Skip to content


In Re: Gluco Series Pvt. Ltd. and ors. - Court Judgment

LegalCrystal Citation
SubjectCompany
CourtKolkata High Court
Decided On
Case NumberCompany Petition No. 448 of 1980
Judge
Reported in[1987]61CompCas227(Cal)
ActsCompanies Act, 1956 - Sections 193, 397 and 398
AppellantIn Re: Gluco Series Pvt. Ltd. and ors.
Cases Referred(g) Howard SmithLtd. v. Ampol Petroleum Ltd.
Excerpt:
- dipak kumar sen, j.1. debendra nath bhattacharya, since deceased, and deb kanta roy were the promoters of gluco series p. ltd. (hereafter referred to as 'the company') which was incorporated on november 11, 1959. at the incorporation of the company, debendra subscribed for 1,000 shares and deb kanta subscribed for 200 shares of rs. 100 each.2. the main object of the company is to manufacture and sell glucose of various types.3. the articles of association of the company provide, inter alia, as follows:'article 7....the company shall be entitled to treat the registered holder of any share as the absolute owner thereof and accordingly shall not, except as ordered by a court of competent jurisdiction or as by statute required, be bound to recognise any benami, equitable or other claim to/or.....
Judgment:

Dipak Kumar Sen, J.

1. Debendra Nath Bhattacharya, since deceased, and Deb Kanta Roy were the promoters of Gluco Series P. Ltd. (hereafter referred to as 'the company') which was incorporated on November 11, 1959. At the incorporation of the company, Debendra subscribed for 1,000 shares and Deb Kanta subscribed for 200 shares of Rs. 100 each.

2. The main object of the company is to manufacture and sell glucose of various types.

3. The articles of association of the company provide, inter alia, as follows:

'Article 7....the company shall be entitled to treat the registered holder of any share as the absolute owner thereof and accordingly shall not, except as ordered by a court of competent jurisdiction or as by statute required, be bound to recognise any benami, equitable or other claim to/or interest in such share on the part of any other person.

Article 29.--Number of directors shall not be less than two and more than seven until otherwise determined by general meeting.

Article 30.--The first directors of the company are--

(a) Sri D.N. Bhattacharjee

(b) Sri D.K. Roy.

The first directors of the company shall be permanent directors and shall not be subject to retirement by rotation. The directors shall have power at any time and from time to time, to appoint any person as an addition to the board so that the total number of directors shall not at any time exceed the maximum number fixed.

Article 42.--Sri D.N. Bhattacharjee shall be the chairman of the board of directors of the company and shall continue to act as such until he resigns voluntarily. He shall preside over all meetings of the board and all general meetings--ordinary or extraordinary. The chairman shall have the authority to exercise all the powers of the managing director as mentioned in Clause 44. The remuneration of the chairman shall be fixed by the board.

Article 43.--The business of the company shall be carried on by the managing director subject to the supervision and direction of the board. Sri D. K. Roy shall be the managing director of the company, and shall continue to act as such managing director of the company until he voluntarily resigns the same.'

4. By a special resolution dated October 12, 1965, a new article, being article No. 48A, was incorporated as follows:

Article 48A,--Notwithstanding anything contained in these articles of association or in the regulations contained in Table ' A ' in Schedule I to the Companies Act, 1956, which may be applicable to the company, so long as any money remains due by the company to West Bengal Financial Corporation, its successor or successors and/or assigns (hereinafter called 'the said Corporation') under or by virtue of any deed or deeds of mortgage and/or hypothecation executed by the company in favour of the said Corporation the following provisions shall have effect: (a) No change shall be made in the memorandum and articles of association of the company or in the capital structure of the company save with the previous consent in writing of the said Corporation.'

5. At its incorporation, the authorised share capital of the company was Rs. 5,00,000. By a special resolution also dated October 12, 1965, the authorised share capital of the company was increased from Rs. 5,00,000 to Rs. 10,00,000.

