TaxTMI 
TaxTMI 
2006 (8) TMI 654
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....in respect of holdings of the petitioner; (d) non-sending of notices for the general meetings including annual general meetings; and (e) non-sending of quarterly results and annual accounts since March 2000, have invoked the provisions of Section 397 of the Companies Act, 1956 ("the Act") seeking the following reliefs: (i) to reconstitute the board of directors of the Company with two nominees of the petitioner and one nominee of the second respondent as directors of the Company; (ii) to appoint the nominee of the petitioner as Chairman of the Board of Directors and general meetings of the Company; (iii) to declare that the increase of authorised capital from Rs. 125 lakhs to Rs. 225 lakhs is null and void; (iv) to declare that the allotment of ten lakhs equity shares of Rs. 10/- each made in favour of the fourth respondent is null and void and (v) to direct the Company to issue share certificates in respect of ten lakhs equity shares held by the petitioner; (vi) to direct the Company to give access in favour of the petitioner for inspection of the books of account and statutory records with effect ....
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....vour of the fourth respondent, an outsider thereby reducing the majority shareholding of the petitioner from 90.91% to 47.6%, as a minority shareholder and acquired control over the affairs of the Company, which constitute serious acts of oppression in the affairs of the Company. There is no material to show as to when the fourth respondent brought in funds towards the allotment of impugned shares. The second respondent holding barely 9% of the share capital cannot be given exclusive control of the Company. There was absolutely no justification to issue further shares in exclusion of the petitioner which is a mala-fide exercise of power, without following the legal procedures. The petitioner has invested to the tune of 90.91% of shares and any necessity for additional funds has to be determined only by the petitioner and no resolution could be passed for increase of the authorised capital in its absence. Whereas the increase of authorised capital and the issue of increased capital have been decided by the members constituting less than 10% of shareholding the Company, without involvement of the petitioner and without any justification. Thus, the respondents are guilty of fraudulent....
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....l Queen Road (P) Limited, under the management of the second respondent, thereby misutilising the Company's funds to the entire prejudice its shareholders. Thus, the investment has not been for the benefit of the Company. If the increase of authorised capital is to be struck down for various irregularities the allotment of shares must also be set aside. * The Reserve Bank of India permission in terms of its communication dated 13.08.1996 for issue of shares to the overseas corporate body shall be valid so long as at least 60% of its ownership is held by non-resident individuals of Indian nationality/origin and in case the ownership held by such persons falls below the level of 60%, the same shall be intimated to the RBI immediately. The RBI circular was not within the knowledge of the petitioner, as the Company never sent any copy of the RBI circular for necessary compliance by the petitioner. The Company has been silent all these years till 2005, without calling for, from the petitioner, any details regarding its ownership and cannot take any exception under the RBI circular dated 13.08.1996 at this belated stage. The Company has produced only a part of the RBI ....
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....to the provisions of Section 193 of the Act. Furthermore, the resolution of the board of directors only approves the increase of authorised share capital from Rs. 125 lakhs to Rs. 225 lakhs, but the board has not resolved either to convene the extra ordinary general meeting for raising the share capital or to issue any notice for the extra ordinary general meeting and therefore the extra ordinary general meeting was convened without any authority by the respondents. The board of directors neither approved the notice of extra ordinary general meeting, which is mandatory requirement under the provisions of the Act. * The Company has been raided by the Excise officials, which confirms the mismanagement in the affairs of the Company. The petitioner is rather concerned that the Company should maintain status quo in regard to all its assets as on the date of company petition and that the second respondent must clear the liabilities incurred after the company petition. * The increase in the authorised capital as well as the allotment of shares came to surface pursuant to the inspection of documents undertaken during May 2006 by the p....
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....ol or merely for the purpose of defeating the wishes of the existing majority share holders. * Kshounish Chowdhury and Ors. v. Kero Rajendra Monolithics Limited and Ors. (2002) 1 Camp. LJ 552 to show that any further issue of shares with a view to convert a majority into a minority is a grave act of oppression. * Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad and Ors. 2005 (Vol.123) CC 566 to show that the directors have a fiduciary duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and the interest of the company they represent. The directors are not entitled to use their powers to issue shares merely for the purpose of defeating the wishes of the existing share holders. * M.S. Madhusoodhanan and Anr. v. Kerala Kaumudi (P) Limited and Ors. to show that mere certificate of posting does not amount to conclusive proof of service of the notice of the addressee concerned. * Tea Brokers (P) Limited and Ors. v. Hemendra Prosad Barooah (1998) 5 Comp. LJ 463 & Life Insurance Corporation of India v. Escorts Limited and Ors. - 1986 (Vol.59) CC 548 to emphasize the r....
