TaxTMI 
TaxTMI 
2001 (10) TMI 1173
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....s hold 90 per cent shares in the company and also for the restoration of the Board with the petitioners in majority. 2. The undisputed facts of the case are that this company was incorpo-rated in August, 1992 with an authorized capital of Rs. 25 lakhs divided into 25,000 shares of 100 each. Later on the authorized capital was raised to 1 crore consisting of 10 lakhs equity shares of 10 each on 1-2-1995. As on 31-7-1995, the paid up capital was Rs. 36 lakhs comprised in 3,60,000 shares and all the shares were entirely held by the 2nd respondent and his family members. With a view to promote a Group Housing Scheme, the company entered into an agreement to purchase 8 acres of land in Bangalore in March, 1992. On 1-8-1995, the petitioners entered into a Memorandum of Understanding (first MOU) with the company and the 2nd respondent by which the cost of development of the land was estimated at Rs. 21.78 crores of which the petitioners were to bear 90 per cent and the 2nd respondent the remaining 10 per cent. It was also agreed that 90 per cent of the shares held by the respondents would be transferred to the petitioners for a consideration of Rs. 3.24 crores and that all the director....
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....ce the petitioners into a negligible majority. There is also a dispute regarding the composition of the Board of Directors of the company. 4. Shri Sen, the Senior Advocate, appearing for the petitioners submitted as follows: When the 2nd respondent acquired the land, with a view to perfect the title to the land which needed funds, entered into an MOU with the petitioners on 1-8-1995 (Annexure A-2) by which the petitioners were to acquire 90 per cent of the shares held by the 2nd respondent and his group for a sum of Rs. 3.24 crores. Clause 11 of the MOU specifically stipulates that on payment of Rs. 3.24 crores representing full conside-ration towards acquisition of 90 per cent shares, the management and control of the company together with movable and immovable assets including the land shall be handed over to the petitioners. Accordingly, the entire amount of Rs. 3.24 crores was paid to the 2nd respondent and 1,25,100 shares were initially transferred to the petitioners on 29-2-1996 and a further 1,94,100 shares were subsequently transferred on 5-4-1997. The share certificates in respect of all these shares are in possession of the petitioners wherein 2nd respondent, in his ca....
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....the petitioners was to be repaid by the 2nd respondent together with certain rate of interest over a period of time. It is also recorded in that MOU that 90 per cent of the shares had been transferred and already given to the petitioners group. In this MOU, calculations had been based on the investment of the petitioners of over Rs. 3.24 crores, being the consideration for 88.6 per cent shares. However, this MOU was not honoured by the 2nd respondent. 6. In the meanwhile, the petitioners came to know that the 2nd respondent had appointed his son Shri Pankaj Garg (3rd respondent) as an additional director with effect from 10-4-1996. This respondent had actually resigned from the position of director on 29-2-1996 in terms of the MOU. His appointment as an additional director was not in the knowledge of the petitioners inasmuch as no notice for the Board Meeting in which he was appointed as an additional director was given to the petitioners even though the same is required in terms of section 286 of the Act. Further since none from the petitioners side attended the purported meeting on 10-4-1996 for want of notice, there was no valid quorum for the Board Meeting as out of the two ....
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.... message dated 5-6-1997, the 2nd respondent also issued a notice to convene a meeting on 9-6-1997 at Bangalore to consider the requisition notice. By a fax dated 6-6-1997 (Annexure A-16), the 2nd respondent contended that he and his group had transferred only 30 per cent shares in the company to the petitioners and further that the 2nd respondent and his group held more than 90 per cent shares in the company. The petitioner directors held a meeting on 9-6-1997 at Calcutta and passed a resolution to convene the requisition meeting on 7-7-1997 at Bangalore. Accordingly, a notice was issued on 10-6-1997 for the EOGM on 7-7-1997. On 18-6-1997, the 1st and 2nd respondent filed a suit in Bangalore OS No. 4640 of 1997 seeking for a declaration that the agreement dated 1-8-1995 had been cancelled and unenforceable and also seeking for restraining the petitioners from holding out as directors of the company. In that suit, for the first time it was disclosed that the authorized capital of the company had been increased from Rs. 1 crore to Rs. 1.36 crores and 10 lakhs equi-preference shares had been created in an EOGM held on 4-7-1995. It was also disclosed that 10 lakh equi-preference shares....
