1. The petitioner holding in excess of one-tenth of the issued share capital of M/s. Pondy Metal & Rolling Mills Private Limited ("the Company") and aggrieved on account of certain acts of oppression in the affairs of the Company namely, (a) illegal increase of the authorised share capital of the Company from Rs. 125 lakhs to Rs. 225 lakhs; (b) illegal allotment of ten lakhs equity shares of Rs. 10/- each in favour of the fourth respondent; (c) non-delivery of share certificates in respect of holdings of the petitioner; (d) non-sending of notices for the general meetings including annual general meetings; and (e) non-sending of quarterly results and annual accounts since March 2000, have invoked the provisions of Section 397 of the Companies Act, 1956 ("the Act") seeking the following reliefs: (i) to reconstitute the board of directors of the Company with two nominees of the petitioner and one nominee of the second respondent as directors of the Company; (ii) to appoint the nominee of the petitioner as Chairman of the Board of Directors and general meetings of the Company; (iii) to declare that the increase of authorised capital from Rs. 125 lakhs to Rs. 225 lakhs is null and void; (iv) to declare that the allotment of ten lakhs equity shares of Rs. 10/- each made in favour of the fourth respondent is null and void and (v) to direct the Company to issue share certificates in respect of ten lakhs equity shares held by the petitioner; (vi) to direct the Company to give access in favour of the petitioner for inspection of the books of account and statutory records with effect from 01.04.2000; (vii) to direct the Company by way of injunction not to sell, transfer, alienate or dispose of the assets and properties of the Company; and (viii) to appoint a Commissioner to search, seize and authenticate the statutory records of the Company.
2. Shri H.L. Tiku, Senior Counsel ably supported by Shri U.K.Chaudhary, Senior Counsel while initiating the arguments submitted: o The Company was incorporated as a private company in October 1991 with, the object of establishing a rolling mill at Pondicherry. The authorised share capital of the Company is Rs. 125 lakhs and its paid up share capital is Rs.l10.03 lakhs as borne out by the annual return made upto 30.09.2000. The petitioner company a Mauritius based foreign body corporate holds ten lakhs equity shares of Rs.l0/- each, out of the subscribed and paid up capital of the Company amounting to Rs. 1, 10,00,300 consisting of 1,00,030 shares of Rs. 10/- which constitute 90.91% of the subscribed and paid up capital of the Company. While the petitioner funded the Company by way of share capital, it was mutually agreed between the petitioner and the second respondent as under: o The petitioner will ever hold 90.91% of the share capital of the Company.
o The second respondent will initially look after the day to day management of the Company and the petitioner will appoint its nominees on the board of the Company as and when considered necessary.
o The second respondent will forward quarterly results of the operations of the Company to the petitioner.
o There will be no change in the shareholding pattern of the Company without the concurrence of the petitioner.
o The petitioner gave full liberty to the second respondent to carry on the day to day affairs of the Company, trusted him and never interfered in its working. However, the second respondent without the knowledge and concurrence of the petitioner and without any notice and in breach of the trust reposed on him illegally held an extra ordinary general meeting to increase the authorised share capital from Rs. 125 lakhs to Rs. 225 lakhs and thereafter on 10.05.2005 issued the entire increased capital by allotment of ten lakhs equity shares in favour of the fourth respondent, an outsider thereby reducing the majority shareholding of the petitioner from 90.91% to 47.6%, as a minority shareholder and acquired control over the affairs of the Company, which constitute serious acts of oppression in the affairs of the Company. There is no material to show as to when the fourth respondent brought in funds towards the allotment of impugned shares. The second respondent holding barely 9% of the share capital cannot be given exclusive control of the Company. There was absolutely no justification to issue further shares in exclusion of the petitioner which is a mala-fide exercise of power, without following the legal procedures. The petitioner has invested to the tune of 90.91% of shares and any necessity for additional funds has to be determined only by the petitioner and no resolution could be passed for increase of the authorised capital in its absence. Whereas the increase of authorised capital and the issue of increased capital have been decided by the members constituting less than 10% of shareholding the Company, without involvement of the petitioner and without any justification. Thus, the respondents are guilty of fraudulent, wrongful burdensome and harsh acts against the petitioner, which would justify the winding up of the Company on just and equitable grounds. However, winding up of the Company would unfairly prejudice the petitioner.
o The Company failed to issue share certificates in respect of the holdings held by the. petitioner, in spite of repeated demands made in his behalf. The respondents have not chosen to send notices of annual general meeting and annual accounts ever since March 2000, thereby keeping the petitioner in darkness in relation to the affairs of the Company.
