Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
Introduction:
In many cases, a petition by a
minority group against majority or vis a vis to the Company Law Board signifies
serious difference of opinion between the groups and it will literally stall
company from pursuing its objects literally.
Everybody knows that a
shareholder or group, who qualifies under section 399 of Companies Act, 1956,
can approach the Company Law Board seeking preventive measures and various
measures when a group in the Company commits oppression or mismanagement.
We normally see the groupism in
private companies and closely held companies and in view of SEBI (DIP)
regulations, there can not be groupism in listed public companies as exists in
private companies and closely held public companies.
Proprietary ship concerns, Joint
Family Businesses and Partnership Firms which are dominated by a single family
or family members, are converted into Private Limited Companies or closely held
Public Companies in many cases. Many companies where we see groupism and
serious disputes between groups are either private limited companies or closely
held public companies.
When there exist serious disputes
between groups, one group tends to approach Company Law Board or the Company
Court. Usually, when there are serious disputes, one group approaches the
Company Law Board under section 397/398 of the Companies Act, 1956 alleging
oppression and mismanagement.
I do strongly feel that many
petitions under section 397/398 are very complicated to determine and it takes
time for the reasons beyond the control of adjudicatory forum at times.
I have extracted a judgment of
the Hon’ble Supreme Court hereunder and the perusal of the judgment in toto
gives an idea as to the complications in Company Law and the need of adhering
to all corporate regulations.
The brief of the Judgment
extracted below is as follows:
1. A Company is dominated by two
groups.
2. There was difference of
opinions between the said two groups in the Company.
3. The shareholding of two groups
respectively was equal more or less at one point of time.
4. However, it is alleged that
one group wanted to dilute the shareholding of other group and as such resorted
to further allotment.
5. The further allotment was
challenged by the aggrieved group before the Company Law Board by filing an
application under section 397/398 of the Act.
6. The Company Law Board has
set-aside one lot of further allotment on the ground that there is no proof for
allotment like recording of minutes and filing return of allotment with the
concerned authorities etc. Board has also taken note of the fact that there was
no proof of notices of the Board Meeting.
7. The Company Law Board has
upheld another lot of further allotment on the ground that the concerned
parties have the knowledge of allotment. The Company Law Board has relied on
the knowledge, without going into other procedural and factual aspects as I
understand.
8. The Managerial Appointment as
challenged was set-aside as illegal.
9. The matter went to High Court
and finally to the Hon’ble Supreme Court.
10. The Hon’ble Apex Court,
though has referred to the factual discrepancies, felt that a jurisdiction
under Article 136 can not be exercised for determination of facts and finally
the Civil Appeal to the Supreme Court was dismissed.
What the case Highlights?
1. The case highlights the need
of complying with the corporate regulations. The Companies Act, 1956 mandates
for recording of minutes and it has a good logic as it will be evidence for
conduct of meeting. The lack of proof of conduct meetings was also considered
in the judgment under consideration.
2. There is a good logic behind
mandating to file returns or forms with the concerned authorities like the
Registrar of Companies (ROC). In the case under consideration, the delay in
filing the return of allotment was considered and it has become crucial for
determination of the validity of the allotment.
3. Relations between or among the
managerial personnel or the groups in a Company are very complicated. Both
groups may be silent on a procedural irregularity when terms are good, but, the
procedural irregularity becomes fatal when disputes arise among the groups.
4. The silence on the part of a
group or a shareholder in questioning the illegality and the delay in
questioning illegality becomes important while determining a dispute under
section 397/398 of the Companies Act, 1956.
5. In view of the stakes, there
should not be any negligence while pursuing a case before the Company Law Board
under section 397/398 and all facts and law to be pleaded carefully at the
initial stage itself. When the matter goes for appeal, the appellate authority
considers law mainly than laying emphasis on factual issues.
6. The factual finding of the
Board may not be disturbed in many cases and as such it is very important for a
party before the Company Law Board to carefully submit all the relevant facts
and take such steps.
