TaxTMI 
TaxTMI 
2005 (1) TMI 409
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....was his wife. They had eight children. For certain reasons with which we are not concerned, the estate of Gaekwad came into the hands of their elder son, Fatehsinhrao P. Gaekwad (FRG) even during the life time of Sir Pratap Singh. FRG floated several companies three of which are Baroda Rayon Corporation Ltd. (BRC) Gaekwad Investment Corporation Company Ltd. (GIC) and Alaukik Trading & Investment Corporation Pvt. Ltd. (Alaukik). BRC came into existence in 1958. At the outset, it was being run under Managing Agency System which was abolished in or about 1968 and later on the same was being managed by the Board of Directors with the assistance of professional executives Appellant No. 1 herein, the youngest son of Pratapsinghrao Gaekwad joined the said company in 1968. He was the Director of Managing Agents till 31-12-1969 whereafter he became the Additional Director with effect from 1st January, 1970. He in the same year became Joint Managing Director. In April 1976, he became the Managing Director of BRC. He was reappointed as Managing Director for two periods of five years each with effect from 19th February, 1980 and 19th February, 1985. FRG passed away on 1st September, 1988, wher....
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....mpany. GIC came into financial trouble when BRC did not declare dividend in 1986-87. The value of BRC shares also declined and, thus, it became difficult to avail of an overdraft facility from the Banks. It was then decided to raise funds from the existing members. The Board of Directors of GIC in a meeting held on 10-11-1987 decided to broad-base the company whereafter an extraordinary general meeting was convened on 17-12-1987. In the said FGM a decision was taken to increase the capital by issuing 25000 equity shares of Rs. 100 each. The matter was again placed in a Board Meeting of GIC on 8th January, 1988. In the said Board Meeting presided over by Appellant No. 1 and attended by Mr. P.U. Rana and Mr. P.H. Chinoy, a resolution was passed that 15000 equity shares of Rs. 100 each be issued at par to the members of the company. The said resolution reads as under : "Resolved that out of 25000 equity shares of Rs. 100 each, 15000 equity shares of Rs. 100 covering Rs. 15,00,000 be issued at par to the members of the Company at present and the balance as and when required. Further Resolved that the Management Committee of the Company be and is hereby authorized to issue equity ....
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....maining 6475 shares were allotted to Appellant No. 1 and family. 6. It is further alleged that FRG became disinterested in the 8000 shares allotted to him. The contention of the Appellants herein is that the balance 7500 shares were renunciated by FRG in his favour and in favour of his children in June, 1988 as the same remained unallotted as other members specifically refused to take up any share. His sons and daughters applied for further 3000 shares through Appellant No. 1 as guardian and the same was allowed. The remaining 4500 shares, however, remained unallotted. The issue is said to have been closed on 10-12-1988. 7. Respondent No. 12 Mrs. Puar who was the Managing Director of Alaukik in a meeting held on 12-10-1989 which was chaired by her issued to herself 1500 shares without allegedly issuing any notice to the existing shareholders and wherefor allegedly no payment was even made. It is contended that by reason of such overt act, the Respondent No. 12 herein came in majority of Alaukik as a result thereof it would cease to be a subsidiary company of GIC. GIC had 84% shares in Alaukik but by reason of the said allotment in favour of Respondent No. 12 its shareholding ....
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....t No. 305/90 was filed by Pramilaraje Khacchar on 28-11-1990 in the Rajkot Civil Court wherein inter alia following reliefs were sought for: "A. it be declared that the purported sales and transfers by the defendants Nos. 3 to 7 of the 9415 equity shares owned by them in the first defendant company in favour of the second defendant company are ultra vires their powers, illegal null and void ab initio and that the said shares continue to be of the ownership of the respective defendant Nos. 3 to 7 as if no such sale or transfer was ever made. B. a decree for permanent mandatory injunction be passed in favour of the plaintiff and against the first defendant directing it to offer and transfer the said 9415 equity shares in the first defendant company to the plaintiff and other remaining members. C. a decree for permanent mandatory injunction be passed in favour of the plaintiff and against the defendant No. 2 restraining the second defendant from exercising or enjoying any voting or other rights in respect of the said 9415 equity shares in the first defendant company. D. that a decree for permanent mandatory injunction be passed in favour of the plaintiff and against the se....
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....ld and the shares transferred to Indreni were rescinded. The Respondents contend that the said plea is by way of an afterthought inasmuch as dividend had been paid to Indreni and TDS on the amount of dividend was deposited in State Bank of India after 9-8-1990. 14. The said suits are still pending. 15. Indisputably, Respondent Nos. 1 and 12 herein took inspection of the Registers of Members and other documents on 10-12-1996 and the relevant extracts were taken and notarised. 16. An Annual General Meeting was allegedly held on 20-12-1990 wherein except for appointment of auditors all other resolutions e.g. seeking appointment of Directors in favour of Appellant No. 1, his wife (Appellant No. 2) and his group were rejected. In the said meeting the shareholdings said to have been acquired by Indreni i.e. 9415 shares was not taken into account and the voting rights of the Appellants were kept confined to 66 shares. It is also not in dispute that prior to the said meeting, Appellant No. 1 lodged a First Information Report apprehending trouble in the said meeting. 17. Respondent No. 1 filed an application under sections 397 and 398 before the Gujarat High Court on or about 4t....