6. It is not in dispute that on March 31, 1979, the issued share capital of the company was Rs. 6,45,000 divided into 6,450 equity shares of Rs, 100 each, fully paid up, which were held as follows:

(a) 2,150 shares stood registered in the name of Debendra then deceased;

(b) 300 shares stood registered in the name of one Benoy Kumar Das, deceased;

(c) 200 shares were registered in the name of Lokenath Bhattachar-jee, a son of Debendra;

(d) 200 shares were registered in the name of Timirari Bhattachar-jee, another son of Debendra;

(e) 200 shares were registered in the name of Batuk Nath Bhatta-charjee, another son of Debendra;

(f) 200 shares were registered in the name of Smt. Chhanda Bhattacharjee, the daughter-in-law of Debendra ;

(g) 450 shares were registered in the name of Sovana Bhattacharjee, the widow of Debendra;

(h) 300 shares were registered in the name of one R. Mukherjee;

(i) 250 shares were registered in the name of one I. B. Gautam;

(j) 2,200 shares were registered in the name of British Electrical & Pumps Private Ltd.;

(k) 1,150 shares were registered in the name of Deb Kanta;

(l) 200 shares were registered in the name of one Darshanlal Jaggi;

(m) 150 shares were registered in the name of Mohini Mohan Choudhury;

(n) 50 shares each were registered respectively in the names of Mrs. Arati Mukherjee, Mrs. Anjali Mukherjee, Bikash Mukherjee, Hrishikesh Mukherjee and Chinta Haran Banerjee.

7. Lokenath Bhattacharjee, Timirari Bhattacharjee, Batuk Nath Bhattacharjee, Chhanda Bhattacharjee and Sovana Bhattacharjee filed this petition under sections 397 and 398 of the Companies Act, 1956, on October 13, 1980, against the company, Deb Kanta Roy and Darshanlal Jaggi, respondents Nos. 1, 2 and 3 respectively.

8. By an interim order passed in the proceedings on November 12, 1980, a special officer was appointed who was directed to make an inventory and initial the books of the company.

9. By another order made on February 13, 1981, the petition in the main application was directed to be amended. Bibhuti Kanta Roy, Mrs. Pratima Roy, Ranjit Roy, Mrs. Sudha Roy, Avijit Roy, Mrs. Suguna Dutta Gupta, Mrs. Sarbani Neogi, Shris Kumar Gupta, Sujit Kanta Roy, Bani Kanta Roy, Mrs. Tapati Roy, Chitta Prasanna Sen, Charu ProsadSengupta, Bhupendra Chandra Sen, Shivaji Sen, Kanak Kanti Das Gupta and Chittaranjan Choudhury were added as parties and impleaded as respondents Nos. 4 to 20 respectively.

10. The petitioners seek, inter alia, the following orders :

(a) Appointment of special officer or officers to take charge of the business and affairs of the company and to arrange for running the same.

(b) The board of directors of the company be superseded ;

(c) A declaration that the purported issue of 900 shares of Rs. 100 each in the purported board meeting held on October 3, 1980, is illegal, wrongful, void and not binding on the company and its shareholders including the petitioners;

(d) Respondents Nos. 4 to 20 be restrained from exercising any right whatsoever relating to the impugned shares issued on October 3, 1980, and further the company be restrained from allowing the said respondents Nos. 4 to 20 to exercise any right whatsoever in respect of the said shares or receiving any dividend or any benefit relating thereto;

(e) A scheme be framed by this court for administration of the company with proportionate representation of the petitioners in the board ; in the alternative, the special officer be directed to convene, hold and conduct an extraordinary general meeting of the company for the purpose of election of directors and to make over charge of the company to the directors to be appointed in such meeting ;

(f) An investigation into the affairs of the company be made in the matter of dealing with the assets of the company by respondents Nos. 2 and 3 particularly since the death of Debendra and the said respondents be directed to restore or make compensation to the company of such sums as may be found due and payable on such inquiry or investigation including the amounts drawn by respondent No. 2 from the company in the form of managing director's remuneration.

11. The case of the petitioners is as follows :

(a) From the quantum of shares subscribed by the promoters at the incorporation of the company, it was evident that Debendra intended to control and manage the company.

(b) The promoters were named as the first directors of the company. Debendra, appointed as the chairman of the board of directors of the company, continued to act as such till he resigned from his office voluntarily. As the chaiman of the company, Debendra had the authority to exercise all powers of the managing director.

(c) The company was in the nature of a partnership and has been run on the basis of personal relationship of the promoters, the members oftheir respective families and their friends on mutual trust and confidence. It was agreed or understood that the families of the promoters or their friends would be suitably represented in the board of directors of the company and would participate in the management of its affairs.

(d) Out of the 6,450 shares issued, the petitioners and the members of their group, namely, the said I. G. Gautam and British Electricals and Pumps P, Ltd., hold 2,200 shares. The respondent along with their friends and supporters hold about 1,800 shares. The petitioners have not been able to obtain mutation of the shares standing in the name of Debendra as clearance under the Estate Duty Act in respect of the estate of Debendra has not been obtained.

