MANU/CL/0014/2011 Equivalent

Citation: [2012]108CLA597(CLB), IN THE COMPANY LAW BOARD PRINCIPAL BENCH AT NEW DELHI Company Petition No. 37 of 2004 Decided On: 26.08.2011

[2012]171CompCas177(CLB),

(2011)4CompLJ355(CLB)

Appellants: Rajendra Prasad Rungta and Others Vs. Respondent: RMC Med Ltd. and Others Hon'ble Smt. Vimla Yadav, Member Subject: Company Catch Words Mentioned IN Judges/Coram:

ORDER Smt. Vimla Yadav, Member 1. In this order I am considering Company Petition No. 37 of 2004 filed by Shri R.P. Rungta and others against RMC MED Ltd. and others under sections 397, 398, 402 and 409 of the Companies Act, 1956 (hereinafter referred to as the Act) alleging oppression and mismanagement and seeking supersession of the presently constituted board of the R-1 company; appointment of administrator to take charge of the books, business, management, papers, records and documents of the R-1 company; directing R-1, R-4 and R-7 to transfer the shares purchased by the petitioners to the petitioners and directing R-1 to record such transfer in the books of the company; Company Application No. 224 was filed attracting the provisions of section 111 of the Act; setting aside the appointment of R-3 and R-5 as additional directors; directing that an EGM of the R-1 company be held under a chairman appointed by the Company Law Board in accordance with the provisions of the Companies Act, 1956 and in accordance with the articles of association of the company. 2. The R-1 company, namely, RMC MED Ltd., was incorporated under the name of Rungta Medical Centre (P) Ltd. under the Companies Act, 1956, on 3 September, 1983. On 11 January, 1989, the name of Rungta Medical Centre (P) Limited was changed to RMC MED (P) Ltd. and a fresh certificate of incorporation was issued to that effect. Subsequently, on 15 February, 1991, the company became a deemed public company under section 43A of the Companies Act, 1956 (hereinafter also referred to as the 'Act') and, therefore, the name of the company was changed to RMC MED Limited and a fresh certificate of incorporation was issued to that effect. The main objects of the company are as follows:

(a) carrying on the business of hospitals, nursing homes, medical shops, clinic's pharmacies, surgical and X-ray Units, laboratories, research establishments, etc.; and (b) objects incidental or ancillary to the attainment of the above said objects of the company.
2.1 The company RMC MED Ltd. runs a hospital known as Rungta Hospital, Malviya Nagar, Jaipur. The original directors of the company, at the time of its incorporation, were Shri Budhi Prakash Rungta, Dr. Vinod Kumar Rungta, Shri R.P. Rungta, Dr. Narendra Rungta and Shri Anil Sharma. The original promoters of the company were Budhi Prakash Rungta, Vinod Kumar Rungta, R.P. Rungta, Suresh Kumar Rungta and Rakesh Kumar Rungta. The authorised capital of the company was Rs. 75,00,000. The paid-up capital of the company was Rs. 60,00,000. There are two whole-time directors of the company, namely, Mr. Suresh Kumar Rungta (R-4) and Mr. Kunj Behari Rungta (R-15), and Dr. Narendra Kumar Rungta (R-7) was the managing director of the company. 3. The petitioners' case is that the P-1 holds 20,100 shares in the R-1 company. P-2 holds 1,49,300 shares in the R-1 company. The petitioners together hold 1,69,400 shares in the R-1 company which is 22.58% out of the total shareholding of the R-1 company. On 22.2.1990, the R-1 company had taken a loan from R-18, i.e., Rajasthan Industrial Investment Corporation Limited 'RIICO'), a Government of Rajasthan undertaking, to the extent of Rs. 61,00,000 for the purposes of construction of a hospital. RIICO had also invested a sum of Rs. 6,15,000.00 by way of equity in R-1 company. The shares of all the promoters and the shareholders were kept as security with RIICO against the loan granted by RIICO. The company continued paying old loans and kept taking fresh loans from RIICO from time to time. Ultimately, the entire outstanding from RIICO was paid by the company on 18.12.2001 and the equity of Rs. 6,15,000 was bought back by the P-1, P-2 and R-15 by paying a sum of Rs. 14,26,077 out of the total price of Rs. 15,13,105 fixed by RIICO for the equity. The balance amount of Rs. 77,028 was paid by R-4 and a sum of Rs. 10,000 by wife of R-7. Even though R-1-company repaid the loan to RIICO by 18 December, 2001, and the equity was bought by the petitioners, the share certificates were never transferred in the name of the petitioners nor were they physically delivered to them. R-4 and 7 have always been taken the stand that the shares have not come back from RIICO, whereas on repayment of loan pledged shares along with transfer deeds were released to R-4 and R-7. Even though P-1 kept raising this issue from lime to lime with the other members of the company, the same was not taken seriously because relations between the directors were good. There were informal

agreements entered into between various shareholders-from time to time but some of them were not acted upon. 4. The petitioners' case is that, as a whole, the P-1 and his family members and investment companies in which they are majority shareholders hold, in aggregate, 7,07,048 equity shares representing 94.27% of the total 7,50,000 equity shares of the R-1 company. The respondents have wrongfully not transferred 70,000 equity shares purchased by the P-16 and 17 and sent for transfer to the R-1 company. It has been pointed out that 36,100 equity shares purchased by P-2 have not been shown by the R-1 company in its shares register. Further, the petitioners had purchased 58,348 equity shares from RICCO but due to the share certificate only being one and also in the possession of the respondents, the R-1 companies have not yet shown these shares in the petitioners' name in the register of shares. 5. It was pointed out by the counsel for the petitioners that, in the year 2003, certain investment companies, i.e., Buniyad Fiscal Services Private Limited, Lovely Agencies (P) Ltd.; Roadco India Private Limited, Hadoti Cement Limited, Rao and Kumari Private Limited and Divine Trade and Credit (P) Ltd., were amalgamated into P-2 as per the orders passed by the hon'ble High Courts of Rajasthan and Calcutta. Even though the P-1 and 2, along with R-8 to 17, had a majority shareholding in the company (72.21%), they did not have sufficient, representation on the board. However, since the relationships were cordial, therefore, there was no cause for any concern. Sometime in the year 2004, P-1 started feeling that things were not going well in the R-1 company and the P-1 had a hunch that the company was being mismanaged. The management had started taking loans from various institutions in utter disregard of the provisions of the Act and articles of association of the R-1 company. Hence, on 27 March, 2004, the P-1 wrote a letter to the R-7 in response to a notice convening a board meeting on 29 March, 2004. In that letter, the P-1 requested that the details of all loans taken in the past one year; details of the utilization of entire loan taken; if the said has been utilized for payment of old loans, details of the same; and schedule of repayment of the present loans should be placed during the course of the meeting. However, no such details were provided in the board meeting, which was held on 29 March, 2004. Again, also, in the board meeting held on 4 June, 2004, P-1 handed over a letter dated 4.6.2004 to all the members to bring to their notice the important issues, namely, handing over the cash to an employee authorized by the board to handle the cash of the company instead of keeping it with R-4 placing before the board comparative quotations in case of any machinery is being purchased by the company; from the time of the company's commencement it has not been able to generate profits and never distributed dividends. However, none of the points were clarified nor were the details requested for given to the P-1. This raised a reasonable doubt in the mind of P-1 that things were not being handled in a proper manner in the R-1 company. 6. It was pointed out that the P-1 was surprised to receive a notice dated 6 June, 2004, given by the managing director of the company (R-7) for holding the meeting of board of directors on 5 July, 2004, at 4:30 p.m., at Rungta Hospital premises, inter alia, to transact the following businesses:

1. To appoint the R-3 as an additional director on the board of the company. 2. To appoint R-5 as an additional director on the board of the R-1 company.
6.1 This meeting had been called within a period of one month from the previous meeting although, otherwise, board meetings are usually held once in three months; it became clear to the petitioners that a larger conspiracy was being hatched by R-2, R-4 and R-7 to induct more members on the board and constitute a board which was hostile to the petitioners to manipulate the affairs of the company to the detriment of the petitioners. It was pointed out that P-1 and the R-15 attended the board meeting on 5 July, 2004, and submitted a letter dated 5.7.2004 protesting against appointment of the two additional directors. However, despite protests, the R-2, R-4 and R-7, who were present in the board meeting proceeded to appoint the two additional directors on the board. 7. The petitioners have contended that the appointment of R-3 and R-5 as two additional directors is not in the interest of the shareholders of the company but is meant for the ulterior purpose of R-2, R-4 and R-7, which cannot be permitted in the eyes of law; the two additional directors who have been appointed do not stay in Jaipur; they are residents of Kolkata; one of the proposed additional directors, R-3, does not have any shareholding in R-1 company; he was a director of the R-1 company but had resigned as a director as long back as in the year 1997; 3,100 shares held by the R-3 were sold to the P-2 in the year 1999, the proof of payment made is in the possession of the P-2 in the form of bills and details of cheques through which R-3 was paid the amount for the purchase of shares, hence, R-3 does not have anything to do with the affairs of the R-1 company; the R-5 staying in Kolkata has a negligible shareholding of a mere 100 shares in the R-1 company out of a total of 7,50,000 shares issued; as such, he does not have any role to play in the affairs of R-1 company. It was contended that the appointment of R-5 on the board is void inasmuch as he is the son of R-2. The R-2 was required under section 299 of the Companies Act, 1956, to disclose his interest in any proposed contact or arrangement. He, however, failed to do so. Further, R-2 took part in the board meeting for appointment of his son, R-5, and even voted at the meeting. Hence, his vote is void and the appointment of R-5 is, therefore, void as not being approved by the majority. 8. The petitioners' case is that when the Company Law Board passed interim order dated 13 July, 2004, granting status quo in respect of shareholding of RMC Med Ltd. it prompted the R-4 to wrongfully and illegally transfer the equity shares held by the petitioners in the shareholder companies (eight companies) in respect of which company petitions were filed before the Company Law Board, New Delhi. The R-4 and R-7 appointed R-3 and R-5 without the consent of the petitioners. It was argued that the affairs of the R-1 company were being managed by the R-7 along with the R-4 and the R-15. The P-1 had written letter dated 27 March 2004 to the R-7 to produce certain records of the R-1

company in the ensuing board meeting to be held on 29 March, 2004, but R-7 had failed to produce the required records of the R-1 Company. Again, the P-I had handed over the letter dated 04 June, 2004, to the R-7 to produce certain records of the R-1 company in the board meeting held on the same day but the R-7 had failed to produce the required records of the R-1 company. Further, the P-1 received notice from the R-7 convening the board meeting on 5 July, 2004, inter alia, to appoint the R3 and R-5 (son of the R-2) as additional directors of the R-1 company. It was pointed out that the P-1 and the R-15 handed over the protest letter dated 05 July, 2004, to the R-7 but the R-7 proceeded to appoint the additional directors. It was pointed out that the minutes book of the R-1 company were not being maintained in accordance with the Act. 9. Drawing my attention to the balance sheet as on 31 March, 2000, it was pointed out that it clearly shows P-2's investment of 1,26,000 equity shares in the R-1 company and the said balance sheet is duly signed by the R-4 and the P-1. The P-1, P-2 and the R-15 bought back most of the equity shares held by the R-18 RIICO. Similarly, R-4 and his wife also bought back certain equity shares held by the R-18. It was pointed out that the R-4 and 7 have deliberately narrated in detail about the scheme of amalgamation of shareholder companies which was sanctioned on 16 January, 2003, and 17 October, 2003, by hon'ble Calcutta High Court and hon'ble Rajasthan High Court, respectively, and upheld, in appeal, as well. The petitioners drew my attention to the contract of sale and purchase of equity shares as documentary evidence in support of purchase of equity shares of the R-1 company by the P2. It was argued that the R-4 and 7 deliberately and wrongfully did not transfer the equity shares purchased by the petitioner No. I's family members and the P-2. Even the 61,500 equity shares bought back from the R-18 and lodged with the R-1 company have not been registered in the name of the P-1's family members and the P-1. It was contended that producing of the copy of agreement dated 6 July, 1999, and the copy of the deed of dissolution dated 9 August, 1999, and the copy of agreement dated 04 January, 2001, and the copy of agreement dated 18 October, 2003, by R-7 are irrelevant in the present petition. It was argued that none of the said MOU/agreements has been entered into or adopted by the R-1 company and the said MOU/agreements are private arrangement and the R-1 company has nothing to do with the said private arrangements. It was also argued that the Company Law Board has no jurisdiction to try and adjudicate in respect of the said private arrangements. 10. Further, the counsel for the petitioners pointed out that FIRs had been registered against the R-4 in respect of siphoning off of the funds of the R-1 company in which charge-sheets had been filed by Police. My attention was also drawn to Company Application No. 224 of 2009 and the prayers made therein were reiterated. 11. It was argued that the Schedule VI clearly provides that under the heading, investment the aggregate amount of company's unquoted investment, shall also be shown in the balance sheet. The Accounting Standard No. 13 deals with the investment made by the company in shares and the said AS No. 13 clearly provides that the aggregate amount of the quoted and unquoted investments, giving market value of the quoted investments, shall be shown in the balance sheet. But the respondents have failed to produce these documents. 12. It was argued that the R-4 have been siphoning of the funds of the R-1 company; specific instances have been given in detail in FIRs which had been registered and charge- sheets have been filed by the Police, Jaipur. It was argued here that the conducts of the R- 4 and R-7 are very harsh and burdensome and lacks probity and there are continuous acts of oppression and mismanagement by the R-4 and R-7 which require to be dealt with seriously by the Company Law Board. 13. It was pointed out that the petitioners have produced the balance sheet of the P-4 for the year ended 31 March, 2000, which, under the heading, Schedule 9, 'Investment', clearly shows 1,26,100 equity shares held in the R-1 company. It was argued that the said balance sheet of the year 2000 has been duly signed by the R-4 along with the P-1 and the respondents, including the R-4, are estopped from alleging to the contrary. 14. It was argued that in Company Application No. 224 of 2009 that the P-1, P-2 and the R-15, R-16 and R-17 had purchased 1,64,448 equity shares and had lodged the same for transfer but the same had not been registered in their names. It was argued that the board of directors at its meeting held on 23 July, 2005, had authorized the R-15 as joint signatory for operation of bank account along with the R-4 and the R-7 and the R-4 filed civil case against the said resolution and interim order was passed by Addl. Civil Judge, Jaipur, which was set aside in appeal filed by the R-1, R-7 and R-15. Even the R-4 filed the writ petition against the said appeal order but the same was dismissed. Further, the R-7 had submitted the resignation letter dated 3 January, 2009. It was contended that the R-4 had always been working for his personal gains and had siphoned off the funds of the R-1 company and even in some of the cases cognizance had been taken against him and he had to undergo civil prison. 15. It was pointed out that there are 19 respondents in the present petition and the R-4 alone has filed the reply to the present petition and the other respondents have not filed any reply to the present petition. Further, the R-7 neither argued the case himself nor through any counsel representing him during arguments in ' the present petition; even R-7's reply is not specific para-wise reply to the company petition deliberately to present imprecise, distorted and misleading reply to mislead the Company Law Board. It was argued that there are continuous acts of oppression and mismanagement as above which manifestly show that there is lack of probity and loss of confidence and faith between the petitioners and the respondents. 16. Replying to the defects and discrepancies pointed out by the respondents in the documents relied upon to substantiate the petitioners' claim of shares it was pointed out that the P-1 has produced the copy of invoice dated 16 August, 1999, for purchase of 36,100 equity shares, the R-4 and R-7 have no legitimate right to question the validity of the said contract, its price and other factors as he is not

privy to the contract between the sellers and the petitioners. It was argued that the sellers have never denied the said contracts at any time, rather they have admitted the sale during investigation before the police investigation in the FIR filed by the petitioners. The petitioner No. 1 has filed FIR against the R-4 and others for theft of securities including equity shares held by the petitioners before Police Station, Jaipur, and the police have filed enquiry report before Addl. Chief Judicial Magistrate, Jaipur, vindicating the averments of the petitioners in the present petition. 17. Petitioners' case is that the respondents have not given para wise specific reply to the averments made by the petitioners in the present petition and rather the respondents have given evasive reply which is unequivocal admission by the respondents that they have admitted the averments made in the present petition. It was contended that -

...The written-statement must deal specifically with each allegation of fact in the plaint and when a defendant denies any such fact, he must not do so evasively, but answer the point of substance. If his denial of a fact is not specific but evasive, the said fact shall be taken to be admitted. In such an event, the admission itself being proof, no other proof if necessary': Badgt and Co v Commissioner of Income Tax, Bombay MANU/SC/0072/1954 : AIR 1955 SC 74 refers. Further, it was contended that73.... Once it is held that the statements made in paragraph 18 of the election petition have not been specifically denied or disputed in the written statement, the allegations made therein would be deemed to have been admitted, and thus, so evidence contrary thereto or inconsistent therewith could have been permitted to be laid.' '... Such an evasive denial attracts order VIII, rule 5 of the Code of Civil Procedure. The statements made in paragraph 18 of the election petition must, therefore, be deemed to have been admitted': Sushil Kumar v Rakesh Kumar MANU/SC/0826/2003 : AIR 2004 SC 230 refers. Further, it was reiterated that14. An admission made in a pleading is not to be treated in the same manner as 'an admission in a document. An admission made by a party to the lis is admissible against him proprio vigore.' 16. A thing admitted in view of section 58 of the Evidence Act need not be proved. Order 8, rule 5, of the Code of Civil Procedure provides that even a vague or evasive denial may be treated to be an admission in which event the court may pass a decree in favour of the plaintiff. Relying on or on the basis thereof a suit, having regard to the provisions of order 12, rule 6, of the Code of Civil Procedure, may also be decreed on admission. It is one thing to say that without resiling from an admission, it would be permissible to explain under what circumstance the same had been made or it was made under a mistaken belief or to clarify one's stand inter alia in regard to the extent or effect of such admission, but it is another thing to say that-a person can be permitted to totally resile there from': Gautam Sarup v Leela Jetley and others MANU/SC/7401/2008 : (2008) 7 SCC 85 refers.
18. It was contended that the respondents have been involved in continuous acts of oppression and mismanagement against the petitioners and the present petition deserved to be allowed in favour of the petitioners. It was pointed out that summing up the scope of sections 397 and 398, considered in extenso in Needle Industries (India) Ltd. and others v Needle Industries Newey (India) Holding Ltd. and others MANU/SC/0050/1981 : (1982) 1 Comp LJ 1 (SC) : (1981) 3 SCC 333, M.S. Madhusoodhanan v Kerala Kaumudi (P) Ltd. and others MANU/SC/0553/2003 : (2003) 4 Comp LJ 185 (SC) : (2004) 9 SCC 204, Dale and Carrington Investment (P) Ltd and another v P.K. Prathapan and others MANU/SC/0748/2004 : (2004) 4 Comp LJ 1 (SC) : (2005) 1 SCC 212, Sangramsinh P. Gaekwad and others v Shantadevi P. Gaekwad (Dead) Though L.Rs. and others MANU/SC/0052/2005 : (2005) 3 Comp LJ 385 (SC) : (2005) 11 SCC 314 and in Kamal Kumar Dutta and anothers v Ruby General Hospital Ltd. and others MANU/SC/8408/2006 : (2006) 5 Comp LJ 511 (SC) : (2006) 7 SCC 613 in the case of V.S. Krishnan and others v West fort Hi Tech Hospital Ltd. and othersMANU/SC/7193/2008 : (2008) 2 Comp LJ 1 (SC), the apex court has held that-

... it is clear that oppression would be made out--

(a) Where the conduct is harsh, burdensome and wrong. (b) Where the conduct is mala fide and is for a collateral purpose where although the ultimate objective may be in the interest of the company, the immediate purpose would result in an advantage for some shareholders vis-a-vis the others. (c) The action is against probity and good conduct. (d) The oppressive act complained of may be fully permissible under law but may yet be oppressive and, therefore, the test as to whether an action is oppressive or not is not based on whether it is legally permissible or not since even if legally permissible, if the action is otherwise against probity, good conduct or is burdensome, harsh or wrong or is mala fide or for a collateral purpose, it would amount to oppression under section 397 and 398.

(e) Once conduct is found to be oppressive under sections 397 and 398, the discretionary power given to the Company Law Board under section 402 to set right, remedy or put an end to such oppression is very wide. (f) As to what are facts which would give rise to or constitute oppression is basically a question of fact and, therefore, whether an act is oppressive or hot is fundamentally /basically a question of fact'
18.1 The petitioners, also relied upon the case of Collyer Logistics International Ltd v Collyer India Fright Forwarding (P) Ltd and others (2009) 4 Comp LJ 359 (CLB) : (2010) 154 Comp Cas 161 (CLB). 19. It was contended that the respondents are estopped from denying the fact that the petitioners are shareholders of the respondent No 1 company, particularly when the respondents have signed and filed the annual return of the respondent No 1 company for the years 1999 to 2002, which clearly shows the names and equity shares held by the petitioners in the annual returns of the R-1 company. Reliance was placed on the case law as under:

13, Estoppel is a rule of evidence and the-general rule is enacted in section 115 of the Indian Evidence Act, 1872 (in short 'the Evidence Act') which lays down that when one person has by his declaration, act or omission caused or permitted another person to believe a thing to be true and to act upon that belief, neither he nor his representative shall be allowed in any suit or proceeding between himself and such person or his representative to deny the truth of that thing: Sunderbai v Devaji Shankar Deshpande MANU/SC/0098/1952 : AIR 1954 SC 82 refers.' 15. On the whole, an estoppel seems to be when, in consequences of some previous act or statement to which he is either party or privy, a person is precluded from showing the existence of a particular state of facts. Estoppel is based on the maxim allegans contraria non est audiendus (a party is not to be heard to allege the contrary) and is that species of presumption juries et de jure (absolute or conclusive or irrebuttable presumption), where the fact presumed is taken to be true, not as against all the world, but against a particular party, and that only by reason of some act done, it is in truth a kind of argumentum ad hominem.' B.L Sreedhar and others v K.M. Munireddy (Dead) and others MANU/SC/1101/2002 : (2003) 2 SCC 355 refers.
20. It was contended that in the present petition, the respondents have signed and filed the annual return of the respondent No 1 company for the year 2002 which clearly shows the names and equity shares held by the petitioners in the annual returns of the respondent No 1 company. The respondents being businessmen cannot take any plea contrary to the same and are acquiescenced from denying the position of the petitioners being as shareholders of the respondent No. 1 company while the respondents have shown the petitioners as shareholders in annual return for the year 1999 to 2002 duly signed by them, on the one hand, and alleging that the petitioners are not shareholders in view of annual return of 2003 and 2004. Reliance was placed on the case law as under:

In our opinion, when a person signs a document, there is a presumption, unless there is proof of force or fraud, that he has read the document property and understood it and only then he has affixed his signatures thereon, otherwise no signature on a document can ever be accepted. In particular, businessmen, being careful people (since their money is involved) would have ordinarily read and understood a document before signing it. Hence the presumption would be even stronger in their case.' Grasim industries Ltd and anothers v Agarwal Steel MANU/SC/1763/2009 : (2010) 1 SCC 83 refers.
21. It was contended that the respondents have played fraud on the Company Law Board due to the fact that the respondents have not produced relevant supporting documents deliberately in the present petition and depriving the Company Law Board to adjudicate the matter in a cohesive manner. Reliance was placed on the case law as under:

29. By 'fraud' is meant an intention to deceive; whether it is from any expectation of advantage to the party himself or from the ill will towards the other is immaterial. The expression 'fraud' involves two elements, deceit and injury to the person deceived. Injury is something other than economic loss, that is, deprivation of property, whether movable or immovable or of money and it will include and any harm whatever caused to any person in body, mind, reputation or such others. In short, it is a non-economic or non-pecuniary loss. A benefit or advantage to the deceiver, will almost always cause loss or detriment to the deceived. Even in those rare cases where there is a benefit or advantage, the second condition is satisfied. Dr. Vimla v Delhi Administration (1963) Supp 2 SCR 585 and Indian Bank v Satyam Fibres (India) (P) Ltd. MANU/SC/0657/1996 : (1998) 2 Comp LJ 421 (SC) : (1996) 5 SCC 550; State of Orissa v Harapriya Bisoi MANU/SC/0835/2009 : (2009) 12 SCC 378 refers. 1. 'Fraud avoids all judicial acts, ecclesiastical or temporal observed Chief Justice Edward Coke of England about three Centuries ago. It is the settled proposition of law that a judgment or decree obtained by playing fraud on the Court is a nullity and non est in the eyes of law. 5. The courts of law are meant for imparting justice between the parties. One who

comes to the court, must come with clean hands. We are constrained to say that more often than not, process of thexourt is being abused. 6. A fraud is an act of deliberate deception with the design of securing something by taking unfair advantage of another. It is a deception in order to gain by another's loss. It is a cheating intended 'to get an advantage. A litigant, who approaches the court, is bound to produce all the documents executed by him which are relevant to the litigation, if he withholds a vital document in order to gain advantage on the other side then he would be guilty of playing fraud on the court as well as on the opposite party.'S.P. Chengalvaraya Naidu (dead) v Jagannath (dead) and others MANU/SC/0192/1994 : (1994) 1 SCC 1 refers.
22. The petitioners have contended that the respondents have made frivolous pretext and no plausible reason is given for non-production of statutory records of the R-1 company before the Company Law Board. Reliance was placed on the case law as under:

The second respondent is falsely claiming that the minutes-book and other statutory records of the company were lost. This would show the conduct of the second respondent, depriving the petitioners of their valuable rights in the company. No annual general meeting was held on 3 August, 2001, and the petitioners did not receive any notice for the said meeting. The resolution passed at the alleged meeting should be declared as null and void...' P Narayanaswamy and others v Tiruppur Transport (P) Ltd (2010) 1 Comp LJ 769 (CLB) refers.
23. Further, the petitioners relied upon the case Arun Kumar Mohta v Ganesh Commercial Co. Ltd. MANU/CL/0017/2006 : (2006) 6 Comp LJ 351 (CLB) : (2006) 134 Comp Cas 500 (CLB), to show that-

(a) When the directors issue shares in breach of their fiduciary duty, for an extraneous purpose, the issue cannot be upheld; (b) Mere production of the certificate of posting issued, by the postal authorities cannot establish service of the communication upon the addressee; (c) In cases of family companies, directorial complaints can be adjudicated in section 397/398 proceedings; (d) Any allotment of additional shares without being supported by any consideration but made to gain control of the company is an act of oppression in its affairs; (e) Vacation of office of director by operation of law by virtue of section 283(1)(g) must fail in the absence of any proof of proper service of notice on the directors; and (f) The allotment of shares for personal gains, without complying with the legal requirements and maintaining fair play and probity in corporate management; and

(g) Appointing directors and removing the petitioners as directors without following the proper procedure would be oppressive and harsh warranting interference of the Company Law Board.
24. Replying to the respondents contention that -

23. It was argued that P-1 had attended board meetings of respondent No. 1 company regularly and, particularly, board meetings held on 1 September, 2004, and on 1 September, 2005, respectively, and petitioner No. 1 had approved the annual accounts for the year 200304 and 2004-05, respectively, of the respondent No. 1 company. As a result, petitioners are estopped from making any allegation of diversion and siphoning of profits of funds.'; the petitioners have contended that the R-2 had approved and signed the balance sheet of the year ended 31 March, 2000 of the petitioner No. 2 company which shows the investment of 20,000 equity shares in the R-1 company is unequivocal admission by the R-2 and the list of shareholders in annual return 2003 and 2004 is forged and fabricated by the respondents.
24.1 Further, reliance was placed on the case law as under:

35. As regards the rival contentions pertaining to the allegations of acts of oppression and mismanagement, it is noted that the petitioners' contentions regarding depletion of the reserves of R-1-company remain uncontroverted. On the other hand, the respondents contention that the P-1 had attended the board meeting of the R-1 company regularly and particularly the board meetings held on 1 September, 2004 and on 1 September, 2005, respectively, and that the P-1 had approved the annual accounts for the year-2003-04 and 2004-05, respectively, of R-1 company also remain uncontroverted.' Nagesh Kumar and others v Nagesh Hosiery Exports Ltd (2008) 3 Comp LJ 357 (CLB) refers.
25. Responding to the case laws relied upon by the respondents it was contended that the cases of Smt Abha Puri and others v Amethi Hume Pipes (P) LtdMANU/CL/0030/2009 : (2010) 1 Comp LJ 107 (CLB) : (2010) 94 CLA 227 (CLB); S.P Nachiappan and anothers v AEE Castings Ltd and others (2009) 92 Comp Cas 5 (CLB); Jagdish Mills Ltd., In re MANU/MH/0079/1955 : (1954) 24 Comp Cas 241 (Bom); Martin Castelino and another v Alpha Omega Ship Management (P) Ltd. (2001) 5 Comp LJ 273

(CLB); Jayanthilal Purshottamdas Patel v Gordhandas Desai (P) Ltd MANU/MH/0006/1966 : (1967) 1 Comp LJ 272 (Bom) : (1968) 38 Comp Cas 405 (Bom); Mathrubhoomi Printing and Publishing Co. Ltd v Vardhaman Publishers Ltd MANU/KE/0085/1991 : (1992) 1 Comp LJ 234 (Ker) : (1992) 73 Comp Cas 80 (Ker), are absolutely irrelevant and inapplicable to present petition in view of the fact that the petitioners' names were duly entered in the register of members of the R-1 company after transfer of related shares and the same was duly reflected in the annual return 2002. It is not the case here that the equity shares were purchased by the petitioners and the same were not transferred and registered in the register of members. On the contrary, this judgment supports the averments of the petitioners. 26. The counsel for the respondent No. 4 pointed out that the R-1 company is a family company and is flagship company of the Rungta family. R-1-company was incorporated on 3 September, 1983. Family started transportation business in 1973 under the name and style of Roadco (India) Corporation with Shri Balchand Rungta, Shri Budhi Prakash Rungta, Smt. Sushila Devi Rungta w/o Shri Vinod Kumar Runga and Shri Rajendra Prasad Rungta, as equal partners. In 1973, Shri V.K. Rungta (R-3) and R P Rungta (P-1) were in service and Dr. Narendra Rungta (R-7) was studying at Jaipur and Suresh Kumar Rungta (R-4) was minor and all were staying at 34, Baikunth Charterjee Lane, Howrah. Entire family thereafter shifted to 908, Lake Town, Calcutta 700089, in 1979. In 1983, a branch of Roadco (India) Corporation was established at Dachepalli (A.P.) and respondent No. 4 was shifted there. After a year, P-1 also joined the R-4 in the family business of Roadco India Corporation. The father of R-2, R-3, R-4, and R-7 and P-1 died in 1988. On the death of the father, R-4 joined the partnership firm in lieu of late Balchand Rungta. Subsequent to death of Shri Balchand Rungta the credit amount standing to his account was transferred to the credit of Shri Balchand Rungta and Sons. Immediately after opening the branch at Dachepalli, five heavy vehicles were purchased, one each in the name of R-2, R-3 and P1 and three in the name of R-4, and the delivery of all these heavy vehicles was taken by the R-2. In early eighties R-2, R-3, R-4, R-7 and P-1 promoted two companies, namely, Rungta Medical Centre (P) Ltd. [now RMC Med Ltd.] (R-1) and Roadco (India) Private Ltd. Entire liasoning and financing of Dachepalli branch used to undertaken by R-2 and R-3 at Calcutta and elsewhere except Andhra Pradesh and entire account used to be drawn and finalized at Calcutta by R-2 and R-3. 27. The counsel for the respondents pointed out that the funds were transferred to RMC Med Limited for the hospital from the investment companies of the family and it associates. In this process, R-2, R3, R-4 and R-7 also motivated other investors to invest in the company. It was pointed out that during the last two and half years before the date of filing of this petition there had been 19 board meetings from 15.1.2000 to 15.7.2004. The P-1 attended 14 meetings out of which, in 12 meetings, he was chairman. Son of P-1, R-15 attended all the board meeting, and at no time anything was brought to the notice of the board which was being done and was prejudicial to the interest of the company/shareholders. It was pointed out that, in 1992, new flats were purchased by R-2 and R-3, at 689, Lake Town, but got registered in the name of R-4 and his family and P-1 and his family. While entire family was to shift, R-2 did not shift because of certain communication gap created by P-1, and R-3 shifted to new premises. Thereafter, few more properties in Kolkata and Jaipur were purchased by R-2, R-3, and R-7 in different names of the family and entire money was remitted from sources at Calcutta. Between 1998 and 1992, many vehicles (more than 30) were purchased and got financed from various bankers at Rourkela and Calcutta, re-payment of which was made by R-3 and/or R-5. These were purchased in individual names and in the names of Roadco (India) Private Ltd., Amber Commercial Company (P) Ltd., etc. All these companies were under the administrative control of the family at Calcutta whereas all the vehicles were put under the administrative control of P-1 and R-4 at Dachepalli. During this time R-2 and R-3 also motivated others to invest from, and in, inter alia, following companies in the ventures of business of the family: Divine Trade and Credit (P) Ltd., Lovelly Agency (P) Ltd., Buniyad Focal Services (P) Ltd. and Hadoti Cement Ltd, In around mid 1995, Rungta Trojan Chemicals Ltd, (now Rungta Chemicals Ltd.), P-2 was promoted of which R-3 was chairman and promoter and the R-3 got various investments from various investors when the company was putting up a plant. The members of family and the associates of R-3 also made deposits/ application for shares which were still outstanding. It may be mentioned that, despite the registered office being at Jaipur, the entire share applications were received at Calcutta only. 28. R-2 and/or R-3 are chairman of all the companies in which family members were directors. Till 1999, the entire shareholding and assets which were the property of the family used to be under the control of Shri Vinod Kumar Rungta; however, on 6 February, 1999, the younger son of Shri Vinod Kumar Rungta, namely, Dinesh Kumar Rungta, died. Shri Rajendra Prasad Rungta, P-1, took the advantage of the situation and coerced Shri Vinod Kumar Rungta to surrender all the shares and property of the family to him. In this process, Shri Rajendra Prasad Rungta signed an agreement; ignoring all other beneficiaries and family members Shri Vinod Kumar Rungta to enter into the MOD on 6 July, 1999, within 4 months from the death of his son. It was pointed out that the MOU dated 6.7.1999, inter alia, states that Shri Vinod Kumar Rungta is entitiled to on e-third share in the entire property of the family including the Rungta Hospital. Shri Rajendra Prasad Rungta had stated that he will pay to the Shri Vinod Kumar Rungta Rs. 40 Lacs, however, Shri Vinod Kumar Rungta had stated that there are five beneficiaries in the entire property. Further, it was pointed out that the family was subject to another great tragedy of the death of Shri Rakesh Agarwal, aged about 25 years, the youngest son in law of Shri Budhi Prakash Rungta. Shri Rajendra Prasad Rungta did not miss this opportunity also and entered into an agreement on 4.1.2001 with Suresh Kumar Rungta; Shri Rajendra Prasad Rungta further wrote a letter to Shri V.K, Rungta on 28.06.2001 which was sent through one of the employees. In this letter, Shri V.K. Rungta was warned by the P-1 for all the consequences if the cheque book of Hodoti Cement was not handed over and balance payment from Bangur did not come. Further, it was pointed out that the mother of Shri Rajendra Prasad Rungta, Shri Budhi Prakash Rungta, Shri Vinod Kumar Rungta, Shri Suresh Kumar Rungta and Dr. Narendra Rungta died on 28.9.2003. During the mourning period all of them were present and had cordial interaction among them. Shri Rajendra Prasad Rungta took the advantage of the atmosphere and induced Shri

Suresh' Kumar Rungta for entering into the MOU dated 18.10.2003. It was pointed out that it had been vicious design of P-1 to -take advantage of the grim situations. Other family members including R-2, R-3, R-4, and R-7 remained silent for a long time in the hope that good sense will prevail upon him one day and everything will set right as should be without affecting the interest of any one in long run. The selfish and aggressive attitude had crossed all the limits and broken the tolerance of all. 29. It was contended that P-1 always kept R-4 under undue influence. P-1 induced him to enter into memorandum of understanding on 04.01.2001; subsequently, again, on 18.10.2003. 30. Responding to the petitioner's allegation that the respondents have illegally transferred petitioner's shares, as mentioned in the annual return of 2002, and their names are not reflecting in the annual return of 2004, it was contended that the annual return for the year 2002 was prepared by P-1 himself and got signed by R-4 in good faith; the P-1 prepared the annual return as per his own wish and not as per record or document of R-1 company and he had shown the shareholding of his own family and associates as per his own wish, since all the records of the R-1 company were destroyed in the rain during 1999 and petitioners took the advantage of the situation and filed the wrong details of shareholders in the annual return for the year 2002; in 2004, when respondents came to know about the fraud played by P-1 by changing the sharehplding list, the respondents filed annual return for the year 2004, as per the copies of share certificates; the R-1 company is in the possession of the photocopies of the share certificates and R-4 is holding the original share certificate relating to his shareholding. 31. It was pointed out that P-1 initiated amalgamation- process when the entire family was in shock due to the threat of shooting R-7 by extortionist. 32. It was pointed out that R-2, R-3, R-4 and R-7 and their associates hold majority shares in R-8, R9, R-19, R-11, R-12, R-13 and R-14 who are the members of R-1. 33. The counsel for the respondents drew my attention to the three statements prepared to show that the petitioners groups' shareholding was 21.56%, the respondents groups' shareholding was 69.58% and others held 8.86% shares. It was argued that the shareholding of Rungta Chemicals based on merger of five companies is under challenge. 34. Responding to the petitioners' first allegation regarding non-transfer of 61,500 shares held by RIICO and that these shares are lying with R- 4 and 7, the counsel for the respondents contended that at the time of construction of the hospital, R-1 company has taken loan from RIICO. While sanctioning the loan RIICO had also invested in 61,500 shares of R-1-company in 1991. A buy back agreement was executed between RIICO and Dr. VK Rungta (R-3) and Dr. Narendra Rungta (R-7) on 4 March, 1991, and, as per the said buy back agreement these shares were to be purchased by Shri VK Rungta and Dr. Narendra Rungta from RIICO. Drawing my attention to the petitioners' additional affidavit dated 14 March, 2011, and enclosed letter dated 11 December, 2002, written by RIICO to R-1 company requesting the transfer of 61,500 shares, it was argued that, as per the said letter, RIICO has forwarded 7 share transfer application forms for the transfer of 61,500 shares and attaching only one share certificate No. 35 for 61,500 equity shares bearing distinctive numbers from 28600 to 347500; this letter does not show any name of the transferee in whose name shares are to be transferred, which means the share transfer deeds sent by RIICO appeared to be blank. Also there is no mention about any agreement of the understanding between the petitioners and the RIICO for the transfer of 61,500 shares; further, no value of the consideration has been mentioned in the said letter; therefore, it cannot be said that these shares were to be transferred to the petitioners only. As regards the other contention of the petitioner that these shares were lying with R-4 and R-7, it was pointed out, is incorrect and without any basis and evidence because, as per R-4's instructions, these shares certificates were received by Shri Sudhir Gangwal, Chartered Accountant, statutory auditor of the R-1 company from RIICO, and are still in his possession. The member's register is also kept by him. It was pointed out that at the time of authentication of the record by bench officer, it was pointed out that it is not understood as to why petitioners are reposing so much trust and confidence in Mr. Sudhir Gangwal for keeping original statutory record of the company even when he has resigned as statutory auditor of the company on 23 July, 2005. 35. Replying to the petitioner's second argument for the transfer of 61,500 shares in their favour that they have made payment to RIICO Rs. 14,26,077 out of total payment of Rs. 15,13,105 during 19971999. Therefore, they are entitled for the transfer of these shares in-their favour; the counsel for the respondents contended that there is no evidence placed on the record by the petitioners in pleadings in support of their argument that they have made the payment of RIICO for the purchase of shares from RIICO. Further, no evidence is placed on the record by the petitioners in the form of any communication, any understanding or the agreement between the RIICO and petitioners regarding the valuation of 61,500 shares. Therefore, mere making of the payment, the RIICO would not entitle payees to have title on the shares. It was pointed out that, out of Rs. 15,13,105, Rs. 77,028 has been shown as payment from Mr. S.K. Rungta, R-4, and Rs. 7,90,00 has been paid by Hadoti Cement Limited in which 93.30%. shares are held by respondents' group. Therefore, it is not the petitioners who paid entire money; it is also the respondents and the company in which respondents are holding majority of the shares who have paid the money to the RIICO; so, the petitioners' claim that they are entitled for 61,500 shares is incorrect, unjustified and without any evidence. The petitioner's allegations that they have purchased the shares were not transferred or are lying with R-4 and R-7 is absolutely wrong, incorrect, without any evidence and strength. 36. It was contended by the respondents that the petitioners have cooked up the story and made the case that they have purchased shares from different persons and attached copies of the invoices and bank statements on the basis of which they have tried to justify their contention. Pointing out the

defects and discrepancies it was contended that these invoices do not have the distinctive numbers; it is surprising to observe that the rate per share has been mentioned in the invoices in the fraction of rupees. For example: rate of Active Traders Private Limited @ Rs. 3.03 per share. Rate for RMC MED Limited is Rs. 2.23 per share; all the invoices are issued on the single day on 16.8.1999; the petitioners have failed to put any evidence on record how the valuation of shares under these transaction has been arrived. Invoice dated 16.08.1999 issued by Sarita Rungta to Hadoti Cement Private Limited has been signed by Sushila Devi Rungta whereas 1 Sushila Devi Rungta has not signed her own invoice at page No. 22 of rejoinder. These invoices produced by the petitioners do not show any evidence of the delivery of shares; petitioner No. 5 has purchased 10,000 shares from Mrs. Saroj Periwal, as per her bill dated 20 October, 1998, and payment was made through DD No. 33784 dated 11.11.1998 on Union Bank of India for Rs. 30,600 whereas the copy of the pay in slip clearly shows that the pay order was issued by Union Bank of India on 11.11.1990; it is not understood how the payment has been made 8 years before the sale of shares; there is no mention of the transfer deeds for the alleged transactions. Nor is there any proof of lodgment of any transfer deed with the company for the transfer of the alleged shares. 37. Alternatively, the respondents have contended that without prejudice to their contentions and considering the worst case scenario, and, assuming that the above invoices are genuine, the question arises whether on the basis of the sale and purchase of shares of a company, can the purchaser become the member of a company; the answer is no because, as per the provision of section 41(2) of Companies Act, 1956, a person can become the member of the company by subscribing to the memorandum, by allotment of shares, and by the transfer of shares. As far as the case of the petitioner is concerned, admittedly, their case is transfer of shares. Their contention is that they have purchased the shares from different sellers, but they have not talked about the transfer of shares in the name of the purchasers. There is no compliance of the provisions of section 108 of the Act. Reliance was placed on the cases of Jayanthilal Purshottamdas Patel v Gordhandas Desai (P) ltd (1967) 1 Comp LJ 272 (Bom) and Radha Krishan Menon in Mathrubhoomi Printing and Publishing Co. Ltd v Vardhaman Publishers Ltd MANU/KE/0085/1991 : (1992) 1 Comp LJ 234 (Ker): (1992) 73 Comp Cas 80 (Ker) to support their contentions. It was contended that the petitioners have not pointed out whether any transfer deed was executed between the seller and the purchaser, whether these transfer deeds have been delivered to the company for effecting the transfer, and whether they in fact received back the share certificate duly certified from R-1 company. 38. Further, the counsel for the respondents pointed out that the petitioners have further contended that the alleged shareholding of petitioner 2 is further certified by respondent No. 4 as he had signed the above balance sheet of the company. In this regard it was argued that the above balance sheet has been signed by R-4 in good faith. Reliance was placed on Smt Abha Puri and others v Amethi Hume Pipes (P) Ltd MANU/CL/0030/2009 : (2010) 1 Comp LJ 107 (CLB), wherein it was held that:

In family company, in view of the closeness of the parties, it is not uncommon that the documents are signed without going through line by line.
38.1 Thus, it was contended that the balance sheet of P-2 has been signed by the R-4 in good faith only and the petitioners cannot take advantage of the above circumstances. 39. As regards the petitioners' contention that their share certificates were stolen, in support of which they had filed copy of F.I.R. and Investigation Report through an additional affidavit dated 15.07.2010 it was contended by the respondents that complete facts have not been given to the investigation officer. 40. The counsel for the respondents argued that the petitioners' contention that they had majority in R-1 company but did not have the control of R-1 company is incorrect and baseless. The-petitioners are holding only 21.92% shares of R-1-company. Moreover, petitioners never demanded any increase in the representation of the board. Regarding shareholding of other investment companies of the group it was pointed but before this hon'ble bench is that the petitioners are not holding majority shares in investment companies. Further, petitioners have filed separate petitions in all the investment companies for which respondents have filed their reply separately. 41. In respect of the amalgamation of Buniyad Fiscal Services (P) Ltd., Lovely Agencies (P) Ltd., Roadco India Ltd. and Divine Trade and Credit (P) Limited into the P-2, i.e., Rungta Chemicals Limited, in 2003, the alleged amalgamation was done by the petitioners on the back of the respondent by using incorrect information and manipulated data to hon'ble High Court and other government departments. The amalgamation orders passed by hon'ble High Court of Rajasthan and Calcutta are pending under appeal with hon'ble Supreme Court. 42. It was pointed out that Dr. N.K. Rungta (R-7), has resigned but this resignation is not yet accepted by the board of directors of R-1 company. Further, R-4 also has the knowledge that R-7 is still attending hospital but R-4 is not aware in what capacity R-7 is attending hospital of the R-1 company. 43. As regards P-2, namely, Roadco (India) (P) Ltd., and P-5. It was pointed out are not the shareholders in R-1 company and cannot maintain the present petition. 44. Responding to the petitioners' allegation that the respondents have illegally transferred petitioners' shares as mentioned in the annual return of 2002 and their names are not reflecting in the annual return of 2004, it was contended that the annual return for the year 2002 was prepared by P-1 himself and got signed by R-4 in good faith; the P-1 prepared the annual return as per his own wish and not as per record or document of R-1 company and he had shown the shareholding of his own family and associates as per his own wish, since all the records of the R-1 company were destroyed in the rain during 1999 and petitioners took the advantage of the situation and filed the wrong details of shareholders in the annual return for the year 2002; in 2004, when respondents came to know about

