1. The petitioners collectively holding 22.96 per cent of the issued share capital of M/s Ashok Iron Works Private Limited ("the Company"), aggrieved on account of certain alleged acts of oppression and mismanagement in the affairs of the Company namely, (a) non-declaration of dividends; (b) increase of the authorised share capital; (c) exclusion of the petitioners from the management of the Company; (d) siphoning of funds by the respondents; (e) illegal expansion programme of the Company; (t) refusal to increase the salary of the first petitioner while increasing the salary of the respondents 3 & 4; (g) payment of commission to the respondents 3 & 4 before finalisation of accounts; and (h) amendment of articles curbing the rights of the petitioners, have invoked in the present petition, the provisions of Section 397/398 of the Companies Act, 1956 ("the Act") seeking various reliefs claimed therein.
2. Sri Udaya Holla, learned senior Counsel while initiating his arguments submitted: * The first petitioner and his family (Hanji Family) and the third respondent and his family (Humbarwadi family) had constituted in the year 1973, prior to incorporation of the Company, a partnership firm under the name and style of M/s Ashok Iron and Steels for carrying on the foundry and engineering business with profit ratio of 25:75 per cent between the two groups. During the year 1978, the first petitioner and the third respondent commenced three more partnership business under the name and style of (i) Jaihind Engineering; (ii) Progressive Engineering and (iii) Standard Engineering with profit ratio of 25:75 percent between them. Later in September 1982, M/s Ashok Iron and Steels, the partnership firm was converted into a private limited company namely, M/s Ashok Iron Works Private Limited by allotting shares in the proportion of 25 per cent to Hanji family and 75 per cent to Humbarwadi family. The conversion was effected by dissolving the partnership firm and allotting the business of the firm to the Company, which was one of the partners in the firm.
Consequently the firm Ashok Iron and Steels stood dissolved and the entire of its business came to be taken over by the Company. By virtue of Section 32 A of the Income Tax Act. 1961 the Company became entitled to the investment allowance, by taking over the assets and liabilities of the partnership firm. The total paid up capital of the Company is 34,900 shares of Rs. 1,000/- each. The third respondent and his family members hold 71.28 per cent, while the first petitioner and his members hold 23.76 per cent of the total paid up share capital of the Company. The balance 4.96 per cent of the shares is held by M/s Nutan Investments and Trading Private Limited, which in turn is controlled by the first petitioner and his family members as well as the third respondent and his family members in the ratio of 25:75 per cent of its paid up capital. Despite formation of the Company, there was a clear understanding between the promoters that the Company would be treated and run on the principles of quasi-partnership. The Company continues to be closely held only by the two families namely, Hanji family and Humbarwadi family. The transactions of the three partnership firms i.e. Jaihind Engineering, Progressive Engineering and Standard Engineering and the Company are being run for the past 30 years as partnership ventures. The first petitioner and the third respondent are whole time directors of the Company ever since its incorporation.
* The functioning of the Company and the three partnership firms and the relationship between the first petitioner and the third respondent have been cordial till the year 2001-02, when differences of opinion crept in between the two family groups, on account of the third respondent illegally siphoning off huge funds from the Company to M/s Fluid Dynamics Private Limited, a company which exclusively belongs to Humbarwadi family. The third respondent is indulging in transferring the Company's funds under the guise of sub-contracting charges for machining, fettling job work, supply of scrap etc.
especially when M/s Fluid Dynamics Private Limited does not have any facilities to carry out such fettling and machining work. The third respondent in the process, has siphoned off during the year 2000 and 2002, over Rs. 78 lakhs which can be detected on scrutiny of delivery challans, excise forms and inward and outward entries in the gate register.
* All possible efforts to bring an amicable solution by persuading the third respondent to mutually resolve the issues have not yielded any desired results. The parties, further, attempted to resolve the differences through the arbitration process by entering into an arbitration agreement and accordingly the Legal Advisor and Chartered Accountant of the Company were appointed as arbitrators.
While the disputes were between the two group of shareholders. the arbitration agreement was wrongly entered into between the first petitioner and the Company. However, the arbitrators proceeded with the arbitration process notwithstanding the objections raised by the first petitioner and the continuation given by the third respondent regarding the validity of the arbitration agreement. The award has been passed without the arbitration agreement and therefore, the award must be ignored. It is only an arbitration agreement and not mere acquiescence confers jurisdiction on an arbitrator, as held in U.P. Rajkiya Nirman Nigam Limited v. Indure Private Limited and Ors.
. It is further held in Khardah Company Limited v. Raymon & Co. (India) Private Limited AIR 1962 SC 1810 that an arbitration agreement confers jurisdiction on the arbitrators to hear and decide the disputes and where there is no such agreement, there is an initial want of jurisdiction which cannot be cured by acquiescence. The disputes are between the first petitioner and the third respondent and therefore, the former under intimation to the arbitrators, appointed Mr. M.B. Karmarkar as his arbitrator and called upon the third respondent to appoint his arbitrator in order to constitute a valid panel of arbitrators for deciding the disputes between the parties. However, the third respondent failed to appoint any arbitrator, as demanded by the first petitioner. In the meanwhile, the arbitrators namely, the legal advisor and Chartered Accountant fraudulently and in collusion with Humbarwadi family passed an award on 24.01.2005 ex-parte. According to KERR on the Law of Fraud and Mistake, fraud includes all acts, omissions, concealments which involve a breach of legal or equitable duty, trust or confidence, justly reposed, and are injurious to another, or by which an undue or un-conscientious advantage is taken of another. Any fraudulent motive or design is not capable of direct proof since it is secret in its origin or inception, as held in Yeshwant Deorao v. Walchand Ramchand , It is always not essential that oral evidence should be taken to substantiate the case of fraud. If there is ample material on record in the case in the form of affidavits, correspondence and other documents on the basis of which proper and necessary inference can be safely drawn, oral evidence is not necessary', as held in Shoe Specialities Private Limited and Ors. v. Stridewell leathers Private Limited and Ors. (1995) Vol. 82 CC 836. The award is a fraud played on the petitioners and is totally void, in respect of which criminal complaint has been lodged against the arbitrators by the first petitioner, which however came to be stayed by the Karnataka High Court. The petitioners have also filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 before the Court of Principal District Judge, Belgaum for setting aside the arbitration award, thereby there is a statutory stay on the operation of the award. An order that is stayed does not exist in the eye of law, as held in Consolidated Coffee Limited v. Agricultural Income Tax Officer, Madikeri and Ors. (2001) 1 SCC 278, The entire arbitral process has been subverted by the third respondent in collusion with the arbitrators in order to remove Hanji family from the governance of the Company and cannot operate against the petitioners, in support of which reliance has been placed on (a) Ram Chandra Singh v. Savitri Devi and Ors.
vitiates every solemn act. Fraud and justice never dwell together.
Misrepresentation itself amounts to fraud. A collusion or conspiracy with a view to deprive the rights of others in relation to a property, would render the transaction void ab initio; and (b) Beli Ram & Brothers and Ors. v. Chaudri Mohammad Afzal and Ors. AIR (35) 1948 Privy Council 168 to show that any decree obtained by fraud and collusion does not operate as res judicata. No one should be permitted to abuse the process of court, failing which a judicial proceeding which is otherwise permissible may become an engine of fraud as held in Bank of India v. Vijay Transport and Ors.
