Shri Navin R. Shah, Smt. Chandri N. ... vs Simshah Estates And Trading Co. ...

on 13 September, 2006 Equivalent citations: 2007 136 CompCas 411 CLB, 2007 74 SCL 372 CLB Bench: S Balasubramanian ORDER S. Balasubramanian, Chairman 1. The above petition was disposed of by an order dated 25th October, 2004 canceling the allotment made to one M/S Complex (I) Private Limited of 1500 shares. This order was taken on an appeal before the Bombay High Court which, while setting aside the said order, remanded the case back to this Board for disposal after giving a hearing to M/S Complex (I) Private Ltd. Accordingly, this company filed an application for impleadment which was allowed and it was added as the 10th respondent. 2. The main complaint of the petitioners in this petition filed under Sections 397/398 of the Companies Act, 1956 is that by allotment of further shares in Simshah Estates & Trading Company Private Limited (the company), the petitioners' group has been reduced from majority into minority. 3. The facts of the case are that the shareholders of the company are closely related family members. The petitioners' group held 51.53% shares in the company. The 1st petitioner is a permanent director and 7th respondent is the Chairman. In the year 1998, 2000 unissued preference shares were reclassified into 2000 equity shares of Rs. 100/. Out of these reclassified 2000 equity shares, 1500 shares were allotted to Complex Credit. This company, according to the petitioners is under the control of 7th respondent. In view of this allotment, the shareholding of the petitioners of 51.53% has come down to about 43%. Accordingly, a declaration has been sought that the allotment of 1500 equity to M/S Complex Credit is illegal and void and therefore this allotment should be cancelled. The respondents have raised a preliminary objection on the ground that the petition is time barred having been filed only in 2002 seeking for cancellation of the shares allotted in 1998. 4. Shri Choudhary appearing for the petitioners submitted: The company was incorporated in 1984 and the relationship among the shareholders who are all closely related family members was cordial till 1998. However, certain disputes had arisen among them due to which it was agreed that there should be consolidation and restructure of share holding in the family companies. However, from the second quarter of 1998, even though the petitioner was/is a permanent directior, he was being excluded from management of the company and no notices for

any board meeting was being given to him. In spite of his taking up the matter with 7th respondent, since no information was made available to him for nearly a year, the 1st petitioner took inspection of records/documents of the company on 21st and 22nd December, 1998. From the inspection, he found that in an allegedly held AGM on 30.9.1998, a special resolution was allegedly passed for re-classifying 2000 redeemable preference shares of Rs. 100/- each into 2000 equity shares of Rs. 100/- each. The petitioners did not receive any notice for this AGM. Further, the 1st petitioner did not receive any notice for the board meeting on 1.9.1998 in which the proposal to place the above resolution before the general body was allegedly approved. The company has not held any board meeting after 10th March, 1998 as is evident from the fact that during the inspection, the 1st petitioner did not find any minutes of board meeting held after that date. Therefore, it is doubtful whether the decision to place the resolution for reclassifying the share capital before the general meeting was taken at all in any board meeting. Even the holding of the AGM is doubtful in as much as no such notice has been annexed to any of the statutory forms filed with the ROC nor the same was available in the records of the company when the 1st petitioner took inspection in December, 1998. Without the consent and approval of the petitioners holding majority shares in the company, neither a special resolution nor an ordinary resolution could have been passed and therefore even if any such resolution had been passed without notice to the petitioners, the same is not only highly oppressive but also illegal. Even the minutes of the said meeting were not available in the records of the company. Therefore, there had been complete manipulation only with a view to convert the petitioners from majority into minority as is evident from the fact that subsequently 1500 shares were