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TMI Blog2004 (9) TMI 385X X X X Extracts X X X X X X X X Extracts X X X X ..... tive of Kerala, had been working in Muscat since long and was staying there alongwith his family. The mother of Prathapan, named Kalyani Kochuraman, was living in Kerala. Prathapan had two sons. According to Prathapan his sons were desirous of returning to India and settling down in their native place. Therefore, Prathapan wanted to set up some business in India in order to settle his sons. Since the parties are relations they were in touch with each other. Towards the middle of 1987 Ramanujam informed Prathapan that a hotel called 'Hotel Siddharth' in a town called Chalakudy, was available for sale. The hotel building had ten rooms, besides a restaurant with a bar attached to it. The partners who were running the hotel were interested in selling it immediately. Ramanujam further informed Prathapan that the hotel was available for down payment of Rs. 6 lakhs (Rupees Six Lakhs). The purchaser, in addition, had to take upon a liability of about Rs. 18 lakhs (Rupees eighteen lakhs) which was standing on the hotel. Ramanujam offered a look after the business of the hotel till Prathapan decided to return to India. The parties decided to go ahead with the purchase of the hotel for which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of balance sheets of the company for a few years of its working have been placed on record by the appellant which show that till 31st March, 1992 there were no profits in the company. For the first time some profit was shown as on 31st March, 1993. Till 31st March, 1993, under the head 'Advance towards share capital pending allotment' only a sum of Rs. 3000 (Rupees Three Thousand) was shown whereas as on 31st March, 1994 under the said head, a balance of Rs. 6,86,500 (Rupees six lakhs eighty six thousand five hundred only) was shown. We have mentioned this figure here because it will be relevant for the main controversy in this case. 3. It is the case of Prathapan that he continued to provide finance to the company by sending money to Ramanujam from time to time. The details of some of such disbursements are as under : (a)A sum of Rs. 1,00,000 in March, 1989; (b)US $ 6300 in favour of Maruthi Udyog Ltd. for allotment of a vehicle for the use of second appellant in November, 1991; (c)A sum of Rs. one lakh in February, 1994; (d)A deposit of Rs. one lakh with State Bank of India in the year 1996 to provide bank guarantee in favour of the sales tax authorities at Kerala; (e)A sum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avour of Ramanujam by filing a Company Petition under sections 397 and 398 of the Companies Act before the Company Law Board in July, 1999. The main challenge in the Company Petition filed by Prathapan alongwith his wife as co-petitioner, was to the said alleged allotment of 6865 equity shares of Rs. 100 each of the company. This was alleged to be an act of oppression on the part of Ramanujam who was managing the company. Prayer was made that the allotment of shares be set aside, and necessary correction be made in the Register of Members of the company. According to Prathapan Ramanujam did not contribute any money from his own resources for purposes of the company while all along he drew a handsome salary for working as the Managing Director. His maximum investment in the company could not be more than Rs. 20,000. He committed fraud and breach of trust as a result of which Pratha pan and his wife had been totally marginalised in the company. In fact, Muralidharan, brother of Prathapan was removed from the Board of Directors of the company on 1st October, 1994 while Suresh Babu, brother-in-law of Prathapan and brother of Pushpa, (Prathapan's wife) was removed as Director on 30th Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anner in which Ramanujam was managing the affairs of the company. The High Court held it to be an act of fraud on the part of Ramanujam in allotting 6865 equity shares of the company in his favour. The High Court further held that a perpetrator of fraud could not be allowed to take benefit of his own wrong. The High Court found that the observation of the Company Law Board that the appellants can sell their shares at par value to the Managing Director, getting 12 per cent interest on their investment, will not be justified but will only help the manipulator. The High Court ordered setting aside of allotment of shares made in the Board Meetings held on 24th October, 1994 and 26th March, 1997, to Ramanujam, the Managing Director of the company. The Share Register was ordered to be rectified accordingly. The present appeal by Ramanujam is directed against the judgment of the High Court. 10. On the basis of the submissions made by the learned counsel for the parties, following issues arise for consideration : Issue 1. Validity of allotment of equity shares of the Company in favour of Ramanujam whereby he becomes a majority shareholder and Prathapan and his wife are reduced to minorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e minutes of the alleged meeting of the Board of Directors said to have taken place on 24th October, 1994. As per the photocopy the minutes appear to be signed by Ramanujam as Chairman. The presence of Suresh Babu as a Director of the Company has been shown in the minutes. However, there is no evidence of presence of Suresh Babu in the said meeting. Article 36 of the Articles of Association of the company requires that a notice convening the meetings of the Board of Directors shall be issued by the Chairman or by one of the Directors duly authorized by the Board in this behalf. Suresh Babu filed an affidavit in the proceedings before the Company Law Board wherein he has categorically stated that at no point of time he was involved in the affairs of the company and in running the business of the company. Further he has stated in the said affidavit that at no point of time he was informed that he had been appointed as Director of the company. He had never received any notice of any Board meetings nor had he ever attended any Board meeting. In