Upendralal Waghray, J.
1. These applications under section 402 of the Companies Act, 1956, read will rule 9 of the Companies (Court) Rules, 1959, are filed by respondent No. 9 in the company petition supported by his affidavit sworn to on August 29, 1988, for the following interlocutory reliefs pending the decision on the company petition :
'(a) that the board of the company be reconstituted to have representatives of Sri R. Khemka and myself proportionate to the share-holding as at December 31, 1984, or in the alternate the board of directors as constituted by the elections held on July 5, 1988, at the annual meeting of the general body be suspended;
(b) that a person be appointed as the joint managing director to represent Sri R. Khemka and myself;
(c) that a direction be given that the function of the managing director be carried out jointly by the managing director and the joint managing director;
(d) that a fresh audit of the books of account of Deccan Enterprises Private Limited by ordered for the periods ended March 31, 1988, and March 31, 1987, by an auditor to be appointed by this court; and
(e) that the proceedings of the meeting of the annual general body conducted on July 5, 1988, be declared void.'
2. The managing director of the company (third respondent) and his group oppose these applications and a counter-affidavit of the third respondent sworn to on September 23, 1988, has been filed. The petitioners in the company petition support the applications and the counter-affidavit of the first petitioner sworn to on March 2, 1989, has been filed. The ninth respondent filed a reply affidavit sworn to on April 10, 1989. The second respondent has filed an affidavit sworn to on September 28, 1989, and petitioner No. 1 has filed an affidavit sworn to on September 29, 1989. A further affidavit of the third respondent sworn to on October 5, 1989, has also been filed.
3. For the sake of convenience, the parties are hereafter referred to according to their rankings in Company Petition No. 27 of 1987. It is filed in June, 1987, under sections 397 and 398 of the Companies Act, 1956, seeking several reliefs, complaining of oppression and mismanagement by two petitioners, i.e., husband and wife, and they impleaded their son as respondent No. 11. During the pendency of the case, respondent No. 11 has been transposed as petitioner No. 3. The three petitioners belong to the Khemka family, hereinafter referred to as 'K group'. The first respondent is a private limited company incorporated in 1966, having its registered office at Secunderabad and factory at Balanagar, Hyderabad. The second respondent is the secretary of the company. Respondents Nos. 3 to 9 belong to the 'Jalan' family (hereinafter referred to as J group). Respondent No. 8 is the father of respondent Nos. 3, 7 and 9. Respondent No. 4 is the wife of respondent No. 3, respondent Nos. 5 and 6 are the children of respondents Nos. 3 and 4. Respondent No. 12 is the Registrar of Companies. Respondent No. 10 is a minor shareholder supporting the petitioners.
4. At the time of incorporation in 1966, the authorised capital of the company was Rs. 2,50,000, which was subsequently increased to Rs. 10 lakhs in 1979. The initial issued capital was Rs. 50,000 divided into 5,000 shares of Rs. 10 each. This was increased from time to time in February, 1970, March, 1974, March, 1976, and March, 1982, when it became Rs. 5 lakhs. Since the incorporation of the company, the K group was having approximately one-third share and the J group together the remaining two-thirds share. The holding after March, 1982, i.e., in November, 1984, was approximately as follows :
K group about ... one-third
J group about ... two-thirds
and a few shares were held by other like respondent No. 10 (25 shares). Among the J group, respondent No. 3 and his family held about 25 per cent. shares and the ninth respondent and his family also a similar percentage. In November, 1984, petitioner No. 1 was the chairman of the company; respondent No. 3 was the managing director; respondent No. 4 (wife of the third respondent) and respondent No. 7 and respondent No. 9 were the directors.
5. Around 1966, petitioner No. 1 and respondent No. 9 were holding important posts as executives of Hyderabad Industries Limited (formerly known as Hyderabad Asbestos Limited) and were having contacts with persons connected with trade in this country and abroad. The first respondent-company was set up as an ancillary unit to the said Hyderabad Industries Limited and petitioner No. 1 and respondent No. 9 with their contacts developed a market for the products of this company. Respondent No. 3, who was a fresh graduate at about the time of incorporation of the company has been functioning as the managing director of this company ever since. Respondent No. 1 (company) has established a joint venture company in the Middle East which has been yielding substantial profits every year. The parties had, during the course of the years, set up other companies, viz., Nucon Private Limited, having its plant at Hyderabad, Deccan Polymers Limited, with a plant at Kandla Free Zone area and a partnership firm by name Secunderabad Agencies. The plant at Kandla Free Zone area was to produce products similar to those of the first respondent-company, but was established there to avail of the incentives offered by the Government. However, as the advantage of the incentives soon disappeared, the plant was shifted to Hyderabad in about 1983-84.
