9911796707
TMI Blog2006 (8) TMI 654X X X X Extracts X X X X X X X X Extracts X X X X ..... meetings including annual general meetings; and (e) non-sending of quarterly results and annual accounts since March 2000, have invoked the provisions of Section 397 of the Companies Act, 1956 ( the Act ) seeking the following reliefs: (i) to reconstitute the board of directors of the Company with two nominees of the petitioner and one nominee of the second respondent as directors of the Company; (ii) to appoint the nominee of the petitioner as Chairman of the Board of Directors and general meetings of the Company; (iii) to declare that the increase of authorised capital from ₹ 125 lakhs to ₹ 225 lakhs is null and void; (iv) to declare that the allotment of ten lakhs equity shares of ₹ 10/- each made in favour of the fourth respondent is null and void and (v) to direct the Company to issue share certificates in respect of ten lakhs equity shares held by the petitioner; (vi) to direct the Company to give access in favour of the petitioner for inspection of the books of account and statutory records with effect from 01.04.2000; (vii) to direct the Company by way of injunction not to sell, transfer, alienate or dispose of the assets and pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany, which constitute serious acts of oppression in the affairs of the Company. There is no material to show as to when the fourth respondent brought in funds towards the allotment of impugned shares. The second respondent holding barely 9% of the share capital cannot be given exclusive control of the Company. There was absolutely no justification to issue further shares in exclusion of the petitioner which is a mala-fide exercise of power, without following the legal procedures. The petitioner has invested to the tune of 90.91% of shares and any necessity for additional funds has to be determined only by the petitioner and no resolution could be passed for increase of the authorised capital in its absence. Whereas the increase of authorised capital and the issue of increased capital have been decided by the members constituting less than 10% of shareholding the Company, without involvement of the petitioner and without any justification. Thus, the respondents are guilty of fraudulent, wrongful burdensome and harsh acts against the petitioner, which would justify the winding up of the Company on just and equitable grounds. However, winding up of the Company would unfairly prejudi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. If the increase of authorised capital is to be struck down for various irregularities the allotment of shares must also be set aside. The Reserve Bank of India permission in terms of its communication dated 13.08.1996 for issue of shares to the overseas corporate body shall be valid so long as at least 60% of its ownership is held by non-resident individuals of Indian nationality/origin and in case the ownership held by such persons falls below the level of 60%, the same shall be intimated to the RBI immediately. The RBI circular was not within the knowledge of the petitioner, as the Company never sent any copy of the RBI circular for necessary compliance by the petitioner. The Company has been silent all these years till 2005, without calling for, from the petitioner, any details regarding its ownership and cannot take any exception under the RBI circular dated 13.08.1996 at this belated stage. The Company has produced only a part of the RBI Circular dated 08.12.2003, to suit its convenience. This circular prohibits only fresh investments but not the investments already made by overseas corporate bodies. By virtue of the RBI guidelines, the automatic permission granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to convene the extra ordinary general meeting for raising the share capital or to issue any notice for the extra ordinary general meeting and therefore the extra ordinary general meeting was convened without any authority by the respondents. The board of directors neither approved the notice of extra ordinary general meeting, which is mandatory requirement under the provisions of the Act. The Company has been raided by the Excise officials, which confirms the mismanagement in the affairs of the Company. The petitioner is rather concerned that the Company should maintain status quo in regard to all its assets as on the date of company petition and that the second respondent must clear the liabilities incurred after the company petition. The increase in the authorised capital as well as the allotment of shares came to surface pursuant to the inspection of documents undertaken during May 2006 by the petitioner, upon which necessary steps have been taken for challenging the various acts of omission and commission on the part of the respondents. The respondents have played fraud on the majority of the shareholders. Section 397 empowers any members to invoke the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ression. Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad and Ors. 2005 (Vol.123) CC 566 to show that the directors have a fiduciary duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and the interest of the company they represent. The directors are not entitled to use their powers to issue shares merely for the purpose of defeating the wishes of the existing share holders. M.S. Madhusoodhanan and Anr. v. Kerala Kaumudi (P) Limited and Ors. to show that mere certificate of posting does not amount to conclusive proof of service of the notice of the addressee concerned. Tea Brokers (P) Limited and Ors. v. Hemendra Prosad Barooah (1998) 5 Comp. LJ 463 Life Insurance Corporation of India v. Escorts Limited and Ors. - 1986 (Vol.59) CC 548 to emphasize the right and privilege of the share holders to participate in the management and administration of the affairs of the company. IT Cube Inc and Anr. v. IT Cube India (P) Limited and Ors. (2004) 3 Comp. LJ 441 to show that convening and holding of any general meeting of the company without giving notice to share holders is illegal and void. Rashmi S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance till filing the company petition. The petitioner is, therefore, not entitled to interfere with, participate or claim any right in the management. The Company has been managed and exclusively controlled by the second respondent, who is the original promoter of the Company. In terms of the RBI communication dated 13.08.1996, permission for issue of shares to the overseas corporate body shall be valid so long as at least 60% of its ownership is held by non resident individuals of Indian nationality/origin. The petitioner was required to inform the Company annually the status of its shareholding in order to ensure that at least 60% shares are held by non-resident Indians. No such intimation has ever been sent by the petitioner to the Company, thereby failed to comply with the conditions stipulated in the RBI communication dated 13.08.1996 and is, therefore, not entitled to hold the shares in the Company or exercise any rights in respect of its shares. The RBI by its communication dated 08.12.2003 derecognised overseas corporate bodies and the petitioner is therefore not entitled to make any further investment in India. The petitioner company had at the time of incorporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fault on account of non service of the notice of the extra ordinary general meeting which will not give cause of action to invoke Section 397. The petitioner executed a power of attorney as early as on 11.05.2005, empowering its attorneys to bring any action, before the Company Law Board in connection with any disputes concerning the Company, which was preceded by the board meeting of directors of the petitioner approving the issue of power of attorney in favour of its attorneys. These actions of the petitioner clearly indicate that it was quite aware of the increase of capital and the subsequent allotment of shares made on 10.05.2005 in favour of the fourth respondent. This Board in Hillcrest Realty Sdn.Bhd. and Ors. v. Hotel Queen Road Pvt. Ltd. and Ors. (order dated 31.01.2006) upheld the validity of the allotment of shares and registration of the transfer of shares at the board meeting held without the issue of notice to one of the directors and therefore the petitioner cannot have any grievance by virtue of non receipt of the notice sent by the Company. The judgment of the Supreme Court in Dale and Carrington Pvt. Ltd. v. P.K. Prathapan (supra) is not applicable to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Company was incorporated as early as in October 1991, whereas the petitioner was incorporated as late as in October 1994. The petitioner invested in the Company in August 1995, after the Company was fully established was making profits. These factors would belie the purported arrangement between the parties namely, (a) the petitioner will always hold 90.91% of the share capital of the Company; (b) the petitioner will appoint his nominees on the board of the Company as and when necessary; and (c) there will be no change of the shareholding of the Company without the consent of the petitioner. Further more, there has been no written understanding between the petitioner and the second respondent regarding the control and management of the Company. The petitioner for the first time through present petition seeks to reconstitute the board of directors of the Company with two of its nominees and one nominee of the second respondent as directors of the Company. The second respondent being a minority shareholder has been in de facto management of the Company ever since its incorporation in the year 1991 and by means of the allotment of impugned shares, the Company has come under d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts in the Registrar of Companies. If the petitioner is aggrieved due to non-service of notice for the extra ordinary general meeting, it has to exercise its civil rights and there is no remedy available before the CLB. Even if non-sending of the notice is illegal, the said act per se is not oppressive. The service of notice of meetings on shareholders residing outside the country is not necessary, as held in Warden and Hotchkiss Limited In re All E.R. Rep. 1945 Vol. I page 507. The petitioner has not complied with the RBI conditions and directions regarding its ownership. It is not known whether 60% of ownership the petitioner is held by the non-resident individuals of Indian nationality. The petitioner claiming to be a foreign body corporate cannot be allotted any shares in view of the restrictions contained in the RBI circular dated 08.12.2003, by which the facilities for overseas corporate bodies under various Foreign Exchange Management Regulations have been withdrawn. The questions and answers contained in the said circular are illustrative in nature and do not have any legal force, which cannot be taken advantage by the petitioner. At the time of allotment of the impug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any is not a glorified partnership and the relationship between the two groups of shareholders is not governed by the principles similar to the principles governing relationship between the partners as claimed by the petitioner. All decisions cited on behalf of the petitioner are in relation to two group of shareholders governed by quasi partnership and therefore, not applicable to the facts of the present case. There is no deadlock in the affairs of the Company, warranting winding up of the Company. The petitioner has neither made out any justification for winding up the Company which is one of the essential requirements, as laid down by the Calcutta High Court in Bagree Cereal (P) Ltd. v. H.P. Bagri (2001) Vol. 145 CC 465 which has been confirmed by the Supreme Court. 