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TMI Blog2016 (7) TMI 476X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the company as on 30.9.1993 shows that the capital of the company was divided into 35,000 Equity Shares of Rs. 100/- each. This 35,000 Equity Shares were held by (1) Mr.G.Kandaswamy (HUF); (2) Three sons of Kandaswamy by name K.Narayanaswamy, K.Balasundaram and K.Venkatesh; (3) The wife of Kandaswamy by name Mrs.K. Lakshmiammal; (4) Mr.G.Kandaswamy as individual; (5) The grandson of Kandaswamy by name Master Sujay Senthil, S/o K.Narayanaswamy and two group of Companies. 4. The head of the family G.Kandaswamy died on 17.4.1999. But, it appears that the company was making losses even as on 31.3.1998. The appellant in the first of these appeals was a Medical Practitioner, who had settled at United Kingdom. After the death of his father, he issued a legal notice on 14.7.1999 to his brothers, asking for particulars of the properties and seeking partition. The brothers as well as the mother issued a legal reply to the appellant. It appears that upto the year 1998, two sons namely K.Venkatesh and K.Narayanaswamy were the Directors of the company. K.Narayanaswamy resigned from Directorship on 4.7.2001 and in his place E.Gopalakrishnan was appointed as an Executive Director. The regis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land of an extent of acres 2.55 was sold for a sum of Rs. 25.00 lakhs. 8. On 26.12.2005, the Dena Bank issued a notice under Section 13(2) of the SARFAESI Act to Akkammal Steels Private Limited. In the meantime, a petition for winding up was filed on the file of this Court in C.P.No.70 of 2002 by one of the creditors of G.K.Alloy Steels Private Limited. By an order dated 22.3.2006, this Court allowed the petition for winding up and directed the Official Liquidator attached to this Court to take over the assets and interests of the company. Paper publications were also directed to be effected. 9. As against the said order, an appeal was filed by the company in OSA.No.194 of 2006. In the appeal, the company offered to make payment of the entire liability to the creditors. The amount payable was arrived at as Rs. 1,13,842.71. Therefore, on the basis of the undertaking given by the company to pay the amount within two weeks, the order for winding up was set aside by the Division Bench of this Court, by a judgment dated 29.7.2006. 10. Thereafter, a Board Meeting was convened on 18.6.2007 for convening an Extraordinary General Body Meeting for the sale of the land of an extent of 3.29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was allowed by the Company Law Board by an order dated 12.7.2010 subject to three directions namely: (a) that all transactions are to be routed through a single bank account; (b) that the respondents will furnish to the appellant herein, a periodical statement of the sales made, money realised and expenses incurred; and (c) that the respondents shall keep the factory, land, building and plant and machinery unencumbered until further orders. 14. As against the order passed by the Company Law Board in Comp. A.No.84 of 2010, at the instance of the Joint Development Agreement holder, the appellant herein filed an appeal in Company Appeal No.21 of 2010 on the file of this Court. While ordering notice in the said appeal on 13.8.2010, this Court granted an interim order of status quo. Subsequently, the appeal was allowed by a final order dated 22.9.2010 with a direction to the Company Law Board to hear the main company petition and to pass appropriate orders. In pursuance of the said order, the Company Law Board took the main petition in C.P.No.7 of 2009 itself for hearing and framed four issues for consideration. They are: (1) Whether the affairs of the company were being conducted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Steels (Cbe) Limited, (2) G.K.Steel and Allied Industries Limited and (3) Akkammal Steels Private Limited. 19. Since G.Kandaswamy died intestate, the shares left behind by him devolved upon his legal heirs. The mother also died on 12.8.2006. Consequently, the shares of the mother also devolved equally among all the three sons. To be precise, 10,705 shares held in the name of G.Kandaswamy (HUF), 415 shares held in the individual name of G.Kandaswamy and 3027 shares held in the name of mother K.Lakshmiammal totalling to 14,147 shares, devolved equally upon the three sons namely K.Narayanaswamy, K.Balasundaram and K.Venkatesh. Since the appellant Dr.K.Balasundaram already had 5,185 shares and since he will be entitled to about 4,715 shares (1/3rd of 14,147 shares), his share capital should come up to 9,900 Equity Shares. 20. The grievances of the appellant in Company Appeal No.15 of 2011, were (1) that no Board Meeting or General Body Meeting were ever held; (2) that no notices of any of those meetings were served upon the appellant; (3) that valuable properties were sold unnecessarily without there being any necessity; (4) that the sales were fraudulent in as much as they were made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paragraph 16 of the counter, the respondents 1 and 2 have made a positive averment that for the General Body Meetings held on 21.11.2005, 12.7.2007, the notices dated 24.10.2005 and 18.6.2007, marked as Ex.R.16 and Ex.R.17 were sent. 24. Before proceeding further, it should be pointed out that the company became a deemed public limited company, by virtue of Section 43A. But, this concept was removed by virtue of the amendment under the Companies (Amendment) Act, 2000. Thereafter, in an Annual General Meeting held on 28.9.2001, the words 'private company' were incorporated in the Articles. Therefore, the Company Law Board was right in holding in paragraph 10 of its order that the company regained its status as a private limited company with effect from 13.12.2000. 