Judgment:
1. The petitioner holding 34 per cent of the paid-up share capital in Soverign Dairy Industries Ltd. ('the company') has filed this petition under section 397/398 of the Companies Act, 1956 ('the Act') alleging various acts of oppression in the affairs of the company and seeking, inter alia, the following reliefs :-- (a) to appoint an administrator in supersession of the board of directors of the company; (d) to declare that the special resolution passed at the general meeting held on 25-11-1998 issuing right shares is illegal and void; (e) to declare that the issue of share capital by the company between 4-12-1998 and 26-12-1998 is null and void; and (f) to declare that respondents 2 to 10 have no authority to alienate or deal with the company's properties.
2. The acts of oppression agitated in the petition relate to the following : (i) illegal allotment of the impugned shares on 20-4-1979 in favour of respondents 3, 4 and two other members.
(ii) alleged acts of oppression of the second respondent in respect of the management and affairs of the company in a manner prejudicial to the interests of the petitioner as well as the company; (iii) alleged misappropriation of the funds and properties of the company; 3. Shri C.A. Sundaram, senior counsel for the petitioner, while initiating arguments submitted that the company was incorporated in July, 1974 with the main object of carrying on all kinds of dairying business. However, the company ceased to carry on any business or commercial activity since the year 1979. The company has neither filed the balance sheets nor annual reports with the Registrar of Companies, Tamil Nadu and did not conduct annual general meeting for the past several years. The company had illegally allotted 30,250 shares in favour of the respondents 3,4 and other two members in the year 1979 by virtue of which the third respondent became the majority shareholder of the company with 39 per cent of the share capital of the company. The company became unviable and bankrupt on account of the mismanagement of the second respondent by the year 1979. The whole of the plant and machinery of the company are found missing since the year 1985. The company became indebted to Bank of Madura Ltd. to an extent of Rs. 1.10 crores. The second respondent had disposed of the plant and machinery worth about Rs. 9 lakhs and misappropriated the funds of the company.
The godown sheds belonging to the company were leased out to third parties, but the rentals were misappropriated by the second and third respondents. The second respondent had convened an extraordinary general meeting on 31-3-1986 seeking authorisation to sell 45 acres of land belonging to the company in order to repay the dues of the Bank of Madura upon which, the petitioner obtained an order of stay in the civil court which was subsequently dismissed as not pressed. At the extraordinary general meeting held on 27-3-1987, the second respondent claimed to own 10,000 shares and his wife 50,000 shares. The petitioner had challenged these allotments in CP No. 49 of 1987 before the High Court of Madras as acts of oppression and mismanagement under the provisions of section 397/ 398. The allotments were ultimately set aside by the High Court and the second respondent was removed from directorship of the company for not having held qualifying shares as per the articles of association of the company. The second respondent leased out seven acres of land belonging to the company in favour of the ninth respondent without a registered lease deed for a period of 84 years for a paltry sum of Rs. 6,500. The lease amount is being misappropriated by the second respondent. The ninth respondent in collusion with the second respondent is in illegal occupation of another 2.5 acres of land of the company. The second respondent has been encumbering the landed property and enriched himself. The second respondent sold 5.3 acres of the land of the company to the ninth respondent and the sale proceeds were never brought into the books of account of the company. The company allowed third parties to excavate large junks of earth from the land belonging to the company for manufacturing bricks and the benefits derived from such excavation were not accounted in the books of the company. The second respondent entered into various agreements in relation to the land of the company with a number of parties and made good profits which were misappropriated by him. The second respondent entered into development agreement with builders and took huge advances which were misappropriated by him. The second respondent created second charge on the assets of the company and availed credit facilities which remained unpaid. Shri Sundaram drew our attention to the various liabilities aggregating to Rs. 42,19,720 which, according to him, do not reflect the correct picture. According to the petitioner, the company owes much larger amount to several persons. On account of the alienation of the landed properties and misappropriation of funds of the company by the second respondent, the High Court by its order dated 20-3-1998 in C.P.No. 49 of 1987 had superseded the board of directors of the company and appointed Advocate Receiver to conduct an extraordinary general body meeting in order to elect a fresh board of directors and to hand over charge of the company to the new board of directors. Accordingly, an extraordinary general meeting was held on 20-6-1998 and the second respondent and his group were elected directors of the company. The new board of directors were elected in complete contravention of the spirit of the order dated 20-3-1998 of the High Court, especially when the second respondent who was disqualified by the High Court was again elected at the extraordinary general meeting held on 20-6-1998. The second respondent and his group were brought on the board of directors of the company to protect the illegal transactions of lease and sale entered into by the second respondent with third parties. At the extraordinary general meeting held on 25-11-1998, a resolution was passed for raising the capital of the company, in spite of the protest made by the petitioner. Subsequently, the petitioner had received a letter of offer from the company offering 60,000 shares out of 1,77,345 shares on right basis for raising the capital of the company. According to the petitioner, there was no necessity to increase the share capital and allot shares on right basis, more so, when the company is not running any business. The allotment is meant to dilute the petitioner's shareholding from the 34 per cent to merely 8 per cent. The board of directors had acted with oblique motive to the detriment of the company. The directors exercised the powers to issue further shares not for the benefit of the company, but solely for the purpose of consolidating and improving the voting power to the exclusion of the existing majority shareholders. In the circumstances, the petitioner has sought for the reliefs made in the petition.
4. Shri A.L. Somayajee, the counsel appearing for the respondents while refuting the allegations made by the petitioner has submitted that the petitioner has made allegations relating to the conduct of the affairs of the company during the period 1979--1997. The petitioner had already filed CP No. 49 of 1987 before the High Court of Madras. The very same allegations are made in the present petition. The High Court having considered all the said allegations passed orders regulating the affairs of the company. The present petition is barred on the principles of res judicata. Shri Somayajee pointed out that the second respondent was disqualified to be a director by the High Court on the sole ground that he did no possess the qualifying shares as on the date of his appointment as director. The High Court did not disqualify the second respondent from being elected director in accordance with the Act for ever. Accordingly, the second respondent after having acquired the qualifying shares was duly elected as a director in the extraordinary general meeting held on 20-6-1998 in the presence of Advocate Receiver appointed by the High Court. Thus the election of Directors in the meeting held on 20-6-1998 was approved by the High Court. Anyway, he resigned as a director in April, 2000. The petitioner has sought the same reliefs already claimed in the company petition before the High Court. The only new act of oppression made in the present petition relates to the increase of capital and the allotment of shares on right basis. Shri Somayajee has reiterated that the petitioner cannot complain about the increase of capital as the rightful entitlement of the petitioner was offered to him. The increase of capital was required by the company and supported by decision of the board of directors. Moreover, it is an isolated act, which cannot be sustained under section 397/398. He further pointed out that the petitioner has already filed a petition before the High Court for winding up of the company. Thus, the petitioner has taken two inconsistent stands, one filing of winding up petition on just and equitable ground and the other complaining of acts of oppression and mismanagement before the CLB. The respondents are willing to offer to the petitioner 14,000 shares more than his rights entitlement, which may be subscribed to by the petitioner. The respondents denied any misappropriation of funds of the company. The properties were sold in order to liquidate the liabilities of the company with Bank of Madura Ltd. and not for personal benefit of the respondents. The second respondent has been collecting the lease amount from the lessees and accounted in the books of account of the company. The petitioner cannot challenge the allotment of shares made in favour of the third respondent as early as in 1979, especially when the petitioner did not agitate this contentious issue in the previous company petition filed before the High Court of Madras.
5. According to the respondent No. 9, the landed property of the company was taken on lease after mutual discussions among the parties, The landed property is a barren land and the lease amount of Rs. 6,500 is the reasonable amount arrived at between the parties. The lease amount has been fixed to take into account the situation of the land.
The land is in the interior place and unmotorable. The ninth respondent had to spend substantial amount to reclaim the land and lay down the roads. The ninth respondent has incurred all these expenses and after taking into account these expenses the parties have fixed the lease amount at Rs. 6,500. The petitioner cannot challenge the lease after a delay of 13 years. The ninth respondent had purchased four acres of land and the entire sale consideration has been credited to the loan account of the company with Bank of Madura in discharge of the liability.
