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TMI Blog2012 (11) TMI 1227X X X X Extracts X X X X X X X X Extracts X X X X ..... y in the board meeting held on September 29, 2009, till the conclusion of the 21st annual general meeting . The board of the company on September 29, 2009, passed a resolution to this effect taking into consideration and in view of the understanding with the board of the company due to the fact that the first petitioner is the largest single shareholder of the company holding 4,15,000 equity shares of Rs . 100 each which represents more than 14 per cent . of the total issued and paid - up share capital of the company . The present board of the company became an illegal board and therefore not entitled to manage the affairs of the company since there is an illegal ouster of respondents Nos . 16 to 18 and with the intrusion of respondents Nos . 7 to 15 claiming themselves as having been appointed by the board of the company as additional directors with effect from January 6, 2011 . In fact, respondents Nos . 7 and 8 had already resigned as directors of the company with effect from December 22, 2010 and Form No . 32 to this effect was filed before the Registrar of Companies on December 24, 2010 . The tenth respondent was appointed as an additional director of the company by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . P . No . 69 of 2007, which is still pending before this Bench . However, without seeking permission of this hon'ble Bench and in violation of the order to maintain the shareholding pattern, the authorised share capital of the company was increased from Rs . 20,00,00,000 ( rupees twenty crore ) consisting of 18,00,000 equity shares of Rs . 100 each and 2,00,000 preference shares of Rs . 100 each to Rs . 30,00,00,000 ( rupees thirty crore ) consisting of 28,00,000 equity shares of Rs . 100 each and 2,00,000 preference shares of Rs . 100 each by amending the capital clause of the memorandum of association and articles of association of the first respondent - company at the 18th annual general meeting held on March 31, 2008 . Even when the authorised equity share capital of the company was Rs . 18,00,00,000 ( rupees eighteen crore ) , the shares were allotted in excess of the said Rs . 18,00,00,000 . However, subsequently an amendment was brought in at the 20th annual general meeting of the company held on September 29, 2009, by passing two special resolutions as follows for the purpose of amending the articles of association and memorandum of association : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s . 18,00,00,000 ( rupees eighteen crore ). It is also seen from Form No . 2 filed on March 22, 2009, September 24, 2009 and July 7, 2010, that equity shares were allotted to several public charitable trusts and private charitable trusts . To cite an example on August 28, 2009, equity shares worth Rs . 4,50,00,000 ( rupees four crore and fifty lakh ) was allotted to Deepthi Media Trust, Kakkanad, Kochi and equity shares worth Rs . 1,00,00,000 was allotted to Chavara Media Trust, Kakkanad, Kochi . Apart from these instances, lesser number of equity shares was also allotted to several charitable trusts, both private and public as in the case of Archeparchy Charitable Trust, Changanacherry, Kottayam . In the case of public trusts unless the instrument by which the said trust is created authorises investment in the equity shares of a public company, the first respondent - company cannot allot its shares as it goes against the terms of the constitution and objects of the trusts . In the case of the private trusts, the investment of trust money can be made only in accordance with section 20 of the Indian Trusts Act, 1882 . Hence the allotment made by the company in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dure under section 257 of the Companies Act, 1956 . Clause 100 of the articles of association of the company also provides that every retiring director shall be eligible for re - election . While the additional directors are eligible only for election and not re - election as per clause 87 of the articles of association, in such cases, the procedure to be followed is in accordance with section 257 of the Act pertaining to the rights of persons other than retiring directors to stand for directorship . The said procedure has not been followed in the case of respondent No . 3 who now falsely claims to be the managing director of the company . It is submitted that the alleged appointment of additional directors on January 6, 2011, is ultra vires the powers of the board of the company and are legally incompetent to act as directors of the company . It is submitted that the shareholders of the company in the 19th annual general meeting held on March 30, 2009, passed resolution appointing the eighteenth respondent as whole - time director ( marketing ) for a period of three years with effect from December 8, 2008 and he will be liable to retirement by rotation . Therefore, the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... director which reads as under : Resolved that in accordance with clause 118 of articles of association of the company and subject to the provisions of section 269 read with Schedule XIII and other applicable provisions, if any, of the Companies Act including any statutory modification or re - enactment thereof for the time being in force, Pengiearambin Poulose Sunny ( PP Sunny ) , be and is hereby appointed as the managing director of the company with effect from August 28, 2010, for a period of one year and during the period of his tenure as managing director he may be paid remuneration by way of salary, allowances and perquisites . 4 . The third respondent, who is an interested director within the meaning of section 287 of the Companies Act, 1956 participated in the said meeting in violation of section 300 of the Companies Act, 1956, without disclosure of his interest in the said contract of appointment as the managing director of the first respondent - company in the said meeting . The third respondent failed to comply with the said requirement and he is liable to be punishable with fine which may extend to Rs . 