TaxTMI 
TaxTMI 
2009 (11) TMI 651
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....nt Nos. 3 and 7 were not shareholders and 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 shareholde....
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....e such Annual Return made upto 30.12.1987 is produced herewith 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....
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....ng shares to the members at a premium of Rs. 140/- per share and inviting 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 t....
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....tuted an act of oppression, an illegal act and lacking probity and being vitiated 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 Artic....
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....ile counter, which may be done by 15/1/03 and rejoinder to he filed by 25/1/03, In the meanwhile, the respondents will 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 notifi....
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....30 p.m. 16.2.2004 ** ** ** ORDER Heard Counsel for both the parties. As the respondents prayed further time to consider the settlement proposal, which has not been objected to by Counsel for the petitioners, 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 p....
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....aid-up capital; necessity for additional funds: basis for the premium etc. According to Sri Naganand, learned Senior Counsel, Article 4 of Articles of Association of the Company ought to have been complied with before the increase of the paid-up capital by passing an 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 fiduci....
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....of maintaining parity in shareholding between the parties. Though the petitioners and the respondents each subscribed one share equally among themselves under the Memorandum of Association of the Company, it cannot be presumed that the equal shareholding must be continued 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-C....
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....hange in the management or control of first respondent-Company. Under these circumstances, the allotment is not oppressive, illegal or lacking in probity. The issue of shares is neither mala fide nor vitiated by malice and therefore, the petitioners are not entitled for 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 p....
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....fied in the case of every allotment of shares, the joint application made on 26.11.2002 by the applicants, (Annexure -13), the relevant portion of which reading as under : "Please note that we wish to maintain the present parity of shareholding The present paid up share capital 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....
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....the meeting held on 13.12.2002 had allotted the impugned shares in favour of the respondents 2 & 4 in complete exclusion of the petitioners, thereby increasing the paid-up capital to Rs. 2.25 lakhs, without assigning any justification for such additional funds, in breach of their fiduciary obligations 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 Priv....
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...., the petition and the application in CA No 7/2004 seeking to implement the resolutions passed- at the annual general meeting held on 26.12,2003 are disposed, however, without any order is to costs, 7.04/2004" and the Petition having been disposed of in terms of the impugned order dated 7.4.2004, granting 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....
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....he petitioners, in fact, had never objected to the presence of these persons on the Board of Management of the Company and none of the allegations made against the directors of the company are true; that there was never any scheme or design on the part of the respondents either to keep out the petitioners or 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....
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.... impugned order, 16. The Company Law Board has, under the order, being of the opinion that the parties were required to maintain parity of shareholdings as on the date of application and that the petitioners collectively holding four shares and respondents 2, 4, 5 and 6 collectively holding like number of shares 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 whic....
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....rs in terms of this order, 17. It is in respect of this order, the petitioners are in appeal in one set of appeal in Company Appeal No.8/2002, while the original respondents are in appeal in two sets of appeals in Company Appeal Nos. 18 of 2005 &. 16 of 2005. 18. While the petitioners who were in appeal in Company Appeal 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 te....
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.... by our persuasion or otherwise, the respondents in Compa No. 8 of 2005 and appellant in Compa Nos. 16 & 18 of 2005 were asked to indicate their say in writing to the court through another memo, We have received the memo filed on behalf of respondents 1, 2 and 4 in Compa No. 8 of 2005 who also happen to he appellant in Compa Nos.16 and 18 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 furthe....
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....nd 398, that a solitary act of allotting shares in the manner as per the resolution of the Company dated 13.12.2002 can never be elevated to a situation of an act of oppression on the part of the persons in management of the affairs of the company, that it is well settled that single and solitary act would not amount to an act of oppression, that it does 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 can....
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....5 is only to seek reliefs over and above what had been granted by the Company Law Board in terms of the impugned order. 25. However, Sri Naganand, learned Senior Counsel has defended the order of the Company Law Board by submitting that the order passed by the Company Law Board was not at all enough in the facts and circumstances of the ease but was still required to 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 ter....
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....y, that the mala fide manner of exercise of power vested in the Board of Management is writ large in the action of the company, particularly in terms of the Resolution dated 13.12.2002, that this resolution cannot be termed as a solitary act of oppression but is preceded by serious acts of omissions and commissions, some of which, though in the context of manner of managing the sister concerns of the 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 sh....
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....ees for the shareholders and who function within the limits of the Memorandum of Association and Articles of Association of the Company, that particularly in the matter of issue of additional shares should make allotment for proper purpose, and such duty they owe to all shareholders of the company; that provisions of Section 81 of the Act regulates the raising of further capital and issue of shares by a company; 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 ....
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....e impugned order of the Company Law Board, looked into the pleadings in the present appeals and considered the submissions made at the Bar and the good number of authorities relied on by the respective counsels. 29. Section 397 and 398 of the Companies Act have been a fertile ground for litigation amongst the warring groups and shareholders in a company, particularly as human nature is to corner as much benefits 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 ....
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....shareholders who incidentally happen to be rebel and not to the liking of the other shareholders who have become the company petitioners before Company haw Board. 33. It does not require a legal expert to recognize that the manner of such allotment is not fair not even uniform. Even the lay person recognizes that. But the beauty of law is to convert things to make a common man not to understand and to convert the obvious 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, ....
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....ition u/s 397 and 398 of the Act and in terms of the judgment dated 12.8.2009 rendered in the case of Vijayan Rajes v. MSP Plantations (P.) Ltd. [2010] 98 SCL 383 (Kar.). Some of these aspects had been examined by a Division Bench of this Court of which one of us was a member and the scope of petition u/s 397 was to some extent was examined in this appeal. 39. We are of the clear view that to constitute an act of oppression it is 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 ....