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TMI Blog2002 (5) TMI 721X X X X Extracts X X X X X X X X Extracts X X X X ..... is referred to as the Managing Director throughout this judgment. C.P. No. 13 of 1999 was filed under section 111 by the Company for rectification of the register of members of the Company in respect of 500 equity shares mentioned in the petition deleting the name of the appellants herein. C.P. No. 65 of 1999 was filed under sections 397 and 398 by the appellants alleging that the affairs of the company are being conducted in a manner prejudicial to their interests and for declaring that issue of shares to any member of the Company apart from the initial issues is null and void and to rectify the registers of the company, accordingly, and remove the second respondent from the office of the Managing Director of the company and to supersede the Board of Directors of the Company. Oppression and mismanagement, illegal allotment of 17,865 equity shares, manipulation of records and documents, etc., were alleged. 2. The petition filed by the Company for rectification of shares was dismissed. With regard to the petition filed by the appellants in M.F.A. No. 284 of 2001, it was held as follows: "However, we do feel that when in 1987, a substantial amount of Rs. 5 lakhs was invested by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and one Devaky paid Rs. 60,000. Agreement dated 6-3-1997 was executed with partners of Hotel Sidhartha under which the company became the owner of Hotel Sidhartha. On 4-11-1986, the company was registered and second respondent (M.D.) and his wife were the original subscribers. On 30-3-1989, 5,000 shares were allotted to the mother of the first appellant as can be seen from Ext. A4 marked in C.P. No. 13 of 1999. On 24-11-1989, 5,000 shares (2,500 to first appellant and 2,500 in favour of second appellant who is the wife of first appellant) were allotted in favour of the appellants out of the total issued capital of 7,100 shares. It is the case of the appellants that on 21-11-1991, first appellant transferred US Dollars 6,300 to the second respondent Managing Director for buying a Maruti Car for his use. First appellant by letter dated 15-8-1992 informed that he invested the money mainly to give employment to his brother Murali and later his own son who was studying. In February, 1994, another Rs. 1 lakh was remitted by the first appellant to the second respondent by Cheque No. 423154 drawn on State Bank of India, Thrissur. Muraleedharan, brother of the first appellant, who was also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Page 48) would show that on 2-9-1996 it was resolved to call the general body meeting to increase the share capital of the company. It is the case of the appellants that no notice of general body meeting was also sent to them or received by them. On 26-3-1997, 11,000 additional shares were issued in the respondent-company of which 9,800 to the second respondent Managing Director himself making him the majority shareholder and balance to his sister's son Suresh Babu (250), his brother (250), his sister-in-law (300), and brother-in-law (400) who are 4th, 5th, 6th and 8th respondents. Thus, the appellant who invested money for the purchase of hotel and who was the majority shareholder was reduced to minority shareholder without notice. 5. According to the return filed on 30-9-1997, first appellant was made a director and on 18-9-1998 second appellant was made a director. But, it is the contention of the appellants that they were not informed that they were appointed as directors. No notice was issued to them. No evidence was produced to show that notice was issued to them. They did not attend any board meetings as can be seen from the minutes book. First appellant ceased to be a Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the above petition. As we have already seen from the facts of the case, the initial investment for purchasing the hotel was done by the appellants even though they were non-residents. First appellant's brother was removed from the Board. Thereafter, share capital was increased without notice. Even the annual return made up to 27-9-1990 and 30-9-1991 would reveal share holding pattern as under : "Authorised capital : Rs. 15 lakhs Issued capital : Rs. 7,10,000 No. of shares : 7,100 Shareholding pattern : The second respondent (MD) : 100 The third respondent : 100 The fourth respondent : 200 The fifth respondent : 50 The seventh respondent : 500 The eighth respondent : 50 The eleventh respondent : 500 The first petitioner(appellant : 2,500 The second petitioner (appellant : 2,500 Devaki : 600" The Managing Director was allotted 6,865 shares in October, 1994 after increasing the share capital from Rs. 15 lakhs to Rs. 25 lakhs as can be seen from Form No. 2 marked as Ext. P18. The annual return as on 23-12-1995 but filed on 13-2-1996 (Ext. P19) shows the change in shareholder pattern. In September, 1996, he was allotted 9,800 shares in April, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case, the same has been questioned nearly 10 years after the allotment/transfer was made. Even this allotment/transfer was made only at the initiative of the second respondent as is evident from Annexure P-42 dated 25-2-1987 which reads as follows : 'To realise the cheque in the name of the company, we require the permission of Reserve Bank of India. They are delaying the things unnecessarily by asking several things. I went to Reserve Bank along with our auditor Mr. Krishnamoorthy and tried our level best to speed up the process. They have no interest. We cannot do our things before getting their clearance. Hence you do one thing. Send a cheque for Rs. 5 lakhs either in the name of mother or Murali. That cheque should not cross or don't write account payee, etc., then the mother can endorse that cheque in company's name. The only problem is that the share holding will be in mother's name. In this regard this is the only way left out. Write a letter to the Bank Manager also regarding this.' It is, therefore, clear that the second respondent was persuading the first petitioner to remit the amount of Rs. 5 lakhs in the name of the first petitioner's mother to ensure the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1(ii) of the policy was quoted. It says as follows : ". . . But, once, foreign investment is permitted by Government under its foreign investment and industrial policy, requisite permissions under the relative sections of Foreign Exchange Regulation Act, 1973, are more or less automatically issued." 