9911796707
TMI Blog2012 (7) TMI 1175X X X X Extracts X X X X X X X X Extracts X X X X ..... omplained against the management and majority share holders of the first respondent company in both the petitions. 2. As the parties in both the appeals are common except for the first respondent companies and as the facts and question of the law involved in both these appeals are identical /similar, with consent of learned counsel for the respective parties, they are heard together and disposed of by this common judgment. 3. The brief facts of the case are follows:- It is the case of the petitioner that he along with respondents 2 to 4 initially floated a company under the name and style Pearls Insulation's Private Limited, in which, they were the directors for life holding 25% shares each in the capital structure of the company amounting to Rs. 4,50,00,000/- . The company started its production activities in a rented shed to begin with. As the petitioner is more technically qualified than the second, third and fourth respondents he took keen interest and toiled with commitment for over all improvements of the company with all dedications. Even he mortgaged his residential property where he was living with his family and raised loan to the tune of Rs. 65,00,000/- with State Ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ach of the promoters would have continuing right to sell and the sixth respondent would have an obligation to buy 12.25% shareholding on the terms and conditions specified therein. The promoters will have a right of refusal in respect of shares offered to them in proportion of their respective shareholding. 5. The SPA and SHA being private agreements are never registered with the Registrar of Companies. The SPA shall come into effect only on fulfillment of all the conditions stipulated in clause 2.1 therein, which shall not be later then 20.12.1998 or such other extended date as may be agreed between the parties in writing. Nevertheless, the conditions in relation to the regulatory approvals and amendments of the memorandum and articles of association as envisaged in 2.1(e) and (f) have not been duly complied within the stipulated time. The proposal for amending the existing articles of association of the Company is merely supported by the minutes of the board meeting dated 09.12.1998 and not by any other documents. There is no material to show that Form No.23 along with the copies of the board resolution dated 09.12.1998 and the amended articles have been filed with the Registrar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er dated 04.08.2003 to the petitioner together with a valuation certificate of shares issued by the Auditors of the Company, in order to ascertain whether the petitioner was interested to purchase his balance 12.25% of equity shares at the rate of Rs. 1,012.12 per share, in response to which the petitioner had endorsed on the said communication on 05.08.2003 stating that he was not interested in buying the shares of the fourth respondent. The respondents 2 and 3 had similarly declined to buy the balance equity shares of the fourth respondent and there is no material to show that the respondents 2 and 3 ever agreed to buy the shares of the fourth respondent, pursuant to his offer made in their favour. The petitioner declined the offer made by the fourth respondent with the intention that the shares of the fourth respondent would be purchased by the sixth respondent, whereas it subsequently came to his knowledge that the respondents 2 and 3 had purchased on 14.11.2003 the shares of the fourth respondent. The fourth respondent being the Managing Director, is duly bound to inform the petitioner before selling his shares to the respondents 2 and 3. The sale of shares in favour of the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquire any of the shares of the petitioner, the latter gave a notice dated 23.08.2003 as per clause 7.1 of the SHA, conveying his desire to sell his 12.25% of equity shares at the rate of Rs. 1,012,.21 in favour of the sixth respondent. The sixth respondent though acknowledged, never conveyed its acceptance to acquire the equity shares of the petitioner. The requirements of articles 10 and 11 have not been complied with in the case of sale of shares of the petitioner in favour of the sixth respondent. 8. The respondents failed to call for any board meeting of the company in spite of repeated requests made by the petitioner for holding discussions on various clauses of the SPA and SHA. Though the company used to send notice of every board meeting to all directors, who threadbare deliberated every business as enlisted in the agenda before passing any resolution, the petitioner never received any notice of the Board meeting during the period between 10.04.2003 and 1.12.2003. The petitioner has produced copies of a number of notices received in respect of the board meetings held on 25.10.2000, 15.5.2001, 29.4.2002 & 14.04.2004 and general meetings of 31.07.2000, 27.07.2001 & 12.05.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gitimate expectation, the petitioner being a permanent shareholder is entitled to continue on the board as a director for life and enjoy all financial benefits flowing therefrom. The terms of private agreements cannot override, the rights of the petitioner which are guaranteed under the statute and the articles of association of the company. Clause 20.2 of the articles provides that a quorum for a meeting of the board should comprise of at least one director appointed by the sixth respondent whether present in person or through an authorised person appointed in accordance with the articles and therefore, in the absence of the sixth respondent, fifth respondent shall be Chairman of the Company. By virtue of article 20.4 no resolution can be passed at a meeting of the board of directors, without an affirmative vote of at least one director appointed by the sixth respondent. Nevertheless, the fifth respondent without any authority in terms of article 20.2 chaired the board meetings on a number of occasions and all such proceedings are liable to be set aside. 