1. Company Petition No. 48 of 1993 is a petition filed under Section 397/398 of the Companies Act, 1956, in the matter of Esemen Metalo Chemicals Pvt. Ltd. (hereinafter called "Esemen") by Mrs. Farhat Sheikh. The petitioner has also filed another petition, being C. P. No.49 of 1993, on the same day in the matter of Detinners Pvt. Ltd. (hereinafter called "Detinners"). Since the cause of action in both the cases is practically the same and as both the companies are controlled by the same family and since the respondents in the cases are almost the same and the reliefs claimed are also identical, both the cases were heard together and are being disposed of by this single order. The petitioner claims to hold 975 equity shares of Rs. 100 each in Esemen constituting about 16.25 per cent. of the subscribed and paid-up capital of the company and 116 equity shares of Rs. 100 each constituting about 23 per cent. of the subscribed and paid-up capital of Detinners. The petitioner and the respondents are close relatives.
Esemen was incorporated in 1968, whereas Detinners was incorporated in 1954.
The family of the late Sheikh Md. Nanvi was carrying on business in partnership under the name and style of Metallo Chemical Works under a deed of partnership dated January 1, 1959. In July, 1967, the partnership was reconstituted by which the two brothers, one sister and the mother of the petitioner became partners. In 1968, the company, namely, Esemen, was incorporated to take over the business of Metallo Chemical Works. According to the petitioner this object was not fulfilled. In 1984, the mother of the petitioner died intestate and the petitioner being a Mohammedean governed by the Hanafi School of Muslim law inherited, along with the other family members, her share in her mother's entitlement in the partnership firm.
3. The grouse of the petitioner is that though she is the holder of 975 shares, her name was wrongfully deleted in 1985 in respect of 560 shares of Esemen as well as her entire shareholding in Detinners and instead, the name of respondent No. 7 was shown as registered shareholder of those shares. She had to initiate proceedings in the Calcutta High Court to restore the transferred shares in her name in both the companies and in both these matters the Calcutta High Court granted her prayers. It is her allegation that additional 1,000 shares were issued in Detinners after her name was directed to be restored by the High Court without allotting any share to her. It is further stated that in both the companies, despite the orders of the appeal court in 1993, the share certificates have not yet been issued to her on some pretext or the other. The acts of oppression and mismanagement alleged in Esemen are as follows : (a) No annual return or balance-sheet has been filed since 1990 and no annual general meeting has been held for several years.
(b) The respondents have not maintained the minutes of all annual general meetings and board meetings.
(d) The respondents are misappropriating valuable property belonging to the company. For instance- (i) Premises No. 2, Waterloo Street, Calcutta, belonging to the company, was let out to several tenants.
(ii) As and when existing tenants vacated, the respondents let out the same to their friends and relatives/associates at abnormally low rents. For example, 350 square feet area let out to Metal Products (P.) Ltd. (a closely held company of respondents) for nil rent and a 500 square feet area let out to another closely held firm, viz., New Era Construction, at a monthly rental of Rs. 200. The normal rent in this area could be not less than Rs. 15 per square feet and by this process substantial amount of pecuniary benefit is being enjoyed by the respondents.
(iii) The godown and shop on the ground floor and two big rooms on the first floor measuring approximately 2,300 square feet which was vacated by a tenant in 1986 was kept under lock and key by her brother, Mohammed Zaki, and was not let out despite the request of the petitioner. The prevailing rent in that area at that time was not less than Rs. 10 per square feet. The loss of rental income is approximately Rs. 25,000.
(iv) Another property at 212, Basant Lal Saha Lane, Tollygunj, Calcutta, which is a shed covering an area of 7,500 square feet has been handed over to a private company which is controlled by Mohammed Zaki and his sons. Even the electricity charges for consumption by that private company are being paid by the respondent-company.
(v) The shed at the above Tollygunj property though shown to be let out to another private company is actually being used by the sons of Mohammed Zaki for personal warehouse purposes and for running a plastic factory.
(vi) The company has a shop on monthly tenancy in Corotola locality which is being used by Mohammed Zaki and his sons.
