TaxTMI 
TaxTMI 
2010 (7) TMI 274
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.... manufacture of plug valves and various other types of valves on 14-12-2006 :- (a)It is the case of the appellants that while as per the shareholders' agreement, the consideration in respect of both the agreements has to be paid and according to the appellants, respondent Nos. 2 and 3, after paying the first stage of consideration and obtaining majority of shares, failed to pay the balance amount and there was a failure on the part of respondent Nos. 2 and 3 in performing their obligation under the said agreement, which resulted in filing of applications in O.A. Nos. 667 and 668 of 2009 by the appellants under section 9 of the Arbitration and Conciliation Act, 1996 in which a direction was given by this court against respondent Nos. 1 and 2 to furnish security. (b)It is stated that 45,600 shares were transferred in favour of respondent Nos. 2 and 3 as on 14-12-2006. Respondent Nos. 4 and 5 were appointed as additional directors of the first respondent-company. The first appellant, who is stated to have continued to be the director and managing director, has also been appointed as the chief operating officer of the first respondent-company from 14-12-2006 and as per the shareholde....
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....espondents. It is stated that the Company Law Board modified the order permitting the respondents to hold board meeting to approve and adopt the accounts of the first respondent's company for the year 2008-09 for submitting the same to the bankers stating that finality shall be subject to the outcome of the company petition. (g)It is stated that the statutory auditors of the company, viz., M/s. Venkatramani and Associates functioning for 23 years, also submitted resignation on 5-2-2010. It is also stated that in an emergent general body meeting stated to have been conducted by the respondents on 13-3-2010, M/s. Agarwal Chhallani and Co. was appointed, as statutory auditors. It is stated that the said auditors are directors of a group of companies "NECO Group of Industries", to which the transfer of shares of the first respondent-company is stated to have been effected. (h)It is stated that the Company Law Board on an application filed by the appellants in Application No. 47 of 2010, restrained the respondents from implementing the resolution for appointment of the said auditors. In the meantime, on the filing of the said company application in C.A. No. 112 of 2009 by respondent N....
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....lant dated 16-11-2007, admitting that the second appellant is no more a director of the company and she is also not a shareholder since her shares were completely transferred and finding that in spite of the said letter, the appellants chose to file the company petition to set aside the allotment made on or after 14-12-2006 and to restore the original shareholding pattern as on 13-12-2006 and that in the meeting there was no challenge by the first appellant in respect of the said shares, the Company Law Board came to the conclusion that the entire dispute rests on the shareholders' agreement dated 14-12-2006, that said dispute has been raised by the appellants in respect of payment which is only a dispute attracting the breach of agreement and therefore, no relief can be asked for before the Company Law Board. Accordingly, the Company Law Board passed the order holding that the company petition is not maintainable and dismissed the same. 5. The order is challenged by the appellants on various grounds including that the further increase of shares or allotment was not taken into consideration; that the appellants complied with the requirements of section 399 of the Companies Act; th....
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.... company petition the appellants questioned the validity of further issue of share capital to the extent of 1,40,000 shares in favour of respondent Nos. 2 and 3, unless the same is decided, the company petition cannot be decided on the question of maintainability for want of required number of shares to maintain a petition under section 399 of the Companies Act. (b)He would strongly rely upon the judgment of the Andhra Pradesh High Court in C.A. Nos. 19 and 20 of 2005 dated 3-7-2009-B. Subba Reddy v. S.S. Organics Ltd. [2009] 151 Comp. Cas. 190 1; wherein it was held that under the Companies Act, there are no powers conferred on the Company Law Board to decide preliminary issues and the Company Law Board cannot exercise the powers of the civil court under the Civil Procedure Code, 1908, except what is explained under section 10E(4C) of the Companies Act. (c)It is his submission that as per the provision of section 10E of the Companies Act, except those mentioned in the said provision, no other provisions of the Civil Procedure Code are applicable. He would also rely upon a Division Bench judgment of the Karnataka High Court in Vijayan Rajes v. MSP Plantations (P.) Ltd. [2009] 151....
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....ted to have been transferred in favour of respondent Nos. 2 and 3 and on the other hand, it is the specific case of the appellants that they were consciously and voluntarily agreeable to sell their shares and the complaint is that the consideration for transfer of shares has not been paid in full. According to him, when the validity or otherwise of the transfer of shares has not been challenged by the appellants in the main company petition, an overall reading of the entire company petition shows that it is only the contractual right which the appellants sought to enforce in the company petition under the guise of treating it as oppression and mismanagement :- (a)It is his submission that the agreement to transfer of shares entered into by the appellants was in their individual status and that has nothing to do with the affairs of the company and therefore, the appellants have no locus standi to maintain the petition under section 397 of the Companies Act. (b)It is his submission that the appellants have made a misstatement before the Company Law Board on the very first hearing to the effect that out of four members of the company, the appellants constituted two in number and in ....