7. It is to be noted that it is
very important for a party to carefully agitate all his rights and preferring
an appeal if need be in the course, as otherwise, many issues will become final
unknowingly.
Extract of the Judgment under
consideration:
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APEPAL NO. 601 OF 2009
(Arising out of SLP (C) No. 4364
of 2006)
Girdhar Gopal Gupta and Ors. ……
...Appellants.
Versus.
Aar Gee Board Mills Pvt. Ltd. and
Ors. …….. ...Respondents.
JUDGMENT
Dr. ARIJIT PASAYAT, J.
1. Leave granted.
2. Challenge in this appeal is to
the judgment of a Division Bench of the Delhi High Court dismissing the appeal
filed by the appellants as not maintainable. Challenge in the appeal was to the
judgment of a learned Single Judge of High Court. Two appeals were disposed of
by a common order dated 7.2.2005.
3. Background facts in a nutshell
are as follows:
M/s Aar Gee Board Mills was
incorporated as private limited company in which two groups hold the shares.
One group is led by Girdhar Gopal Gupta (hereinafter referred to as `Gupta
Group') and other by Guru Charan Dass (hereinafter referred to as `Garg
Group'). The company was incorporated with authorized share capital of Rs.20
lacs (20,000 equity shares of Rs.100/- each). At the time of incorporation, the
Gupta Group subscribed 1722 equity shares and the Garg Group was allotted 1662
equity shares. The shareholding between the two groups was accordingly in the
ratio of 50.9% : 49.1%. This company purchased a sick unit from UPFC in the
year 1985 consisting of land at GT Road Industrial Area Ghaziabad measuring
7215 sq. yards along with the plant and machinery. The company operated the
aforesaid unit for few years after its purchase. However, in October 1994 this
unit had to be closed down. Reasons were stated to be non-installation of water
treatment plant for pollution control and non payment of Government dues. Both
the groups alleged non cooperation and mis-management against each other.
After the closure of the
aforesaid unit, disputes arose between the parties. Both the parties referred
the matter for arbitration. Three arbitrators were appointed who gave their
awards. In the final award given on 18th April, 1998 the arbitrators inter-alia
concluded that the aforesaid unit should be divided equally between the two
groups. There is some dispute about the terms of reference to the aforesaid
arbitrators. Fact remains that although proceedings before the said arbitrators
were initiated under the Arbitration Act, 1940 and, therefore, awards were
required to be made rule of the Court, but no steps were taken in this behalf
by either of the groups.
On 20th August, 1998, Garg Group
filed the return with the Registrar of Companies informing the Registrar of
Companies about the allotment of 9507 equity shares of Rs.100/- each which was
allotted in favour of the members of the Garg Group. It was stated that these
allotments were made in the years 1994 and 1995.
With the allotment of aforesaid
shares in favour of the family members of the Garg group the shareholding pattern
changed drastically.
The shareholding of the Gupta
Group which was hitherto to the extent of 50.9% came down to 13.4% and that of
the Garg Group rose to 86.6%.
Aggrieved by this and some other
acts on the part of the Garg Group, Gupta Group filed CP.65/2001 under Sections
397 and 398 of the Companies Act, 1956 (in short the `Act') before the Company
Law Board (for short the `Board') alleging oppression and mis-management on the
part of the Garg Group. Three acts of oppression and mis-management were
highlighted which are as under:
(a) Illegal allotment of 9507
equity shares as noted above.
(b) Appointment of Mr. Parmanand,
brother of Mr. Guru Charan Dass Garg as the Additional Director with effect
from 20th October, 1994, return in respect of which was also filed with the
Registrar of Companies on 20th August, 1998.
(c) Removal of Mr. Girdhar Gopal
Gupta and Mr. Ram Narain Gupta as directors from the company on 16th September,
1998 without notice of any Board meeting.
The Board decided this petition
vide order dated 25th March, 2004. As far as issue of allotment of shares is
concerned, the Board opined that allotment of 5564 shares to the Garg group was
illegal and set aside the same. In so far as allotment of 3943 shares is
concerned, benefit of doubt was given to the Garg Group on the ground that this
allotment was within the knowledge of the Gupta Group.
