9911796707
TMI Blog2007 (3) TMI 789X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondents 7 to 9 (C.P. No. 50 of 2003); respondents 5 to 9 (C.P. No. 51 of 2003) and respondents 6 to 10 (C.P. No. 52 of 2003) from the office of directors of the Companies; (f) misappropriation of funds; incurring of advertisement expenses disproportionate to the turnover and other financial irregularities on the part of the respondents 2 to 5 (C.P. No. 50 of 2003); respondents 2 to 4 (C.P. No. 51 of 2003) and respondents 2 to 5 (C.P. No. 52 of 2003); (g) illegal disposition of the fixed assets, plant and machinery and improper management of the assets and funds of the Companies; (h) illegal convening of the annual general meeting of the Companies; (i) illegal acquisition of a large number of shares from other shareholders in violation of the relevant articles of association of the Companies and section 108 of the Act; (j) abuse of fiduciary position by the second respondent by illegal transfer of shares and improper reconstitution of the boards to usurp control over the Companies and secure control over the trade mark; and (k) improper maintenance of accounts of the Companies; and (l) a large scale suppression of turnover by the Companies, have invoked the equitable jurisdict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with more or less equal shareholding among the first petitioner and respondents 2 & 7 (C.P. No. 50 of 2003); first petitioner and respondents 2 to 5 (C.P. No. 51 of 2003) and first petitioner and respondents 2 & 6 (C.P. No. 52 of 2003). There was also equal participation by these persons in the management of the Companies. In 1996 M/s. New Hope Food Industries Private Limited (NHFIPL) was incorporated by the petitioner along with seventh respondent (C.P. No. 50 of 2003) and certain others for manufacture of cakes. In 1998 M/s. Milka Nutriments Private Limited (MNPL) was promoted for manufacture of biscuits by the promoters of PBPL and of NHFIPL. In 2000 M/s. Milka Industries Private Limited was promoted in association with all the promoters except the second respondent, of MNPL. The seventh respondent (C.P. No. 50 of 2003) was managing director in charge of the day-to-day management of the affairs of these Companies. These Companies have been marketing the products under the trademark "Milka", registered in the name of PBPL, on payment of royalty as per the understanding between the promoters. All the Companies were doing extremely well till the seventh respondent (C.P. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Companies from July 2003, without any notice of the board meetings to the first petitioner. The grievance of the petitioners is total absence of notice and not the mode of service of notice of the board meetings by hand delivery, as claimed by the respondents. If notice of the board meeting is not sent to a single director, the entire proceedings of the board meeting are vitiated. It was held in (a) Akbarali A. Kalvert v. Konkan Chemicals (P.) Ltd. [1997] 88 Comp. Cas. 245 (CLB) that (a) the company shall give notices of board/general meetings to directors/members so long as they continue to remain so; and (b) certificates of posting are not reliable since it is too well known that certificates of postings can be got hold of without actually putting the letters in the post; (b) Sikkim Bank Ltd. v. R.S. Chowdhury [2000] 102 Comp. Cas. 3871 (Cal.) that any board meeting held without any notice and/or unreasonably short notice to the directors is bad and invalid and that the decision taken at the board meeting is invalid; (c) Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp. Cas. 417 (SC) that any board meeting convened without notice to one director is not valid and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at (a) the articles of association of a private company are a contract between the parties; (b) when the articles provide that "no transfer of any share in the capital of the company shall be made or registered without the previous sanction of the directors...." then previous sanction shall be obtained from the directors for transfer of the shares held by the members, which connotes that there should be a written resolution accepting the transfer from the transferor to the transferee and such previous sanction should precede the handing over of the shares. This legal position has been followed by this board in Radhe Shyam Tulsian v. Panchmukhy Investments Ltd. [2003] 113 Comp. Cas. 298 (CLB). Clause 18 of the articles stipulates that "No member shall be entitled to transfer the shares in the company except with the previous sanction of the Board of Directors", which has not been satisfied in the present case. Article 18 does not permit any negotiated transfer as between members on their own or at the wish of any shareholder. A shareholder on dmeciding to transfer his shares loses the right to choose the transferee. Furthermore, no