Binani Metals Ltd. and Triton Vs. Gallant Holdings Ltd. and ors. - Court Judgment

Excerpt:
1. in this order i am considering cp no. 104/2005 filed under sections 397, 398,399,402,403 and 111a wherein the petitioners have challenged the malafide and illegal act of the respondents in allotting 10,000 shares to respondents no. 2 and his family members, without any notice to the petitioners as mandated under law for allotment of shares and without offering them to the petitioners.2. the brief facts of the case are: on 24.3.1983, the respondent no. 1 company (hereafter referred to as "gallant') was incorporated, with its regd. office at gallant house, 12/18 v.p. road, c.p. tank, mumbai. the authorized share capital of gallant on date of incorporation was rs. 1,00,000/- (10,000 shares) divided into 5,000 equity shares of rs. 10/- each and 5,000 9% cumulative preference shares of rs. 10/- each.gallant was initially a wholly owned subsidiary of metal distributors limited. the said metal distributors ltd. stood amalgamated with petitioner no. 1 company on 23.11.1983. consequent upon said amalgamation of metal distributors ltd. with petitioner no. 1, gallant became wholly owned subsidiary of the petitioner no. 1. the issued, subscribed and paid up capital of gallant as on june 23,1992 was rs. 10,000/- (1000 shares). the petitioner no. 1 held entire shareholding of gallant. the petitioner no. 1 held 998 shares and mr. braj binani, the petitioner's nominee held 2 shares. the authorized capital of gallant was increased from r. 1 lac to rs. 15 lacs on 26.4.1993.however, the issued and paid capital remained at rs. 10,000/- with petitioner no. 1 holding 998 shares and its nominee holding 2 shares.in the year 1993-94, gallant allotted 14000 shares to the petitioner no. 1. with the allotment of the 14000 shares, the shareholding of the petitioner no. 1 increased to 15000 with 14000 shares held in its own name and 1000 held by its nominees viz. 300 shares in name of mr. daga surjratan, 400 shares in the name of mr. m.k. rao and 300 shares in name of mr. r. balchandran. gallant on 16.8.1993 came out with rights issue. however, the petitioner no. 1 did not subscribe to the same instead renounced the said rights issue in favour of triton trading company ltd. the petitioner no. 2 herein, who bought 5000 shares and chavannes & co. pvt. ltd. stood amalgamated with the petitioner no. 2 herein. thus, the shareholding of petitioner no. 2 became 10,000 shares. gallant also allotted 15000 shares to respondent nos. 2 to 4,8 and 9. by allotment of said shares the issued and paid up share capital of gallant became rs. 4 lacs. it is pertinent to mention here that triton trading company pvt. ltd. chavannes and co. pvt. ltd. mr. daga surjratan, mr. m.k. rao and mr. r. balchandran form a part of the petitioner's group. the petitioner's group held 25000 shares out of 40000 issued shares and gallant on 16.8.1993 ceased to be a subsidiary of the petitioner no. 1. the petitioners allegedly did not receive any annual reports of gallant for the year 2000 and thereafter. the board of directors of the petitioner no. 1 on 1.6.2000 resolved that 1,50,000 equity shares of gallant be purchased and that a sum of rs. 15 lacs be paid towards subscription to respondent company for purchase of 1,50,000 equity shares of rs. 10/- each. the petitioner no. 1 accordingly paid a sum of rs. 15 lacs to gallant by cheques being the share application money. however, the petitioner no. 1 was neither allotted the shares nor the refund of the said money was received by the petitioner no. 1. the respondent no. 2 on 11.12.2002. malafidely, illegally and without following the due process of law or without any notice in that behalf to the existing members including the petitioners who held majority shareholding in gallant, allotted 10000 shares to himself and his family members being respondent nos. 2 to 7. the petitioners allegedly neither received any notices for further issue of shares or offer of shares for allotment nor any annual reports for the year 2000, 2001 and 2002. by allotment of the said impugned shares the issued and paid up share capital of gallant became rs. 5 lacs and the respondent no. 2 and his family holding increased to 25000 shares while the petitioners holding remained at 25000 shares, in that, the said respondents, though were in minority held equal shares to that of the petitioners group in gallant. since the petitioners were not receiving any notices or annual reports from gallant, the petitioners caused an inspection with roc on july 8,2003 and august 28,2003. upon inspection of the records the petitioners found that though gallant filed its balance sheet and annual return for the year 2001 on january 8,2002, the said documents were not available/traceable in the inspection file.the issued and paid up share capital shown in the annual return filed by the company for the year 2000 did not tally with the details of the shares held by the shareholders as per serial no. v of the annual return. the respondent company did not reflect the share application money being the sum of rs. 15 lacs paid by the petitioner no. 1 in balance sheet of the company for the year 2001. the petitioner by its letter dated november 3, 2003 while bringing on record that the petitioner has not been receiving the annual reports for the year 2001, 2002 and 2003 called upon gallani to send the proof of dispatch of the same. the petitioners once by its letter dated november 19, 2003 reminded gallant to hand over the annual reports to its representatives. gallant on 2.12.2003 for the first lime forwarded copies of annual reports for the years 2001, 2002 and 2003. on obtaining the said annual reports the petitioners for the first time came to know that gallant had allotted further 10000 shares to respondent nos. 2 to 7 which were never offered to the petitioners nor any notice of allotment was sent to the petitioner nor the annual reports were sent to the petitioners.3. the counsel for the petitioners contended that the issuance of further 10000 shares to respondent nos. 2 to 7 is only for gaining control of the company in that while the