TaxTMI 
TaxTMI 
2009 (11) TMI 651
X X X X Extracts X X X X
X X X X Extracts X X X X
....therefore outsiders to the company. Respondents 3 and 7 though are not Shareholders in the company had nevertheless been taken as directors of the company and it was in this capacity they had been arraigned as respondents to Company Petition. 2. The further particulars as pleaded in the company petition presented before the Company Law Board are as under: "I. Particulars of the Company : The petitioners are shareholders of the 1st respondent-company [hereinafter referred to as the 'company']. The company was incorporated on 26.06.1982. Its registered office is situated at 7th Milestone, Tumkur Road, Peenya, Bangalore - 560 058. The authorized shore capital of the company is Rs. 5,00,000 [Rs. Five lakhs] divided into 5,000 [five thousand] equity shares of Rs. 100 [Rs. One hundred only] each. The paid-up share capital of the company is Rs. 800/- [Rs. Eight Hundered] comprising of 8 [eight] equity shares of Rs. 100/- [Rs. One Hundered] each fully paid. Each of the petitioners holds one paid-up share. The other four shares are held by respondents 2, 4, 5 and 6. The company has never issued share certificates to any of the shareholders. The main object of the company is to carry on....
X X X X Extracts X X X X
X X X X Extracts X X X X
....th and marked as Annexare-3. The said Annual Return also indicates the names of the Directors. The petitioners and respondents 2, 4, 5 & 6 were the owners who were managing the company in an harmonious manner for about 7 to 8 years. There were no differences during that time. All decisions were taken by the Board of Directors unanimously. In ail General Body Meetings, resolutions were passed unanimously. At that time there was harmony in the Company. III. Particulars of Respondents: 1st respondent is the company in respect of the affairs of which this petition has been filed. The respondents 2, 3 and 7 are Directors of 1st respondent Respondents 3 and 7 are outsiders having no shares in the company. Respondents 2, 4, 5 and. 6 hold one share each in the 1st respondent - company." 3. The company petitioners had approached the company law board for relief complaining of oppression and mismanagement on the part of the respondents and had for such purpose pleaded a series of developments not only with regard to the manner of management of the first respondent - company but also of its sister concerns such as Prakash Roadlines Limited, Prakash Leasing Limited and had narrated the riv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the remittance from the interested members desire us of subscribing to additional shares by remitting the amount on or before 30.11.2002. 7. It was the version of the Company Petitioners that though they categorically offered to take additional shares and that the further version that the letter of offer never indicated the entitlement of each of the shareholder, the petitioners had nevertheless pointed out the attempt on the part of the company and the persons in-charge of the management of the company, was nothing short of an act of oppression and an illegal act and being in the line of fire of such oppressive manner of functioning of the respondents, not only by the first respondent-company, but also in respect of other sister concerns wherein also some of the respondents were in control and the further allegation that the second and third respondents in particular, had always acted in a manner deleterious to the interest of other members and to virtually oust other shareholders of the companies for improving their own position etc. The cause of action for approaching the Company haw Board was pleaded to be the manner of allotment of the proposed additional shares decided in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....by mala fides and on such allegations, the petitioners had approached the Company haw Board seeking for the following reliefs: "(i) declare that the letters dated 6.12.2002 from the 1st Respondent to the Petitioners (Annexure-14 and 15) are illegal, mala fide and oppressive and quash the same: (ii) direct Respondents, their servants and agents to allot in favour of the Petitioners an equal number of shares of the Ist Respondent Company as the shares to be allotted to Respondent No, 2, 4, 5 & 6 or their nominees or 3rd party/ies; ii(a) Declare that the purported, allotment of 3000 shares at the alleged Board Meeting held on 13.12.2002 to Respondents 2 and 4 is illegal, oppressive and mala fide and set aside the said allotment and consequently order reduction of the paid-up share capital of the 1st Respondent Company by cancelling the allotment of the said 3000 shares. (iii) declare that the action of Respondents in keeping Petitioners No. 1 & 3 out of office as Director of 1st Respondent Company is oppressive and illegal: (iv) direct amendment of Articles of Association of the 1st Respondent Company to provide that composition of the Board of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ll maintain the status quo in regard to the paid Capital of the company and any resolution that may be passed will be implemented, only with approval of this Bench. Call on 28.1.2003 at 2.30p.m. 26.12.2002 ** ** ** ORDER Heard Counsel for the petitioners and respondents. Counsel for the respondents submitted that the company made further allotments in 2nd week of December. 