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.... issued as the same would ultra vires the memorandum. 9. As far as the payment of consideration for 1,94,100 shares is concerned, Shri Sen referred to page 331 of Vol. III and pointed out that during the period 2-8-1995 to 31-12-1996, the petitioners and their group had paid a sum of Rs. 4,25,71,000 including a sum of Rs. 1,24,61,000 paid in cash. Out of the total amount, the 2nd respondent had repaid an amount of Rs. 90 lakhs which was paid on 4-9-1995 by a demand draft, with interest on the understanding that the same would be replaced by cash payment later by the petitioners. Accordingly, the same was paid in cash in instalments. This is the cash payment which the 2nd respondent now denies to have received. He referred to the auditors certificates at pages 333 to 352 of Vol. III, wherein, the auditors, on the basis of the accounts of the petitioners group have certified the cash payment to the 2nd respondent for acquisition of shares in the company. Thus, the amount of investment made by the petitioners and their group is the order of Rs. 3.35 crores. Therefore, he submitted that there is absolutely no doubt that the petitioners had paid for 1,94,100 shares and that the 2nd r....
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....rms of the said MOU. Further, he also challenged the actual amount of investment made by the petitioners in spite of his having admitted receipt of over Rs. 1 crore in cash during the negotiations held in the Chamber of the Members of the Board. Under the circumstances, he prayed that the management of the company should be handed over to the petitioners after declaring them to be the holders of 90 per cent shares in the company. He contended that the company has taken a stand on issue of equi-preference shares only with a view to reduce the petitioners from majority to minority and therefore is a grave act of oppression (Howard Smith Ltd. v. Amtol Petroleum Ltd. 1974 1 AER 1126) and Nanalal Zaver v. Bombay Life Assurance Co. Ltd. AIR 1950 SC 172). He also pointed out that by issue of the equi-preference shares, the 2nd respondent has acted in breach of his fiduciary duties of a director and as such the issue is invalid as decided in Piercy v. S. Mills & Co. Ltd. (1920 Ch.D 77). 11. Shri Chatterjee, the Advocate appearing for the respondents 1, 8 and 9 submitted as follows : The claim of the respondents that equi-preference shares were issued is nothing but a concocted story. In....
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....ence shares into equity shares. Section 80(1), permits a company to issue preference shares only if so authorized by the articles and section 80(1)(a) also stipulates that preference shares are to be redeemed only out of the profits of the company or out of proceeds of a fresh issue. Provision of section 80(4) deals with calculation of fees and does not permit conversion of preference shares into equity shares. As per section 80(6), any issue in violation of the provisions of section 80 would be void. Therefore, even assuming that the equi-preference shares were issued and converted into equity shares as claimed by the respondents, the same being in violation of the provisions of section 80 and also of article 5, the same is invalid and has to be cancelled. 13. Shri Raghavan, the Advocate appearing for the respondents submit- ted as follows : The main issues for consideration in this petition are whether the petitioners hold 1.24 lakh shares or 3.19 lakh shares and whether equi-preference shares could be issued and whether the same were issued. Before examining the same, it is to be first examined as to whether the petitioners are trying to enforce their rights as shareholders o....
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....tioners cannot now claim any legal infirmity in the issue of equi-preference shares. 15. Shri Raghavan continued his arguments as follows : As far as the transfer of shares to the petitioners is concerned, the actual position is that only 1,25,100 shares were transferred as indicated by the petitioners in the petition at para (i) of page 10 of the petition. Only in the rejoinder, as an after thought, the petitioners have claimed that further 1,94,100 shares had been transferred. Even at this time, they had not indicated how and when the consideration for these shares was paid. They had only sought leave for producing the details. Only in the affidavit dated 3-11-1998, the petitioners furnished the details of the alleged payment wherein an amount of Rs. 4,25,71,000 is shown to have been paid by them. This includes a sum of Rs. 75 lakhs paid as a loan to the company. This also includes a sum of Rs. 20.1 lakhs paid on 31-12-1996, after the date of termination letter. No one would make such a substantial payment after demanding repayment of investment on 17-12-1996. Further, the peti-tioners have not produced any voucher in respect of the cash payments and the entries in the books o....
