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Tarlok Chand Khanna and Another Vs. Raj Kumar Kapoor and Others - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtDelhi High Court
Decided On
Case NumberCompany Petitions Nos. 58, 86, 91 of 1978, C.P. No. 14 of 1979 and Criminal Miscellaneous (Company)
Judge
Reported in[1983]54CompCas12(Delhi); ILR1982Delhi156
Acts Companies Act, 1956 - Sections 9, 111, 111(1), 155, 284, 397, 398 and 408
AppellantTarlok Chand Khanna and Another
RespondentRaj Kumar Kapoor and Others
Excerpt:
companies act (1956) - section 284--removal of director--applies to all companies and the only exceptions are those that are built into the section itself--notice board meeting--should preferably be by registered post--transfer of shares effected with out complying with the company's articles--whether the provisions of the companies act would override the company's articles.; the petitioner promoted a company whose members and share-holders consisted of family members. when the petitioner who belonged to one which held the majority share holding, fell ill in 1975, the respondent who belonged to the other group, took over the company's management. subsequently, some more shares were transferred to the majority shareholders and the petitioner was removed form the board of directors of the.....1. this petition under ss. 397 and 398 of the companies act, 1956, and the connected petitions under s. 155 of the act, being c.p. no. 86/78, c.p. no. 91/78 and c.p. no. 14/79, and crl. misc. (company) no. 3/80 under s. 340 of the cr.p.c. surface disputes that have arisen between two groups in a private company composed of close relations. 2. himalaya electricals industries (india) private limited, for short, the company, was incorporated in june, 1952. it was essentially promoted by tarlok chand khanna, for short, khanna, petitioner no. 1 in c.p. no. 58/78. respondent no. 1, raj kumar kapoor, for short, kapoor, a close relation of khanna, was admitted to its membership. the entire issued capital has, by and large, been held by khanna, his wife and his three sons and kapoor and his wife......
Judgment:

1. This petition under ss. 397 and 398 of the Companies Act, 1956, and the connected petitions under s. 155 of the Act, being C.P. No. 86/78, C.P. No. 91/78 and C.P. No. 14/79, and Crl. Misc. (Company) No. 3/80 under s. 340 of the Cr.P.C. surface disputes that have arisen between two groups in a private company composed of close relations.

2. Himalaya Electricals Industries (India) Private Limited, for short, the company, was incorporated in June, 1952. It was essentially promoted by Tarlok Chand Khanna, for short, Khanna, petitioner No. 1 in C.P. No. 58/78. Respondent No. 1, Raj Kumar Kapoor, for short, Kapoor, a close relation of Khanna, was admitted to its membership. The entire issued capital has, by and large, been held by Khanna, his wife and his three sons and Kapoor and his wife. In September, 1975, Khanna fell seriously ill and was eventually incapacitated and almost lost his vision. It is then that Kapoor took advantage of his absence, as alleged by Khanna, or took over management under the adverse circumstance of the liability of Khanna, as alleged by Kapoor. Until 1976, out of the entire issued and paid-up capital of Rs. 1,25,500, Khanna, his wife and his three sons - Ramesh Khanna, Kanwal Khanna and Ish Khanna - held among them 133 shares of the value of Rs. 66,500. Kapoor and his wife, respondent No. 2 in C.P. No. 58/78, between them held 114 shares of the face value of Rs. 57,000. One Gaur held 4 shares of the face value of Rs. 2,000. In the years 1976 and 1977, 27 shares held by Ramesh Khanna, 10 shares held by Kanwal Khanna and 4 shares held by Gaur were shown as having been transferred in the records of the company to Kapoor and his nominees. This improved the position of the Kapoor group to 155 and reduced that of the Khanna group to 96. Khanna was removed from the board. In February, 1978, 102 further shares were allotted to the Kapoor group increasing its strength to 257. 30 shares, at one time held by Parshu Ram, an employee of the company, had been earlier shown in the record of the company as transferred to the wife of Khanna.

3. By C.P. No. 58/78, Khanna complains of oppression and mismanagement and seeks directions with regard to the conduct of the affairs of the company, as well as the cancellation of the transfer and registration of shares belonging to Kanwal Khanna, M. L. Gaur and Ramesh Khanna, cancellation of the additional shares issued and allotted to Kapoor and his nominee, removal of the wife of Kapoor from the board, removal of Kapoor from the board, reinstatement of Khanna on the board, and a direction for payment of arrears of remuneration as a director. Kapoor and his wife are the respondents in this petition. C.P. No. 86/78 is by Ramesh Khanna for rectification of the register of members with regard to 27 shares held by him. C.P. No. 91/78 is for some relief by Kanwal Khanna in respect of 10 shares held by him. C.P. No. 14/79 is apparently in the nature of a counter-blast filed by Parshu Ram, at the instance of Kapoor, to annul the transfer of 30 shares held by him to the wife of Khanna : By Crl. Misc. (Company) No. 3/80, the Khannas seek to carry the dispute beyond the limits of adjudication and want Kapoor to be prosecuted for certain offences arising out of certain returns filed with the Registrar of Companies and applications and affidavits filed in this court.