2002, In view of the facts and circumstances of the case, the following order is made; (a) The company will not make any further allotment until further orders. (b) The allottees will not exercise their voting rights in respect of the shares allotted in the second week of December 2002: and (c) Any resolution that may be passed in any General Body Meeting will be implemented with prior approval of the Bench. The above order is passed, in supersession of the order dated 26.12.2002. The respondents will file counter by 21/2/02 and rejoinder to be filed by 7/3/03. The petition will be heard on a date to be notified later. 28.1.2003. ** ** ** ORDER The respondent will file counter in CA.No.104/03 by 31/10/03, upon which orders will be passed on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....adjourned to 11.3.04 at 10.30 AM, 25.2.2004 ** ** ** ORDER As the settlement proposal failed, orders will be passed, on merits of the Company Petition. 11.3.2004 ** ** ** ORDER The petitioners collectively holding fifty per cent of the paid-up capital of Prakash Coach Builders Private Limited ('the Company') and constituting not less than one-tenth of the total number of its members have filed this, petition under Sections 397, 393, 402 & 403 of the Companies Act, 1956, ('the Act') complaining of the allotment of 1125 shares each in favour of respondents 2 and 4 in complete exclusion of the Petitioners as illegal and oppressive, 3. Shri S.S. Naganand, learned Senior Counsel appearing for the petitioners, while elaborating the background of the Company as well as its group Companies / entities with a spate of litigations between the parties submitted that the first respondent-Company being a private limited Company was promoted in dune 1982 by the petitioners and respondents 2,4,5 and 6 being close relatives, with main object of carrying on the business of bus body building, coach building and other allied activities. The authorised share capital of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n ordinary resolution at the general meeting of members of the Company. Though the petitioners had by their letter dated 26.11.2002 (Annexure 13 of the petition) agreed to take additional shares and forwarded four Bank pay orders of Rs. 1,49,760/- each, the Company had rejected the application of the petitioners on the ground that they did not fulfil the requirements of section 41 of the Act. At the same time the Company had allotted on 13.12.2002, 1125 shares each to the respondents 2 and 4, increasing the paid-up capital beyond the statutory limit, in breach of trust and good faith, which according m learned Senior Counsel is oppressive and constitutes an act of oppression in the affairs of the Company, especially when the petitioners have always been holding equal number of shares in the company as those of the respondents 3, 4, 5 & 6. Sri Naganand, learned Senior Counsel pointed out that the directors are in a fiduciary position vis-a-vis the company and must exercise their power for the benefit of the Company and ensure fair play in action in corporate management but failed to act for the benefit of the Company and solely for their personal aggrandisement and to the detriment ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nued till winding-up of the company. The first respondent-Company is neither in form nor in substance a quasi-partnership and never functioned on the basis of mutual trust and confidence as in the case of partnership. The relationship between the parties are not as that of partners. While the second respondent the only family member is a director, the petitioners 1 and 3 are not directors. The remaining two directors being outsiders are on the board since 1937, thereby the theory of partnership as propounded, by the petitioners is negated. The principles of partnership must be applied in the rarest of rare cases-as held in Kilpest Private Limited v. Shekhar Mehra [1996] 87 CC 615. The petitioners have not been evincing any interest in the affairs or attending the annual general meetings of the company since the pear 1995. The third petitioner is carrying on business at Hindpur in competition with the first respondent-Company. As there is no parity among the shareholders, it would not result in deadlock and therefore, there is no scope for windingup of the Company on just and equitable grounds. By virtue of Articles of Association of the Company the Board of Directors of the Company....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or any relief as claimed in the Company Petition. 4. Considering the relationship of the parties, I have suggested to learned Counsel to explore the possibilities of any amicable settlement of the dispute, pursuant to which Shri Ramakrishnan, learned Counsel expressed the willingness of the respondents to purchase the shares of the petitioners at a value of Rs. 240 per share which is said to be arrived on the business prospectus of the Company as a running concern and without taking into account the leasehold rights in respect of the landed property held by the Company. While this proposal was not acceptable to the petitioners, Shri Naganand, learned Senior Counsel made an offer across the bar to purchase the shares of the respondents at Rs. 480/- per shares which was neither acceptable to respondents. Thus the parties could not arrive at any settlement among themselves. I, therefore, shall proceed to consider the pleadings and arguments of learned Counsel, The issue that arises for my consideration is whether the allotment of shares impugned in the Company petition, made in favour of the respondents 2 & 4 in complete exclusion of the petitioners, would amount to an act of oppress....