- (1.) THIS order will dispose of Appeal Lodging Nos. 1, 2 and 4 of 1999. For the sake of convenience, the facts have been taken from Appeal Lodging No. 1 of 1999. These appeals have been filed against the order dated 22nd March, 1999, hereinafter referred to as "the impugned order"; passed by the Principal Bench of the Company Law Board (hereinafter referred to as "the C. L. B. "), at New Delhi in Company Petition No. 46 of 1998. The aforesaid Company Petition was filed by respondent Nos. 1 to 5 herein being petitioners therein under sections 397 and 398 of the Companies Act, 1956, hereinafter referred to as "the Act". The facts leading to the filing of the present appeals may briefly be noticed.
(2.) APPELLANT No. 1 Company was incorporated on or about 26th July, 1994 with an authorised and paid up share capital of Rs. 5 lakhs. Sometime in March, 1995, respondent No. 1 along with appellant No. 2 and respondent Nos. 6, 7 and 8 purchased 100 per cent shareholding of the Company (respondent Nos. 1 to 5 hereinafter will be referred to as "group A". The other shareholders will be hereinafter referred to as "group B" ). Respondent No. 1 held 20 per cent shareholding of the subscribed capital as he was holding 10,000 shares out of 50,000 shareholding of the Company of Rs. 10/- each. On 8th March, 1995 Dipak Mehta (respondent No. 1) and Laxman N. Godbole (respondent No. 7) were appointed as Additional Directors. On 21st May, 1995 first respondent resigned as a Director. In the Board meeting, appellant No. 2 Shri Bardeskar was appointed as Director. On 30th September, 1995 Bardeskar and Godbole were appointed as Directors at the Annual General Meeting of the Company. Members of the Kasargod family who were the original shareholders of the Company resigned from the Directorship during May, 1995 and December, 1995. Associates of first respondent gave a loan of Rs. 22 lakhs on interest to the Company. On 7th December, 1995 the authorised share capital of the Company was increased to Rs. One crore pursuant to a Resolution passed by EOGM. On 8th December, 1995 the Board of Directors resolved to issue further shares and to accept the share application moneys. On 15-1-1996 by a Board Resolution, Dipak Mehta, Mrs. Bhanu Mehta, Devan Mehta and Kunal Mehta along with Wandrekar were appointed as Additional Directors. During the period January to March, 1996, appellant No. 1 Company received share application moneys aggregating to Rs. 54,30,000/ -. Out of the share application moneys, Group A had deposited Rs. 29 lakhs. This contribution was made by converting loan of Rs. 22 lakhs and payment of Rs. 7 lakhs. The balance Rs. 25,30,000/- was contributed by Group B. Even though the authorised share capital was enlarged and amounts were received towards share application moneys, no allotment of shares was made and paid up capital of the Company continued to be Rs. 5 lakhs till 7th May, 1998. The balance-sheet for the year ending 31st March, 1996, 31st March, 1997 and 31st March, 1998 records the share capital of the Company as Rs. 5 lakhs and share application moneys were shown as Rs. 52,50,000/- as on 31st March, 1996 and Rs. 54. 30 lakhs as on 31st March, 1997 and 31st March, 1998. The aforesaid facts were reflected in the returns filed by the Company with the Registrar of Companies for the aforesaid three years. At the Annual General Meeting of the appellant No. 1 Company held on 30th September, 1996, respondent Nos. 2 to 4 belonging to Group A who were appointed as Additional Directors ceased to be Directors as they were not confirmed as Directors. Thus, with effect from 30th September, 1996 the following persons were appointed as Directors on the Board of the Company. i)P. P. Bardeskar. ii)P. V. Wandrekar. iii)L. N. Godbole. iv)Dipak Mehta. v)Devan Mehta. Thus, there were three Directors from Group B and 2 Directors from Group A. Disputes arose between Group A and Group B as a result thereof the plant of the Company was closed. It is further pleaded that the first respondent with a view to create deadlock submitted false Resolution to the bankers purporting to be the Resolution of the Board meeting thereby providing the first respondent to be one of the signatories to the Bank Account. By letters dated 5th April, 1997, 9th April, 1997 and 20th April, 1997, the first respondent asked the Bank to stop operations of the account and a sum of Rs. 12 lakhs of the Company has been blocked. Apprehending that the first respondent will fabricate the records with a view to convert the share moneys into share capital, these facts were placed on the record by letter dated 9th April, 1997. Respondent Nos. 1 to 5 are stated to have fabricated the Board Resolution and purported to file return in Form No. 2. A meeting of the Board of Directors was held on 18th April, 1997 but no business was transacted. This fact was also recorded by letter dated 19th April, 1997 addressed by Group B to Group A. On 12th April, 1997 respondent No. 1 lodged a police complaint making several false allegations. A statement was made before the police signed by the respondent and the second appellant. In April, 1998 respondent Nos. 6 to 8 decided to transfer their shareholding in favour of appellant Nos. 7 to 20. Notice