member is entitled to claim the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inority of the second respondent group into majority and reducing the petitioners group to the status of minority in the Companies. The second respondent and his family members constituting the board approved the impugned transfers to themselves at the board meeting held on 25-8-2003, which can be nothing more than oppressive. This Board in (a) S. Varadarajan v. Udhayem Leasings & Investments (P.) Ltd. [2005] 125 Comp. Cas. 8531 (CLB - Chennai) held that any transfer of shares without exhausting the rights of pre-emption in violation of the articles amounts to oppression; and (b) M.M. Dua v. Indian Dairy & Allied Services (P.) Ltd. [1996] 86 Comp. Cas. 657 (CLB) that where there is a provision in the articles of association of a company for pre-emption by members in the matter of transfer of shares, a transfer in violation of such provisions constitutes oppression; and (c) Akbarali A. Kalvert's case (supra) that any transfer of shares in violation of the articles amounts to denying a privilege available to the shareholder. The fiduciary position of the board has been grossly abused by the second respondent in fabri- cating the transfer of shares and in creating a majority for his g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms of shareholding and management by means of the impugned transfer of shares, thereby their affairs are being conducted in a manner prejudicial to the interests of the Companies and their shareholders. This Board in S. James Fredrick v. Minnie R. Fredrick [2000] 24 SCL 181 (CLB) held that appointment of additional directors disturbing parity in the constitution of board of directors of a family company would constitute an act of oppression; and (b) Kshounish Chowdhury v. Kero Rajendera Monolithics Ltd. [2002] 36 SCL 497 (CLB - Delhi) that appointment of additional directors made to gain control of the board is neither bona fide nor in the interest of the company. PBPL owns the trademark "Milka" and the same is licenced to all other group companies and, therefore, by securing control over the parent Company, the second respondent gained control over the trademark and thereby cornered all the benefits arising out of the popular trade-mark. The Companies being private limited companies are managed on quasi-partnership principles and it is rather unjustifiable for a single shareholder to resort to a series of oppressive acts so as to take control of the Companies in gross vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d sixth respondent (C.P. No. 52 of 2003) is questioning the genuineness of his signature in the instruments of transfer. u The second respondent resorted to a large scale non-accounting of turnover and siphoning off funds, which came to light, pursuant to raid of the factory premises of the Companies conducted in June 2005 by the Central Excise Department. Furthermore, the Sales Tax Department found out that the Companies are engaged in a large scale unaccounted turnover. No audit of accounts has been done after 31-3-2003 and no board meetings have been convened for the past more than two years and no details concerning the affairs of the Companies have been placed before the boards. The Companies have been incurring extensive expenditure on advertisement without being backed by any board resolution and corresponding increase in turnover of the Companies. u The Companies were engaged, during the years 2003-2006, in the new line of manufacture of cakes, incurring extensive capital investment to install plant and machinery for manufacture of cakes and extensive expenditure on advertisement, without any board resolution. The second respondent, under the guise of advertisement expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r grounds : u All the respondents and erstwhile promoters live in the same vicinity and have been close individuals and hence it has been the regular practice of the Companies to send notice of any meeting to members and directors either through hand delivery or by post or courier. Section 53(1) permits the company to serve documents on the members personally. No grievance has been raised in this behalf for the last ten years. When the first petitioner was Chairman of the Companies, he had also followed the same procedure in regard to issue of notices for the board meetings and conduct of the same. However, the board of directors of the Companies decided to send the notice by courier for the meetings held on 30-10-2003 and adopted and approved the accounts. Though the first petitioner attended the board meetings on 30-10-2003, he failed to record his presence by not signing the attendance register. The first petitioner has been regularly attending the registered office and work premises of the various group companies and he is also aware of the day-to-day activities of the Companies. u The Companies are private limited companies