Judgment:
1. In the instant petition filed under section 397/398 of the Companies Act, 1956 (the ‘Act’), the petitioners have alleged that by allotment of 1340 additional shares by the 2nd respondent to his own group, the petitioners have been converted from a majority into a minority and that he has also appointed respondents 3 and 4 as directors without the knowledge and consent of the petitioners. On the basis of these allegations, the petitioners have sought for cancellation of the allotment of additional shares and also for a declaration that the appointment of respondents 3 and 4 as null and void. When the 2nd respondent had disclosed in his reply that the petitioner-directors had also been removed as directors in an EOGM, the petitioners sought for restoration of their directorship.
2. The facts are : Amethi Hume Pipes Private Limited was incorporated in 1982. The 3rd and 4th petitioners and the 2nd respondent are brothers. The company was promoted by their father. The signatories to the Memorandum was the father, the 2nd respondent, the 1st petitioner being the wife of the 3rd petitioner and the 2nd petitioner being the wife of the 4th petitioner. Before the allotment of the impugned shares, the petitioners’ group collectively held 2,100 equity shares out of 3,600 equity shares that had been subscribed and paid up. The 2nd respondent group held 1,000 shares. The balance 500 shares continued to remain in the name of the late father. The board of directors consisted of the 1st and 2nd petitioners and the 2nd respondent, each of them being a whole-time director drawing remuneration. The allegations in the petition are that with a view to gain majority in the board, the 2nd respondent had allegedly appointed the 3rd respondent being his wife and the 4th respondent being his son as directors on 31-3-2007 and that that 1,340 shares were allotted to the 3rd and 4th respondents with a view to gain majority in the shareholding also.
3. The counsel for the petitioners submitted: By holding 2,100 shares out of 3,600 shares, the petitioners constituted the majority in the shareholding. Right from 1982, there had been no change in the shareholding. The petitioner-directors and the 2nd respondent were carrying on the business of the company smoothly till 2007. The 1st petitioner was in charge of production, the 2nd petitioner in charge of marketing and the 2nd respondent was looking after accounting and finance. However from 2007 onwards, the 2nd respondent began to run the company as if it was his own proprietorship. Cash transactions remained unaccounted for and expenses were inflated. When questioned, he had decided to take complete control of the company. With a view to gain majority on the board, he had purportedly appointed the 3rd and 4th respondents as directors in an allegedly held board meeting on 31-3-2007. Similarly, in the same alleged meeting, he had purportedly allotted 1,030 shares to the 3rd respondent and 310 shares to the 4th respondent. By these allotments, the 2nd respondents’ group came to hold 2,340 shares against 2,100 shares held by the petitioners’ group. In other words, a majority has been converted into a minority. In fact, no board meeting was held on that day and even if it had been held, no notice for this meeting was given to either of the petitioner-directors. Since the petitioner-directors were not present, neither the appointment nor the allotment of shares could have been made with only one director present. In terms of article 25, directors are to be appointed only in a general meeting, that too, on the principle of proportionate representation by the system of single transferable vote. Only in case of a casual vacancy, the said vacancy can be filled up in terms of section 262. There was no casual vacancy in the board to invoke the provisions of section 262 of the Act. At the time when these two persons were allegedly appointed as directors, they did not hold any qualification shares as required in terms of article 27 of the Articles of Association. Further, even for raising the share capital, no justification was given and that itself would show that the motive for allotment of shares was only to gain majority in shareholding. Further, in an allegedly held board meeting on 18-12-2007, the 2nd respondent has allegedly appointed himself as the Managing Director. When the company never had a Managing Director for over 25 years, there was no need for him to have appointed himself as the Managing Director and it was done only with a view to concentrate all the managerial powers with him. In the reply to the petition, the 2nd respondent has disclosed that an EOGM was allegedly held on 18-12-2007 in which decision to remove the 1st and 2nd petitioners as directors was taken. No notice for this meeting was received by the petitioner-directors nor any of them attended the said meeting. Therefore, considering the fact that the company is a family company in which the petitioners’ group has been actively involved for over 25 years with majority shareholding and also the majority on the board, the allotment of additional shares should be cancelled as also the appointment of 3rd and 4th respondents as directors and as well as appointment of the 2nd respondent as the Managing Director. The 1st and 2nd petitioners should be restored as directors and arrears remuneration should be directed to be paid to them.