o While the petitioner held ten lakhs shares, the second respondent was holding one lakh shares in the Company. This shareholding pattern remained without any change till 10.05.2005, when the impugned shares were allotted to the fourth respondent. The notice dated 15.03.2005, convening the extra ordinary general meeting on 18.04.2005 for the purpose of increasing the authorised capital from Rs. 125 lakhs to R.s.225 lakhs was purportedly sent on 21.03.2005 to the petitioner by certificate of posting, which would in the normal course take at least three weeks to reach the petitioner located in Mauritius. The petitioner, applying the rule of probability, will not and cannot keep quite, in the event of receipt of the notice of extra ordinary general meeting, proposing the increase in the authorised share capital of the Company. The respondents failed to produce the despatch register or the books of account to show that any notice has been sent under certificate of posting to the petitioner.
o The explanatory statement appended to the notice of the extra ordinary general meeting shows that the increase in the share capital became necessary on account of the losses incurred by the Company and fresh credit facilities secured from the bank. Whereas, the board of directors at the board meeting held on 10.05.2005 approved the increase in the capital due to the raise in prices of steel and the pressure from the bank to enhance the promoter contribution towards equity. Form No. 2 filed with the Registrar of Companies would indicate that ten lakhs shares of Rs. 10/- each have been allotted on 10.05.2005 for cash consideration in favour of the fourth respondent. However, the Company invested the entire one crore of rupees on the very same day namely, 10.05.2005 in Hotel Queen Road (P) Limited, under the management of the second respondent, thereby misutilising the Company's funds to the entire prejudice its shareholders. Thus, the investment has not been for the benefit of the Company. If the increase of authorised capital is to be struck down for various irregularities the allotment of shares must also be set aside.
o The Reserve Bank of India permission in terms of its communication dated 13.08.1996 for issue of shares to the overseas corporate body shall be valid so long as at least 60% of its ownership is held by non-resident individuals of Indian nationality/origin and in case the ownership held by such persons falls below the level of 60%, the same shall be intimated to the RBI immediately. The RBI circular was not within the knowledge of the petitioner, as the Company never sent any copy of the RBI circular for necessary compliance by the petitioner. The Company has been silent all these years till 2005, without calling for, from the petitioner, any details regarding its ownership and cannot take any exception under the RBI circular dated 13.08.1996 at this belated stage. The Company has produced only a part of the RBI Circular dated 08.12.2003, to suit its convenience.
This circular prohibits only fresh investments but not the investments already made by overseas corporate bodies. By virtue of the RBI guidelines, the automatic permission granted in favour of the overseas corporate bodies under various Foreign Exchange Management Regulations has been withdrawn. However, the RBI is according fresh permission for issue of equity shares to overseas corporate bodies on a case-to-case basis and therefore the petitioner empowered, by virtue of the RBI guidelines, to make investments in the Company with prior sanction of the RBI. The Company ought to have obtained the requisite permission before the impugned allotment of shares made in favour of the fourth respondent. The petitioner continues to be a shareholder and unless the RBI declares that it is not eligible for any shares, the petitioner cannot be deprived of its right to make fresh investment in the Company. A shareholder has got every right to take part in the management of the Company.
o The minutes of the board meeting held on 15.03.2005, copy of which has been produced alongwith reply of the respondents would reveal that the minutes are neither dated nor signed by Chairman of the meeting, thereby not satisfying the requirements of Section 193 of the Act. At the same time, the minutes of the very same board meeting obtained from the Company and produced by the petitioner would show that the minutes are signed by the Chairman but, however not dated. While the minutes produced by the respondents further disclose that "Sri R.P. Mittal took the chair of the meeting", the minutes obtained by the petitioner from the Company would indicate that Sri R.P. Mittal was elected to the chair of the meeting. The minutes of the board meeting produced by the respondents specifically authorises R.P. Mittal director of the Company to issue notice of the extra ordinary general meeting for the purpose of increase in the authorised share capital from Rs. 125 lakhs to Rs. 225 lakhs. However, there is no such authorisation in the minutes of the board meeting obtained from the Company and produced by the petitioner empowering R.P. Mittal to issue notice of the extra ordinary general meeting. Thus, the recitals of the minutes of the board meeting held on 15.03.2005 are not uniformly recorded by the Company and they do not confirm to the provisions of Section 193 of the Act. Furthermore, the resolution of the board of directors only approves the increase of authorised share capital from Rs. 125 lakhs to Rs. 225 lakhs, but the board has not resolved either to convene the extra ordinary general meeting for raising the share capital or to issue any notice for the extra ordinary general meeting and therefore the extra ordinary general meeting was convened without any authority by the respondents. The board of directors neither approved the notice of extra ordinary general meeting, which is mandatory requirement under the provisions of the Act.
o The Company has been raided by the Excise officials, which confirms the mismanagement in the affairs of the Company. The petitioner is rather concerned that the Company should maintain status quo in regard to all its assets as on the date of company petition and that the second respondent must clear the liabilities incurred after the company petition.
o The increase in the authorised capital as well as the allotment of shares came to surface pursuant to the inspection of documents undertaken during May 2006 by the petitioner, upon which necessary steps have been taken for challenging the various acts of omission and commission on the part of the respondents. The respondents have played fraud on the majority of the shareholders. Section 397 empowers any members to invoke the jurisdiction of 397 and therefore there is no bar for the petitioner company, a majority shareholder to approach the CLB for redressing its grievances.
