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TMI Blog2019 (5) TMI 763X X X X Extracts X X X X X X X X Extracts X X X X ..... te, shares of Moral were transferred to Mr. R.P. Mittal @ ₹ 20 per share. Thus, the High Court has opined that these acts in overall factual matrix of the case, were sufficient to conclude that ground under section 397 had been made out. It was improper for the Directors to allot shares to themselves and to the exclusion of Mr. Ashok Mittal in the facts and circumstances of the case and that too without issuance of notice to him. Section 19(2) of the Companies Act provides that nothing in sections 85 to 89 shall apply to a private company unless it is a subsidiary of a public company and this question has to be finally decided whether it is a private or public limited company in the pending civil suit which have been stated to be transferred to NCLT for decision in accordance with law. Otherwise, section 87 provides that notice has to be issued to preference shareholders also for the meeting and they have a right to participate in the meeting. It appears prima facie even if dividend has not been declared. In that case also, preference shareholders shall have a right to vote in the meeting. Section 108 operates independently of section 286 or section 300. The invalida ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Hotels Co. Ltd. (IHCL) held 10% shares and the balance shares were held by the employees of hotels of ITDC under a Voluntary Retirement Scheme. 4. Pursuant to its decision to disinvest, the Government invited bids for sale of shares in HQRL. The appellant No.3 Moral Trading Investment Ltd., in short hereinafter referred to as Moral , a public limited company, was declared the successful bidder. 5. By a share purchase agreement dated 8.10.2002 Moral acquired the shares of Government of India and IHCL in HQRL for a sum of ₹ 45 crores. Out of this, ₹ 33.37 crores was obtained by way of loans from banks. 99.97% shares of HQRL being held by Moral, HQRL became Moral s subsidiary. 6. Appellant No.1, Mr. R.P. Mittal, and the appellant No.2, Mrs. Sarla Mittal, who held the controlling interest in Moral, and the Respondent No.3, Mr. Ashok Mittal, younger brother of the Appellant No.1, Mr. R.P. Mittal were appointed as Additional Directors of HQRL on 8.10.2002, and later, regular Directors at the Annual General Meeting of HQRL held on 28.12.2002. 7. On 30.9.2002 HQRL passed a resolution in its Extra Ordinary Genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 5 crore comprising 5 lakh preference shares of ₹ 100 each. On 19.7.2003 HQRL approved the issuance of 4,64,290 redeemable preference shares to Hillcrest respondent No.2. In or about August September, 2003, to fund the redevelopment of the hotel, a term loan of ₹ 40 crores was raised from Indian Overseas Bank. According to the appellants the loan was secured by the joint personal guarantees of Mr. R.P. Mittal, Mrs. Sarla Mittal and Mr. Ashok Mittal, the corporate guarantee of Moral and the collateral security of personal assets of Mr. R.P. Mittal and Mrs. Sarla Mittal. 12. On 27.7.2004, HQRL in compliance of resolution dated 28.12.2002 passed under section 81(1A) of the Act, issued 23.90 lacs equity shares at par to Moral, the single shareholder holding 99.97% of equity. On 7.1.2005 HQRL in compliance of resolution dated 28.12.2002 passed under section 81(1A) of the Act issued 41.51 lakh equity shares to Moral, 1.10 lakh equity shares to Mr. R.P. Mittal and 4.5 lakh equity shares to Mrs. Sarla Mittal. 13. On 14.1.2005 an Extra Ordinary General Meeting (EOGM) was held wherein a shareholder s resolution was adopted pursuant to which HQRL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Any resolution for winding up the company or for the repayment or reduction of its share capital shall be deemed directly to affect the rights attached to preference shares within the meaning of this clause. (b) Subject as aforesaid, every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, be entitled to vote on every resolution placed before the company at any meeting, if the dividend due on such capital or any part of such dividend has remained unpaid: (i) in the case of cumulative preference shares, in respect of an aggregate period of not less than two years preceding the date of commencement of the meeting; and (ii) in the case of non cumulative preference shares, either in respect of a period of not less than two years ending with the expiry of the financial year immediately preceding the commencement of the meeting or in respect of an aggregate period of not less than three years comprised in the six years ending with the expiry of the financial year aforesaid. Explanation.: For the purposes of this clause, dividend shall be deemed to be due on preferenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat no notice had been issued to Ashok Mittal who was, at the material time, a Director. 