and are not family companies. There are no groups ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the present case, it has been proposed at the annual general meeting, pursuant to a special notice received from some of the shareholders, for appointment of an auditor after expiry of the term of office of the present auditor under section 225 of the Act and therefore, any such change in the auditors of the Companies will be made in strict compliance with the principles of shareholders democracy and therefore, the proposed appointment cannot be questioned, unless the provisions of law are not duly followed. However, the present auditor continues to be auditor of the Companies, in view of the stay granted by this Bench in holding the annual general meeting for the year 2003. Consequently, the accounts of the Companies for the year 2003-04 could not be audited, since the auditor was appointed by the members of the Companies at the annual general meeting during the year 2002 to audit the accounts only for the financial year 2002-03. u Clause 26 of the articles of association empowers the Companies to call an annual general meeting at a shorter notice of not less than seven days. According to the petitioners, clause 26 of the articles of association does not dispense with the requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aggrieved shareholder would have been entitled to only 23 per cent of the shares; and (c) if there is nothing in the articles prohibiting a member from identifying a willing member on his own and negotiating the price for the shares, any transfer cannot be said to be violative of the articles. If the share transfers are held invalid, still the shares would revert back only to the members who were holding the shares earlier. There has not been violation of the articles and no case of oppression has been made out by the petitioners. Even assuming that the first petitioner had attended the board meeting and voted against the share transfers, still the share transfers would have been approved by a simple majority. Furthermore, the Companies have duly recorded the share transfers in the minutes book of the board meetings, which is conclusive evidence of the proceedings recorded under section 194 of the Act. The Companies have produced the minutes of various board meetings substanting the approval of impugned transfers and appointment of additional directors. By a mere transfer of shares between the existing members, without issue of fresh shares, new majority could not be created in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of section 171 shall, unless otherwise specified therein or unless the articles of the company provide, apply with respect to general meetings of a private company which is not a subsidiary of a public company. In the instant case, clause 26 contains a specific provision permitting convening of annual general meeting at a short notice of not less than 7 days and therefore, section 171 shall not apply. Nevertheless the Company did not convene the annual general meeting on account of the stay granted by this Bench and therefore, the grievances of the petitioners in this regard do not survive. u The issue relating to 'trademark' of the Company is subject-matter of a civil suit which is already pending before the High Court of Madras. This grievance covered under the intellectual property law cannot constitute an act of oppression or mismanagement. All acts of mismanagement have been raised by means of filing an affidavit, only after filing of the company petition and must, therefore, be ignored. The Madras High Court held in Asoka Betelnut Co. (P.) Ltd. v. M.K. Chandrakanth [1998] 1 Comp. LJ 325 to show that the facts arising subsequent to the filing of the petition cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer his shares in the Companies except with the previous sanction of the board of directors. The language used in article 18 being in the negative form, it emphasises the insistence of compliance with "the previous sanction" of the board of directors, before the transfer of shares by any member in the Companies and therefore, in my considered view, the requirements of article 18 are mandatory in character and not merely directory, irrespective of the fact whether the transfer of shares is in favour of any member or non-member. By virtue of article 19, no share is transferable to a non-member provided any member is willing to purchase the same at a mutually agreeable value. It is, therefore, open to a member before transferring his shares in favour of a non-member, to ascertain the willingness of any member to purchase the shares so offered by any selling member, which is however subservient to article 20, according to which, any member intending to transfer his shares shall give notice as prescribed therein, appointing the company as his agent for the sale of shares, on which the board of directors has to