As per case facts, GIC, a family investment company, faced financial trouble, prompting its board to issue new shares. The Appellant and his family acquired a majority stake through these ...
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CASE NO.:
Appeal (civil) 6359 of 2001
PETITIONER:
Sangramsinh P. Gaekwad & Ors.
RESPONDENT:
Shantadevi P. Gaekwad (Dead)thr.Lrs. & Ors.
DATE OF JUDGMENT: 20/01/2005
BENCH:
N. Santosh Hegde & S.B. Sinha
JUDGMENT:
J U D G M E N T
W I T H
CIVIL APPEAL NOS. 6360 AND 6361 OF 2001
S.B. SINHA, J :
These appeals are directed against a judgment and order dated
9.8.2000 passed by a Division Bench of the High Court of Gujarat at
Ahmedabad in O.J. Appeal Nos. 6, 7 and 8 of 1995 whereby and whereunder
the judgment and order dated 17.12.1994 passed by a learned Single Judge
of the said Court dismissing Company Petition No. 51 of 1991 filed by the
First Respondent herein, was set aside.
BACKGROUND FACTS :
Sir Pratapsinghrao Gaekwad was the Ruler of Baroda. Maharani
Shantadevi Gaekwad was his wife. They had eight children. For certain
reasons with which we are not concerned, the estate of Gaekwad came into
the hands of their elder son, Fatesinghrao P. Gaekwad (FRG) even during
the life time of Sir Pratap Singh. FRG floated several companies, three of
which are Baroda Rayon Corporation Ltd. (BRC), Gaekwad Investment
Corporation Company Ltd. (GIC) and Alaukik Trading & Investment
Corporation Pvt. Ltd. (Alaukik). BRC came into existence in 1958. At the
outset, it was being run under Managing Agency System which was
abolished in or about 1968 and later on the same was being managed by the
Board of Directors with the assistance of professional executives. Appellant
No. 1 herein, the youngest son of Pratapsinghrao Gaekwad, joined the said
company in 1968. He was the Director of Managing Agents till 31.12.1969
whereafter he became the Additional Director with effect from 1st January,
1970. He in the same year became Joint Managing Director. In April 1976,
he became the Managing Director of BRC. He was reappointed as
Managing Director for two periods of five years each with effect from 19th
February, 1980 and 19th February, 1985. FRG passed away on 1st
September, 1988, whereafter he was appointed as Chairman and Managing
Director on 23.9.1988.
GIC was a small investment company. Its equity capital consisted of
425 shares of Rs. 100/- each. The said shares were mainly held by the
family members. A large chunk of shares was held by Jaisingh Ghorpade
Trust of which FRG was a trustee. The beneficiaries of this Trust are said to
be outsiders. Some shares of GIC were held by outsiders also. The share
holding pattern of the Company was as under:
Sr.
No.
Name
No. of Shares
1.
Shrimant Fatesinghrao Gaekwad
301
2.
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H.H. Maharani Shantadevi Gaekwad
7
3.
H.H. Maharani Padmavatidevi Gaekwad
20
4.
Prince Ranjitsingh P. Gaekwad
10
5.
Shrimant Sangramsinh P. Gaekwad
1
6.
Princess Shubhanginidevi Gaekwad
5
7.
H.H. Mrunalinidevi Puar
10
8.
Shrimant Lalitadevi Kirdatt
5
9.
Shrimant Shivrajkumar
1
10.
H.H. Padmavatidevi Gaekwar &
H.H. Maharani Shantadevi Gaekwar
4
11.
Shrimant Pramila Raje of Jasdan
4
12.
Shrimant Asharaje Gaekwad
5
13.
Shrimant Ajaysinh Murarrao Ghorpade
1
14.
Shrimant Vasundhara Raje Murarrao
Ghorpade
1
15.
Shrimant Ashokraje Gaekwad
1
16.
Shrimant Vimala Raje Gaekwad
1
17.
Shrimant Devayanidevi Gaekwad
1
18.
Shrimant Ajitsinh Gaekwad
1
19.
Shri Jaysinghrao M. Ghorpade & H.H.
Maharani Padmavatidevi Gaekwad
5
20.
Shrimant Dilipsinh G. Desai & Smt.
Kusumben D. Desai
5
21.
Smt. Kusumban D. Desai & Shri
Dilipsinh G.Desai
5
22.
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Capt. V.S.Hazare
10
23.
Smt. Pramilabai Hazare
10
24.
Shri Malhari N. Khade
1
25.
Shri Rameshchandra V. Dhaibar
10
Total equity shares
425
Alaukik was a subsidiary of GIC. Respondent No. 12, Mrs. Mrunalini
Devi Puar was its Managing Director.
Allegedly, GIC suffered a loss during the financial years ending 31st
March, 1987 and 31st March, 1988 as a result whereof substantial parts of
the equity and reserves were wiped out. It could not even pay off the loans
and credits. It had no funds to subscribe for the rights issue made in 1989 by
BRC. Its share holding in BRC was likely to fall with which its forged
fortunes were closely linked as the dividend from the shares of BRC was the
major source of income of the company. GIC came into financial trouble
when BRC did not declare dividend in 1986-87. The value of BRC shares
also declined and, thus, it became difficult to avail of an overdraft facility
from the Banks. It was then decided to raise funds from the existing
members. The Board of Directors of GIC in a meeting held on 10.11.1987,
decided to broad-base the company, whereafter an extraordinary general
meeting was convened on 17.12.1987. In the said EGM, a decision was
taken to increase the capital by issuing 25000 equity shares of Rs. 100/-
each. The matter was again placed in a Board Meeting of GIC on 8th
January, 1988. In the said Board Meeting presided over by Appellant No. 1
and attended by Mr. P.U. Rana and Mr. P.H. Chinoy, a resolution was
passed that 15000 equity shares of Rs. 100/- each be issued at par to the
members of the company. The said resolution reads as under:
"Resolved that out of 25000 equity shares of Rs.
100/- each, 15000 equity shares of Rs. 100/-
covering Rs. 15,00,000/- be issued at par to the
members of the Company at present and the
balance as and when required.
Further Resolved that the Management Committee
of the Company be and is hereby authorized to
issue equity shares to members in such proportion
as it deems fit.
Further Resolved that the Management Committee
be and is hereby authorized to do all such acts,
deeds and things necessary for the purpose."
Pursuant to or in furtherance of the said resolution, the Company
Secretary, Mr. M.N. Khade issued a circular letter dated 12.2.1988 to all the
existing shareholders requesting them to subscribe for the equity shares at
par wherefor a time limit of three weeks was fixed. It was stated that if no
reply is received by 10th March, 1988 it would be presumed that the
concerned shareholder was not interested in the offer. The said circular
letter reads as under:
"12th February, 1988
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Shrimant Fatehsinhrao Gaekwad
Hoechest House, Nariman Point
Bombay \026 400 021
It has been decided to increase the equity capital of
the Company by the issue of 15000 equity shares
of Rs. 100/- each at par, to the members of the
Company.
You are hereby requested to convey your
acceptance for the number of shares for which you
would like to subscribe, along with a cheque
covering the full amount at the rate of Rs. 100/-
per share, within three weeks from the date of
receipt of this letter. If no reply is received by 10th
March, 1988 it will be presumed that you are not
interested in the offer and the shares will be
offered to the other members.
Thanking you,
Yours faithfully,
For Gaekwad Investment Corporation
Pvt. Ltd.
(M.N. Khade)
SECRETARY"
On or about 13th February, 1988, another meeting was convened
which was chaired by FRG wherein the resolution passed in the meeting
dated 8th January, 1988 was confirmed. The Managing Committee, having
regard to the fact that no offer was received from the existing shareholders,
in its meeting dated 21st March, 1988 extended the time for the aforesaid
offer. It was further decided that out of 15000 shares, 8000 shares be kept
apart for the time being for FRG and the balance 7000 shares be kept apart
for other existing members. Allegedly, on instructions of Appellant No. 1
herein, the Company Secretary gave first option to the other family members
to subscribe for shares according to their request and the remaining were put
in the name of Appellant No. 1 and his family; pursuant whereto only two
persons, Mrs. Puar asked for allotment of 500 shares and Mrs.
Shubhanginidevi Gaekwad for 25 shares respondent and, thus, the remaining
6475 shares were allotted to Appellant No. 1 and family.
It is further alleged that FRG became disinterested in the 8000 shares
allotted to him. The contention of the Appellants herein is that the balance
7500 shares were renunciated by FRG in his favour and in favour of his
children in June, 1988 as the same remained unallotted as other members
specifically refused to take up any share. His sons and daughters applied for
further 3000 shares through Appellant No. 1 as guardian and the same was
allowed. The remaining 4500 shares, however, remained unallotted. The
issue is said to have been closed on 10.12.1988.
Respondent No. 12, Mrs. Puar who was the Managing Director of
Alaukik in a meeting held on 12.10.1989 which was chaired by her issued to
herself 1500 shares without allegedly issuing any notice to the existing
shareholders and wherefor allegedly no payment was even made. It is
contended that by reason of such overt act, the Respondent No. 12 herein,
came in majority of Alaukik as a result thereof it would cease to be a
subsidiary company of GIC. GIC had 84% shares in Alaukik but by reason
of the said allotment in favour of Respondent No. 12, its share holding
therein was diluted to 32%. The account of the Company was also said to
have been transferred to a current account.
On 1.9.1990, a Civil Suit being No. 675/90 was filed by GIC against
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Alaukik questioning inter alia the allotment of 1500 equity shares of Rs.
100/- each to the defendant No. 2 therein.
In the said suit, Mrs. Puar filed her written statement on 29.11.1990
wherein inter alia a stand was taken that 8000 shares kept apart for FRG
devolved on Shantadevi as a Class I heir of FRG. She incidentally applied
for allotment of the said shares also on 29.11.1990. A contention was also
raised in the said written statement that if the said shares are allotted,
Respondent Nos. 1 and 12 would be holding the majority shares in GIC and
Alaukik even if allotment of 1500 shares in Alaukik is held to be bad in law.
It is also not in dispute that Indreni Holding Pvt. Ltd. (Indreni) was a
wholly owned company of the Appellants herein. Allegedly, by way of tax
planning, the Appellants herein decided to transfer 9415 shares in favour of
the said company wherefor allegedly a letter was prepared by the Company
Secretary on or about 15.11.1989 which reads as under:
"November 15, 1989
To
All the Shareholders.
The Company has received intimation from
existing shareholders about their intention to sale
some of their shares of Gaekwad Investment
Corporation the details of which are attached
herewith.
Pursuant to the provision of the Articles, it is
hereby brought to your notice about the sale of the
shares by the existing shareholders. You are
therefore requested to intimate to the Company
about your interest in purchasing the share before
20th December, 1989.
Please note that in case if the company does
not hear from you within stipulated period it will
be construed that you are not interested in
purchasing\005\005\005\005\005\005..of the same as board
deem fit.
Yours faithfully,
For Gaekwad Investment Corporation
Pvt. Ltd.
(M.N. Khade)
SECRETARY"
It, however, stands admitted that the said letter was not circulated.
The Appellants herein were allegedly under a belief that the said
notice had been circulated and as no response thereto was received, they
transferred 9415 shares out of 9481 shares to Indreni. Questioning the said
transfer, three suits came to be filed by different shareholders marked as Suit
No. 305/90, 867/90 and 872 of 90. Suit No. 305/90 was filed by Pramilaraje
Khacchar on 28.11.1990 in the Rajkot Civil Court wherein inter alia
following reliefs were sought for:
"A. it be declared that the purported sales and
transfers by the defendants Nos. 3 to 7 of the 9415
equity shares owned by them in the first defendant
company in favour of the second defendant
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company are ultra vires their powers, illegal, null
and void ab initio and that the said shares continue
to be of the ownership of the respective defendants
Nos. 3 to 7 as if no such sale or transfer was ever
made.
B. a decree for permanent mandatory injunction be
passed in favour of the plaintiff and against the
first defendant directing it to offer and transfer the
said 9415 equity shares in the first defendant
company to the plaintiff and other remaining
members.
C. a decree for permanent mandatory injunction be
passed in favour of the plaintiff and against the
defendant No. 2 restraining the second defendant
from exercising or enjoying any voting or other
rights in respect of the said 9415 equity shares in
the first defendant company.
D. that a decree for permanent mandatory
injunction be passed in favour of the plaintiff and
against the second defendant directing the second
defendant to repay the first defendant company
dividend, if any, paid to the second defendant with
interest at 24 per cent per annum.
E. any other relief that the Hon'ble Court deems fit
in the circumstances of the case be granted."
Suit No. 867/90 was filed by Shubhangini Gaekwad in Baroda Civil
Court on 12.12.1990 praying for identical reliefs.
Suit No. 872 of 1990 was filed on 19.11.1990 by Ajit Singh Gaikwad,
the Respondent No. 8 herein, wherein one additional relief was claimed
which is in the following terms:
"it be decreed and first defendant be directed to
offer and transfer 9415 equity shares with
distinctive numbers mentioned in para 18(a) to the
plaintiff and other remaining members of the first
defendant company in pursuance of the Articles of
Association."
In Suit No.867 of 1990, concededly an order of injunction was
passed on 28.11.1990, as prayed for by the plaintiffs, restraining Indreni
from exercising or enjoying any voting or other rights in respect of the said
9415 equity shares in GIC.
A similar order of injunction was passed by Civil Judge, S.D.
Vadodara in Suit No. 867 of 1990 in the suit filed by Mrs. Shubhanginidevi
Gaekwad on 12.12.1990.
In their replies filed in the suits, the Appellants herein inter alia
contended that a Board Meeting was convened on 13.7.1990 for
reconsidering the transfer of shares to Indreni. They also sought for legal
opinion in view of the fact that the notice dated 15.11.1989 was not
circulated to the members. The purported resolution passed in the said
meeting reads as under:
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"Resolved that the transfer of 9415 equity shares in
favour of Indreni Holdings Pvt. Ltd. approved by
the Board on 30.3.90 be reconsidered and that the
matter be referred to Transferors and Transferees.
Resolved further that the legal opinion be sought in
the matter of captioned transfer of 9415 equity
shares of the company in favour of Indreni
Holdings Pvt. Ltd."
The Respondents herein, however, contend that the said resolution
was a fabricated one as no Board Meeting was held on the said date. On or
about 20th July, 1990, the Appellant No. 1 issued a letter to the Board of
Directors that if the transfer of shares was found to be irregular, he should be
permitted to remove transfer notice as per articles. On 9.8.1990, allegedly, a
Board meeting was held and the shares transferred to Indreni were
rescinded. The Respondents contend that the said plea is by way of an
afterthought inasmuch as dividend had been paid to Indreni and TDS on the
amount of dividend was deposited in State Bank of India after 9.8.1990.
The said suits are still pending.
Indisputably, Respondent Nos. 1 and 12 herein took inspection of the
Registers of Members and other documents on 10.12.1996 and the relevant
extracts were taken and notarised.
An Annual General Meeting was allegedly held on 20.12.1990
wherein except for appointment of auditors all other resolutions e.g. seeking
appointment of Directors in favour of Appellant No. 1, his wife (Appellant
No. 2) and his group were rejected. In the said meeting the share holdings
said to have been acquired by Indreni i.e. 9415 shares was not taken into
account and the voting rights of the Appellants were kept confined to 66
shares. It is also not in dispute that prior to the said meeting, Appellant No.
1 lodged a First Information Report apprehending trouble in the said
meeting.
Respondent No. 1 filed an application under Sections 397 and 398
before the Gujarat High Court on or about 4th March 1991 wherein she
initially prayed for the following reliefs:
(A-i) Declaration that she is allottee of 8000 equity shares of respondent
No. 6 company.
(A-ii) Direction to issue share certificates immediately to her of these 8000
shares.
(B) Declaration that issue and allotment of 3000 shares in excess of 6475
shares to respondent No. 1 (present Appellant No. 1) or nominees of
respondent No. 1 to 5 (present Appellant No. 1 to 5) is null and void
ab-initio.
(C) Declare that she is sole heir of Late F.P.G. and as such she is entitled
to be in majority and control of respondent No. 6 company.
(D) Declare respondent No. 1,2 (present Appellant No. 1&2) 9, 10 and 11
(present Respondent No. 9,10,11) have ceased to be directors in
respondent No. 6 company.
(E) Restrain by injunction respondent No. 1,2 (present Appellant No.
1&2) 9, 10 & 11 (present Respondent No. 9,10,11) from acting as
director, officer of respondent No. 6 company.
(F) Declare any act deed or thing done after A.G.M. of 20-12-1990 by
respondent No. 1,2 (present Appellant No. 1&2)9,10&11(present
Respondent No. 9,10,11) as null and void.
(G) Declarations in regard to resolutions passed at the E.G.M. dated 14-1-
1991.
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(H) Appointment of receiver.
(I) Pending Admission respondent No. 1 & 2 (present Appellant No. 1 &
2) be directed to produce before this Hon'ble Court or receiver all
documents, papers, etc.
(J) Pending admissions interim injunction against respondent No. 1,2
(present Appellant No. 1&2) 9, 10 & 11 (present Respondent No.
