2015 (7) TMI 298 - Board - Companies Law

Transfer of shares under the family arrangement - Appointment of additional director in absence of quorum - Construction on land in breach of status quo order issued by board - Held that - It is a well-settled rule of interpretation that a document required to be interpreted must be read as a whole. While interpreting the family arrangement it must be borne in mind that the situation as prevailing in June, 1996 and not in September, 2002 would have to be considered because the need for family arrangement arose in June, 1996 on account of irreconcilable disputes and differences arising between the two brothers, i.e., RKK and MKK. Considering the intent and purpose of the family arrangement and the fact that MKK accepted the Machinery Division in its entirety to the complete exclusion of RKK it must be held that under the family arrangement resignation by MKK as director in Hanuman Cotton Mills Ltd. (HCM) on 7th June, 2004 and 1 transfer of his 1,025 shares to RKK in 1999 were reciprocal obligations to be performed by MKK. The annual statements for the following years showing RKK as holder 1,025 shares under Folio No. 96 were signed by MMK which shows that MMK was also aware of the transfer of 1,025 shares held by MKK to RKK under the family arrangement. I accordingly hold that pursuant to the family arrangement and as agreed therein, MMK after receiving the Machinery Division to the complete exclusion of RKK had given his 1,025 shares under Folio No. 96 to RKK who in turn delivered the same to MMK who was admittedly the custodian of all the share certificates in HCM for completion of necessary legal formalities relating to transfer of such shares. The fact that under the signature of MMK, i.e., the Patriarch, and the person exercising the supervisory and controlling powers in HCM the annual returns for all subsequent years reflected RKK as the holder of 1,025 shares even though under the same Folio No. 96, the inference that shares held by MKK were agreed to be transferred to RKK is irresistible. I hold accordingly and direct HCM to rectify its register of members and to register transfer of 1,025 shares held by MKK under folio 96 in favour of RKK. In view of the above findings the petition by MKK is, in my considered opinion, actuated by his greed in view of the fact that the value of the land owned by HCM had shot up over the years. No relief, therefore, deserves to be granted to MKK since on the date of the petition he had no locus to file a petition under section 397 of the Act having divested himself of his entire shares in HCM in favour of RKK. Section 300 of the Act prohibits a director of the company from taking part in the discussion at the Board meeting if he is in anyway, whether directly or indirectly, concerned or interested in the resolution sought to be passed. His presence shall also not count at such Board meeting for the purpose of forming a quorum, at any such discussion or vote. RKK being the father of ANK was an interested director in the appointment of ANK and ought to have refrained from participating at such Board meeting held on 10th February, 2004. Therefore, even on this ground apart from there already being a lack of quorum as required by the Articles of Association of HCM the resolution passed at such Board meeting fails to satisfy the test required by law. I therefore, hold that the appointment of ANK as an Additional Director in HCM on 10th February, 2004 and the purported transfer of 60 shares by Shakuntala Kejriwal to ANK are bad in law. There is not an iota of doubt that the construction activity undertaken by RKK through Wellcast Products (P.) Ltd. (WC) on the land of HCM is clearly in breach of the status quo order dated 13th July, 2009 and liable to be removed by RKK and WC as undertaken by them. In view of my finding that the allotment of equity in HCM to WC is bad in law and set aside, R-5 (WC) has, even otherwise no legal right to remain on the land of HCM. I, therefore, direct RKK and WC to remove the entire construction by WC (R- 5) on the land of HCM within two months from the date of this order at their own cost. If this is not done a special officer shall be appointed by this Board for ensuring compliance of this order. - Decided partly in favour of appellant.

Summary

Issues Involved:

1. Validity of Family Arrangement (FA) of 1996.
2. Transfer of 1,025 shares from MKK to RKK.
3. Appointment of Ankit Kejriwal (ANK) as an additional director.
4. Legality of Board meetings and resolutions.
5. Preferential allotment of shares.
6. Appointment of R N Sen as an additional director.
7. Allegations of oppression and mismanagement.

Detailed Analysis:

1. Validity of Family Arrangement (FA) of 1996:

The family arrangement of June 1996, reduced to writing on 29th September 2002, was intended to separate the working and liabilities, not ownership. The arrangement demarcated management responsibilities: RKK was to handle the foundry work (including HCM), and MKK was to manage the machinery division. The arrangement did not imply a transfer of ownership of HCM's land to RKK. MMK retained overall control, and both sons were to provide monthly accounts to him. The family remained joint in mess and residence.

2. Transfer of 1,025 shares from MKK to RKK:

The transfer of 1,025 shares held by MKK under Folio No. 96 to RKK was part of the family arrangement. MKK signed the annual return of HCM for 1999, showing RKK as the holder of these shares. The transfer was reflected in subsequent annual returns signed by MMK. The court directed HCM to rectify its register of members to reflect this transfer.

3. Appointment of Ankit Kejriwal (ANK) as an additional director:

ANK's appointment on 10th February 2004 was invalid due to lack of quorum and absence of notice to MKK, who was a director at the time. The purported transfer of 60 shares by Shakuntala Kejriwal to ANK also failed to meet legal requirements. The court set aside ANK's appointment and the share transfer.

4. Legality of Board meetings and resolutions:

Several Board meetings, including those held on 7th March 2005, 8th April 2005, and 25th August 2005, were invalid due to lack of proper quorum and absence of legal notice to MMK. Resolutions passed at these meetings were set aside.

5. Preferential allotment of shares:

The resolutions passed at the EGMs on 17th May 2005 and 19th September 2005 for the allotment of shares were invalid. The explanatory statements did not meet the mandatory requirements of the Unlisted Public Companies (Preferential Allotment) Rules, 2003. The court set aside the allotment of shares to RKK, SK, and WC, noting that the actions were intended to reduce MMK and other shareholders to a minority.

6. Appointment of R N Sen as an additional director:

R N Sen's appointment on 25th August 2005 was invalid due to lack of proper quorum and absence of legal notice to MMK. The court set aside his appointment.

7. Allegations of oppression and mismanagement:

The court found that the actions of RKK, including the unauthorized construction on HCM's land by WC, were in breach of the status quo order and intended to oppress MMK and other shareholders. The court directed the removal of the construction and issued several injunctions to prevent further acts detrimental to HCM's interests.

Conclusion:

The court directed HCM to rectify its register of members, set aside invalid appointments and share allotments, and issued injunctions to protect the interests of MMK and other shareholders. The petition was partly allowed, with specific directions for compliance.