decide, under article 21, regarding the transfer of such shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies as per the following details : PBPL (C.P. No. 50 of 2003) S.No. Name of transferor Name of transferee No. of shares Date of transfer Date of sanction by the Board 1. K. Panner Selvam K. Jayakrishnan 250 22-8-2003 25-8-2003 2. R. Rajagopal Shanthini Jayakrishnan 200 22-8-2003 25-8-2003 3. G.S. Revathy Shanthini Jayakrishnan 100 22-8-2003 25-8-2003 4. S. Maheswari Shanthini Jayakrishnan 450 22-8-2003 25-8-2003 5. M. Subramaniam Shanthini Jayakrishnan 500 22-8-2003 25-8-2003 6. M. Subramaniam K. Jayakrishnan 300 22-8-2003 25-8-2003 7. G.D. Selvaraj Shanthini Jayakrishnan 1,400 22-8-2003 25-8-2003 8. Saly James K. Jayakrishnan 950 22-8-2003 25-8-2003 9. Thangamma Joseph K. Jayakrishnan 350 22-8-2003 25-8-2003 S.No. Name of transferor Name of transferee No. of shares Date of transfer Date of sanction by the Board 10. P.R. Manickam K. Jayakrishnan 250 22-8-2003 25-8-2003 11. G.D. Sekar K. Jayakrishnan 1,590 22-8-2003 25-8-2003 12. V.M. Joseph K. Jayakrishnan 940 22-8-2003 25-8-2003 13. G.S. Latha K. Jayakrishnan 250 18-7-2003 30-7-2003 14. P.K. Krishnan K. Jayakrishnan 1,190 18-7-20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25-8-2003 7. G.L. Venkatesh K. Jayakrishnan 1,000 22-8-2003 25-8-2003 8. M. Loganathan K. Jayakrishnan 500 22-8-2003 25-8-2003 9. G.S.Subramaniam K. Jayakrishnan 500 22-8-2003 25-8-2003 10. P. Shanmugam & S. Jayalakshmi K. Jayakrishnan 1,000 18-7-2003 30-7-2003 11. P.K. Krishnan K. Jayakrishnan 1,150 18-7-2003 30-7-2003 12. R. Kumar N. Chellammal 500 18-7-2003 30-7-2003 13. S. Maheswari N. Chellammal 376 18-7-2003 30-7-2003 S.No. Name of transferor Name of transferee No. of shares Date of transfer Date of sanction by the Board 14. G.S. Gayathri N. Chellammal 387 18-7-2003 30-7-2003 15. M. Subramaniam N. Chellammal 500 18-7-2003 30-7-2003 16. G.D. Selvaraj N. Chellammal 750 18-7-2003 30-7-2003 17. G.D. Sekar K. Jayakrishnan 750 18-7-2003 30-7-2003 18. Jameskutty Mathew K. Jayakrishnan 500 18-7-2003 30-7-2003 19. Joy John K. Jayakrishnan 1,000 18-7-2003 30-7-2003 20. Thangamma Joseph K. Jayakrishnan 300 18-7-2003 30-7-2003 21. V.M. Joseph K. Jayakrishnan 1,100 18-7-2003 30-7-2003 22. K. Jayakrishnan J. Yuvana Rekha 50 10-7-2003 14-7-2003 23. Amirthavalli Tamilselvan K. Jayakrishna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial to establish that the transfers were made in favour of the second respondent and his associates, with previous sanction of the board of directors of the Companies in strict compliance with article 18. The Supreme Court in John Tinson & Co. (P.) Ltd.'s case (supra), while interpreting the articles which provided that "no transfer of any share in the capital of the company shall be made or registered with the previous sanction of the directors", categorically held that there should be a written resolution accepting the transfer from the transferor to the transferee and such previous sanction should precede the handing over the shares. This legal proposition has been adopted by this Board in Radhe Shyam Tulsian's case (supra) thus : "Where the company is a public limited company and there is no specific provision in its articles that no transfer of any shares in the capital of the company shall be made or registered without the previous sanction of the directors, the objection that the board of directors had not resolved to register the transfer of share and therefore there is no valid registration would not be tenable." In the present cases before me, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pirit behind the pre-emptive provisions of the articles and urged that the equity of the transferors is no way affected if the respondents herein are directed to make an offer to the other shareholders in proportion to their shareholding in the Companies. However, considering the requirement of previous sanction and exclusive authority of the board of directors, bestowed on them by virtue of the articles, discussed supra, to decide regarding the transfer of shares, this decision sought to be relied upon by Shri Vidhya Shankar, learned Counsel, renders no assistance to the petitioners. The plea raised by the respondents, on the strength of Hillcrest Realty SDN. BHD's case (supra) that any transfer of shares being a private arrangement between the transferor and transferee cannot be considered to be in the affairs of the company and consequently, the registration of such transfer by the company can neither be construed to be oppressive, must be viewed in the light of the observations of this Board in the said decision that any transfer of shares of a private company has to be strictly in accordance with the articles and therefore, the company should always follow the terms of applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs of MBPL. Similarly, while Smt. Meenakshi Anuradha had resigned from directorship, the