4. In the matter of Detinners, the main allegation is the issue of additional shares without any justification when the business has been lying closed for a long time and the company has not been carrying on any commercial activity. The increase was mala fide since prior to the issue the petitioner has obtained an order from the High Court to restore 116 shares in her name. It is further stated that the company being a private one no invitation could have been made to outsiders to subscribe to the share capital. Further, it was the obligation of the company to offer the new shares proportionately to all the members which was not done. It is further alleged that the respondents are drawing lump sum amount as remuneration. No notice of any general meeting or any board meeting has been sent to the petitioner since 1988. Similarly, the allegations of instances of acts of mismanagement as in Esemen have also been narrated. The exclusive instances of mismanagement applicable to Detinners, as stated in the petition, are as follows : (a) The factory of the company located in a leasehold land at Swami Vivekahand Jogeshwari Road, Bombay, is closed for the last three years and all workers paid off. The residential quarters of the workers have been demolished and the land is lying vacant yielding no income to the company. The respondents are illegally and wrongfully seeking to dispose of the said property to enrich themselves.
(b) The company has a tenancy on the first floor at 2 Waterloo Street, Calcutta. Approximate area is 1,300 square feet. The respondents have wrongfully transferred this tenancy to Metalo Products P. Ltd., which is a company entirely controlled by them.
(c) The respondents are illegally and wrongfully using the tenanted ground floor flat, garage and servant quarters at premises No. 4, Moira Road, Calcutta, for their own residential purposes.
(d) The respondents are illegally and wrongfully trying to dispose of freehold land belonging to the company measuring around 4.56 acres situated at Mahesh Tala, South Distt., 24 Parganas, West Bengal.
(e) The respondents are also illegally and wrongfully trying to dispose of 2,000 shares of Esemen which owns valuable property.
(f) The respondents have totally stopped the business of the company.
(g) It is further stated in the petitions that in a suit instituted in the Calcutta High Court the respondents having arrived at a family settlement resiled therefrom.
5. Subsequent to the filing of the above petition the petitioner also filed an application being C. A. No. 44 of 1994 stating that she had come to know from an appeal proceeding in the Calcutta High Court under Section 10F of the Companies Act against the interim orders of the Company Law Board that the respondents have increased the issued and subscribed capital in Esemen also by issue of further 5,000 equity shares which were allotted to the wife and children of Mohammed Zaki on July 23, 1990. These shares of Rs. 100 each were paid up to the extent of Rs. 25 each. The increase in the capital has been made by the respondents only with the ulterior motive of diluting the shareholding of the petitioner and to take away her qualification under Section 399 of the Companies Act. The petitioner has, therefore, prayed in the application for restraining the respondents from giving effect to this increase and from exercising any right in respect of these 5,000 shares.
6. While hearing the parties in respect of the interim prayer, Shri S.B. Mukherjee made a submission on behalf of Esemen that status quo ante will be maintained notwithstanding the allotment of additional 5,000 shares. We passed an interim order in respect of both the companies restraining the respondents from disposing of and/or transferring and/ or alienating or selling the movable and immovable assets of the company.
7. Shri S. B. Mukherjee, appearing on behalf of the respondents, questioned the maintainability of the petition as regards Esemen due to nonfulfillment of requirements under Section 399. He stated that the allegations in the petition and those in the plaint in the suit with regard to the same properties before the Calcutta High Court are exactly identical. The petitioner has contended before the High Court that no transfer of assets from the partnership firm had taken place in Esemen's case. He alleged that the petitioner has also not filed a declaration that no prior suit is pending with regard to the same matter. In fact she has obtained certain interim orders from the court.
He, therefore, stated that the petition as far as Esemen is concerned deserves to be dismissed. In reply, Shri P.C. Sen, on behalf of the petitioner, undertook to withdraw the suit unconditionally.
Subsequently, on July 4, 1994, an order from the Calcutta High Court was also obtained permitting the petitioner to withdraw the suit prospectively. With this the objection of Shri Mukherjee of parallel proceedings no longer survives. We shall deal with the question of prospective withdrawal at the appropriate stage.
