COMPANY LAW BOARD
This company was incorporated in 1948 with registered office at Calcutta. The authorized capital of the company was Rs. 10 lacs consisting of 4000 6% tax free redeemable cumulative preference shares of Rs. 100/-each and 6000 ordinary shares of Rs. 100/-each. The paid up capital of the company, before issue of new and bonus shares, consisted of 4132 ordinary shares of which Rs.45 was partly paid and 1868 fully paid ordinary shares and 3065 fully paid preference shares. These 4132 partly paid shares were originally held in the name of one M/S Gupta Brothers on which Rs.25/- had been paid. In the year 1966, these shares were forfeited and the petitioners became the shareholders in respect of these shares in 1986 on reissue of these to them. According to the respondents, these shares were issued to the petitioners on account of M/sGupta Bros and therefore they were liable to pay the interest attributable to Gupta Bros for non payment of the calls made on them, while according to the petitioners, these shares were held in their own names for their own benefits. It is alleged by the petitioners that without notice to the petitioners, the authorized capital was increased in July, 1994 to Rs.5 crores. The company had revalued its only asset, namely, an industrial plot in Okhla Industrial Area, New Delhi by over Rs.3 crores and the company had issued bonus shares against this revaluation reserve at the rate of 60 ordinary shares for every preference shares as well as ordinary shares, which were fully paid. No bonus shares were allotted to the petitioners. In August 1995, the company issued 3065 equity shares to the preference shareholders in discharge of the preference shares held by them, against the provisions of the Act. In February 1996, the company had issued 25,000 partly paid equity shares at Rs 40 per share, to the respondents group in exclusion of the petitioners. By these acts, the petitioners who were majority shareholders, were reduced to a negligible minority. Such conversion of majority nto minority is a grave act of oppression. The 2nd petitioner was appointed as a director in the AGM held in October, 1986 and the first petitioner was co-opted on the Board from 4th May, 1991 and was confirmed in the General Body Meeting held on 1st July, 1991. It is further alleged that petitioners have not been receiving any notice for the Board Meetings as well as General Body Meetings after 1st July, 1991. However, an inspection of the ROC records showed that both these petitioners had ceased to be directors w.e.f. 1st July, 1991 and that in the year 1992, 4th and 5th respondents had been appointed as directors. Later on when the respondents filed their replies, it transpired that the 4132 partly paid shares held in the names of the petitioners had been forfeited and the said shares had been restored in the name of M/S Gupta Bros. At the last stage of hearing, it further transpired that M/S Gupta Bros had further transferred these shares to someone else. During the proceedings a number of applications were filed, the important one being that, the respondents had illegally leased out the only land of the company to their own sister concerns on terms which are prejudicial to the interest of the company and the shareholders. With these allegations, the petitioners have sought for restoring their names in the register of members, cancellation of the allotment of bonus shares as well as the further issue of 25000 shares to the respondents group, cancellation of the lease agreements entered into with the sister concerns of the respondents and restoration of the petitioners as directors.
M/s Tinplate Dealers Association Pvt Ltd & others Petitioners: 1. Shri Satish Chandra Sanwalka 2. Shri Rajnish Sanwalka 3. Smt. Shubha Sanwalka 4. Shri Manish Sanwalka 5. Shri Ashish Sanwalka 6. M/S Ish Traders Pvt.Ltd. 7. M/S Sha-Kunt Enterprises Pvt.Ltd. Respondents: 1. M/S Tinplate Dealers Association Pvt.Ltd. 2. Shri Satyasheil Gupta 3. Shri Vikaramsheil Gupta 4. Shri Mahesh Narain 5. Shri Brij Raj Kapoor 6. Mrs. Savtri Gupta & Shashi Kant Gupta (Joint) 7. Shri Satyasheil Gupta & Sh.Vikramshell Gupta (Joint) 8. Shri Shashikant Gupta 9. Mrs. Pushpa Satyasheil & Sh.Vikram Sheil Gupta & Jaipal Gupta Sons Pvt.Ltd. (Joint)
BEFORE THE COMPANY LAW BOARD
C.P. No 29 of 1996
Present: 1. Shri S. Balasubramanian, Vice Chairman
2. Shri C.R. Mehta, Member
In the matter of Companies Act, 1956- Sections 397/398 and 111(4)
In the matter of Satish Chandra Sanwalka & others
M/s Tinplate Dealers Association Pvt Ltd & others
1. Shri Satish Chandra Sanwalka
2. Shri Rajnish Sanwalka
3. Smt. Shubha Sanwalka
4. Shri Manish Sanwalka
5. Shri Ashish Sanwalka
6. M/S Ish Traders Pvt.Ltd.
7. M/S Sha-Kunt Enterprises Pvt.Ltd.
1. M/S Tinplate Dealers Association Pvt.Ltd.
2. Shri Satyasheil Gupta
3. Shri Vikaramsheil Gupta
4. Shri Mahesh Narain
5. Shri Brij Raj Kapoor
6. Mrs. Savtri Gupta & Shashi Kant Gupta (Joint)
7. Shri Satyasheil Gupta & Sh.Vikramshell Gupta (Joint)
8. Shri Shashikant Gupta
9. Mrs. Pushpa Satyasheil & Sh.Vikram Sheil Gupta &
Jaipal Gupta Sons Pvt.Ltd. (Joint)
10. Registrar of Companies,West Bengal.
11. M/s Udit Property company
12. M/s Variety Services Saket Private Limited
Present on behalf of parties:
1. Shri A.N Haksar, Sr. Advocate ..for petitioners
2. Shri U.K.Chaudhary, Sr.Advocate ..for petitioners
3. Shri V.B. Gupta, Advocate ..for petitioners
4. Shri Sudipto Sarkar, Sr Advocate ..for respondents
5. Ms Anamika Ghai, Advocate ..for Resp. 6-7
6. Shri Meet Malhotra, Advocate ..for Resp. 1,2,3,7,9,11&12
O R D E R
(Date of final hearing 2-11-2000)
1. The petitioners claiming to hold 4132 partly paid ordinary shares of Rs.100/-each and 3065 fully paid preference shares of Rs.100/-each in M/S Tinplate Dealers Association Private Limited ( the company) have filed this petition under Sections 397/398 and Section 111(4) of the Companies Act, 1956 (the Act) alleging various acts of oppression and mismanagement in the affairs of the company and seeking rectification of the register of members. The main allegations relate to issue of further shares in the company in exclusion of the petitioners, issue of bonus shares contrary to the provisions of law, removal of the petitioners 1 and 2 as directors of the company, appointment of new directors on the Board etc. and they have sought for consequential reliefs.