50,000 as provided under section 299 ( 4 ) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the directorships of petitioners Nos . 2 to 4, their directorships must be restored . In view of the illegality, fraud and oppressive and malicious manner of appointment of respondents Nos . 7 to 15, their directorships must be set aside . ( c ) Though the petitioners hold a combined 17 . 39 per cent, stake in the capital of the company, petitioner No . 1 alone continues to be a director of the company . On the other hand, with only twice the shareholding of petitioners, respondents are holding all key positions and they occupy all other fourteen directorships of the company . ( d ) More than 21,000 public shareholders and certain trusts are holding about 40 per cent . of the capital of the company . There is not even a single director representing the public interest involved . It is a fit case where an administrator must be appointed immediately without much loss of time and appointment of directors on a proportional representation basis should be introduced to have a proper representation to all interest groups whereby the existing control of management of the company in the hands of a few will be eliminated . ( e ) Respondents Nos . 2, 3, 4, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout any rhyme or reason, induct or remove directors . ( k ) The reckless and indiscriminate manner of raising of money from unwary public or routing ill - gotten money in the names of trustees, fathers and apparently in the names of noble men, indiscriminate appointment of directors and allotment of shares call for immediate intervention by this hon'ble Bench by ordering an investigation into the affairs of the company . ( l ) Until the completion of an investigation into the affairs of the company, there should be a stay of any general meeting whether an extraordinary general meeting or an annual general meeting . ( m ) In a recent board meeting held on August 16, 2011, there is another proposal for making a further issue of shares . Even while the implementation of the special resolutions allegedly passed at the impugned annual general meeting 2010 allegedly held on February 28, 2011, have been stayed, the respondents have gone about filing returns with the Registrar of Companies to notify the increase in capital and further they have called the annual general meeting of 2011 which includes yet another proposal to increase the authorised capital and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 ( CLB ) in the matter of ( Eswar Usha Corporation v . Richimen Silks Ltd .). ( n ) [ 1980 ] 50 Comp Cas 771 ( Cal ) in the matter of ( Debi Jhora Tea Co . Ltd . v . Barendra Krishna Bhowmick ) paragraph 31 . ( o ) [ 1999 ] 21 SCL 186 ( Bom ) in the matter of ( Shree Anupar Chemical ( India ) P . Ltd . v . Dipak G . Mehta ) paragraph 9 . 6 . In view of the facts and reasons as stated above, the learned practising company secretary prayed this Bench to grant the reliefs as prayed for . 7 . Respondents Nos . 1 and 3 filed a detailed counter affidavit . Shri Manoj Menon, learned counsel appearing for these respondents denied all the allegations made in the petition . He submitted that the contentions of the petitioners in these proceedings are primarily with regard to - ( i ) removal of the first petitioner as the chairman of the board; ( ii ) appointment of additional directors ( respondents Nos . 7 to 15 ) at the board meeting held on January 6, 2011; ( iii ) increase of the authorised share capital and allotment of shares, allegedly to trusts; ( iv ) cessation of respondents Nos . 16 to 18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appointment of additional directors in accordance with article 87 read with section 260 of the Act cannot be a subject - matter of the petition under sections 397 and 398 of the Act . On the point of increase of the authorised share capital and allotment of shares, allegedly to trusts, he submitted that at the 20th annual general meeting held on September 29, 2009, two special resolutions were passed by the shareholders amending the memorandum and articles of association increasing the authorised share capital of the company to Rs . 30 crores comprising of 30 lakhs equity shares of Rs . 100 each . In terms of section 16 read with section 94 of the Act, amendment of the memorandum of association is by an ordinary resolution . In terms of section 31, any amendment / alteration to the articles of association shall be by of special resolution . The respondents state that when any item has been approved as a special resolution, when only an ordinary resolution is required under the Companies Act, it would not invalidate such resolution . It is submitted that the petitioner was the chairman of the board meeting which was held on August 28, 2009, when the board had resolved to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors with effect from January 1, 2011 . These respondents have not challenged their cessation as directors before this hon'ble Board and the petitioner is not entitled to espouse their cause in these proceedings . In fact, the eighteenth respondent has challenged his cessation as director in a suit being O . S . No . 27 of 2011, before the Learned Munsif Magistrate Court at Kottayam and the same issue cannot be re - agitated by the petitioner in these proceedings . On the point of continuation of the third respondent as managing director, learned counsel submitted that the third respondent was appointed as additional director on May 28, 2009 and at the board meeting held on August 28, 2009, he was appointed as managing director for a period of one year . At the annual general meeting held on September 29, 2009, the shareholders confirmed the appointment of the third respondent as the managing director for a period of one year with effect from August 28, 2009 and such a confirmation was required in terms of section 269 read with Schedule XIII of the Act . At the board meeting held on August 10, 2010, the third respondent was appointed by the board as managing director for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,50,000 equity shares of Rs . 