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....ly is subject to the simultaneous allotment of 8000 equity shares to petitioner No. 1. 500 equity shares to Smt. Mrunalinidevi Puar, 25 equity shares to Smt. Shubhanginidevi Gaekwad and that the allotment of any further shares including the said 3000 shares to Respondent Nos. 4 and 5 is null and void and illegal and be pleased to set them aside. A-3. In the event that this Hon'ble Court holds that the allotment of 6475 shares to Respondent Nos. 1 to 5 and of 3000 shares to Respondent Nos. 4 and 5 is valid, this Hon'ble Court be pleased to declare that the said 9475 shares were transferred to M/s. Indreni Holdings Pvt. Ltd. and shall be offered and transferred by Respondent No. 6 to the shareholders holding pro rata on the basis of the original shareholding of 425 equity shares. A-4. That this Hon'ble Court be pleased to direct Respondent No. 6 by an order of mandatory injunction to forthwith transmit 300 equity shares registered in the name of late Fatehsinhrao Gaekwad as the then trustee of the Jaysinhrao Ghorpada Trust in favour of the present trustees. Petitioner No. 1 and Smt. Mrunalinidevi Puar. A-5. That this Hon'ble Court be pleased to transfer (i ) Special Civil Su....
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....xed assets/investments of the Company by way of its shares in its holding or subsidiary company, start new businesses and decide the matters relating to policy decisions of material hearing, without placing the agenda to that effect before the Board of Directors and without holding a meeting presided over by an independent Chairman appointed by the Company Law Board by its order dated 28th September, 1992." 20. A question as regard the efficacy of simultaneous proceedings one before the High Court and another before the Company Law Board arose for consideration and by an order 9-3-1993 the Division Bench directed that in view of the nature of controversy it would be in the interest of the parties if the matter was finally heard and disposed of. The Appellants herein allegedly took a stand that if the said petition under section 397 was heard on merits and disposed of expeditiously they would have no objection to the matter being heard either before the Company Law Board or before the learned Company Judge. Upon obtaining liberty from the Division Bench, the matter was mentioned before the learned Company Judge enquiring as to whether it can be disposed of expeditiously whereupon....
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.... (vi)On the question of mismanagement, it was opined "there was hardly any mismanagement and only an apprehension that the change in control may amount to mismanagement" would not be acts of mismanagement. Three appeals were filed against the said judgment before the Division Bench of the said High Court which came to be allowed by reason of the impugned judgment. Judgment of the Division Bench 23. The Division Bench, on the other hand, held that the allotment of both 6475 and 3000 shares was invalid. As far as 6475 shares are concerned, it was held that the allotment was solely motivated by self-interest and the minutes confirming such allotment were not acceptable. As far as 3000 shares are concerned, the Division Bench did not accept the authenticity of the letter by the Company Secretary of FRG renouncing the shares. Transfer of 9415 shares to Indreni was held to be invalid as no transfer notice was given to the company as required in terms of Article 8 of the Articles of Association. As the transfer was duly recorded, to undo any such transfer, a resolution by the Board of Directors of Indreni would be required. In the absence of any such resolution the transfer bei....
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....eceased Shrimant Fatehsinhrao P. Gaekwad in respect of the shares which stood in his name in the register of the members of the company at the time of his demise out of the said 425 shares in respect of which he had voting rights, will be entitled to vote by themselves or through their proxies at the said meeting for appointing the Directors of the Company. No outsider will be allowed to remain present at the meeting except the Additional Registrar who will Chair and conduct the meeting with his official assistants. The Additional Registrar will be assisted by a Section Officer of the High Court of his choice in the said work. 6. All the shareholders who are parties to the present proceedings are hereby put to notice about the date of the said Extraordinary General Meeting to be held on 14-10-2000 at 11.00 AM at the Registered Office of the respondent No. 6 company at 'Indumati Mahal', Baroda. The Additional Registrar will, however, get published the notice of the meeting in one English daily and one Gujarati daily having circulation in the area. The Additional Registrar will also immediately issue individual notices of the said meeting to the shareholders. The Additional Regist....
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....that the Division Bench of the High Court committed a manifest error insofar as it failed to take into consideration the admission of Respondent No. 1 and Respondent No. 12 herein that 6475 shares were allotted pursuant to the Resolution of the Board during the life time of FRG. Such allotment was in fact admitted in the company petition filed by the Respondent No. 1. The learned counsel would contend that only at a later stage when the Respondent No. 12 herein filed a company petition before the Company Law Board, Delhi a challenge as regards allotment of 6475 shares was also made. In the Company Petition although the reliefs were later on amended, pleadings were not. On a fair and reasonable reading of the pleadings, it was submitted that only inference that can be drawn was that the subject matter of challenge centered round the allotment of 3000 shares only and transfer of their shares by the Appellants to Indreni on the premises that it being an outsider it was impermissible in terms of the relevant provisions of the Articles of Association. 26. Mr. Salve would argue that as the Appellants had acquired 6475 additional shares, there was indisputably no question of their abus....
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....allegation as regard fabrication of document or any aggrandizement on the part of the Appellant was raised. Respondent Nos. 1 and 12, it was urged, prevaricated their stand from time to time and as such their plea should not have been accepted by the Division Bench. Submissions on behalf of the respondents 29. Mr. Ashok Desai and Mr. P.V. Kapoor, learned senior counsel appearing on behalf of Respondent Nos. 1 and 12 respectively, on the other hand, would submit : (i)Appellant No. 1 being in fiduciary position as the Director of GIC as also a family member was required to act in utmost good faith, make full and honest disclosure to other shareholders and thus he could not have made any profit by allotting shares to himself and his family members directly or indirectly and was furthermore required to inform the shareholders as regard the benefits arising therefrom so that they could participate therein. Such a fiduciary position remains, despite non-applicability of section 81 of the Company Act. (ii)Appellant No. 1 in breach of said fiduciary duty aggrandized himself by transforming himself from a miniscule minority of 1.86% to 86% and failed to explain as to how he got ....