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l of the Company is Rs. 800/- "(Eight hundred only), consisting of 3 shares of Rs. One Hundred, each. Our group holds POUR Shares, and the group of Mr. Bharat Bhushan Narang and, Mr. Sudershan Kumar Manchanda hold the balance FOUR Shares. Although the number of share being offered and issued is not stated and also requires the approval of the General body, we are enclosing herewith the below mentioned FOUR Bank Pay Orders/ Cheques of Rs. 1,49,780/- (One lakh forty nine thousand seven hundred sixty) each in order to protect our interest This is without prejudice to our contention that the issue is illegal and malafide. Pay Order No. 022944 dated 26.11.2002 drawn on Union Bank of India on account of Vijay Kumar Narang. Pay Order No. 022944 dated 26.11.2002 drawn on Union Bank of India on account of Neeta Narang. Cheque No. 706967 dated 26.11.2002 drawn on State Bank of Patiala on account of Geetha Rai. Cheque No. 856807 dated 26.11.2002 drawn on State Bank of Patiala, on account of Bhupinder Rai". is required to be examined. It is clear from the above recitals that the petitioners wanted to maintain the parity of shareholding as on the date of application, with the petitioners ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bligations and trust towards the Company and its shareholders, which would constitute an act of oppression in the affairs of the company against the petitioners, warranting winding up of the Company on just and equitable grounds. Moreover, by virtue of the impugned allotments, the parity of shareholding between the parties maintained since the inception of the Company is found to be disturbed. Had there not been any parity of shareholding as contended by the respondents, they would not have at all offered shares to the petitioners. Moreover, when the petitioners by their letter dated 26.11.2002 (Page 110 of Company Petition) had insisted the third respondent to maintain the present parity of shareholding, there was no denial of any such parity of shareholding between the parties, Therefore, the plea of the respondents that there was no parity of shareholding must fail, Even thought, Kilpest Private Ltd. (supra), the Apex Court held that only in rare cases the principles of partnership should be applied, the Court has not completely barred application of the principles of partnership to a company and the principles of partnership cannot liberally be invoked. Therefore, the action of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anting partial relief to the petitioners, the present appeals, both by the petitioners and the respondents in the Company Petition, as noticed in the earlier part of this order. 13. The. Company Petition had been resisted by the respondents by filing a common Counter Statement dated 27.3.2003. 14. The respondents contended, inter alia, that the petition was not tenable in terms of the provisions of Sections 397 and 398 of the Companies Act; that It does not necessarily indicate any act of either oppression or mismanagement, within the scope of the statutory provisions and that substantial part of the averments In the petition were irrelevant as it related to other Companies, but not to the first respondent-Company and that reference to other litigation was of no consequence in the context of the relief sought for in the Company petition; that the first respondent-Company is a profit making efficiently managed company, as indicated by the facts and figures revealed in the Annual Report of the Company, copy of which had been placed before the Company Law Board by the company petitioners themselves; that it had made profits and had resolved to extend Rs. 5.76 lakh as on 31.12.2002 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....others from the first respondent-Company or other sister concern companies where the parties were members or shareholders; that there was never any arrangement or agreement, amongst the shareholders or between the groups as alleged in the petition; that there was never any concept in the Company Law, quoted at any point of time as visualized amongst the parties particularly, all of them being close relatives would not fall into different groups; that the company was a homogeneous one and formed with a paltry investment of Rs. 800/- and with each member subscribing to just one share and had carried on its business activities and had prospered and that the directors were well within rights and competent to allot additional shares in their entire discretion, but notwithstanding, had, in fact, to be fair to all the shareholders, decided to offer subscription to additional shares to all members; that the petitioners had been given a chance to increase their shares in the company and letters to this effect had been sent to all members; that the increase in the subscribed share capital being inevitable in the wake of the statutory changes in law, attributing motives to the respondents in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es of Rs. 100/- each, constituting the paid-up capital of Rs. 800/- and in the wake of the letter of offer being silent about the number of shares that were offered to each of the shareholders, but nevertheless, the petitioners having responded by forwarding four pay orders for Rs. 1,49,760/- representing Rs. 240/- per share, inclusive of premium of Rs. 40/- which is sufficient and to elicit, the petitioners put together 15% of the unsubscribed share capital of Rs. 5 lakh of the company and