9911796707
TMI Blog2005 (1) TMI 409X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain reasons with which we are not concerned, the estate of Gaekwad came into the hands of their elder son, Fatehsinhrao P. Gaekwad (FRG) even during the life time of Sir Pratap Singh. FRG floated several companies three of which are Baroda Rayon Corporation Ltd. (BRC) Gaekwad Investment Corporation Company Ltd. (GIC) and Alaukik Trading & Investment Corporation Pvt. Ltd. (Alaukik). BRC came into existence in 1958. At the outset, it was being run under Managing Agency System which was abolished in or about 1968 and later on the same was being managed by the Board of Directors with the assistance of professional executives Appellant No. 1 herein, the youngest son of Pratapsinghrao Gaekwad joined the said company in 1968. He was the Director of Managing Agents till 31-12-1969 whereafter he became the Additional Director with effect from 1st January, 1970. He in the same year became Joint Managing Director. In April 1976, he became the Managing Director of BRC. He was reappointed as Managing Director for two periods of five years each with effect from 19th February, 1980 and 19th February, 1985. FRG passed away on 1st September, 1988, whereafter he was appointed as Chairman and Mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded to raise funds from the existing members. The Board of Directors of GIC in a meeting held on 10-11-1987 decided to broad-base the company whereafter an extraordinary general meeting was convened on 17-12-1987. In the said FGM a decision was taken to increase the capital by issuing 25000 equity shares of Rs. 100 each. The matter was again placed in a Board Meeting of GIC on 8th January, 1988. In the said Board Meeting presided over by Appellant No. 1 and attended by Mr. P.U. Rana and Mr. P.H. Chinoy, a resolution was passed that 15000 equity shares of Rs. 100 each be issued at par to the members of the company. The said resolution reads as under : "Resolved that out of 25000 equity shares of Rs. 100 each, 15000 equity shares of Rs. 100 covering Rs. 15,00,000 be issued at par to the members of the Company at present and the balance as and when required. Further Resolved that the Management Committee of the Company be and is hereby authorized to issue equity shares to members in such proportion as it deems fit. Further Resolved that the Management Committee be and is hereby authorized to do all such acts, deeds and things necessary for the purpose." Pursuant to or in furtheran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in his favour and in favour of his children in June, 1988 as the same remained unallotted as other members specifically refused to take up any share. His sons and daughters applied for further 3000 shares through Appellant No. 1 as guardian and the same was allowed. The remaining 4500 shares, however, remained unallotted. The issue is said to have been closed on 10-12-1988. 7. Respondent No. 12 Mrs. Puar who was the Managing Director of Alaukik in a meeting held on 12-10-1989 which was chaired by her issued to herself 1500 shares without allegedly issuing any notice to the existing shareholders and wherefor allegedly no payment was even made. It is contended that by reason of such overt act, the Respondent No. 12 herein came in majority of Alaukik as a result thereof it would cease to be a subsidiary company of GIC. GIC had 84% shares in Alaukik but by reason of the said allotment in favour of Respondent No. 12 its shareholding therein was diluted to 32%. The account of the Company was also said to have been transferred to a current account. 8. On 1-9-1990, a Civil Suit being No. 675/90 was filed by GIC against Alaukik questioning inter alia the allotment of 1500 equity shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endant company in favour of the second defendant company are ultra vires their powers, illegal null and void ab initio and that the said shares continue to be of the ownership of the respective defendant Nos. 3 to 7 as if no such sale or transfer was ever made. B. a decree for permanent mandatory injunction be passed in favour of the plaintiff and against the first defendant directing it to offer and transfer the said 9415 equity shares in the first defendant company to the plaintiff and other remaining members. C. a decree for permanent mandatory injunction be passed in favour of the plaintiff and against the defendant No. 2 restraining the second defendant from exercising or enjoying any voting or other rights in respect of the said 9415 equity shares in the first defendant company. D. that a decree for permanent mandatory injunction be passed in favour of the plaintiff and against the second defendant directing the second defendant to repay the first defendant company dividend, if any, paid to the second defendant with interest at 24 per cent per annum. E. any other relief that the Hon'ble Court deems fit in the circumstances of the case be granted." Suit No. 867/90 was fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ably, Respondent Nos. 1 and 12 herein took inspection of the Registers of Members and other documents on 10-12-1996 and the relevant extracts were taken and notarised. 16. An Annual General Meeting was allegedly held on 20-12-1990 wherein except for appointment of auditors all other resolutions e.g. seeking appointment of Directors in favour of Appellant No. 1, his wife (Appellant No. 2) and his group were rejected. In the said meeting the shareholdings said to have been acquired by Indreni i.e. 9415 shares was not taken into account and the voting rights of the Appellants were kept confined to 66 shares. It is also not in dispute that prior to the said meeting, Appellant No. 1 lodged a First Information Report apprehending trouble in the said meeting. 17. Respondent No. 1 filed an application under sections 397 and 398 before the Gujarat High Court on or about 4th March, 1991 wherein she initially prayed for the following reliefs : (A-i)Declaration that she is allottee of 8000 equity shares of respondent No. 6 company. (A-ii)Direction to issue share certificates immediately to her of these 8000 shares. (B)Declaration that issue and allotment of 3000 shares in excess of 6475 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In the event that this Hon'ble Court holds that the allotment of 6475 shares to Respondent Nos. 1 to 5 and of 3000 shares to Respondent Nos. 4 and 5 is valid, this Hon'ble Court be pleased to declare that the said 9475 shares were transferred to M/s. Indreni Holdings Pvt. Ltd. and shall be offered and transferred by Respondent No. 6 to the shareholders holding pro rata on the basis of the original shareholding of 425 equity shares. A-4. That this Hon'ble Court be pleased to direct Respondent No. 6 by an order of mandatory injunction to forthwith transmit 300 equity shares registered in the name of late Fatehsinhrao Gaekwad as the then trustee of the Jaysinhrao Ghorpada Trust in favour of the present trustees. Petitioner No. 1 and Smt. Mrunalinidevi Puar. A-5. That this Hon'ble Court be pleased to transfer (i ) Special Civil Suit No. 675 of 1990 pending before the Court of the Civil Judge (Senior Division) at Baroda, (ii) Special Civil Suit No. 305 of 1990 pending before the Court of the Civil Judge, Senior Division, at Rajkot, (iii ) Special Civil Suit No. 867 of 1990 pending before the Court of the Civil Judge (Senior Division) Baroda, at Baroda, (iv) Special Civil Suit No. 87 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard by its order dated 28th September, 1992." 