the fraud played by P-1 by changing the shareholding list, the respondents filed annual return for the year 2004 as per the copies of share certificates, the R-1 company is in the possession of the photocopies of the share certificates and R-4 is holding the original share certificate relating to his shareholding. 45. It was contended by the respondents that the petitioners have cooked up the story and made the case that they, have purchased shares from different persons and attached copies of the invoices and bank statements on the basis of which they have tried to justify their contention. Pointing out the defects and discrepancies it was contended that these invoices do not have the distinctive numbers. It is surprising to observe that the rate per share has been mentioned in the invoices in the fraction of rupees, the petitioners have failed to put any evidence on record how the valuation of shares under these transactions has been arrived. There is no mention of the transfer deeds for the alleged transactions. Nor is there any proof of lodgment of any transfer deed with the company for the transfer of the alleged shares. 46. Alternatively, the respondents have contended that, without prejudice to their contentions and considering the worst case scenario and assuming that the above invoices are genuine, the question arises whether, on the basis of the sale and purchase of shares of a company, can the purchaser become the member of a company? The answer is no because, as per the provision of section 41(2) of Companies Act, 1956, a person can become the member of the company by subscribing to the memorandum, by allotment of shares, and by the transfer of shares. As far as the case of the petitioner is concerned, admittedly, their case is transfer of shares. Their contention is that they have purchased the shares from different sellers, but they have not talked about the transfer of shares in the name of the purchasers. There is no compliance of the provisions of section 108 of the Act. Reliance was placed on the cases of Jayanthilal Purshottamdas Patel v Gordhandas Desai (P) Ltd (1967) 1 Comp LJ 272 (Bom) and Radha Krishan Menon in Mathrubhoomi Printing and Publishing Co. Ltd v Vardhaman Publishers Ltd (1992) 1 Comp LJ 234 (Ker) to support their contentions. It was contended that the petitioners have not pointed out whether any transfer deed was executed between the seller and the purchaser, whether these transfer deeds have been delivered to the company for affecting the transfer, and whether they had received the share certificate back duly certified from the R-1 company. 47. As regards the petitioners' contention that their share certificates were stolen, in support of which they had filed copy of FIR and investigation report through an additional affidavit dated 15.7.2010, it was contended by the respondents that in the FIR complete facts were not given to the investigation officer, hence, the investigation report cannot be relied upon. 48. As regards the balance sheet as on 31.3.2000 of Hadoti Cement, as it reflects an investment of 23,400 equity shares of R-1 company, as contended by the petitioners, the respondents contention is that the same was signed in good faith, he being younger brother of P-1 as usually other documents were being got signed by P-1 in earlier occasions also. In this regard, reliance was placed on the case of Smt Abha Puri and others v Amethi Hume Pipes (P) Ltd MANU/CL/0030/2009 : (2010) 1 Comp LJ 107 (CLB), wherein it was held that 'in family company, in view of the closeness of the parties, it is not uncommon that the documents are signed without going through line by line'. 49. Replying to the petitioners' contention that the respondents have tried to defeat the rights of petitioner, to requisition the extraordinary general meeting of R-1 company, the P-1 had served a notice on the R-1 company on 21 July, 2004, for holding the extraordinary general meeting under section 169 of Companies Act, 1956, for the appointment of two directors and the same was not convened by the petitioners. It was pointed out that the above said notice was dated 21 July, 2004, whereas the copy of the notice show the date of notice as 15 July, 2004; meeting could not be called in view of the order of the Company Law Board in Company Petition No. 37 of 2204. Moreover, there is no need for the respondents to do any such alleged act as the petitioners are neither in the majority on the board of directors of R-1 company nor in majority in the share capital of the R-1 company and their presence in any meeting of the R-1 company would not have any adverse impact on the passing of resolutions in such meetings. 50. Replying to the allegation that respondents have illegally appointed R-3, Shri V.K. Rungta, and R5, Rakesh Kumar Rungta, in July, 2004, despite protest from the petitioners, it was pointed out that notice was given and the petitioners had attended; no qualification shares are required by the directors. Therefore, the directors were appointed in accordance with the article 53 of article of association of the company. The above appointments were made much before the date of serving of the alleged notice (i.e. 21.07.2004); therefore, the allegation of the petitioners that the appointment has been made in order to defeat the purpose of the notice of the petitioners under section 169 is absolutely false and incorrect. Article 50 of articles of association provides that the directors are not required to hold any qualification shares; therefore, the contention that the directors are required to hold qualification shares is baseless. 51. I have considered the rival submissions and the case law relied upon by the parties. There is no dispute with the case law cited. Each case turns on its own facts. The petitioners' case is that R-4 has wrongfully deleted their shareholding as evidenced in the annual returns of 2002/2003 in the group companies which have shareholding in the R-1 company and added the same in the name of the respondents in the annual return of 2004 thereby reducing the majority shareholders to a minority and creating a new majority to gain control and management of the R-1 with an oblique motive. It has been alleged that immediately after the Company Law Board passed an interim injunction ordering status quo in RMC MED Ltd and others (Company Petition No. 37 of 2004) on 13.7.2004, the respondents, to circumvent that order, appointed more directors in back date; however, Form 32 for alleged appointments were filed only in the first week of July/ August 2004, and round which theAGM was shown to have been held. The respondents' case is that the petitioners' claim regarding

their shareholding is completely false and incorrect and is based only on the annual return of R-1 company filed for the year 2002 when the petitioners were in control of the books of accounts and the statutory registers of the R-1 company. P-1 taking advantage of the bereavements in the family took upon him to ensure the statutory compliances of the company. Further, the records of the R-1 company were destroyed in heavy rains at Calcutta, in 1999, whereby P-1 took advantages of the lost records and manipulated the shareholders list of R-1-company for the year 2002. When R-4 came to know about the incorrect and false shareholding list, he filed corrected list of shareholders along with the annual return of 2004 as per the photocopies of the share certificates available with company. Annual return for the year 2002 as prepared by P-1 was signed by R-19 in good faith. According to the respondents the petitioners' case is transfer of shares; they contend that they have purchased the shares from different sellers, but they have not talked about the transfer of shares in the name of the purchasers in accordance with the provisions of section 108 of the Act; the purchase invoices, not produced earlier, do not show distinctive numbers, rate per share, is in fraction of the rupee, rate on a single day is different, how the valuation of shares has been arrived at is not shown, some invoices have been signed by a different family member, invoices do not show any evidence of delivery of shares, it is not known whether any transfer deed was executed between the seller and the purchaser, whether these transfer deeds were delivered to the company for affecting transfer, whether they had received the shares certificates back duly certified from the R-1 company, how can their claim be based on balance sheet of 2002; the directors were appointed in their presence. The petitioners1 FIR regarding stealing (theft?) of these shares, the investigation report filed through the petitioners' additional affidavit should not be relied upon as complete facts have not been given to the investigation officer. 52. It is noted that R-1-company is the flagship company of the Rungta family. Several group companies of Rungta family hold shares in it. It is noticed that out of 19 respondents only one respondent, R-4 alone, has filed counter affidavit to the company petition. Only when the arguments commenced in 2011, the R-1 company has adopted the reply filed by R-4. Other respondents have avoided entering appearance and filing any reply affidavit. The petitioners' contention that after the Company Law Board ordered status quo to be maintained in its order dated 13.7.2004 in the flagship company of Rungta family (RMC MED LTD. Company Petition No. 37 of 2004), the respondents, to circumvent the Company Law Board's orders, appointed directors in all the investment compares in back date exceeding the limit of total number of directors as provided for in articles of association is found to be correct. Respondents have failed to explain as to why the directors were appointed in separate board meetings or EGM when AGM was about to be convened. There is no explanation as to why the R-1 company required more directors, even exceeding the limit prescribed in the articles, when there was no business being done in the investment group companies. The necessity for appointing directors before 13th July (the date of the Company Law Board's order) whereas Form 32 was filed in the last week of July and first week of August remains unexplained. The benefits of such appointments and the advantages, if any, from 2004, till date, have not been pointed out. Petitioners' contentions that the appointments were made at their back, they being family members and having major stake in the R-1 company, were not informed, no notice(s) were served on them their consent was not taken, remain uncontroverted. The respondents have failed to produce any notices for convening board meeting(s), EOGM, board minutes, minutes of EOGM in the investment group companies. The respondents' contention that the records were destroyed in rain in Calcutta in 1999 does not carry their case any further. Instead it strengthens the petitioners' contentions since no records even for the subsequent years to 1999 have been produced by the respondents. Appointment of directors in July, 2004, is for the purpose of gaining control over R-1 company by circumventing the Company Law Board's order dated 13.7.2004. Appointment of directors is not borne out from the records which were avoided to be produced. It reflects the state of affairs in the group companies and in the R-1 company. Resolutions were passed arbitrarily without complying with the procedures laid down. The acts done, when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld. The respondents' contention that the directors were appointed in group companies in EGM and not board meeting does not carry their case any further, as no notices were given to the petitioners, appointments were at their back, were not justified, were in excess of the limit prescribed, the respondents have avoided to file counter affidavits, even if the petitioners are not on the board, they have legitimate expectation of representation in control and management of the R-1 company through its group companies in which they have majority stake. 53. As regards the change in the shareholding, as shown in the annual return for 2004 reducing the petitioners to a minority and creating a new majority, it is noted that no annual returns have been filed by the respondents after 2004, nor have they revised the annual returns of 2002/2003. The petitioners have relied upon their shareholding as reflected in the annual return for the year 2002/2003 and earlier years as filed by the R-1 with the ROC. The annual return for the 2002/2003 has been signed by R-4. Though the respondents, after having signed the annual returns, have attempted to find certain defects and discrepancies to disbelieve (disprove?) the petitioners' claim of being the shareholders and are now raising objections to the effect that there are no transfer deeds and the petitioners have not proved as to when did they apply to the R-1 company for transfer of the shares as per requirement of the provisions of section 108 of the Act, it is not understood as to why the original share certificates are not produced by the respondents to substantiate their claim as per the annual return of 2004. It was first stated by the respondents that the share certificates are available, and the same can be produced as well, but when the petitioners referred to the FIR and the investigation report regarding their shares having been stolen, and that even the sellers have given statement before the police during investigation that the shares were sold by them to the petitioners, the respondents changed their stand to state that the photocopies of the share certificates only were available. When photocopies' of the share certificates were produced by the respondents, the petitioners pointed out even the stamp duty was deficient. Original share certificates were not produced by the respondents. Nor did they produce any other document/statutory record to

substantiate their claim. No supporting documents like transfer deeds, register of members, board minutes were produced. The same story of rain in Calcutta in 1999 in which the records were said to have been destroyed was told. Even the records subsequent to 1999 were not produced. The petitioners have produced the contract notes, purchase vouchers, confirmation from seller, the shareholder's own balance sheets showing those investments, some of those balance sheets have been signed by the respondents as well whereas the shareholders, as reflected in the annual return of 2004, which include certain limited companies, have not shown their shareholding in their own balance sheets. The petitioners' case is based on annual returns of an earlier period i.e. 2002 which has been signed by the respondents as well, unless these annual returns are revised the annual returns of 2002 and 2003 have to be relied upon. There is no transfer of shares shown in the annual return for 2004 which shows a changed position from 2002/2003. It is surprising that the shareholders as shown in the annual return of 2004 have, instead of defending their claim, have chosen to avoid entering appearance and filing counter affidavits. Despite service and opportunities given, they have not filed reply to the company petition. The petitioners' case is that their names were duly entered in the register of members of the R-1 company after transfer of related shares and the same were duly reflected in the annual return for the year 2002, it is not their case that the equity shares were purchased by the petitioners and the same were not transferred and registered in the register of members. The petitioners' case of diluting their shareholding in the annual return of 2004 is made out. Annual return of 2002 is a prima facie evidence which the respondents have failed to refute. No statutory records, giving the pretence of rain (though that too relates to an earlier period) have been produced; no proper procedure has been followed to change the shareholding in the annual returns of 2004; there is no evidence of service of any notice on the petitioners for passing any resolutions; original share certificates have not been produced. When compared with the evidence produced by the petitioners, the respondents' claim has no credential value, nor is supported on facts and in law. In view of the above, the change of shareholding as reflected in the annual return of R-1-company for the year 2004 cannot be relied upon. 54. On 5.7.2004, despite protest by P-1, R-2, R-4 and R-7 in the board meeting appointed two more additional directors, namely, Vinod Kumar Rungta (R-3) and R.K. Rungta (R-5 and S/o R-2). It has rightly been pointed out that the respondents who, in fact, have less than 5% shareholding in the R-1 company had done this to gain management control in the company without the R-1 company gaining anything from such appointments as the directors so appointed do not stay in Jaipur; they are residents of Calcutta. R-3 who was earlier appointed as director long back in the year 1997 has resigned and even his shareholding (3,100 shares 0.41%)' was sold to P-2 in 1999; R-3 has no stake in the company without having much to contribute in the affairs of the company. Similarly, R-5 who is the son of R-2 has no stake in the R-1 company; he holds only 100 shares (0.01%). The appointments have been with mala fide intention to exclude the petitioners' group from management; the petitioners; despite having major stake in the company had no proportionate representation on the board of the R-1 company. 55. For smooth running of the company, the Company Law Board had on 13.7.2004 ordered status quo regarding shareholding as also immovable assets of the R-1 company not to be disturbed in any manner. At present, the R-1 company's bank A/C is being operated by joint signatories (one having been appointed by the Company Law Board). P-1 and R-15 are the two directors running the hospital at present. R-7 has resigned as director of the company. R-4 has abandoned the affairs of the company. 56. The fiduciary capacity within which directors have to act enjoins upon them a duty to act on behalf of the company with utmost care and skill and due diligence and in the interest of the company: More so, in a family company. They have a duty to make full and honest disclosures to shareholders regarding all important matters relating to the company. Shares issued for maintenance and acquisition of control over the company is an extraneous purpose, and therefore, cannot be upheld. The motive of change in the balance sheet of 2004 in the present case was mala fide. On facts, the shareholding was changed with the sole object of gaining control of the company by becoming majority shareholders and was an act of oppression on the part of the respondents. More so, as the meetings passing such resolutions were held at the back of the petitioners without giving proper notices and without following proper procedure. Regarding service of notices, it is settled law that the onus to prove service rests on the sender. That onus has not been discharged. In view of above, the changed shareholding in the annual return of 2004 cannot be sustained and is required to be set aside. 57. The petitioners' allegations that their group has been converted from a majority to a minority in shareholding and respondents' representation in management has substantially been increased are found to be correct. In view of the continuous effects of such oppressive acts, to undo the effects and to regulate the affairs of the R-1 company in future, the present petition deserves to be allowed. A clear case of oppression has been made out; the conduct of the respondents has been harsh, burdensome, against probity and good conduct. Once conduct is found to be oppressive under sections 397 and 398, the discretionary power given to the Company Law Board under section 402 to set right, remedy or put an end to such oppression is very wide. The respondents have been involved in continuous acts of oppression against the petitioners and the present petition deserved to be allowed in favour of the petitioners. 58. In view of the foregoing, Company Petition No. 37 of 2004 stands allowed. The R-1 company is hereby directed to restore the position of shareholding as reflected in its annual returns for the years 2002/2003 and allotment of shares to respondents is hereby set aside; all statements/statutory forms filed in this regard with the ROC are held to be invalid, all resolutions passed in board meetings/AGM/EOGM are hereby cancelled, the R-1 company is hereby directed to rectify its register of members and shares register accordingly after taking into consideration consolidating of equity shares in the name of the parties pursuant to the orders of hon'ble Rajasthan and Calcutta High Courts

sanctioning amalgamation of shareholder companies, considering the claims of the applicants for transfer of shares by duly constituted board in compliance with this order. Further, the appointments of R-3, R-5, appointed as directors despite protest by the petitioners is hereby set aside giving the majority shareholders in this family company their right of proportionate representation on the board in accordance with the principle of legitimate expectation, the legitimate representation having been denied, the majority shareholders are, by virtue of being in majority, are entitled to control, manage and run the affairs of the company, this is a benefit or advantage which the members enjoy and are entitled to enjoy in accordance with the provisions of the Company Law in the matter of administration of the affairs of the company by electing their own men to the board of directors of the company, all statements/resolutions/statutory forms filed with ROC with regards to appointments of R-3 to R-5 are hereby held to be invalid. All company applications stand disposed off. All interim inunctions given stand vacated. No order as to costs. Manupatra Information Solutions Pvt. Ltd.
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MANU/CL/0080/2007 Equivalent Citation: [2007]147CompCas406(CLB), (2011)2CompLJ635(CLB) IN THE COMPANY LAW BOARD PRINCIPAL BENCH, NEW DELHI Decided On: 04.12.2007 Appellants: Yogeshwari Kumari and Ors. Vs. Respondent: Lake Shore Palace Hotels Pvt. Ltd., Arvind Singh Mewar and T. Narayanan Unni Hon'ble Judges/Coram: S. Balasubramanian, Chairman Subject: Company Catch Words Mentioned IN ORDER S. Balasubramanian, Chairman 1. The petitioners, holding 25.1% of shares in M/S Lake Shore Palace Hotels Pvt. Ltd. (the company), have filed this petition with the main allegations that by increasing the share capital of the company, the 2 respondent is attempting to oust the petitioners from the company and also to reduce them to a hapless minority and that he; is guilty of financial mismanagement in the affairs of the company. With these allegations, the petitioners have sought for supersession of the Board, appointment of an administrator and for permanently restraining the respondents from increasing either the authorized or paid up share capital. 2. In brief, the undisputed facts of the case are: The company was originally promoted by late Maharana Bhagwat Singh of Mewar and he had leased out one of his palaces (Shiv Niwas Palace) to the company for running a hotel. He had three children the 1st petitioner, the 2nd respondent and Shri Maharaj Kumar Mahender Singh. The 2nd respondent is the younger brother of the 1st petitioner. Late Maharana expired on 3.11.1984 leaving a Will appointing the 2nd respondent and one A. Subramaniam (who expired in 1993) as executors. The High Court of Rajasthan granted probate of the Will in 1987. Through the Will, late Maharana had created a trust in the name of Maharana Mewar Institution Trust to which he placed a number of immovable and movable assets owned by him including some of the shares held by him in the company. Of the 700 shares held by him in the company, he bequeathed 100 shares each to the 1st petitioner and the 2nd respondent leaving 500 shares for the Trust. He had also stipulated that none of them should sell their shares except to the Trust. He had named 5 trustees, the 1st petitioner being the Chairman and the 2nd respondent as the Managing Trustee. In 1989, the company issued certain number of shares on a right basis. This issue was challenged by the petitioners before the High Court of Rajasthan by a petition under Sections 397/398. The judgment of the learned Single Judge was appealed against by both the parties before the Division Bench. Before the Division Bench, the parties decided to settle the disputes amicably by a Memorandum of Understanding on 25.8.1999. Some of the terms of the agreement were:

a. The 2nd respondent was to transfer 145 shares held by him to the 1st petitioner. b. Shri T.N. Unni, CA to be appointed as a director of the company. c. The services of the proprietary concern of the 1st petitioner would be utilized by the company on payment of Rs. 6 lacs per annum. d. The 1st petitioner was to withdraw the said petition.
3. The Court accepted the terms of Settlement and accordingly all the terms were implemented. By acquiring 145 shares from the 2nd respondent, the shareholding of the petitioners came to be 25.1% while that of the 2nd respondent to 52%. In 2004/2005, the company proposed to issue 3000 shares on a right basis and the said proposal has been challenged in the present petition. 4. Shri Sarkar appearing for the petitioners submitted: Right from incorporation in 1972 till 1979, none of the family members except late Maharana held shares in the company. In 1979, the total number of shares issued was 125 out of which late Maharana held 75 shares and the 1st petitioner who was allotted 25 shares held 20% of the issued capital of the company. On issue of further shares in 1980, she came to hold 33.4% shares while late Maharana held 58.3% shares. On further issue of shares in 1982, the shareholding of late Maharana went up to 77.5% while that of the 1st petitioner came down to 20%). Only in 1983, the 2nd respondent became a shareholder when late Maharana transferred 7.5% shares from his holding to the 2 respondent. Again in 1984, late Maharana transferred 25 further shares in favour of the 2nd respondent, thus, he came to hold 10% shares in the company. Thus it is evident that neither the petitioners nor the 2 respondent contributed towards the shares of the company. As per the Will of late Maharana, all the assets held by him were to go to the Trust. In his Will, late Maharana had specifically mentioned that shares in the company had been allotted to the members of the family with the intention that the hotel would always remain a closely knit family concern. Thus, in a family company, certain equities are to be maintained. Even though probate had been granted, the 2nd respondent being the only surviving executor, delayed the execution of the Will and continued to control the 700 shares held in the name of late Maharana, in his capacity as the

executor. To ensure that even after administration of the estate by which 500 shares would go to the Trust, with a view to maintain control over the affairs of the company, he increased the authorized capital of the company from Rs. 25 lacs to Rs. 50 lacs in 1989 and 923 shares were offered to the 1st petitioner as right shares. However, 923 shares were not allotted to the 1st petitioner. Instead of offering right shares to the Estate and accepting the same on behalf of the Estate in his capacity as the executor of the Estate, the 2n respondent got these shares allotted to himself. He got himself allotted 1023 shares. Thus, from a 10% shareholder, he became a 56.6% shareholder, thus became the absolute majority. In addition, he also came to control 23.1% shares held by the Estate in his capacity as the executor. This action of right issue and consequent allotments along with other acts of mismanagement on the part of the 2nd respondent was agitated before the Rajasthan High Court in a petition under Sections 397/398. Before the Division Bench, the parties had entered into a settlement by which 145 shares were transferred by the 2 respondent to the 1st petitioner to increase her shareholding to 25.1% with the understanding that no further shares would be issued in the company so as to maintain the percentage of the shareholding of the petitioner, the Estate and the 2nd respondent. The company holds 49% shares in Lake Palace Hotel, Jaipur which is running very profitably. By the majority shareholding in the company, the 2nd respondent controls the Lake Palace hotel also but the petitioner is not on the board of the Lake Palace Hotel even though the return for her shares in the company depends on the performance of the Lake Palace Hotel. 5. Sometimes in 2004, the 2nd respondent desired to purchase the shares held by the 1st petitioner. Since the 1st petitioner had been completely excluded from the management of the affairs of the company, she expressed her willingness to consider selling her interest at a fair price. Instead of having the fair value determined, the 2nd respondent offered Rs. 1 crore for her shares which was not acceptable to the 1st petitioner. Thereafter, the petitioner received a valuation report prepared by the 3 respondent stating that the same had been prepared at the behest of the 1st petitioner even though she had never asked the 3 rd respondent to prepare any valuation report. In that report, Shri Unni had grossly under valued the price of the shares with the view to benefit the 2nd respondent. His failure to acquire the shares of the petitioners at a gross under value had prompted the 2nd respondent to go in for a right issue with the view to put pressure on the petitioners. 6. The learned Counsel further submitted: On 13.12.2004, the company issued a notice for convening a Board meeting on 29.12.2004 to consider increase in the authorized capital from Rs. 50 lacs to Rs. 5 crores claiming that funds were needed for project implementation. No project report was circulated. She sent a letter of protest on 29.12.2004 against this proposal. She attended the meeting and again expressed her dissent but with the support of Shri Unni, the 2nd respondent got the proposal through and they decided to convene an EOGM on 29.1.2005 to seek the approval of the shareholders to increase the authorized capital. The explanatory statement did not contain any particulars/details of the projects. In the EOGM, the 1st petitioner demanded a poll and with his majority shareholding, the 2nd respondent got the proposal approved. Thereafter, a board meeting was convened on 30.3.2005, by a notice dated 14th March, 2005. Along with the notice, a summary of the projects had been enclosed and agenda also included an item for discussion on method of raising finance to fund the projects and to approve the most suitable method. There was no mention of any expansion plan in the agenda. The Statement enclosed with the notice only indicated the status of the projects which had already been completed and expenses towards renovation etc. Except this chart, no other details have been given. It is to be noted that in the board meeting on 29.12.2004 wherein it was decided to increase the authorized capital, even this chart has not been produced. Further, the notice for the board meeting is dated 14th March, 2005 but the chart shows details as on 1st April, 2005. There was no agenda of this meeting for issue of shares on a right basis. However with the connivance of Shri Unni, the 2nd respondent got the proposal to offer 30000 equity shares of Rs 1000 per share on a right basis and the petitioners got the letters of offer. 7. Notwithstanding the spirit with which the agreement was entered into before the High Court that no further shares would be issued/the share capital expanded and that the company would be managed properly, the 2n respondent has tried to increase its shareholding and continues to mismanage the affairs of the company with the active connivance of Shri Unni. Having illegally acquired 52% shares in the company, by proposing further right issue of 30000 shares, the 2nd respondent is trying to reduce the petitioners to a hapless minority as the 2nd respondent is fully aware that the petitioners are not in favour of increasing the capital of the company and as such would not accept the shares. His proposal to increase the capital was malafide. He knew that the petitioners would not accept the right shares and that being the Executor of the Estate he would not subscribe to the shares in the name of Trust. Thus all these shares would be available for allotment to himself and he would subscribe to the same and thus gain full control of the company. This is the same modus operandi that he adopted in the allotment in 1989 which resulted in the earlier petition. However, after this petition was filed, he accepted 2000 shares on behalf of the Trust out of the shares offered to it. This itself would show the malafide purpose of the right issue. The purported claim of the 2nd respondent that the company is in need of funds is bogus. From the balance sheet as on 31.3.2004, it is evident that the 2nd respondent has spent substantial funds on real estate. Even assuming that the company needed funds, he did not take any effort to look for alternate source of funds by way of loans from the banks or by way of unsecured borrowings. The agreement before the High Court was entered into on the understanding that there would be no further issue of capital to reduce the holding of the 1st petitioner and the Estate. In other words, whatever was the percentage of shares after transfer of 145 shares that the 1st petitioner and the Estate held, the same could never be reduced/altered. Therefore, the proposed allotment by way of right of 30000 shares is not bonafide and is motivated and is highly oppressive to the petitioners. The admitted fact is that the company holds 49.5% shares in Lake Palace Hotel. It has leased out the hotel property to Taj Group of hotels and it gets a minimum guarantee amount of over Rs. 10 crores every year. The 2nd respondent is in charge of that hotel but no dividend has been declared for the shares held by the respondent company affecting the interest of the petitioners as