On the two counts, this petition
was decided in favour of the Gupta Group as it is held that appointment of Mr.
Parmanand as Additional Director was invalid. Likewise, removal of Mr. Girdhar
Gopal Gupta and Mr. Ram Narain Gupta as directors was also held to be illegal.
The Gupta group has preferred
Co.A.(SB) No.9/2004 against that portion of the Order whereby allotment of 3943
shares is not disturbed. The Garg Group on the other hand, filed Co.A.(SB)
No.11/2004 in respect of other findings which were returned in favour of the
Gupta group. That is how these appeals wee heard together and were disposed of
by a common order.
In so far as issue of allotment
of shares is concerned, Board in para 12 held as follows:
"The last point for
consideration is the allotment of 9507 equity shares which have been allotted
on 25.6.1994, 20.10.1994, 9.1.1995. The respondents have failed to produce
notice/minutes of the board meeting in which 9507 shares were allotted. The
return of allotment of shares in Form No. 2 has been filed in one lot on
20.8.1998 with the ROC after a delay of 4 years. The respondents have submitted
that in the balance sheet signed of 1993-94 by the petitioner indicated
application money of Rs.3,94,320 and accordingly the petitioners were aware of
allotment of 9507 shares. It is true that a sum of Rs. 3,94, 320/- has been
shown in the balance sheet of 1993-94 which the respondents have allotted
further shares of Rs.5,56,380 for which no explanation has been given. It is
also not known whether any money amount to Rs.5,56,380/- was ever received by
the company and how the same has been utilized in the company which was closed
down in 1995."
The High Court noted that the
Board recorded a categorical finding that the respondents in the petition i.e.
Garg Group had failed to produce notice/minutes of the Board meeting in which
9507 shares were allotted. It was also recorded that although these shares were
allotted in two lots in 1994 and 1995, return of allotment of these shares was
filed in one lot on 20th August, 1998 with the Registrar of Companies after a delay
of 4 years.
However, the allotment of shares
to the extent of 3943 shares only was distributed on the ground that the Gupta
Group would have the knowledge much earlier but it was not challenged earlier.
Accordingly, the Board declared the allotment of 5564 shares as illegal and the
same was set aside.
Learned Single Judge first
referred to this aspect. He noted that the Garg Group had failed to produce any
notice or minutes of the Board meetings regarding allotment of shares.
4. Learned counsel appearing for
the Garg Group did not dispute this position before the learned Single Judge at
the time of arguments. His only argument was that the records of the company
were in possession of the Gupta Group and therefore his client could not
produce the records to the aforesaid effect.
5. Learned Single Judge noted
that there was some controversy about the possession of company's records.
Though learned counsel appearing for the Gupta Group referred to the final
award of Arbitrators wherein it has been recorded that some records were in
possession of the Garg Group, yet the High Court did not go into this aspect
because the categorical submission of Gupta Group in the petition was that
there was no notice of allotment of shares and there was no decision of the Board
of Directors to allot the shares. The allegations were not traversed by the
Garg Group in their reply filed. The High Court noted that the respondents
never came out with a case that there was no such notice for allotment of
shares given to the existing shareholders or there was any such decision taken
by the Board of Directors for allotment of shares. That part of the Board's
order was therefore confirmed.
6. The residual issue was the
balance 3943 shares. Here again, a categorical finding recorded was that there
was no notice or Board's decision for allotment of shares. However, benefit of
doubt was given as share application money was reflected in the Balance Sheet
of the company as on 31.3.1994. It indicated share application money of Rs.
3,94, 320/-.
The original Balance Sheet was
produced which shows that it bears the signature of Mr. Girdhar Gopal Gupta as
well as Mr. Guru Charan Dass Garg. The Board from the aforesaid entry in the
Balance Sheet came to conclude that allotment of these shares were within the
knowledge of Gupta Group. The High Court held that such knowledge cannot be
ruled out. It was inferred that Gupta Group had information about the allotment
of shares in the year 1994 and challenge was made only in the year 2001.
