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TMI Blog2006 (11) TMI 337X X X X Extracts X X X X X X X X Extracts X X X X ..... case. The Apex Court in Uttaranchal Road Transport Corpn. v. Mansaram Nainwal AIR 2006 SC 2840 observed as follows at paragraph 13 : "13. ... A decision is a precedent on its, own facts. Each case presents its own features. It is not everything said by a Judge while giving judgment that constitutes a precedent. The only thing a Judge s decision binding a party is the principle upon which the case is decided and for this reason it is important to analyse a decision and isolate from it the ratio decidendi . According to the well-settled theory of precedents, every decision contains three basic postulates : ( i ) findings of material facts, direct and inferential. An inferential finding of fact is the inference which the Judge draws from the direct, or perceptible facts; ( ii ) statements of the principles of law applicable to the legal problems disclose by the facts; and ( iii ) judgment based on the combined effect of the above. A decision is an authority for what it actually decides. What is of the essence in a decision is its ratio and not every observation found therein nor what logically flows from the various observations made in the judgment. The enunciation of the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted Rupees Twenty lakhs and they were made directors from the inception as a public limited company and they were continuing as directors. As per the Articles of Association, total number of directors are 20. Two promotee directors (Chairman and his wife) were permanent and 18 directors were to be elected. There were two vacancies in the board due to resignation of two directors. One N.N. Purshothaman, who is not a relative of second respondent Chairman, applied to issue duplicate share certificates stating that his shares were missing and also requested to transfer the shares. The above request was approved by the Board of Directors in its meeting held on 24-8-2005. It was decided to issue duplicate share certificates as provided under section 84 of the Act, and also to transfer the shares. Accordingly, shares were transferred. The above board meeting was also attended by the first petitioner. As decided by the board meeting on 24-8-2005, annual general body meeting was fixed to be held on 29-9-2005. Draft notice of the meeting was also approved in the board meeting. Notices were issued under certificate of posting as provided under section 53(1)(2) of the Act. Since one-third of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business for voting on a show of hands and it was passed by a majority of votes as follows : Resolved that consent of the company be and is hereby accorded under section 81(1A) of the Companies Act, 1956 to offer or issue any number of shares in the authorised capital of the company to any person(s) whether or not those person(s) include the members of the company or not, in such manner and subject to such terms and conditions as the Board may in the absolute interest of the company deem fit." To pass a special resolution two-third majority was required. It is only stated that majority shareholders passed the resolution. That is not enough. Here, only conclusion possible in the special resolution to offer share to persons other than shareholders were not passed in view of section 81(1A). Thereafter board decided to issue right shares to all existing shareholders on the ratio of 1:4 without any discrimination. 3. Contending oppression and mismanagement, petitioners approached the Company Law Board alleging that they had invested huge sum of money on the promise that they will be continued as directors, but, that promise was not honoured. It was further contended that no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... illegal and void; ( h )to pass such further and other orders to regulate the affairs of the first respondent company in future." 4. Single Member (Vice-Chairman) Bench of the Company Law Board, Chennai held that there is oppression and mismanagement mainly because annual general body meeting held on 29-9-2005 was without proper notice. But, all decisions of the annual general body meeting were not set aside. Main reliefs granted by the impugned order are the following : "7. In view of my foregoing conclusions and ( a ) in exercise of the powers under section 402; ( b ) to regulate the conduct of the hospital s affairs in future; and ( c ) in public interest, the following order is passed : ( I )It is hereby declared that ( a )the further issue of shares impugned in the company petition is illegal and void; ( b )the election of the respondent Nos. 16 to 23 as directors is set aside; ( c )the retiring directors namely, the petitioner Nos. 1 to 4 and the respondent Nos. 5 and 14 shall be deemed to have been automatically reappointed as directors at the eleventh annual general meeting and shall continue till the date of the twelfth annual general meeting for the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... follows : "397. Application to Tribunal for relief in cases of oppression. (1) Any members of company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members including any one or more of themselves may apply to the Tribunal for an order under this section, provided such members have a right so to apply in virtue of section 399. (2) If, on any application under sub-section (1), the Tribunal is of opinion ( a )that the