9. We also note that at present, the policy is further relaxed. (See also Foreign Exchange Management [Permissible Capital Account Transac-tions) Regulations, 2000]. Strict provisions are there only against repatria- tion of amount outside India from the business in India. The Supreme Court in paragraph 63 of the judgment held as follows : "...Traditional norms of statutory interpretation must yield to broader notions of the national interest. If the legislation is viewed and construed from that perspective, as indeed it is imperative that we do, we find no difficulty in interpreting 'permission' to mean 'permission', previous or subsequent, and we find no justification whatsoever for limiting the expression 'permission' to 'previous permission' only. In our view, what is necessary is that the permission of the Reserve Bank of India should be obtained at some stage for the purchase o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd his wife or close relatives only. He has increased the shares by dubious methods and, finally, the Managing Director wanted to expel the appellants completely and filed the application for rectification of share register. The annual return made up to 30-9-1996 and filed on 3-12-1996 shows that authorised capital was increased from Rs. 15 lakhs to Rs. 25 lakhs in September, 1996. Even in the minutes of the proceedings of the annual general body meeting held on 30-9-1996, there is no mention of increasing the share capital and from the copy of the proceedings it is seen that only five subjects were dealt with and increase of authorised capital of the company was not discussed. However, it is pointed out that a special resolution was passed increasing the authorised capital from Rs. 15 lakhs to Rs. 25 lakhs as can be seen from Exts. P22, 23 and 24. Thereafter, as per Ext. P4, additional shares were allotted to the second respondent Managing Director, 9,800, shares were allotted to the second respondent on 26-3-1997. Evidence would also show that there were remittances by the appellants for further improvement of the company and to bail out the company from recovery against sales-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kept in darkness of allotment of shares by which the control was taken away. Here, the sequence will show that shares were issued only to benefit the Managing Director. 12. In Gluco Series (P.) Ltd., In re [1987] 61 Comp. Cas. 227 (Cal.), it was held as follows : "Law appears to be settled that it is not open to the directors of a company to issue and allot shares in a manner by which an existing majority of shareholders are reduced to a minority. The Court will scrutinise with particular circumspection any such issue or allotment and unless it is satisfied beyond reasonable doubt that such issue was unavoidable and was resorted to as an extreme and emergency measure with an object of fundamental importance, e.g., saving the existence of the company, will not allow the existing balance of power in the company to be disturbed. It is also settled law that the majority shareholders cannot ultimately be kept out of control of the company as was held in Albert David Ltd., In re [1964] 68 CWN 163 and Sindhri Iron Foundry (P.) Ltd., In re [1964] 34 Comp. Cas. 510 (Cal); 68 CWN 118" (p. 243) The facts in this case show that majority shareholders were cheated and the appellants who made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioners to sell their shares to the respondents. Since the Company has not declared any dividend so far, we consider that the petitioners should get a return of at least 12 per cent of their investment. Therefore, the petitioners are at liberty to sell their shares to the respondents at par value with 12 per cent simple interest per year right from the date of their investment. Once, the petitioners exercise this option, the same will be binding on the respondents. In case, the petitioners choose this option, they should exercise their option in writing within a month from the date of this order by sending a notice to the Company and the second respondent and the Company/the second respondent should arrange to purchase these shares within three months thereafter. As and when the consideration is paid, the petitioners should execute blank transfer forms and hand them over to the respondents. In case, the Company desires to purchase the shares, it is at liberty to reduce the share capital to that extent by the authority of this order." We are of the opinion that the above reasoning of the CLB is totally against law, illegal and perverse. It will only perpetuate fraud. It is true tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70 per cent of the shares. In the circumstances, the CLB should have set aside the issuance of new shares. It is true that the Managing Director was managing the affairs of the hotel and appellants were residing abroad. But, the Managing Director was getting salary during all these periods and it was increased several times in board meetings attended by him, his wife and close relatives as seen from the minutes of the board meetings. Appellant who had the substantial investment did not get any return. As per the balance sheet, the Company was not making any profit during the time. In fact, it was on heavy loss. So, it shows either the inefficiency of the Managing Director or the fraudulent book entries. If it was continuously making losses, the Managing Director would not have been so keen in purchasing shares, especially when appellants were prepared to make further investments and even purchase all shares. By the efforts of the Managing Director, the company was not able to make any profits or declare any dividend. The appellants purchased another hotel only when they came to India and found out the circumstances like issue of new shares, not taking bar licence in the name of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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