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TMI Blog2010 (4) TMI 623X X X X Extracts X X X X X X X X Extracts X X X X ..... opment Corporation Ltd. ('BSIDC') with the co-promoter being Shri Pradip Sancheti. A joint venture agreement dated 29-10-1994, for a period of 10 years was entered into between the parties, the object of which was to take over the assets purchased by the BSIDC in a liquidation proceeding of the Gayday Iron and Steel Co. Ltd., and to commission the factory so purchased by the BSIDC into production. It is the case of the appellants that although both the co-promoters had nominated three directors each to the board of directors of the company but the day-to-day control of the affairs of the company including the financial matters rested in the hands of Shri P. Sancheti and Shri V. S. Bharaktiya (nominee and father-in-law of Shri P. Sancheti) who were appointed in the first meeting of the board of directors of MSPL held on 15-3-1985, as executive director and managing director respectively. They being the only whole time directors of the company continued to exercise exclusive control over the day-to-day management and control of the affairs of the company from 15-3-1985 to 2-12-1991. 4. The total paid-up capital of the company was Rs. 2.5 crores and equity shares to the tune of Rs. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 402 of the Companies Act, 1956. In the said company petition the respondents claimed to hold 10 per cent of the equity share capital of the company and further stated that they had made full payment for purchase of those shares through account payee cheques on scheduled commercial banks and holding those shares since the last five years or more. It was stated in the said petition that the private promoters made efforts and the plant was even prepared for trial production which was carried out in 1986. It was further stated that the State Electricity Board disconnected the power lines as a result of which the production could not be started. It is further stated that the same was due to non-release of the working capital. Ultimately during the year 1989-90 with the poor law and order situation at the factory with several assaults, thefts and dacoities and non-payment of wages and salaries to the employees the then managing director handed over the charge to BSIDC. The BSIDC failed to comply with their obligations and in order to cover up their misdeeds, has indulged in victimisation of the promoters including initiating unwarranted criminal proceedings. As many as ten litigatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Learned counsel for the appellants submits that the main issue which had been raised by them before the Company Law Board has not been answered categorically and no finding has been recorded as to the exact number and value of shares held by the petitioners-respondents and only in a vague manner it has been held that they are entitled to maintain the petition. 10. In this regard learned counsel relies upon the definition of "member" as contained in section 41 of the Companies Act, 1956, which is in the following terms : "41. Definition of 'member'.-(1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members. (2) Every other person who agrees in writing to become a member of a company and whose name is entered in its register of members shall be a member of the company. (3) Every person holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the concerned company." 11. He also refers to section 150 of the Act relating to maintenance of register ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... articipate and exercise his vote at a meeting of a company in accordance with the Act and the articles of association of the company. Section 41 of the Act defines the expression 'member' of a company. The subscribers to the memorandum of association of a company shall be deemed to have agreed to become members of the company and on its registration shall be entered as members in its register of members. A subscriber to the memorandum is liable as the holder of shares which he has undertaken to subscribe for. Any other person who agrees to become a member of a company and whose name is entered in its register of members shall be a member of the company. In his case, the two conditions, namely, that there is an agreement to become a member and that his name is entered in the register of members of the company are cumulative. Both the conditions have to be satisfied to enable him to exercise the rights of a member. Subject to section 42 of the Act, a company or a body corporate may also become a member. When once a person becomes a member, he is entitled to exercise all the rights of a member until he ceases to be a member in accordance with the provisions of the Act." (p. 577) 13. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Traders (P.) Ltd. [1961] 31 Comp. Cas. 122 , in paragraph 7 of which it has been held as follows : "From this it would appear that in fact the petitioners, having already had their application for rectification of the register dismissed by the learned District Judge, and not having filed a suit to establish their rights as advised by him, are now seeking the same relief under the guise of an application under sections 397 and 398 of the Act. Learned counsel for the petitioners was unable to cite any case in which such a course had been permitted, and in my opinion he will never be able to do so, since I consider that a petition under sections 397 and 398 can only be maintained by a person or persons who are shown as members in the register of the company, and if the persons who wish to file such a petition are not shown as members rightly of wrongly they must first have the register rectified before they can bring a petition. I accordingly uphold the objection embodied in the first of the preliminary issues and do not consider that it is necessary to go into the second. I accordingly dismiss the petition with costs to respondent Nos. 1 to 4. Counsel's fee Rs. 100. Petition dismis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avit to show the manner in which the equity share certificates were being issued. It is urged by learned counsel that under the said background the Company Law Board ought to have carefully considered those so called original share certificates produced by respondent Nos. 2 to 5 with due suspicion and not relied upon them until the respondents could have satisfied the proper forum and got the register of members rectified in accordance with law. 18. Learned counsel submits that it has been wrongly held in the concluding part of the impugned order that notices of annual general meeting were sent to all the petitioners in respect of the annual general meeting relating to the years ending