(e) Even without 2,150 shares standing in the name of Debendra, the petitioners and their group hold an absolute majority in the company having more than 66% of the total voting rights.

(f) Although the company was incorporated in 1955 and acquired assets in the shape of land, factory and modern machinery, it did not commence production. If such production is commenced, it is possible for the company to make substantial profit.

(g) After the death of Debendra in December, 1978, the petitioners have been kept completely in the dark as to the management and the affairs of the company and have been excluded from such management though they became entitled to participate therein as the majority group and after the death of Debendra also by reason of the agreement or understanding as aforesaid. The petitioners have not been served with any notice of any annual general meeting nor have they received the annual accounts of the company. The respondents are not holding any annual general meeting of the company in violation of law for which the company is liable to be prosecuted.

(h) Respondent No. 3, holding 200 shares, has been appointed a director of the company after the death of Debendra in breach or violation of the said agreement or understanding and without the knowledge or consent of the petitioners.

(j) From the balance-sheet of the company as on March 31, 1979, obtained from the Registrar of Companies, West Bengal, the petitioners have come to know that the factory, land, building, plant and machinery were mortgaged or hypothecated to the West Bengal State Financial Corporation (hereafter referred to as 'the Corporation') and that the liability of the company to the Corporation as on March 31, 1979, was Rs. 4,38,000.

(j) The Corporation initiated proceedings in this court for realisation of its dues under the West Bengal State Financial Corporation Act,1951, claiming Rs. 6,82,854.09. By an order dated August 7, 1972, made in the said proceedings, joint receivers were appointed for selling the mortgaged assets of the company. The joint receivers have, however, been directed not to oust the company from its land and premises till the completion of the sale. The respondents and, in particular, respondent No. 2, have been attempting to sell the assets of the company at a gross under-value for the ostensible purpose of liquidating the liabilities of the Corporation. Their object is to make wrongful and illegal gain at the cost of the company and its shareholders. In the usual course, it would not have been possible to sell such assets without the approval of the members of the company under Sections 293 of the Companies Act, 1956.

(k) Respondent No. 2 has been receiving Rs. 18,000 per year by way of remuneration as managing director without rendering any service to the company. Such remuneration has been received up to the year ending on March 31, 1979.

(l) By reason of the aforesaid, it has become impossible to carry on the business of the company and on the facts it is possible to have the company wound up on just and equitable grounds. But such winding up would be prejudicial to the interests of the petitioners.

12. The further case of the petitioners introduced by the amendment of the petition is, inter alia, as follows:

(a) At the time of the making of an inventory by the special officer, it transpired from the register of members, share ledgers and the directors' minute books of the company that at an alleged meeting of the board of directors held on October 3, 1980, 900 shares of the company of the face value of Rs. 100 each were issued to respondents Nos. 4 to 20.

(b) The said shares were issued wrongfully and illegally, in violation of the Companies Act and the articles of the company and in breach of the fiduciary duties of the persons in charge of the company. Such issue is void and not binding on the company and its shareholders. By issuing the said shares, the respondents who are in a minority sought to convert themselves to a majority to perpetuate their illegal and wrongful control of the management and the affairs of the company and to prevent the petitioners from participating in such management which the petitioners as the majority were entitled to.

(c) The said issue has caused prejudice to the petitioners and amounts to oppression. The said shares were issued not in the interest or for the benefit of the company, but was solely for the benefit of the respondents.

(d) No information about the said issue was given to the petitioners either before or after the board meeting and the same was recorded probably with a back date. The respondents were not entitled to issue the said shares or invite outsiders to subscribe. The issue of the said shares was not necessary as the company did not even commence its business nor was it in need of any finance. The petitioners were ready and willing to subscribe for new shares in the company on a pro-rata basis if invited. The petitioners are not aware whether the said shares were issued for consideration other than cash or, whether they were fully paid up or not nor how the money realised, if any, from the issue has been utilised.

13. Two affidavits of Deb Kanta Roy, respondent No. 2, affirmed respectively on December 8, 1980, and February 16, 1981, have been filed on behalf of respondents Nos. 1, 2 and 3 in opposition to the petition. The case of the said respondents is as follows:

(a) It was agreed or understood between respondent No. 2 and Debendra that respondent No. 2 as the managing director would be solely responsible for all administrative, executive and other functions of the company and also for acquisition of assets for setting up of its factory.

(b) The financial affairs of the company were to be the sole responsibility of Debendra who promised and assured that necessary finance would be provided or arranged by him.