they are not in a position to get any dividend from the respondent company. The shareholding in Lake Palace Hotel is a very valuable asset of the company. Being in charge of Lake Palace Hotel, the 2nd respondent is advancing loans to other entities which are controlled by him or his relatives. No funding is done by Lake Palace Hotel for the needs of the company. Thus, the misstatement of the 2nd respondent is evident from these facts. 8. As a matter of fact, the company is running a hotel which is functioning in a lease hold property and has only 36 rooms. Its major asset is the shares held by it in Lake Palace Hotel. Since the petitioners were not getting any return on their investment and the 2nd respondent was insisting on further issue of shares, the petitioners were willing to go out of the company but the 2nd respondent offered only a sum of Rs. 1 crore notwithstanding the fact that the value of the hotel property is over Rs. 30 crores and the company holds 49.5% in Lake Palace Hotel, the value of which would be very high. Even now, the petitioners are willing to divest their entire shares if the shares are valued on real estate price. The: 2nd respondent should not have any objection as he has acquired the shares at par value. Let the valuation of the shares held by the petitioners be directed to be done as on 31st March, 2006. In the alternative, if at all the company is need of funds, the petitioners are prepared to give loans in proportion to their shareholding at market rate of interest and let the 2nd respondent also do so instead of right issue. 9. In regard to Shri Unni, the learned Counsel submitted: Shri Unni was appointed as a director in terms of agreement before the High Court. At that time the petitioner had reposed complete trust and confidence in him, but of late he has started against the interests of the petitioner. He has completely turned against the petitioners. He has supported the 2nd respondent in approving right shares in the board meeting. This was done with a view to oust the petitioners from the company. It is to be noted that initially the 2nd respondent offered Rs. 1 crore to the petitioners for their shares, which the 1st petitioner did not accept. With a view to convince that Rs. 1 crore was a reasonable price, the 2nd respondent got Shri Unni to prepare a valuation report showing a much lesser value for the shares. Being a director of the company, Shri Unni should not have carried out the valuation. Further, he is also guilty of professional misconduct, as being a director of the company, he could not have been appointed as the statutory auditor of Lake Palace Hotel in which the company holds 49% shares. Therefore, he should be removed as a director of the company. 10. Summing up his arguments, Shri Sarkar submitted that the only manner by which the interests of the petitioners could be protected is that, their shares should be directed to be purchased by the 2nd respondent/company on a fair valuation based on the asset value of the company as well as Lake Palace Hotel or in the alternative, any funds required by the company should be mobilized through loans by the petitioners and the respondent/Estate and the present offer of right shares should be cancelled. 11. The learned Counsel relied on the following cases:

a. Clemens v. Clemens Bros 1976 2 AER 268: The powers conferred on the board of directors must be exercised not only in the manner required by law but also bonafide for the benefit of the company as a whole, but it must not be exceeded. These conditions are always implied and seldom expressed. b. Standard Industries Ltd. v. Mafatlal Industries Ltd. 80 CC 764 CLB: Even allotment of right shares could be considered to be oppressive and when a shareholder is not willing to invest in the right shares, his entire shareholding could be directed to be purchased on a fair valuation. c. Re: A company 1985 BCLC 80: Even a right issue in facts of a case could be considered to be unfairly prejudice to a shareholder and with a view to preserve the status quo, injunction can be granted against the right issue. d. Re: A company 1986 BCLC 362: If the majority knows that the petitioner does not have the money to take up his right and the offer is made at par when the shares are plainly worth a great deal more than par as part of a majority holding (but very little as a minority holding), it seems to me arguable that carry through the transaction in that form could, viewed objectively, constitute unfairly prejudicial conduct. In this case, however, it seems to me that the petitioner, is he lacks the resources or inclination to contribute pari passu to the company could protect its interest by offering to sell his existing holding to the majority. Indeed if the company need funds and he does not want to pay his shares, it seems to be fair that he should offer to sell out. e. Howard Smith v. Ampol Petroleum Ltd. 1974 AC 821: When a dispute arises whether directors of a company made a particular decision for one purpose or another, the court is entitled to look at the situation objectively in order to estimate how critical or pressing or substantial are, per contra, in substantiate an alleged requirement may have been. f. S. James Fadrick v. Mrs. Minnie R. Fadrick 101 CC 294 CLB: In a family company with limited number of shareholders, the shares held by the company in the subsidiary could be distributed among the shareholders.
12. Shri Vibhu Bakhru appearing for the petitioners submitted: In the earlier proceedings before Rajasthan High court, no decision on merit was given by the Division Bench. The matter ended in a compromise. Therefore, the principle of res judicata cannot be applied. In terms of Section 11 of the CPC also, there is no finality in the judgment. What the petitioners allege is regarding the conduct of the 2 respondent consolidating his position in all companies in breach of the family set up. He had

acquired the shares meant for the Trust. Thus all the benefits which should legally go to the Trust have been appropriated by the 2nd respondent. The 2nd respondent has offered Rs. 1 crore for the 25% shares held by the petitioners. Even, in his own proposal to the State Bank of Bihaner & Jaipur on 8th March, 2002, the Vice President (Finance) of the company stated that on a conservative basis the value of Shiv Nivas Palace was about Rs. 30 crores. If so, the shares of the petitioners should be valued at least at Rs 7.5 crores. Further even assuming that the petitioners are not interested in taking the shares, when such a valuable property is involved, there is no reason as to why the 2nd respondent should acquire the shares at par. Shri Unni being a director of the holding company cannot function as the statutory auditor of its subsidiary. The 1st petitioner agreed for induction of Shri Unni as a director only with the hope that he would be impartial. However, his subsequent conduct has shown that he is siding with the 2nd respondent and therefore the petitioners have lost complete faith in him. At the time when the consent terms were entered into before the High court, the understanding was that the percentage shareholding of the petitioner would remain without any change. The 1st petitioner never interfered with the working of the company. Therefore when such an understanding is breached, the petitioners have a fresh cause of action. It is to be noted mat the authorized capital was increased only after the petitioners rejected the offer of Rs 1 crore made by the 2nd respondent. This itself would show that the motive for increase in the capital is not bonafide but only to gain absolute control over the company knowing fully well that the petitioners would not subscribe to the shares. It is further to be noted that the letters from the banks relied on by the 2nd respondent related to the period 2003 and 2005 and not relating to 2004. By using the position of a trustee, executor and majority shareholder, the 2nd respondent is trying to acquire the shares of the petitioners at a low price. Once the 2nd respondent acquires the shares of the petitioners, his individual control over Lake Palace Hotel would become 64%. Shri Unni, being aware of the agreement before the High Court, could not have approved issue of further shares. This itself would indicate that he is no longer neutral but is siding with the 2 respondent. This is the reason why the petitioners are challenging his continuance as a director as well as the auditor of Lake Palace Hotel. Taking into consideration that both the petitioners as well as the 2 respondent had acquired the shares by inheritance, one has to look at the group as a whole for valuation. The 2nd petitioner being a trustee of the Trust is very much concerned with the interest of the Trust. Even though the Trust is entitled for 6400 shares, the 2nd respondent has acquired on behalf of the Trust only 2000 shares. Thus the 2nd respondent has acted against the interests of the Trust also in breach of his fiduciary duties to the Trust. 13. Shri Mookherjee, Senior Advocate, appearing for 2nd and 3rd respondents submitted: The petition has been filed in respect of the 1st respondent company and Lake Palace Hotel has not even been made a party to the proceedings and therefore there can be no reference to Lake Palace Hotel in deciding the disputes between the parties. From 1991 to 1999, the petitioners held 615 shares and regular dividend had been declared on the shares. In 1999, in terms of the agreement before the High Court, the petitioner acquired 145 shares from the 2nd respondent at par. This would indicate that the petitioner is not averse to acquire the shares at par and even now the proposal of the company is to offer right shares at par. Her total investment in the company is Rs. 7.6 lacs and she has been a director of the company and has been receiving Rs. 6 lacs per year in terms of the agreement before the High Court. Thus, she has by now received more than Rs. 42 laks by way of dividend/compensation. She cannot allege any financial mismanagement as she has been signatory to the annual reports up to 2004. Many of the allegations raised in the petition relate to the period prior to the date of her petition under Sections 397/398 of the Act before the High Court. The allegation that the 2nd respondent has gained majority shares in the company and that he had not subscribed to the shares offered to the Estate etc. had all been covered in the earlier petition. Since the parties had agreed to settle their disputes before the High Court and had actually done so, none of the issues raised in the earlier petition can ever be raised in the present petition. As a matter of fact, after the settlement, the petitioners withdrew the said petition without liberty. Therefore having withdrawn the said petition without liberty, the petitioners cannot now voice any grievance against the 2nd respondent that he had gained majority shares in the company illegally. In terms agreed before the High Court, the 1st petitioner had elected to continue with the company and unless the same is disturbed, she cannot complain. Therefore, the only allegations relating to the period after 1999 can be looked into by this Board. In the petition, the only allegation relating to the period after 1999 is that the company is proposing a right issue. 14. In so far as the proposal to issue further shares is concerned, it is not the case of the petitioners that the company is not in need of funds. Even in the petition at paragraph 25, the petitioners have only complained that the 2nd respondent has not made any attempt to look for alternate source of funds. In her letter dated 27.1.2005, her allegation was that the need for funds had arisen due to the mismanagement by the 2 respondent. In her letter dated 9.4.2005, she had alleged that agenda item No. 4 for the board meeting on 30.3.2005 was to discuss the various methods of raising funds and that the 2nd respondent had unilaterally decided that funds should be raised by issue of further shares. This would indicate that the 1st petitioner was conscious of the fact that the company is in need of funds. Having withdrawn the earlier petition due to which none of the earlier allegations would survive, she has included all those allegations in the present petition only to build a case of consecutive events. Para 21 to 34 of the earlier petition have been practically reproduced. 15. He further submitted:, It is the sole prerogative of the board of directors to decide the mode and manner of raising funds required for the company. The financial position of the company is reflected in the Chartered Accountant's certificate dated 9.9.2005, as enclosed with the sur rejoinder. As per this certificate, the net worth of the company was negative to the extent of Rs. 2.13 crores as on 31.3.2004 and of Rs. 1.1 crore as on 31.3.2005. As a matter of fact, Lake Palace Hotel had given an advance of Rs. 10 crores to the company by way of trade deposit on account of which only the company could survive. The petitioners are fully aware of the financial position of the company as the

1st petitioner had signed the balance sheets as on 31st March, 2002, 31.3.2003 as well as 31.3.2004. All these years, the company had incurred losses. Because of this dire financial position of the company, when the company requested for term loan facility from the Banks for project finance, the Bank of Baroda as well as Vijaya Bank had advised the company to increase the paid up capital of the company. Therefore, the necessity of issue of further snares arose because the 2n respondent could not raise funds through any other source, contrary to the stand of the petitioners, that alternate method of raising funds had not been considered. Raising of funds through issue of shares is the most cost effective as there will be no liability towards interests etc. In a closely held company, it is the duty of every shareholder to assist the company by inducting funds by way of share capital when the company is in need. Further, nothing was done in a clandestine or secret manner. The matter of raising the authorized capital was discussed in a board meeting on 29.12.2004 by giving a notice on 13.12.2004 showing this business as a part of the agenda for the board meeting. In response to the said notice, by a letter dated 29.12.2004, the 1st petitioner objected to the proposal for increase in the authorized capital only on the ground that even though in the past share capital had been raised, the company had not made any profit. She did not voice any other grievance. The 1st petitioner attended the said meeting and in that meeting the 2nd respondent gave full details as to why the company was in need of funds requiring the increase in the authorized capital. Even though she voted against the proposal, by majority, the proposal was cleared and it was decided to convene an EOGM and accordingly on 5.1.2005, notice for EOGM on 29.1.2005 was issued. The 1st petitioner attended the EOGM and sought for a poll and her entire group voted against the proposal but was carried through by majority. Thereafter by a notice dated 14.3.2005, a board meeting was convened on 30.3.2005 to approve projects to be under taken by the company (Project report was annexed with the notice) and also for deciding the methods of financing the project. Responding to this notice, by a letter dated 20.3.2005, the 1st petitioner alleged that Shri Unni should not attend any board meeting as his appointment was bad in law and as such he should not attend the meeting on 30.3.2005. She further alleged that the annexure to the notice was not a project report but only a summary of the progress of certain projects allegedly approved in a board meeting in September, 1996. Therefore, she sought for deferring discussions on the projects and also the method of raising finance till such time she received the full project report. The 1st petitioner attended the meeting on 30.3.2005. In the meeting, the 2nd respondent gave complete details of the projects under implementation and the need to complete the projects at the earliest. He also mentioned that for completion of the projects, funds could be raised both by way of right issue and also borrowing terms loans from the banks. However, the 1st petitioner voted against the proposal to issue and allot right shares of 30000 equity shares of Rs. 1000/- each. Thereafter, the 1st petitioner started making allegations against the 2nd respondent of siphoning of funds and also alleged that by the proposed right shares, the 2nd respondent was trying to reduce the percentage shareholding in the company. Shri Unni has been continuing as a director on the basis of the consent terms approved by the High Court and his appointment as a regular director had been approved by the general body attended by the petitioners and therefore the allegation that his appointment is illegal has no validity. The allegation that Explanatory Statement annexed to the notice for the EOGM did not contain full particulars as provided in Section 173 of the Act is concerned, since the 1st petitioner was fully aware of the need for funds in the company, non enclosure of the project report with the Explanatory Statement is not fatal. As a matter of fact, Explanatory Statement is not a mandatory requirement. In Suramul Nagarmull v. Shew Bhagwan Jalan 1973 ILR 1 Cal 207, it has been held that non complying the provisions of Section 173 does not make the proceedings of the meeting void and may in certain circumstances become voidable. In the present case, the petitioners have not pleaded in the petition about the violation of Section 173 but the same was presented only during the arguments. This is because, the petitioners knew about the implementation of the project right from 1996. Even assuming that there was some infirmity in the said Explanatory Statement, the same cannot be considered to be oppressive. In Shree Hari Rao v. Gopal Automotives 1996 CC 493 CLB, this Board has held that issue of shares on a right basis cannot be considered to be an act of oppression as, if all the shareholders accept the right shares, there would be no-change in the existing percentage holding. In Hari Kumar Raja v. Sovereign Dairy Industries Ltd. 106 CC 91 CLB, this Board has again held that since by issue of right shares, no new majority is created, the act of issuing right shares cannot be considered to be an act of oppression. In Maharana Lalita Rajyalakshmi v. Indian Motor Co. Ltd. 1962 Cal. 127, it has been held that failure to supply the fuller possible details will not be visited with an application under Section 397 except that it could invalidate a meeting and no more. The main ground of challenging the Explanatory Note is that it has talked of need of funds for expansion while the project report is nothing but funds for renovation. As per the New Shorter Oxford Dictionary, expansion would include increasing the scope of activities or the scale of operations of a company. Likewise in Webster's Dictionary, expansion would include renovation. Therefore on the contention that the explanatory statement was defective, the issue of rights shares cannot be alleged to be an act of oppression. 16. The learned Counsel further submitted: The petitioners have alleged mismanagement in the affairs of the company. Since the 1st petitioner has signed the balance sheets from 2002 to 2004 without raising any objection, she cannot allege mismanagement up to 2004. As a matter of fact, she has not made any allegation in the petition but all these allegations have been made only in the rejoinder which cannot be looked into unless these allegations pertain to the period after filing of the petition as held in Sangram Sinh P. Gaekwad v. Shanta Devi P. Gaekwad AIR 2005 SC 808. The petitioner has made another allegation that advertisement, sales promotion expenses of the associate companies are being debited in the accounts of the company. It is just a bald allegation without any particulars. The petitioner has further alleged that the 2nd respondent has caused capital expenses of over Rs. 370 lacs when the Tourism Industry was in bad shape. This statement is false. Out of Rs. 370 laks of project works, Rs. 250/- lacs were carried forwarded as on 31.3.2004. The projects were undertaken at a time when the industry future was looking bright and rosy and Tourisms was in upswing. The petitioner has further alleged that compared to the performance of other hotels, the performance of the company is bad. No comparison of the performance of hotels can be made as the performance

would depend on location, size etc. The respondent company hotel has only 36 rooms and the occupancy varies from season to season. From the report prepared by M&A Associates as enclosed with the sur rejoinder, it can be seen that on every parameter compared to the size of the hotel the performance of the company has been fairly good. 17. The learned Counsel further submitted: Sometime in 2004, the 1st petitioner evinced her interest to go out of the company. Accordingly, she requested Mr. Unni to prepare a valuation report. He valued the shares held by the petitioners on various methods giving different valuation. As per P/E Ratio method, the value of their holding came to Rs. 78 lacs. On Income Capitalization Method- Rs. 75 lacs and on break up value- Rs. 311 lakhs. However, she declined to accept the report on the ground that she had never authorized Shri Unni to do the valuation; that the value indicated was too low; that Shri Unni had not done the valuation as an independent person. However, she did not question the principles adopted for valuation. In the valuation, Shri Unni had taken into consideration the break up value of even the subsidiaries to ensure that the value of the shares of the petitioners is reflected correctly. This is in spite of the fact that in valuing the shares of a company, the assets of subsidiary need not be taken into accounts as held by SAT in its order dated 8.12.2005 (GL Sultania v. SEBI). The petitioners have expressed another grievance that dividend has not been paid. This grievance itself is not correct in as much as the company was regularly paying dividend till 2001 where after due to losses, the company could not declare dividend. Non payment of dividend cannot be considered to be an act of oppression or mismanagement as held in Jaladhar Chakraborty v. Power Tools & Appliances Co. Ltd. 79 CC 505. 18. The learned Counsel submitted that no case of either oppression or mismanagement has been made out. The petitioners have sought for directions to the 2nd respondent to purchase the shares at a fair value. Such an order can be made only if some equity is shown to be in favour of the petitioners. In Shanti Prasad Jain v. Kalinga Tubes MANU/SC/0368/1965, the Supreme Court has held that certain prerequisites should be fulfilled to seek relief under Sections 397/398 of the Act. They are; the acts complained of should be such as to oppress a minority in the capacity as shareholders; the facts relied on should establish making of a winding up order on equitable grounds. In the present case, they have not satisfied any of the pre-conditions. In Needles case the single judge granted leave under Section 398 of the Act while the Division Bench as well as Supreme Court considered the matter in terms of Section 397 alleging oppression in the matter of allotment of shares. In the present, since there is no oppression as the proposal of issue of shares is on right basis, relief could be granted only under Section 398 for which the petitioner has not made out a case. Even in the Needle's case, in paragraph 172, the Supreme Court came to conclusion that no act of oppression had been made out, yet, granted relief only with a view to place the parties in the same position as they would have been but for the acts complained of. In the present case, there is no change in the status of the petitioners. She can always retain the present position by subscribing to the right shares. It is on record that after the 2nd respondent subscribed to his entitlement and funds came into the company, renovation/expansion have taken place and the banks also gave further loans. It is to be noted that late Maharana expired in 1984 at which time the turnover of the company/hotel was Rs. 22 lacs and the company had suffered a loss of Rs. 16 lacs with occupancy of 19%. Presently, the turnover has gone over Rs. 200 lacs and there is a profit of more than 10 to 12 percent on the turnover. Shri Sarkar relied on Section 459 of the English Act to contend that the action of the board of directors is unfairly prejudicial to the petitioners. While Section 459 of the English Act refers to prejudice to members, Section 397 of Act refer to prejudice to public interest and not members. Therefore, provisions of Section 469 of the English Act cannot be extended to Section 397. 19. In rejoinder, Shri Sarkar submitted: The main argument of the learned Counsel for the respondents is that since no oppression has been made out for grant of relief, the petitioner should show that equity is in their favour. Not only the petitioners have established oppression in the attempt of the 2nd respondent to increase the capital of the company, even equity is in their favour. It is on record that none of the parties in the proceeding had contributed to the shares when they originally became the shareholders of the company. The entire assets including the shares belonged to their father. His assets have been put in the form of a company creating an artificial status of minority/majority. But for this corporate set up, the petitioners could have sought for partition. The petitioners' right cannot be taken away just because the assets are with the company. But for the manipulation of the 2nd respondent, the Trust would have been the major shareholder, in which the petitioners are principal beneficiaries. Therefore, the claim of the petitioners for fair valuation could never be objected to by the 2nd respondent. The petitioners have referred to the earlier proceedings only to show that similar allegations are recurring. Just because the 1st petitioner had entered into a compromise in the earlier proceeding, it does not mean that the petitioners will have to put up future acts of oppression. In Gaekwad case, in paragraph 186, the Supreme Court has held that while exercising the powers under Section 402, the court can mould the relief depending on the circumstances. Again in Paragraph 207, the court has further held that even in a case where oppression is not established, the court can grant relief so as to do substantial justice between the parties. In the present case, the most equitable relief that can be granted is directing parting of ways by which the petitioners could sell their shares on a fair value. If such a relief is not granted, the war between the two would perpetuate and the same will be against the interests of the company. Whether the parties should part ways or not is for the CLB to determine and cannot be at the choice of parties. The petitioners have established that there have been disputes in the past, in the present and likely to be in the future also. Potentiality of conflict is always there. Once the petitioners have established that further issue of shares would be prejudicial to their interest, they could seek equitable remedy by seeking parting of ways. 20. I have considered the pleadings and arguments of the counsel. There are three main allegations in the petition. One is that there is no justification to issue right shares, that the 2nd respondent is guilty of financial mismanagement and even though Shri Unni was appointed with the consent of the 1st petitioner and the 2nd respondent, he has become hostile towards the 1st petitioner. In so far as issue of right shares is concerned, the same has been challenged on various grounds, that the projected

financial needs for the company is artificial and manipulated, that even assuming there is need, the same has been brought about by the 2nd respondent by diverting the funds of the company to his own entities and that the proposal for right issue is an off shoot of the refusal of the petitioner to sell her shares to the 2nd respondent at Rs. 1 crore. The right issue is also challenged on the ground that the 2nd respondent is trying to gain substantial majority by acquiring the unsubscribed shares by the petitioners and the Estate and as such the proposal itself is malafide and with an ulterior motive. It is further alleged that in view of the agreement before the High Court, there could be no change in the shareholding of either the 1st petitioner or the 2nd respondent. 21. First, I shall deal with the contention of Shri Mookherjee that this Board should not take cognizance of any allegation relating to the earlier petition before the High Court since that petition had been withdrawn on the basis of a compromise. He contended that those allegations more particularly, the allegation that the 2nd respondent illegally acquired the shares unsubscribed by the Estate, do not survive once the petition was withdrawn. I do agree that once a matter had a reached finality in the earlier proceeding, whether by way of an order or merits or by way of a compromise, the same issues cannot be raised in a subsequent proceeding. However, in the present case I find that even though that there is a narration in the petition of the allegations in the earlier petition, no relief relating to those allegations has been sought. It is quite obvious that the petitioners have narrated the earlier allegations only lay stress that the 2nd respondent has practiced the same modus operandi in 2005 also. Therefore, I do not find any fault on their part in narrating the earlier proceeding. However, I would rely on the earlier proceeding only in regard to the terms of the agreement before the High court deciding the allegations in the petition and not for any other purpose. 22. Of the three main allegations in the petition, two are practically incidental in the sense no substantial consequential relief appears to have been sought in the petition. Therefore, I shall deal with these two allegations first. One is with regard to the financial mismanagement. The allegation in the petition, as seen from paragraph 45 of the petition is: " The petitioners variably believe that respondent No. 2 has financially drained the respondent company by diverting its funds for his personal aggrandizement by incurring huge unnecessary amounts towards business promotion, repairs and maintenance etc. for a hotel of only 35 rooms. The petitioners also have personal knowledge that most of the personal expenses of the respondent No. 2 and his family members are debited to the respondent company in one form or another. This extends to even respondent No. 2 holding all his personal functions at the cost of the respondent company and inviting guests from all over the world to stay for free in the hotel of the respondent company". With these allegations, it is also averred in the petition that since petitioners have no access to the internal accounts of the company, an independent audit should be directed. It is further stated that this financial mismanagement is only with a view to give a justification that funds are needed so that he could oust the petitioners from the company. Except this, no other allegation of financial mismanagement is made in the petition. In the rejoinder, in paragraph 37, further allegations that unnecessary loans have been advanced to unknown entities, that all advertisement and publicity expenses of other group companies have been booked on the respondent company have been made. To substantiate these allegations, certain expenses, loans etc. have been quantified. During the arguments, allegations were made more particularly with regard to the alleged financial mismanagement of Lake Palace Hotel. It is to be noted that this petition was filed in April, 2005. The 1st petitioner had signed the annual accounts of the company for the year 2003-2004 sometimes in September.2004 and the same has been approved in the AGM on 30.9.2004. Even though, in the rejoinder, the petitioner has claimed that her objections on the accounts had not been recorded by the 2nd respondent, I do not find any such averment in the petition. Having signed the annual accounts, without any written protest on the accounts in September 2004, the petitioner cannot allege financial mismanagement in April 2005. Further, during the arguments and in the written submissions, the petitioners have alleged that the 2nd respondent being in management of Lake Palace Hotel in which the company holds 49% shares, has been financially supporting some of the hotels owned by his relatives and taken on lease by the Lake Palace Hotel. Shri Mookherjee pointed out that Lake Palace Hotel in fact given a loan of Rs. 10 crores to the respondent company and this has not been disputed by the petitioners. Therefore, considering the averment of the petitioners in paragraph 46 of the petition that the financial mismanagement by the 2nd respondent is not because of any inability or incompetence on his part but solely because of a well planned out method to oust the petitioners on the ground that the company is in need of funds, I do not find that the petitioners have established that there is financial mismanagement in the company. 23. The next allegation relates to Shri Unni. The petitioners' grievance is that Shri Unni has supported the 2nd respondent in the board meeting on 29.12.2004 in approving the proposal to increase the authorized capital in spite of the protest by the 1st petitioner. The further allegation is that he again supported the 2nd respondent when the proposal to issue right shares was taken in the board meeting held on 30.3.2005 even though there was no agenda regarding the said proposal and in spite of the protest by the 1st petitioner. It is further alleged that even though the 1st petitioner did not ask for any valuation report by Shri Unni and even though the same was prepared at the behest of the 2nd respondent, Shri Unni had valued the shares at a ridiculously low price. Thus, the trust and confidence reposed in him by the 1st petitioner when she had agreed for induction as a director in the agreement before the High Court have been completely belied by Shri Unni and as such he should be removed as a director. It is further alleged that he is guilty of professional misconduct by being the statutory auditor of the Lake Palace Hotel while holding the position of a director in the respondent company. The admitted fact is that Shri Unni was appointed as per the consent terms placed before and approved by the High Court. If his subsequent conduct, as alleged by the petitioners, is against the interest of the petitioners, the right course would be to approach the High Court and get the consent order modified. This Board has no jurisdiction to remove Shri Unni as a director since his appointment was on account of the consent terms approved by the High Court. In so far as his acting as the statutory auditor of Lake Palace Hotel, if he is guilty of professional misconduct, it is for the