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....ticipated for the last ten years, in the management or not even enquired as to the functioning of the Company. The petitioner has never attended any meeting of shareholders and has not voted on any resolution. The Company never forwarded the quarterly results of its operations or annual accounts to the petitioner at any point of time. The Company ever declared any dividend and the petitioner never complained of any grievance till filing the company petition. The petitioner is, therefore, not entitled to interfere with, participate or claim any right in the management. The Company has been managed and exclusively controlled by the second respondent, who is the original promoter of the Company. * In terms of the RBI communication dated 13.08.1996, permission for issue of shares to the overseas corporate body shall be valid so long as at least 60% of its ownership is held by non resident individuals of Indian nationality/origin. The petitioner was required to inform the Company annually the status of its shareholding in order to ensure that at least 60% shares are held by non-resident Indians. No such intimation has ever been sent by the petitioner to the Company, there....
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.... by the board of directors in allotting impugned shares in favour of the fourth respondent. The petitioner cannot question the utilisation of funds raised by way of issue of additional shares. * The petitioner's address as given in the petition is different from the address furnished either in the rejoinder or the minutes of the board meeting of the petitioner. In view of this, the Company is helpless and cannot be found fault on account of non service of the notice of the extra ordinary general meeting which will not give cause of action to invoke Section 397. The petitioner executed a power of attorney as early as on 11.05.2005, empowering its attorneys to bring any action, before the Company Law Board in connection with any disputes concerning the Company, which was preceded by the board meeting of directors of the petitioner approving the issue of power of attorney in favour of its attorneys. These actions of the petitioner clearly indicate that it was quite aware of the increase of capital and the subsequent allotment of shares made on 10.05.2005 in favour of the fourth respondent. This Board in Hillcrest Realty Sdn.Bhd. and Ors. v. Hotel Queen Road Pvt. Ltd....
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....y interest in the affairs or the management of the Company for the past ten years. This conduct of the petitioner will disentitle him from claiming any right of management control in respect of the affairs of the Company. This legal proposition has been approved by the Supreme Court in Sangramsinh P.Gaekwad and Ors. v. Shantadevi P. Gaekwad (Dead) thr. Lrs. and Ors. 4. Shri C.A. Sundaram, learned Senior Counsel appearing for the second respondent submitted: * The Company was incorporated as early as in October 1991, whereas the petitioner was incorporated as late as in October 1994. The petitioner invested in the Company in August 1995, after the Company was fully established was making profits. These factors would belie the purported arrangement between the parties namely, (a) the petitioner will always hold 90.91% of the share capital of the Company; (b) the petitioner will appoint his nominees on the board of the Company as and when necessary; and (c) there will be no change of the shareholding of the Company without the consent of the petitioner. Further more, there has been no written understanding between the petitioner and the second respondent regarding th....
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....rendered by the Courts from time to time. By virtue of Section 53(1). a document may be served by the company on any member either personally, or by sending it by post to him to his registered address, which requirements has been duly satisfied by the Company. In the absence of any suspicious circumstances there is no need for the respondents to prove service of the notice. The petitioner without even enquiring from the Company regarding the allotment of shares went for inspection of the documents in the Registrar of Companies. If the petitioner is aggrieved due to non-service of notice for the extra ordinary general meeting, it has to exercise its civil rights and there is no remedy available before the CLB. Even if non-sending of the notice is illegal, the said act per se is not oppressive. The service of notice of meetings on shareholders residing outside the country is not necessary, as held in Warden and Hotchkiss Limited In re All E.R. Rep. 1945 Vol. I page 507. * The petitioner has not complied with the RBI conditions and directions regarding its ownership. It is not known whether 60% of ownership the petitioner is held by the non-resident individuals of India....
