S.S. Subramani, J.
1. Writ Appeal No. 806 of 1994. - This writ appeal is by the petitioner against the judgment of the learned single judge in Writ Petition No. 19256 of 1993, dated May 10, 1994. This writ appeal was heard along with C. M. A. Nos. 743 of 1993 and 875 of 1994, since they are connected with the same matter.
2. C. M. A. No. 743 of 1993 is by the third respondent in the writ petition and C. M. A. No. 875 of 1994 is by the eighteenth respondent.
3. The relevant facts in the writ appeal are as follows :
According to this appellant, as per the resolution dated April 30, 1992, of the third respondent-company, it was resolved to increase the share capital from 5,000 equity shares to 25,000 equity shares having a value of Rs. 10 per share. As per article 6 of the articles of association, the same was offered to all the shareholders of the company. Since two shareholders did not agree to purchase the same within the period, the same was offered to the eighteenth respondent, another shareholder, who agreed to purchase the same. It was originally offered 8,000 shares according to the proportion of its holding. But it wanted an additional allotment of 12,000 shares more which was also agreed to be allotted. On that basis, all the 20,000 additional shares were allotted to the eighteenth respondent.
4. The eighteenth respondent wanted financial assistance, and it requested the petitioner for the same, and the same was agreed to be given by the petitioner/appellant. It was also agreed that the eighteenth respondent should pay interest at the rate of 15 per cent. per annum, and the additional shares were to be pledged to the petitioner as security for the financial assistance. On June 5, 1992, a resolution was passed by the petitioner-company to provide the financial assistance sought for by the eighteenth respondent. On the basis of the conditions stipulated in the resolution, the eighteenth respondent executed a letter of pledge on June 6, 1992. On June 7, 1992, it requested the third respondent herein to transfer shares which stood in the name of the eighteenth respondent. On June 15, 1992, the third respondent informed the petitioner that the 20,000 equity shares which stood in the name of the eighteenth respondent stood transferred in the name of the petitioner and directed that the name of the petitioner be recorded in the registers. The said fact was informed to the petitioner by the third respondent by letter dated June 16, 1992.
5. It is the case of the petitioner/appellant that respondents Nos. 4 to 7 filed an application before the first respondent herein under sections 397 and 398 of the Companies Act against the third respondent and others seeking the intervention of the Board. In that proceeding, the petitioner was not made a party. The petitioner was informed about the pendency of such a proceeding by the first respondent on the basis of a notice asking it to produce certain documents stated therein. In compliance with the direction, the petitioner/appellant produced the documents. In spite of the production of the documents, the petitioner was not discharged. The petitioner engaged an advocate to be present in the proceedings as a spectator since it was interested in the proceedings.
6. It is alleged that even though the petitioner was not made a party, the first respondent passed on order against the petitioner in the sense that the petitioner's name was directed to be deleted from the registers of the third respondent-company. The petitioner is, therefore, prejudiced by the impugned order. The main ground of attack against the order of the first respondent is that the petitioner/appellant was not given any opportunity to present its case and the entire order is violative of the principles of natural justice. Even though the petitioner put forward his contention on the violation of the principles of natural justice before the learned single judge, contention was also taken regarding the merits of the case. Its case was that by virtue of the first respondent's order, its right as a member of the company or as its shareholder now stands removed, and for that reason, it is aggrieved. The order binds it. The said order was sought to be set aside by invoking the extraordinary original jurisdiction of the writ court under article 226 of the Constitution of India.
7. In the original petition, the fifth respondent contested the proceeding on the ground that the petitioner was given sufficient opportunity to present its case. In fact, is advocate was present all along during the proceedings. Its further allegation was that the petitioner has suppressed material facts and the petition itself is filed at the instance of other respondents who hotly contested the case before the first respondent. The petitioner is only a pledgee and the allotment of shares in the name of the pledgor was invalid and that it was in violation of the articles of association of the company. There was no offer to the other shareholders and they were not even aware regarding the increase of the share capital. It is contended that the petitioner not only produced the document but also advanced elaborate arguments. It is further contended that in the proceedings under sections 397 and 398 of the Companies Act, the issue regarding how the company is being managed, and whether it affects the shareholders or the public at large alone has to be decided. An individual mortgagee or a person who claims to be a shareholder or a creditor cannot claim a relief. The proceeding is akin to a declaratory suit. The allegation that the proceedings before the first respondent was against the principles of natural justice was disputed. That there is no attempt made by the petitioner to get itself impleaded in the proceeding, and if it wanted, it could have done the same. The issue before the first respondent was whether the petitioner was a necessary party to the proceedings. The petitioner was participating in the proceeding through its advocate, without making an attempt to get impleaded. It was not interested in being made a party. It knew that the proceedings were initiated regarding the invalidation of the shares allotted to the eighteenth respondent, i.e., the pledgor of the petitioner. In effect, the fifth respondent contended that the entire proceeding was valid, and it was legal. It prayed for the dismissal of the petition.
8. Some of the respondents, namely, respondents Nos. 3 and 18, supported the case of the petitioner and they wanted the writ petition to be allowed on the ground that the order is bad on the ground of violation of the principles of natural justice. According to them, the petitioner is a necessary party to the proceedings, and any order passed by it has affected the petitioner, and hence it is bad.
9. By the impugned order, the learned single judge held that the proceedings before the first respondent are not liable to be quashed, and that the principles of natural justice were not violated. The appellant was aware of the purpose for which it was asked to appear before the first respondent. The appellant had in fact participated in the proceedings. It was further held that the appellant argued the case before the first respondent. The appellant is not an aggrieved party so as to invoke the extraordinary original jurisdiction of this court. The right of the appellant is only that of a pledgee which was also canvassed before it, and the order of the first respondent is just and equitable. Accordingly, the writ petition was dismissed. The correctness of that order is canvassed in this appeal.
10. Before this court, the main point advanced by learned counsel for the appellant was that the order of the Company Law Board is violative of the principles of natural justice. According to the appellant, the petitioner before the first respondent had in fact relinquished the relief against the persons who are not parties to the proceedings and in spite of the same, the name of the appellant had been directed to be removed from the registers of the company. The petitioner/appellant was not given any opportunity to present its case, and the finding that it is a pledgee of the shares of the eighteenth respondent is not correct. The proceedings under sections 397 and 398 of the Companies Act are really to avoid the petitioner and had the petitioner before the first respondent invoked the jurisdiction under section 111 of the Companies Act, which is the correct provision that should have been invoked, the consequence would have been different. The complainants before the first respondent were aware that the appellant is a necessary party, that one of the complainants before the first respondent filed a suit, namely, C. S. No : 966 of 1992 before this court seeking the reliefs that are sought for in the petition before the Company Law Board, which was subsequently withdrawn. In that suit, the first respondent and the appellant were also parties. The withdrawal of the suit was also mala fide and it was intended to avoid the petitioner from the proceeding. It was argued by learned counsel that he never argued regarding the merits of the case, though the learned single judge and the Company Law Board have gone into the merits of the case, which has affected him prejudicially. The said contention was supported by learned counsel appearing for respondents Nos. 3 and 18. According to them, the application filed before the first respondent is bad for non-joinder of necessary, parties. The complainants who are in the position of plaintiffs in a civil suit, purposely avoided making the appellant a party. Since it is a necessary party to the proceedings, the application before the Company Law Board was not maintainable, and the order is without jurisdiction. While canvassing the said contention, it was argued that originally proceedings under sections 397 and 398 of the Companies Act were taken before the civil court and the High Court, and that the power is now given to the Company Law Board. Except the forum, all the other procedures applicable to a civil suit are applicable before the first respondent. In that view, the non-joinder affects the maintainability and jurisdiction of the Board to consider the same.
11. It is further contended that apart from the non-joinder, the fundamental right of the appellant is also affected. He is entitled to be heard before adverse orders are passed against it. The principles of natural justice, according to learned counsel, which was originally a part of the procedure is now a part of the Constitution, and is covered by article 14 of the Constitution. It is also contended that since the order is passed without the necessary party, it is void, and the same cannot be implemented by any authority.
12. The said argument was countenanced by learned counsel for respondents Nos. 4 and 5. According to them, in a proceeding under sections 397 and 398 of the Companies Act, the appellant is not a necessary party. The main question that is agitated before the first respondent is regarding the allotment of shares to the eighteenth respondent in the C. P. For challenging the same, the appellant is not a necessary party. When once the allotment in favour of the eighteenth respondent is cancelled, the appellant, who was only a pledgee, cannot question the same. It is only a legal consequence of the cancellation of the allotment. For that purpose, the petitioner need not be heard. Alternatively; it was argued that in this case the appellant was fully heard by the first respondent, and, in fact, the appellant was represented by advocates and it also participated in the proceedings. The appellant had notice of the entire proceedings, but purposely avoided getting itself impleaded. It is further contended that the extraordinary jurisdiction of this court should not be invoked and the appellant should have invoked the jurisdiction under the Companies Act which is an effective alternative remedy : A necessary incidental proceeding was also initiated before the first respondent by way of an interlocutory application in I. A. No. 19 of 1992. In that proceeding also, it was held that the petitioner is only a pledgee. That order has not been challenged. It was also contended that under section 405 of the Companies Act, the appellant should have got itself impleaded if it felt that its rights are going to be affected. The appellant who had sufficient opportunity and notice of the proceedings, refused to do so, and the said conduct is sufficient to refuse to exercise the discretionary jurisdiction of this court. It is also contended that the writ petition is lacking in good faith, and that the appellant has taken inconsistent stands in the different courts and the case of the appellant is fully agitated by other persons. In fact, according to the contesting respondents, the appellant has filed this writ petition as well as this appeal only at the instance of other persons against whom orders have already been passed. Lastly, it was contended that even in case the principle of natural justice are found to be violated, ultimately, the petitioner is not going to get a better result, and the same result will have to follow. In that event, the court should not exercise its discretionary jurisdiction.
13. The first question to be decided in this case is, how far the principles of natural justice have been violated.
14. The said question depends on how far the appellant is a necessary party to the proceedings, and how far it is aggrieved by the order of the first respondent. To decide the said issue, certain facts in detail are necessary.
15. As on June 5, 1992, the third respondent-company was controlled by the following shareholders :
1. Standard Distilleries and BreweriesPvt. Ltd. (fifth respondent) 1,000 shares2. Stridewell Leathers Pvt. Ltd.(fourth respondent) 2,000 shares3. Bhankerpur Simbhaoli and BreweriesP. Ltd., (eighteenth respondent) 2,000 sharesTotal 5,000 shares
16. The company petition under sections 397 and 398 was moved by the first two shareholders who held the majority shares on that date. The application was filed along with two other persons, i.e., respondents Nos. 6 and 7 herein, who were also directors of the company. It is an admitted case that from April, 1992, there was some misunderstanding between the fourteenth respondent and also respondents Nos. 6 and 7, who are members of the Chhabria family. It began as a family feud, which spread to the establishments controlled by them. We find that on April 22, 1992, an advocate representing respondents Nos. 6 and 7 issued a notice to the third respondent and also some of its directors including the fourteenth respondent that they knew that there was an attempt to increase the share capital of the third respondent-company so as to take away the majority shares of the petitioner in the company. The notice was sent by registered post.