. It is held in Gram Panchayat of Village Naulakha or decree obtained by fraud or collusion can be avoided not only by proceedings for avoidance but also can be raised in later proceedings. The third respondent withdrew an amount of Rs. 1.07 crores from the Company in order to satisfy the illegal arbitral award passed in respect of the three partnership firms namely, (i) Jaihind Engineering, (ii) Progressive Engineering and (iii) Standard Engineering. The third respondent further, instead of reverting the funds back to the Company, deposited the funds in the name of the partnership firms on the ground that first petitioner is no longer a partner in the partnership firms, pursuant to the arbitral award.
Thus, the third respondent treats the Company as a proprietary concern without adhering to the democratic principles applicable to corporate entities.
* During the last 2-3 years, the Company has been making substantially huge profits. The profit for the year ended 31,03.2004, before interest and depreciation accounted for Rs. 16.7 crores and for the year 2004-05 the Company earned profit of Rs. 29.21 crores. Nevertheless, the Company never declared any dividend since inception and no benefit or return on investments was given to the shareholders mainly on promise of the paucity of profits. The first petitioner requested the board of directors to declare dividend thereby passing on a reasonable portion of the profits of the Company to the shareholders, which came to be rejected by the board of directors controlled by Humbarwadi family. The declaration of dividend was intentionally avoided to deprive the minority shareholders of the returns on the investments made in the Company, which constitutes an act of oppression in the affairs of the Company. It has been held in (a) Life Insurance Corporation of India v. Escorts Limited entitled to enjoy the profits of the Company in the shape of dividends; (b) M.M.T.C. Limited v. Indo-French Bio-Tech Enterprise Limited and Ors. (2000) Vol.99 CC 112 that it is one of the basic statutory rights of a shareholder to receive the dividend declared and if the Company fails to pay the same, a shareholder can definitely claim oppression/mismanagement; and (c) Re Sam Weller & Sons Limited [Re a company (No. 823 of 1987)] -1990 BCLC 80 that failure to declare an adequate dividend could constitute unfair prejudice to the shareholders.
* The first petitioner proposed at the board meeting to increase the remuneration in the form of increased salary and commission in proportion to the shareholding of Hanji family and Humbarwadi family, but the third respondent again on the strength of his majority in the board of directors and in the shareholding of the Company rejected the proposal made by the first petitioner on the ground that the managerial remuneration is based on professional qualification and competence and it has nothing to do with the shareholding pattern. Nevertheless, at the meeting of board of directors held on 14.03.2005. the remuneration of the third respondent was increased from Rs. 3.6 lakhs to Rs. 60 lakhs per annum apart from commission of 5 per cent and other perquisites aggregating Rs. 1.5 crores per annum. Similarly, the remuneration of the fourth respondent who became a director only in December 2004 was fixed at Rs. 24 lakhs per annum apart from commission of 4 per cent and other perquisites aggregating Rs. 1 crore per annum. The remuneration was made effective with effect from 21.12.2004. The third respondent and his son withdrew the commission amount as early as on 01.06.2005 much before the determination of profits for the year ended 31.03.2005 and even before the annual accounts were approved by the general body, Whereas the total salary of the first petitioner, one of the founder directors for the last 30 years, remained at Rs. 3 lakhs per annum including all benefits as against the salary of Rs. 1.5 crores to the third respondent and Rs. 1 crore to the fourth respondent paid by the Company. The petitioners have been denied their legitimate share in the profits and benefits of the business of the Company, particularly when the Company is a family run, closely held company or quasi-partnership firm. There has been a total lack of bonafides on the part of Humbarwadi family in unilaterally and exorbitantly increasing the salary of respondents 3 & 4 with retrospective effect and denying the same benefit to Hanji family. The Company was doing well when the first petitioner was in management. The total production during the year 1996-97 of the Company accounted for 21114 MTs. The Company reached 95.97 per cent capacity utilisation of the unit. During the year 1997-98 the production was adversely affected on account of the workers strike. However, during the year 2004-05 when the third respondent was in management, the capacity utilisation accounted for only 57.99 per cent with total production of 24355 MTs. The profit and loss account as at 31.01.2005 would reveal capacity utilisation of only 14 per cent.
* The eighth petitioner, belonging to Hanji family has been a director since the year 1999. Nevertheless the third respondent on the strength of the majority shareholding removed the eighth petitioner from directorship of the Company by defeating the resolution on re-appointing him as a director at the annual general meeting held on 04.07.2005. This is in breach of the policy and principles followed by the Company so as to harm the interest of the minority shareholders.
* The third respondent proposed at the board meeting held on 22.08.2005 to increase the authorised share capital of the Company from Rs. 3.70 crores to Rs. 10 crores with the ulterior motive of reducing the shareholding of Hanji family from 25% to a negligible percentage and taking away protective rights of the minority shareholders. Furthermore, the third respondent unilaterally proposed at the extra ordinary general meeting held on 26.09.2005, certain amendments to the articles of association of the Company which would eliminate the protection provided to the minority shareholders in the articles of association. The proposed amendments are with a malafide intention to usurp control of the Company and do away with the safeguards enjoyed by the minority shareholders.
* While the Act provides for an outsider to be a proxy, Article 2(xii) proposes that the "proxy" must be a member of the Company.
This is violative of Section 176.
* The Company has been authorised by virtue of Article 2A to carry out any transaction under the Act, which enables the board of directors to exercise wide and unfettered powers which are not intended in the articles.
* Article 6 is substituted, empowering the board of directors to dispose off the unissued shares in the Company to any person, whether he is a member or not, in such proportion and in such manner, the board of directors may think fit.
* The board of directors is being empowered, by amending Article 13 to decline the registration of transfer of shares thereby restraining the minority shareholders from selling the shares to any other person even in the absence of any member declining to purchase the shares at a fair market value. No such absolute power should be given to the board of directors.
* Article 14 is modified thereby the existing restriction on the board not to refuse the transfer of shares to family members is being removed. By this, in case a shareholder wants to fight for his legitimate cause, he cannot continue to be a shareholder.
* The existing Article 20, which requires consent of the shareholders in general meeting to allot shares to persons other than members of the Company is being deleted. Consequently the board of directors is empowered to allot shares to any person who is not a member without the consent of the general body and members' rights are taken away.
* Article 29 which requires the board of directors to obtain sanction of the Company in general meeting to borrow money in excess of the paid up capital and reserves of the Company is proposed to be deleted, which directly affects the petitioners' rights.
* The executive director is proposed to be treated, by way of addition to Article 33, as director not liable to retire by rotation, with a view to benefit the third respondent's son, who is presently the Managing Director.
* The existing restrictions contained in Article 38 on payment of remuneration to the directors are being removed thereby giving unrestricted powers to the board of directors, so as to cover up the extravagant remuneration enjoyed by the third respondent and his son.
* The requirement of approval of Central Government in terms of the existing Article 40 for appointment of the Managing Director/Technical Director, is proposed to be removed, with a view to bring the fourth respondent on the board.