100 each . The allegation that because of the substantial investment made by the petitioner in the company, he was appointed as chairman of the company in the board meeting held on September 29, 2009, till the conclusion of the 21st annual general meeting and the said appointment was made in consideration and by way of acknowledgment for the huge investment of Rs . 4 . 15 crores made by the petitioner and that the petitioner is still the chairman of the company is completely denied . It is submitted that the petitioner was only appointed as chairman of the board in terms of article 106 of the articles at the board meeting held on September 29, 2009 . However, at the board meeting held on December 22, 2010, the directors appointed the second respondent as the chairman of the board, in view of non - confidence expressed by majority of the directors with regard to the conduct of the petitioner . The petitioner was present at the said meeting . In any event, the petitioner has not sought for any relief in these proceedings, with regard to the appointment of the second respondent as the chairman of the board . The second respondent has been duly ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of association and section 260 of the Act clearly empower the board at any time and from time to time to appoint any other person as director . Such appointment of additional directors by the board on January 6, 2011, is valid and in accordance with the articles and the Act . Respondents Nos . 7 to 15 have also been elected as directors by the shareholders at the first annual general meeting held after their appointment, i . e . , at the 21st annual general meeting on February 28, 2011 . The eighteenth respondent has been appointed as a director, who is subject to retirement by rotation . He has not been appointed as a director for a specific term under article 98, to contend that he cannot be considered for retirement by rotation . In any event, apart from the fact that no relief has been claimed, based on the retirement / cessation of office of the eighteenth respondent, the petitioner has no locus standi to espouse the cause of the sixteenth to eighteenth respondents . Respondents Nos . 16 to 18 ceased to be directors with effect from January 1, 2011, as per section 256 of the Act . Respondents Nos . 7 to 15 had been duly appointed in accordance with article 87 read wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... special resolutions passed at the 20th annual general meeting held on September 29, 2009, are illegal, invalid for the reasons that the memorandum of association cannot be amended or altered by a special resolution but only by the mode prescribed under section 16 of the Companies Act, 1956, are denied . These allegations are made on the petitioner's incorrect understanding of the law . The resolutions for altering the authorised share capital have been made in accordance with the Act and the articles . The petitioner was the chairman of both, the board meeting held on August 28, 2009 and the 20th annual general meeting held on September 29, 2009 and had participated and voted in favour of such resolutions and has now for wholly collateral purposes sought to raise such untenable contentions . The authorised share capital was increased on September 29, 2009 to Rs . 30 crores at the 20th annual general meeting and the shares have been allotted within the limits prescribed . The company has not allotted shares to any trust . On August 28, 2009, the company has allotted 4,50,000 shares to Rev . Fr . Mathew Pulimoottil and 1,00,000 shares to Rev . Fr . Joseph Mattom . Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 300 of the 1956 Act, without disclosure of his interest in the said contract of appointment as managing director of the first respondent - company is denied . The third respondent did not participate in the discussion of the board and the resolution regarding his appointment as the managing director . Further, sections 299 and 300 of the Act are not applicable for the appointment of the managing director of the board . The appointment of the third respondent has been confirmed by the shareholders at the 21st annual general meeting . With regard to the allegation that proper board meeting was convened by the first petitioner who was chairman and director of the company at the requisition of other directors, it is submitted that the petitioner is not competent to convene any board meeting . As per article 105, the quorum for a meeting of the directors is one - third of the number of directors or three directors whichever is higher . The petitioner has no authority to summon any meeting of directors and there was no quorum because three out of the alleged five persons present at the alleged meeting held on January 10, 2011, had ceased to be directors . The respondents f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inue with the publication of Deepika daily, weekly and magazines and / or start publishing any other periodicals or publications . The other objects incidental or ancillary to the attainment of the above main objects are specifically detailed out in paragraph ( B ) of the memorandum of association . The regulations of the company have been provided specifically in the articles of association of the company . The main grievance of the petitioners is that the articles of association to be altered to provide for election of directors on proportional representation basis . Upon perusal of the articles, clause 83 onwards provides for directors, nominated directors, rotation of directors, proceedings of directors, minutes and the power of directors, etc . Further, clauses 118 to 122 provide for the management . Clause 86 provides for the directors of the company, who need not hold any qualification of shares . The clauses also provide for the alternate directors . On a detailed perusal of the clauses, there is no mention in the articles that a proportional representation will be given to the members . Clause 86 specifically says that even the directors who need not hold qualif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 was in respect of allotment of shares . In the board meeting held on August 28, 2009, apart from other resolutions, the third respondent was appointed as managing director . The other items were regarding allotment of shares, passing of annual accounts, notices for annual general meeting, etc . The other resolution which was passed as a special resolution is to deletion of existing clause 3 of the articles and in its place the following clause was substituted : The authorised share capital of the company is Rs . 