19. The present case arises out of the said petition filed by Hillcrest and Mr. Ashok Mittal against the appellants in the Company Law Board in September, 2005 under Sections 397/398 of the Act, challenging the allotment/transfer of shares effected on 27.7.2004, 7.1.2005 and 10.5.2005 on inter alia grounds of (i) financial mismanagement of HQRL by Mr. R.P.Mittal and Mrs. Sarla Mittal; (ii) Invested in Cumulative Redeemable Preference Share (CRPS) on the understanding that HQRL would remain a subsidiary of Moral and that in the event of HQRL failing to pay any dividend for two years, Hillcrest would be entitled to exercise its voting rights in all resolutions; (iii) illegality of allotments made on 27.7.2004, 7.1.2005 and 10.5.2005. In the absence of notice under Section 286 of the Companies Act to Mr. Ashok Mittal, who was a Director of HQRL; (iv) the allotments having been made by the remaining Directors without disclosing their obvious interest in violation of section 300 of the Companies Act; (v) the allotments being made without any valuation of equity shares of HQRL; (vi) no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said IA No.12164 of 2008 in C.S. (OS) 1382 of 2008 allowing Hilcrest to vote in the Extraordinary General Meeting to be held on 16th October, 2008 and also appoint Administrator to look after the day to day affairs of HQRL. 26. On 16th October, 2008, Mr. R.P. Mittal, Mrs Sarla Mittal and HQRL filed an appeal against the orders dated 15th October, 2008 and 24th October, 2008 passed by the Delhi High Court in IA No.12164/ 2008 in C.S. (OS) 1832 of 2008 before the Division Bench. 27. The appellants state that on or about 21st October, 2008, Mr. R.P. Mittal filed an application under the Right to Information Act whereupon the Registrar of Companies, by letter dated 21st October, 2008 informed the appellant that the status of HQRL had not been changed from private company limited by shares to public company limited by shares for the technical reasons specified in the said letter. 28. On 24th October, 2008 the interim order passed by the Delhi High Court on 5th October, 2008 in IA No.12164/ 2008 in C.S. (OS) No.1832 of 2008 was made absolute. 29. On 14th January, 2009, the Division Bench of Delhi High Court by a common order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preference share capital, ₹ 40 crores bank loan from IOB on personal guarantee of Mr. Ashok Mittal, Mr. R.P. Mittal and Mrs. Sarla Mittal. HQRL has claimed that the net worth of Mr. Ashok Mittal was much higher than others. 37. HQRL has further contended that the management changed hands from R.P. Mittal group on 15.1.2009 vide order of Delhi High Court. Prior to leaving the management of HQRL, Mr. R.P. Mittal and Mrs. Sarla Mittal with the help of their accomplices, removed and did away with the books of account and statutory records of HQRL. Thereafter, a number of third parties, all related to Mr. R.P. Mittal started claiming to have lent monies to HQRL. Most of these demands were based on oral agreements with Mr. R.P. Mittal. When the new management assumed charge of HQRL, the financial position of HQRL was weak, there being only ₹ 2.82 lacs in the bank account of HQRL; the immediate liabilities including government dues, taxes and salaries of staff were ₹ 98,62,563; HQRL had defaulted on payment of interest to the bank amounting to ₹ 4,73,98,446 along with total bank liability of about ₹ 30 crores; and its account was on the verge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test as to whether an action is oppressive or not is not based on whether it is legally permissible or not since even if legally permissible, if the action is otherwise against probity, good conduct or is burdensome, harsh or wrong or is malafide or for collateral purpose, it would amount to oppression under section 397. Reliance has also been placed on Needle Industries (India) Ltd. Ors. v. Needle Industries Newey (India) Holding Ltd. Ors. (1981) 3 SCC 333; Sangramsinh P. Gaekwad Ors. v. Shantadevi P. Gaekwad (Dead) through LRs. Ors. (2005) 11 SCC 314; and V.S. Krishnan Ors. etc. v. Westfort Hi tech Hospital Ltd. Ors. (2008) 3 SCC 363. 43. Shri Misra, learned senior counsel further urged that no oppression was caused to Mr. Ashok Mittal by allotment of shares on 27.7.2004, 7.1.2005 and allotment/transfer of shares on 10.5.2005 to majority shareholders having 99.97% equity. It was further submitted that there could not be any oppression caused to Mr. Ashok Mittal by inter se transfer of shares from Moral to Mr. R.P. Mittal as the said transaction was between Moral and Mr. R.P. Mittal, whereby HQRL only records the transfer. The argument on behalf of Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titled to vote on every resolution placed before the company at any meeting. Even otherwise, the ground of HQRL not remaining subsidiary of Moral (a public company) has itself been diluted by Hillcrest, as can be seen from the note with the heading Shareholding pattern of R1 (HQRL) . It is relevant to mention here that it was held by the High Court of Bombay in CDS Financial Services (Mauritius) Ltd. v. BPL Communications Ltd. Ors. (2004) 121 Comp Case 374, that RBI s special permission under the special laws of FEMA will prevail over the provisions of the Companies Act, 1956. If the analogy of the High Court in impugned order is applied then all earlier meetings of HQRL deserve to be declared void as violative of sections 286 and 300. 