Shri Tiku, learned senior Counsel in support of his legal submissions relied on the following decisions: o Ramashankar Prosad and Ors. v. Sindri Iron Foundry (P) Ltd. AIR 1966 Calcutta 5/2-to show that if the oppression is of short duration but is of such a lasting character that redress is impossible by calling board meetings or general meetings of the company, a case for intervention under Section 397 is made out.
Where the majority is eclipsed both on the board and at the general meeting of the company by the manipulations of the respondents, affecting the normal functioning of the Company would amply justify exercise of power under Section 397.Dale and Carrington Invt. (P)Ltd. and Anr. v. P.K.Prathapan and Ors.
shares in a company is reduced to the position of minority shareholder in the company by an act of the company or by its board of directors malafide, the said act must ordinarily be considered to be an act of oppression to the said member. The member who holds the majority of shares in the company is entitled by virtue of his majority to control, manage and run the affairs of the company. This is a benefit or advantage which the member enjoys and is entitled to enjoy in accordance with the provisions of company law in the matter of administration of the affairs of the company by electing his own men to the board of directors of the company. " o Punt v. Symons and Co., Limited 1993 (2) Ch 506 to show that where shares are issued by the directors not for the general benefit of the company, but for the purpose of controlling the holders of greater number of shares by obtaining a majority of voting power, the issue of new shares shall be set aside.
o Piercy v. S. Mills and Co. 1918-19 (All E. R.Rep.) to show that directors of a company are not entitled to use their powers to issue shares merely for the purpose of maintaining their control or merely for the purpose of defeating the wishes of the existing majority share holders.Kshounish Chowdhury and Ors. v. Kero Rajendra Monolithics Limited and Ors. (2002) 1 Camp. LJ 552 to show that any further issue of shares with a view to convert a majority into a minority is a grave act of oppression.Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad and Ors.
2005 (Vol.123) CC 566 to show that the directors have a fiduciary duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and the interest of the company they represent. The directors arc not entitled to use their powers to issue shares merely for the purpose of defeating the wishes of the existing share holders.M.S. Madhusoodhanan and Anr. v. Kerala Kaumudi (P) Limited and Ors. to show that mere certificate of posting does not amount to conclusive proof of service of the notice of the addressee concerned.
o Tea Brokers (P) Limited and Ors. v. Hemendra Prosad Barooah (1998) 5 Comp. LJ 463 & Life Insurance Corporation of India v. Escorts Limited and Ors. - 1986 (Vol.59) CC 548 to emphasize the right and privilege of the share holders to participate in the management and administration of the affairs of the company.IT Cube Inc and Anr. v. IT Cube India (P) Limited and Ors. (2004) 3 Comp. LJ 441 to show that convening and holding of any general meeting of the company without giving notice to share holders is illegal and void.Rashmi Seth v. Chemon (India) Private Limited and Ors. 1995 (Vol.82) CC 563 to show that if the power to issue further shares is exercised by the directors not for the benefit of the company but simply and solely for the purpose of consolidating and improving their voting power to the exclusion of existing majority share holders, the court will interfere in exercise of such powers.
3. Sri Sudipto Sarkar, learned Senior Counsel, appearing for the Company while opposing the company petition submitted: o The second respondent conceived the idea of setting up of rolling mill for the manufacture of steel and incorporated the Company in the year 1991 with his two daughters and a close associate.
o The Company had purchased lands in 1991-1992 for putting up its factory, acquired the plant, machinery and equipments in the year 1992, constructed the building for the factory and office, commissioned the plant and machinery in November 1993, started the production in 1993-1994 and began earnings thereof. Whereas, the petitioner Company was incorporated only on 05.10.1994 with authorised capital of US $ 10,00,000 divided into 10,00,000 ordinary shares of one US dollar each, out of which only two shares have been subscribed by two of the individuals. The second respondent and his wife have given guarantee securing the credit facilities availed from bank by the Company. The petitioner being a stranger never played any role in the promotion and establishment of the steel unit, as pleaded by the petitioner and never involved in the management and control of the Company.
o There was no understanding that (a) the petitioner will always hold 90.91% shares of the Company; (b) the petitioner will appoint its nominee on the board of the Company as and when considered necessary; and (c) the shareholding pattern will not be changed without the consent of the petitioner.
o The petitioner purchased the shares of the Company by way of investment and never participated for the last ten years, in the management or not even enquired as to the functioning of the Company. The petitioner has never attended any meeting of shareholders and has not voted on any resolution. The Company never forwarded the quarterly results of its operations or annual accounts to the petitioner at any point of time. The Company ever declared any dividend and the petitioner never complained of any grievance till filing the company petition. The petitioner is, therefore, not entitled to interfere with, participate or claim any right in the management. The Company has been managed and exclusively controlled by the second respondent, who is the original promoter of the Company.
