9911796707
TMI Blog1998 (3) TMI 573X X X X Extracts X X X X X X X X Extracts X X X X ..... of the company was Rs. 8 lakhs made up of 8,000 equity shares of Rs. 100 each. 29 per cent of the capital was held by the company petitioners-respon- dents group and another 29 per cent was held by the respondents in the company petition and appellants herein. Hathimal Pincha, company petitioner No. 1/respondent No. 1 in this appeal, and Chandmal Pincha, respondent No. 2 in the company petitioner and appellant No. 1 herein, are brothers. Apart from that two other brothers Inder Chand Pincha who intervened in the appeal and Mohan Lal Pincha alongwith his family members were holding 21 per cent each of the paid-up capital of the company. The above four brothers were also the first directors of the company though Inder Chand Pincha and Mohan Lal Pincha ceased to be the directors when the company proceeding was started. The petitioners/ respondents as well as the respondents/appellants groups together hold- ing 58 per cent of the shares were controlling the company with 29 per cent each - the two groups were also equally represented in the Board. The company was a family concern of the Pincha family and a partnership unit in the guise of a limited liability company. The company owned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to respondent No. 6 amounting to Rs. 4 lakhs and also appointed respon-dent No. 4 as an additional director. It was also gathered at a Board meeting in September, 1995, that the accounts of the company for the year ending 31-3-1995 were approved and a sanction for increase of the authorised capital up to Rs. 50 lakhs was also obtained. The petitioners also learnt that the annual general meeting was held in September, 1995, in which inter alia other items, the authorised capital was increased and the appointment of respondent No. 4 as a director was regularised. As per the petition, the Board meetings held in May, August and September, 1995, and annual general meeting held in September, 1995, the decision to increase the authorised and paid up capital and allotment of 4,000 equity shares to respondent No. 6, Vijay Kumar Pincha, in the company petition, and the appointment of respondent No. 4, Rajiv Pincha, as a director were null and void and liable to be set aside on the grounds as specified below in the petition: ( i )No notices of board meetings of May, August and September, 1995, were given to or received by petitioners Nos. 1 and 3. ( ii) No Board meetings as referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company. ( xi )In the part [past ?] the company had been offering shares to all existing shareholders in proportion to their existing holding. No reasons have been given for deviating from the said procedure. 7. On receipt of the letter of offer made in October, 1995, the petitioners pointed out that though they were willing to subscribe for further shares, they would not do so without the issue and allotment of 4,000 equity shares in favour of respondent 6 being set aside and the other acts complained of revoked. According to the petitioner, on negotiation, R-2 agreed to have equal representation on the board and to re-distribute the 4,000 shares equally. On protest by the petitioners that the offer should be made to all the shareholders, though the respondents agreed to do so, no action was actually taken. In the circumstances the petitioners had sought the following final reliefs: ( i )A scheme for management, administering and control of the affairs of the company. ( ii )Supersession of the Board of directors and appointment of an administrator. ( iii )Declaration that the notices for the Board meetings of May/August and September, 1995, and the annual general mee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to pursue their own export business of tea after 3-3-1994; but having failed had resorted to this course of legal proceedings. During the year 1993-94, the company suffered a heavy loss at the instances of petitioner 3 who was a director at that time and made commitment with exorbitant liabilities. Immediately after the loss was incurred, he ceased to take any interest in the business of the company. The petitioners also pursued their own business by diverting tea export orders from the respondent company and thereby engaged in competitive business. The petitioners' group also did not make any financial inputs whereas the respondents' group injected a sum of Rs. 4 lakhs by way of capital and Rs. 16 lakhs by way of unsecured loan. The company's financial position was very grave after 31-3-1994 and some of the creditors had filed winding up petitions. 11. As regards the two issues, namely, the non-reappointment of petitioner No. 3 in the annual general meeting in September, 1994, appointment of R-4 as a director and the issue of additional capital of Rs. 4 lakhs to respondent 6, the reply was as follows: "The notices for the annual general meeting of 28 December, 1994, was duly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. Petitioner No. 1 did not believe that the company was in a state fit for renewal and hence was not interested in making investments. However, the company was in urgent need of funds and as such the management acted in the best interest of the company in accordance with the powers entrusted to the directors under the articles of association to issue the additional capital. 