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....o acted in a systematic and planned manner at the back of the petitioner. However, the petitioner has taken a different stand in its rejoinder by alleging that the second respondent started sidelining the petitioner and avoiding his enquiries from the financial year 1999-2000 and further that the respondents never sent any notice or the annual general meeting or extra ordinary general meeting to the petitioner since March 2000. Thus, the petitioner has been taking contradictory stands at different point of time. * The Company is not a glorified partnership and the relationship between the two groups of shareholders is not governed by the principles similar to the principles governing relationship between the partners as claimed by the petitioner. All decisions cited on behalf of the petitioner are in relation to two group of shareholders governed by quasi partnership and therefore, not applicable to the facts of the present case. There is no deadlock in the affairs of the Company, warranting winding up of the Company. The petitioner has neither made out any justification for winding up the Company which is one of the essential requirements, as laid down by the Calcut....
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.... of no consequence on account of the legal disability suffered by the petitioner in subscribing to the enhanced capital by the petitioner, is ill conceived in the light of the RBI Circular dated 08.12.2003, a close scrutiny of which, envisages the eligibility of the overseas corporate bodies in undertaking fresh investments with the prior permission of Government/Reserve Bank of India as the case may be. By virtue of the RBI Circular dated 08.12.2003, dealing with de-recognition of overseas corporate bodies, facilities under various Foreign Exchange Management Regulations have been withdrawn. This circular does not impose any blanket bar against overseas corporate bodies in undertaking fresh investments, as specified therein. It has to be borne in mind that the petitioner has not expressly dispensed with the need for being given any notice of extra ordinary general meeting held on 18.04.2005. The respondents have produced a certificate of posting to establish service of notice on the petitioner by sending it by post in accordance with Sub-section (1) of Section 53. The certificate of posting, in the event of serious disputes between the parties, cannot amount to conclusive proof of....
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....e of extra ordinary general meeting clearly indicates that the increase in the authorised capital has been necessitated by the facts that the Company suffered losses and availed fresh financial facilities from the bank. The board of directors, on the other hand, approved the increase in the share capital from Rs. 125 lakhs to Rs. 225 lakhs at the board meeting held on 15.03.2005 to meet the raise in prices of steel and the pressure from the bank for enhancing the promoter contribution towards equity. At the same time, the Company utilized the entire one crore of rupees realized, pursuant to the issuance of enhanced capital, for entirely a different purpose by purchasing the shares in M/s. Hotel Queen Road Private Limited, which is not the main business of the Company. The respondents failed to establish the benefit derived by the Company on account of the further enhancement as well as issue of the share capital. Section 193 applying to the public as well as private companies provides, inter alia, that within 30 days of the conclusion of every meeting of the Company, the minutes book has to be written and each page of such recording must be initiated or signed by the Chairman an....
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....sion of the majority shareholder which cannot be allowed, as held in Rashmi Seth v. Chemon (India) Private Limited (supra). The directors who are empowered by the articles to allot shares at their discretion ought to have (i) exercised their power with utmost good faith for the benefit and interest of the Company; (ii) ensured fair play in action in corporate management; and (iii) acted bonafide in exercise of their responsibilities in further issue of shares. The exercise of power to allot further shares by the directors solely for their personal aggrandizement without caring for the future interest of the Company has been disapproved by the Courts. The holding of the petitioner, by virtue of the impugned allotment, has been reduced from 90.91% to 46% of shares in the Company. Such issue of further shares converting a majority into a minority is held to be a grave act of oppression in Kshounish Chowdhury v. Kero Rajendra Monolithics Limited (supra). The Supreme Court in Dale and Carrington Investment (P) Limited v. P.K. Prathapan (supra) held that if a member who holds the majority of shares in a company is reduced to the position of minority shareholder by an act of the company o....
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....ered to be as being conducted in a manner oppressive to any member or members ' as laid down in Section 397 of the Act. The right and privilege of the shareholders to participate in the management of the Company have been approved by the Supreme Court in Life Insurance Corporation of India v. Escorts Limited (supra). The Supreme Court in Dale and Carrington Investment Private Limited v. P.K. Prathapan 25 (supra) categorically held that the member who holds the majority of shares in the Company is entitled by virtue of his majority to control, manage and run the affairs of the Company and elect his own men to the board of directors of the Company. The petitioner, being a majority shareholder, despite its disassociation with the day to day management of the Company and the petitioner's lack of interest over the affairs of the Company, all these years, cannot be denied of its right to administer the future affairs of the Company. The petitioner's right cannot be brushed aside on the plea that it is only an investor and not a bonafide shareholder of the Company. These facts of the present case would amply demonstrate that there is such a lack of probity in the conduct of....