2. This company was incorporated in 1948 with registered office at Calcutta. The authorized capital of the company was Rs. 10 lacs consisting of 4000 6% tax free redeemable cumulative preference shares of Rs. 100/-each and 6000 ordinary shares of Rs. 100/-each. The paid up capital of the company, before issue of new and bonus shares, consisted of 4132 ordinary shares of which Rs.45 was partly paid and 1868 fully paid ordinary shares and 3065 fully paid preference shares. These 4132 partly paid shares were originally held in the name of one M/S Gupta Brothers on which Rs.25/- had been paid. In the year 1966, these shares were forfeited and the petitioners became the shareholders in respect of these shares in 1986 on reissue of these to them. According to the respondents, these shares were issued to the petitioners on account of M/sGupta Bros and therefore they were liable to pay the interest attributable to Gupta Bros for non payment of the calls made on them, while according to the petitioners, these shares were held in their own names for their own benefits. It is alleged by the petitioners that without notice to the petitioners, the authorized capital was increased in July, 1994 to Rs.5 crores. The company had revalued its only asset, namely, an industrial plot in Okhla Industrial Area, New Delhi by over Rs.3 crores and the company had issued bonus shares against this revaluation reserve at the rate of 60 ordinary shares for every preference shares as well as ordinary shares, which were fully paid. No bonus shares were allotted to the petitioners. In August 1995, the company issued 3065 equity shares to the preference shareholders in discharge of the preference shares held by them, against the provisions of the Act. In February 1996, the company had issued 25,000 partly paid equity shares at Rs 40 per share, to the respondents group in exclusion of the petitioners. By these acts, the petitioners who were majority shareholders, were reduced to a negligible minority. Such conversion of majority nto minority is a grave act of oppression. The 2nd petitioner was appointed as a director in the AGM held in October, 1986 and the first petitioner was co-opted on the Board from 4th May, 1991 and was confirmed in the General Body Meeting held on 1st July, 1991. It is further alleged that petitioners have not been receiving any notice for the Board Meetings as well as General Body Meetings after 1st July, 1991. However, an inspection of the ROC records showed that both these petitioners had ceased to be directors w.e.f. 1st July, 1991 and that in the year 1992, 4th and 5th respondents had been appointed as directors. Later on when the respondents filed their replies, it transpired that the 4132 partly paid shares held in the names of the petitioners had been forfeited and the said shares had been restored in the name of M/S Gupta Bros. At the last stage of hearing, it further transpired that M/S Gupta Bros had further transferred these shares to someone else. During the proceedings a number of applications were filed, the important one being that, the respondents had illegally leased out the only land of the company to their own sister concerns on terms which are prejudicial to the interest of the company and the shareholders. With these allegations, the petitioners have sought for restoring their names in the register of members, cancellation of the allotment of bonus shares as well as the further issue of 25000 shares to the respondents group, cancellation of the lease agreements entered into with the sister concerns of the respondents and restoration of the petitioners as directors.
3. When the petition was taken up for hearing, considering the family nature of the company, we suggested to the parties that they must attempt at an amicable settlement of the disputes. Accordingly, this Bench passed an order on 13.10.1996 incorporating therein the terms of settlement, which inter alia contained that the bonus shares allotted out of the revaluation reserve as well as further issue of 25000 ordinary shares would be treated as cancelled and that the 4132 ordinary shares would be restored in the name of the petitioners. It was also stipulated in that in view of the consent order, the petition would be treated as withdrawn. However, two of the respondents viz. respondent 5 and respondent 9 challenged the consent order on the ground that they were not parties to the same. After hearing the parties, this Bench passed an order on 6th March, 1997 recalling the consent order dated 13.10.1996 and restoring the petition. Thereafter, the respondent raised a preliminary objection that this petition was not maintainable in terms of Section 399 of the Act. After hearing the preliminary objection, this Bench passed an order on 23.7.1997 indicating that the merits of the case would be further heard. Aggrieved by this order, the respondents filed an appeal before Calcutta High Court seeking for a direction to this Bench to pass an order on the maintainability of the petition and the said Court allowed the appeal. Accordingly, this Bench passed a detailed order on 30.12.1997 stating that since the maintainability of the petition involved complicated questions of law and facts, the same could not be decided at the preliminary stage without going through the merits of the case and accordingly the matter was fixed for hearing on merits. During the pendency of the petition, we also recorded an undertaking given by the counsel for the respondents that the status quo in relation to the land belonging to the company at Delhi shall be maintained. The petitioners filed an application CA 45 of 1998 complaining that in breach of the undertaking given by the company not to deal with the property of the company in any manner, the company had started some construction work on the land and as such the respondents have committed an act of contempt. By an order dated 9th March, 1998, we dismissed this application for the reasons recorded in that order. Thereafter, the matter was heard on a number of days and finally concluded on 2.11.2000.
