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TMI Blog2004 (11) TMI 330X X X X Extracts X X X X X X X X Extracts X X X X ..... s a Director of the company. 3. Certain disputes arose between Shri Sachikanta Routray who held 1,64,560 shares in the company and his other brothers including the opposite party No. 2 relating to various businesses, namely, Rourkela Roller Flour Mills, Utkal Flour Mills (Rourkela) Pvt. Ltd., petrol pump, two foreign liquor outlets along with bonded warehouse at Rourkela, Lingaraj Roller Flour Mills, Gauri Shankar Food Processing, A.B. Tea wholeselling for Orissa. Utkal Motors Pvt. Ltd., Kiln bricks manufacturing, Potato cold storage industry, S.K. Exports Pvt. Ltd., Utkal Udyog (Export Unit), Paradip Ice Factory, Hindustan Marine Industries etc. 4. Because of these disputes, the authorised representative of the petitioner inspected the records of the company in the office of the Registrar of Companies, Orissa, Cuttack and found that opposite parties 2 and 3 have increased the authorised share capital of the company and have allotted the increased share capital to themselves and their relatives and associates from time-to-time as stated hereunder : ( i )An EGM of the company is alleged to have been held on 14-8-2003 and Form Nos. 5 and 23 have been filed on 12-9-2003 with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -duced into the records of the company. The petitioner has further alleged that no notice of the aforesaid EGMs were even served and the EGMs were not actually held. The petitioner has further stated that Article 9 of the Articles of Association of the company provides that where the company decides to increase the capital of the company by issue of further shares, such shares shall be offered to members and such offer shall be made by a notice specifying the number of shares to which the member is entitled, but in violation of the said Article 9 of the Articles of Association of the Company the opposite parties 2 and 3 have dishonestly and fraudulently allotted the increased authorised share capital of the company to themselves and to their relatives and associates and by the such manipulative action reduced the majority shareholders of the company to a minority and enhanced their position from minority shareholders to majority shareholders of the company. According to the petitioner, such action of the opposite parties 2 and 3 who were Directors of the company amount to breach of fiduciary duty of opposite parties 2 and 3 to the company and the Court should under section 203 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt that a person has been guilty while an officer of the company, of any fraud or misfeasance in relation to the company or of any breach of his duty to the company. He argued that the expression "in course of winding up" would mean at any time after presentation of the petition for winding up before the Court and not at any time after the winding up order is passed. He referred to the provisions of section 441(2) of the Act which states that in case of winding up of a company by the Court, such winding up shall be deemed to have commenced at the time of presentation of the petition for winding up. He submitted that whenever the Legislature intended that a particular consequence will follow only after the winding up order is passed, it has expressly stated so in the specific provision of the Act. In this context, he referred to the provisions of section 446(1) of the Act which provides that "when a winding up order has been made" or the Official Liquidator has been appointed as Provisional Liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of winding up order, shall be proceeded with, against the company, except by leave of the Court and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in sub-section (3) of section 203 of the Act, the petition under section 203 of the Act filed by the petitioner is not maintainable. 11. Mr. Das relied on the averments in the counter-affidavit and additional counter-affidavit filed on behalf of the opposite parties 1, 2 and 3 and submitted that the increase in the authorised share capital of the company and the allotment of such increased share capital of the company in favour of opposite parties 2 and 3 and their relatives and friends were not done with any dishonest and fraudulent intention but were done because of a family settlement under which Shri Sachikanta Routray and his associates were to transfer their shares in the company in favour of the opposite parties 2 and 3. He submitted that the increase of share capital and the allotment of the shares were not in any way detrimental to the interests of the company because fresh capital was required for expansion and diversification of the business of the company. He submitted that the decision of the Chancery Division In re, Looe Fish Ltd. s case ( supra ) does not apply to the facts of the present case. He cited the decision of the Andhra Pradesh High Court in Sala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught, and at the hearing of the application, the last mentioned person may appear and himself give evidence or call witnesses. (4) An application for the making of an order under this section by the Court or the Tribunal having jurisdiction to wind up a company may be made by the Official Liquidator, or by the liquidator of the company, or by any person who is or has been a member or creditor of the company. (5) On the hearing of any application for an order under this section by the Official Liquidator or the Liquidator, or of any application for leave under this section by a person against whom an order has been made on the application of the Official Liquidator or Liquidator, the Official Liquidator or Liquidator shall appear and call the attention of the Court or the Tribunal, as the case may be to any matters which seem to him to be relevant, and may himself give evidence or call witnesses. (6) An order may be made by virtue of sub-clause ( ii ) of clause ( b ) of sub-section (1), notwithstanding that the person concerned may be criminally liable in respect of the matters on the ground of which the order is to be made. (7) If any person acts in contravention of an ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is pending of the power to prevent a Director or person who is guilty of the conduct described in section 203(1)( b ) from continuing to be associated with the management of the company. This certainly cannot be the intention of the Legislature. 