17. It is alleged that thereafter a meeting of the directors of the board was held on April 30, 1992, in which the share capital of the third respondent-company was directed to be increased from 5,000 to 25,000. The said meeting and increase in the share capital are challenged by the petitioners before the Company Law Board as fraudulent. It is alleged by the eighteenth respondent that notice was given to petitioners Nos. 1 and 2 before the Company Law Board offering the increased shares in proportion to the shares held by them. The same was sent by certificate of posting and a date was fixed for accepting the same. Petitioners Nos. 1 and 2 before the Company Law Board did not accept the same before the stipulated time, and hence it was offered to the eighteenth respondent. Originally, the offer was for 8,000 shares in proportion to the shares held by it. Later, the eighteenth respondent requested for increasing the allotment, and it was acceded to, since petitioners Nos. 1 and 2 before the Company Law Board did not accept the same. On the basis of the allotment in favour of the eighteenth respondent, the eighteenth respondent paid the share value in cash, and immediately thereafter, the eighteenth respondent wanted financial assistance from the appellant-company, and the request was accepted by the appellant as per letter dated June 5, 1992, on condition that the increase shares should be pledged to it for a period of three years, and that during the period of pledge, it will enjoy all the legal rights as a shareholder of the third respondent-company including the right to vote, etc. The eighteenth respondent accepted the conditions and, on June 6, 1992, executed a deed of pledge in favour of the appellant-company. The material clauses in the deed of pledge are in paragraphs 2 to 6 and they read thus :
'In the event of failure or default on the part of the borrowers in paying to you all outstandings under the said account whensoever and in whatever manner demanded by you (hereinafter referred to as 'the account'), you shall by giving 7 (seven) days' notice to us (such notice to be conclusive as to the default by the borrower) of its intention to sell, dispose of or otherwise realise or encash the said securities, be entitled without being liable for any loss or damage or dimunition in value sustained thereby, to sell, dispose of or otherwise realise or encash all or any of the said securities on such terms and in such manner and for such price as you may in your absolute discretion think fit and receive and apply the net proceeds of such sale, disposition, encashment or realisation towards satisfaction of the borrower(s) entire liability under the said account and we shall sign all such documents and furnish all such information and do all such acts and things as may be required by you for enabling or facilitating any such sale, disposition, realisation or encashment, as the case may be. In the event of deficiency in the sale proceeds of the said securities or any disposition realisation or encashment thereof, we shall be personally liable and responsible to make good such deficiency.
Without prejudice to any rights available to you in law as pledgees, we shall from time to time if and when so required by you, execute in favour of you and your nominee fresh transfer deeds in respect of the said securities pledged hereunder before the validity period of the transfer deeds lodged by us expires so as to ensure that you or such nominee always has in its possession valid transfer deeds in respect of the said securities.
During the period of the pledge, you or your nominee will be entitled to all accretions to the said securities, including all dividends/interest, bonus shares/rights shares and other benefits from time to time accruing or issued in respect of the said securities or any part thereof. We hereby agree that if so demanded by you, we shall from time to time deposit with you all interest/dividend from time to time receive in respect of the said securities and you will be entitled to adjust the same in liquidating the balance, if any, outstanding under the said accounts. We shall if so demanded by you from time to time forthwith also deposit with you all bonus shares and right shares that may from time to time be issued and they shall be deemed to form part of and be comprised in the expression 'the said securities' and subject to the pledge hereby created over the said securities if so demanded by you, we shall execute a supplemental document of pledge for the purpose. Without prejudice to the aforesaid, until they are deposited with you, we shall hold them in trust for you.
During the period of the pledge, you will be entitled to all the rights of a shareholder as available under law. You shall also have the right to have a separate folio allotted to you in the register of members in respect of the shares held by you under pledge.
During the continuance of this security, all voting rights in respect of any of the said securities shall be exercisable solely and exclusively by you.'
18. Subsequently, on June 7, 1992, the petitioner/appellant requested for the transfer of shares and the same was also transferred on June 15, 1992. The fact of transfer was also informed to the appellant-company by the third respondent by letter dated June 10, 1992. If we go by the transfer of shares alone, the arguments of the appellant's counsel would have some merit. But before going into the question of transfer, we have also to consider the articles of the company, and also the letters of pledge and the conduct of the appellant before the Company Law Board and the concession made by it before the first respondent.
19. On August 20, 1992, the first respondent passed an order in Company Application No. 29 of 1992, initiated by respondents Nos. 4 to 7. It is in pursuance of that order; the appellant was given notice regarding the proceedings. Paragraph 6 of the order reads thus :
'We also direct the Bench Officer, Company Law Board, to serve a copy of this order on Malleswara Finance and Investment Co. Pvt. Ltd. with the directions to them to appear before us in the next date of hearing and file be September - 25, 1992, copies of correspondence and other documents relating to acquisition of 20,000 shares in Shoe Specialities Pvt. Ltd. from Bhankarpur Simbhaoli Beverages Pvt. Ltd. and the sources of funds for the acquisition and present custody of the shares certificates together with a copy of the latest annual report........'
20. It is pursuant to the said order, the appellant was informed about. the pendency of the proceedings. The notice was, to appear on the next date of hearing and also to file the documents by September 25, 1992. It was for two purposes, namely, to appear on the next hearing and to produce the documents by September 25, 1992. The next hearing date was on October 26, 1992. On January 27, 1993, the appellant filed vakalat through advocates, Mr. K. K. Lahiri, Mr. A. Kumar and Mr. Pramod Saigal. On the same day, the same advocates, except Mr. Pramod Saigal, entered appearance on behalf of respondents Nos. 8 to 11 also. The fourteenth respondent also entered appearance on August 19, 1992, through Mr. Pramod Saigal, one of the advocates appearing for the appellant. It goes without saying that when the same counsel appear for the fourteenth respondent and also for some other respondents, they have a common case to be urged before the Company law Board and there is no inconsistency in their stand to be taken before them. It also goes without saying that they are agitating for the same cause and for the common purpose. Taking into account the above facts, we have to consider whether the principles of natural justice are violated.
21. Pursuant to the notice mentioned above, the appellant filed a memo (letter) before the first respondent on October 7, 1992. From that letter, it is clear that the appellant was aware of the purpose for which notice was issued to it. It had notice of the proceedings. After submitting the documents on that date, the appellant has stated in that letter thus :
'We, however, reserve our right to add, amend and modify our contentions and submissions at the time of hearing'.
22. The same is seen at page 1103 of the first respondents, file (Volume II).
23. From the above submission, it is clear that the appellant understood what it meant by hearing and the purpose for which the notice was sent to it. The hearing may be either oral or in writing. The appellant could have submitted his explanation in writing, or could have submitted his contentions orally. Along with this, we find that for all postings till the final orders are passed, the appellant was represented by an advocate before the Company Law Board. It is seen from the endorsement obtained at each and every posting. If the appellant was asked to produce the document, why he participated in the further hearings of the petitioner and why he engaged an advocate, is not explained. The vakalat filed authorises the advocate to act on its behalf for all purposes. Further, what has it got to submit if only he was asked to produce documents, is also not explained. The presence of the advocate throughout the hearing also shows that the appellant was aware that rights regarding the shares are being questioned in the proceedings before the Company Law Board and he silently participated in the same without any objection. The matter did not end there.
When the matter was being argued before the Company Law Board, the appellant's counsel admitted :
'It is an admitted position both by Malleswara and Bhankerpur that the only interest Malleswara has in these shares is as a pledgee'.
24. The said admission by the appellant's counsel before the first respondent also shows that it actually participated in the proceedings; and it was actually supported by the eighteenth respondent and it knew as to what was its legal position so far as the shares are concerned. The said submission before the Company Law Board by the appellant is not questioned either in the writ proceedings or in the appeal. So, when that submission stands, it has to be found that the appellant actually and actively participated in the proceedings before the Company Law Board and he knew the consequences of the order to be passed by it. In that view, it cannot be said that the principles of natural justice were violated.
25. In appeal, even though the appellant did not dispute the submission before the Company Law Board that his position is only that of a pledgee, before this court and in the writ petition, it was contended that the appellant was a transferee or at least a mortgagee in so far as the shares are concerned, and for that reason he should be heard. Even that contention forgets for a moment that nothing prevented the appellant from disputing that fact before the first respondent. This court will have to take as the truth what has been recorded by the Company Law Board, especially when the same is not challenged or disputed either in the writ petition or in this appeal. Vide Bhagwati Prasad v. Delhi State Mineral Development Corporation, : (1990)ILLJ320SC and State of Maharashtra v. Ramdas Shrinivas Nayak, : 1982CriLJ1581 .
26. Since a different stand is taken by the appellant before this court claiming itself to be a mortgagee, the same is also considered here de hors the admission made before the first respondent.
27. We have already extracted the clauses of the pledge agreement. The main contention of the appellant is based on clauses 5 and 6 of the pledge agreement. We may say that it should not be read in isolation. Clauses 5 and 6 should be read along with clause 3 of the agreement, and the circumstances under which the said document was executed. It is on the basis of clause 3, a pledge deed is executed and a blank transfer deed is also taken. It also says that the eighteenth respondent will execute in favour of the appellant or its nominee fresh transfer deeds from time to time, if and when required. It is this context, we have to find our whether a mortgage is created in respect of the shares allotted to the eighteenth respondent.
28. It is now admitted position that mortgage can be created in respect of movable properties also. The principles for governing the mortgage are the same as in section 58 of the Transfer of Property Act.
29. A mortgage must be in respect of an interest in a specific property. A blank transfer form which does not make mention of any property cannot therefore, be a mortgage in the eye of law. Where share scrips along with blank transfer forms are handed over, it does not automatically mean that the transaction is always one of mortgage of movables. Whether there was mortgage or pledge is a question of fact. It is in this context, we have to look into the clauses in the letter of pledge, and also the acceptance of the appellants to finance the eighteenth respondent as per letter dated June 5, 1992. Clause 1 of the deed of pledge says that the share certificates will be a continuous security and the certificates shall be subject to a pledge : It further says that without prejudice to the above rights, clauses 5 and 6 are incorporated. But even that right is in respect of the shares held by the appellant as a pledgee. The rights of the shareholders are all governed by the articles of association and also the provisions of the Companies Act. The appellant's case is that the appellant's name has been incorporated in the registers of the company in accordance with law. It only says that the third respondent has transferred it, and it is not concerned as to the nature of the transfer and how it was transferred. It only pleads ignorance as to the title of the eighteenth respondent and the resolution of the third respondent. The learned single judge has held that 'a reading of the board resolutions of Malleswara (appellant) and the letter of pledge makes it clear and beyond doubt that the appellant is only a pledgee of the shares of SSPL (respondent No. 3) held by Bhankerpur (respondent No. 18) '. It has also been rightly held that 'as a pledgee holding the shares as security, the interest of the appellant is only to protect the intercorporate deposit of Rs. 2,40,000 made by them. The appellant cannot claim any independent interest or right in the 20,000 equity shares, the allotment of which has been set aside by the Company Law Board (first respondent) '.
30.Article 6 of the article of association read along with article 7, 8 and 9 will show that a transfer of a share in favour of a stranger is more or less prohibited. It is said in the articles (sic) that shares have been transferred in favour of the appellant. The said clauses read thus :
'6. If at any time any shareholder desires transfer of his or her share held in the company, the share shall in the first instance be offered at a price determined by the auditors of the company to the existing share-holders or to such other party to whom the board of directors may agree.
7. No transfer of shares shall be made or registered without the previous sanction of the directors who may, in their absolute and uncontrolled. discretion, decline to register any proposed transfer of shares without assigning any reason. The directors may also decline to register any proposed transfer of shares if they are of the opinion that it would not be desirable to allow the proposed transferee to become a member or to increase his holding in the company.
8. Save as provided in section 108 of the Act, no transfer of shares shall be registered unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor or by or on behalf of the transferee shall have been delivered to the company together with the certificate or, if such certificate be non-existent, the letter of allotment of such shares. Such instrument of transfer shall specify the name, address and occupation (if any) of both the transferor and the transferee and the transferor shall be deemed to remain the member in respect of such shares until the name of the transferee shall have been entered into the register of members in respect thereof. Each signature to such transfer shall duly be attested by the signature of one witness who shall add thereto his address and occupation.
9. If at any time it is proposed to increase the subscribed capital of the company by allotment, the same shall be offered to the members who at the date of offer hold the equity shares in the company in proportion to the capital paid up on their shares. In case of refusal of the said offer by any such member the same shall be offered to the remaining members in proportion to their initial holding in the company.'
31. The above articles make it clear that it is obligatory on the part of any shareholder desiring to transfer his or her share held in the company, to offer the same at a price determined by the auditors of the company to the existing shareholders or to such other party to whom the board of directors may agree. Therefore, it is clear that the eighteenth respondent could not have transferred the shares to Malleswara (appellant) without first offering the same to the complainants before the Company Law Board. It is to be held that the appellant was recorded in the register of members only for the purpose of enabling the petitioner to receive dividend and exercise voting rights pursuant to the letter of pledge. Learned counsel, on the basis of the decision in Shatzadi Begum, Saheba v. Girdharilal Sanghi, : AIR1976AP273 , argued that it is a case of a mortgage and not a pledge. True, in that case, it has been held that obtaining of blank transfer is a convenient mode of exercising the right of sale which the pledgee in law is entitled to do. The validity of the transfer was not in issue in that case. The admitted shareholder executed the deed of pledge evidenced by exhibit A-1 in that case, directing the transferee to obtain the transfer of shares in his favour and also exercise the rights of a shareholder. It was in view of the said circumstance in that case, their Lordships held that it was a mortgage and not a pledge. The facts and circumstances of the case are entirely different, and on the basis of that position alone, we cannot hold that the deed of pledge executed in this case amounted to a mortgage. In fact; in view of the admissions made by the appellant before the Company Law Board, we can only say that the finding of the learned single judge and the Company Law Board that the document is only a deed of pledge and not a transfer, has to be upheld.
