TaxTMI 
TaxTMI 
2007 (3) TMI 789
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....illegal ousting of the respondents 7 to 9 (C.P. No. 50 of 2003); respondents 5 to 9 (C.P. No. 51 of 2003) and respondents 6 to 10 (C.P. No. 52 of 2003) from the office of directors of the Companies; (f) misappropriation of funds; incurring of advertisement expenses disproportionate to the turnover and other financial irregularities on the part of the respondents 2 to 5 (C.P. No. 50 of 2003); respondents 2 to 4 (C.P. No. 51 of 2003) and respondents 2 to 5 (C.P. No. 52 of 2003); (g) illegal disposition of the fixed assets, plant and machinery and improper management of the assets and funds of the Companies; (h) illegal convening of the annual general meeting of the Companies; (i) illegal acquisition of a large number of shares from other shareholders in violation of the relevant articles of association of the Companies and section 108 of the Act; (j) abuse of fiduciary position by the second respondent by illegal transfer of shares and improper reconstitution of the boards to usurp control over the Companies and secure control over the trade mark; and (k) improper maintenance of accounts of the Companies; and (l) a large scale suppression of turnover by the Companies, have invoked th....
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....naged as quasi-partnership based on mutual trust and confidence and with more or less equal shareholding among the first petitioner and respondents 2 & 7 (C.P. No. 50 of 2003); first petitioner and respondents 2 to 5 (C.P. No. 51 of 2003) and first petitioner and respondents 2 & 6 (C.P. No. 52 of 2003). There was also equal participation by these persons in the management of the Companies. In 1996 M/s. New Hope Food Industries Private Limited (NHFIPL) was incorporated by the petitioner along with seventh respondent (C.P. No. 50 of 2003) and certain others for manufacture of cakes. In 1998 M/s. Milka Nutriments Private Limited (MNPL) was promoted for manufacture of biscuits by the promoters of PBPL and of NHFIPL. In 2000 M/s. Milka Industries Private Limited was promoted in association with all the promoters except the second respondent, of MNPL. The seventh respondent (C.P. No. 50 of 2003) was managing director in charge of the day-to-day management of the affairs of these Companies. These Companies have been marketing the products under the trademark "Milka", registered in the name of PBPL, on payment of royalty as per the understanding between the promoters. All the Companies wer....
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....econd respondent proclaimed to be managing director of the Companies from July 2003, without any notice of the board meetings to the first petitioner. The grievance of the petitioners is total absence of notice and not the mode of service of notice of the board meetings by hand delivery, as claimed by the respondents. If notice of the board meeting is not sent to a single director, the entire proceedings of the board meeting are vitiated. It was held in (a) Akbarali A. Kalvert v. Konkan Chemicals (P.) Ltd. [1997] 88 Comp. Cas. 245 (CLB) that (a) the company shall give notices of board/general meetings to directors/members so long as they continue to remain so; and (b) certificates of posting are not reliable since it is too well known that certificates of postings can be got hold of without actually putting the letters in the post; (b) Sikkim Bank Ltd. v. R.S. Chowdhury [2000] 102 Comp. Cas. 3871 (Cal.) that any board meeting held without any notice and/or unreasonably short notice to the directors is bad and invalid and that the decision taken at the board meeting is invalid; (c) Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp. Cas. 417 (SC) that any board meeting conven....
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.... Co. (P.) Ltd. v. Surjeet Malhan [1997] 88 Comp. Cas. 750 (SC) that (a) the articles of association of a private company are a contract between the parties; (b) when the articles provide that "no transfer of any share in the capital of the company shall be made or registered without the previous sanction of the directors...." then previous sanction shall be obtained from the directors for transfer of the shares held by the members, which connotes that there should be a written resolution accepting the transfer from the transferor to the transferee and such previous sanction should precede the handing over of the shares. This legal position has been followed by this board in Radhe Shyam Tulsian v. Panchmukhy Investments Ltd. [2003] 113 Comp. Cas. 298 (CLB). Clause 18 of the articles stipulates that "No member shall be entitled to transfer the shares in the company except with the previous sanction of the Board of Directors", which has not been satisfied in the present case. Article 18 does not permit any negotiated transfer as between members on their own or at the wish of any shareholder. A shareholder on dmeciding to transfer his shares loses the right to choose the transferee. Fu....