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....nd 3000 shares in favour of the Appellants herein was valid in law. (iv) Whether the Respondent No. 1 herein could claim title in respect of 8000 shares in the petition filed under sections 397 and 398 of the Companies Act. (v) Whether transfer of 9415 shares in favour of Indreni by the Appellants was valid and if not the effect thereof. (vi) Whether the issue of oppression and/or mis-management on the part of the Appellant No. 1 herein in running the affairs of the company towards the Respondent Nos. 1 and 12 have been proved. Fiduciary duty 32. Chapter IX of the Indian Trusts Act provides for certain obligations in the nature of trusts. The Trust Act recognizes various kinds of trusts including resulting trust. An express trust, however, may be created by reason of an agreement between the parties [See Barclays Bank v. Quistclose Investments 1970 AC 567]. 33. By reason of section 88 of the Indian Trusts Act, a person bound in fiduciary character is required to protect the interests of other persons but the heart and soul thereof is that as between two persons one is bound to protect the interests of the other and if the former availing of that relationship makes....
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....e not to be quoted at the stock exchange. The plaintiffs therein intended to dispose of certain shares wherefor they offered 12/5s. per share purported to be based on a valuation which they had obtained from independent valuers a few months prior thereto. The said offer was accepted. The transaction pertaining to the said agreement was entered into but it was later on discovered by the plaintiffs that prior to and during their own negotiations for sale the Chairman and the Board were approached by one Holden with a view to the purchase the entire undertaking of the company with a view to resell the same at a profit to a new company. The question of fiduciary obligation on the part of the Directors arose therein when the plaintiff brought an action against the Chairman and the two other purchasing Directors asking for setting aside the sale on the ground that the defendants as Directors ought to have disclosed the feature of negotiations with Holden when negotiating purchase of their shares. The question therein posed was : Assuming that Directors are, in a sense, trustees for the company, are they trustees for individual shareholders? The Chancery Division despite holding that the ....
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....o plead and demonstrate the same. 39. We, however, do not intend to put our seal of approval on Percival's case (supra) in its entirety. The situation may be different when a special contract, special relationship or special circumstances arise. Percival's case (supra) may not also be applicable in a case of takeover bid - Gelting v. Kilner 1972 (1) All ER 1166 or when the general body of shareholders is only two of them - Glavanies v. Brunninghausen [1996] 19 ACSR 204. 40. In Palmer's Company Law, 23rd edition, page 848, it is stated: "64-02. Relationship is with company: The fiduciary relationship of a director exists with the company : the director is not usually a trustee for individual shareholders. Thus, a director may accept a shareholder's offer to sell shares in the company although he may have information which is not available to that other, and the contract cannot be upset even if the director knew of some fact which made the offer an attractive proposition. So in Percival v. Wright a person who had approached a director and sold him shares in the company, afterwards, upon discovering that the director had known at the time of the contract that negotiations wer....
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....the duty of directors to current shareholders as sellers of their shares. In case of conflict between two interests, the company's interest must be protected. The directors, however, will have a fiduciary relation if they have taken unto themselves the burden of giving advice to current shareholders. 44. The aforementioned principles of law found favour with the Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 3 SCC 333 wherein it was held : "Where directors of a company seek, by entering into an agreement to issue new shares, to prevent a majority shareholder from exercising control of the company, they will not be held to have failed in fiduciary duty to the company if they act in good faith in what they believe, on reasonable grounds, to be the interests of the company. If the directors' primary purpose is to act in the interests of the company, they are acting in good faith even though they also benefit as a result." In Needle Industries (India) Ltd.'s case (supra), this Court furthermore noticed Punt v. Symons [1903] 2 Ch. 506 and opined in the following terms: "105. In Punt v. Symons [(1903) 2 Ch. 506 : 72 LJ Ch. 768 :....
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.... Zealand in Coleman v. Myers [1977] 2 NZLR 225 as also Court of Appeal of New South Wales in Brunninghausen v. Glavnics [1999] 46 NSWLR and held that the directors had no fiduciary duty to the shareholders in the facts and circumstances obtaining therein. However, observations were made therein that such duties may arise in special circumstances demonstrating the salient features and well-established categories of fiduciary relationship such as agency which involves duties of trust, confidence and loyalty. 47. Absence of special circumstances or special reasons as pointed out hereinbefore normally would not bring in the concept of fiduciary relationship in a director vis-a-vis the current shareholders. However, in Coleman's case ( supra) and Brunninghausen's case (supra) it was held that the fiduciary duties of directors to the shareholders exist in the specially strong context of the familiar relationships having regard to their personal position of influence in the company concerned. 48. We may at this stage consider the case laws replied upon by Mr. Desai. 49. Dale & Carrington Invt. (P.) Ltd. v. P.K. Prathapan [2004] 54 SCL 601 (SC) requires a closer scrutiny. In th....
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....re to the shareholders of such a company when further shares are being issued. This requirement flows from their duty to act in good faith and make full disclosure to the shareholders regarding affairs of a company. The acts of directors in a private limited company are required to be tested on a much finer scale in order to rule out any misuse of power for personal gains or ulterior motives." Evidently, therefore, the ratio which emerges from the decision is that the duty to disclose as regard issue of additional shares is relatable to proper purpose thereof. If the purpose is proper and the action of the director is bona fide, the ratio should not be extended so as to hold that such a duty of the director towards the shareholder is absolute despite the fact that there is no legal requirement therefor. Duty of disclosure to shareholders in that case had a strong nexus with the affairs of the company. Dale & Carrington Invt. (P.) Ltd.'s case (supra ) is not an authority for the proposition that the purported fiduciary duty of a director towards the shareholder is absolute although the transaction in question may not have a direct co-relationship with the affairs of the company. ....