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.... Comp. Cas. 696 (SC). (f)It is his submission that the appellants having filed an application under section 9 of the Arbitration and Conciliation Act, 1996 cannot now go back and say that the position as it stood on 14-12-2006 has to be taken note for the purpose of deciding about the locus standi of the appellants in maintaining the petition under section 397 of the Companies Act. 8. I have heard learned counsel for the appellants and the respondents and referred to the impugned order and given my anxious thoughts to the issues involved in this case. 9. These appeals being ones filed under section 10F of the Companies Act, which are maintainable on any question of law, arise from the orders of the Company Law Board. A reference to the pleadings in these appeals show that the major complaint made by the appellants being the petitioners in the original company petition filed under sections 397 and 398 of the Companies Act is revolving around the shareholders' agreement dated 14-12-2006 and another agreement entered on the same day for the purpose of transfer of technical know-how of the first respondent-company in favour of the second and third respondents by the appellants being....
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....e to the extent of 1,40,000 fully paid-up equity shares by allotting 71,400 shares to the second respondent and 68,600 shares to the third respondent on 10-10-2007 in the meeting of the board of directors. It is not in dispute that the first appellant participated in the said meeting and at that time, he was the chairman of the board. 13. After the said further allotment, the shareholding pattern of the company as stated by the appellants in the company petition was as follows :- 1.Both the appellants together-14,410 shares-7.20 per cent. 2.Respondent Nos. 2 and 3-1,85,590 shares-92.80 per cent. However, according to respondent Nos. 2 and 3, after further allotment the shareholding pattern is, 1.First appellant-328 shares-0.164 per cent. 2.Respondent-1,85,600 shares-92.808 per cent. 3.Others-14,072 shares-7.036 per cent. Therefore, on the date of further issue of share capital, viz., 10-10-2007, even if the appellants' shares along with others, as stated by respondent Nos. 2 and 3, are put together, the shareholding pattern is 7.20 per cent in respect of the appellants, as admitted by them. That position continued admittedly till the date of presenting of the company petiti....
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.....Declare that acts of respondent Nos. 2 to 5 as fraud, deceit and oppressive to the shareholders of the company in general and the petitioners in particular and constitute acts of mismanagement; 2.Direct respondent Nos. 4 and 5 or any one claiming through them from interfering with the day-to-day management of the company; 3.To declare all the share allotment of respondent No. 1 company on or after December 14, 2006 as null and void and to restore the original shareholding pattern as on December 13, 2006; 4.Declare that respondent Nos. 4 and 5 are unfit to act as directors of respondent No. 1 company by reason of their conduct, disabled themselves from acting as directors of the company and they are unfit to continue as director in the best interest of the company and to remove them from the office of the director and appoint such other person or persons as this Hon'ble Board may deem fit; 5.Direct respondent Nos. 2 to 5 to compensate the company for the loss caused to the company due to their oppressive acts and mismanagement of the company's assets; 6.Declare that the acts of respondent Nos. 2 to 5 qua respondent No. 1 does not bind the petitioner in his capacity as a direct....
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....m 14-12-2006, and that the first appellant has chosen to file the company petition in the year 2009 by joining with his wife, the second appellant, to restore the original shareholding pattern as on 13-12-2006, the Company Law Board held that the claim of the appellants is only in respect of the agreement for transfer of shares and since the appellants are not holding the required number of shares as well as control of members, viz., 10 per cent, the company petition is not maintainable. 18. The contention of Mr. R. Murari, learned counsel for the appellants by heavily relying upon the Division Bench judgment of the Karnataka High Court in Vijayan Rajes' case (supra) is that for the purpose of maintaining a petition before the Company Law Board under sections 397 and 398 of the Companies Act, the qualifying shareholdings must be looked into not as it was on the date of presentation of the petition, but on the date of oppression alleged. That was a case where the appellant before the Division Bench who is the son of the second respondent was functioning as the managing director of the company after his return from U.S.A. and after his marriage with the second appellant, she also be....
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....he Act, the question to be looked into is as to whether the petitioners constitute the requisite number of members or they had the requisite shareholding in the company prior to the acts complained of. If the date of presentation of the petition should be looked into in a technical way, it could defeat the very purpose of the legislative enactment of sections 397 and 398 of the Act, as the overbearing majority shareholders can simply by high handed action or even for other purpose and by oppressive methods, dismember the minority shareholders and leave them with no remedies, as the dismembered minority shareholders technically do not qualify for maintaining a petition under section 399 of the Act, being not a member at all. As the minority shareholders will be complaining only after the acts occurred and when they have been removed from the membership of the company, the understanding and interpretation to be given to section 399 is only so as to further the object of relief to be given in a situation governed by sections 397 and 398 of the Act and not to foreclose the options to an aggrieved person and to deny the very relief sought to be extended to a complaining minority share-h....