8. During the hearing, Shri P.C. Sen, senior advocate, appearing on behalf of the petitioner, narrated the facts with regard to the petitioner's holding of 975 shares of Esemen and the respondent's wrongful transfer of 560 shares belonging to the petitioner. He reiterated that despite the appeal court decision, the share scrips in respect of the 560 shares have not been delivered, to highlight the conduct of the respondents towards the petitioner. He stated that the capital was further increased by issue of 5,000 shares thereby reducing the petitioner's holding from 16.25 per cent. to approximately 8 per cent. He raised doubts about the conduct of the respondents by stating that having issued additional capital in July, 1990, and filing the return of allotment in August, 1990, they did not mention about the increase in the capital to the petitioner in any correspondence or in any proceedings. Even in 1991, when the petitioner made an application to the High Court in which she had mentioned the capital of the company as Rs. 6 lakhs, the respondents in their reply have preferred not to contradict the same. Refuting the contention of the respondents that the petitioner has already filed a suit in the Calcutta High Court in respect of the same matter, Shri Sen stated that the subject-matter of the suit and the present petition are not exactly identical. In particular, the allegations regarding letting out of certain properties made in the petition are not before the High Court at all. He further stated that the oppressive act of issue of additional shares was discovered subsequent to the filing of the petition and hence has to be taken into consideration. He submitted that the jurisdiction of the Company Law Board is an equity jurisdiction and as such all the related facts have to be taken into account. Shri Sen further undertook on behalf of the petitioner to withdraw this suit before the Calcutta High Court to enable the Company Law Board to freely decide the case. This was also subsequently done by the petitioner and allowed by the High Court on July 4, 1994. He asserted that since he is questioning the issue of additional shares as an oppressive act, the same cannot be counted in reckoning the qualification under Section 399 of the Act.
This apart, Shri Sen stated that the total number of members in Esemen is only eight and three more shareholders appeared to have come into existence in 1993 by means of transfer of insignificant lots of shares thereby increasing total number of members to 11. He cited Piyush Kanti Guha v. West Bengal Pharmaceutical and Phytochemical Development Corporation Ltd., AIR 1982 Cal 94, to state, that, where the main relief in a company petition was on the ground of oppression which is distinctly different from the relief pressed for in a civil suit, the stay of proceedings in the company petition should not be granted. He further cited in Rama-shanker Prosad v. Sindri Iron Foundry Pvt. Ltd., ME 1966 Cal 512, in appeal proceedings to state that in a company petition the reliefs are not necessarily confined to the prayers in the petition. The court has to take into account all the circumstances of the case. He stated that in that case valuation of shares was ordered since both parties could not carry on together.
9. Dealing with the case of Detinners, Shri Sen submitted that the distinguishing features of this case are that (a) maintainability has not been questioned, (b) there is no question of parallel proceedings, (c) all the shareholdings of the petitioner were wrongfully transferred by the respondent thereby denying the membership to the petitioner but restored by the High Court, (d) the further issue of shares was known already and included in the main petition itself, (e) there is no question of partnership property having been transferred to the company. Elaborating the details Shri Sen stated that the petitioner ceased to be a member due to wrongful transfer of her shareholding in 1985. Rectification was ordered by the High Court in 1991. The respondents, however, have stated in their reply that they have sent notices in this interregnum which obviously is impossible as they have removed her from membership. The respondents have resorted to fabrication of documents which reflects on their conduct. Shri Sen cited the decision of the Company Law Board in Ringtong Tea Company's case (C. P. No. 18 of 1992) (since reported in [1996] 85 Comp Cas 289 (CLB)) to state that relief can be granted even if subsequent rejoinders disclose enough particulars. He reiterated that the proceedings before the High Court under Section 155 is not a closed chapter and it cannot be ignored. He alleged mala fides with regard to the additional issue of capital as there is no need for additional funds. The balance-sheets of the company also do not show any additional capital expenditure. The reply of the respondents also does not give sufficient explanation with regard to the need for additional capital. He further stated that intervention is necessary even if no new majority is created but there is dilution of the petitioner's percentage. He cited, in this connection, the decision of the Supreme Court in Nanalal Zaver v. Bombay Life Assurance Co. Ltd. [1950] 20 Comp Cas 179 ; AIR 1950 SC 172, to establish that even in a case where the directors have discretion with regard to allotment of shares, they should not discriminate among shareholders and directors are prevented from offering shares to outsiders before offering to the shareholders.