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....n laid down in Dale & Carrington Invt. (P.) Ltd.'s case (supra ) would be inconsistent with the duty of a director vis-a-vis the Company and the settled law that the statutory duty of a direction is primarily to look after the interest of the company. 56. In Bajaj Auto Ltd. v. N.K. Firodia [1970] 2 SCC 550, the Court was concerned with the discretionary exercise of power by the Directors in terms of section 111(3) of the Companies Act. In the light of refusal by director to register a transfer, the Court held that it is necessary for the directors to act bona fide and not arbitrarily in the following terms : "12. Article 52 of the appellant company provided that the Directors might at their absolute and uncontrolled discretion decline to register any transfer of shares. Discretion does not mean a bare affirmation or negation of a proposal. Discretion implies just and proper consideration of the proposal in the facts and circumstances of the case. In the exercise of that discretion the Directors will Act for the paramount interest of the company and for the general interest of the shareholders because the Directors are in a fiduciary position both towards the company and towar....
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....sale or disposal of the company's assets and undertaking, a proposed merger or division of the company, a proposed reorganization of the company's share capital affecting existing members and a proposal for the voluntary liquidation of the company." No law in absolute terms, thus, had been laid down therein. In the instant case, there had been no transaction of sale and purchase of shares between the director and the shareholder. The said decisions, therefore, have no application in the instant case. In a way it instead of supporting the contention of Mr. Desai, counters his views. 59. It is interesting to note that in Needle Industries (India) Ltd.'s case (supra), this Court said even in certain cases the Directors attempt to maintain their control over the company or in newly acquiring may not amount to abuse of their fiduciary power stating : "Applying this principle, it seems to us difficult to hold that by the issue of rights shares the Directors of NIIL interfered in any manner with the legal rights of the majority. The majority had to disinvest or else to submit to the issue of rights shares in order to comply with the statutory requirements of FERA and the Reser....
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....the directors take upon themselves the task of advising the shareholders who may be his family members or when a transaction of purchase or sale is entered into by and between the director and the shareholders wherein the former taking undue benefit or having ill or improper or ulterior motive or mala fide act solely to make pecuniary benefit and gain for himself and to the detriment of such shareholders. If a general fiduciary duty of a director vis-a-vis shareholders is laid down the same would lead the directors to the risk of multiple legal actions by dissenting minority shareholders. Burden of proof 63. According to Mr. Desai, however, the burden to prove his bona fide was upon the Respondent No. 1. The learned counsel in support of the said contention has referred to section 111 of the Evidence Act and also relied upon a decision of this Court in Krishna Mohan Kul alias Nani Charan Kul v. Pratima Maity [2004] 9 SCC 468. In Krishna Mohan Kul's case (supra), this Court was considering a transaction resulting in execution of a deed of settlement by one Dasu Charan Kul. The said deed was executed in presence of the witnesses although they were not in existence. The executan....
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....alities of the situation and does not confine them to a narrow legalistic view". For the said purpose, the test required to be adopted is the true character of the company. The initial burden was upon the Respondent No. 1 but nothing had been shown so as to hold that the burden shifted to the Appellants herein. Issue of additional 15000 shares and 6475 shares to the appellants 68. An Extraordinary General Meeting of the GIC was to be convened pursuant to the Board meeting dated 10-11-1987 wherein a resolution was adopted in the following terms : "Resolved that an Extraordinary General Meeting of Gaekwad Investment Corporation Private Limited be convened to consider increase issue the capital of the company on Thursday, the 17th December, 1987 at 11.00 A.M. in the registered office of the company." Pursuant to or in furtherance of the said resolution an Extraordinary General Meeting of the GIC was held wherein a resolution was passed to increase the equity shares by 25000 shares at the rate of Rs. 100 to the members of the company in the following terms : "Resolved that Clause V of the Memorandum of Association of Gaekwad Investment Corporation Private Limited be chan....
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....nce to the Managing Committee meeting, however, was not made by the Appellant No. 1 in his affidavit dated 10-12-1992 in C.P. No. 13 of 1992, but it is of not much consequence as would appear from the discussions made hereinafter. However, it appears that with a view to give effect to aforementioned letter dated 12-2-1988, a meeting of the Board of Directors was held on 13-2-1988 wherein FRG was present. In the said meeting, the following resolution was adopted : "(2) The Board confirmed the minutes of the Directors Meeting held on 8th January, 1988. (3) It was reported to the Board that necessary action has been taken on the Agenda of the Board Meeting held on 8th January, 1988. (4) The financial position of the Company was discussed at length. The Board was informed that letters have been addressed on 12th February, 1988 to the shareholders informing them that the company has issued 15000 equity shares of Rs. 100 each to the members and to convey their acceptance on or before 10th March, 1988. The company would know the amount, the company would receive from them." The said meeting bears the signature of the Secretary to the Chairman. However, although in her original....