20. A question as regard the efficacy of simultaneous proceedings one before the High Court and another before the Company Law Board arose for consideration and by an order 9-3-1993 the Division Bench directed that in view of the nature of controversy it would be in the interest of the parties if the matter was finally heard and disposed of. The Appellants herein allegedly took a stand that if the said petition under section 397 was heard on merits and disposed of expeditiously they would have no objection to the matter being heard either before the Company Law Board or before the learned Company Judge. Upon obtaining liberty from the Division Bench, the matter was mentioned before the learned Company Judge enquiring as to whether it can be disposed of expeditiously whereupon a schedule of hearing was worked out. Respondent Nos. 12 and 13 herein were also added as parties in the said proceedings. The affidavits filed by the parties in all the proceedings were permitted to be brought on records and they were further permitted to file replies and/or rejoinders thereto. 21. The learned Company Judge disposed of the matters on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Division Bench 23. The Division Bench, on the other hand, held that the allotment of both 6475 and 3000 shares was invalid. As far as 6475 shares are concerned, it was held that the allotment was solely motivated by self-interest and the minutes confirming such allotment were not acceptable. As far as 3000 shares are concerned, the Division Bench did not accept the authenticity of the letter by the Company Secretary of FRG renouncing the shares. Transfer of 9415 shares to Indreni was held to be invalid as no transfer notice was given to the company as required in terms of Article 8 of the Articles of Association. As the transfer was duly recorded, to undo any such transfer, a resolution by the Board of Directors of Indreni would be required. In the absence of any such resolution the transfer beingcomplete, only Indreni could have transferred the shares back to the Appellants. The Division Bench further held that there was a breach of fiduciary duty on the part of the Appellant No. 1. It opined that the relief that may be granted by the Courts is equitable though originating from a statutory provision. Since the actions of the respondents were designed to wrest control of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the meeting except the Additional Registrar who will Chair and conduct the meeting with his official assistants. The Additional Registrar will be assisted by a Section Officer of the High Court of his choice in the said work. 6. All the shareholders who are parties to the present proceedings are hereby put to notice about the date of the said Extraordinary General Meeting to be held on 14-10-2000 at 11.00 AM at the Registered Office of the respondent No. 6 company at 'Indumati Mahal', Baroda. The Additional Registrar will, however, get published the notice of the meeting in one English daily and one Gujarati daily having circulation in the area. The Additional Registrar will also immediately issue individual notices of the said meeting to the shareholders. The Additional Registrar is authorized to seek assistance for conducting the meeting from all or any of the parties to these proceedings and/or the officials of the company who shall be bound to assist him in that regard. No adjournment motion will be entertained at the said meeting. 7. The Additional Registrar will on completion of the said meeting, prepare and sign the minutes of the meeting recording its outcome and decla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a later stage when the Respondent No. 12 herein filed a company petition before the Company Law Board, Delhi a challenge as regards allotment of 6475 shares was also made. In the Company Petition although the reliefs were later on amended, pleadings were not. On a fair and reasonable reading of the pleadings, it was submitted that only inference that can be drawn was that the subject matter of challenge centered round the allotment of 3000 shares only and transfer of their shares by the Appellants to Indreni on the premises that it being an outsider it was impermissible in terms of the relevant provisions of the Articles of Association. 26. Mr. Salve would argue that as the Appellants had acquired 6475 additional shares, there was indisputably no question of their abusing any position to take over the company as they had all along been incharge thereof. 27. Respondent Nos. 1 and 12, Mr. Salve would contend, having taken inspection of the documents on 10-12-1990 and company petition having been filed on 4-3-1991 as well as the relevant documents having been annexed thereto would clearly demonstrate that reliance thereupon had been placed by the Respondent No. 1 herein and, thus, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spectively, on the other hand, would submit : (i)Appellant No. 1 being in fiduciary position as the Director of GIC as also a family member was required to act in utmost good faith, make full and honest disclosure to other shareholders and thus he could not have made any profit by allotting shares to himself and his family members directly or indirectly and was furthermore required to inform the shareholders as regard the benefits arising therefrom so that they could participate therein. Such a fiduciary position remains, despite non-applicability of section 81 of the Company Act. (ii)Appellant No. 1 in breach of said fiduciary duty aggrandized himself by transforming himself from a miniscule minority of 1.86% to 86% and failed to explain as to how he got such advantages to the detriment of other shareholders. The explanations offered by him as regard allotment of shares are wholly inconsistent and contradictory as conflicting versions had been set out which do not clearly and cogently explain as to how the different shares were (a) decided to be issued, (b) offered for subscription, (c) allotted to Appellant No. 1 and (d) allotted to non-members. Transfer to Indreni was a device ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the affairs of the company towards the Respondent Nos. 1 and 12 have been proved. Fiduciary duty 32. Chapter IX of the Indian Trusts Act provides for certain obligations in the nature of trusts. The Trust Act recognizes various kinds of trusts including resulting trust. An express trust, however, may be created by reason of an agreement between the parties [See Barclays Bank v. Quistclose Investments 1970 AC 567]. 