Accordingly, it was held that the
view taken by the Board was plausible and possible view and the interference
was not called for.
7. So far as the question
relating to removal of two Directors of Gupta Group and induction of Directors
of Garg Group is concerned, the High Court did not interfere with the decision
of the Board. It was felt that it was an academic exercise as admittedly the
company was not functioning since 1993 and the only aspect relevant for the
purpose would be the distribution of assets of the company.
8. Learned counsel for the
appellant submitted that allotment of shares could only be done by the Board of
Directors and there is no presumption in law of allotment of shares merely
because of receipt of share application money. It is pointed out that benefit
of doubt had been given to the respondents to the extent of 3943 shares as a
result of which the appellants who had a slight majority of shareholding of
50.9 % have been reduced to 23.5% and the respondents who originally held 49.1%
shares have been increased to 76.5%.
9. Reference is made to Article 8
of the Articles of the Company which shows that the shares have to be under the
control of the Board and the Board has the power to allot or dispose of the
same. The same reads as follows:
"The shares be under the
control of the Board who may allot or otherwise dispose of the same to such
persons on such terms and conditions and at such time as the Board may think
fit but subject to the Articles herein contained and also to the restrictions
mentioned in the foregoing clause 2 hereof."
10. The concurrent finding is
that no notice of the Board meeting was given and no Board's meeting was held
in respect of allotment of shares. The said finding has not been under
challenge by the respondents and it has become final. It is, therefore,
submitted that two different yardsticks cannot be applied for 5564 shares and
3943 shares. In essence, it is submitted that the courts below have erred in
giving benefit of doubt in respect of 3943
shares merely because a sum of
Rs.3,94,320/- were shown as share application money in the Balance Sheet as on
31.3.1994. It is submitted that records are not in possession of the appellants
and have been categorically found to be in possession of the respondents. It is
also submitted that the approach under Sections 397 and 398 of the Act was not
belated.
Oppression in converting majority
shares to minority shares is continuous one and, therefore, there is continuous
oppression. It is stated that the appellants learnt about the ostensible issue
of shares by the respondents only when they carried out the inspection with the
Registrar of Companies in the year 2000. Appellants sent a letter on 3.4.2000
to the respondents intimating about the issuance of shares. Since there was no
satisfactory reply, petition under sections 397 and 398 of the Act was filed.
11. So far as the receipt of
share application money is concerned the Balance Sheet only shows that it was
under the head of `share application money' and there was no allotment.
12. In response, learned counsel
for the respondents submitted that the case of the appellants before the Board
was that the respondents have raised the share capital of Rs.3,94,320/- by
allotting 3943 shares at Rs.100/- each on 25.6.1994, 20.10.1994 and 9.1.1995
without issuing notice of such meetings to the appellants. It is pointed out
that admittedly the meetings were held at the registered office of the company
i.e. the residence of the appellants and as such allotments made by the
respondents lead to an act of oppression under Section 398 of the Act. It is
pointed out that the totally a new case is presented before this Court that no
meeting for allotment of alleged equity shares were ever held and the share
application money reflected in the Balance Sheet ending on 31.3.1994 cannot be
converted into share capital and therefore the allotment is bad under Section
286 of the Act admittedly, when the quorum of Directors was duly empowered to
do so.
Moreover, both the Directors were
signatories of the Memorandum and Articles of Association of the Company. It is
pointed out that undisputed facts are as under:
13. The registered office of
respondents 1 and 2 was at 73, Gujarawala Town, Part-II, G.T. Karnal Road,
Delhi which is the residence of the appellants. All the Board's meetings were
held and resolutions therein were passed at the same registered office.