4. In support of their respective claims, parties produced evidence by way of affidavits and documents. The petitioners also examined two officials of the Registrar of Companies, inter alia, with a view to establish that Kapoor had filed two successive returns, exs. P-A and P-B, as also the circumstances in which and the dates on which these two returns were filed. I have heard learned counsel for the parties at length on the various questions in controversy between the parties.

5. The first question for consideration is as to the true holdings of the parties and the validity of the transfers and registration of four sets of shares held by Gaur (4), Kanwal Khanna (10), Ramesh Khanna (27) and Parshu Ram (30). This would also involve the question as to the validity of the additional issue of shares as well as the dates on which and the circumstances in which the two returns were filed by Kapoor and if, having regard to all the circumstances, he is liable to be prosecuted for any offence.

6. As regards the transfer of 10 shares held by Kanwal Khanna, according to the capital share account register of the company, these shares were transferred by Kanwal Khanna to Kapoor on March 30, 1976. Kanwal Khanna claims that he never transferred these shares and no transfer deed was executed. He further claims that the share certificates were with Kapoor and he misused the trust reposed in him. He further claims that by his letter of March 23, 1978, annex. P-2, he had sought the return of the share certificates from Kapoor but there was no reply. Kapoor claims that these shares were purchased by him from Kanwal Khanna because Kanwal Khanna was losing interest in the company and Kanwal Khanna had been paid for these shares. According to him, the transfer deed was duly executed but the relevant records were removed from the offices of the company by the Khannas. In support of the valid transfer and registration, Kapoor also relies on the fact that Ramesh Khanna, the brother of Kanwal Khanna, had attended the annual general meeting of the company held on June 22, 1976, as also later in December, 1976, and still later in March, 1977, and even though Kanwal Khanna had never been sent notice of these meetings, Ramesh Khanna raised no objection which he would have if Kanwal Khanna had not transferred these shares. It is further claimed that the transfer was duly reflected in the balance-sheets of the company for the years 1976, as well as 1977, which were duly signed by none other than Khanna, the father of Kanwal Khanna.

7. True, the transfer deed in respect of these shares of these shares is not available Parties have made accusations and counter-accusations against each other with regard to the transfer deed. The registration of the transfer is not supported by the resolution of the Board because the present minute book of the Board starts from July, 1976. Here again, there are accusations and counter-accusations with regard to the previous minute book. There is also no proof with regard to payment of consideration apart from the entry in the capital account register itself. There is neither any cheque payment nor any receipt executed by Kanwal Khanna. Kanwal Khanna did ask for the return of the certificates in March, 1978. The transfer was, however, not challenged until 1978, and what appears to clinch the matter is the admitted fact that notices for the annual general meetings held in June, 1976, and, thereafter, were not sent to Kanwal Khanna because of the transfer and even though the meetings of June, 1976. December, 1976, and March, 1977, were attended by Ramesh Khanna, and some of these were attended by Ish Khanna, as also Khanna himself, no objection was raised with regard to the non-receipt of notice by Kanwal Khanna. If these shares had not been transferred, one would have expected an objection by Kanwal Khanna as well as by the other members of the group. This clearly shows that these shares had been duly transferred by Kanwal Khanna in favor of Kapoor and it is, thereforee, not possible to hold that these shares had not been duly transferred.

8. Regarding four shares held by Gaur, it has been a common case of the parties that Gaur has been a non-resident during the last many years. No transfer deed has been placed on record. His shares could not have been transferred without the prior permission of the Reserve Bank in view of his admitted status as a non-resident. There is, however, no challenge by him to the purported transfer and one does not know whether he claims to be a shareholder of the company or has lost interest in it. In any event, in his absence and in the absence of any records relating to this transfer and the legal impediment to any such transfer, it is not possible to accept the contention that these shares were duly transferred in favor of Kapoor or that the transfer had been duly registered in the records of the company. The transfer and its registration must, thereforee, be ignored until their existence and validity are determined in appropriate proceedings to which Gaur is a party.

9. As for the shareholding of Ramesh Khanna, the transfer was based on a transfer deed admittedly executed by Ramesh Khanna but the contention of the Khannas is that this was a blank transfer deed, intended to be used for the transfer of shares to the wife of Khanna. It is alleged that the blank transfer deed, duly signed by Ramesh Khanna, had been delivered to Kapoor for registration and since the share certificates were already lying with him he misused the trust by transfer of shares in his favor or in favor of his nominee. This contention does not stand to reason. If the transfer was intended to be made in favor of Ramesh Khanna's mother, one is unable to understand why a blank transfer deed duly signed by Ramesh Khanna was handed over to Kapoor. Even with regard to this transfer, there is no proof of consideration but it is reflected in the capital account register. There was no requisition from Ramesh Khanna requiring Kapoor to return the transfer deed or the share certificates. One would have expected such a requisition if the shares were intended to be transferred to the wife of Khanna. The registration of this transfer is based on the approval of the Board in its meeting held on August 29, 1977, even though Khanna did not attend that meeting. The meeting also approved the acceptance by the company of the resignation of Ramesh Khanna from service. The admitted fact that contemporaneously with the transfer, Ramesh Khanna resigned from the company and set up in co-operation with Kanwal Khanna and with the blessing of Khanna, an independent business in the same industry, gives support to the version of Kapoor with regard to this transfer. Ish Khanna had also resigned earlier and Kanwal Khanna had transferred his holding. These circumstances also lend support to the version with regard to the transfer of these shares. From all these circumstances, it would be a reasonable inference to draw that these shares had been duly transferred by Ramesh Khanna. I have arrived at this conclusion independently of the circumstances relied upon on behalf of Kapoor that the transfer was duly reflected in the annual return for the year 1977, a subject I would presently deal with in another context.