33. By reason of section 88 of the Indian Trusts Act, a person bound in fiduciary character is required to protect the interests of other persons but the heart and soul thereof is that as between two persons one is bound to protect the interests of the other and if the former availing of that relationship makes a pecuniary gain for himself; section 88 would be attracted. What is sought to be prevented by a person holding such fiduciary benefit is unjust enrichment or unjust benefit derived from another which is against conscience that he should keep. When a person makes a pecuniary gain by reason of a transaction, the cestui qui trust created thereunder must be restored back. 34. The purported breach of trust on the part of Appellant No. 1 herein relate to : (i)Is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard were approached by one Holden with a view to the purchase the entire undertaking of the company with a view to resell the same at a profit to a new company. The question of fiduciary obligation on the part of the Directors arose therein when the plaintiff brought an action against the Chairman and the two other purchasing Directors asking for setting aside the sale on the ground that the defendants as Directors ought to have disclosed the feature of negotiations with Holden when negotiating purchase of their shares. The question therein posed was : Assuming that Directors are, in a sense, trustees for the company, are they trustees for individual shareholders? The Chancery Division despite holding that the Directors must act bona fide and for the best interest of the company did not accept the argument that the relationship between the shareholders inter se are the same as that of partners in an unincorporated company holding : "...The contrary view would place directors in a most invidious position, as they could not buy or sell shares without disclosing negotiations, a premature disclosure of which might well be against the best interests of the company. I am of the opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company Law, 23rd edition, page 848, it is stated: "64-02. Relationship is with company: The fiduciary relationship of a director exists with the company : the director is not usually a trustee for individual shareholders. Thus, a director may accept a shareholder's offer to sell shares in the company although he may have information which is not available to that other, and the contract cannot be upset even if the director knew of some fact which made the offer an attractive proposition. So in Percival v. Wright a person who had approached a director and sold him shares in the company, afterwards, upon discovering that the director had known at the time of the contract that negotiations were on foot for the purchase by an outsider of all the shares in the company at a higher figure, could not impeach the contract. In his judgment Swinfen-Eady J. said 'there is no question of unfair dealing in this case. The directors did not approach the shareholders with the view of obtaining their shares. The shareholders approached the directors and named the price at which they were desirous of selling'." 41. In Pennington's Company Law, 6th Edn. at pages 608-09, it is stated : "Directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors of a company seek, by entering into an agreement to issue new shares, to prevent a majority shareholder from exercising control of the company, they will not be held to have failed in fiduciary duty to the company if they act in good faith in what they believe, on reasonable grounds, to be the interests of the company. If the directors' primary purpose is to act in the interests of the company, they are acting in good faith even though they also benefit as a result." In Needle Industries (India) Ltd.'s case (supra), this Court furthermore noticed Punt v. Symons [1903] 2 Ch. 506 and opined in the following terms: "105. In Punt v. Symons [(1903) 2 Ch. 506 : 72 LJ Ch. 768 : 89 LT 525 : 52 WR 41] which applied the principle of Fraser v. Whalley (71 ER 361 : 11 LT 175), it was held that : Where shares had been issued by the Directors, not for the general benefit of the company, but for the purpose of controlling the holders 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. But Byrne, J. stated : There may be occasions when Directors may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances or special reasons as pointed out hereinbefore normally would not bring in the concept of fiduciary relationship in a director vis-a-vis the current shareholders. However, in Coleman's case ( supra) and Brunninghausen's case (supra) it was held that the fiduciary duties of directors to the shareholders exist in the specially strong context of the familiar relationships having regard to their personal position of influence in the company concerned. 48. We may at this stage consider the case laws replied upon by Mr. Desai. 49. Dale & Carrington Invt. (P.) Ltd. v. P.K. Prathapan [2004] 54 SCL 601 (SC) requires a closer scrutiny. In that case one P.K. Prathapan (Prathapan), an NRI through his mother induced Ramanujam to promote a company by making initial investment of Rs. 5 lakhs in shares. Prathapan, the principal shareholder of the Company came to know that the Board of Directors in its meeting held on 24th October, 1994 and chaired by Ramanujam, adopted a resolution on the premise that a sum of Rs. 6,86,500 stood to the credit of said Ramanujam and in lieu thereof equity shares of Rs. 100 each would be allotted in his favour. Prathapan was not intimated about the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oper purpose thereof. If the purpose is proper and the action of the director is bona fide, the ratio should not be extended so as to hold that such a duty of the director towards the shareholder is absolute despite the fact that there is no legal requirement therefor. Duty of disclosure to shareholders in that case had a strong nexus with the affairs of the company. Dale & Carrington Invt. (P.) Ltd.'s case (supra ) is not an authority for the proposition that the purported fiduciary duty of a director towards the shareholder is absolute although the transaction in question may not have a direct co-relationship with the affairs of the company. 50. Moreover, the Bench did not have the advantage of considering the 4-Judge Bench decision of this Court in Nanalal Zaver's case (supra). It furthermore did not have the advantage of noticing the decisions of other jurisdictions which had been noticed hereinbefore. 