company s affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members; and ( b )that to wind-up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound-up; the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit." To attract section 397, the persons complaining should prove that the affairs of the company are being conducted in a manner prejudicial to public interest or in a mann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his proprietary rights as a shareholder. It is in the light of these principles that we have to consider the facts... with reference to section 397." (p. 1543) The Court also held that wide discretion is vested in the Court to make order under section 397. It held as follows : "The power conferred on the Court to grant a remedy in an appropriate case appears to envisage a reasonably wide discretion vested in the Court in relation to the order sought by a complainer as the appropriate equitable alternative to a winding-up order. It is clear from these various decisions that on a true construction of section 397, an unwise, inefficient or careless conduct of a director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary rights as a shareholder." In Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [2005] 123 Comp. Cas. 566 1 , the Supreme Court held that jurisdiction under this section is very wide. It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into play in case of mismanagement . Relief under section 398 of the Act is to save the Company if the affairs of the company are being conducted in a manner prejudicial to the company in the interest of the company as a whole and not to any particular member/members. To attract the section, there shall be con- tinuing mismanagement. It is not necessary for the court to find out a case for winding up in case of mismanagement in order to grant relief. Under section 397 the power is of discretionary nature which enables the Company Law Board to make an order as it thinks fit with a view to bringing to an end the matter complained of as distinguished from the power granted under section 398 which enables the Board to pass an order with a view to bringing an end or preventing the matters complained of or apprehended. ( See Rajahmundry Electric Supply Corpn. Ltd. v. A. Nageswara Rao AIR 1956 SC 213; Palghat Exports (P.) Ltd. v. T.V. Chandran [1994] 79 Comp. Cas. 213 (Ker.). Very vast discretion is given under section 402 to the Company Law Board, to pass orders in case section 397 or 398 are alleged. ( See : Cosmosteels (P.) Ltd. v. Jairam Das Gupta AIR 1978 SC 375. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt to conclusive proof of service of notice on the addressees. It is not always safe to place reliance on mere certificate of posting, in the absence of any other corroborative evidence such as dispatch register, books of account, reflecting the expenses incurred in connection with sending of notices to the petitioners and other shareholders. It will only show that certain postal envelopes have been put into the post office and will not by itself necessarily mean that there has been service on the addressee concerned." 7. Section 172 of the Act reads as follows : "172. Contents and manner of service of notice and persons on whom it is to be served. (1) Every notice of a meeting of a company shall specify the place, and the day and hour of the meeting, and shall contain a statement of the business to be transacted thereat. (2) Notice of every meeting of the company shall be given ( i )to every member of the company, in any manner authorised by sub-sections (1) to (4) of section 53; ( ii )and ( iii )**** ** (3) The accidental omission to give notice to, or the non-receipt of notice by, any member or other person to whom it should be given shall not invalidate the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for providing such a notice." The above passage was quoted with approval by the Apex Court in V. Raja Kumari v. P. Subbarama Naidu [2004] AIR SCW 6344. After noticing section 27 of the General Clauses Act, it was also observed as follows at paragraph 14 : "No doubt section 138 of the Act does not require that the notice should be given only by post . Nonetheless the principle incorporated in section 27 can profitably be imported in a case where the sender has despatched the notice by post with the correct address written on it. Then it can be deemed to have been served on the sendee unless he proves that it was not really served and that he was not responsible for such non-service." In Black s Law Dictionary giving of notice is distinguished from receiving of the notice : "A Person notifies or gives notice to another by taking such steps as may be reasonably required to inform the other in the ordinary course, whether or not such other actually comes to know of it. A person receives a notice when it is duly delivered to him or at the place of his business." In Maxwell on Interpretation of Statutes, the learned author has emphasized that provisions relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed and stamped and sent under certificate of posting is deemed to have been duly served. This view has been repeatedly followed by other Courts in the following cases: ( See Jadabpore Tea Co. Ltd. v. Bengal Dooars National Tea Co. Ltd. [1984] 55 Comp. Cas. 160 and Challa Rajendra Prasad v. Asian Coffee Ltd. [2000] 100 Comp. Cas. 689 1 . 