* The restrictions in relation to payment of remuneration within the statutory limits and the requirements of obtaining sanction of Central Government, as envisaged in Article 43 are being removed to benefit the third respondent and his son. The safeguards provided in Sections 309 & 314 are being dispensed with, causing prejudice to the Company.
* It is proposed by means of articles 44B and 44C to empower the board of directors to issue sweat equity shares and employees stock option, in order to extend undue advantage to the third respondent and his family.
The cumulative effect of these amendments is to get away the petitioners from the management of the Company. The first petitioner objected for the proposed amendments to the articles of association.
However, the third respondent on the strength of his majority in the board of directors got the resolutions passed, without giving any justification for rejecting the objections raised by the petitioners, thereby the petitioners being minority shareholders are being oppressed by the respondents. It has been held in Mathrubhumi Printing and Publishing Company Limited v. Vardhaman Publishers Limited and Ors. (1992) Vol. 73 CC 80 that no majority of shareholders can, by altering the articles retrospectively, afreet, to the prejudice of the non consenting owners of shares, the right already existing under a contract, nor take away the right already accrued.
* The core business of the Company comes from two units comprising of two foundries and one machine shop. The third respondent is embarking upon to put up one more foundry unit with the initial expansion plan for 18,000 MTs at an estimated cost of Rs. 19 crores and additional machine shop. However, in September 2004 the investment for the first phase of the expansion programme was unilaterally increased to Rs. 28.96 crores, while the annual capacity remained without any change at 18,000 MTs. The third respondent modified the expansion programme in March 2005, thereby clubbing two phases of expansion into one phase with the total capacity of 30,000 MTs at the increased investment cost of Rs. 54 crores. At the same time, the board at its meeting held on 14.03.2005 passed a resolution approving the expansion plan for 36,000 MTs with project cost of Rs. 62 crores, which shows the dictatorial attitude of the third respondent. There has not been any technical and commercial appraisal of the project for 36,000 MTs at the project cost of Rs. 62 crores. Whereas the Company has already incurred an amount of Rs. 53 crores on the expansion project by March 2005. While the output of the foundry ought to be 3000 MTs per month, it is producing only 400 MTs per month. In view of the huge investments, the Company is saddled with additional loans of Rs. 24.85 crores and further an additional working capital loan of Rs. 10 crores. The total outstanding loans of the Company amount to Rs. 92.88 crores. The Company with its present source of income will not be in a position to service the huge outstanding debts and is severally hampered by liquidity crunch. Furthermore, the new machine shop with the investment of Rs. 26 crores made till 31.03.2005 is not functional and not likely to yield any results on account of the outdated machines, which require substantial modifications. The Company should go in for new and sophisticated machinery to make the new machine shop functional and profitable. The first petitioner has been voicing his concern regarding the huge investments on the expansion plan which has been rejected by the third respondent enjoying majority on the board of directors of the Company.Needle Industries (India) Limited and Ors. v. Needle Industries Newey (India) Holding Limited and Ors.
held the Court is empowered to grant relief, in order to do substantial justice between the parties, even when no case of oppression is made out by the aggrieved shareholders. It has been held in Maharashtra Power Development Corporation Limited v. Dabhol Power Co. and Ors. (2003) Vol. 117 CC 506 that though a single act of oppression would not ordinarily give rise to a cause of action for filing a petition under Section 397, yet if the effects of a single act are burdensome, wrongful and oppressive which are of continuing nature, and the member concerned is deprived of rights and privileges for all time to come in future, then the petition under Section 397 can be filed even in respect of a single act. If the Court is satisfied as held in J.P. Srivastava & Sons (P) Limited and Ors. v. Gwalior Sugar Company Limited and Ors.
that the petitioners represent a body of shareholders holding the requisite percentage, it can assume that the involvement of the Company in litigation is not likely done and that it should pass orders to bring to an end the matters complained of and not reject it on a technical requirement. Substance must take precedence over form. The arbitrators by an award dated 24.01.2005 directed Hanji Family to sell their shares to the board of directors of the Company. If there is any difference regarding the price between the parties, the statutory' auditor of the Company shall fix the reasonable market value of the shares which is binding upon the parties. There has been animosity between Hanji family and the statutory auditor and therefore, the valuation of shares should not be left to the statutory auditor. The powers of CLB under Section 402 are statutory powers in pursuance of which directions are given to sell or purchase of shares of the Company by either of the parties. The arbitration agreement is between the two shareholders and the Company is not a party to the agreement, in which case the CLB in exercise of the powers wider Section 402 may direct the Company to purchase shares of the petitioners. When a shareholder puts his money into a company on certain conditions, if the shareholders find that these conditions or some of them are deliberately and consistently violated by the action of a member and officials of the company who wields an overwhelming voting power, and if the result of that is that they are deprived of the ordinary facilities, then there arises a situation in which it may be just and equitable for the court to wind-up the company, as held in Loch v. John Blackwood Limited 1924 ALE.R. 20. This situation squarely applies to the present case.
* The respondents expressed their willingness to buy the shares of the petitioners at the rate of Rs. 5000/- per. share which does not reflect the current market value of the shares. The valuation of shares must be carried out on the gross profits earned by the Company, as held in Rakhra Sports Private Limited and Ors. v. Khraithilal Rakhra and Ors. (1993) Vol. 74 CC 545, in which case the value of each share will work out at Rs. 21.000/- per share. The respondents may be given the first option to purchase the shares of the petitioners and in the event of the respondents are not willing to purchase the shares of the petitioners, the petitioners are willing to purchase the shares of the respondents at a fair market value, which may be determined by any independent and reputed valuer listed out by mem. This Board as held in Debi Jhora Tea Co. Ltd. v. Barenitra Krishna Bhowmick and Ors. (1980) Vol. 50 CC 771 has unlimited powers under Sections 397 & 398 read with Section 402 and can supplant the entire corporate management and give directions contrary to the articles or the provisions of the Companies Act.
While carrying out the valuation of shares, the valuer must take into account the salaries and perquisites paid to the directors. In a proceeding under Section 397/398 it is only the fairness which is paramount for remedying the grievances of the shareholders. Shri Holla, learned senior Counsel, while concluding his submissions offered that the petitioners, are ready and willing to offer Rs. 15,000/- per share for the shares held by the respondents.
3. Shri K.G. Raghavan, learned Counsel vehemently opposed the company petition on the following grounds: * The Company was a partner in M/s Ashok Iron and Steels, Belgaum for a period of over a year. By a deed of dissolution dated 30.09.1982, the partnership was dissolved and the business of the dissolved firm was allotted to the Company. The partnership firm was not converted into a private limited company. It was never understood that 25 per cent would be held by Hanji family and 75 per cent by Humbarwadi family for all time to come. The memorandum and articles of association of the Company do not indicate any such restriction in respect of issue of shares to the shareholders. The board of directors of the Company is comprised of directors who are independent and not related to either family and therefore, the Company is not run like a partnership concern. Any restrictive or pre-emption right of transfer of shares, being a common feature of the most of private limited companies is permissible in law. The partnership became the Company, with which relationship among the partners ceased to exist. While the partnership was constituted by nine partners, the Company was promoted independently with more number of shareholders. The partnership structure was not continued by the Company. In the Company, there are independent directors, apart from Hanji and Humberwadi family, thereby giving up the principles of partnership. The articles of association do not confer management right either on the petitioners group or the respondents group. Article 40 does not stipulate that the Managing Director will be from either of these two groups of shareholders. Shri S. Ramaiah, not being a member of these two families, was the Executive Director of the Company for a period of five years. Hence, no quasi partnership principles can be extended to the Company. The principles enunciated by the Supreme Court in Hind Overseas Private Limited v. Raghunath Prasad Jhunjhunwatla and Anr.
family or several friends and relations together form a company and there is no right as such agreed upon for active participation of members who arc sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked, are not satisfied. It has been held in Kilpest Private Limited and Ors. v. Shekhar Mehra promoters of a company, whether or not they were hither to partners, elect to avail of the advantages of forming a limited company and when they voluntarily and knowingly bind themselves by the provisions of the Companies Act, a limited company should not be easily treated as a quasi-partnership.