allegedly allotted on 20.11.1998 to the 10th respondent which is under the complete control of the 7th respondent. Further even to allot the shares to 10th respondent, no justification like financial need of the company etc. has been established. Since the company is a family company, if at all further shares had to be issued, it should have been issued proportionately. Issuing of shares to a non member, that too under the control of the 7th respondent, would clearly indicate that the motive for allotting the shares to the 10th respondent was with a view to grab the company by the respondents. The manipulation of records is evident that even form No. 23 and 5 which should have been filed by 28.10.1998 were filed only on 18.12.1998 after the alleged allotment to the 10th respondent on 20.11.1998 The respondents have contended that the 1st petitioner was a party to reclassification of the capital in 1985 and in 1995 and therefore when the capital was reclassified in 1998, the petitioners cannot have any objection. This argument is fallacious, as, for the earlier reclassifications, all the shareholders including the petitioners had given their consent but in 1998, no such consent was taken either in the board meeting or in the general meeting by conveniently omitting to issue notices for these meetings to the petitioners who were at that time holding majority shares in the company. In terms of Section 286 notices have to be issued to all directors for Board meetings and it is a settled law that any board meeting held without notices to all directors is invalid. The very fact that now the respondents assert that due to some family arrangement, the capital was reclassified and therefore the petitioners cannot

object, it is to be noted that in the reply to the petition, there is no such reference to the alleged family understanding but such a plea was taken nearly two years later. 5. The learned Counsel further submitted: The respondents are guilty of manipulation of records not only pertaining to reclassification of the share capital but also further allotment of shares. The petitioner was reportedly present in the AGM held on 30.9.1998 while in fact he never attended any of the AGMs. From the copy of the passport of the 1st petitioner, it is evident that he was traveling out of India from 11.8.1998 to 4.9.1998, but in the minutes of the Board meeting on 1.9.1998, the presence of the 1st petitioner is recorded. Thus manipulation in the records of the company is manifest. The very fact that the company has not produced the attendance register showing the signature of the petitioner therein would indicate that the petitioner was not present in any of these meetings. 6. The learned Counsel further submitted: In so far as the delay in filing the petition is concerned, the petitioners were attempting at resolving the disputes amicably in the domestic forum. However, due to set back in the family businesses in the year 1991 to 1995 and also due to the demise of senior members in the family, during this period no effective compromise could be arrived at. Only when all the efforts to resolve the disputes amicably failed, the petitioners were forced to file this petition. The efforts made by the petitioners for resolving the disputes is evident from the affidavit of Mahesh Shah, the brother of the 1st petitioner, who was actively involved in the negotiations. 7. Summing up his argument, the learned Counsel submitted that even though the petitioner was in day to day management of the company, the respondents have completely excluded him and in the process have also converted the petitioners' group from a majority into a minority. Therefore, the alleged resolution passed in the AGM held on 30.9.1998 should be declared to be null and void and the shares allotted to M/S Complex Trading should be cancelled. The learned Counsel relied on the following case laws: parameshwary Prasad Gupta v. UOI 44 CC 1: Even if notice for board meeting is not given even to a single director, then, the said meeting is invalid. Kuldip Singh Dhillon v. Paragoan Utility Financial Pvt. Ltd. 64 CC 19: Notice of board meetings should be sent to all directors failing which the decision taken in that meeting will be invalid. Ujjwal Sarin v. Om Prakash Baldev Krishan Builders and Contractors Pvt Ltd. CP No. 68 of 2002: IN a company in the form of a quasi partnership, shares should be allotted on a prorata basis failing which the allotments otherwise would be invalid.