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.... have the effect of converting the existing minority of the second respondent group into majority and reducing the petitioners group to the status of minority in the Companies. The second respondent and his family members constituting the board approved the impugned transfers to themselves at the board meeting held on 25-8-2003, which can be nothing more than oppressive. This Board in (a) S. Varadarajan v. Udhayem Leasings & Investments (P.) Ltd. [2005] 125 Comp. Cas. 8531 (CLB - Chennai) held that any transfer of shares without exhausting the rights of pre-emption in violation of the articles amounts to oppression; and (b) M.M. Dua v. Indian Dairy & Allied Services (P.) Ltd. [1996] 86 Comp. Cas. 657 (CLB) that where there is a provision in the articles of association of a company for pre-emption by members in the matter of transfer of shares, a transfer in violation of such provisions constitutes oppression; and (c) Akbarali A. Kalvert's case (supra) that any transfer of shares in violation of the articles amounts to denying a privilege available to the shareholder. The fiduciary position of the board has been grossly abused by the second respondent in fabri- cating the transfer o....
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....pondent has brought out material changes both in terms of shareholding and management by means of the impugned transfer of shares, thereby their affairs are being conducted in a manner prejudicial to the interests of the Companies and their shareholders. This Board in S. James Fredrick v. Minnie R. Fredrick [2000] 24 SCL 181 (CLB) held that appointment of additional directors disturbing parity in the constitution of board of directors of a family company would constitute an act of oppression; and (b) Kshounish Chowdhury v. Kero Rajendera Monolithics Ltd. [2002] 36 SCL 497 (CLB - Delhi) that appointment of additional directors made to gain control of the board is neither bona fide nor in the interest of the company. PBPL owns the trademark "Milka" and the same is licenced to all other group companies and, therefore, by securing control over the parent Company, the second respondent gained control over the trademark and thereby cornered all the benefits arising out of the popular trade-mark. The Companies being private limited companies are managed on quasi-partnership principles and it is rather unjustifiable for a single shareholder to resort to a series of oppressive acts so as to....
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.... 2003); fifth respondent (C.P. No. 51 of 2003) and sixth respondent (C.P. No. 52 of 2003) is questioning the genuineness of his signature in the instruments of transfer. u The second respondent resorted to a large scale non-accounting of turnover and siphoning off funds, which came to light, pursuant to raid of the factory premises of the Companies conducted in June 2005 by the Central Excise Department. Furthermore, the Sales Tax Department found out that the Companies are engaged in a large scale unaccounted turnover. No audit of accounts has been done after 31-3-2003 and no board meetings have been convened for the past more than two years and no details concerning the affairs of the Companies have been placed before the boards. The Companies have been incurring extensive expenditure on advertisement without being backed by any board resolution and corresponding increase in turnover of the Companies. u The Companies were engaged, during the years 2003-2006, in the new line of manufacture of cakes, incurring extensive capital investment to install plant and machinery for manufacture of cakes and extensive expenditure on advertisement, without any board resolutio....
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....of the memorandum of association. 4. Shri P.H. Arvind Pandian, learned Counsel opposed the company petition on the following, among other grounds : u All the respondents and erstwhile promoters live in the same vicinity and have been close individuals and hence it has been the regular practice of the Companies to send notice of any meeting to members and directors either through hand delivery or by post or courier. Section 53(1) permits the company to serve documents on the members personally. No grievance has been raised in this behalf for the last ten years. When the first petitioner was Chairman of the Companies, he had also followed the same procedure in regard to issue of notices for the board meetings and conduct of the same. However, the board of directors of the Companies decided to send the notice by courier for the meetings held on 30-10-2003 and adopted and approved the accounts. Though the first petitioner attended the board meetings on 30-10-2003, he failed to record his presence by not signing the attendance register. The first petitioner has been regularly attending the registered office and work premises of the various group companies and he is als....