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....page 10 of the petition, then the disputes actually relate to the property and not the management of the company. This being the case, there is no cause of action to allege oppression against the 2nd respondent. With the second MOU, their relationship with the company as shareholders had ended and now the relationship is that of a creditor and debtor. Since the whole matter had been renegotiated and the second MOU had been signed, the only course available to the petitioners is to get this MOU executed through a civil suit and there is no scope for a 397 petition. 17. As regards the contention of the petitioners that the transfer of 1,94,100 shares had been registered in the register of members, the learned counsel submitted as follows : It is not denied that blank transfer forms were handed over to the petitioners along with the share scripts in respect of these shares. Even though in these share scripts, the 2nd respondent had made endorsement of registration, yet, other columns relating to the folio numbers and the date of registration had been left blank. Perhaps, the 2nd respondent made a mistake of handing over the share scripts to the petitioners, but not definitely after....
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....etitioners group attended this meeting. Therefore, the change in the composition of the Board was done transparently with notices to the petitioners. In so far as the list of directors filed with the ROC along with the annual return is concerned (page 124 of Vol. II), it is to be noted that this list reflected the position on that day before the AGM and not after the AGM and therefore the appointment of the 3rd respondent and cessation of the 8th and 9th respondents were not reflected. As regards the absence of the name of the 3rd respondent in that list as appointed as an additional director on 10-4-1997, it occurred due to mistake and was an omission. 19. In regard to equi-preference shares, he submitted : The first MOU specifically provides for issue of equi-preference shares for Rs. 1 crore. It also provides for increase in the paid-up capital of the company to that extent without mentioning any increase in the authorized capital since the same had already been increased on 4-7-1995, that is, earlier to the date of the first MOU on 1-8-1995 and the petitioners were aware of the same. Late filing of Form 5 would not vitiate the alteration to the Memorandum. In the Board meeti....
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....immediately, the land price was to be paid over a period of time. Initially, they were to pay Rs. 5 crores, including the consideration for the shares, of which they had paid only Rs. 2.21 crores and not Rs. 3.34 crores as claimed by them. Therefore, before claiming any relief, they have to prove that they had paid consideration for 90 per cent shares and also that 90 per cent shares had been transferred to them. A comparison of the figures of payment made by the petitioners, as revealed by them in pages 207 of Vol. II and 331 of Vol. III would reveal the contradictions in their claim. In page 127 of the petition, the petitioners themselves have averred that they had paid Rs. 1.25 crores for 1,25,100 shares. There are no other details of further payment in the petition. As per section 58 of the Evidence Act, pleadings constitute waiver of proof. Since they have not mentioned anything over Rs. 1.25 crores in the petition, they are estopped from claiming anything further. Even though the petitioners rely on the second MOU dated 6-4-1997 for their contention that the figures indicated therein would prove that the 2nd respondent had admitted the receipt of Rs. 3.24 crores, yet from the....
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.... title to the shares being false, this petition should be dismissed. 23. Shri Sen, in rejoinder submitted as follows : This petition has not been filed with the view to get the MOUs executed as contended by the counsel for the respondents. The petitioners have filed this petition in their capacity as shareholders of the company on the allegations that their majority in the Board and the shareholding had been altered by the 2nd respondent and his group and that such action is oppressive to the petitioners who are not just financiers of the project, but equity partners as admitted by the 2nd respondent himself at page 264 of Vol. II. When the 2nd respondent refuses to recognize the majority of the petitioners, it is a grave act of oppression against them, meriting the winding up of the company on just and equitable consideration. 24. In regard to the majority of the petitioners, Shri Sen submitted : The 2nd respondent has admitted in his letter of 27-12-1996 that the petitioners were the registered shareholders of 90 per cent shares and therefore, now he cannot resile from that position and he is estopped from denying this assertion. Even in the MOU dated 6-4-1997, the same is ....
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.... the transfer had been endorsed on the reverse of the certificate at the time when the shares were handed over to the petitioners, as alleged by the respondents, the ROC would not have revalidated the transfer instruments. Further, the dates on the instruments being 7/8-10-1996, could not have been handed over on 1-8-1995 as claimed by the respondents. In regard to the stand of the respondents that the transfer numbers and the register numbers etc. do not tally with the register of transfer, this stand has no bearing as the register is with the company and is susceptible to manipulation. It has been held by the CLB in Satish Chand Sanwalka v. Tinplate Dealers Association (P.) Ltd. [1998] 93 Comp. Cas. 70 1 CLB that in between the share register and the share certificate, the prima facie evidence of the share certificate has primacy over the share register. Therefore, when the proof of payment of consideration is established and the registration of transfer is endorsed on the certificates and when the share certificates are in possession of the petitioners, the 2nd respondent cannot claim that the shares had not been transferred/registered for want of consideration. 26. We have c....