46. It was also urged by Mr. Misra, learned senior counsel, that the finding of the High Court as to provision under section 108 of the Companies Act, 1956 and thereafter initiating the proceedings under section 340 Cr.P.C. against Mr. R.P. Mittal was also erroneous, as the High Court had itself recorded that there was no record available with the bank to ascertain when the certificates were released to the Mr. R.P. Mittal. The Righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Mr. Ashok Mittal. In or about 2004 05 the R.P. Mittal group through the three impugned resolutions sought to increase its shareholding in the company. Pursuant to an Extra Ordinary General Meeting Mr. Ashok Mittal and Hillcrest took over the management of the company. The actual change in management, hence, took place on or about 15.1.2009. After takeover of management by Mr. Ashok Mittal further investment amounting to ₹ 49.5 crore was made by him out of which ₹ 9.5 crores was directly invested by Mr. Ashok Mittal to pay out bank dues and other pressing creditors. In addition, on or about 30.7.2009 another ₹ 40 crores were raised through a rights issue. R.P. Mittal group was offered shares in proportion to the shareholding in the company but declined to take any share or make any investment in the company. Hence, the entire amount was brought in by Mr. Ashok Mittal. As of now Mr. Ashok Mittal holds 92% of equity shares of HQRL whereas Moral and Mr. R.P. Mittal own about 8% shares of HQRL. The main disputes between the parties pertain to (i) allotment and transfer of shares to R.P. Mittal Group and Moral in 2005; (ii) takeover of management by Ashok Mittal and H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in violation of section 108 of the Companies Act because it has been found as a fact by the High Court that physical share certificate was not in possession of Moral on the relevant date. In proceedings under section 397 filed by Hillcrest and Mr. Ashok Mittal, the Company Law Board found that the resolution had been passed illegally but it declined to set aside the allotment and transfer on unsustainable grounds. It is well settled that in a petition under section 397 of the Companies Act it is normally desirable unless any special circumstances exist, to pass an order which to all intents and purposes would be beneficial to the company itself and the majority of its members. 56. It was finally contended that the High Court order be upheld without upsetting the existing position in relation to management of company. 57. It was submitted by Mr. Mihir Kumar, learned counsel for Hillcrest that the appellants have filed two appeals namely C.A. No. 3934/2017 and C.A. No.3935/2017. The sole legal question arising in the instant matters is whether the 3 meetings of the Board of Directors of HQRL held on 27.7.2004, 7.1.2005 and 10.5.2005 were legal and va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso placed on Firestone Tyre Rubber Co. v. Synthetics Chemicals Ltd. Ors. (supra). 61. It was also contended by learned counsel for Mr. Ashok Mittal that he had seriously been oppressed as he admittedly had substantial interest in HQRL; allotment of shares by appellants allotted shares to themselves without providing any opportunity of representation to Mr. Ashok Mittal and also without providing any opportunity to Mr. Ashok Mittal to participate in the offer; said allotment was at gross undervaluation and in breach of the fiduciary position of Mr. R.P. Mittal and Mrs. Sarla Mittal as Directors of HQRL; the 3 meetings violated Section 286 thereby ipso facto invalidating the meetings. Mr. Ashok Mittal had a right to participate in the offer of shares to any extent irrespective of his existing equity shareholding of 1 share; and that transfer of shares by Moral to Mr. R.P. Mittal was against loan. Even Mr. Ashok Mittal had granted loan to Moral but against that Moral did not transfer any shares. Appellants reliance on section 81(1A) is unmerited. It was further contended that the appellants argument of Mr. Ashok Mittal holding only one share is manifestly erron ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... converted into a public limited company. This Court without meaning to decide the issue finally prima facie observed that an application was filed before the Registrar in Form 23 along with resolution dated 30.9.2002 is sufficient to arrive at a prima facie conclusion that HQRL had altered its status and had become a public company. It was further observed by this Court that since the number of members exceeded 50 as the shares were said to have been allotted to 134 persons on 30.9.2002, prima facie HQRL lost its private character. However, this Court also observed significantly as this issue has to be decided in the two pending suits, it would not be proper for this Court to dwell into the question further. This Court held that considering the explanation to section 87(2)(b) gives Hillcrest as a cumulative preference shareholder the right to vote on every resolution. This Court also made it clear that the observations were prima facie in the nature of limited only for disposal of special leave petition and should not influence the final decision in the suits. The question relating to HQRL whether it is a private or public company has been left open for decision in the suits. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es were said to have been allotted to 134 persons on 30th September, 2002, on which date the resolutions were passed by Hotel Queen Road Pvt. Ltd., the company lost its private character requiring the subsequent resolutions to be passed regarding alteration of the share capital. 