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.... Comp. Cas.) :- "We are clearly of the opinion that, having regard to the scheme and the purpose of sections 397 and 398 of the Act, the reasoning on a pari materia provision of the English Act would be a valuable guide. The said construction, appears to us, to further the purpose intended to be fulfilled by petitions under sections 397 and 398 of the Act. It facilitates solution of problems in case of oppression of the minorities when the member is dead and his heirs or legal representatives are yet to be substituted. This is an equitable and just construction. This construction, as suggested by Pennycuick J., does not militate against either equity or justice. We would, therefore, adhere to that construction. In this connection, it may be mentioned that, in the 1972 edition of Gore-Broivne on Companies, it has been stated as follows (p. 798) :- 'It has recently been settled that the personal representatives of a deceased member, even though they are not registered as members, are entitled to present a petition under section 210. In Jermyn Street Turkish Baths Ltd., In re [1970] 3 All ER 57 (Ch. D), Pennycuick J., held that on its true construction section 210 required that the ....
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....al body meeting held on 23-9-2007 and 29-9-2008 and by virtue of further issue of shares and allotment of the same to the second and third respondents, holding of share capital by the first appellant became 0.164 per cent and in respect of others it became 7.036 per cent and respondent Nos. 2 to 5 held 92.8 per cent as claimed by respondent Nos. 2 and 3. Even as per the claim of the appellants, if it is taken that the contention of the appellants is correct that the second appellant has still retained shares, the percentage of share capital held by them on the dates stated above was only 7.20 per cent. 25. It is true that having participated in the meeting especially the first appellant being the husband of the second appellant, the appellants chose to file the company petition under sections 397 and 398 of the Companies Act alleging oppression and the petition came to be filed in the year 2009. Therefore, it is clear that after the shareholding of the company was reduced to less than 10 per cent of the total share capital as early as in October, 2007, the appellants chose to approach the Company Law Board by raising the plea of oppression and mismanagement under sections 397 and ....
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....ts against respondent Nos. 2 and 3 for breach of the terms of agreements entered into between the parties on 14-12-2006. In such circumstances, the appellants having waited for a considerable period of time, have to necessarily prove that they have a right to file company petition under sections 397 and 398 of the Companies Act. In my considered view, that should be the construction of section 399(1) of the Companies Act, 1956 which is as follows :- "399. Right to apply under sections 397 and 398.-(1) The following members of a company shall have the right to apply under section 397 or 398 :- (a )in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares; (b )in the case of a company not having a share capital, not less than one-fifth of the total number of its members." 27. Even the literal interpretation of the words in section 399(1) of the Act, if applied to th....
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....ng, from one or more Benches from among its members and authorise each such Bench to exercise and discharge such of the Board's powers and functions as may be specified in the order; and every order made or act done by a Bench in exercise of such powers or discharge of such functions shall be deemed to be the order or act, as the case may be, of the Board. (4C) Every Bench referred to in sub-section (4B) shall have powers which are vested in a court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely :- (a )discovery and inspection of documents or other material objects producible as evidence; (b )enforcing the attendance of witnesses and requiring the deposit of their expenses; (c )compelling the production of documents or other material objects producible as evidence and impounding the same; (d )examining witnesses on oath; (e )granting adjournments; (f )reception of evidence on affidavits. (4D) Every Bench shall be deemed to be a civil court for the purposes of section 195 and [Chapter XXVI of the Code of Criminal Procedure, 1973 (2 of 1974)], and every proceeding before the Bench shall be deemed to be a j....
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....s) Act, 1985 (SICA) does not provide for bifurcation of the subject-matter of action as it is available under section 34(2)(a)( iv) of the Arbitration and Conciliation Act, 1996, has rejected the said contention by relying upon the judgment of the Supreme Court in Sukanaya Holdings (P.) Ltd. v. Jayesh H. Pandya [2003] 5 SCC 531 and concluded that the management and the statutory violations set out in the company petition could be bifurcated and dealt with separately. In the petition challenging the order of the Company Law Board holding that the company petition is not maintainable on the ground that the Company Law Board has no jurisdiction to decide preliminary objections, while referring to the contention that the Company Law Board has jurisdiction to decide about the preliminary issues, the High Court held that the regulations framed as per section 10E(6) of the Companies Act, viz., Company Law Board Regulations, 1991 do not enable the Company Law Board to decide the preliminary issues. The High Court also relied upon the judgment of the Supreme Court dealing with the contravention of the Government directives relat- ing to reservation of SC/ST in IOB, in All India Indian Overs....
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....directives relating to reservation for SC/ST employees in IOB. Accordingly, IOB stayed the promotions. IOB Officers' Association and other candidates challenged the same before the Delhi High Court by filing a writ petition. On the ground that National Commission had no power to issue interim orders, the writ petition was allowed. The same was challenged by the All India Indian Overseas Bank SC and ST Employees' Welfare Association. Reliance was placed on clauses (5) and (8) of article 338 of the Constitution of India in support of the contention that the Commission had power to pass such orders. The hon'ble Supreme Court after considering clauses (5) and (8) of article 338 of the Constitution of India and also the earlier decision in M.V. Rajwade v. Dr. S.M. Hassan AIR 1954 Nagpur 71 and Dr. Baliram Waman Hiray v. Justice B. Lentin Manu/SC/0582/1988 : [1988] 4 SCC 419 : [1989] 176 ITR 1 (in relation to section 4 of the Commissions of Inquiry Act, 1952), laid down as under (page 611) :- 'Interestingly, herein, in clause (8) of article 338, the words used are "the Commission shall. . . have all the powers of the civil court trying a suit". But the words "all the powers of a civil c....
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....decide about the maintainability of the petition on the ground that the person who approaches the Company Law Board or the court has no qualification as prescribed under section 399(1) of the Act. 32. Therefore, when the statutory provision of the Companies Act itself is very clear that unless and until the persons have the qualifications enshrined under section 399(1) of the Act, they have no right even to file a company petition under sections 397 and 398 of the Act, in my considered view, such power need not be traced to either the Code of Civil Procedure or any other law. In such circumstances, the contents of section 10E(5) as enumerated supra, which not only enable the Company Law Board to be guided by the principles of natural justice but also its discretion, gives abundant power to the Company Law Board to exercise its discretion to find out as to the person who files the petition before it under sections 397 and 398 of the Act as to whether he is having the right to make such petition as required under section 399(1) of the Act, which can certainly be decided as a preliminary issue before going into the merits of the case. Therefore, the power given to the Company Law Boa....
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.... limitation. What is required in these matters is a broad commonsense approach. If the court is satisfied that the petitioners represent a body of shareholders holding the requisite percentage, it can assume that the involvement of the company in litigation is not lightly done and that it should pass orders to bring to an end the matters complained of and not reject it on a technical requirement. Substance must take precedence over form. Of course, there are some Rules which are vital and go to the root of the matter which cannot be broken. There are others where non-compliance may be condoned or dispensed with. In the latter case, the rule is merely directory provided there is substantial compliance with the Rules read as a whole and no prejudice is caused (see : Pratap Singh v. Shri Krishna Gupta AIR 1956 SC 140). In our judgment, section 399(3) and regulation 18 have been substantially complied with in this case." is not helpful to the case of the appellants. 35. That was a case where the members of the company were family members and there was a difference of opinion on the demise of certain family members and a compromise was entered into without the knowledge of one of the ....
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....rounds on which this was asked for were : A.The consideration for the transfer had not been agreed upon and no consideration had in fact been paid. B.No proper documents had been executed effecting the transfer. C.Neither Valsa nor Sukumaran Mani, a minor had any knowledge of the transfer and the transfer of their shares was invalid. D.Section 108 of the Companies Act, 1956 had not been complied with in respect of any of the transfers. The learned Single Judge rejected all four contentions, and in our view, rightly. The Division Bench held in favour of Mani and his group on grounds which are legally and factually unsustainable for the reasons stated in the following paragraphs. The documentary evidence relating to the transfer, shows without a shred of doubt that there was a valid transfer of shares. To begin with the minutes of the meeting held on March 19, 1985 [exhibit R-62(a)], which were signed by Mani, records : 'Shares of Sri M.S. Mani. All the shares in Kerala Kaumudi owned by Sri M.S. Mani and family would be pledged by him to Sri M.S. Madhusoodhanan who shall extend financial facilities to Sri M.S. Mani. The loan will be paid with 22 per cent interest by Sri Mani w....
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....be issued in favour of Sri M.S. Madhusoodhanan and to affix the common seal of the company in the share certificates in the presence of the company secretary'." 38. While dealing with section 9 of the Arbitration and Conciliation Act, 1996, in the light of section 115 of the Code of Civil Procedure, even though the Act does not provide for the applicability of the Code specifically and in the circumstance that under section 37(2) of the Arbitration and Conciliation Act, 1996, a second appeal remedy is not available, the Supreme Court in ITI Ltd.'s case (supra), by holding that the remedy of revision would not cease to be available under section 115 of the Civil Procedure Code, laid down that the issue to be decided is as to whether there is an express bar of applicability of the Code, in the following words (page 516 of [2002] 5 SCC) :- "10. We do not agree with this submission of learned counsel. It is true in the present Act application of the Code is not specifically provided for but what is to be noted is : is there an express prohibition against the application of the Code to a proceeding arising out of the Act before a civil court ? We find no such specific exclusion of the....