, chairman. However, Mohinder Singh was not the managing
director of the company nor was Bir Singh Johal its chairman. The resolution
does not find a place in the original minutes book of the board of directors.
Some resolutions dated April 11, 1976, are entered in the minutes book (copy
exhibit P. 3-A). These resolutions are different from the resolution, exhibit
P-3. Mr. Sodhi has not been able to show any other resolution in the minutes
book, copy of which is exhibit P-3. In the circumstances, it is evident that
the affairs of the company were mismanaged by the respondents.
Mr.
Jain has further argued that Shri Rameshinder Singh operated the accounts on
the basis of that resolution and advanced loans to the persons in the names of
some fictitious persons and thus misappropriated the amounts. He submits that
the cheque, exhibit P-7, was issued in the name of one Jagtar Singh, but there
was no such person. On the other hand, Mr. Sodhi has placed reliance on the
statement of Shri B. D. Sharma, accountant, P.W.-6, who stated that he knew
Jagtar Singh who took a loan of Rs. 10,000 from the company. Mr. Sodhi has also
referred to the cheque, exhibit P-7, of Rs. 10,000. The said cheque was a
payee's account cheque and the payment of the cheque was made to the Punjab and
Sind Bank. In view of the circumstances brought to my notice by Mr. Sodhi, it
cannot be held that Jagtar Singh was a fictitious person.
The
next contention of Mr. Jain is that Shri Mohinder Singh who was appointed as a
manager by the respondent had embezzled a huge amount of the company but no
effective step was taken to recover the amount from him. In order to prove the
aforesaid facts, Mr. Jain placed reliance on
the resolutions of the board of directors, exhibit P-87, dated December 30,
1976, exhibit P-67, dated April 16, 1977, exhibit P-68, dated May 25, 1977,
exhibit P-69, dated June 25, 1977, exhibit P-70, dated July 6, 1977, exhibit
P-71, dated September 27, 1977 and exhibit P-72 dated December 13, 1977. In the
resolution, exhibit P-87, it was stated that a sum of Rs. 5,21,000 odd was due
on May 31, 1975, from M/s. Sundeep Bus Private Ltd., Mansa, District Bhatinda.
However, Shri Mohinder Singh reconstructed the record and showed an amount of
Rs. 2,68,000 due from the said company. Thus, a benefit of Rs. 1,67,580 was
given to the company. It is further stated that Shri Mohinder Singh had
introduced false credits in the account books in favour of Sarabha Land and
Motor Finance (P.) Ltd. in connivance with Shri Raghbir Singh of the said
company. These entries were got fictitiously made by him. In the resolution,
exhibit P-67, it was said that certain irregularities were committed by Shri
Mohinder Singh and, therefore, his services had been terminated. It was
resolved that a sub-committee consisting of the chairman and the managing
director be appointed to go into the accounts and submit a report for taking
appropriate action against him.
In the resolutions,
exhibits P-68, P-69 and P-70, it was decided to adjourn the meetings as the
report of the sub-committee had not been received. In exhibit P-71, it was said
that Mohinder Singh had not rendered accounts and had handed over the cash.
Consequently, it was decided to approach him for that purpose. In the
resolution, exhibit P-72, dated December 13, 1977, the matter again came up
before the board of directors and it was resolved that action against Shri
Mohinder Singh be deferred. From the abovesaid resolutions, it is clear that
taking of appropriate action against Shri Mohinder Singh was being deferred
without any reason even though it stood established that he had misappropriated
the funds of the company. It is true that Shri Naranjan Singh Domeli made a
statement that a FIR was lodged against Shri Mohinder Singh but the particulars
of the FIR have not been brought on the record. It has not been shown that any
further action was taken by the directors to recover the amount. It appears
that the FIR was lodged to complete the formalities and the directors were not
serious in taking any action against him. Thus, the allegation of the
petitioners that the company was mismanaged stands established.
Mr. Jain has also argued
that interest-free loans were given to PISCO, Shri Mohinder Singh and one Shri
Paramjit Singh. Even no document was got executed from them in token of having
received the amounts. The act amounts to mismanagement. I find substance in
this submission. The argument regarding the payment of loans to the aforesaid
persons and PISCO stands established from the copies of the ledger of the
respondent-company, exhibits P-57 to P-66. In exhibits P-57 to P-59, several
amounts are shown to have been advanced to PISCO and an amount of Rs. 14,309 is
shown as due from it as on December 5, 1978. In exhibits P-60 to P-63, various
amounts are shown to have been paid to Mohinder Singh. In exhibit P-63, an
amount of Rs. 36,730.52 is shown as due from Mohinder Singh as on December 30,
1978. In exhibits P-64 to P-66, amounts are shown to have been advanced to Shri
Paramjit Singh and an amount of Rs. 33,830 is shown to be due from him as on
January 1, 1977. No amount of interest was debited to their account. No
document was got executed from the said debtors. The aforesaid amounts have not
been repaid by the said persons. Col. K. S. Dhillon, petitioner, deposed that
Shri Pavittar Singh was the managing director of PISCO and Shri Swaran Singh,
Shri Ravindar Singh, Shri Rameshin-der Singh and Amar Singh were its directors.
It appears that the amounts were advanced to PISCO without interest because the
said directors wanted to help their concern. After taking into consideration
all the circumstances, I am of the view that the affairs of the company were
conducted by the respondents in a manner oppressive to the petitioners.
Before parting with the
judgment, an argument advanced by Mr. Sodhi may be noticed. It is that once the
resolutions, exhibits P-1, P-2, P-17, P-18, R-2/6 and P-20, were passed by the
directors, they could not be challenged in view of section 290 of the Act. In
support of this contention, he refers to Sunder Lal Jain v. Sandeep Paper Mills
P. Ltd. [1984] PLR 165; [1986] 60 Comp Cas 77 (P & H).
I do not agree with the
argument of Mr. Sodhi. Out of six resolutions challenged by the petitioner,
five have been declared invalid and one, i.e., exhibit P-20, valid. Exhibits
P-l, P-17 and P-18 have been declared invalid on the ground that the quorum at
the meetings was incomplete and no proper notice of the meeting was given to
the directors, exhibit P-2 on the ground that no proper notice was given to the
directors and exhibit R. 2/6 on the ground that no notice of requisite period
was given. Exhibit P-18 was declared invalid also on the ground that the
resolution was opposed by the majority of the directors and, therefore, it
could not be deemed to have been passed. Section 290 of the Companies Act
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. It is evident from
the language of the section that it gives protection to the acts of the
directors if their appointments were invalid on account of any defect or
disqualification or the same had come to an end. It does not give protection to
their acts which are otherwise illegal. Thus, the resolutions passed in a
meeting which had not been properly convened are not valid resolutions.
