AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2015 (4) TMI 1183
X X X X Extracts X X X X
X X X X Extracts X X X X
....illage, Tal. Bhiwandi - 420 302, Maharashtra. The Petitioner No. l is the shareholder of the Respondent No.5 Company holding 2 crores fully paid up equity shares of Rs. 10/- each, which constitute 44% of the total paid up equity share capital of the Company. 2.2 The Petitioner No.2 holds 4,50,000 fully paid up equity shares of Rs. 10/- each, which constitute 1% of the total paid up equity share capital of the Company. The Petitioner No.2, in addition to being a shareholder in the Company, is also the Chairman and Director of the Petitioner No. 1 Company and has been duly authorized by the Petitioner No. 1 Company to initiate the present action on its behalf including on behalf of himself. The Petitioners therefore, collectively hold 2,04,50,000 equity shares in the Company representing 45% of the total paid up share capital and thus they are competent to file the petition in terms of the provisions contained under Section 399 of the Act. 2.3 Respondent No. l is a promoter and a Director on the Board of Directors of the Company. He also claims to be the Chairman of the Company and responsible for the day to day management of the Company. He holds 1,50,05,000 fully ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or marketing and distribution of the products to be manufactured by the Company. The meeting was held in the first week of April, 2012 at the Respondent No. 1's office in Goregaon. 2.8 Thereafter, in the last week of April, 2012, the Respondent No. 1 initiated discussions with the Petitioner No.2 for becoming a business partner and requested him to invest in the Company, offering him a 50% equity shareholding in the Company. The Respondent No.1 represented to the Petitioner No. 2, in several meetings between the parties, that the Company was planning to construct a plant which would be able to produce approximately 40 million meters of fabric per annum of a quality acceptable in international markets. The Respondent No. 1 further represented that for the purpose of the above production capacity, the Company was in the process of installing a state of the art plant, with new technology and high quality machines. The Respondent No.1 further represented that for the above purpose, the Company had availed a considerable loan from banks, securing the same with assets and shares of the Respondent No. 1 and its related entities. The Respondent No. 1 Later also provided the Pe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....easons such as requirement of approvals from the Board of Directors and various banks from which the Company had taken secured loans, that may have caused delay in execution of the SHA, The Respondent No. 1, however, represented that he would do all necessary acts and seek all required approvals and permissions from the Company and from various banks in order to give effect to the understanding between the parties. The Respondent No. 1 further represented that he would, at his instance, get all acts done by the Company, and pass all resolutions required by the Company, in order to give effect to the terms of the SHA and to protect the rights of the Petitioners. 2.13 It is the case of the Petitioners that although the cause of action in the present petition does not entirely arise out of the SHA, the Petitioners, with the sole intention of bringing out the understanding between the parties, are providing the rights provided there under to the Petitioners, which Inter alia include immediate participation in the management of the Company and immediate information to the banks wherein the Petitioners have invested money, which fact the Respondent No. 1 ensured the Petitioners ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der Sections 397, 398, 402 and 403 of the Companies Act, 1956, to bring an end to the aforesaid acts of oppression perpetrated by Respondent Nos. 1, 2, 3 and 4 and for necessary orders and reliefs in respect thereto, including as prayed for herein; (b) to pass order(s) under Sections 397, 398, 402 and 403 of the Companies Act, 1956 to bring an end to the aforesaid acts of mismanagement perpetrated by Respondent Nos. 1, 2 and 3 and for necessary orders and reliefs in respect thereto including as prayed for herein; (c) to pass an order under Sections 397, 398, 402 and 403 of the Companies Act, 1956, quashing the resolutions passed by the Respondent No. 5 Company at the instance of Respondent Nos. 1 to 4, without following the due process of law and specifically without giving due notice to the Petitioners of such meetings where the resolutions have been passed, including but not limited to: (i) Resolutions permitting increase in the authorized share capital of the Company passed in the Extra Ordinary General meeting held on September 20, 2013; (ii) Resolutions permitting amendment of the Memorandum of Association and the Articles of Association of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion of shares at the cost of Respondent Nos. 1 to 4; (ii) Directing the independent valuer to take into consideration for the purposes of the evaluation, the report of the independent auditor as sought for in interim