4. Shri U.K. Choudhary, Sr. Advocate appearing for the petitioners submitted as follows: The main contention of the respondents is that the petitioners held the shares on behalf of Gupta Bros. and that the petitioners had no beneficial interest in the shares. This contention is wrong both in law as well as on facts. Referring to the copies of the share certificates enclosed with the petition, he pointed out that all the share certificates contained the name of the petitioners and there is no indication that these shares were held on behalf of M/S Gupta Bros. Further, at the time when the shares were issued, the petitioners had paid Rs.25/- as application money and Rs.10/- each as allotment money and first call on 21.5.1986 and 7.8.1986, respectively. The face value of the shares is also shown as Rs.100/-each. Once shares are forfeited, the name of the earlier shareholder is deleted from the Register of Members and the shares become the property of the company. It is for the Board of Directors to decide the terms and conditions under which the shares are to be re-issued/re-allotted. Such shares could be issued at par, at premium or at a discount. In the present case, the shares were issued at par as is evident from the share certificates itself. Therefore, the contention of the respondents that by an agreement between M/S Gupta Bros. and the petitioners, the later undertook to take over the liabilities towards interest on the amount of call made on M/S Gupta Bros. does not hold water. Further, nothing has been produced before this Bench that there was any written agreement to this effect. It is also wrong to contend that Gupta Bros. whose shares had been forfeited as early as in 1966 should have voiced their grievance about the forfeiture in 1986 resulting in the alleged agreement between the petitioners and M/S Gupta Bros. He also pointed out that the petitioners had, as early as on 16th March, 1986, at the time of making the payment towards application and allotment money of Rs.35/- specifically indicated in that letter that balance Rs.65/- was due " ON CALL". Thereafter, on a call of Rs.10/- made, the same was paid by the petitioners. Thereafter, no call was made by the company on the petitioners to pay up the balance. The very fact that the company had also not asked for compliance with the provisions of Section 187 (C) of the Act would indicate that the shares were allotted/issued to the petitioners in consideration of the money invested by them and therefore the question of the petitioners holding the shares on behalf of the Gupta Bros. does not arise. Referring to Page 183 of Volume 1, wherein a copy of the directors' report dated 6th September, 1986 is annexed, he pointed out even in this report, the directors had stated that the forfeited shares have been re-issued to the petitioners and the balance sheet as on 31st March, 1986 also indicates the fact of forfeiture of shares. He also pointed out that while the forfeited amount is shown in the balance sheet as on 31.3.1987, the same is not found in the balance sheet as on 31st March, 1988 indicating very clearly that the said amount had been refunded to M/S Gupta Bros. and if it is so, then, the question of the petitioners holding the shares on behalf of Gupta Bros does not arise since with receipt of their investment back, M/S Gupta Bros had no further interest in the shares. He also pointed out that the respondents have not furnished any proof to show that any interest was demanded from the petitioners in respect of the forfeited shares.
5. He further pointed out that if any money had been called on the shares, then, the called up money to be received should have been shown separately in the balance sheet as per Schedule VI of the Companies Act. However, the balance sheets till 1992 do not indicate any amount as due on called up money. Therefore, the contention of the respondents that money had been called on these shares is unfounded. Even otherwise, he pointed out that there can be no provision for running interest on the alleged called up money that was due on forfeited shares. According to him, if at all, there was an agreement that the petitioners were to pay interest on the money due from Gupta Bros on the calls made on them, then, the interest up to the date of re-issue to the petitioners should have been crystallized and shown as a premium on the shares so re-issued. However, neither the share certificates nor any correspondence from the company indicates that the petitioners are liable for payment of interest.
6. He further pointed out that the company can also not contend that the shares were transferred from Gupta Bros. to the petitioners since the share certificates do not indicate any endorsement to the effect that they were transferred. Further, if it had been a transfer, then, the petitioners were liable to pay only Rs.75/- and not Rs.100/- since Gupta Bros. had already paid Rs.25/- per share. He also pointed out that the respondents have not established the identity of M/S Gupta Bros. If it had been a firm, it could not have held shares in its name which would be against the provisions of the Act and if it is a HUF, then, it must belong to the group of 2nd respondent in which case, the veil will have to be lifted. Once it is done so, it will be clear that the 2nd respondent in his anxiety to retain control over the company has raised all these untenable issues.
7. Regarding subsequent forfeiture of shares held by the petitioners, Shri Choudhary pointed out that the respondents are not clear as to the grounds of forfeiture. While in the reply, they have stated that the shares were restored in the name of M/s Gupta Bros as there was an attachment order against the shares and with a view to avoid any legal consequences, during the hearing it was urged that the forfeiture was effected owing to the failure of the petitioners to pay the call made by a notice dated 5th January 1991. He submitted that the notice dated 5th January, 1991 alleged to have been issued to the petitioners was never received by them and as a matter of fact the said notice is a fabricated one. In this notice, the address of the registered office is noted as 8A/1, Everest House while as early as in 1986, the registered office had been shifted to 23A, Netaji Subhash Road as is evident from the annual return at Page 112 of Volume 1. Further this notice while seeking payment of the dues at Rs.55/- per share together with interest from 1.1.1967 does not speak of forfeiture. Therefore, it is not a valid notice of forfeiture as contemplated in law. He also pointed out that after forfeiture, the shares have been restored in the name of M/S Gupta Bros. without their discharging the claim on the shares. This itself would show, the learned counsel contended, that the entire episode of forfeiture is with a mala fide intention.
8. In regard to issue of bonus shares against the revaluation reserves, Shri Choudhary pointed out that bonus shares could be issued only against free reserves and not against revaluation reserves. In this connection, he referred to page 282 of Volume 1 wherein the Department of Company Affairs had issued a circular dated 6.9.1994 prohibiting issue of bonus shares against revaluation reserve. In this regard, he also referred to page 283 wherein SEBI had issued similar instructions in respect of listed companies. He also pointed out that there have been no general body resolution for issue of bonus shares as prescribed by law. Referring to the Explanatory Statement contained in Page 148 of Volume 1 in relation to the EOGM on 5.7.1994 which considered the increase in authorized capital to Rs. 5 crores, he pointed out that the need for increase in the authorized capital is shown to be for the purposes of mobilizing funds. However, the company has without receiving any consideration to augment its financial resources issued bonus shares for Rs.3 crores. He also pointed out that even for this EOGM, no notices were received by the petitioners. He further pointed out that bonus shares had been issued to the preference shareholders against the provisions of law only with a view to reduce the petitioners to a negligible minority. He further pointed out that even the allotment of 25000 shares to the respondents' group was made only with a view to reduce the petitioners to minority and not on the basis of any need for funds for the company. Since the petitioners have been associated with the company for over 10 years, in all fairness, they should also have been offered additional shares when the company allotted 25000 shares to the respondents' group. Referring to Re Cetus Electronics P Ltd (62 CC 688), he pointed out that the Company Law Board had held that even in a private limited company, proportionate shares should be offered to all the shareholders and therefore, exclusion of the petitioners in the allotment of further shares is an act of oppression. He also pointed out that the paid up amount on these shares is only Rs40/- per share and therefore, it is obvious that the shares were issue only to convert the majority into minority.