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....ar of Companies. The Annual Return was signed by Mr. P.U. Rana and Mr. H.A. Shinde. The details of equity shareholding reflected in the Annual Return was as follows : Sr. No. Name Equity Shares 1. Smt. Shantadevi Gaekwad 7 2. Shri F.P. Gaekwad 323 3. Late Smt. Padmavatidevi Gaekwad 20 4. Shri R.P. Gaekwad & Shri S.R.G. 10 5. Capt. V.S. Hazare 10 6. Shri Shivrajkuar Khacchar 1 7. Smt. Pramilabai Hazare 10 Sr. No. Name Equity Shares 8. Shri Vimalaraje Gaekwad 1 9. Smt. Shubhangini R. Gaekwad 30 10. Smt. Lalitadevi Kirdatt 5 11. Smt. Mrunalinidevi Puar 1010 12. Smt. Pramilaraje of Jasdan 4 13. Smt. Asharaje Gaekwad 1505 14. Smt. Devyanidevi Gaekwad 1 15. Shri Ajitsinh Gaekwad 1 16. Smt. Mrunalinidevi Puar & Shri R.P. Gaekwad 5 17. Smt. M. Puar & Smt. Shantadevi G. 4 18. Shri Ajaysinh Ghorpade 1 19. Smt. Vasundraraje Ghorpade 1 20. Shri Sangramsingh Gaekwad 2001 21. Shri S.P. Gaekwad, H.U.F. 1475 22. Shri S.P. Gaekwad - F&NG of Shri Pratapsinh Gaekwad 2750 23. Shri S.....
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....erested in subscribing 8000 shares, he would have applied and paid the requisite amount therefor and as he did not take any such step, it is difficult to hold that the offer became a firm one. 80. Furthermore, the very fact that some outsiders have transferred shares in favour of FRG also belies the argument of Mr. Desai to the effect that the intrinsic value thereof was Rs. 1 lakh or Rs. 2 lakh per share. Had this been so, there was no reason for the outsiders to transfer their shares in the name of FRG. 81. It was, therefore, not a case where FRG would try to consolidate his position by purchasing 22 shares. Some other considerations, therefore, must have weighed with him. One of them may be that he intended to oust the outsiders. FRG admittedly was Chairman of the company till his death. No dispute was raised by any member as regards allotment of shares during his life time. The findings of the Division Bench that he had full interest in the company shares may not be correct inasmuch as had that been the position, he would have definitely opted for allotment of 8000 shares in his name. In any event he would have opposed allotment of 7500 shares in the name of Appellant and....
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.... thereby categorically opted to purchase 1000 shares. There is no mention in the said letter that such offer was made at the instance of the Appellant No. 1 herein. It is not uncommon to advance loan on interest in preference to purchase of shares as a person may be certain about the return of money vis-a-vis the uncertainty as regard purchase of shares as in the case of letter, the person investing in the shares may lose if not entirely, to some extent. Similarly, the question as to why the Appellants herein did not advance any loan to the Company is again a matter of not much consequence, particularly, when the parties have not been examined on oath. It is furthermore not necessary for us to dwell at length the submissions of Mr. Desai as regard effect of absence of any notice of closure. 86. It is futile to go into the question as to whether 14 per cent interest was to be paid on the amount of loan as admittedly Respondent Nos. 1 and 12 advanced the said amount by way of loan only. Only at a later stage a claim was laid to utilize the amount towards the purchase of 8000 shares. 87. Significantly, although the Respondent No. 1 participated in the family meeting dated 23-3-1....
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....Alaukik allotted in her name as a result whereof the Suit No. 675 of 1990 was instituted. 92. Even in the prayer portion, no relief has been prayed for to set aside the transfer recession as regards allotment of 6475 shares. 93. In Paragraph (2) while dealing with the contentions of the Respondents purporting to be as regard alleged false statement relating to the issue of 15000 shares and related aspects, the Appellants herein had given in great details the manner in which: (i)the company was being managed; (ii)holding of Board meeting on 10-11-1997 which was attended by FRG, Appellant No. 1 and Mr. P.H. Chinoy wherein it was resolved that an Extraordinary General Meeting be convened on 17-12-1987, to consider the increase/issue of capital of the company; (iii)holding of Extraordinary General Meeting of the Company on 17-12-1987 chaired by Mr. P.U. Rana and attended by Mr. Shinde and Mr. M.N. Khade wherein the financial position of the company in the absence of dividend income was discussed and resolution was adopted that company would issue 25000 equity shares to any members as the Board of Directors deem fit and subsequent thereto and as consequence of the authori....
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....are placed on records by the parties. 98. Admittedly, on 21-3-1988, a meeting was held. Draft minute No. 1, although was unsigned and sent with a covering letter of Mr. Khade on or about 29-3-1988 in the following manner: "The Committee considered the allotment of 15000 Equity Shares of Rs. 100 each of the Company recently offered to the members After discussion the allotment was decided as under: S. No. Name No. of Shares Value of Shares 1. Shrimant Fatesinh Gaekwad 8000 8,00,000 2. Shrimant Sangramsinh Gaekwad 6475 6,47,500 3. Shrimant Mrunalinidevi Puar 500 50,000 4. Shrimant Shubhanginiraje Gaekwad 25 2,500 Total 15,000 15,00,000 The Shares would be allotted as and when the amounts are received. As there was no other business the meeting terminated." 99. The second draft minutes of the meeting are as under: "Total number of shares to be allotted worth Rs. 15 lakhs, i.e., 15000 at Rs. 100. Requisitions so far 1. Chairman 8000 shares Rs. 8,00,000 2. Maharani of Dhar 500 s....