51. The Court, it is interesting to note, noticed Needle Industries (India) Ltd.'s case (supra) as regards the power of the company to issue new shares but the legal effect thereof was not considered in details. The directors have a power to issue additional capital shares and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... na fide and not arbitrarily in the following terms : "12. Article 52 of the appellant company provided that the Directors might at their absolute and uncontrolled discretion decline to register any transfer of shares. Discretion does not mean a bare affirmation or negation of a proposal. Discretion implies just and proper consideration of the proposal in the facts and circumstances of the case. In the exercise of that discretion the Directors will Act for the paramount interest of the company and for the general interest of the shareholders because the Directors are in a fiduciary position both towards the company and towards every shareholder. The Directors are therefore required to act bona fide and not arbitrarily and not for any collateral motive." [Emphasis supplied] (p. 554) This Court therein also applied the bona fide test of the Director and for the benefit of the company as a whole. In that case, the directors assigned reasons which were tested from three angles view, viz., (i) whether the directors acted in the interest of the company; (ii), whether they acted on a wrong principle; and (iii) whether they acted with an oblique motive or for a collateral purpose. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s his views. 59. It is interesting to note that in Needle Industries (India) Ltd.'s case (supra), this Court said even in certain cases the Directors attempt to maintain their control over the company or in newly acquiring may not amount to abuse of their fiduciary power stating : "Applying this principle, it seems to us difficult to hold that by the issue of rights shares the Directors of NIIL interfered in any manner with the legal rights of the majority. The majority had to disinvest or else to submit to the issue of rights shares in order to comply with the statutory requirements of FERA and the Reserve Bank's directives. Having chosen not to disinvest an option which was open to them, they did not any longer possess the legal rights to insist that the Directors shall not issue the rights shares. What the Directors did was clearly in the larger interests of the Company and in obedience to their duty to comply with the law of the land. The fact that while discharging that duty they incidentally trenched upon the interests of the majority cannot invalidate their action. The conversion of the existing majority into a minority was a consequence of what the Directors were obliged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Burden of proof 63. According to Mr. Desai, however, the burden to prove his bona fide was upon the Respondent No. 1. The learned counsel in support of the said contention has referred to section 111 of the Evidence Act and also relied upon a decision of this Court in Krishna Mohan Kul alias Nani Charan Kul v. Pratima Maity [2004] 9 SCC 468. In Krishna Mohan Kul's case (supra), this Court was considering a transaction resulting in execution of a deed of settlement by one Dasu Charan Kul. The said deed was executed in presence of the witnesses although they were not in existence. The executant in that case was more than 100 years of age. He was paralytic and his mental and physical conditions were found to be not in order. Though his left-thumb impression was stated to have been affixed on the document, there was no witness who could substantiate that he had in fact put his thumb impression. In the aforementioned fact situation, provisions of section 111 of the Indian Evidence Act was invoked holding that the burden of establishing perfect fairness, adequacy and equity is cast upon the person in whom the confidence has been reposed and the rule applies to all persons standing i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ekwad Investment Corporation Private Limited be convened to consider increase issue the capital of the company on Thursday, the 17th December, 1987 at 11.00 A.M. in the registered office of the company." Pursuant to or in furtherance of the said resolution an Extraordinary General Meeting of the GIC was held wherein a resolution was passed to increase the equity shares by 25000 shares at the rate of Rs. 100 to the members of the company in the following terms : "Resolved that Clause V of the Memorandum of Association of Gaekwad Investment Corporation Private Limited be changed as under :- That the authorised capital of the company shall consist of Rs. 1,00,00,000 (Rupees one crore) divided into 25,000 equity shares of Rs. 100 each and 75,000 (four per cent) Non-cumulative Irredeemable Preference Shares of Rs. 100 each. Resolved that capital clause of the Articles of Association of Gaekwad Investment Corporation Private Limited be changed as under:- That the Authorised Capital of the Company shall consist of Rs. 1,00,00,000 (Rupees one crore) divided into 25,000 equity shares of Rs. 100 each and 75,000 (four per cent) Non-cumulative Irredeemable Preference Shares of Rs. 100 eac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Agenda of the Board Meeting held on 8th January, 1988. (4) The financial position of the Company was discussed at length. The Board was informed that letters have been addressed on 12th February, 1988 to the shareholders informing them that the company has issued 15000 equity shares of Rs. 100 each to the members and to convey their acceptance on or before 10th March, 1988. The company would know the amount, the company would receive from them." The said meeting bears the signature of the Secretary to the Chairman. However, although in her original pleadings the factum of issuance of such circular letter dated 12-2-1988 had not been denied or disputed but in her rejoinder to the reply, she said so. The said stand apparently was taken by way of afterthought and, thus, cannot be accepted. 71. We, moreover, do not see any reason to come to the conclusion as has been done by the Division Bench of the High Court that the said meeting was not held at all. The company being a family company, the minutes of the said meeting, which bear the signature of the Appellant No. 1 herein, should not be discarded. 72. In the pleadings, it was accepted, as would appear from the discussions made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gaekwad 1505 14. Smt. Devyanidevi Gaekwad 1 15. Shri Ajitsinh Gaekwad 1 16. Smt. Mrunalinidevi Puar & Shri R.P. Gaekwad 5 17. Smt. M. Puar & Smt. Shantadevi G. 4 18. Shri Ajaysinh Ghorpade 1 19. Smt. Vasundraraje Ghorpade 1 20. Shri Sangramsingh Gaekwad 2001 21. Shri S.P. Gaekwad, H.U.F. 1475 22. Shri S.P. Gaekwad - F&NG of Shri Pratapsinh Gaekwad 2750 23. Shri S.P. Gaekwad - F&NG of Shri Priyadarshini Gaekwad 1750 Total Shares 10,925 Thus, the above allotment of 10500 equity shares was confirmed and accepted in the 31st Annual General Meeting of GIC. All disputes which are now being raised about the issue of additional capital of 10,500 equity shares cannot be raised since the allotment is confirmed/ratified in the said Annual General Meeting. We would, however, deal with the question as regard validity of allotment of 3000 shares in favour of the appellants and 500 shares allotted in favour of Respondent No. 12 separately. 