6. In the company petition, a counter-affidavit of the third respondent sworn to on July 17, 1987, has been filed on behalf of respondents Nos. 1 and 3. Respondents Nos. 2, 4 to 8 have filed memos adopting the counter affidavit of the third respondent. Respondents Nos. 10 and 11 (since transposed as petitioner No. 3) and some of their relatives who are shareholders have filed affidavits sworn to during August and September, 1987, supporting the petitioners. A reply affidavit of petitioner No. 1 sworn to on September 21, 1987, and a further reply affidavit after perusal of records sworn to on November 24, 1987, have been filed by him. The third respondent has filed an additional counter-affidavit sworn to on December 15, 1987, on behalf of respondents Nos. 1 and 3. Respondent No. 2, that is, the company secretary, has filed six counter-affidavits sworn to during December, 1987, in reply to the allegations made by respondents Nos. 10, 11 and their relations referred to earlier. Thereafter, on service of notice, the ninth respondent has appeared and filed a counter affidavit sworn to on February 29, 1988, which makes allegations of oppression and mismanagement against the third respondent and supports the petitioners. After the said affidavits and counter-affidavits had been filed, issues have been framed by this court on April 8, 1988, and, by an order dated April 28, 1988, the parties were asked to file documents and also lists of such documents that are admitted by them. The parties have filed voluminous documentary evidence and they have also filed lists admitting some documents filed by the opposite party and, on that basis, some documents have also been marked by consent.
7. After framing of issues, an affidavit of the third respondent sworn to on July 26, 1988, has been filed in reply to the counter-affidavit of the ninth respondent which is referred to earlier. The first respondent had filed an application for recasting of issues, viz., Company Application No. 106 of 1988, which has been disposed of by an order dated September 1, 1989.
8. Along with the company petition, the petitioners filed several applications for interlocutory reliefs many of which are still pending, viz., Company Application No. 191 of 1987, in which an ex parte interim injunction has been granted on July 3, 1987, restraining respondents Nos. 2 and 3 from allotting the shares of the company. Company Application No. 192 of 1987 is for an injunction restraining the seventh respondent from functioning as director and Company Application No. 193 of 1987 is for an injunction restraining the third respondent from functioning as managing director.
9. Company Application No. 196 of 1987 is to appoint an interim committee of management and Company Application No. 207 of 1987 is for an injunction restraining the third respondent from operating the bank account or spending any monies which come to his hands as managing director. Counters have been filed in these applications but they have not been disposed of so far. C.A. No. 197 of 1987 seeking an injunction against the third respondent from functioning as a director of the foreign joint venture company has been disposed of on October 14, 1987.
10. Respondent No. 9 has filed the present applications, that is, C.A. Nos. 184 to 188 of 1988, for the reliefs briefly noticed earlier. After the framing of issues and filling of documents, the petitioners filed C.A. Nos. 151, 152 and 154 of 1989 to summon certain documents pertaining to the company and respondent No. 3 and his family, etc., (sic) from the State Bank of India and Andhra Bank counters were filed by respondent No. 3 and after hearing the parties by a common interim order dated July 20, 1989, the contesting respondents were asked to file extracts of bank accounts for the period between November 1, 1984, to February 28, 1985, reflecting the receipt of cheques or drafts towards issue of additional equity capital together with the particulars of persons who issued the cheques and their bank accounts. Pursuant to the said order, some documents (which will be referred to presently) were filed by them. The said applications are, however, still pending.
11. Counsel for the ninth respondent had been pressing for the disposal of the present applications on the ground that the disposal of the company petition will take a long time and that the delay is causing irreparable loss to his client who, together with the petitioners, holds a majority of shares in November, 1984, and only because of the illegal acts of the third respondent, they have been excluded from management. According to the ninth respondent, the acts of oppression and mismanagement have been continuing even after filing of the company petition and he was being deprived of large amounts because of the mismanagement.
12. Sri T. Anantha Babu, learned counsel appearing for respondents Nos. 1 and 3, however, suggested that the disposal of the company petition itself is appropriate as issues have already been framed. He has also urged that, in the applications for interlocutory reliefs filed by the petitioners, viz., C.A. No. 191 of 1987, etc., only some interim directions were granted or notice ordered and they have not been taken up so far, and these applications also need not be taken up now and the company petition itself may be proceeded with.
13. Keeping in view the several controversies raised about the oppression and exclusion from management in the various affidavits in the company petition referred to earlier and the voluminous documentary evidence and oral evidence that parties may let in, the disposal of the company petition will take time, these applications were heard at some length.
14. Though several controversies are raised by the petitioners and the ninth respondent including the factum of holding of board meetings on November 26, 1984, January 5, 1985, and February 28, 1985, and some other board meetings and annual general meetings, service of notices on the petitioners and the ninth respondent and the validity of the decisions taken, etc., the focus during the hearing turned on the aspect about the legality and validity of the decision to increase the authorised capital, its allotment to respondents Nos. 3 to 6, the receipt of any advantage by the company and the availability of funds with respondents Nos. 3 to 6 to pay for the said issue. Paragraphs 19A, 22, 53, 54, 61 and 62 of the company petition; paragraph 50 of the counter-affidavit of the third respondent sworn to in July, 1987; and counter-affidavits of the ninth respondent and the rejoinder of the third respondent to the said affidavit of the ninth respondent as well as issue No. 3 reflect this aspect of the controversy. The other controversies are not being dealt with now.
15. In brief, the case of the petitioners and the ninth respondent is that the third respondent had brought into existence material to show that additional capital was issued and allotted to him and his family members (respondents Nos. 4, 5 and 6) some time during November, 1984, to February, 1985, with a view to change the shareholding pattern of the company. It is also contended that respondents Nos. 3 to 6 did not have the necessary funds available at that time to subscribe for the additional capital nor was any amount received by the company. It is only a make believe exercise of bank entries and entries in the company's book without any benefit to the company itself. According to them, it is an abuse of fiduciary powers as directors by respondents Nos. 3 and 4.