32. The third respondent-company is a private limited company. The transfer of shares are controlled by the articles. Hence, it cannot be considered as a marketable security. That also shows that there cannot be a mortgage.
33. It is only after finding that the appellant is holding the property only as a pledgee, the Company Law Board further found that necessary orders are required to protect its rights. It directed the eighteenth respondent to pay back the loan with interest. It directed the eighteenth respondent to pay the amount of Rs. 2,40,000 with interest due to the appellant. When protective orders have been passed by the Company Law Board, it cannot be said that the appellant is in any way prejudiced by virtue of the orders of the first respondent. The appellant's right as a creditor is protected, and the appellant cannot have any better relief than what has been granted by the first respondent.
34. In a proceeding under sections 397 and 398 of the Companies Act, the only question to be decided is, whether the affairs of the company are being conducted in a manner prejudicial to the interest of the company, or in any manner prejudicial to its members, or whether there is any material change that has taken place in the management and control of the company, and whether such constitution has affected or is likely to affect the affairs of the company. When we read these two sections, it is clear that the Company Law Board has taken into consideration how the company has been managed. It is not the individual's right or the rights of the individual shareholder or creditor that is the subject-matter of the litigation. The proceedings under sections 397 and 398 are like a declaratory suit. It is for that reason that the Companies Act provides that any person who is not a party can get himself impleaded in the proceeding. Section 405 of the Companies Act says :
'If the managing director or any other director, the managing agents, secretaries and treasurers or the manager, of a company, or any other person, who has not been impleaded as respondent to any application under section 397 or 398 applies to be added as respondent thereto, the Company Law Board shall, if it is satisfied that there is sufficient cause for doing so, direct that he may be added as a respondent accordingly.'
35. A reading of the said section will make it clear that if sufficient cause is shown, any person who has not been impleaded as a respondent to any application under sections 397 and 398 can get himself impleaded, if he desires. We have already stated that the appellant was all along present through his counsel, participating in the proceeding, and also submitted before the first respondent that its right is only that of a pledgee, but did not seek to implead itself for reasons best known to itself. We feel that such an action on the part of the appellant is intentional. We feel that it is intended to reserve for itself an opportunity to challenge the Company Law Board's order, if it goes against it. The opportunity to get itself impleaded was not exercised, and the appellant had waived its right to be a party to the proceeding. It did not want itself to be impleaded before, the Company Law Board. But in spite of the same, the Company Law Board (the first respondent) protected its interests and rights.
36. The question whether the appellant is a necessary party may also be considered.
37. The petitioner before the Company Law Board challenged the genuineness and truthfulness of the board meeting dated April 30, 1992, and also the subsequent decision to allot the shares to the eighteenth respondent. The alleged policy decision of the third respondent was in fact the subject matter before the Company Law Board. In that proceeding, the appellant cannot be a necessary party. The removal of its name from the register is only a consequential order, which the Company Law Board is bound to pass, to make its order effective. We are taking that view on the basis of the decision in General Manager, South Central Railway v. A. V. R. Siddhanthi, : (1974)ILLJ312SC , and also in Janardhana (A.) v. Union of India, : (1983)IILLJ175SC . It is also held in Cosmosteels P. Ltd. v. Jairam Das Gupta : [1978]2SCR422 that in a proceeding under section 402 of the Companies Act, reduction in the share capital is bound to ensue, but, before granting such a direction, it is not necessary to give notice of the consequent reduction of share capital to the creditors of the company and no such requirement is laid down in the Act.
38. Even if we hold that there had been some violation of the principles of natural justice, the result of the proceedings would not have been different. Before the learned single judge as well as before this court, the appellant's counsel argued on the rights of a pledgee and that of a mortgagee. According to learned counsel for the appellant, the appellant claimed the entire right as a shareholder of the company. That was the claim put forward by the eighteenth respondent as well as the third respondent before the Company Law Board. But when that is negatived, the appellant, even if it had put forward that contention before the Board has only to fail. There cannot be a different result. In Kapoor (S. L) v. Jagmohan, : [1981]1SCR746 , it was held that where, on the admitted or indisputable facts only one conclusion is possible and under the law only one penalty is permissible, the court may not issue its writ to compel the observance of natural justice, because, courts do not issue futile writs.
39. When the matter was being argued before us, we put a question as to whether the appellant has got a better case to be argued from what was contended before the Company Law Board. The appellant has filed an affidavit, which is replied by the respondents as well. The main contention that was put forward in the affidavit was that if the appellant had been made a party, it could have moved the Company Law Board to take into consideration the equity relief of permission to purchase the entire shares of the company. When the petitioner has come forward with a case which we have found not bona fide, the grounds stated in the affidavit also should fall on the same basis. In either way, a better result could not have followed than what was granted by the first respondent. It is only the right of the eighteenth respondent, if any, that the appellant can claim. If the equitable right sought in the affidavit is granted, then this court will have to recognise the illegality in proceedings in the allotment of shares to the eighteenth respondent. It means, this court will have to perpetuate the illegality.
40. Another contention of the appellant is that in spite of the petitioner before the Company Law Board having relinquished the relief against persons not parties to the proceedings, the first respondent has allowed the same. The said submission of learned counsel is not correct. Relinquishment of any relief can only be against a party to the proceedings. The relief of removal of the name of the appellant is incidental to the relief to be granted under sections 397 and 398. In Ramashankar Prosad v. Sindri Iron Foundry (P.) Ltd., : AIR1966Cal512 , it was held that it is always open to courts to give a plaintiff or an applicant such general or other relief as they deem just to the same extent as if it had been asked for. The powers under sections 397 and 398 of the Act are wide enough to grant that relief.
41. The writ petition was objected to by the contesting respondents on the ground that the petitioner has gut an effective alternative remedy, and the extraordinary jurisdiction of this court should not have been invoked.
42. Section 10F of the Companies Act provides for an appeal by the person aggrieved by the decision of the Company Law Board within 60 days from the date of communication of the decision or order of the Company Law Board or any question of law arising therefrom. The High Court is also given the power to condone delay if the appellant shows sufficient cause for not preferring the appeal within the period. In exercise of the powers conferred by sub-section (6) of section 10E of the Companies Act, 1956, the Company Law Board has made the Company Law Board Regulations, 1991. Regulation 1(3) says that the General Clauses Act, 1897 (10 of 1897), applies to the interpretation of these regulations as it applies to the interpretations of a Central Act. Regulation 2(p) defines the word 'party'. It says that 'party' means a person who files an application or petition before a Bench, the respondent, the Registrar of Companies or the Regional Director and includes any person who has a right under the Act to make suggestions or objections.
43. It is not disputed that the petitioner/appellant, as a creditor, or even on the basis of his claim as a mortgagee, had a right to make suggestions or objections even if no notice was issued to him, and even if he was not made an eo nomine party. So, by virtue of the regulation, a person who was not made an eo nomine party, can make suggestions or objections, and such a party would be deemed to be a party for the purpose of. proceedings before the first respondent. Such a person can file an appeal under section 10F of the Companies Act. The expression used is not 'party' but 'person aggrieved'. The appellant is not an eo nomine party. At the most, it may have to seek leave of this court. In case the court finds that the appellant's rights have been affected on a prima facie reading of the order, leave will be granted, vide Ponnalagu Ammal (K.) (Smt.) v. State of Madras, : AIR1953Mad485 , since section 10E of the Companies Act provides for effective remedy, the writ jurisdiction of this court should not have been invoked. The very same question as to whether the petitioner is a necessary party is also a matter in issue in the appeal filed by the third and the eighteenth respondents. Whether the petitioner's rights are affected is also in issue in the same appeal. When effective remedy is available by statute, we decline to interfere in proceedings which have to be decided mainly on affidavits.
44. A further argument was advanced before us that only a certain category of proceedings under the Act enables a person to make suggestions or objections as contemplated under section 2(p) of the Regulations, and since the petitioner in the writ petition does not come within that category, the appellant cannot be a party for the purpose of filing an appeal. For the said purpose, learned counsel relied on various sections, namely, sections 17(3), 101, 141, and 391 to 394. According to learned counsel, only when the Company Law Board invokes the powers under the said sections, he could file his submissions. A reading of the definition given to the word 'party' shows that it should not be interpreted in the way in which learned counsel for the appellant wants us to read it. It is too exhaustive a definition, and takes in all persons who are entitled to make suggestions or objections, as deemed parties. In this connection, it must also be remembered that the appellant itself has understood the meaning of the word 'party' as we have explained here.
45. On October 7, 1992, when it moved a representation before the Company Law Board, it reserved its rights to modify, cancel or add to the submission which it intended to make. So, it knew that it is a person entitled to make suggestions or objections. So, the appellant knew that its rights are only that of a pledgee. After having taken active part in the proceedings, it is futile for the appellant to contend that it could not put forward its suggestions or objections. Such a contention put forward by learned counsel for the appellant cannot be countenanced.
46. It is also the contention of the appellant that the order of the Company Law Board was not communicated to it, and without the same, it could not file an appeal. The said argument has no force. The regulation provides for getting certified copies on application by persons who are not eo nomine parties. Further, this writ petition as well as the writ petition filed before the Karnataka High Court were filed by the appellant on the basis of copies issued to other respondents through the advocates who also appeared for the appellant. Hence, that contention has also to fail.
47. It is also the contention of learned counsel for the respondents that the writ petition contains inconsistent pleas, and there is suppression of materials also. We find force in the said contention as well. All along, the case of the appellant is that it was asked to file the documents alone, before the Company Law Board, and in spite of the production of the documents, it was not discharged from the proceedings. In the affidavit, it has not given the details of the notice. A reading of the notice makes it clear that it was asked to appear for the hearing and also to produce the documents. As we have stated earlier, hearing includes both oral and documentary, which the appellant had before the first respondent. The said fact is materially suppressed in the writ petition. It also suppressed the filing of the representation on October 7, 1992, before the first respondent in which it has reserved its rights to make submissions before it.
48. In this writ petition, we find that certain false allegations have also been made. Before this court it has stated that it moved an oral application before the Company Law Board (first respondent) and it wanted to be made a party and that the same was declined. We find that such a contention is false to its own knowledge. The same can be found to be false in view of the earlier proceedings taken by the appellant before the Karnataka High Court. Before the Karnataka High Court, it only stated that even on the production of the documents before the first respondent, it failed to discharge the appellant from further appearance. The learned single judge has given in detail the inconsistent stands taken by the appellant in courts and forums, which we do not want to narrate once again. We fully agree with the observations of the learned single judge in holding that the appellant has been taking inconsistent stands before different courts and forums, and that it has also suppressed material facts and the present writ petition is filed without good faith. We confirm that finding of the learned single judge. In this connection, it is worthwhile to note the decision of this court. In Marappa Gounder (K.) v. State of Madras [19561] 1 MLJ 324; [1956] LW 58, it has been held that it is obligatory on the part of a person invoking the writ jurisdiction of the High Court to make a full and true disclosure of all relevant facts. If the petitioner has suppressed materials and relevant facts, which, if brought to the notice of the court, when applying for the rule nisi, should have certainly influenced the court in deciding one way or the other, it is not enough to say that even had these facts been placed before the court, it might have issued rule nisi pending a final investigation. It was further held that the suppression of facts was certainly intended to deceive the court into granting the order.
49. Learned counsel on both sides also relied on various decisions of the Supreme Court and various High Courts regarding the applicability of the principles of natural justice, and how far the same has affected the decision of the first respondent.