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....he suit in the Calcutta High Court and the suit in Bangalore civil court. As far as the suit in the Calcutta High Court is concerned, the petitioners have filed an affidavit on 18-5-2001 stating that the said suit had been dismissed for non-prosecution and have also enclosed a copy of the order of that Court dismissing the suit for non prosecution. Therefore, the objection relating to the parallel proceedings in relation to the suit in Calcutta High Court no longer survives. In regard to the civil suit in Bangalore, it is a suit filed by the respondents and not the petitioners. Therefore, the same cannot be held against the petitioners. From the copy of the plaint filed by the petitioners, we find that in that suit the 2nd respondent has sought for a declaration that the first MOU is cancelled and therefore, unenforceable and also for a permanent injunction restraining the petitioners as holding themselves as directors and interfering with the respondents as directors. We note that the civil court has only granted an interim relief to the extent that the status quo in regard to the EOGM convened on 7-7-1997 was to be maintained. The learned counsel for the respondents also contende....
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....ided for 3 directors from the petitioners group on the Board of the company. While the petitioners acquired 18 per cent shares for a sum of Rs. 84 lakhs, the balance 42 per cent were not acquired as the same were held by foreign shareholders the acquisition of which required various clearances. In the meanwhile the petitioners had also given an inter corporate deposit of Rs. 2.15 crores. Certain disputes arose between the parties and the petitioners therein filed a suit in Bombay High Court for a decree for cancellation of the MOU and also for repayment of their investment of 2.99 crores. In view of this, the respondents took the stand that if the Bombay High Court were to grant the prayers of the petitioners, then the petitioners would not be members of the company to pursue the petition before the CLB and as such, the proceedings should be stayed/the petition be dismissed. This Board held that in view of the civil proceedings in relation to the MOU, the Board would only consider the allegations of oppression in their capacity as members. Thus this Board has been taking the view that in a petition under section 397/398, this Bench is only concerned with as to whether the allegatio....
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....e, the petitioners being 3 in number, satisfy the alternate requirement of section 399 that a petition could be filed by members constituting 10 per cent of the numerical strength of the membership of the company. Therefore, this petition is maintainable. 29. While dealing with the merits of the case, it is necessary to note that both the sides have engaged advocates on behalf of the company even though only the 2nd respondent has filed a common reply on behalf of the company and also on his own behalf. Thus, the disputes are really between the 2nd respondent and the petitioners. The main complaint of the petitioners is that the 2nd respondent does not recognize the petitioners as holders of 88.6 per cent shares in the company. It is not in dispute that the 2nd respondent admits that 1,24,100 shares were registered in the names of the petitioners. The dispute relates to the balance of 1,94,100 share. Even in respect of these shares, the admitted position is that the share certificates in respect of these shares are in possession of the petitioners. We have seen the original share certificates in respect of these shares as produced by the learned counsel for the petitioners and f....
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....4,26,33,000 as on 1-7-1997 at 24 per cent interest at quarterly rest. Even though it was contended by the learned counsel for the 2nd respondent that since this calculation is subject to verification even as per the MOU, there is no finality in the figure, we note that the amount noted was "subject to recheck calculation mistakes, if any" indicating clearly it was the interest calculation which was subject to recheck and not the principal amount. Therefore, there is clear admission on the part of the 2nd respondent to have received more than Rs. 3 crores from the petitioners as their investment in the company/shares. Even though Shri Sen urged that we should also take note of the admission of the 2nd respondent in the Chamber, of cash receipt of over Rs. one crore, as rightly pointed out by Shri Raghavan, we have to ignore the same as the discussions were without prejudice. However, his admission in the second MOU of receipt of over Rs. 3 crores has to be taken note of. 30. The petitioners have given a statement of their investment in the shares/company according to which the total amount paid by the peti-tioners works out to Rest. 4,25,71,000. Of this amount a sum of Rs. 1,24,6....