relief (b) herein below; amounts returned, refunded and repaid by the Respondent Nos. 1 to 4 pursuant to relief sought in (f) herein above; etc.; in addition to the financial records of the Company; and (iii) Directing that the Respondent Nos. 1 to 4 to bear the cost of the entire process of evaluation; (j) to pass an order under Sections 397, 398, 402 and 403 of the Companies Act, 1956, directing that due to the breakdown of trust and confidence between the RS Group and the TT Group, it is just and equitable to wind up the Respondent No. 5 Company; (k) That in the alternative to (i) herein above, to pass art order under Sections 397, 398, 399, 402 and 403 of the Companies Act, 1956, directing that the RS Group be bound to buy-out the shares of the TT Group, at the price ascertained pursuant to the above evaluation; 3. The Respondents Nos. 1, 4 and 5 appeared and filed their reply to the Petition. The Respondents In their reply de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....suant to several meetings between the Petitioner No.2 and the Respondent No. 1, wherein the Respondent No. 1 had inter alia made several representations about the state of the art plant which was to be set up at Bijapur, Karnataka (Plant); c. That the Respondent No. 1 offered the Petitioners 50% equity stake in the Company. d. That the association was thus formed on the basis of mutual trust and confidence, on the basis of which the Petitioner No.2 has directly and indirectly also advanced unsecured loans to the Company to the extent of Rs. 24.38 Crores. e. That there are, in fact, for all purposes, only 2 partners in this quasi partnership viz. the Petitioner No.2 (and his concerns) and the Respondent No. 1 (and his concerns). f. Further, the SHA grants several management rights to the Petitioners including:- i. the right of the Petitioner No.2 to be appointed as a Director and Vice Chairman; ii. the right to take joint decisions on all important matters; iii. the right to require unanimous Director Resolutions for matters stated therein; iv. the right to obtain information about the financial position of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....such, the interest of a member who had ventured his capital in the business of a small private Company might include the legitimate expectation that he would continue to be employed as director and therefore, unfair prejudice would be caused to his interest as a member." 9. In continuation of this argument, the Ld. Counsel then invited my attention to the decision in the case of (i) Gurmit Singh v. Polymer Papers Ltd. [2003] 45 SCL 251 (CLB) (pg.507, pr.39), and (ii) Vijay Krishna Jaidka v. Jaidka Motor Co. Ltd. [1977] Comp LJ 268 on the issue of legitimate expectation/indicating to his right to participate in a partnership Company being a shareholder in the management and affairs of the Company in the nature of quasi-partnership. a. In the case of Gurmit Singh (supra) (pg.507, pr.39) it is held as follows; ". . . . . the petitioners have also invoked the principles of legitimate expectations. In cases of legitimate expectations, the denial of the same could be considered to be an act of oppression. For the authority on the principles of legitimate expectations reference could be made to Boyle & Birds' Company Law III Edition wherein it is stated that in a quasi-....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... them together. In such circumstances, the court may apply equitable remedies if the petitioners have come to court with clean hands. In case the facts show that the petitioners and respondents have come together on the basis of certain relationship which already existed, the equitable remedies could be considered. Thus, whether a Company is a family Company and whether partnership principles have to be applied, would all depend upon the facts of each case, and is significant issue. This required piercing the corporate veil to understand the real nature of relationship." 10. Next point argued by the Ld. Counsel appearing for the Petitioners is that the Petitioners have been denied notice of important meetings, including notices to AGMs and EOGMs of the Company to which they are entitled to in law and this amounts to an act of oppression as has been held consistently by various courts in their decisions. Further, the failure on part of the Respondents to appoint the Petitioner No.2 on the Board of the Company as a Director amount to an act of oppression, which renders the Resolutions passed in the AGMs and EOGMs of the Company invalid and illegal for want of service of notice. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for the reasons stated above, the question of the Respondent No.5 Company be construed as a quasi-partnership does not arise. 14. The Ld. Sr. Counsel appearing for the Respondents, further tried to distinguish the facts of the present case with that of the cases of Hind Overseas (P.) Ltd. (supra) and Ebrahimi (supra) as well as in the case of Ramdas Motor Transport Ltd. v. Kareda [2002] 36 SCL 361 (AP) and Bennet Coleman & Co. v. Union of India [1977] 47 Comp Cas 92 (Bom) cited by the petitioners' Counsel. The Ld. Sr. Counsel for the Respondents referred to and relied upon the decision in the case of Kilpest (P.) Ltd. v. Shekhar Mehra [1996] 10 SCL 233 (SC) to support his contentions. 