(c) Relying on the aforesaid, respondent No. 2 proceeded with acquisition of land and import of plant and machinery for the company. He also entered into a collaboration agreement with an East German firm for operation of the plant.

(d) By 1964-65, the company was ready to start production with its plant within one or one and half years provided finance was available,

(e) During 1966-67, Debendra became involved in a series of litigations, both civil and criminal, his health deteriorated and he failed to provide or arrange for finance for the company.

(f) Later, in 1974-75, Debendra, to solve his financial difficulties, attempted to withdraw his capital invested in the company. He pressed respondent No. 2 to buy his shares in the company or to find out buyers for the same. No one was ready to buy such shares at that stage but respondent No. 2 out of gratitude bought 1,150 out of the 2,150 shares held by Debendra in or about 1976 and promised to buy the balance 1,000 shares. Debendra executed a blank transfer deed in respect of the said 1,150 share and made over the same to respondent No. 2 but by mistake share scrips of the balance 1,000 shares were also made over along with the said transfer deed and as such the said transfer could not be registered as Debendra fell ill in 1977.

(g) Apart from subscribing for shares in the names of himself, his wife, sons and daughters-in-law between 1962 and 1964, Debendra did not take any interest in the company or the management thereof.

(h) Respondent No. 2 on his personal guarantee arranged loans to the company from the Corporation and the United India Credit and Development Co. Ltd., and presently he is personally liable as a guarantor to the extent of over Rs. 10 lakhs. There has been litigation between the company and the Corporation and a settlement has been arrived at ultimately. A general project report of the viability of the company has been made and it is expected that with a farther investment of Rs. 59'68 lakhs, the company will be able to function.

(i) The petitioners never participated nor showed any interest in the affairs of the company at any time. They knew that Debendra had failed to provide finance for the company as promised and that as a result the company had suffered prejudice and hardship. The petitioners had abandoned the company as lost.

(j) The company is presently viable and expected to start production within 2 to 3 years. Realising this, the petitioners are suddenly taking interest in the company. This application has been made to sabotage the efforts of respondent No. 2 to revive the company.

(k) Debendra stopped attending the meetings of the company altogether after 1968 and in his absence the meetings of the board could not be held. In 1969, respondent No. 2, on the advice of Debendra, co-opted Darshanlal Jaggi, respondent No. 3, as a director. Respondent No. 3, an unsecured creditor of the company, was known to Debendra and at the suggestion of Debendra, a part of the unsecured loan of respondent No. 3 was converted into shares and allotted to the latter.

(l) The appointment of respondent No. 3 as a director was duly recorded in the returns filed with the Registrar of Companies. Debendra had full knowledge of the aforesaid as he had signed such returns as also the share scrips issued to respondent No. 3.

(m) In or about 1976, Indu Gautam offered to sell 250 shares of the company held by her to respondent No. 2 and executed and made over an application for transfer to the latter. She, however, did not hand over the share scrips or certificates. It is contended that Indu Gautam and M/s. British Electrical and Pumps Ltd. are not supporting the petitioners nor have they any right to do so.

(n) The petitioners and their group hold, at the maximum, 1,650 shares of the company and are not in a majority. Respondent No. 2 and the other members not in the petitioners' group hold 3,800 shares.

(o) Notices of the annual general meetings of the company used to be sent to all members by post. At no time there had been any complaint of non-receipt of such notices. The petitioners never attended any of the annual general meetings of the company from 1963. Debendra did not want the petitioners or any of them to participate in the affairs of the company and had no faith, trust or confidence in them.

(p) Benoy Kumar Das, deceased, in whose name 300 shares of the company stand registered had executed a transfer form in respect of the said shares.

(q) Respondent No. 2 was also responsible in alleging other unsecured loans to the company which, as on March 31, 1980, were as follows:

Rs.(i) B.C. Sen 9,718(ii) K.P. Das Gupta 2,500(iii) B.K. Roy 61,695(iv) M/s. D.K. Roy & Co. 9,650(iv) M/s. Alloy Comp. Development Pvt. Ltd. 80,000(r) The remuneration of respondent No. 2 as the managing director of the company was fixed initially at Rs. 1,000 per month. Under a resolution dated October 12, 1965, the said remuneration was increased to Rs. 1,500 per month with annual increments. Respondent No. 2 was also allowed the following:

(i) reimbursement of expenses incurred for maintenance, repair and running of a car and the salary of a driver;

(ii) office allowance of Rs. 200 per month for permitting the company to use the personal office of respondent No. 2.