50. Before going to the decisions we may consider as to what is meant by principles of natural justice.
51. Natural justice generally means that persons liable to be directly affected by proposed acts, decisions or proceedings, be given adequate notice of what is proposed, so that they may be in a position, (a) to make representations on their own behalf; or (b) to appear at a hearing or inquiry (if one is to be held); and (c) effectively to prepare their own case and to answer the same (if any) they have to meet. In S. A. de Smith's Judicial Review of Administrative Action, third edition, at page 173, it is noted that notice is not necessary or obligatory if a person claiming to be aggrieved had known or did in fact know what was being alleged or what was likely to happen to him, or that he suffered no real detriment by the omission or impliedly waived the defect by appearing at a subsequent hearing. The principles of natural justice guarantee only adequate opportunity of appearance and they do not guarantee that a hearing or inspection shall never proceed or that action shall never be taken to a person's detriment unless everyone entitled to appear does in fact appear. The learned author also says, at page 177 of the same edition, that 'hearing means both oral and written submissions, and what the party has to be given is only an opportunity to be heard and not that the person must be compelled to be heard.' The person against whom an order is passed, cannot insist that he must be heard only in a particular capacity. It is not the insistence of the law. It only contemplates that he must be given an opportunity of being heard, and the deciding authority must act in fairness.
52. In Russell v. Duke of Norfolk [1949] 1 All ER 109 (CA), it was held that the requirement of natural justice must depend on the circumstances of the case, the nature of enquiry and rules under which the Tribunal is acting on the subject-matter that is being dealt with, etc. In that case, it was decided that the person concerned must have opportunity to be heard. It was held that domestic Tribunals are entitled to act in a way, which would not be permissible on the part of local justice sitting as a court of law.
53. The same author, in Constitutional and Administrative Law, 1971 edition, held that the rules of natural justice are often described as 'fair play in action'. One must always remember, however, that natural justice imposes no more than a duty to observe minimum standards of procedural fairness. It does not require that the decision be right or even just; or that reasons be given for the decision; or that the proceedings be conducted in public or that a record of the proceedings be maintained. On the basis of the said enunciation of law, we cannot but conclude that the appellant in this case was given sufficient opportunity, and it did avail of the same, though it did not avail of the opportunity of being made a party which it was entitled to.
54. In Tripathi (K. L.) v. State Bank of India, : (1984)ILLJ2SC , it was held that the basic concept is fair play in action - administrative, judicial or quasi-judicial. The concept of fair play in action must depend upon the particular lis, if there be any; between the parties, if the credibility of a person who has testified or given some information is in doubt, or if the version or the statement of the person who has testified, is in dispute, the right of cross-examination must inevitably form part of fair play in action but where there is no lis regarding the facts but certain explanation of the circumstances there is no requirement of cross-examination to be fulfilled to justify fair play in action. It was further held in that case that the rules of natural justice are flexible and cannot be put in any rigid formula. In order to sustain a complaint of violation of principles of natural justice on the ground of absence of opportunity of cross-examination, it has to be established that prejudice has been caused to the party concerned by the procedure followed. Neither cross-examination nor the opportunity to lead evidence by the delinquent is an integral part of all quasi-judicial adjudications.
55. In Vohra (J. R.) v. India Export House Pvt. Ltd., : [1985]2SCR899 , the question that came up for consideration was, whether under the Delhi Rent Control Act, the tenant was liable to be put on notice under the relevant section of the Act. As per the said Act, once a limited tenancy is properly created under section 21, the order for putting the landlord in vacant possession of the leased premises by evicting the tenant at the expiry of the fixed period has to be passed as a matter of course. In that case, the landlord issued a notice to the tenant that the period of lease was to expire, and that he must vacate the premises. The tenant did not vacate the premises, nor did he reply to the notice. The landlord thereafter moved the authorities under the Act for getting vacant possession. A warrant of delivery was issued without giving notice to the tenant. The same was challenged before the Delhi High Court, on the ground that the order violates the principles of natural justice. The challenge was upheld by the Delhi High Court. The matter was taken to the Supreme Court. Their Lordships of the Supreme Court held in that case as follows (headnote) :-
'Section 37(1) incorporates only a rule-of natural justice, namely, that an order prejudicially affecting a person shall not be made without hearing him and considering his objections, if any, to the proposed order. But an order can be said to affect a person prejudicially only if any right of his would be affected adversely and in view of the non obstante clause contained in section 21, the tenant on the expiry of the limited period has no right or protection whatsoever under any law to continue in possession and as such the issuance of a warrant of possession directing him to vacate the premises in his occupation cannot be regarded as one which prejudicially affects him.'
56. In this case, it is admitted by the appellant before the first respondent that his position is that of a pledgee : Its contention has been recognised by the first respondent and necessary direction has been given to pay the amount due to it. In that view, we cannot find that the appellant is in any way prejudiced by the order of the first respondent.
57. In Rattan Lal Sharma v. Managing Committee, Dr. Hari Ram (Co-education) Higher Secondary School, : (1993)IILLJ549SC , it was held as follows (at page 2161) :
'What particular rule of natural justice should apply to a given case must depend to a great extent on the facts and circumstances of that case, the framework of the law under which the enquiry is held and the constitution of the Tribunal or body of persons appointed for that purpose. Whenever a complaint is made before a court that some principle of natural justice had been contravened, the court has to decide whether the observance of that rule was necessary for a just decision on the facts of that case.'
58. It was further held, approving the statement of law made by Prof. Wade in his Administrative Law, as follows (at page 2161) :
'It is not possible to lay down rigid rules as to when the principles of natural justice are to apply : not as to their scope and extent. Everything depends on the subject-matter, the application for principles of natural justice, resting as it does upon statutory implication, must always be in conformity with the scheme of the Act and with the subject-matter of the case. In the application of the concept of fair play there must be real flexibility. There must also have been some real prejudice to the complainant; there is no such thing as a merely technical infringement of natural justice. The requirements of natural justice depend on the facts and the circumstances of the case, the nature of the enquiry, the rules under which the Tribunal is acting, the subject-matter to be dealt with, and so forth.'
59. In this case, except for an argument that there was violation of the principles of natural justice, the appellant was not in a position to bring to our notice the kind of violation complained of, and how far the appellant was prejudiced. It was merely a technical argument on the basis of the alleged infringement. It was for that purpose, we asked the appellant to submit an affidavit regarding the so-called claims which it could not make since it was not made an eo nomine party. Accordingly, an affidavit was filed on August 30, 1994. In the said affidavit, except stating the various grounds mentioned in the grounds of appeal, no real additional contentions have been taken. According to the appellant, the points raised in paragraphs (h), (i), (j), (k) and (l) of the affidavit could not be raised by him before the first respondent.
60. We have already stated that in the proceeding under sections 397 and 398 of the Companies Act, the allotment of additional shares to the eighteenth respondent was the main question that was being agitated. The appellant, under normal circumstances, cannot be interested in that proceeding, and he could not be heard since he was only a creditor. What the appellant now wants is, that it should be allowed to agitate those points. We do not think that the contentions stated in the affidavit will in any way affect the decision of the case. There would not have been even a remote chance of a change in the decision by the first respondent. Some of the contentions that have been raised are legal arguments not affecting the facts. Such contentions have been taken and fully argued by the appellants in the connected appeals, who support the present appellant in this writ appeal. In that view, we hold that there could not have been any prejudice to the appellant, nor its right affected in any way.
61. In Ramana Dayaram Shetty v. International Airport Authority of India, : (1979)IILLJ217SC , generally known as International Airport Authority's case, their Lordships said that the principles of natural justice are part of article 14 of the Constitution. Their Lordships further held that a decision violating the said principles is really void. After so holding, their Lordships refused to interfere in that case only for the reasons that the petitioner therein was instigated by some other person, and that the application was lacking in good faith. In this case, in spite of the appellant being protected by the order of the first respondent, it has filed this writ petition at the instance of respondents Nos. 3 and 18, who themselves have taken the cause of the appellant in the same proceedings and have also filed appeals. Since the writ petition is lacking in good faith and has been filed at the instigation of some others, we refuse to exercise our discretion.
62. The appellant also relied on the decision in Union Carbide Corporation v. Union of India, : AIR1992SC248 , known as the Bhopal Gas Tragedy case. The question that came up before the Supreme Court was, how far the settlement arrived at between the Union of India and others will bind the individuals who are immediately connected with the decision, and who were not heard. Taking into consideration all the facts, their Lordships of the Supreme Court held that 'the principles of natural justice should not degenerate into a set of hard and fast rules. There should be a circumstantial flexibility'.
63. It is held in R v. Secretary of State for the Home Department, ex parte Mughal [1973] 3 All ER 796 (CA) that the natural justice must not be stretched too far. Only too often people who have done wrong seek to invoke the principles of natural justice so as to avoid the consequences.
64. We have already found that the principles of natural justice have not been violated. Moreover, persons who are more interested in retaining the appellant as a shareholder, have filed appeals, and have taken up the contentions of the appellant.
65. For the above reasons, we do not find that there is any infirmity in the order of the first respondent The same is not liable to be quashed in a proceeding under articles 226 of the Constitution. We further hold that the appellant's rights have been well protected, and that the appellant is not prejudiced, nor have its rights been affected.
66. In the result, the decision of the learned single judge has only to be confirmed, and it is accordingly confirmed.
67. C. M. A. No. 743 of 1993 and C. M. A. No. 875 of 1994. - Both these appeals under section 10F of the Companies Act arise out of the order passed by the Company Law Board, New Delhi, in C. P. No. 29 of 1992.
68. C. M. A. No. 743 of 1993 is filed by respondents Nos. 1 to 6, and C. M. A. No. 875 of 1994 is filed by the eighteenth respondent before the Company Law Board.
69. An application was filed under sections 397 and 398 of the Companies Act in C. P. No. 29 of 1992, before the Company Law Board, New Delhi, by Stridewell Leathers Private Limited and Standard Distilleries and Breweries Private Limited along with their directors. In both the appeals, the petitioners before the Company Law Board are respondents Nos. 1 to 4. The parties in these appeals are described as in the company petition.
70. Petitioners Nos. 1 and 2 are registered shareholders in the fifth respondent-company holding 2,000 and 1,000 equity shares of Rs. 10 each, respectively, out of the total paid-up capital of 5,000 equity shares as on June 5, 1992. They together constituted 60 per cent. of the total paid up capital, the balance 2,000 equity shares being held by the appellant in C. M. A. No. 875 of 1994. It is the contention of petitioners Nos. 1 to 4 that on June 5, 1992, the sixth respondent issued additional 20,000 equity shares of Rs. 10 each to the appellant in C. M. A. No. 875 of 1994 (hereinafter referred to as the eighteenth respondent before the Company Law Board) without making any offer to the petitioners as the existing share-holders. According to the petitioners, even after the fraudulent increase in the shares, they constituted 12 per cent. of the increased paid-up capital and hence they satisfied the eligibility criteria under section 399 of the Companies Act for filing the application. Petitioners Nos. 3 and 4 are directors of the company and also shareholders and in that capacity, they have joined in filing the application.
71. According to the petitioners, from April, 1992, a serious fraud was being committed by one faction of the Chhabria family. They were engaged in fraudulent transactions since March-April, 1992. According to them, the eighth respondent's group resorted to conspiracy and fraud to confiscate the majority holding of the petitioners in the fifth respondent-company and convert their majority into a minority.
72. There were proceedings before the Company Law Board under sections 247 and 250 of the Companies Act; filed by the eighth respondent seeking to investigate into the ownership of shares in Gordon Woodroffe Ltd. held by Tracstar Investment Private Limited and the fifth respondent, alleging that certain undisclosed persons have wrongly obtained control of the shareholdings of the fifth respondent and Tracstar. In these proceedings, on May 25, 1992, when the fifth respondent filed its affidavit dated May 23, 1992, and even up to the hearing on June 8, 1992, when the petitioners as shareholders of the fifth respondent-company applied to the Company Law Board for impleading themselves as party, none of the parties controverted the position of 60 per cent. of the paid-up capital in the fifth respondent being held by petitioners Nos. 1 and 2 and the balance 40 per cent. by the eighteenth respondent (appellant in C. M. A. No. 875 of 1994).