Moreover, all the statutory records were kept at the registered office as
mandated by Sections 193, 196(1), 303 (1), 307(5) and 209 of the Act. The
company was passing through financial crises and there was need to meet the
government dues and installation of an effluent treatment plant in view of the
directions of this Court. The quorum under the Articles of Association was two
Directors as per Clause 33 of the Article of Association. Two persons were
present in the meeting. The Board of Directors allotted 3943 equity shares when
the requisite quorum of two Directors of the respondent group was there. In the
meetings held on 25.6.1994, 20.10.1994 and 9.1.1995 at the registered office as
per Clause 33 of the Articles of Association as well as under Section 287 of
the Act.
Auditor was appointed under
Section 224 and power of attorney was signed by appellant No.1 on 4.9.1995 for
which meeting was held and Balance Sheet as on 31.3.1995 was audited by the
auditor on 4.9.1995 under Section 215 of the Act. Significantly, no mala fides
have been imputed on the part of the auditor and no allegations of fraud or
mala fide intention were imputed upon the respondents before the Board, learned
Single Judge and
not even before this Court.
14. There is no dispute that the
Balance Sheet as on 31.3.1994 was duly signed by appellant No.1 and share
application money amounting to Rs.3,94,320/- was reflected as share application
money in the Balance Sheet with mutual understanding that the same was to be
treated as share capital in next financial year ending on 31.3.1995.
15. To give effect to the
understanding, the same was converted on 25.6.1994, 20.10.1994 and 9.1.1995.
Resolution dated 21.4.1997 was passed and signed by appellant No.1 authorising
respondent No.2 for getting sales tax and income tax assessment completed. In
the sales tax assessment proceedings appellant No.1 was representing the
company. The Balance Sheet was filed at that time before the Assessing
authority. An order dated 16.6.1998 for the assessment year 1994-95 clearly
disclosed that appellant No.1 had appeared before the Sales Tax Authority on
3.6.1998 and produced records of the company. Thus, the Balance Sheet of the
company as on 31.3.1995 was available with appellant No.1 and produced before
the Sales Tax Authority. Therefore, the claim of the ignorance of the records
by the appellants is wrong.
16. It is pointed out that
because of rising prices of estates of the company the petition under Sections
397 and 398 of the Act was filed on 20.10.2001. However, the returns for
allotment of 9507 shares including 3943 shares were filed before the Registrar
of Companies on 20.8.1998.
17. It is submitted that the plea
relating to Section 286 is not available in the present case as meeting
admittedly held and the proof of service of notice was in the possession of the
appellants as part of statutory record.
Even after the meeting on
4.9.1995 wherein auditors were appointed the earlier meetings of the board are
ratified and the appellants cannot question that. If the appellants' claim is
accepted it is inconceivable as to how share application money shown has been
utilized in the subsequent years and as to how they were reflected in the
Balance Sheet.
18. So far as the other submissions
relating to records manipulations it is submitted that this is not a case where
jurisdiction under Article 136 of the Constitution should be exercised.
19. We find that there are some
factual controversies, for example, the effect of the appellants ratifying the
Balance Sheet, appearing before the Sales Tax Authorities and the undisputed
position with respect to share application money as reflected in the financial
statements. It is difficult to believe that even though the conversion of the
share application money was done in June 1994, October, 1994 and January 1995,
it was not in the knowledge of the appellants. The fact that the appellants
were representing the company before various authorities including the Sales
Tax Authorities and Income Tax Authority clearly rules out the possibility of
appellants being unaware of the situation. It is true that the allotment of
shares is different from receipt of share application money but the conduct of
the parties and their understanding of the situation largely determines the
basic issue.
20. Considering the nature of the
controversy we do not consider this to be a fit case where any interference
under Article 136 of the Constitution is called for.
21. The appeal is dismissed.
There will be no order as to costs.
..........................................J.
(Dr. ARIJIT PASAYAT)
..........................................J.
(P. SATHASIVAM)
..........................................J.
(AFTAB ALAM)
New Delhi,
February 2, 2009
Ozg Sarfaesi / DRT Lawyer
Ahmedabad | Pune |
Kolkata | Bangalore | Delhi | Mumbai
VoIP Text / Phone
# 09811415837-61-72-84-92-94
Website: http://sarfaesi.ozg.in
Email: debt@liaisoning.com