4. Shri Sharma, Advocate, appearing for the respondents submitted. The petitioners have suppressed material facts. They had not disclosed the fact that the 2nd respondent was appointed as the general agent of the company in a board meeting held on 26-5-1982 and a power of attorney was also executed in his favour. In terms of the power of attorney, he has the full power insofar as the management of the company is concerned. The 2nd respondent had two other proprietary firms which he converted into partnerships between him and the 3rd and 4th respondents as partners. Even in case of these partnership firms, the 2nd respondent was the constituted power of attorney holder. Disputes and differences arose in respect of these two partnership firms. Since the disputes could not be settled even through conciliation proceedings by reputed persons, the 2nd respondent resigned from the partnership firms.
5. As far as the respondent company is concerned, it is true that before the impugned allotments, the petitioners’ group held 2,100 shares and the 2nd respondent’s group held 1,000 shares. It is also a fact that before the impugned appointment of directors, the board consisted of the 1st and 2nd petitioners and the 2nd respondent. The 3rd and 4th respondents had deposited some money as share application money a long time back and therefore, in a board meeting held on 31-3-2007, 1,340 shares were allotted against the application money. The balance sheet as on 31-3-2007 reflects this allotment and this balance sheet has been signed by the 1st petitioner. Similarly, the annual return filed on 29-9-2007 reflecting this allotment and appointment of new directors has also been signed by the 1st petitioner. Therefore, to allege that shares had been allotted to the 3rd and 4th respondents or that new directors were appointed without the know-ledge and consent of the petitioner-directors is not correct.
6. Sometimes in early 2007, the 3rd and 4th petitioners started interfering with the working of the company in collusion with the 1st and 2nd petitioners. Without issuing a notice to the 2nd respondent, the 1st and 2nd petitioners held a board meeting on 1-7-2007 and passed a resolution changing the operation of the cash credit account. The various acts of the petitioners created lot of difficulties in running the affairs of the company. Further, since the petitioners’ group was in charge of sales, it was selling goods for cash and did not bring the proceeds into the books of account due to which the company incurred huge losses in 2007. On 29-10-2007, the 2nd respondent wrote to the 1st petitioner bringing out various prejudicial acts done by her and sought for her explanation. She did not reply to the said show-cause notice for over 40 days. This show-cause notice has not been disclosed in the petition. In the meanwhile, a requisition dated 29-10-2007 was received from a shareholder seeking for convening an EOGM to remove the 1st and 2nd petitioners as directors. Accordingly, the board issued a notice on 22-11-2007 calling for an EOGM on 18-12-2007. The said notice was sent to all the petitioners but none of them attended the said meeting. The EOGM was duly held on 18-12-2007 and members present holding 52.7 per cent shares passed a resolution removing the 1st and 2nd petitioners as directors. Since they were removed due to their prejudicial acts, the same cannot be considered to be oppressive. Thus, no act of oppression or mismanagement has been established and as such, this petition should be dismissed.
7. In rejoinder, the counsel for the petitioners submitted: As far as the power of attorney is concerned, the same had been revoked as early as in 1988 immediately after the death of one of the executors of the power of attorney in 1997. Further, the power of attorney does not empower appointment, removal etc. of directors nor it permits the 2nd respondent to appoint himself as the MD. However, the directors’ report signed by the 2nd respondent does not disclose either the allotment or the appointment of directors. Insofar as the annual report is concerned, the signature of the 1st petitioner has been forged. She did not sign the said annual report. Insofar as the non-attendance of the 1st and 2nd petitioners in the EOGM held on 18-12-2007 is concerned, the 2nd respondent was fully aware that they were in Delhi due to the accidental death of one of their relations. Insofar as passing of the board resolution on 1-7-2007 by the petitioners to change the bank operation is concerned, it was done only because the 2nd respondent had withdrawn money from the bank for his own use and had also transferred a substantial of Rs. 9.93 lakhs to his own other entities. In view of this, to protect the interests of the company, the petitioners passed a resolution that the bank operations shall be jointly done by 2 out of the 3 directors. By doing so, they have not excluded the 2nd respondent being a joint signatory. The ground for removal of the 1st and 2nd petitioners as directors is that they had not responded to the letter of the 2nd respondent dated 29-10-2007. Insofar as the letter of the 2nd respondent dated 29-10-2007 making allegations against the petitioners is concerned, the petitioners have given a suitable reply on 10-12-2007 which has been suppressed in the reply. It is to be noted that on one hand having sent one letter, on the same day the 2nd respondent himself