TaxTMI 
TaxTMI 
2013 (5) TMI 548
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....at the Respondent No.1 himself or through his nominee continue to attend the Board Meetings along with two more Directors from that Group; (ii) directing that the quorum in the Board Meeting of Appellant No. 1 shall not be complete without the presence of at least one of the Directors from the Respondents' Group; and (iii) further directing that the Respondents' Group shall also nominate one of the Directors from their Group who is resident in India who shall be a joint signatory to the transactions with Banks and other organizations. The Learned Member of the CLB has passed the said directions against the Appellants on the ground of oppression of the Respondents who are the minority shareholders of the Company. 2. This Court (Coram: S.C. Dharmadhikari, J.) by an order dated 2nd December 2011, admitted the above Appeal and framed the following questions of law: (I) Whether the Company Law Board made an order and issued a direction to the appellantoriginal respondent No.1 in penultimate para of the judgment (Para 57) so as to deal with a situation which is summarized in para 47 of the impugned judgment?. (II) In other words, the contesting respondents to this appeal having ....
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....pany and did not raise any grievance either with regard to the management of the Company or of any nature whatsoever. With the Respondents increasing their investments/shareholding in the Company, the Respondents together hold 40 per cent shareholding in the Company and the Appellants together hold the balance 60 per cent. None of the Respondents ever provided personal guarantee for the Company. 6. Respondent No. 1 was a Director in the Company from 23rd December 1997 to 23rd January 2002 and Respondent No.2 was a Director in the Company from 23rd December 1997 to 24th March 2006. However, Respondent Nos. 1 and 2 did not attend a single meeting either of the Board of Directors of the Company or any General Meeting of the Company, save and except the EGM held on 24th May 2006. Respondent Nos. 1 and 2 also did not take any direct interest in the working/functioning of the Company except gathering information on phone or by visiting the factory once in a year. However, Respondent No.3 was a Director of the Company from 19th October 2001 to 17th October 2003. Respondent No. 3 attended several meetings of the Board of Directors of the Company and was also a signatory to the audited a....
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....esaid circumstances, the alternate resolution for sale of the undertaking was taken up for voting. Respondent No.1 suggested an amendment viz. the offers received for the sale of the undertaking be placed before the shareholders and thereafter they should be given an opportunity to give a higher offer and purchase the undertaking. The amendment was put to vote and defeated. According to the Appellants, the amendment suggested by Respondent No. 1 was defeated because it was felt that this would prevent serious bids from being received. One Mr. Girish Shetty also proposed an amendment to the resolution for sale of the undertaking, which was to the effect that the Board of Directors of the Company shall not accept to sell the undertaking for consideration less than the paid up capital of the Company, without taking the consent of the General Body of the Company. This amendment was also put to vote and was passed by the majority. The alternate resolution (Resolution 2 i.e. the sale of undertaking) was also passed by the majority. 10. Pursuant to the Resolution passed at the said EGM, the Committee for Disposal of the Undertaking constituted by the General Body held meetings in relat....
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.... filings made by the Company with the Office of the Registrar of Companies. However, till date the said information has not been provided to the Respondents; (viii) Even though the Respondents were agreeable for passing of the Resolution and investment of more money in the Company, the Appellant Nos. 2 to 7 defeated their own Resolution for expansion of plant and machinery and necessary increase in capital by way of rights issue and further borrowings; (ix) The Respondents requested Appellant Nos. 2 to 7 to amend the resolution for sale by proposing that right to better the best offer received for the sale of the undertaking be given to Members of the Company a proposal which was rejected by Appellant Nos. 2 to 7; (x) Appellant No. 4 offered to buy shares of the Respondents at Rs. 12.50 per share, which offer the Respondents refused and the Respondent Nos. 3 to 11 countered the offer of Appellant No. 4 by offering Rs. 18 per share to the Appellants; (xi) Appellant No. 4 offered to sell the Company to the Respondents at Rs. 38 crores but raised the price to Rs. 50 crores when the Respondents agreed to the price of Rs. 38 crores; (xii) The Company has to repay 608.75 l....
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....he CLB as follows: (i) Respondent Nos. 1 and 2 are residents of Kenya and apart from making financial investments in the equity of the Company during their association with the Company since 1997, have never participated in the management or the running of the Company. During their tenure as Directors or even thereafter, they have not attended a single Board Meeting or General Body meeting. The only meeting ever attended by Respondent No. 1 was the EGM held on 24th May 2006, which he admittedly attended as a Shareholder and a Member. The Respondents have not attended any meeting of the Company even after the filing of the Petition. Not a single letter nor any communication has been addressed by the Respondents to the Company or any of the Appellants/Directors to make any enquiry about the schedule of the Board Meetings or accounts or with respect to any other affairs of the Company. None of the Respondent Nos. 1, 2 and 3 who have been Directors of the Company have ever provided their personal guarantee for the Company and in fact the reason for Respondent No.1 resigning from the Directorship of the Company was that he did not wish to furnish any personal guarantee for the Compan....