13. It was denied that the other shareholders of the company were kept in the dark relating to issue of shares. Mohan Lal Pincha Group had already shown a desire to sell their shares and subsequent offer to them for additional shares was rejected. Inder Chand Pincha Group, had, for long, created a lot of problems by reasons of which proceedings were instituted against the group before the Calcutta High Court both by petitioners and respondents jointly. In fact, the petitioners have sup- pressed these proceedings which are relevant in deciding the instant petition. In any event, both these groups showed no interest. The issue of 4,000 shares in favour of R-6 is not in violation of any provisions of the Act. This issue was made against payment received from the averment of the petitioners that they raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AGM, P-3 was not re-elected and yet they did not agitate because of a purported tacit understanding that P-3 will be reappointed. P-3 has extended the guarantee for the credit availed from the bank despite his not being a director. (C)According to the petition no notice of Board meetings of May/ August and September, 1995, and no notice of the AGM of Septem-ber, 1995 were received by any of the petitioners. However, there was no allegation of non-receipt of notice of earlier or later general body meetings or board meetings. (D)From the correspondences produced alongwith the reply it appears that the petitioner No. 1 himself wrote to one of the brothers that Inder Chand Pincha on 17-10-1995 regarding the increase in the paid up capital which establishes that P-1 had knowledge of increase in the capital. However, in the rejoinder, it is stated that this action of his was based on the understanding that Rs. 4 lakhs additional will be divided equally between the petitioners' and respondents' group. Regarding the letter of 17-10-1995, petitioners have countered that first page of the letter had been replaced by the respondents. However, there is no averment with regard to what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the respondent No. 4 could not be a ground of oppression, more so when the appointment of respondent No. 4 as new director in 1995 was regularised in the next AGM. As regards ( c ), neither the petitioners could establish their case of non-service of notice nor the respondents could effectively rebut the allegations. 20. The CLB thereafter considered the effect of allotment of 4,000 additional shares to respondent No. 4. The Board also took note of justifications cited by the respondents for issuance of additional shares including the financial difficulties and the purported pressure by the SBI for induction of further capital to maintain the debt equity ratio within 4:1. The Board also addressed its mind to the acceptability of the plea of the respondents as well as the refusal of the petitioners to shoulder the responsibility of the company. The Board after going through the plead- ings as well as the materials on record could not find any valid reason for the issuance of 4,000 shares exclusively to the respondent No. 6 in 1995 since all throughout in the past the company chose to offer shares to the shareholders on a pro rata basis. The Board also rejected the plea of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n full consideration of facts and situation found that the issuance of additional share upset the shareholding proportion and the incidence of oppression was continuing; accordingly issue of 4,000 shares was set aside. The CLB after considering all the pros and cons, however, did not adopt the procedure permitting the oppressor to buy from the oppressed. The Board took into consideration that the company was a family company concern and it would be appropriate for the shareholders to decide the composition of the Board. The Board also took into consideration about the stay order of the Court in regard to voting of 6 per cent share held by one of the other two shareholders group and that from the pleadings the Board found that the shareholders holding 21 per cent each were not interested in the company and each one was statutorily different groups. The Board after taking into consider- ation the respective stand of the company found that the situation did arise that one of them would have to go out of the company. Since both the groups were in the management, they would be in a position to know the real worth of the company which may not be apparent from any valuation that may b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y questioned the legality and validity of the direction of the CLB ordering both the groups to offer their bids for the shares in the company and whoever offered highest bid would take control of the company. The learned counsel further questioned the bona fides of Shri I.C. Pincha, the intervenor in this appeal. Mr. Bhattacharjee has pointed out that Shri Pincha in fact lost the interest in the company and placed his shares in the company to the appellants and respondents groups as far back in 1983 and did not have any financial involvement in the company and with the oblique motive joined hands to the respon- dents' group and only with a view to disturb the management and take over the control of the company. Mr. Bhattacharjee in support of his contention relied upon the following decisions : (A)The incidental reduction of shareholding strength of one group in a company pursuant to issuance of shares to another group to raise funds required by the company does not merit interference by courts: ( i ) Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. AIR 1981 SC 1298; ( ii ) Shanti Prasad Jain v. Kalinga Tubes Ltd AIR 1965 SC 1535; (B)Oppr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td [1976] 2 All ER 268 (page 677). 25. Mr. G.K. Bhattacharjee, the learned counsel for the intervenor, I.C. Pincha, has questioned the actions of the appellants more particularly, the acts of appellant No. 1 who issued and allotted 4,000 shares to his son ignoring other 71 per cent shareholders. Mr. Bhattacharjee has pointed out that the application made by him before this Court and submitted that the intervenor also was a holder of 1,675 equity shares comprising of 21 per cent of the paid-up capital. The company was set up and grew up at the initiative of the intervenor and reaps its benefit because of his dedication who served as a director and manager of the company for more than 8 years in initial state and by his drive and initiative turned the sick tea garden into a viable and profitable unit. The intervenor mainly supported the decision of the CLB. The Company Appeal No. 44 of 1997 was mainly directed against the decision of the CLB in directing for bidding of the shares. 