9. The fifth respondent, though represented that FIPB granted clearance to the sixth respondent to acquire the shares of the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary to cross-examine the respondents with reference to their objections and affidavits filed by them, which will in no way prejudice the parties. The CLB vested with inherent powers under Regulation 44, to try the petition on every issue arising there from, may permit cross-examination of the respondents, to meet the ends of justice as claimed in C.A.205/2006. 10. Clause 7.14 of the SPA contemplates that in the event of any promoter sells his shares, he shall automatically also resign as a Managing/Joint Managing Director as the case may be, of the Company and all his rights under the SPA shall ipso facto come to an end. Clause 8.6 of the SHA specifies that directors shall be entitled to continue in office until their share holdings reduced below 12.25% or they cease to hold the office of Managing Director/Joint Managing Director for any reason whatsoever or they are attain the age of 65 years, which ever is earlier. These clauses are not incorporated in the articles of association of the Company and therefore, the Company is not bound by any of these clauses of the SPA and SHA. The petitioner being a permanent member and director of the company, can manage his individual rights ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out any justification whatsoever. Therefore, he sought for the following reliefs:- (i) to declare that the redemption of 10% preference shares of the petitioner by the Company is null and void; (ii) to set aside the board resolution of the Company, approving the transfer of 10% preference shares in favour of the respondents 2 & 3 or the sixth respondent; (iii) to set aside the proceedings of the board meeting held on 14.11.2003 and declare that the transfer of 12.25% equity shares effected by the fourth respondent in favour of the respondents 2 & 3 is illegal; (iv) to direct the respondents 2 & 3 to surrender 12.25% equity shares of the fourth respondent in favour of the Company; (v) to declare that the petitioner is entitled to purchase 1/3rd shares along with the respondents 2 & 3 from and out of the balance 12.25% equity shares of the fourth respondents; (vi) to allow the petitioner to invest his monies in the Company to purchase 1/3rd shares of the fourth respondent; (vii) to restrain the respondents from interfering with the functions and duties of the petitioner as a permanent director of the Company; (viii) to direct the Company to call for a board meeting fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A further stipulates that before calling upon the sixth respondent to purchase the shares in terms of clause 7.1, each of the promoters would have to offer the shares to the other three promoters at the same computed price, who would have a right of first refusal, before the sixth respondent is called upon to purchase the shares. This option is available to each of the promoters for a period of five years from 18.12.1998 to 18.12.2003. 16. Clause 7.14 of the SHA explicitly provides that in the event of any one of the promoters exercising his option to sell his shares in terms of the SHA, he shall automatically also resign as a Managing/Joint Managing Director of the Company and all his rights under the SHA shall come to an end. Article 19.4 incorporating clause 8.6 of the SHA, envisages that petitioner was entitled to be the Joint Managing Director until (a) shareholding is reduced below 12.25%; or (b) he ceases to hold the office of joint managing director for any reason; or (c) he attains the age of 65 years which ever is earlier. There is no provision for any '"directorship for life" in the amended articles of association of the company. 17. The company adopted a fresh set of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, drawing remuneration for the whole period of his term, as the Whole Time Director and the Joint Managing Director of the company. At the extra ordinary general meeting of the Company held on 19.12.2001, the nominees of the sixth respondent were elected as directors and promoters were re-appointed as the Whole time directors, including the petitioner as the Joint Managing Director, upon expiry of the original term of the years from 1998, as reflected in Form No.32 filed with the ROC. The petitioner similarly acted upon the aforesaid resolutions and availed the remuneration from the company for more than two years until his resignation in January 2004. 18. The fourth respondent in terms of the SHA offered to sell his remaining 12.25% shares in the company at the rate of Rs. 1,012.21per share in favour of the petitioner and the respondents 2 & 3, upon which the petitioner promptly declined to accept the offer made by fourth respondent by way of making necessary endorsement in the letter of offer dated 04.08.2003. The respondents 2 & 3 purchased equal number of shares from the fourth respondent at the price certified by the company's Auditors, which was followed by delivery of sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etter of the petitioner. The petitioner promptly encashed the pay order on 20.01.2004 and absolutely enjoyed the proceeds of his remaining equity shares. It is, therefore, beyond doubt that the petitioner sold his equity share voluntarily in favour of the sixth respondent. The summary of action at the meeting held on 17.01.2004, attended by the petitioner, the fifth respondent and director of sixth respondent would evidence the due process of sale of shares of the petitioner in favour of the sixth respondent. The letter of resignation and no claim was prepared on 15.01.2004 and signed on 17.01.2006, on completion of the formalities of the sale and after receipt of the pay order by the petitioner, the proceeds are still held by him. 20. The petitioner in his legal notice issued dated 09.02.2004 sent to the sixth respondent challenged only his letter of resignation from the office of director of the company and no grievances have been made of the sale of his shares to the sixth respondent, which has been reiterated in his reply legal notice dated 06.03.2004, showing the sale of his shares voluntarily effected in favour of the sixth respondent. The petitioner in his early company pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Company. 