9.He pointed out that during the pendency of the proceedings, the respondents not only commenced construction on the land owned by the company, they also entered into an agreement for leasing the building for a paltry sum of Rs. 1 lac per year for a period of 30 years to two of their own sister concerns. He also pointed out that the lessees of the building are owned and controlled by the respondents. The terms and conditions of the lease deeds are one sided favouring the lessees and against the interest of the company. Since prima facie it appears that by leasing the property of the company to their own entities, the respondents have acted against the interests of the company, the transactions with the lessees should be cancelled and the property restored to the company.
10. Summing up his arguments, Shei Chaudhary submitted that the respondents has acted unfairly and in an oppressive manner against the petitioners only with the view to gain complete control over the property of the company. To achieve this object, the respondents have manipulated and fabricate various records of the company and ultimately, in an indirect manner appropriated the only property of the company in d dubious manner. Therefore he submitted that it is a fit case wherein the CLB should order an investigation iinto the affairs of the company as held in Syed Mahomed Ali Vs Sundaramurthy (28 CC 554 Mad) , besides granting the reliefs sought for.
11. Shri Sarkar, Sr. Advocate appearing for the respondents contended that this petition is not maintainable for various reasons. One is that the names of the petitioners are not in the Register of members and as such they are not members of the company entitling them to file this petition. Secondly, since the shares are partly paid for which calls were due, the petition is not maintainable in terms of Section 399 of the Act. Elaborating this point, he pointed out that the petitioners were holding the shares which were forfeited for non payment of calls made and therefore, when the shares were re-issued to the petitioner, the liability for paying the calls already made continued with the shares. Section 399 stipulates that for invoking the provisions of Sections 397/398 of the Act, the shareholders should have paid all calls made on the shares. Referring to Article 18 of the Articles of Association of the company, he pointed out that in case of shares forfeited for non payment of calls, then, the company need not make further calls on those shares after they were re-issued. According to him, once shares are forfeited, as per this Article, 9 % interest on the defaulted amount, is straightway is attributable. Therefore, when the forfeited shares are re-issued, the new shareholder not only becomes liable to pay the call money, but also an interest at the rate of 9%. Since all the shares held by the petitioners were forfeited shares for non payment of calls on M/S Gupta Bros. and since the petitioners had paid only Rs.45/- as against Rs.100/- being the face value, the petitioners had defaulted in paying the calls already made and also the interest due thereon. Therefore, in terms of Section 399, they are barred from invoking the provisions of Section 397/398 of the Act. He also pointed out that it is wrong to contend that after the shares were re-issued, the company had to make a fresh call since such a course is not possible as the capital of the company had already been raised when calls were made initially on Gupta Bros. Referring to Principles of Company Law by HAJ Ford, he pointed out that the purchaser of forfeited shares is liable for future calls and also for the call which occasioned the forfeiture. On the same proposition, he relied on Randt Gold Mining Company Ltd. Vs. Wain wright ( 1901 1 Ch D. 184) and also on In Re. Randt Gold Mining Company Ltd. (1904 2 Ch D 468) . He also submitted that the liability of a new shareholder will cease only if the Articles so provide and a certificate is granted to the shareholder that he acquires the shares free from such liability. In the present case, neither the Articles provide for freeing the new shareholders from the past liability nor any such certificate had been given to the petitioners. Therefore, he submitted that the calls made earlier which occasioned the forfeiture continued with the shares and therefore the petitioners are disqualified to file this petition in terms of Section 399 of the Act.
12. He also pointed out that in case of forfeited shares, there could not be any fresh allotment but only re-issue which would mean that the earlier liability on the shares would continue even after the re-issue. On this proposition, that re-issue of forfeited shares is not a fresh allotment, he relied on Shri Gopal Jalan & Co. Vs. Calcutta Stock Exchange Association Ltd. ( 33 CC 862). On the same proposition, he cited in Re. Calcutta Stock Exchange Association Limited ( AIR 1957 Cal. 438 ). Relying on Stadmed Pvt. Limited Vs. Kshetra Mohan Saha ( 39 CC 741), he pointed out that whenever a call is made on a share, it becomes a debt due and till the debt is discharged, the said shareholder cannot make an application in terms of Section 399 of the Act. He further pointed out that once the shares are forfeited, the liability of the original shareholder ceases upon such forfeiture and he is no longer a shareholder and the liability devolves on the new acquirer. Only in cases, where the Articles otherwise provide, the shareholder whose shares were forfeited would continue to be liable even that not as a shareholder but as a debtor as decided in Ladies Dress Association Limited Vs. Pulbrook Limited ( 1900 2QB 376.
13. He further pointed out that even assuming that the petitioners were not liable for the calls made on M/s Gupta Bros, yet the company had made a call on the shares held by the petitioners by a notice dated 5.1.91 asking them to pay the balance along with interest by 11.4.1991. There was no response from the petitioners for this notice and there fore the shares were forfeited on 2.8.95. Therefore, they ceased to be members of the company with effect from that date. In regard to forfeiture of shares held by the petitioners, he contended that this Bench has no jurisdiction to enquire as to whether any call was made or not as the same has to be agitated in a separate proceedings under Section 111 of the Act and they cannot agitate the same in the present proceedings. On this proposition, he relied on Gulabai Kalidas Naik Vs. Laxhmi Das Lallubhai Patel ( 47 CC 151 ). According to him, once the CLB finds that the petitioners have not fulfilled the requirements of Section 399 of the Act, then, they have no locus standi to file this petition and as such the same should be dismissed in limine.