26. Mr. J.M. Chowdhury, the learned counsel for Mr. H.M. Pincha and others in Company Appeal No. 44 of 1997, submitted that the methodology adopted by the CLB is unknown in law and, therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the petitioners were fully aware of the non-reappointment. The validity of the meeting was also not chal-lenged. Regarding non-appointment of the petitioner 3 as a director on the alleged understanding was not accepted by the Board. The CLB, did not consider the same to be act of oppression. The appointment of one more director, namely, respondent 4 did not confer any extra benefit to the respondents as already the respondents had the majority in the Board. The mere appointment of respondent 4 was not treated as a ground of oppression and according to the Board no qualitative change in the Board of management took place. The Board further took into account the fact that the appointment of respondent 4 as additional director was regularised in the next annual general meeting, 1995, as director. The Board on evaluation found that the petitioners did not raise anything about the non-issue of notice in respect of annual general meeting of 1994. Even in respect of Board meeting of August, 1996, the petitioner 1 did not deny that he was aware of the meeting to be held on 30-8-1996 to consider the accounts for 1995-96. Petitioner 1 also did not deny that he sought adjournment of the B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty ratio it could make the entire Rs. 20 lakhs as unsecured loan if the matter was so urgent. The only purpose of the bankers' insistence was to improve the debt/equity ratio which according to the CLB could have been done through unsecured loan as well. The CLB accordingly viewed that there was no justification as to why the capital base sought to be increased in that fashion by disturbing the shareholdings proportion without providing an opportuni- ty to the shareholders to subscribe to the capital. The CLB considering the fact situation also did not accept the plea of lack of interest of the respondents. The CLB also took into consideration about the argument of the petitioners regarding issue of additional shares allotted to the respon-dent 6 and held that in the absence of any lawful justification, the issue of 4.000 additional shares to the respondent 6 alone was found to be an act or oppression. The CLB in arriving, its decision scrutinised the fact situation minutely. 30. It is not disputed that the directors of a company are authorised to issue shares to raise the capital for the company, the main purpose of which is to subserve the company. The said power cannot be ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nduct of the company's affairs. It must be something more, so much so that there is want of probity and unfairness causing prejudice to the other members of the company in exercise of its lawful rights as a shareholder of the company. The power conferred on the CLB is wide and discretion-ary in nature only subject to limitation imposed by law and the established principles of law and norms. The CLB while exercising that power must no doubt keep in mind about the democratic rights of the majority of the members to manage its own house within the limits, at the same time, the CLB is entrusted with the duty to protect the interest of the other members against the unlawful incursion. It is a power coupled with responsibility as laid down under section 10E of the Act. Sub-section (5) of section 10E provides that without prejudice to the provisions of sub-sections (4C) and (4D), the CLB shall in the exercise of its powers and the discharge of its functions under this Act, or any other law be guided by the principles of natural justice and shall act in its discretion. The scheme of the Act, therefore, undoubtedly confers on the CLB power to act in its discretion. The discretion means to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not to have permitted the said respondents to offer any bid to purchase the shares. The CLB according to the appellant after setting aside the fraudulent allotment, ought to have restored the original shareholding. The CLB in fact, dealt with the respective matters and after considering all the aspects of the matter permitted both the groups to offer their respective bids for the shares in the company and whoever offers the highest bid should control the company. The CLB took into account that the company is a family concern and, therefore, considered that it would be appropriate for the shareholders to decide the composi- tion of the Board of directors. However, in view of the stay in regard to voting in respect of 6 per cent shares held by one of the other two shareholder groups on which Mr. A.K. Bhattacharjee, the learned counsel for the appellant in Appeal No. 42 of 1997 raised a dispute (which was raised by Mr. Bhattacharjee at the later stage of the proceeding) and also after taking note of the pleadings, submitted that the shareholders held 21 per cent each were not interested in the company and each one was supporting the different groups. In the context of those circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ief and to do complete justice to the parties. There cannot be any rigid rule which can be insisted upon. 34. The CLB duly addressed its mind to the relevant aspects of the matter and thereafter, passed the above orders which cannot be faulted as arbitrary, discriminatory nor can the same be branded as mechanical exercise of power without any application of mind. No infirmity as such is discernible, on the conclusion drawn from the facts. For the reasons stated above, I do not find any merit in the appeals and accordingly, both the appeals are dismissed. In terms of the direction issued by the CLB, both the groups shall now furnish their bids in sealed cover indicating therein the price of the shares at which they are prepared to purchase the shares of the other group within a month from receipt of this order. The appellants as well as respondents in the appeals are accordingly directed to appear before the CLB, Principal Bench, New Delhi, on 22-4-1998, and offer and advance their bids in a sealed cover as per the direction of the CLB who shall thereafter fix a date for opening the bids in presence of the parties. 35. Subject to the observations and directions hereinabove, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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