petitioner's group held 25000 shares and respondent no. 2's group held 15000, but by allotting further 10000 shares to himself and his family members, the respondent no. 2's group held 25000. thereby the majority enjoyed by the petitioners was diluted. the action of respondent in allotting the 10000 shares, it was contended, without following the due process of law and informing the petitioners about the said allotment and without offering them to the petitioners is totally malafide and shows that their object was only to gain control of gallant. besides the allotment was not for the benefit of the company. the respondents had the sum of rs. 15 lacs from the petitioners towards allotment of 15000 shares in june 2000 much before the allotment of 10000 shares to the respondents in december 2002. if the company needed funds that the company was already holding the amount as also the request for allotment of shares from the petitioners. amended article 6(f) of the articles of association of gallant provides that the two thirds of the total number of directors of the company at any time shall be nominated or appointed by metal distributors ltd. upon amalgamation of metal distributors limited with petitioner no. 1 the said appointment/nomination is to be made by the petitioner no. 1. it was contended that it is settled law that in the matter of issue of additional shares, the directors owe a fiduciary duty to issue shares for a proper purpose. this duty is owed by them to the shareholders of (he company. the act of the board of directors of gallant in reducing the majority of the petitioners is malafide and is an act of oppression. the petitioners, who hold majority of the shares in gallant, are entitled, by virtue of their majority, to control, manage, and run the affairs of gallant. besides, by virtue of article 6(f) of the articles of association of gallant, the petitioner no. 1 is entitled to nominate and/or appoint two thirds of the total number of directors of the company. reference was made to the judgment of the apex court in the matter of dale and carrington investment. p. ltd. v. p.k. prathapan and ors. . the petitioners contended that they are entitled to relief prayed for in the petition including that the entire allotment of 10000 shares in favour of respondent nos. 2 to 7 on december 11, 2002 is liable to be set aside as also the petitioners are entitled to exercise of their power under article 6(f) of the articles of association of gallant and also entitled to be allotted shares worth rs. 15 lacs.4. cp no. 104/2005 was mentioned on 8.12.2005. on that date considering the facts and circumstances of the case clb had directed the company/respondents to maintain status quo as of date of the shareholdings and the fixed assets of the company including tenancy rights. since this was an ex-parte order the petitioners were directed to serve a copy of the petition alongwith a copy of this ex-parte order on all the respondents forthwith and the respondents were given liberty to apply and file their replies to the petition by 10.1.2006 and the petitioners were permitted to file rejoinder to the reply of the respondents by 5.2.2006. the matter was listed for hearing on 8.3.2006.on that date none attended on behalf of the respondents. the matter was adjourned to 6.6.2006 at 10.30 a.m. with the directions to the bench officer to issue notices to the respondents for hearing on 6.6.2006.even on 6.6.2006 the respondents did not enter appearance. on that date the cp was heard and petitioners were directed to send a copy of their written submissions to the respondents forthwith and the respondents were given liberty to apply within a fortnight. the petitioners were also directed to serve a copy of clb's order dated 6.6.2006 wherein order had been reserved subject to the receipt of any pleadings/written submissions from the respondents. the petitioners were also directed to file an affidavit for compliance of service on the respondents. on 15.6.2006 the petitioners filed an affidavit of compliance for service on the respondents enclosing the requisite documents proving service on the respondents. till date clb has not heard anything from the respondents. in these circumstances, i am left with no other alternative than to pass order in cp no. 104/2005 ex-parte disposing of the petition on merits.5. i have considered the pleadings and documents filed therewith as well as the arguments and case laws filed by the counsel for the petitioners. on consideration of the facts and circumstances of case. i find that the respondents have failed to refute the allegation levelled against them. in the present case the petitioners plea is that on 11.12.2002 respondent no. 2 had malafidely, illegally and without following the due process of law or without any notice to the existing members including the petitioners who held majority shareholding in gallant allotted 10,000 shares to himself and his family members (r-2 to 7) even while the petitioners' application money amounting to rs. 15 lacs for purchasing 15,000 equity shares was available with the respondent company. with this allotment the number of shares of the respondents increased to 25,000 shares while the petitioners holding remained as 25,000 shares and this act of the respondent had reduced the petitioners who are the majority shareholders to equal shareholding which amounted to oppression. this act of the respondents, as pointed out by the petitioners, was not for a proper purpose but for an extraneous reason only to gain control of the respondent company. it was further pointed out that even the requirement of amended article 6(f) of the articles of association of gallant which provides that the two thirds of the total number of directors of the company at any time shall be nominated or appointed by metal distributors ltd. was given a go by. my attention was drawn to the settled law that in the matter of issue of additional shares the directors owe a fiduciary duty to issue shares for a proper purpose. this duty owed by the respondents to the shareholders of the company was breached. it was reiterated that the act of the board