TaxTMI 
TaxTMI 
2006 (11) TMI 337
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.... its own features. It is not everything said by a Judge while giving judgment that constitutes a precedent. The only thing a Judge's decision binding a party is the principle upon which the case is decided and for this reason it is important to analyse a decision and isolate from it the ratio decidendi. According to the well-settled theory of precedents, every decision contains three basic postulates : (i ) findings of material facts, direct and inferential. An inferential finding of fact is the inference which the Judge draws from the direct, or perceptible facts; (ii) statements of the principles of law applicable to the legal problems disclose by the facts; and (iii) judgment based on the combined effect of the above. A decision is an authority for what it actually decides. What is of the essence in a decision is its ratio and not every observation found therein nor what logically flows from the various observations made in the judgment. The enunciation of the reason or principle on which a question before a Court has been decided is alone binding as a precedent. (See : State of Orissa v. Sudhansu Sekhar Misra [1968] 2 SCR 154 : (AIR 1968 SC 647) and Union of India v. Dhanwanti ....
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....airman and his wife) were permanent and 18 directors were to be elected. There were two vacancies in the board due to resignation of two directors. One N.N. Purshothaman, who is not a relative of second respondent Chairman, applied to issue duplicate share certificates stating that his shares were missing and also requested to transfer the shares. The above request was approved by the Board of Directors in its meeting held on 24-8-2005. It was decided to issue duplicate share certificates as provided under section 84 of the Act, and also to transfer the shares. Accordingly, shares were transferred. The above board meeting was also attended by the first petitioner. As decided by the board meeting on 24-8-2005, annual general body meeting was fixed to be held on 29-9-2005. Draft notice of the meeting was also approved in the board meeting. Notices were issued under certificate of posting as provided under section 53(1)(2) of the Act. Since one-third of the directors have to retire in every annual general meeting, six directors have to retire and those vacancies are, to be filled. (See : sections 255 and 256), one of the agenda in the annual general body meeting was the same. Hence, f....
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.... number of shares in the authorised capital of the company to any person(s) whether or not those person(s) include the members of the company or not, in such manner and subject to such terms and conditions as the Board may in the absolute interest of the company deem fit." To pass a special resolution two-third majority was required. It is only stated that majority shareholders passed the resolution. That is not enough. Here, only conclusion possible in the special resolution to offer share to persons other than shareholders were not passed in view of section 81(1A). Thereafter board decided to issue right shares to all existing shareholders on the ratio of 1:4 without any discrimination. 3. Contending oppression and mismanagement, petitioners approached the Company Law Board alleging that they had invested huge sum of money on the promise that they will be continued as directors, but, that promise was not honoured. It was further contended that notice to the annual general body meeting was not properly given. Special resolution was not passed regarding issue of shares. Issue of right shares was incorrect and removal of petitioners 1 to 4 and respondents 5 and 14 from the dir....
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.... mismanagement mainly because annual general body meeting held on 29-9-2005 was without proper notice. But, all decisions of the annual general body meeting were not set aside. Main reliefs granted by the impugned order are the following : "7. In view of my foregoing conclusions and (a) in exercise of the powers under section 402; (b) to regulate the conduct of the hospital's affairs in future; and (c) in public interest, the following order is passed : (I )It is hereby declared that- (a )the further issue of shares impugned in the company petition is illegal and void; (b)the election of the respondent Nos. 16 to 23 as directors is set aside; (c )the retiring directors namely, the petitioner Nos. 1 to 4 and the respondent Nos. 5 and 14 shall be deemed to have been automatically reappointed as directors at the eleventh annual general meeting and shall continue till the date of the twelfth annual general meeting for the year 2006; and (d)the transfer of shares by Purushothaman in favour of the respondent Nos. 16 to 21 and others is invalid. However, Purshothaman is free to transfer his shares in accordance with the law. (II)The Company will convene and hold the t....
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....cluding any one or more of themselves may apply to the Tribunal for an order under this section, provided such members have a right so to apply in virtue of section 399. (2) If, on any application under sub-section (1), the Tribunal is of opinion- (a )that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members; and (b)that to wind-up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound-up; the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit." To attract section 397, the persons complaining should prove that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to shareholders. The Court can grant the remedy only if proved facts would justify passing of winding up order on the ground that it is just and equitable, but, instead of winding up, remedies can be granted as winding ap unfairly prejudice the members.....