10. As for the transfer of shares registered earlier in the name of Parshu Ram, an employee of the company, the case of Khannas is that these shares were transferred by Parshu Ram to the wife of Khanna is September, 1974, for a consideration of Rs. 4,800, when the company had suffered huge losses and that the transfer was duly registered in the records of the company and Parshu Ram has filed the present petition in February, 1979, at the behest of Kapoor after disputes started between the Kapoor and the Khannas and Khanna filed the proceedings in court. It is interesting to notice in this context that Parshu Ram never appeared in this court to pursue the petition and even Kapoor could not deny that Parshu Ram ceased to be a member because the very annual return on which Kapoor relies, whether of the year 1977 or earlier, do not appear to list his name as a member of the company. If the shareholding was transferred in 1974, and the challenge to the registration and transfer was not made until 1979, the plea of Khanna appears to find support from this circumstance. Kapoor was also unable to deny the charge of Khanna that this transfer had been duly effected and registered in the records of the company in 1974 itself. The petition of Parshu Ram, thereforee, appears to have been filed at the instance of Kapoor as a measure of counter-blast and there is, thereforee, no ground to interfere in that behalf.

11. The transfer of shares and their registration in respect of the aforesaid four batches were sought to be voided on the ground that under art. 8 of the articles of the company, a transfer of shares could be sanctioned by the Board only by a unanimous decision of the directors and that none of these were sanctioned by such a decision. This is what art. 8 provides :

'8. All transfer of shares shall be sanctioned only with the unanimous decision of the directors and the directors may refuse to register any transfer of a share without assigning any reason.'

12. This article would regulate the sanction of transfers because the power of the company under its articles to deal with transfers is preserved by sub-s. (1) of s. 111 of the Act. Such a provision is also not inconsistent with any provision of the Act and is, thereforee, outside the reach of s. 9 of the Act. A unanimous decision of the directors was, thereforee, necessary for a valid sanction of any transfer. Aid of art. 8 is, however, unnecessary in the case of shares held by Gaur because I have already held that there was no valid transfer. If there was no valid transfer, there was no question, of registration whether or not art. 8 is invoked. So far as the transfer of shares of Parshu Ram is concerned, art. 8 would not hit it, because Kapoor does not join in the challenge to this transfer and this transfer apparently had the concurrence of both the permanent directors. This can be clearly inferred from the fact that the various returns filed by the company and signed by Kapoor after the transfer consistently reflected this transfer, including the return for the year 1977, on which Kapoor particularly relied, on the ground that it had been signed by Khanna as well. I would deal with the two returns for the year 1977, filed by Kapoor presently. There is, however, no material to show that the registration of the transfers of 10 shares of Kanwal Khanna and 27 shares of Ramesh Khanna had the sanction of the company with the unanimous decision of the directors, as envisaged by art. 8 of the articles. The records with regard to the first of these transfers were not available. The registration of the second transfer was based on the decision of the Board in its meeting held on August 29, 1977, which was attended by Kapoor and his wife in the absence of Khanna. This registration could not, thereforee, be said to be with the unanimous decision of the directors. The expression 'present and voting' is not to be found in the phraseology of this article. The article must, thereforee, be construed to mean that the sanction should be with the unanimous decision of all the directors of the company. That would be a reasonable construction of the article in the absence of any words of limitation. Unanimity among all the directors, thereforee, was a condition for a valid registration. The registration of these transfers was, thereforee, vitiated on account of non compliance with art. 8, and it would be open to the transferees of these shares to seek the registration of these transfers in accordance with law. Until then, the transfers which are otherwise valid would not be given effect to by the company until they have been duly registered in accordance with the decision of the Board in terms of art. 8 of the articles of the company.

13. That takes me to the consideration of the contention of Kapoor that, in any event, the objection to the validity of transfers of Kanwal Khanna and Ramesh Khanna and their registration was squarely met because both the transfers and their registration were duly reflected in the annual return, filed by the company for the year 1977 in the office of the Registrar of Companies, and the concurrence of Khanna to the registration be inferred from the fact that the return was signed by Kapoor as well as Khanna. This calls for an examination of the circumstances in which two returns for the same period were filed.