of directors of gallant in reducing the majority of the petitioners is malafide and is an act of oppression. the petitioner relied on the judgement of the apex court in the matter of dale and carringion investment pvt. ltd. v. p.k. prathapan and ors. reported in (2005) scc 212.6. as regards further allotments, the respondents have not been able to prove the necessity of such increase and following of proper procedure for allotment. the facts of this case do not warrant such increase.nothing was placed on record to show the need of the company for further investment and hence need for allotment of additional shares.in view of the doctrine of "proper purpose''"', it follows that in the matter of issue of shares, directors owe a fiduciary duty to shareholders of the company to issue shares for a proper purpose. the fiduciary capacity within which directors have to act enjoins upon them a duty to act on behalf of the company with utmost care and skill and due diligence and in the interest of the company. they have a duty to make full and honest disclosure to shareholders regarding all important matters relating to the company. shares issued for maintenance and acquisition of control over the company is an extraneous purpose, and, therefore, cannot be upheld. in needle industries' case the supreme court referred to some old english decision with approval. punt v.symons was quoted (at scc p. 394, para 105) in which it was held: where shares had been issued by the directors, not for the general benefit of the company, but for the purpose of controlling the holders of the greater number of shares by obtaining a majority of voting power, they ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used.prercy v. s. mills and co. ltd. applied the same principle while holding: (all er p.316 e-e). the basis of both cases is, as i understand, that directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholding.the principle deduced from these cases is that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld. in the present case the conclusion is inevitable that neither was the allotment of additional shares in favour of respondents bonafide nor as it in the interest of the company nor was a proper and legal procedure followed to make the allotment. the motive for the allotment was malafide. on facts, impugned allotment of additional shares done with the sole object of gaining control of company by becoming majority shareholder was clearly an act of oppression on the part of the respondents. moreso, as the meetings passing such resolutions were held at the back of the petitioners without giving proper notices and without following proper procedure. regarding service of notices, it is settled law that the onus to prove service rests on the sender. that onus has not been discharged.7. it is settled law that in a case of oppression, a member has to specifically plead on five facts - (a) what is the alleged act of oppression; (b) who committed the act of oppression; (c) how it is oppressive; (d) whether it is in the affairs of the company; (e) and, whether the company is a party to the commission of the act of oppression. on considering the present case on merits, i find that all the live aspects of oppression stand proved. the acts of oppression in the affairs of the company have been listed in detail highlighting how these are oppressive. there is specific averment as to who committed the act of oppression and how the company is a party to the oppression.it is a well settled proposition that the provision of sections 397 and 398 are to be invoked to get the grievances of oppression and mismanagement redressed. i find that the petitioners have rightly invoked the provisions of sections 397/398. if a member who holds the majority of shares in a company is reduced to the position of minority shareholders in the company by an act of the company or by its board of directors malafidely, the said act must ordinarily be considered to be an act of oppression to the said member. i am, therefore, of the view that the allotment of further impugned shares of 10,000 in the company made for personal gains and with a view to gain advantage against the other shareholders of a company which was earlier the subsidiary company of the petitioners was neither in compliance with the legal requirements nor ensured the fair play and probity in corporate management, resulting in the enhancement of the shareholding of the respondents no. 2 to 7. this would constitute an act of oppression as held in praful m patel v. wonderweld electrodes p.ltd (2002) 6 comp lj 423, akbarali a kalvert v. konkan chemicals p. ltd. (1994) 15 cla 170(clb (2002) 110 comp. cases 31 and m.k. haridas v. asal malabar beedi depot p. ltd. (2002) 48 cla 10(clb)the member who holds the majority of shares in the company is entitled by virtue of his majority to control. manage and run the affairs of the company. this is a benefit of advantage which the member enjoys and is entitled to enjoy in accordance with the provisions of company and in the matter of administration of the affairs of the company by electing his own member to the board of directors of the company. the facts on record show that holding of meetings, allotting additional shares, without following proper procedure were wholly unauthorized and invalid and hence have to be set aside.8. in view of the above, and to do substantial justice between the parties, i hereby grant the petitioners' prayer at para 23 (a) and (d) as given at page 20 of the petition - the allotment of 10,000 equity shares of rs. 10/- each to respondent nos. 2 to 7 made on 11.12.2002 is hereby set aside and it is directed that the amounts received thereon be treated as interest free unsecured loans subject to adjustments against the dues from the respondents nos. 2 to 9 and the register of members be rectified accordingly. further, it is hereby directed that the directors on the board of the respondent company be appointed within a month of receipt of this order as per the articles of association of the respondent company.9. with the above directions, i dispose of this petition. no order as to cost.