(s) By a subsequent resolution passed on September 28, 1974, the remuneration of respondent No. 2 was further enhanced to Rs. 2,500 per month which respondent No. 2 has never charged in view of the financial position of the company.

(t) Since the incorporation in 1959, respondent No. 2 has drawn from the company only Rs. 29,700 and over Rs. 2 lakhs remained due to him as arrears of his remuneration on November 30, 1980.

(u) Respondent No. 2 was and remains the permanent managing director of the company for his life.

14. The case of the said respondents Nos. 1, 2 and 3 as to the allotment of new shares on October 3, 1980, is as follows :

(a) In the affidavit affirmed by respondent No. 2 on December 8, 1980, the shareholding as on March 31, 1980, had been stated and the new issue on October 3, 1980, was not mentioned.

(b) The unsecured loans to the company, referred to earlier, were obtained by respondent No. 2 from his friends and relatives including his brother, Bibhuti Kanta Roy. All the said loans were without interest and were secured by the personal guarantee of respondent No. 2.

(c) The said creditors had been pressing respondent No. 2 for repayment of their loans for a long time.

(d) After March 1980, when it became apparent that the company would rehabilitate itself and commence production within two years, the said creditors refused to wait further and threatened that unless their loans were paid or settled, they would apply for winding up of the company.

(e) Respondent No. 2, thereafter, pursuaded the said creditors to accept shares of the company, at par, in satisfaction of their respective claims though at the material time the shares had no saleable value.

(f) Pursuant thereto, the board of directors of the company at its meeting held on October 3, 1980, allotted shares of the face value of Rs. 90,000 to the said creditors or their nominees in pro tanto satisfaction of their repective claims.

(g) The said shares were issued bona fide and in exercise of the fiduciary powers and duties of the directors of the company for saving the company from being wound up.

(h) The petitioners have no right to interfere with lawful and bona fide exercise of power by the directors.

15. The petitioners have alleged in reply as follows :

(a) Respondent No. 2 was and is not the sole guarantor of the loan agreement between the company and the West Bengal State Financial Corporation.

(b) By their letter dated July 29, 1974, the Industrial Reconstruction Corporation (India) Ltd. called upon the company to make arrangements for transfer to the former or their nominees shares of at least 76 per cent, of the total paid up value of all shares issued by the company. It was recorded further in the said letter that such shares would remain transferred till the repayment of the proposed loan of the Reconstruction Corporation in full.

(c) Pursuant thereto, Debendra and the two other shareholders, viz., Indu Gautam, Benoy Kumar Das, Mohini Mohan Chowdhury and R. Mukherjee, had executed blank transfer deeds in respect of the shares held by them. Between September and November, 1976, the said transfer deeds and the share scrips had been handed over to respondent No. 2 so that the shares could be transferred to the Industrial ReconstructionCorporation (India) Ltd. or their nominees if and when the latter would sanction the proposed loan in favour of the company. None of the said shareholders sold their shares to respondent No. 2 and there is no record whatsoever of any such sale. The transfer deeds executed by the said shareholders have since lost their validity.

16. At the heating, learned counsel for the petitioners submitted that the petitioners and their group constituted the majority of the shareholders. The shares standing in the names of Debendra and Benoy Kumar Das who were no longer alive stood neutralised. The Mukherjee group of shareholders holding 300 shares as also the said Mohini Mohan Chowdhury and R. Mukherjee were neutral and in any event were not supporting the respondents. Indu Gautam and M/s. British Electrical and Pumps P. Ltd, were actively supporting the petitioners.

17. Respondents Nos. 2 and 3 as on record did not have the support of any other shareholder including the new allottees to whom 900 shares were purportedly issued on October 3, 1980.

18. Learned counsel submitted further that it was not established that Debendra and Binoy Kumar Das had sold their shares to respondent No. 2. It was the case of respondents Nos. 2 and 3 that Debendra had executed a blank transfer deed in respect of 1,150 shares but as he did not make over the share scrips, the transfer could not be completed. The transfer deed has since lost its validity by efflux of time and the shares stood registered in the names of the original holder. Similar was the case of Benoy Kumar Das, Indu Gautam, Mohini Chowdhury and R. Mukherjee.

19. On the other hand, such facts supported the case of the petitioners that the transfer deeds were executed to fulfil the conditions of the loan offered by the Industrial Rehabilitation Corporation (India) Ltd. to the company.