He reinforced his arguments by citing the decisions of the English courts in Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821 and Piercy v. S. Mitts and Co. Ltd. [1920] i Ch 77. Reacting to the respondent's plea that past concluded transactions cannot be reopened and refuting the applicability of the decision in Sheih Mohan Lal Ganpairam. v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 54 Comp Cas 777 ; AIR 1965 Guj 96, Shri Sen stated that past concluded transactions may not be questioned only as regards third parties. He further cited the same judgment that even if an act is legal but if it is oppressive the same can be questioned. The question of discrimination between the two groups of shareholders has also been dealt with in Ringtong's case (C. P. No. 18 of 1992) (since reported in [1996] 85 Comp Cas 289 (CLB)) by the Company Law Board. He refuted the submission on behalf of the respondents and stated that the ratio in Bengal Luxmi Cotton Mills Lid., In re [1965] 35 Comp Cas 187 (Cal) does not apply as in the present case no suit has been filed for cancellation of the new issue of shares. Accordingly, Shri Sen prayed for orders as per prayer in the petition.
10. On behalf of the respondents, Shri Mukherjee submitted that the allegation of not serving notice of meetings is not sustainable and the petitioner in fact never wrote to the company about the non-receipt of notices. Evidence of notice having been sent at the available address was also produced by the respondents. He stated that, according to the petitioner, she has vacated her residence at No. 4, Moira Street, Calcutta, whereas there is no such communication to the company with the result the company could not have sent notices to any other address. With regard to the contention that the respondents are shown to have sent notice while the petitioner was not a member, Shri Mukherjee stated that the evidence produced is in respect of the year 1993 after the membership of the petitioner was restored. He stated that none of the allegations are based on factual evidence. Even if there is accidental omission to issue notice to a member it should not affect the validity of a meeting. As regards the charge of mismanagement, no specific instances have been pointed out except certain apprehension expressed to the effect that the respondents intend to dispose of the assets of the company. As regards non-filing of balance-sheets and annual returns they have been actually filed and evidence of filing has also been produced. He further stated that the petitioner's case is one of loss of confidence arising out of strained relationship due to family disputes which cannot be the subject matter of the petition. In this connection, he cited Srikanta Datta Narasimharaja Wadiyar v. Sri Venknteswara Real Estate. Enterprises Pvt.
Ltd. [1991] 72 Comp Cas 211 (Kar). He also stated that no proper case has been made out regarding the contention that the company has suspended business and that the net worth has been wiped out. According to "him, the substratum of the company is not gone. He stated that there has been a temporary set back in business but the company management has taken up alternative lines of business.
11. Reacting to the issue of additional shares Shri Mukherjee stated that Section 81 of the Act is not applicable to the company as it is a private company. Further, the issue was made in 1990 and the petitioner has not questioned the same for a long time. Thus, the petition suffers from laches. Reacting to the contention that the respondents have not mentioned about the increase in capital in the legal proceedings, he stated that there was no intentional suppression and this was also not an issue before the High Court. Regarding the increase in the number of shareholders he stated that the transfers were within the provisions of the articles of the company. He stated that even the petitioner's shareholding was by means of transfer only. The petitioner has not made out a case for striking down the allotment of additional shares even in the rejoinder. He cited Article 5 of the articles to state that the prohibition for transfer is only for outsiders and not for transfer within the family. The petitioners have only made a grouse that proportionate shares were not allotted to them which in any case cannot be contested in view of Article 4 which gives absolute discretion to the board of directors. The petitioner, however, has not challenged the need for funds. Still the need for funds is justified. He drew our attention to the profit and loss account for the year ended March 31, 1991, which shows certain new activities like storing and handling for which funds were required and such activities were continued in 1991-92 also.
12. Shri Mukherjee also dealt with the allegation that in Esemen, certain lump sum amounts were drawn as remuneration by the respondents which is not true and as per the balance-sheet no remuneration is shown to have been drawn by them.
13. In Detinners, whatever remuneration paid to the respondents Has been reflected in the audited balance-sheet.
14. Shri Mukherjee cited Bengal Luxmi Cotton Mills Ltd., In re [1965] 35 Comp Cas 187 (Cal) stating that when a civil court is already seized of the matter the same matter cannot be agitated within a company petition. He further cited Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Cas 777 ; AIR 1965 Guj 96, to state that even an unlawful action if it is not oppressive, the court cannot interfere. (He cited this to justify the issue of shares in 1990 which was lawful, according to him). He also referred to Mohta Bros. P. Ltd. v. Calcutta Landing and Shipping Co.