77. The moment the resolutions were passed by the company on 30th September, 2002, the provisions of the Companies Act became applicable and by operation of law, Hotel Queen Road simultaneously ceased to be a private limited company and under the conditions prescribed in the Act, Hillcrest Realty acquired voting rights in the meetings of the company by operation of Section 87(2)(b) and Section 44 of the said Act. The right of a preference shareholder to acquire voting rights is also indicated in clear and unambiguous terms in the Explanation to Section 87(2)(b). 78. Since the question as to whether Hotel Queen Road ceased to be a private company upon the resolutions being passed on 30th September, 2002, is the crucial issue for decision in both the two suits referred to hereinabove, it would not be proper for this Court to delve into the question further. 79. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of deciding this matter as held in the State of Assam v. Barak Upatyaka D.U. Karamchari Sanstha (2009) 5 SCC 694: 21. A precedent is a judicial decision containing a principle, which forms an authoritative element termed as ratio decidendi. An interim order which does not finally and conclusively decide an issue cannot be a precedent. Any reasons assigned in support of such non final interim order containing prima facie findings, are only tentative. Any interim directions issued on the basis of such prima facie findings are temporary arrangements to preserve the status quo till the matter is finally decided, to ensure that the matter does not become either infructuous or a fait accompli, before the final hearing. 66. The Company Law Board as well as the High Court have found that the provision of notice under Section 286 of the Companies Act was not complied with. The High Court has observed that the interested Directors have participated in the meeting. Mr. R.P. Mittal and Mrs. Sarla Mittal were in a fiduciary capacity they could not participate in the decision where shares were transferred to their own group/company. Even if HQRL were a private ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved in Elder v. Elder [1952] S.C. 49: The decisions indicate that conduct which is technically legal and correct may nevertheless be such as to justify the application of the 'just and equitable jurisdiction, and, conversely, that conduct involving illegality and contravention of the Act may not suffice to warrant the remedy of winding up, especially where alternative remedies are available. Where the 'just and equitable' jurisdiction has been applied in cases of this type, the circumstances have always, I think, been such as to warrant the inference that there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company's affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy. Neither the judgment of Bhagwati J. nor the observations in Elder (supra) are capable of the construction that every illegality is per se oppressive or that the illegality of an action does not bear upon its oppressiveness. In Elder a complaint was made that Elder had not received the notice of the Board meeting. It was he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aths (supra). We have not adopted that modification in India. 111. Whether one looks at the matter from the point of view expressed by this Court in Nanalal Zaver (AIR 1950 SC 172) or from the point of view expressed by the Privy Council in Howard Smith, (1974 AC 821, 831) the test is the same, namely, whether the issue of shares is simply or solely for the benefit of the Directors. If the shares are issued in the larger interest of the Company, the decision to issue shares cannot be struck down on the ground that it has incidentally benefited the Directors in their capacity as shareholders. We must, therefore, reject Shri Seervai's argument that in the instant case, the Board of Directors abused its fiduciary power in deciding upon the issue of rights shares. (emphasis supplied). 69. Reliance has also been placed on a decision of this Court in Sangramsinh (supra) in which this Court has observed: 196. The Court in an application under Sections 397 and 398 may also look to the conduct of the parties. While enunciating the doctrine of prejudice and unfairness borne in Section 459 of the English Companies Act, the Court stre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mala fide or for a collateral purpose, it would amount to oppression under Sections 397 and 398. (e) Once conduct is found to be oppressive under Sections 397 and 398, the discretionary power given to the Company Law Board under Section 402 to set right, remedy or put an end to such oppression is very wide. (f) As to what are facts which would give rise to or constitute oppression is basically a question of fact and, therefore, whether an act is oppressive or not is fundamentally/basically a question of fact. 71. It was also urged that by inter se transfer between Moral and Mr. R.P. Mittal, no oppression could be caused to Mr. Ashok Mittal. The finding as to undervaluation is also not correct. HQRL could not have raised any objection regarding the aforesaid transaction between Moral and Mr. R.P. Mittal. The claim made by Hillcrest that they were entitled to vote on resolution dated 10.5.2005 is not correct proposition of law. In this regard reliance has been placed upon section 205 of the Companies Act. Learned counsel has also urged that position of shareholders in a company is analogous to that of partners inter se, is wholly inaccurate. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere oppressive as they involved repeated violation of the mandatory provisions of the Companies Act of 1956 and was done surreptitiously without giving any notice to Mr. Ashok Mittal or Hillcrest. The attempt to convert the statutory status of HQRL vis vis public company, Moral by transferring the shares of Moral in HQRL was against the interest of the preference shareholders of Hillcrest, therefore, it is oppressive. Hillcrest and Mr. Ashok Mittal have also supported the aforesaid submissions. 73. Mr. Jaideep Gupta, learned senior counsel to carry home the aforesaid submission has placed reliance on following paragraph of Sangramsinh P. Gaekwad (supra) thus: 181. The jurisdiction of the Court to grant appropriate relief under Section 397 of the Companies Act indisputably is of wide amplitude. It is also beyond any controversy that the court while exercising its discretion is not bound by the terms contained in Section 402 of the Companies Act if in a particular fact situation, a further relief or reliefs, as the court may seem fit and proper, is warranted. (See Bennet Coleman Co. v. Union of India [(1977) 47 Comp Cases 92 (Bom)] and Syed Mahomed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the shares to Ravi and Srinivasan at the meeting held on 8 8 1986 and the affirmation of such allotment at the meeting allegedly held on 16 8 1986 were vitiated thereby and invalid. Reliance has also been placed on Union of India v. Allied International Products Ltd. Anr. (1970) 3 SCC 594: 15. The application for allotment of shares and acceptance thereof constitute a contract between the Company and the applicant. Section 73(1) of the Companies Act imposes a penalty whereby the allotment of shares becomes void on the happening of the contingency specified therein. The imposition of penalty depends upon the violation of the Exchange and when imposed operates to invalidate all contracts resulting from allotment of shares between the applicants for shares and the Company. Such a provision must be strictly construed. Unless the statute in clear terms so provides, when the Exchange intimates its desire to consider the application further, an inference that the Exchange has still rejected the application, cannot be made. (Emphasis supplied) 74. Section 286 of the Act of 1956 dealing with requirement of notice to Director, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of forming a quorum at the time of any such discussion or vote; and if he does not, his vote shall be void. (2) Sub section (1) shall not apply to (a) a private company which is neither a subsidiary nor a holding company of a public company; (b) a private company which is a subsidiary of a public company, in respect of any contract or arrangement entered into, or to be entered into, by the private company with the holding company thereof; (c) any contract of indemnity against any loss which the directors, or any one or more of them, may suffer by reason of becoming or being sureties or a surety for the company; (d) any contract or arrangement entered into or to be entered into with a public company, or a private company which is a subsidiary of a public company, in which the interest of the director aforesaid consists solely (i) in his being a director of such company and the holder of not more than shares of such number or value therein as is requisite to qualify him for appointment as a director thereof, he having been nominated as such director by the company referred to in sub section (1), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : (All ER p. 391 H) Equity prohibits a trustee from making any profit by his management, directly or indirectly. Ultimately the issue in each case will depend upon the facts of that case. 14. Lindley, M.R. observed in Alexander v. Automatic Telephone Co. (1900) 2 Ch. 56: The Court of Chancery has always exacted from Directors the observance of good faith towards their shareholders and towards those who take shares from the company and become co adventurers with themselves and others who may join them. The maxim caveat emptor has no application to such cases, and Directors who so use their powers as to obtain benefits for themselves at the expense of the shareholders, without informing them of the fact, cannot retain those benefits and must account for them to the company, so that all the shareholders may participate in them. 16. In Needle Industries case (supra) the Board of Directors had resolved to issue 16,000 equity shares of ₹ 100/ each to be offered as rights shares to the existing shareholders in proportion to the shares held by them. The offer was to be made by a notice specifying the number of sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders. 19. In Hogg v. Cramphorn Ltd. (1967) 1 Ch 254, Buckley, J. reiterated the principle in Punt (supra) and in Piercy (supra). It was held that if the power to issue shares was exercised for an improper motive the issue was liable to be set aside and it was immaterial that the issue was made in a bona fide belief that it was in the interests of the company. 