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....iven as a loan to the company, he has repaid Rs. 23 lakhs and has also produced the bank account in support of the same. (This is to be confirmed by the petitioners). Even then, we find that the petitioners had invested a sum of Rs. 3.117 crores in the shares/company. If so, there had been consideration for the shares. The respondents have raised a issue whether the petitioners would pay an amount of Rs. 20,10,000 on 31-12-1996 after having terminated the MOU by their letter dated 19-12-1996. We find that after this letter was issued, there seems to have been some further discussions between the parties in respect of the project as is evident from the letter of the petitioners dated 13-1-1997 at Annexure A-6. Therefore, it appears that even after the issue of a notice of termination on 19-12-1997, the petitioners evinced an interest in continuing their association with the company. If it is so, then, they could have paid an amount of Rs. 20,10,000 on 31-12-1996. 31. The receipt of full consideration for the entire 3,19,200 shares is also evident from the fact that according to the version of the 2nd respondent himself he had handed over all the share certificates in respect of t....
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.... in the 'initial' column on the reverse of the share certificates, in respect of 1,94,100 shares, he has signed on the reverse as 'authorized signatory'. If his contention that all the share certificates in respect of all the 3,19,200 shares were handed over to the petitioners on 1-8-1995 with blank signature on the reverse, is to be accepted, then, there is no reason for him to have adopted different methods of signing the share certificates - signing in the initial column in respect of 1,25,100 shares and signing as authorized signatory in respect of 1,94,100 shares. In addition, the 2nd respondent is not in a position to explain as to how and when he had signed the transfer instruments indicating tallying the signatures. Further, as rightly pointed out by the learned counsel for the petitioners, the ROC Calcutta would not have revalidated the instruments if the share certifi- cates bore the endorsement of the company in token of registration of the transfer of shares at the time when they were presented for revalidation. Further, the 2nd respondent has also not explained the documents filed by the petitioners in regard to the Board Resolution appointing Ranguta as Share Transfer....
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....ential value under section 84 over prima facie evidence of the Share Register under section 164, inasmuch as the latter is under the control of the company and is susceptible to manipulation. This is what this Board has held in Tinplate Dealers Association (P.) Ltd.'s case (supra) and in Rajendra Prasad Gupta v. Scientific Instruments Co. Ltd. [1999] 1 CLJ 121. Thus, taking into consideration our finding that the 2nd respondent had received the consideration for the shares and that these shares had been transferred and registered in the names of the petitioners/their group, and since the share certificates are in possession of the petitioners, we have no hesitation to come to the conclusion that the petitioners are validly registered legal owners of 3,19,200 shares in the company for valuable consideration. 34. The learned counsel for the respondents raised an issue that any transfer in violation of section 108 of the Act which mandates cancellation of the stamps on the instruments of transfer is void if the stamps are not cancelled. He relied on Mathrubhumi Printing & Publishing Co. Ltd.'s case (supra) and Nuddea Tea Co. Ltd.'s case (supra). In both these cases, the challenge o....
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.... the same was void. In the present case, the company is a public limited company and we find from the articles 34 to 43 of the company that there is no specific provision as in that of John Tinson & Co. (P.) Ltd.'s case (supra). Therefore, the decision of the Apex Court in that case are not applicable in the present case. Further, we also note that the 2nd respondent has not produced any evidence to show that in respect of registration of 1,25,100 shares the same was approved by the Board. In the present case, unfortunately, the separate identity of the 2nd respondent and the company/Board has been lost and therefore, once he has signed the reverse of the share certificates as a token of registration of the shares, the same has to be taken as if the same had the approval of the Board. 36. The next issue relates to the issue of equi-preference shares. According to the petitioners the issue is void in terms of the provisions of the Act and the Articles and also the Memorandum while according to the 2nd respondent, the issue was valid in all respects. It is an admitted position that the first MOU contemplates issue of equi-preference shares for an amount of Rs. 1 crore initially to....