9. The Hon ble Apex Court in M.S. Madhusoodanan v. Kerala Kaumudi (P.) Ltd. AIR 2004 SC 909 held that the fact of posting has to be proved by the sender and that statutory presumption is only a rebuttable presumption. It is true that though section 53 of the Companies Act uses the words shall presume it is a rebuttable presumption. Court can rely on the same only if it is proved that due posting of the document is proved. Once it is so proved, onus rests on the addressee to show that document referred to in the certificate of posting was not received by him. The Apex Court held as follows : "121. Raising of a presumption, therefore, does not by itself amount to proof. The result of a mandatory requirement for raising a presumption cast on Court, as there is under section 53(2) of the Companies Act, is that the burden of proof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an was ousted. Madhusoodanan and his children did not receive the notice. In another meeting, the share capital was increased to Rs. 20 lakhs and for 25 shares of Rs. 1,000 each and Chairman was authorised to issue notices to the existing shareholders to apply for shares within seven days. According to Madhusoodanan, he was not informed about that offer of shares also. But, Madhusoodanan was also removed from the directorship. It was stated to be approved in the extraordinary general body meeting. Article 74 was deleted without even an agenda in the meeting which required an extraordinary resolution. The Apex Court found that article 49 which speaks of an accidental omission is not applicable to extraordinary general body meetings. At paragraph 96, it was affirmed by the Apex Court as follows : "96. The submission of the respondents that under article 49 of the Articles of Association of the Company even if no notice were given of the Extraordinary General Meeting, this would not vitiate the proceedings is misconceived. This was no ordinary general meeting but a meeting where a special resolution was to be passed. This had to be done under section 81 of the 1913 Act, to which art ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioning the validity of the annual general body meeting and issue of right shares. In the application for injunction, Civil Court ordered (Order in I. A. No. 4727 of 2005) as follows : "The petitioner s case is that the Annual General Meeting held on 29-9-2005 is invalid because no proper notice was given to the petitioners and other NRI shareholders with regard to the meeting. The respondents produced documents which will prove that proper notice was served on all the shareholders with regard to the Annual General Meeting held on 29-9-2005. The respondents produced evidence to show that notice was served on the petitioner and all other shareholders with regard to the Annual General Meeting. That document was not disputed by the petitioners. Therefore, the averment that no notice was served on the petitioner and other shareholders does not stand for consideration. In the petition it is stated that even though no notice was served the petitioner came to know about the Annual General Meeting held on 29-9-2005 and he attended the meeting. Then he came to know that eight new directors were appointed on that day. But the respondents produced documents which show that the petitioner and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lars of the retiring directors, their eligibility and willingness for reappointment as directors of the company." We have perused the notice of the annual general body meeting. In the notice dated 24-8-2005 calling the 11th annual general body meeting on 29-9-2005, seventh item of ordinary business as well as explanatory statement quoted by us (para 2) it can be seen that the names of the retiring directors were specifically mentioned. The names were also given in the report of the Board of Directors and sent along with the notice of annual general body meeting. First petitioner was present in the board meeting which approved the resolutions of the board meeting. Consequent on the receipt of notice, all the six retiring directors, first four petitioners and respondents 5 and 14, gave notice signifying their intention to contest. It shows that they were aware that they were retiring and contesting. Under section 257 of the Act, other shareholders who are retiring directors eligible for appointment as directors should give notice in the manner provided under the Act. Since eight other shareholders eligible for appointment applied within the time prescribed, notice was published in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he second respondent and his family members did not materialise, unlike in the past several years. Consequently, the strength of NRI directors, after the annual general meeting got reduced to three in number, while the strength of the directors belonging to the second respondent group increased from three to eleven numbers. The election of close kith and kin of the second respondent to the office of director, in complete exclusion of the petitioners who have been on the board admittedly since the year 1998, to my mind, is a visible departure from the standards adopted by the second respondent and his family members in offering directorship to those who contributed a minimum of Rs. 10 lakhs in case of doctors and Rs. 20 lakhs in case of others. This departure involving an element of lack of probity or fair dealing to the petitioners, in the matter of their proprietary or individual rights as shareholders would constitute oppression." 