16. Learned counsel for the third respondent has, however, refuted these allegations and contended that the issue and allotment has been made in accordance with law and this application is only an attempt by the ninth respondent who has fallen out with the other members of the family to cause harm to the first respondent-company. It is also pointed out that the petitioners had set up rival companies, viz., Andhra Polymers Limited and Ramak Enterprises Private Limited, which also produce goods similar to the first respondent-company and were not interested in investing any capital and are now interest only in causing harm to the first respondent-company. It is also the case of the third respondent that there was an arrangement among the members of the J group some time in September-October, 1984, according to which, the ninth respondent took over Nucon Private Limited and respondents Nos. 3 and 4 took over the first respondent-company. The ninth respondent, therefore, did not subscribe to the additional issue.
17. The examination of the material now is for appreciating the controversy raised and to ascertain the existence of a prima facie case and balance of convenience for interlocutory relief. In addition to the documents which have been marked by consent or portions in the affidavits filed by the parties, the documents which have been filed but are not yet marked by consent are being referred to and marked for the purpose of identification in these applications. This marking is without prejudice to the contentions of the parties regarding their proof and relevancy in the company petition. For the sake of convenience, the documents filed by the petitioners as well as the ninth respondent will be marked as ZA series and those filed by respondents Nos. 1 and 3 will be marked as ZB series. Again, for these applications, it is being assumed that the minutes of the two meeting of the board of directors of the first respondent company dated November 26, 1984, and January 5, 1985, and also the decision regarding allotment in its meeting held on February 28, 1985, are true as contended by respondents Nos. 1 and 3.
18. The minutes of the meeting of the board of directors held on November 26, 1984, marked as exhibit ZB-1 read as follows :
'Deccan Enterprises Private Limited.
Minutes of the meeting of the Board of directors of Deccan Enterprises Private Limited, held on Monday, November 26, 1984, at 11 a.m., at the registered office of the company at 5-2-175/1, Rashtrapathi Road, Secunderabad-500 003, 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 3rd November, 1984, were read, confirmed, initialled and signed by the chairman.
4. The managing director informed the board that presently the 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 equipment, etc., is 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 lakhs to Rs. 10 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 per share shall be payable with application in full.'
'Further resolved that the new shares shall be subject to the memorandum and articles of association of the company.'
'Further resolved that the new equity shares shall rank pari passu, with the existing shares.'
'Further resolved to offer the new shares to the existing share holders 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 for receipt of application along with application money be 15th December, 1984.'
19. The managing director was directed to sent notice/intimation 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 all such acts, deeds, 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 discussion the meeting terminated with a vote of thanks to the chairman.
Sd. . . . . . . . . . . 5-1-1985
Chairman'.
20. The other documents filed by the company disclose that, on the same day, the company wrote letters to the shareholders offering shares at par fixing December 15, 1984, as the last date for receipt of applications together with the amount and despatched them on the same day after obtaining certificate of posting from Sanjeevareddynagar Post Office. Further, on November 30, 1984, respondents Nos. 3 to 6, by separate letter, have applied to purchase the additional issue of different amounts but totalling Rs. 5 lakhs enclosing cheques for the amount applied for by each. Other documents to be referred to presently show that the cheques are drawn on their respective savings bank accounts in Andhra Bank, Hyderbasti branch and the first respondent-company also has a current account in that branch. The amounts were also credited in the company's ledger as share application money.
21. The minutes of the next meeting of the board held on January 5, 1985, now marked as exhibit ZB-2 read as follows :
'Deccan Enterprises Private Limited
Minutes of the meeting of the board of directors of Deccan Enterprises Private Limited held on Saturday 5th January, 1985, at 11. a.m., at the registered office of the company at 5-2-175/1, Rashtrapathi Road, Secunderabad-500 003, 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 receipt of application for further issue of share capital : The board reviewed the position regarding further issue of share 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 discussion, the meeting terminated with a vote of thanks to the chairman.
Sd. . . . . . . . . . . . . 28-2-1985
Chairman.'
On the same day, letters were sent to the shareholders under certificate of posting from the same post office intimating the extension of time. By letters dated January 14, 1985, some members of the J group (excepting the ninth respondent and his family) informed the company that they will not subscribe for the additional issue. By letters dated March 4, 1985, of the company, respondents Nos. 3 to 6 are informed about the allotment of additional shares to them in accordance with the decision of the board in its meeting held on February 28, 1985. This allotment is for the entire additional issue of Rs. 5 lakhs for which payment was made on 30th November, 1984. Apparently, there was no other application for the additional issue.