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.... in his correspondence dated 11th May 2006 addressed to the Company, Respondent No.1 has stated that he will be attending the meeting as a (vi) The allegation of share certificates not being handed over to the Respondents is false and incorrect. The share certificates were handed over to Respondent No.3 who was a representative Director and was visiting the plant on a day to day basis. Not a single communication or demand is made, until in the petition the allegation of nonreceipt of share certificates is made for the first time. Share Certificates were found from the drawer of Respondent No.3 which have been admittedly handed over on 16th March 2007 to the Respondents before the CLB. (vii) Resolution No.1 placed before the EGM convened on 24th May 2006 pertained to the expansion of the plant and machinery and necessary increase in capital by way of rights issue and further borrowings and it was suggested that the shareholders holding more than 5000 shares should provide their shares as personal guarantees to the State Bank of India in order to secure a term loan of Rs. 11 crores. This was objected to by Respondent No.1 as can be seen from the minutes of the EGM held on 24th ....
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....) whereby they have sought the reinstatement of Respondent No.1 as a Director on the Board of the Company and reservation of a permanent place on the Board for the representative of the Respondents. The Respondents cannot seek modification of the relief by stating that the Respondents were now seeking a representation on the Board proportionate to their shareholding. (xi) The Respondents have not made out any case against the Appellants for oppression and/or mismanagement and the Petition deserves to be dismissed with costs. 14. The Appellants have before this Court, repeated their submissions recorded hereinabove. They have submitted that the Learned Member of the CLB has set out the submissions of the parties in great detail. However the Learned Member of the CLB has without application of mind and without appreciating any of the submissions, passed an order which is totally perverse and which in fact will bring about a deadlock as regards the functioning of the Company. Though the Respondents failed to establish any oppression of the minority shareholders and/or mismanagement of the Company and have given up all their prayers save and except prayer clause (c ), whereby the....
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....f record that the counter offer by the Respondents to take over the Company was Rs. 38 crores, which figure was provided by the Appellant No.4 himself. This offer was turned down. The apprehension of the Respondents is that on the one hand the appellants were agreeable to mere return of capital of Rs. 11 crores but were not willing to allow the Respondents to take over the socalled unviable undertaking at Rs. 38 crores (being the price initially quoted by the Appellants themselves)". 16. It is further submitted by the Respondents that the CLB has rightly observed that with a substantial holding of 40 per cent and with no returns on their investment and looking at the nontransparent manner in which the sale was sought to be done, the Respondents had a valid apprehension as regards the conduct and management of the Company. In fact, by wanting to remove the Respondents, by buying out their shareholding at unfair rates and pushing them out of the Company, the Appellants were oppressing the minority shareholders of the Company viz. the Respondents. Even as regards the manner of dealing with the offers received from third parties, pursuant to the advertisement, on what basis the Boar....
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.... Coleman & Co. vs.. Union of India 1997 (47 Comp. Cases 92) (Paras 116 onwards) ; and (c )the Andhra Pradesh High Court in the case of Sri Ramdas Motor Transport Ltd. vs. Karedla Suryanarayana and others (2002) 110 Comp. Cases 193 (Paragraph 116 onwards). 18. I have considered the submissions advanced on behalf of the parties and also the case law relied upon by them. From a perusal of the impugned order, I find that though the submissions of the parties have been recorded at length, the discussions qua the submissions made by the parties and the reasoning given in support of the finding that the minority (Respondents) have been oppressed by the majority is not adequate or satisfactory. In fact it is pointed out by the learned Senior Advocate appearing for the Appellants that in paragraph 55 of the impugned order, the Learned Member has discussed the settled proposition of law qua the fiduciary capacity of directors and their duty to make full and honest disclosure to shareholders, and the fact that equity prohibits directors who are akin to trustees, from making any profit. It is submitted that the said paragraph does not consider or state as to how the principles enunciated th....