that amounting to the petitioners having consented for the allotment of this number of shares in their favour and having tendered equivalent value, the company was required to allot these shares and quoting non-compliance with the requirement of Section 41 was only a pretext to illegally deprive the petitioners of their legitimate 'entitlement for being allotted the number of shares which they had aspired for and in spite of the petitioners having their expressed willingness to comply with the requirement of law, the Board of Directors in its meeting held on 13.12.2002.ignoring the offers of the petitioners and proceeding to allot shares in favour of respondents 2 and 4 only to the company petit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al No. 8/2005 are before this Court to improve their position and to get further relief before this court on the premise that the Company Law Board has unjustifiably deprived the petitioners of such reliefs. The company and the other shareholders and directors are also in appeal in two sets of appeals contending that the Company Law Board in passing the impugned order has committed an act of illegality and a grave error in law, in partially allowing the company petition; that the company petition should have been dismissed in limine in total; that the petitioners before the Company law Board did not deserve any relief at all, there was absolutely no merit in the company petition; that the Company Law Board has totally misunderstood the scope of the provisions of sections 397 and 398 of the Act; that the understanding of the Company Law Board is clearly in the teeth of the law laid down and declared as per a number of weighty authorities of the Supreme Court dealing with the statutory provisions of Sections 397 and 398 of the Act and the order of the Company Law Board is not at all tenable in lame has to be set aside and the Company petition dismissed by allowing their appeals. 19.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....8 of 2005 and submission of Sri Dhyan Chinnappa, learned counsel for these parties is that even now there is no possibility of a settlement and. the only possible response on the part of his clients is one of making an offer to purchase the shareholdings of the appellants at a fair price. These two memos even when read together leaves more areas and fresh grounds for disputes and litigation rather than attempting to bring about an amicable settlement. It is obvious to us that the parties are in no mood to settle the matter by themselves and are more keen to have decision from the court List for further hearing on 9.11.2009". 21. Though the matter is listed as for further hearing, we having heard the learned counsel for the parties elaborately and on all the aspects of the matter, the learned counsels having made submissions, no further hearing was necessary and accordingly, we have proceeded to dictate the judgment opining as under: 22. Appearing on behalf of the company and the shareholders and others in the Management of the affairs in the Company Appeal No. 18/2005 which is by the Company and its two directors, Mr. Narotam was a director at that tune and the appellants in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....es not qualify for relief u/s 397 of the Act, that the company petitioners had never made good the requirements of Section 397 and the Company petition before the Company Law Board for seeking relief, that the argument of not understanding the agreement between the shareholders to maintain parity while is disputed on facts, assuming it to be so for argument sake and without conceding, it is pointed out that it is of no consequence on the affairs of the Company that an inter se arrangement amongst the shareholders is not one that can bind the company, that the Company is governed and regulated in its functions and transaction of business only by. the articles of association of the company, that even in law no shareholder of a Private Limited Company has a right to claim parity with other members of the company, that any shareholder cannot even claim as a matter of right to be allotted the same number of shares as are allotted in favour of any other members, that allotment of shares in a private company is in the entire discretion of its Board of Directors, even as recognized by statute in Section 81 of the Act, that even the petition averments never made out a case of continued and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... be improved upon in terms of the prayer sought for by the company petitioners, that the powers conferred on the Company Law Board for granting the relief u/s 397, 398 are very wide, that such is the legal position in terms of the provisions of Section 402 and 403 of the Act which read as under: "402. Without prejudice to the generality of the powers of the [Tribunal] under section 397 or 398, any order under either section may provide for - (a) the regulation of the conduct of the company's affairs in future: (b) the purchase of the shares or interests of any members of the company by other members thereof or by the company; (c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital; (d) the termination, setting aside or modification of any agreement howsoever arrived at, between the company on the one hand, and any of the following persons, on the other, namely- (i) the managing director, (ii) any other director, (iii) and (iv) (iv) the manager upon such terms and conditions as may, in the opinion of the [Tribunal], be just and equita....