* The Company has been a profit making organization and reached astronomical growth for the past six years under the Chairmanship of the third respondent, as borne out by the balance sheets of the Company. During his Chairmanship, the Company's profits alter tax has steadily increased from Rs. 292.06 lakhs to 1082.52 lakhs in the year 2004-05. The Company managed professionally with the work force of 1500 people with turnover for the year 2004-05 of Rs. 168 crores, paid several crores of rupees in the form of excise duty, sales tax and income tax and earned foreign exchange to the tune of Rs. 14.40 crores. Most of the decisions in respect of the Company's affairs have been taken with the concurrence of the first petitioner, who is a whole time director of the Company.
* There has been since the year 1986, business dealings between the Company and M/s Fluid Dynamics Private Limited, as borne out by the Register of Contracts maintained by the Company. FDPL has the facilities or machineries to carry out fettling or repairs to machines. FDPL has been in receipt of work orders, purchase orders and such contracting work from the Company, which are supported by invoices, work orders, purchase orders etc. and are within the knowledge of the petitioners. All the vouchers for the period 2000-2001 have been produced for carrying out inspection by the petitioners. The accounts for the years 2000-01 and 2001 -02 were duly audited and adopted at the relevant point of time, but the petitioners never made any complaint on the purported siphoning of the Company's fluids. The first petitioner never complained of these issues at any of the board meetings, but grievances are being raised for the first time in the present proceedings. The first petitioner was the Managing Director during the period between 1991-92 and 1998-99, during which time the first petitioner entrusted substantial work to FDPL. The Company has given job work and purchase orders to certain partnership firms, owned and controlled by the first petitioner family, thereby making substantial earnings for the past several years.
* The parties entered into an arbitration agreement in relation to the valuation of shares of the Company. The arbitrators appointed by both parties have given their award, which has been wrongly challenged by the petitioners and is pending adjudication before the Court of District Judge, Belgaum. The criminal proceedings initiated against the arbitrators, on account of the arbitration award have been stayed in the criminal petition filed before the Karnataka High Court, the fact of which has been suppressed by the petitioners. The arbitral award is a matter of record and has become Final and binding between the parties. The issues arising out of the arbitration proceedings or the criminal proceedings have nothing to do with the management of the Company or the allegations of oppression against the petitioners and therefore, not germane to the proceedings before the CLB. * The declaration of dividend is left to the collective decision of the board of directors, which cannot be termed to be an oppressive conduct. It has been held in (a) Jaladhar Chakraborty and Ors. v. Power Tools and Appliances Co. Limited and Ors. (1994) Vol. 79 CC 505 that non-declaration of dividend per se would not be considered as an act of oppression and failure to do so could not be a ground for an application for oppression under Section 397 of the Act; and (b) K.M.J. Joseph and Anr. v. Kuttanad Rubber Company Limited (1984) Vol 56 CC 284 that when (i) the directors have not caused the value of the shares to fall so as to compel the minority to sell their shares to the majority; (ii) non-declaration of dividend did not affect the value of shares; (iii) shares did not suffer from devaluation; and (iv) there is no attempt on the part of the company to oppress the minority shareholders by non-declaration of dividends, the court will not interfere on account of non-declaration of dividends. The board of directors was not in favour of the declaration of any dividend, since there was need to retain profits by way of reserves to meet the margin money required for expansion and growing needs of working capital of the Company.
The claim of the first petitioner towards commission to the working directors in proposition to their shareholding namely, 75 per cent to Humbarwadi group and 25 per cent to Hanji group was not considered by the Board on the ground that the issue of managerial remuneration can not be related to the shareholding pattern of the working directors. The first petitioner accepted the collective decision of the board of directors taken at the meeting held on 20.12.2004 on the issue of managerial remuneration and declaration of dividend, by approving the minutes of the concerned board meeting at the next board meeting without any exception. The first petitioner by his communication dated 30.12.2004 pointed out certain discrepancies in the minutes dated 20.12.2004, but never raised any objection on payment managerial remuneration and non-declaration of dividend, as decided at the board meeting held on 20.12.2004. There were four independent directors at the board meeting held on 20.12.2004, when these issues were deliberated. The Company since its incorporation in the year 1981 never declared dividend though, profits have been made consistently over the years barring a few years. Moreover, directors in their wisdom decided that there should not be any declaration of dividend and therefore, the third respondent cannot be found fault without any justification. The board of directors approved the annual accounts on 04.06.2005, while the accounts were ready even on 01.06.2005. It was a mistake on the part of the Accounts Section, which prepared the accounts in paying commission on 01,06.2005. However, the payment of commission was ratified by the board of directors, thereby curing the irregular payment of commission to the respondents 3 & 4. When at a subsequent meeting of the board of directors of a company, the earlier resolution is confirmed, the decision taken at the earlier meeting gets ratified and it would relate back to the date of the act ratified, as held in Maharashtra State Mining Corporation v. Sunil - Judgmettf dated 24.04.2006 of the Supreme Court in civil appeal No. 2228 of 2006. The grievances in relation to the declaration of dividend or the increase in managerial remuneration can not be raised in a Section 397/398 proceeding.
* The statement of turnover, profit and salary indicates that remuneration paid at the discretion of the board of directors was never paid in proportionate to the shareholding of the working directors. The third respondent, however, did not draw any remuneration, while the first petitioner was managing the affairs of the Company. No malafides could be attributed to the directors on payment of the remuneration, which is not connected to the dividends payable by the Company. There is no link between the shareholding and remuneration drawn by the working directors. The above practice is maintained by the parties from very inception of the Company.
While the first petitioner had no objection at the board meeting held on 14.03.2005, for paying remuneration to the third respondent, he was insisting for himself one third of the Managing Director's salary, in view of his holding of 25 per cent of the shares in the Company. Any excessive remuneration can not amount to an act of mismanagement. The petitioners are jealous of the remuneration paid to the respondents. If a director of a company were to draw remuneration to which he was not legally entitled or in excess of the remuneration to which he was legally entitled, this would not of itself amount to oppression, as held in In re Jermyn Street Turkish Baths Limited - (1971) 1 WLR 1042. It is further held in Smith and Ors. v. Croft and Ors. (1986) BCLC 207 that any excessive salary paid by the company to its directors would not constitute an act of oppression. The Kerala High Court held in Palghat Exports Private Limited and P. Ramkumar v. T.V. Chandran and Ors. Judgment date 26.05.1993 of Kerala High Court that under Sections 397 and 398 of the Act (a) no personal grievance of a member himself is contemplated; (b) if the petition is not bonafide, the court is bound to reject it; (c) if the object of a petition under Section 397 is to recover the money invested from the controlling shareholders, it is an abuse of the process of the court and on that ground the petition would be dismissed; and (d) if a petition is lodged with the object of exerting pressure in order to achieve a collateral purpose, the petition must be dismissed.