76. Furthermore, taking a view of the admitted unequivocal stand taken by Respondent No. 1 as also by Respondent No. 12 in Company Petition No. 7 of 1992, the High Court was not correct in holding that the party shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... life time. The findings of the Division Bench that he had full interest in the company shares may not be correct inasmuch as had that been the position, he would have definitely opted for allotment of 8000 shares in his name. In any event he would have opposed allotment of 7500 shares in the name of Appellant and Respondent Nos. 12 and 13 if he intended to consolidate his position as had been opined by Division Bench of the High Court. 82. It is not necessary for us to dwell at length the question as to whether there had been an express renunciation by FRG in relation to 8000 shares allotted to him as the letter dated 11-6-1988 purported to have been written by Shri Khade to the Appellant No. 1 is disputed. Even if we proceed on the basis that there had been no express renunciation by FRG as regards 8000 shares allotted in his favour, there may not be any doubt whatsoever that in law, having regard to the fact that he acquired only a personal interest therein, the same came to an end with his death. 83. In absence of any documentary evidence, it is also difficult for us to accede to the contention raised on behalf of the Respondents herein that the Respondent Nos. 1 and 12 advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the amount of loan as admittedly Respondent Nos. 1 and 12 advanced the said amount by way of loan only. Only at a later stage a claim was laid to utilize the amount towards the purchase of 8000 shares. 87. Significantly, although the Respondent No. 1 participated in the family meeting dated 23-3-1988 and had received the letter of offer dated 12-2-1988, did not opt for any share. As indicated hereinbefore, she had not claimed for allotment of any share even after the death of FRG which took place on 1st September, 1988. Even in November, 1988, she even did not subscribe for rights issue of BRC and in fact renounced such offer as had been admitted in her rejoinder affidavit filed in Company Petition No. 51 of 1991 to the reply filed by the Appellant No. 1 herein. In the said rejoinder, a story was made out for the first time that such renunciation was made so that BRC equity shares can be purchased by the family in the name of such persons as was decided. 88. In view of our findings that the Respondent No. 1 is estopped and precluded from questioning the allotment of 6475 shares to the Appellant herein. It may not be necessary for us to go into the details of alleged inconsiste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Khade wherein the financial position of the company in the absence of dividend income was discussed and resolution was adopted that company would issue 25000 equity shares to any members as the Board of Directors deem fit and subsequent thereto and as consequence of the authority given by the shareholders to raise capital, a Board Meeting of the Company was held on 8-1-1988 wherein Appellant No. 1, Mr. P.H. Chinoy, Mr. P.U. Rana were present and after discussion, it was resolved that 15000 equity shares of Rs. 100 each be issued at par to the members of the company; (iv)the issuance of a circular letter dated 12-2-1998 pursuant to or in furtherance of the said resolution to all members of the company. 94. But in para 10 of her reply to the said affidavit, Respondent No. 12 stated: "What is stated in Paras II 2(ii )( iii)( iv) & (v) of the affidavit in reply is broadly true except that Shri Khade was not only then the Company Secretary of Respondent No. 6 Company but still continues to be the Company Secretary." 95. The Respondent No. 1, therefore, accepted and admitted the allegations made by the Appellant No. 1 herein by reason of non-traversal of the said pleadings. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be allotted worth Rs. 15 lakhs, i.e., 15000 at Rs. 100. Requisitions so far 1. Chairman 8000 shares Rs. 8,00,000 2. Maharani of Dhar 500 shares Rs. 50,000 3. Princess Subhangini Raje Gaekwad 25 shares Rs. 2,500 4. Sangramsinh P. Gaekwad and others 6475 shares Rs. 6,47,500 Total 15000 shares 15,00,000 The Shares will be allotted in the names asked for by the above parties." This is the purported first version. 100. The third draft is said to be in the following terms: "A Committee Meeting of Gaekwad Investment Corporation Pvt. Ltd. was held on 21-3-1988 at 3.00 PM at Hoechst House, Nariman Point Bombay- 400021 Present: 1. Shrimant Sangramsingh Gaekwad 2. Shri P.H. Chinoy Shri Sangramsingh Gaekwad was in the Chair. In terms of the Resolution passed at the Board of Directors meeting held on 8-1-1988 for issue of 15000 Equity Shares of Rs. 100 each of the Company offer letter dated 12-2-1988 have been sent to the Shareholders of the Company requesting them to convey their acceptance for the number of shares they would like to subscribe alongwith their cheques for the full amount of Share. Subscription ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus, was given to all the parties named in the said minutes of the meeting to either apply for shares in their own names or in the names of any other person of their choice. In that view of the matter, the words written by hand 'and others' as contained in the first draft of the meeting may not be of much significance. Furthermore as noticed hereinbefore, the said draft minute as sent by Mr. M.N. Khade with a covering letter. In the company petition, the issuance of the said letter and the ratio of allotment having not been denied or disputed, we have to proceed on the basis that the contents of the said minutes of meetings are correct. Even in law, shares can be allotted as and when the amounts were received. Admittedly, all the family members had participated in the issue even if the last date of offer dated 10-3-1988 had expired. The restriction as regard time of allotment, thus, may not be of much significance. 