8. The learned Counsel appearing for the respondents Shri Mehta submitted: There has been a mis-joinder of parties. The 3rd petitioner is not a shareholder as he had already transferred his shares to the 2nd petitioner on 12.2.1999 as is evident from the copy of the transfer instrument at page 96 of the rejoinder. The claim of the petitioners that they hold 51.53% shares in the company is not correct. The Simplex Group has a number of family businesses. Since disputes and differences had arisen among the family members, an oral family settlement was arrived at by which the petitioner got 100% control of a rich family company. In terms of the same settlement the respondent company was to come to the control of the 7th respondent and his group. That is why in terms of the settlement, the 2nd petitioner transferred 806 shares by way of gift to one Ravi Shah of the respondents' group. Therefore, the actual holding of the petitioner on the day of filing of the petition is only 43%. This fact has been admitted by the petitioner in the rejoinder affidavit dated 6th August, 2002 wherein it is stated that the shareholding shown in the petition is as on 7.10.1995. If this transfer is taken into account, on the day of filing of the petition, the petitioners held only 43% shares in the company and as such they were not in majority to allege that they have been concerted into a minority. 9. The learned Counsel further submitted: The company being a family company, the management of the same has been in an informal manner and all statutory provisions in regard to management have not been followed for long. All the family directors reside at the same block and meet each other regularly. Therefore, formal issue of notice for board meetings was never the practice. However, all decisions were taken in consultation with all the four directors. It is for the first time that the petitioner, who has not complied with the terms of oral family agreement, has raised the issue of non issue of notices. For personal reasons, in 1993, the 1st and 2nd petitioners moved to Mumbai and took charge of all the family offices in Mumbai. All the staff were reporting to him directly. He was fully aware of the allotment of shares to Complex Trading. Since the 1st petitioner was in charge of the registered office of the company and has also been filing returns with the ROC, he was fully aware of the AGM held on 30.9.1998 wherein reclassification of share capital was done and also of the allotment of 1500 shares to Complex Trading on 22.11.1998. Having come to know of these facts as early as in 1998 and having not objected to the said reclassification and allotment all these years, the petitioners cannot challenge the same in 2002 by filing this petition. He did not object so long for the simple reason that it was in accordance with oral family agreement. Even otherwise, this petition should be dismissed on account of waiver, acquiescence etc. Further, the petition is also barred by limitation. In Hungerford Investment Trust Ltd. 1970 ILR 286,it has been held that Article 137 of Limitation Act is applicable to proceedings under Sections 397/398 of the Companies Act. In Sheth Mohan Lal Ganpat Rao v. Sayaji Jubillee Cotton and Jute Mills Ltd. 34 CC 777 Guj., it has been held that even if a resolution passed by a board is in contravention of the provisions of law but it may be very much in the interest of the company and shareholders. Therefore, the

same cannot be challenged as an act of oppression but could be attacked as invalid in a suit. In SP Jain v. Kalinga Tubes Ltd. , it is held that it should be established that the conduct of the majority shareholders was oppressive and that there must be continuous acts on the part of the majority shareholders continuing up to the date of the petition showing that the affairs of the company are being conducted in a manner oppressive to some part of the members. In Sangram Sink P. Gaekwad v. Shanta Devi , it has been held that 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 necessarily to be proved. Similar decision has been given by Kolkatta High Court in Hungerford Investment Trust Ltd. v. Turner Morrison Co. Ltd. 1970 ILR 286. In Kale v. Dy. Director of Consolidation , the Supreme Court has held that a family arrangement could be oral and even could be implied from the conduct of the parties and that a fair and equitable family arrangement is final and binding on the parties to the settlement. In the present case, since the petitioner never objected to the allotment of shares to the 10th respondent for nearly 4 years, it is quite evident that they were aware that the allotment was in pursuance to the family settlement. Similar decision has been given by the Supreme Court in Shanugam Pillai . Therefore, the petition should be dismissed. 