* The Company has three plants, of which plants I & II are running to capacity and protitable. The financial viability has been conducted by State Bank of India. Similarly, one Wolfgang A Pech, a German Consultant, conducted technical viability study of plant III of the project, which is in possession of the Company and the viability reports are within the knowledge of the first petitioner.
The issue of expansion plans came to be deliberated from time to time at the board meetings of the Company. The increase in cost of setting up the project was necessitated on account of the rise in prices of steel and increase in cost of associated materials. At the meeting of the board of directors held on 14.03.2005, the issue of increasing the capacity of plant III from 18000 MTs to 36,000 MTs was considered on the basis of financial and technical viability reports, upon which necessary resolution was unanimously passed and the first petitioner was a consenting party to the said transaction.
The first petitioner was in receipt of a copy of the minutes of the board meeting on 04.04.2005, but never objected to the approval accorded to the expansion plan at the relevant board * meeting. The first petitioner, on the other hand, only made certain suggestions by his letter dated 04.06.2005 on the minutes of the board meeting dated 14.03.2005 and never expressed any concern on the expansion plan approved by the board of directors. The first petitioner further by his letter dated 04.06.2005 raised objections only regarding salary and not the expansion plan approved by the board of directors. This decision is business decision and left to the wisdom of the board of directors. This act is not unfair, burdensome and harsh and does not come under Section 397. The Supreme Court held in Shanti Prasad Jain v. Kalinga Tubes Limited it must be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story, There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company are being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. Any new expansion plan takes time to yield the desired results. There is a progressive growth in plant III, since March, 2005, which would reach its maximum capacity in due course of time. The Company did not procure old and out dated machines for the machine shop. Every machine has been acquired in a transparent manner and with full knowledge of all directors. Thus, the issue of expansion plant has been dealt with in a democratic manner with the concurrence of the first petitioner.
* The changes to the articles of association have been carried out in a lawful manner with majority of 76.20 per cent at the extra-ordinary general meeting held on 26.09.2005. The decision was to amend 27 items of articles but the petitioners are aggrieved on account of only 12 items. It has been held in (a) Claude-Lila Parulekar v. Sakat Papers P. Ltd. and Ors.
Section 36 of the Companies Act, 1956 makes the memorandum and articles of the company, when registered, binding not only on the company but also the members inter se to the same extent as if they had been signed by the company and by each member and covenanted to by the company and each shareholder to observe all the provisions of the memorandum and of the articles. The articles of association constitute a contract not merely between the shareholders and the company but between the individual shareholders also. The articles are a source of power of the directors who can as a result exercise only those powers conferred by the articles in accordance therewith.
Any action not referable to the articles and contrary thereto would be ultra vires; and (b) Harinagar Sugar Mills Limited v. Shayam Sunder Jhwjhumwla and Ors. that the memorandum and articles of association of a company when registered bind the company and the members of the company to the same extent as if they respectively had been signed by the company and each member, and contained covenants on its and on his part to observe all the provisions of the memorandum and articles. The changes are essentially for the proper management and functioning of the Company and would not affect the petitioners' right in the Company. The Company incorporated as a private limited company, became a deemed public company and with deletion of Section 43A of the Act, its status as a private limited company continued. The directors with a view to (a) to weed out all provisions which existed when the Company remained to be a deemed public company; and (b) to absorb the recent changes to the Company Law, brought out certain amendments to the articles of association of the Company. None of the changes would in any way affect the petitioners and usurp control of the Company. Similarly, mere increase in the authorised capital would not oppress any member including the petitioners group. When the Company desired to issue further shares for the purpose of expansion plan, the petitioners are unwilling to make any further investment.
* By virtue of articles 2(xii) no outsider can be a proxy. This applies to all shareholders including the respondents. In the light of Section 170(1) of the Act, the amendment is not violative of Section 176, as claimed by the petitioners.
* Article 2A does not cause any injury to the petitioners. It empowers the Company to carry out such acts as authorised in the articles.
* The new Article 6 on the powers of the board is nothing but an expansion of the existing article. It does not effect in any way adversely the petitioners.
* Articles 13 is introduced empowering the directors to refuse the transfer of shares in respect of suspicious people.
* Article 20 governing the allotment of shares is deleted on account of the changes in the Company Law.
* Article 29 on borrowing powers is sought to be deleted, since the provisions of Section 293 are not applicable to the Company.
* Article 33 providing that the executive director is not liable to retire applies to the post and not to the individuals. The fourth respondent is presently the Managing Director and any one from the petitioners' group may in future become the Managing Director.
Hence, proposed Article 33 can not said to be unfair.
* Article 40 dealing with the appointment of Managing Director/Technical Director is applicable to the office of director, of which the petitioners can have no grievance.
* The amendments to articles 38 & 43 concerning restriction on payment of managerial remuneration have become necessary, as they are not applicable to private limited companies.
* Article 44B and 44C on the issue of sweat equity shares and employees stock option have been introduced to keep in pace the present day context and no grievances can be attributed to the petitioners.
* The respondents are not willing to sell their shares to the petitioners. However, the respondents are ready to purchase the shares of the petitioners in the manner prescribed by the articles.
The petitioners are at liberty to follow the exit route in terms of the articles. The petitioners are interested to extract more money for their shares under the guise of the company petition and by circumvesting the articles, which cannot be supplemented. The petitioners shall invoke articles 10 while selling their shares to the respondents and cannot make use of the CLB for getting higher price for their shares, in support of which reliance has been placed on (a) Re a company, exparte Krenter - (1989) BCLC 365 to show that when the appropriate solution to a break down in the relationship of members of a company was for the petitioner to sell his shares to the respondent or the company and there was machinery for determining fair price at which the same should take place, presentation of a petition under Section 459 of the (English) Act, 1985, will ordinarily be an abuse of the process of the court; (b) Re a company - (1986) BCLC 362 to show that when the company's articles provided a mechanism for exit from the company and when the aggrieved shareholders have not invoked the articles and the auditors have not certified a fair price, it can not be said that the conduct of the majority shareholders is unfair; and (c) Re a company - (1987) BCLC 94 to show that when the articles have made provision in case of any break down in relationship between the shareholders., the aggrieved shareholders must part ways by selling their shares at a fair value determined by the auditors in terms of the articles. The petitioners estimated the value of shares at Rs. 21,000/- per share, which smacks their bonafides. The petitioners want to get away with the award and articles of association of the Company. The Company never declared any dividend, and the petitioners will get the benefit of dividend, while the shares are valued by the statutory auditor. The net asset value will go up, if dividend has not been declared by the Company. Any excess remuneration paid to the working directors will also be adjusted while arriving at the valuation of the shares. The auditor has the absolute discretion to arrive at a fair value of the shares of the Company, in terms of the relevant articles. The petitioners have challenged the arbitral award before the District Court, Belgaum. If the appeal gets dismissed, any order that may be passed by the CLB may be in conflict with the award on the price payable for the shares of the petitioners. The award stipulates that the shares of the petitioners shall be offered at the price which may be determined by the statutory auditor of the Company. The CLB can not go into the same issues and reliefs involved in the arbitral award.
