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TMI Blog2004 (8) TMI 777X X X X Extracts X X X X X X X X Extracts X X X X ..... ference shares in accordance with Article 3 (C) of the articles of association; (d) to direct the company to issue duplicate share certificates in respect of the 2,84,000 equity shares issued and allotted to the petitioner; (e) to amend article 4(a) of the articles of association of the company in the following manner: (i) any share may be transferred by a member to any other member or the spouse or major child of such member: Provided that the Board of directors shall be bound to recognise and record such transfers; (ii) any share may also be transferred to any person other than members of the company provided no member is willing to purchase the same. 2. Shri R. Murari, learned counsel, while initiating his arguments submitted that the company was incorporated in January 1984 for the purpose of manufacturing and selling cotton, yarn, etc. The entire equity shares in the company are held by the petitioner with 2,84,000 equity shares of Rs. 10 each, his son the second respondent, holding 2,83,999 shares and the remaining one share with Visva Bharathi Textiles (P) Ltd., which is held equally by the petitioner and the second respondent. The petitioner is holding shares of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s financial health, liquidity and profitability. The second respondent harassed the petitioner and victimised certain office staff by refusing the increment on the false ground that a sum of Rs. 8,15,000 was withdrawn from the company's account for personal gain, which according to the petitioner was for making advance payment to cotton suppliers, in tune with the prevalent practice, but entrusted to him by the accountant, while proceeding on leave. The amount of cash received from the accountant was remitted in the company's bank account on the very next day itself as borne out by the bank challan, bank statement and extract from the ledger account maintained by the company (pages 75 to 80 of the company petition). The company neither incurred any loss on account of this cash transaction. The second respondent has raised the disputes in regard to use of the guest house belonging to the company and the custody of the original documents of title pertaining to the guest house. Thus, the second respondent has been subverting the functioning of the company by either not attending meetings or by attending and refusing to participate or by voting against the resolutions concernin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fecting the working of the company and employees and when the relationship of the two parties reached a stage where reconciliation was difficult. 3. Shri Venkatraman, learned counsel appearing for the second respondent, submitted: The second respondent's grandfather had started a partnership firm manufacturing and selling cotton, yarn, etc., which was subsequently converted into the present company with the petitioner and the second respondent as signatories to the memorandum and articles of association. The equity shares held by the petitioner are in his fiduciary capacity as karta of the HUF which consists of the petitioner and the second respondent. The partition between the petitioner and second respondent is only a partial partition and, therefore, the shares held by the petitioner are in his capacity as karta of the HUF. The second respondent has been on the Board since the very inception of the company actively taking part in the day-to-day affairs of the company and participating in all the meetings and proceedings in relation to the functioning of the business and co-operating with the petitioner in all the corporate affairs. Shri Venkatraman, learned counsel, specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintain regular minutes book, which were often written in pieces of papers and no Board minutes were placed before the meetings since March 2003. The attendance register and the minutes books were not made available to the second respondent for his scrutiny and verification. The second respondent is maintaining good relationship with the staff members of the company and giving due respect to the petitioner. Shri Venkataraman, learned counsel, pointed out that the amount of Rs. 8,15,000 was not kept towards advance for purchase of cotton and never placed by the accountant with the petitioner for safe custody, which does not require any accounting entry or voucher. When the second respondent came to know about the huge balance shown in the books of account, the petitioner had prepared a false voucher and made false entries in the cash book with connivance of the accountant, Moreover, it is not the practice of the textile mills at Rajapalayam to give any advance in cash for purchase of cotton. The petitioner attempted to misappropriate the amount illegally out of the books of the company. The misappropriated amount was remitted by the petitioner the next day after the closing hours o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econd respondent for the duplicate share certificates in respect of his shares provided he duly applies for the same. The transfer of one equity share made by the second respondent in favour of Viswa Bharti Textiles (P) Ltd., 25 redeemable non-cumulative preference shares in favour of 25 different persons are entered in the register of members of the company. The transfer of preference shares was approved at the Board meeting held on 01.04.1985 by the Board of directors comprised of the petitioner and the second respondent. These transfers could not have been effected in favour of the transferees without the original share certificates. This confirms the issuance of the share certificates in favour of the shareholders. The company has been convening the Board meetings and maintaining the minutes duly signed by the Chairman of such meetings from time to time in strict compliance with the relevant provisions of the Act. The company is not benefited on account of the accumulated stock pursuant to the excise duty exemption granted by the Government of India, but only the consumers. The various correspondence show the lack of confidence between the petitioner and the second respondent. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. 