14. Dealing with merits of the case, Shri Sarkar pointed out that the respondents holding 1868 fully paid shares were always in majority compared to the petitioners holding 4132 partly paid shares as Article 22 provides that a member is not entitled to vote in respect of shares on which money was due and outstanding. Even otherwise, since no dividend had been declared in respect of the preference shares, the respondents holding 3065 shares were entitled to exercise voting rights in respect of these shares also. If that is so, even in this case, the respondents were in majority. In this connection, he referred to Article 21, according to which, every shareholder is entitled for one vote- both in respect of show of hands as well as poll for every share held by him. Therefore, the contention of the petitioners that they have been reduced to minority by allotment of further shares has no basis.
15. In regard to the cessation of office of directors by the petitioners, he pointed out that the respondents being in majority could decide the composition of the Board of Directors and the petitioners do not have any vested rights to claim the position of a director. He pointed out that the petitioners became shareholders only in 1986 and therefore there is no question of application of the principles of partnership or joint management. Further, he pointed out that even though they ceased to be directors of the company in 1991, they moved the CLB only in 1996 i.e. after a gap of nearly 5 years, that too only after the title to the land was perfected. Therefore, he pointed out that there is absolutely no equity in favour of the petitioners to claim equitable relief from this Bench.
16. In regard to the leasing of the property of the company, Shri Sarkar pointed out that as per the terms of the allotment of the plot, the company had to construct at least a part of the building before June 1998. Since the company did not have sufficient funds, one of the directors undertook construction of a building on the plot by providing funds from another company controlled by him. But for this construction, the possession of the land could have been taken over by the DDA. Since the lessees had spent considerable amount for the construction of the building, the company through it fit to lease out the building to the lessees for a consideration which cannot be on any ground considered to be against the interests of the company. Therefore, he contended that the respondents have not acted in a manner prejudicial to the interest of the company.
17. Summing up his arguments, Shri Sarkar pointed out that the company has not been doing any business for a long time and the only asset of the company is the land. Therefore, the only order that could be passed, even assuming, that this petition is maintainable is that the company should be directed to refund the investment made by the petitioners of about Rs.1.8 lacs with suitable interest or otherwise the petition should be dismissed.
18. We have considered the pleadings and arguments of the counsel. The maintainability is challenged on two counts- one is that since the petitioners held partly paid shares on which calls were due, they are disqualified from filing this petition and the other is that since their shares have been forfeited, they are no longer members of the company and as such they have no locus standi to file this petition.
19. First we shall deal with the first objection. There are two limbs to this objection. One is that since the petitioners held the shares in account of Gupta bros, the liability of Gupta Bros for the call as well as the interest accrued devolved on the petitioners and the other limb is that once a call is made, the liability towards the call is attached to the share and who ever obtains the share subsequently, such a person is liable to pay the call. It is on record that M/s Gupta Bros held 4132 shares which were partly paid at Rs 25/- per share. The company reportedly made a call on the shares at Rs 75/- per share and on the failure of M/s Gupta Bros to pay the calls , the shares were reportedly forfeited in 1966. The stand of the respondents is that by an agreement between M/s Gupta Bros and the petitioners, the shares were reissued to the petitioners on account of Gupta Bros and the petitioners were to discharge the liability of M/s Gupta Bros on account of the interest accrued on the forfeited shares. The question for consideration is whether the shares were/could be held on account of Gupta Bros. In 1986, the petitioners became shareholders in respect of these shares. On 16th May 1986, one of the petitioners had written the following letter to the company. (Annexure RJ 2 ): “I am enclosing herewith the following two Demand Drafts in your favour: 1. No.QBS 344936 dt.17.5.1986 for Rs.7600.00 2. No.QBS 344929 dt.17.5.1996 for Rs.3000.00 - both of Punjab National Bank, New Delhi. Please receive the amount towards application money for allotment of 300 equity shares to me, being Rs.35/- per share paid up and balance Rs.65/- per share due 'ON CALL'. This is in accordance with the discussions I had at Delhi on 12.4.1986 with your goodselves and the erstwhile holders of the shares ( which presently stand forfeited @ Rs.25/- per share paid up)". Similar letters had been written by the other petitioners also In response, the company sent a letter to the petitioners (Annexure P-1) in the following terms: " Thank you for your letter dated 16-5-5-86 and the two drafts enclosed therewith for transfer of shares from Gupta Bros. to you. In compliance of the decision of our Board of Directors, we send herewith the following share scripts:- (1) Share Certificate No.012 for 300 equity shares of Rs.100/-each, paid up value Rs.35/- per share, distinctive Nos. 3901 to 4200. Please acknowledge receipt in good order. We welcome you as our shareholders". Similar replies had been sent to the other petitioners also.
20. It is the contention of the respondents that the last line of the letter of the petitioners itself would indicate that there was an agreement between the petitioners and M/s Gupta Bros that the shares would be held in account of Gupta Bros. We do not find that the contents of this letter support this contention of the respondents. As a matter of fact, while the petitioners letter talks of re-allottment, the company’s letter talks of transfer of shares held by Gupta Bros. In either case, M/s Gupta Bros having ceased to be members in 1966, could have nothing to do with the shares about which, they could have some understanding with the petitioners. Therefore, the question of the petitioners holding the shares on account of Gupta Bros, who had ceased to be members of the company two decades back did not arise. Further, if any one were to hold shares on behalf of another, then the other person should have paid for the shares and the holder would only be a name lender. In the present case, the petitioners were not given any credit for the amount of Rs 25/- per share paid by Gupta Bros and it is the petitioners who had paid Rs 45/- per share after the shares were reissued. It is incomprehensible that a person who pays the consideration for the shares, would agree to hold the shares on account of someone else. Further M/s Gupta Bros have not come forward to make this claim, while the company has done so even though the company records do not indicate that the provisions of Section 187C have been complied with for the company to take this stand. Further, we also note, as pointed out by Shri Chaudhary, that after 1986, the forfeited amount is not shown in the balance sheet under any head, giving raise to a presumption that the amount forfeited had been refunded to Gupta Bros. If is so, then, they had no further interest the company. Therefore, there is absolutely no basis for the claim that the shares were held by the petitioners on account of Gupta Bros. Accordingly, we reject this stand of the company that the shares were held by the petitioners on account of M/s Gupta Bros.