73. According to them, one Mr. P. R. Pandia, who was a company secretary, played fraud and through his influence certain documents were created. The object of the fraud, according to them, appears to be the issue of further shares in the fifth respondent-company, so as to reduce the holding of the petitioners from 60 per cent. to 12 per cent. and to increase the holding of the eighteenth respondent from 40 per cent. to 88 per cent. which was achieved by raising the paid up capital, by issuing the entire further shares of Rs. 2 lakhs to the eighteenth respondent. As per article 9 of the articles of association of the fifth respondent, an offer of new shares must be refused by a member. That is a condition precedent to offer the said shares to other members. The first respondent and its officials exerted pressure on Mr. P. R. Pandia to misuse his position as ex-director of the second petitioner-company and as the representative of the second petitioner-company in the fifth respondent under section 187 of the Companies Act, to sign the documents so as to show as if the first respondent refused to subscribe to the additional shares. Three subordinate officers of the eleventh respondent-company who ceased to be directors with effect from April 10, 1992, in the fifth petitioner-company, also colluded with their bosses in the eleventh respondent-company by creating and forging records, to show that the second respondent-company had declined to subscribe the additional shares in the fifth respondent-company. It is further stated that the meeting dated April 30, 1992, was intended to defraud the petitioners. Even long before the alleged meeting dated April 30, 1992, a notice was issued by petitioners Nos. 1 and 2 to the fifth respondent and its directors, to desist from exercising their powers in any manner prejudicial to or undermining the interests of the shareholders in the company. In spite of the same, on April 30; 1992, the directors took a decision in violation of article 9 of the Articles of association, to bring down the majority holding of the petitioners. It was further averred that the fifth respondent was doing contract jobs and did not have sufficient plant and machinery, and there was no justification for further raising the paid-up capital, and that the paid-up capital was increased only with an intention to bring the petitioners to a minority position. According to them, the issue was not in accordance with article 9 of the articles of association, and that there was no offer to the existing shareholders.
74. According to the petitioners, when the petition before the Company Law Board was filed by the eleventh respondent, the above acts were not informed to the Board till June 9, 1992, even though so many affidavits were filed. Only on June 9, 1992, when the petitioners sought to implead themselves in that case, an affidavit was filed stating that they are now minorities. Even at that time, nothing was stated as to whom additional shares were allotted. There after, the petitioners filed the present petition on July 15, 1992, for the following reliefs :
'(a) to declare as null and void and as non est the resolutions passed by respondents Nos. 2 to 6 after May 23, 1992;
(b) to declare as fraudulent, unlawful and void and as non est the resolution and decision to issue, allot and the issue and allotment of, further capital, in the company, to the extent of Rs. 2,00,000 to Bhankerpur;
(c) to reduce and bring down the capital of the company to Rs. 50,000 as in existence before the fraudulent allotment and to return the money received towards the fresh allotment to Bhankerpur;
(d) to declare as void unlawful and non est any transfer of its shares by Bhankerpur made after May 23, 1992, whether out of its original holdings or the impugned newly issued paid-up capital;
(e) to declare the resolutions passed by respondents Nos. 2 to 6 after May 23, 1992, supporting SWC/MRC in the matter of GWL are null and void;
(f) to remove respondents Nos. 2 to 6 from the office of the director of the first respondent-company;
(g) to direct the first respondent-company to convene the extraordinary general meeting of the first respondent-company and to direct voting on the resolution proposed in the requisition of the two petitioner-companies dated June 12, 1992, on the basis of the paid-up capital and voting rights subsisting prior to the impugned further issue of the paid-up capital of Rs. 2,00,000 in favour of Bhankerpur;
(h) to strike off affidavits sworn to by the fourth respondent on May 23, 1992, and June 29, 1992, before this Hon'ble Bench in C. P. No. 19 of 1992;
(i) grant injunction restraining respondents Nos. 2 to 6 from convening the extraordinary general meeting pursuant to the notice dated June 12, 1992, sent by the petitioners or to any notice sent or purported to have been sent by Bhankerpur or by any persons who own, hold or possess the shares allotted after May 23, 1992, or their nominees or suo motu on the basis of enhanced paid-up capital of Rs. 2,50,000 and the enhanced voting rights;
(j) grant an injunction restraining the respondents from permitting the allottees of the fresh allotment of equity shares of Rs. 10 each from exercising their rights as shareholders of the first respondent-company including the voting rights;
(k) grant injunction restraining the respondents from transferring the further issue of equity shares made on or after May 23, 1992, by respondent No. 1 to any other person.'
75. A detailed counter-affidavit was filed by one of the directors of the fifth respondent-company on his own behalf and on behalf of respondents Nos. 1 to 10, all of them directors of the said company. According to them, the application under sections 397 and 398 of the Companies Act is misconceived. The first contention taken by them is that the application is barred in view of the pendency of the suit filed by one of the petitioners before the Madras High Court as C. S. No. 966 of 1992 for the same relief. In view of the filing of the suit, the said respondents contended that the petitioners have elected not to proceed with the application under sections 397 and 398 of the Companies Act, and the Company Law Board should not take note of the proceedings before it. They prayed that the Company Law Board should not entertain the proceedings. It is further averred that the reliefs claimed in the petition are available to the petitioners in the civil court, and that there is an alternative remedy, and having chosen to invoke the alternative remedy, the application before the Board either should be stayed or held as not maintainable. It was further averred by them that the grounds mentioned in the petition will not amount to oppression or mismanagement of the affairs of the fifth respondent-company. The last ground was that there are no grounds made out for the winding up of the company which is essential to invoke the powers under sections 397 and 398 of the Companies Act.
76. It is further stated that none of the conditions stipulated under sections 397 and 398 of the Companies Act have been fulfilled, and the reliefs prayed for are not for the benefit of the fifth respondent-company. According to them, the instant proceedings have been issued only to pressurise the respondents including the fifth respondent to submit to the unlawful activities of the petitioners Nos. 3 and 4. It is filed with an improper motive and the whole object was to bring the individual rivalry before the forum, and under those circumstances, they wanted a dismissal of the application.
77. On the merits of the case, they contended that the application is vague and lacks material particulars. They denied that Mr. Pandia had anything to do with the offer to increase the capital of the twelfth respondent. According to them, Mr. Pandia never manipulated any record. According to them, one R. K. Bhattacharya, one of the directors of the company had informed in writing that the are not willing to accept the offer made, and he has written a letter to the fifth respondent rejecting the same. In so far as the offer made to the second petitioner is concerned, it was alleged that they have not answered within the stipulated time. The offer was made to petitioners Nos. 1 and 2 by sending the same by post evidenced by certificate of posting dated May 2, 1992. Since petitioners Nos. 1 and 2 did not accept the offer, the same was offered to the eighteenth respondent. Originally, the eighteenth respondent was offered 8,000 shares in proportion to the shares held by it. It was allotted additional shares of 20,000 since the same was rejected by the other shareholders. The allotment of shares to the twelfth respondent was legal and the same cannot be questioned by the petitioners, nor can it be a ground for invoking the jurisdiction of the Board under sections 397 and 398 of the Companies Act. The allotment of the additional shares to the eighteenth respondent was on the basis of the decision taken by the fifth respondent legally and with notice. The issue of allotment of shares in the fifth respondent-company does not in any manner alter or change its affairs, and no majority has been created. No communication or intimation was issued by the eleventh respondent to the fifth respondent with regard to any issue or allotment of shares. The decision regarding the issue or allotment had been taken by the fifth respondent independently of the eleventh respondent and its board. They prayed that the individual dispute between the directors or their family members should not be investigated in a proceeding under section 397 of the Companies Act.
78. The eleventh respondent, in its reply to the petition on its own behalf and on behalf of respondents Nos. 8, 9 and 10, challenged the maintainability. It is contended by them that petitioners Nos. 2 and 12 are under its control and its directors are its ex-employees : It was further stated that no authority-has been given to the second petitioner to institute the proceeding and the user of, the name of the second petitioner in the proceeding is without authority and that the same has to be removed. The allegation of conspiracy and fraud resorted to by the eleventh respondent was denied. They also supported the case of the first respondent and wanted dismissal of the petition.
79. The eighteenth respondent who is the appellant in the other C. M. A., namely, C. M. A. No. 875 of 1994, also supported respondents Nos. 1 to 6 and 11. According to them, the shares were allotted to them legally. The first respondent communicated the allotment of shares on June 5, 1992, and thereafter on June 6, 1992, the said shares were pledged in favour of one Malleswara, and the pledge was in its very nature a mortgage for Rs. 2,40,000 made by it. On the same day, blank transfer was made transferring the rights over the same to Malleswara, through a letter.
80. The fifteenth respondent, in his reply, denied having any part in creating any document. He said that he is an unnecessary party, and he is at present secretary of the company B. D. A. Limited with effect from April 9, 1992. After the petition was filed, an application was filed by one V. B. Nandhi on October 16, 1992, in his individual capacity that the second petitioner's name should be deleted from the array of petitioners. The said application was also considered by the Company Law Board. In that application, namely, C. M. P. No. 92 of 1992, it was contended that Malleswara to whom the shares were pledged by the eighteenth respondent is under the ultimate control of the eleventh respondent. Since the second petitioner is not under the control of the respondents Nos. 3 and 4 and since they are not authorised to institute the proceedings, the application is liable to be dismissed. He requested that the name of the second petitioner be deleted from the petition.
81. The said application was dismissed by the Company Law Board along with the order which is now under challenge. But we find that the dismissal of the order in C. M. P. No. 92 of 1992, is not challenged in the C. M. A. No ground has been taken questioning the correctness of the said order. But certain facts in the interlocutory application have got some relevance in disposing of the C. M. A. Those findings are : (1) that it is the practice of the second petitioner-company to accept registration orally; (2) that R. K. Battacharya ceased to be a director of the second petitioner-company from April 10, 1992, and that the same is clear from a copy of Form 32 filed before the Registrar of Companies and which was accepted, and that the affidavit filed by Mr. Nandhi in support of C. M. P. No. 92 of 1992, cannot be entertained. It was further held that the board meetings of the second petitioner-campany which used to be held at Calcutta are not genuine meetings. The minute books are prepared by it at the instance of R. K. Battacharya who ceased to be a director with effect from April 10, 1992. It was one of the contentions in the C. M. A. that the board of directors was reconstituted on April 10, 1992, and the necessary form was filed on April 29, 1992, before the Registrar of Companies. It was further submitted that the allegation that all the documents produced as well as the minutes books are fabricated false. Accepting the contentions of the petitioners, C. M. P. No. 92 of 1992, was dismissed.
82. The Company Law Board, by the impugned order, held that the allotment of additional shares to the eighteenth respondent, i.e., the appellant in. C. M. A. No. 875 of 1994, is not proper, and the share capital of the fifth respondent be reduced to 5,000. The members register was also directed to be rectified directing to remove the name of Malleswara from the register of members. The fifth respondent was directed to return the amount to the eighteenth respondent due to the repayment of intercorporate deposit to Malleswara on their giving an undertaking to be placed with Malleswara in order to satisfy the pledge. The Board also cancelled all resolutions passed by the general body meeting of the fifth respondent subsequent to June 5, 1992, including the request made on July 15, 1992. It is the said direction that is challenged in this appeal.
83. The main grounds of attack against the order of the Company Law Board are : (1) Petitioners Nos. 3 and 4 are not competent to file the application and, therefore, the application is bad for misjoinder of parties. (2) The petitioners have filed a civil suit before the Madras High Court which amounts to an election and abandonment. The result is that they have abandoned the relief sought for before the Company Law Board. (3) The reasoning adopted by the Company Law Board regarding the allotment of shares is wrong. It is against pleadings and admissions, overlooking statutory provisions regarding presumption. (4) The allegation before the Company Law Board is not proved by any evidence. Fraud of one kind was alleged, but another kind of fraud is sought to be proved. No evidence was taken. (5) It was further contended that though in the application before the Company Law Board; so many allegations are made, ultimately except regarding the allotment of shares to the eighteenth respondent, all other matters have been given up. In that case, the proceedings cannot be maintained under sections 397 and 398 of the Companies Act. (6) There is nothing to show that the notice contemplated under section 400 of the Companies Act was issued to the Central Government. Hence, the application is liable to be dismissed. (7) The application under section 397 of the Companies Act was reduced to an application under section 111 of the Companies Act. If so, the procedure contemplated under section 111 of the said Act should have been followed.