14. In the affidavit in opposition filed by Kapoor in C.P. No. 58/78, Kapoor alleged that the return for the period ending December 31, 1976, reflected the change in the shareholding in that year and the return had also been signed by none other than Khanna himself. It was further alleged that the change in the shareholding in 1977 was also reflected in the annual return filed for that period but the further plea that the latter return was also signed by Khanna was not made. This plea was never made until an application, being C.A. No. 605/79, was filed on November 13, 1979, seeking leave to file an additional affidavit of that date which was enclosed along with the application. In this affidavit, two additional pleas were raised, that the changes in the share-holdings in 1976 and 1977 were reflected in the annual return filed for the year 1977, and that this return had been duly signed by Khanna along with Kapoor. There is an interesting backdrop to this application which can be reconstructed from the material that eventually came to light. Annual return for the period ending December, 1977, was originally filed by Kapoor on March 21, 1978, and is Ex. P-A. This return, which is signed by Kapoor and his wife, Nirmala Kapoor, as directors of the company, inter alia, indicates that Gaur and Kanwal Khanna had ceased to be members of the company before the year 1977, and further that 27 shares held by Ramesh Khanna during the year 1977 were transferred to Nirmala Kapoor, wife of Kapoor, on August 29, 1977. This document was apparently found defective by the Registrar of Companies and a notice was admittedly sent to Kapoor in October, 1979, requiring him to rectify the defects. Kapoor, on his own showing, went to the office of the Registrar on the 9th and 12th of November, 1979, and according to para. 9 of the affidavit, when he went there on the 9th November, 1979, 'corrections were made in certain documents for the years 1971, 1975 and 1977, etc.'. He also stated that he went to the office of the Registrar again on November 12, 1979. Para. 10 of the affidavit is significant and runs thus : '10. That during the course of the visits on 9th and 12th November, 1979, I saw the annual return filed by the company for the year 1977. In that return is mentioned the transfer of 27 shares by Shri Ramesh Khanna in favor of Smt. Nirmala Kapoor and also the factum of the appointment of Smt. Nirmala Kapoor as director of the company on March 21, 1977. The said annual return is duly signed by me as managing director and also by Shri T. C. Khanna, the other director of the company.' By this application (C.A. No. 605/79), the court was requested to summon the file of the Registrar so that the annual return for the year ending December, 1977, could be examined by the court. Notice of this was issued to the Registrar and when the file was produced, it was discovered that there were two returns for the period, Ex. P-A, which was originally filed, and Ex. P-B, which was sought to be substituted on November 12, 1979. Evidence of the officials of the Registrar has since been recorded and what appears to have happened is this. When Kapoor went to the office of the Registrar on or about 12th of November, 1979, he carried with him a fresh return for the same period incorporating certain changes which were required, but on a form which had apparently been signed by Khanna blank because none of the entries is in his hand. This document, Ex. P-B, was filed on November 12, 1979, but the office of the Registrar put on it a stamp which had reference to the document filed earlier in that it gives the number and date under which the fee had been originally deposited when the return was filed in March, 1978. Below the stamp, however, are the signatures of the officers under the date line November 12, 1979. It appears that possibly the intention was to substitute this document for the original return, and, either to take away the original document or to ensure that that was not produced in court when the record was summoned. This, however, appears to have misfired because the Khannas were a little vigilant and on inspection found what had happened. This is how the records when summoned contained both the returns, and the evidence of the two officials of the Registrar, P.W. 1 and P.W. 2, abundantly establishes that Ex. P-A, which is signed only by Kapoor and his wife, was filed on March 21, 1978, and the other return, Ex. P-B, which is on a form bearing the signatures of Khanna, was filed only on November 12, 1979, a day before the application C.A. No. 605/79, was filed. Since Ex. P-B was filed in November, 1979, and Ex. P-A filed in March, 1978, was not signed by Khanna, the affidavit-in-opposition did not contain the plea that the return for the year 1977 had been signed by Khanna. These preparations were apparently made to prepare the ground to urge in the affidavit, enclosed with that application, that the return filed by the company in respect of the year 1977 was duly signed by Khanna. The fact, that the earlier return had not been signed by him and a subsequent document was filed only a day before the application, was not disclosed to the court and an impression was perhaps sought to be created by the application, as also the accompanying affidavit, as if the only return for the year 1977 had been signed by Khanna and that, thereforee, the change in the shareholding had his concurrence. It is possible that Kapoor discovered an old form of a return bearing the signature of Khanna, because Khanna could not have signed it in 1979 or even in 1978, because C.P. No. 58 was filed by Khanna in May, 1978. It also follows that when Ex. P-A was filed by Kapoor in March, 1978, he was not aware that a blank form of the annual return, signed by Khanna, was lying with him, as, otherwise, the same would have been used on the earlier occasion. It is also possible that the importance of such a form was not realised in March, 1978, because the petition was filed in May, 1978. That all the entries in both the returns are exclusively in the handwriting of Kapoor closes the other option. It is, thereforee, reasonable to infer that with a view to reinforce the validity and existence of these transfers, an attempt was perhaps made to substitute the annual return in the office of the Registrar of Companies and a false plea was sought to be raised in the affidavit that the only return for the year 1977, reflecting these changes, had been signed by no other person than Khanna. But for the vigilance of the Khannas, and perhaps, for the intervention of someone in the office of the Registrar of Companies, an impression could have successfully been created that the return filed in the office of the Registrar for the year 1977 reflecting these changes had been signed by Khanna. It also appears that such an attempt could not have been made without the active connivance of someone in the office of the Registrar of Companies. There may perhaps be another way of looking at the course of events. There may be possibly be some loose ends needing to be tied up and some questions calling for Explanationn. In view, however, of the fact that I do not rely on this return, it is unnecessary to take this matter any further.