Judgment:
1. In this order I am considering CP No. 104/2005 filed under Sections 397, 398,399,402,403 and 111A wherein the petitioners have challenged the malafide and illegal act of the respondents in allotting 10,000 shares to respondents No. 2 and his family members, without any notice to the petitioners as mandated under law for allotment of shares and without offering them to the petitioners.

2. The brief facts of the case are: On 24.3.1983, the respondent No. 1 company (hereafter referred to as "Gallant') was incorporated, with its Regd. Office at Gallant House, 12/18 V.P. Road, C.P. Tank, Mumbai. The authorized share capital of GALLANT on date of incorporation was Rs. 1,00,000/- (10,000 shares) divided into 5,000 equity shares of Rs. 10/- each and 5,000 9% Cumulative Preference Shares of Rs. 10/- each.

GALLANT was initially a wholly owned subsidiary of Metal Distributors Limited. The said Metal Distributors Ltd. stood amalgamated with petitioner No. 1 company on 23.11.1983. Consequent upon said amalgamation of Metal Distributors Ltd. with petitioner No. 1, Gallant became wholly owned subsidiary of the petitioner No. 1. The issued, subscribed and paid up capital of Gallant as on June 23,1992 was Rs. 10,000/- (1000 shares). The petitioner No. 1 held entire shareholding of GALLANT. The petitioner No. 1 held 998 shares and Mr. Braj Binani, the petitioner's nominee held 2 shares. The authorized capital of GALLANT was increased from R. 1 lac to Rs. 15 lacs on 26.4.1993.

However, the issued and paid capital remained at Rs. 10,000/- with petitioner No. 1 holding 998 shares and its nominee holding 2 shares.