appropriate regulatory authority to look into this complaint and not this Board under Sections 397/398. ( I may record that after the conclusion of the hearing, it was reported by the learned Counsel for the respondents that the complaint of the petitioners in this regard to the Institute of Chartered Accountants of India has been dismissed by the Institute). 24. Now the main allegation relates to issue of right shares. Shri Mookherjee contended that a shareholder can allege oppression only if, by issue of further shares, a new majority is created or an existing majority is converted into a minority. In case of right issue, since every shareholder would be entitled to get proportionate shares, no shareholder can allege oppression as long as the right issue is made to raise funds needed by the company. He relied on two of the decisions of this Board-Gopal Automobiles and Sovereign Diary cases wherein this Board has held in the matter of issue of rights shares no oppression can be alleged. Shri Sarkar relied on another case of this Board - Mafatlal Services case wherein this Board has held that even in case of right shares, there could be oppression. He also cited 4 English decision wherein it has been held that even issue of right shares could unfairly prejudice a member/members. Shri Mookherjee argued that an act unfairly prejudicial to the interest of a member is not covered under Section 397 of the Act as it deals with only prejudice to the public interest and Section 398 deals with instances of acts prejudicial to public interest or the company and neither of the Sections deals with prejudice to a member. This raises an issue whether an act which is considered to be unfairly prejudicial to the interests of a member in terms of Section 459 of English Companies Act could be considered to be oppressive in terms of Section 397 of Indian Companies Act. While according to Shri Mookherjee, it cannot be in view of the fact that neither Section 397 nor 398 talks of prejudicial to the interest of members, Shri Sarkar argued that an act prejudicial to the interest of a member is also covered under Section 397.1 do not propose to examine this issue in detail in the context of the present case, except to hold that a conduct which is unfairly prejudicial in the context of Section 459 of English Act, if it is harsh and burdensome to a member, then, such an unfairly prejudicial conduct would be covered under Section 397. 25. The settled principle of law in so far as issue of further shares is concerned- whether right shares or otherwise, is that, the same should be bonafide and in the interest of the company and one of the tests very often applied is whether the company is in need of funds. In the present case, while the company has taken a stand that for renovation/new projects, the company needs funds, according to the petitioners, by mismanaging the affairs of the company, the 2nd respondent has brought the company to a stage where the company has to resort to raising of funds. It has also been further alleged that both in the board meetings on 29.12.2004 and 30.3.2005, no details regarding the projects had been disclosed. In the rejoinder, the petitioners have enclosed the opinion of an Architect opining that the estimates given for the project/renovation as indicated by the company were overstated. It is also alleged that the Explanatory Statement stating that the funds were required for the project was wrong as no new project has been undertaken but all the expenses related only to renovation. The sum and substance of these arguments is that by projecting the need for funds and knowing fully well that the petitioners were not interested in subscribing to the shares, the 2nd respondent had planned to acquire the unsubscribed shares of both the petitioners and the Estate by himself. It is also further alleged that; the proposal of right issue was mooted only after the 1st petitioner declined to accept the offer of the 2nd respondent of Rs. 1 crore for the shares held by the petitioners. It was also argued that the 2nd respondent did not look for alternate course of raising funds even if needed. 26. The mode and manner of raising funds is always the sole prerogative of the board of directors but in a company in the nature of a family company, the same may not always hold good. The admitted position in the present case is that both the petitioners and the 2nd respondent acquired their initial shares from their father, perhaps without paying any consideration and there are only three groups of shareholders, namely, the petitioners, the 2nd respondent and the Estate. Since the Estate is controlled by the 2nd respondent in his capacity as the Executor, literally there are only two group of shareholders. Shri Mookerjee argued that in a family company, every shareholder has to contribute funds to the company. Therefore, equity demands that there is a consultative process and consensus between the two in relation to raising of funds provided the company is in need of funds. The petitioners have made various arguments that the Explanatory Statement was defective; that full project details had not been disclosed; that instead of projects, the one sheet project report reflects only renovation; that the estimates are overstated etc. These objections are mostly technical and legalistic. The sum and substance of these objections is whether the company requires funds to carryout renovations/development. I have not been able to find, either in the pleadings or during the arguments that the renovations proposed in the project report are unnecessary or unwarranted. In a hotel industry, upgradation of the facilities and also constant renovation is a standard practice. I find from the accounts of the company that there was an addition to the fixed assets of a sum of about Rs. 40 lacs in 2002-2003 and about Rs. 85 lacs in the year 2003-2004. As rightly pointed out by Shri Mookherjee, the main contention of the petitioners is that the 2nd respondent had not explored raising of funds through other means than the right issue. Therefore, I am of the view that, even assuming that the estimates are overstated, considering the financial position of the company, it does require funds to carry out the renovations. Therefore, the only question that has to be examined is whether to raise funds the only source is by way of issue of right shares, considering the stand of the petitioners that in terms of the agreement before the High Court that there could be no issue of further shares and that the shareholding should remain, all times to come, as it stood after the agreement before the High Court. The agreement before the High Court by which the 2nd respondent transferred 145 shares to the 1st petitioner is significant in the sense that 145 shares is an odd figure. By these 145 shares, the petitioners' shareholding came to be 25.1% meaning thereby no special resolution can be passed without the consent of the petitioners. In other words, even though, the petitioners are in minority, yet, they have the special rights attached to 25.1% shares. Any attempt to disturb this percentage shareholding, without the consent of the petitioners, could be an act of oppression. The petitioners' main objection for the right issue is that they would not get any benefit by investing in the right shares

as the company has not been declaring any dividend. I am inclined to agree with the petitioners. While non payment of dividend by itself will not give rise to a claim of oppression, yet, forcing the shareholders to continue to invest without any return on the same could be an act of oppression. In the present case the facts are startling. The face value of the shares held by the petitioners is about Rs. 7.6 lacs. To subscribe to the right shares with the view to maintain their existing percentage and protect their special rights, they have to invest over about Rs. 75 lac, i.e., nearly 10 times of the face value of the shares that they hold and for which they are not likely to get any return in the near future. (The real investment of the petitioners, omitting the shares got transferred from the father, is only Rs. 1.45 lacs for 145 shares transferred by the 2nd respondent to the petitioners in terms of the agreement before the High Court. Now to maintain their shareholding, they have to invest about Rs. 75 lacs which is nearly 50 times of their original investment). It may be argued that on this score, the petitioners cannot allege oppression as even the 2nd respondent has to invest substantial amount for the right shares offered to him. Investment by a majority shareholder is different from investment by a minority shareholder as the majority shareholder has the advantage of controlling the company and thus being in a position to derive various attended benefits while the minority shareholder does not. Shri Mookherjee argued that in view of payment of Rs. 6 lacs per year on their megre investment, the petitioners have already received over Rs. 42 lacs. It is to be noted that in the earlier petition, the petitioners had questioned the mode and manner of the 2nd respondent acquiring majority shares in the company and by withdrawing the said petition, they had allowed the 2nd respondent to continue with the majority shareholding and therefore the amount of Rs. 6 lacs is nothing but a compensation given to the petitioners in not insisting on maintaining their then existing shareholding percentage. Forcing a shareholder to invest such a substantial amount of money without any returns only to maintain their percentage shareholding is harsh, burdensome and therefore is definitely oppressive. 27. The earlier cases of this Board relied on by Shri Mookerjee can be distinguished. In Gopal Automobiles case, this Board observed that in case of a right issue, since it would not affect the shareholdings of the shareholders resulting either in creation of a new majority or reduce the majority into a minority, no oppression could be alleged if the company is really in need of funds. It also observed that no shareholder stating that he has no confidence in the management and is unwilling to subscribe can seek for restraining a company from issuing right shares. This Board also noted that in spite of the allegations of oppression, the petitioner therein had actually subscribed to the shares. In Sovereign Diary case, the allegation was that the company was not doing any business and therefore there was no need for any additional funds to be mobilized through issue of right shares but was resorted to reduce the petitioner from 34% to 8% shareholding as he was not willing to subscribe to the right shares. This Board found that the company was really in need of funds to clear the existing liabilities held that issue of right shares cannot be considered to be an act of oppression. However, in Mafatlal Services case, the holding company made a right issue to raise funds to subscribe to the shares of its wholly owned subsidiary which was rendering services to other companies controlled by the respondents therein. Therefore, the petitioners objected to the issue of right shares. Observing that the action of the respondents suffered from lack of probity and fair play as evidenced by their resolute to go ahead with the issue in spite of opposition from shareholders holding 48% shares in the company, the Board declined to stop the issue but directed the respondents to purchase the shares of the petitioners. 28. In both the cases cited by Shri Mookerjee, the petitioners therein, not only alleged that the company was not in need of funds they also alleged that the motive was only to reduce the shareholding of the petitioners. In the present case also, the same allegations have been made but at the same time the petitioners are not averse to provide funds to the company- not in the form of share capital but in the form of loans on a reasonable rate of interest. The willingness of the petitioners, not withstanding their stand that the company is not in need of funds, to fund the company, is a distinguishing factor. One of the main arguments of the 2 respondent for proposing the right issue is that to grant further loans, the bankers have advised improving the debt equity ratio. When a bank is approached for a loan by a company having a low capital base, the bank would require either increasing the capital base or insist on long term funds to be inducted by the promoters. If the promoters are able to induct long term funds by way of loans, the bank would not insist on increasing the capital base. In such cases, the banks only stipulate that the loans given by the promoters should not be withdrawn till the loans by the bank are cleared. As a matter of fact, I find from the letter of Bank of Baroda dated 8.7.2004 that they had advised the promoters to induct long term funds. Therefore, when the petitioners are willing to contribute by way of loans, the 2nd respondent cannot have any objection that in terms of the requirement of the bank, only share capital has to be increased. No doubt, taking loans would involve payment of interest but the same cannot be helped in facts of this case. 29. Both during the course of the proceedings and also at the conclusion of the hearing, on my suggestion that the parties should resolve the dispute amicably, both the sides gave some suggestions without prejudice. Unfortunately, none of the suggestion, was accepted by both the parties. The petitioners desired to go out of the receipt of fair value determined on asset basis including the assets of Lake Palace Hotel. The respondents were unwilling to consider this suggestion on the main ground that neither the 2nd respondent nor the company has funds to acquire the shares on the basis of asset value. Therefore, even though in closely held companies where un-reconcilable difference have arisen among the parties, this Board has always directed parting of ways, the same is not possible in the present case in view of the inability expressed by the 2nd respondent/the company that they do not have sufficient funds to purchase the shares held by the petitioners' group. Therefore, certain other relief which does not require valuation of shares has to be evolved. Even though the petitioners are not interested in investing in shares on account of no returns on the investment, they expressed their desire to induct the required funds by way of loans on a reasonable rate of interest provided the 2nd respondent also does so instead of investing in shares. Therefore, this could be one of the methods of

resolving the disputes. The second would be that the right issue may be allowed to go on without any hindrance with liberty to the respondents to acquire the unsubscribed shares provided some compensation is given to the petitioners for reduction in their percentage holding. The third is that, in view of the apprehension expressed during the hearing that any reduction in their shareholding percentage in the company would indirectly affect them in their interest through the company in Lake Palace Hotel, the shares held by the company in Lake Palace Hotel could be transferred to the petitioners in proportion to their holding in the company and the fourth is that a lumpsum payment, not on the basis of valuation, but on a equitable consideration could be paid to the petitioners either by the company or by the 2nd respondent in consideration of the shares held by the petitioners. 30. On an overall appreciation of the facts and with a view to put an end to the acts complained of, I give the following options to the petitioners to choose one of them:

1. I had passed an interim order allowing the company to go ahead with the right issue keeping the shares offered to the petitioner and the Estate intact. It was pointed out by Shri Mookerjee that in terms of the said order, while the 2nd respondent has subscribed to his entitled shares, the Estate has also subscribed to 2000 shares and the entitlement of the petitioners and those unsubscribed by the Estate are kept intact. He further mentioned that because of increase in the capital base, the company could avail additional loan facilities from the banks of about Rs 2.5 crores and with these funds renovation work has been completed. The money spent on the renovation from 2005 till date can be quantified and deducting Rs 2.5 crores funded by the Banks, the petitioner can fund 25.1% of the balance amount by way of long term loans carrying an interest at the rate of 10%(which is more or less the bank rate for long term fixed deposits). Since they would share the actual expenses, this would also allay the apprehension of the petitioners that the project estimate is overstated. The investments of the 2nd respondent and the Estate in the shares shall be treated as loans carrying the same rate of interest. The right shares already issued shall stand cancelled. If the petitioners choose this option, the same will not affect the company in any manner as the loans shall form part of long term funds. 2. The company will go ahead with the right issue and the 2nd respondent is at liberty to acquire the shares unsubscribed. Since it would reduce the shareholding of the petitioners substantially, the company shall pay a sum of Rs. 20 lakhs per year (including Rs. 6 lakhs now being paid) with an increase of Rs. 1 lakh every three years thereafter. This amount will include dividends, if any, declared by the company in future. The petitioners will continue to hold the shares that they currently hold and the 1st petitioner will continue as a director as long as the said shares are held by the petitioners. This would be more or less in line with the agreement between the parties before the High Court when company agreed to pay Rs. 6 lacs for the 2nd respondent to acquire majority shares in the company. Since in the present case, the petitioners will lose their special right in respect of 25.1% shares, they should be entitled for adequate compensation which I have fixed at Rs. 20 lac. 3. During the hearing, it appeared that the petitioners were mainly concerned with the shares held by the company in Lake Palace Hotel which is one of the main assets of the company. As this Board did in James Fedrick's case, the company will transfer 25.1% of the shares held by it in Lake Palace Hotel at face value to the petitioners and the petitioners will surrender all their shares to the company at face value and cease to be members of the company and the company shall reduce its paid up capital to this extent. Difference, if any, in the value of shares surrendered/transferred, the same shall be adjusted by payment in cash. The 1st petitioner shall cease to be a director of the company and there shall be no payment of Rs. 6 lacs as hereto before. 4. The forth option is parting of ways. The petitioners demanded that their shares should be valued on real estate price taking into consideration the assets of the company as also that of Lake Palace Hotel. The 2nd respondent not only objected to the inclusion of the assets of the Lake Palace Hotel in the valuation, he also expressed his inability to mobiles funds to purchase the shares of the petitioners on a real estate price basis. Considering the fact that the company is a family company and that after a full round of litigation, the second round is going on and that future litigation can also not be ruled out, I am of the view that the petitioners should go out of the company for a reasonable consideration for their shares. Purely on an equitable ground, I am fixing the price for their shares at Rs. 5 crores ( Rupees five crores). Either the company or the 2nd respondent, at his option, shall purchase the shares at this price. The 1st petitioner shall cease to be a director of the company effective from the date of surrender/transfer and on receipt of consideration and the petitioners shall not be entitled for Rs. 6 lacs as hereto before. I make it abundantly clear that this amount of Rs 5 crores is not based on any valuation but has been fixed on equitable consideration taking into consideration, the interests of both the sides.
31. Any of the options chosen by the petitioners shall be binding on the company and the 2nd respondent. The petitioners shall intimate to the company/2nd respondent, in writing by 10th January

2008, the option that they have chosen. In case the petitioners elect the 4th option, the parties are liberty to apply to this Board for deciding on the terms of payment. In case, the petitioners do not choose any of the options, the petition shall be deemed to have been dismissed and all interim orders shall also be deemed to have been vacated. The petition is disposed of in the above terms. Manupatra Information Solutions Pvt. Ltd.
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MANU/CL/0020/1998 Equivalent Citation: [1998]92CompCas525(CLB) IN THE COMPANY LAW BOARD PRINCIPAL BENCH C.P. No. 20 of 1991 Decided On: 18.02.1998 Appellants: Subhash Chand Agarwal and Anr. Vs. Respondent: Associated Limestone Ltd. and Ors. Hon'ble Judges/Coram: P.K. Majumdar, Chairman and A.R. Ramanathan, Member Counsels: For Appellant/Petitioner/Plaintiff: Vinod Kumar Jain, Chartered Accountant for Petitioners Nos. 1 and 2 For Respondents/Defendant: M.C. Mehta, Adv. for Respondents Nos. 1 and 2, R.S. Suri and Rohit K.Aggarwal Advs. for Respondent No. 3 Counsels: For the Registrar of Companies: Hiraballabh, Adv. Subject: Company Catch Words Mentioned IN Acts/Rules/Orders: Companies Act, 1956 - Sections 81, 297, 299, 397, 397(2), 398, 398(1) and 402 Cases Referred: In Re: Albert David Ltd., [1964] 68 CWN 163; In Re: Laxmi Film Laboratory and Studios (P.) Ltd., [1984] 56 Comp Cas 110 (Guj); Nagavarapu Krishna Prasad v. Andhra Bank Ltd. [1983] 53 Comp Cas 73 (AP); Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp Cas 235 (Delhi); Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351(SC); In Re: Clive Mills Co. Ltd., [1964] 34 Comp Cas 731 (Cal); P.S. Offshore Inter Land Services P. Ltd. v. Bombay Offshore Suppliers and Services Ltd. [1992] 75,Comp Cas 583 (Bom); Krishnanand Agnihotri v. State of Madhya Pradesh,MANU/SC/0134/1976 : AIR 1977 SC 796; Palghat Exports Pvt. Ltd, v. T.V. Chandran [1994] 79 Comp Cas 213 (Ker); In Re: Lundie Bros. Ltd., [1965] 35 Comp Cas 827 (Ch D); Asoka Betelnut Co. Pvt. Ltd. v. M.K. Chandrakanth [1997] 88 Comp Cas 274 (Mad); Sanatan Investment Co. (P.) Ltd. v. Prem Chand Jute Mills Ltd. [1983] 54 Comp Cas 186 (Cal); Vihas Jalan v. Hyderabad Industries Ltd, [1997] 88 Comp Cas 551 (CLB); Chander Krishan Gupta v. Pannalal Girdhari Lal Pvt. Ltd. [1984] 55 Comp Cas 702 (Delhi); Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. [1962] 32 Comp Cas 207 (Cal); Gover Rustom Irani v. Property Co. P. Ltd. [1976] TLR 1682 (Cal); Yugal Kishore Sinha v. B.N. Rahtogi, AIR 1958 Patna 154; Nanalal Zaver v. Bombay Life Assurance Co. Ltd., [1950] 20 Comp Cas 179, MANU/SC/0003/1950 : AIR 1950 SC 172; D.P. Maheshwari v. Delhi Administration, AIR 1984 SC 153; Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC); Hind Overseas Pvt. Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91, MANU/SC/0050/1975 : AIR 1976 SC 565; Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743; Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] 29 Comp Cas 1 (HL) ; [1958] 3 All ER 66, 86; Elder v. Elder and Watson Ltd. [1952] ORDER 1. This petition filed in September, 1991, by Shri Subhas Chandra Aggarwal and Smt. Anju Aggarwal under Section 397/398 of the Companies Act, 1956 (hereinafter called "the Act"), against Associated Limestone Limited (hereinafter called "the company") complaining of oppression and mismanagement has a long and chequered history. It is appropriate to trace this history before coming to the merits of the petition. A chronological account of the case : 2. After the initial hearings in December, 1991, January and February, 1992, an attempt was made at the instance of the Company Law Board for settlement of the dispute between the parties. In the month of March, 1992, it appears that there was a meeting of the concerned parties excepting the petitioner and respondent No. 3 but including respondent No. 2 at which there was an agreement to the effect that all allotments made by the company after it became public in July, 1985 (originally the company was incorporated as a private company) are not valid, and, therefore, a redistribution of such shares among the original shareholders was agreed upon. The Rajasthan State Mineral Development Corporation (RSMDC) which got allotment of about 50.4 per cent, of the shares after the company became public was also agreeable for reallotment of their shares and also suggested a settlement in the process as is evident from the communication from that institution. At the hearing held on April 7,1992, it appears from the records that a settlement was arrived at by which all allotments, after the company became public, in contravention of Section 81(1A) of the Act, are to be cancelled excepting the allotments made to RSMDC, respondent No. 3 and one Shri Rohit Bohra, director of the company. It was also agreed, inter alia, to redistribute the shares wrongfully allotted along with the shares allotted to RSMDC. Though it appears that no formal shape to this settlement was given, there is a reference to this settlement in the order of the Company Law Board dated June 4, 1992. It is also further recorded that the representative of respondent No. 2 withdrew his consent to the compromise and submitted alternative proposals which were not acceptable and compromise efforts failed. In view

of this, the Company Law Board passed an interim order dated June 4, 1992, reconstituting the board of directors with immediate effect in order to make interim arrangement for conducting the affairs of the company. In this board, the petitioner, respondents Nos. 2 and 3, and the representatives of the RSMDC were appointed. It was also directed that these three parties will deposit equally the amount due to the RSMDC towards repurchase price of the shares along with the interest at the rate of 14 per cent, since the RSMDC desired to off-load their shareholding. In addition all share transfers and allotments after the filing of the petition were stayed. Ail-the above information is available in volume I as part of the pleadings. 3. Aggrieved by the above order dated June 4, 1992, respondent No. 2 and another director in the earlier board, namely, Shri Rohit Vohra filed two separate appeals under Section 10F of the Act, before the Rajasthan High Court challenging the reconstitution of the board of directors by the Company Law Board through an interim order. On these two appeals, the Rajasthan High Court passed stay orders in June and July, 1992, by which order dated June 4, 1992, of the Company Law Board was stayed. The High Court, however, had given liberty to the Company Law Board to proceed with the main petition. The appeals were finally disposed of by the High Court by its order dated April 7, 1995. It is recorded in the final order that the question whether the Company Law Board has the jurisdiction through an interim order to reconstitute the board of directors or to put a restraint on the transfer of shares which were the grounds of appeal have become complicated due to counsel for the respondents therein raising the plea that the orders passed by the Company Law Board or by the High Court ( stay order) have not been complied with. This is a factual matter and for that purpose the High Court directed that the respondents therein may submit the factual position before the Company Law Board which should take that into consideration and pass final orders. It was further directed that if any interim relief is required by any party they may apply to the Company Law Board. It was concluded that it is not appropriate to observe anything with regard to the interim order of the Company Law Board or the compliance or non-compliance of orders. It was left to the Company Law Board to pass necessary orders which it may deem proper. 4. After the above final orders, the petitioners filed an affidavit dated May 1, 1995, being C. A. No. 126 of 1995 seeking issue of fresh directions to dispose of the matter since the Company Law Board had stayed the proceedings by an order dated October 22, 1992, in view of the pending appeal before the Rajasthan High Court. 5. In the interregnum respondent No, 3 through an application in September, 1994 (C. A. No. 156 of 1994), had prayed for early hearing in view of the interim order of the Rajasthan High Court clarifying that the Company Law Board is free to proceed so far as the main petition is concerned. Around this time an affidavit was also filed by the petitioner narrating additional instances of acts of oppression and mismanagement. However, before a final decision on this interim application for resumption of hearings and the additional affidavit of the petitioner could be taken up, since the petitioner's application, viz., C. A. No. 126 of 1995, along with the copy of the Rajasthan High Court's final order was received, the proceedings were resumed in November, 1995. Thus, for a period of nearly four years no progress could be made in the petition. Interim proceedings : 6. After resumption in November/December, 1995, further attempts at compromise were made. With these attempts not coming to fruition the interim application, namely, C. A. No. 126 of 1995, filed by the petitioners seeking further directions to the respondents to implement our order of June 4, 1992, regarding board of directors and stay of transfer of shares was heard. At the hearing held on September 30, 1996, the advocate for respondent No. 2 fairly conceded that with the disposal of the appeal by the High Court technically our order June 4, 1992, got revived. However, the plea of the petitioner to operate the board as reconstituted by us could not be given effect to since in the meanwhile the general body during the operation of the stay had elected the board of directors and hence he prayed that they should be allowed to continue. In this connection he also cited various caselaws to show that the courts do not intervene to dislodge the duly elected directors of the company. It was also found that during this period one transfer of 10 shares of Shri S. K. Singh and a transmission to the widow of an existing member only took place. The advocate justified these transfers as not in violation of the orders of the Company Law Board as during this period the Company Law Board order had been stayed by the High Court, since that order was under challenge. After hearing, we issued an interim order allowing the board of directors as elected by the general body, but inducted three more persons, that is those persons whom we had inducted vide our order dated June 4, 1992. We did not find any serious violation of our orders regarding transfer and transmission while disposing of the application nor did the petitioners raise such objection in their application. They, therefore, adequately complied with the directions of the High Court of Rajasthan with regard to violation of any of the orders of the Company Law Board or of the High Court. Amendment application : 7. After the disposal of the appeal by the Rajasthan High Court, the petitioners filed an amended petition on December 20, 1995, seeking to amend the original petition on the ground that after the original petition, the respondent-company and its directors were not supplying any information and not allowing the applicants to inspect the records of the company. However, subsequently, the petitioner had come to know more details about acts of oppression and hence preferred the amending application, along with an amended petition. The respondents though formally objected to the amendments subsequently tacitly conceded since they filed their replies to the amended petition though under protest. We were however convinced that since the petitioners were denied inspection of the statutory records as already alleged in the original petition and hence, we had allowed the inspection in early 1992, all the further material on facts are relatable to the broad allegations in the petition and have arisen out of inspection granted to the petitioners by us. Accordingly, the amended petition was taken on record along with replies which were filed subsequently. This entire process to

reach the main stage of hearing took up to March, 1997, when the hearing on the merits really commenced. 8. Facts of the case in pleadings : 9. On the facts it is stated in the amended petition that the company was incorporated as a private limited company on October 6, 1983, with three parties, namely, petitioner No. 1, respondent No. 2 and one Shri Sunil Kumar Singh with all the three holding 10 shares each. Petitioner No. 1, one of the promoter directors, resigned from directorship in 1985, before the company was converted into a public company. An agreement was reached around that time between the promoters and the RSMDC for the purpose of operating limestone mines. Thus, the main business of the company is quarrying limestone through a joint venture project with the RSMDC. The two petitioners in all hold 524 shares or 12.55 per cent. of the equity capital of the company, the paid-up capital being Rs. 4,17,600 divided into 4,176 shares of Rs. 100 each, thus they qualify under Section 399 of the Act, to apply. 10. The allegations in the petition are :