20. The principle deduced from these cases is that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld. 21. Courts in the Commonwealth countries including England and Australia have emphasized that the duty of the Directors does not stop at to act bona fide requirement. They have evolved a doctrine called the 'proper purpose doctrine' regarding the duties of company directors. In Hogg v. Cramphorn (supra), explicit recognition was give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f management of the company. Barooah and his friends and relations were majority shareholders of the respondent company having 67% of the total issued capital of the company. Barooah personally held 300 equity shares out of 1155 shares issued by the company. He was at all material times a Director of the company. His case was that he was wrongfully and illegally ousted from the management of the company. One Khaund, who initially started as an employee of the company had 110 shares in the company and belonged to the minority group. Khaund was appointed as the Managing Director of the company. Barooah's grievance was that Khaund took advantage of his position as Managing Director and acted in a manner detrimental and prejudicial to the interests of the company and in a manner conducive to his own interest. Khaund had hatched a plan with other Directors, to convert petitioner Barooah into a minority and to obtain full and exclusive control and management of the affairs of the company. In a petition filed under Sections 397 and 398 of the Companies Act, 1956, acts of Khaund were found to be by way of 'oppression and mismanagement' within the meaning of Sections 397 and 398 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hem to raise capital when required for the purpose of the company, this was not the object of the Directors in this case. 28. It will be seen from the judgments in Needle Industries (supra) and Tea Brokers (supra) that the courts in India have applied the same tests while testing exercise of powers by Directors of companies as in other Commonwealth countries. 29. In the present case we are concerned with the propriety of issue of additional share capital by the Managing Director in his own favour. The facts of the case do not pose any difficulty particularly for the reason that the Managing Director has neither placed on record anything to justify issue of further share capital nor has it been shown that proper procedure was followed in allotting the additional share capital. Conclusion is inevitable that neither was the allotment of additional shares in favour of Ramanujam bona fide nor was it in the interest of the company nor was a proper and legal procedure followed to make the allotment. The motive for the allotment was mala fide, the only motive being to gain control of the company. Therefore, in our view, the entire allotment of shares to Ramanujam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n towards, and owes a duty to, another company which is proposing to enter into engagements with the company of which he is a director, he is in our opinion within this rule. He has a personal interest within this rule or owes a duty which conflicts with his duty to the company of which he is a director. It is immaterial whether this conflicting interest belongs to him beneficially or as trustee for others. This rule was characterised by Lord Cairns L.C. in Parker v. McKenna [1874] LR 10 Ch. App. 96, 118, as not a technical or arbitrary rule but a rule founded upon the highest and truest principle of morality. Thus, this rule applies not only where there in a conflict of interest or conflict of interest and duty but also where there is a conflict to two duties. It is immaterial whether the interest is a personal interest or arises out of a fiduciary capacity or whether the duty which is owed is in a fiduciary capacity. Actual conflict is also not necessary. A possibility of conflict is enough to bring the case within the ambit of this rule nor does the application of this rule depend upon the extent of the adverse interest. Directors stand towards the company in a fid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resolution was wanting in quorum because H M Periwal was not entitled to participate in the voting and the resolution itself was not valid because H M Periwal has voted that resolution. It follows that P C Periwal was not validly appointed as Additional Director. x x x x x As I earlier remarked the fundamental principle of equity which runs right through like a golden thread in all the decisions of courts is that no director can participate or vote in a Board meeting where he is aware that his duties and interests conflict or are likely to be in competition. This rule attaches to the very office of a director which is of a fiduciary character. Corporate enterprises, in which the ultimate properties are the shareholders, are entrusted completely in the hands of the Board of Directors. The only basis for the Board being given the management and administration of the corporate enterprise is the trust and confidence reposed by the shareholders in the directors. It is, therefore, of prime importance that in any transaction in which the directors participate as directors of the company they should not only declare their personal interests therein, buy they must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up. The shares or other interest of any member in a company are personal estate transferable in the manner provided by its articles, and are not of the nature of