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.... alleged by the petitioners, especially when removal of auditor means removal before the expiry of his term of office which is dealt by section 224(7) of the Act. However, in the present case, it has been proposed at the annual general meeting, pursuant to a special notice received from some of the shareholders, for appointment of an auditor after expiry of the term of office of the present auditor under section 225 of the Act and therefore, any such change in the auditors of the Companies will be made in strict compliance with the principles of shareholders democracy and therefore, the proposed appointment cannot be questioned, unless the provisions of law are not duly followed. However, the present auditor continues to be auditor of the Companies, in view of the stay granted by this Bench in holding the annual general meeting for the year 2003. Consequently, the accounts of the Companies for the year 2003-04 could not be audited, since the auditor was appointed by the members of the Companies at the annual general meeting during the year 2002 to audit the accounts only for the financial year 2002-03. u Clause 26 of the articles of association empowers the Companies to ca....
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....egal act need not be oppressive; (b) even if there is violation of the provisions of the articles of association, the same could not be considered an act of oppression, especially when, the aggrieved shareholder would have been entitled to only 23 per cent of the shares; and (c) if there is nothing in the articles prohibiting a member from identifying a willing member on his own and negotiating the price for the shares, any transfer cannot be said to be violative of the articles. If the share transfers are held invalid, still the shares would revert back only to the members who were holding the shares earlier. There has not been violation of the articles and no case of oppression has been made out by the petitioners. Even assuming that the first petitioner had attended the board meeting and voted against the share transfers, still the share transfers would have been approved by a simple majority. Furthermore, the Companies have duly recorded the share transfers in the minutes book of the board meetings, which is conclusive evidence of the proceedings recorded under section 194 of the Act. The Companies have produced the minutes of various board meetings substanting the approval of ....
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....lared invalid. u The petitioners claim that article 26 does not dispense with the requirement of section 171(2) of the Act, whereas section 170(1)(ii) provides that the provisions of section 171 shall, unless otherwise specified therein or unless the articles of the company provide, apply with respect to general meetings of a private company which is not a subsidiary of a public company. In the instant case, clause 26 contains a specific provision permitting convening of annual general meeting at a short notice of not less than 7 days and therefore, section 171 shall not apply. Nevertheless the Company did not convene the annual general meeting on account of the stay granted by this Bench and therefore, the grievances of the petitioners in this regard do not survive. u The issue relating to 'trademark' of the Company is subject-matter of a civil suit which is already pending before the High Court of Madras. This grievance covered under the intellectual property law cannot constitute an act of oppression or mismanagement. All acts of mismanagement have been raised by means of filing an affidavit, only after filing of the company petition and must, therefore, be ign....
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....nterest of the company; (b) if the company has a lien on such shares; and (c) if the number of members exceeds the limit prescribed under the articles. A careful analysis of the articles suggests that no shareholder is empowered to transfer his shares in the Companies except with the previous sanction of the board of directors. The language used in article 18 being in the negative form, it emphasises the insistence of compliance with "the previous sanction" of the board of directors, before the transfer of shares by any member in the Companies and therefore, in my considered view, the requirements of article 18 are mandatory in character and not merely directory, irrespective of the fact whether the transfer of shares is in favour of any member or non-member. By virtue of article 19, no share is transferable to a non-member provided any member is willing to purchase the same at a mutually agreeable value. It is, therefore, open to a member before transferring his shares in favour of a non-member, to ascertain the willingness of any member to purchase the shares so offered by any selling member, which is however subservient to article 20, according to which, any member intending ....