had given a letter of requisition seeking for removal of the 1st and 2nd petitioners. This itself shows the mala fide intention of the 2nd respondent to exclude the petitioners from the management of the company. Insofar as the knowledge attributed to the petitioners about the allotment of shares is on the basis that the 1st petitioner had signed the balance sheet and also the annual report reflecting the increase in the paid up capital. Insofar as signing of the balance sheet is concerned, it was done in a routine manner without looking into the actual figures contained therein. If the directors’ report had disclosed the increase in the paid up capital or/and of the appointment of the 3rd and 4th respondents as directors, the petitioners would have known the ill design of the 2nd respondent. Further, from the minutes of the board meetings disclosed by the 2nd respondent, it may be seen that even though the 3rd and 4th respondents were allegedly appointed as directors on 31-3-2007, yet, their presence is not shown in the minutes of the board meetings dated 7-5-2007, 10-8-2007, 30-8-2007 and 4-9-2007. The very fact that Form No. 32 in respect of their appointments was filed only on 22-11-2007, it would indicate that the alleged appointment of these two directors on 31-3-2007 did not take place at all. Even assuming that the 3rd and 4th respondents had been appointed as directors on 31-3-2007, it could have been only as additional directors and they were not re-elected in the EOGM on 29-9-2007 and as such they ceased to be directors effective from that date. Therefore, it is crystal clear that by allotment of shares to his own group and by appointment of the 3rd and 4th respondents in this family company, the 2nd respondent has mala-fidely and oppressively gained majority both in the shareholding and on the board. Having done so, he has completely excluded the petitioners’ group in the management by removing them as directors. There could not be a better case than this where the 2nd respondent, who was a minority shareholder has grossly oppressed the majority group and as such the reliefs sought for should be granted.
8. I have considered pleadings and arguments of the counsel. Initially the grievances of the petitioners were that by allotment of 1,340 shares to the respondents’ group, the petitioners have been reduced from majority into minority and that by appointing the 3rd and 4th respondents as directors, the 2nd respondent had gained majority on the board and that by appointing himself as the MD, the 2nd respondent has assumed full control of the company. Later on, when the 2nd respondent disclosed in his reply that the 1st and 2nd petitioners had been removed as directors in an EOGM held on 18-12-2007, this act has also been added as grievance.
9. The admitted fact is that the company is a family company and before the acts impugned in the petition, the petitioners’ group was in the majority of both the shareholding and also of the board. It is inconceivable that the petitioners would have voluntarily given up their majority shareholding and majority on the board as contended by the respondents. The 2nd respondent has very heavily relied on the signatures of the 1st petitioner on the balance sheet which reflects increase in the paid up capital of the company and in the annual report which reflects both the allotment as well as appointment of directors. In a family company, in view of the closeness of the parties, it is not uncommon that documents are signed without going through line by line. Therefore, the signature of the 1st petitioner in the balance sheet and signature in the annual report (which the petitioners claim to be forged) cannot disentitle the petitioners to challenge the allotment and the appointment. If the petitioners had really participated in the board meeting on 31-3-2007 and had consented to give up their majority in the shareholding as well as on the board, it would indicate smooth relationship between the parties at that time. If so, there was no reason for the 1st and 2nd petitioners to pass a resolution changing the bank operation on 1-7-2007, i.e., within a period of three months. Further, the stand of the 2nd respondent is that shares were allotted to the 3rd and 4th respondents against the share application money. I find from the balance sheet as on 31-3-2006 that the share application money available was only Rs. 31,000 but shares were allotted worth Rs. 1,34,000. Therefore, if the shares were to be allotted against the application money, it could have been only to the extent of Rs. 31,000 and in which case, the petitioners’ majority would not have been affected. Therefore, it is evidently clear that the allotment of shares worth Rs. 1,34,000 was only with a view to gain larger shareholding in the company than that of the petitioners. However, I note that in para 3A of his sub-rejoinder, the 2nd respondent averred that it was open for the petitioners to apply for allotment of shares and make payment to the company, however, without specifying whether any offer was made to the petitioners to subscribe to the shares. By the impugned allotment, while the percentage shareholding of the petitioners came down from 58 per cent to 42.5 per cent, the shareholding of the respondents went up from 28 per cent to 47.5 per cent. The shares held in the name of the deceased father is 500 constituting around 10 per cent.