22. Pursuant to the interim directions of this court dated July 20, 1989, in C.A. Nos. 151, 152 and 154 of 1989 referred to earlier, the first respondent-company has, along with a memo dated August 17, 1989, filed an extract of current account No. 206 of the first respondent-company with Andhra Bank, Hyderbasti branch, for the period November 28, 1984, to February 21, 1985, in two sheets-now marked as exhibit ZB-3 and also four certificates dated August 12, 1989, issued by that bank regarding crediting of cheques to this account on November 30, 1984, and December 1, 1984. Again, with a memo dated September 19, 1989, respondents Nos. 1 and 3 have filed six documents along with a list. They are : (a) An extract of the same account of respondent No. 1-Company as exhibit ZB-3 but containing some particulars regarding entries on December 1, 1984, and is marked as exhibit ZB-3 (a); (b) an extract of savings bank account No. 40 of the fourth respondent in the same bank relating to 1st December, 1984, marked as exhibit ZB-4; (c) an extract of savings bank account No. 691 of the fifth respondent of the same bank relating to 30th November, 1984, marked as exhibit ZB-5; (d) an extract of savings bank account No. 1577 of the sixth respondent of the same bank relating to 30th November, 1984, marked as exhibit ZB-6; (e) a certificate dated September 14, 1989, issued on the letter-head of R. M. Trading Corporation, Madras, marked as exhibit ZB-7; and (f) another certificate dated August 19, 1989, issued by S. Daga and Company, Chartered Accountants, Hyderabad, marked as exhibit ZB-8.
23. Again, with a memo dated September 27, 1989, respondents Nos. 1 and 3 have filed 16 documents with a list. Out of these, the documents relevant for discussion are : A certificate dated September 27, 1989, issued by Swami and Seshadri, Chartered Accountant, Hyderabad, marked as exhibit ZB-9; a certificate dated September 27, 1989, issued by the State Bank of India, Main branch, Hyderabad, marked as exhibit ZB-10; a xerox copy of the extract of savings bank account No. 28 of the third respondent with the same branch of the Andhra Bank in two sheets from 28th to 30th November, 1984 (one sheet) and 1st to 24th December, 1984 (another sheet), together marked as exhibit ZB-11; a xerox copy of an extract of savings bank account No. 691 of the fifth respondent with the same bank, marked as exhibit ZB-5(a); a xerox copy of an extract of savings bank account No. 1577 of the sixth respondent with the same bank marked as exhibit ZB-6(a). Exhibit ZB-5(a) and exhibit ZB-6(a) relate to the same account as exhibits ZB-5 and ZB-6 but for the previous day. A xerox copy of the ledger of the first respondent-company relating to the share application money account for 1984-85 marked as exhibit ZB-12. On the same day, a note of arguments with some more documents and also charts explaining the flow of funds, entries in bank accounts and certificates referred to also have been filed on behalf of respondents Nos. 1 and 3.
24. Petitioner No. 1 has filed a further affidavit sworn to on September 28, 1989, raising an objection to the filling of documents by respondents Nos. 1 and 3 during the hearing and without any explanation for delay and further contesting the truth, validity and contents of the certificates issued by the State Bank of India, viz., exhibit ZB-10.
25. While the arguments were coming to a close on October 6, 1989, an affidavit of the third respondent sworn to on October 5, 1989, has been filed and another note of arguments together with extra copies of some documents which have been filed earlier have been filed on behalf of respondents Nos. 1 and 3.
26. For appreciating the controversy, it is convenient to examine it under the following sub-heads :
(a) reasons for issue of additional capital of Rs. 5 lakhs and the procedure followed for issue and allotment of the same;
(b) whether the company (first respondent) received any advantage by additional issue or it was merely to increase the shareholding of the third respondent; and
(c) whether grant of interlocutory relief is appropriate and, if so, nature of such relief
Point No. (a). - The resolution of the board dated November 26, 1984, that is, exhibit ZB-1, extracted above, gives the reasons for the additional issue. Recession in demand for the products of the first respondent company because of which diversification was envisaged which needed additional capital equipment. It also noted the tight financial position of the company. In the counter-affidavit of the third respondent in the company petition sworn to on July 26, 1988, several additional reasons are given in paragraphs 3(f), (g) and (h). Here reference is made to the pressure from the State Bank of India to increase the capital to enable increased availability of loan finance and to business rivalry from the companies of the petitioners because of which diversification requiring funds was necessary. There is also a reference to the amounts of the company being locked up with Nucon Private Limited and Secunderabad Commercial Company (a partnership firm of the parties). Counsel for respondents Nos. 1 and 3 has placed reliance on exhibits B-29 to B-31 in support of the reason of pressure from the bank.
27. Counsel for the petitioners and the ninth respondent referred to various allegations made by their clients in the affidavits disputing the aforesaid statements in the counter-affidavit of the third respondent. According to them, the reasons given in the counter-affidavit are an afterthought and invented for the purpose of these applications. No correspondence or documents indicating any pressure from the bank is filed. The reference is only to exhibits B-29 to B-31 letters of the bank in 1981 to increase the share capital. It is pointed out there was an increase in the share capital in 1982 and the bank thereafter never wanted or wrote for increase of any share capital of this company. Similarly, no material is filed to show that the increase in capital was immediately intimated in writing to the State Bank of India or to show that, because of the said increase, any financial limit was enhanced. It is also pointed out that the alleged rivalry from Andhra Polymers Limited is now being urged as an afterthought. The documents marked by consent, viz., exhibit A-15, dated November 30, 1983, which is a debit note raised by the first respondent-company in favour of Andhra Polymers Limited and exhibits A-16 and A-18, dated November 30, 1983, and December 10, 1983, being debit notes of Ramak Enterprises Limited by the first respondent-company show that the registered offices of these two companies were also situated in the same premises as the registered office of the first respondent-company. The debit notes indicate that the normal work like posting of letters was being handled by the staff of the first respondent-company for which the debit notes were raised toward postage. This improbabilises the plea of such rivalry at least till the end of 1983. It is pointed out that the certificate issued by the State Bank of India, that is exhibit ZB-10 in September, 1989, was only to help the third respondent. It is addressed to 'whomsoever it may concern' and, curiously, there is a reference to an oral request of petitioner No. 1 to withdraw his bank guarantee furnished on behalf of the first respondent-company. According to the petitioner, he had never orally informed or written to the bank indicating his intention to withdraw the guarantee already furnished nor had he received any letter in writing either from the bank or the company on this subject. Several other comments are made about the said certificate including the circumstance that, in the concluding portion, the bank reserved its right to proceed against the persons who have given guarantee.