10. Shri Mathur, Advocate, appearing for the 10th respondent submitted: The 1st respondent being a director of the company was fully aware of the allotment made to the 10th respondent in 1998 but never raised any objection. The allegation of the petitioner that the 10th respondent is related to the other respondents is not correct. It is a listed company and it was a bonafide allottee of the shares. Even otherwise, the 10th respondent is protected by the doctrine of indoor management. The concept of indoor management has been approved in Varkey Souriar v. Keraleeya Banking Co. Ltd. 27 CC 591 Ker.) and Dew an Singh v. Minerva Films Ltd. 29 CC 263-Pnj. 11. In rejoinder, Shri Choudhary submitted: It is a fact that till March, 1998 there were no disputes. Both the sides attended most of the board and general meetings. However, between June and October, 1998, the 1st petitioner did not receive any notice for board meetings. That is the reason the petitioner sought for inspection of records from which he noted that the last minutes available was of the date of 10.3.1998. Therefore, subsequent minutes must have been fabricated which is evident from the fact that even though the petitioner was away abroad on 1.9.1998, he was shown to be present in the board meeting in which the decision to reclassify the share capital was allegedly taken. Further, the allotment of shares to a non member in a family

company is highly oppressive. In so far as the alleged family settlement is concerned, no doubt there was exchange of shares for the purpose of consolidation of holdings and restructuring, but not with a view to arrive at a family settlement. The very fact that the alleged family settlement was not even whispered in the reply affidavit filed by the 2nd respondent on 31.5.2002 would indicate that it is only an after thought. There has been not even any contemporaneous correspondence in relation to the family settlement. Therefore the bogey of family settlement is nothing cut a concocted story. As far as the 10th respondent is concerned, it is not an independent. It is connected with the respondents and that is the reason why it did not seek for refund of Rs. 3 lacs given as loan to the company for nearly 14 years. The 10th respondent is actually a investment company of the respondents. The shares were allegedly allotted to the 10th respondent against adjustment of the loans given by it 14 years earlier and the amount adjusted was a mere Rs. 1.5 lacs which the company could have easily repaid or could have mobilized the same from the other shareholders. Therefore the claim of the 10th respondent that it is a bonafide allottee of shares cannot be accepted. 12. I have considered the pleadings, arguments and the written submissions. In the written submissions, the respondents have elaborately dealt with, citing various judgments, the sanctity of family arrangements and as to why a judicial forum should not interfere with family settlements. In the present case, the existence of a family settlement has not been established as is evident from the fact that, in the first reply filed on 31.5.2002 by the 2nd respondent, there is not even a whisper about the family settlement and a different justification for allotment of shares to the 10 respondent had been given. Only in the reply filed by the 7th respondent on 7.4.2004, the issue relating to the family settlement has been raised. It is the contention of the petitioner, that there was no family settlement, but only consolidation and restructuring of the family companies. Therefore, in the -absence of any evidence that there was a family settlement oral or otherwise, the various submissions made in the written submission in regard to family settlements have no relevance and accordingly, I am disposing of this petition on merits. 13. The respondents have raised the issue of limitation. It is true that there had been a delay of nearly 4 years in moving this petition seeking for cancellation of the allotment made in 1998. The contention of the petitioners that the delay was on account of their attempts to settle the disputes amicably in the domestic forum. It is not uncommon that in family companies, judicial intervention is sought only when attempts to settle the disputes amicably, fail. Further, proceedings under Sections 397/398 are equitable in nature and therefore, strict technicalities cannot be applied more so when limitation Act is not applicable to proceedings under Sections 397/98 before this Board. Therefore, I do not consider that this petition is barred by limitation. 14. The main allegation in the petition is that by allotment of shares to the 10th respondent, the petitioner's group has been reduced to a minority. The respondents have questioned the claim of the petitioner that they collectively hold 51., 53% shares on the ground that the 2nd petitioner