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.... "The power conferred on the Court to grant a remedy in an appropriate case appears to envisage a reasonably wide discretion vested in the Court in relation to the order sought by a complainer as the appropriate equitable alternative to a winding-up order. It is clear from these various decisions that on a true construction of section 397, an unwise, inefficient or careless conduct of a director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder." In Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [2005] 123 Comp. Cas. 566^1 , the Supreme Court held that jurisdiction under this section is very wide. It was also cautioned as follows : "188. But the same would not mean that section 397 provides for a remedy for every act of omission or commission on the part of the board of directors. Reliefs must be granted having regard to the exigencies of the situation and the Court must arriv....
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....ection, there shall be con- tinuing mismanagement. It is not necessary for the court to find out a case for winding up in case of mismanagement in order to grant relief. Under section 397 the power is of discretionary nature which enables the Company Law Board to make an order as it thinks fit with a view to bringing to an end the matter complained of as distinguished from the power granted under section 398 which enables the Board to pass an order with a view to bringing an end or preventing the matters complained of or apprehended. (See Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageswara Rao AIR 1956 SC 213; Palghat Exports (P.) Ltd. v. T.V. Chandran [1994] 79 Comp. Cas. 213 (Ker.). Very vast discretion is given under section 402 to the Company Law Board, to pass orders in case section 397 or 398 are alleged. (See: Cosmosteels (P.) Ltd. v. Jairam Das Gupta AIR 1978 SC 375. 6. To attract actions under sections 397 and 398 of the Act in support of the finding of oppression and mismanagement, main reason stated is the convening of eleventh annual general body meeting without proper notice. Now, we will analyse whether annual general body meeting was convened in violation of t....
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....es to the petitioners and other shareholders. It will only show that certain postal envelopes have been put into the post office and will not by itself necessarily mean that there has been service on the addressee concerned." 7. Section 172 of the Act reads as follows : "172. Contents and manner of service of notice and persons on whom it is to be served.-(1) Every notice of a meeting of a company shall specify the place, and the day and hour of the meeting, and shall contain a statement of the business to be transacted thereat. (2) Notice of every meeting of the company shall be given- (i )to every member of the company, in any manner authorised by sub-sections (1) to (4) of section 53; (ii)and (iii)**** ** (3) The accidental omission to give notice to, or the non-receipt of notice by, any member or other person to whom it should be given shall not invalidate the proceedings at the meeting." Notices were given under certificate of posting as provided under section 53(1) and (2). Evidence for the same was also produced. Any accidental omission to serve the notice will not invalidate the meeting as provided under section 172(3) of the Act. It is also pertinent t....
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....hat the notice should be given only by 'post'. Nonetheless the principle incorporated in section 27 can profitably be imported in a case where the sender has despatched the notice by post with the correct address written on it. Then it can be deemed to have been served on the sendee unless he proves that it was not really served and that he was not responsible for such non-service." In Black's Law Dictionary 'giving of notice' is distinguished from 'receiving of the notice' : "A Person notifies or gives notice to another by taking such steps as may be reasonably required to inform the other in the ordinary course, whether or not such other actually comes to know of it. A person receives a notice when it is duly delivered to him or at the place of his business." In Maxwell on Interpretation of Statutes, the learned author has emphasized that 'provisions relating to giving of notice often receive liberal interpretation'. (Vide Page 99 of the 12th Edition). (See also : Basant Singh v. Roman Catholic Mission [2002] 7 SCC 531 at page 538 and Green View Radio Service v. Laxmibai Ramji AIR 1990 SC 2156). 8. How notice should be given for annual general body meeting is provided....