25. Keeping the above background in mind, if we test the validity of the first contention, it can be seen that the main or only act of oppression that the appellant alleged against the majority was the sale of the company's property. But, as rightly contended by the respondents and as rightly accepted by the Company Law Board, Section 293(1)(a) of the Act is a complete answer. Under the said provision, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. It was further argued that the High Court has recorded its own finding on certain issues which the High Court could not go into and therefore the judgment of the High Court is liable to be set aside. We do not agree with the submission made by the learned counsel for appellants. it is settled law that if a finding of fact is perverse and is based on no evidence, it can be set aside in appeal even though the appeal is permissible only on the question of law. The perversity of the finding itself becomes a question of law. In the present case we have demonstrated that the judgment of the Company Law Board was given in a very cursory and cavalier manner. The Board has not gone into real issues which were germane for the decision of the controversy involved in the case. The High Court has rightly gone into the depth of the matter. As already stated the controversy in the case revolved around alleged allotment of additional shares in favour of Ramanujan and whether the allotment of additional shares was an act of oppression on his part. On the issue of oppression the finding of the Company Law Board was in favour of Prathapan i.e. his impugned act was held to be an act of oppression. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the proceedings at the meeting. Apart from the above procedure, while sending notice for any meeting, the procedure prescribed in Section 53 (1) and (2) of the Act has to be followed. 25. It is the case of respondent Nos.1 and 2 that proper notices in terms of Section 172 read with Section 53 (1) and (2) have duly been sent to all the share holders including the petitioners in respect of the AGM dated 29.9.2005. It was contended on the side of the petitioners that in the absence of any other corroborative evidence, it is not safe to accept the notices sent through 'certificate of posting' and it cannot be presumed that the addressee had the knowledge of the meeting." 32. Therefore, it is contended by the learned counsel, that the failure of the respondents to produce the dispatch register to show that they sent the notices as required under the Act, was fatal to their case. 33. But, I do not think that the above decisions are of any assistance to the appellant. As I have pointed out earlier, the company in question was a private limited company at the time when the sale transaction took place. Therefore, even assuming that no notices were issued for the General Body ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, there must be a Board with the minimum strength. Rejecting the said contention, the Division Bench held that the power could be exercised even though the strength of the Board had fallen below the minimum or below the quorum or when there is only one Director capable of acting. 38. Similarly, in P.Natarajan Vs. Central Government [(2004) 1 CTC 340], a Division Bench of this Court held: (i) that the Directors of a company, who are due to retire at an Annual General Meeting, vacate their office on the last date on which the Annual General Meeting should have been held; and (ii) that a Director vacates his office at the latest on the date of which an Annual General Meeting could have been called as required by Section 166 and that though the defacto doctrine will save the decisions taken by Directors after they vacated the office, it will not clothe his presence with any right to remain in the office of de jure. 39. In any case, the company is actually a family company. No other member of the family nor any other Director has objected to the sale transaction that forms the foundation of the case of the appellant. When none of the shareholders and none of the Directors oppose t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raudulent inasmuch as they were made in favour of Narayanasamy's sons for a consideration much lower than the market value. 43. But in the given circumstances, I do not think that the sale transactions had been entered into unnecessarily. There is no dispute about the fact that the company in question had borrowed money from Dena Bank and State Bank of India. Dena Bank filed an application before the DRT for recovery of money against a company by name Akkammal Steels Private Limited, which was also held by the members of the very same family. In the said case, the present company was impleaded as the fourth respondent. There was yet another application by State Bank of India against G.K.Alloy Steels Private Limited for recovery of money. The proceedings under the SARFAESI Act were also taken against Akkammal Steels Private Limited. A petition in C.P.No.70 of 2002 was filed against the company in question for winding up. By an order dated 22.3.2006, the Company Court ordered winding up. Therefore, there was a dire necessity for procuring finances. Hence, the argument that there was no necessity to sell the properties, is completely misconceived. 44. The next contention is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hose principles and having an adverse effect on the interests of the other family members, have to be considered as acts of oppression. 48. Keeping in mind the fundamental principles of law as laid down in the aforesaid decisions, if we come back to the facts of the present case, it can be seen that the sale transactions in question were entered into at a time when the company was facing (i) winding up proceedings (ii) recovery proceedings before the DRT and (iii) recovery proceedings under the SARFAESI Act. In other words, the sale transactions were entered into at a time when the company was in dire financial strait. If these transactions had not been entered into, the Official Liquidator would have taken over the assets of the company and sold them in public auction. This important aspect has to be kept in mind before we scan the sale transactions with an eye of suspicion. 49. The main reason as to why the appellant is attacking the sale transactions is that the sale consideration paid thereunder was far less than the market value, as reflected in the register of guidelines maintained in the office of the Registrar. 