15. In the circumstances, it cannot be said that the aforesaid transfers had the concurrence of Khanna or that the annual return reflecting these changes duly signed by Khanna had been filed so as to fix Khanna with the knowledge of these exchanges. I would, thereforee, ignore Ex. P-B for the purpose of determining the validity of these transfers and their registration. I have already held above that these two transfers were valid but their registration was not. It would, thereforee, be open to the transferees to seek the registration of these transfers in accordance with law, but, until the transfers are duly registered, the Khannas would not be entitled to exercise any rights in relation to these two sets of shares.

16. That leaves for consideration the question the question whether proceedings for the prosecution of Kapoor should be initiated for any offences that he may have committed having regard to the circumstances in which Ex. P-B was filed and the plea sought to be raised on its basis. I have already discussed above in great detail the circumstances in which and the purpose with which Kapoor might have filed the two annual returns for the period ending December, 1977, and how and why, pursuant to the filing of the second return, Ex. P-B, an application, being C.A. No. 605/79, was filed by him on November 13, 1979. I have already observed that the application and the affidavit enclosed with it were perhaps intended to create a wrong impression that the return for the period ending December, 1977, filed by the company with the Registrar of Companies, had been signed by Khanna along with Kapoor and to conceal the fact from this court that the original return filed for the period did not bear the signature of Khanna. It is, however, true that neither the affidavit nor the returns have had the desired effect partly because the attempt was more or less frustrated but primarily because the way I had looked at the validity of the transfer of two batches of shares and of their registration, the reinforcement that these transfers had been duly reflected in the return said to have been signed by Khanna would not affect the ultimate decision in the case. It is true that perjury is rampant in court proceedings at almost all levels and because of the burden of normal judicial work, presiding officers are reluctant to get involved in the trial of collateral matters, because it is time-consuming. I was for that reason (not ?) inclined to consider the question of prosecution of Kapoor. The Khannas and the Kapoor, are, however, very closely related and any further proceedings between them or involving them is bound to cause further bitterness, which would not be conducive to their personal relations or to the conduct of the future business of the company. Kapoor has apparently acted rather indiscreetly in an attempt to establish a valid transfer of shares in his favor and was probably misguided into an attempt to use a blank form of return signed by Khanna to reinforce his case. No useful purpose would, thereforee, be served by pursuing the matter any further in the peculiar circumstances of this case.

17. The next question is as to the validity of the allotment of further shares by the Board of Directors of the company on February 24, 1978. In this meeting 102 equity shares of the value of Rs. 51,000 were allotted to the Kapoor group. The validity of the allotment is challenged on the ground that by virtue of the provision contained in art 6 of the articles, the unallotted shares were put under the control and at the disposal of the Directors, who may allot the same at their absolute discretion, but 'only with their unanimous consent'. The allotment of the additional shares must, however, be voided on the short ground that no notice of the meeting was sent to Khanna in view of his purported removal. For the reasons I would presently give, while dealing with the question of the validity of the removal of Khanna, his removal was bad and that being so, he was entitled to the notice of the meeting which authorised the allotment Notice of this meeting admittedly was not issued to him. Besides, allotment of further shares could have been done only with the unanimous decision of the Board. There was no unanimity either, if Khanna continued in law to the a director, in view of the invalidity of his removal. The allotment of further shares must, thereforee, fall with the decision in respect of the removal of Khanna and the Kapoor group must be confined to the shareholding as subsisted prior to the date of the meeting. The payment, if any, made by the Kapoor group to the company for the additional shares would be refunded to Kapoor or his nominees, as the case may be.

18. The next question is with regard to the validity of the removal of Khanna from the Board. Khanna is apparently the promoter of the company and was one of the two permanent directors of the company, under art. 10 of the articles, entitled to hold office for life, unless he voluntarily resigned, and was designated as director-in-charge by that article. Kapoor was the other permanent director and was designated by that article as the managing director of the company. Article 14 further provides that in case of the death of any permanent director a 'person nominated by such a director in his lifetime shall be permanent director of the company in place of the deceased director'. Article 17 further provides that every director, other than the permanent director, shall retire at the annual general meeting. Article 23 further empowers the managing director and the director-in-charge to carry on the business of the company and certain powers of management are entrusted to the director-in-charge by that article.