14. Moreover, sub-section (2)( b ) of section 203 makes it clear that "the Court having jurisdiction to wind up the company" is the Court which can pass an order under section 203(1)( b ) of the Act and sub-sections (3) and (4) of section 203 also make it clear that it is "the Court having jurisdiction to wind up the company" and not which has passed the winding up order before which the application under section 203(1)( b ) is to be filed. A plain reading of section 441(2) would show that in case of a winding up by the Court, such winding up shall be deemed to commence at the time of presentation of the petition for winding up. Hence, even though it may be commonly understood that winding up of a company normally commences when the order for winding up is passed by the Court by virtue of the statutory fiction in sub-section (2) of section 441 of the Act, winding up in respect of a company by a Court commence at the time of presenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice and loss. In Pushpa Wati Puri s case ( supra ) cited by Mr. Das, the issue was as to when would the right to apply under sections 446(2)( b ) and 542 of the Act be said to accrue for the purpose of Article 137 of the Schedule to the Limitation Act, 1963 and the Delhi High Court held on an interpretation of the provisions of the Act and in particular sections 446 and 542 that the right to apply will arise only when the winding up order is passed and not before. The Delhi High Court was not considering in the said case as to what would be the meaning of in course of winding up of a company in section 203(1)( b ) of the Act. 16. The next issue to be decided in this case is whether the petition under section 203 is liable to be dismissed for non-compliance of the provisions of sub-section (3) of section 203 of the Act. Sub-section (3) of section 203 of the Act provides that a person intending to apply for the making of an order under section 203 shall give not less than ten days notice of his intention to the person against whom the order is sought, and at the hearing of the application, such person against whom the order is sought may appear and himself give evidence or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have appeared in this case, filed their counter-affidavits and documents and had been heard. In the circumstances, the question of dismissing the petition for non-compliance of the provisions of sub-section (3) of section 203 of the Act does not arise. 18. Coming now to the main issue in this case, Article 9 of the Articles of Association of the company is quoted hereinbelow : "9. In case where the Company decides to increase the capital of the Company by the issue of further shares or by further issue of shares out of unissued authorised capital such shares shall be offered to the members (irrespective of class) and such offer shall be made by notice specifying the number of shares to which the member is entitled and limiting at time within which the offer, if not accepted, will be deemed to be declined and after the expiration of such time or on receipt of an intimation from the member to whom such notice is given that he declines to accept the shares offered, the Directors may dispose of the same in such manner as they think most beneficial to the company." It is clear from Article 9 of the Articles of Association of the company that where the company decides to increas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of necessary returns and transfer of the shares held by Shri Sachikanta Routray in the company to opposite parties 2 and 3, therefore, was just a formality. It is also pleaded in the additional counter-affidavit filed on behalf of the opposite parties 1, 2 and 3 that when there was need to increase the share capital of the company, opposite party No. 2 had meetings with Shri Sachikanta Routray who informed the opposite party No. 2 that as he has severed his interest in the said business, he was not going to contribute to the said business either by equity or in any other manner and the opposite party No. 2 could bring in his own funds in whichever manner he deemed appropriate. Accordingly, the authorised share capital of the company was increased and such increased shares were allotted from time-to-time and no allotment was made in favour of Shri Sachikanta Routray. 20. I am afraid that this plea of family settlement taken by the opposite parties 1 to 3 in the additional counter-affidavit cannot be a good defence for the opposite parties 2 and 3 increasing the authorised share capital and for allotting the shares out of the authorised increased share capital to themselves, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son, J. relying on the principles as laid down in Fraser v. Whalley [1864] 2 H. M. 10, and Punt v. Symons Co. [1903] 2 Ch. 506, held that the power to issue shares in a limited company given to Directors for the purpose of enabling them to raise capital when required for the purpose of company is a fiduciary power to be exercised by them bona fide for the general advantage of the company, and when the company is in no need of further capital, Directors are not entitled to use their power of issuing shares merely for the purpose of maintaining their control, or the control of themselves and their friends, over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders. Following the aforesaid decision in S. Mills Co. Ltd. s case ( supra ), Jonathan Parker, J. In re, Looe Fish Ltd. s case ( supra ) held that the allotment of 24,000 shares by Mr. Soady in order to maintain his control of the company was in clear breach of his duty as Director to the company and for this reason, Mr. Soady was disqualified to act as the Director of the company. In the language of Jonathan Parker, J. : "In my judgment there ..... X X X X Extracts X X X X X X X X Extracts X X X X
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