20. On the allotment of the said 900 shares, learned counsel submitted that the object of the said allotment was to convert the petitioners who were in the majority to a minority. There was no evidence that the allottees of the said shares were creditors of the company and their names were not disclosed in the balance-sheet of the company. There was no need to issue new shares and the consideration for the issue was fictitious. The alleged creditors were only four in number but allotments were made to a number of persons.

21. Learned counsel for respondents Nos. 2 and 3 contended in answer that under the articles of the company, respondent No. 2 was the permanent managing director. Debendra, the chairman of the company, had leftthe entire affairs of the company in charge of respondent No. 2, who had shouldered the entire burden during the difficult years of the company. There was no complaint of oppression or mismanagement during the lifetime of Debendra though the petitioners were registered shareholders. It was only after the death of Debendra and when the company was expected to tide over its difficulties that the petitioners are seeking to assert their majority to interfere with the affairs of the company.

22. Learned counsel submitted that the said 900 shares were issued lawfully, validly and bona fide to settle the demands of the genuine creditors of the company. The accounts of the company were regularly audited and the same would show that the said creditors were genuine and thai their respective loans were being carried over from year to year.

23. Learned counsel next submitted that no case of oppression nor one of mismanagement having been made out, the petition was not maintainable. The main complaint on the allotment of the said 900 shares had been sufficiently explained.

24. In support of the respective contentions of the parties, a number of decisions were cited at the Bar and are considered as follows :

(a) Nanalal Zaver v. Bombay Life Assurance Co. Ltd. : [1950]1SCR391 . This decision was cited for the following observation from the judgment of S.R. Das J. (at pp. 203, 207 of 20 Comp Cas):

' It is well established that directors of a company are in a fiduciary position vis-a-vis the company and must exercise their power for the benefit of the company. If the power to issue further shares is exercised by the directors not for the benefit of the company but simply and solely for their personal aggrandisement and to the detriment of the company, the court will interfere and prevent the directors from doing so. The very basis of the court's interference in such a case is the existence of the relationship of a trustee and of cestui que trust as between the directors and the company......

If the directors exercise the power for the benefit of the company and at the same time they have a subsidiary motive which in no way affects the company or its interests or the existing shareholders, then the very basis of interference of the court is absent,...the court of equity only intervenes in order to prevent a breach of trust on the part of the directors and to protect the cestui que trust, namely, the company and possibly the existing shareholders. If as between the directors and the company and the existing shareholders, there is no breach of trust or bad faith, there can be no occasion for the exercise of the equitable jurisdiction of the court.'

(b) Fildes Bros. Ltd., In re [1970] 1 All ER 923 (Ch D). The question whether the concept of quasi-partner ship could be applied in the case of a company where one of the directors devoted nearly all his time to the company's business and the other did little except attending the directors' meeting and whether on a disagreement between the directors the company could be wound up on just and equitable grounds came up for consideration in this case. It was held by Megarry J. that the words ' just and equitable ' were wide in their scope and it could not be said that they were incapable of being applied in a case where one director was far more active in the company's affairs than the other.

(c) Mannalal Khetan v. Kedar Nath Khetan : [1977]2SCR190 . This decision was cited for the proposition that the negative words in Sections 108 of the Companies Act, 1956, were prohibitory and such prohibition was mandatory as the form of language was in the negative.

(d) H.R. Harmer Ltd.. In ve [1958] 3 All ER 689 ; [1959] 29 Comp Cas 305 (CA). This decision was cited for the following observations of Lord Clyde in Baird v. Lees [1924] SC 83, 92, which were quoted with approval (at p. 325 of 29 Comp Cas):

' A shareholder puts his money into a company on certain conditions. The first of them is that the business in which he invests shall be limited to certain definite objects. The second is that it shall be carried on by certain persons elected in a specified way. And the third is that the business shall be conducted in accordance with certain principles of commercial administration defined in the statute, which provide some guarantee of commercial probity and efficiency. If shareholders find that these conditions or some of them are deliberately and consistently violated and set aside by the action of a member and official of the company who wields an overwhelming voting power, and if the result of that is that, for the extrication of their rights as shareholders, they are deprived of the ordinary facilities which compliance with the Companies Acts would provide them with, then there does arise, in my opinion, a situation in which it may be just and equitable for the court to wind up the company.' (e) Suresh Chandra Marwaha v. Lauls P, Ltd. [1978] 48 Comp Cas 110 (P & H). This decision was cited for the following observations (headnote):

