COMPANIES ACT, 1956: ss. 397 and 398 - Allegations of oppression and mismanagement, illegal allotment of equity shares resulting in conversion of majority shareholding into minority shareholding, appointment of Additional Director and removal of two Directors - Company Law Board holding allotment of 5564 shares out of 9507 shares as illegal and giving benefit of doubt as regards allotment of 3943 shares as it was within the knowledge of petitioners, and holding appointment of Additional Director and removal of two Directors illegal and in favour of petitioners - Appeal by petitioners as regards allotment of 3943 shares - HELD: There being some factual controversies as regards petitioners ratifying the Balance Sheet and their representing before authorities including sales tax and income tax authorities, which clearly rule out the possibility of petitioners being unaware of the situation - Considering the nature of controversy it is not a fit case where any interference under Article 136 of the Constitution is called for - Constitution of India, 1950 - Article 136. Respondent no. 1-Company was incorporated as a private limited company in which shareholdings of the group led by appellant no. 1 was 50.9% and that of the group led by respondent no. 2 was 49.1%. The company purchased a sick unit from UPFC in the year 1985 alongwith its land admeasuring 7215 sq. yards in the Industrial Area of the city. Later the unit was closed. Thereafter disputes arose between the parties and the matter was referred for arbitration. Awards were given, but no steps were taken to make the awards rule of the court. On 20.8.1998 the respondent no. 2 group filed return before the Registrar of Companies showing about the allotment of 9507 equity shares of Rs.100/- each to have been made in their favour in the years 1994 and 1995. With the said allotment of shares shareholding of the appellant group came down to 13.4% and that of the respondent group rose to 86.6%. The appellant group filed a petition u/ss 397 and 398 of the Companies Act, 1956 before the Company Law Board alleging oppression and mismanagement on the part of respondent group for illegal allotment of 9507 equity shares, appointment of an Additional Director w.e.f. 20.10.1994 at the instance of respondent group and removal of two Directors of the appellant group from 16.9.1998. The Company Law Board held that the allotment of 5564 shares out of 9507 equity shares, was illegal and set aside the same. As regards the remaining 3943 shares, benefit of doubt was given to respondent group on the ground that this allotment was within the knowledge of the appellant group. The Board further declared appointment of Additional Director and removal of two Directors as illegal. Both the parties filed appeals, which were dismissed by the High Court. In the instant appeal, it was contended for the appellants that allotment of shares could only be done by the Board of Directors and there was no presumption in law of allotment of shares merely because of receipt of share application money; that by allotment of 3943 shares the appellants' majority shareholding from 50.9% was reduced to 23.5% and as such, the converting of majority shares to minority shares was a continuous oppression.
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
Aar Gee Board Mills Pvt. Ltd. and Ors. ...Respondents
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
(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
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
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
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
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
"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
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
21. The appeal is dismissed. There will be no order as to costs.
(Dr. ARIJIT PASAYAT)
February 2, 2009