Consequently the resolutions, exhibits P-1, P-2, P-17, P-18 and R 2/6, cannot
be held valid under the said section.
It is true that the
resolutions, exhibits P-l, P-17 and P-18, were also held invalid on the ground
that the quorum for the meeting was incomplete as some of the directors present
there ceased to be so. But, in the facts and circumstances of this case, the
section does not give protection to the resolutions passed in such meetings.
The reason is that the resolutions in the present case have not been passed
bona fide by the directors, as out of the six beneficiaries, five were
directors of the company and the sixth was the wife of one of them. The sole
object of the directors in passing the resolution was to promote their
self-interest. Moreover, the benefit of the said section can normally be taken
by a third person and not by the directors or their close relations. It is
further noteworthy that some of the resolutions were oppressive to the minority
shareholders. In Sunder Lal Jain's case [1986] 60 Comp Cas 77 (P& H), it
was observed by me that even if a director ceased to be so in view of section
283, the resolution of the board of directors could not be held illegal in view
of section 290 which provided that the acts done by a person would be valid
notwithstanding that it might 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. The facts of that
case were that a boiler was sold by the company after a decision had been taken
in a meeting of the board of directors. The purchaser had no concern with the
company. He took a plea that he was a bona fide purchaser for valuable
consideration. The case is clearly distinguishable and, therefore, the
observations therein are of no help in deciding the petition.
Consequently, in view of
the finding that there were no continuous acts of the majority shareholders
which had been oppressive to the petitioners, I dismiss the petition. However,
the parties are left to bear their own costs.
[1998] 93 COMP. CAS. 750 (DELHI)
HIGH COURT OF
v.
Jai Manga Ram Mukhi
MAHINDER
NARAIN J.
S. No. 2146 of 1993
NOVEMBER
9, 1993
A.K. Sen, S. Shroff and Ms. Ritu
Bhalla for the Plaintiff.
R.K.
Garg, R.P. Dave, G. Ramaswamy, Rajiv Shakdhar, M.H. Beg and Ms. Pallavi Shroff
for the Defendants.
JUDGMENT
Mahinder
Narain, J.—This
suit for damages, declaration and injunction was filed by the plaintiff Mr.
Ferruccio Sias, stating that he is whole-time director in the company, known as
SAE (India) Limited. The persons who are sued for damages, declaration and
injunction, are defendants Nos. 1 to 11. All of whom were directors and/or
employees of SAE (
The
plaintiff asserted that the present suit is directed against the conspiracy and
tortious action of defendants Nos. 1 to 7, and against their mala fide,
unauthorised and illegal activities. It was asserted that these actions are
detrimental to the interest of SAE (India) Limited and its shareholders ; that
the said defendants were usurping the control of the company, and that
presently their interest is directly in conflict with the interest of SAE
(India) Limited. It was also asserted that the said defendants are not entitled
or authorised to represent SAE (
The
important fact which has to be kept in mind, is that it was asserted in the
plaint itself, that SAE (
The
disputes which are raised in this plaint, appear to have crystallised as a
result of the economic liberalisation policies of the present Narasimha Rao
Government. Consequent upon the liberalised economic policies, it appears that
those who were behind the scenes in SAE (
It
is asserted in the plaint that the aforesaid foreign company (hereinafter
called "Elettrofin") was a member of the "Asea Brown Boveri
group" (hereinafter called the "ABB group"). Elettrofin owns
32.32 per cent. of the issued share capital of Rs. 49,35,150, equity shares of
Rs. 10 each, and is the single largest shareholder of SAE (India) Limited. It
was asserted that one Dr. Cesare Rossi was an ordinary director of the company,
who died some time in July, 1993. After Rossi's death, there were only five
directors. After Rossi's death, J.M. Mukhi, who is an ordinary director of the
company, in the absence of Dr. Cesare Rossi, used to be voted to be the
chairman at the meeting of the board. The directors after the demise of Dr.
Rossi, were J.M. Mukhi, K.N. Shenoy, Luigi Ruggieri, Ferruccio Sias and
Niranjan Swaroop Mittal.
After
the demise of Dr. Cesare Rossi, there were, therefore, five directors on the
board of SAE (India) Ltd. Consequent upon the economic liberalisation policy of
the Narasimha Rao Government, these five directors adopted and passed a
resolution, being resolution dated August 24, 1993, wherein it was agreed in
principle that SAE (India) Limited, the increase of share capital of the
company, which capital should be subscribed to by Elettrofin Societa Anonima
Finanziaria at a price which was "a fair price". The fair price was
to be determined by Mr. Malegan of S.B. Billimoria and Co., chartered
accountants, who was stated to be well versed in the field of valuation of
shares. This resolution is passed on August 24, 1993.
It
is also asserted in the plaint that the proposal to be put up before the board
for using the Asea Brown Boveri logo and on the stationery of SAE (India)
Limited, as also on visiting cards, etc., so as to indicate that SAE (India)
Limited is part of the Asea Brown Boveri group. It is asserted in the plaint
that the board of directors in the meeting of the company on August 24, 1993,
took the following unanimous decisions :
1. Resolved that the board of directors approve in
principle the increase of share capital for issue of shares to Elettrofin
2. Resolved that ICICI Securities and Finance
Company Limited be asked to suggest a fair price for the said shares.
3. Resolved that the board of directors approved
in principle the amalgamation of the company with Asea Brown Boveri Ltd.
4. Resolved that S.B. Billimoria and Co.,
chartered accountants, be asked to suggest a fair exchange ratio for the shares
for the purpose of amalgamation.
5. Resolved that Amarchand and Mangaldas and
Hiralal Shroff and Co., Solicitors and Advocates, be asked to prepare a draft
of a scheme for amalgamation.
6. Resolved that a committee of the board of
directors be appointed comprising Mr. J.M. Mukhi and Mr. N.S. Mittal to examine
the assessments and evaluations and to recommend fair terms for the said
increase and issue of shares as above and the amalgamation of the company with
Asea Brown Boveri Limited for consideration of the board of directors.