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....the instruments of transfer and minutes of various board meetings of the Companies produced before the Bench that the second respondent and his family members and/or associates had acquired the impugned shares of the Companies as per the following details : PBPL (C.P. No. 50 of 2003) S.No. Name of transferor Name of transferee No. of shares Date of transfer Date of sanction by the Board 1. K. Panner Selvam K. Jayakrishnan 250 22-8-2003 25-8-2003 2. R. Rajagopal Shanthini Jayakrishnan 200 22-8-2003 25-8-2003 3. G.S. Revathy Shanthini Jayakrishnan 100 22-8-2003 25-8-2003 4. S. Maheswari Shanthini Jayakrishnan 450 22-8-2003 25-8-2003 5. M. Subramaniam Shanthini Jayakrishnan 500 22-8-2003 25-8-2003 6. M. Subramaniam K. Jayakrishnan 300 22-8-2003 25-8-2003 7. G.D. Selvaraj Shanthini Jayakrishnan 1,400 22-8-2003 25-8-2003 8. Saly James K. Jayakrishnan 950 22-8-2003 25-8-2003 9. Thangamma Joseph K. Jayakrishnan 350 22-8-2003 25-8-2003 S.No. Name of transferor Name of transferee No. of shares Da....
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....30-7-2003 21. K. Bhaskar K. Jayakrishnan 432 18-7-2003 30-7-2003 22. Joy John & Usha Joy K. Jayakrishnan 1,500 18-7-2003 30-7-2003 23. V.M. Joseph K. Jayakrishnan 2,000 18-7-2003 30-7-2003 Total 1,3450 PBHPL (C.P. No. 52 of 2003) S.No. Name of transferor Name of transferee No. of shares Date of transfer Date of sanction by the Board 1. K. Panner Selvam K. Jayakrishnan 100 16-11-2003 29-11-2003 2. N.Parameshwaran J. Ajay Shivakumar 400 16-11-2003 29-11-2003 3. G.S. Latha N. Chellammal 387 16-11-2003 29-11-2003 4. Ranganayakiammal N. Chellammal 500 22-8-2003 25-8-2003 5. P.R. Manickam K. Jayakrishnan 500 22-8-2003 25-8-2003 6. R. Murugan K. Jayakrishnan 500 22-8-2003 25-8-2003 7. G.L. Venkatesh K. Jayakrishnan 1,000 22-8-2003 25-8-2003 8. M. Loganathan K. Jayakrishnan 500 22-8-2003 25-8-2003 9. G.S.Subramaniam K. Jayakrishnan 500 22-8-2003 25-8-2003 10. P. Shanmugam & S. Jayalakshmi K. J....
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....gh. The Board noticed that all the transferees as covered by the transfer deeds were the existing members of the Company. The Board further noted that transfers contemplated from the transferors to the transferees were in accordance with article 19 of the Articles of Association and transfer deeds duly executed and stamped had been submitted to the Board for necessary approval. The Board after due consideration passed the following resolutions." It is unequivocally clear from the above observations of the board of directors of the Companies forming part various resolutions and the board resolution dated 29-11-2003 of PBHPL that "..... the transfer deeds duly executed and stamped had been submitted to the Board for necessary approval". It is, therefore, beyond doubt that none of the transfer instruments including the one dated 10-7-2003 in relation to 50 shares of PBHPL reportedly gifted in favour of J. Yuvana Rekha, daughter of the second respondent, impugned in the present proceedings, is preceded by previous sanction of the board of directors of the Companies in tune with the mandatory requirements of article 18. The respondents have not caused production of any material to es....
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....he company, which was in financial difficulties. Thus, the decision cited by Shri Pandian, learned Counsel has no application to the cases on hand. The transfer of 400 shares of PBHPL by N. Parameshwaran in favour of J. Ajay Shivakumar, a non-member, as on the date of transfer, in terms of the instrument of transfer dated 16-11-2003, in the absence of any material showing the issue of any transfer notice by the transferor, is hit by article 20. Any transfer of shares denying a privilege available to the member in violation of the articles has been disapproved in Akbarali A. Kalvert's case (supra). This Board held in (a) S. Varadarajan's case (supra) and (b) M.M. Dua's case (supra) that any transfer of shares without exhausting the rights of pre-emption in violation of the articles would constitute an act of oppression. In this context, the assertion made on behalf of the respondents that all the impugned transfers would have been approved by the boards even with participation of the first petitioner does not merit any consideration. Shri R. Vidhya Shankar, learned Counsel, while placing reliance on M.M. Dua's case (supra) pointed out the spirit behind the pre-emptive provisions of ....