Ltd. [1970] 40 Comp Cas 119 (Cal) to state that vague and uncertain allegations cannot be considered by the court. Referring to Ringtong's case (C. P. No. 18 of 1992 (CLB) (since reported in [1996] 85 Comp Cas 289 (CLB)), Shri Mukherjee stated that the orders were linked with the High Court matter. Presently the property dispute is pending before the High Court and as such the same ratio needs to be adopted. The petitioner has taken two different stands one before the High Court and another before the Company Law Board in respect of the same subject-matter.
15. Reacting to the contention that the petitioner's proportionate claim in the assets of the company has been reduced by further issue of shares, Shri Mukherjee cited in Badta F.,Guzdar v. OTU955] 25 Comp Cas 1 ; [1955] 27ITR 1 (SC) to state that a shareholder has no interest in the assets of the company. According to this judgment, a shareholder has got no right in the property of the company in a running business.
Shri Mukherjee concluded that both the petitions, therefore, deserve to be dismissed.
16. From the pleadings and arguments, the following issues emerged for our consideration : 2. Whether we should stay our proceedings in Esemen because of the pendency of the suit instituted by the petitioners in the Calcutta High Court with regard to family properties ; 3. Whether the petitioner has established a case of oppression and mismanagement ; 17. The maintainability of the petition in Esemen has been questioned, consequent to the issue of additional 5,000 shares by the company in 1990 and the transfer of some shares by some of the respondents by which the total number of members has been increased to 11. It is a fact that the petitioners were not aware of these two developments one in 1990 and the other in 1993. As regards the issue of shares, it has become the subject-matter of the petition by means of a subsequent application taken out by the petitioner and is being considered as one of the acts of oppression. In this background, in our opinion, it is not justified to disqualify the petitioner under Section 399. Apart from this, the respondents have not been able to establish that the total number of shareholders was 11, much before the filing of the petition. The transfer is of a small quantity of 30 shares which gives the clear indication of the intention of the respondents to increase the total number in order to disqualify the petitioner under Section 399 of the Companies Act, 1956. In view of this, we hold that the petition as regards Esemen is maintainable.
17. As regards the staying or dismissing the petition on the ground of the suit proceedings in the High Court, and the non-disclosures, we have taken cognizance of the undertaking given by Shri P.C. Sen that the petitioner will withdraw the suit as soon as the courts reopen. We also note the sincerity of the petitioner in unconditionally withdrawing the suit at the earliest opportunity. We are of the opinion that the decision in Bengal Luxmi Cotton Mills Ltd., In re [1965] 35 Comp Cas 187 (Cal) is not strictly applicable in the present case as the petitioner has not gone for an exactly alternative remedy because the present petition raises certain additional issues with regard to reducing the percentage holding of the petitioner which is not an issue in the suit. Moreover, the present petition is the enforcement of a corporate right whereas the suit relates to private properties.
Further, the petitioner has already withdrawn the suit thereby depriving herself of the alternative remedy. Thus, the suit having been permitted to be withdrawn though prospectively, the net result is the absence of the alternative remedy and as such there is no ground for dismissing or staying the proceedings before us. There is no possibility of conflicting decisions which was the apprehension of the respondents. The charge of the respondents that the petitioner has not come with clean hands due to non-disclosure about the suit proceedings cannot be sustained as the cause of action and the issues are substantially different in the suit and in the present proceedings. As such, there is no bar to our proceeding in this case. The petition does not suffer from delay and laches as alleged by the respondents. The petitioner had to first establish her right as a member for which there was a prolonged litigation from 1987 to 1993. She has now come up under sections 397 and 398 of the Companies Act having firmed up her position as a member.
18. The acts of oppression alleged by the petitioner in the case of both the companies relate to : (a) Non-issue of notice of general body meeting, non-maintenance of minute books of general body and board meetings, non-preparation of balance-sheets, and annual returns and non-filing of the same with the Registrar of Companies since 1985.
(b) Continued harassment of the petitioner after wrongfully transferring her shares in the companies by misusing a power of attorney granted to respondent No. 2 some years back.
(c) Issue of additional shares to the respondents and their relatives and transfer of small quantities of shares in Esemen to increase the number of members by both of which the petitioners' percentage holding and eligibility having been diluted.