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....9^1. 9. The Hon'ble Apex Court in M.S. Madhusoodanan v. Kerala Kaumudi (P.) Ltd. AIR 2004 SC 909 held that the fact of posting has to be proved by the sender and that statutory presumption is only a rebuttable presumption. It is true that though section 53 of the Companies Act uses the words 'shall presume' it is a rebuttable presumption. Court can rely on the same only if it is proved that due posting of the document is proved. Once it is so proved, onus rests on the addressee to show that document referred to in the certificate of posting was not received by him. The Apex Court held as follows : "121. Raising of a presumption, therefore, does not by itself amount to proof. The result of a mandatory requirement for raising a presumption cast on Court, as there is under section 53(2) of the Companies Act, is that the burden of proof is placed on the person against whom the presumption operates for disproving it. It is only if such person is unable to discharge the burden, that the Court will act on the presumed fact [See : Dahyabhai v. State of Gujarat AIR 1964 SC 1563). A presumption however is of course not always rebuttable. But the mere use of the word 'shall' before the ....
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....es also. But, Madhusoodanan was also removed from the directorship. It was stated to be approved in the extraordinary general body meeting. Article 74 was deleted without even an agenda in the meeting which required an extraordinary resolution. The Apex Court found that article 49 which speaks of an accidental omission is not applicable to extraordinary general body meetings. At paragraph 96, it was affirmed by the Apex Court as follows : "96. The submission of the respondents that under article 49 of the Articles of Association of the Company even if no notice were given of the Extraordinary General Meeting, this would not vitiate the proceedings is misconceived. This was no ordinary general meeting but a meeting where a special resolution was to be passed. This had to be done under section 81 of the 1913 Act, to which article 49 is expressly subject and the requirement for giving due notice under section 81 is mandatory. Furthermore, article 49 speaks of an 'accidental omission' to give notice not officiating the proceedings in other words the omission must be bona fide, and not an omission which was wilful be it was in this case." (p. 927) Further, the Court also found tha....
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....regard to the meeting. The respondents produced documents which will prove that proper notice was served on all the shareholders with regard to the Annual General Meeting held on 29-9-2005. The respondents produced evidence to show that notice was served on the petitioner and all other shareholders with regard to the Annual General Meeting. That document was not disputed by the petitioners. Therefore, the averment that no notice was served on the petitioner and other shareholders does not stand for consideration. In the petition it is stated that even though no notice was served the petitioner came to know about the Annual General Meeting held on 29-9-2005 and he attended the meeting. Then he came to know that eight new directors were appointed on that day. But the respondents produced documents which show that the petitioner and other NRI Directors who retired by rotation submitted their nomination to be re-elected. The election also took place. The respondents produced the entire ballot papers used by the shareholders at the time of voting. Those documents were also not disputed by the petitioners and others. The documents produced by the respondents revealed that proper notice o....
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....it can be seen that the names of the retiring directors were specifically mentioned. The names were also given in the report of the Board of Directors and sent along with the notice of annual general body meeting. First petitioner was present in the board meeting which approved the resolutions of the board meeting. Consequent on the receipt of notice, all the six retiring directors, first four petitioners and respondents 5 and 14, gave notice signifying their intention to contest. It shows that they were aware that they were retiring and contesting. Under section 257 of the Act, other shareholders who are retiring directors eligible for appointment as directors should give notice in the manner provided under the Act. Since eight other shareholders eligible for appointment applied within the time prescribed, notice was published in newspapers as provided under section 257(1A) of the Act. Section 257(1A) of the Act reads as follows : "(1A) The company shall inform its members of the candidature of a person for the office of director or the intention of a member to propose such person as a candidate for that office, by serving individual notices on the members not less than seven d....
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....in of the second respondent to the office of director, in complete exclusion of the petitioners who have been on the board admittedly since the year 1998, to my mind, is a visible departure from the standards adopted by the second respondent and his family members in offering directorship to those who contributed a minimum of Rs. 10 lakhs in case of doctors and Rs. 20 lakhs in case of others. This departure involving an element of lack of probity or fair dealing to the petitioners, in the matter of their proprietary or individual rights as shareholders would constitute oppression." 14. We have also seen that out of the eight directors elected in the annual general body meeting, six elected were not relatives or 'kith or kin' of the Chairman as observed by the Company Law Board. The CLB also relied on the decision of Shanti Prasad Jain v. Kalinga Tubes Ltd. AIR 1965 SC 1535 and Suresh Chandra Marwaha v. Lauls (P.) Ltd. [1978] 48 Comp. Cas. 110 (Punj. & Har.) to set aside the election of the directors and re-appointing the directors on the ground of 'legitimate expectation'. In none of the above decisions, theory of legitimate expectation or promissory estoppel was relied on to se....