view of this categorical denial by Suresh Babu about attending any meetings of the Board of Directors of the company, it was incumbent on the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held as alleged we are unable to accept that a meeting of the Board of Directors was held on 24th October, 1994. If no meeting of the Board of Directors took place on that date, the question of allotment of shares to Ramanujam does not arise. We are inclined to believe that photocopy of the minutes of the alleged meeting dated 24th October, 1994 produced by appellants, is sham and fabricated. The alleged allotment of additional equity shares of the company in favour of Ramanujam is, there fore, wholly unauthorized and invalid and has to be set aside. Normally this Court would not have gone into these questions of fact. However, the learned counsel for the appellant in the course of his arguments drew our attention to the various Articles of Association of the company, which unfortunately neither the Company Law Board nor the High Court considered. We cannot help referring to them, particularly in view of the fact that the Articles of a company are its constituent document and are binding on the company and its Directors. The facts on record show that the company was being run as one man show and Ramanujam was maintaining the Minutes Book of meetings of Board of Directors only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts market value. He started working on a strategy to get controlling shares in the company. It was in furtherance of this objective that Ramanujam managed to show the entry regarding advance against shares in the Balance Sheet as on 31st March, 1994. For this amount, he allotted equity shares to himself to gain control of the company. In these facts it is difficult for us to appreciate that the additional funds were required by the company. In our view the finding of the High Court that no funds were needed by the company is fully justified. The only purpose was to allot additional shares in the company to himself to gain control of the company and to achieve this objective, the books of the company appear to have been manipulated. The High Court was right in holding that the entire manipulation of records of the company by Ramanujam was an act of fraud on his part. (d)We may also test the alleged act of allotment of equity shares in favour of Ramanujam from a legal angle. Could it be said to be a bona fide act in the interest of the Company on the part of Directors of the Company? 11.1 At this stage it may be appropriate to consider the legal position of Directors of companies r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule out any misuse of power for personal gains or ulterior motives. Non-applicability of section 81 of the Companies Act in case of private limited companies casts a heavier burden on its directors. Private limit ed companies are normally closely held, i.e., the share capital is held within members of a family or within a close knit group of friends. This brings in considerations akin to those applied in cases of partnership where the partners owe a duty to act with utmost good faith towards each other. Non-applicability of section 81 of the Act to private companies does not mean that the directors have absolute freedom in the matter of management of affairs of the company. 11.2 In the present case Article 4(iii) of the Articles of Association prohibits any invitation to the public for subscription of shares or debentures of the company. The intention from this appears to be that the share capital of the company remains within a close knit group. Therefore, if the directors fail to act in the manner prescribed above they can in the sense indicated by us earlier be held liable for breach of trust for misapplying funds of the company and for misappropriating its assets. 11.3 The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds those who take shares from the company and become co-adventurers with themselves and others who may join them. The maxim 'Caveat emptor' has no application to such cases, and directors who so use their powers as to obtain benefits for themselves at the expense of the shareholders, without informing them of the fact, cannot retain those benefits and must account for them to the company, so that all the shareholders may participate in them." Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 3 SCC 333 is a judgment of this Court in which amongst various other aspects the power of directors regarding issue of additional share capital was also considered. This Court observed: "The power to issue shares is given primarily to enable capital to be raised when it is required for the purposes of the company but it can be used for other purposes also as, for example, to create a sufficient number of shareholders to enable the company to exercise statutory powers, or to enable it to comply with legal requirements as in the instant case. Hence if the shares are issued in the larger interest of the company, the decision cannot be struck down on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the share. On appeal the Division Bench held that the affairs of Needle Industries (India) Ltd.'s case (supra) were being conducted in a manner oppressive to the Holding Company. The Division Bench ordered winding up of the company. A further appeal to the Court was allowed mainly on the ground that there was no oppression. However, a direction was issued that the Indian shareholders pay an amount equivalent to that by which they unjustifiably enriched, namely Rs. 90 x 9495 which comes to Rs. 8,54,550 to the Holding Company. In Needle Industries (India) Ltd.'s case (supra) this Court referred to some old English decisions with approval. Punt v. Symons [1903] 2 Ch. 506 was quoted in which it was held "where the shares had been issued by the Directors, not for the general benefit of the company, but for the purpose of controlling the holder of the greater number of shares by obtaining a majority of voting power, they ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used." Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch. 77 applied the same principle while holding: "....the basis of both cases is, as I understand, that directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of directors to be fair. The directors' acts should not only satisfy the test of bona fides they should also be done with a proper motive. Any lingering doubts over the status of the purpose doctrine as a separate and independent head of directors duty within the common law jurisdiction have been laid to rest by two decisions of the Court of Appeal in England in Rolled Steel Products (Holdings) Ltd. v. British Steel Corpns. 1986 Ch. 246 and Bishopsgate Investment Management Ltd. (In Liquidation) v. Maxwell (No. 2) [1994] 1 All ER 261. It was held by the Court of Appeal in Bishopsgate that the bona fides of the directors alone would not be determinative of the propriety of their actions. In a parallel development in Australia the proper purpose doctrine has been approved in a decision of the High Court in Whitehouse v. Carlto Hotel (P.) Ltd. [1987] 162 CLR 285. 11.7 The Tea Brokers (P.) Ltd. v. Hemendra Prosad Barooah [1998] 5 Comp. LJ. 463 was also a case of a minority shareholder who on becoming managing director of the company, issued further share capital in his favour in order to gain control of management of the company. Barooah and his friends and relations were majority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." Further it was held that if a member who holds the majority of shares in a company is reduced to the position of minority share holder in the company by an act of the company or by its Board of Directors mala fide, the said act must ordinarily be considered to be an act of oppression to the said member. 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. This is a benefit or advantage which the member enjoys and is entitled to enjoy in accordance with the provisions of company law in the matter of administration of the affairs of the company by electing his own men to the Board of Directors of the company. On the question of relief, the court observed: "A majority shareholder should not ordinarily be directed to sell his shares to the minority group of shareholders, if per chance through fortuitous circumstances or otherwise, the minority group of shareholders come into power and management of the company. The majority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the directors were right in considering that the majority's wishes were not in the best interests of the company, the allotments were invalid and ought to be declared void. It follows from this case that the exercise by directors of fiduciary powers for purposes other than those for which they were conferred is in valid. It may be said that although the power of issuing shares is given to directors primarily for the purpose of enabling them to raise capital when required for the purpose of the company, this was not the object of the directors in this case..." 11.9 It will be seen from the judgments in Needle Industries (India) Ltd.'s case (supra) and Tea Brokers (P.) Ltd.'s case (supra) that the courts in India have applied the same tests while testing exercise of powers by directors of companies as in other Commonwealth countries. 11.10 In the present case we are concerned with the propriety of issue of additional share capital by the Managing Director in his own favour. The facts of the case do not pose any difficulty particularly for the reason that the Managing Director has neither placed on record anything to justify issue of further share capital nor it has been show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id when presented cannot cease to be maintainable by reason of events subsequent to its presentation. In S. Varadarajan v. Venkateswara Solvent Extraction (P.) Ltd. [1994] 80 Comp. Cas. 693 (Mad.), a petition was filed by the applicant and four others under sections 397 and 398 of the Companies Act. During the pendency of the petition, the four other persons who had joined the applicant in filing the petition sold their shares thereby ceasing to be shareholders of the company. It was held that the application could not be rejected as not maintainable on the ground that the four shareholders ceased to be shareholders of the company. The requirement about qualification shares is relevant only at the time of institution of proceeding. In Jawahar Singh Bikram Singh (P.) Ltd. v. Smt. Sharda Talwar [1974] 44 Comp. Cas. 552 , a Division Bench of the Delhi High Court held that for the purposes of petition under section 397/398 it was only necessary that members who were already constructively before the court should continue the proceedings. It is a case in which the petitioner who had filed a petition died during the pendency of the petition. While filing the petition he had obtained cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding of fact is perverse and is based on no evidence, it can be set aside in appeal even though the appeal is permissible only on the question of law. The perversity of the finding itself becomes a question of law. In the present case we have demonstrated that the judgment of the Company Law Board was given in a very cursory and cavalier manner. The Board has not gone into real issues which were germane for the decision of the controversy involved in the case. The High Court has rightly gone into the depth of the matter. As already stated the controversy in the case revolved around alleged allotment of additional shares in favour of Ramanujam and whether the allotment of additional shares was an act of oppression on his part. On the issue of oppression the finding of the Company Law Board was in favour of Prathapan, i.e., his impugned act was held to be an act of oppression. The said finding has been maintained by the High Court although it has given stronger reasons for the same. 13.2 We find no merit in the argument that the High Court exceeded its jurisdiction under section 10F of the Companies Act while deciding the appeal. Issue 4 : Relief 14. On the question of relief, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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