14. We have also seen that out of the eight directors elected in the annual general body meeting, six elected were not relatives or kith or kin of the Chairman as observed by the Company Law Board. The CLB also relied on the decision of Shanti Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 993 SC 155, after considering the House of Lords decision in Council of Civil Service Unions v. Minister for the Civil Service [1984] 3 All ER 935 held as follows : "It may be indicated here that the doctrine of legitimate expectation imposes in essence a duty on public authority to act fairly by taking into consideration all relevant factors relating to such legitimate expectation . Within the conspectus of fair dealing in case of legitimate expectation , the reasonable opportunities to make representation by the parties likely to be affected by any change of consistent past policy, come in. . . . "(p. 165) But, the above principle cannot be extended in company law. Doctrine of legitimate expectation is mostly confined to the right of a fair hearing before a decision which results in negativing a promise or withdrawing of an undertaking. Forgetting the benefit of legitimate expectation, there should be a clear promise or a clear and unambiguous representation and burden of proof is on the person who claims the benefit on the basis of legitimate expectation. This principle that is applicable in administrative law is unknown on company law, in any event, in this case, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8), one-third of directors have to retire in every annual general body meeting and it is for the shareholders to elect. The fact that petitioners 1 to 4 and respondents 5 and 14 were retiring and their eligibility to re-election was mentioned in the notice of general body meeting. In fact, notice of annual general body meeting was approved in the director board meeting in which first petitioner was present. All the six submitted their nominations. Petitioners relied on the decision of the Apex Court in Dale and Carrington Invt. (P.) Ltd. v. Prathapan [2004] (3) KLT 475. There, the decision of this Court (one of us, Justice J.B. Koshy, who wrote the judgment for the Division Bench), was approved by the Hon ble Supreme Court. In that case, one Prathapan, an NRI, though his mother, induced one of his relative Ramanujam to promote a company by making initial investment of Rupees Five lakhs and the entire amount was given by Prathapan. But, later, showing that the company was running on loss and Ramanujam advanced money it was manipulated that a sum of Rupees 6,86,500 was standing to the credit of Ramanujam and the board of directors in its meeting held on 24-10-1994 chaired by Rama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upreme Court in Dale and Carrington Invt. (P.) Ltd. s case ( supra ) because of the initial investment made by some of the directors they cannot be changed at all. The Apex Court in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [2005] 11 SCC 314 observed as follows : "67. The ratio in Dale and Carrington Invt. (P.) Ltd. v. Prathapan [2004] (13) KLT 475 SC : (2005 CLC 449) thus, must be understood to have been rendered in the fact situation obtaining in that case. It does not lay down a law that fiduciary duty of a Director to the Company extends to a shareholder so as to entitle him to be informed of all the important decisions taken by the Board of Directors. Such a broad proposition of law, if understood to have been laid down in Dale and Carrington would be inconsistent with the duty of a Director vis-a-vis the company and the settled law that the statutory duty of a Director is primarily to look after the interest of the company." As mentioned in Palmer s Company Law, director s fiduciary duty is with the company and not with individual shareholder and there is no agency relationship with shareholder and directors. But directors shall not misrepresent and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffice of directorships in the company along with deposits of Rs. 500 each. As such these persons are eligible for being appointed as directors, if so resolved by the forthcoming annual general meeting. Dr. U.K. Gopalan, Dr. Deni Mohan, R. Raghunandan, K.S.R. Chandran, Anirudhan P.A., Adv. M. G. Rajeev, Dr. M. G. Subramonian, Dhanesh Mohan." The names of eight persons were absent in the notice calling for general body meeting as they submitted their willingness after the issuance of the notice. Similarly, six retiring directors also submitted willingness after issuance of notice, but, in the notice advertised in newspapers, it is not mentioned that six retiring directors are also contesting. It is true that statutory obligation to publish names of contestants under section 257(1A) is only when shareholders other than retiring directors file nomination as provided under section 257(1). Section 256 also gives indication that for the retiring director to get re-appointed need not file nomination and automatically he is a candidate and if there is no contestant, they can be re-appointed without a polling. In the absence of election or re-appointment in the adjourned meeting, re-appo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 56 to offer or issue any number of shares in the authorized capital of the company to any person(s) whether or not those person(s) include the members of the Company or not, in such manner and subject to such terms and conditions as the Board may, in the absolute interest of the company, deem fit." The minutes recorded was also quoted by us in para 7. We are of the opinion that the Company Law Board was right in holding that special resolution was not passed. It is not recorded in the meeting that there is two-third majority. But, the word majority is mentioned. Without passing a special resolution by two-third majority shares cannot be offered to outsiders. Finding of the Company Law Board that special resolution was not passed according to law, needs no interference. 