(a) The share capital of the company was raised from time to time and about 971 shares of Rs. 100 each were allotted to a number of benami/ fictitious shareholders. Further, all allotments made after the company became a public company are null and void since such issues were made without the approval of shareholders by special resolution as required under Section 81(1A) of the Act. (b) The petitioners have not received any notice of annual general meetings, accounts, etc., for the last seven years and the company has not filed the annual returns regularly. (c) The petitioners had requested through registered letters that additional shares may be offered to them in case the company proposed-to issue further shares which however has not been heeded to. (d) The petitioners also requested for inspection of the register of members along with the necessary remittance in this regard. No reply at all was received from the company. (e) The request for calling extraordinary general meeting was refused by respondent No. 2. (f) The petitioners also understood that respondent No. 2 summoned the annual general meeting some time in September, 1991, at the private residence of a political leader. Though no notice was received by the petitioners, a copy obtained from another shareholder showed that it was not accompanied by the balance-sheet, directors' report, auditors' report, etc. The notice also was signed by respondent No. 2 though the chairman as well as the managing director personally informed the petitioner that the meeting does not have their consent. (g) General meetings were held without quorum and the appointment of auditor is irregular since no proper notice stating that a special resolution is necessary for this purpose has been given and no representative of the RSMDC was present which is a requirement as per the articles of association.
11. It was the conclusion of the petitioners that in view of the above, the affairs of the company are being managed in a manner oppressive to the minority shareholders and completely mismanaged to the detriment of all the shareholders of the company. 12. In addition to the above, further allegations are made that: (a) despite the existence of a managing director the affairs of the company were being managed de facto by an official of the RSMDC in his personal capacity, (b) no disclosure of interest as well as appropriate approval of the board has been obtained as per the requirements of Sections 297 and 299 of the Act, for the joint sector agreement with the RSMDC, (c) the joint sector agreement was entered into by respondent No. 2 without properly disclosing the contents of the same to the board of directors, (d) all the taxes, dead rent, etc., relating to the mines payable by respondent No. 2 have been burdened on the respondentcompany. The allotments of shares were made to the relatives and friends of respondent No. 2 without appropriate disclosure, (e) the then managing director, namely, respondent No. 3 has been illegally removed without complying with the provisions of the Companies Act, (f) certain adverse findings exist in the enquiry conducted by the Director, Mining and Geology, Government of Rajasthan, with regard to the maintenance of records by the company, and (g) there are certain adverse remarks by the auditors in their audit report dated August 22, 1991. 13. The petitioners also contended in the amended petition that there is a clear cut case of winding up because of the continued oppression of the minority, but winding up will prejudicially affect their interest. This averment however was absent in the original petition. 14. The petitioners, therefore, have sought the following substantive reliefs :

(1) Declaring as null and void the allotment of shares made in contravention of Section 81 of the Act, or in the alternative, regularise the allotment but the petitioner be granted additional shares to maintain his percentage. (2) Allow buy-back of shares held by the RSMDC by the petitioner, respondent No. 2 and respondent No. 3, in the same ratio of their original holding.

(3) Ordering an investigation into the affairs of the company. (4) Declare that respondent No. 2 is ineligible and incompetent to remain as a director and made responsible for funds illegally usurped by him. (5) The petitioner be appointed as a permanent director. Apart from the above, certain other prayers which are purely interim in nature have been incorporated in the final reliefs.
15. Reply pleadings by respondents Nos. 1 and 2 : 16. Respondents Nos. 1 and 2 filed detailed replies to the original petition as well as to the amendment application. As regards the allegations in the original petition of non-receipt of notice of annual general meetings and non-filing of annual returns, etc., it was contended that notices were regularly sent and annual returns have been regularly filed. Photocopies of the postal certificate as well as the relevant entry of the despatch register have also been enclosed with the reply. It is further contended that the petitioners had been perhaps sending letters to the wrong address since the registered office has been already shifted. It is further stated that the petitioner in collusion with respondent No. 3 has been sending the letters to the address of the latter which correspondence also is a concoction inasmuch as registered letters written on a particular day were shown to be received by respondent No. 3 on the same day. It is further contended that even remittance for obtaining copies of registers, etc., were perhaps sent to the above wrong address which is also described as concoction. All these acts are described as joint ventures between the petitioner and respondent No. 3 to grab control of the company. 17. In the reply to the amendment application, the following preliminary objections have been raised:

(a) The amendment application is a surreptitious attempt to move a fresh company petition on back date. In this petition not less than 33 new respondents who are not even shareholders as on the date of the moving of the original petition have been included. As already submitted by the respondents there were only 27 shareholders on the date of filing of the petition. (b) Despite inspecting the records of the company, the petitioner has given deliberately wrong addresses of shareholders even though the latest list of members was made available to the petitioner before the Company Law Board proceedings as well as in the High Court proceedings. Thus, the petitioner tried to clearly mislead the Company Law Board. (c) Though a number of subsequent events have been included in the amended petition still an erroneous impression is sought to be created as if this petition was filed in September, 1991, which is not a fact. In particular this relates to the removal of respondent No. 3 as managing director. (d) The amendment application does not bear the consent of petitioner No. 2. (e) The amendment application is also not supported by fresh affidavits of the petitioners and they seem to have relied on the original affidavits which also are not in conformity with the Company Law Board Regulations. (f) Under Order VI, Rule 17 of the Code of Civil Procedure, though wide discretion is available to allow amendments in the pleadings, through various decisions of the High Courts and the apex court, it is now established that no new cause of action can be introduced nor the substratum of the dispute can be changed. It is also not possible to substitute one cause of action for another. (g) The petitioner has unnecessarily dragged on the litigation by introducing unnecessary and unrelated elements as well as parties. Hence, the petition should be dismissed on the basis of the preliminary objections.
18. Another major preliminary objection of the respondent is that the petitioner has failed to make out a case for winding up which is a must for granting relief under Section 397 of the Act. It has been held by the Company Law Board and High Courts in various cases that a case for winding up has to be made by the petitioner but that such winding up will be prejudicial. In this petition, no such case has been made out. It is also contended that the simple averment of the petitioner that a case for winding up exists has also been only as an afterthought after the respondents pointed out and stressed upon this basic lacuna during the early hearings and was, therefore, incorporated in the amended petition. 19. On the additional facts in the amended petition, it is stated by these respondents that :

(a) As regards the allotment of shares allegedly in violation of Section 81 of the Act, all the allotments have been made by duly constituted board meetings. Further, the petitioner cannot be permitted to pick and choose certain allotments as illegal but approve certain other allotments. In fact allotments were made even to the two petitioners as well as to respondent No. 3. (b) Regarding allegation of allotment to benami/fictitious persons, the petitioner has failed to bring forth any proof about these shares being benami after the inspection of

the records. (c) The petitioner has placed reliance on a wrong copy of the articles of association to state that for a general body meeting, the presence of a representative of the RSMDC is a must otherwise the meeting is invalid whereas the correct copy has been already provided to the petitioner. The correct copy has also been placed on the record of the High Court and still the petitioner is trying to mislead the Company Law Board. (d) As regards the joint venture agreement, it is stated that it has been duly approved and is also incorporated in the articles of association of the company. Further, out of the eight shareholders at the time of entering into the joint venture agreement, seven shareholders have already submitted duly sworn affidavits stating that the joint venture agreement was entered into by respondent No. 2 with their due knowledge and consent was also given at the general meeting of the company. Suitable replies have also been filed with regard to the other allegations of mismanagement.
20. As regards the reliefs, it is stated that in view of the replies there is no case made out by the petitioner and they are not entitled to any relief. 21. As regards the additional allotments the respondents have no objection if all the allotment of shares deemed/considered as in violation of the provisions of Section 81 and consequently cancelled or permitted to be reallotted but they opposed the cancellation of only certain allotments as proposed by the petitioners. It is further stated that the RSMDC has committed in writing before the Rajasthan High Court that respondent No. 2 is the only person who has a right to buy back the shares, in case they off-load the same. 22. As regards the relief that the petitioner may be appointed as a permanent director it is vehemently opposed on the ground that looking to the extent, manner and behaviour of the petitioner who tried to make a mountain out of a non-existing mole-hill and his basic nature of complaining perpetually he should not be allowed to act as a director. Finally, the respondents have prayed for outright rejection of the amendment application as well as the original company petition on the basis of preliminary objections raised by the answering respondents. Further keeping in view the attitude and manner in which the petitioners and respondent No. 3 have contested this petition, they may be directed to sell their shares to the majority at a reasonable price which may be fixed by the Company Law Board. Reply by respondent No. 3 : 23. Respondent No. 3 earlier filed a reply to the petition and subsequently filed a consolidated reply to both the original and the amended petition. The subsequent reply, however, was not taken on record. His affidavit basically concurs with the allegations made in the petition. Respondent No. 3 has brought to the notice of the Company Law Board certain special facts relating to the company, namely, that the entire records of the company were stolen from the registered office by one Shri Ankit Sharma, an employee of the company, for which a first information report was lodged by him in his capacity as the managing director. Subsequently, he came to know that these records are with respondent No. 2. As such, respondent No. 2 is the only person who can deal with the contentions raised in the petition. It is also stated in the affidavit that in April, 1991, when he was also present at a board meeting the registered office of the company was purported to be changed, but actually no such decision was taken. Subsequently, respondent No. 2 commenced false propaganda stating that he (respondent No. 3) ,has been removed from managing directorship. Apart from these narration of facts all the contentions of the petitioner have been accepted by respondent No. 3. Arguments by counsel : 24. The hearings in this case were extended over nearly six months. The petitioner's counsel, Shri Vinod Kumar Jain, chartered accountant, narrated the facts in the amended petition and reiterated the instances of non-receipt of notices of general body meetings, annual reports, shifting of the registered office without notice, non-filing of annual returns, denial of inspection, etc. He also questioned the validity of the meetings in view of the absence of RSMDC representatives at these meetings. In addition he questioned the allotment of shares in violation of Section 81 of the Act. He further stated that even though the petitioners had deposited money for allotment of further shares the full allotment was not given to them. He laid stress on the applicability of Section 81 to this company right from the day it became a public company. According to him, Section 81(1) exempts any issue made by the company within two years of formation or within one year of the first allotment of shares. This company having been formed in 1983, (though as a private company) since the entity is the same, the period of two years is over in 1985. As such in July, 1985, when the company became public, right from that day any allotment made shall have to conform to Section 81(1) requirement as a public company. In his view, the period of two years should not be counted from the day the company became a public company as the word used is "formation" and the time limit is to run from the date of formation. Formation as per Section 12 of the Act is through filing memorandum/ articles etc. which has taken place in 1983 itself. In 1985, there was no further formation but is only a change of name or at best it is like a minor becoming a major or a child becoming a man, the private company became a public company. Shri Jain also dealt at length with the interpretation of the wording in the joint venture agreement with the RSMDC to establish that the petitioners are also co-promoters and hence entitled to buy back the shares held by the RSMDC. Though there is no specific allegation with regard to the implications of the joint sector agreement, in support of the prayer for repurchase of shares from RSMDC proportionately by the petitioner also, it was argued that the petitioners should also be considered as co promoter as according to Shri Jain, the term includes "associate" as well. There are no other "associates" other than the original promoters and hence there is a valid justification for an

order to that effect as Shri Jain contended. Shri Jain submitted certain case-laws after arguments along with written submissions which were also considered by us. 25. Shri M. C. Mehta, advocate, appearing on behalf of respondents Nos. 1 and 2 laid stress on the non-maintainability since the petition does not comply with the fundamental requirement under Section 397, namely, that a case has to be made out for winding up on "just and equitable" grounds. In fact, in the original petition, there is no such averment to this effect at all. Even in the amended petition, it has not been substantiated as to how the company can be wound up on just and equitable grounds. According to him, this is a pre-condition for considering any petition under Section 397. In this connection, he cited the following cases :

Albert David Ltd., In re [1964] 68 CWN 163 at 171 ; Laxmi Film Laboratory and Studios (P.) Ltd., In re [1984] 56 Comp Cas 110 at 131 (Guj) ; Nagavarapu Krishna Prasad v. Andhra Bank Ltd. [1983] 53 Comp Cas 73 (AP); Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp Cas 235 (Delhi) and Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 at pages 366 and 367 (SC).
26. Apart from this he also challenged the maintainability on the grounds of the consent not being given and that the consent should be "appropriate" consent. He also cited a number of cases with regard to the consent in the absence of which the petition has to be dismissed. He also challenged the affidavit filed by the petitioners on the ground that these affidavits are not in accordance with the Company Law Board Regulations and as such the petition cannot be entertained. To support this contention , Shri Mehta filed a catena of cases. 27. Apart from the above preliminary contentions, Shri Mehta also challenged the petition, in particular the amended petition, which deals with subsequent acts which have no linkage with the allegations in the main petition. He also further contended that the allegations in the petition are vague and imprecise. Such wild allegations without details cannot be entertained by the court particularly in the context of a prayer for investigation. In this connection, he cited the following cases :

Clive Mills Co. Ltd., In re [1964] 34 Comp Cas 731 (Cal) ; P. S. Offshore Inter Land Services P. Ltd. v. Bombay Offshore Suppliers and Services Ltd. [1992] 75,Comp Cas 583 (Bom) and Krishnanand Agnihotri v. State of Madhya Pradesh, MANU/SC/0134/1976 : AIR 1977 SC 796.
28. As regards the subsequent acts which form part of the amended petition, the following cases were cited :

Shanti Prasadjain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC); Palghat Exports Pvt. Ltd, v. T. V. Ctiandran [1994] 79 Comp Cas 213 (Ker) ; Lundie Bros. Ltd., In re [1965] 35 Comp Cas 827 (Ch D) ; Asoka Betelnut Co. Pvt. Ltd. v. M. K. Chandrakanth [1997] 88 Comp Cas 274 (Mad) ; Sanatan Investment Co. (P.) Ltd. v. Prem Chand Jute Mills Ltd. [1983] 54 Comp Cas 186 (Cal) and Vihas Jalan v. Hyderabad Industries Ltd, [1997] 88 Comp Cas 551 (CLB).
29. Shri Mehta also stated that the allegation of non-maintenance of records and denial of access to records cannot be acts of oppression. At worst, it may be a default under the relevant provisions of the Companies Act, which may or may not involve penal consequences under the relevant provisions of the Act. In this connection he cited the following cases :

Chander Krishan Gupta v. Pannalal Girdhari Lal Pvt. Ltd. [1984] 55 Comp Cas 702 (Delhi); Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. [1962] 32 Comp Cas 207 (Cal) ; Gover Rustom Irani v. Property Co. P. Ltd. [1976] TLR 1682 (Cal) and Suresh, Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp Cas 235 (Delhi).
30. Dealing with the merits, Shri Mehta submitted that the allotments were made as per the actual applications made by the existing shareholders. Further, he emphasised that the petitioners cannot be allowed to pick and choose a cut-off date for applicability of Section 81. This Section according to him deals with public limited companies only and the formation of a company is governed by Section 12 according to which a public limited company can be formed only by at least seven promoters and in the instant case five new members joined the existing three members only on May 31, 1985, and only thereafter the present public limited company was formed and the same was registered by the Registrar of Companies, vide certificate of incorporation dated July 24,1985, and hence the shares allotted after a period of two years from that date, i.e., after July 24, 1987, if at all may be alleged as in violation of Section 81. He further justified that in any case the allotment to the RSMDC is not in violation of Section 81 as it has been done under a joint venture agreement duly approved by the shareholders of the company in general meeting unanimously and hence the provisions of Section 81(1A) are complied with. He also at the same time challenged the contentions of respondent No. 3 in his reply filed subsequently after filing reply to the original petition, that the ten shares of Shri Sunil Kumar Singh have been renounced in his favour. According to him, there is no renunciation as there was no rights issue and even if there was a renunciation of the existing ten shares this was never informed to the company and has never been taken on the records of the company. There is no such document to that effect. 31. As regards other instances of oppression cited by the petitioners, Shri Mehta stated that the petitioners never wrote earlier complaining of such acts for a number of years. Though there are many other shareholders no such protest has been received from any one. As regards allegation of denial of inspection and copy of the register of members he stated that all the correspondence in this regard has been addressed to the residential address of respondent No. 3 with the result, the company had no occasion to deal with such correspondence. 32. In fact, it was the contention of Shri Mehta that the whole conduct of the petitioners is mala fide

and all the acts are consequent upon the strained relationship of respondent No. 3 with the company and respondent No. 2. It was his case that it is a collusion between respondent No. 3 and the petitioner which is also evident from the reply of respondent No. 3 to the petition, accepting the entire contents of the petition. According to him, respondent No. 3, never got himself elected as a director at any annual general meeting. Respondent No. 3 could never work to the satisfaction of the board and indulged in various acts of commission and omission as managing director which ultimately resulted in his removal. The acts and conduct of the petitioner and respondent No. 3 before and during the proceedings amply and clearly prove their collusion. 33. As regards the allegations of mismanagement the following submissions were made :

(a) The allegation of allotment to benami persons is false since the full address and particulars were submitted to the High Court and the Company Law Board and has also been inspected by the petitioners during these proceedings. (b) The allegation of annual general meeting having been held without quorum is based on a wrong copy of the articles of association of the company and as per the correct version of the articles, there is no need for a nominee of the RSMDC to be present and hence the general meeting cannot be questioned on this ground of quorum. (c) Appointment of auditors at the annual general meeting is not invalid since there is a specific reference to Section 224A in the notice which clearly means that a special resolution is required and notice has been accordingly given. (d) Regarding the allegation of certain observations of the Director of Mines, Government of Rajasthan, in his letter dated September 25,1991, though no action was taken by respondent No. 3, who was in charge of the management at the time, the matter has been settled subsequently and the assessment has been finalised. He produced copies of the assessment orders in this connection. (e) As regards certain observations of the auditors on the accounts for the year ended March 31,1991, these relate to the period when respondent No. 3 was the managing director and as such he only was responsible, still, the board has given suitable replies to all the points raised by the auditors to their satisfaction. (f) As regards allegation of violations of Sections 297 and 299, Sim Mehta stated that not only the fact of entering into the joint sector agreement by respondent No. 2 as copromoter was duly approved by the Board on June 18, 1984, but the joint sector agreement itself after it was entered into on March 29, 1985, was ratified again by the board of directors on June 5, 1985, and by the annual general meeting on June 15, 1985. The minutes books in this regard were submitted to the Company Law Board and inspection was also offered to the petitioners. (g) As regards the allegation of management being dictated by a single individual who is an official of the RSMDC, the matter has been thoroughly investigated by the RSMDC already.
34. Shri Mehta, therefore, concluded that the petition has to be dismissed in limine on the ground that the basic requirement of a case for winding up has not been made out. Further, the entire allegations have to be disregarded in view of the conduct of the petitioners for delay and laches and for collusion with respondent No. 3 who carried a grouse since he was removed as a managing director of the company. 35. Arguments were also advanced on behalf of Shri T. K. Rana, respondent No. 3, on certain issues by Shri Rohit K. Aggarwal, advocate, and on certain other issues by Shri R. S. Suri, advocate. The points argued on behalf of respondent No. 3 mainly related to the effect of shares allegedly allotted in contravention of Section 81 and the interpretation of the joint sector agreement and the need for distribution of shares on unloading by the RSMDC. The substance of the argument in respect of alleged violation of Section 81 is that all concerned shareholders had constructive notice of additional issue of shares and having participated in subsequent general meetings where the allotments have been given effect to, the petitioners are stopped to make any grievance about the allotments made. In the circumstances, and as confirmed in a catena of cases since "procedure is the handmaid of justice", any ruling that the allotments are to be set aside, the same would result in grave injustice to bona fide purchasers of shares including respondent No. 3. In this connection, the advocate also stated that the same principles were enunciated by the Patna High Court in Yugal Kishore Sinha v. B. N. Rahtogi, AIR 1958 Patna 154. He also drew a conclusion from a decision of the Supreme Court in Nanalal Zaver v. Bombay Life Assurance Co. Ltd., [1950] 20 Comp Cas 179 ;MANU/SC/0003/1950 : AIR 1950 SC 172, that so long as the shares were issued bona fide in the interest of the company the allotment is not per se invalid, but the procedure being illegal it can be avoided by the company or any director or shareholder aggrieved and may be used as a weapon of defence when any right or liability arising out of such allotment is sought to be enforced. 36. On the interpretation of the joint sector agreement and distribution of shares upon unloading by the RSMDC it was contended that the term "co-promoter" does not cover only respondent No. 2 but his associates as well. A reading, of all the relevant clauses together as contained in the joint-sector agreement would go to show that it includes the co-promoter, his nominees and associates. The same interpretation has to be given for the same term in the buy back agreement also. This is also fortified by various communications from the RSMDC to respondent No. 3 expressing its desire to sell the shares in his capacity as constituent of "co-promoter". Thus, it was argued on behalf of respondent No. 3 that the allotment of 500 shares should not be cancelled and that he should get his due share of the

RSMDC holding when it unloads to the co-promoters. On maintainability-Our conclusions : 37. We have carefully considered the pleadings and arguments by counsel along with the written submissions made on behalf of the parties. Before we take up the merits of the case, it is appropriate to deal with the preliminary objections on behalf of respondents Nos. 1 and 2. In this connection, we should also record that as a quasi-judicial body normally we do not resort to part adjudications that it is to give a ruling on maintainability and other preliminary objections and to issue final orders thereafter if the petition is admitted. Thus, we do not have two stages of admission and consideration on the merits as in High Courts. As has been ruled by the apex court in D. P. Maheshwari v. Delhi Administration, AIR 1984 SC 153, we invariably adopt a composite adjudication of both preliminary issues and merits together unless the parties insist otherwise. At the same time, the non-insistence by any party at the initial stages cannot be presumed to go against such party. 38. In the present case, on behalf of the first and second respondents, counsel raised certain preliminary objections including on maintainability. On maintainability, our attention was drawn to the provisions of Section 397 which is reproduced below:

"(1) Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or member's (including any one or more of themselves) may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of Section 399. (2) If, on any application under Sub-section (1), the Company Law Board is of opinion(a) that the company's affairs (are being conducted in a manner prejudicial to public interest or) in a manner oppressive to any member or members; and (b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up : the (Company Law Board) may, with a view to bringing to an end the matters complained of, make such order as it thinks fit."