9,10,11) from acting as directors or officers of the company.
(K) Ad-interim relief's in terms of para H, I & J above.
However, the said reliefs were subsequently amended and the
following additional reliefs were also prayed for :
"A-1 That this Hon'ble Court be pleased to declare
that all allotments of shares in Respondent No. 6
company made beyond the original paid up capital
consisting of 425 equity shares as existing on 23rd
March 1988 are null and void and illegal and of no
legal effect whatsoever and be pleased to set them
aside;
A-2. In the alternative to prayer \026 A-1 and in any
event, this Hon'ble Court be pleased to declare that
the allotments of 6475 equity shares to Respondent
Nos. 1 to 5 and/or to their nominees or to the
members of their nominee or to the members of
their family is subject to the simultaneous
allotment of 8000 equity shares to petitioner no. 1.
500 equity shares to Smt. Mrunalinidevi Puar, 25
equity shares to Smt. Shubhangini Devi Gaekwad
and that the allotment of any further shares
including the said 3000 shares to Respondent No.
4 and 5 is null and void and illegal and be pleased
to set them aside.
A-3. In the event that this Hon'ble Court holds that
the allotment of 6475 shares to Respondent Nos. 1
to 5 and of 3000 shares to Respondent Nos. 4 and
5 is valid, this Hon'ble Court be pleased to declare
that the said 9475 shares were transferred to M/s.
Indrani Holdings Pvt. Ltd. and shall be offered and
transferred by Respondent No. 6 to the
shareholders holding pro rata on the basis of the
original shareholding of 425 equity shares.
A-4. That this Hon'ble Court be pleased to direct
Respondent No. 6 by an order of mandatory
injunction to forthwith transmit 300 equity share
registered in the name of late Fatehsinhrao
Gaekwad as the then trustee of the Jaysinhrao
Ghorpada Trust in favour of the present trustees.
Petitioner No. 1 and Smt. Mrunalidevi Puar;
A-5. That this Hon'ble Court be pleased to transfer
(1) Special Civil Suit No. 675 of 1990 pending
before the Court of the Civil Judge (Senior
Division) at Baroda, (ii) Special Civil Suit No. 305
of 1990 pending before the Court of the Civil
Judge, Senior Division, at Rajkot (iii) Special Civil
Suit No. 867 of 1990 pending \026 before the Court of
the Civil Judge (Senior Division) Baroda, at
Baroda (iv) Special Civil Suit No. 872 of 1990
pending before the Court of the Civil Judge
(Senior Division) at Baroda and (v) Special Civil
Suit No. 63 of 1991 pending before the Court of
the Civil Judge Senior Division (Surat) at Surat, to
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the file of this Hon'ble Court for hearing and
disposal along with the present company petition;
A-6. In the alternative to prayer A-5, this Hon'ble
Court be pleased to stay all interim or ad interim
orders passed in the suits mentioned in prayer A-5
above;"
Sections 397-398 of the Companies Act were amended in 1990 in
terms whereof the jurisdiction of the High Court in that behalf vested in the
Company Law Board pursuant whereto the Respondent No. 12 herein filed a
purported application under the said provisions before the Company Law
Board, Special Bench, New Delhi which was marked as Company Petition
No. 7 of 1992 on the ground of alleged continued mis-management of the
Company and oppression. Allegedly, with a view to avoid simultaneous
proceeding before two forums Respondent No. 1 herein sought permission
before the Gujarat High Court to withdraw the proceedings being C.P. No.
50 of 1991 but the said request was opposed by the Appellants herein and
was ultimately rejected by the High Court by an order dated 21.4.1992. An
appeal thereagainst was preferred before the Division Bench which was
marked as 22 of 1992. The Appellants, on the other hand, sought stay of the
proceedings before the Company Law Board whereupon an order was
passed appointing Mr. Justice C.T. Dighe as an independent Chairman. Mr.
Ranjitsinh Gaekwad, Respondent No. 4 herein was also appointed as a
Director of GIC and the proceedings were stayed. Against the said order an
appeal was preferred by Respondent No. 12 herein before a Division Bench
of the Gujarat High Court which was marked as Appeal No. 20 of 1992
wherein the following interim order was passed:
"Rule Returnable on 19.1.1993. Ad-interim
injunction restraining the company from raising its
share capital, confirmed or undertake sale or
purchase and/ or mortgage fixed assets/
investments of the Company by way of its shares
in its holding or subsidiary company, start new
businesses and decide the matters relating to policy
decisions of material bearing, without placing the
agenda to that effect before the Board of Directors
and without holding a meeting presided over by an
independent Chairman appointed by the Company
Law Board by its order dated 28th September,
1992."
A question as regard the efficacy of simultaneous proceedings, one
before the High Court and another before the Company Law Board arose for
consideration and by an order 9.3.1993 the Division Bench directed that in
view of the nature of controversy it would be in the interest of the parties if
the matter was finally heard and disposed of. The Appellants herein
allegedly took a stand that if the said petition under Section 397 was heard
on merits and disposed of expeditiously they would have no objection to the
matter being heard either before the Company Law Board or before the
learned Company Judge. Upon obtaining liberty from the Division Bench,
the matter was mentioned before the learned Company Judge enquiring as to
whether it can be disposed of expeditiously whereupon a schedule of hearing
was worked out. Respondent Nos. 12 and 13 herein were also added as
parties in the said proceedings. The affidavits filed by the parties in all the
proceedings were permitted to be brought on records and they were further
permitted to file replies and/ or rejoinders thereto.
The learned Company Judge disposed of the matters on the basis of
said affidavits.
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JUDGMENT OF THE SINGLE JUDGE:
N.J. Pandya, J. by reason of his judgment dated 17.12.1994 dismissed
the said Company Petition opining:
(i) Allotment of 6475 shares having been admitted, no dispute could be
raised as regard thereto. Further allotment of 3000 shares was in terms of
the resolution adopted by the Board Meeting which was preceded by the
offer of shares to others. Such allotment was made in terms of the decision
of the Managing Committee which was authorized therefor by the Board of
Directors. No time was specified for the Managing Committee to take
appropriate decision in that regard. FRG renounced his shares and 3000
shares out of 8000 shares which were to be allotted to the appellants was
also valid.
(ii) As regard the transfer of 9415 shares by the Appellants in favour of
Indreni lifting the corporate veil thereof, the learned Judge held that the
shareholders of Indreni being the Appellants only; any transfer made in its
favour did not affect the company. Assuming such transfer was bad in law,
the voting rights in relation thereto continued to remain vested with the
transferors.
(iii) In a petition under Sections 397 and 398 of the Companies Act, the
Court is concerned with the question as to whether the control of the
company slipped from one party to the other and as the Appellants, in any
event, continued to form majority and, thus, any transfer made in favour of
Indreni did not amount to oppression.
(iv) Shifting of registered office from Baroda to Bombay although was
questionable, no relief was granted on the ground that the same would
amount to putting the clock back and would invalidate the entire AGM and
subsequent events which would not be in public interest and furthermore
would result in unnecessary expenditure to the parties.
(v) Shantadevi did not have a right to 8000 shares by inheritance. An
adhoc allotment of shares was merely an invitation which did not culminate
in a right and, thus, no case could have been built thereupon.
(vi) On the question of mismanagement, it was opined "there was hardly
any mismanagement and only an apprehension that the change in control
may amount to mismanagement" would not be acts of mismanagement.
Three appeals were filed against the said judgment before the Division
Bench of the said High Court which came to be allowed by reason of the
impugned judgment.
JUDGMENT OF THE DIVISION BENCH
The Division Bench, on the other hand, held that the allotment of
both 6475 and 3000 shares was invalid. As far as 6475 shares are
concerned, it was held that the allotment was solely motivated by self-
interest and the minutes confirming such allotment were not acceptable. As
far as 3000 shares are concerned, the Division Bench did not accept the
authenticity of the letter by the Company Secretary of FRG renouncing the
shares. Transfer of 9415 shares to Indreni was held to be invalid as no
transfer notice was given to the company as required in terms of Article 8 of
the Articles of Association. As the transfer was duly recorded, to undo any
such transfer, a resolution by the Board of Directors of Indreni would be
required. In the absence of any such resolution the transfer being complete,
only Indreni could have transferred the shares back to the Appellants.
The Division Bench further held that there was a breach of fiduciary
duty on the part of the Appellant No.1. It opined that the relief that may be
granted by the Courts is equitable though originating from a statutory
provision. Since the actions of the respondents were designed to wrest
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control of the company by improper means, the minority shareholders could
approach the courts for relief which may be granted by the courts.
RELIEFS :
The reliefs granted to the Respondents by the Division Bench are as
under :
"1. It is hereby declared and ordered that all the
allotments of shares from the additional share
capital increased pursuant to the resolution of the
Extra-ordinary General Meeting held on
17.12.1987 and the resolution of the Board of
Directors dated 8.1.1988 and the decisions for such
allotments, of the Managing Committee be treated
as invalid and ineffective for all purposes and the
shareholdings of all the members of the respondent
No. 6 company hereby stand restored to the
original 425 shares held by the members ignoring
such subsequent allotments. The Register of
members and other records of the company will
stand rectified accordingly.
2. The Registered Office of the respondent No. 6
company is hereby declared to be continuing at the
same place i.e. "Indumati Mahal" at Baroda,
irrespective of the resolution to shift it to Surat and
the respondent Nos. 1 and 2 are directed to
forthwith restore the entire record of the company
to its Registered Office at Baroda.
3. All the Directors or purported Directors of the
respondent No. 6 company stand removed
forthwith. They will from today, not deal with the
affairs of the company in any manner.
4. An Extra-ordinary General Meeting of the
shareholders of the company will be convened on
14th October, 2000 at 11.00 A.M. at the Registered
Office of the Company at Baroda, for appointing
Directors of the Company on the basis of the
existing share-holding of 425 shares of the
members of the company, in accordance with the
Article of Association.
5. The aforesaid meeting scheduled to be held on
14th October, 2000 will be conducted under the
Chairmanship of the Additional Registrar of the
High Court Shri V.B. Gandhi. All the share-
holders of 425 shares including the petitioner No.
1 as the sole hair of the deceased Shrimant
Fathesinhrao P. Gaekwad in respect of the shares
which stood in his name in the register of the
members of the company at the time of his demise
out of the said 425 shares in respect of which he
had voting rights, will be entitled to vote by
themselves or through their proxies at the said
meeting for appointing the Directors of the
Company. No outsider will be allowed to remain
present at the meeting except the Additional
Registrar who will Chair and conduct the meeting
with his official assistants. The Additional
Registrar will be assisted by a Section Officer of
the High Court of his choice in the said work.
6. All the share-holders who are parties to the
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present proceedings are hereby put to notice about
the date of the said Extra-ordinary General
Meeting to be held on 14.10.2000 at 11.00 AM at
the Registered Office of the respondent No. 6
company at "Indumati Mahal", Baroda. The
Additional Registrar will, however, get published
the notice of the meeting in one English daily and
one Gujarati daily having circulation in the area.
The Additional Registrar will also immediately
issue individual notices of the said meeting to the
share-holders. The Additional Registrar is
authorized to seek assistance for conducting the
meeting from all or any of the parties to these
proceedings and/ or the officials of the company
who shall be bound to assist him in that regard.
No adjournment motion will be entertained at the
said meeting.
7. The Additional Registrar will on completion of
the said meeting, prepare and sign the minutes of
the meeting recording its outcome and declare in
writing the names of persons who are appointed by
the share-holders as the Directors of the
respondent No. 6 company at the said meeting, and
thereupon such directors shall assume the
management of the company on such declaration
being made.
8. The remuneration of the Additional Registrar is
fixed at Rs. 10,000/- and the remuneration of the
Section Officer will be Rs. 3,000/- for the said
purpose. The respondent No. 6 is permitted to
withdraw the said amount and also a further
amount towards the expenses for publishing notice
etc. totaling Rs. 30,000/- from its Banks for the
purpose of depositing it in the registry. The
learned Counsel for the respondent No. 6 company
states that the respondent No. 6 will deposit the
amount of Rs. 30,000/- in the Registry of this
Court within 15 days.
9. The learned Counsel for the respondent No. 6
Company has agreed to supply the names and
present addresses of all the share-holders of the
425 shares of the Company, to the Additional
Registrar on or before 19th August, 2000."
SUBMISSIONS ON BEHALF OF THE APPELLANTS:
Submissions were made on behalf of the Appellants by Mr. Harish
Salve, learned senior counsel and Mr. Kailash Jethmalani. In assailing the
judgment of the Division Bench, the learned counsel at the outset would
draw our attention to the fact that the concerned companies were family
companies, having been floated by FRG and the affairs of several of them
were being managed by his brothers and sisters. Appellant No. 1 had been
put incharge of the BRC and GIC for a long time. It was urged that no
dispute was ever raised as regard the decision of the Board of Directors to
broad-base the company by floating 25000 shares out of which 15000 shares
were to be allotted at the first instance. The pattern of share allotment
pursuant to or in furtherance of the decision of the Board of Directors i.e.
8000 shares were allotted to FRG and 6475 shares were allotted to the
Appellants stood admitted. It was urged that the Division Bench of the High
Court committed a manifest error insofar as it failed to take into
consideration the admission of Respondent No. 1 and Respondent No. 12
herein that 6475 shares were allotted pursuant to the Resolution of the Board
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during the life time of FRG. Such allotment was in fact admitted in the
company petition filed by the Respondent No. 1. The learned counsel would
contend that only at a later stage when the Respondent No. 12 herein filed a
company petition before the Company Law Board, Delhi a challenge as
regards allotment of 6475 shares was also made. In the Company Petition
although the reliefs were later on amended, pleadings were not. On a fair
and reasonable reading of the pleadings, it was submitted that only inference
that can be drawn was that the subject matter of challenge centered round the
allotment of 3000 shares only and transfer of their shares by the Appellants
to Indreni on the premise that it being an outsider it was impermissible in
terms of the relevant provisions of the Articles of Association.
Mr. Salve would argue that as the Appellants had acquired 6475
additional shares, there was indisputably no question of their abusing any
position to take over the company as they had all along been incharge
thereof.
Respondent Nos. 1 and 12, Mr. Salve would contend, having taken
inspection of the documents on 10.12.1990 and company petition having
been filed on 4.3.1991 as well as the relevant documents having been
annexed thereto would clearly demonstrate that reliance thereupon had been
placed by the Respondent No. 1 herein and, thus, on the admitted fact, the
Division Bench committed a manifest error in issuing the impugned
directions insofar as it failed to take into consideration that the company was
a family concern in respect whereof a completely different standard should
be applied. In this case, it has not been found that the Respondents had been
thrown out of the Management or they were deprived of the shares of BRC.
It was contended that the company was not in active business and had held
only some shares in Alaukik and BRC. Furthermore, there was no lack of
probity or acts of misfeasance of company property on the part of the
Appellants. The composition of the parties would not change even if
allotment of 3000 shares as also the transfer of Indreni are held to be invalid
inasmuch as by reason of the shareholding pattern the Appellants would
continue to be in the majority. The learned counsel would contend that the
dispute arose only after Mrs. Puar transferred 1500 shares of Alaukik to
herself and by reason thereof the mother and daughter intended to take over
Alaukik and consequently BRC. Only as a face saving measure, Respondent
No. 1 claimed 8000 shares which were allotted to FRG on 29.11.1990 and
not prior thereto. It was pointed out that Respondent No. 1 applied for
succession certificate on 28.11.1989 wherein she disclosed the assets of
FRG but except 22 shares in GIC she did not lay claim on any other share of
GIC, far less 8000 shares. Before filing their respective company petitions
both Respondent Nos. 1 and 12 were aware about the entire state of affairs
and their purported ignorance about the internal affairs of the company is not
borne out of records. In this connection, our attention has been drawn to
paragraphs 7 and 8 of the statements made in the company petition by the
Respondent No. 1. It was pointed out that identical statements were made
by the Respondent no.12 in her Company Petition before the Company Law
Board., Delhi.
Even therein no allegation as regard fabrication of document or any
aggrandizement on the part of the Appellant was raised. Respondent Nos. 1
and 12, it was urged, prevaricated their stand from time to time and as such
their plea should not have been accepted by the Division Bench.
SUBMISSIONS ON BEHALF OF THE RESPONDENTS
Mr. Ashok Desai and Mr. P.V. Kapoor, learned senior counsel
appearing on behalf of Respondent Nos. 1 and 12 respectively, on the other
hand, would submit:
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(i) Appellant No. 1 being in fiduciary position as the Director of GIC as
also a family member was required to act in utmost good faith, make full and
honest disclosure to other shareholders and thus he could not have made any
profit by allotting shares to himself and his family members directly or
indirectly and was furthermore required to inform the shareholders as regard
the benefits arising therefrom so that they could participate therein. Such a
fiduciary position remains, despite non-applicability of Section 81 of the
Company Act.