In the year 1993-94, GALLANT allotted 14000 shares to the petitioner No. 1. With the allotment of the 14000 shares, the shareholding of the petitioner No. 1 increased to 15000 with 14000 shares held in its own name and 1000 held by its nominees viz. 300 shares in name of Mr. Daga Surjratan, 400 shares in the name of Mr. M.K. Rao and 300 shares in name of Mr. R. Balchandran. GALLANT on 16.8.1993 came out with rights issue. However, the petitioner No. 1 did not subscribe to the same instead renounced the said rights issue in favour of Triton Trading Company Ltd. the petitioner No. 2 herein, who bought 5000 shares and Chavannes & Co. Pvt. Ltd. stood amalgamated with the petitioner No. 2 herein. Thus, the shareholding of petitioner No. 2 became 10,000 shares. GALLANT also allotted 15000 shares to respondent Nos. 2 to 4,8 and 9. By allotment of said shares the issued and paid up share capital of GALLANT became Rs. 4 lacs. It is pertinent to mention here that Triton Trading Company Pvt. Ltd. Chavannes and Co. Pvt. Ltd. Mr. Daga Surjratan, Mr. M.K. Rao and Mr. R. Balchandran form a part of the petitioner's group. The petitioner's group held 25000 shares out of 40000 issued shares and GALLANT on 16.8.1993 ceased to be a subsidiary of the petitioner No. 1. The petitioners allegedly did not receive any Annual Reports of GALLANT for the year 2000 and thereafter. The Board of Directors of the petitioner No. 1 on 1.6.2000 resolved that 1,50,000 equity shares of Gallant be purchased and that a sum of Rs. 15 lacs be paid towards subscription to Respondent Company for purchase of 1,50,000 equity shares of Rs. 10/- each. The petitioner No. 1 accordingly paid a sum of Rs. 15 lacs to GALLANT by cheques being the share application money. However, the petitioner No. 1 was neither allotted the shares nor the refund of the said money was received by the petitioner No. 1. The respondent No. 2 on 11.12.2002. malafidely, illegally and without following the due process of law or without any notice in that behalf to the existing members including the petitioners who held majority shareholding in GALLANT, allotted 10000 shares to himself and his family members being respondent Nos. 2 to 7. The petitioners allegedly neither received any notices for further issue of shares or offer of shares for allotment nor any Annual Reports for the year 2000, 2001 and 2002. By allotment of the said impugned shares the issued and paid up share capital of GALLANT became Rs. 5 lacs and the respondent No. 2 and his family holding increased to 25000 shares while the petitioners holding remained at 25000 shares, in that, the said respondents, though were in minority held equal shares to that of the petitioners group in GALLANT. Since the petitioners were not receiving any notices or Annual Reports from GALLANT, the petitioners caused an inspection with ROC on July 8,2003 and August 28,2003. Upon inspection of the records the petitioners found that though GALLANT filed its Balance Sheet and Annual Return for the year 2001 on January 8,2002, the said documents were not available/traceable in the inspection file.

The issued and paid up share capital shown in the Annual Return filed by the company for the year 2000 did not tally with the details of the shares held by the shareholders as per serial No. V of the Annual Return. The Respondent company did not reflect the share application money being the sum of Rs. 15 lacs paid by the petitioner No. 1 in Balance Sheet of the company for the year 2001. The petitioner by its letter dated November 3, 2003 while bringing on record that the petitioner has not been receiving the Annual Reports for the year 2001, 2002 and 2003 called upon GALLANI to send the proof of dispatch of the same. The petitioners once by its letter dated November 19, 2003 reminded GALLANT to hand over the Annual Reports to its representatives. GALLANT on 2.12.2003 for the first lime forwarded copies of Annual Reports for the years 2001, 2002 and 2003. On obtaining the said Annual Reports the petitioners for the first time came to know that GALLANT had allotted further 10000 shares to respondent Nos. 2 to 7 which were never offered to the petitioners nor any notice of allotment was sent to the petitioner nor the Annual Reports were sent to the petitioners.

3. The counsel for the petitioners contended that the issuance of further 10000 shares to respondent Nos. 2 to 7 is only for gaining control of the company in that while the petitioner's group held 25000 shares and respondent No. 2's group held 15000, but by allotting further 10000 shares to himself and his family members, the respondent No. 2's group held 25000. Thereby the majority enjoyed by the petitioners was diluted. The action of respondent in allotting the 10000 shares, it was contended, without following the due process of law and informing the petitioners about the said allotment and without offering them to the petitioners is totally malafide and shows that their object was only to gain control of GALLANT. Besides the allotment was not for the benefit of the company. The respondents had the sum of Rs. 15 lacs from the petitioners towards allotment of 15000 shares in June 2000 much before the allotment of 10000 shares to the respondents in December 2002. If the company needed funds that the company was already holding the amount as also the request for allotment of shares from the petitioners. Amended Article 6(f) of the Articles of Association of GALLANT provides that the two thirds of the total number of directors of the company at any time shall be nominated or appointed by Metal Distributors Ltd. Upon amalgamation of Metal Distributors Limited with petitioner No. 1 the said appointment/nomination is to be made by the petitioner No. 1. It was contended that it is settled law that in the matter of issue of additional shares, the Directors owe a fiduciary duty to issue shares for a proper purpose. This duty is owed by them to the shareholders of (he company. The act of the Board of Directors of GALLANT in reducing the majority of the petitioners is malafide and is an act of Oppression. The petitioners, who hold majority of the shares in GALLANT, are entitled, by virtue of their majority, to control, manage, and run the affairs of GALLANT. Besides, by virtue of Article 6(f) of the Articles of Association of GALLANT, the petitioner No. 1 is entitled to nominate and/or appoint two thirds of the total number of directors of the company. Reference was made to the judgment of the apex Court in the matter of Dale and Carrington Investment. P. Ltd. v. P.K. Prathapan and Ors. . The petitioners contended that they are entitled to relief prayed for in the petition including that the entire allotment of 10000 shares in favour of respondent Nos. 2 to 7 on December 11, 2002 is liable to be set aside as also the petitioners are entitled to exercise of their power under Article 6(f) of the Articles of Association of GALLANT and also entitled to be allotted shares worth Rs. 15 lacs.