March 31,1991 and March 31,1992, whereas it had itself in the earlier part of the order taken note of the fact that such notices were sent only to two of the petitioners and further the names of the two petitioners were found in the annual returns filed before the Registrar of Companies but as a matter of fact it was found that the total shareholding of two of the petitioners, namely, respondent Nos. 4 and 5 did not comprise one-tenth of the paid-up capital of the company. It is urged by learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f good faith on the part of the petitioner undoubtedly continues. Thus, even if the directors or majority shareholders have been guilty of improper or irregular conduct, so that there is a prima facie case for relief, it will be refused if the real purpose of the petitioner is to obtain payment of a debt owed by the company, or to force the directors to accept his views as to the way in which the company's business should be managed; or if the petitioner has submitted to the conduct complained of without protest and has acquiesced in the improper management of the company affairs. Likewise, delay by the petitioner in initiating proceedings after he must have realised that he was the victim of a scheme of oppression or unfair treatment will induce the court to refuse relief, because this indicates that the petitioner has acquiesced in the respondents' conduct and that his complaint is, therefore, not made in good faith.' It should be noticed that, in English law, there is no provision which is similar or comparable to section 398 of the Act. But section 397 of the Act is present in the English Act in a slightly different form. In the 1985 Act, the word 'oppression' is substituted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ations have been made earlier. It is submitted that the very entertainment of such an application goes against the purpose for which section 398 of the Companies Act has been enacted. 21. Learned counsel for respondent Nos. 2 to 5 on the other hand has sought to support the order of the Company Law Board. Learned counsel has taken me to the various paragraphs of the impugned order in which the contention of respondents has been considered. It is submitted by learned counsel that the Company Law Board has rightly taken into account the annual returns filed by the company before the Registrar of Companies in which respondent Nos. 4 and 5 have been shown as members. In this regard he refers to section 164 of the Act which provides as follows : "164. Registers, etc., to be evidence.-The register of members, the register of debentures holders, and the annual returns, certificates and statements referred to in sections 159, 160 and 161 shall be prima facie evidence of any matters directed or authorised to be inserted therein by this Act." 22. It is further submitted by learned counsel that the original share certificates produced by the respondents have rightly been relied upon by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. v. Gwalior Sugar Co. Ltd. [2004] 122 Comp. Cas. 696 1, of which it has been held as follows : "The object of prescribing a qualifying percentage of shares in petitioners and their supporters to file petitions under sections 397 and 398 is clearly to ensure that frivolous litigation is not indulged in by persons who have no real stake in the company. However it is of interest that the English Companies Act contains no such limitation. What is required in these matters is a broad commonsense approach. If the court is satisfied that the petitioners represent a body of shareholders holding the requisite percentage, it can assume that the involvement of the company in litigation is not lightly done and that it should pass orders to bring to an end the matters complained of and not reject it on a technical requirement. Substance must take precedence over form. Of course, there are some rules which are vital and go to the root of the matter which cannot be broken. There are others where non-compliance may be condoned or dispensed with. In the latter case, the rule is merely directory provided there is substantial compliance with the rules read as a whole and no prejudice is caused ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany before the Registrar of Companies and further that they have been issued notices of two annual general meetings. There being no such finding with respect to respondent Nos. 2 and 3 and further there being a specific finding that respondent Nos. 4 and 5 did not qualify as holding one-tenth share capital, this court fails to understand as to how even by relying upon the said decision the Company Law Board could have arrived at a conclusion that the petitioners had succeeded in showing that they were holding 10 per cent equity shares and entitled to maintain a petition under section 398 before it. 29. This court is also of the view that the term member has been defined by section 41, specifically by sub-section (2) thereof and not by section 2(27) which merely provides that the expression "member" does not include a bearer of a share warrant of the company and thus excludes the said category of persons from the definition of member in section 41 where it is provided that in order to be recorded as member of the company the person must agree in writing to be a member and his name should also find a place in the register of members. It is evident from the records that the names o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -men of the co-promoters against whom serious allegations were in existence. 32. Moreover, the petitioners before it having failed to show their bona fides in the matter the application ought not to have been entertained on that sole ground, apart from the fact that they had completely failed to establish that they were genuine holders of one-tenth share of the company. 33. The findings regarding the existence of the so called share certificates produced on behalf of respondent Nos. 2 to 5 also ought not to have been accepted by the Company Law Board in view of the serious allegations that there were hundreds of signed blank share certificates in existence from the time when the company was under the control of private co-promoters. This should have been reason enough for the Company Law Board to have directed the petitioners to first approach the proper forum for correcting the register of members. 34. Thus, on a consideration of the entire facts and circumstances of the case, I find that the impugned order dated 30-4-1998-Banford Investment Ltd.'s case (supra) of the Company Law Board is fit to be quashed and set aside. It is accordingly quashed and set aside. The appeal is th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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