It
appears from what is stated in the plaint that serious disputes arose between
some of the members of the board of directors, namely, J.M. Mukhi, Mr. Madan
and Mr. N.S. Mittal, firstly, regarding valuation of the shares of SAE (India)
Limited, and, secondly, on the exchange rate regarding the shares of SAE
(India) Limited and ABB (India) Limited vis-a-vis the amalgamation proposal.
The differences seem to have come to a head, and a meeting of the board of
directors of SAE (India) Limited was called, according to the plaintiff,
unfairly while some of the members of the board of directors were abroad. This
meeting was, according to the notice dated September 13, 1993, calling for the
meeting of the board, to take place on September 15, 1993. It is contended that
the notice of the meeting having been served upon all the directors by methods
which were not normally adopted for serving of notice, namely, by issuing
facsimile notices, and a meeting of the board of directors of SAE (India)
Limited was held on September 15, 1993. In that meeting defendants Nos. 4 to 7
were appointed as whole-time additional directors, according to the plaintiff,
illegally and mala fide. These four whole-time additional directors were Y.L.
Madan, S.C. Singhal, P. Dasgupta and J. Narayanan.
It
is not disputed in the plaint that while the additional directors were
appointed, the pre-existing five directors, namely, J.M. Mukhi, K.N. Shenoy,
Luigi Ruggieri, Ferruccio Sias and Niranjan Swaroop Mittal, continued to be the
directors. The appointment of four additional directors at the board meeting on
September 15, 1993, as whole-time directors, has effected a fundamental change
in the management of the company, and in the board of directors of the company.
It is also asserted in the plaint that this has resulted in causing damage to
the "corporate interest" of SAE (India) Limited, which has given rise
to cause of action to file this suit for recovery of damages.
This
was the original plaint.
The
suit then was for recovery of damages in the sum of Rs. 10,00,000. The suit was
filed by the plaintiff against all the defendants. The suit as filed, did not
have proper court fee affixed upon it. On September 23, 1993, I gave two
directions : (a) that the plaint in suit be made in accordance with the
practice and procedure of this court ; and (b) that the additional court fee
paid after filing of the suit, be taken on record.
Thereafter,
an application under Order VI, rule 17 of the Code of Civil Procedure, 1908,
I.A. No. 8507 of 1993 was filed for amendment of the plaint in the suit. By that time,
Mr. Dave had presented himself in court, and stated, without entering
appearance in court as required by Order III, rule 4 of the Code of Civil
Procedure, 1908, that they have filed a caveat which was, at that time, not on
record.
I
dealt with I.A. No. 8507 of 1993, by my order dated September 28, 1993. I
allowed the same. As by September 29, 1993, caveat has been lodged, summons in
the suit and notice of the application were taken by Mr. R.P. Dave, who was
being led by Mr. R.K. Garg, senior advocate. Copies of the amended plaint and
documents were ordered to be given to Mr. Dave. Direction was given to file
written statement within two weeks.
I
had heard the parties in part, and directed on August 27, 1993, that the
interim orders sought by the plaintiff, be crystallised by counsel for the
plaintiff.
By
the next date, counsel for the defendants also wanted to make submissions, and
I have heard them also.
I
had pointed out to Mr. Sen that the instant plaint is a very unusual plaint,
inasmuch as it lacked an averment, as per practice in this court, the plaint
did not have an assertion at its beginning, or within the first few paragraphs,
that the plaint in the suit is being signed and verified by a person named in
the plaint, (as required by Order 29 of the Code of Civil Procedure, 1908, when
suits are instituted by corporations or by individuals on behalf of
corporations), and that the person who has signed and verified the plaint, has
got authority to institute the suit on behalf of the corporation.
This
has become consequential, as in the amended plaint, notice of which was given
to the defendants, not only Ferruccio Sias has sued as plaintiff, but he is
added as SAE (India) Limited as plaintiff No. 2. The corporation as a corporate
entity, as required by Order 29 has to sue by and through a plaint which has
been signed and verified by a person in accordance with Order 29 of the Code of
Civil Procedure.
I
had also pointed out to Mr. Sen that by virtue of an early decision of this
court in the case of Oberoi Hotels (India) Pvt. Ltd. v. Observer Publications
(P) Ltd. (Suit No. 469 of 1966, decided on 26th November, 1968), which has
never been dissented from, it is also necessary that there be proper
authorisation for the purposes of institution of the suit, in case the
plaintiff in the suit is a corporation. It is a necessary requirement that
there be proper authority by resolution of the board of directors, or there has
to be a power of attorney authorising institution of the suit on behalf of the
corporation, or there has to be power conferred by the articles of association
of a corporation, in a particular officer, to institute suits on behalf of the
corporation.
Later
on, Bhandare J. in a case Nibro Limited v. National Insurance Co. Ltd. [1991]
70 Comp Cas 388 ; AIR 1991 Delhi 25, has reviewed a large number of cases
bearing upon the question of signing and verification of plaints, postulated by
Order 29 of the Code of Civil Procedure, 1908, the authority to act and
authority to institute suits, when a suit is instituted by a corporation. In
that judgment also, this court has reiterated what was stated in Oberoi Hotels
(India) Pvt. Ltd. v. Observer Publications (P) Ltd. (Suit No. 469 of 1966,
decided on 26th November, 1968), about the necessity of having authorisation
from the corporation to institute the suit. In view of the aforesaid two
judgments of this court, with which I am in respectful agreement, it cannot be
doubted that a person instituting a suit on behalf of the corporation, has to
be a person authorised to institute the suit.
The
authority to institute a suit is distinct from and in addition to what is
contemplated by Order 29 of the Code of Civil Procedure, 1908, which deals only
with signing of plaints and verification of pleadings by certain persons
mentioned in that provision.
It
was contended by Mr. Sen that all the documents and papers which confer
authority to institute a suit on behalf of SAE (India) Limited on Mr. Sias, are
in the custody of the defendants. These include the power of attorneys which
have been granted to Mr. Sias by resolution of the board of directors.
The
defendants had filed a caveat in court, and during the course of hearing,
handed over copies of the power of attorneys granted in favour of Mr. Sias.
They have also shown the original power of attorney to me. The relevant
provisions of the power of attorney indicate that Mr. Sias has also been given
power to institute suits jointly with certain persons named in that power of
attorney.