21. Now the next issue is as to what was the amount payable by the petitioners when the forfeited shares were reissued to the petitioners. According to the company the shares were transferred, while according to the petitioners the shares were reallotted. Since the letter of the company mentions that the share certificates were being sent as per the resolution of the Board, if the respondents had enclosed a copy of the Board resolution, the matter would have been clearer. If the shares had been transferred, then, there should be some endorsement on the shares to that effect. We do not find any such endorsement. The certificates appear to be new certificates with endorsements at the reverse that Rs 25 paid as application on forfeited shares, Rs 10 as allotment money and Rs 10 as 1st Call. Therefore, the question of transfer of shares does not arise. Shri Sarkar pointed out that forfeited shares could never be re-allotted as with every allotment, there would be addition to the subscribed capital of the company. However Article 17 empowers the directors to sell re-allot or annual the forfeiture. The very fact that the shares had not been transferred, they should have been either re-allotted or reissued. In paragraph 5.2.10 of the reply, the respondents themselves have averred that the shares were reissued. The only issue for determination is the value/price at which they were reissued. According to the respondents, the petitioners, who held the shares on account of Gupta Bros had to pay Rs 100 per share together with interest at 9% from the time the shares were forfeited in 1966. In the reply, in paragraph 5.2.10, they have computed the amount payable by the petitioners as Rs 17,97,240 comprising of Rs 2,27,260 towards balance of Rs 55 per share and Rs 15,17,160 toward interest for the period from 1.1.67 to 31.12.90. We have already held that there is no material to show that the shares were held by the petitioners on account of Gupta Bros. Normally, once the shares are forfeited, then, there will be no liability towards interest after the date of forfeiture since, with the forfeiture, the membership of a share holder in the company ceases. As a matter of fact, in the case reported in 1868 3 Ch Appeals 412, it was held that, in the absence of any provisions in the Articles, even the liability of a member to pay the calls which occasioned the forfeiture ceases upon forfeiture, since he would no longer be a member of the company. However, if the Articles so provide, then the original shareholder would be liable, but not as a shareholder but only as a debtor. (1904 AC 165). These cases indicate that every thing would depend on the provisions of the Articles of a company. Article 18 of the Company provides “Any member whose shares have been forfeited shall, notwithstanding such forfeiture, be liable to pay and shall forthwith pay to the company all calls installments, interest and expenses owing upon or in respect of such shares at the time of forfeiture together with interest thereon, from the time of forfeiture until payment at nine per cent per annum and the director may enforce the payment of such moneys or any part thereof if they think fit, but shall not be under any obligation to do so.” Thus, even from this Article, it is clear that it is the member whose shares have been forfeited is liable for payment of interest and the interest is not attached to the shares to make the person to whom the shares are reissued, liable for the interest. Therefore, the claim of the respondents that the petitioners were liable to pay interest from 1967 has no basis.
22. The next issue is whether the petitioners were liable to pay the calls which occasioned the forfeiture. According to the learned counsel for the respondents, once a call is made, the call is attached to the shares and whoever takes the share subsequently, he is liable to pay the call so made and the company need not have to repeat the call. This proposition that once a call is made, then the liability to pay the call is attached to the share is no doubt true, but whether the person who subsequently takes the share is liable to pay the call would depend upon the manner by which he acquires the share. When a person acquires a share by transfer of a partly paid share on which a call has been made, he is liable for the calls outstanding on the share so transferred. Whether the same principle could be applied when a forfeited share is reissued/re-allotted requires determination. Normally, when a share is forfeited, it becomes the property of the company and the Board of Directors may deal with the forfeited shares in any manner they think fit. It is what has been specifically provided in Article 17 of the company also. The shares could be reissued at a premium or at a discount after giving credit to the amount already paid, or at par. The Board could also require the person to whom the shares are reissued to pay the entire amount before reissue or accept part of the amount, leaving the balance to be called later in one or more installments. Therefore, once a share is forfeited, it is for the Board to determine the manner in which the outstanding call is to be adjusted. Shri Sarkar heavily relied on the decision of Chancery Division in Randt Gold Mining Company Case. In that case, certain shares were forfeited for non payment of calls and were resold by the company to a purchaser, to whom a certificate was issued stating that he was deemed to be a holder of the shares discharged from all calls due. The Article of that company was more or less in line with the Article 22 of the company in the present case, which reads “A holder of any shares shall to be entitled to vote either by show of hands or at polls unless there have been paid to the company all sums of money then due from that holder in respect of these shares". The issue before the Court was whether, the purchaser of the forfeited shares on which calls were due from the original shareholders, could exercise votes on the shares or not. The Court held that the purchaser was not entitled to vote since calls were due and payable by the original shareholder. According to Shri Sarkar, if the same principles are applied then the petitioners holding forfeited shares on which calls were due, cannot file this petition, as Section 399 of the Act stipulates that a person holding shares on which calls are due, is not entitled to file a petition under Sections 397/98 of the Act. -He also cited the decision of House of Lords in respect of the same company reported in 1904 PC 165. In this case, it was held that the person to whom forfeited shares are issued, he would be relieved from any liability under the previous call which has been made by the company and from any consequences of not complying with that call, but he is subject to any call which the company may properly make. He is in the same position in all respects as if those previous calls had never been made. It was also observed in that case that the purchaser of the forfeited shares is to get a certificate of proprietorship like every body else specifying what has been paid on his shares and leaving him liable in respect of the balance to any call which the company may properly make. According to us, the decision of House of Lords seems to lay down the correct position of law. Once a share is forfeited, it becomes the property of the company and the person to whom the shares are re-issued, is only governed by the terms under which the shares are re-issued as for all practical purposes, he is acquiring the shares afresh from the company. In the present case, the share certificates indicate the face value of Rs.100/- and on the reverse of the share certificates, it is indicated that a sum of Rs.45/- has been paid. Therefore, the petitioners are liable to pay Rs.55/- per share as and when further calls are made. It is also clear from the letter dated 6.5.86 of the petitioners that they themselves had indicated that the balance of Rs.65/- per share due ON CALLS. We also note that subsequent to this the petitioner had paid a sum of Rs.10/- as first call on 7.8.1986. In none of the Balance sheets of the company upto 1991, nor in the annual returns it is indicated that any call was remaining unpaid on these shares, clearly indicating that neither the company had intended that the petitioners would be taking the shares subject to the calls remaining unpaid, nor the same was the fact. As a legal proposition, we are of the firm view that once a forfeited share is re-issued, the person who acquires the shares is governed only by the terms of reissue. If the terms specify that he is taking the shares subject to the calls outstanding, then only calls could be treated as outstanding. In the absence of such a stipulation, then he takes the shares free of such outstanding calls. In the present case, there is no such stipulation and therefore, the shares were free of the calls outstanding. In view of this finding, the claim of the respondents that since the petitioners held his shares on which a call was due prior to forfeiture and as such are disqualified to file a petition in terms of Section 399 cannot be sustained.