28. It is pointed out by counsel for the ninth respondent that the alleged board meetings held on November 26, 1984, January 5, 1985 and February 28, 1985, when the decision regarding the issue and allotment of additional shares was taken were attended by only respondents Nos. 3 and 4. According to him, the reason for the additional issue by doubling the existing capital was only to increase the percentage of shareholding of respondents Nos. 3 to 6 from the pre-existing about 27 per cent. to over 75 per cent. It is significant that, shortly after the meeting on November 26, 1984, respondents Nos. 3 to 6 applied for the entire additional issue and deposited the cheques on November 30, 1984. Section 81 of the Companies Act does not apply to a private limited company but it is evident from the resolution dated November 26, 1984, itself that the board decided to offer the additional issue to all the existing shareholders. In view of this, it was necessary that an offer was sent to all shareholders. The letters alleged to have been sent do not indicate the number of shares offered to the existing shareholders and were sent under certificate of posting. Subscription was received for the entire additional issue of Rs. 5 lakhs on November 30, 1984, itself from respondents Nos. 3 to 6 but, in the meeting held on January 5, 1985, attended by the third respondent and the fourth respondent (husband and wife), time was extended for applying for the additional issue. There is no apparent reason for this after applications with cheques for the entire issue were already received, as no criteria were laid down regarding number of shares to be applied for by the existing shareholders either in the earlier letter or the letter now written. This intimation of extension of time is also said to have been sent by certificate of posting from the same post office. Again, only the members of the J group who were supporting the third respondent wrote letters on a single day, viz., January 11, 1985, indicating that they will not subscribe to the additional issue.
29. Counsel for respondents Nos. 1 and 3 pointed out that the ninth respondent filed his counter-affidavit in the company petition late, i.e., in February, 1988, as he had altered his stand after the petition was filed because of some differences among the members of the J group. This is denied by the ninth respondent and, according to him, only after service of notice, he had put in appearance and filed the counter. The documents marked by consent, viz., exhibits C-1 to C-5 of 1985 and exhibits C-6 to C-9 of 1986 which are letters of parties, indicate that there were differences among respondents Nos. 3 and 9 even by then. This prima facie negatives the contention of the third respondent.
30. According to the ninth respondent and the petitioners, the reasons given for additional issue in the minutes of the board meeting, exhibit ZB-1, or in the counter-affidavits of the third respondent in the company-petition are only illusory and the real purpose was to alter the shareholding so that the third respondent gains control of the company. Only the third respondent and the fourth respondent attended the alleged meetings and, apart from the support of the third respondent, there is no material to show that anyone else was aware of the meetings of the board or of any offer to subscribe to the additional issue. It is also contended that the third respondent did not have the funds for subscribing to the additional issue and the allegation that the issue was made for cash is also not correct.
31. On the other hand, learned counsel for respondents Nos. 1 and 3 contends that the petitioners were busy with their own companies, viz., Andhra Polymers Limited and Ramak Enterprises Limited, and were not interested in making any further investments in the first respondent company. According to the petitioners, there was no need for additional capital and if any such issue was made and offer come to them, they would have subscribed for the same. They pointed out to the profits being consistently earned by the company since its inception including profits from the foreign joint venture company and also the reserves it had as evident from the balance-sheet filed by respondents Nos. 1 and 3. According to them, the Indian sales had fallen for a couple of years resulting in losses because this very group had established a sister company called Deccan Polymers Limited under the same management and manufacturing the same items at a plant in Kandla Free Zone for the purpose of taking financial incentives. Subsequently, the factory of Deccan Polymers was shifted to Hyderabad and is not functioning. Thereafter, the sales of the first respondent-company have improved. It is also pointed out that, when an illegal action was taken to replace petitioner No. 3 by the third respondent as the nominee of the first respondent-company on the board of the foreign joint venture, it has been challenged in the Calcutta High Court.