84. The appellant in C. M. A. No. 875 of 1994, also supported the argument of the appellant in C. M. A. No. 745 of 1993. No additional contention was taken by the appellant in C. M. A. No. 875 of 1994.
85. Regarding the contention that no notice was issued under section 400 to the Central Government, we may say that such a contention is not correct. We find that notice was issued on July 27, 1992, and on behalf of the Central Government, a letter is also issued on September 23, 1992, to the Company Law Board informing that it has decided that no representation need be filed on behalf of the Central Government, either to oppose or support the petition. The Central Government has left the matter to be decided by the principal Bench of the Company Law Board. The Government, therefore, requested to inform the decision taken in the matter before the Bench when the matter comes up for hearing. In view of the said order by the Union of India, the argument that there was no notice under section 400 of the Companies Act, has no leg to stand on. The said contention is, therefore, rejected.
86. The next contention that was taken is that the application is bad for misjoinder of parties. According to the appellants, petitioners Nos. 3 and 4 should not have been allowed to join the application, since they are not shareholders in either of the petitioner-companies and they have no locus standi to join long with them. The same is not accepted by petitioners Nos. 3 and 4. According to them, they are shareholders in petitioners Nos. 1 and 2 companies. They have proved that they are shareholders. At any rate, it is not disputed that petitioners Nos. 3 and 4 are directors of the petitioner-companies and are entitled to make submissions and objections before the Company Law Board. They are parties under section 2(p) of the Regulations framed by the Company Law Board. In fact, no argument was made that they are not shareholders of petitioners Nos. 1 and 2. Hence, the contention that the application is bad for misjoinder also falls to the ground.
87. The other ground raised by the appellant is that the conduct of the petitioners in filing a suit before the Madras High Court for similar relief amounts to waiver. The petitioners should not have been allowed to proceed with their application before the Company Law Board. It amounts to multiplicity of proceedings, and the Company Law Board should have desisted from entertaining the application or at least should have stayed the entire proceedings till the civil suit was decided.
88. It is true that some of the petitioners filed a suit before this court for more or less the same reliefs sought before the Company Law Board. It was subsequent to the filing of the application. It was contended that from the averments in the plaint we can infer that they have abandoned the application before the Company Law Board. The relevant passages that are relied on by the appellants are found in paragraph 4 of the plaint. It says
'. . . It calls for the powerful arm of the high judiciary to unravel this unlawful misappropriation of property and proprietary rights of the plaintiffs by securing evidence of the kind which only the substantive jurisdiction under the Civil Procedure Code and the original side of the High Court can ensure.
In fact, if is settled law that in matters of corporate general body meetings the limited jurisdiction of the Company Law Board is not available for judicial regulation. It is gain an accepted principle of law that the validity of allotment at shares is eminently suited to be determined in declaratory proceedings. Again the limited jurisdiction under the Companies Act conferred on the Company Law Board under sections 397 and 398 can only deal with the conduct of a corporate management towards its own shareholders. Consequently, the Company Law Board forum cannot judicially treat a malice where the remote controllers acting through a puppet management affect the rights at not just the shareholders of the concerned corporate body but the shareholders and finally of the ultimate shareholders. The plaintiffs and particularly the third plaintiff after having approached the Company Law Board under sections 397 and 398 of the Companies Act along with defendant No. 24 as complaining shareholders against the unlawful confiscation of their rights in the ninth defendant and GWL only to find that its co-complainant, namely, defendant No. 24, itself had been hijacked and the plaintiffs' rights in defendant No. 24 itself had been confiscated by the defendants behind the back of the plaintiffs. . .
In fact, once fraud is alleged and particulars of the fraud are furnished, the issue becomes eminently fit for determination in civil proceedings. In the circumstances, the plaintiffs after having resorted to proceedings under sections 397 and 398 of the Companies Act and finding its width and scope to be inadequate to deal with the impact and effect of the fraud perpetrated By them on the defendants are approaching this honourable court with the substantive suit for the relief prayed for.'
89. It is in view of the said contention, the appellant contends before us that the petitioners will not get the substantive relief which they have sought before it and the elaborate procedure contemplated under the Civil Procedure Code alone will give substantial justice and having taken that stand, they cannot continue the proceedings before it.
90. When a suit was filed, the plaintiffs therein also moved for interlocutory orders. No interim relief was granted.
91. The contesting respondents including the appellant, challenged the right of the plaintiff in invoking the civil jurisdiction, and put forward a contention that the Company Law Board is seized of the matter and that the Board has got jurisdiction. It seems that the plaintiffs therein filed an application to withdraw the suit, with liberty to take appropriate proceedings. The application was filed on January 28, 1993. The said application was opposed tooth and nail by the appellants herein. A similar memo was also filed before the Company Law Board stating that they have moved an application for withdrawal of the suit. Ultimately, this court allowed the plaintiffs therein to withdraw the suit with liberty to take appropriate proceedings and without prejudice to continue the proceedings which they have already taken.
92. The question of election will arise only when inconsistent proceedings have been taken. It is a kind of estoppel. In this case, the filing of the suit subsequent to the filing of the petition before the Company Law Board cannot be said to be an inconsistent proceeding taken by the plaintiffs. The civil court and the Company Law Board have jurisdiction to decide some matters pleaded. But the Company Law Board has wider jurisdiction and it can pass any orders just and convenient. Its powers are very wide. It is only an additional remedy given to the plaintiffs. At any rate, it has come out in evidence that they have withdrawn, and the withdrawal was allowed by the court with liberty to pursue their rights under section 397 of the Companies Act. It is also to be noted that by filing the suit, the appellants or the contesting respondents have not changed their stand to their detriment. In fact, the plaintiffs have only accepted the stand taken by the appellants, that the civil suit is not maintainable and they are proceeding with the application filed before the Company Law Board. Having accepted the stand taken by the appellants, by no stretch of imagination, can it be said that the petitioners are estopped on the principle of election, from continuing the proceedings before the Company Law Board.
93. For the said purpose, elaborating the arguments, learned counsel for the appellants relied on a judgment in India Cements Limited v. State Construction and Transport Co. (O. S. No. 246 of 1984, dated April 17, 1989) rendered by one among us (Srinivasan J.).
94. In that case, the principle of election was upheld taking into consideration the facts of that case. From the facts of that ease, it was clear that parallel proceedings were initiated and the party who challenged the proceeding took benefit under one of the proceedings and thereafter did not challenge the same. Under these circumstances, the learned judge held that after having taken the benefit, he is precluded from continuing the suit. In this case, we do not find any such act on the part of the plaintiffs, nor did they derive any benefit by filing the suit.
95. It was held in that case that the two actions must be mutually exclusive. The learned judge also relied on a passage from Spencer Bower and Turner on the Law relating to Estoppel by Representation, second edition, page 305, which is as follows :
'303. Election in the conduct of litigation. - The last of the four fields in which the doctrine under discussion may be observed in operation, and, perhaps, the most important and interesting of them all, because yielding the greatest variety of illustrative examples, is the conduct of litigation, in the course of which it very frequently happens that a party litigant is confronted with the necessity of immediately making a definite choice between two possible courses of action which are mutually exclusive. Whenever this occurs, the general rule of estoppel by election comes into play; that is to say, if by words, or (as is almost invariably the case) by conduct or inaction, he represents to the other party litigant his intention to adopt one of the two alternative and inconsistent proceedings or positions, with the result that the latter is thereby encouraged to adopt or persevere in a line of conduct which he otherwise would have abandoned or modified, or (as the case may be) to change tactics from which he otherwise would never have deviated, the first party is estopped, as against his antagonist, from resorting afterwards to the course or attitude which, of his free choice, he has waived or discarded. Thus, where either of two alternative Tribunals is open to a litigant, each having jurisdiction over the matters in dispute, and he resorts for his remedy to one of such Tribunals in preference to the other, he is precluded, as against his opponent, from any subsequent recourse to the latter, at least at the point at which he has taken judgment in the first, and, so also, in the case of to alternative modes of trial, if a litigant, by conduct or inaction, acquiesces in the adoption of one of these modes, by taking part in the proceedings down to their conclusion without objection, protest, he is estopped from afterwards complaining that the mode of trial with which he was content at the time was irregular or without jurisdiction. . .'
96. In view of the abovesaid law, we are of the opinion that the same has no application to the facts of this case. The said contention of the appellants is, therefore, repelled.
97. The other contention of the appellant is that the reasoning adopted by the Company Law Board regarding the validity of the allotment of shares to the eighteenth respondent and the decision to increase the share capital is wrong. According to it, the Company Law Board has not taken into consideration the legal principles behind increase in the share capital and its allotment and the presumption that arises on the basis of the certificate of posting.
98. To consider the said contention, it is necessary to look into the history of the company and how the misunderstanding between the directors has affected its affairs.
99. The third respondent-company was incorporated on November 2, 1987, with an authorised capital of Rs. 1 lakh. As on February 29, 1991, there were three shareholders, petitioners Nos. 1 and 2 having 60 per cent. shares, i.e., 3,000 shares, and the eighteenth respondent having 40 per cent. shares, i.e., 2,000 shares. In April, 1992, in the Chhabria family, disputes arose. The eighth respondent was on one side and the other members of the family, i.e., petitioners Nos. 3 and 4 and others were on the other side. The reason for the dispute is narrated in the petition. Paragraph 7 of the petition before the Company Law Board has given a short history as to how the dispute began.
100. The Chhabria family consists of M. D. Chhabria, R. D. Chhabria, M. R. Chhabria and K. R. Chhabria. They had interest in various companies. The Shaw Wallace group is a part of the Chhabria group of companies, mainly consisting of SWC and its subsidiaries, Dunlop India Limited, Mather and Platt Limited, Hindustan Dorr Oliver India Limited, Nihon Electronics Limited, Orson Electronics Limited and Gordon Woodroffe Limited, etc. However, there are other companies owning distilleries and breweries with which the Shaw Wallace group had tie up arrangements under specific contracts. These companies were and are in terms of the ownership, control and commercial dealings, totally independent of the Shaw Wallace group. More specifically, Mewar Sugar Mills Limited (Rajasthan), Rainbow Distilleries Private Limited (Pune), New India Distilleries (Jammu), Rampur Distilleries and Chemical Co. Ltd. (Rampur), India Breweries and Distilleries Limited (Bihar), Tracstar Investments Private Limited (Bangalore), Bankerpur Simbhaoli Beverage Private Limited and BDA Limited (from August, 1990), were and even among the independent companies with which the Shaw Wallace group had, and even now have, business tie up arrangements. Out of these companies, the last three, namely, Tracstar Investments Private Limited, Bhankerpur Simbhaoli Beverages Private Limited and BDA Limited are owned outside the Shaw Wallace group, by one section of the Chhabria family consisting of R. D. Chhabria and M. D. Chhabria. Shoe Specialities Private Limited, i.e., the fifth respondent, is another company wholly owned and controlled by one section of the Chhabria family, namely, M. D. Chhabria and R. D. Chhabria.
101. One of the members of the Chhabria family, namely, K. R. Chhabria, was a non-resident Indian like his brother, M. R. Chhabria, until 1984. K. R. Chhabria had contributed substantially for the growth of the Chhabria group abroad until 1984. The Chhabria group gained control of the share-holdings of R. G. Shaw and Company Limited in Shaw Wallace Company. In the year 1984, K. R. Chhabria was requested to go over to India by M. R. Chhabria to secure and complete the takeover of Shaw Wallace Company by the Chhabria group. Pursuant to the family understanding and after takeover of Shaw Wallace Company by the Chhabria family, K. R. Chhabria gave up his non-resident Indian status under the Foreign Exchange Regulation Act and income-tax laws In view of this, M. R. Chhabria was the only family member of the Chhabria family who could officially hold the shares of not only Shaw Wallace Company, but also of the other Chhabria group companies abroad as under the provisions of the Foreign Exchange Regulation Act, a resident Indian cannot acquire or hold assets abroad without prior permission of the Reserve Bank of India. K. R. Chhabria had also given guarantee to Hongkong Bank for the loans taken by the Chhabria group to finance the acquisition of Shaw Wallace Company and the said guarantee continued even after he ceased to be a non-resident Indian. It is further stated in the petition that an oral understanding amongst the members of the Chhabria family came into being whereby it was agreed and understood that M. R. Chhabria would own and control most of the companies of the Chhabria group, viz., Dunlop India Limited, Mather and Platt Limited, Hindustan Dorr Oliver India Ltd., Orson Electronics Limited, Nihon Electronics Limited and Shaw Wallace Company and its subsidiaries, and that the rest of the family will own and control the tie up distillery companies associated with Shaw Wallace Company, viz., BDA Ltd., Tracstar Investments Private Limited, Bhankerpur Simbhaoli Beverages Private Limited besides Gordon Woodroffe Limited where the majority shares were and are held and owned by M. D. Chhabria and R. D. Chhabria. As a consequence of this arrangement, K. R. Chhabria was released from the guarantee given to Hongkong Bank.