of the intended transfer of the shares was given to the Company. On 13th April, 1998 notice of the Extraordinary General Meeting to be held on 29th April, 1999 was sent to all the shareholders. The Board at its meeting held on 13th April, 1998 gave its approval in principle for the proposed transfer. On 29th April, 1998 the Board duly approved the transfer in favour of appellant Nos. 7 to 20. At the same Extraordinary General Meeting i. e. 29th April, 1998, respondent Nos. 1 to 4 (Group A) were removed as Directors of the Company. Appellant Nos. 3 to 6 were appointed as Additional Directors. It was also decided to repay the share application moneys paid by various persons in 1995-96. Accordingly a sum of Rs. 18,10,000/- was refunded to respondent Nos. 6 to 8. Respondent Nos. 1 to 5 were also offered the share application money which was not accepted. On 8th May, 1998 and 20th May, 1998 appellant No. 1 further allotted 58,660 and 11340 shares respectively making a total of 7 lakh shares. Thus the first respondent was now holding only 10000 shares out of 1,20,000 shares. By an agreement dated 8th May, 1998 manufacturing of chemical Imidazole was being carried out by the Company for Aarti Drugs Limited, appellant No. 19. Another statement was recorded by the police on 4th June, 1998 wherein appellant No. 2 had stated that his statement before the police was not admissible since his mental condition at that time was not proper and the Board of Directors earlier consisted of appellant No. 2, Godbole, Wandrekar, Dipak Mehta and Devan Mehta. Group A filed Company Petition No. 515 of 1998 under section 433 (f) of the Companies Act, hereinafter referred to as "the Act". In the pleadings before the High Court, Group A specifically admitted that Company had not allotted shares of the amount of Rs. 29 lakhs. It was further specifically admitted that respondent Nos. 2 to 5 were never shareholders of the appellant No. 1 Company. It was stated that the acts of mismanagement complained of were in their capacity as Directors of the Company who were not members. Therefore, it was stated that the remedy under sections 397 and 398 of the Act would not be available. This Court by order dated 24th July, 1998 dismissed the Company petition. It is pleaded that this Court came to the conclusion that respondent Nos. 6 to 8, appellants herein, were holding 60 per cent of the shares and were in majority. It was also held that respondent No. 1 had only 20 per cent shares and was in minority. After the dismissal of the Company petition, respondent Nos. 1 to 5 filed the petition before the C. L. B. under sections 397 and 398 of the Act. The petition has been allowed by the C. L. B. Hence two appeals by Group B and the third appeal by Group A.
(3.) MR. Dwarkadas the learned Counsel has submitted that there can be no oral agreement which would supercede the Memorandum of Articles of Association. There is no provision that the shareholding are on equal footing as pleaded by the respondents. In fact, the Articles of Association provided on the contrary that shares can be only transferred to a person named by the Directors. In other words, shares can only be transferred to a person whom the Directors nominate. Furthermore, this was a pre-existing Company which had been acquired. Thus the Memorandum of Articles of Association in existence continued to hold the field. Therefore, Group A is only 20 per cent shareholder. If a quota of shareholding was to be provided, the same could have been done only by amendment of the Articles of Association. It is submitted that C. L. B. has wrongly set aside the transfer of the shares in favour of appellant Nos. 7 to 20. Even then the shareholding of the first respondent remained at 20 per cent at all material times. According to Mr. Dwarkadas, the C. L. B. has committed serious factual errors which would amount to errors of law. Admittedly petitioner No. 1 i. e. respondent No. 1 alone was a shareholder of the Company. Petitioner Nos. 2 to 5 admittedly did not hold any shares in the Company and could not have complained and did not have any locus standi to file a petition by virtue of section 397. Thus Group A consisted only of one individual i. e. petitioner No. 1. Majority shareholding i. e. 80 per cent was held by Group B. This group comprised of appellant No. 2 and respondent Nos. 6 to 8 prior to 29th April, 1998 and thereafter comprised of appellant Nos. 2 and 7 to 20. Except for a short period during January, 1996 and September, 1996 Group A never enjoyed a majority on the Board. Thus the findings of the C. L. B. to the contrary cannot be upheld. It is further submitted that there was no glorified partnership between members of Group A and Group B. This has been held to be so by Justice Deshmukh in the order dated 24th July, 1998 while dismissing the winding up petition. No appeal having been filed against the said order, the issue is clearly res judicata between the parties. Equally the finding that there was no deadlock and the petitioner No. 1 alone held shares in the Company representing 20 per cent of the paid up capital was also conclusive final and binding and, therefore, res judicata. The finding to the effect that the petitioners had failed to make