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....te, however, had been filed by Mrs. Puar in her company petition, the correctness whereof is in question. Even in the second draft of the minutes of meeting, however it was mentioned that the shares will be allotted in the name asked for by the above parties and, thus, there may not be in variance of substance in the two drafts. 101. According to Mrs. Shantadevi Gaekwad, Respondent No. 1 herein and others, it as a family meeting (para 6.5 of the company petition). She has also annexed the draft minutes of the meeting with the said petition and further annexed allotment ratio discussed at the meeting. The draft minutes forwarded by Mr. M.N. Khade had also been annexed in the company petition. It may, therefore, be safe to opine that the purported family meeting was in fact a Board meeting of which the parties were fully aware of. The minutes of the said meeting clearly suggest that the shares were to be allotted if an offer to that effect was made together with the tender of value thereof whereupon the shares would be allotted in the names of the persons as asked by the above parties. Liberty, thus, was given to all the parties named in the said minutes of the meeting to either a....
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.... 21-3-1991, 10-4-1992 and 10-12-1992. 104. For the views we have taken, it is not necessary to go into the said question as also the question as to whether in fact time for actual payment towards allotment of shares had been extended or not. 105. Shantadevi in her company petition categorically stated that prior to filing of petition under sections 397 and 398 of the Companies Act, she made inspection of the records of the company and obtained notorised copy thereof on 10-12-1990. At the time of filing the said company petition concededly she had complete knowledge of the affairs of the company as reflected from the documents maintained at the Registered Office of the Company. On her own showing, Mr. P.U. Rana who was a director of the company had at her request gave her inspection of the registers including company registers, minute book, share registers, etc. Relying on or on the basis of the said documents, Respondent No. 1 herein categorically stated: "(6.5) It was decided and agreed in the said family meeting and also subsequently in a meeting of the Company's Board of Directors, that out of the 15,000 equity shares, 8000 equity shares would be allotted to Shri Fatehs....
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....ted to the Appellants herein. 108. In view of the fact that the presence of FRG in the decision making process to broad-base the company, the authority of FRG as regards control of the company had never been disputed and his presence in one of the Board meetings, the plea of issuance of additional shares has sufficiently been established. A decision to which FRG is a party can only give rise to a question of oppression on his part an no one else. In any event, such a case has never been made out that FRG was guilty of commission of any acts of oppression or mismanagement had been committed while he was the chairman of the company. 109. We are, therefore, of the opinion that the Respondent No. 1 failed to substantiate the charge of oppression on the ground of issuance of 6475 shares in favour the Appellants. Claim of the first respondent in respect of 8000 shares 110. The first Respondent herein claimed 8000 shares evidently relying on or on the basis of such allotment on the sole ground that on the death of FRG, the same was inherited by her as a Class-I heir. She raised a grievance only as regards allotment of 3000 shares to the Respondent Nos. 3 and 4 herein, as would....
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....the High Court in his order now impugned while accepting the appeals against him. It is made clear that those observations are not meant to be final, but have obviously been made to dispose of the claim to temporary injunction which shall keep confined to that limited exercise without affecting the merits of the case. This disposes of the Special Leave Petitions." 114. Our attention has been drawn to an interlocutory proceedings in the suit relating to title, wherein allegedly a prima facie case was not found in favour of the Appellants herein but this Court is not concerned therewith as it has been accepted at the Bar that keeping in view of the fact that the question is subjudice, this Court would not go into the said issue. In fact, Mr. Desai, learned counsel appearing on behalf of the Respondent No. 1, has given up the same. 115. The finding of the Division Bench of the High Court to the effect that the Respondent No. 1 is entitled to get 8000 shares which was firm allotment made to FRG is, thus, not sustainable in law. 116. Moreover, the allotment in favour of the members of the Company was provisional in nature which would amount to invitation to offer and not an ....
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....(u) to mean shares, stocks, bonds, etc. We are unable to appreciate how an offer of shares by itself creates any interest in the shares in favour of the person to whom the offer is made. An offer of shares undoubtedly creates 'fresh rights' as said by this Court in Mathalone v. Bombay Life Assurance Co. Ltd. [1954] SCR 117 : AIR 1953 SC 385 : [1954] 24 Comp. Cas. 1 but, the right which is creates is either to accept the offer or to renounce it; it does not create any interest in the shares in respect of which the offer is made." (p. 410) The Division Bench of the High Court treated the allotment to be a confirmed one purported to be relating to regulation 28 of Table A of the Companies Act. The said provision has no application in the facts and circumstances of this case. Issue of 3000 shares 118. The allotment of 3000 shares, however stand on a different footing. The conduct of the Appellants in this regard would call for a closer scrutiny. 119. There is no proof of express renunciation of his 8000 shares by FRG in favour of the Appellant. 120. It is true that the Respondent No. 1 herein although questioned the allotment of 3000 shares given to the son and daughter ....
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....e Appellant Nos. 3 to 5 and 500 shares to the Respondent No. 12 out of the 8000 shares originally allotted to FRG are bad in law. Transfer ignoring right of pre-emption 125. Article 3 of the Company states that the Company is a private company and the right of transfer is restricted in the manner provided for therein. Article 4 provides for capital of the Company. Article 5 provides that the share in the capital of the Company for the time being would be under the control of the Directors who may allot or otherwise dispose of the same to such persons in such proportion and on such terms and conditions and either at a premium or at par or at a discount. Article 6 provides that the transfer of shares shall be restricted in the manner to the extent provided in Articles 7 to 15 thereof. 126. Article 7 of the Articles of Association of the company provides for embargo in favour of a person who is not a member of a company and thus postulates the policy of transfer first to a member only. 127. Article 8 provides for a notice to transfer for a fair value A transfer notice is not revocable except with the sanction of the Directors. Upon receipt of such notice, if the company fi....