had already gifted 806 shares to 9th respondent and to establish the same they have relied on a signed instrument of transfer gifting the shares. Therefore, according to the respondents, if these shares are excluded, the petitioner holdings would be only 43%. They have also alleged that by reclassifying the share capital in 1995, the petitioner had allotted all the shares to his own group, thus, acquired majority as against each of the four groups holding 25% shares at that point of time. I find from the records that at no time the respondents had questioned the allotment of shares to the petitioner's group in 1995. Taking into consideration, the averment of the petitioner that the said reclassification and allotment was with the approval of all shareholders and in view of the fact that the respondents had never questioned the said allotment, the respondents cannot now impugn the said allotment to claim that the petitioners have unjustifiably increased their shareholding. Likewise, in so far as the gift of 806 shares by the second petitioner to the 9th respondent is concerned, the name of the 9th respondent has not been entered in the register of members in respect of these shares and they continue to be in the name of the 2n petitioner. It is not a case where the instruments of transfer were lodged with the company along with share scripts and that the company had refused to register the gift. As a matter of fact, the share scripts are reportedly with the 2nd petitioner who has disowned the act of gift. Therefore, the respondents cannot claim that these shares belong to the 9th respondent. Therefore, these shares cannot be excluded from the holdings of the petitioners. In other words, the claim of the petitioners that they are the majority, holding 51.53% shares is established. 15. The petitioners have questioned the allotment to the 10th respondent on various grounds; that the 1st petitioner did not receive the notice for the Board meeting on 1.9.1998; that the petitioners did not receive notice for the AGM on 30.9.1998 wherein the reclassification was approved; that the 1st petitioner did not receive any notice for the Board meeting on 20.11.98; and that allotment of 1500 shares to the 10th respondent was with a view to convert the petitioners from a majority into a minority. In addition, the petitioners have also alleged fabrication of minutes of board meetings and general meetings. In this connection, I find a lot of contradictions in the stand of the respondents. In the reply, it has been specifically stated that notices were being issued for meetings as per the practice of the company but during the hearing and in the written submissions, it has been stated that since the company is a family company, everything is done informally but with the consent of all the four directors. Therefore, the admitted position is that notices were not being given for board meetings. In paragraph 6(b)(i) of the reply dated 7th April, 2003, the 3rd respondent has averred that the petitioner was present in the meetings of the board of directors held on 10.3.1998, 15.5.1998, 1.9.1998, 20.11.1998 and 15.12.1998. However, from the copies of the minutes filed by the petitioner on 19.2.2004, I find that on 10.3.1998 and 15.5.1998, only two directors other than the petitioner were present. Likewise, in the meeting held on 15.12.1998, 3 directors other than the petitioner were present. In subsequent meetings also, either the meeting was attended by two or three directors other than the petitioner. Thus, the averments of the respondents are not in line with the records of the

company. Considering the fact that the presence of the 1st petitioner is shown in the board meeting on 1.9.1998 when he was actually away abroad as seen from the copy of his passport, the fabrication of the minutes on that day is evident. Likewise, in the absence of attendance register showing the presence of the petitioners in the AGM held on 30.9.1998 in which the reclassification of the share capital was approved, the respondents cannot claim that the petitioners were present in that meeting. If the petitioners had been present, without their consent, the resolution could not have been passed since the petitioners were holding majority snares in the company. Even assuming that reclassification of the share capital cannot be considered to be an act of oppression, yet, the subsequent allotment, with which also I find contradictions in the stand of the respondents, has resulted in the conversion of the petitioner from a majority into a minority. 16. In paragraph 47 of the reply of the company affirmed by the 2nd respondent, it is averred that even though the 1st petitioner was aware of the proposed allotment of 1500 shares, he did not apply for any shares for allotment in his name and only one application was received from Complex Trading Company Limited and therefore shares were allotted to it. There is nothing on record either by way of notice or in the minutes of the meeting that shares were offered to the petitioners. Instead, in the copy of the minutes of the board meeting on 20.11.1998 filed by the petitioners, it is recorded that the "Chairman informed the board that the company has received several applications for allotment of equity shares of the company in aggregate amounting to 1500 equity shares of Rs. 100/- each". If several applications had been received, how only the 10th respondent was allotted the entire shares of 1500 has not been explained. In that reply, no justification for allotment of 1500 shares had been given except to say that "The allotment to the Complex Trading Company was in the best interest of the respondent No. 1 company and has in fact reduced the percentage shareholding of all the shareholders, both the respondents as well as the petitioners " (Para 49). However, in the reply of the 7th respondent, it is averred that shares were allotted to a creditor.