23. The petitioner having declined to purchase the shares of the fourth respondent and sold his own shareholding to the sixth respondent, in terms of the articles of association of the Company is not interested to associate with the company. The petitioner has confirmed in his letter of resignation and no claim that the sale of his shares has been carried out in accordance with the terms and conditions as stipulated in the articles of association of the Company. The petitioner has been further confirmed that he has no rights as a shareholder or director or promoter or employee of the Company and that he has no claims against the company or any of its directors or shareholders. 24. The petitioner never raised any grievances in the unregistered company petition dated 29.11.2003 with regard to his preference shares redeemed in October, 2003 by the Company. The petitioner could never be forced to handover the preference shares by a middle level officer working in the company, as claimed by the petitioner being the Joint Managing Director and the covering letter dated 03.11.2003 does not indicate any protest on the part of the petitioner. In any event the petitioner himse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n sent to the Registrar of Companies on which they are placing reliance to hold that the appellant had no interest in the company erred in holding non-issuance of notice has not prejudiced the interest of the appellant and the material on record has revealed that amended Articles of Association has been sent to R.O.C. He further contended that the Board has also failed in its function in not approaching the issues in the right perspective and examining the various acts of mismanagement, oppression committed by the respondents/shareholders against which the appellant had complained. He also further contended that though it was pointed out that an uneven treatment has been meted out to him by the actions of the respondent which constituted an act of oppression, the Board holding it otherwise cannot be sustained. He further contended that the Company Law Board has erred in not taking into consideration the relevant aspects and the materials which has been placed by him before the Company Law Board and in the absence of worthwhile objections to the petition by the respondent, it has erroneously dismissed the petition and further as the decision of the Company Law Board is not based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not suffer from any illegality or infirmity calling for interference hence the appeal be dismissed. 31. In the light of the aforesaid facts, the material on record and the rival contentions the points that arise for consideration are :- i) Whether the appellant has made out a case of either oppression or mismanagement or both? ii) Whether the impugned order of the Company Law Board suffers from any legal infirmity calling for interference? 32. The undisputed facts as disclosed from the material on record are :- Initially the petitioner along with respondents 2 to 4 floated a company under the name and Style Pearl Insulations Pvt. Ltd. in which they were the directors for life holding 25% share each in the capital structure of the company amounting to Rs. 4,50,00,000/-. Thereafter with the able assistance of the petitioner the said company prospered in the market and was able to withstand tough competition from the like companies with the joint and consolidated efforts of the petitioner and respondents 2 to 4. Thereafter visualising the good market potential for their products, they decided to start one more unit and accordingly, they entered into a memorandum of unders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 7.1 (a) (b) and (c). The exit option contained in clause 7 is available only in regard to the entire lot of 12.25% holding of each of the promoters in one lot, and not for any piecemeal disinvestment of such holdings. Any acceptance of shares by any parties in the SHA should require corresponding acceptance of the same number of shares of the Company (clause 7.5). Any party desirous of selling its shares (the "Selling Shareholder") shall serve a notice in writhing on all the other shareholders ("the Non-Selling Shareholder") specifying the sale price in accordance with the price formula and certified by the Auditors of the Company, upon which a Non- Selling Shareholder shall exercise its option to purchase the shares within a period of 30 days from the date of the notice. The sale price certified by the Company's Auditors shall be final and binding on the parties, unless mutually agreed to otherwise by them. The Selling and Non-Selling Shareholders shall make necessary applications to the concerned regulatory authorities to complete the sale transaction (clause 7.6). The Non-Selling Shareholder in the event of not exercising its right to purchase the shares within the prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any conflict between the terms of the SHA and those of the memorandum and articles of association of the Company, the terms of SHA shall prevail over the latter. The parties shall ensure that the terms and conditions of the SHA are adhered to, to the extent possible. The parties shall ensure that the memorandum of association or articles of association or altered as may be necessary to incorporate the terms of the SHA into the same. 34. The grievance of the petitioner is that :- a) Illegal redemption of preference shares: b) Coerced sale of equity shares belonging to the petitioner in favour of the sixth respondent; c) Forced removal of the petitioner from directorship of the Company; d) Sale of equity shares of the fourth respondent to the respondents 2 & 3, in gross violation of the terms and conditions of the SHA and articles of association of the Company e) Denial of access to statutory records of the Company; f) Non-sending of notices of board meetings; and g) Statutory violations, while carrying on the affairs of the Company. 