(ii) Appellant No. 1 in breach of said fiduciary duty aggrandized himself
by transforming himself from a miniscule minority of 1.86% to 86% and
failed to explain as to how he got such advantages to the detriment of other
shareholders. The explanations offered by him as regard allotment of shares
are wholly inconsistent and contradictory as conflicting versions had been
set out which do not clearly and cogently explain as to how the different
shares were (a) decided to be issued, (b)offered for subscription, (c) allotted
to Appellant No. 1 and (d) allotted to non-members. Transfer to Indreni was
a device to put the shares beyond the reach of the original shareholders and
the said company actually received the benefits thereof by getting dividends.
(iii) It is true that Respondents came out with a different case but that was
because of the fact that they had no knowledge about the complete affairs of
the company to start with having regard to the fact that the Appellants were
in control of the relevant documents. The total constellation of the
circumstances would show that the Appellant No. 1 had aggrandized himself
and his conduct had led to oppression of other members.
(iv) The power of the company court under Sections 397 and 398 being of
widest amplitude the reliefs granted by the Division Bench were permissible
in law.
(v) Each share of GIC was a valuable one keeping in view of the share
price of BRC, Alaukik and other properties possessed by it. The value of
each share of GIC which was floated at the rate of Rs. 100 would have been
worth more than Rs. 900 and furthermore by investing nine lakhs, the
Appellants received more than 30 lakhs of rupees by way of dividend.
(vi) As BRC had declared dividend and was a profit making company;
there was no need to broad-base company. The burden to prove bonafide
was on the Appellants.
REPLY:
Mr. Salve in reply would inter alia contend that the question of
aggrandizement had neither been pleaded nor proved. The learned counsel
furthermore urge that there was no factual foundation as regard the
allegation of fraud or self-aggrandizement. He would contend that a
distinction has to be borne in mind as regard fiduciary relationship with the
company and with the shareholder.
POINTS FOR CONSIDERATION:
(i) Whether the Appellant No. 1 in his capacity as Director of the
Company had a fiduciary duty towards the shareholders.
(ii) Whether there has been a valid decision to broad-base the company by
issuing additional shares.
(iii) Whether the allotment of 6475 shares and 3000 shares in favour of the
Appellants herein was valid in law.
(iv) Whether the Respondent No. 1 herein could claim title in respect of
8000 shares in the petition filed under Sections 397 and 398 of the
Companies Act.
(v) Whether transfer of 9415 shares in favour of Indreni by the Appellants
was valid and if not the effect thereof.
(vi) Whether the issue of oppression and/ or mis-management on the part
of the Appellant No. 1 herein in running the affairs of the Company towards
the Respondent Nos. 1 and 12 have been proved.
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FIDUCIARY DUTY:
Chapter IX of the Indian Trusts Act provides for certain obligations
in the nature of trusts. The Trust Act recognizes various kinds of trusts
including resulting trust. An express trust, however, may be created by
reason of an agreement between the parties. [See Barclays Bank Vs.
Quistclose Investments [1970] AC 567]
By reason of Section 88 of the Indian Trusts Act, a person bound in
fiduciary character is required to protect the interests of other persons but the
heart and soul thereof is that as between two persons one is bound to protect
the interests of the other and if the former availing of that relationship makes
a pecuniary gain for himself; Section 88 would be attracted. What is sought
to be prevented by a person holding such fiduciary benefit is unjust
enrichment or unjust benefit derived from another which is against
conscience that he should keep. When a person makes a pecuniary gain by
reason of a transaction, the cestui qui trust created thereunder must be
restored back.
The purported breach of trust on the part of Appellant No. 1 herein
relate to :
(i) Issuance of additional 15000 shares;
(ii) Allotment of 6475 shares to himself and his family members as also
an HUF; and
(iii) Allotment of 3000 shares out of 8000 shares which had been allotted
to FRG in favour of his minor children.
(iv) Transfer of 9415 shares in favour of Indreni.
Issuance of equity based capital shares under the Companies Act in
relation to a private company would be governed by its Memorandum of
Association and Articles of Association. It has not been pointed out that in
terms of Memorandum of Association the Board of Directors acted ultra
vires in adopting a resolution as regard issuance of 25000 capital shares; out
of which 15000 shares were to be issued at the first instance. Section 81 of
the Companies Act indisputably has no application in relation to a private
company, the pre-requisite thereof is, thus, not attracted in the instant case.
Appellant No. 1, therefore, apart from Section 88 of the Indian Trusts Act in
the event of its applicability did not have any statutory obligation to
discharge as a trustee in this behalf.
A Director of a Company indisputably stands in a fiduciary capacity
vis-`-vis the Company. He must act for the paramount interest of the
company. He does not have any statutory duty to perform so far as
individual shareholders are concerned subject of course to any special
arrangement which may be entered into or a special circumstance that may
arise in a particular case. Each case, thus, is required to be considered
having regard to the fact situation obtaining therein and having regard to the
existence of any special arrangement or special circumstance.
The question came up for consideration as far back in 1901 in Percival
Vs. Wright [1902 (2) Ch. 421]. In that case, the shares of the company were
in few hands which were transferable only with the approval of the Board of
Directors. The shares did not carry any market price and were not to be
quoted at the stock exchange. The plaintiffs therein intended to dispose of
certain shares wherefor they offered 12 l.5s. per share purported to be based
on a valuation which they had obtained from independent valuers a few
months prior thereto. The said offer was accepted. The transaction
pertaining to the said agreement was entered into but it was later on
discovered by the plaintiffs that prior to and during their own negotiations
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for sale the Chairman and the Board were approached by one Holden with a
view to the purchase the entire undertaking of the company with a view to
resell the same at a profit to a new company. The question of fiduciary
obligation on the part of the Directors arose therein when the plaintiff
brought an action against the Chairman and the two other purchasing
Directors asking for setting aside the sale on the ground that the defendants
as Directors ought to have disclosed the feature of negotiations with Holden
when negotiating purchase of their shares. The question therein posed
was: Assuming that directors are, in a sense, trustees for the company, are
they trustees for individual shareholders? The Chancery Division despite
holding that the Directors must act bonafide and for the best interest of the
company did not accept the argument that the relationship between the
shareholders inter se are the same as that of partners in an unincorporated
company holding :
"\005The contrary view would place directors in a
most invidious position, as they could not buy or
sell shares without disclosing negotiations, a
premature disclosure of which might well be
against the best interests of the company. I am of
the opinion that directors are not in that position.
There is no question of unfair dealing in this
case. The directors did not approach the
shareholders with the view of obtaining their
shares. The shareholders approached the directors,
and named the price at which they were desirous
of selling."
Percival (supra) was noticed by a 4-Judge Bench of this Court in
Nanalal Zaver and Another Vs. Bombay Life Assurance Co. Ltd. and Others
[1950 SCR 391] in the following terms:
"\005It is clear that until the Singhania group get
their names entered in the register of the members
they are not shareholders but are complete
strangers to the company. It has been held in
Percival v. Wright [L.R. (1902) 2 Ch. 421] that
ordinarily the directors are not trustees for the
individual shareholders. Even if the directors owe
some duty to the existing shareholders on the
footing of there being some fiduciary relationship
between them as stated in some cases [see for
example In re Gresham Life Assurance Society]
[L.R. 8 Ch. App. 446 at p. 449] I see no cogent
reason for extending this principle and imputing
any kind of fiduciary relationship between the
directors and persons who are complete strangers
to the company. In my judgment, therefore, the
conduct of the respondents 2 to 9 cannot be judged
on the basis of any assumed fiduciary relationship
existing between them and the Singhania group. In
my opinion, the respondents 2 to 9 owed no duty
to the Singhania group and, therefore, the motive
to exclude them cannot be said to be mala fide per
se."
The Court further held that having regard to Regulation 42 read with
Section 105-C of 1936 Companies Act vis-`-vis Regulation 27 of 1882 Act,
the directors exercise a larger power to issue additional capital shares.
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It is true that while referring to 'Percival', the court used the
expression 'ordinarily', but if a special situation arises, it would be for the
person complaining to plead and demonstrate the same.
We, however, do not intend to put our seal of approval on Percival
(supra) in its entirety. The situation may be different when a special
contract, special relationship or special circumstances arise. Percival (supra)
may not also be applicable in a case of take over bid (Gelting vs. Kilner,
1972 (1) All ER 1166) or when the general body of shareholders is only two
of them (Glavanies vs. Brurning hausen (1996) 19 ACSR 204)
In Palmer's Company Law, 23rd edition, page 848, it is stated:
"64-02. Relationship is with company: The
fiduciary relationship of a director exists with the
company: the director is not usually a trustee for
individual shareholders. Thus, a director may
accept a shareholder's offer to sell shares in the
company although he may have information which
is not available to that other, and the contract
cannot be upset even if the director knew of some
fact which made the offer an attractive proposition.
So in Percival v. Wright a person who had
approached a director and sold him shares in the
company, afterwards, upon discovering that the
director had known at the time of the contract that
negotiations were on foot for the purchage by an
outsider of all the shares in the company at a
higher figure, could not impeach the contract. In
his judgment Swinfen-Eady J. said "there is no
question of unfair dealing in this case. The
directors did not approach the shareholders with
the view of obtaining their shares. The
shareholders approached the directors and named
the price at which they were desirous of selling."
In Pennington's Company Law 6th Edn. at page 608-09, it is stated :
"Directors owe no fiduciary or other duties to
individual members of their company in directing
and managing the company's affairs, acquiring or
disposing of assets on the company's behalf,
entering into transactions on its behalf, or in
recommending the adoption by members of
proposals made to them collectively. If directors
mis-manage the company's affairs, they incur
liability to pay damages or compensation to the
company or to make restitution to it, but individual
members cannot recover compensation for the loss
they have respectively suffered by the
consequential fall in value of their shares, and they
cannot achieve this indirectly by suing the
directors for conspiracy to breach the duties which
they owed the company. However, there may be
certain situations where directors do owe a
fiduciary duty and a duty to exercise reasonable
skill and care in advising members in connection
with a transaction or situation which involves the
company or its business undertaking and also the
individual holdings of its members."
In Dawson International plc vs. Coats Patons plc [1988 SLT 854]
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Percival (supra) was relied upon holding that the Directors are, in general,
under no fiduciary duty to shareholders and in particular current
shareholders with respect to the disposal of their shares in the most
advantageous way as directors are not their agents and as such are not
normally entrusted with the management of their shares. It was, however,
observed that if the directors take it upon themselves to give advice to
current shareholders they have a duty to act in good faith and not
fraudulently nor can mislead the shareholders whether deliberately or
carelessly, in which event, they may have a remedy.
A distinction, thus, has been carved out as regards the fiduciary duty
of the directors with regard to the property and funds of the company as
contra-distinguished from the duty of directors to current shareholders as
sellers of their shares. In case of conflict between two interests, the
company's interest must be protected. The directors, however, will have a
fiduciary relation if they have taken unto themselves the burden of giving
advice to current shareholders.
The aforementioned principles of law found favour with the Court in
Needle Industries (India) Ltd. and Others Vs. Needle Industries Newey
(India) Holding Ltd. and Others [(1981) 3 SCC 333] wherein it was held:
"Where directors of a company seek, by entering
into an agreement to issue new shares, to prevent a
majority shareholder from exercising control of the
company, they will not be held to have failed in fiduciary
duty to the company if they act in good faith in what they
believe, on reasonable grounds, to be the interests of the
company. If the directors' primary purpose is to act in
the interests of the company, they are acting in good faith
even though they also benefit as a result."
In Needle (supra), this Court furthermore noticed Punt vs. Symons
[(1903) 2 CH 506] and opined in the following terms :
"105. In Punt v. Symons ((1903) 2 Ch 506 : 72 LJ
Ch 768 : 89 LT 525 : 52 WR 41), which applied
the principle of Fraser v. Whalley (71 ER 361 : 11
LT 175), it was held that :
Where shares had been issued by the Directors, not
for the general benefit of the company, but for the
purpose of controlling the holders of the greater
number of shares by obtaining a majority of voting
power, they ought to be restrained from holding
the meeting at which the votes of the new
shareholders were to have been used.
But Byrne, J. stated :
There may be occasions when Directors may fairly
and properly issue shares in the case of a company
constituted like the present for other reasons. For
instance it would not be at all an unreasonable
thing to create a sufficient number of shareholders
to enable statutory powers to be exercised.
106. Peterson, J. applied the principle enunciated
in Fraser (71 ER 361 : 11 LT 175) and in Punt
(((1903) 2 Ch 506 : 72 LJ Ch 768 : 89 LT 525 : 52
WR 41) in the case of Piercy v. S. Mills &
Company Ltd. ((1920) 1 Chancery 77 : (1918-19)
All ER Rep 313 (Ch D) : 122 LT 20 : 35 TLR
703). The learned Judge observed at page 84 :
"The basis of both cases is, as I understand, that
Directors are not entitled to use their powers of
issuing shares merely for the purpose of
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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\005
\005What is considered objectionable is the use of
such powers merely for an extraneous purpose like
maintenance or acquisition of control over the
affairs of the Company. .."
In Needle Industries (supra), Nanalal Zaver (supra) was affirmed
stating the sole test is whether the issue of shares is simply or solely for the
benefit of the Directors holding:
"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."
Fiduciary duty of the Directors to the company should not be equated
with the duty to the shareholders.
In Peskin and Another Vs. Anderson and Others [2001] 1 BCLC 372,
Percival (supra) as also other decisions taking similar or contrary view were
noticed by the Court of Appeal including the judgment of the Court of
Appeal in New Zealand in Coleman vs. Myers as also Court of Appeal of
New South Wales in Brunninghausen vs. Glavnics (1999) 46 NSWLR and
held that the directors had no fiduciary duty to the shareholders in the facts
and circumstances obtaining therein. However, observations were made
therein that such duties may arise in special circumstances demonostrating
the salient features and well-established categories of fiduciary relationship
such as agency which involves duties of trust, confidence and loyalty.
Absence of special circumstances or special reasons as pointed out
hereinbefore normally would not bring in the concept of fiduciary
relationship in a director vis-`-vis the current shareholders. However, in
Coleman (supra) and Brunninghausen (supra) it was held that the fiduciary
duties of directors to the shareholders exist in the specially strong context of
the familial relationships having regard to their personal position of
influence in the company concerned.
We may at this stage consider the case laws replied upon by Mr.
Desai.
M/s. Dale & Carrington Invt. P. Ltd. & Anr. Vs. P.K. Prathapan &
Ors. [2004 (7) SCALE 586] requires a closer scrutiny.
In that case one P.K. Prathapan (Prathapan), an NRI through his
mother induced Ramanujam to promote a company by making initial
investment of Rs. 5 lakhs in shares. Prathapan, the principal shareholder of
the Company came to know that the Board of Directors in its meeting held
on 24th October, 1994 and chaired by Ramanujam, adopted a resolution on
the premise that a sum of Rs. 6,86,500/- stood to the credit of said
Ramanujam and in lieu thereof equity shares of Rs. 100/- each would be
allotted in his favour. Prathapan was not intimated about the said meeting.
By reason of the said act, Prathapan who was a majority shareholder in the
Company was reduced to a minority. The case of Prathapan was that
Ramanujam did not contribute any money from his own resources for the
purpose of starting the company and he all along drew a handsome salary for
working as Managing Director thereof. The charge of oppression and
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mismanagement against Ramanujam by Prathapan before the Company Law
Board succeeded. However, the only relief which Prathapan obtained was a
direction upon him to sell his shares to Ramanujam which was questioned
by him. This Court held that the directors act on behalf of a company in a
fiduciary capacity and their acts and duties are to be exercised for the benefit
of the company. It, however, while analyzing the acts of a director as an
agent of the company observed that in a limited sense they are also trustees
for the shareholders of the company. However, without discussing the
limitations of such fiduciary relationship, it was observed:
"15\005 The fiduciary capacity within which the
Directors have to act enjoins upon them a duty to
act on behalf of a company with utmost good faith,
utmost care and skill and due diligence and in the
interest of the company they represent. They have
a duty to make full and honest disclosure to the
shareholders regarding all important matters
relating to the company. It follows that in the
matter of issue of additional shares, the directors
owe a fiduciary duty to issue shares for a proper
purpose. This duty is owed by them to the
shareholders of the company. Therefore, even
though Section 81 of the Companies Act which
contains certain requirements in the matter of issue
of further share capital by a company does not
apply to private limited companies, the directors in
a private limited company are expected to make a
disclosure to the shareholders of such a company
when further shares are being issued. This
requirement flows from their duty to act in good
faith and make full disclosure to the shareholders
regarding affairs of a company. The acts of
directors in a private limited company are required
to be tested on a much finer scale in order to rule
out any misuse of power for personal gains or
ulterior motives."
Evidently, therefore, the ratio which emerges from the decision is that
the duty to disclose as regard issue of additional shares is relatable to proper
purpose thereof. If the purpose is proper and the action of the director is
bonafide, the ratio should not be extended so as to hold that such a duty of
the director towards the shareholder is absolute despite the fact that there is
no legal requirement therefor. Duty of disclosure to shareholders in that
case had a strong nexus with the affairs of the company. Dale & Carrington
(supra) is not an authority for the proposition that the purported fiduciary
duty of a director towards the shareholder is absolute although the
transaction in question may not have a direct co-relationship with the affairs
of the company.