X X X X Extracts X X X X
X X X X Extracts X X X X
....respondent company and the shareholders who were the beneficiaries of the resolution dated 13.12,2002 and Board of Management; that too constitutes an act of oppression, it is not necessary for the complainant - petitioners to demonstrate the existence of any illegality or violation of the statutory provisions; that the relief as granted by the Company Law Board is really not of any avail or benefit to the company petitioner but having been kept out of the management of the affairs of the company and not having allotted the necessary shares in favour of the company petitioners at a point of time, when the assets of the company which are the assets with reference to the shareholders and should have been evenly distributed amongst the 8 shareholders and each shareholder in the company should have been fairly and evenly treated and the assets of the company should have been sought to be apportioned, evenly but on the other hand the most discriminatory manner of the allotment of shares only in favour of five shareholders while could enable these shareholders to reap the profits and benefits which the company can make by claiming commensurate dividend on such number of shares, the compa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pany; that the Directors are nevertheless required to make a true and proper disclosure of the purpose for which additional shares are issued, manner in which they are issued, number of shares that are sought to be issued and proportionate shares are sought to be issued etc,. That such are the requirements on the part of the Directors because of the fiduciary nature of the position of the shareholders and the manner of conduct of the Directors in a private limited company is put to test on a very fine scale to determine as to whether the powers vested in them are properly used, not in any way misused or even for collateral considerations of favouring a few and spite others; that the provisions of Section 81 does not operate in respect of private limited company, that the greater responsibility and duty to act fairly and wisely is on the Directors and in the present case it being so, necessarily implies that the Directors are not free to exercise their discretion in the manner of allotment of equity shares for raising additional capital for the company and therefore submits that the act of allotting 2250 number of shares in favour of two shareholders is clearly and undoubtedly even ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts as is possible for oneself and even at the cost of the neighbour, the fellow passengers and the co-shareholders. 30. Fairness and proper management is not necessarily a favoured phenomenon, but bitter acrimony, mud-slinging, subversive acts are all part of Corporate Management. Gaining control of the company at the cost of other shareholders becomes the sole aim and those who ore already in control want to consolidate their power and position further so that their regime is not threatened to end abruptly but is perpetuated. Brothers turn enemies, relatives forget their relationship and start fighting one another, cordiality turns to rivalry, bitterness, acrimony, can even lead to violence sometimes. The persons accustomed to power are loath to give up their power and on the other hand want to perpetuate it. But in nature even a worm retorts when cornered and when it comes to a question of survival, even the weak and meek muster courage! 31. The Companies Act is a codified piece of Corporate Legislation to regulate the conduct of companies registered in this country and to provide ways and means and solutions to problems which may crop up in the course of Corporate Management. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ous to be not so, by a complicated legal language. 34. That exactly is what has happened by the innumerable decisions rendered by courts and Tribunals at different levels explaining the scope and extent of operation of the provisions of Section 397 and 398 of the Companies Act, what could have been otherwise a clear picture has blurred because of not necessarily uniform way of legal thinking and also because of the problem of finding a solution in different situations and the manifestations of an act of oppression. Human nature is most unpredictable and the ways and means are as innovative under different situations, to achieve what is intended or and are innumerable to human mind and rather unfortunately ill-motivated when it comes to achieving sinister things, achieving selfish things to the detriment of others. 35. The provisions of Section 397 of the Companies Act is not in any way helpful to resolve the situation of oppressive conduct, affecting members of a company who complain of suffering and seek relief in terms of petition u/s 399 of the Act in view of the conditions mandated for being fulfilled for the Company Law Board to bring about a satisfactory end to the impasse ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not necessary that the act should be an illegal act or an act which is in violation of any statutory provisions, Even an act violating the statutory provisions, that itself is an illegal act, which takes care of in terms of other provisions of the Act for correction. But the word 'oppression' and the meaning of this in a situation is phenomenon which one has to infer from the facts and circumstances by examining the impact of the act complained of on the complaining members. To some extent it is an abstract concept and also subjective. 40. What act can constitute an act of oppression is dependant on the particular facts and circumstances of each case and that in turn depends, who are all involved in the drama and the background and the circumstances in which such acts are performed and complained of and ultimately depending on what can be the outcome or impact of the same. 41. Bereft of legal considerations etc., the act of the management in allotting as many as 2250 shares of the company in favour of two members of the company to the a exclusion of all others by itself can constitute an act of oppression and the question will be as to whether this can be said to be otherwise wh....