5. I have considered the pleadings and elaborate arguments of learned Senior Counsel. The issues which arise for consideration are whether the petitioner has made out a case under Section 397 and if so, whether the petitioner is entitled for the reliefs as claimed in the company petition. The main grievance is that the petitioner had neither any notice nor knowledge of the extra ordinary general meeting held on 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign Exchange Management Regulations have been withdrawn. This circular does not impose any blanket bar against overseas corporate bodies in undertaking fresh investments, as specified therein. It has to be borne in mind that the petitioner has not expressly dispensed with the need for being given any notice of extra ordinary general meeting held on 18.04.2005. The respondents have produced a certificate of posting to establish service of notice on the petitioner by sending it by post in accordance with Sub-section (1) of Section 53. The certificate of posting, in the event of serious disputes between the parties, cannot amount to conclusive proof of service of notice on the addressee, meeting the mandatory requirements of Section 172. It is rather unsafe to place any reliance on mere certificate of posting, without any corroborative evidence such as despatch register, books of account etc, showing the expenses incurred in connection with sending of notices to the shareholders, including the petitioner. The certificate of posting would show that certain postal envelopes have been put into the post office and will not by itself necessarily mean that there has been conclusive proof of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company utilized the entire one crore of rupees realized, pursuant to the issuance of enhanced capital, for entirely a different purpose by purchasing the shares in M/s. Hotel Queen Road Private Limited, which is not the main business of the Company. The respondents failed to establish the benefit derived by the Company on account of the further enhancement as well as issue of the share capital. Section 193 applying to the public as well as private companies provides, inter alia, that within 30 days of the conclusion of every meeting of the Company, the minutes book has to be written and each page of such recording must be initiated or signed by the Chairman and on the last page of such recording the Chairman shall sign and put the date. It is observed from copies of the minutes of the board meeting dated 15.03.2005 and 10.05.2005, enhancing the share capital and issuing the enhanced capital respectively, they are not in strict compliance with the requirements of Section 193. The respondents have not chosen to produce the original minutes book, containing the board resolutions, inspite of several of the discrepancies, appearing in the copies of the minutes of the board of direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solely for their personal aggrandizement without caring for the future interest of the Company has been disapproved by the Courts. The holding of the petitioner, by virtue of the impugned allotment, has been reduced from 90.91% to 46% of shares in the Company. Such issue of further shares converting a majority into a minority is held to be a grave act of oppression in Kshounish Chowdhury v. Kero Rajendra Monolithics Limited (supra). The Supreme Court in Dale and Carrington Investment (P) Limited v. P.K. Prathapan (supra) held that if a member who holds the majority of shares in a company is reduced to the position of minority shareholder by an act of the company or by its board of directors malafide, the said act must ordinarily be considered to be an act of oppression to the said member. The Chancery Division in Punt v. Symons and Co. Limited (supra) held that any issue of shares under the general and fiduciary power of the directors for the purpose of acquiring an unfair majority for the purpose of altering the rights of parties warrants inference of the Court. The directors are not entitled to use their powers of issuing shares for the purpose of defeating the wishes of the exi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is majority to control, manage and run the affairs of the Company and elect his own men to the board of directors of the Company. The petitioner, being a majority shareholder, despite its disassociation with the day to day management of the Company and the petitioner's lack of interest over the affairs of the Company, all these years, cannot be denied of its right to administer the future affairs of the Company. The petitioner's right cannot be brushed aside on the plea that it is only an investor and not a bonafide shareholder of the Company. These facts of the present case would amply demonstrate that there is such a lack of probity in the conduct of the affairs of the Company by the respondents that the petitioner can no longer have confidence in the respondents, warranting winding up of the Company under just and equitable clause as held in the case of Ramashankar Prasad v. Sindri Iron Foundry (P) Limited (supra). Any order of winding up of the Company will however prejudice the interests of the Company and its members. At the same time, the rights of the respondent group on account of its active involvement in the promotion and development of the Company must necessari ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