The petitioners have not made any prayer in the petition for sale of the shares by the petitioners.
* The respondents did not withdraw an amount of Rs. 1.07. crores to satisfy the arbitral award in respect of the three partnership firms. The Company made the payments in. respect of on-going transactions with the partnership firms. The ledger extract of the Company for the period from 01.01.2005 to 31.01.2005 would disclose an amount of Rs. 1.31 crores due by the Company to the partnership firms.Hanuman Prasad Bagri and Ors. v. Bagress Cereals Private Limited and Ors.
that Section 3.97(2) of the act provides that an order could be made on an application made under Sub-section (1) if the court is of the opinion - (i) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members; (ii) that the facts would justify the making of a winding-up order on the ground that it was just and equitable that the Company should be wound up; and (iii) that the winding up order would unfairly prejudice the applicants; and (b) Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaehvad that (a) the expression "oppressive" would mean burdensome, harsh and wrongful; (b) the affairs of the company must be such that it would be just and equitable to order winding up thereof and that the majority acting through the board of directors by reason of abusing their dominant position oppressed the minority shareholders; (c) if the pleadings and/or the evidence adduced in the proceedings reminds unsatisfactory to arrive at a definite conclusion of oppression or mismanagement the petition must be dismissed; (d) case for grant of relief under Sections 397 and 398 must be made out in the petition itself and the defects contained therein cannot be cured nor lacuna tilled by other evidence oral or documentary; (e) while exercising the powers under Section 398 and 402, it is the interest of the company that is being considered and not the individual dispute between the parties; (f) the interest of the company requires that the majority shareholders must have their say in the management; and (g) when a decision is taken on a business consideration the court should not ordinarily interfere.
The petitioners failed to make out these requirements and therefore, no relief can be granted by the CLB. The company petition is nothing but an abuse of process of law. There is no justification to invoke Section 397/398. The plea that even if no case is made, the Court can grant relief to the aggrieved shareholders has been negatived by the Supreme Court in Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad 4. I have considered the pleadings and arguments advanced for the parties. The issues which arise for consideration are whether the alleged acts of oppression and mis-management warrant interference of this Bench, and if so, the required remedies with a view to bringing to an end the matters complained of in the company petition. It is on record that Hanji family and Humbarwadi family had in the year 1973 constituted a partnership firm under the name and style of M/s Ashok Iron and Steels for carrying on the foundry and engineering business with profit ratio of 25:75 per cent between the two groups. Similarly, the first petitioner and the third respondent had commenced in the year 1978, three more partnership business with profit ratio of 25:75 per cent between them. The Company incorporated in the year 1981 was a partner in M/s Ashok Iron and Steels. However, by a deed of dissolution dated 30.09.1982, the partnership was dissolved and the business of the dissolved firm was taken over by the Company. The third respondent and his family members hold 71.28 per cent, while the first petitioner and his family members hold 23.76 per cent of the total paid up share capital of the Company. The balance of 4.96 per cent of the shares of the Company is held by M/s Nutan Investments and Trading Private Limited, which is controlled by Hanji family and Humbarwadi family, in the ratio of 25:75 per cent of its paid up capital. Thus. Hanji family and Humbarwadi family have been holding 25:75 per cent of stake in the business ventures undertaken by them since the year 1973, despite the fact that there has been no such explicit understanding to the effect that 25 per cent would be held by Hanji family and 75 per cent by Humbarwadi family for all time to come. Nevertheless, the fact remains that Hanji family and Humbarwadi family have been sharing the profits since inception in the ratio of 25:75 per cent, whether the business is run in the name of the partnership or the Company. It therefore, goes without saying mat the intention of Hanji family and Humbarwadi family is to share the profits of the business in the ratio of 25:75 per cent.
Against this background, the grievances of the petitioners in regard to non payment of increased salary and/or commission and non-declaration of dividends must be considered.
It is not under dispute that the profits of the Company before interest and depreciation for the year ended 31.03.2004 accounted for Rs. 16.7 crores. Similarly, the profits for the year ended 31.03.2005 stood at Rs. 29.21 crores. The declaration of dividend or increase in the remuneration in the form of increased salary or commission is left to the collective wisdom of the board of directors of the Company. The first petitioner by his letters dated 15.12.2004 requested the board of directors (a) for payment of commission to the working directors on the net profits of the Company in proportion to the shareholding of the Company i.e. 75 per cent to Humbarwadi group and 25 per cent to Hanji group; and (b) for declaration of an interim dividend of atleast 50 per cent of the profits. The board of directors at the meeting held on 20.12.2004 deliberated the proposal putforth by the first petitioner on payment of managerial remuneration as well as declaration of dividend.
The board of directors collectively did not favour the proposal regarding managerial remuneration on the ground that managerial remuneration payable to the working directors is based on the professional qualification and competence and that it is nothing to do with the shareholding pattern. The board of directors dropped the item relating to declaration of dividend in view of the need for retaining the profits within the Company by way of reserves to meet margin money required for the expansion and growing needs of working capital. The first petitioner is a party to these decisions of the board of directors. While the first petitioner had no objection at the board meeting held on 14.03.2005, for paying the increased remuneration to the respondents 3 & 4, he was demanding for himself one-third of the managing directors' salary in view of his holding of 25 per cent shares in the Company. The first petitioner while suggesting certain changes to be carried out in the minutes of the meeting dated 20.12.2004, never objected to the decisions of the board of directors on payment of managerial remuneration and non-declaration of dividend to the shareholders. The sequence of events would show that there is no illegality in rejecting the proposal of the first petitioner regarding payment of managerial remuneration and declaration of dividend. At the same time, in a petition under Section 397 it is not the legality or illegality of an action which has to be examined, but it is the probity and fairness towards the petitioners in the matter of the proprietary rights as shareholders, with which the said decisions are taken must be considered. Though, the increase in remuneration and declaration of dividend were declined by the directors at the meeting held on 20.12.2004, yet remuneration of the respondents 3 & 4, being father and son, together with commission came to be enhanced to Rs. 1.5 crores and one crore per annum respectively with effect from 21.12.2004, as approved at the board meeting held on 14.03.2005. It shall be borne in mind that the board of directors at the board meeting held on 20.12.2004 declined to declare dividend in order "to meet the margin money required for expansions and growing needs of Working Capital".