19. According to Kapoor, Khanna fell seriously ill in April, 1975, and was admitted to a nursing home and even though by August, 1975, he had recovered, by September, 1975, he 'became almost invalid' 'as he had undergone a major brain operation' and was, thereforee, unable to look after the affairs of the company except to attend the meetings of the Board and that in spite of this, out of regard, the company had been paying his salary regularly for a period of almost three years. According to Kapoor, Ramesh Khanna had been attending the meetings of the Board and the annual general meeting of the company as a representative of the Khanna Group even though the sons of Khanna had been carrying on independent business in competition with the business of the company. It is claimed that on a requisition from two shareholders for the removal of Khanna, a meeting of the Board of Directors was held on March 30, 1978, a notice of which had been sent to Khanna on March 27, 1978, and the Board resolved to convene an extraordinary general meeting to consider the question of removal. The extraordinary general meeting was convened for April 26, 1978, and a notice of it was sent to all the share-holders, including Khanna, on April 3, 1978, and the requisition for removal was enclosed with the notice. It is claimed that in the extraordinary general meeting held on April 26, 1978, Khanna was removed from the Board. It is alleged that the Khannas knew of this meeting because it was only after receipt of the notice of the meeting that they illegally purported to convene a meeting of the Board for April 27, 1978, to create confusion and that none of the Khannas attended the extraordinary general meeting as part of their concerted action. The validity of the removal of Khanna from the Board depends on the answer to the questions if the appointment of the wife of Kapoor to the Board on March 27, 1977, and the meeting of the board of directors of the company held on March 30, 1978, and the extraordinary general meeting of the company held on April 26, 1978, were valid as also in the way one resolves an apparent conflict between the provisions of some of the articles and the provisions of the Companies Act.

20. The first question to be considered is the validity of the appointment of the wife of Kapoor to the Board. This is important because until she was appointed to the Board in the meeting held on March 27, 1977, Kapoor and Khanna were the only directors of the company. If the meeting of the Board said to have been held on March 30, 1978, was to have taken a valid decision to convene an extraordinary general meeting to consider the motion for the removal of Khanna with any claim of legitimacy, someone must be added to the Board, obviously because Khanna would not agree even if he was present in such a meeting and if he absented himself, a meeting could not be held for want of quorum. It was for this reason apparently that the process of removal of Khanna had perforce to be initiated by the induction of a friendly director in the Board by Kapoor. This appears to be a clear genesis of the appointment of the wife of Kapoor as a member of the Board. She was appointed a director of the company by virtue of a resolution passed at the extraordinary general meeting of the company held on March 21, 1977. Exception is taken to this meeting by Khanna on the ground that this was done without any notice to him but there is no substance in this objection because this meeting, among others, was attended by Ramesh Khanna. The validity of the appointment is, however, challenged on the ground that in terms of art. 16, permanent directors had the power by their unanimous decision 'only' to induct a new director. This is how art. 16 reads :

'16. The permanent directors shall have power from time to time and at any time by their unanimous decision only to appoint any qualified persons as a director of the company so that the total number shall not at any time exceed five.'

21. It empowers the permanent directors to appoint a director of the company only by their unanimous decision but it is difficult to hold that there is anything in the language of the article which excludes the exercise of that power by the company in the general meeting. The expression 'unanimous decision only' merely underscores that the decision of the permanent directors shall be unanimous but it is difficult to read in the article a provision that the permanent directors alone are entitled, by unanimity or otherwise, to appoint additional directors. It is, thereforee, not possible to avoid the appointment of the wife of Kapoor as a member of the Board of Directors of the company.

22. The next question that, however, arises is whether Khanna had notice of the meeting of the Board of Directors held on March 30, 1978, and of extraordinary general meeting held on April 26, 1978, since it is claimed that these meetings had been duly held in the absence of the Khanna group and the decisions taken at the meetings were duly recorded in relevant minute books. According to Kapoor, a notice had been received from G. C. Khanna, a member of the company to move a resolution for the removal of Khanna on the ground that he was unable to discharge the duties and responsibilities of a director by virtue of physical incapacity and a meeting of the Board of Directors of the company was convened for March 30, 1978, by a notice of March 24, 1978, inter alia, to consider the convening of an extraordinary general meeting in terms of the requisition received from the shareholders. It is claimed that the notice of this meeting was duly sent to Khanna and on March 27, 1978, under certificate of posting, an intimation with regard to the requisition was also sent by a separate letter with which a copy of the requisition is said to have been enclosed. A photo copy of the certificate of posting has been produced to show that four covers were posted, two of which were addressed to Khanna while the third and the fourth were addressed to Kapoor and his wife on March 27, 1978. It is further claimed that the Board met on March 30, 1978, in the absence of Khanna and decided to convene an extraordinary general meeting on April 26, 1978, to consider the motion for the removal of Khanna. It is interesting to notice in this context that by a registered A.D. letter of March 23, 1978, annex. P-9, Ish Khanna and Kanwal Khanna made a grievance to the managing director that they had not been receiving notice of the annual general meetings or copies of the balance-sheet, etc. A registered A.D. letter of March 27, 1978, annex. P-19, was also sent by the wife of Khanna making a similar complaint. The meeting of the Board convened for March 30, 1978, was obviously expected to be a controversial one since a permanent director was sought to be removed. There was, however, no Explanationn why, in spite of this, a registered notice was not sent for the meeting even though the registered letters were being received from the Khanna group almost at the same time when the notice was supposed to have been sent under certificate of posting to Khanna. It has often been pointed out that though the requirement of the Companies Act is satisfied by posting a communication under certificate of posting, service by this mode is the easiest stand for any one to take at any time and it is not a sheer coincidence that in practically all controversial meetings, the party claiming to have held the meetings and to have notified the others almost always relies on a certificate of posting clearly pointing to the possibility that such meetings are invariably managed rather than held. This is because of the unfortunate circumstance that certificates of posting are readily available. If the meeting of the Board had, thereforee, been held, I see no reason why a registered A.D. notice was not sent to Khanna even though that may not be the strict legal requirement. The so-called certificate of posting also does not appear to meet the requirement of law because, in the first instance, there is no averment that the postal covers had been duly posted and the certificate of posting had been duly issued and received. All that has been filed is a photo copy of a list of four names with postal stamp marking. I am not prepared to accept these as sufficient proof of the dispatch of the notices to Khanna and in holding that they have been notified of the meeting of the Board scheduled to be held on March 30, 1978. What I have said above with regard to the meeting of the Board is equally true of the extraordinary general meeting said to have been held on April 26, 1978. The extraordinary general meeting was supposed to have been held on April 26, 1978. Notice of this meeting is of March 31, 1978, and is supposed to have been sent under certificate of posting on April 1, 1978. It is interesting to notice in this context that between March 24, 1978, and April 24, 1978, there were at least half a dozen letters written to the company on behalf of Khanna group which were registered A.D. covers and which remained unreplied. These ar P-7 to P-9, and three of these are registered A.D. covers. Neither of these were replied to by the company. In that kind of a situation, one would have expected the company to send registered A.D. notice to Khanna whose removal was due to be considered even though it may be conceded that in view of the reduced majority of the Khanna group by that time, partly on account of the transfers and partly on account of the increased allotment, the decision with regard to Khanna would have been a foregone conclusion. It follows, thereforee, that either these meetings were never held or if they were held, Khanna was not properly notified of the same.