(para 16) In the sur- rejoinder it is stated that the loan account of the 10th respondent had a credit balance of Rs 1,56,274 and on the basis of an arrangement with the 10th respondent, Rs 1.5 lakhs were adjusted against the loan and the balance was paid in cash. It is an admitted position that the 10th respondent had given the loan more than 10 years back and there is nothing on record to show that the 10th respondent demanded repayment of the loan or that it had agreed to adjust the loan by subscribing to the shares of the company. Even though the 10th respondent has contended that it is an independent entity not connected with the respondents, yet, in its reply to the petition it has also contended about the alleged family settlement. If the 10th respondent were to be an independent entity having no connection with the respondents, there was no need for the 10th respondent to refer to the family settlement and to allege that the petitioners have acted in breach of the family settlement in filing this petition. Whether the 10th respondent is an independent entity or not can be determined from the pleadings of the respondents themselves. In para 2(iii) of the reply by the 7th respondent, it is

averred that since it was agreed that the 1st respondent company would remain with the 7th respondent and his group, reclassification was done. In para 6(b)(ix) of the reply filed by the 3rd respondent on 7.4.2003, it is averred that the allotment was pursuant to the family settlement. If even after the allotment to the 10th respondent, the company were to remain with the respondents, then, naturally, the 10th respondent cannot be independent but should have connection with the respondents. That is why, perhaps, it never demanded refund of the loan for over 10 years. Therefore, from the facts and circumstances of the case the only conclusion that could be arrived at is that the allotment of 1500 shares to the 10th respondent was not bonafide and has been done with a view to convert the existing majority into a minority. It has been contended by the learned Counsel for the respondents that a single act cannot constitute an act of oppression within the meaning of Section 397 of the Act. In a number of cases, this Board has held that in so far as allotment of shares is concerned, even though it is single act, since, it has continuous effect, the same could be considered to be an act of oppressions within the meaning of Section 397 of the Act. 17. On an overall examination of the case, I find that the petitioner has established that the allotment of shares to the 10th respondent was only with a view to reduce the holding of the petitioners from over 51% to 43%. Conversion of a majority into a minority is one of the gravest acts of oppression, meriting the winding up of the company on just and equitable grounds. Therefore, all the resolutions relating the impugned shares viz Board and AGM resolutions regarding reclassification of the capital and the Board resolution approving allotment of 1500 shares to the 10 respondent have to be declared as null and void and accordingly I do so. The learned Counsel for the 10th respondent invoked the doctrine of indoor management. This doctrine could be invoked only with reference to acts which relate to the provisions of the Memorandum and Articles, and not in a case where oppression is alleged. Further, I have also held that the 10th respondent is not independent. In addition, since the allotment to the 10th respondent is only against adjustment of its loan, no prejudice would be caused to it, as, on cancellation of the shares, its original loan to the company would get restored. Accordingly, I direct the company to rectify its register of members by canceling 1500 shares allotted to the 10 respondent within a month from the date of this order. Till the rectification is effected, the 10th respondent shall not exercise any voting rights on the impugned shares and till then the respondents shall maintain status quo as of date of all the fixed assets of the company. 18. Since the present proceeding has revealed that the relationship among the parties has soured to such an extent that they may not be able to carry on the affairs of the company collectively, I give an option to the respondents, being in minority, to go out of the company if they so desire by selling their shares to the petitioners on a fair value to be determined by an independent valuer. In case the respondents exercise this option, the same shall be binding on the petitioners. In case, the respondents decide to go out of the company, they may make an application to this

Board for appointment of an independent valuer to determine the fair value of the shares. This option should be exercised within a month of the date of this order.