23. The alternate objection of Shri Sarkar is that since the shares held by the petitioners have been forfeited, they are no longer members of the company and as such cannot file this petition. He also argued that we cannot look into the issue relating to forfeiture in this petition and that they have to file a separate petition under Section 111 of the Act to get the matter adjudicated. On this proposition, he also cited Gulab Rai case (Supra). In the present case, when the petition was filed, the petitioners were not aware of the forfeiture of their shares. Only subsequently, on filing of the reply, it came to light that the company had forfeited the shares held by the petitioners. Therefore, on the day of filing of the petition, there was nothing to show that the petitioners were aware that the shares had been forfeited and that they were no longer members of the company. This fact distinguishes Gulab Rai case wherein the petitioners had, in the petition itself, challenged their removal as members. Further, this Board has been taking a view that if in a petition under Section 397/98, the allegations of oppression relate to removal as a member or conversion into a minority, then the petition could be heard, notwithstanding the fact that the conditions of Section 399 are not fulfilled, first to determine their entitlement. In Dipak G. Mehta Vs. Shree Anupar Chemicals India Private Limited, (1999 33 CLA 393 CLB), this Board took this view and considered the maintainability of the petition first in terms of Section 399. Therefore, this objection that this Bench cannot look into the issue relating to forfeiture cannot be sustained.
24. According to the company, it had issued a notice to the petitioners on 5.1.1991 requiring them to pay Rs.55/- per share along with interest accrued since 1.1.1967 to 31.12.1990 amounting to Rs.380/- per share. The petitioners did not pay the amount. In a Board Meeting held on 2.8.1995, all the shares held by the petitioners were restored in the name of M/S Gupta Bros. (Paragraph 5.10 of the reply). The reason for restoring the shares in the name of M/S Gupta Bros., as per the reply, is that it came to the knowledge of the company that before the shares were re-issued to the petitioners, there was an attachment order and therefore to avoid any legal consequences arising out of violation of the court order, the shares were restored in the name of M/S Gupta Bros. Thus, we find the forfeiture of the shares is not on account of the failure of the petitioners to pay the call alleged to have been made by the letter dated 5.1.1991. The respondents have not produced any document to evidence the court order to justify their action. However during the earlier arguments, a plea was raised that the share forfeited for non payment of the call made by the letter dated 5.1.91. This Bench had specifically pointed out this contradiction in its order dated 30th September, 1997. Assuming that the forfeiture was on account of the failure of the petitioners to pay the call made by the notice dated 5.1.91, then we find the respondents have not countered the various infirmities pointed out by Shri Chaudhary on this notice. Further, this notice demanded a substantial amount towards interest, which we have already held not liable to be paid by the petitioners. In case of forfeiture, strict compliance with the usual procedure is mandatory failing which the forfeiture is invalid. As per Article 30 of Table A stipulates that the notice calling for payment also should indicate that failure to pay the call would result in the forfeiture of the shares. In the notice dated 5.1.91, there is no such indication. Further, even though the notice was dated 5.1.91, the alleged forfeiture took place only in 1994. That is nearly after 5 years. Therefore, the company should have issued a specific notice of forfeiture before effecting the same. In view of this we have no hesitation to hold that the forfeiture is invalid and accordingly declare that the petitioners continue as shareholders of the company, and as such are qualified to file this petition in terms of Section 399 and therefore this petition is maintainable. The company will rectify the register of members by entering the names of the petitioners within 2 months of this order. The company is at liberty to make further call for payment of the balance Rs 55 per share.
25. The main grievance of the petitioners is that they have been converted into a minority by issue of bonus and equity shares. As far as issue of bonus shares is concerned, it is on record that the company had issued bonus shares against the revaluation reserve. Both the counsel argued on the correctness or otherwise of issue of bonus shares out of the revaluation reserve as also issue to the preference share holders. There is no specific provisions in the Companies Act regulating issue of bonus shares. While in respect of listed companies, the SEBI has issued guidelines, in respect of other companies, the Central Government has also issued guidelines. In the Act, only Table A, contains certain provisions relating to capitalization of profits. Article 96 of Table A deals with the issue of bonus shares. Article 96(3), reads “A share premium account and a capital redemption reserve account may, for the purposes of this regulation, only be applied in the paying up of unissued shares to be issued to members of the company as fully paid bonus shares”. This Article has limited the power of a company to issue bonus shares only against share premium account and capital redemption account. This company has adopted Table A as it Articles with certain modifications. As far as Article 96 of Table A is concerned, there is no modification in the Articles of the company and therefore, the company could not have issued bonus shares against the revaluation reserve account. Therefore, the issue of bonus shares, being against the provisions of the Articles, has to be declared as invalid. In view of the violation of the provisions of the Articles, we are not dealing with as to whether bonus shares could be issued to preference shareholders and whether the issue was against the guidelines issued by the Government.
26. The next allegations relates to preference shares. It appears that in a Board meeting held on 5.7.94, it was decided to issue 3065 equity shares for the purpose of redemption of preference shares out of the proceeds of the issue and before doing so, bonus shares were issued against these preference shares. Again it appears that the preference shares were redeemed on 2.8.95. If it is so, then there was no need for the company to have convened an EOGM on 9.11.96 to seek the permission of the general body for issue of further preference shares in redemption of the existing preference shares. Since the petitioners have already filed a suit in Delhi High Court challenging the holding of this meeting and since the proceedings are pending we are not considering this issue in this order.