15. In addition to the above, it is the contention of the Ld. Sr. Counsel appearing for the Respondents that from the averments made in the, Petition, it is clear that the grievances of the Petitioners i.e. non compliance of the provisions of the SHA are essentially only of contractual nature, According to him, on a plain reading of the Petition and other supporting pleadings thereto, it will be clear that the Petitioners have set out various acts therein and contended that the Respondent No....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble to the aggrieved shareholder is to file a proceeding in a civil court and not by way of a Petition under Section 397 and 398 of the Act. 17. In continuation of his aforesaid arguments, Mr. Seervai, Ld. Sr. Counsel appearing for the Respondents submitted that the present Petition only discloses that a dispute has arisen between the parties to the SHA dated 12/12/2012, According to him, it does not show the actual instances of oppression and mismanagement. He submits that in a petition filed under Sections 397 and 398 of the Act, the Petitioners are required to set out the instances of oppression and mismanagement. Mr. Seervai, taking me through the Petition, pointed out that the grievances of the Petitioners are essentially only contractual in nature. Referring to the provisions of the SHA, he asserted that the Petitioners have set out various acts that the Respondent No. 1 has not done which were allegedly required to be done under the provisions of the SHA. He further pointed out that as per averments made in the Petition, the Petitioners were forced to accept only 45% of equity stake in the Respondent No.5 in the terms of the SHA, although they were desirous of 50% equity ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....spondents in their capacity as the shareholders of the Company and not under the rights available to them pursuant to the Shareholders Agreement dated 12/12/2012 entered into between the parties, which was a private arrangement. The Ld. Counsel submitted that, in any event, the Petitioners are not debarred from referring to the clauses of the SHA for the purpose of proving the fact that they have subscribed the shares in the Company pursuant to the SHA to enable them to exercise their rights, to participate in the management and affairs of the Company. It was, therefore, contended that the said contentions of the Respondents are untenable and liable to be rejected in limine. He further made a successful attempt to distinguish the decisions in the case of Chatterjee Petrochem, Incable Net (supra) etc. cited by the Respondents' Counsel. 20. I have considered the rival submissions and perused the record. In my view, the first issue that arises for my consideration is as to whether this Petition is not maintainable for the reasons assigned by the Respondents referred to in the preceding paras. 21. Having critically examined the pleadings of the parties and the terms of SHA, i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts), failure to provide notices of the board/shareholder meetings of the Company, failure to provide financial statements, siphoning off and mismanagement of funds (for which the Petitioners have requested forensic audit), etc. 22. Similarly, the law laid down in case of Incable Net (Andhra) Ltd. (supra) is also not applicable to the present case for the reasons stated here as under:- a. In the Incable Net (Andhra) case, relief was refused as the petition arose out of an EPC contract, which is a very specific commercial contract outside the ambit of Sections 397 and 398 of the Act, The contention of the Respondents in that case was that the contractual obligations under the EPC contract did not fall within the scope of Section 397 and the Hon'ble Supreme Court held that the EPC contract was a commercial contract and stands outside the ambit of Sections 397. In the present case, the reliefs prayed for pertain to the denial of shareholder rights by the Company and failure to honour the quasi partnership between the Petitioners and Respondent Nos. 1 and 4. b. In the case of Aslam Ali (supra), it was held that he did not hold l/10th of the shares and further th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 25. Having given my thoughts and upon a close scrutiny of the decisions cited by both the parties, it is clear that there is no readymade yardstick to determine as to when an incorporated Company could be considered to be a quasi-partnership for the purpose of the proceedings under Sections 397 and 398 of the Act. It would depend on the facts of a given case. In normal circumstances, when two or more persons form a Company, the presumption is that they have decided to work within the frame work of the Articles and subject themselves to the discipline applicable to an incorporated Company as held by the Apex Court in Kilpest (P.) Ltd. Case (supra). In the Case of Kilpest (P.) Ltd. (supra), the Hon'ble Supreme Court held that analogy of the partnership is to be confined to a rare case for invoking the jurisdiction under Section 433, for winding up a small private Company where the Company has broken up because