19. As regards the allegations contained in (a) above, these have not been satisfactorily established. On the other hand, the respondents have produced sufficient proof of the filing of annual returns and balance-sheet after 1985, The respondents have also been able to produce proof of despatch of notices of general body meetings wherever applicable. As rightly rebutted by the respondents, the petitioner has not been able to establish that she had made a complaint of non-receipt of notices nor did she ask for copies of the balance-sheet at any time in the past though she was a member of Esemen all along.
20. As regards minutes, the allegation of non-maintenance of meetings could not be established. A shareholder has no access to the board minutes but can ask for copies of the minutes of the general body. It appears that the petitioner had not asked for copies of the minutes of the general body at any time. The allegation of non-maintenance of minutes, therefore, is riot well founded. In view of these, we are not able to uphold the charge of oppression based on the above allegations.
21. As regards the allegation of continued harassment by transferring the shares of the petitioner against her will, Shri S. B. Mukherjee was of the view that this is a past concluded transaction and as such should not be looked into by us. He has cited Shelh Mohanlal Ganpat Ram v. Shri Sayajee Jubilee Cotton and Jute Mills Co. Ltd. [1964] 34 Comp Gas 777 ; AIR 1965 Guj 96. In fact the judgment goes more in favour of the petitioner. In para. 25 of the judgment, it is, stated that sections 397 and 398 being designed to suppress an acknowledged mischief, they should receive liberal interpretation and the court should give such construction as will advance the remedy. The court, however, has stated that the principle of interpretation cannot be so applied to set aside or interfere with past and concluded transactions between a company and third party. As such, the powers available under Section 402 of the Companies Act are not curtailed and the Company Law Board is not precluded from going into the details regarding the wrongful transfer of the shares belonging to the petitioner.
22. We have gone through the original decisions of the Calcutta High Court under Section 155, the decisions of the Appellate Bench, the subsequent decision on application for delivery of share certificate as well as the latest Division Bench order with regard to the issue of the share certificates. The various judgments have clearly established that under the guise of a family settlement, the petitioner's shares in Esemen and Detinners were wrongly transferred to the son of respondent No. 2. The date of the transfer deed, the date of registration, the proceedings of the board meeting for transfer were all considered to establish that the transfer was wrongfully done by exercising a power of attorney executed by the petitioner nearly ten years back and the transfer having been done when the petitioner was personally present in India. Though it is lawful to join issues in litigation the conduct of the respondents in continuing the agony even after the appellate court ordered rectification of the members' register in favour of the petitioner. The orders of the High Court are enough for us to come to this conclusion.
23. As regards the third ground, on inspection of records at the office of the Registrar of Companies the petitioner became aware of the issue of additional 1,000 shares in Detinners. However, she was not aware of the additional issue in Esemen since in the entire litigations and even before us this fact had not come out from the respondents. The petitioner became aware of the additional share issue in Esemen only from the appeal filed by the respondents, against our interim orders.
Even the increase in the number of members in Esemen from 8 to 11 was known to the petitioner only from the replies filed by the respondents.
The petitioner, therefore, was right in claiming that the respondents should not be permitted to take advantage of their own wrong and she should not be disqualified on this ground. We have, therefore, upheld the maintainability of the petition by ignoring the additional issue of shares and the transfer of shares in Esemen. We have now to consider the justifiability of the additional issue of shares both in Esemen and in Detinners. The respondents have justified the additional issue on the ground of working capital requirements and for the purpose of taking up new activity. It should be kept in mind that the additional issues were made in the year 1990. Additional capital may be required in respect of any capital expenditure or for the working capital requirements of the company. We find from the balance-sheets of Esemen that no material additions have been made in the fixed assets during the year 1990, 1991 or 1992. We also find that there had been a decline in the activity as reflected in the sales figures and the constant inventory figures in the annual accounts. We find on the contrary, the outstandings from another company under the same management had increased which means the funds were diverted. Similarly, in the case of Detinners, there had been no addition to the fixed assets during these years and there had been no manufacturing activity in these years. Consequently, the introduction of additional capital is not well justified. The timing of the additional share issue is also relevant.
The petitioner obtained a favourable decision in June, 1990, from the High Court and the additional share issue has come immediately thereafter.