Moreover, the Bench did not have the advantage of considering the 4-
Judge Bench decision of this Court in Nanalal Zaver (supra). It furthermore
did not have the advantage of noticing the decisions of other jurisdictions
which had been noticed hereinbefore.
The Court, it is interesting to note, noticed Needle Industries (supra)
as regards the power of the company to issue new shares but the legal effect
thereof was not considered in details. The directors have a power to issue
additional capital shares and in the process may obtain some pecuniary gain
but only when such pecuniary gain is obtained through ulterior motive, they
would be answerable to the shareholders.
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It is also interesting to note that while applying the 'extraneous
purpose test' or 'ulterior motive test', the Court noticed Piercy Vs. S. Mills
& Co. Ltd. (1920) 1 Ch. 77 wherein it was held:
"The basis of both cases is, as I understand, that
Directors are not entitled to use their 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."
The expression 'merely' assumes significance.
Significantly, in Needle Industries (supra) it was categorically held
that the Directors have power to issue shares at par even if their market price
is higher being primarily a matter of policy. (See para 120)
'Proper purpose' doctrine and the doctrine of 'fairness' vis-`-vis the
doctrine of 'bona fide' was considered in view of its findings that the
allotment of all additional shares was gained by Ramanujam through
manipulations and commission of acts of frauds upon becoming the
Managing Director of the Company with a view to gain sole control of the
management thereof and to the exclusion of Prathapan.
The ratio in Dale and Carrington (supra), thus, must be understood to
have been rendered in the fact situation obtaining in that case. It does not
lay down a law that fiduciary duty of a director to the company extends to a
shareholder so as to entitle him to be informed of all the important decisions
taken by the Board of Directors. Such a broad proposition of law, if
understood to have been laid down in Dale and Carrington, would be
inconsistent with the duty of a director vis-`-vis the Company and the settled
law that the statutory duty of a direction is primarily to look after the interest
of the company.
In Bajaj Auto Ltd. Vs. N.K. Firodia and Another etc. [(1970) 2 SCC
550], the Court was concerned with the discretionary exercise of power by
the Directors in terms of Section 111(3) of the Companies Act. In the light
of refusal by director to register a transfer, the Court held that it is necessary
for the directors to act bonafide and not arbitrarily in the following terms:
"12. Article 52 of the appellant company provided
that the Directors might at their absolute and
uncontrolled discretion decline to register any
transfer of shares. Discretion does not mean a bare
affirmation or negation of a proposal. Discretion
implies just and proper consideration of the
proposal in the facts and circumstances of the case.
In the exercise of that discretion the Directors will
Act for the paramount interest of the company and
for the general interest of the shareholders because
the Directors are in a fiduciary position both
towards the company and towards every
shareholder. The Directors are therefore required
to act bona fide and not arbitrarily and not for any
collateral motive."
(emphasis supplied)
This Court therein also applied the bona fide test of the Director and
for the benefit of the company as a whole. In that case, the directors
assigned reasons which were tested from three angles view, viz., (i) whether
the directors acted in the interest of the company; (ii), whether they acted on
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a wrong principle; and, (iii) whether they acted with an oblique motive or for
a collateral purpose. It was observed in M/s. Harinagar Sugar Mills Ltd. Vs.
Shyam Sunder Jhunjhunwala & Others [(1962) 2 SCR 339] that the action of
the directors must be set aside if the same was done oppressively,
capriciously, corruptly or in some other way malafide. In this case, this
Court is not faced with such a situation.
In Coleman and Others Vs. Myers and Others [(1977) 2 NZLR 225]
the gist of the complaint made by the appellants against the first respondent
was that he planned to acquire total control of the company at virtually no
cost to himself by means of selling the Strand-Coburg and other properties
of the company and making use of its liquid capital reserves; that his inside
knowledge of the company's affairs and the advice he obtained showed him
that there were good prospects of accomplishing this, leaving him sole
owner of an unencumbered asset worth some millions; and that he not only
refrained from disclosing to the shareholders generally his plan and the
magnitude of his potential gain, but also made misrepresentations tending to
conceal the plan.
In the aforementioned factual backdrop while holding that mere status
of a company director would not create any responsibility towards a
shareholder but it was observed that the standard of conduct required from a
Director in relation to dealings with them will depend upon all the
surrounding circumstances and the nature of responsibility which in a real
and practical sense he has assumed.
In Pennington's Company Law, at page 609, on Coleman (supra), it is
commented:
"It is uncertain whether this reasoning can be
extended to other situations where directors owe
duties to the company but the relevant decision has
to be made by its members individually or
collectively, and the directors advise them as to the
decision they should make. Such situations would
include a proposed sale or disposal of the
company's assets and undertaking, a proposed
merger or division of the company, a proposed
reorganization of the company's share capital
affecting existing members and a proposal for the
voluntary liquidation of the company."
No law in absolute terms, thus, had been laid down therein. In the
instant case, there had been no transaction of sale and purchase of shares
between the director and the shareholder.
The said decisions, therefore, have no application in the instant case.
In a way it instead of supporting the contention of Mr. Desai, counters his
views.
It is interesting to note that in Needle Industries (supra), this Court
said even in certain cases the Directors attempt to maintain their control over
the company or in newly acquiring may not amount to abuse of their
fiduciary power stating:
"Applying this principle, it seems to us difficult to
hold that by the issue of rights shares the Directors
of NIIL interfered in any manner with the legal
rights of the majority. The majority had to
disinvest or else to submit to the issue of rights
shares in order to comply with the statutory
requirements of FERA and the Reserve Bank's
directives. Having chosen not to disinvest, an
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option which was open to them, they did not any
longer possess the legal rights to insist that the
Directors shall not issue the rights shares. What the
Directors did was clearly in the larger interests of
the Company and in obedience to their duty to
comply with the law of the land. The fact that
while discharging that duty they incidentally
trenched upon the interests of the majority cannot
invalidate their action. The conversion of the
existing majority into a minority was a
consequence of what the Directors were obliged
lawfully to do. Such conversion was not the
motive force of their action."
No argument in this case was advanced as regard the purported breach
of fiduciary duty on the part of the Appellant No. 1 in the matter of increase
of shares during the life time of FRG before the learned Single Judge; on the
other hand it was admitted that FRG during his life time was controlling the
company, and, thus, the Appellants herein in no way can be held to have any
fiduciary liability towards other shareholders in respect of issuance of 6475
shares in their favour.
Directors may have a fiduciary duty where a take over bid is made for
a company and its directors advise its shareholders whether to accept or
reject the bid as they owe a duty to advice honestly. The standard of
conduct expected of a director in relation to transaction with the
shareholders will differ and would necessarily depend upon the
circumstances and the nature of the responsibility.
It is, thus, not possible to lay down a law which will have universal
application. No authority has been brought to our notice which states that
there exists a duty in a director to advise the shareholder as to whether they
should purchase the share of the company or avail the benefit of an offer. In
an appropriate case, a fiduciary relationship may come into being having
regard to the responsibility undertaken by the directors towards the
shareholders by way of a special contract.
The law which emerges from the discussions made hereinbefore is
that the directors do not have any fiduciary duty to advice shareholders as to
when and in what manner they should enter with the transactions with the
company including acceptance of offer of additional shares. Such a
fiduciary duty would arise inter alia in exceptional situations when the
directors take upon themselves the task of advising the shareholders who
may be his family members or when a transaction of purchase or sale is
entered into by and between the director and the shareholders wherein the
former taking undue benefit or having ill or improper or ulterior motive or
malafide act solely to make pecuniary benefit and gain for himself and to the
detriment of such shareholders. If a general fiduciary duty of a director vis-
`-vis shareholders is laid down the same would lead the directors to the risk
of multiple legal actions by dissenting minority shareholders.
BURDEN OF PROOF:
According to Mr. Desai, however, the burden to prove his bona fide
was upon the Respondent No.1. The learned counsel in support of the said
contention has referred to Section 111 of the Evidence Act and also relied
upon a decision of this Court in Krishna Mohan Kul Alias Nani Charan Kul
and Another Vs. Pratima Maity and Others [(2004) 9 SCC 468]. In Krishna
Mohan (supra), this Court was considering a transaction resulting in
execution of a deed of settlement by one Dasu Charan Kul. The said deed
was executed in presence of the witnesses although they were not in
existence. The executant in that case was more than 100 years of age. He
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was paralytic and his mental and physical conditions were found to be not in
order. Though his left-thumb impression was stated to have been affixed on
the document, there was no witness who could substantiate that he had in
fact put his thumb impression.
In the aforementioned fact situation, provisions of Section 111 of the
Indian Evidence Act was invoked holding that the burden of establishing
perfect fairness, adequacy and equity is cast upon the person in whom the
confidence has been reposed and the rule applies to all persons standing in
confidential relations such as agents, trustees, executors, administrators,
auctioneers, etc. It was, however, clarified that in term of Section 111 of the
Evidence Act, the person concerned should have been in a position of active
confidence where fraud is alleged.
In this case no transaction took place between the parties and, thus,
the ratio of Krishna Mohan (supra) is not applicable to the fact of the present
case. In view of our findings that having regard to the nature of transactions
as the Appellant No. 1 did not have any fiduciary duty towards the
contesting Respondents, the question of invoking the provisions of Section
111 of the Evidence Act does not arise in the instant case.
In Regal (Hastings) Ltd. Vs. Gulliver and Others [(1967) 2 AC 134],
an action was brought by the Appellants therein against the Respondents
who were defendants to recover the amount specified therein towards profits
made by them upon the acquisition and sale by them of shares in the
subsidiary company formed by the Appellant. The said action was also
brought against the company's solicitor for recovery of the amount specified
therein being profits made by him in similar dealings in the shares. The
action was based on claim for damages and misfeasance and for negligence
on their part. It is in that situation, the doctrine of trust was applied. In the
fact of the present matter neither a case of trust nor negligence nor
misfeasance has been made out.
The ratio which can be carved out from this case is that the Directors
must not derive personal profit from information acquired by them as
Directors. Such is not the case here.
In Needle Industries (supra), this Court observed that Section 397
"warrants the court in looking at the business realities of the situation and
does not confine them to a narrow legalistic view". For the said purpose, the
test required to be adopted is the true character of the company. The initial
burden was upon the Respondent No. 1 but nothing had been shown so as to
hold that the burden shifted to the Appellants herein.
ISSUE OF ADDITIONAL 15000 SHARES AND 6475 SHARES TO THE
APPELLANTS :
An Extraordinary General Meeting of the GIC was to be convened
pursuant to the Board meeting dated 10.11.1987 wherein a resolution was
adopted in the following terms:
"Resolved that an Extra-Ordinary General Meeting
of Gaekwad Investment Corporation Private
Limited be convened to consider increase/ issue
the capital of the company on Thursday the 17th
December 1987 at 11.00 A.M. in the registered
office of the company."
Pursuant to or in furtherance of the said resolution an Extraordinary
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General Meeting of the GIC was held wherein a resolution was passed to
increase the equity shares by 25000 shares at the rate of Rs.100/- to the
members of the company in the following terms :
"Resolved that Clause \026 V of the Memorandum of
Association of Gaekwad Investment Corporation
Private Limited be changed as under:-
That the authorised capital of the company shall
consist of Rs. 1,00,00,000/- (Ruepes One Crore)
divided into 25,000 equity shares of Rs. 100/- each
and 75,000 four percent Non-cumulative
Irredeemable Preference Shares of Rs. 100/-
Resolved that capital clause of the Articles of
Association of Gaekwad Investment Corporation
Private Limited be changed as under:-
That the Authorised Capital of the Company shall
consist of Rs. 1,00,00,000/- (Rupees one crore)
divided into 25,000 equity shares of Rs. 100/- each
and 75,000 four per cent Non-cumulative
Irredeemable Preference Shares of Rs. 100/- each.
Further Resolved that the Board of Directors of the
Company be and is hereby authorized to issue
25,000 equity shares to any members they deem
fit.
Further Resolved that in the event of the company
being wound up on reduction of capital or
otherwise the holders of the said Irredeemable
Preference Shares shall be entitled to the surplus
assets of the company applied in the first place in
repaying to them the amount paid up on the
irredeemable preference shares held by them
respectively but shall not be entitled to any further
participation in such surplus assets. In case of
reduction of capital of the equity share capital, the
holders of equity capital shall not be entitled for
repayment unless consent of the irredeemable
preference share holders is obtained.
Further Resolved that the holders of the said
preference shares shall not have any right to vote
on any resolution placed before the company
unless if directly affects the rights attached to their
preference shares even if the dividend is not paid
for any number of years, however, will have a
right to vote only on those resolutions which will
affect their interests."
However, on 8.1.1988, the Board decided to issue 15000 shares out of
25000 shares to its members at that time. On or about 12.2.1988, a notice
was issued asking the members for acceptance and remit cheque covering
the full amount as regard shares allotted to them in three weeks, i.e., by 10th
March, 1988.
Issuance of the aforementioned notice is not disputed. The Appellant
No. 1 herein in the company petition filed by Respondent No. 1 alleged that
prior to the Managing Committee meeting a Board meeting was also held.
Similar assertion was made in his affidavit dated 11.4.1992 in C.P. No. 7 of
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1992. Reference to the Managing Committee meeting, however, was not
made by the Appellant No. 1 in his affidavit dated 10.12.1992 in C.P. No. 13
of 1992, but it is of not much consequence as would appear from the
discussions made hereinafter. However, it appears that with a view to give
effect to aforementioned letter dated 12.2.1988, a meeting of the Board of
Directors was held on 13.2.1988 wherein FRG was present. In the said
meeting, the following resolution was adopted:
"(2) The Board confirmed the minutes of the
Directors Meeting held on 8th January, 1988.
(3) It was reported to the Board that necessary
action has been taken on the Agenda of the Board
Meeting held on 8th January, 1988.
(4) The Financial Position of the Company was
discussed at length. The Board was informed that
letters have been addressed on 12th February 1988
to the shareholders informing them that the
company has issued 15000 equity shares of Rs.
100/- each to the members and to convey their
acceptance on or before 10th March 1988. The
company would know the amount, the company
would receive from them."
The said meeting bears the signature of the Secretary to the Chairman.
However, although in her original pleadings the factum of issuance of such
circular letter dated 12.2.1988 had not been denied or disputed but in her
rejoinder to the reply, she said so. The said stand apparently was taken by
way of afterthought and, thus, cannot be accepted.
We, moreover, do not see any reason to come to the conclusion as has
been done by the Division Bench of the High Court that the said meeting
was not held at all. The Company being a family company, the minutes of
the said meeting, which bear the signature of the Appellant No. 1 herein,
should not be discarded.
In the pleadings, it was accepted, as would appear from the
discussions made hereinafter, that a decision had been taken to broad-base
the company by the Board of Directors during the life time of FRG himself
who participated in the meetings. His Secretary had furthermore endorsed
the draft minutes of one of the meetings which was in the handwriting of
N.K.K. Mohammed and the Chairman (FRG) had okayed the same. The
said draft minutes are annexed to the company petition of the Respondent
No.1 herself. Further Mr. M.N. Khade, Company Secretary had confirmed
the facts relating to the issue of allotment of 15000 shares.
The 31st Annual General Meeting of GIC held on 30th September,
1989 in this situation assumes importance. In the said meeting the annual
accounts together with Directors Report and Auditors Report for the year
ended 31st March, 1989 were discussed at length and the following
resolution was passed:
"Resolved that the Directors Report and the
Audited accounts of the Company for the year
ended 31st March 1989 placed before the meeting
be and the same are hereby received and adopted."
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The minutes of this meeting were signed by Mr. P.U. Rana, Director
of the Company.
It appears that Balance Sheet as on 31.3.1989 clearly indicated the
issue of additional equity share capital being 10,5000 equity shares of Rs.
100 each. The amount of loan of Rs. 15 lakhs from Shantadevi is clearly
shown under unsecured loans, remaining amounts have also been advanced
to the company by way of loan. No dispute was raised in the said meeting
as regard the aforementioned transactions.
Furthermore, Annual Return of this meeting held on 30th September,
1989 was filed before the Registrar of Companies, Gujarat at Ahmedabad on
30.11.1989. Mr. H.A. Shinde wrote a letter to Registrar of Companies. The
Annual Return was signed by Mr. P.U. Rana and Mr. H.A. Shinde. The
details of equity shareholding reflected in the Annual Return was as follows:
Sr.
No.
Name
Equity Shares
1.
Smt. Shantadevi Gaekwad
7
2.
Shri F.P. Gaekwad
323
3.
Late Smt. Padmavatidevi Gaekwad
20
4.
Shri R.P. Gaekwad & Shri S.R.G.
10
5.
Capt. V.S. Hazare
10
6.
Shri Shivrajkuar Khacchar
1
7.
Smt. Pramilabai Hazare
10
8.
Shri Vimalaraje Gaekwad
1
9.
Smt. Shubhangini R. Gaekwad
30
10.
Smt. Lalitadevi Kirdatt
5
11.