of inability of the pending fractions, the distribution of business and assets as in the case of dissolution of Partnership is permissible, the fact whether partnership principles are applicable or not depended upon factors like equal shareholding possession of Commercial ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orporation did the Petitioner purchase 30% from the existing shareholders. Therefore, in my opinion, the principles of the said case apply to the present case. For the reasons discussed herein above, I am not inclined to accept the Petitioners contention that since in the present case there are only two clear groups of shareholders with almost equal shareholding and further the SHA provides several equal rights, including right to participate in the management of the Company and, therefore, the principles of quasi partnership would be applicable. As held above, in my opinion, the present Company is not in the nature of quasi partnership for the reasons discussed hereinabove. 28. Having held that the Company is not a quasi-partnership, the petitioners' grievances as to his non appointment as the Director of the Company and refusal to designate him as its Vice Chairman, in terms of Clause 3.1 and 2.1 respectively of the SHA, can never be made the basis of this Petition for oppression and mismanagement. The law on this point is very clear as held in the cases of Re Laundie Bros Ltd., In re [1965] 2 All E.R. 692 and Re: Bellador Silk Ltd. [1965] 1 All E.R. 667 that to show oppre....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Rs. 95 Crores, by passing a Special Resolution to give effect to the change, including alterations in the MOA and AOA of the Company, without the knowledge and consent of the Petitioners. According to Mr. Zal Andhyarujina, the Petitioners came to know about the alterations in the MOA and AOA only on 21/4/2014. 32. It is further contended that the Respondents have intentionally and fraudulently increased the authorized share capital of the Company without informing or seeking approval from the Petitioners, as they were well aware that in light of the ongoing disputes between the two groups and in violation of the understanding, the two groups would maintain similar shareholding. The Petitioners' Counsel submitted that the Respondents have increased the authorized share capital only to dilute the shareholding of the Petitioners and to increase the shareholding of Respondent Nos. 1 and 4 to over 75% of the total paid up capital of the Company, through the alleged Rights Issue. 33. Mr. Zal Andhyarujina further submitted that the Respondents have admitted that no notices were issued for the aforementioned EOGMs held on 14/3/2013, to increase the authorized share capital of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the Respondents have intentionally issued such number of shares in order to reduce the Petitioners' shareholding below 25%. Furthermore, the Respondents have, till date, not been able to bring forward any evidence/material whatsoever to substantiate their claim that they have brought in the money pursuant to the alleged calls made. 38. The Ld. Counsel submitted that actions of the Directors in conducting the Issue and calling for funds towards the same have been for the personal gain and interest of Respondent Nos.l and 4. He submits that, as per law, the Directors are agents of the Company and they must act in a fair manner for the interest of the Company. To support his contention, the Ld. Counsel relied upon a decision in the case or Dale & Carrington invt. (P) Ltd. v. P.K. Prathapan [2004] 54 SCL 601 (SC), the Hon'ble Supreme Court discussed the Director's role in the issue of shares. In this case the Court observed as under:- "As agents of the Company they must act within the scope of their authority and must disclose that they are acting on behalf of the Company. The fiduciary capacity within which the Directors have to act enjoins upon them a duty t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hed that although the issue was camouflaged as a rights issue, the Respondents have created a situation in which it was impossible for the Petitioners to subscribe to the same. This further shows that the Respondents never intended and expected the Petitioners to subscribe to the Issue, According to the Ld. Counsel, the pleadings and documents on record further establishes beyond any doubt that the motive behind the issue of shares was to dilute the shareholding of the Petitioners from 45% to below 24%. To support his contention, he then referred to the case of BM Jain & Sons Co. (P.) Ltd. v. (Bombay) Cable Car Co. (P.) Ltd. [2001] 30 SCL 140 (CLB). "If is a settled position of law that further shares can be issued only for the benefit/interest of the Company and not with a view to create a new majority to reduce a majority into minority even if the powers to issue shares is vested in the board. If the purpose of issue/allotment of shares is for upsetting the existing shareholding to the detriment of one group, then such an allotment of shares is to be held an act of oppression whether or not partnership principles are applied." 