While the remuneration of the respondents 3 & 4 was increased, the remuneration of first petitioner, one of the founder directors for the lat three decades, remained without any enhancement. There is no link between the shareholding and remuneration, but in commercial parlance profits are shared either in the nature of remuneration or commission or dividend. There is no doubt that while the respondents 3 & 4 got enhanced remuneration including commission with effect from 21.12.2004, the first petitioner was denied any benefits of the business of the Company. Every shareholder is entitled to enjoy the profits of the company in the shape of dividends as held in Life Insurance Corporation of India v. Escorts LimitedM.M.T.C, Limited v.Indo-French bio-Tech Enterprise Limited and Ors. (supra), it is one of the basic rights of a shareholder to receive the dividend declared by the company. In the light of these principles enunciated by the Supreme Court, failure to declare an adequate dividend would constitute unfair prejudice to the shareholders as held in Re Sam Weller & Sorts Limited (supra). Against this background, the decision in Jaladhar Chakraborty and Ors. v. Power Tools and Appliances Co. Limited and Ors. (supra), wherein it has been held that non-declaration of dividend perse would not amount to an act of oppression has no application to the present case. The circumstances under which the Court will interfere on account of non-declaration of dividend as elaborated in K.M.J. Joseph and Anr.
v. Kuttanad Rubber Company Limited (supra) are absent in the present case, yet the peculiar facts of the case before me would indicate that non-declaration of dividend, but selective and exorbitant increase of remuneration and commission to the respondents 3 & 4 without extending similar benefits to the first petitioner will be nothing but an act of oppression against the petitioners. The plea that the third respondent did not draw any remuneration, while the first petitioner was managing the affairs of the ' Company is in no way justifiable, in the light of meagre remuneration drawn by the first petitioner at the relevant point of time. This single act of oppression would not ordinarily give rise to any cause of action for filing a petition under Section 397, but at the same time when the petitioners are deprived of their rights and privileges, as recognized by the Courts, to enjoy the profits of the Company in the, shape of dividends, since its inception in the year 1981 such aggrieved shareholders can apply before CLB even in respect of even a single act, as held in Maharashtra Power Development Corporation Limited v. Dabhol Power Company and Ors. (supra) irrespective of the fact whether the quasi partnership principles, as enunciated in Hind Overseas Private Limited v. Raghunath Prasad Jhunjhunwalla and Anr.Kilpest Private Limited and Ors. v.Shekhar Mehra (supra), can be extended to the Company or not. In view of this, the question whether the CLB is empowered to grant any relief even when no case of oppression is made out by the aggrieved shareholders does not arise for my consideration. The grievance of the petitioners that the respondents 3 & 4 were paid commission, prior to approval of annual accounts on 04.06.2005, does not survive, in view of the ratification by the board of directors regarding payment of commission in favour of the respondents 3 & 4 at the subsequent board meeting, thereby it would relate back to the date of the act ratified, as held in Maharashtra Power Development Corporation Limited v. Dabhol Power Co. and Ors.
The specific charges are that the third respondent has been since the year 2001-02 illegally siphoning of funds, under the guise of sub-contracting charges, to the tune of over Rs. 78 lakhs from the Company to M/s Fluid Dynamics Private Ltd., a company exclusively belonging to Humbarwadi family. The Register of Contracts, a copy of which has been produced before the Bench discloses the particulars of contracts entered into by the Company with several of the entities including M/s Fluid Dynamics Private Ltd, during the period between 20.11.1982 and 01.12.1995. It is observed from the Register of Contracts maintained by the Company that job work was undertaken by M/s Fluid Dynamics Private Ltd., from time to time on several occasions.
The relevant entries as on 03.11.1994 and 01.12.1995 would show that the Company had given job work to M/s Fluid Dynamics Private Ltd. (pages 155 & 156 of the Register of Contracts). It is further observed from the Register of Contracts (page 149) that the first petitioner himself had signed the entry relating to job work given by the Company in favour of M/s Fluid Dynamics Private Ltd. The petitioners have produced copies of invoices at random relating to the job work done by M/s Fluid Dynamics Private Ltd, for the Company during the period between July 1994 and July 2005. The Company made available the vouchers for the period 2000-01 at the time of hearing for inspection by the petitioners. While the petitioners could not pin point any diversion of funds, they were merely asking for delivery challans.
excise forms and inward and outward entries in the gate register. The fact remains without any dispute that the Company has been entrusting job work to M/s Fluid Dynamics Private Ltd., for the past several years including during the period when the Company has been under the management of the first petitioner. The petitioners never made any grievance at any prior point of time, about siphoning of funds by the third respondent, but raised for the first time before the CLB. The first petitioner never chose to place the grievance relating to the alleged siphoning of funds on account of M/s Fluid Dynamics Private Ltd, at any of the board meetings. Further more, the general allegations mat the third respondent siphoned of Rs. 78 lakhs during the year 2000 and 2002 remain unsubstantiated, The petitioners are barred by laches or acquiescence from complaining of alleged illegal siphoning of the funds by the third respondent from the Company to M/s Fluid Dynamics Private Ltd more so when the accounts for the years 2000-01 and 2001-02 have been duly audited and adopted, without any objection raised by the petitioners. Similarly, the allegations regarding misappropriation of Rs. 1.07 crores are neither supported by particulars nor foundation laid for proving such misappropriation of funds. It is well settled that if the allegations are not established by evidence. no relief can be granted remedying any of such grievances.
The Company has three plants, of which, it is reported that plant-I and plant-II secured ISO 9000 and QS 9000 certification respectively. The grievance of the petitioners is that the third respondent is embarking upon to add one more foundry unit, without financial and technical viability for 36,000 tonnes at a cost of Rs. 62 crores. Similarly, the new machine shop with an investment of Rs. 26 crores has not become functional on account of addition of the outdated machines. With these enormous investments the plant and machinery will not be viable and the Company cannot service the huge outstanding debts., which will ultimately result in financial crunch. In this connection, the proceedings of the meeting of the board of directors of the Company held on 14.03.2005 and participated by among others the first petitioner assume importance. The board of directors resolved unanimously to increase the project cost of plant-III from Rs. 28.90 crores to Rs. 35.00 crores for capacity creation of 18,000 MTs per annum. The increase in cost of setting up plant-Ill was necessiated on account of the increase in prices of construction materials, especially steel and cement and also on account of upgradation of the old equipments, as borne out by the minutes dated 14.03.2005. It is further observed that the board of directors deliberated at the very same meeting the issue of increasing the capacity of plant-Ill from 18,000 MTs to 36,000 MTs with project cost of Rs. 62 crores in order to catch up the market demand for the Company's products. The board after discussions approved the increase in the capacity of plant-Ill from 18,000 MTs to 36,000 MTs with project cost of Rs. 62 crores. It shall be borne in mind that the first petitioner is a party to the unanimous decisions taken by the board of directors on the basis of financial and technical reports, copies of which have been produced before the Bench.