27. The petitioners have questioned the increase in the authorized capital without which further shares could not have been issued, on the ground that the company had not sent the notice for the general body meeting on 5.7.94 in which the resolution to increase the authorized capital was passed. Eventhough the company has not produced any evidence to show that notices were issued to the petitioners, mere increase in authorized capital cannot be construed as an act of oppression. However, if, afterwards, shares are issued resulting in prejudicial effect on a set of shareholders then, such further issue could be considered to be an act of oppression. Consequent to the increase in the authorized capital, bonus shares were issued as also further 25000 shares. In regard to bonus shares, we have already held that the same was in violation of the Articles. Further issue of 25000 shares was made in March 1996. At this time, as per the version of the respondents, the petitioners had ceased to be members of the company on account of the forfeiture of their shares, which also we have held as invalid. In regard to the need for additional funds, we find that on mobilization of Rs 10,00,000 arising out of issue of 25000 at Rs 40 per share-partly paid-, the company had paid about Rs 15 lakhs to DDA. We find from the resolution of the Board dated 28-2-96, that the shares were offered only to the 2nd respondent, without any offer being made to any other shareholders. Since there were only two group of shareholders, not withstanding the fact that the company is a private limited company, equity and fairness demanded that the petitioners, being the only other group should also have been offered shares. When there are only two groups of shareholders in a company, offering and allotment of shares to only one group has to be considered to be an act of oppression meriting appropriate relief. Since the money raise by the issue of shares ahs been utilized for the benefit of the company, instead of canceling the allotment, we direct, that the 2nd respondent should transfer such number of shares to the petitioners group which would maintain the original ratio between the two groups on the paid up equity share capital in the company. To enable the 2nd respondent to transfer the shares, the petitioners should remit the consideration for the shares at Rs 40 per share to the company within two months of this order, and the company will arrange to have the shares transferred. The company will also ensure that in all future issues, the petitioners are offered proportionate shares.
28. Another grievance of the petitioners is that their group had two nominees on the Board of which one is reportedly had vacated his office under Section 283(1)(g) and the other was not reelected. According to them they came to know of their cessation of office only in 1995 and that they never receive any notice for the Board meetings after 1991. We are not in a position to appreciate as to how the petitioners, who know that periodical Board meetings ought to have been held, did not seek any information from the company. Any way, we do not propose to examine this grievance in detail, as we feel that the company having two identifiable groups of shareholders, should have directors from both the groups. In the consent order dated 30.10.96, we had recorded that the 1st petitioner would be co-opted on the Board and in fact he was co-opted. Therefore, we direct that one of the nominees of the petitioners will be inducted into the Board of directors within a month of this order, and this nominee will continue on the Board subject only to that the petitioners will have the right to change that nominee by a notice to the company. He will not be liable for retirement by rotation nor be removed by the general body. He should be given notice for all the Board meetings well in advance together with agenda for the meetings.
29. The allegations in relation to the landed property of the company are many fold. The company ceased to have any business for a number of years. In the year 1985, the DDA had allotted a plot of land to the company on a perpetual lease, with a stipulation to complete construction within a time frame. According to the company, it could get UCLR clearance only in 1994. When the company sought for extension of time for completion of the building, the DDA levied certain composition fee against which the company filed a writ petition before the Delhi High Court which directed the company to pay about Rs 15 lakhs to DDA. According to the company, DDA gave time upto 19.4.98 to construct a minimum area of the plot and since, the company could not mobilize funds on its own, with a view to save the land from repossession by DDA, the 3rd respondent and his mother- the 9th respondent who were the directors of the 11th respondent undertook to mobilize funds through the 11th respondent at a very cost of 24% for constructing a building of about 4000 s.ft. Like wise the 12th respondent also undertook to construct a similar adjoining building. In consideration there of both these respondents entered into a lease agreement with the company in respect of these buildings. Both these respondents were added as parties on an application made by the petitioners. The petitioners have not challenged the fact relating to the DDA stipulation of construction of minimum area by April 1998. They have only raised the issue that the company could have by itself raised the funds for construction of the building instead of allowing one on the directors to do so on the understanding that the building would be given on lease to them on terms which are highly detrimental to the interest of the company. We do find from the terms of lease that they are one sided and against the interest of the company. The consideration for the lease is Rs 50000 per year for each portion of the building and the lease is for a period of five years, with the lessees having the option to extend the same for 5 further periods of 5 years each on the same terms and conditions. In other words, for 30 years, the company would be getting only Rs 50000 from each of these two lessees. The terms of lease also permit the lessees to further lease or sub lease the building to any one on any terms without recourse to the company. We also find that one of the terms of the lease is that the lessees would have the first option to develop the remaining portion of the land as and when the company decides to develop the same. Thus for all practical purposes, the land of the company has been handed over to the lessees on a platter that to the entities owned and controlled by the directors themselves Since it is the only property of the company, the directors should have taken the shareholders into confidence before entering to the lease agreements. There is nothing on record to show that the same was placed before the shareholders nor before the Board. Therefore, we direct that the company should, within a month after complying with the directions contained in the earlier paragraphs relating to shares, convene a general body meeting of the company and place the terms and conditions of the lease for its consideration and if the general body were to modify any of the terms and conditions of the lease, then the same will be binding on the 11th and the 12th respondents.
30. Thus on an over all assessment of the allegations, we are of the view that the respondents had been guilty of oppressing the petitioners, by deleting their names from the register of members, by issuing bonus shares against the provisions of the Articles, by which the percentage holding of the petitioners was reduced, which was further reduced by issue and allotment of further 25000 shares and by disassociating the nominees of the petitioners from the Board. In respect of all these acts of oppression ,we have, in the relevant paragraphs of this order, given suitable directions to be complied within a set time frame, which the company should adhere to.
31. With the above directions we dispose of this petition with no order as to cost.
(C.R Mehta) (S.Balasubramanian)