102. Another aspect of the matter also cannot also be lost sight of 6475 shares were allotted in the name of the Appellants as also in the names of SPG, HUF were allotted between April and June, 1988. Mrs. Shubhanginidevi Gaekwad was allotted 25 shares and Mrs. Puar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 15,000 equity shares, 8000 equity shares would be allotted to Shri Fatehsinhrao Gaekwad, 500 equity shares to Shrimati Mrunalini Devi Puar, the sister of Shri Fatehsinhrao Gaekwad, 25 shares to Princess Shubhangini Raje and 6475 shares for Shri Sangramsinh Gaekwad, the First Respondent herein." Despite such categorical admissions in the pleadings, a statement was made across the bar that at the time of filing of the Company Petition the Respondent No. 1 herein did not have all informations which came to light at a much later stage. It was urged that only with a view to obtain complete reliefs, prayers made in the company petition were amended and reliefs had been granted by the High Court keeping in view the pleadings and affidavits filed by the parties in all the three matters. We have our own doubts how far the procedure adopted were correct when is a case of oppression the court must strictly go by the pleadings made in the application. The provisions of the Civil Procedure Code do not envisage that pleadings in any other case should be the basis for grant of relief, particularly, when the plea taken in both the petitions are contradictory and inconsistent with each other. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 3000 shares to the Respondent Nos. 3 and 4 herein, as would appear from a perusal of the allegations made in the company petition and on a reasonable construction thereof. 111. The allotments made to the parties including 8000 shares were provisional in nature and as such shares were to be allotted on payment, as is evident from the minutes of the meetings. No other person except the Appellants herein, Mrs. Puar and Mrs. Shubhangini Devi opted for allotment of shares to the extent of 6475, 1000 and 25 shares respec-tively. 112. It is not in dispute that upon demise of FRG, Respondent No. 1 applied for grant of succession certificate on 28-11-1989 wherein she disclosed the assets of FRG but except for his 22 shares in GIC, no claim for any other share was made far less her right as regard 8000 shares. It is also not in dispute that the matter relating to her claim to succeed FRG as his Class I heir is pending adjudication in Civil Suit No. 725/1991 in Baroda Civil Court. She claimed title in respect of 8000 shares by inheritance in terms of Hindu Succession Act. Indisputably, in terms of section 15 of the said Act she is a Class-I heir but the Appellants herein contend that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount to invitation to offer and not an offer. A right to a share would fructify only when an offer made by the company is accepted. Only upon acceptance of such offer a binding contract comes into being. A right, as is well known, fructifies only upon conclusion of a contract and not prior thereto. When a share is allotted in favour of a person as a member of the company, it becomes his personal right. Such a personal right is not heritable. By reason of a mere provisional allotment without making any payment therefore no legal right in the shares was created. It would also be of some interest to note that even initial allotment of shares cannot be transferred. 117. In Canbank Financial Services Ltd. v. Custodian [2004] 54 SCL 626 (SC), it has been held: "42. The allotment of CANCIGOS is not a transfer as thereby Canbank Mutual Fund had allowed the shares not as owner thereof. The Benami Transactions Act applies when there is a transaction in which the property is transferred. If allotment of CANCIGOS is not a transfer of property, the Act would not apply. [See Sri Raj Sachdeva v. Board of Revenue AIR 1959 All. 595 and Swadeshi Cotton Mills Co. Ltd. In re 1932 Comp. Cas. 411]. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e son and daughter of the Appellant Nos. 1 and 2 herein, no such challenge was made as regards 500 shares allotted to Respondent No. 12. It is also true that the dividend had been paid for the year ending 31-3-1991 at the rate of 10 per cent and 300 per cent respectively to both Respondent Nos. 12 and 13 in respect of 1000 shares and 25 shares held by them respectively. But this action on the part of the contesting respondents would not validate the transaction as regard issuance of 3000 shares in favour of the Appellants. 121. Even assuming that the children of the Appellant Nos. 1 and 2 became members, in relation to the shares originally allotted to Fatehsingh Gaekwad, as was submitted by Mr. Jethmalani, no further circular or notice to the shareholders about the availability thereof had been issued. Even the Appellant No. 1 in his affidavit has contradicted himself by making inconsistent statements. 122. Furthermore, in absence of any resolution by the Board of Directors, no offer could be made to the Respondent No. 12 as regard 500 shares out of 8000 shares which were allotted to FRG. 123. The Appellants herein have utterly failed to prove that there has been any renunciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inds out a person who intends to purchase the same, a notice of the Proposing Transferor shall be issued. Article 10 provides for valuation of shares by the auditors in case of any difference between the Proposing Transferor and Purchasing Member Article 12, however, provides that if the company does not find a Purchasing Member and give notice in the matter stated in Article 9 with a period of 28 days after being served with a transfer notice, the Proposing Transferor shall at any time within three months afterwards be at liberty subject to Article 16 thereof to sell the share to any person and at any price. 128. Article 14 envisages transfer to a member of the family in respect whereof the embargo contained in Articles 7 to 13 would not apply. Only when a share is to be transferred by a member to an outsider being a person of his choice other than those specified in Article 14, the requirements contained in the aforementioned Articles are required to be complied with. 129. Article 15 provides for registration of transfer whereas Article 16 empowers the Directors to register any transfer or transmission of a share without assigning any reason except in a case where the transfere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary to consider the validity or otherwise of the said meeting as no sufficient materials except the factum of the payment to Indreni had been brought on records to show that the said resolution dated 13-7-1990/ 9-8-1990 adopted by the Board are forged and fabricated. In any event, it is not necessary to go into the details of the matter as the three suits filed by the Respondents are pending in different courts of law. It has further to be borne in mind that a pre-emptive right is granted in favour of a member of a private company so that his right of control is not taken away. Exercise of such pre-emptive rights is particularly needed in relation to those private companies which are essentially incorporated partnerships. (See Gower and Davies' Principles of Modern Company Law Seventh Edition, page 635). 