o In terms of the RBI communication dated 13.08.1996, permission for issue of shares to the overseas corporate body shall be valid so long as at least 60% of its ownership is held by non resident individuals of Indian nationality/origin. The petitioner was required to inform the Company annually the status of its shareholding in order to ensure that at least 60% shares are held by non-resident Indians. No such intimation has ever been sent by the petitioner to the Company, thereby failed to comply with the conditions stipulated in the RBI communication dated 13.08.1996 and is, therefore, not entitled to hold the shares in the Company or exercise any rights in respect of its shares. The RBI by its communication dated 08.12.2003 derecognised overseas corporate bodies and the petitioner is therefore not entitled to make any further investment in India. The petitioner company had at the time of incorporation had certain persons on its board, but now there are different directors. It is not known as to who are the persons behind the promoters and in the management of the petitioner company, ownership of which must be investigated under Section 247 of the Act.
o The Company's banker while extending financial facilities in its letter of sanction dated 04.11.2003 stipulated that in case the Company incurs any net loss in any year, the same should be made good by bringing fresh capital of cash equity and maintain debt equity ratio as per the banking norms. This condition has been re-enforced by the banker in its subsequent sanction letter dated 07.03.2005, while granting fresh credit facilities. The Company suffered net loss in the current as well as previous years except the year 2004. In view of this, it was decided at the board meeting held on 15.03.2005 to increase the authorised share capital from Rs. 125 lakhs to Rs. 225 lakhs. The recitals of the notice calling for the extra ordinary general meeting have been approved at the board meeting held on 15.03.2005. Accordingly, the Board issued the notice for the extra ordinary general meeting on 21.03.2005 to the shareholders under certificate of posting. Mere increase in the authorised capital of which the petitioner is quite aware, cannot constitute oppression. After approval of the shareholders in the extra ordinary general meeting for increase in the authorised share capital, the board of directors at its meeting held on 10.05.2005 allotted ten lakhs equity shares of Rs. 10/- each to the fourth respondent, a company promoted and controlled by the second respondent. It cannot be expected of a private Company to maintain its minutes books in accordance with the provisions of Section 193.
The directors have the authority under the articles of association of the Company to allot shares and therefore the petitioner cannot question the discretion of the authority exercised by the board of directors in allotting impugned shares in favour of the fourth respondent. The petitioner cannot question the utilisation of funds raised by way of issue of additional shares.
o The petitioner's address as given in the petition is different from the address furnished either in the rejoinder or the minutes of the board meeting of the petitioner. In view of this, the Company is helpless and cannot be found fault on account of non service of the notice of the extra ordinary general meeting which will not give cause of action to invoke Section 397. The petitioner executed a power of attorney as early as on 11.05.2005, empowering its attorneys to bring any action, before the Company Law Board in connection with any disputes concerning the Company, which was preceded by the board meeting of directors of the petitioner approving the issue of power of attorney in favour of its attorneys.
These actions of the petitioner clearly indicate that it was quite aware of the increase of capital and the subsequent allotment of shares made on 10.05.2005 in favour of the fourth respondent. This Board in Hillcrest Realty Sdn.Bhd. and Ors. v. Hotel Queen Road Pvt.
Ltd. and Ors. (order dated 31.01.2006) upheld the validity of the allotment of shares and registration of the transfer of shares at the board meeting held without the issue of notice to one of the directors and therefore the petitioner cannot have any grievance by virtue of non receipt of the notice sent by the Company.Dale and Carrington Pvt. Ltd. v. P.K. Prathapan (supra) is not applicable to the present case in as much as the facts of the two cases are entirely different. The Calcutta High Court inRamashankar Prosad v. Sindri Iron Foundry (supra) directed the majority to sell their shares. In the. case of Tea Brokers (P) Ltd. v. Hemendra Prosad Barooah (supra), both the parties wanted to be in the management of the Company, unlike in the present case and therefore the facts of the case will not be applicable to the present case. The second respondent has been in management of the Company right from its incorporation and the petitioner can never make any claim to exercise control over the Company.
o By virtue of Section 402(b), the CLB may provide for the purchase of the shares of any members of the company by other members thereof or by the company. This section does not contemplate purchase of the shares of the minority shareholders by the majority shareholders nor does it envisage valuation of the shares of the Company for the purpose of sale of the shares by any member to other members of the company. There is no requirement of law that majority shareholders will always remain as majority shareholder. The petitioner not being a bonafide shareholder may be directed to take back its investment as the petitioner has parked its funds only by way of investment in the Company. Furthermore, the second respondent in spite of his minority shareholding has been allowed to be in management of the Company for the past ten years and therefore, the petitioners must be directed to sell their shares to the respondent group on the principles enunciated by the CLB in Praful M. Patel v. Wonderwehl Electrodes Pvt. Lul. (2003) Vol. 115 CC377 and the second respondent must be allowed to be in control of the Company without any disturbance in support of which Sri Sarkar applies reliance on Arati Dutta Gupta and Ors. v. Unit Construction Co. Ltd. and Ors. (2005) Vol.124 CC 584. The petitioner never evidenced any interest in the affairs or the management of the Company for the past ten years.