102. It is further averred in the petition that subsequent to the oral understanding, the companies owned by M. D. Chhabria and R. D. Chhabria had good business in beverages, which was not liked by the other group controlled by M. R. Chhabria. It is alleged that due to the development of the companies owned by M. D. Chhabria and R. D. Chhabria, M. R. Chhabria was perturbed. He decided to do everything within his reach to go back on the family arrangement. With this intention, in or around April, 1993, M. R. Chhabria decided to undo all that had been done during April, 1990, to September, 1991, and began to claim that all the companies including BDA Limited, GWL, Tracstar and Bhankerpur belonged to him and to Shaw Wallace Company and not to any other Chhabrias. This was the family dispute. M. R. Chhabria caused a press release stating that there was no split in the family, but it was only a family squabble that had intruded into the business. According to the petitioners, the said statement of the eighth respondent appeared in the Bombay daily, Sunday Midday, dated April 19, 1992. Eventually, a family dispute had been converted into a corporate battle.
103. Subsequent to April 19, 1992, there are records to show that the family dispute has ended in a dispute over the ownership and control of the companies. On April 22, 1992, a notice was issued by the counsel for M. D. Chhabria and R. D. Chhabria to the fifth respondent regarding the rights in the company and their apprehension regarding the interference by M. R. Chhabria and his people. The reason for the apprehension was that the directors in the fifth respondent-company were employees of Shaw Wallace Company owned by M. R. Chhabria. The copy of the notice is among the file of the Company Law Board. The notice makes mention of the family dispute that has arisen between the two groups of Chhabrias. The notice requested the board of directors to desist from exercising their powers in a manner which prejudices or undermines the interest of the shareholders of the company, who are petitioners Nos. 1 and 2 in this case. The receipt of the notice is admitted.
104. We find that an application was filed before the Company Law Board as C. P. No. 19 of 1992, under sections 247 and 250 of the Companies Act by Shaw Wallace Company owned by M. R. Chhabria. One of the main reliefs sought in that case was, to investigate into the persons who held the shares in the fifth respondent-company. The application was filed on May 5, 1992. One of the directors of the fifth respondent-company filed an affidavit before the Company Law Board on May 23, 1992, stating that as on that date, the petitioners are holding 3,000 shares and the fourth respondent is holding 2,000 shares. Nothing was stated about the increased share capital alleged to have been allotted to the eighteenth respondent in the case or about the board meeting dated April 30, 1992. On June 9, 1992, the present petitioners filed an application in C. P. No. 19 of 1992, on the ground that they are holding 60 per cent. shares. The counter-affidavit was filed on June. 29, 1992, by the very same person who earlier filed an affidavit on May 23, 1992, stating that the petitioners have been reduced to a minority. Even there, nothing was stated about the increased share capital allotted to the eighteenth respondent in this case, or about the Malleswara Finance Company. We find that the board meeting was alleged to have been held on April 30, 1992, by the board of directors whereby the share capital of the first respondent was increased from Rs. 50,000 to Rs. 2,50,000, and the shares from 5,000 to 25,000. It is further averred that on May 2, 1992, the alleged offer was made to the petitioners in the company petition with regard to the allotment in proportion to the shares held by them. It is further seen that on May 20, 1992, a letter was sent on behalf of the second petitioner that they have rejected the offer. On May 21, 1992, the eighteenth respondent is alleged to have written a letter to the fifth respondent accepting the offer of 8,000 shares and they further wanted allotment of 12,000 shares more. On May 25, 1992, the first respondent, on the basis of the request made by the eighth respondent, has allotted 12,000 shares. It is the said offer and allotment that is questioned in this case.
105. In the affidavit dated May 23, 1992, filed in C. P. No. 19 of 1992 which is also among the file, nothing is said about the increased share value as on that date, i.e., on May 23, 1992. It is admitted therein that petitioners Nos. 1 and 2 are holding 3,000 shares and the eighteenth respondent 2,000 shares. There is no change in the pattern of shareholding, nor is there any mention, about the board meeting alleged to have been held on April 30, 1992. This affidavit is filed by none other than one of the directors of the company. It is the very same director who subsequently filed an affidavit on June 29, 1992, that the petitioner's shareholding is now reduced to a minority. Even then, nothing is stated about the increased shareholding by the eighteenth respondent or the allotment to Malleswara.
106. On June 9, 1992, petitioners Nos. 1 and 2 therein sought impleadment in C. P. No. 19 of 1992. It is averred that, on June 12, 1992, the very same petitioners wanted to convene an extraordinary general body meeting of the fifth respondent-company. In the affidavit, the petitioners have asserted that they hold 60 per cent. share in the company. They never suspected till that date that their control over the company is taken away
107. The main argument of the appellant's counsel was that on May 2, 1992, an offer was made to the petitioners regarding the allotment of the increased share on the basis of the board meeting dated April 30, 1992, and they did not accept the same within the time granted. For the said purpose, the appellants' counsel relies on a piece of paper in which the address of petitioners Nos. 1 and 2 and that of the eighteenth respondent are typed, and above that there is a heading 'under certificate of posting'. There is also a postal seal. According to learned counsel, under section 53 of the Companies Act, it must be presumed that the articles sent by that certificate of posting have been delivered to the concerned addressees. According to learned counsel, the Company Law Board has not taken into consideration the presumption under section 53 of the Companies Act, and it has taken into consideration only section 114 of the Evidence Act, and this, according to learned counsel, has seriously affected the decision of the case.
108. Section 53(2) of the Companies Act reads thus :
'53. Service of documents in members by company. - . . . . . .
(2) Where a document is sent by post, -
(a) service thereof shall be deemed to be effected by properly addressing, prepaying and posting a letter containing the document, provided that where a member has intimated to the company in advance that documents should be sent to him under a certificate of posting or by registered post with or without acknowledgment due and has deposited with the company a sum sufficient to defray the expenses of doing so, service of the document shall not be deemed to be effected unless it is sent in the manner intimated by the member, and
(b) such service shall be deemed to have been effected -
(i) in the case of a notice of a meeting, at the expiration of forty-eight hours after the letter containing the same is posted, and
(ii) in any other case at the time at which the letter would be delivered in the ordinary course of post.'
109. According to learned counsel, a reading of the said section amounts to a fiction and once a certificate of posting is produced with address of the addressee, there is a deemed fiction that the cover is received by the addressee.
110. The said argument of learned counsel presupposes that the document is sent by post. It is only a matter of presumption. A presumption can be drawn only when there is no other evidence available. In this case, the primary evidence regarding the posting of the letter is not produced. The best evidence that can be produced in this case is the despatch register of the company, and the books of account showing the expenses incurred by the company for posting the letters, etc. None of these documents is produced. When the primary evidence is not produced, a presumption on the basis of section 53(2) of the Companies Act cannot be made use of since the posting of the letter is in dispute. Only if a document is sent by post, the presumption under section 53 of the Companies Act can arise. When there is no evidence regarding the posting of the letter, the document relied on by the appellant cannot be made use of.
111. We have also a doubt whether the paper in which the address is typed, can be construed as a certificate of posting. The paper bears the date May 2, 1992, whereas the postal stamp is dated May 3, 1992. There is also a discrepancy in the address of one of the addressees. The address of the first petitioner is not correct. In the certificate of posting, the pin code number of the first petitioner is mentioned as '110 036' whereas the pin code number of the first petitioner is New Delhi-110 035. So, it cannot be presumed that a letter was sent to the correct address.
112. It has also been noted by the Company Law Board that the letter was addressed to the registered office of the first petitioner at New Delhi. But a reply is sent on the basis of a parallel meeting held at Calcutta, declining the offer. There is no explanation as to how the chairman of the company at Calcutta got possession of the letter posted to the registered office of the company. It follows that the same is manipulated. It is further found by the Company Law Board that even though the letter was not sent to its address as seen in the register of the company, from the purported certificate of posting, it is seen that the same was addressed to the erstwhile address of the first petitioner-company, and they did not receive it. That is also one more circumstance in this case to show that the letter might not have been sent.
113. Article 9 of the articles of association of the first respondent-company deals with the allotment and transfer of shares. It says that if at any time the company desires to allot shares, the same shall be offered to the members in proportion to the capital paid up on the shares. In case of refusal of that offer by the shareholder, the same shall be allotted to the remaining members in proportion to their initial holding in the company. According to the petitioners, the company was doing very good business and the share value had increased at that time, and they would be only too glad to accept the offer since the offer was 'on par'. According to the petitioners, the value of each share of Rs. 10 was worth more than Rs. 100 on that date, and when the same was offered 'on par', they would have accepted the same. According to us, the said contention of the petitioners is worth consideration.
114. The Company Law Board, after taking into consideration all materials and also the circumstances of the case, held that there is no evidence of posting and there was no valid offer made to the petitioners.
115. In this connection, a decision of the Calcutta High Court in Rama-Shankar Prosad v. Sindri Iron Foundry (P.) Ltd., : AIR1966Cal512 , and also the decision of the Supreme Court in Shiv Kumar v. State of Haryana JT [1994] 4 162, are worth consideration. In both these decisions, it is held that a certificate of posting by itself is not evidence of posting a letter, and in the Calcutta case, their Lordships have observed that judicial notice can be taken that a certificate of posting can be obtained even without posting a letter.
116. Two more decisions, namely, Kanak Lata Ghose (Smt.) v. Amal Kumar Ghose, : AIR1970Cal328 and Achamma Thomas (Smt.) v. E. R. Fairman, AIR 1970 Mys 77, were cited before us by learned counsel for the appellants for the proposition that when there is a presumption, that presumption will hold good unless it is rebutted. According to us, even if there is a presumption, the same stands rebutted by virtue of the circumstances of this case. Even in those cases, it was held that to raise such a presumption, the circumstances also will have to be taken into consideration.
117. Taking into consideration the above circumstances, we hold that there is no valid offer made to the petitioners and hence the finding of the Company Law Board regarding the allotment of shares to the eighteenth respondent herein is not valid. The petitioners' case was that the first respondent-company was doing only contract job and, therefore, there was no justification for raising the share capital. From the subsequent events, it can be seen that the share capital was increased only for the purpose of including the name of Malleswara in the register as if the shares have been transferred. There is no evidence forthcoming that such increase in the share capital was necessary. That also supports the case of the petitioners.
118. The allotment of shares to the eighteenth respondent is based on the board meeting alleged to have been held on April 30, 1992. In the affidavit filed before June 9, 1992, in C. P. No. 19 of 1992, mentioned above, there is no mention of the board meeting whether there was a board meeting actually, is not proved except on paper. When the petitioners questioned the same, it was the duty of the appellants to substantiate the same by evidence, which is lacking.
119. It was next contended by the appellants that transfer of shares by the eighteenth respondent in favour of Malleswara is also valid. According to him, articles 6 and 7 of the articles of association have no application in this case since it is not an absolute transfer. According to him, in the case of mortgage, the conditions stipulated in article 6 of the articles of association is not applicable. The said contention is also without any merit. From the articles of association, it can be seen that the first respondent is a company limited by shares. Article 2(a) provides that 'No invitation shall be issued to the public to subscribe for any shares in or debentures of the company.' Article 2(c) states that 'The right to transfer the shares of the company shall be restricted in the manner and to the extent hereinafter provided'. It is thereafter, articles 6 to 9 provide the manner of transfer of shares. We have already incorporated the said clauses 6 to 9, at pages 29, 30 and 31 of this judgment. From a reading of the above articles, it is clear that the company wanted that no stranger should be inducted into the company and that the allotment of shares should be among the shareholders. Clauses 6 and 9 have to be read together. If so read, it goes without saying that any violation of these articles will make the transfer invalid even if we consider that the arrangement with Malleswara was a transfer. The appellant's counsel also submitted that the transfer in favour of Malleswara is a mortgage. According to him, only in case there is a complete transfer, article 6 has to be invoked. We have already found in the connected writ appeal that the transaction with Malleswara is only a pledge and, therefore, the same is not repeated here.