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....which have been ploughed back into the Company and utilized for reduction of borrowings in order to save interest thereon. There are no overdue secured loans or outstanding unsecured loans and the overall liabilities have been substantially reduced (Annexure R6/Pg. 258). 20. Despite the aforesaid facts being placed before the CLB, the Learned Member of the CLB has, without taking a note of the aforesaid facts submitted,and without taking the same into consideration, erroneously come to a completely bald finding that, " in the interest of the R1 Company and in the interest of the petitioners and the Respondents, the R1 Company cannot be left to be run in the manner being run at present". 21. It is alleged in the Petition that Respondent Nos. 3 to 11 have not been handed over their share certificates and the Respondents were not forwarded with copies of the balance sheet despite requests, nor were they forwarded any notices of meetings by the Company. Respondents Nos. 3 to 11 have until the filing of Petition on 1st July 2006 never protested about the alleged nonreceipt of the share certificates at any stage. Respondent No. 3 was on the Board of Directors of the Company till Se....
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....nts, upon balancesheets of any Company being duly filed by the Company with the Registrar of Companies,, the same becomes a public document available to the public at large. Thus the Appellants had absolutely nothing to gain by keeping back the balancesheets from the Respondents. The only letter written to the Appellants by the Respondents is the letter dated 11th May 2006 by the Respondent No.1 to the Chairman of the Company. In the said letter not a whisper is made about the Respondent No.1 or the other Respondents not having received any notices qua the meetings of the Company. The letter dated 11th May 2006 written by the Respondent No.1 to the Chairman of the Company was immediately responded to by the Company in its letter dated 16th May 2006. In paragraph 3 of the said letter, it is categorically recorded that the statement of accounts were provided to the Respondent No.1 from year to year and pursuant to the request of the Respondent No.1 the balancesheets for the last five years were forwarded along with the said letter to the Respondent No.1. Not only has the Respondent No.1 not denied the fact of having received the statement of accounts by the Company from year to year,....
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....nure of Directorship of the Company provided any guarantee to Banks and Financial Institutions from which monies were borrowed by the Company. According to the Appellants, since the Respondents were not wanting to give any guarantee to Banks and Financial Institutions from which monies were borrowed by the Company, they were not keen on continuing as Directors of the Company. For this reason, Respondent No.1 informed the Appellant No.2 in the year 2002 that he is desirous of resigning as a Director from the Board of the Company and that he would also be sending a letter to this effect. Accordingly his resignation was accepted in the meeting of the Board of Directors held on 23rd January 2002 and the same also featured in the balancesheet for the year ending 31st March 2002, which balancesheet is admittedly signed by Respondent No.3. Though the Respondent No. 1 in July 2006 for the first time made a grievance in the Company Petition that he was removed without his knowledge as a Director of the Company in 2002, and that he came to know about it only in the year 2005, Respondent No.1 has failed to explain as to when he came to know of his alleged removal in the year 2005 and through ....
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....rn and had not run into a financial crunch. Accordingly, an EGM was convened on May 24, 2006 and notices (along with the requisite explanatory statement and the proposed resolutions of the same) were sent to all the shareholders, including the Respondents. The said notice ( Annexure R7 Pgs. 259 to 266 Vol. I) was duly received by the Respondents and it was in response to this notice that Respondent No.1 addressed the letter dated May 11, 2006 to the Company ( Annexure D at pg. 198 Vol. I). As can be seen from the explanatory statement appended to the notice, Resolution No. 2 for sale of the undertaking was to be considered and voted upon only if Resolution No. 1, for expansion of the Plant and Machinery and necessary increase in capital by way of Rights Issue and further borrowing, did not find support with the shareholders of the Company. The EGM of the Company held on May 24, 2006 was attended by Respondent Nos. 1 to 3. The minutes of the said EGM of the Company are on record as Annexure R10 (at pages 272 to 287 Vol. I). From the said minutes, it is apparent that Respondent No. 1, at the outset recorded his objection to the resolution whereby the Board of Directors was empowered ....
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....al which was passed, was reasonable and adequately protected the interests of all the shareholders. I am of the view that the Appellants have therefore given cogent reasons as to why the proposal of Respondent No.1 to amend the said Resolution No. 2 was rejected upon being put to vote viz. that if the shareholders of the Company were to have a right to better any bids received by the Company, it was felt that no bid or at least no serious bids would have been received by the Company for the said undertaking. This appears to be a genuine apprehension on the part of the Appellants who have after considering the proposed amendment as suggested by Respondent No.1, rejected the same by majority. The said rejection of the proposal to amend Resolution No.2 after application of mind, by no stretch of imagination, as suggested by Respondent No.1, can be termed as an act of oppression on the part of Appellants against the minority shareholders, more so when all the shareholders were given a right to bid for the undertaking at the first instance i.e. along with other bidders so that the other bidders would not feel that the bids invited from them is a mere sham and ultimately the undertaking ....