All
the powers of attorney are to be strictly construed, and the power of attorney
in favour of Mr. Sias, being power of attorney, dated May 28, 1993, only gives
power to sue jointly with others. That power of attorney cannot come to the aid
of Mr. Sias vis-a-vis the authority to institute the present suit against the
defendants on behalf of SAE (India) Limited.
The
relevant provisions of the power of attorney dated May 28, 1993, are clauses
14, 15, 16 and 21 which read as under :
"14. To commence, prosecute or enforce and defend
answer or oppose any suits and other legal proceedings (whether civil or
criminal) in any court or tribunal wherever or before any Government touching
any matter in which the company may hereafter be interested or concerned and as
the said attorney shall think fit and to compromise refer to arbitration
abandon submit to judgment or become non-suited in any such action or
proceeding as aforesaid.
15. To appoint and retain solicitors, advocates, and
pleaders and such appointments and retainers from time to time to revoke and
others again to appoint as occasion shall require.
16. To make sign
execute present and file all applications plaints petitions or written statements
warrants of attorney tabular statements vakalatnamas or any other document
expedient or necessary in the opinion of the said attorney to be made signed
executed presented or filed in relation to any of the purposes aforesaid and
such documents again to receive back.
21. The attorney
shall do and perform all or any of the acts and things covered by this power of
attorney by joint signature with any of the following persons signing within
the limits of the power of attorney granted to them by the company."
|
(i) Mr. N.S. Mittal |
: |
Director |
|
(ii) Mr. Y.L. Madan |
: |
General
Manager (Finance) |
|
(iii) Mr. M. Dutta |
: |
General
Manager (Customer Focus Facilitate) |
|
(iv) Mr. W. Fossa |
: |
General
Manager (PTL Construction) |
|
(v) Mr. S.K. Bhattacharya |
: |
General
Manager (PTL Commercial) |
Faced
with this situation, Mr. Sen has urged that the abovesaid rules regarding
authority to institute suits are there only because what has to be asserted, is
whether the corporation is the entity which intended to sue the defendants, and
if a suit is brought by a person not authorised, then the court could call for
a meeting of the shareholders of the company so that the majority of them could
determine whether they are willing to ratify the institution of the suit.
It
must be noted that authority to institute a suit, and ratification of the act
of institution of the suit, are two different things. The authority to
institute pre-exists the institution of the suit, and ratification of the act
of institution of suit which is filed, is after the suit has been instituted by
a person not authorised to do so.
As
regards the authority to commence an action, it cannot be doubted that the
board of directors of the company are authorised by resolutions to act on
behalf of the company. In fact, the memorandum and articles of association of
SAE (India) Limited itself says that the SAE (India) Limited shall function
through its board of directors. It is so stated in article 116, which reads as
under :
"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 power, 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 as may be prescribed 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."
Regarding
the authorisation of other persons to act on behalf of the company, the
relevant articles are articles 122 and 123, the relevant parts whereof read as
under :
"122.
Subject to the provision of the Act and in particular to the prohibitions and
restrictions contained in section 292 thereof and subject to article 123
hereof, the board may, from time to time entrust to and confer upon a managing
director for the time being such of the powers exercisable under these presents
by the board as it may think fit and may confer such powers for such time and
to be exercised for such objects and purposes, and upon such terms and
conditions, and with restrictions as it thinks fit ; and the board may confer
such powers, either collaterally with, or to the exclusion of, and in
substitution for all or any of the powers of the board in that behalf ; and
may, from time to time, revoke, withdraw, alter or vary all or any of such
powers.
123.
Notwithstanding anything to the contrary in article No. 122, and other powers
conferred by these articles, it is hereby expressly declared that the managing
director and the joint managing director shall always subject to the provisions
of the Act, have the following powers jointly and severally, that is to say ;
(17)
To institute, prosecute, compound, defend, compromise, withdraw or abandon any
legal proceedings by or against the company or its officers or otherwise
concerning the affairs of the company and to act on behalf of the company in
all matters relating to insolvencies or liquidations and to apply for and
obtain letters of administration with or without will annexed to the estate of
persons with whom the company have dealings."
It
is to be noted that the authority conferred by the aforesaid articles is on the
managing director and the joint managing director to institute suits. Mr. Sias
is a whole-time director in terms of the power of attorney which has been
granted to him. He has accepted that he is the director of the company. It is
not permissible to say that he is the managing director of the company in view of the
provisions of the Companies Act. Mr. Sen referred to the provisions of section
2(26) of the Companies Act, which relate to the managing director. That section
reads as under :
"
'managing director' means a director who, by virtue of an agreement with the
company or of a resolution passed by the company in general meeting or by its
board of directors or by virtue of its memorandum or articles of association,
is entrusted with substantial powers of management which would not otherwise be
exercisable by him, and includes a director occupying the position of a
managing director, by whatever name called :
Provided
that the power to do administrative acts of a routine nature when so authorised
by the board such as the power to affix the common seal of the company to any
document or to draw and endorse any cheque on the account of the company in any
bank or to draw and endorse any negotiable instrument or to sign any
certificate of share or to direct registration of transfer of any share, shall
not be deemed to be included within substantial powers of management :
Provided
further that a managing director of a company shall exercise his powers subject
to the superintendence, control and direction of its board of directors."
In
the instant case, the provisions of section 2(26) relating to managing director
given in the Companies Act are not attracted for the reasons that Mr. Sias has
himself accepted by the power of attorney given to him by the company that he
is not managing director. He is a whole-time director and general manager, but
not the managing director. He is, therefore, not covered by articles 122 and
123 of the articles of association of the company, which give power to the managing
director to institute a suit. He, therefore, has no authority to institute this
suit thereunder.
In
view of the above position, Mr. Sen referred to a number of cases, the purport
of which cases was that even if a person is not a person authorised to institute
a suit on behalf of the company, yet he could institute a suit on behalf of the
company, and what the court would do in such cases, is to pass interim orders,
if necessary, calling for a meeting of the shareholders of the company to find
out whether the majority of shareholders would ratify the action of the
unauthorised person to institute a suit on behalf of the company.
Mr.
Sen referred to Danish Mercantile Co. Ltd. v. Beaumont [1951] 1 All ER 925
(CA). This is a case in which the solicitors of the company brought a suit on
behalf of the company without being authorised by the company to institute a
suit. The court said, in that case, that the suit is not properly instituted,
in that sense a nullity, and the suit is liable to be stayed if the defendant
does not delay his application for stay. If the company ratifies the
institution of the suit, the suit is regularised. This case does not help Mr.