32. According to the third respondent, an understanding was reached among the members of the J group sometime in September-October, 1984 according to which the third respondent was to take over the first respondent-company and the ninth respondent was to take over Nucon Private Limited and, therefore, the ninth respondent did not subscribe for the additional issue of the first respondent-company. The circumstance that the third respondent took over as managing director of Nucon Private Limited at about that time is relied upon in support of this contention. Admittedly, there is nothing in writing to evidence this understanding. It is pointed out by counsel for the ninth respondent that the shareholding of Nucon Private Limited has not been altered and the petitioners and the third respondent continue to be its shareholders. He also refers to two letters written by the third respondent to the ninth respondent in September, 1986, which have been marked by consent as exhibits A-54 and A-56 making enquiries about the affairs of Nucon Private Limited. The balance-sheet of Nucon Private Limited as on March 31, 1985, (marked by consent as exhibit B-44) shows a loss of Rs. 39 lakhs. It is stated that the balance-sheet as on March 31, 1984, also shows a loss of Rs. 31 lakhs for two years. Even according to the third respondent, Nucon Private Limited, owes heavy amounts to the first respondent-company and, subsequent to the filing of this petition a separate petition to wind up Nucon Private Limited has been filed by the first respondent company. It is contended that, comparing the financial position of Nucon Private Limited with that of the first respondent-company which, in addition to having large reserves, has substantial profits from the foreign joint venture company, it will not be reasonable to expect such an arrangement. These circumstances, prima facie, negative the plea of the third respondent regarding any such understanding between the third respondent and the ninth respondent. The reason given by the third respondent for there being no willing applicant or petitioners and the ninth respondent being aware and not applying for additional issue is also prima facie not acceptable. The reasons for the increase in share capital now given in the counter-affidavit of the third respondent are prima facie only an afterthought. It is appropriate to examine the reason given in the minutes of the board meeting regarding the need for finance for capital investment while dealing with point No. (b).
Point (b). - Exhibit ZB-12, that is, the extract of the general ledger of the first respondent-company relating to share application money shows that a sum of Rs. 5 lakhs has been credited on November 30, 1984, as follows :
'DECCAN ENTERPRISES PRIVATE LIMITEDGENERAL LEDGERShare application money account-----------------------------------------------------------------Year Particulars Voucher Folio Debtor Creditor Dr. Balance1984 or Amount Amount orMonth J.V.No. Rs. Rs. Cr.anddate-----------------------------------------------------------------Nov.30 By Andhra JV400 153 60,000Bank a/c30 By do. JV401 154 20,00030 By do. JV402 154 4,00,00030 By do. JV403 154 20,0001985March To Share JV575 216 5,00,000capital a/c---------------------------------5,00,000 5,00,000 Nil'---------------------------------
The extract of current account of the first respondent-company with Andhra Bank, Hyderbasti branch exhibit ZB-3 and 3(a); extract of savings bank account of the third respondent with the same bank, that is, exhibit ZB-11; and the extracts of savings bank accounts of respondents Nos. 4 to 6, viz., exhibits ZB-4, 5(a), 6, 6(a) with the same bank, throw some light on these transactions. Counsel for respondents Nos. 1 and 3 has also sought assistant from three certificates, exhibit ZB-7, dated September 14, 1989, issued by R.M. Trading Corporation, Madras; exhibit ZB-8, dated September 19, 1989, issued by S. Daga and Company, chartered Accountants, Hyderabad; and exhibit ZB-9, dated September 27, 1989, issued by Messrs. Swami and Seshadri, Chartered Accountants, Hyderabad, in this connection. Counsel for respondents Nos. 1 and 3 has also filed charts for explaining the entries. These documents were filed piece meal after the issues were framed and during pendency of these applications and, as pointed out earlier, understanding the entries presented some difficulty at the initial stages. On the basis of the aforesaid material, the following facts emerge : The savings bank account of the third respondent, exhibit ZB-11, indicates that a sum of Rs. 5 lakhs was credited by clearing on November 28, 1984. On November 30, 1984, there are entries showing transfer by withdrawal as follows : Rs. 4 lakhs to the current account of the first respondent-company exhibit ZB-3; Rs. 20,000 to the savings bank account of the first respondent, that is, exhibit ZB-5 and exhibit ZB-5(a); and Rs. 80,000 to the savings bank account of the sixth respondent, that is, exhibits ZB-6 and exhibit ZB-6(a). Exhibit ZB-1 also shows that, on the next day, that is, December 1, 1984, the following deposit of Rs. 5 lakhs is made as follows : (a) Rs. 84,000; (b) Rs. 21,000; (c) Rs. 45,000; (d) Rs. 3,50,000. Again, on the same day, viz., December 1, 1984, there is a withdrawal entry for Rs. 5 lakhs by transfer to Poddar Projects. This extract of account of the third respondent and exhibit ZB-9, dated September 27, 1989, are filed along with a list of documents dated September 27, 1989. It is stated that the third respondent had obtained a loan of Rs. 5 lakhs from Poddar Project which was credited by transfer to his account on November 28, 1984, and, after being used for entries towards payment of additional issue on November 30, 1984, it was repaid by transfer on December 1, 1984. It is useful to extract exhibit ZB-8 and exhibit ZB-7 :
Exhibit ZB-8
Office Phones : 556450
44736
Residence : 235570
S. DAGA AND COMPANY
CHARTERED ACCOUNTANTS
4-6-489 (1st floor), Esamia Bazar, Hyderabad 500 027
Date : 19-09-1989
Certificate
33. This is to certify that Deccan Polymers Limited, 5-2-175/1, R.P. Road, Secunderabad, had credited on December 1, 1984, the account of Deccan Enterprises Private Limited by a sum of Rs. 4,55,000 (rupees four lakhs fifty-five thousand only) towards full and final settlement of their Bill No. Miscellaneous/P & M. dated December 1, 1984, for Rs. 4,55,000 (rupees four lakhs fifty-five thousand only) for supply of machinery and debited the said sum to the loan account of R.M. Trading Corporation, Madras, appearing in their books of account maintained for the year 1984-85.