120. It was next contended by the appellants' counsel that no grounds have been made in this case for invoking the jurisdiction under sections 397 and 398 of the Companies Act. According to learned counsel, one kind of fraud is alleged in this case, stating that the fifteenth respondent was the man responsible for creation of documents and fraudulent acts. The said act of Pandia is not substantiated, but the Company Law Board has taken the increase in the allotment of shares as a fraudulent act. According to learned counsel, though one kind of fraud is alleged, the finding is with regard to another kind of fraud without any basis. The said contention has also no force from a reading of the petition and also the various counter-affidavits filed by the respondents, it can be seen that the main matter in dispute was the decision to increase the share capital of the company so as to reduce the majority shareholders into minority shareholders. The petitioners averred that the alleged board meeting dated April 30, 1992, is an afterthought. The same has been discussed in the earlier part of this judgment.
121. The immediate effect of the increased allotment may also be considered.
122. It is admitted that the petitioners were holding 60 per cent. shares in the fifth respondent-company. The eighteenth respondent was holding 40 per cent. which also belonged to the petitioners originally. But according to the petitioners, by manipulation it was taken over by the eighth respondent, and at his instance, the employers created documents by which the increased share capital was also allotted to the eighteenth respondent. The intention was that the minority shareholding of the eighteenth respondent was increased to eighty-eight per cent. and that of the petitioners was reduced to 12 per cent. The increase in the shareholding is not made in good faith. We have already stated that the increase in allotment to the eighteenth respondent was invalid. By virtue of the increase, immediately a stranger is sought to be inducted into the company with full voting rights. All these acts were against the provisions of the articles of association. In that view of the matter, we hold that a case has been made out by the petitioners that there is a motive and a mala fide intention to defeat the rights of the shareholders.
123. In this connection, it may also be noted that as per the register of members of the fifth respondent-company, the transfer in favour of the eighteenth respondent was effected as early as on June 4, 1992, whereas the resolution to allot the shares was only on June 5, 1992. There is no explanation for the above inconsistency. It also shows the pre-determined fraud committed by the directors. It was on the same date, i.e., June 5, 1992, that Malleswara is made a transferee. It is a non-member, fully controlled by the fifth respondent. We have verified the original of the register of members. We are suspicious about the genuineness of the entries. The fraud is thus fully implemented.
124. It is seen that the letter refusing to accept the offer is signed by Mr. R. K. Bhattacharya. It is in evidence that Mr. R. K. Bhattacharya resigned as a director long before the date of refusal. He resigned on April 10, 1992, and the same is reported to the Registrar of Companies in Form 32 and the same is approved. Once he has resigned as a director, it is not shown as to under what authority and capacity in the second respondent-company, he has signed the letter refusing to accept the offer. That also shows that the offer made was only on paper and not a reality.
125. It is also contended that no case of oppression has been made out. A single act by itself will not constitute a ground for invoking the jurisdiction of the Company Law Board under section 397 of the Companies Act. According to learned counsel, it must be a continuous act and burden-some. It was also contended that it is not just and convenient for the Company Law Board to intervene in this case as contemplated under the sections.
126. Learned counsel for the appellants contended that the allotment of shares is a matter of internal management of the company, which is outside the scope of sections 397 and 398 of the Companies Act.
127. It is held in Gluco Series Pvt. Ltd., In re [1987] 61 Comp Cas 227 (Cal) as follows (p. 243) :
'It is well-settled that it is not open to the directors of a company to issue and allot shares in a manner by which an existing majority of shareholders are reduced to a minority. The court will scrutinise with particular circumspection any such issue or allotment and unless of is satisfied beyond reasonable doubt that such issue was unavoidable and was resorted to as an express and emergency measure with an object of fundamental importance, e.g., saving the existence of the company, it will not allow the existing balance of power in the company to be disturbed.'
128. In this connection, it may also be noted that the increase of capital and allotment of shares are challenged by the petitioners after the affidavit dated June 9, 1992, was filed before the Company Law Board. Their intention was to get hold of the control of the company by any means.
129. Regarding the issuance of increased share capital, in the very same judgment, it was held that the same will be condemned if the purpose is simply and solely to dilute the majority voting power. An issue of shares purely for the purpose of creating voting power has repeatedly been condemned. Their Lordships of the Supreme Court approved the dictum of Byrne J. in Punt [1903] 2 Ch. 506 that 'there may be reasons other than to raise capital for which shares may be issued'. Following the early decision in Nanalal Zaver v. Bombay Life Assurance Co. Ltd. : [1950]1SCR391 , it was held that it is well established that directors of a company are in a fiduciary position vis-a-vis the company and must exercise their power fur the benefit of the company. If the power to issue further shares is exercised by the directors not for the benefit of the company but simply and solely for their personal aggrandisement and to the detriment of the company, the court will interfere and prevent the directors from doing so. The very basis of the court's interference in such a case is the existence of the relationship of a trustee and cestui que trust as between the directors and the company. As stated earlier, the petitioners have stated that there was no necessity to increase the capital since there was no plant or machinery. Why the share capital was increased is not explained. We further find from the records in C. P./C. M. P. No. 92 of 1992 in this case that Malleswara to whom the additional shares were pledged, is a company controlled by the fifth respondent. From the above facts, it is clear that the eighth respondent and his employees who are the directors of the fifth respondent-company did not act in good faith, and their action was detrimental to the company, and the same has affected its proper management and also the rights of the shareholders, and a case for winding up is proved.
130. It is held in Shanti Prasad Jain v. Kalinga Tubes Limited : [1965]2SCR720 , that the provision of section 397 of the Companies Act is more or less akin to section 210 of the English Companies Act of 1948. It was held that the purpose of introducing section 210 in the English Companies Act was to give an alternative remedy to winding up in case of mismanagement or oppression. The law always provided for winding up, in case it was just and equitable to wind up a company. However, it was being felt for some time that though it might be just and equitable in view of the manner in which the affairs of a company were conducted to wind it up, it was not fair that the company should always be wound up for that reason, particularly when it was otherwise solvent. That is why section 210 was introduced in the English Act to provide an alternative remedy where it was felt that though a case had been made out on the ground of just and equitable cause to wind up a company, it was not in the interest of the shareholders that the company should be wound up and that it would be better if the company was allowed to continue under such directions as the court may consider proper to give. That is the genesis of the introduction of section 153C in the 1913 Act, and at present section 397 of the Indian Companies Act. In paragraph 18 of the said judgment, it is held that the word 'oppressive' meant 'burdensome, harsh and wrongful'. It was also held that 'the section does not purport to apply to every case in which the facts would justify the making of a winding up order under the just and equitable rule, but only to those cases of that character which have in them the requisite element of oppression'. It was also held that 'the result of applications under section 210 in different cases must depend on the particular facts of each case, the circumstances in which oppression may arise being so infinitely various that it is impossible to define them with precision'. The circumstances must be such as to warrant the inference that 'there had been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy.' In this case, we may see that the directors have misused their power at the instance of the eighth respondent not to protect the interest of the company, but with an ulterior motive to take control of the same. They have abused the confidence and this amounts to oppression. Paragraph 19 of the said judgment is also relevant for our purpose, and it reads as follows (at page 366 of 35 Comp Cas) :
'These observations from the four cases referred to above apply to section 397 also which is almost in the same words as section 210 of the English Act, and the question in each case is whether the conduct of the affairs of a company by the majority shareholders was oppressive to the minority shareholders and that depends upon the facts proved in a particular case. As has already been indicated, it is not enough to show that there is Just and equitable cause for winding up the company, though that must be shown as preliminary to the application of section 397. It must further 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 were 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. It is in the light of these principles that we have to consider the facts in this case with reference to section 397'.
131. The petitioners have demonstrated before the Company Law Board as to how they have been oppressed as regards the management and even after the order how they are not allowed to manage the company. We find that in spite of the order of the Company Law Board, the fifteenth respondent has transferred the shares to two or three persons though it has undertaken that it will not transfer the shares to any one. Further, in spite of the notice calling for a general body meeting, for one reason or other it is being dragged on. Even though the order has been passed by the Company Law Board in the year 1993, till date (it is now more than one year since the order has been passed), the petitioners could not implement the order, nor were they able to manage the company as they were doing before April, 1992. Even if the allotment of shares fraudulently is a single act, its consequences are continuous. The appellant's counsel agreed that if it has a continuous effect, it will mount to oppression.
132. It is also contended by the appellants' counsel that it is a case where there is an allegation of fraud and no evidence is taken and no attempt was also made by the petitioners to substantiate the same by adducing evidence. The said argument also cannot hold good for the reason that before the Company Law Board all parties have participated in the proceedings on the basis of affidavits and counter-affidavits, and findings have been arrived at on that basis. It is always not essential that oral evidence should be taken to substantiate the case of fraud. It was so held in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. : [1981]3SCR698 , it was held in that case that if there is ample material on the 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. In the same case, at paragraph 52, it was held that the person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as shareholder. If this act is proved, the power of the Company Law Board to invoke section 397 of the Companies Act will be justified.
133. In paragraph 107, it was held that the court will not permit directors to exercise powers, which have been delegated to them by the company in circumstances which put the directors in a fiduciary position when exercising those powers, in such a way as to interfere with the exercise by the majority of its constitutional rights.
134. Another contention that was taken by the appellants was that the increase in the shareholding is a matter of internal management and if the same is challenged, it is only a matter for rectification which comes under section 111 of the Companies Act. In that view, the powers under section 397 of the Companies Act should not have been invoked. A reading of the petition will show that the petitioners cannot invoke the powers under section ill of the Companies Act. It is not a case of rectification of register that they sought for. Section 111 of the Companies Act has no applicability at all in this case. It is mismanagement and misuse of powers by the directors that is pleaded in the petition, and hence that argument of the learned counsel for the appellants has to fail.
135. The Company Law Board has taken into consideration all materials and has given the finding that it has to invoke the powers under section 397 of the Companies Act and has found that grounds for winding up amendment have been made out. But it has refused to wind up the company in the best interest of the shareholders. We agree with the said findings.
136. An appeal under section 10F of the Companies Act before this court can be entertained only on a question of law which arises from that order. We do not find any question of law in this case. The only question is, whether the increased share capital was proper and whether the same was offered to the petitioners. That is purely a question of fact. In that view of the matter, we hold that the decision of the Company Law Board is proper and no interference is called for.
137. In the result, W. A. No. 806 of 1994, C. M. A. No. 743 of 1993 and C. M. A. No. 875 of 1994, are dismissed, with no order as to costs.
138. After the judgment was pronounced, a request was made orally on behalf of respondents Nos. 1 to 4 in the C. M. As. and respondents Nos. 4 to 7 in the W. A., that a direction may be given to hold the extraordinary general meeting and fix a date therefor. It is represented that already such a direction was given by the Company Law Board in C. P. No. 44 of 1993 and the meeting was called for to be held on August 4, 1994. It is stated that before the meeting could be held, as the appellant in the writ appeal had obtained stay of removal of his name from the register, the abovesaid respondents prayed for postponing of the meeting and it was adjourned. It is now stated that, if the regular procedure prescribed under the Companies Act is followed, it will require at least a period of 45 days to convene the meeting and this will cause undue prejudice to the parties. It is also pointed out that all the shareholders are before us now, and no prejudice will be caused to anybody by giving the direction as prayed for by them.
139. The request is opposed by learned counsel for the appellant in the writ appeal as well as by learned counsel for appellants in the C. M. As. It is stated by them that the regular procedure prescribed in the Companies Act can be followed by the parties.
140. Having regard to the long drawn litigation, we are of the view that it will be in the interest of justice to grant the request as prayed for by respondents Nos. 1 to 4 in the C. M. As. Hence, we direct the company to hold the extraordinary general meeting on October 19, 1994. This order will be treated as notice to the parties for the meeting on October 19, 1994, within the meaning of the Companies Act.