Sen. The company has not ratified the action of Mr. Sias which is not taken in
the sphere of his authority. His action is attacked as being motivated because
Mr. Sias's connection with some companies in Europe which belong to the Asea
Brown Bovery group, as he has been the general manager of Asea Brown Bovery,
Saldemi, a company of the group in Nigeria prior to coming to India.
In
my view the board of directors of the company, incorporated in India, which is
an independent legal entity, has to take action only keeping in view the
interest of the company. The board of directors has also additionally to take action
in accordance with what is perceived by them to be in the interest of the
majority of the shareholders of the company, in which they are directors. In
the instant case, the foreign company Elet-trofin Societa Anonima Finanziaria
holds only 33 per cent. of the shares. The rest of the shares are owned by
financial institutions in India, or by shareholders in India. The board of
directors of SAE (India) Limited would be acting properly if they were looking
after the interest of the majority of the shareholders as a whole.
Mr.
Sen also referred to Pender v. Lushington [1877] 6 Ch 70. The observations at
pages 78 and 79 go to show that the court is empowered to hold over an action,
to call a meeting of the shareholders to assert the wishes of the majority of
the shareholders. The facts of that case are different from the present one.
The principle of law laid down may be good, but does not merit application to
the present case.
Mr.
Sen also referred to Dr. Satya Charan Law v. Rameshwar Prosad Bajoria [1950] 20
Comp Cas 39 (FC).
According
to Mr. Sen, an unusual situation has arisen vis-a-vis the affairs of SAE
(India) Limited. According to him, fundamental changes have been effected in
the management of the company, whereas the company was managed by the five
directors earlier, namely, J.M. Mukhi, N.S. Mittal, F. Sias, the plaintiff,
K.N. Shenoy and Ruggieri. The company has been hijacked by the resolution
passed by J.M. Mukhi, N.S. Mittal, over the objections of Mr. Sias, at a
meeting of the board of directors, held on September 15, 1993.
According
to Mr. Sen, only the abovesaid three directors could be present at the meeting
of the board of directors on that date, as Mr. Shenoy and Ruggieri were known
to be outside India on that date and J.M. Mukhi and N.S. Mittal used the
majority to induct other persons as directors of the company at the meeting of
the board of directors, held on September 15, 1993. According to Mr. Sen, there
was no proper notice to the directors of the company regarding the meeting to
be held on that date.
The
new directors who were elected on the board at the two meetings held, one on
September 15, 1993, and another on September 17, 1993, by use of majority by
J.M. Mukhi and N.S. Mittal against Mr. Sias, are Y.L. Madan, S.C. Singhal, P.
Dasgupta, J. Narayanan, P. Verma and S.K. Bhat-tacharya.
Of
these new directors, Y.L. Madan, S.C. Singhal, P. Dasgupta, J.Narayanan were
elected at the meeting held on September 15, 1993, and P. Verma and S.K.
Bhattacharya were elected at the meeting held on September 17, 1993.
It
is to be noted that none of the old directors ceased to be directors of the
company, that is to say, J.M. Mukhi, N.S. Mittal, Sias, K.N. Shenoy and
Ruggieri continued to be directors of SAE (India) Limited.
Mr.
Sen asserts that the fundamental change has happened in the management of the
company, and there is a "hijacking" because of additional persons
being appointed on the board of directors.
I
must, however, note that the persons who have been appointed on the board of
directors of the company, as a result of the majority of J.M. Mukhi and N.S.
Mittal, are not strangers to the company. Y.L. Madan was the General Manager
(Finance) of the company, S.C. Singhal was the Deputy Manager (Personnel), P.
Dasgupta was the Deputy Manager (Personnel), in charge of provident fund
service, J. Narayanan was the Commercial Officer in the company, P. Verma was
Deputy General Manager (Construction) of the company and S.K. Bhattacharya was
Deputy General Manager (PTL Com).
It
must also be noted that of the old directors, J.M. Mukhi is an advocate by
profession. Mr. Sias apparently has old connections with Elettrofin Societa
Anonima Finanziaria, an Italian company, which is in turn, connection with Asea
Brown Bovery, Zurich, which is also connected with Asea Brown Boveri, Sadelmi.
K.N.
Shenoy is a director of Asea Brown Boveri (India) Limited, and Ruggieri is
based in Milano, Italy, and is connected with the companies, associated with or
connected with Asea Brown Boveri Limited, namely, Asea Brown Boveri, Zurich,
Asea Brown Boveri, Sadelmi and Elettrofin Societa Anonima Finanziaria.
Mr.
Sen also referred to and relied upon the observations mentioned in Gower's
Principles of Modern Company Law, at page 643, which are as under :
"1. The proper plaintiff in an action in respect
of a wrong alleged to be done to a corporation is prima facie the corporation.
2. Where the alleged wrong is a transaction
which might be made binding on the corporation and on all its members by a
simple majority of
the members, no individual member of the corporation is allowed to maintain an
action in respect of that matter because, if the majority confirms the
transaction, cadit quaestio : or, if the majority challenges the transaction,
there is no valid reason why the company should not sue.
3. There is also no room for the operation of
the rule if the alleged wrong is ultra vires the corporation because the
majority of members cannot confirm the transaction.
4. There is also no room for the operation of
the rule if the transaction complained of could be validly done or sanctioned
only by a special resolution or the like, because a simple majority cannot
confirm a transaction which requires the concurrence of a greater majority.
5. There is an exception to this rule where
what has been done amounts to fraud and the wrongdoers are themselves in
control of the company. In this case, the rule is relaxed in favour of the
aggrieved minority, who are allowed to bring a minority shareholders' action on
behalf of themselves and all others. The reason for this is that, if they were
denied that right, their grievance would never reach the court because the
wrongdoers themselves, being in control, would not allow the company to
sue."
These
observations are in connection with the rule in Foss v. Harbottle [1843] 2 Hare
461. The fifth exception to the rule in Foss v. Harbottle will be relatable to
an action to prevent oppression of the minority by a majority. In the Indian
context action lies under sections 397 and 398 of the Companies Act, not a suit.