43. Referring to the said decision, it wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ns provide that there should be at least 30 days gap between the payment of first call and the second call, which is missing in the present case, and it can be seen that the First Call was made on 17/5/2014, payable by 30/9/2014 and the Second Call on 23/9/2014, payable by 10/10/2014. 48. The Ld. Counsel for the Petitioners further denied that there was a split of the First Call, as sought to be contended by the Respondents. According to him, a bare perusal of the alleged board resolutions and the alleged statutory filings of the Company clearly show that there was no such discussion or decision made by the Board to split the First Call. It was pointed out that the Board Resolutions, and the statutory filings clearly bring out that there were two distinct calls made by the Company. According to the Petitioners' Counsel, this shows that the said argument was merely an afterthought and a feeble attempt to justify the continuous oppression and mismanagement by the Respondents. 49. In light of the above, it was contended on behalf of the Petitioners that the alleged Rights issue was carried on with the intent to dilute the shareholding of the Petitioners in the Company and br....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to Mr, Zal Andhyarujina, the information received in the inspection showed, in fact, that the Respondent Nos. 1 and 4 had not brought in the promised sums in the Company and the Company had, despite that, still been able to pay the dues to the banks. Further, the Respondents had, during arguments, tendered a table before this Board, inter alia showing that the Company had made the First Call on the issue for Rs. 3 per share and that the same had been paid by the Respondent Nos. 1 and 4. However, as stated in the Additional Affidavit, the Petitioners found out that the Company had, in fact made two calls, the First Call for Rs. 2/- and the Second Call for Re. l/- only. According to the Petitioners' Counsel, this clearly shows that the Respondents have time and again intentionally refused to disclose relevant information and provided incorrect information to the Petitioners as well as this Board. The Petitioners verily believed that the Respondents have done so to hide the true and correct manner in which the Respondent No. 5 Company is being managed by the Respondents. 53. The Ld, Counsel referred to and relied upon a decision in the case of Dale & Carrington Investment (P.)....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... other side must have an adequate opportunity to deal with the material produced against it that grave prejudice was caused to the Petitioners in the manner in which the documents were provided, as no further inspection of this material was offered and/or could be conducted by the Petitioners. He submitted that, till date, the Petitioners are not aware of and/or could not access the validity of the material/documents; that the contents of the envelope were not accompanied by any affidavit in support of the same and/or on any manner of oath as to the genuineness of the documents. 55. Mr. Zal Andhyarujina, further argued that assuming, whilst denying the genuineness of the documents/material, the said material, at the highest, showed only (i) payment of the application and allotment money by Respondent Nos. 1 and 4; (ii) that the Company had not been declared as a NPA by the banks; and (iii) that the Respondents have not provided complete information to this Board. He, therefore, contended that no evidence of the money being brought in on First Call and Second Call was provided to the Petitioners and, further, no details of the utilization of funds were provided. 56. It was, th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Rights Issue, filed this Petition alleging oppression and mismanagement upon the Respondents, wherein they sought interim relief to stay the operation and effect of the Letter of Offer dated 7/4/2014. Finally, the consortium banks by their letters dated 22nd and 23rd April, 2014, gave ultimatum to the Company to regularize the accounts or face the consequences. In the course of hearing of the Petition, this Board, therefore, asked a question to the Petitioners as to whether they are interested to subscribe the Rights Issue of the Company to which they answered "NO". In these circumstances, this Board by its Order dated 25/4/2014, permitted the Respondent Nos. 1 to 4 to subscribe to their rights entitlement as also the rights entitlement of the Petitioners under the Rights Issue. According to Mr. Seervai, the Respondents initially subscribed to the extent of Rs. 2/- per share on their behalf as well as on behalf of the Petitioners and this enabled the Company to meet its urgent loan repayment commitments and save itself from being declared as non performing assets. The Ld. Sr. Counsel then submitted that subsequently, the Respondent Nos. 1 and 4 subscribed to a further extent o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the said complaint made by the Petitioners, deserves to be dismissed. 