30 crores divided into 30 lakhs equity shares of Rs . 100 each with power to increase, reduce, consolidate, divide or re - arrange the share capital for the time being into several clauses with preferential rights or privileges as may be decided by the company . The important factor is that for the increase in the share capital and the necessary alterations to the clauses of the articles, the petitioners were present in the capacity as chairman and directors . I do not find any dissent expressed by them . The minutes also include the allotment of shares which the petitioners were party to the proceedings . In so far as the annual general meeting which was he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent has been appointed to the board as managing director on September 28, 2009 and his appointment was confirmed at the annual general meeting held on September 29, 2009 . Further, he has been appointed as the managing director at the board meeting held on August 10, 2010, for a further period of one year and his appointment was confirmed at the 21st annual general meeting held on February 28, 2011 . Further, he was appointed at the board meeting held on August 16, 2011 and approved at the annual general meeting held on September 28, 2011 . The only grievance of the petitioner is with regard to appointment of the third respondent at that board meeting . I do not find any illegality in the meetings and therefore the meetings were held validly in accordance with law . There is no need to interfere by this Bench in these meetings . Accordingly, the issue is answered . 23 . Now I deal with issue No . ( iii ). The grievance of the petitioner is that the company has allotted shares to various trusts on various dates in the names of individuals who are styled as managing trustees which is illegal and unauthorised . From the perusal of articles, the initial authorise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Sub - Court, Thiruvananthapuram challenging his removal as the chairman . In view of the proceedings pending before the other court and as observed this Bench cannot interfere with the discretion of the board . Moreover, managerial and directorial complaints do not come under the purview of sections 397 and 398 of the Act . Admittedly, the company is neither a family - run company nor carrying on the basis of quasi - partnership . Petitioners Nos . 2, 3 and 4 were directors who were liable to retire by rotation at the 21st annual general meeting which was to be held by September 30, 2010 . However, the Registrar of Companies, Kerala extended the time for holding the annual general meeting up to December 31, 2010 . The petitioners ceased to be directors with effect from January 1, 2011 . From the perusal of petition it is seen that petitioners Nos . 2 and 3 have not challenged their cessation as directors before any other court as in the case of petitioner No . 1 . Moreover, the petitioners cannot espouse their cause in these proceedings, more particularly directorial complaints . It is seen that petitioner No . 4 has challenged his cessation as director by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter considering the facts in detail therein . In the present case, the petitioners failed to establish any kind of fraud in the allotment of shares, therefore, the facts of that case are completely different to the facts of the present case . In the matter of Bank of Rajasthan Ltd . v . Rajasthan Breweries Ltd . [ 2007 ] 140 Comp Cas 622 ( CLB ) and Hemant Babubhai Desai v . Jayant Vitamins Ltd . [ 2010 ] 157 Comp Cas 373 ( CLB ) are concerned, the Company Law Board while dealing the matter under section 237 ( b ) ordered for investigation . In the present case, the investigation is not taken as an issue, therefore, the said citations are not applicable to this case . In the matter of Kshounish Chowdhury v . Kero Rajendra Monolithics Ltd . [ 2002 ] 110 Comp Cas 441 ( CLB ) : [ 2002 ] 47 CLA 240, is concerned, the Company Law Board while dealing the issues on appointment of additional directors as oppressive on the facts as stated therein . However, in the present case, the appointment of directors either additional or on rotation basis is not mala fide . Hence the citation is not applicable to the present case . The other citations relied upon by the prac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ropriate remedy by way of company suit which can give him full relief if such action had been taken by the company on inadequate ground . The Division Bench found that if a director even if illegally terminated cannot bring his grievance as to termination to winding up the company for that single and isolated act, even if it was doing good business and even if the director could obtain each and every adequate relief in a suit in a court . In the present case, petitioner No . 1 has filed a suit regarding his removal as chairman . Further, the fourth petitioner also filed a suit challenging his removal . The findings of the apex court are squarely applicable to the facts of the present case . The other allegations of the petitioners regarding appointment of the third respondent as managing director is concerned, the respondents have relied upon a citation of this Bench in the matter of Srihari Rao v . Gopal Automotive Ltd . [ 1998 ] 4 Comp . LJ 140 : [ 1999 ] 96 Comp Cas 493, wherein the Company Law Board was of the view that appointment of managing director ( page 502 of 96 Comp Cas ): ... we feel that, when the general body of members, in their own wisdom, have appro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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