5.3 Whether the conduct of the affairs of a company by the majority of shareholders is oppressive or not will depend upon the facts of a particular case. In the instant case before me, the petitioner as well as the second respondent is holding each 50 per cent of the paid-up capital of the company. These are the only two directors since very inception of the company. While, according to the respondent, the requirements of Section 397 have not been satisfied, denying the petitioner any relief, it is the case of the petitioner that the affairs of the company are being conducted in a manner oppressive to the petitioner and that the second respondent and himself have developed great animosity to one another resulting in a deadlock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... take necessary steps to clear the stock, avoiding liquidity crisis. Similarly, at the Board meeting held on 16.06.2003, the Board of directors, including the second respondent decided to take necessary steps for clearing the stock of finished goods. It cannot be therefore, be said that the second respondent failed to co-operate with the first petitioner to liquidate the accumulated stock of finished goods. In this connection, the reasons, adduced by the second respondent in his reply statement, for such accumulation assume relevance, which read as under: The textile industry and the whole of the economy were facing a severe recession during the years 2000 and 2001. Many mills had to shut their shops because of the lower realisations of the yarn prices when compared with the cotton prices. It was a matter of prudent business practice that the 2nd respondent advised that the stocks should not be sold below their costs and that as the market revival was around the corner, the stocks could be sold out surely at better price realisations. All around Tamil Nadu -- all the spinning mills resorted to store their stocks rather than to sell in the market in a loss margin and to sell them at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company petition. It is on record that the second respondent did not attend the Board meeting on 20.03.2004 on the ground that the subject matter is sub judice before the Company Law Board. Thus, there is no ultimate denial of the issue of duplicate share certificates by the second respondent in favour of the petitioner. (v) Non-redemption of preference shares--According to the petitioner -- the second respondent did not cooperate either in the redemption of the preference shares or declaration of dividend, which is stoutly denied by the second respondent. It is on record that the directors' reports appended to the balance sheet and profit and loss account for the years ended 31.03.1997 and 31.03.1998 show that the directors recommended a dividend at 50% on the equity-shares and 12% on the redeemable cumulative preference shares, proposition of which is duly reflected in the respective balance sheets. The petitioner has introduced the minutes of the various Board meetings held from time to time, wherein there is nut even an agenda either for declaration of dividend or redemption of preference shares in accordance with the relevant articles of association of the company. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the members present, namely, the petitioner and the second respondent. The second respondent at the Board meeting held on 14.11.2003 (pages 65-66 of company petition), did not agree for surrender of the excess power in favour of TNEB. Thus, it is observed that during the entire period between 09.04.2003 and 14.11.2003, the agenda in relation to the co-option of a third director and surrender of the surplus power alone could not be passed at the relevant Board meetings, as there was no consensus between the two directors and that the issue of duplicate share certificates was deferred. The entire remaining agenda which came up before the Board of directors from time to time stood unanimously passed. It shall be borne in mind that the affairs of a company are conducted on the principles of corporate democracy of the Board of directors. The courts time and again declined to interfere with the business judgment of directors, unless there is evidence that they have acted in bad faith or the decision is perverse as held in a number of decisions. I do not find adequate material to show that the second respondent acted in bad faith while opposing the resolutions at the relevant point of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hovardhan Saboo's case, supra, after considering the facts of that case held that even if a case of oppression is not established; substantial justice could be done by giving relief between the parties. When deadlock in the management is established, the only solution that could put an end to this dispute is severing of the relationship by sale of shares by one party to the other. The charges levelled by the second respondent against the petitioner in several of the paragraphs of the reply statement categorically show that the parties have lost mutual trust and that it would be impossible for them to work together even if an independent Chairman is appointed. It is on record that the second respondent's grandfather had started a partnership firm, which subsequently became the present company vested with the petitioner, and the second respondent. As the company has been established on the basis of trust and confidence between the shareholders and such mutual trust and confidence has broken down as seen from the instances narrated above, it is just and equitable that the company should be wound up, which would be against the interest of the company, especially, when it is a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in his individual capacity and not as the karta of HUF. It is on record that the Board of directors of the company had allotted 1,000 equity shares at the Board meeting held on 01.04.1985, 1,25,000 equity shares on 30.03.1996 and 1,25,000 equity shares on 30.03.1998 in favour of the petitioner. These allotments were found to be made in the individual name of the petitioner and not in his capacity as karta of the HUF, which is reflected in the register of members of the company, as contended in paragraph 7 of the rejoinder, the fact of which has not been disputed by the second respondent and the annual report of the company (pages. 85-94 of company petition). I am, therefore, of considered view that the petitioner has prima facie established that the shares held by lam are in his individual name/and not in the capacity of karta of the HUF. In these circumstances, the second respondent will purchase 2,84,000 shares held in the name of the petitioner at a value which may be determined by a valuer, towards which the parties will appear on 20.10.2004 at 2.30 p.m. to suggest a mutually acceptable valuer, on which time, further directions regarding valuation of the shares will be given. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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