The decision to increase the capacity of plant-Ill, is a business decision, which is left to the absolute wisdom of the board of directors. It is the duty of the CLB to recognize the corporate democracy of a company in managing its affairs. It is not for the CLB to restrict the powers of the board of directors. It is not open to the CLB to interfere with day-to-day functions, management and administration of a company unless it is established that the decisions taken by the board of directors are ultra vires the Companies Act or the articles of association of the Company. It is not for the CLB to dictate to the board how it should function. The first petitioner without making any grievances at any of the subsequent board meetings, has belatedly challenged the increase in capacity of plant-III from 18,000 MTs to 36.000 MTs in the present proceedings. The conduct of the respondents in increasing the capacity of plant-Ill cannot be said to be burdensome, harsh and wrongful and does not satisfy the yardstick prescribed by the Supreme Court laid down in Shanti Prasad Jain v.Kalinga Tubes Limited The Company represented by its Chairman namely, the third respondent entered into an arbitration agreement in September 2004 on behalf of the board of directors with the first petitioner for himself and other family members, to determine the value of 25 per cent shares of the first petitioner and his family members in the Company in order to take away their 25 per cent share from the Company and quit. Accordingly, Shri T.N. Sanikop, Advocate and Shri M.S. Paranjape, Chartered Accountant, were appointed as arbitrators. The arbitrators proceeded with the arbitration proceedings and gave their award on 24.01.2005, despite the objections raised by the first petitioner regarding the validity of the agreement, reasons of which are not germane to the contentious issues before the Bench. In terms of the award dated 24.01.2005, the first petitioner and his family members should exit the Company and indicate the selling price of the shares. Thereafter, the Company shall accept the offer made by the first petitioner and his family members or quote its purchase price of the shares. If there is no consensus regarding the price between the vendors and the Company, the statutory auditor will fix the market value of the shares, which is binding on the petitioners as well as the Company. This award dated 24.01.2005 is under challenge before the Court of District Judge, Belgaum and in view of Section 34 of the Arbitration and Conciliation Act, 1996 there is a statutory stay on the operation of the award. Any order, which is stayed does not exist in the eye of law as held in Consolidated Coffee Limited v. Agricultural Income Tax Officer (supra).
According to the petitioners, the award is a fraud played on them and is totally void, in respect of which the first petitioner has lodged a criminal complaint against the arbitrators before the Court of Judicial Magistrate, Belgaum for offences punishable under various provisions of the Indian Penal Code, which however came to be stayed in the criminal petition filed before the Karnataka High Court at the instance of the third respondent. In the course of hearing, while the petitioners are willing to purchase the shares of the respondents at the rate of Rs. 15,000/- per share, the latter expressed their willingness to abide by Article 10 of the articles of association of the Company, in terms of which fair selling value of shares shall be determined by the statutory auditor of the Company. Accordingly, the respondents offered to purchase the shares of the petitioners for a sum of Rs. 5.000/- per share, which in my view, cannot reflect the current market value, in the light of the principles enunciated in Rakhra Sports Private Limited and Ors. v. Khraithilal Rakhra and Ors. (supra), according to which the valuation of shares must be carried out on gross profits earned by the Company. By virtue of Sections 397 & 398 read with Section 402. this Board is empowered to direct the purchase of the shares of any members of the company by other members thereof or by the company and has unlimited powers, as held in Debi Jhora Tea Co. Limited v. Barendra Krishna Bhowmick and Ors. (supra), to give directions contrary to the articles or provisions of the Act. The Company and the first petitioner are parties to the arbitration agreement and therefore, there can be no impediment in giving any direction for the purchase of the shares of the petitioners by other members namely, Humbarwadi family, not withstanding the fact that the award dated 24.01.2005, is under challenge before the Court of District Judge, Belgaum. The relationship between the first petitioner and the statutory auditor, one of the arbitrators, can not be expected to be cordial, on account of the criminal complaint lodged by the first petitioner in connection with the award dated 24.01.2005, by which the statutory auditor was to fix the reasonable market value of the shares of the Company. In view of this, any direction for purchase of the shares of Hanji family by Humbarwadi family at a fair selling value which may be fixed by the statutory auditor, in terms of Article 10 will not however be palatable. The valuation on the other hand, shall necessarily be carried out by any independent valuer, which will meet the ends of justice, thereby, the petitioners can exit the Company at a fair selling value, satisfying the spirit of Article 10 and bringing to an end the matters complained of by the petitioners and the principles enunciated in Re a Company (Supra). In view of the relief proposed by me, I do not find any need to go into the grievances of the petitioners regarding the alleged arbitrary amendments to the articles of association, which are left to the collective wisdom of the board of directors of the Company and the prejudices which the petitioners may suffer thereof. In this context, the purported removal of the eighth petitioner from the office of director is quite immaterial, especially when Hanji family is ready and willing to quit the Company on receipt of the fair selling value of the shares held by them.
Hanji family and Humbarwadi family have been, since the year 1973, carrying on the foundry and engineering business with profit ratio of 25:75 per cent between the two groups. It is not under dispute that Hanji family has invested their money in the Company on the understanding that 25 per cent of profits of the Company would be available to them, which has not been found to be followed and therefore, they are deprived of their privileges enjoyed since inception of the Company, resulting in a situation that it is just and equitable to wind up the Company as held in Loch v. John Blackwood Limited (supra). This fact would demonstrate that there is such a lack of probity in the conduct of the affairs of the Company that the petitioner can no longer have confidence in the respondents. The Company being a profit making concern with huge workforce, any order to wind up the Company will definitely prejudice the interests of the Company and its shareholders. The petitioners do not have the privilege of reaping the benefits of their investments in the Company and are not willing to make any additional investment while the proposed expansion of plant-Ill needs enormous funds. If, the respondents who are willing to pump in additional funds, are permitted to do so. it would result in change of the shareholding pattern which has been maintained for more than three decades. Further more, in view of the irreconcilable differences between Hanji family and Humbarwadi family, on the future expansion plans, the Company cannot function with the co-existence of these two families.
The intention of the petitioners, as could be ascertained from the company petition, is to seek appropriate remedial, measures with a view to bringing to an end the matters complained of by them. This is manifest from as many as fifteen reliefs as claimed by the petitioners.
It may be observed that the petitioners have not choosen to claim the monies invested by them from the controlling shareholders. It is only when the differences could not be reconciled between the petitioners and the respondents in carrying on together the affairs of the Company on account of, inter alia, the proposed expansion plans mooted out by the respondents Sri Udaya Holla, learned Counsel, came out with a workable proposal for the exit of the petitioners from the Company and not at any earlier point of time. At this juncture, it is relevant to point out that the first petitioner while questioning the validity of the arbitration agreement, merits of which are not being considered by me. in his communication dated 26.11.2004 advised the arbitrators that he had repeatedly emphasized that an settlement of his share in the business he wanted to have one or more of the divisions of the business and not merely money towards his share of the business. In the circumstances, the decision in Palghat Exports Private Limited and P.Ramkumar v. T.V. Chandran and Ors. (supra) will have no application to the facts of the case before me. It is, for these reasons, cannot be said that the presentation of the present company petition would amount to an abuse of the process of the Court as held in Re a company, exparte Kremer (supra) In view of my foregoing conclusions and in exercise of powers under Section 402 of the Act, it is hereby directed that the petitioners group, being minority shareholders will sell their shares in favour of the respondents at a value to be determined by an independent valuer.
Accordingly, M/s Deloitte Touche, Millers Road, Bangalore (Phone No.22254610) will determine the fair market value of the shares of the Company as at 31.03.2005, being proximate to the date of company petition, after taking into account the submissions which may be made by both the parties. The valuation which may be made by the valuers shall be binding on them. Within a period of 45 days from the date of receipt of the valuation report, the respondents, on receipt of the original share certificates together with blank transfer forms from the petitioners, settle the consideration for the shares at the value arrived at by the valuers. The Company will negotiate the lee payable to the valuers and shall bear the same.
With the above directions, the company petition stands disposed of. In view of this, all the interim orders in force are vacated. No order as to costs.