19. Whether issuance of right shares is correct is the next question to be considered. The Company Law Board set aside the decision to issue right shares and held that it is illegal and void. The CLB accepted the decision of the general body meeting for the increase in the share capital. The petitioners did not challenge the above decision. For increase in share capital of the company only ordinary resolution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of CLB regarding issue of right shares is correct or not? On 15-10-2005, when board decided to offer right shares to all shareholders without discrimination on the same proportion depending on their holding, there was no stay of any kind. The share transfer committee allotted the shares and actual allotment was made when there was no stay. In any event, question to be decided is whether issue of right shares in the same proportion to all shareholders without when finance was urgently required is an act of oppression or mismanagement. The Company Law Board issued interim order on 13-2-2006 to issue right shares and keep the shares of petitioners pending subject to finality of company petition. It is offered by the counsel for the appellant that NRI shareholders can still accept the offer of shares within a reasonable time so that voting pattern will not change. They cannot insist that they will not further invest, but shall be a permanent direction. The fact that the company was in need of urgent finance is not disputed. Even in the board meeting held prior to the annual general body meeting wherein first petitioner was also present, there was a proposal to accept two shareholde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. AIR 1981 SC 1298, it was held that directors have absolute power to issue right share provided they are acting under good faith. It was held as follows (para 108 of AIR) : "Where Directors 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 their 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." (p. 1338) After considering Needle Industries (India) Ltd. s case ( supra ) AIR 1981 SC 1298, the Apex Court in Sangramsinh P. Gaekwad s case ( supra ) observed as follows : "If the shares are issued in the larger interest of the company, the decision to issue shares cannot be struck down on the ground that it has incidentally benefited the Directors in their capacity as shareholders." 20. But, in this case, election of eight directors wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to issue with any mala fide intention or, it affected any body s right. It is a bona fide decision taken in good faith as finance was required urgently for modernisation. In view of the pendency of cases, the above offer of issue shares to all the shareholders can be extended by another one month from today. Therefore, no prejudice is caused. It is true that object of section 290 is to protect persons dealing with the company. Outsiders as well as shareholders are protected by providing that acts done, by a person as a director shall be valid although their appointment was declared subsequently as invalid. Mainly this protection is for the outsiders, but, a shareholder also cannot be taken aback by setting aside a decision of the Board done in good faith merely because election of some of the directors were set aside subsequently. The acts of a de facto director are treated as valid both vis-a-vis members. In Kanssen v. Rialto (West End) Ltd. [1945] 15 Comp. Cas. 23 (CA). Lord Greene M.R., while dealing with section 143 of the Companies Act which reads, "the acts of a director or manager shall be valid notwithstanding any defect that may afterwards be discovered in h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the board of directors to issue duplicate shares in place of lost shares. Transferring the shares of Purushothaman was approved in the same board wherein first petitioner attended. By no stretch of imagination, it can be stated that the above issuance of duplicate shares or transfer of shares was illegal. Duplicate shares were issued on receipt of indemnity bond as provided under section 84(2). Indemnity bonds and documents produced would show that share transfer was also effected validly. Decision to issue duplicate shares to Purushothaman and transfer of the same were not challenged in the petition. Therefore, the relief granted by the Company Law Board in this regard also cannot be accepted. 23. With regard to acts of mismanagement alleged regarding the arrangement with special investigating centre, the agreement with the special investigating centre was made when petitioners 1 to 4 as well as their supporting NRI directors were in the board and they cannot press that point to get relief under section 398 as they were in management. However, we are of the opinion that if any amount is due from special investigating centre that should be realised by the company and the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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