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....timate expectation'. Within the conspectus of fair dealing in case of 'legitimate expectation', the reasonable opportunities to make representation by the parties likely to be affected by any change of consistent past policy, come in. . . . "(p. 165) But, the above principle cannot be extended in company law. Doctrine of 'legitimate expectation' is mostly confined to the 'right of a fair hearing before a decision which results in negativing a promise or withdrawing of an undertaking. Forgetting the benefit of legitimate expectation, there should be a clear promise or a clear and unambiguous representation and burden of proof is on the person who claims the benefit on the basis of legitimate expectation. This principle that is applicable in administrative law is unknown on company law, in any event, in this case, it was not proved by the petitioners that there was any promise made by the Chairman that they will continue as directors for ever because of their investment. As observed in Union of India v. Hindustan Development Corpn. AIR 1994 SC 988 legitimate expectation is not the same thing as anticipation. It is different from a mere wish or desire or hope and a mere disappointm....
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....t petitioner was present. All the six submitted their nominations. Petitioners relied on the decision of the Apex Court in Dale and Carrington Invt. (P.) Ltd. v. Prathapan [2004] (3) KLT 475. There, the decision of this Court (one of us, Justice J.B. Koshy, who wrote the judgment for the Division Bench), was approved by the Hon'ble Supreme Court. In that case, one Prathapan, an NRI, though his mother, induced one of his relative Ramanujam to promote a company by making initial investment of Rupees Five lakhs and the entire amount was given by Prathapan. But, later, showing that the company was running on loss and Ramanujam advanced money it was manipulated that a sum of Rupees 6,86,500 was standing to the credit of Ramanujam and the board of directors in its meeting held on 24-10-1994 chaired by Ramanujam decided to issue 6,865 equity shares of Rs. 100 each in his favour and Prathapan was not intimated about the meeting. By reason of the said Act, Prathapan who was a majority shareholder in the company was reduced to minority. Ramanujam did not contribute any money from his own resource for starting a company and he was drawing salary for working as managing director. The charge of....
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....be understood to have been rendered in the fact situation obtaining in that case. It does not lay down a law that fiduciary duty of a Director to the Company extends to a shareholder so as to entitle him to be informed of all the important decisions taken by the Board of Directors. Such a broad proposition of law, if understood to have been laid down in Dale and Carrington would be inconsistent with the duty of a Director vis-a-vis the company and the settled law that the statutory duty of a Director is primarily to look after the interest of the company." As mentioned in Palmer's Company Law, director's fiduciary duty is with the company and not with individual shareholder and there is no agency relationship with shareholder and directors. But directors shall not misrepresent and they should act bona fide in the best interest of the company. (See Palmer's Company Law, 23rd Edition, Chapter 64, pages 848 to 850). In Rolta India Ltd. v. Venire Industries Ltd. [2000] 100 Comp. Cas. 19^1 , a Division Bench of the Bombay High Court held that powers of directors to manage the company cannot be curtailed by shareholders' agreement. Here, in this case, there was full disclosure and ret....
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.... general body meeting as they submitted their willingness after the issuance of the notice. Similarly, six retiring directors also submitted willingness after issuance of notice, but, in the notice advertised in newspapers, it is not mentioned that six retiring directors are also contesting. It is true that statutory obligation to publish names of contestants under section 257(1A) is only when shareholders other than retiring directors file nomination as provided under section 257(1). Section 256 also gives indication that for the retiring director to get re-appointed need not file nomination and automatically he is a candidate and if there is no contestant, they can be re-appointed without a polling. In the absence of election or re-appointment in the adjourned meeting, re-appointment can be deemed to be made under section 256(4)(b) unless their unwillingness is notified in writing. But, even though there is no statutory obligation, in fairness, since eight shareholders have decided to contest and polling became a necessity, when newspaper advertisement was made with regard to eight shareholders who are contesting, the fact that retiring directors are also offering themselves for ....