39. Sub-section (2)(b) clearly stipulates two tests, viz.; (i) that on consideration of the facts of the case, there should be justification for the making of a winding up order on "just and equitable grounds"; and (ii) a conclusion that to wind up the company would unfairly prejudice the complaining member or members. The above two are essential for a petition under Section 397 seeking relief on the ground of oppression apart from the petition establishing that the company's affairs are in fact being conducted in a manner oppressive to any member or members. This requirement has a history behind it originating from the Cohen Committee Report in the UK before the amendment of the law in 1948. Before this amendment, the only alternative was winding up, and hence this remedy as an alternative is available as per the amendment only if such a situation is reached. The basic rule in corporate democracy is that the majority shall prevail, Section 397 proceedings being exception to this rule. Though the English law has undergone a sea change, thereafter, the Indian law being as it is, these tests are inevitable. Shri M. C. Mehta, advocate, for respondents Nos. 1 and 2 firstly drew our attention to the fact that in the original petition there is not even an averment to the effect that the facts justified the making of a winding-up order, but also that such order if made will be prejudicial to the petitioners. The petition is totally silent on this issue. In the revised petition, there is a mere averment to the above effect without any details as to which facts justify the winding-up order and in what way such order will be prejudicial to the petitioner's interest. Shri Mehta also contended that through an amended petition, the petitioners cannot improve their case. 40. We gave anxious consideration to the above preliminary objection and looked at the same in the context of legal precedence. Though the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351, briefly dealt with this issue it has clearly pronounced that it must be shown as preliminary to the application under Section 397 that there is just and equitable cause for windingup of the company. This case was brought to our notice by the advocate for respondents Nos. 1 and 2. Apart from this from our own study we could locate one more ruling of the apex court in Rajahmundry Electric Supply Corporation Ltd. v. A. Nageswara Rao [1956] 26 Comp Cas 91 (SC), which had already recognised this basic requirement which was only followed by the same court in Shanti Prasadjain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351, referred to above, namely, that an order under Section 397 can be made only if the facts would justify a winding-up order. In other words, law envisages that an order under Section 397 is clearly an alternative to winding-up of the company. Though valid ground should exist for winding up on just and equitable grounds it should also be shown that such a step would be detrimental to the member or members. Hence, an order under Section 397 could be considered only on satisfaction of this condition. 41. We also looked into the two decisions cited by Shri Mehta, namely, Laxmi Film Laboratory and Studios (P.) Ltd., In re [1984] 56 Comp Cas 110, 131 (Guj) in which Justice A. M. Ahmadi (as he then was) has opined "Now, on a plain reading of Section 397 of the Act which is analogous to Section 210 of the English Act, the court must be satisfied that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner "oppressive to any member or members and that the facts would justify the making of a winding-up order on the ground that it was just and equitable so to do under Section 433(f) but if such an order is likely to unfairly prejudice any member or members, the court may exercise its power under Section 402 with a view to bringing' to an end the matters complained of. It is, therefore, an essential condition for the maintenance of a petition under Section 397 of the Act that facts and circumstances which would justify the making up

of a winding up order on-just and equitable grounds should exist as required by Section 433(f) of the Act". This judgment once again has underlined that for maintaining a petition under Section 397 this is a condition which has to be fulfilled. In other words, in the absence of this condition, a petition under Section 397 cannot be maintained. We also considered the other case cited by Shri Mehta, namely, Naydvarapu Krishna Prasad v. Andhra Bank Ltd. [1983] 53 Comp Cas 73 (AP) , wherein a Division Bench of the Andhra Pradesh High Court, while considering an appeal in the matter of Sections 397 and 398, proceeded to consider as a preliminary issue the question whether the petitioners have made out a case for winding up of the company. All the above precedents clearly establish that in order to maintain a petition under Section 597 a case has to be made out that there is justification for winding up of the company on just and equitable grounds from the facts contained in the petition. Therefore, the non-existence of such condition is fatal to the petition. 42. We have noted in the present case that even in the amended petition, a reply was filed by respondents Nos. 1 and 2 objecting to the absence of valid justification for winding up and yet the petitioners have chosen not to file any rejoinder to the reply. During the arguments also though this preliminary objection was emphasised, there was no counter. Even otherwise, if we review the background of the company, applying the principle of dissolution of partnership this is not a case of partnership or a family business being run as a company which perhaps could have supported the petitioner's cause. In this case, the company has a large number of shareholders not necessarily belonging to a limited group of persons. The shareholding of the parties is also not such that there is a deadlock in the management or affairs of the company. Since these are some of the tests to be Applied as per the decision of the apex court from time to time, in particular Hind Overseas Put. Ltd. v. Raghunath Prasad Jkunjhunwalla [1976] 46 Comp Cas 91 ; MANU/SC/0050/1975 : AIR 1976 SC 565, the benefit of such principle cannot also be given. 43. Another significant feature in this case is that more than 50 per cent, of the shares are held by a State Government undertaking, namely, the RSMDC, resulting in the company virtually falling within the definition of a "Government company" under the Act, i.e., RSMDC holding 50.4 per cent, whereas the test for a Government company under Section 617 of the Act is holding of not less than 51 per cent. The principle of dissolution on just and equitable grounds in the case of a largely held virtually Government company is unprecedented. Moreover, from a study of the working results it is evident that the company is turning the corner and past losses ,ai'e being wiped out. In the circumstances we are fully convinced that the petitioner has not fulfilled the primary condition under Section 397(2), namely, a justification for winding up on just and equitable grounds. 44. Apart from this, the advocate for the respondents has rightly contended that in accordance with the provisions of the Code of Civil Procedure, an amended petition cannot be allowed to make out a fresh case if the petitioner has failed to make out one in the original petition. As already noted, the petitioner has failed to bring out in the original petition that there is a justification for winding-up which he has tried to make up through the amended petition. Any consideration whether on account of maintainability or on allegations if an amended petition makes out a new case which is not originally made out, it would be unfair to admit such matters as part of the original proceedings. Hence, on this ground also, we cannot accept the petition under Section 397 of the Act. 45. The other preliminary issues raised by Shri Mehta, however, do not cut the petition at its root. These objections are more relating to form than relating to substance namely, that the affidavit signed by the petitioners is not strictly in accordance with our regulations. Further, there is no valid consent by Smt. Anju Aggarwal. These objections however do not really go to the root of the matter. As regards the affidavit, strict compliance cannot be insisted upon so long as the petitioners confirmed that it is genuinely filed by them and that they stand by the averments in the petition. As regards consent, since Smt. Anju Aggarwal has signed the petition as one of the petitioners, the use of the word "consented" does not mean that she is a consenter and not a petitioner. Moreover, she is qualified to be a petitioner in view of her own shareholding in the company. Hence, these preliminary objections are overruled by us. On subsequent events : 46. Another preliminary objection raised by the respondents relates to inclusion of subsequent acts after the filing of the petition. The respondents have filed a catena of judgments of the Supreme Court, High Courts as well as the Company Law Board to show that the court will be travelling outside the allegations in the petition in such a case. On a consideration of all these cases, we are fully convinced that a petitioner cannot make out a new case so long as it is unrelated to the main allegation in the, petition. The removal of respondent No. 3 as the managing director does not fit into the various allegations contained in the original petition which are all in the nature of complaints of a member of a company. The cause of action which the petitioner is seeking to make through this new allegation of unjust removal of managing director is not only having no nexus with the main petition but also cannot constitute a basis of complaint by a member unless certain consequences affecting the interest of the company by the removal are narrated to establish that it is prejudicial to the interest of the company. Since no such consequences are brought to light through this petition the same could not have been considered, as such, we are not specifically going into this allegation. However, other allegations which are germane to the original petition have been given the consideration. On alleged acts of mismanagement: 47. The petition is a composite one under Section 397/398 of the Act. We have already come to the conclusion that since the petition does not satisfy the precondition of justification for winding up on just and equitable grounds, we have no other alternative except to ignore the allegations of oppression as mentioned in the petition. However, we may subject to the preliminary objections raised by the respondents regarding fresh cause of action not germane to the original petition, consider the allegations of mismanagement, i.e., acts prejudicial to the interest of the company or public interest. For this purpose, it is necessary to classify them into two categories, namely, oppression and

mismanagement. How do we classify the allegations into acts of oppression and mismanagement ? Section 397(1) as it reads makes it abundantly clear that "oppression" has something to do personally with the complaining member or members. In other words actions of management which adversely affect the members in their proprietary and legal rights will fall under the classification "oppression". This has been succinctly put by the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 at 782 :

"A conduct which lacks in probity, conduct which is unfair to and which causes prejudice to the petitioner in the exercise of his legal and proprietary rights as a shareholder".
48. This conclusion has been arrived at on a consideration of a number of English cases on the subject by the Supreme Court. In this connection, the observation of Lord Keith in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] 29 Comp Cas 1 (HL) ; [1958] 3 All ER 66, 86 was as follows (at page 28 of 29 Comp Cas) :

"Oppression under Section 210 may take various forms, It suggests, to my mind, as I said in Elder v. Elder and Watson Ltd. [1952] Scottish Cases 49 a lack of probity and fair dealing in the affairs of a company to the prejudice of some portion of its members".
49. Thus, oppression relates to commission or omission on the part of management which affects the rights of members. Looked at from this point of view the various allegations relating to non-receipt of notice of meetings, non-filing of annual returns failure to reply or comply with the request letters of the petitioners for inspection, etc., and even the allotment of shares without offering to the existing members allegedly in violation of Section 81 of the Act fall squarely under the category of "oppression". In view of the valid preliminary objections raised by respondents Nos. 1 and 2, we do not propose to go into these allegations. These allegations are personal in nature and cannot be considered as prejudicial to public interest or the company's interest. However, the petitioner is not remedyless. Most of these allegations are in the nature of grievances for which specific alternate courses of action are available under various provisions of the Act which could be resorted to by the petitioners. The decisions of the Delhi and Calcutta High Courts cited by the respondents are specifically on these issues that non-maintenance of books and records and denial of inspection and even failure to give notice of general meetings cannot constitute acts of oppression. Perhaps the intentional consistent elimination of a member from the affairs of a company may in a closely held company warrant the presumption of existence of oppression particularly in a private company which is virtually a partnership but this is not the case here. As regards the allegation of allotments in violation of Section 81 of the Act even if the petition under Section 397 had been maintainable, a decision on this allegation could have its implications on the repurchase/reallotment of the shares allotted to RSMDC. This is substantially what is aimed at by the petitioner as well as respondent No. 3. This specific aspect is already the subject-matter of a civil suit which in our opinion will take care of the grouse of the petitioner. Hence, we do not wish to burden the civil court with our findings on this matter. However, the interest of the company would not be adversely affected in the meanwhile as more than 50 per cent, is held by a State Government undertaking. 50. As regards the other fall out of the decision regarding violation of Section 81 of the Act on respondent No. 3 with regard to his continued entitlement to 500 shares which he is presently holding as well as his entitlement, if any, to any portion of the shares being off-loaded by RSM-DC, there are two civil litigations, namely, one which is already narrated-above and the other which is a challenge to the purported renunciation/ gift of 10 shares of Shri S. K. Singh in favour of respondent No. 3. Both these litigations would virtually sort out in effect the consequences if any of alleged violation of Section 81 as well as the vexed question of transfer of shares and renunciation of the rights of Shri S. K, Singh. In case respondent No. 3 is held to be the true owner of 10 shares it may have its repurcussion on the 500 shares as well as the entitlement to the RSMDC shares. In particular because of the shifting stand of Shri S. K, Singh unless evidence is recorded in detail it may not be appropriate to come to conclusions in summary proceedings as in our case regarding the truth behind the alleged transfer/gift. However, the civil court may be able to come to definite conclusions on these issues and adequately take care of the complaint by the petitioner. Thus, our inability to go into this allegation does not also prejudice the petitioner in any way. 51. As regards acts of mismanagement, which are all narrated in the amended petition we have noted the objection of Shri Mehta that the opportunity for an amendment cannot be made use of by a petitioner to improve his case and that no new cause of action can be introduced nor the basic fabric or the substratum of the dispute changed, we are convinced that the events narrated are not subsequent events but prior events. We have also noted that under Order VI, rule 17 of the Code of Civil Procedure, regarding amendment, discretion is available with the court but the scope for an amendment petition should be limited as evident from the decisions of various High Courts as well as the apex court. At the same time, we are also conscious of the fact that the jurisdiction under Section 398 is an equitable jurisdiction. It is, therefore, necessary to adopt caution in exercising our jurisdiction with regard to addition of new grounds though in this case none of them arc subsequent events. In this connection, we have to specifically keep in view the purpose behind the provisions contained in Section 398(1)(a) read with Section 402 of the Act. Section 398(1)(a)deals with a complaint that the affairs of the company are being conducted in a manner prejudicial to public interest or prejudicial to the interest of the company. Keeping in view the powers under Section 402 which are to be exercised in the interest of the company courts have already come to the conclusion that this jurisdiction is an equitable jurisdiction. Moreover, these facts have come out after inspection, though the basic allegation has been already laid out in the petition perhaps without full details. This being so we are inclined to consider the allegations of mismanagement though contained in the amended petition and strictly speaking may constitute additional facts but relating to periods before the , filing of the petition. The main allegations of mismanagement as contained in the amended petition relate to : (a)

allotment of shares to benami/fictitious persons. (b)holding general meetings without quorum. (c) the affairs of the company are de facto managed by an official of the RSMDC in his personal capacity. (d) appointment of auditors not done by special resolution. (e) observations against the 'company in the report of the Director, Mines and Geology, Government of Rajasthan. (f) observations of auditors in their report for the year ended March 31, 1991. (g) non-disclosure of interest of respondent No. 2 under Sections 297 and 299. (h) burdening the company with taxes, dead rent, etc., relating to the mines which have to be borne by respondent No. 2.
52. We have examined all the above allegations with the documents filed by the respondents along with their replies. Regarding allotment to benami/ fictitious persons the respondent company has already made available the complete list of shareholders along with the register of members and these parties have also been impleaded as additional parties in the amended petition. In fact some of the parties have also filed replies thereafter. If some have not filed any replies, that alone cannot establish that they are fictitious. The petitioners' allegation appears to be based on perhaps some incomplete particulars filed with the Registrar of Companies which ultimately could not be conclusively established in view of the statutory registers produced by the company which have not been challenged which contains the full address and particulars of allottees. Thus, the allegation can no longer be sustained. 53. As regards the allegation of holding general meetings without quorum this is based on perhaps a wrong copy of the articles of association of the company available with the petitioner while filing the petition. Subsequently we have verified from the copy available with the Registrar of Companies and we are satisfied that there is no stipulation for the presence of a nominee of the RSMDC for general meetings though such stipulation exists in respect of board meetings. The respondents have also stated on affidavit that a correct copy of the articles of association was' furnished to the petitioners and as such this grouse can no longer subsist. Since there is no basis for the allegation that a general meeting is incomplete without the presence of the RSMDC representative, the allegation, totally falls to the ground. 54. The allegation that the affairs of the company are being managed by an official of the RSMDC in his personal capacity has been sought to be substantiated by means of a copy of the letter written by one Shri O. P. Sharma to the managing director ostensibly giving certain instructions. However, beyond this, nothing has been established to show whether these instructions have been carried out and whether the managing director had been continuously acting as per the instructions of that individual. One instance or a purported instance cannot lead to a conclusion that the affairs of the company are being conducted at the dictates of one individual. Moreover, it appears that the RSMDC has already instituted certain internal inquiries in this regard. A copy of the report of the inquiry was also made available to us by the RSMDC. Thus, this aspect has been taken care of by the RSMDC through appropriate action. Hence, we find no need to go into the allegation any further. 55. Regarding the deficiency in the appointment of auditors the allegation is that since the State Government undertaking is holding more than 25 per cent, of the capital, the appointment should be by means of a special resolution whereas the notice does not say so. In this connection, we are in agreement with the respondent-company that the indication in the notice that the appointment is in accordance with the provisions of Section 224A is itself sufficient to mean that the resolution was to be passed as a special resolution since this is the only requirement of this sub-section. In this connection, Shri Mehta also drew our attention to the practice followed by many leading companies in the corporate sector which is identical. It is also found from the minutes book that in fact the resolution has been passed as a special resolution. As such we do not find any substance in this allegation either. 56. As regards the allegation that there had been some adverse observation of the Director (Mines and Geology) with regard to the maintenance of records, the company has confirmed that the points raised have been settled to the satisfaction of the authorities concerned and the assessment has been completed and the matter put an end to. The company has also produced copies of the final assessment orders. In the circumstances, we do not find any scope for probing into this issue which has been closed to the satisfaction of authorities concerned. 57. As regards the allegation of certain adverse observations by the auditors against the company, these are part of the report to the shareholders. So long as such report is placed before the shareholders and they had enough opportunity in the internal forum to debate and decide, we will not intervene in such matters unless such an opportunity had never been available or any mala fides are attributed. Moreover, the petitioner has not spelt out the seriousness of the observations to enable us to examine the ramifications or seriousness of such observations. Thus, this allegation lacks in complete details and has also been taken care of by the internal forum. 58. Regarding the allegation of non-disclosure of interest of respondent No. 2 under Sections 297 and 299 of the Act, in the matter of the joint sector agreement, strictly speaking, these agreements were entered into when the company was a private company. As a private company these Sections have a limited application in the sense that though Section 297 is applicable, the contract is to be only approved by the board of directors. As regards Section 299 the requirement is that only the

director concerned should disclose his interest but is still entitled to participate and vote at the meeting. All the same from the affidavits filed, it is established that the contract was approved not only by trie board of directors but also by the general body. Approval by the general body though not a requirement has also been complied with. In addition, it is also found that some of the terms of the joint venture agreement have been incorporated in the articles of association of the public company. An amendment to the articles in this regard which could be done only by a special resolution would have again warranted a proper disclosure by an explanatory statement in the notice for the meeting. As such this allegation of non-disclosure has absolutely no substance. Moreover, the respondentcompany produced the minutes book of the board and general body meetings of the private company before the Company Law Board and opportunity was afforded to the petitioners to inspect the same which has not been made use of by the petitioners. Similarly, regarding the allegation that the expenses relating to taxes, dead rent, etc., relating to the mines are being borne by the company instead of by respondent No. 2, these have also arisen out of the joint sector agreement and as such has to be linked with the previous allegation, this being a related matter. 59. In view of our findings as above, as regards acts of mismanagement, we find that there is no scope for giving any relief to the petitioner on this score as well. On the conduct of the, petitioners : 60. While disposing of this petition, we have also noted the arguments advanced on behalf of respondents Nos. 1 and 2 regarding the conduct of the petitioners and respondent No. 3, The following are relevant:

(a) The petitioners took no interest in the affairs of the company for nearly seven years excepting to apply for some additional shares and did not complain about non-receipt of notices, etc. (b) The awareness as a shareholder has come to the petitioners only around the middle of 1991, when it appears that relationship between respondents Nos. 2 and 3 got strained. (c) The inclusion of the grouse of respondent No. 3 including his removal as an MD in the amended petition indicates the common cause between petitioners and respondent No. 3. All letters of complaint were sent by the petitioner to the address of respondent No. 3 though this address was only for some time the registered office of the company. When the petitioners were not aware of anything about the company during the sevenyear period, how did they come to know about the change in registered office alone? Even registered letters sent to this address were shown to be on the same day of despatch which indicates the nexus between the petitioner and respondent No. 3. (d) The manner in which the petitioner has been picking and choosing for challenging the legality of allotments in the light of Section 81 of the Act, and, thereafter, protecting the interest of respondent No. 3. (e) The Extraordinary prayer in the petition which is self-contradictory, i.e., on the one hand seeking to declare as null and void the allotments allegedly in violation of Section 81 and at the same time seeking to distribute the shares of RSMDC between the petitioners and respondent No. 3 besides respondent No. 2. (f) Respondent No. 3 though a shareholder, since the allotment of his shares being liable to be disputed has possibly conveniently used the petitioner to file the petition.
61. A consideration of all the above taken together leads us to believe that-the petitioners have no case of their own but are espousing the cause of respondent No. 3. In these circumstances also we consider it appropriate not to intervene in the affairs of the company and leave the matter with regard to the entitlement of shares of respondent No. 3 as well as regarding the interpretation of joint venture agreement to be done by the civil court. Since the allegations could not be established and since we could find nothing adverse against respondent No. 2 or in the affairs of the company we have to consider the prayers in this background. The prayers of the petitioners considered : 62. As already stated, in exercise of the equitable jurisdiction we have to keep in view the interest of the company. We have noted that the affairs of the company are being managed all along with the involvement of representatives of the RSMDC and with a shareholding of more than 50 per cent, by the RSMDC and the company virtually falls within the definition of a Government company. In case the RSMDC shares are to be disinvested as per the joint sector agreement the shares would devolve upon those whom the civil court may decide as the proper person to get the shares. In any case, if the shares devolve on respondent No. 2 we may have to say something if at all we have any adverse findings against respondent No. 2. From the above consideration of the case, we have no adverse findings against respondent No. 2 and as such even if he gets the management we have no reason to believe that the company will be carried on detrimental to the interest of the company or public interest. As such, even on exercise of equitable jurisdiction, we have nothing to order with regard to the future governance of the company. 63. With regard to the prayer for ordering an investigation, we are in full agreement with the contention of counsel for the respondents that full and complete details of allegations of misappropriation, misapplication of funds, mismanagement or other improper conduct have not been