63. Before I enter into adjudication of the said Issue, I would like to reproduce relevant parts of the two decisions rendered by the Hon'ble High Court in the cases of Sangramsinh P. Gaekwad (supra) and Nanalal Zaveri (supra),which have been relied upon, in fact, by both the parties. a. Sangramsinh P. Gaekwad (supra) wherein it is held as under:- 61. Evidently, therefore, the ratio which emerges from the decision is that the duty to disclose as regards issue of additional shares is relatable to proper purpose thereof. If the purpose is proper and the action of the Director is bona fide, the ratio should not be extended so as to hold that such a duty of the Director towards the shareholder is absolute despite the fact that there is no legal requirement therefore. Duty of disclosure to shareholders in that case had a strong nexus with the affairs of the Company. Dale & Carrington is not an authority for the proposition that the purported fiduciary duty of a Director towards the shareholder is absolute although the transaction in question may not have a direct co-relationship with the affairs of the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that the statutory duty of a Director is primarily to look after the interest of the Company. 68. In Bajaj Auto Ltd v. N.K. Firodla the Court was concerned with the discretionary exercise of power by the Directors in terms of Section 111(3) of the Companies Act. In the fight of refusal by the Director to register a transfer, the Court held that it is necessary for the Directors to act bona fide and not arbitrarily in the following terms: "12. Article 52 of the appellant Company provided that the Directors might at their absolute and uncontrolled discretion decline to register any transfer of Shares. Discretion does not mean a bare affirmation or negation of a proposal. Discretion implies just and proper consideration of the proposal in the facts and circumstances of the case. In the exercise of that discretion the Directors will act for the paramount interest of the Company and for the general interest of the shareholders because the Directors are in a fiduciary position both towards the Company and towards every shareholder. The Directors are therefore required to act bona fide and not arbitrarily and not for any collateral motive." 69. This Court therein also appl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Company." 73. No law in absolute terms, thus, had been laid down therein. In the instant case, there had been no transaction of sale and purchase of shares between the Director and the shareholder. 74. The said decisions, therefore, have no application in the instant case. In a way it instead of supporting the contention of Mr. Desai, counters his, views. 75. It is interesting to note that in Needle Industries this Court said even in certain cases the Directors' attempt to maintain their control over the Company or in newly acquiring control over the Company may not amount to abuse of their fiduciary power stating: "Applying this principle, it seems to us difficult to hold that by the issue of rights Shares the Directors of NIIL interfered in any manner with the legal rights of the majority. The majority had to disinvest or else to submit to the issue of rights shares in order to comply with the statutory requirements of FERA and the Reserve Bank's directives. Having chosen not to disinvest, an option which was open to them, they did not any longer possess the legal right to insist that the Directors shall not issue the rights shares. What the Directo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... former takes undue benefit or has ill or improper or ulterior motive or mala fide acts solely to make a pecuniary benefit and gain for himself and to the detriment of such shareholders. If a general fiduciary duty of a Director vis-a-vis shareholders is laid down, the same would lead the Directors to the risk of multiple legal actions by dissenting minority shareholders. b. Nanalal Zaver v. Bombay Life Assurance Co. Ltd. AIR 1950 SC 172, wherein it is held as under:- "It is convenient here to state what the true approach should be to a question of this nature when it arises in a case. It is well settled that in exercising their power whether general or special, the directors must always bear in mind that they hold a fiduciary position and must exercise their powers for the benefit of the Company and for that alone and that the Court can intervene to prevent the abuse of a power whenever such abuse is held proved, but it is equally settled that where directors have a discretion and a bona fide acting in the exercise of it, it is not the habit of the Court to Interfere with them. When the Company is in no need of further Capital, directors are not entitled to use their p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....faith in what they believe, on reasonable grounds, to be the interests of the Company, but if the power to issue shares is exercised for an improper motive, the issue is liable to be set aside and it is immaterial that the issue is made in bona fide belief that it is in the interest of the Company. 65. It is well settled that the directors may exercise their powers bona fide and in the interest of the Company. If the directors exercise their powers of allotment of shares bona fide and in the interest of the Company, the said exercise of powers must be held to be proper and valid and the said exercise of powers may not be questioned and will not be invalidated merely because they have any subsidiary additional motive even though this is to promote their advantage. An exercise of power by the directors in the matter of allotment of shares, if made mala fide and in their own interest and not in the interest of the Company, will be invalid even though the allotment may result incidentally in some benefit to the Company. 66. On the submissions advanced by the Ld. Counsels for rival parties, and the law discussed above, the next question that arises for consideration is as to wheth....