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....ng that special resolution was not passed. It is not recorded in the meeting that there is two-third majority. But, the word 'majority' is mentioned. Without passing a special resolution by two-third majority shares cannot be offered to outsiders. Finding of the Company Law Board that special resolution was not passed according to law, needs no interference. 19. Whether issuance of right shares is correct is the next question to be considered. The Company Law Board set aside the decision to issue right shares and held that it is illegal and void. The CLB accepted the decision of the general body meeting for the increase in the share capital. The petitioners did not challenge the above decision. For increase in share capital of the company only ordinary resolution is required as provided under section 94(1). If share capital is increased, the board of directors can decide the question of issuance of right shares (section 81). A special resolution is necessary in the general body meeting only for issuance of shares to outsiders in view of section 81(1A) of the Act. Accordingly, right shares were offered. Petitioners were also offered right shares at the ratio of 1 : 4. All the sha....
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....e proportion to all shareholders without when finance was urgently required is an act of oppression or mismanagement. The Company Law Board issued interim order on 13-2-2006 to issue right shares and keep the shares of petitioners pending subject to finality of company petition. It is offered by the counsel for the appellant that NRI shareholders can still accept the offer of shares within a reasonable time so that voting pattern will not change. They cannot insist that they will not further invest, but shall be a permanent direction. The fact that the company was in need of urgent finance is not disputed. Even in the board meeting held prior to the annual general body meeting wherein first petitioner was also present, there was a proposal to accept two shareholders from outside with Rs. 50,00,000 each as requirement of finance is undisputed. But, for issuance of shares to outsiders, special resolution was necessary under section 81(1A), but, special resolution was not passed legally. Since the director board has power to issue right shares without exceeding the authorised capital, the decision to issue right shares cannot be set aside unless there is lack of bona fides. There is n....
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....ciary 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." (p. 1338) After considering Needle Industries (India) Ltd.'s case (supra ) AIR 1981 SC 1298, the Apex Court in Sangramsinh P. Gaekwad's case (supra) observed as follows : "If the shares are issued in the larger interest of the company, the decision to issue shares cannot be struck down on the ground that it has incidentally benefited the Directors in their capacity as shareholders." 20. But, in this case, election of eight directors were already set aside by the CLB and that board decided to issue right shares. Whether that is a reason for setting aside the issue of right shares is the next important question to be considered in their case. Merely because election of some of the directors were set aside subsequently, the decision taken by the director board earlier will not become invalid. In this case, there were 20 directors in the board. Election of 8 directors were set aside subsequent to b....
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....ers are protected by providing that acts done, by a person as a director shall be valid although their appointment was declared subsequently as invalid. Mainly this protection is for the outsiders, but, a shareholder also cannot be taken aback by setting aside a decision of the Board done in good faith merely because election of some of the directors were set aside subsequently. The acts of a de facto director are treated as valid both vis-a-vis members. In Kanssen v. Rialto (West End) Ltd. [1945] 15 Comp. Cas. 23 (CA). Lord Greene M.R., while dealing with section 143 of the Companies Act which reads, "the acts of a director or manager shall be valid notwithstanding any defect that may afterwards be discovered in his appointment or qualification", decided that the section will protect the acts even though the parties concerned knew the facts but were not conscious of the defect. It is true that if there is no appointment at all, the section will not be applicable [See : Morris v. Kanssen [1946] 16 Comp. Cas. 186 at page 190]. But, here there was appointment of eight directors and they were elected by the majority of shareholders attending the annual general body meeting, even thoug....
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....dly. Decision to issue duplicate shares to Purushothaman and transfer of the same were not challenged in the petition. Therefore, the relief granted by the Company Law Board in this regard also cannot be accepted. 23. With regard to acts of mismanagement alleged regarding the arrangement with special investigating centre, the agreement with the special investigating centre was made when petitioners 1 to 4 as well as their supporting NRI directors were in the board and they cannot press that point to get relief under section 398 as they were in management. However, we are of the opinion that if any amount is due from special investigating centre that should be realised by the company and the company auditor should go through the agreement with the special investigating centre and also the accounts specifically on this aspect and submit a report pointing out whether any amounts by way of percentage of profit or rent has to be received from the centre etc. and their report should be placed before the board after the next annual general body meeting and the board should take appropriate action on the report. In the result, all the appeals are allowed partly and the order of the C....