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....mpanies. At the board meeting held on 26-6-2003, (a) approval for sale of the assets of PBPL was accorded; and (b) the respondents 4 and 5 were co-opted as directors of PBPL. While the respondents 8 and 9 had resigned from the post of managing director and director respectively, respondents 3 and 6 came to be appointed as directors at the board meeting held on 30-7-2003. The resignation of the seventh respondent from the office of the director was accepted by the board of directors at the meeting held on 18-8-2003. The respondents have produced copies of the notices dated 21-7-2003 and 9-8-2003, purportedly sent by post, convening the board meeting of PBPL on 30-7-2003 and 18-8-2003 respectively. There has been no copy of the notice of the board meeting produced before the Bench, said to have been held on 26-6-2003. The extracts of the attendance register indicate that leave of absence was granted to the first petitioner from attending these board meetings of PBPL. At the board meeting held on 30-7-2003, while resignations of the respondents 5 to 9 were accepted, third respondent and one Smt. Meenakshi Anuradha came to be co-opted as directors of MBPL. Similarly, while Smt. M....
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.... one Smt. N. Chellammal); and at the board meeting held on 29-11-2003 (650 shares in favour of the fourth respondent). Thus, 13,450 shares of MBPL were acquired by way of transfer by the respondents 2 to 4 and one Smt. N. Chellammal. The extracts of the attendance register indicate that leave of absence was granted to the first petitioner from attending the board meetings of MBPL held on 30-7-2003 and 25-8-2003 and further the first petitioner was absent for the board meeting held on 29-11-2003. The transfer of shares impugned in C.P. No. 51 of 2003 was approved (on 30-7-2003) by the respondents 2 & 5 to 9; (on 25-8-2003) by the respondents 2 & 3 and one Smt. Meenakshi Anuradha, who is reportedly nominee of the second respondent; and (on 29-11-2003) by the respondents 2 to 4. The board of directors of PBHPL accorded sanction under article 18 read with article 23 to transfer the shares impugned in C.P.No. 52 of 2003 at the board meeting held on 14-7-2003 (550 shares in favour of the second respondent and one Ms. Yuvana Rekha); at the board meeting held on 30-7-2003 under article 18 (8,313 shares in favour of the respondents 2 and 4), at the board meeting held on 25-8-2003 under a....
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....r, there is no material whatsoever, to substantiate either dispatch or service of any of such notices, as contended by them. The Companies have not chosen to produce the dispatch register or the books of account showing expenses incurred for sending the notice of board meetings by post. The appointment and/or resignation of directors and transfer of the impugned shares came to be considered by the board of directors of the Companies at as many as 12 meetings, out of which the first petitioner reportedly obtained leave of absence for 9 board meetings and further refused to sign the attendance register in respect of two of the board meetings and absented at one board meeting. In the absence of any material to substantiate the purported request from the first petitioner seeking leave of absence, it is quite improbable that the first petitioner had either knowledge of the board meetings or requested leave of absence from attending the board meetings and therefore, the extracts of the attendance register produced by the respondents, to my mind, are self serving documents, without advancing the case of the respondents. The settled legal proposition is that notice to every director of a m....
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....ailesh Rajnikant Parekh's case (supra) have not been duly satisfied before effecting the transfer of some of the shares in favour of the second respondent and his family members. The impugned transfers having been found to be violative of the articles of association of the Companies, it is nothing but futile to go into various deficiencies appearing in the instruments of transfer produced in the present proceedings. The charges levelled on account of the purported unaccounted turnover, consistent increase in liabilities, sundry debtors, accumulated losses, advertisement expenses without proper authority, diversion of profits, unauthorised sale of assets etc., in the affairs of the Companies have been merely brushed aside by the respondents on the sole ground, as held in Asoka Betelnut Co. (P.) Ltd.'s case (supra) that the facts arising subsequent to the petition cannot be relied upon. However, it has to be borne in mind that while validity of the company petition will be adjudicated on the facts existing at the time of presentation of the petition, the facts arising subsequent to the filing of the petition will always be taken into consideration for moulding the reliefs. It is o....