This conduct of the petitioner will disentitle him from claiming any right of management control in respect of the affairs of the Company. This legal proposition has been approved by the Supreme Court in Sangramsinh P.Gaekwad and Ors. v. Shantadevi P. Gaekwad (Dead) 4. Shri C.A. Sundaram, learned Senior Counsel appearing for the second respondent submitted: o The Company was incorporated as early as in October 1991, whereas the petitioner was incorporated as late as in October 1994. The petitioner invested in the Company in August 1995, after the Company was fully established was making profits. These factors would belie the purported arrangement between the parties namely, (a) the petitioner will always hold 90.91% of the share capital of the Company; (b) the petitioner will appoint his nominees on the board of the Company as and when necessary; and (c) there will be no change of the shareholding of the Company without the consent of the petitioner. Further more, there has been no written understanding between the petitioner and the second respondent regarding the control and management of the Company. The petitioner for the first time through present petition seeks to reconstitute the board of directors of the Company with two of its nominees and one nominee of the second respondent as directors of the Company. The second respondent being a minority shareholder has been in defacto management of the Company ever since its incorporation in the year 1991 and by means of the allotment of impugned shares, the Company has come under dejure management of the second respondent and therefore, the impugned allotment does not in any way result in any change in the control of the Company. No directorial complaints will constitute an act of oppression. The petitioner invested in the Company by way of equity participation for the purpose of getting return on its investment, but never intended to the purchase of equity shares in the Company as a bonafide shareholder and manage its day to day affairs.
o The petitioner has never been in the management ever since its investment made in the Company and cannot now seek to reconstitute the board of directors with two of its nominees. The prayer for an order of injunction directing the respondents not to sell, transfer, alienate or dispose of the assets and properties of the Company would reveal that the petitioner is only an investor and not a bonafide shareholder. The petitioner is more concerned with and aiming at the properties of the Company than its affairs. The petitioner claims to be a foreign body corporate and therefore its ownership must necessarily be looked into, so as to ensure whether the directions of RBI have been duly satisfied by the petitioner regarding its ownership.
o The petitioner has given a power of attorney on 11.05.2005 authorising its attorneys to initiate proceedings in the CLB in relation to the affairs of the Company. This single factor would conclusively establish the fact that the notice of extra ordinary general meeting increasing the authorised capital has. been received by the petitioner and the petitioner is aware of the impugned allotment of shares made on 10.5.2005 in which case the petition is liable to be dismissed. None of the provisions of the Act envisages proof of service of notice and therefore service of notice is not a mandatory requirement. This requirement has been necessitated on account of the judgments rendered by the Courts from time to time.
By virtue of Section 53(1). a document may be served by the company on any member either personally, or by sending it by post to him to his registered address, which requirements has been duly satisfied by the Company. In the absence of any suspicious circumstances there is no need for the respondents to prove service of the notice. The petitioner without even enquiring from the Company regarding the allotment of shares went for inspection of the documents in the Registrar of Companies. If the petitioner is aggrieved due to non-service of notice for the extra ordinary general meeting, it has to exercise its civil rights and there is no remedy available before the CLB. Even if non-sending of the notice is illegal, the said act per se is not oppressive. The service of notice of meetings on shareholders residing outside the country is not necessary, as held in Warden and Hotchkiss Limited In re All E.R. Rep. 1945 Vol. I page o The petitioner has not complied with the RBI conditions and directions regarding its ownership. It is not known whether 60% of ownership the petitioner is held by the non-resident individuals of Indian nationality. The petitioner claiming to be a foreign body corporate cannot be allotted any shares in view of the restrictions contained in the RBI circular dated 08.12.2003, by which the facilities for overseas corporate bodies under various Foreign Exchange Management Regulations have been withdrawn. The questions and answers contained in the said circular are illustrative in nature and do not have any legal force, which cannot be taken advantage by the petitioner. At the time of allotment of the impugned shares the petitioner was barred from making fresh investments in the Company, in which case non-sending of notice to the petitioner for the extra ordinary general meeting, will not constitute oppression. This legal proposition has been laid down by the Supreme Court in Needle Industries (India) Limited v. Needle Industries Newey (India) Holding Limited (1981) Vol.51 CC 743. The respondent group, being minority shareholders are oppressed by the majority, which is denounced by the Supreme Court in Sangramsinh P. Gaekward v. Shantadevi P. Gaekwmrd o The petitioner is mainly aggrieved on account of the purported mismanagement in the affairs of the Company on account of its profitability position during the period between 31.03.1999 and 31.03.2004. Nevertheless the petitioner never evinced any interest in the affairs of the Company. The Company never sent any balance sheet or quarterly results of its operations or notice of general meetings since the year 2000. The Company has not declared any dividend at all. However, the petitioner kept quite all these years till filing the company petition without making any grievances on account of these past acts which are not amenable to jurisdiction of the CLB. o The plea of the petitioner that its share certificates were reportedly kept in safe custody with the Company whenever demanded by the petitioner is rather very strange. The second respondent does not know with whom he is dealing with and there is no long term relationship with the petitioner to allow custody of its share certificates with the Company. Nevertheless, the petitioner never claimed the share certificates during the past ten years and therefore, its charges are untenable. According to the petitioner, since middle of 2004, the fundamental basis of trust and mutual confidence were breached by the respondents, who acted in a systematic and planned manner at the back of the petitioner.