34. The above is certified as true and correct as per records produced for our verification.
For S. Daga and Company,
Chartered Accountants
Sd. . . . . . . . . .
(Rajiv Dave)
Partner'
Exhibit ZB-7 :
R. M. TRADING CORPORATION
12, Sterling Road, Madras 600 034
14-9-1989
TO WHOMSOEVER IT MAY CONCERN
35. This is to certify that we had taken a loan of Rs. 4,55,000 (rupees four lakhs fifty five thousand only) from Deccan Polymers Limited on 1-12-1984 and we had given a loan of Rs. 4,55,000 on 1-12-1984 to the following parties at Hyderabad :
AmountRs.1. Ms. Kavita Jalan 50,0002. Mr. O. P. Jalan 3,50,0003. Mrs. Sudha Jalan 34,0004. Mrs. Vikas Jalan 21,000------------Total 4,55,000------------
Since we did not have any bank account at Hyderabad/Secunderabad, to avoid delay and to save bank charges, we had advised Deccan Polymers Limited to pay the sum of Rs. 4,55,000 to the above parties on our behalf and debit the same to our account with Deccan Polymers Limited towards loan account. Accordingly, Deccan Polymers Limited had arranged payment of the sum of Rs. 4,55,000 to the above parties through Deccan Enterprises Private Limited, Secunderabad, as follows and we credited the sum of Rs. 4,55,000 to our account with Deccan Polymers Limited on December 1, 1984 :
Cheque No. and Date Amount Party's name631635/1-12-1984 50,000 Kavita Jalan631638/1-12-1984 3,50,000 O. P. Jalan631637/1-12-1984 34,000 Sudha Jalan631636/1-12-1984 21,000 Vikas Jalan
The above loan of Rs. 4,55,000 was refunded by us directly to Deccan Polymers Limited, Secunderabad, as follows :
Date Cheque/DD No. Amount Towardsand date6-9-1985 226156/6-9-1985 1,00,000 refund of loan amount5-10-1985 086271/5-10-1985 1,00,000 do.9-12-1985 0165698/9-12-1985 1,00,000 do.3-1-1985 0264806/3-1/1986 1,55,000 do.------------4,55,00031-3-1989 0479347/15-3-1989 52,160 interest-------------5,07,160-------------
For R. M. Trading Corporation,
Sd. . . . . . . . . . .
(R. M. Benefit Trust)
Trustee
Proprietor'.
Deccan Polymers is a sister concern of the first respondent-company and under the same management as noticed earlier. According to exhibit ZB-8, Deccan Polymers had, on December 1, 1984, credited the account of the first respondent company with Rs. 4,55,000 towards settlement of a bill for supply of machinery said to have been delivered on that day and debited on identical amount to the loan account of R.M. Trading Corporation, Madras. Exhibit ZB-7 discloses that, on December 1, 1984, Deccan Polymers had, on behalf of R.M. Trading Corporation, Madras, credited the amount of Rs. 4,55,000 to the bank account of respondent No. 6. The accounts of respondent No. 4 to respondent No. 6 show transfer entries of the amount received from Deccan Polymers to the account of respondent No. 3 on the same day. It is explained on behalf of respondents Nos. 1 and 3 that from the account so received from Deccan Polymers and together with another sum of Rs. 45,000 received by the third respondent from Deccan Polymers a sum of Rs. 5 lakhs was repaid to Poddar Projects. According to exhibit ZB-7, the interest on this loan is paid on behalf of respondents Nos. 3 to 6 only on March 31, 1989, that is, after this petition was failed. Thus, in essence, Deccan Polymers transferred the machinery to the first respondent-company for Rs. 4,55,000 and, at the same time, gave a loan of Rs. 4,55,000 to the third respondents Nos. 3 and 6 and paid another sum of Rs. 45,000 to the third respondent. This sum of Rs. 5 lakhs was transferred to Poddar Projects on December 1, 1984. Thus, the amount transferred by Deccan Polymers to the account of respondents Nos. 3 and 6 is the real source of funds for the additional issue and this has again been shown as loan by Deccan Polymers to R.M. Trading Corporation, Madras.
36. The criticism of counsel for the ninth respondent that all these are mere book entries and, in fact, no transfer of cash was involved cannot be brushed aside Prima facie, there was an entry for transfer of some machinery from the sister concern under the same management, that is, Deccan Polymers to the first respondent-company. The credit facility provided by Poddar Projects for a period of less than a week without interest and that too about the time of the resolution of the board, exhibit ZB-1 and transfer of funds by Deccan Polymers to respondents Nos. 3 to 6 on the same day as the said amount is said to be paid towards cost of machinery are significant. The criticism of counsel for the ninth respondent and the petitioners that there was no advantage to the company by the issue of capital and it was only done to alter the shareholding in favour of the third respondent is also, prima facie, justified. The several comments by counsel for the ninth respondent regarding the certificates produced by the first respondent and the third respondent and the extracts of bank accounts also cannot be easily brushed aside.