real estate. (b) This Court in National Textile Workers Union Ors. v. P. R. Ramakrishna Ors. (1983) 1 SCC 228 has observed: 9. Considerable reliance was however placed on behalf of respondent Nos. 6 to 9 on the statement of the law on this point contained in the leading text books on company law. Respondent Nos. 6 to 9 drew our attention to Palmer Company Precedents (17th Edn.) volume 2 at page 77 where it is stated that any creditor or shareholders may appear to support or oppose the petition but no one else can do so even if he has an indirect interest in the continued existence of the company. So also in Buckley on the Companies Act (14th Edn.) at page 546 the law has been stated in the following terms, namely, the only persons entitled to be heard are the company, its creditors and contributories...the court may in its discretion hear other persons who have an interest in order to learn what public grounds there are in favour of, or in opposition to, the winding up but such persons c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. We cannot therefore mechanically accept as valid a legal rule which found favour with the English courts in the last century when the doctrine of laissez faire prevailed. It may be that even today in England the courts may be following the same legal rule which was laid down almost a hundred years ago, but that can be no reason why we in India should continue to do likewise. It is possible that this legal rule might still be finding a place in the English text books because no case like the present one has arisen in England in the last 30 years and the English courts might not have had any occasion to consider the acceptability of this legal rule in the present times. But whatever be the reason why this legal rule continues to remain in the English text books, we cannot be persuaded to adopt it in our country, merely on the ground that it has been accepted as a valid rule in England. We have to build our own jurisprudence and though we may receive light from whatever source it comes, we cannot surrender our judgment and accept as valid in our country whatever has been decided in England. The rule enunciated in re: Bradford Navigation Company case (supra) does not commend itself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use there were no profits, was enhanced by adopting the interpretation that would permit Class A shareholders to vote when dividends had not been paid, regardless of whether there had been a declaration by the directors. The submission was that those rules have the function of setting requirements for the organisations whose securities are to be publicly traded. The commercial purpose of both the restriction on voting of preference shares and the exceptions from that restriction, as set out in the listing rules, was said to be to leave the voting control of the company in the hands of ordinary shareholders, except when the situations identified in the listing rule arose, when the additional right and protection of being entitled to vote was conferred on the preference shareholder. Mr Jackson QC submitted that nothing about that purpose dictated or suggested that it would be better served by restricting the operation of r. 30.16(c) to dividends declared but not paid. 18. Mr McKenna s response was that the proper focus was the meaning of the words in the constitution and what they revealed about the balance struck between the preference shareholders understandable wish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company that exercising of voting right would violate conditions imposed by Reserve Bank of India. It is the submission of the company that plaintiff cannot vote beyond the limit of 49%. In order to appreciate this issue, it would be necessary to state few admitted facts. When the plaintiff purchased preference shares, it had applied and obtained permission from the Reserve Bank of India under section 29(l)(b) of the Foreign Exchange Regulations Act, l973 ( FERA ). While granting such permission under section 29(l)(b) of the FERA, the Reserve Bank of India vide letter dated l2.l.l998 imposed several conditions. Two conditions which are relevant for our purpose are as follows: (l) that no shares be acquired by CDC without the prior permission of the Reserve Bank of India; (2) that the conditions contained in the letter dated 6.l.l998 shall be complied with. The letter dated 6.l.l998 stipulates that foreign equity shall not exceed 49% as is permissible under the policy for investing in companies. Further the licence granted by the DOT when amended by letter dated 29.l.200l stipulated that certain conditions shall always be complied with and shal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company in the pending civil suit which have been stated to be transferred to NCLT for decision in accordance with law. Otherwise, section 87 provides that notice has to be issued to preference shareholders also for the meeting and they have a right to participate in the meeting. It appears prima facie even if dividend has not been declared. In that case also, preference shareholders shall have a right to vote in the meeting. 84. Reliance has also been placed on the provisions of section 169(4) of the Companies Act regarding calling of EOGM on requisition. The resolution with respect to EOGM is not in issue in the present case. As such we need not dilate upon the provisions of section 169(4) and the submissions. 