23. The question still remains, if Khanna, a permanent director of the company, could have been removed by the company in a general meeting in spite of the provision in the articles. If neither of the two meetings were valid, because Khanna had no notice of these, even though he was intended to be removed from the board, his removal is bad in law irrespective of the way one looks at the power of the company in a general meeting to remove a permanent director, who is appointed as such by name in the articles. I would, however, consider the question since was raised. No doubt, Khanna was a permanent director named in art. 10 to hold office for life. In terms of art. 14, he also had a right during his life time to nominate his successor on the board in the event of his death. He could, nevertheless, be removed under s. 284 of the Act. Section 284 is based on s. 184 of the English Act and applies to all types of companies, public and private, and the only exceptions are those that are built into the section itself. A person appointed as a life director by the articles or by any agreement is, nevertheless, removable by the company in general meeting and has no security of tenure in office. While the shareholders have no power, apart from that given in the statute or the articles, to intervene in the management of the company's affairs, this section was designed to enable them to control the directors by their removal. The only exceptions are the directors appointed by the Central Govt. under s. 408, and life directors holding office on April 1, 1952. The only other exceptions are nominee directors of financial institutions, with which we are not concerned. No doubt, art. 14 empowers a permanent director to nominate a director to take his place after his death, but even that does not save the tenure from the operation of s. 284. True, s. 184 of the English Act specifically exclude the operation of articles which s. 284 does not, but that was not necessary in view of the scheme of the Indian Act, because s. 9 of the act provides that the provisions of the Act would have effect, notwithstanding anything to the contrary contained in the articles of the company. No further provisions for exclusion of provisions in the articles to the contrary was necessary. Khanna could have, thereforee, been removed, if the requirements of s. 284 and of a valid meeting had been satisfied. This was, however, of no avail, because as observed earlier, the proceedings of the meetings which led to removal were invalid the absence of notice to Khanna either of the proposed motion, or of the proposed meeting of the Board and the extraordinary general meeting of the company. The effect, thereforee, is that Khanna continues to be a permanent director notwithstanding his purported removal from the Board.

24. The next question is as to the regulation of the conduct of the affairs of the company in future and as to the directions that may be necessary and proper in the circumstances to ensure the smooth conduct of the business of the company. In view of all that has happened, there seems to be very little possibility of the two groups being able to get along. There are also other genuine difficulties. Kapoor has certainly been running the show almost on his own during the last many years since 1975-76, when Khanna got incapacitated. He must have also made not only substantial investment, but devoted considerable time to business. Meanwhile, Khanna has not only remained incapacitated, but on his own showing, has been virtually blind and, thereforee, obviously unable to look after the business or even to indirectly participate in the conduct of the affairs of the company as a member of the Board, much less as director-in-charge, to which position he was appointed by the articles. His sons have admittedly been carrying on for some time now an independent business in the same industry, though confined to certain other items. He has also admitted to have given them assistance in establishing the business by offering to mortgage his property to enable them to raise bank credit. The Khannas were, thereforee, not averse in this situation to be bought out of the company provided they get not only a fair value for their admitted holding, but are also paid their entitlement such as arrears of salary of Khanna as director and towards the amount standing to their credit in the books of account of the company, if any. Since Kapoor was responsible for taking a series of precipitate steps to exclude Khannas and to perpetuate his hold over the company, Khanna would ordinarily be entitled to an option to buy out Kapoor on reasonable terms. It would, however, not be possible compel Kappor to transfers his holding to Khanna because of the peculiar compulsions referred to above. It is also necessary to make a provision for the smooth functioning of the company until Khanna has been paid.