set out. No order for investigation is to be made on the basis of vague allegations because before ordering investigation a prima facie conclusion has to be reached based on certain materials. In the absence of full particulars the court will decline to embark upon investigation into charges of fraud and misconduct. This proposition is supported by a number of cases cited by Shri Mehta. In view of our conclusion as above that none of the charges of mismanagement are substantiated, the prayer for investigation has to be rejected. In this connection, we have also to record that the Registrar of Companies has already reported that the company has been regularly filing the returns and that there are no other complaints against the company. 64. As regards the appointment of the petitioner as a permanent director we have already dealt with the lukewarm interest shown by the petitioners in the affairs of the company. Further, the petitioners appear to be only espousing the cause of respondent No. 3. Hence, by inducting the petitioner we may be perhaps escalating the disputes further between respondents Nos. 2 and 3 which could be only detrimental to the interest of the company. In the end, we dispose of the petition without granting any of the prayers of the petitioners. All interim orders stand vacated. However, since the petitioners, respondents Nos. 2 and 3 have already deposited the cost of the shares with the RSMDC, on unloading of the shares as per decision of the civil court the party/parties who get the shares shall reimburse forthwith the money deposited to the parties who do not get shares along with simple interest at the rate of 14 per cent, per annum. Manupatra Information Solutions Pvt. Ltd.
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MANU/CL/0024/1996 Equivalent Citation: [1996]87CompCas331(CLB) IN THE COMPANY LAW BOARD PRINCIPAL BENCH Company Petition No. 23 of 1994 and Company Application Nos. 59 and 71 of 1995 Decided On: 31.05.1995 Appellants: Vijay M. Porwal and Anr. Vs. Respondent: Pentokey Organy (India) Ltd. and Ors. Hon'ble Judges/Coram: S. Balasubramanian, Chairman and A.R. Ramanathan, Member Counsels: For Appellant/Petitioner/Plaintiff: F.E. Devitre and R.D. Dastur, Advs. For Respondents/Defendant: R.A. Kapadia, Sr. Adv., T.N. Subramanian and Mahesh Agarwal, Advs. Subject: Company Catch Words Mentioned IN Acts/Rules/Orders: Companies Act, 1956 - Sections 169, 173 and 173(2) Cases Referred: Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Co. Ltd., [1971] 41 Comp Cas 377 (Bom.); Suresh Chandra Marwaha v. Lauls Private Ltd., [1978] 48 Comp Cas 110 (P & H); Suresh Kumar Sanghi v. Supreme Motors Ltd., [1983] 54 Comp Cas 235 (Delhi); Nagavarapu Krishna Prasad v. Andhra Bank Ltd., [1983] 53 Comp Cas 73 (AP); Siddaramappa Bapurao Patil v. Ratna Cements (Yadwad) Ltd., [1991] 70 Comp Cas 27 (Kar); Rao (V.M.) v. Rajeswari Ramakrishnan, [1987] 61 Comp Cas 20 (Mad); Escorts Ltd. v. Union of India, [1985] 57 Comp Cas 241 (Bom.); Life Insurance Corporation of India v. Escorts Ltd., [1986] 59 Comp Cas 548; S. Varadarajan v. Venkateswara Solvent Extraction (P.) Ltd., [1994] 80 Comp Cas 693 (Mad) ORDER 1. In this order we are considering Applications Nos. 59 of 1995 and 71 of 1995 of the petitioners in Company Petition No. 23 of 1994, filed under Section 397/398 of the Companies Act, 1956, in the matter of Pentokey Organy (India) Ltd. The prayers made in Company Application No. 59 of 1995, are that the respondent-company should be restrained from implementing the resolution passed at the extraordinary general meeting of the company held on June 20, 1994, removing the petitioners as directors of the company, on the ground that the explanatory statement annexed with the notice of the meeting did not fulfil the requirements of Section 173 of the Companies Act and that the company be directed to offer inspection of documents. Company Application No. 71 of 1995 relates to amendments to the main petition. 2. It is essential to record, in brief, the events which led to the filing of Company Application No. 59 of 1995. The petitioners filed the main petition Company Petition No. 23 of 1994 and the chairman of the Company Law Board sitting as a single member passed an interim order on June 15, 1994, restraining the company from transacting the business relating to the removal of the petitioners as directors of the company at the extraordinary general meeting convened June 20, 1994. This order was challenged in the High Court of Bombay and a single judge set aside the order of the Company Law Board on the ground that the constitution of a Bench for considering a Section 397/398 petition with a single member was not in accordance with the Company Law Board Regulations. However, he also passed an interim order that the decision of the extraordinary general meeting will not be implemented and that the petitioners would be permitted to participate in the board meeting but they will not represent themselves as directors on the board to conduct any work. The order of the single judge was appealed against and the Division Bench of the Bombay High Court upheld the decision of the single judge but it continued the interim order for a further period of two weeks. Since the period of two weeks was to expire, this instant application has been made with the prayer to either restrain the company from implementing the resolution or in the alternative stay the implementation of the resolution till the disposal of the main petition. In a hearing on April 3, 1995, we ordered the continuation of the interim order of the single judge. 3. Shri Devitre, advocate for the petitioner, commencing his arguments stated that while the interim order passed by the Company Law Board on June 15, 1994, has been set aside by the High Court of Bombay, the Division Bench has also recorded that the petitioner is at liberty to approach the Company Law Board to seek appropriate orders relating to the subject matter of the interim order and it has also been observed that the Company Law Board need not take into consideration any observation of the single judge on the merits of the case and as such the Company Law Board can pass any orders relating to the extraordinary general meeting held on June 20, 1,994. According to him, the proceedings of the extraordinary general meeting which was convened for the sole purpose of removing the petitioners as directors was vitiated by non-compliance with the provisions of Section 173 of the Companies Act. This section provides, in Sub-section (2), that a statement setting out all material facts concerning each item of business should be annexed to the notice convening the meeting. In the present case, the company failed to annex with the notice such a statement setting out all material facts. The idea of giving material facts is to ensure that the members of the company

are appraised of the facts to enable them to take a decision on the resolutions to be moved. Shri Devitre contended that the main ground for removal of the petitioners as directors as per the requisition given by the shareholders, was that, these petitioners-directors had addressed a letter on April 25, 1994, to the company's bankers, the State Bank of India, alleging that the company was not appropriately functioning in relation to the credit facilities granted to the company and also signifying their wish to get themselves disassociated with the company. In the explanatory statement, the company has simply reproduced the same without giving any additional very pertinent information that the petitioner, in the board meeting held on May 6, 1994, had stated that he was prepared to withdraw the said letter. His statement has been recorded in the minutes also. Secondly, according to Shri Devitre, a proper reading of the letter of April 25, 1994, would show that the purpose of writing the letter was only to give notice of withdrawing personal guarantees because the petitioners were against the company's financial mismanagement. He further stated that even though they had indicated that they desired to withdraw the personal guarantee to the tune of Rs. 1.51 crores, still personal guarantee to other financial institutions to the tune of Rs. 7.5 crores is still in force and this matter was not indicated in the explanatory statement. Further in the explanatory note, a statement has been made that this requisition was considered in the board meeting held on May 16, 1994, but the fact that the petitioners expressed their protest was not indicated in the explanatory note. 4. Shri Devitre narrated the sequences which culminated in the requisi-tionists giving the requisition for convening an extraordinary general meeting for removing the petitioners as directors. The company gave a notice on May 4, 1994, for convening a board meeting on May 16, 1994, to consider the item regarding removal of the petitioners as directors. This agenda item was contested in the Bombay City Civil Court and the court held that the board of directors shall not consider this item or any resolution to be pursued with that item. It also made an observation that, in case the company received any requisition as contemplated in Section 169 from the Shareholders, in this regard, the board may consider the same. This order was passed on May 13, 1994, by a message dated May 14, 1994, which was a Saturday and received by the petitioners on 15th (Sunday) the company intimated the petitioners that a requisition for removal of the petitioners as directors had been received and the same would be placed before the board meeting to be held on May 16, 1994. He further stated that four directors have issued the requisition and they all belong to the family of respondent No. 2 who is the managing director of the company. This requisition was discussed on May 16, 1994, at the board meeting and petitioner No. 1 stated that the matter might be adjourned to a later date for proper discussion but the same was not agreed to and the board decided to call for the extraordinary general meeting. He also mentioned that another important particular which should have been included in the explanatory statement was that even before the petitioner had sent a letter to the State Bank of India, the petitioners had already been relieved of their personal guarantee with effect from May 25, 1994, as per the letter of the State Bank of India, dated April 27, 1994 (exhibit R-88L). 5. The cumulative effect of all the omissions in the explanatory note would make, Shri Devitre argued, the convening of the extraordinary general meeting, void. Even otherwise, according to him, continuation of the petitioners as directors on the board of the company, would not in any way affect the company, especially when, as per the agreement with the other promoters, the petitioners were to have, at any time, two nominees on the board of the company. On the nature of the explanatory statement, he relied on Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Co. Ltd, [1971] 41 Comp Gas 377 (Bom). He also stated that the respondents have not adduced any grounds against continuation of the petitioners as directors. Therefore, Shri Devitre pleaded that the impugned resolution may be declared void or in the alternative the implementation of the resolution may be stayed till the main petition is disposed of. 6. Shri Kapadia, senior advocate appearing on behalf of respondents Nos. 3 and 4, disputed the claim of the petitioners that the material facts had not been brought to the notice of the shareholders. According to him, the material facts are different from full particulars. Substantiating the stand of the company that the letter of April 25, 1994, written by the petitioner to the State Bank of India was against the interests of the company, Shri Kapadia, drew our attention to the said letter (exhibit R88J) and stated that from the contents of the letter, two aspects are clear, i.e., the intention of the petitioner of dissociating from the company and its anti-company nature. He also drew our attention to the endorsement made thereon that copies of this letter have been endorsed to other top functionaries of the State Bank. He also stated that the petitioners had not shown any interest in making any further financial commitment towards the company as is evident from the fact that when the company desired to increase the credit facility from Rs. 1.51 crores to Rs. 2.66 crores, the petitioners did not agree to enhancing their personal guarantee till March, 1994. In the month of March, 1994, the State Bank of India increased the limit to Rs. 2.4 crores and at that time, the guarantee given by the petitioners in respect of Rs. 1.51 crores had been replaced by the guarantee of two other directors. This information was passed on to petitioner No. 1 on March 25, 1994 (exhibit R-88-I). At the board meeting held on March 26, 1994, the replacement of the guarantee given by the petitioners by two other directors was placed before the board and the petitioners were present at the board meeting. Therefore, according to Shri Kapadia, when the petitioners wrote to the State Bank withdrawing their guarantee they were fully aware that their guarantee was no longer subsisting and only with a view to malign the company, they wrote that letter to the bank. He also drew our attention to the fact that the petitioners never wrote to other financial institutions in which their personal guarantee to the tune of Rs. 7.5 crores was subsisting. Therefore, Shri Kapadia contended that the explanatory note did not suffer from want of particulars in this regard. As regards the offer of withdrawal of the letter written to the bank by the petitioner, Shri Kapadia stated that by alleging misappropriation, the petitioners had already made the company defensive in respect of these allegations and even assuming they withdrew the letter, it does not restore their position as guarantors inasmuch as the bank had already relieved them from the position of guarantors. Even otherwise, the petitioner never withdrew the letter but the offer to withdraw was made only after receipt of the requisition. Therefore, according to Shri Kapadia, this was not a matter which could have been highlighted in the explanatory statement when the petitioners

were fully aware of the same. 7. As far as omission to mention about the subsisting guarantee of Rs. 7.5 crores is, Shri Kapadia stated that the other directors had given guarantee to the tune of Rs. 13.5 crores. Therefore, according to Shri Kapadia, the allegation in this regard by the petitioner is only to somehow or other prevent the implementation of the resolution of the extraordinary general meeting. He further stated that the other objection of the petitioners that their protest in the board meeting should have been indicated in the explanatory statement, has no basis as it is immaterial inasmuch as, as per Section 169, the board was bound to call for an extraordinary general meeting when requisitioned and the protest in this regard by any of the members of the board had no bearing on the same. 8. In regard to staying the implemention of the resolution of the extraordinary general meeting, Shri Kapadia pointed out that under Section 397/398 of the Companies Act, it is only members' rights which could be agitated and not the directorial rights. On this aspect, he relied on Suresh Chandra Marwaha v. Lauls Private Ltd. [1978] 48.Comp Cas 110 (P & H), Suresh Kumar Sanghi v. Supreme Motors Lid, [1983] 54 Comp Cas 235 (Delhi), Nagavarapu Krishna Prasad v. Andhra Bank Ltd. [1983] 53 Comp Cas 73 (AP), Siddaramappa Bapurao Patil v. Ratna Cements (Yadwad) Ltd. [1991] 70 Comp Cas 27 (Kar) and Rao (V. M.) v. Rajeswari Ramakrishnan [1987] 61 Comp Cas 20 (Mad). In regard to inspection of documents by the petitioner, Shri Kapadia stated that the petitioner had filed a suit in the civil court at Bombay seeking certain interim relief including the inspection of documents. While the civil court granted the prayer for inspection of documents, the suit was withdrawn. Even otherwise the company gave inspection of all the documents as per order of the Company Law Board dated June 15, 1994. Presently one of the prayers of the petitioner is to inspect the books of account which Shri Kapadia contended is against the statement of petitioner No. 1 himself, vide his letter dated March 15, 1994, wherein he had written to the company that he does not have any specific query on accounts (exhibit R-36). Shri Kapadia further stated that inspection of documents to which the petitioners are entitled as shareholders has been given to them. As far as their right as directors is concerned, since they have already been removed as directors, they are not entitled to the same. Summing up his arguments, Shri Kapadia stated that non-implementation of the extraordinary general meeting resolution would mean continuation of the petitioners as directors which has no bearing on the final relief and even as final relief, their continuation as directors cannot be granted. In a corporate democracy, he further stated that it is the prerogative of the shareholders to elect/remove directors and in the instant case the general body of shareholders has removed the petitioners from the directorship and, therefore, the Company Law Board should not intervene. 9. Replying to the arguments of Shri Kapadia, Shri Devitre pointed out that the Jetter relied on by the respondents at exhibit R-88-I regarding enhanced credit facilities approved by the State Bank of India was dated March 25, 1994, and it contained enclosures which are different from the loan agreement and other documents indicated to have been enclosed with that letter and as such this letter should not be deemed to have given a notice to the petitioners regarding their release from the guarantee given by them. He further stated that even in the High Court, the petitioner had denied receipt of these enclosures. The respondents' contention that the petitioner's release from the guarantee was discussed at the board meeting cannot be given credence inasmuch as the draft minutes of the meeting were received by the petitioner on May 5, 1994, i.e., after they had written the impugned letter to the State Bank of India. Even otherwise it is not possible for the petitioner to presume that when the bank sanctioned enhanced credit facilities, the petitioner had been relieved from the earlier guarantee when two new directors gave the guarantee for the enhanced limit. Even it is recorded in the minutes of the board meeting held on May 16, 1994, that the State Bank of India had released the guarantee of the petitioners with retrospective effect from March 25, 1995. The petitioner had renewed the guarantee on October 6, 1993, in addition to extending the guarantee for Rs. 7.5 crores sanctioned by the IDBI for the capital project. Even the shares of the petitioner have been pledged with the IDBI. When the petitioner was withdrawing the guarantee of only Rs. 1.51 crores their guarantee for a larger amount of Rs. 7.5 crores was still subsisting and if this fact had been disclosed in the explanatory statement, the real import of the petitioner's letter to the State Bank of India would have been appreciated by the shareholders and as such this is a material fact which should have been disclosed in the explanatory statement. In regard to the claim regarding corporate democracy, Shri Devitre assailed this claim on the ground that as against Rs. 50.13 lakhs of the paid-up capital, only shares for Rs. 24.01 lakhs were voted in the meeting and as against nearly 25,000 members, only 35 attended the meeting. Of these 35 members, 32 members belonged to either of the two groups and only three other members were present. In other words, no member of the public attended the extraordinary general meeting. In addition he stated that on the date of the meeting, there was a news item regarding the order passed by the Company Law Board restraining the holding of the extraordinary general meeting and this could have influenced many members in not attending the meeting. In view of the various submissions made by him, Shri Devitre prayed that not only the petitioners should be allowed to have inspection of the documents which have already been ordered by the Company Law Board, vide its order dated June 15, 1994, but the resolutions passed at the extraordinary general meeting on June 20, 1994, should also be declared void. 10. We have considered the pleadings and arguments of counsel. The prayer for a direction to restrain the respondents from giving effect to or implementing the resolution of removal pf the petitioners as directors passed in the extraordinary general meeting held on June 20, 1994, has been made on the plea that the explanatory statement attached to the notice calling for meeting did not disclose material particulars. 11. Admittedly, the meeting was a requisitioned meeting by some of the shareholders of the company who also happened to be the directors. There is no dispute that the requisitionists were qualified to requisition the meeting under Section 169(4) of the Act. It is not also in dispute that the board of directors, in compliance with the provisions of Section 169, called the meeting within the time limit as provided in Section 169(6). The notice was issued by the company on May 21, 1994, convening the

extraordinary general meeting on June 20, 1994. Along with the notice, a copy of the requisition received from the shareholders was also enclosed. The requisitionists had also attached an explanatory statement along with their notice under Section 173 of the Companies Act. In the said explanatory statement, the requisitionists have stated "the members of the company and the requisitionists in particular have lost faith in the two directors, namely, Mr. Vijay M. Porwal and Mr. Bhupat K. Shah, and are not satisfied with their holding office as directors of the company and, therefore, both of them be removed as directors of the company. As if what is stated above was not enough, Mr. Vijay M. Porwal and Mr. Bhupat K. Shah without any provocation in that behalf, addressed a very strange and anti-company letter No. TS/23, dated April 25, 1994, to the company's bankers, the State Bank of India, to the effect that the bank was not properly secured in relation to the credit facility granted to the company and also their intentions of dissociating with the company." 12. In the explanatory statement appended with the notice calling for the extraordinary general meeting by the company, the same reasons as indicated in the explanatory statement of the requisitionists has more or less been reproduced. The explanatory statement attached by the company also states that the notice of requisition by the shareholders had been considered by the board on May 16, 1994, and as required under Section 283(3) of the Act a copy of the notice has been given to the directors proposed to be removed and that the shareholders directors who had issued the requisition were deemed to be interested in these resolutions. 13. As we have elaborated earlier, according to the petitioners, this explanatory statement issued by the company did not fulfil the requirements of Section 173(2) of the Companies Act in as much as various material particulars had not been disclosed. Before going into the merits of the contentions of the parties as in this regard, it is essential to examine the legal position relating to the explanatory statement under Section 173(2) of the Act. 14. Section 173(2) states that "where any items of business to be transacted at the meeting are deemed to be special as aforesaid, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business including, in particular, the nature of the concern or interest, if any, therein of every director". In the present case, removal of directors is a special business. On the underlying object of this section, Shri Devitre relied on Firestone Tyre and Rubber Co. Ltd. v. Synthetics and Chemicals Co. Ltd. [1971] 41 Comp Cas 377 in which the Bombay High Court held that "the object underlying Section 173(2) is that the shareholders may have before them all facts which are material to enable them to form a judgment on the business before them. Any fact which would assist them in making up their mind, one way or the other, would be a material fact under Section 173 and has to be set out in the explanatory statement. This provision is mandatory and not directory and disobedience of its requirements must lead to nullification of the action taken". It is essential at this point of time to note that in this case it was the company which called for the general body meeting for approval of certain resolutions. In the present case before us, it is a requisitioned meeting. The legal position in regard to such a meeting, especially for removal of directors, has been elaborately dealt with by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Gas 548 as cited by the respondents' counsel. In that case the LIC requisitioned a general body meeting for removal of nine directors of Escorts Ltd. No reasons for their removal had been indicated in the notice of requisition. Escorts Ltd., in a writ before the Bombay High Court, contended that the notice was bad in as much as the notice did not contain any reasons for removal of directors in Escorts Ltd. v. Union of India [1985] 57 Comp Gas 241 (Bom). 15. In this case the Bombay High Court has said that when a meeting is requisitioned by some shareholders for the purpose of removing a director, the requisitionists must disclose the grounds on which they want to proceed against the director. This is necessary because the company has to inform the director before any of the resolutions to remove him is considered so as to enable him to exercise the statutory right of making a representation to the shareholders about the matter. The right of representation will be an empty formality if the proposed action does not inform the director concerned of the grounds on which he is sought to be removed since he will not know what representation he should make. Further, the court held that the notice of the meeting must be accompanied by a copy of the resolution and an explanatory statement. 16. This decision of the Bombay High Court was, however, reversed by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548. The Supreme Court observed as follows (page 636) :

"Thus, we see that every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements, to call an extraordinary general meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling a meeting and he is not bound to disclose the reasons for the resolutions proposed to be moved at the meeting. Nor are the reasons for the resolutions subject to judicial review. It is true that under Section 173(2) of the Companies Act, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each item of business to be transacted at the meeting including, in particular, the nature of the concern or the interests, if any, therein, of every director, the managing agent, if any, the secretaries and treasurers, if any, and the manager, if any. This is a duty cast on the management to disclose, in an explanatory note, all material facts relating to the resolution coming up before the general meeting to enable the shareholders to form a judgment on the business before them. It does not require the shareholders calling a meeting to disclose the reasons for the resolutions which they propose to move at the meeting. The Life Insurance Corporation of India, as a shareholder of Escorts Ltd., has the same right as every shareholder to call an extraordinary general meeting of the company for the purpose of moving a resolution to remove some directors and appoint others in their place. The Life Insurance Corporation of India cannot be restrained from doing so nor is

it bound to disclose its reason for moving the resolutions."

17. This decision of the Supreme Court was followed by the Madras High Court in S. Varadarajan v. Venkateswara Solvent Extraction (P.) Ltd. [1994] 80 Comp Cas 693 (Mad). The court said (page 711) :

"Thus, it is clear that the obligation to annex an explanatory statement to the notice of the meeting is only on the company when it calls for a meeting to transact the special business. When a requisitionist calls for an extraordinary general meeting under Section 169, there is no obligation on the requisitionist to annex an explanatory statement to the notice of the meeting."
18. From the above decisions, it is explicit, that a shareholder requisitioning a meeting to transact special businesses like removal of directors etc. does not have to give any reasons nor any explanatory statement need to be attached. As per Section 169, the company has to call for an extraordinary general meeting to consider the resolutions proposed by the requisitionists failing which the requisitionists themselves can convene the meeting. The obligation of the company in a requisitioned meeting is to send a copy of the requisition along with the proposed resolution and if there is an explanatory statement with the notice, the same also has to be sent to the shareholders. In other words, the company itself is not bound to attach any explanatory statement inasmuch as the meeting has not been called by itself but only by the requisitionists and the company acts only as a medium to convene the meeting. In the present case we find that in the explanatory statement attached by the company, it has only reproduced the explanatory statement as given by the requisitionists and it has also complied with the provisions of Section 173(2) to indicate therein that some of the directors, being requisitionists, are interested in the proposed resolutions. Thus, the company has complied with the provisions of law, even assuming that the explanatory statement attached by the company does not reveal the alleged material particulars. The claim of the petitioners amounts to asking the company to supplement additional material either in support or against the reasons given by the requisitionists. We feel that, in convening a requisitioned meeting, the company's role is limited to the forwarding of the material received by it, from the requisitionists to all the members and nothing more. Therefore, according to us, the notice calling for the meeting issued by the company does not suffer from any legal infirmity as alleged by the petitioners and as such we are not going into the question whether so many details advanced by the petitioners as material, are material or not, as the same is not necessary in view of our holding that the notice calling for the meeting did not suffer from any legal infirmity. 19. Another point raised by the petitioners is that, in view of a press note on the date of the meeting, many shareholders did not attend the meeting and that except 3 of the 35 members present, all were belonging to either of the two groups, namely, the petitioner and the respondents and as such the decision of the general body did not represent the true will of the large body of the shareholders. This argument also does not seem to be very valid inasmuch as we find that in the seventh annual general meeting of the company, there were only 51 shareholders present and as per the information collected by us from the company regarding the earlier meetings, it is seen that the number of members present was only around 50. 20. Regarding the voting in respect of the resolutions, it is stated in the application that if the voting in respect of the shares held by Shri R. V. Shah group and RCTC are eliminated then the resolutions would have been defeated. In this connection, it is necessary to refer to the report of the chairman of the meeting. The chairman has counted the votes in three ways ; one is as per scrutineer's report and second, after removing the votes cast by Shri R.V. Shah group and the third by excluding votes relating to newly created shares. We find that in all the three situations, the votes cast for the resolutions were more than the votes cast against the resolutions. As far as the counting of votes relating to RCTC is concerned, the chairman's report covers that also. The final position that emerges, as per the chairman's report on the result of the votes polled in the extraordinary general meeting is that the resolutions removing the petitioners as directors had been passed by majority. Thus, we are unable to intervene on behalf of the petitioners in this matter. Accordingly, it is not necessary for us to continue with our order dated April 3, 1995, wherein we had directed the company not to implement the decision of the extraordinary general meeting and as such we vacate that order. 21. Regarding inspection of documents, it is the grievance of the petitioners that our order dated June 15, 1994, had not been complied with. Now that we have allowed the company to implement the decision of extraordinary general meeting removing the petitioners as directors, they will be only entitled to inspection of documents which they are entitled to as members and those which have been relied on by the respondents in their replies. Accordingly in modification of our order dated June 15, 1994, we direct the company to offer to the petitioners, all documents which they are entitled as members and those which the respondents have relied on in their replies. The inspection will be given within a period of one month from the date of receipt of this order. 22. In regard to Application No. 71 of 1995 seeking to incorporate amendments to the main petition, we allow the same except that portion relating to the extraordinary general meeting held on June 20, 1994, since we have already considered the same in this order. The respondents will file their replies to the amended application by July 15, and rejoinder, if any, will be filed by August 15, 1995. We also find that the petitioners are yet to file their replies on C. A. No, 236 of 1994 filed by the respondents on maintainability of the petition. As such, the petitioners will file their replies to this application by July 15, and rejoinders if any will be filed by August 15, 1995. As already indicated, the petition will be finally heard on September 25, 1995, to September 27, 1995, at 10.30 a.m. each day. Manupatra Information Solutions Pvt. Ltd.