Smt. Mrunalinidevi Puar
1010
12.
Smt. Pramilaraje of Jasdan
4
13.
Smt. Asharaje Gaekwad
1505
14.
Smt. Devyanidevi Gaekwad
1
15.
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Shri Ajitsinh Gaekwad
1
16.
Smt. Mrunalinidevi Puar & Shri R.P.
Gaekwad
5
17.
Smt. M. Puar & Smt. Shantadevi G.
4
18.
Shri Ajaysinh Ghorpade
1
19.
Smt. Vasundraraje Gorpade
1
20.
Shri Sangramsingh Gaekwad
2001
21.
Shri S.P. Gaekwad H.U.F
1475
22.
Shri S.P. Gaekwad \026 F&NG of Shri
Pratapsinh Gaekwad
2750
23.
Shri S.P. Gaekwad \026 F&NG of
Priyadarshini Gaekwad
1750
Total Shares
10,925
Thus, the above allotment of 10500 equity shares was confirmed and
accepted in the 31st Annual General Meeting of GIC. All disputes which are
now being raised about the issue of additional capital of 10,500 equity shares
cannot be raised since the allotment is confirmed/ ratified in the said Annual
General Meeting. We would, however, deal with the question as regard
validity of allotment of 3000 shares in favour of the appellants and 500
shares allotted in favour of the Respondent No.12 separately.
Furthermore, taking a view of the admitted unequivocal stand taken
by Respondent No.1 as also by Respondent No. 12 in Company Petition No.
7 of 1992, the High Court was not correct in holding that the party should be
relegated back to the same position as if no additional shares other than 425
shares were issued and in that view of the matter the reliefs granted by the
Division Bench appear to be self-contradictory and inconsistent with each
other. If the only relief to which the Respondent Nos. 1,12 and 13 became
entitled to that all additional shares over and above 425 original shares
should be directed to be cancelled, the question of Respondent No. 1's
entitlement to further 8000 shares from the additional 15000 shares would
not arise. Her claim in this behalf is not only wholly inconsistent but also
self-destructive.
It is difficult to believe that the contesting respondents herein were not
aware of the decision of the Board of Directors to broad-base the company
and allotment of 8000 shares in favour of FRG out of the same.
Mr. Desai assails the findings of learned Single Judge contending that
if FRG was not inclined to subscribe to 8000 shares kept apart for him, there
was absolutely no reason as to why he should acquire 22 shares belonging to
the following:
"Shri Ashokraje Gaekwad 1
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Shri R.V. Dhaibar 10
Smt. Kusum Desai &
Shri Dilip Desai 5
Shri Dilip Desai &
Smt. Kusum Desai 5
Shri M.N. Khade 1"
All the aforementioned shares are held by the outsiders.
The very fact that the Board had approved the transfer of
aforementioned 22 shares is also indicative of the fact that had FRG been
interested in subscribing 8000 shares, he would have applied and paid the
requisite amount therefor and as he did not take any such step, it is difficult
to hold that the offer became a firm one.
Furthermore, the very fact that some outsiders have transferred shares
in favour of FRG also belies the argument of Mr. Desai to the effect that the
intrinsic value thereof was Rs. 1 lakh or 2 lakh per share. Had this been so,
there was no reason for the outsiders to transfer their shares in the name of
FRG.
It was, therefore, not a case where FRG would try to consolidate his
position by purchasing 22 shares. Some other considerations therefor must
have weighed with him. One of them may be that he intended to oust the
outsiders. FRG admittedly was Chairman of the company till his death. No
dispute was raised by any member as regard allotment of shares during his
life time. The findings of the Division Bench that he had full interest in the
company shares may not be correct inasmuch as had that been the position,
he would have definitely opted for allotment of 8000 shares in his name. In
any event, he would have opposed allotment of 7500 shares in the name of
Appellant and Respondent Nos. 12 and 13 if he intended to consolidate his
position as had been opined by Division Bench of the High Court.
It is not necessary for us to dwell at length the question as to whether
there had been an express renunciation by FRG in relation to 8000 shares
allotted to him as the letter dated 11.6.1988 purported to have been written
by Shri Khade to the Appellant No. 1 is disputed. Even if we proceed on the
basis that there had been no express renunciation by FRG as regards 8000
shares allotted in his favour, there may not be any doubt whatsoever that in
law, having regard to the fact that he acquired only a personal interest
therein, the same came to an end with his death.
In absence of any documentary evidence, it is also difficult for us to
accede to the contention raised on behalf of the Respondents herein that the
Respondent Nos. 1 and 12 advanced a sum of Rs. 15 lakhs each without any
interest and, thus, they were in a position to purchase 8000 shares. The fact
remains that the same had not been done. The fact remains that
advancement of loan by both Respondent Nos. 1 and 12 whether with or
without interest stands accepted, which was done in November, 1988.
However, the question as to whether an interest of 14% per annum was
payable thereon or not is in dispute. According to the Appellants, however,
TDS had been deducted on the interest amount and the certificates had been
issued by GIC. There is also no gainsaying that at least Mrs. Puar was
having full knowledge as regards floating of additional shares. She even in
her affidavit did not explain as to under what circumstances she had applied
for allotment of only 1000 shares and not more. It is inconceivable having
regard the tenor of her letter of May 1988 that she was asked the Appellant
No. 1 to send a sum of Rs. 1,00,000/- towards purchase of share by
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Appellant No. 1 and she complied with the said request without knowing the
implication thereof.
There is no allegation (much less proof) that she even made inquiries
as regard the status of allotments. She being the managing director of a
subsidiary of GIC, it is difficult to believe that she was entirely oblivious to
the share issue of GIC having a very small capital base of 425 shares.
She had moreover sent two cheques of Rs. 80,000 and Rs. 20,000
respectively being dated 23rd March, 1988 and 10th May, 1988 and thereby
categorically opted to purchase 1000 shares. There is no mention in the said
letter that such offer was made at the instance of the Appellant No. 1 herein.
It is not uncommon to advance loan on interest in preference to purchase of
shares as a person may be certain about the return of money vis-`-vis the
uncertainty as regard purchase of shares as in the case of latter, the person
investing in the shares may lose if not entirely, to some extent. Similarly,
the question as to why the Appellants herein did not advance any loan to the
Company is again a matter of not much consequence, particularly, when the
parties have not been examined on oath. It is furthermore not necessary for
us to dwell at length the submissions of Mr. Desai as regard effect of
absence of any notice of closure.
It is futile to go into the question as to whether 14% interest was to be
paid on the amount of loan as admittedly Respondent Nos. 1 and 12
advanced the said amount by way of loan only. Only at a later stage, a claim
was laid to utilize the amount towards the purchase of 8000 shares.
Significantly, although the Respondent No. 1 participated in the
family meeting dated 23.3.1988 and had received the letter of offer dated
12.2.1988, did not opt for any share. As indicated hereinbefore, she had not
claimed for allotment of any share even after the death of FRG which took
place on 1st September, 1988. Even in November, 1988, she even did not
subscribe for rights issue of BRC and in fact renounced such offer as had
been admitted in her rejoinder affidavit filed in Company Petition No. 51 of
1991 to the reply filed by the Appellant No. 1 herein. In the said rejoinder, a
story was made out for the first time that such renounciation was made so
that BRC equity shares can be purchased by the family in the name of such
persons as was decided.
In view of our findings that the Respondent No. 1 is estopped and
precluded from questioning the allotment of 6475 shares to the Appellant
herein. It may not be necessary for us to go into the details of alleged
inconsistencies and contradictions in the three minutes of the meetings as
also alleged three different versions of the Appellant No. 1 herein.
Suffice it to point out that the Appellant No. 1 alone is not guilty, if at all, of
taking inconsistent plea. The contesting Respondents are also guilty to that
effect in equal measures. The Respondents herein, as discussed
hereinbefore, have taken not only contradictory stand and inconsistent pleas
but also prevaricated the same from stage to stage. Even before us different
contentions have been raised which were not raised before the learned Single
Judge nor were pleaded in the company petition.
It must also be placed on records that in the written submissions,
several contentions have been raised which were not raised in oral
submissions.
Moreover, the Respondent No. 12 was given power of attorney by the
Respondent No. 1.
A transaction by a lady who is illiterate or a purdah-nashin and a
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transaction by a lady who looks after the family business/family property
would be differently viewed. She, being the Managing Director of Alaukik,
a subsidiary company of GIC would be presumed to know the affairs of the
Company as Alaukik on her own showing would be vitally affected by the
rights issue.
She also chaired a meeting of the Company on 12-10-89
It is, therefore, clear that the dispute was raised despite full knowledge
about allotment of shares by different persons only after the Respondent No.
12 got 1500 shares of Alaukik allotted in her name as a result whereof the
suit No. 675 of 1990 was instituted.
Even in the prayer portion, no relief has been prayed for to set aside
the transfer, recession as regard allotment of 6475 shares.
In Paragraph (2) while dealing with the contentions of the
Respondents purporting to be as regard alleged false statement relating to the
issue of 15000 shares and related aspects, the Appellants herein had given in
great details the manner in which:
(i) the company was being managed;
(ii) holding of Board meeting on 10th November, 1997 which was
attended by FRG, Appellant No. 1 and Mr. P.H. Chinoy wherein it was
resolved that an Extra-Ordinary General Meeting be convened on 17th
December, 1987 to consider the increase/ issue of capital of the company .
(iii) holding of Extra-Ordinary Genreal Meetng of the Company on 17th
December, 1987 chaired by Mr. P.U. Rana and attended by Mr. Shinde and
Mr. M.N. Khade wherein the financial position of the company in the
absence of dividend income was discussed and resolution was adopted that
company would issue 25000 equity shares to any members as the Board of
Directors deem fit and subsequent thereto and as consequence of the
authority given by the shareholders to raise capital, a Board Meeting of the
Company was held on 8th January, 1988 wherein Appellant No. 1, Mr. P.H.
Chinoy, Mr. P.U. Rana were present and after discussion, it was resolved
that 15000 equity shares of Rs. 100 each be issued at par to the members of
the company.
(iv) The issuance of a circular letter dated 12.2.1988 pursuant to or in
furtherance of the said resolution to all members of the company.
But in para 10 of her reply to the said affidavit, Respondent No. 12
stated:
"What is stated in Paras II 2(ii)(iii)(iv) & (v) of the
affidavit in reply is broadly true except that Shri
Khade was not only then the Company Secretary
of Respondent No. 6 Company but still continues
to be the Company Secretary."
The Respondent No. 1, therefore, accepted and admitted the
allegations made by the Appellant No. 1 herein by reason of non-traversal of
the said pleadings.
It is interesting to note that the Respondent No. 1 in her rejoinder
categorically stated that everybody received the circular letter and even
Appellant No. 1 did not apply for the shares pursuant thereto but the same
had not been replied to.
In the aforementioned situation, in our considered opinion, she cannot
now be permitted to turn around and contend that there was no requirement
to raise any fund or there was no valid reason to increase the capital of GIC
by issues of shares.
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Once it is held that the decision to issue 15000 additional shares was
validly taken, out of which 6475 shares were allotted to the Appellants, the
Appellants were in majority. Furthermore, there does not appear to be any
reason as to why the Respondents herein despite knowledge did not object
thereto.
No sufficient material has been brought on records to satisfy us that
the minutes of the said Board meeting dated 13.2.1988 was a forged and
fabricated one. However, it is not disputed that no offer was received upto
10th March, 1988. The stand of the Appellants herein is that the said date
was later on extended. However, on 21.3.1988 6475 shares were allotted in
terms of the said Resolution to Appellant No. 1 herein, 8000 shares were
allotted to FRG, 500 shares to Mrs. Mrunalini Devi Puar and 25 shares to
Mrs. Shubhangini Raje. Furthermore, it was an adhoc allotment and not a
confirmed one.
Let us now consider the effect of three draft minutes of meetings
which are placed on records by the parties.
Admittedly, on 21.3.1988, a meeting was held. Draft minute No. 1,
although was unsigned and sent with a covering letter of Mr. Khade on or
about 29.3.1988 in the following manner:
"The Committee considered the allotment of 15000 Equity Shares of Rs.
100/- each of the Company recently offered to the members. After
discussion the allotment was decided as under:
S.No.
Name
No. of Shares
Value of Shares
1.
Shrimant
Fatesinh
Gaekwad
8000
8,00,000/-
2.
Shrimant
Sangramsingh
Gaekwad
6475
647500
3.
Shrimant
Mrunalinidevi
Puar
500
50,000
4.
Shrimant
Shubhanginiraje
Gaekwad
25
2500
Total
15000
15,00,000/-
The Shares would be allotted as and when the amounts are received. As
there was no other business the meeting terminated."
The second draft minutes of the meeting are as under:
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"Total number of shares to be allotted worth Rs. 15 lakhs, i.e., 15000 at Rs.
100/-
Requisitions so far
1.
Chairman
8000 shares
Rs. 8,00,000/-
2.
Maharani of Dhar
500 shares
Rs. 50,000/-
3.
Princess Subhangini Raje
Gaekwad
25 shares
Rs. 2,500/-
4.
Sangramsinh P. Gaekwad
and others
6475 shares
Rs. 6,47,500
Total
15000 shares
15,00,000/-
The Shares will be allotted in the names asked for by the above parties."
This is the purported first version.
The third draft is said to be in the following terms:
"A Committee Meeting of Gaekwad Investment
Corporation Pvt. Ltd. was held on 21st March,
1988 at 3.00 PM at Hoechst House, Nariman
Point, Bombay \026 400021
Present: 1. Shrimant Sangramsingh Gaekwad
2. Shri P.H. Chinoy
Shri Sangramsingh Gaekwad was in the Chair. In
terms of the Resolution passed at the Board of
Directors meeting held on 8.1.1988 for issue of
15000 Equity Shares of Rs. 100/- each of the
Company offer letter dated 12th February, 1988
have been sent to the Shareholders of the Company
requesting them to convey their acceptance for the
number of shares they would like to subscribe
alongwith their cheques for the full amount of
Share. Subscription accepted by them. Out of
these additional Equity Shares it is decided to issue
51% additional Equity Share Capital to Lt. Col.
Dr. Fatehsinghrao Gaekwad and the balance 49%
to be issued to the existing members depending on
the offer accepted by them. In case the existing
members do not subscribe to the additional Share
Capital offered to them in terms of the letter of
offer dated 12th February, 1988 sent to all the
members of the Company, it was decided to offer
these Equity Share Capital remaining unsubscribed
to the persons as the Committee deems fit. As
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there was no other business, the meeting
terminated.
Sd/- Chairman"
The apparent difference between the first and second versions of the
meeting is that whereas the words "and others" appear after the words
"Chairman, Sangramsingh Gaekwad", in the second one the same is missing.
However, having regard to the endorsement made therein; the genuineness
whereof has not been doubted or disputed; and, moreover, as in sum and
substance the contents of both the meetings are same, the fact that 6475
shares were allotted to Sangramsingh Gaekwad, the Appellant No. 1 herein
is beyond any doubt particularly when such a fact stands admitted by the
Respondent No1. in the company petition itself.
The purported third minute, however, had been filed by Mrs. Puar in
her company petition, the correctness whereof is in question. Even in the
second draft of the minutes of meeting, however, it was mentioned that the
shares will be allotted in the name asked for by the above parties and, thus,
there may not be in variance of substance in the two drafts.
According to Mrs. Shandadevi Gaekwad, Respondent No. 1 herein
and others, it was a family meeting (para 6.5 of the company petition). She
has also annexed the draft minutes of the meeting with the said petition and
further annexed allotment ratio discussed at the meeting. The draft minutes
forwarded by Mr. M.N. Khade had also been annexed in the company
petition. It may, therefore, be safe to opine that the purported family
meeting was in fact a Board meeting of which the parties were fully aware
of. The minutes of the said meeting clearly suggest that the shares were to
be allotted if an offer to that effect was made together with the tender of
value thereof whereupon the shares would be allotted in the names of the
persons as asked by the above parties. Liberty, thus, was given to all the
parties named in the said minutes of the meeting to either apply for shares in
their own names or in the names of any other person of their choice. In that
view of the matter, the words written by hand "and others" as contained in
the first draft of the meeting may not be of much significance.
Furthermore, as noticed hereinbefore, the said draft minute was sent
by Mr. M.N. Khade with a covering letter. In the company petition, the
issuance of the said letter and the ratio of allotment having not been denied
or disputed, we have to proceed on the basis that the contents of the said
minutes of meetings are correct. Even in law, shares can be allotted as and
when the amounts were received. Admittedly, all the family members had
participated in the issue even if the last date of offer dated 10.3.1988 had
expired. The restriction as regard time of allotment, thus, may not be of
much significance.
Another aspect of the matter also cannot also be lost sight of. 6475
shares were allotted in the name of the Appellants as also in the names of
SPG, HUF were allotted between April and June, 1988. Mrs.