However, the petitioner has taken a different stand in its rejoinder by alleging that the second respondent started sidelining the petitioner and avoiding his enquiries from the financial year 1999-2000 and further that the respondents never sent any notice or the annual general meeting or extra ordinary general meeting to the petitioner since March 2000. Thus, the petitioner has been taking contradictory stands at different point of time.
o The Company is not a glorified partnership and the relationship between the two groups of shareholders is not governed by the principles similar to the principles governing relationship between the partners as claimed by the petitioner. All decisions cited on behalf of the petitioner are in relation to two group of shareholders governed by quasi partnership and therefore, not applicable to the facts of the present case. There is no deadlock in the affairs of the Company, warranting winding up of the Company.
The petitioner has neither made out any justification for winding up the Company which is one of the essential requirements, as laid down by the Calcutta High Court in Bagree Cereal (P) Ltd. v. H.P. Bagri (2001) Vol. 145 CC 465 which has been confirmed by the Supreme Court.
5. I have considered the pleadings and elaborate arguments of learned Senior Counsel. The issues which arise for consideration are whether the petitioner has made out a case under Section 397 and if so, whether the petitioner is entitled for the reliefs as claimed in the company petition. The main grievance is that the petitioner had neither any notice nor knowledge of the extra ordinary general meeting held on 18.04.2005. According to the respondents, the Company had despatched the notice of extra ordinary general meeting on 21.03.2005 by certificate of posting which ought to have, in the normal course, reached the petitioner. The respondents further drew support from the minutes of the board meeting of the petitioner held on 11.05.2005 granting power of attorney in favour of its attorneys and the consequent execution of the power of attorney on 1 1.05.2005 empowering the attorneys, inter-alia, to initiate proceedings in the CLB in relation to the matters concerning the Company, to impute knowledge about the extra ordinary general meeting and the allotment of impugned shares. The sequence of events may, perhaps, indicate that the petitioner might be aware of the extra ordinary general meeting convened and held by the Company. It is required to be seen whether mere knowledge of the meeting would tantamount to serving of notice in terms of Section 172 of the Act. This section provides that notice of every meeting of the Company shall be given to every member of the Company, whose name appears on its register of members, in any manner authorised by Sub-sections (1) to (4) of Section 53. It is settled law that the requirements of Section 172 are mandatory and must strictly be complied with, non-compliance of which invalidates the resolutions passed at such meeting. In this context, the principles laid down in Wardon v. Hotchkhs Limited (supra) that service of notice on shareholders residing outside the country will be of little assistance to the respondents. The assertion of Sri. Sundaram, learned Senior Counsel, drawing support from the decision of the Supreme Court in Needle Industries (India) Limited v. Needle Industries Neway (India) Holding Limited (supra) that non-sending of the notice of the extra ordinary general meeting will be of no consequence on account of the legal disability suffered by the petitioner in subscribing to the enhanced capital by the petitioner, is ill conceived in the light of the RBI Circular dated 08.12.2003, a close scrutiny of which, envisages the eligibility of the overseas corporate bodies in undertaking fresh investments with the prior permission of Government/Reserve Bank of India as the case may be. By virtue of the RBI Circular dated 08.12.2003, dealing with de-recognition of overseas corporate bodies, facilities under various Foreign Exchange Management Regulations have been withdrawn. This circular does not impose any blanket bar against overseas corporate bodies in undertaking fresh investments, as specified therein. It has to be borne in mind that the petitioner has not expressly dispensed with the need for being given any notice of extra ordinary general meeting held on 18.04.2005. The respondents have produced a certificate of posting to establish service of notice on the petitioner by sending it by post in accordance with Sub-section (1) of Section 53. The certificate of posting, in the event of serious disputes between the parties, cannot amount to conclusive proof of service of notice on the addressee, meeting the mandatory requirements of Section 172. It is rather unsafe to place any reliance on mere certificate of posting, without any corroborative evidence such as despatch register, books of account etc, showing the expenses incurred in connection with sending of notices to the shareholders, including the petitioner. The certificate of posting would show that certain postal envelopes have been put into the post office and will not by itself necessarily mean that there has been conclusive proof of service of the notice on the addressee concerned, as held by the Supreme Court in M.S. Madhusoodhanan v. Kerala Kaumudi (P) Ltd (supra). It is, therefore, far from doubt that mere production of certificate of posting will not necessarily mean that there was conclusive service of notice of the extra ordinary general meeting on the petitioner. This Board in IT Cube Inc v. IT Cube India (P) Ltd. (supra) has set aside the allotment of further issue of shares, being wrongful, illegal and void initio for want of notice to the petitioner and without holding general meeting. The ratio that meetings without notice to a director are invalid has not been applied in Hillcrest Realty Sdn. Bhd v. Hotel Queen Road Private Limited (supra), in view of the fact that neither of the petitioners in that case could claim to be a shareholder of the Company, as they became shareholders by transfer/allotment of shares approved in board meetings without notice to the second petitioner and, therefore, not applicable to the Facts of the present case.