'The legislature, while providing exception in Clause (b) of Sections 398(1) of the Companies Act, 1956, clearly visualised that cases might occur in which financially hardpressed companies might save themselves by arranging with their creditors to become shareholders and directors in ieu of remaining creditors for the whole or part of the amount due to them and that such a change occurring in the management will not afforda cause of action to any member of a company under Sections 398 of the Act.' (f) Sindhri Iron Foundry (P.) Ltd., In re [1964] 34 Comp Cas 510 (Cal); 68 CWN 118. Here, in an application under sections 397 and 398 of the Companies Act, issue and allotment of a number of shares in a company whereby an admitted majority of shareholders were reduced to a minority was struck down. On appeal, the judgment of the trial court was confirmed. See Ramshankar Prasad v. Sindhri Iron Foundry (P.) Ltd. [196,6] 70 CWN 520 (Cal).

(g) Howard SmithLtd. v. Ampol Petroleum Ltd. [1974] AC 821 (PC). This judgment was cited for the following observations of the Privy Council (at p. 837): '...it must be unconstitutional for directors to use their fiduciary powers over the shares in the company purely for the purpose of destroying an existing majority, or creating a new majority which did not previously exist. To do so is to interfere with that element of the company's constitution which is separate from and set against their powers. If there is added, moreover, to this immediate purpose, an ulterior purpose to enable an offer for shares to proceed which the existing majority was in a position to block the departure from the legitimate use of the fiduciary power becomes not less, but all the greater. The right to dispose of shares at a given price is essentially an individual right to be exercised on individual decision and on which a majority, in the absence of oppression or similar impropriety, is entitled to prevail. Directors are of course entitled to offer advice, and bound to supply information, relevant to the making of such a decision, but to use their fiduciary power solely for the purpose of shifting the power to decide to whom and at what price shares are to be sold cannot be related to any purpose for which the power over the share capital was conferred upon them.'

25. Copies of the documents recording the issue and allotment of 900 shares had not been annexed to the petition. At the hearing, the relevant documents relating to the said issue and allotment were produced under the directions of the court and considered. The minutes of the meeting of the board held on October 3, 1980, revealed that at the said meeting only respondents Nos. 2 and 3 were present. The material portion of the said minutes are as follows :

'The managing directors placed before the board eleven (11) applications for shares from the creditors of the company whose money had been lying with the company for several years in adjustment of their respective loan accounts against allotments of the company's shares to them.

The applications were considered.

The applicants are the creditors of the company and have been pressing for refund of their moneys over a long time and the company was in no position to repay these loans. In the circumstances, their offer to subscribe to the shares of the company in adjustment of their respective loans was considered advantageous to the interest of the company in so far as the liability of the company would have thereby been reduced to that extent.

Sri D.K. Roy further placed before the board six (6) applications for shares...

Sri. D.K. Roy requested that the shares may be considered to be allotted to the applicants on adjustment in full of his personal and that of M/s. D. K. Roy and Co.'s loans to the company.

The matter was considered and the following resolution's were passed unanimously......'

26. The said minutes were typed in separate sheets and pasted on the minute book.

27. Section 193 of the Companies Act, 1956, provides, inter alia, as follows:

'193(1). Every company shall cause minutes of all proceedings of every general meeting and of all proceedings of every meeting of its board of directors or of every committee of the board, to be kept by making within thirty days of the conclusion of every such meeting concerned, entries thereof in books kept for that purpose with their pages consecutively numbered....

193(1B). In no case the minutes of proceedings of a meeting shall be attached to any such book as aforesaid by pasting or otherwise.'

28. Learned counsel for respondents Nos. 2 and 3 contended that it Wasthe practice in this company to paste the minutes of the board meetings inthe book and this practice had been followed throughout.

29. It appears that by pasting the minutes of the said meeting in the book, Sections 193(1B) of the Companies Act was violated and, as such, the said minutes cannot be regarded as evidence of what transpired in the said meeting. The alleged practice followed by the company cannot cure the defect in the recording of the minutes nor override the statutory provision.

30. In any event, it was not recorded in the minutes as to how many applications were placed at the meeting and considered and the particulars of such applications. The minutes also do not record the alleged outstand-ings on account of the said loans on the date of the meeting and to what extent the same were being adjusted.