24. The learned advocate for the petitioner has rightly drawn our attention to the observation of the Privy Council in Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821 (PC). The observation with regard to the appropriateness of a court looking into the raising of finance by the management and enquiring into the reasons behind the raising of finance has been dealt with in that decision. The relevant passage is set out below (headnote) : "Per curiam. A matter such as the raising of finance is one of management, within the responsibility of the directors. It would be wrong for a court to question the correctness of the management's decision if bona fide arrived at. But, when a dispute arises whether the directors of a company made a particular decision for one purpose or for another, or whether there being more than one purpose, one or another purpose was the substantial or primary purpose, the court is entitled to look at the situation objectively in order to estimate how critical or pressing or substantial an alleged requirement may have been. If it finds that a particular requirement, though real, was not urgent or critical at the relevant time, it may have reasons to doubt or discount the assertions of individuals that they acted solely in order to deal with the matter." 25. The above observation in 1918 has been preceded by a more appropriate observation by the Chancery Division in Piercy v. S. Mills and Co. Ltd. [1920] 1 Ch 77 which better fits into the facts of the present case. The observation is reproduced below (headnote) : "A power to issue shares in a limited company given to directors for the purpose of enabling them to raise capital when required for the purpose of the company is a fiduciary power to be exercised by them bona fide for the general advantage of the company, and when the company is in no need of further capital, directors are not entitled to use their power of issuing shares merely for the purpose of maintaining their control, or the control of themselves and their friends, over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders." 26. These observations are good enough for us to get into the details and bona fides of the additional issue of capital.
27. The respondents have asserted their discretion available to the directors as provided in the articles for the issue of the additional shares. In this context, the role of the directors as the custodians of the interests of the shareholders is required to be kept in mind. The Supreme Court in Nanalal Zaver v. Bombay Life Assurance. Co, Ltd, [1950] 20 Comp Cas 179 ; AIR 1950 SC 172, has clearly laid down the rule that the directors of a company are in a fiduciary position vis-a-vis the company and must exercise their power for the benefit of the company. There exists a relationship of a trustee and cestuique trust as between the directors and the company. If this trust is violated the action of the directors is liable to intervention by the court.
28. This is all the more important in a private company since the issue of additional shares in the case of public companies is already regulated by Section 81. It is not that law has given absolute liberty to the directors of private companies to deal with their shareholders in any manner they wish. With regard to issue of additional shares, the responsibility of the directors towards the members becomes all the more onerous in a private company. This is the reason why courts have applied the quasi partnership theory in such cases in the past and have granted remedy if the relationship is sought to be disturbed. We should, therefore, look into the facts of this case keeping the above in view.
29. The additional issue of shares in Esemen has reduced the petitioner's shareholding from 16.25 per cent. to 8.8 per cent. and in Detinner from 23.2 per cent. to 19.33 per cent. The petitioner had been agitating in the High Court for her share of the ancestral properties which now form part of the assets of Esemen. From the balance-sheets of the two companies, it is evident that the companies have valuable properties. The business of the two companies also appears to be dwindling. There has also been retrenchment of workmen as is evident from the balance-sheet of Detinners. Under the circumstances, the apprehension of the petitioner about her share in the properties being diluted consequent to the additional issue of shares is not without substance. Normally a shareholder acquires a right to participate in the profits of a company, but when the business of the company is at a standstill and the worth of the company is not relatable to its operations but to the possession of valuable assets it has to be viewed accordingly. The observation of the Supreme Court in Bacha F. Guzdar v.CIT [1955] 25 Comp Cas 1 ; AIR 1955 SC 74, cited by the respondents that the shareholder does not become entitled to a share in the assets of the company only is not relevant in the present context as that observation related to the tax implications on the value of a share. On the other hand valuation of shares based on net worth which in turn is based on the value of the assets is accepted as a principle of share valuation even in respect of going concerns. The dilution of the petitioner's percentage naturally dilutes her claim on the net worth of the company. In view of our finding that the additional issue of shares is not bona fide in the interest of the company and in view of the issue having been found to be in violation of the fiduciary responsibility of the directors, the additional share issue does constitute an act of oppression.
30. The petitioner has also alleged mismanagement against the respondents on the ground of drawing lump sum amount as remuneration and discontinuing the business of the company. In addition there are charges of letting put of properties of the companies by respondents at cheaper rates to their own companies or relations. The respondents, however, have been able to establish that no remuneration has been drawn by them in Esemen and in case of Detinners whatever remuneration drawn has been disclosed in the balance-sheet. We, therefore, find no ground or basis for this allegation. As regards discontinuation of business in Detinners the respondents have justified the same on the ground that the raw material is not available. At the same time, from the year 1992-93 Detinners have started trading activity in Bombay which is also reflected in the balance-sheet of the company.