50. But, as rightly pointed out by the respondents, a Full B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitution to it, but individual members cannot recover compensation for the loss they have respectively suffered by the consequential fall in value of their shares, and they cannot achieve this indirectly by suing the Directors for conspiracy to breach the duties which they owed the company. However, there may be certain situations where Directors do owe a fiduciary duty and a duty to exercise reasonable skill and care in advising members in connection with a transaction or situation which involves the company or its business undertaking and also the individual holdings of its members." Therefore, the upshot of the above discussions is that the Directors are in a position of a trust. They must confirm to the probity and their conduct should be above suspicion." 55. But in the case on hand, the Directors were actually facing an emergency to save the company from being wound up. The appellant, who was mostly out of India, does not appear to have contributed anything to save the company. In the proceedings before the DRT, he was actually set ex parte. The bank could not even serve notices on him. Therefore, the Company Law Board was right in holding that the sale transactions ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d with authority to establish, maintain and subscribe to any institution or Society which may be for the benefit of the Company, and to "make payments towards any charitable or any benevolent object, or for any general public, general or useful object". But this is within the authority of the Directors only if the Company has the power under the Memorandum of Association to achieve the object specified, or for doing anything incidental to or naturally conducive to objects specified. If the object is not within the competence of the Company, the Directors relying upon Art. 93 (t) cannot expend the funds of the Company for achieving that object. The primary object of the Company is to carry on life insurance business in all its branches, and donations of the Company's funds for the benefit of a trust for charitable purposes is not incidental to or naturally conducive to that object. There is in fact no discernible connection between the donation and the objects of the Company. Undoubtedly the Memorandum of Association has to be read together with the Articles of Association, where the terms are ambiguous or silent. There is however no ambiguity in the relevant terms of the Mem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jected all the six grounds of attack of the appellant to the impugned order of the Company Law Board, let me now take up for consideration the scope of jurisdiction to be exercised by the Company Law Board/this Court while dealing with a petition under Sections 397 and 398 read with Section 402. This exercise has become necessary only in view of the fact that the only and main grievance of the appellant is the sale of the property of the company. 61. In V.S.Krishnan and others v. Westfort Hi-tech Hospital Ltd., [(2008) 3 SCC 363], the Supreme Court listed out of the circumstances when oppression would be made out, as follows:- "From the above decisions, it is clear that oppression would be made out: (a) Where the conduct is harsh, burdensome and wrong. (b) Where the conduct is mala fide and is for a collateral purpose where although the ultimate objective may be in the interest of the company, the immediate purpose would result in an advantage for some shareholders vis- `-vis the others. (c) The action is against probity and good conduct. (d) The oppressive act complained of may be fully permissible under law but may yet be oppressive and, therefore, the test as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at there should be continued oppression over a period of time." 64. In D.Ramkishore v. Vijayavada Share Brokers Ltd. [(2008) 144 Comp.Cases 326], the Andhra Pradesh High Court held that the Company Law Board has wide powers under Section 402 which are residuary in nature. However, the power to set aside a sale under Section 402, can be exercised if the sale was made within three months before the date of the application under Section 397 or 398, as held by this Court in T.Vinayaka Perumal v. T.Balan [(2011) 1 Comp.LJ 74]. 65. In Raghunath Swarup Mathur v. Har Swarup Mathur [(1970) 40 Comp. Cases 282], it was held in paragraph 9 of the judgment, as follows: "Section 397 of the Act undoubtedly empowers this court to make such orders " as it thinks fit" but only " with a view to bringing to an end the matters complained of". The matters complained of must be proved to establish : "(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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y contended by the learned counsel for the appellants, the Company Law Board committed two errors of law. The first is that after upholding the genuineness of the sale transactions and after holding in the beginning of paragraph 30 of its order that the transactions were in the interests of the company, the Company Law Board was not entitled to impose a surcharge. The second error of law committed by the Company Law Board is that the amount of Rs. 20 lakhs was arrived at only arbitrarily. Therefore, in normal circumstances, the surcharge order passed against the appellants in appeal No.19 of 2011 is liable to be set aside. 72. But, as seen from the facts of the case, the fight is actually between the members of the same family. Though disputes between the directors or shareholders inter se, in relation to an incorporated company, have to be resolved within the parameters of the Company Law, the Court cannot lose sight of the fact that in closely held companies, the disputes largely assume the nature of a claim for partition. Parties to such disputes, when they are in an advantageous position, invoke the provisions of the Companies Act, 1956 to retain the benefits and privileges th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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