fourth respondent was co-opted as a director by the board of directors at the board meeting held on 25-8-2003. The respondents have produced copies of the notices dated 23-7-2003 and 18-8-2003, purportedly sent by post, convening the board meeting of MBPL on 30-7-2003 and 25-8-2003 respectively. The extracts of the attendance register indicated that leave of absence was granted to the first petitioner from attending these board meetings of MBPL. At the board meeting held on 30-7-2003, resignations of the respondents 6 to 10 from the office of the director were accepted; second respondent was appointed as managing director and respondents 3 and 4 came to be appointed as directors of PBHPL. At the board meeting held on 30-10-2003, the third respondent had resigned from his directorship and the fifth respondent came to be co-opted as a director. The respondents have produced copies of the notices dated 21-7-2003 and 23-10-2003, purportedly sent by post, convening the board meetings of PBHPL on 30-7-2003 and 30-10-2003 respectively. The extracts of the attendance register indicate that leave of ab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g held on 25-8-2003 under article 18 (3,500 shares in favour of the respondents 2 and 4); and at the board meeting held on 29-11-2003 under article 18 (887 shares in favour of the respondents 2, 4 and 5). Thus, 13,250 shares of PBHPL were acquired by way of transfer by the respondents 2, 4, 5 and one Ms. Yuvana Rekha. The extracts of the attendance register indicate that leave of absence was granted to the first petitioner from attending the board meetings of PBHPL held on 14-7-2003, 30-7-2003 and 25-8-2003 and further the first petitioner refused to sign the attendance register at the board meeting held on 29-11-2003. The transfer of shares impugned in C.P. No. 52 of 2003 was approved (on 14-7-2003 and 30-7-2003) by the respondents 2 & 6 to 10; (on 25-8-2003) by the respondents 2 to 4; and (on 29-11-2003) by the respondents 2, 4 & 5. By virtue of section 53(1), a document may be served by the company on any member either personally, or sending it by post to his registered address. The first petitioner by his communications dated 1-2-2003, 15-4-2003 and 10-6-2003 had requested the managing director of PBPL, MBPL and PBHPL separately, to send the notice of board meetings only by RP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to every director of a meeting of the board of directors is mandatory, Without which any resolution passed at such meeting is inoperative as held in Parmeshwari Prasad Gupta's case (supra). This shall equally apply to the resolutions passed by the board of directors of the Companies, appointing directors and sanctioning transfer of shares, impugned in the present proceedings. By approving the transfer of 8,970 shares of PBPL; 13,450 shares of MBPL; and 13,250 shares of PBHPL in favour of the second respondent and his family members and/or his associates, without however, affording any opportunity in favour of other shareholders in exercise of the right of pre-emption for purchase of the shares offered by the transferors, the directors, whose conduct should be above suspicion as observed by the Supreme Court in Kamal Kumar Dutta's case (supra), have not shown that they have acted with utmost good faith and for the benefit of and in the interest of the Companies, in accordance with the memorandum and articles of association of the Companies, as laid down in Dale & Carrington Investment (P.) Ltd.'s case (supra) and Vaishnav Shorilal Puri's case (supra). The impugned transfers distur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he reliefs. It is on record that PBPL had convened 8 board meetings; MBPL convened 9 board meetings and PBHPL 9 board meetings between the period from 28-11-2002 to 15-3-2004, transacting, inter alia, progress of the affairs of the Companies, approval of accounts, transfer of shares, co-option of directors, appointment of managing director, purchase and sale of assets, entering into contracts, royalty agreement, availing of bank loans and working capital facilities. The first petitioner never attended any of the board meetings and it is found that he was either granted leave of absence from attending the board meetings or absented or refused to sign the attendance register, thereby, the first petitioner at no point of time, involved in the day-to-day affairs of the management of the Companies, since November, 2002. I do not find, as already observed elsewhere, any valid service of notice of the board meetings at the relevant point of time. In the absence of any material substantiating the involvement of the first petitioner, being one of the promoter directors in the management of the Companies during the disputed period, the entire financial transactions are necessarily required t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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