6. We have considered the pleadings and arguments of senior counsel for the petitioner as well as respondents. The main acts of oppression and mismanagement relate to non-filing of statutory returns; non-finalization of the accounts of the company; misuse of the properties and misappropriation of funds of the company; unlawful alienation of the properties of the company and allotment of shares in the year 1979 and also in November, 1998 in favour of the third respondent. A close scrutiny of the petition in CP No. 49 of 1987 filed by the petitioner before the High Court of Madras reveals that all these issues, Save the allotment of shares in 1998, have been raised and considered by the High Court and appropriate orders passed. The petitioners have raised the very same issues afresh in the present petition. The High Court, in our view, having gone into the various acts of oppression and mismanagement alleged by the petitioner has passed orders in which case the petitioner is barred from raising the very same issues in the present company petition before the CLB. We are not, therefore, inclined to go into these acts of oppression and mismanagement alleged by the petitioner in the affairs of the company related prior to November, 1998.
7. In relation to events after the order of the High Court, it is on record that a new set of directors was elected in an EOGM held on 20-6-1998 pursuant to the directions given by the Madras High Court. Of the four directors elected, except the second respondent, the other three were new directors who did not hold any position in the company before that day. Therefore, the prayer relating to appointing an administrator in place of board of directors docs not arise, especially when the second respondent has also resigned from the directorship in April, 2000. It is on record that the petitioner himself in his notice for requisitioning an EOGM included an item relating to the financial position of the company. In the same meeting, notice issued by another shareholder in regard to increasing the paid-up capital of the company was also considered. From the minutes of the EOGM held on 25-11-1998, it is seen that in spite of the opposition of the petitioner, the item relating to increasing the paid-up capital of the company was approved by the shareholders. The main contention of the petitioner in regard to the increase in the paid-up capital is that the company was not in need of funds and increase in the capita! proposed was only with a view to reduce the percentage holding of the petitioner. It is an established position of law that if the share capital is increased either with a view to reduce the majority into minority or with a view to create a new majority then such an increase could be considered as an act of oppression. It is also an established position of law that if the increase in the paid-up capital of the company arising on account of need for funds even it' it incidentally creates a new majority, then such an act cannot be considered to be an act of oppression. In the present case, the new set of board of directors in their wisdom taking into consideration the financial needs of the company decided to issue further shares that too on a right basis. The issue of shares on a right basis could never create a new majority. According to the petitioner the company is not in need of funds and, therefore, the issue of further shares is mala fide. We arc not in a position to support this stand. From the audited balance sheets filed before us for the years 1987 to 1999 (the audit of which had not been carried out for all these years which was also a point of complaint of the petitioner in the earlier proceedings before the High Court), we find that other than the lease rental, the company was not having any income while the carried over loss at the end of 31-3-1999 was of the order of nearly Rs. 1.3 crores. Further, we also find that the company owes more than Rs. 45 lakhs by way of secured as well as unsecured loans besides a huge liability in regard to interest to Bank of Madura which has filed an execution petition before the Debt Recovery Tribunal claiming over a sum of Rs. 4.65 crores. We also note from the notice for the AGM convened on 24-6-2000 that the company had proposed to engage itself in marketing dairy products. Thus, without raising further funds, the company would not be able to survive leave alone revive itself.
Therefore, the action of the board of directors as approved by the general body to raise fresh capital is found to be bona fide and in the interest of the company. Therefore, taking into consideration that the share capital is being raised for the benefit of the company and that the petitioner had been offered shares on a right basis, we do not propose to interfere with the decision of the general body or the Board in deciding to issue further shares. Since, we have kept the right offer to the petitioner pending till the disposal of this petition, the petitioner is at liberty to apply for his right entitlement, if need be, even for additional shares as offered by the company of about 14,000 shares by 15-2-2001.
8. The petitioner has also sought a direction to award damages for the wrongful acts of the second respondent without any particulars of the alleged improper activities of the second respondent after the order of Madras High Court. If this relates to the acts of the second respondent before the order of the Madras High Court then it is relevant to refer to the judgment of the Madras High Court, wherein the High Court itself has come to the conclusion (at para 32) that the petitioner had not established that there has been misappropriation of funds belonging to the company. Therefore, no directions are sought for in this regard from us. Another prayer of the petitioner is that we should declare that the respondents 2 to 10 have no authority of to alienate or deal with the company's properties. The petitioner has not justified with proper material to seek this prayer against the new board of directors and as such the same cannot be considered.