It is observed that the authorised share capital of the Company has been increased from Rs. 125 lakhs to Rs. 225 lakhs at the board meeting held on 15.03.2005, without however, assigning any justification for such enhancement of the share capital. The board of directors has not resolved either for convening the extra ordinary general meeting for enhancing the authorised capital or for issuing any notice for the extraordinary general meeting, as borne out by the minutes of the board meeting dated 15.03.2005 provided by the Company to the petitioner. No reliance can be placed on the minutes produced by the respondents, disclosing such authorizations, for want of production of the original minutes book containing the relevant minutes of the board meeting. The explanatory statement forming part of the notice of extra ordinary general meeting clearly indicates that the increase in the authorised capital has been necessitated by the facts that the Company suffered losses and availed fresh financial facilities from the bank. The board of directors, on the other hand, approved the increase in the share capital from Rs. 125 lakhs to Rs. 225 lakhs at the board meeting held on 15.03.2005 to meet the raise in prices of steel and the pressure from the bank for enhancing the promoter contribution towards equity.
At the same time, the Company utilized the entire one crore of rupees realized, pursuant to the issuance of enhanced capital, for entirely a different purpose by purchasing the shares in M/s. Hotel Queen Road Private Limited, which is not the main business of the Company. The respondents failed to establish the benefit derived by the Company on account of the further enhancement as well as issue of the share capital.
Section 193 applying to the public as well as private companies provides, inter alia, that within 30days of the conclusion of every meeting of the Company, the minutes book has to be written and each page of such recording must be initiated or signed by the Chairman and on the last page of such recording the Chairman shall sign and put the date. It is observed from copies of the minutes of the board meeting dated 15.03.2005 and 10.05.2005, enhancing the share capital and issuing the enhanced capital respectively, they are not in strict compliance with the requirements of Section 193. The respondents have not chosen to produce the original minutes book, containing the board resolutions, inspite of several of the discrepancies, appearing in the copies of the minutes of the board of directors dated 15.03.2005 produced by the respondents and obtained by the petitioner from the Company, which are available before the Bench. In this connection, beneficial reference is invited to Micromeritics Engineers Private Limited v. S. Munusamy (2003) Vol. 116 CC 465, wherein the Madras High Court held that when any person, who has not produced the original minutes book and only a copy of the minutes book has been produced before the Company Law Board, without satisfying the requirements of Section 193, no presumption under Section 195 could be drawn.
Therefore, no presumption can be drawn in the present case, that the board meetings or the extra ordinary general meeting which are under dispute have been duly convened and the proceedings have validly taken place in accordance with the relevant provisions of the Act. The board of directors raised additional funds by issuance of the enhanced capital reportedly to meet the losses incurred by the Company and enhance the promoter contribution towards equity, but the entire funds were immediately utilized to purchase the shares of M/s. Hotel Queen Road Private Limited, which is not the purpose of either the enhancement of share capital or issuance of the enhanced capital.