25. There was some controversy between the parties with regard to the opening of a new bank account in the name of the company by Kapoor in the Kamal Nagar Branch of the Canara Bank and as to the accountability of the management of the company with regard to the operation of the bank account. The opening of this account was an apparent sequel to the instructions by Khanna to the existing banker of the company with regard to the disputes that had surfaced between the two groups and which may have possibly led to the disruption of normal banking channel for the conduct of the business of the company. In any event, whatever the compulsions for the opening of this account, it was nevertheless the account of the company and even though operated upon by Kapoor exclusively, he is answerable to the company for the various transaction reflected in this account. In any event, all the directors of a company who are conducting the business of the company on its behalf or in its name are always accountable to the company for the funds or property of the company that they deal with in the course of the discharge of their duties. There was also some controversy as to how much funds each of the groups had made available to company in addition to their respective contributions to the capital. Some of the credits to which the groups are entitled are apparently duly reflected in the books of account of the company. It is possible that some of the credit entries may be exaggerated or fictitious as was alleged on behalf of Khanna with regard to the period during which has group had remained ousted from the management of the company and the affairs of the company were being managed by Kapoor. These matters can be adequately dealt with on the completion of the account of the company and the preparation and audit of the balance-sheet and profit and loss account of the company to date. If any of the groups is not satisfied with the accounts or their audit, they would be entitled to raise these matters in the next meting of the Board, as also indeed, in general meeting of the company and solicit an appropriate decision at any of the two levels to ensure that the rights and liabilities of the directors and the creditors of the company qua the company are properly reflected in the balance-sheet and they dealt with accordingly.

26. Having regard to all the circumstances, I would make the following directions :

(1) Of the total issued capital of Rs. 1,25,500, divided into 251 equity shares of Rs. 500 each, the valid holding of the Khanna group in respect of which they are entitled to exercise their rights is 96. The valid holding of the Kapoor group in respect of which they are entitled to exercise their rights would be 114. 4 shares continue to be held by Gaur. 10 shares of Kanwal Khanna and 27 shares of Ramesh Khanna continue to be registered in their names but having been transferred to the Kapoor group, Kanwal Khanna and Ramesh Khanna would not be entitled to exercise any right with regard to these shares. Shares held by Parshu Ram were duly transferred and registered.

(ii) The additional allotment of 102 further shares in favor of Kapoor on February 24, 1978, having been voided, Kapoor of his nominee would not be entitled to exercise any right in relation to these shares and would have the corresponding right to the refund of the amount, if any, that may have been paid by him or his nominee to the company on account of the consideration for these shares.

(iii) The removal of Khanna from the Board is void and he through-out continued to be a permanent director of the company as well as director-in-charge in terms of the articles. He would be entitled to be paid the salary that was being drawn by him as director-in-charge but only for a period of 18 months. The amount would be paid within a period of six months by equal monthly Installments. The first Installment would be paid over before February 10, 1981. He would continue to be the permanent director until he resigns or is removed. He would, however, not be entitled to draw any salary in future and would be liable to be removed in accordance with law.

(iv) Khanna would have the option to be purchased out of the company by Kapoor on payment of the face value of the shares registered in the name of Khanna besides the arrears of salary referred to above and any amount that may be found due to any member of Khanna group on the audit of the balance-sheet and profit and loss account for the period ending December, 1980. The option may be exercised by Khanna within 3 months and the payment would be made within 3 months of the acceptance of the offer by the Kapoor. The Kapoor would be bound to accept the offer within one week of the receipt of the same. If the Khanna do not exercise the option, Kapoor would have the option to be bought out of the company on the same terms.

(v) The Khanna group would be paid such amount as may be standing to the their credit in the books of account of the company on the basis of the certificate of the auditor to be furnished on the completion of the audit of the books of account to date. The certificate would be furnished within 3 months and the payment would be made within 3 months thereafter in equal monthly Installments.

(vi) The Board of Directors of the company would, until the exercise of the option or settlement between the parties otherwise, be presided over by Justice Prithvi Raj, former judge of this court, who would be the chairman of the company. All decisions of the board would be unanimous, but failing that, with the concurrence of the chairman. The business of the company would, however, continue to be carried on during the period by Kapoor under the overall supervision of the Board. The Chairman would be paid a remuneration of Rs. 750 per month an would continue to hold office for a period for six months unless it is extended by the Board or by the company in its annual general meeting. The Company would also have the liberty to substitute any other person acceptable to both the parties for the aforesaid incumbent as Chairman. The Chairman would generally supervise the conduct of the business of the company and would, inter alia, explore the possibility of a smooth transition to the exclusive control by the one other of the groups.

(vii) Liberty to the Chairman and to the parties to obtain directions of the court from time to time with a view to carry out the above directions.

(viii) C.P. No. 58/78, C.P. No. 86/78 and C.P. No. 91/78 are disposed of in the aforesaid terms.

(ix) C.P. No. 14/79 and Cr. Misc. (Company) No. 3/80 are dismissed.

(x) Khanna would have his costs. Counsel fee is assessed at Rs. 750.


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