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....f Mr. Desai cannot be accepted as it is not the case of the Respondents that the said notice was acted upon and the provisions of Articles 9 to 11 had been complied with. 134. It may be noticed that in the suits filed by the shareholders against the Appellant relating to transfer of shares in favour of Indreni, except in suit No. 872 of 1990, no prayer for pro rata allotment thereof in favour of other members had been made. 135. The contents of the said circular letter appear to be vague inasmuch as how many shares are proposed to be transferred had not been stated therein. Furthermore no action having been taken within a period of 28 days from the date of issuance of such notice the proposed transferee is entitled to transfer the shares to any person of his choice. 136. It is now well-settled that only one pre-emptive offer is to be made which is otherwise to be accepted or not at all. The existing shareholders are not entitled to be given further pre-emptive rights in respect of those unaccepted shares. Even such a right can be waived or modified. 137. In any event, the transfer has been rescinded in terms of the resolution passed in a meeting dated 9-8-1990. At this ....
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....g up order on the ground that it was just and equitable that the company should be wound up, the Company Law Board may, with a view to bringing to an end the matters complained of, make such order as it thinks fit." 141. Section 398 provides for relief in cases of mismanagement in the following terms: "Application to Company Law Board for relief in cases of mismanagement.-(1) Any members of a company who complain- (a )that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or (b)that a material change (not being a change brought about by, or in the interests of, any creditors including debenture holders, or any class of shareholders, of the company) has taken place in the management or control of the company, whether by an alteration in its board of directors or manager or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the ....
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....holders.The conduct thus, complained of must be such so as to oppress a minority of the members including the petitioners vis-a-vis the shareholders which a fortiorari must be an act of the majority. Furthermore, the fact situation obtaining in the case must enable the court to invoke just and equitable rules even if a case has been made out for winding up for passing an order of winding up of the company but such winding up order would be unfair to the minority members. 147. The interest of the company vis-a-vis the shareholders must be uppermost in the mind of the court while granting a relief under the aforementioned provisions of the Companies Act, 1956. 148. Mala fide, improper motive and similar other allegations, it is trite, must be pleaded and proved as envisaged in the Code of Civil Procedure. Acts of mala fide are required to be pleaded with full particulars so as to obtain an appropriate relief. 149. The remedy under section 397 of the Companies Act is not an ordinary one. The acts of oppression must be harsh and wrongful. An isolated incident may not be enough for grant of relief and continuous course of oppressive conduct on the part of the majority sharehold....
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....oard, Bombay, they would be the basis for grant of relief particularly in view of the fact that the reliefs claimed therein are different. After the amendment in the Companies Act, the Company Law Board alone had the jurisdiction to entertain an application under sections 397 and 398 of the Companies Act, as the jurisdiction of the High Court was ousted thereby and, thus, the allegations made in the Company Petition filed by the Respondent No. 12 being company petition No. 7 of 1992 could not have been the subject-matter of adjudication by the High Court. It is trite that what cannot be done directly cannot be done indirectly. The conduct and the status of the parties vis-a-vis the company also assume significance. Whereas the Respondent No. 1 herein claimed relief inter alia as a sole class I heir of the FRG, the Respondent No. 12 claimed her relief on the basis of being a person involved in protecting the affairs of the Gaekwad family as also in her own right as a shareholder. It is significant, however, that in Suit No. 675 of 1990 pending in the court of Baroda, Gujarat in her written statement the Respondent No. 12 claimed that if her mother had been issued the 8000 shares, he....
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....ally held that the conduct complained of must relate to the manner of management of the affairs of the company and must be such so as to oppress a minority of the members including the petitioners qua shareholders. The court, however, pointed out that law, however, has not defined what oppression is for the purpose of the said section and it is left to court to decide on the facts of each case whether there is such oppression. 156. In Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 WLR 404 it was categorically held that the conditions precedents contained in section 210 of the Act of 1948 must be satisfied before any relief can be granted. 157. Yet again in H.R. Harmer Ltd., In re [1958] 3 All ER 689 (CA), the Court of Appeal 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 observed: "...It is not lack of confidence between shareholders per se that brings section 210 into play, but lack of confidence springing from oppression of a minor....
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....ted in a manner oppressive of himself and if he fails to allege facts capable of establishing that the company's affairs are being conducted in such a manner the petition will disclose no ground for granting any relief and must be dismissed in limine. It was observed: "Those who are alleged to have acted oppressively must be shown to have acted at least unfairly towards those who claim to have been oppressed. In Scottish Co-operative Wholesale Society, Ltd. v. Meyer (a case under section 210) Viscount Simonds adopted a dictionary definition of the meaning of 'oppressive' by, it is said, 'burdensome, harsh and wrongful'." In Elder v. Elder & Watson, Ltd., also a case under section 210, the Lord President (Lord Cooper) said: '...the essence of the matter seems to be that the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing and violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely.' Lord Keith said: "...oppression involves, I think, at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a....
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....to whether the conduct and the background of the two companies (their informed way of doing business disregarding the Companies Act etc.) could be taken into account to decide whether there had been unfair prejudice to one party in an application under section 459 of the English Companies Act was answered in the affirmative. 165. When a decision is taken on a business consideration, it is tite, the court should not ordinarily interfere - See Maharashtra Power Development Corpn. Ltd. v. Dabhol Power Co. [2004] 52 SCL 224 (Bom.). 166. The burden to prove oppression or mismanagement is upon the petitioner. The Court, however, will have to consider the entire materials on records and may not insist upon the petitioner to prove the acts of oppression. An action in contravention of law may not per se be oppressive. Bhagwati, J. (as His Lordship then was) in Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton & Jute Mills Co. Ltd. AIR 1965 Guj. 96 stated the law, thus: "...It may be that a resolution may be passed by the Directors which is perfectly legal in the sense that it does not contravene any provision of law, and yet it may be oppressive to the minority shareholders or....