4. CP No. 104/2005 was mentioned on 8.12.2005. On that date considering the facts and circumstances of the case CLB had directed the company/respondents to maintain status quo as of date of the shareholdings and the fixed assets of the company including tenancy rights. Since this was an ex-parte order the petitioners were directed to serve a copy of the petition alongwith a copy of this ex-parte order on all the respondents forthwith and the respondents were given liberty to apply and file their replies to the petition by 10.1.2006 and the petitioners were permitted to file rejoinder to the reply of the respondents by 5.2.2006. The matter was listed for hearing on 8.3.2006.

On that date none attended on behalf of the respondents. The matter was adjourned to 6.6.2006 at 10.30 a.m. with the directions to the Bench Officer to issue notices to the respondents for hearing on 6.6.2006.

Even on 6.6.2006 the respondents did not enter appearance. On that date the CP was heard and petitioners were directed to send a copy of their written submissions to the respondents forthwith and the respondents were given liberty to apply within a fortnight. The Petitioners were also directed to serve a copy of CLB's order dated 6.6.2006 wherein order had been reserved subject to the receipt of any pleadings/written submissions from the respondents. The petitioners were also directed to file an affidavit for compliance of service on the respondents. On 15.6.2006 the petitioners filed an affidavit of compliance for service on the respondents enclosing the requisite documents proving service on the respondents. Till date CLB has not heard anything from the respondents. In these circumstances, I am left with no other alternative than to pass order in CP No. 104/2005 ex-parte disposing of the petition on merits.

5. I have considered the pleadings and documents filed therewith as well as the arguments and case laws filed by the counsel for the petitioners. On consideration of the facts and circumstances of case. I find that the respondents have failed to refute the allegation levelled against them. In the present case the petitioners plea is that on 11.12.2002 respondent No. 2 had malafidely, illegally and without following the due process of law or without any notice to the existing members including the petitioners who held majority shareholding in Gallant allotted 10,000 shares to himself and his family members (R-2 to 7) even while the petitioners' application money amounting to Rs. 15 lacs for purchasing 15,000 equity shares was available with the respondent company. With this allotment the number of shares of the respondents increased to 25,000 shares while the petitioners holding remained as 25,000 shares and this act of the respondent had reduced the petitioners who are the majority shareholders to equal shareholding which amounted to oppression. This act of the respondents, as pointed out by the petitioners, was not for a proper purpose but for an extraneous reason only to gain control of the respondent company. It was further pointed out that even the requirement of amended Article 6(f) of the Articles of Association of Gallant which provides that the two thirds of the total number of directors of the company at any time shall be nominated or appointed by Metal Distributors Ltd. was given a go by. My attention was drawn to the settled law that in the matter of issue of additional shares the directors owe a fiduciary duty to issue shares for a proper purpose. This duty owed by the respondents to the shareholders of the company was breached. It was reiterated that the act of the Board of Directors of Gallant in reducing the majority of the petitioners is malafide and is an act of oppression. The petitioner relied on the judgement of the Apex Court in the matter of Dale and Carringion Investment Pvt. Ltd. v. P.K. Prathapan and Ors. reported in (2005) SCC 212.

6. As regards further allotments, the respondents have not been able to prove the necessity of such increase and following of proper procedure for allotment. The facts of this case do not warrant such increase.