138. As the notice of transfer itself was rescinded, we are of the view that 'Indreni' was not required to transfer the said shares back to the Appellants. In any event, the title in relation to the aforementioned shares is a matter between the Appellants and the Indreni and the Respondents herein cannot have any say therein. 139. For the foregoing reasons, we are of the opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany Law Board for an order under this section, provided such members have a right so to apply by virtue of section 399. (2) If, on any application under sub-section (1), the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Company Law Board may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit." 142. Section 402 of the Companies Act provides for the reliefs which may be granted without prejudice to the generality of the powers of the court under the aforementioned provisions. 143. The expression 'oppressive' it is now well-settled, would mean burdensome, harsh and wrongful. 144. 'Oppression' complained of, thus, must relate to the manner in which the affairs of the company are being conducted and the conduct complained of must be such as to oppress the minority members. By reason of such acts of oppression, it must be shown that the majority members obtained a predominant voting p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther be designed to secure pecuniary advantage to the detriment of the oppressors or wrongful usurpation of authority. 150. In Halsbury's Laws of England, 4th Edition, Volume 7, para 1011, it is stated: "1011. Conduct amounting to oppression.-In this context, 'oppressive' means burdensome, harsh and wrongful. It does not include conduct which is merely inefficient or careless. Nor does it include an isolated incident: there must be a continuing course of oppressive conduct, which must be continuing at the date of the hearing of the petition. Further, the conduct must be such as to be oppressive to the petitioner in his capacity as a member whatever remedies he may have in respect of exclusion from the company's business by being dismissed as an employee or a director, he will have none under the provisions relating to oppression. On the other hand, these provisions are not confined merely to conduct designed to secure pecuniary advantage to the oppressors; they cover the case of wrongful usurpation of authority, even though the affairs of the company prosper in consequence." It has to be borne in mind that when a complaint is made as regard violation of statutory or contractual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Respondent Nos. 1 and 12 had initiated different proceedings in different forums to suit their own purposes. From the materials brought on records, it can safely be inferred that proceeding before the Company Law Board, Delhi was initiated by the Respondent No. 12 herein when it was discovered that the Respondent No. 1 may not obtain any relief in the Company Petition filed by her before the Gujarat High Court. 153. The Respondent No. 1 in her application did not disclose the grounds for challenging the issue of 6475 shares to the Appellants. In that view of the matter the relief granted by the High Court to the effect that issue of all shares beyond 425 shares is bad in law cannot be sustained having regard to the fact that a bald prayer was made in the petition without laying any foundation therefor in the company petition. Such reliefs evidently had been granted keeping in view the allegations made by the Respondent No. 12 in her company petition filed before the Company Law Board, Delhi which is impermissible in law. 154. We may at this juncture have a look to the case laws operating in the field with a view to find out as to what relief, if at all, could be granted to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder." In Needle Industries (India) Ltd.'s case (supra ), this court observed: "44. Coming to the law as to the concept of 'oppression', section 397 of our Companies Act follows closely the language of section 210 of the English Companies Act of 1948. Since the decisions on section 210 have been followed by our Court, the English decisions may be considered first. The leading case on 'oppression' under section 210 is the decision of the House of Lords in Scottish Co-op. Wholesale Society Ltd. v. Meyer [1959 AC 324/ [1958] 3 All ER 66 (HL)]. Taking the dictionary meaning of the word 'oppression', Viscount Simonds said at page 342 that the appellant-society could justly be described as having behaved towards the minority shareholders in an 'oppressive' manner, that is to say, in a manner 'burdensome, harsh and wrongful'. The learned Law Lord adopted, as difficult of being bettered, the words of Lord President Cooper at the first hearing of the case to the effect that section 210 'warrants the court in looking at the business realities of the situation and does not confine them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties. While enunciating the doctrine of prejudice and unfairness borne in section 459 of the English Companies Act, the Court stressed the existence of prejudice to the minority which is unfair and not just prejudice per se. 160. The Court may also refuse to grant relief where the petitioner does not come to court with clean hands which may lead to a conclusion that the harm inflicted upon him was not unfair and that the relief granted should be restricted - London School of Electronics, In re [1986] Ch. 211. Furthermore, when the petitioners have consented to and even benefited from the company being run in a way which would normally be regarded as unfairly prejudicial to their interests or they might have shown no interest in pursuing their legitimate interest in being involved in the company - See RA Noble & Sons (Clothing) Ltd., In re 1983 BCLC 273. In a given case the Court despite holding that no case of oppression has been made out may grant such relief so as to do substantial justice between the parties. 