Shubhanginidevi Gaekwad was allotted 25 shares and Mrs. Puar was allotted
1000 shares on or about 30.5.1988. All the share certificates had been
issued which bear the signatures of Appellant No. 1 and Mr. H.A. Shinde,
Directors of Company and countersigned by Mr. M.N. Khade. It is apparent
from the records that Shri Shinde and Shri Khade are now siding with the
Respondents and have filed affidavits in support of their case. It is also of
some significance to note that out of two cheques of Rs. 80,000 and Rs.
20,000 issued by Respondent No. 12 for purchase of 1000 shares, one is
dated 23rd March, 1988 and the other is dated 10th May, 1988. It is,
therefore, difficult to accept having regard to the aforementioned fact
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situation that the Respondent No. 12 was not aware of the affairs of the
company. If she had no knowledge about the issue of the shares, we wonder
how she could draw a cheque in March, 1988. We, therefore, are of the
opinion that in relation to allotment of 7500 shares, Mrs. Puar and Mrs.
Shubhanginidevi Gaekwad are estopped and precluded from questioning the
allotment having received the benefit thereof and having full knowledge
thereabout all along.
An attempt has been made by Mr. Desai to show that some
contradictory and inconsistent statements have been made by the Appellant
No. 1 herein in his affidavits dated 21st March, 1991, 10th April, 1992 and
10th December, 1992.
For the views we have taken, it is not necessary to go into the said
question as also the question as to whether in fact time for actual payment
towards allotment of shares had been extended or not.
Shantadevi in her company petition categorically stated that prior to
filing of petition under Sections 397 and 398 of the Companies Act, she
made inspection of the records of the company and obtained notorised copy
thereof on 10th December, 1990. At the time of filing the said company
petition concededly she had complete knowledge of the affairs of the
company as reflected from the documents maintained at the Registered
Office of the Company. On her own showing, Mr. P.U. Rana who was a
director of the company had at her request gave her inspection of the
registers including company registers, minute book, share registers, etc.
Relying on or on the basis of the said documents, Respondent No. 1 herein
categorically stated:
"(6.5) It was decided and agreed in the said family
meeting and also subsequently in a meeting of the
Company's Board of Directors, that out of the
15,000 equity shares, 8000 equity shares would be
allotted to Shri Fatehsinhrao Gaekwad, 500 equity
shares to Shrimati Mrunalini Devi Puar, the sister
of Shri Fatehsinhrao Gaekwad, 25 shares to
Princess Shubhangini Raje and 6475 shares for
Shri Sangramsinh Gaekwad, the First Respondent
herein."
Despite such categorical admissions in the pleadings, a statement was
made across the bar that at the time of filing of the Company Petition the
Respondent No. 1 herein did not have all informations which came to light
at a much later stage. It was urged that only with a view to obtain complete
reliefs, prayers made in the company petition were amended and reliefs had
been granted by the High Court keeping in view the pleadings and affidavits
filed by the parties in all the three matters. We have our own doubts how far
the procedure adopted were correct when in a case of oppression the court
must strictly go by the pleadings made in the application. The provisions of
the Civil Procedure Code do not envisage that pleadings in any other case
should be the basis for grant of relief, particularly, when the plea taken in
both the petitions are contradictory and inconsistent with each other. Before
us affidavits from different proceedings made by the same person or by the
other supporting or opposing the application have been placed. They have
not been cross-examined. Their attention had not been drawn to their earlier
statements which could be done only in terms of Section 145 of the
Evidence Act. With the view to elicit the truth the court must have before it
a clear picture. In this case, unfortunately, the parties herein have not made
any efforts to examine themselves in court so as to enable the other side to
cross-examine them. Had the parties to the proceedings been examined and
cross-examined, the could have been confronted with the earlier statements
made by them in another affidavit.
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In Needle Industries (supra), this Court has frowned upon such
practices.
Similarly, Mrs. Puar in her rejoinder to the counter-affidavit filed by
the Appellants herein in Company Petition No. 7 of 1992 accepted that
during the life time of FRG and to his knowledge, a decision to broad-base
company by issuing 25000 shares out of which 15000 at the first instance
was taken. It also stands admitted from one or the other minutes of meetings
referred to in her petition that out of the 15000 shares 6475 shares were to be
allotted to the Appellants herein.
In view of the fact that the presence of FRG in the decision making
process to broad-base the company, the authority of FRG as regards control
of the company had never been disputed and his presence in one of the
Board meetings, the plea of issuance of additional shares has sufficiently
been established. A decision to which FRG is a party can only give rise to a
question of oppression on his part and no one else. In any event, such a case
has never been made out that FRG was guilty of commission of any acts of
oppression or mismanagement had been committed while he was the
chairman of the company.
We are, therefore, of the opinion that the Respondent No.1 failed to
substantiate the charge of oppression on the ground of issuance of 6475
shares in favour the Appellants.
CLAIM OF THE FIRST RESPONDENT IN RESPECT OF 8000
SHARES :
The First Respondent herein claimed 8000 shares evidently relying on
or on the basis of such allotment on the sole ground that on the death of
FRG, the same was inherited by her as a Class-I heir. She raised a grievance
only as regards allotment of 3000 shares to the Respondents Nos. 3 and 4
herein, as would appear from a perusal of the allegations made in the
company petition and on a reasonable construction thereof.
The allotments made to the parties including 8000 shares were
provisional in nature and as such shares were to be allotted on payment, as is
evident from the minutes of the meetings. No other person except the
Appellants herein, Mrs. Puar and Mrs. Shubhangini Devi opted for allotment
of shares to the extent of 6475, 1000 and 25 shares respectively.
It is not in dispute that upon demise of FRG, Respondent No. 1
applied for grant of succession certificate on 28.11.1989 wherein she
disclosed the assets of FRG but except for his 22 shares in GIC, no claim for
any other share was made far less her right as regard 8000 shares.
It is also not in dispute that the matter relating to her claim to succeed
FRG as his Class I heir is pending adjudication in Civil Suit No. 725/1991 in
Baroda Civil Court. She claimed title in respect of 8000 shares by
inheritance in terms of Hindu Succession Act. Indisputably, in terms of
Section 15 of the said Act she is a Class I heir but the Appellants herein
contend that the said provision has no application having regard to Section
5(2) thereof as inheritance in the family is governed by the rule of
primogeniture. A pure question of title is alien to an application under
Section 397 of the Companies Act wherefor the lack of probity is the only
test. Furthermore, it is now well-settled that the jurisdiction of the Civil
Court is not completely ousted by the provisions of the Companies Act,
1956. (See Dwarka Prasad Agarwal Vs. Ramesh Chander Agarwal [(2003)
6 SCC 220])
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A dispute as regard right of inheritance between the parties is
eminently a civil dispute and cannot be said to be a dispute as regards
oppression of minority shareholders by the majority shareholders and/ or
mismanagement.
Furthermore, in the said suit when an application for interim
injunction was filed only, a prima facie observation was made to the effect
that the succession was not to be governed by Hindu Succession Act. Such
observations do not constitute a binding decision as no finality is attached
thereto. The matter came upto this Court in S.L.Ps. (C) No. 17018/95 and
17020/95 which were disposed of observing:
"We may also allay the fears of the petitioner
regarding the observations made by the learned
Single Judge of the High Court in his order now
impugned while accepting the appeals against him.
It is made clear that those observations are not
meant to be final, but have obviously been made to
dispose of the claim to temporary injunction which
shall keep confined to that limited exercise without
affecting the merits of the case.
This disposes of the Special Leave
Petitions."
Our attention has been drawn to an interlocutory proceedings in the
suit relating to title, wherein allegedly a prima facie case was not found in
favour of the Appellants herein but this Court is not concerned therewith as
it has been accepted at the Bar that keeping in view of the fact that the
question is subjudice, this Court would not go into the said issue. In fact,
Mr. Desai, learned counsel appearing on behalf of the Respondent No. 1, has
given up the same.
The finding of the Division Bench of the High Court to the effect that
the Respondent No. 1 is entitled to get 8000 shares which was firm allotment
made to FRG is, thus, not sustainable in law.
Moreover, the allotment in favour of the members of the Company
was provisional in nature which would amount to invitation to offer and not
an offer. A right to a share would fructify only when an offer made by the
company is accepted. Only upon acceptance of such offer, a binding
contract comes into being. A right, as is well known, fructifies only upon
conclusion of a contract and not prior thereto. When a share is allotted in
favour of a person as a member of the company, it becomes his personal
right. Such a personal right is not heritable. By reason of a mere provisional
allotment without making any payment therefor no legal right in the shares
was created. It would also be of some interest to note that even initial
allotment of shares cannot be transferred.
In Canbank Financial Services Ltd. Vs. The Custodian and Ors [JT
2004 (7) SC 266], it has been held:
"The allotment of CANCIGOS is not a transfer as
thereby Canbank Mutual Fund had allowed the
shares not as owner thereof. The Benami
Transactions Act applies when there is a
transaction in which the property is transferred. If
allotment of CANCIGOS is not a transfer of
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property, the Act would not apply. [See Sri Raj
Sachdeva Vs. Board of Revenue [AIR 1959 All
595] and The Swadeshi Cotton Mills, Co., Ltd. , In
re. [1932 Comp. Cas 411].
In Madura Mills Co. Ltd., In re. [1937
Comp. Cas 71], Varadachariar, J. stated the law
thus:
"As we have already observed, it is no doubt true
that in the hands of a shareholder, a share is
property and when a shareholder exchanges his
shares with another it may be possible to regard
the transaction as amounting to a transfer whether
by way of exchange or conveyance: Cf. Coats v.
Inland Revenue Commissioners (1897) 2 Q.B.
423. But when the company is for the first time
issuing shares, it seems to us that there is no
question of property already possessed by the
company being thereby transferred to the allottee."
In Needle Industries (supra), this Court opined :
"137. We see no substance in Shri Nariman's
contention that the letter of offer could not have
been sent to the Holding Company without first
obtaining the RBI's approval under Section 19 of
FERA. Counsel contends that under Section
19(1)(b), notwithstanding anything contained in
Section 81 of the Companies Act, no person can,
except with the general or special permission of
the Reserve Bank, create 'any interest in a security'
in favour of a person resident outside India. The
word "security" is defined by Section 2(u) to mean
shares, stocks, bonds, etc. We are unable to
appreciate how an offer of shares by itself creates
any interest in the shares in favour of the person to
whom the offer is made. An offer of shares
undoubtedly creates "fresh rights" as said by this
Court in Mathalone v. Bombay Life Assurance Co.
Ltd. (1954 SCR 117 : AIR 1953 SC 385 : (1954)
24 Com Cas 1) but, the right which it creates is
either to accept the offer or to renounce it; it does
not create any interest in the shares in respect of
which the offer is made."
The Division Bench of the High Court treated the allotment to be a
confirmed one purported to be relating to Regulation 28 of Table A of the
Companies Act. The said provision has no application in the facts and
circumstances of this case.
ISSUE OF 3000 SHARES:
The allotment of 3000 shares, however, stand on a different footing.
The conduct of the Appellants in this regard would call for a closer scrutiny.
There is no proof of express renunciation of his 8000 shares by FRG
in favour of the Appellant.
It is true that the Respondent No. 1 herein although questioned the
allotment of 3000 shares given to the son and daughter of the Appellant Nos.
1 and 2 herein, no such challenge was made as regards 500 shares allotted to
Respondent No. 12. It is also true that the dividend had been paid for the
year ending 31.3.1991 at the rate of 10% and 300% respectively to both
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Respondent Nos. 12 and 13 in respect of 1000 shares and 25 shares held by
them respectively. But this action on the part of the contesting respondents
would not validate the transaction as regard issuance of 3000 shares in
favour of the Appellants.
Even assuming that the children of the Appellant Nos. 1 and 2 became
members, in relation to the shares originally allotted to Fatehsingh Gaekwad,
as was submitted by Mr. Jethmalani, no further circular or notice to the
shareholders about the availability thereof had been issued. Even the
Appellant No. 1 in his affidavit has contradicted himself by making
inconsistent statements.
Furthermore, in absence of any resolution by the Board of Directors,
no offer could be made to the Respondent No. 12 as regard 500 shares out of
8000 shares which were allotted to FRG.
The Appellants herein have utterly failed to prove that there has been
any renunciation of 8000 shares by Fatehsinh Gaekwad or any resolution
was taken in this behalf by the Board. We have grave doubt about the
authenticity of the letter of the Company Secretary of FRG renouncing his
shares. Even allotment of 500 shares in favour of Respondent No. 12 out of
said 8000 shares is invalid. In that view of the matter, the contentions of the
Appellant No. 1 to the effect that his children, Pratapsinh S. Gaekwad and
Priyadarshiniraje S. Gaekwad applied for further 3000 shares through him
and in view of the availability of shares, the Board of the Company decided
to issue and allotted the said 3000 shares to them cannot be accepted. It also
does not appear that the Board of Directors or the Management Committee
took any resolution to allot shares to the other members out of the said 8000
shares.
It is also difficult to accept that efforts had been made by the
Appellant No. 1 to find out if any other member would like to offer
subscription of shares of the company as alleged by him and that efforts had
also been made to find out subscribers for those shares.
We, therefore, are of the opinion that the transactions relating to issue
of 3000 additional shares in the names of the Appellant Nos. 3 to 5 and 500
shares to the Respondent No. 12 out of the 8000 shares originally allotted to
FRG are bad in law.
TRANSFER IGNORING RIGHT OF PRE-EMPTION:
Article 3 of the Company states that the Company is a private
company and the right of transfer is restricted in the manner provided for
therein. Article 4 provides for capital of the Company. Article 5 provides
that the share in the capital of the Company for the time being would be
under the control of the Directors who may allot or otherwise dispose of the
same to such persons in such proportion and on such terms and conditions
and either at a premium or at par or at a discount. Article 6 provides that the
transfer of shares shall be restricted in the manner to the extent provided in
Articles 7 to 15 thereof.
Article 7 of the Articles of Association of the company provides for
embargo in favour of a person who is not a member of a company and thus
postulates the policy of transfer first to a member only.
Article 8 provides for a notice to transfer for a fair value. A transfer
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notice is not revocable except with the sanction of the Directors. Upon
receipt of such notice, if the company finds out a person who intends to
purchase the same, a notice of the Proposing Transferor shall be issued.
Article 10 provides for valuation of shares by the auditors in case of any
difference between the Proposing Transferor and Purchasing Member.
Article 12, however, provides that if the company does not find a Purchasing
Member and give notice in the matter stated in Article 9 with a period of 28
days after being served with a transfer notice, the Proposing Transferor shall
at any time within three months afterwards be at liberty subject to Article 16
thereof to sell the share to any person and at any price.
Article 14 envisages transfer to a member of the family in respect
whereof the embargo contained in Articles 7 to 13 would not apply. Only
when a share is to be transferred by a member to an outsider being a person
of his choice other than those specified in Article 14, the requirements
contained in the aforementioned Articles are required to be complied with.
Article 15 provides for registration of transfer whereas Article 16
empowers the Directors to register any transfer or transmission of a share
without assigning any reason except in a case where the transferee is a
member of the company or in whose favour the transferee has been effected
in terms of Article 14.
Indreni is a wholly owned company of the Appellants. Such a family
company may be considered to be a quasi-partnership. The learned Single
Judge lifted its corporate veil and held that having regard to the nature of the
investment made by the family, the transfer may not be held to be illegal.
However, in law no transfer could be made in favour of a body corporate
having regard to the Articles of Association of the Company.
In any event, when a notice to the company by a member is vitiated,
the same can be withdrawn in law. Furthermore, a transfer in violation of
Article is void [See Palmer's Company Law, 23rd Edition 22-14].
In the instant case, the actual notice of transfer has not been produced.
However, a letter has been brought on record to show that Mr. Khade was
asked to serve the notice to the members of the company which he did not.
Mr. Desai submitted that as notice of transfer had already been issued,
the same become irrevocable which entitled the Appellants to opt for
purchasing the shares on a pro-rata basis. The said submission of Mr. Desai
cannot be accepted as it is not the case of the Respondents that the said
notice was acted upon and the provisions of Articles 9 to 11 had been
complied with.
It may be noticed that in the suits filed by the shareholders against the
Appellant relating to transfer of shares in favour of Indreni, except in suit
No. 872 of 1990, no prayer for pro-rata allotment thereof in favour of other
members had been made.
The contents of the said circular letter appear to be vague inasmuch as
how many shares are proposed to be transferred had not been stated therein.
Furthermore, no action having been taken within a period of 28 days from
the date of issuance of such notice, the proposed transferee is entitled to
transfer the shares to any person of his choice.
It is now well-settled that only one pre-emptive offer is to be made
which is otherwise to be accepted or not at all. The existing shareholders are
not entitled to be given further pre-emptive rights in respect of those
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unaccepted shares. Even such a right can be waived or modified.
In any event, the transfer has been rescinded in terms of the resolution
passed in a meeting dated 9.8.1990. At this stage, it is not necessary to
consider the validity or otherwise of the said meeting as no sufficient
materials except the factum of the payment to Indreni had been brought on
records to show that the said resolution dated 13.7.1990/9.8.1990 adopted by
the Board are forged and fabricated. In any event, it is not necessary to go
into the details of the matter as the three suits filed by the Respondents are
pending in different courts of law.
It has further to be borne in mind that a pre-emptive right is granted in
favour of a member of a private company so that his right of control is not
taken away. Exercise of such pre-emptive rights is particularly needed in
relation to those private companies which are essentially incorporated
partnerships. (See Gower and Davies' Principles of Modern Company Law,
Seventh Edition, page 635)
As the notice of transfer itself was rescinded, we are of the view that
'Indreni' was not required to transfer the said shares back to the Appellants.
In any event, the title in relation to the aforementioned shares is a matter
between the Appellants and the Indreni and the Respondents herein cannot
have any say therein.
For the foregoing reasons, we are of the opinion that the Division
Bench of the High Court committed a serious error in holding that the
transfer by the Appellants in favour of the said Indreni being bad in law, the
members of the company were entitled to allotment thereof on pro-rata
basis.
OPPRESSION AND MISMANAGEMENT:
Sections 397 of the Companies Act reads as under:
397. (1) Any members of a company who
complain that the affairs of the company are being
conducted in a manner prejudicial to public
interest or in a manner oppressive to any member
or members (including any one or more of
themselves) may apply to the Company Law
Board for an order under this section : provided
such members have a right so to apply in virtue of
Section 399.
(2) If, on any application under sub-section (1), the
Company Law Board is of the opinion :
(a) that the company's affairs are being conducted
in a manner prejudicial to public interest or in a
manner oppressive to any member or members;
and
(b) that to wind up the company would unfairly
prejudice such member or members, but that
otherwise the facts would justify the making of a
winding up order on the ground that it was just and
equitable that the company should be wound up;
the Company Law Board may, with a view to
bringing to an end the matters complained of,
make such order as it thinks fit.
Section 398 provides for relief in cases of mismanagement in the
following terms :
"398. Application to Company Law Board for relief in
cases of mismanagement.
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(1).- Any members of a company who complain \026
(a) that the affairs of the company are being
conducted in a manner prejudicial to public
interest or in a manner prejudicial to the
interests of the company; or
(b) that a material change (not being a change
brought about by, or in the interests of, any
creditors including debenture holders, or any
class of shareholders, of the company) has
taken place in the management or control of
the company, whether by an alteration in its
Board of directors or manager or in the
ownership of the company's shares, or if it
has no share capital, in its membership, or in
any other manner whatsoever, and that by
reason of such change, it is likely that the
affairs of the company will be conducted in
a manner prejudicial to public interest or in a
manner prejudicial to the interests of the
company;
may apply to the Company Law Board for an order under
this section, provided such members have a right so to
apply in virtue of section 399.
(2) If, on any application under sub-section (1), the
Company Law Board is of opinion that the affairs of the
company are being conducted as aforesaid or that by
reason of any material change as aforesaid in the
management or control of the company, it is likely that
the affairs of the company will be conducted as aforesaid,
the Company Law Board may, with a view to bringing to
an end or preventing the matters complained of or
apprehended, make such order as it thinks it."
Section 402 of the Companies Act provides for the reliefs which may
be granted without prejudice to the generality of the powers of the court
under the aforementioned provisions
The expression 'oppressive', it is now well-settled, would mean
burdensome, harsh and wrongful.
'Oppression' complained of, thus, must relate to the manner in which
the affairs of the company are being conducted and the conduct complained
of must be such as to oppress the minority members. By reason of such acts
of oppression, it must be shown that the majority members obtained a
predominant voting power in the conduct of the company's affairs.
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. Vs. Union of India
and Others [(1977) 47 Comp. Cases 92] and Syed Mahomed Ali Vs. R.
Sundaramurthy and others [AIR 1958 Madras 587]
But the same would not mean that Section 397 provides for a remedy
for every act of omission or commission on the part of the Board of
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Directors. Reliefs must be granted having regard to the exigencies of the
situation and the court must arrive at a conclusion upon analyzing the
materials brought on records that the affairs of the company were such that it
would be just and equitable to order winding up thereof and that the majority
acting through the Board of Directors by reason of abusing their dominant
position had oppressed the minority shareholders. The conduct, thus,
complained of must be such so as to oppress a minority of the members
including the petitioners vis-`-vis the shareholders which a fortiorari must be
an act of the majority. Furthermore, the fact situation obtaining in the case
must enable the court to invoke just and equitable rules even if a case has
been made out for winding up for passing an order of winding of the
company but such winding up order would be unfair to the minority
members.
The interest of the company vis-`-vis the shareholders must be
uppermost in the mind of the court while granting a relief under the
aforementioned provisions of the Companies Act, 1956. .
Mala fide, improper motive and similar other allegations, it is trite,
must be pleaded and proved as envisaged in the Code of Civil Procedure.
Acts of mala fide are required to be pleaded with full particulars so as to
obtain an appropriate relief.
The remedy under Section 397 of the Companies Act is not an
ordinary one. The acts of oppression must be harsh and wrongful. An
isolated incident may not be enough for grant of relief and continuous course
of oppressive conduct on the part of the majority shareholders is, thus,
necessary to be proved. The acts complained of may either be designed to
secure pecuniary advantage to the detriment of the oppressors or wrongful
usurpation of authority.
In Halsbury's Laws of England, 4th Edition, Volume 7, para 1011, it is
stated:
"1011. Conduct amounting to oppression. In this
context, "oppressive" means burdensome, harsh
and wrongful. It does not include conduct which is
merely inefficient or careless. Nor does it include
an isolated incident: there must be a continuing
course of oppressive conduct, which must be
continuing at the date of the hearing of the petition.
Further, the conduct must be such as to be
oppressive to the petitioner in his capacity as a
member: whatever remedies he may have in
respect of exclusion from the company's business
by being dismissed as an employee or a director,
he will have none under the provisions relating to
oppression.
On the other hand, these provisions are not
confined merely to conduct designed to secure
pecuniary advantage to the oppressors; they cover
the case of wrongful usurpation of authority, even
though the affairs of the company prosper in
consequence."
It has to be borne in mind that when a complaint is made as regard
violation of statutory or contractual right, the shareholder may initiate a
proceeding in a civil court but a proceeding under Section 397 of the Act
would be maintainable only when an extraordinary situation is brought to the
notice of the court keeping in view of the wide and far-reaching power of the
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court in relation to the affairs of the company. In this situation, it is
necessary that the alleged illegality in the conduct of the majority
shareholders is pleaded and proved with sufficient clarity and precision. If
the pleadings and/ or the evidence adduced in the proceedings remains
unsatisfactory to arrive at a definite conclusion of oppression or mis-
management, the petition must be rejected.
It may be true that the parties had agreed before the High Court that
pleadings in all connected cases be treated as part of the records of the High
Court but by reason thereof it cannot be inferred that although the High
Court had no jurisdiction to adjudicate upon the company petition filed by
the Respondent No. 12 herein filed before the Company Law Board, Delhi
and the Company Petition filed by the Respondent No. 1 before the
Company Law Board, Bombay, they would be the basis for grant of relief
particularly in view of the fact that the reliefs claimed therein are different.
After the amendment in the Companies Act, the Company Law Board alone
had the jurisdiction to entertain an application under Sections 397 and 398 of
the Companies Act, as the jurisdiction of the High Court was ousted thereby
and, thus, the allegations made in the Company Petition filed by the
Respondent No. 12 being company petition No. 7 of 1992 could not have
been the subject matter of adjudication by the High Court. It is trite that
what cannot be done directly cannot be done indirectly. The conduct and the
status of the parties vis-`-vis the company also assume significance.
Whereas the Respondent No. 1 herein claimed relief inter alia as a sole class
1 heir of the FRG, the Respondent No. 12 claimed her relief on the basis of
being a person involved in protecting the affairs of the Gaekwad family as
also in her own right as a shareholder. It is significant, however, that in Suit
No. 675 of 1990 pending in the court of Baroda, Gujarat in her written
statement the Respondent No. 12 claimed that if her mother had been issued
the 8000 shares, her holding together with that of her mother's would exceed
60%.
The Respondent Nos. 1 and 12 had initiated different proceedings in
different forums to suit their own purposes. From the materials brought on
records, it can safely be inferred that proceeding before the Company Law
Board, Delhi was initiated by the Respondent Nos. 12 herein when it was
discovered that the Respondent No. 1 may not obtain any relief in the
Company Petition filed by her before the Gujarat High Court.
The Respondent No. 1 in her application did not disclose the grounds
for challenging the issue of 6475 shares to the Appellants. In that view of
the matter the relief granted by the High Court to the effect that issue of all
shares beyond 425 shares is bad in law cannot be sustained having regard to
the fact that a bald prayer was made in the petition without laying any
foundation therefor in the company petition. Such reliefs evidently had been
granted keeping in view the allegations made by the Respondent No. 12 in
her company petition filed before the Company Law Board, Delhi which is
impermissible in law.
We may at this juncture have a look to the case laws operating in the
field with a view to find out as to what relief, if at all, could be granted to the
Respondent No. 1 by the Gujarat High Court in the facts and circumstances
of the present case.
In Shanti Prasad Jain Vs. Kalinga Tubes Ltd. etc. [AIR 1965 SC
1535], this Court quoted with the approval the following passage from the
decision in Elder's Case, AIR 1952 SC 49, as summarized at page 394 in
Meyer's case, AIR 1965 SC 381:
"(4) Although the word 'oppressive is not defined,
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it is possible, by way of illustration, to figure a
situation in which majority shareholders, by an
abuse of their predominant voting power, are'
treating the company and its affairs as if they were
their own property' to the prejudice of the minority
share-holders-and in which just and equitable
grounds would exist for the making of a winding-
up order....... but in which the 'alternative remedy'
provided by Section 210 by way of an appropriate
order might well be open to the minority
shareholders with a view to bringing to an end the
oppressive conduct of the majority."
In Shanti Prasad Jain (supra) referring to Elder Case, it was
categorically held that the conduct complained of must relate to the manner
of management of the affairs of the company and must be such so as to
oppress a minority of the members including the petitioners qua
shareholders. The court, however, pointed out that that law, however, has
not defined what oppression is for the purpose of the said Section and it is
left to court to decide on the facts of each case whether there is such
oppression.
In Scottish Cooperative Wholesale Society Ltd. Vs. Meyer and
Another [(1958) 3 WLR 404] it was categorically held that the conditions
precedents contained in Section 210 of the Act of 1948 must be satisfied
before any relief can be granted.
Yet again in H.R. Harmer Ltd., In re [(1958) 3 All ER 689 (CA)], the
Court of Appeal held that 'the section does not purport to apply to every
case in which the facts would justify the making of a winding up order under
the 'just and equitable' rule, but only to those cases of that character which
have in them the requisite element of oppression'.
It was observed:
"\005. It is not lack of confidence between share-
holders per se that brings S. 210 into play, but lack
of confidence springing from oppression of a
minority by a majority in the management of the
company's affairs, and oppression involved at least
an element of lack of probity or fair dealing to a
member in the matter of his proprietary rights as a
shareholder."
In Needle Industries (supra), this Court observed:
"44. Coming to the law as to the concept of
'oppression', Section 397 of our Companies Act
follows closely the language of Section 210 of the
English Companies Act of 1948. Since the
decisions on Section 210 have been followed by
our Court, the English decisions may be
considered first. The leading case on 'oppression'
under Section 210 is the decision of the House of
Lords in Scottish Co-op. Wholesale Society Ltd. v.
Meyer (1959 AC 324 : (1958) 3 All ER 66 (HL)).
Taking the dictionary meaning of the word
'oppression', Viscount Simonds said at page 342
that the appellant-society could justly be described
as having behaved towards the minority
shareholders in an 'oppressive' manner, that is to
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say, in a manner "burdensome, harsh and
wrongful". The learned Law Lord adopted, as
difficult of being bettered, the words of Lord
President Cooper at the first hearing of the case to
the effect that Section 210 "warrants the court in
looking at the business realities of the situation and
does not confine them to a narrow legalistic view".
Dealing with the true character of the company,
Lord Keith said at page 361 that the company was
in substance, though not in law, a partnership,
consisting of the society, Dr. Meyer and Mr. Lucas
and whatever may be the other different legal
consequences following on one or other of these
forms of combination, one result followed from the
method adopted, "which is common to partnership,
that there should be the utmost good faith between
the constituent members". Finally, it was held that
the court ought not to allow technical pleas to
defeat the beneficent provisions of Section 210
(page 344, per Lord Keith; pages 368-69, per Lord
Denning).
In Re Five Minute Car Wash Service Ltd. [1966] 1 All ER 242, the
Court upon considering the nature of relief which can be granted under
Section 210 of the Companies Act, 1948 observed that in a case falling
under Section 210 of the Companies Act, 1948, relief will be granted if the
petitioner establishes that at the time when the petition was presented the
affairs of the company were being conducted in a manner oppressive of
himself and if he fails to allege facts capable of establishing that the
company's affairs are being conducted in such a manner the petition will
disclose no ground for granting any relief and must be dismissed in limine.
It was observed:
"Those who are alleged to have acted oppressively
must be shown to have acted at least unfairly
towards those who claim to have been oppressed.
In Scottish Co-operative Wholesale Society, Ltd.
v. Meyer (a case under s. 210) Viscount Simonds
adopted a dictionary definition of the meaning of
"oppressive" by, it is said, "burdensome, harsh and
wrongful".
In Elder v. Elder & Watson, Ltd., also a case
under s. 210, the Lord President (Lord Cooper)
said:
"\005the essence of the matter seems to be that the
conduct complained of should at the lowest
involve a visible departure from the standards of
fair dealing, and a violation of the conditions of
fair play on which every shareholder who entrusts
his money to a company is entitled to rely."
Lord Keith said:
"\005oppression involves, I think, at least an element
of lack of probity or fair dealing to a member in
the matter of his proprietary rights as a
shareholder."
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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 stressed the existence of prejudice to the minority which is unfair and
not just prejudice per se.
The Court may also refuse to grant relief where the petitioner does not
come to court with clean hands which may lead to a conclusion that the
harm inflicted upon him was not unfair and that the relief granted should be
restricted. (See Re London School of Electronics, [1986] Ch. 211)
Furthermore, when the petitioners have consented to and even
benefited from the company being run in a way which would normally be
regarded as unfairly prejudicial to their interests or they might have shown
no interest in pursuing their legitimate interest in being involved in the
company. (See Re RA Noble & Sons (Clothing) Ltd. [1983] BCLC 273].
In a given case the Court despite holding that no case of oppression
has been made out may grant such relief so as to do substantial justice
between the parties.
It is now well-settled that a case for grant of relief under Sections 397
and 398 of the Company Act must be made out in the petition itself and the
defects contained therein cannot be cured nor the lacuna filled up by other
evidence oral or documentary. (See In re Bengal Luxmi Cotton Mills Ltd.
1965 (35) CC 187).
In Shanti Prasad Jain Vs. Union of India [75 Bom. LR 778] it was
held that the power of the company court is very wide and not restricted by
any limitation contained in Section 402 thereof or otherwise
In Shoe Specialities Ltd. vs. Standard Distilleries and Breweries (P)
and Others [1997 (1) Comp. LJ 243], it is stated :
"While exercising the powers under sections 397
and 402 of the Companies Act, the Court is
considering not only the relief that is sought for
but also considers as to what is the nature of the
complaint and how the same has to be rectified. It
is the interest of the company that is being
considered and not the individual dispute between
the petitioner and the respondent. If that be so, the
interest of the company requires that the majority
shareholders must have their say in the
management "
In Jesner Vs. Jarrad Properties [(1993) BCLC 1032], a question arose
as to whether the conduct and the background of the two companies (their
informed way of doing business disregarding the Companies Act, etc.) could
be taken into account to decide whether there had been unfair prejudice to
one party in an application under Section 459 of the English Companies Act
was answered in the affirmative.
When a decision is taken on a business consideration, it is trite, the
court should not ordinarily interfere. [See Maharashtra Power Development
Corporation Ltd. Vs. Dabhol Power Co. and Others, (2004) 3 Comp LJ 58
(Bom)]
The burden to prove oppression or mismanagement is upon the
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petitioner. The Court, however, will have to consider the entire materials on
records and may not insist upon the petitioner to prove the acts of
oppression. An action in contravention of law may not per se be
oppressive. Bhagwati, J. (as His Lordship then was) in Mohanlal Ganpatram
and another Vs. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. and
others [AIR 1965 Guj. 96 at 103] stated the law, thus:
"\005It may be that a resolution may be passed by
the Directors which is perfectly legal in the sense
that it does not contravene any provision of law,
and yet it may be oppressive to the minority
shareholders or prejudicial to the interests of the
Company. Such a resolution can certainly be
struck down by the Court under Section 397 or
398. Equally a converse case can happen. A
resolution may be passed by the Board of Directors
which may in the passing contravene a provision
of law, but it may be very much in the interests of
the Company and of the shareholders..."
The said decision has been referred to with approval in Needle
Industries (supra). (Para 49). The conduct which is technically legal and
correct, thus, may justify grant of relief on the application of the just and
equitable jurisdiction and conversely that conduct involving illegality and
contravention of the Act may not suffice to warrant grant of any remedy.