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....zed capital was increased before the date of the first MOU and when actually such records indicate the authorized capital as on that date as Rs. 1 crore, we find justification in the contention of the petitioners that the authorized capital had not been increased on 4-7-1995 and the EOGM resolution is a fabricated one. The learned counsel for the 2nd respondent contended that since there is no mention in the first MOU regarding the increase in the authorised capital while stipulating issue of preference shares, it would indicate that the authorised capital had already been increased and the petitioners were aware of it. We would have agreed with the counsel, if there had been some independent evidence in the form of Form 2 or amended Memorandum filed with the Registrar, before the disputes had started. Unfortunately, no independent evidence has been produced and on the contrary, the annual report as on 28-9-1995 shows the authorised capital only as Rs. 1 crore. Therefore, we are inclined to agree with the petitioners that the alleged issue of equi-preference shares for Rs. 1 crore is ultra vires the memorandum and, therefore, is a nullity. 37. Even though we have held that the i....
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....g 30 per cent shares which would not have been possible if the equi-preference shares had become equity shares on 10-4-1997. We are not convinced with the contention of the counsel for the respondents that the stand of the respondents in that case that the petitioners held 30 per cent shares was on account of their stand that they were holding 90 per cent shares. 38. The legality of issue of these equi-preference shares has also been raised by the petitioners. Section 80 deals with issue of redeemable preference shares according to which no preference share shall be redeemed except out of profits of the company which would otherwise be available for dividend or out of the fresh issue of shares made for the purposes of redemption. This section also provides that subject to the provisions of this section, redemption of preference shares may be effected on such terms and in such manner as may be provided by the articles of the company. Thus, the issue of redeemable preference shares is governed by the provisions of the Act as well as the articles. The article 5 of the company reads "Subject to the provisions of these Articles, the company shall have the power to issue preference sh....
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....stablished. Even though, the settled position of law is that an isolated act in violation of statutory provisions need not be considered to be oppressive, yet, in the present case, assuming these shares had been issued to the 2nd respondent and his group in terms of the MOU according to which, 90 per cent of the same were to be transferred to the petitioners, which the 2nd respondent has not done so, by the issue and allotment of equi-preference shares, the petitioners had been reduced from 88.6 per cent shareholders to less than 10 per cent shareholders. Further, by investing less than 1/3rd of what the petitioners had invested (Rs. 1 crore as against Rs. 3.34 crores), the respondents claim absolute majority, which itself is an act of oppression. 40. Another allegation of the petitioners is the composition of the Board of Directors. According to the petitioners, in terms of the MOU, there should have been 4 directors from their side and the 2nd respondent on the Board of Directors of the company. Accordingly, 2nd and 3rd petitioners and 8th and 9th respondents were appointed as directors. Their complaint is that the 3rd respondent who had resigned from the Board on 29-2-1996 ha....
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....d quorum as out of the two directors present, the 2nd respondent, being the father of the 3rd respondent was an interested director and he could not have participated in the business of appointing his son as an additional director. His appointment as regular director is also invalid in view of the fact that in the AGM held on 27-9-1996 in which he was appointed as a director, there were only two shareholders present as seen from the minutes of that meeting at Annexure R-14. Further, no notice for this meeting appears to have been given to the petitioners as is evident from the fact that if the petitioners had the notice, they would have definitely questioned the items proposed for consideration in that meeting since there is no mention of the respondents 8th and 9th being eligible for appointment as director as has been done in respect of the 3rd respondent. Therefore holding of the AGM without notice and conducting business thereat without quorum invalidate all the proceedings in that meeting. If so, the 3rd respondent had not been validly appointed in that meeting and even assuming that he has been appointed as an additional director on 10-4-1996, he could hold office only upto t....
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....titioners from 88.6 per cent shareholders to about 25 per cent shareholders even with 3,19,200 shares registered in their names. Such conversion of a majority into minority is a grave act of oppression. In a company, where there are only two groups of shareholders, such acts of oppression would definitely justify winding up of the company on just and equitable grounds and therefore, the petitioners are entitled to appropriate reliefs. 43. As far as the reliefs are concerned, we have already held that the petitioners are holders of 3,19,200 shares and that the issue/allotment of equi-preference shares is a nullity. Therefore, the petitioners constitute absolute majority with 88.6 per cent shares and as such are legally entitled to manage the company. This is what Shri Sen also prayed for. Even though it was contended that as per the first MOU, the petitioners had to pay over Rs. 19 crores to the 2nd respondent to take over the management of the company, since we are considering the case of oppression de hors the MOU, this stand cannot be considered by us. Even otherwise, we find from the MOU that clause 11 of the first MOU reads "It is agreed that the management and control of th....