31. 255 shares were issued at the instance of respondent No. 2 in purported adjustment of a loan from respondent No. 2 to the company and also in adjustment of loans from M/s, D.K. Roy and Co. The said shares were issued against six applications placed before the meeting. None of the applicants was respondent No. 2 or M/s. D.K. Roy and Co. ,

32. From the books of account of the company produced and considered at the hearing, it appeared that though the said 900 shares were issued and allotted by the board on October 3, 1980, there were entries in the journals of the company in September, 1980, showing some adjustment of the said loans. No final adjustment of the said loans was shown either in the journal or the ledger on October 3, 1980, or thereafter. There was no reference whatsoever in the account books of the board meeting held on October 3, 1980, or the issue or allotment of shares in adjustment of the loans.

33. The loans against which the shares were issued came to the companyin driblets by way of petty cash from time to time. There is no recordwhen or how the company or its board decided to obtain such loans. There,is no record of any agreement by and between the company an,d the saidcreditors under which the loans were kept outstanding indefinitely withoutany interest. . :.

34. Taking into account the shares standing in the names of Debendra andBenoy Das, both deceased, and which are presently neutralised, it is clearthat the issue or allotment of the said 900 shares on October 3, 1980, hasresulted in complete disequilibrium of the shareholding in the company asit stood prior to the said date. .

35. Law appears to be settled that it is not open to the directors of a company to issue and allot shares in a manner by which an existing majority of shareholders are reduced to a minority. The court will scrutinise with particular circumspection any such issue or allotment and unless it is satisfied beyond reasonable doubt that such issue was unavoidable and was, resorted to as an extreme and emergency measure with an object of fundamental importance, e.g., saving the existence of the company, will not allow the existing balance of power in the company to be disturbed. It is also settled law that the majority shareholders cannot ultimate!^ be kept out of control of the company as was held in Albert David Ltd., In re [1964] 68 CWN 163 and Sindhri Iron Foundry (P.) Ltd. [1964] 34 Comp Cas 510 (Cal); 68 CWN 118.

36. In the facts and circumstances, I hold that at the material time thepetitioners were in the majority taking into account the effective sharesheld by the parties. I also hold further that as a result of the issue andallotment of the said 900 disputed shares, the existing majority of the shareholders of the company had been disturbed.

37. The other irregularity in the issue and the allotment of the shares have been noted above. It is also noted that none of the allottees of the said 900 shares appeared in the proceeding to support the allotments.

38. Accordingly, it must be held that the petitioners have made out a case of mismanagement within the meaning of Sections 398 of the Companies Act, 1956, and also have made out a case of oppression against the petitioners which brings respondents Nos. 2 and 3 within the mischief of Sections 397 thereof.

39. The other allegations of the petitioners can be conveniently dealt with in the domestic forum when the majority of the shareholders will take charge of the affairs of the company.

40. For the above reasons, the petitioners succeed in this application which is disposed of by the following order:

(a) It is declared that the issue of the said 900 shares on October 3, 1980, is illegal and void and not binding on the company and its shareholders ;

(b) Respondents Nos. 4 to 20 are restrained from exercising any rights whatsoever in respect of or under the said 900 shares;

(c) The present board of directors of the company is superseded ;

(d) The special officer already appointed is directed to call a meeting of the shareholders of the company on the basis of the shareholding as on March 31, 1979, as recorded in the relevant annual return for the con-stitution of a new board of directors;

(e) The special officer will hand over charge of the company to the new board of directors after the same is constituted ;

(f) The special officer will file a report after handing over charge of the company to the new board. Till the new board is elected, the special Officer will be in charge of the affairs and the management of the company;

(g) The matter will appear in the list for further directions on August 20, 1984;

(h) The petitioners will pay to the special officer further 75 gms. towards his remuneration;

(i) The petitioners' costs to be paid by respondents Nos. 2 and 3.

41. It is made clear that I have not finally adjudicated on the claims of the unsecured creditors of the company who will be entitled to realise their dues, if any, in the manner as they may be advised.

42. Learned counsel for respondents Nos. 1, 2 and 3 asked for stay of the operation of this order for one week, to the extent it supersedes the present board. Such stay is allowed on condition that the special officer willforthwith take charge of all assets and records of the company and retain the same in his custody.

43. It is stated on behalf of respondents Nos. 1, 2 and 3 that other concerns are carrying on their business in the registered office of the company. It is made clear that the special officer will not take charge of the assets and records of the other concerns, if any. The special officer will allow access to respondent No. 2 to the registered office of the company and have inspections of documents and records of the company. Respondent No. 2 will be entitled to continue negotiations with the financial institutions during the period of stay but will not conclude any negotiation. No letter will be issued on behalf of the company without the approval of the special officer who will initial the office copies of all letters signifying his approval.

44. All parties and the special officer to act on a signed copy of the minutes of this order on the usual undertaking.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //