TaxTMI 
TaxTMI 
1982 (2) TMI 236
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....thorised capital of Rs. 5 lakhs divided into one thousand ordinary shares of Rs. 100 and 200 cumulative preference shares of Rs. 2,000 each. The memorandum of association was signed by the appellant, Bali, and the respondent, Sodhi, who had initially each one cumulative preference share. Shortly, thereafter, further preference shares were issued making a total of 50. The dispute is as to the division of these shares between two groups. It is also a common case that eight preference shares are held by Sinha and Kapur, who are not apparently taking sides either with Sodhi or Bali. The broad fact that Bali group holds 21 preference shares is also not disputed. That Sodhi holds four shares in his own name and one is held by his wife is also not disputed. There is also no dispute that four shares were held by R. C. Sodhi, the brother of the respondent, Sodhi. There the agreement ends. According to Bali other 12 shares were owned by and were entered in the register of members in the name of Des Raj (4), Mulakh Raj (4) and Chandok (4). Sodhi, however, claimed when he moved an application-C. P. No. 32/1971-that these 12 shares of Des Raj (4), Mulakh Raj (4), Chandok (4) had been transferr....
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....is court. Till this question is decided, I undertake not to alienate or in any manner subject the company to any commitment or liability except for ordinary day-to-day transactions without taking the express orders of the court". On the same date the learned judge passed the following order: "The statements of Shri Dina Nath Sodhi and Shri S. L. Bali are recorded. Shri Bali will file a detailed affidavit concerning the returns stated to have been filed before the Registrar for the years ending 1966, 1967 and 1968, mentioning the details of the shares held by the petitioner and the members of his family. He will also cover the points mentioned in the Government's report which has been filed today by Shri Rishikesh for Shri Davinder K. Kapur. The petitioner will also file a detailed affidavit of shares of himself and the members of his family and how and when they were acquired". The matter was then heard and disposed of by P. N. Khanna J., by his order of May 23, 1972, as follows: "In the result, I find that Shri Bali is not the owner of the 8 shares which previously stood in the names of Des Raj and Mulakh Raj and that the petitioner and the members of his family, i.e., his wif....
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....d and disposed of together by a Division Bench on March 18,1977, dismissing all the appeals. Thereafter, the matter was tried by the company judge on merits who framed the following issues: (1)Whether the issue of 1,000 equity shares of Rs. 100 each by Sri Bali to himself, his wife, daughters and minor children, Sood and Mehta Kartar Singh, was at the back and without the knowledge and concurrence of the petitioner and amounted to an act of oppression? (2)Whether the annual general meetings held in December, 1969, and April, 1970, were, invalid as they had been held without notice to the petitioner and the members of his family? (3)Whether the respondents ousted the petitioner from the board of directors of the company and brought about a material change in its management and control? (4)Whether the company in the present case was really in the nature of a partnership between two groups, one of the petitioner and the other of Bali? (5)Whether it is just and equitable that the company should be wound up? (6)Are the majority of the shareholders opposed to the winding up, and if so, what is its effect? The learned single judge, as already mentioned, has by his order of Decembe....
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....to Sodhi and his wife who were admittedly members for the meetings held in December, 1969, and April, 1970. Now, sections 171 and 172 provide for the calling of a general meeting only after giving notice for the requisite period and containing the contents and manner of service. It is not suggested that these requirements do not apply to the company. In the present case, our finding is that no notices of the meeting were sent to Sodhi and his wife. There is no excuse of accidental omission. The stand taken was that notices were sent, which we have disbelieved. Thus, deliberately and designedly Sodhi and his wife were not given notice for the holding of the meeting allegedly held in December, 1969, and April 29, 1970. In such circumstances it is the law that if the time of holding the meeting and other essential particulars required by the section are not specified in the notice, the meeting will be invalid, and all resolutions passed thereat will be of no effect. (See Prachi Insurance Co. Ltd. v. Chaudhury Madhusudandas [1964] 2 Comp. L. J. 157 (Orissa). Now, December, 1969, meeting purported to elect directors which called April 29, 1970, meeting. The latter meeting is said to hav....
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....were acquired. A reference to the order of P. N. Khanna J. dated May 23, 1972, in C.P. No. 32/1971 will show that the question posed before him squarely was-whether Sodhi and the members of his family owned 5 shares as said by Bali or 21 shares as claimed by Sodhi? Des Raj and Mulakh Raj are brothers and their sister is married to Sodhi's brother. Des Raj, Mulakh Raj and Chandok were originally allotted 4 preference shares each in 1951, which Sodhi claimed were his nominees. He also claimed that the price of these shares had been paid by him. Four shares were allotted in 1953 to Sodhi's brother. There was no dispute so far as the 4 shares which stood in the name of Sodhi, and 4 shares which stood in the name of his deceased brother, R.C. Sodhi, and one share in the name of Sodhi's wife. The dispute only was with regard to the 12 shares (four each in the name of Des Raj, Mulak Raj and Chandok). Sodhi's case was that the shares of Des Raj were transferred in 1961 to his son, Ramesh Sodhi; shares of Mulakh Raj were transferred to his second son, Suresh Sodhi, and the shares of Chandok were transferred in the same year to his daughter, Savita Sodhi. Bali, however, claimed that the shar....
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....ansferred to Bali at the agreed price of Rs. 7,500 for each such share. Against this order of Khanna J. of May 23, 1972, three appeals, namely-Company Appeal No. 10/1972 by Bali, Company Appeal No. 11/1972 by Shakuntala Bali and Company Appeal No. 13/1972 by the company-were filed. The Division Bench also posed the question: Whether D. N. Sodhi and the members of his family held 21 shares as alleged by him or whether they held 5 shares, as alleged by Bali? It may be mentioned that Chandok is said to be the son of a friend of D. N. Sodhi. The Division Bench, after going through the whole matter, also came to the conclusion that the entries relied upon in the register of members by Bali could not prevail over the entries in the annual returns which showed the sons and daughter of D. N. Sodhi as the holders of these 12 shares. The Division Bench also agreed with the finding of Khanna J. that the claim of Bali that 8 shares held by Des Raj and Mulakh Raj were transferred to Bali's wife and that the 4 shares held by Chandok were transferred to him was unacceptable. They have recorded a finding that right from December 30, 1961, to December 29, 1967, in every annual return the two sons a....
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....nd in his place Mrs. Shakuntala Bali was instead elected. On issue No. 2, therefore, it has to be held that the meetings held in December, 1969, and April, 1970, were invalid, as they were held without notice to D. N. Sodhi and members of his family. Thus, it comes to this that Sodhi and his family who were entitled to attend the meetings, being members were never given notice of the meetings. These meetings were, therefore, held invalidly. Issue No. 1: The allotment of these 1,000 equity shares was purported to have been made in a meeting of the board of directors held on November 12,1970. Prior to that date the issued capital of the company was Rs. 1 lakh consisting of 50 preference shares of Rs. 2,000 each and on the findings given earlier 21 shares of Rs. 2,000 each were held by Sodhi group; 21 shares of Rs. 2,000 each were held by Bali group and 8 shares were held by Mehta and Kapoor. On November 12,1970, the board of directors decided to allot one thousand equity shares of Rs. 100 each to about 10 persons, which, apart from allotment of 20 shares each to one P. L. Sood and K. S. Mehta, the rest were given to Bali and his family being his wife and daughters and sons. Case of....
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....is as follows: "The meeting of 2nd May, 1977, was unquestionably illegal for reasons already stated. It must follow that the decision taken by the board of directors in that meeting could not, in the normal circumstances, create mutual rights and obligations between the parties". As the said allotment was made by a director who was purported to have been elected at an invalid meeting, the said action lacked in validity. Mr. Talwar, however, sought to invoke section 290 of the Companies Act to say that any act done by or purported to be done by a director is valid notwithstanding that it may afterwards be discovered that his appointment was invalid by any reason of defect or disqualification. The argument is that it is only subsequently during the present proceedings that it has been found that the meeting of April, 1970, which elected Mrs. Bali as director was invalid, and, therefore, the act of Mrs. Bali as a director allotting these shares must be held to be valid in terms of this section. We cannot agree. Now, section 290 is based on the rule culled out from Turquand' s case [1856] 25 LJ QB 317; 6 E & B 327, which, as reproduced in Morris v. Kanssen [1946] 16 Comp. Cas. 186 ; ....
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....t it acts within its powers and that its transactions are regular and orderly. To admit in their favour a presumption that that is rightly done which they have themselves wrongly done is to encourage ignorance and condone dereliction from duty. It may be that in some cases, it may be that in this very case, a director is not blameworthy in his unauthorised act. It may be that in such a case some other remedy is open to him, either against the company or against those by whose fraud he was led into this situation, but I cannot admit that there is open to him the remedy of invoking this rule and giving validity to an otherwise invalid transaction. His duty as a director is to know; his interest, when he invokes the rule, is to disclaim knowledge. Such a conflict can be resolved in only one way". As explained in Morris' case [1946] 16 Comp. Cas. 186,194; [1946] 1 All ER Rep. 586, 591 this section clearly indicates that "this deals with slips or irregularities in appointment, not with a total absence of appointment, and still less with a fraudulent usurpation of authority." ".It has been held that, notwithstanding the provisions of s.180 if the directors are not properly appointed, ac....
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....ntial to uphold the transaction in all cases in which the principle of section 290 of the Companies Act can be invoked. See observations in Albert Judah Judah v. Ramapada Gupta, AIR 1959 Cal. 715, para. 81; [1960] 30 Comp. Cas. 582 , at p. 626. In the present case, as the overwhelming majority of these one thousand shares were allotted to Bali, Mrs. Bali and their children, the question of even suggesting of their having acted bona fide does not arise. Mr. Talwar again repeated the apparently innocuous suggestion that the company was even willing to allot the same number of shares to the Sodhi group and this would show the bona fide of Bali group that they did not want to exclude Sodhi. But this suggestion cannot conceal the real motive behind the allotments made on November 12, 1970, in such a clandestine manner by having a meeting held without giving a notice to Sodhi. Mr. Talwar also sought to urge that the company required funds and it was for this reason that this allotment of 1,000 shares was made. The suggestion was that it was in pursuance of agenuine need that these additional shares were allotted and not because of any mala fide motive. An innocent and apparently genuine ....
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....e. Issue No. 3 : This issue really stands concluded by our finding earlier that the meetings in December, 1969, and April, 1970, were invalid. That they were called without notice to Sodhi group and that 1,000 extra shares were issued without involving Sodhi in this decision making is also established. It is apparent that all this was done with the main, if not sole, purpose of excluding Sodhi from the control and management of the company. That Sodhi was undoubtedly associated right from the incorporation in 1949 to April, 1970, even on the showing of Bali group is without any challenge. This is in fact admitted by Bali in the purported notice allegedly issued for the meeting of April 29, 1970. In the explanatory statement it is clearly stated that Sodhi and Bali have been directors since 1953. Bali, by calling an invalid meeting and changing the control of the company, was doing so with the sole motive of excluding Sodhi from the management and the action was not a bona fide one. Now, it is well settled 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 th....
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.... belonged to Sodhi group and 21 to Bali group. Both Sodhi and Bali have remained directors right up to April, 1970. Bali in his evidence given in C. P. No. 32/1971, on November 24, 1971, though he purported to claim that he was in-charge of the company in all respects and was looking after all details of the company had to admit that both he and Sodhi were getting Rs. 1,000 per month in addition to car allowance, though he mentioned that the remuneration to Sodhi was stopped in 1961-62. This statement was modified by him in his evidence on September 29, 1971, to say that no remuneration was credited to Sodhi's account after July 1, 1967. But then this stood contradicted by his further statement that the balance-sheet for the period ending June 30, 1970, showed that a sum of Rs. 2,10 ,575.64 was for remuneration not paid to Sodhi. He could not say as to how much was due to Sodhi and how much was due to him. Sodhi's case was that he had not been taking in cash the remuneration which was being credited to his accounts by the company. The books of the company which had all the time been with Bali support the stand of Sodhi that Rs. 1,000 as remuneration and car allowance was being cred....
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....ali himself and cannot be accepted. That for the day to day functioning of the board of directors it necessitated the presence of Sodhi is also clear from the said explanatory statement because his non-attendance at the meetings is being made a grievance for the reason to have only one director in future. Whatever the merits of this allegation against Sodhi be, the facts at least stands established that it was clearly understood that the management of the company was to be run jointly by Sodhi and Bali and was in fact run for all these years on an equal participation of responsibility as well as the enjoyment of equal remuneration and other benefits. On the basis of these findings, Mr. Parekh's contention is that this is a case which falls within the ratio laid down in Ebrahimi v. Westbourne Galleries Ltd, [1972] 2 WLR 1289; [1973] AC 360 (HL), entitling the respondent to claim that it is just and equitable that this company should be wound up. Now, under section 433(f), a company may be wound up by the court if the court is of the opinion that it is just and equitable that the company should be wound up. Lord Wilberforce in the said judgment at page 496 finally buried the controve....
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....there was a series of mala fide acts showing lack of probity, a company, even if it is in the image of partnership, should not be wound up. But this plea was negatived in Ebrahimi's case where it was said by Lord Cross that: "it is not a condition precedent to the making of an order under the sub-section that the conduct of those who oppose its making should have been 'unjust or inequitable ' (at p. 503(g) of [1972] 2 All ER and at p. 1301 of [1972] 2 WLR). As a matter of fact Ebrahimi's case specifically approved Yenidje Tobacco Co. Ltd., In re [1916] 2 Ch 426, which was a case of two equal share directors, between whom a state of deadlock came into existence, but it was emphasised by Lord Cozens-Hardy M.R. that: "whether there is deadlock or not... 'the circumstances are such that we ought to apply, if necessary, the analogy of the partnership law and to say that this company is now in a state which could not have been contemplated by the parties when the company was formed...' "(at p. 497 of [1972] 2 All ER and at p. 1295 of [1972] 2 WLR). The reason why an order was made was as explained by Lord Cross as, "the reason why the petitioner succeeded was that the court thought it ri....
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....o exclude Sodhi, because as Lord Cross said in Ebrahimi's case [1972] 2 All ER 492,505(e); [1972] 2 WLR 1289, 1303: "But the jurisdiction to wind up under section 222(f) continues to exist as an independent remedy and I have no doubt that the Court of Appeal was right in rejecting the submission of the respondents to the effect that a petitioner cannot obtain an order under that sub-section any more than under section 210 unless he can show that his position as a shareholder has been worsened by the action of which he complains". Of course, if the petitioner who relies on "just and equitable" clause is the one responsible for the breakdown of confidence between him and the other party, he cannot invoke this clause. Nothing has been shown in the present case that Sodhi had in any way acted as to justify the action of Bali to resort to the action of removing him. What makes the action of Bali indefensible is that the whole thing was done in such a secret manner; further, Sodhi has been able to show that the nature of the company and the business and the understanding was that the company would be carried on in such a manner that both of them, i.e., Sodhi and Bali, would participate ....
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....made before Rangarajan J. on January 8, 1971, and after the decision by Khanna J. and the appellate Bench (Co. Appeal No. (10/1973), execution of the transfer of the shares in the name of Sodhi's children was strongly resisted. The conduct of Bali for quite some time had been to exclude Sodhi from any further participation in the management which found its climax when he called the meeting in December, 1969, and April, 1970, without issuing notice to Sodhi, his brother and to the other shareholders. In his evidence he purported to deny that any remuneration was credited to the account of Sodhi but had to admit that the books do show this fact. The company being such a small company, out of 50 preference shares, 42 are held by 2 groups of 21 each. Both Sodhi and Bali have been in the control of management till 1970 when Bali made an attempt to oust Sodhi from management. This action shows that Bali was destroying the basis which was the foundation of the company. It is not a case where in the normal case Sodhi is being outvoted. Relations between the two are at worst. There is no allegation which each is not willing to believe against the other. In that state of affairs the busines....
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....1971, but no relief for winding up had been claimed, the present application for winding up is barred on the principles of res judicate or at least on the principles of O.2, r.2, CPC. The argument being that before an order can be passed under section 397, the court has to come to a conclusion that the company's affairs are being conducted in a manner prejudicial to public interest and that to wind up the company would unfairly prejudice such members but otherwise the facts would justify the winding-up order on the ground that it was just and equitable that the company should be wound up. Therefore, so runs the argument, that when the earlier application-C.P. No. 32/1971-was filed under sections 397/398, grounds for asking for winding up under "just and equitable" clause existed and since the winding up was not sought, the respondents cannot now ask for winding up. This argument obviously assumes as if reliefs under sections 397 and 433 are the same and, therefore, an application under section 433 would be an abuse of the process of the court if winding-up was not sought in an earlier application under section 397. The argument is misconceived". The relief that could be granted und....
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....ng up or not. The argument is misconceived. When the application is moved for winding up on the ground that it is just and equitable to do so especially for the reason that the company is in substance a partnership, it is inevitable that the other details as to how many shares belong to each party and what has been the history of the company must necessarily figure in any determination. Therefore, the fact whether Sodhi has been ousted or not would very much form a part of the necessary determination of C.P. No. 39/1973, even on the basis of allegations as it stood in this very application alone. But that apart, this plea that the matters which were not mentioned in the Company Petition No. 39/1973, alone must be considered and the matters referred to in C.P. No. 32/1971, cannot be relied upon in C. P. No. 39/1973, has already been rejected in an earlier judgment in C. A. No. 8/1973, decided on March 8, 1977. In that case, the Bench, though it accepted that the petitioner in a winding up is confined to the complaint set forth in a petition and cannot be allowed to rely on allegations not made therein, nevertheless observed that the petitioner had expressly stated in paragraph 12 of....
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....ased on section 443(2) of the Companies Act which provides that where a petition is presented on just and equitable grounds the court may refuse to make an order of winding up if it is of the opinion that some other remedy is available to the petitioner and that they are acting unreasonably in seeking to have the company wound up instead of pursuing the other remedies. The remedy which was put forth as an alternative remedy in para 13 was to the effect that the applicant was prepared to purchase the shares of all the dissenting shareholders at a proper and reasonable price and that for this purpose a form of chartered accountants of repute or a valuer may be appointed to work out the value of shares and after hearing the parties the value of the shares be approved. This suggestion was supported by one Mr. Dhera Singh, who elaborated it by his affidavit of March 5, 1979. Thus after the valuer had determined the value of shares, the court was also to determine the interest of Sodhi in the shares and payment for that to be made by the company. But Sodhi and his family members were only in the first instance to be allowed to withdraw the value of 9 shares by completing the formalities ....
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....terest of one Jaidev in a joint venture is hardly of any consequence because he cannot claim to control the rights of the respondents by the mere fact that he has a joint venture in the company. Whatever his rights are, will be taken note of and his rights protected under law even if the company is ordered to be wound up. Section 557 of the Act is equivalent to section 346 of the English Companies Act. The argument that if the majority of the creditors oppose the making of a winding-up order, that is an end of the matter was negatived and it was emphasised that though the court may and will have regard to the fact, it does not mean that the court has no function to perform. Vide Re Vuma Lid. [1960] 1 WLR 1283; [1960] 3 All ER 629. Further, 'that even if the majority of the creditors opposed the winding up the circumstances existed to the contrary, the court has full discretion in the matter' was reiterated in Re P. & J. Macrae Ltd. [1961] 1 All ER 302; [1961] 31 Comp. Cas. 424, where it was stated that if a majority of creditors have given reasons to oppose a petition for winding up, then prima facie they are entitled reasonably to expect that their wishes will prevail. However it....
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....g that Sodhi and his group had rights over 21 shares and directing Bali to pay Rs. 1,57,500 to Sodhi in terms thereof. If this order had been accepted by Bali by depositing Rs. 1,57,500 in lieu of the transfer of these shares and if in spite of this Sodhi had insisted upon an order of winding up, his action may have fallen within the ambit of section 443(2) of the Act and Sodhi may not be able to establish his right to claim winding up of the company. Here, however, what happened was that Bali never accepted the order but went up in appeal, but without any success. After P.N. Khanna J. had decided the matter in favour of Sodhi, Shakuntala Bali filed a suit in this court being Suit No. 135/1973, claiming that she was not bound by the decision with regard to 8 shares to which she laid claim but which had been held in favour of Sodhi. Even after the Division Bench had decided (in C.A. No. 8/1975), by its order of March, 1977, Shakuntala Bali persisted in the suit and the same has been dismissed by Kapur J. on March 5,1980, wherein he has held that Shakuntala Bali was bound by the earlier litigation which had rejected her claim that these 8 shares belonged to her. This would conclusive....