35. It is the case of the petitioner none of the terms of the SHA has been incorporated into the Articles of Association of the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istered by the ROC can never be in doubt and is binding not only on the Company but also the members inter se, including the petitioner as well as the respondents, in the light of the decision in Smt. Claude- Lila Parulekar Vs. Sakal Papers Pvt. Ltd. and others and V.B. Rangaraj Vs. V.B. Gopalakrishnan and others as reflected in the impugned order. A perusal of the amended Articles of Association which have been extracted to in the impugned order discloses that the amendments have been made and incorporated in the Articles of Association of the Company. Therefore, the various clauses of SHA now incorporated in the amended Articles of Association of the company would become relevant in respect of issue to be resolved in this particular case. 37. The material on record reveals that the members of the Company including the petitioner at the extraordinary general meeting held on 09.12.1998 have approved and adopted the amended articles of association of the Company incorporating the SHA clauses. No doubt an attempt is made by the petitioner to show that the ROC was not to locate the documents, but having regard to the material on record which reveals that the amended articles of assoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions contained in paras 2.1 and 2.3 of the SPA have been completed. That goes to show that the Company has duly fulfilled in terms of the affirmation of the petitioner in dealing with the amended articles of association of the Company. Therefore, the petitioner after having acted upon and enjoyed benefits of the amended articles of association of the Company, by drawing his salary and perquisites as the Joint Managing Director till the date of his disputed resignation, is estopped from urging that the SHA clauses have not been incorporated in the articles of association of the Company. 39. Coming to the question of the respondent Company has redeemed the prescribed shares from the completion of the SPA viz. 31.5.2004, it is relevant to know that the promoters and the sixth respondent expressly agreed as contemplated in Clause 5(b) of the SHA that as far as possible in the best interest of the company and subject to any law for the time being in force, they shall not redeem the 10% preference shares subscribed by them before 5 years from the completion date of share purchase agreement. The intention of the parties is clear from the words employed viz. as far as practicable in the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nner prescribed therein. After the petitioner rejected the offer of the fourth respondent and having lost his remedy as per the agreement cannot in any way make any grievance of the sale of the shares by the fourth respondent in favour of respondents 2 and 4 despite they having not exercised the option at the first instance in view of the fact that the shares were acquired by them at the price formula. On the other hand, there would have been justification to question the sale of shares in favour of respondents 2 and 3 in the event of their acquiring shares from the fourth respondent at a price lower than the price formula. The minutes recording the summary actions of the meeting held on 14.11.2003 in relation to sale of share of the fourth respondent in favour of respondents 2 and 3 depicts due completion of the transaction between the parties and from the aforesaid very minutes, it is clear that it could not relate to any Board Meeting of the company and as such, there is no need to send any notice to the petitioner of the meeting held on 14.11.2003. The material on record reveals the transfer of shares of the fourth respondent in favour of respondents 2 and 3 was not approved in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercion or pressure brought on him. On the other hand, he has voluntarily sold his 12.25% equity shares in exercise of his right and option as provided in the SHA. He has not made any grievance of the same in his earlier petition. Therefore, there is no merit in the contention of the petitioner that his 12.25% equity share have been transferred in favour of the company by exerting coercion and forcing him to sell. Apart from this it is on record that in the meeting held on 17.1.2004 at Bangalore, the petitioner has received cheque for Rs. 3,00,56,267/- for purchase of his shares, has tendered the letter of resignation and no claim from the petitioner to the Company. The material on record which includes letter of resignation and no-claim of the petitioner to the company would categorically go to show that he has sold his balance equity shares in the company to the sixth respondent and has delivered the share certificates together with the signed share transfer forms in accordance with the Articles of Association of the Company. He has also confirmed his resignation from the board of Directors of the Company and has acknowledged the receipt of entire dues arising from his employment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a party to the meetings in which the amendments were made to the Articles of Association of the company, after the 6th respondent gained entry into the Company by acquiring the shares. The impugned order of the Board and the material on record now placed before us would not disclose that the grievance made by the petitioner are supported with any substantive material. In view of the fact that the petitioner has resigned from the Company after taking the value of his shares and as his daughter and son have started another company which is competing with the respondent company, there is no merit in the case made out by the petitioner in respect of oppression and mismanagement. Insofar as the contention of the learned counsel that the CLB has passed orders in the chambers by not pronouncing in the open court hall after notifying the date and therefore, it is vitiated on account of it being in violation of Regulation 29 of CLB Regulations 1991 is concerned, at best it may amount to an irregularity and not an illegality affecting the order and as the decision of the Board being based on merits and the irregularity not affecting the order nor it has affected the interest of the app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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