161. It is now well-settled that a case or grant of relief under sections 397 and 398 of the Companies Act must be made out in the petition itself and the defects conta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a converse case can happen. A resolution may be passed by the board of directors which may in the passing contravene a provision of law, but it may be very much in the interests of the company and of the shareholders...." (p. 103) The said decision has been referred to with approval in Needle Industries (India) Ltd.'s case (supra ) (Para 49). The conduct which is technically legal and correct, thus, may justify grant of relief on the application of the just and equitable jurisdiction and conversely that conduct involving illegality and contravention of the Act may not suffice to warrant grant of any remedy Isolated act of oppression may not be sufficient to grant any relief but there should be a continued oppression therefor. The test of lack of bona fide should be applied in both for the winding up petition while determining an application under section 397 of the Companies Act. [See Guidezone Ltd. In re [2000] 2 BCLC 321]. We may at this juncture notice that the Respondent No. 1 in her application under section 397 of the Companies Act did not complain of any act of mis-management complaints of mis-management were made by the Respondent No. 12 only. 167. For the purpose of gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iduciary duty towards them either as a director or as a person looking after the interest of the family in the discharge of his duty under as a director. 173. Respondent No. 12 in her petition, alleged mismanagement of the Company on the part of the Respondent No. 1. The Appellants in their reply while denying and disputing that the company was mismanaged alleged that it had earned profit. In Rejoinder to the said reply, Mrs. Puar questioned the correctness or veracity of the balance sheet of GIC contending that the so-called profit disclosed in the accounts is merely a book entry. A contrary stand however has been taken before us suggesting that the shares had been issued by the Appellants unto themselves at a gross undervalue. The question which arises is as to whether the Respondent Nos. 1 and 12 are bound by their own pleadings. It is neither in doubt nor in dispute that the Code of Civil Procedure being applicable to a proceeding of this nature, not only the plea of fraud is required to be specifically pleaded and proved. Even an amendment of pleadings could not have been permitted if thereby the Company Petitioner made an attempt to get rid of her admission. 174. Section 58 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 178. In Modi Spg. & Wvg. Mills Co. Ltd. v. Ladha Ram & Co. AIR 1977 SC 680, the law is stated in the following terms: "10. It is true that inconsistent pleas can be made in pleadings but the effect of substitution of paragraphs 25 and 26 is not making inconsistent and alternative pleadings but it is seeking to displace the plaintiff completely from the admissions made by the defendants in the written statement. If such amendments are allowed the plaintiff will be irretrievably prejudiced by being denied the opportunity of extracting the admission from the defendants. The High Court rightly rejected the application for amendment and agreed with the trial Court." (p. 681) In the instant case, the Respondent No. 1 even did not amend the company petition by withdrawing the admissions or resiling therefrom. 179. In Kaveripatnam Subbaraya Setty Annaiah Setty Charities Trust v. S.K. Viswanatha Setty [2004] 8 SCC 717, this Court deprecated raising a plea for the first time before the appellate court without amendment of plaint holding that when materials to substantiate such plea had not been brought on record and, thus, it is impermissible to consider the same, stating: "13. ...Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of the Appellants herein and further in absence of any pleading of commission of fraud on the part of the Appellant No. 1 herein, the High Court committed a manifest error in issuing the impugned directions. Once the aforementioned facts are not in question, the company petitioner cannot take a stand different from that raised in her petition simply on the ground that other and further reliefs were claimed by amending the reliefs portion. Reliefs could be granted by the court had the material facts necessary to prove her case been pleaded and proved. In absence of any pleading, no evidence would be admissible and the court as is well-known ordinarily would not grant any relief which has no been pleaded. Quasi-partnership - Family company - Corporate veil 181. A company incorporated under Indian Companies Act is a body corporate. However, in certain situations, its corporate veil can be lifted. See Kapila Hingorani v. State of Bihar [2003] 6 SCC 11. 182. The Court, however, has made a clear distinction between a family company, a private company and a public limited company. The true character of the company, the business realities of the situation should not be confin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's case (supra), para 43). 186. Kilpest (P.) Ltd. v. Shekhar Mehra [1996] 10 SCC 696, whereupon Mr. Desai placed strong reliance, thus, cannot be said to be an authority for the proposition that for no purpose whatsoever the principles of quasi-partnership can be applied to an incorporated company. The real character of the company, as noticed hereinbefore, for the purpose of judging the dealings between the parties and the transactions which are impugned may assume significance and in such an event, the principles of quasi-partnership in a given case may be invoked. The ratio of the said decision, with respect, cannot be held to be correct as a bare proposition of law, as was urged by Mr. Desai, being contrary to a larger Bench judgments of this Court and in particular Needle Industries (India) Ltd.'s case (supra). It is, however, one thing to say that for the purpose of dealing with an application under section 397 of the Companies Act, the court would not easily accept the plea of quasi-partnership but as has been held in Needle Industries (India) Ltd.'s case (supra), the true character of the company and other relevant factors shall be considered for the purpose of grant of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ster of the members and other records of the company will stand rectified accordingly. (B)The Board of Directors shall consider the question as regard shifting of the office of the Company to Surat from Baroda. The records of the company, if any, in possession of any of the members or any other director shall be restored to the Registered Office of the Company failing which it would be open to the company to initiate appropriate proceedings before appropriate forum. An Extraordinary General Meeting of the Shareholders of the Company will be convened on 26-2-2005, at 11.00 a.m. at Baroda for appointment of the directors of the company on the basis of the shares respectively held by them as also the Articles of Association and in accordance with this order of this Court. (C)The aforesaid meeting will be conducted under the Chairmanship of a nominee of the Registrar of the Companies. (D)All the shareholders will be entitled to vote by themselves or through their proxies at the said meeting for appointment of the directors of the company. (E)The Registrar of the Companies shall for the purpose of holding the said meeting shall issue notices thereof to the shareholders and may get t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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