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.... their shares in the Company. The Appellants have relied on the decision of the Calcutta High Court in the case of Maharani Lalita Rajya Lakshmi vs. Indian Motor Co. AIR 1962 Cal 127 in support of their submission that it is well settled law that nondeclaration of dividend does not amount to oppression of the shareholders. In any case as explained in the affidavitinreply of the Company before the CLB, it has ploughed its profits back into repayment of debt and acquisition of assets (Pg. 215 Vol. 1). By doing so, the Company has ensured that it has not defaulted on its obligations to Bankers in servicing its debt and has also reduced its debt (Pg. 258 Vol.1). A decision to this effect taken at various meetings, has also been supported by Respondent No.3 who was present at such meetings. Again it is not the case of the Respondents that the profits of the Company have been misappropriated and/or siphoned off by the Appellants. In view thereof, again the Respondents have not established any case of oppression. 27. The Appellants in view of the opposition and litigation initiated by the Respondents, decided not to sell the undertaking and in fact informed the CLB that in view of all ....
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....mphasized the nonparticipation of the Respondents in the affairs of the Company and questioned the right of the Respondents to stay on in the Company after initiating litigation with the Appellants. Further the Appellants questioned the legality of the Respondents orally changing/modifying the reliefs sought and submitted that it was the Respondents who ought to exit the Company and for the fair value of their shares. It is settled law that the valuation date has to be approximately close to the date of the filing of the Petition. (ii) In paragraph 57 of the impugned order, the following directions were given to the Company: (a) The Company was directed to amend its Memorandum and Articles of Association so as to give Respondents proportional representation on the Board of Directors of the Company. Till this was done, Respondent No. 1 (or his nominee) was to continue as a Director along with 2 more Directors from the Respondents' Group. This direction has been passed in complete disregard to the contention of the Appellants that those Respondents who were Directors of the Company had voluntarily resigned as they did not wish to provide personal guarantees for securing financi....
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....t is clear that Respondent No. 1 himself, was not per se opposed to the sale of the undertaking. However, even after Resolution No. 2 was passed, no bids for the undertaking were received from the Respondents. Therefore, there was no question of the Respondents "feeling" oppressed on account of the Resolution for sale of the undertaking having been passed at the EGM held on May 24, 2006. (iv) In any event having specifically given up all the prayers in the Petition except prayer 'C', at the hearing before the CLB, in my view it was not open to the CLB to pass the aforementioned extreme and drastic directions. The said directions have the effect of creating a deadlock in the affairs of the Company where none existed earlier. Further, the said directions have no relation whatsoever with the alleged grievance (which, in any event, was totally specious and untenable) of the Respondents or with the submissions made by the Respondents before the CLB. Question No.2: (II) In other words, the contesting respondents to this appeal having stated before the Company Law Board that they do not wish to press for reliefs in terms of prayers (f) and (g) of the Company Petition and that the....
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....ion a further relief or reliefs, as the court may deem fit and proper, are warranted. (See Bennet Coleman & Co. v. Union of India (1977) 47 Comp Cas 92 (Bom) and Syed Mahomed Ali v. R. Sundaramoorthy AIR 1958 Mad 587: (1958) 2 MLJ 259: (1958) 28 Comp Cas 554). 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 arrive at a conclusion upon analysing the materials brought on record that the affairs of the company were such that it would be just and equitable to order winding up thereof and that the majority acting through the Board of Directors by reason of abusing their dominant position had oppressed the minority shareholders. The conduct, thus, complained of must be such so as to oppress a minority of the members including the petitioners visavis the entire body of shareholders which a fortiorari must be an act of the majority. Furthermore, the fact situation obtaining in the case must enable the court to invoke just and equitable rules even if a case has been made out for winding up for passing an....
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.... Respondents to arm twist the Company on every issue and thereby ensure that there is a deadlock on every issue. In other words, by the impugned order, the CLB has created a situation for a potential deadlock where none existed earlier. It is once again reiterated that the aforesaid directions have been passed by the CLB in a case where (I) the allegations of the Respondents as regards alleged 'oppression' are demonstrably false and incorrect; and (ii) all the prayers except prayer 'c' in the Petition were expressly given up by the Respondent. Therefore, far from being in the interest of the Company, the said directions of the CLB are extremely detrimental and prejudicial to the interest of Appellant No.1 Company and are therefore not permissible under Section 402 of the Companies Act, 1956. Question No.4: (IV) Whether in exercise of these powers, can the Company Law Board ignore pleadings and the submissions of the parties and make any order or direction so as to deal with a situation of alleged deadlock because of the infighting and disputes between the parties, despite no material to prove such a situation is placed before it?" (i) At the outset, neither was there any d....