Isolated act of oppression may not be sufficient to grant any relief but there
should be a continued oppression therefor. The test of lack of bonafide
should be applied in both for the winding up petition while determining an
application under Section 397 of the Companies Act. [See Re Guidezone
Ltd. (2000) 2 BCLC 321] We may at this juncture notice that the
Respondent No. 1 in her application under Section 397 of the Companies
Act did not complain of any act of mis-management. Complaints of mis-
management were made by the Respondent No. 12 only.
For the purpose of grant of relief, the High Court could only consider
the pleadings filed in Company Petition No. 5 of 1991. If no relief could be
granted having regard to the pleadings contained therein, it is inconceivable
in law that such relief would be granted on the basis of the pleadings made
in other proceedings and totally ignoring the admissions made by the
Respondent No. 1 herein in the proceedings initiated by her.
PLEADINGS AND PROOF \026 LEGAL REQUIREMENTS :
We may now consider the submissions of Mr. Desai that the
Appellant No. 1 herein is guilty of commission of fraud. Application filed
by the Respondent No. 1 before the Gujarat High Court does not contain the
requisite pleadings in this behalf, the requirements wherefor can neither be
denied nor disputed.
It is not in dispute that having regard to Rule 6 of the Company Courts
Rule, the provisions of the Code of Civil Procedure will be applicable in a
proceeding under the Companies Act. In terms of Order 6, Rule 4 of the
Code of Civil Procedure, the plaintiff is bound to give particulars of the
cases where he relies on misrepresentation, fraud, breach of trust, etc.
In Chief Engineer, M.S.E.B. & Anr. Vs. Suresh Raghunath Bhokare
[2004 (8) Supreme 845], this Court held:
"\005Thus, applying the basic principle of rule of
evidence which requires a party alleging fraud to
give particulars of the fraud and having found no
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such particulars the Industrial Court came to the
conclusion that the respondent could not be held
guilty of fraud\005"
It was observed:
"\005In the absence of any such particulars being
mentioned in the show cause notice or at the trial,
attributing some overt act to the respondent, we do
not think the Board can infer that the respondent
had a role to play in sending a fraudulent list solely
on the basis of the presumption that since
respondent got a job by the said proposal, said list
is a fraudulent one. .. "
In A.C. Ananthaswamy and Others Vs. Boraiah (Dead) By LRS.
[(2004) 8 SCC 588], this Court held that the level of proof required for
proving fraud is extremely high. [See also Maharashtra Power Development
Corporation Ltd. Vs. Dabhol Power Co. and Others, (2004) 3 Comp LJ 58
(Bom)]
Order 6, Rule 17 provides for amendment of the pleading whereas
Order 8, Rule 9 provides for subsequent pleadings by a defendant. The
company petitioners did not raise a plea as regard the value of the company
share or commission of fraud by the Appellant No.1 herein and/or his
fiduciary duty towards them either as a director or as a person looking after
the interest of the family in the discharge of his duty under as a director.
Respondent No. 12 in her petition, alleged mismanagement of the
Company on the part of the Respondent No.1. The Appellants in their reply
while denying and disputing that the company was mismanaged alleged that
it had earned profit. In Rejoinder to the said reply, Mrs. Puar questioned the
correctness or veracity of the balance sheet of GIC contending that the so-
called profit disclosed in the accounts is merely a book entry. A contrary
stand, however, has been taken before us suggesting that the shares had been
issued by the Appellants unto themselves at a gross undervalue. The
question which arises is as to whether the Respondent Nos. 1 and 12 are
bound by their own pleadings. It is neither in doubt nor in dispute that the
Code of Civil Procedure being applicable to a proceeding of this nature, not
only the plea of fraud is required to be specifically pleaded and proved.
Even an amendment of pleadings could not have been permitted if thereby
the Company Petitioner made an attempt to get rid of her admission.
Section 58 of the Indian Evidence Act reads as under:
"58. Facts admitted need not be proved.-No fact
need to be proved in any proceeding which the
parties thereto or their agents agree to admit at the
hearing, or which, before the hearing, they agree to
admit by any writing under their hands, or which
by any rule of pleading in force at the time they are
deemed to have admitted by their pleadings:
Provided that the court may, in its
discretion, require the facts admitted to be proved
otherwise than by such admission."
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In terms of the aforementioned provision, things admitted need not be
proved. In view of the admission of Respondent No. 1 alone, the issue as
regards allotment of 6475 shares should have been answered in favour of the
Appellants. The Company Petitioner at a much later stage could not be
permitted to take a stand which was contrary to or inconsistent with the
original pleadings nor could she be permitted to resile from her admissions
contained therein.
Admissions made by the Respondent No. 1 was admissible against her
proprio vigore.
In Nagindas Ramdas Vs. Dalpatram Iccharam alias Brijram and others
[AIR 1974 SC 471], this Court held:
"26\005Admissions if true and clear are by far the
best proof of the facts admitted. Admissions in
pleadings or judicial admissions admissible under
Section 58 of the Evidence Act, made by the
parties or their agents at or before the hearing of
the case, stand on a higher footing than evidentiary
admission. The former class of admissions are
fully binding on the party that makes them and
constitute a waiver of proof. They by themselves
can be made the foundation of the rights of the
parties. On the other hand evidentiary admissions
which are receivable at the rival as evidence are by
themselves not conclusive. They can be shown to
be wrong."
(See also Biswanath Prasad and Others Vs. Dwarka Prasad and
Others, AIR 1974 SC 117)
In Viswalakshmi Sasidharan (Mrs.) and Others Vs. Branch Manager,
Syndicate Bank, Belgaum [(1997) 10 SCC 173], this Court held:
"\005On the other hand, it is admitted that due to
slump in the market they could not sell the goods,
realize the price of the finished product and pay
back the loan to the Bank. That admission stands
in their way to plead at the later stage that they
suffered loss on account of the deficiency in
service..."
Judicial Admissions by themselves can be made the foundations of the
right of the parties.
In M/s. Modi Spinning & Weaving Mills Co. Ltd. and another Vs.
M/s. Ladha Ram & Co. [AIR 1977 SC 680], the law is stated in the
following terms:
"10. It is true that inconsistent pleas can be made
in pleadings but the effect of substitution of
paragraphs 25 and 26 is not making inconsistent
and alternative pleadings but it is seeking to
displace the plaintiff completely from the
admissions made by the defendants in the written
statement. If such amendments are allowed the
plaintiff will be irretrievably prejudiced by being
denied the opportunity of extracting the admission
from the defendants. The High Court rightly
rejected the application for amendment and agreed
with the trial Court."
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In the instance case, the Respondent No.1 even did not amend the
company petition by withdrawing the admissions or resiling thereform.
In Kaveripatnam Subbaraya Setty Annaiah Setty Charities Trust Vs.
S.K. Viswanatha Setty [(2004) 8 SCC 717], this Court deprecated raising a
plea for the first time before the appellate court without amendment of plaint
holding that when materials to substantiate such plea had not been brought
on record and, thus, it is impermissible to consider the same, stating:
"13\005However, there is no material placed on
record by way of pleadings to show whether the
appellant is a religious or charitable institution.
The plaint was never amended. The appellant
seeks exemption. Exemption needs to be alleged
and proved. Opportunity is required to be given to
the respondent to meet the plea of exemption. In
the circumstances, we are in agreement with the
view expressed by the High Court that the said
plea was not open to the appellant at the stage of
second appeal, particularly, in the absence of any
material available to substantiate such plea."
In Heeralal Vs. Kalyan Mal and Others [(1998) 1 SCC 278] following
Modi Spinning (supra), it was observed:
"9\005The facts of the present case are entirely
different and consequently the said decision also
cannot be of any help for the learned counsel for
the respondents. Even that apart the said decision
of two learned Judges of this Court runs counter to
a decision of a Bench of three learned Judges of
this Court in the case of Modi Spinning and
Weaving Mills Co. Ltd. v. Ladha Ram and Co.,
(1977) 1 SCR 728 : (AIR 1977 SC 680). In that
case Ray, C.J., speaking for the Bench had to
consider the question whether the defendant can be
allowed to amend his written statement by taking
an inconsistent plea as compared to the earlier plea
which contained an admission in favour of the
plaintiff. It was held that such an inconsistent plea
which would displace the plaintiff completely from
the admissions made by the defendants in the
written statement cannot be allowed. If such
amendments are allowed in the written statement
plaintiff will be irretrievably prejudiced by being
denied the opportunity of extracting the admissions
from the defendants\005."
It was also observed :
"12. In our view, therefore, on the facts of this case
and as discussed earlier, no case was made out by
the respondents, contesting defendants, for
amending the written statement and thus
attempting to go behind their admission regarding
5 out of 7 remaining items out of 10 listed
properties in Schedule-A of the plaint\005"
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(See also M/s. ABL Ltd., Durgapur, Burdwan Vs. Radha Gobinda Ghatak &
Ors., 1999 (1) CHN 645) and Krishna Gupta & Ors. Vs. Madan Lal & Ors ,
2002 (96) DLT 829).
In view of our findings aforementioned, it must be held that having
regard to the admission made by the Respondent No. 1 in her pleadings as
regard broad-basing of the company and issuance of 6475 shares in favour
of the Appellants herein and further in absence of any pleading of
commission of fraud on the part of the Appellant No. 1 herein, the High
Court committed a manifest error in issuing the impugned directions.
Once the aforementioned facts are not in question, the company
petitioner cannot take a stand different from that raised in her petition simply
on the ground that other and further reliefs were claimed by amending the
reliefs portion. Reliefs could be granted by the court had the material facts
necessary to prove her case been pleaded and proved. In absence of any
pleading, no evidence would be admissible and the court as is well-known
ordinarily would not grant any relief which has not been pleaded.
QUASI-PARTNERSHIP \026 FAMILY COMPANY \026 CORPORATE VEIL:
A company incorporated under Indian Companies Act is a body
corporate. However, in certain situations, its corporate veil can be lifted.
(See Kapila Hingorani vs. State of Bihar [(2003) 6 SCC 1])
The Court, however, has made a clear distinction between a family
company, a private company and a public limited company. The true
character of the company, the business realities of the situation should not be
confined to a narrow legalistic view. [See Needle Industries (supra)]
It is now well-known that principles of quasi-partnership is not
foreign to the concept of Companies Act. For the purpose of grant of relief
the principles of partnership had been applied even in a public limited
company. (See Loch and another Vs. John Blackwood Ltd., 1924 AC 783,
Ebrahimi Vs. Westbourne Galleries Ltd. and others, 1972 (2) All ER 492).
The principles applicable to the winding up of a company contained in
Section 44(g) of the Indian Partnership Act was applied in a winding up
petition under Section 433 (f) of the Companies Act by a 3-Judge Bench of
this Court in Hind Overseas Private Ltd. Vs. Raghunath Prasad
Jhunjhunwalla and another [AIR 1976 SC 565] following Ebrahimi (supra).
However, it was observed that when more than one family or several friends
and relatives together form a company and there is no right as such agreed
upon for active participation of members were sought to be excluded from
management, the principles of dissolution of partnership cannot be liberally
invoked.
In Kilpest Pvt. Ltd. and Others Vs. Shekhar Mehra [(1996) 10 SCC
696], it was stated:
"11. The promoters of a company. whether or not
they were hitherto partners, elect to avail of the
advantages of forming a limited company. They
voluntarily and knowingly bind themselves by the
provisions of the Companies Act. The submission
that a limited company should be treated as a
quasi-partnership should, therefore, not be easily
accepted. Having regard to the wide powers under
Section 402, very rarely would it be necessary to
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wind up any company in a petition filed under
Sections 397 and 398.
12. The present was a petition under Sections 397
and 398. The Division Bench exercised power
under Section 402 to appoint Mehra as a Director
to protect his interest and guard against
mismanagement. It required Dubey to return to the
company the sum of Rs 52,875 which he had
wrongly appropriated to himself. It directed the
Registrar of Companies to enquire into other
allegations of misconduct in which it found, prima
facie, substance; and we may say immediately that
we have perused the report filed by the Registrar
of Companies which shows that no substance was,
ultimately, found therein. We agree with the
Division Bench that this was no case for winding
up the company and must dismiss the appeal filed
by Mehra."
(See also Dabhol Power Co. (supra), para 43)
Kilpest Pvt. Ltd. and Others Vs. Shekhar Mehra [(1996) 10 SCC 696],
whereupon Mr. Desai placed strong reliance, thus, cannot be said to be an
authority for the proposition that for no purpose whatsoever the principles of
quasi-partnership can be applied to an incorporated company. The real
character of the company, as noticed hereinbefore, for the purpose of
judging the dealings between the parties and the transactions which are
impugned may assume significance and in such an event, the principles of
quasi-partnership in a given case may be invoked.
The ratio of the said decision, with respect, cannot be held to be
correct as a bare proposition of law, as was urged by Mr. Desai, being
contrary to a larger Bench judgments of this Court and in particular Needle
Industries (supra). It is, however, one thing to say that for the purpose of
dealing with an application under Section 397 of the Companies Act, the
court would not easily accept the plea of quasi-partnership but as has been
held in Needle Industries (supra), the true character of the company and
other relevant factors shall be considered for the purpose of grant of relief
having regard to the concept of quasi partnership.
FINDINGS:
The upshot of our aforementioned discussions is:
(i) The Appellant No. 1 had no fiduciary duty to inform the
Respondent Nos. 1, 12 and 13 herein as regard the benefit or
otherwise of opting for allotment of shares.
(ii) The Respondent No. 1 herein in her company petition having
admitted the factum of broad-basing of the company by issuance of
15000 additional equity shares and allotment of 6475 shares in
favour of the Appellants herein cannot now be permitted to turn
around and raise the correctness or validity thereof. However,
allotment of 3000 shares in favour of the Appellants and 500
shares in favour of the Respondent No. 12 purported to be out of
8000 shares allotted to FRG are bad in law.
(iii) The Respondent No. 1 herein had not been able to prove any act of
oppression as against the Appellant No. 1.
(iv) The claim of the Respondent No. 1 as regards declaration of her
title and/ or allotment of 8000 shares is not tenable in law. The
alleged right of the Respondent No. 1 to claim title over the said
shares as a class 1 heir of Fatehsinh Gaekwad cannot be
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determined in an application filed under Sections 397 and 398 of
the Companies Act and in particular having regard to the fact that
the said question is pending adjudication in a duly instituted civil
suit.
(v) Transfer of 9415 shares by the Appellants in favour of Indreni by
itself was not an act of oppression keeping in view of the fact that
the entire shares of the said company were held by the Appellants
alone and in any event the notice of transfer having been rescinded,
the Appellants continue to be the owner in respect thereof.
CONCLUSION:
For the reasons aforementioned, the impugned judgments of the
Division Bench cannot be sustained which is set aside accordingly. The
appeals are allowed in part and to the extent mentioned hereinbefore with
the following directions:
(A) It is hereby declared that the allotment of shares from the additional
share capital had been increased pursuant to the resolution of the
Extraordinary General Meeting held on 17th December,1987 and the
resolution of the Board of Directors dated 8.1.1988 shall be treated as
valid and effective except the allotment of 3000 shares in favour of
Pratapsinh S. Gaekwad and Priyadarshiniraje S. Gaekwad and 500
shares in favour of Respondent No. 12 herein. The register of the
members and other records of the company will stand rectified
accordingly.
(B) The Board of Directors shall consider the question as regard shifting
of the office of the Company to Surat from Baroda. The records of
the company, if any, in possession of any of the members or any other
director shall be restored to the Registered Office of the Company
failing which it would be open to the company to initiate appropriate
proceedings before appropriate forum. An Extraordinary General
Meeting of the Shareholders of the Company will be convened on 26th
February, 2005 at 11.00 a.m. at Baroda for appointment of the
directors of the company on the basis of the shares respectively held
by them as also the Articles of Association and in accordance with
this order of this Court.
(C) The aforesaid meeting will be conducted under the Chairmanship of a
nominee of the Registrar of the Companies.
(D) All the shareholders will be entitled to vote by themselves or through
their proxies at the said meeting for appointment of the directors of
the company.
(E) The Registrar of the Companies shall for the purpose of holding the
said meeting shall issue notices thereof to the shareholders and may
get the said notice published in newspapers one in English and one in
Gujarati for circulation in the area.
(F) Costs of publication and issuance of such notice shall be borne by the
company. Appellant No. 1, however, shall deposit a sum of
Rs. 30,000/- before the Registrar of the Companies within two weeks
from date for meeting the requisite expenditure thereof. The said sum
of Rs. 30000/- shall be reimbursed to Appellant No. 1 by the company
within four weeks from the date of the meting.
(G) The Appellant No. 1 shall further supply the names and addresses of
the shareholders of the company to the Registrar of company within
two weeks from date.
(H) The Registrar of the Companies or his nominee shall be entitled to
seek assistance for peaceful conducting of the meeting from such
authority or authorities as may be considered necessary.
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(I) No adjournment motion may be entertained.
(J) Let a copy of this order be forwarded to the Registrar of Companies
by the Registry of this Court forthwith for appropriate action.
Legal Notes
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