85. Coming to the submissions based upon the provisions of section 108 of the Act of 1956. Section 108 is extracted hereunder: Sec 108 Transfer not to be registered except on production of instrument of transfer. (1) A company shall not register a transfer of shares in, or debentures of, the company, unless a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on beha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1965 (31 of 1965) or executed after such commencement in a form other than the prescribed form, shall be accepted by a company, (a) in the case of shares dealt in or quoted on a recognized stock exchange, at any time not later than the expiry of six months from such commencement or the date on which the register of members is closed, in accordance with law, for the first time after such commencement, whichever is later; (b) in any other case, at any time not later than the expiry of six months from such commencement. (1C) Nothing contained in sub sections (1A) and (1B) shall apply to: (A) Any share : (i) which is held by a company in any other body corporate in the name of a director or nominee in pursuance of sub section (2), or as the case may be, sub section(3), of section 49, or (ii) which is held by a corporation, owned or controlled by the Central Government or a State Government, in any other body corporate in the name of a director or nominee, or (iii) in respect of which a declaration has been made to the Public Trustee under section 153B, if : (1) the company or corporation, as the case may be, stamps or otherwise end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the name of its director or nominee referred to in clause (A)(i) or clause (A)(ii), or any declaration referred to in clause (A)(iii), or any deposit referred to in clause (B), of this sub section is made after the expiry of the period or date mentioned in clause (a) of sub section (1B) or after the expiry of the period mentioned in clause (b) of that sub section, as the case may be, the form of transfer, in respect of the share which is the subject of such investment, declaration or deposit, means the prescribed form ; or (C) any share which is held in any company by the Central Government or a State Government in the name of its nominee, except that every instrument of transfer which is executed on or after the 1st day of October, 1966, in respect of any such share shall be in the prescribed form. (1D) Notwithstanding anything in sub section (1A) or sub section (1B) or sub section (1C) where in the opinion of the Central Government it is necessary so to do to avoid hardship in any case, that Government may on an application made to it in that behalf, extend the periods mentioned in those sub sections by such further time as it may deem fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... complying with the provisions of the Act is emphasised by the negative language. Negative language is worded to emphasise the insistence of compliance with the provisions of the Act. (See State of Bihar v. Maharajadhiraja Sir Kameshwar Singh of Darbhanga [1952] SCR 889; K. Pentiah v. Muddala Veeramallappa [1961] 2 SCR 295 and unreported decision dated April 28, 1976 in Criminal Appeal 279 of 1975 and Additional District Magistrate, Jabalpur v. Shivakant Shukla (1976) 2 SCC 521.) Negative words are clearly prohibitory and are ordinarily used as a legislative device to make a statutory provision imperative. 17. In Raza Buland Sugar Co. Ltd. v. Municipal Board, Rampur. (1965) 1 SCR 970 this Court referred to various tests for finding out when a provision is mandatory or directory. The purpose for which the provision has been made, its nature, the intention of the legislature in making the provision, the general inconvenience or injustice which may result to the person from reading the provision one way or the other, the relation of the particular provision to other provisions dealing with the same subject and the language of the provision are all to be considered. Prohib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ramanan v. M.S.D. Chandrasekara Raja Anr. (2008) 6 SCC 750 thus: 23. Sections 397 and 398 of the Act empower the Company Law Board to remove oppression and mismanagement. If the consequences of refusal to exercise jurisdiction would lead to a total chaos or mismanagement of the company, would still the Company Law Board be powerless to pass appropriate orders is the question. If a literal interpretation to the provisions of Section 397 or 398 is taken recourse to, may be that would be the consequence. But jurisdiction of the Company Law Board having been couched in wide terms and as diverse reliefs can be granted by it to keep the company functioning; is it not desirable to pass an order which for all intent and purport would be beneficial to the company itself and the majority of the members? A court of law can hardly satisfy all the litigants before it. This, however, by itself would not mean that the Company Law Board would refuse to exercise its jurisdiction, although the statute confers such a power on it. 24. It is now a well settled principle of law that the Courts should lean in favour of such construction of statute whereby its jurisdiction i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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