I
have heard Mr. R.K. Garg, senior advocate, who appeared for the caveator. By my
order dated October 6, 1993, I have said that the caveat filed in the case by
Mr. R.P. Dave, advocate, has to be treated as a caveat in the instant case.
Mr.
Garg asserted that the suit has got two plaintiffs, one Mr. Sias and other is
the company. According to Mr. Garg, Mr. Sias has no authority, either in law,
nor is he appointed by the power of attorney to institute the suit on his own.
According
to Mr. Garg, Mr. Sias, the plaintiff, is a director of the company. He is a
manager of the company, but he is not a manager in terms of section 2(24) of
the Companies Act, as he is not the manager of the whole or substantially the
whole of the business.
Mr.
Garg also asserts that in view of the fact that Mr. Sias holds power of
attorney dated May 28, 1993. He cannot assert that he is managing director in
terms of section 2(26) of the Companies Act, as he has accepted by the said
power of attorney, to be designated as the whole-time director and manager of
the company, and he is estopped from contending otherwise.
I
think there is force in the contention of Mr. Garg. Mr. Sias has accepted by
the said general power of attorney that he is director, and also manager, for
the purposes specified in that power of attorney, it is not possible for him to
contend that he is the managing director of the company. Furthermore, according
to the said general power of attorney issued in favour of Mr. Sias, it is not
permissible for him to act otherwise than in accordance therewith. That power
of attorney authorises Mr. Sias to institute the suit, but only in a particular
manner. The particular manner of institution of the suit is that he must join
with the persons named in the power of attorney, while instituting the suit. He
has not done so. The relevant provisions of the power of attorney dated May 28,
1993, have been reproduced above. Mr. Sias has to join with others. Unless the
others join with him, and none of them has joined him, he does not have
authority to institute the suit on behalf of the company.
Mr.
Garg has contended that according to the articles of association of the
company, the quorum of the meeting for the board of directors is two directors,
and for the meeting of the board to be held on September 15, 1993, notice
whereof had been given to all the existing directors by facsimile, and that
notice had been received by all the directors also. It is of no consequence
that some of the directors were not present at that meeting. Notice having been
received, the option was with the directors to whom the notice was sent, to
attend the meeting. As they did not do so, they are themselves responsible for
absenting themselves from the meeting of September 15, 1993.
The
notice dated September 13, 1993, was sent by facsimile. The meeting was
scheduled for September 15, 1993. The notice which was sent to Ruggieri in
Italy, which is well connected with the international flights, gave sufficient
time to him to reach India, if he was so advised, as the flight takes about
eight hours to reach, but he chose not to attend the meeting. It is also
asserted that Mr. Shenoy was out of India. He is a nominated director on the
board, because of the connection with the companies in Europe.
He
was also notified with the facsimile notice. He could have also attended the
meeting, had he been so inclined. As no particular manner of notifying
directors of the company, in my view, Mr. Garg is right in his submission.
Mr.
Sen relied upon the judgment of Justice North in Homer District Consolidated
Gold Mines, In re [1888] 39 Ch. D 546. This case related to a summons under the
Companies Act, and related to a meeting of directors of the company, at which
the quorum was present. The meeting was held at a few hours notice to two of
the directors who did not attend, of whom one did not receive notice till the
next day, and the other could not attend till 3 o'clock ; the fifth director was abroad and no
notice was sent to him. At the board meeting the earlier resolution of the
board regarding certain shares, was cancelled and another resolution passed.
That case does not apply to the facts and circumstances of the instant case.
The court in that case proceeded on the basis that the notice was inadequate.
It was given with the knowledge that the directors were not available, the
court nullified the action for that reason, and not merely for the reason that
there was no agenda for the meeting accompanying the notice.
In
the instant case it has been rightly contended by Mr. R.K. Garg, that the said
case will have no application, inasmuch as facsimile notice message had been
sent to all the directors concerned, which notice message had been duly
received, and there was sufficient time to attend the meeting, had they been so
inclined, and as a matter of fact, Mr. Sias did attend the meeting. The notices
were received not only by Ruggieri at Milano, Italy, but also were served at
the place where notices were usually served, to Mr. Shenoy. That they did not
attend the meeting held on September 15, 1993, was of their own doing, and what
was done at the meeting, cannot lead to a conclusion that what transpired at
the meeting on September 15, 1993, should be nullified. In other words, Mr.
R.K. Garg contends that the proposition laid down by Justice North in the said
case, is good law, but on the facts the same does not apply to the instant
case. I agree with what is stated by Mr. R.K. Garg. Mr. Garg also relied upon
the observations of this court made in Abnash Kaur v. Lord Krishna Sugar Mills
[1974] 44 Comp Cas 390 (Delhi) ; [1972] ILR 2 Delhi 413, in which it has been
held that because of section 286 of the Companies Act, law does not require
that there was to be an agenda for a meeting of the board of directors. Only a
notice of the meeting of the board is required by section 286 of the Companies
Act, and that too notice is to go to the directors in India. Agenda of the
meeting is required to go for shareholders' meeting in terms of section 172 of
the Companies Act. According to Mr. Garg, notice was sent by facsimile, which
was received by the directors of SAE (India) Limited, who were abroad ; that
they did not attend the meeting is their default, and not the default of the
board of directors, who participated in the meeting. An agenda for the meetings
would ensure application of the mind to the matters at hand. The meeting will
be more fruitful and useful. In any case, if no agenda is circulated the
directors could object at the meeting have the meeting adjourned. The
observations of North J. which were not noticed in Abnash Kaur v. Lord Krishna
Sugar Mills [1974] 44 Comp Cas 390 (Delhi) ; [1972] ILR 2 Delhi 413, may need
to be properly weighed and considered in an appropriate case. I am sitting
singly. This case is not one such case.
In
any case, Mr. Garg contends that by virtue of article 88 of the articles of
association of SAE (India) Limited, the board of directors can make additional directors of the
company, and these additional directors, according to section 2(6) of the
Companies Act, shall remain additional directors of the company till the next
annual general meeting of the company.
It
is also contended by Mr. Garg that by virtue of section 106 of the Companies
Act, a secretary is duty bound to convene a meeting of the board of directors
on being asked by any of the directors of the company, and the directors of SAE
(India) Limited were right in calling for a meeting of the board of directors
in view of the letter received from the employees of the company on September
11, 1993.
Mr.
Garg is also right in his submission that no particular form of notice is
prescribed for a meeting of the board of directors. The notice sent by
facsimile will be adequate notice.