X X X X Extracts X X X X
X X X X Extracts X X X X
....result thereof, it was unable to meet its repayment commitments to the banks and consequently after giving oral reminders to regularize the account, the bank finally issued a notice dated 25/3/2014 to pass requisite resolutions authorizing Rights Issue. Having minutely examined these letters, I do not find anything therein that suggests that the letters of the bank were engineered by the Respondents for the purpose of the Rights Issue with intent to dilute the Petitioners shareholding as sought to be contended by them. Further, the documents submitted by the Respondents in the course of arguments clearly show that the Respondents have deposited a substantial sum towards the Rights Issue. The proof of payments produced by the Respondents in the following chart goes to clearly show that the payments were made for the urgent requirement of funds by the Company. For the sake of convenience, I reproduce these details in the shape of a chart here as under:- I. Details of Application and allotment money paid by Ramesh D. Shah (Respondent No. 1) for shares forfeited by Tushar D. Thakkar (Petitioner No. 1) and Tushar Clothing Pvt. Ltd. (Petitioner No. 2) in the Right Issue. 1. May ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....000410 dated May 7, 2014 drawn in favour of ETCO Denim Pvt. Ltd. by Ramesh D. Shah Family Trust instructing Kotak Mahindra Bank to remit funds of Rs. 93,30,069/- by RTGS towards application money for shares forfeited by Tushar D. Thakkar (Petitioner No. 2) and subscribed by Ramesh D. Shah Family Trust (Respondent No. 4) in the Rights Issue. RTGS/NEFT Form bearing acknowledgement dated May 7, 2014 evidencing transfer of funds from Ramesh D. Shah Family Trust (Respondent No. 4) account to ETCO Denim Pvt. Ltd for application money for shares forfeited by Tushar D. Thakkar (Petitioner No. 2) in the Right Issue. 3. May 12, 2014 Copy of cheque bearing No. 000411 dated May 12, 2014 drawn in favour of ETCO Denim Pvt. Ltd by Ramesh D. Shah Family Trust (the Respondent No. 4) instructing Kotak Mahindra Bank to remit funds of Rs. 93,30,069/- by RTGS towards allotment money for shares forfeited by Tushar D. Thakkar (Petitioner No. 2) and subscribed by Ramesh D. Shah Family Trust (Respondent No. 4) in the Rights Issue. RTGS/NEFT Form bearing acknowledgement dated May 12, 2014 evidencing transfer of funds from Ramesh D. Shah Family Trust (Respondent No. 4) account to ETCO Denim Pv....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o account in deciding this issue. It is pertinent to mention here that the copies of the documents were handed over to Mr. Zal Andhyarujlna with the understanding that the same shall not be disclosed to others on account of the Respondents' apprehension that again the Petitioners may start false communication with the Bankers of the Company leading to adverse effect on the Company's affairs. In my view, the reason shown by the Respondents is justified. Taking into consideration the stand of the Respondents, in my view, the objection raised by the Petitioner as to the Introduction of these documents in the course of arguments is devoid of force. The said objection is, therefore, rejected. 71. Pointing out the various acts of mismanagement in the conduct of affairs of the Company, it was argued on behalf of the Petitioners that the Respondents have siphoned off huge amounts of funds by over invoicing of the machineries. In this regard, Mr. Zal Andhyarujina, Ld. Counsel has taken me through various documents on record and submitted that the Respondents had intentionally neither informed the Petitioners of the functioning of the Company nor had they made the Petitioners a pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Machinery and other utilities of the Project and (ii) to Analyse and ascertain the cost of machinery acquired by the Company by perusing the comparative costs/purchase price of similar machinery available in the market. 73. The Petitioners' Counsel further submitted that the Independent Engineer, however, failed to bring out any Instance where such a comparison of costs and validation of expenditure could be done. According to him, the Independent Engineer has merely taken as true the invoice value of the machinery purchased by the Respondents as the correct value. It is submitted that the LIE Report ought to have gone through be necessary Inquiry as to whether the invoices were in fact genuine. The Ld. Counsel for the Petitioners concluded that the Respondents were siphoning off funds through a system of over invoicing. Although, the LIE Report not in any manner establish that in fact no siphoning off funds has taken place but it is to be borne in mind that it fails to consider the market value and comparative cost of such machinery. 