31. As regards Esemen, though no sales was made in 1991-92, it appears that the company has taken up some new activity of storing and handling, as such, the charge of discontinuing business as a ground of mismanagement cannot be sustained.
32. As regards the properties, the petitioners have alleged that the respondents have let out companies' properties to their own relations as well as closely held companies at cheaper rents. The petitioner had been able to give certain details of properties let out. The petitioners have also in their rejoinder challenged the respondent to provide the list of the tenants in 1970 and of today. The respondents, however, have not been able to meet this question and have merely rebutted the allegations without providing any details.
33. In the case of Detinners, the properties of the company include a piece of lease hold factory land at Bombay, 4.56 acres of free hold land at Mahesh Tolla Rapur in West Bengal besides certain tenanted properties. In the case of Esemen, the properties of the company include premises in Waterloo St., Calcutta, lease hold premises in Basant Lal Saha Road and a shop on monthly tenancy in a prime locality in Calcutta. In the case of all the premises, the petitioner had given at least some details of the parties to whom the premises were let out and the amount of rental being charged in some of the cases. The corresponding market rent has also been set out to show as to how the actual rent charged is much less. The petitioner has also been able to establish the relationship between the respondents and some of the tenants to indicate the personal interests of the directors. Since the petitioners are denied access to the records of the company they cannot be expected to provide full details of the allegations. It is for the respondents to categorically establish that whatever facts are set out by the petitioners are not true and should have brought out the correct position. Instead, the respondents in their replies in both the companies cases have merely denied the allegations. As regards Esemen, the respondents have merely stated that the allegation with regard to properties were the same as contained in the petitioner's suit before the High Court, and these allegations have been duly dealt with in the written statement therein which was annexed to the reply of the respondents. We went through the replies of the respondents in the suit proceedings and we find that it also contained mere denials as regards use of the properties by the respondents without any details. Of course, the allegation that respondents are trying to dispose of properties is a mere apprehension but the misuse of properties and letting out of properties by respondents to their own parties is based on facts which could not be rebutted by the respondents. We have, therefore, to conclude that the allegations of mismanagement as regards letting out of properties stand unrefuted.
34. While dealing with the question of relief, the learned advocate for the petitioners cited the Supreme Court decision in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; AIR 1981 SC 1299, and stated that in that case even though the company petition failed and a case of oppression was not made out the court still did substantial justice by setting aside the wrongful allotment of shares. In the present case we are convinced that the petitioner has been able to conclusively establish oppression and mismanagement by the respondents and at least one of the allegations of mismanagement has also gone unrebuted. In the circumstances, it is appropriate to grant reliefs to the petitioner. While granting the reliefs we have also to keep in view that the petitioner is a minority shareholder. We are also convinced that the petitioner will not able to carry on with the respondents as a member of the company. Since this is a family concern it would not be advisable to introduce any outsider like a special officer or administrator as prayed for by the petitioner. We are also alive to the fact that though the additional allotment of shares is oppression, the same were issued only to the family members. Keeping these in view, we direct that the fair value of the shares of the petitioner in both the companies be determined by taking the balance-sheet of the two companies as on March 31, 1993. The valuation should be done without taking the effect of the additional shares issued by the two companies in 1990. The valuation shall be carried out within two months from the date of this order by P.K. Mitra and Co., chartered accountants, 18, R.N. Mukherjee Road, Calcutta, the fee for which shall be paid by the company. The respondents shall extend full co-operation to the valuers in their work and shall arrange to purchase the shares of the petitioner at this value within one month of the submission of the valuation report by the valuers. The price shall be paid by demand draft drawn in the petitioner's name which shall be deposited with the advocate for the petitioner who shall arrange to surrender whatever share certificates which are in the possession of the petitioner and executing necessary documents for other shares for which share certificate is not available before handing over the demand draft to the petitioner. Besides this relief we do not consider it necessary to provide any other relief as prayed for by the petitioner. In case the shares are not purchased as ordered above the petitioner is at liberty to approach this Bench with an application for any further reliefs. All interim orders stand vacated.
Let a copy of the order be sent to P.K. Mitra and Company valuers. The petition is disposed of on the above terms. There is no order as to costs.