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....ulars of the cases where he relies on misrepresentation, fraud, breach of trust, etc. 170. In Chief Engineer, M.S.E.B. v. Suresh Raghunath Bhokare 2004 (8) Supreme 845, this Court held: "...Thus, applying the basic principle of rule of evidence which requires a party alleging fraud to give particulars of the fraud and having found no such particulars the Industrial Court came to the conclusion that the respondent could not be held guilty of fraud..." It was observed: "...In the absence of any such particulars being mentioned in the show cause notice or at the trial, attributing some overt act to the respondent, we do not think the Board can infer that the respondent had a role to play in sending a fraudulent list solely on the basis of the presumption that since respondent got a job by the said proposal, said list is a fraudulent one..." 171. In A.C. Ananthaswamy v. Boraiah [2004] 8 SCC 588, this Court held that the level of proof required for proving fraud is extremely high. See also Maharashtra Power Development Corpn. Ltd's. case (supra) 172. Order 6, Rule 17 provides for amendment of the pleading whereas Order 8, Rule 9 provides for subsequent pleadings by a d....
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....issible against her proprio vigore. 175. In Nagindas Ramdas v. Dalpatram Iccharam alias Brijram AIR 1974 SC 471, this Court held: "26. ...Admissions, if true and clear are by far the best proof of the facts admitted. Admissions in pleadings or judicial admissions, admissible under section 58 of the Evidence Act, made by the parties or their agents at or before the hearing of the case, stand on a higher footing than evidentiary admission. The former class of admissions are fully binding on the party that makes them and constitute a waiver of proof. They by themselves can be made the foundation of the rights of the parties. On the other hand evidentiary admissions which are receivable at the trial as evidence, are by themselves, not conclusive. They can be shown to be wrong." (p. 477) 176. See also Biswanath Prasad v. Dwarka Prasad AIR 1974 SC 117. 177. In Mrs. Viswalakshmi Sasidharan v. Branch Manager, Syndicate Bank [1997] 10 SCC 173, this Court held: "...On the other hand, it is admitted that due to slump in the market they could not sell the goods, realize the price of the finished product and pay back the loan to the Bank. That admission stands in their way to ple....
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....ourt in the case of Modi Spg. & Wvg. Mills Co. Ltd. v. Ladha Ram & Co. [1977] 1 SCR 728 : (AIR 1977 SC 680). In that case Ray, C.J., speaking for the Bench had to consider the question whether the defendant can be allowed to amend his written statement by taking an inconsistent plea as compared to the earlier plea which contained an admission in favour of the plaintiff. It was held that such an inconsistent plea which would displace the plaintiff completely from the admissions made by the defendant in the written statement cannot be allowed. If such amendments are allowed in the written statement plaintiff will be irretrievably prejudiced by being denied the opportunity of extracting the admissions from the defendants..." It was also observed: "12. In our view, therefore, on the facts of this case and as discussed earlier, no case was made out by the respondents, contesting defendants, for amending the written statement and thus attempting to go behind their admission regarding 5 out of 7 remaining items out of 10 listed properties in Schedule-A of the plaint..." (See also ABL Ltd. v. Radha Gobinda Ghatak 1999 (1) CHN 645 and Krishna Gupta v. Madan Lal 2002 (96) DLT 829). ....
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....gement, the principles of dissolution of partnership cannot be liberally invoked. 185. In Kilpest (P.) Ltd. v. Shekhar Mehra [1996] 10 SCC 696, it was stated: "11. The promoters of a company, whether or not they were hitherto partners, elect to avail of the advantages of forming a limited company. They voluntarily and knowingly bind themselves by the provisions of the Companies Act. The submission that a limited company should be treated as a quasi-partnership should, therefore, not be easily accepted. Having regard to the wide powers under section 402, very rarely would it be necessary to wind up any company in a petition filed under sections 397 and 398. 12. The present was a petition under sections 397 and 398. The Division Bench exercised power under section 402 to appoint Mehra as a Director to protect his interest and guard against mismanagement. It required Dubey to return to the company the sum of Rs. 52,875 which he had wrongly appropriated to himself. It directed the Registrar of Companies to enquire into other allegations of misconduct in which it found, prima facie, substance; and we may say immediately that we have perused the report filed by the Registrar of ....
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....f her title and/or allotment of 8000 shares is not tenable in law. The alleged right of the Respondent No. 1 to claim title over the said shares as a class 1 heir of Fatehsinh Gaekwad cannot be determined in an application filed under sections 397 and 398 of the Companies Act and in particular having regard to the fact that the said question is pending adjudication in a duly instituted civil suit. (v)Transfer of 9415 shares by the Appellants in favour of Indreni by itself was not an act of oppression keeping in view of the fact that the entire shares of the said company were held by the Appellants alone and in any event the notice of transfer having been rescinded, the Appellants continue to be the owner in respect thereof. Conclusion 188. For the reasons aforementioned, the impugned judgments of the Division Bench cannot be sustained which is set aside accordingly. The appeals are allowed in part and to the extent mentioned hereinbefore with the following directions: (A)It is hereby declared that the allotment of shares from the additional share capital had been increased pursuant to the resolution of the Extraordinary General Meeting held on 17-12-1987, and the resolu....