74. In addition to the above, it was submitted that in the given facts and circumstances of this case, the Respondents may also be directe....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Nos. 1 and 4 are pressurized into purchasing the Petitioners shareholding in the Company. He, therefore, contended that there are no circumstances which call for an investigation/enquiry into the affairs of the Respondent No.5 and, hence, such reliefs cannot be granted to the Petitioners. 77. I have considered the rival submissions and perused the material available on record. It is a matter of record that after receipt of various complaints from the Petitioners, the consortium of Banks passed an order for conducting a Special audit of the Company. In addition, an Independent Engineer was deputed to verify the facts of the complaints. However, after verification as per reports, the banks did not find any substance in the complaints of the Petitioners. It has been rightly contended by Mr. Zal Andhyarujina that the Banks normally do not conduct a forensic audit and they, based on the existing financial of the Company, give their report. Further, the engineer deputed by the Banks also only verified the invoice value and did not enter into the investigation as to the correct market value of the machineries. I also agree that no Bank would invite any adverse report to their own proj....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n Section 402 of the Act, as well as exercising its own powers suo motu conferred upon it by virtue of section 237(b) is competent to pass anorder for investigation, but the facts and circumstances in the case, in my opinion, do not warrant an order for an investigation. I, therefore, reject this prayer made by the Petitioners. 79. Having held that no case of oppression and mismanagement is made out against the Respondents, now the last question that falls for my consideration is as to whether this is a fit case in which the Respondents may be directed to buy-out the shares held by the Petitioners in the Company at a fair value. Mr. Zal Andhyarujina, Ld. Counsel appearing for the Petitioners, contended that even if, in the opinion of the CLB, no case of oppression is made out under Sections 397 and 398, the CLB in the exercise of its rights and powers under Section 402 of the Act, is competent to direct the Respondents to buy out the shares of the Petitioners at a fair price to be determined by an independent valuer. 80. Opposing the said prayer, it was argued on behalf of the Respondents that the present Petition is not a genuine petition filed by the Petitioners under Secti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....disputes arose between the parties. It appears that the Petitioner No. 2, in fact, in his mind has a great suspicion that the Respondent Nos. 1 and 5 purchased the old/used machineries in place of the prescribed machineries for the production of the denim and siphoned off huge sums of amount by way of over invoicing the bills. It is a common law that suspicion, howsoever, strong cannot take the place of proof. At the same time, I would say that there may be good reasons which led the Petitioners' mind to such kind of suspicion. His suspicion may be bona fide. He might not be able to gather any concrete evidence in this regard. However, looking into the facts that Independent Engineer appointed by the Banks did not find any substance in this allegation and in the absence of any other corroborative evidence available on record, on the basis of his mere suspicion, it will not be appropriate for me to render any finding against the Respondents with respect to the siphoning off funds as alleged by the Petitioners. 82. 1 have also taken into consideration the contention advanced by Mr. Seervai relying on the decision of the Bombay High Court In the case of Rajeev Kapoor (supra) wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....w laid down in the case of Rajeev Kapoor (supra), in the facts and circumstances of the case, is not applicable. 84. As stated above, It is a settled proposition of law as held in the cases of Sangram Sinh P Gaekwad (supra), M.D.C. Radharamanan (supra) and Needle industries (India) Ltd. (supra), that even if the CLB comes to the conclusion that the Company Petition has no merit, yet the CLB can pass an order directing one party to part ways with the Company by setting his shareholdings to the other group. Upon a critical analysis of the facts and circumstances of the present case, it is established that both the groups cannot jointly participate in the management of the Company. It is further evident that the two groups of shareholders, lack confidence and mutual trust in each other. It is also clear that the two groups cannot run the management of the Company together and the Company cannot function smoothly by these two rival groups, if they continue to hold shares. It would be, therefore, in the fitness of things and just and proper that the Respondent Nos. 1 and 4 who are admittedly majority shareholders and in control of the affairs of the Company be directed to buyout the ....