Nothing was placed on record to show the need of the company for further investment and hence need for allotment of additional shares.

In view of the doctrine of "proper purpose''"', it follows that in the matter of issue of shares, Directors owe a fiduciary duty to shareholders of the company to issue shares for a proper purpose. The fiduciary capacity within which Directors have to act enjoins upon them a duty to act on behalf of the company with utmost care and skill and due diligence and in the interest of the company. They have a duty to make full and honest disclosure to shareholders regarding all important matters relating to the company. Shares issued for maintenance and acquisition of control over the company is an extraneous purpose, and, therefore, cannot be upheld. In Needle Industries' case the Supreme Court referred to some old English decision with approval. Punt v.Symons was quoted (at SCC P. 394, para 105) in which it was held: Where shares had been issued by the Directors, not for the general benefit of the company, but for the purpose of controlling the holders of the greater number of shares by obtaining a majority of voting power, they ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used.

Prercy v. S. Mills and Co. Ltd. applied the same principle while holding: (All ER p.316 E-E).

The basis of both cases is, as I understand, that Directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholding.

The principle deduced from these cases is that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld. In the present case the conclusion is inevitable that neither was the allotment of additional shares in favour of respondents bonafide nor as it in the interest of the company nor was a proper and legal procedure followed to make the allotment. The motive for the allotment was malafide. On facts, impugned allotment of additional shares done with the sole object of gaining control of company by becoming majority shareholder was clearly an act of oppression on the part of the respondents. Moreso, as the meetings passing such resolutions were held at the back of the petitioners without giving proper notices and without following proper procedure. Regarding service of notices, it is settled law that the onus to prove service rests on the sender. That onus has not been discharged.

7. It is settled law that in a case of oppression, a member has to specifically plead on five facts - (a) what is the alleged act of oppression; (b) who committed the act of oppression; (c) how it is oppressive; (d) whether it is in the affairs of the company; (e) and, whether the company is a party to the commission of the act of oppression. On considering the present case on merits, I find that all the live aspects of oppression stand proved. The acts of oppression in the affairs of the company have been listed in detail highlighting how these are oppressive. There is specific averment as to who committed the act of oppression and how the company is a party to the oppression.

It is a well settled proposition that the provision of Sections 397 and 398 are to be invoked to get the grievances of oppression and mismanagement redressed. I find that the petitioners have rightly invoked the provisions of Sections 397/398. If a member who holds the majority of shares in a company is reduced to the position of minority shareholders in the company by an act of the company or by its Board of Directors malafidely, the said act must ordinarily be considered to be an act of oppression to the said member. I am, therefore, of the view that the allotment of further impugned shares of 10,000 in the company made for personal gains and with a view to gain advantage against the other shareholders of a company which was earlier the subsidiary company of the petitioners was neither in compliance with the legal requirements nor ensured the fair play and probity in Corporate management, resulting in the enhancement of the shareholding of the respondents No. 2 to 7. This would constitute an act of oppression as held in Praful M Patel v. Wonderweld Electrodes P.Ltd (2002) 6 Comp LJ 423, Akbarali A Kalvert v. Konkan Chemicals P. Ltd. (1994) 15 CLA 170(CLB (2002) 110 Comp. Cases 31 and M.K. Haridas v. Asal Malabar Beedi Depot P. Ltd. (2002) 48 CLA 10(CLB)The member who holds the majority of shares in the company is entitled by virtue of his majority to control. manage and run the affairs of the company. This is a benefit of advantage which the member enjoys and is entitled to enjoy in accordance with the provisions of company and in the matter of administration of the affairs of the company by electing his own member to the Board of Directors of the company. The facts on record show that holding of meetings, allotting additional shares, without following proper procedure were wholly unauthorized and invalid and hence have to be set aside.

8. In view of the above, and to do substantial justice between the parties, I hereby grant the petitioners' prayer at para 23 (a) and (d) as given at page 20 of the petition - the allotment of 10,000 equity shares of Rs. 10/- each to respondent Nos. 2 to 7 made on 11.12.2002 is hereby set aside and it is directed that the amounts received thereon be treated as interest free unsecured loans subject to adjustments against the dues from the respondents Nos. 2 to 9 and the register of members be rectified accordingly. Further, it is hereby directed that the directors on the Board of the respondent company be appointed within a month of receipt of this order as per the Articles of Association of the respondent company.

9. With the above directions, I dispose of this petition. No order as to cost.