Point (c). - Counsel for the ninth respondent has relied upon the decision in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743, 808 (SC), particularly paragraph 105 onwards (page 1337 of AIR 1981) and contended that, in view of the material referred to above including the documentary evidence filed by respondents Nos. 1 and 3 themselves, a case of abuse of fiduciary power in the issue and allotment of share capital as directors by respondents Nos. 3 and 4 is made out. It is contended that, by the said illegal issue and allotment, the third respondent has converted his position from a minority shareholder to a major shareholder and has been perpetuating further acts by excluding the petitioners and the ninth respondent who, in fact, have a majority shareholding but for the alleged additional issue. It is also contended that there was no valid reason for the issue of additional capital and the manner in which it is said to have been done is also illegal. Learned counsel for respondents Nos. 1 and 3 has contended that the issue of additional capital was for the conduct of the affairs of the company and any incidental change in the shareholding cannot be said to be oppressive or illegal. He has placed reliance on the decision in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351, particularly on paragraph 16 onwards. The decision cited by counsel for respondents Nos. 1 and 3 is not helpful in deciding the present controversy. The ratio on this aspect is the decision in Needle Industries (India) Ltd.'s case [1981] 51 Comp Cas 743 particularly the concluding part of para 106 is a useful guide (at page 809 of 51 Comp Cas) :
'The fact that, by the issue of shares, the directors succeed also or incidentally in maintaining their control over the company or in newly acquiring it, does not amount to an abuse of their fiduciary power. What is considered objectionable is the use of such powers merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company.'
On the basis of the material and circumstances in the case referred to earlier, I am of the opinion that prima facie a case has been made out that (a) respondents Nos. 3 and 4 have abused the fiduciary powers as directors in gaining control of the company and the affairs of the company are being conducted in a manner oppressive to the shareholders like the petitioners, the ninth respondents and their associates; and (b) the change in the pattern of shareholding and the subsequent changes in the board of directors will prejudicially affect the interest of these shareholders.
37. During the hearing, counsel for the contesting parties offered to purchase the shareholding of the other but, there was no meeting ground, either on the price or on the modalities for purchase. The factory of the company is said to be production and the company is having profits from the foreign joint venture company. At this stage, it will not be appropriate to order winding up of the company.
38. The submission of counsel for respondents Nos. 1 and 3 that the local plant of the company is now functioning well and yielding profits and, therefore, it is not advisable to grant any relief cannot override the factors mentioned earlier. It is one of the relevant factors to be kept in view. The apprehension of learned counsel for respondents Nos. 1 and 3 that if the present management is disturbed the secret processes used in the local unit of the company will be made available to other rival companies is apparently made only as an attempt to defeat these applications. There is no material to show that any such secret processes were secured or for which patent is applied for. This very unit was being managed by the board consisting of all groups and it is pointed out by counsel for the petitioners that petitioner No. 3 as an executive director was involved in the setting up of the plant itself. Even if true, this also cannot override the other comments mentioned earlier. The conditions for appointment of a receiver for the factory are not identical to the grounds for grant of a relief under section 403, 397 and 398 of the Companies Act regarding the conduct of affairs of the company.
39. The contention of counsel for the ninth respondent and the petitioners that a major source of income of the first respondent-company is from the joint venture foreign company on whose board at present the third respondent is the nominee and the continuance of the third respondent and his supporters on the board is likely to prevent profits reaching the members. The apprehension about the interest of the members being adversely affected is based on the material referred to above and that the assets of the company may not be available by the time the company petition is decided after protracted trial and the likelihood of books of account being tampered with during this period cannot be brushed aside. The balance of convenience lies in preventing the present management from continuing to manage the affairs of the company during the pendency of the company petition or till further orders.
40. It is to be next examined as to the nature of interlocutory relief that is appropriate for this case : Counsel for the ninth respondent has referred to two decisions where interlocutory relief was granted under section 403 pending the petitions under sections 397 and 398 of the Companies Act by appointment of an interim administrator or special officer to supersede the board. They are : S. Narayanan v. Century Flour Mills [1987] 2 Comp LJ 25 and A. K. Mukherjee v. Clarian Advertising Service Ltd. [1982] 52 Comp Cas 315 (Cal). Some relevant considerations are that the factory is in production and the foreign venture company yields substantial profits. On the basis of the material and circumstances in the case, I consider it appropriate to state that Sri P. Ramachandra Raju, Retired Judge, High Court of Andhra Pradesh, Hyderabad, is appointed as interim administrator or special officer to take charge of and conduct the affairs of the company is supersession of the board of directors for a period of two years in the first instance. A person was to be selected by the court from a panel of names to be filed by the petitioners and respondent No. 9 and respondent No. 3 are appointed as two assistant administrators to assist the administrator. Any opinion of the assistant administrators will by only advisory and the decision will be of the administrator. The assistant administrators will function under the control and directions of the administrator. The administrator will have a meeting with the assistant administrators at the registered office of the company at least once every week. The remuneration of the administrator is fixed at Rs. 5,000 per month tentatively. He will, in addition, be entitled to the use of the company's car and a telephone at his residence, the expenses to come out of the company's funds. It is open to any of the parties or the administrator to move this court for directions.
41. The applications are ordered accordingly. Respondent No. 3 to pay the costs of these applications assessed at Rs. 5,000 to be shared equally between the petitioners and respondent No. 9 i.e., one half each.