Mr.
Sias has filed his agreement with SAE (India) Limited. This agreement is dated
June 20, 1983. This agreement has a duration of five years. The designation of
Mr. Sias under this agreement is general manager. In this view of the matter,
it is not open to Mr. Sias to assert as he has sought to do, that he is manager
in terms of section 2(24) of the Companies Act.
In
view of the fact that Mr. Sias has accepted the agreement dated June 20, 1983,
I do not think it is open to him to contend that he is governed by section
2(24) of the Companies Act. It is rightly contended by Mr. Garg that Mr. Sias
is a manager of SAE (India) Limited, having powers of attorney, the terms
whereof have been approved by the Government of India, as contained in the
power of attorney dated May 28, 1993, and inasmuch as the general power of
attorney dated May 28, 1993, also gives power or authority to Mr. Sias only to
institute a suit jointly with other persons, mentioned in clause 21 of the
power of attorney, he has no authority to institute the instant suit. In this
connection, Mr. Garg has referred to and relied upon Turner Morrison and Co.
Ltd. v. Hungerford Investment Trust Ltd. [1972] 42 Comp Cas 512 ; AIR 1972 SC
1311.
Mr.
Garg has also relied upon and referred to Nibro Limited v. National Insurance
Co. Ltd. [1991] 70 Comp Cas 388 (Delhi) ; AIR 1991 Delhi 25, in which Bhandare
J., after reviewing cases bearing upon the subject, has come to the conclusion,
a conclusion with which I am in respectful agreement, that the authority to
institute a suit is distinct from signing and verification of the plaint under
Order 29 of the Code of Civil Procedure, 1908.
It
is in these circumstances contended that Mr. Sias has no authority to institute
the suit, and, therefore, no interim order, as sought in the suit, can be
passed by this court.
Mr.
Garg has also relied upon and referred to Prudential Assurance Co. Ltd. v.
Newman Industries Ltd. (No. 2) [1982] 1 All ER 354 (CA), wherein it is stated
that the preliminary issue is whether the plaintiff is entitled to sue.
According to Mr. Garg, and I think he is right in his contention, that reading
articles 122 and 123 of the articles of association, along with the power of
attorney dated May 28, 1993, it is clear that Mr. Sias is the director and
general manager of SAE (India) Limited. He is not the managing director, as contemplated
by articles 122 and 123 of the articles of association. Nor is he the joint
managing director, duly authorised to institute suits. Therefore, this suit
cannot be filed by Mr. Sias on behalf of the company.
Mr.
Garg says that the disputes which have arisen in the instant case, have arisen
because of the fact that the board of directors with the weight of Mr. Sias,
Mr. Ruggieri and K.N. Shenoy [who is the director of Asea Brown Bovery (India)
Limited], managed to pass a resolution with a majority of three of them had in
the board of directors of SAE (India) Limited, that the liberalised economic
policy of the present Government, be taken advantage of for issuing additional
shares to Elettrofin Societa Anonima Finanziaria only, instead of issuing the
shares to all the shareholders of the company, and the dispute also was
regarding the valuation of the shares, that is to say the price at which the
shares were to be allotted to the foreign company, and also about the proposed
amalgamation with ABB India and the proportion in which the shares were to be
issued to the existing shareholders of the company.
It
is also asserted by Mr. Garg that the amalgamation with Asea Brown Boveri
(India) Limited would not be in the interest of the company when Asea Brown Bovery
has issued bonus shares to its own shareholders, and has also diluted the value
of each share vis-a-vis the share of SAE (India) Limited, and in view of the
dilution in the value of the shares of Asea Brown Bovery (India) Limited, the
proportion proposed for amalgamation of SAE (India) Limited, and the proportion
proposed between the shares of SAE (India) Limited and Asea Brown Bovery
(India) Limited shares was unfair.
According
to Mr. Garg, it will be clear from a note on valuation of shares prepared by
J.M. Mukhi, that the only thing which was being sought was that the valuation
of the shares should be a fair valuation, and not an unfair valuation.
It
is also contended by Mr. Garg that with the increased shareholding of
Elettrofin Societa Anonima Finanziaria, the sanctioning of the amalgamation
scheme, would be a matter of formality, and a majority shareholding of 51 per
cent. will be able to push the matter of amalgamation through in accordance
with a time-bound programme of merger, which had been drawn up for the
amalgamation of the two companies.
Mr.
Garg meets the contention of Mr. Sen that there was no cause for holding a
meeting of the board of directors on September 15, 1993, by asserting that
inasmuch as the decision had already been taken by the board of directors
regarding the issue of additional shares to Elettrofin Societa Anonima
Finanziaria, and amalgamation of the company with Asea Brown Bovery (India)
Limited by the resolution of the board of directors, in which J.M. Mukhi and
N.S. Mittal had participated, that a letter dated September 11, 1993, had been
received from the employees of the company in which serious reservations have
been made regarding their future, and in view of the fact that the Supreme
Court of India had, in National Textile Workers' Union v. P.R. Ramakrishnan
[1983] 53 Comp Cas 184 ; [1983] 1 SCC 228 stated that the workmen of the
company have to be heard in the matter of amalgamation under section 391 of the
Companies Act. It was but proper for the board of directors to meet on
September 15, 1993, and for that meeting of September 15, 1993, notice was sent
by facsimile to all the directors concerned. The board of directors met to
consider the said letter of the employees, and in addition, to consider the
exchange ratio between the shares of SAE (India) Limited and Asea Brown Bovery
(India) Limited, [which have been diluted in value by issue of bonus shares of
Asea Brown Boveri (India) Limited], and to consider the valuation of the shares
of SAE (India) Limited, at which the said shares were to be offered to
Elettrofin Societa Anonima Finanziaria. Mr. Garg says that the amount of Rs. 90
per share which seems to have been determined by S.B. Billimoria and Co. was
inadequate inasmuch as the share of SAE (India) was quoted in the market, at
over Rs. 230 per share.
According
to Mr. Garg, the board of directors of every company, as observed in Gower's
Principles of Modern Company Law, has a duty to that company alone, to the
company in which they are the directors. They do not owe any allegiance, nor
should they look after the interest of a company which may be the holding
company of the company in which they are directors. I am in agreement with what
is stated by Mr. Gower, and what is stated in Bell v. Lever Brothers [1932] AC
161 (HL).
Mr.