Though the theory that the petitioner will ever hold 90.91 % of the share capital of the Company has not been established, yet it has been deprived of its right to undertake fresh investments in the Company, under the guise of the RBI Circular dated 08.12.2003. The directors, in the present case, being the second respondent and his wife, utilized the fiduciary powers over the shares not for the benefit of the Company, but for the purpose of consolidating the de facto controlling power of the respondent group by allotting shares in favour of the fourth respondent, a company under the management of the second respondent, in exclusion of the majority shareholder which cannot be allowed, as held in Rashmi Seth v. Chemon (India) Private Limited (supra). The directors who are empowered by the articles to allot shares at their discretion ought to have (i) exercised their power with utmost good faith for the benefit and interest of the Company; (ii) ensured fair play in action in corporate management; and (iii) acted bonafide in exercise of their responsibilities in further issue of shares. The exercise of power to allot further shares by the directors solely for their personal aggrandizement without caring for the future interest of the Company has been disapproved by the Courts. The holding of the petitioner, by virtue of the impugned allotment, has been reduced from 90.91% to 46% of shares in the Company. Such issue of further shares converting a majority into a minority is held to be a grave act of oppression in Kshounish Chowdhury v. Kero Rajendara Monolithics LimitedDale and Carrington Investment (P) Limited v. P.K. Prathapan (supra) held that if a member who holds the majority of shares in a company is reduced to the position of minority shareholder by an act of the company or by its board of directors malafide, the said act must ordinarily be considered to be an act of oppression to the said member. The Chancery Division in Punt v. Symons and Co. Limited (supra) held that any issue of shares under the general and fiduciary power of the directors for the purpose of acquiring an unfair majority for the purpose of altering the rights of parties warrants inference of the Court. The directors are not entitled to use their powers of issuing shares for the purpose of defeating the wishes of the existing majority shareholders as held in Piercy v. S. Mills and Co. (supra). The judgement in Sangrasinh P.Gaekwad v. Shantadcvi P. Gaekwad (supra) has applied the same test while dealing with exercise of powers by directors in issue of further shares. The Calcutta High Court, on the entitlement of the majority shareholders to control the affairs of the Company in Tea Brokers (P) Ltd. v. Hemendra Prosad Barooah (supra) held thus: The member who holds a majority of the shares in the company is entitled by virtue of his majority to control, manage and run the affairs of the company. This is a benefit or advantage which the member enjoys and is entitled to enjoy in accordance with the provisions of company law in the matter of administration of the affairs of the company by electing his own men to the Board of directors of the company and by refusing to elect persons whom he does not want to be on the Board by exercising his majority voting right in the matter of such election and also in other matters where the views of the majority are to prevail in accordance with the provisions of the company law and administration. This is undoubtedly, a right and privilege which a member enjoys in his capacity as a member of the company. It will ordinarily be an act of oppression on the member if he is deprived of this privilege and right. Such an act will undoubtedly be harsh, burdensome and wrongful and will necessarily be an act of oppression to the member concerned. Such an act may be even a single act done on one particular occasion, if the effect of such an act will be of a continuing nature and the member concerned is deprived of his rights and privileges for all time to come in future. If the affairs of the company arc so conducted as will result in this kind of oppression to any member or members, the affairs of the company must be considered to be as being conducted in a manner oppressive to any member or members ' as laid down in Section 397 of the Act.
The right and privilege of the shareholders to participate in the management of the Company have been approved by the Supreme Court in Life Insurance Corporation of India v. Escorts Limited (supra). The Supreme Court in Dale and Carrington Investment Private Limited v. P.K.Prathapan 25 (supra) categorically held that the member who holds the majority of shares in the Company is entitled by virtue of his majority to control, manage and run the affairs of the Company and elect his own men to the board of directors of the Company. The petitioner, being a majority shareholder, despite its disassociation with the day to day management of the Company and the petitioner's lack of interest over the affairs of the Company, all these years, cannot be denied of its right to administer the future affairs of the Company. The petitioner's right cannot be brushed aside on the plea that it is only an investor and not a bonafide shareholder of the Company. These facts of the present case would amply demonstrate that there is such a lack of probity in the conduct of the affairs of the Company by the respondents that the petitioner can no longer have confidence in the respondents, warranting winding up of the Company under just and equitable clause as held in the case of Ramashankar Prasod v. Sindri Iron Foundry (P) Limited (supra). Any order of winding up of the Company will however prejudice the interests of the Company and its members. At the same time, the rights of the respondent group on account of its active involvement in the promotion and development of the Company must necessarily be recognized and adequately protected as recognized in Arati Dutta Gupta v. Unit Construction Company Limited (supra). Any order directing the petitioner being a majority shareholder to sell its shares to the minority shareholders, as recognized by this Board in Praful M. Patel v. Wonderweld Electrodes Private Limited (supra), will not redress the wrong done to the majority group and will not give it sufficient compensation or relief against the act of oppression complained of in the petition and on the other hand, may add to its suffering and grievance and cause greater hardship in the light of the judgement of the Supreme Court in Dale and Currington Private Limited v. P.K. Prathapan (supra). The arguments that the petitioner must be directed to transfer its shares to the respondent group, in the backdrop of the present case, do not merit any consideration. In view of my foregoing conclusions and (i) in exercise of the powers under Section 402; and (ii) to regulate the conduct of the future affairs of the Company, it is hereby declared that- (a) the enhancement of the authorised share capital from Rs. 125 lakhs to Rs. 225 lakhs is illegal and void; (b) the further issue of shares in favour of the fourth respondent impugned in the company petition, being wrongful is set aside; (c) the members of the Company are at liberty to constitute its board of directors, however, providing proportional representation to the respondent group, which shall appropriately be incorporated in the articles of association of the Company; (d) the board of directors of the Company so constituted by the members shall manage the day to day affairs of the Company as per the articles of association of the Company ; (e) the Company shall deliver share certificates to the petitioner in respect of its holdings within 30 days of receipt of this order.
With the above directions, the company petition stands disposed of. No order as to costs.