10. It is to be noted that by the impugned allotments, the 2nd respondent group gained more percentage holding than the petitioners and this has been used to remove the 1st and 2nd petitioners as directors. As I have observed earlier, in the reply to the petition, the 2nd respondent has heavily relied on the signature of the 1st petitioner in the balance sheet and the annual report. In the reply there is no averment that petitioner-directors had attended the alleged board meeting on 31-3-2007. Only in the sub-rejoinder, the 2nd respondent has averred that the petitioner-directors attended the board meeting on 31-3-2007. It is highly inconceivable that the petitioners holding majority shares and also being in the majority on the board would consent to their being reduced into a minority by allotment of shares and lose their majority in the board by agreeing to the appointment of 3rd and 4th respondents as directors. There is no independent proof for petitioner-directors attending the board meeting like signatures in the attendance register, acknowledgement of sitting fees, if any, or notice for these board meetings to the petitioners. The minutes have been signed only by the 2nd respondent. Thus, purely on the basis of the signature on the balance sheet and the disputed signature in the annual return it cannot be held that the petitioner-directors had participated in the board meeting on 31-3-2007 and had approved the allotment of shares as well as consented to the appointment of 3rd and 4th respondents. If the petitioner-directors had not attended the said meeting, the 2nd respondent alone could not have constituted the quorum to transact any business. Further, if the 3rd and 4th respondents had been appointed as directors as contended by the 2nd respondent on 31-3-2007, as pointed out by the petitioner, their presence had not been shown in the board meeting held on 7-5-2007, 10-8-2007, 30-8-2007 and 4-9-2007. Even though the learned counsel for the respondents submitted that since these directors were under the impression that they could not attend board meetings till Form-2 was filed, the filing of Form-2 belatedly itself would indicate that the alleged appointment is nothing but, a fabrication. Further, in terms of article 25 of the articles of association of the company, the directors are to be appointed on the principle of proportional representation and perhaps this is the reason why all along the 1st and 2nd petitioners and the 2nd respondent holding 1/3rd shares each had been appointed as directors. When the articles provide for proportionate representation, the question of removing the 1st and 2nd petitioners does not arise. Further, insofar as appointment of the 3rd and 4th respondents as directors by the board is concerned, in terms of article 25, they could have been appointed only to fill up casual vacancies and in view of the fact that there were no casual vacancies on 31-3-2007, the question of their appointment to fill up any casual vacancy does not arise. However, I find from article 26 that the board has the power to appoint additional directors and if these two had been appointed as additional directors, they would have ceased to be directors in the next AGM. There is nothing on record to show that they were re-appointed. Thus, even in terms of the articles, the appointment of the 3rd and 4th respondents as directors cannot be sustained.
11. Assuming that the petitioners had voluntarily given up their majority both in the shareholding and on the board, by misusing the newly acquired shares and majority on the board, the respondents could have never removed the 1st and 2nd petitioners as directors. Such an act is highly oppressive in a family company, especially when these two petitioners had been directors in the company for over 25 years. Further, I also note that on the same day of writing a letter to the 1st petitioner making allegations against her, without waiting for her reply, the 2nd respondent also requisitioned a meeting for removal of the 1st and 3rd petitioners as directors. This shows his mala fide intention.
12. Thus, on an oral appreciation of facts of the case, I hold that the respondents have acted in a highly oppressive manner towards the petitioners and as such the impugned allotment, appointment of the 3rd and 4th respondents as directors have to be declared null and void and I accordingly do so. Similarly I also declare that the removal of 1st and 2nd petitioners as directors as null and void. In other words, I restore the shareholding as well as the board as they prevailed before 31-3-2007. Consequently, the amount of money paid as consideration for the cancelled shares by the 3rd and 4th respondents shall be refunded to them and register of members shall be rectified removing their names in respect of the impugned shares. The petitioner-directors shall be paid arrears of remuneration as per their entitlement for the interregnum period. I further stipulate that, by using their majority shareholding and majority on the board, the petitioners shall not take any step to exclude the 2nd respondent from the management and he will continue to discharge the functions as he was doing before 31-3-2007. The bank accounts shall be operated jointly by either of the petitioners and the 2nd respondent so that neither side could allege siphoning off funds etc. Since, there has never been a post of Managing Director in the company, he shall be ceased to be the Managing Director with immediate effect. Whoever convenes a board meeting, the other two directors should be given 5 days notice along with agenda, should be given and the directors shall sign attendance register to be brought into use immediately. I only hope that the parties will work together for the betterment of the company from hence on as they had done for nearly 25 years.
13. The petition is disposed of in the above terms.