Garg also referred to Bell v. Lever Brothers [1932] AC 161 (HL) at page 228, to
contend that it is not open to the holding company to dictate to the board of
directors. The board of directors of a company must do all acts in the interest
of the company, and its shareholders. I am in respectful agreement with the
said view. The directors of any company cannot and should not act as if they
are puppets on a string, acting out a charade on the jerks and pulls of an
invisible master puppeteer (the holding company) behind the curtain, behind a
corporate veil, acting for motives to cause gain to the holding company,
instead of to the shareholders of the company in which they are directors.
It
appears to me that it is fundamental to the functioning of any company that the
board of directors of the company should owe allegiance only to the company in
which they are the directors. It is not permissible for the board of directors
to act on the dictates of any other company, even if it is a subsidiary of that
other company. It also cannot be that the directors of the company give up
their duty and right of independent action, to act for the well being and the
interest of the company in which they are the directors, as also the interest
of the entirety of shareholders of the company in which they are directors.
Mr.
Garg contends that there is no corporate injury to the company SAE (India)
Limited, which is the basis on which the suit has been filed. The contention of
Mr. Sen that there is corporate injury, is without any foundation.
Mr.
Garg has brought to my notice that before Mr. Sias came to India as a general
manager of SAE (India) Limited, he was working as general manager of Sadelmi at
Lagos in Nigeria, and Sadelmi is a company of Asea Brown Bovery, Zurich. There
is very strong assertion that Mr. Sias is looking after the interest of the
foreign company rather than looking after the interest of SAE (India) Limited,
when he institutes the instant suit, when he is a party to a resolution of the
board of directors for the issuance of fresh capital of Elettrofin Societa
Anonima Finanziaria to increase its shareholding to 51 per cent. and,
thereafter, amalgamating it with Asea Brown Bovery (India) Limited, which is
part of the grand design to benefit the foreign companies, rather than SAE
(India) Limited, and its shareholders.
It
is pointed out by Mr. Garg that Mr. Sias who is the director of the company,
was originally paid Rs. 6,000 per month, and is now being paid Rs. 15,000 per
month. There is a strong suggestion that this is not the payment which would be
acceptable to a European, which Mr. Sias is, working in India. The suggestion
is that Mr. Sias is acting at the dictates of his European masters, who still
pay him over and above, and in addition to what he is receiving from SAE
(India) Limited. In answer to that, Mr. Sen stated that this is a wrong
suggestion. Mr. Sias is, in fact, receiving a payment of Rs. 3,72,000 per
annum, which is adequate compensation to a European ; as in addition to that,
he also gets the usual perquisites from the company.
Mr.
Sen also contends that the valuation of the shares at which the shares are to
be given to Elettrofin Societa Anonima Finanziaria, is not an unfair valuation.
Nor is it going to be an unfair valuation. That valuation has presently been
approved by a known "expert" Mr. Malegam of S.B. Billimoria and Co.,
but is also the subject-matter of approval of the valuation department of the
Industrial Credit and Investment Corporation, and as such there is no likelihood of unfairness in the
valuation. He also asserts that the market value of the shares does not reflect
the true and intrinsic worth of the shares, as it represents the speculative
value of the shares. These are matters for the shareholders of the company to accept,
after due deliberation.
If
the holding company desires to take advantage of the policy of liberalisation
of the Government of India, and to gain majority control of a subsidiary, and
if a subsidiary company desires to amalgamate with another Indian company in
which the holding company has substantial interest or control, then the
interest of the shareholders of the company must be protected by the directors,
by insisting upon a proper and fair and just valuation of shares of the company
in which they are directors, and it is only at that proper, fair and just value
that the shares of the company should be offered to the holding company, which
seeks to gain majority control of the company in which there are distinct
shareholders. The interest of the shareholders of any company must, at all
times, be protected by the directors of the company. In the instant case, the
directors of SAE (India) Limited were duty bound to protect the interest of the
company, which is an independent legal entity under the Indian Companies Act,
and the entity is quite distinct from Elettrofin Societa Anonima Finanziaria,
which is a foreign company. It was the duty of the directors of SAE (India)
Limited, to protect the interest of shareholders of the company. It was the
duty of the board of directors of SAE (India) Limited that the interest of SAE
(India) Limited be looked after by them by insisting upon a fair and just
valuation of the shares, and the directors of the Indian company were duty
bound to ensure that they did not allow the majority control take over of the
Indian company by a foreign company unless the foreign company paid a fair and
just price for the shares, not preferentially, but along with such other
persons who held the shares of SAE (India) Limited, and were prepared to buy
further shares in SAE (India) Limited. In other words the directors of SAE
(India) Limited were duty bound to ensure that the Indian company did not lose
any valuable asset whether in terms of Indian rupees, or in terms of foreign
exchange. Shares which had larger value ought not to be permitted to be
acquired at a lesser value by another company, or group of companies.
The
company is represented by a board of directors, which board of directors
continues to have persons on its board who were on the board prior to September
15, 1993. They have additional directors in the company, their continuance on
the board shall be determined by the shareholders in the general meeting, in
accordance with the provisions of the Companies Act. No corporate injury
appears to have been done to SAE (India) Limited by addition of directors to
its board of directors.
SAE
(India) Limited has been in existence in India, as stated in the plaint, since
the year 1951. It has grown over a period of time. Its shares have increased in
value. Apparently it is a prosperous company. It has its own facilities for
research and development. It can continue to carry on business in India.
According to the balance-sheets filed in this court, it has got substantial
reserves. If it needs any more capital, the same can be raised by resorting to
procedures which are permissible by following the procedures contemplated by
the Indian Companies Act. There does not appear to be any loss occasioned to
the company as a result of re-constitution of the board of directors by
addition of four directors on September 15, 1993, and September 17, 1993.
In
the aforesaid circumstances, I hold that Mr. Sias has no authority to institute
the suit, and as such following the principles laid down in Oberoi Hotels
(India) Pvt. Ltd. v. Observer Publications (P) Ltd. (Suit No. 469 of 1966,
decided on 26th November, 1968) and Nibro Limited v. National Insurance Co.
Ltd. [1991] 70 Comp Cas 388 ; AIR 1991 Delhi 25, the same is liable to be
dismissed.
The
suit is accordingly dismissed.
[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 relied as the letter itself was not a genuine letter. Therefore, the contention of R-9 that the 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.