out a case of just and equitable winding up of the Company is binding not only on the parties but also on the C. L. B. . In the face of the above, it is submitted that the C. L. B. has given completely perverse, erroneous and inconsistent findings. The C. L. B. has wrongly held that Group A held 50 per cent share capital and/or was entitled to 50 per cent share capital and a majority on the Board. The findings rendered by the C. L. B. that the transfer of the shares by respondent Nos. 7 to 9 in favour of appellant Nos. 7 to 20 being contrary to Article 12, is contrary to findings rendered by the High Court. Equally the findings with regard to removal of petitioner Nos. 1 and 4 as Directors at the Extraordinary General Meeting held on 29th April, 1998, the allotment of shares to appellant Nos. 7 to 20 at the Extraordinary General Meeting and the appointment of respondent Nos. 3 to 6 as Additional Directors at the Board meeting held on 29th April, 1998 are based on the earlier findings which are wholly inconsistent with the findings recorded by the High Court. He further submitted that the C. L. B. has erred in law in holding that violation of the statutory provisions would result in oppression if the actions result in tilting the balance in favour of any particular group. It is submitted that commission of illegality by the majority cannot be termed as an act of oppression. It is further submitted that the C. L. B. has wrongly held that there was an agreement as pleaded. The finding of equality of shareholding and majority of Group A on the Board is stated to be perverse. It is further submitted that no relief could have been granted to non-members. According to Mr. Dwarkadas, paras 2, 4 and 7 of the operative part of the order beside being incorrect findings in law are wholly inconsistent. On the one hand C. L. B. has held that petitioner No. 1 alone was the shareholder of the Company and petitioner Nos. 2 to 5 were not shareholders. On the other hand whilst passing the final order, the C. L. B. has granted relief to the very same parties. This, according to Mr. Dwarkadas, discloses total non-application of mind on the part of C. L. B. . Granting of relief to any non-member renders the order without jurisdiction or in excess of jurisdiction. According to Mr. Dwarkadas, the correct position in law is that any private agreement which is contrary to the Articles of Association is not binding either on the shareholder or on the Company. Since the oral agreement has not been incorporated in the Articles of Association it was not binding on the shareholders or on the Company. He has further submitted that the provisions of the Contract Act are incorporated in the Companies Act. Thus, unless there is an offer and acceptance there can be no allotment of shares. The relief which is granted by C. L. B. is in excess of its powers under section 402 of the Companies Act as it does not have any nexus with the object of sections 397 and 398 of the Act. Thus, it is submitted that the C. L. B. has exceeded its powers. The implication of the order is that instead of bringing to an end the conduct complained of in the petition, the majority has been reduced to a nominal minority. It is submitted that the majority has been punished for acts of oppression that may have been committed. Mr. Dwarkadas has submitted that in construing any agreement, the conduct of the parties is very important. Applying this test it is submitted that the agreement could not have been implemented without increasing the capital. Execution of an agreement and contents therein are sought to be justified by an agreement entered into at the Police Station on 12th April, 1997 and on the basis of a certificate issued by a Bank. The statement made before the police cannot be used as a foundation for establishment of an agreement. Similarly the certificate issued by the Bank cannot be relied upon as it is issued at the instance of the respondents herein. It is submitted that C. L. B. has committed errors at every step. He submits that the C. L. B. has ignored all the events which took place prior to 1998. The events of 1998 ought to have been judged by taking into consideration the entire circumstances. On 21st May, 1995 second appellant was appointed as an Additional Director at a Board meeting held on 21st May, 1995. On 30th September, 1995 respondent No. 7 and appellant No. 2 were elected as Directors at the Annual General Meeting. On 15-1-1996 first to fourth respondents and respondent No. 6 were appointed as Additional Directors by a Board Resolution. Thus from 21st May, 1995 to 15th January, 1996 none representing Group A was on the Board of Directors. On 30th September, 1996 AGM was held when respondent Nos. 2 and 3 were not re-elected as Directors and, therefore, they ceased to be Directors. Accordingly with effect from 30th September, 1996 the following 5 persons were Directors. 1. Second appellant- Group B 2. First respondent - Group A 3. Fourth respondent -Group A. 4. Sixth respondent- Group B. 5. Seventh respondent - Group B. Hence on and after 30th September, 1996 Group A had only 2 Directors whereas Group B had 3 Directors which position remained unchanged. Relying on the events from June, 1996 the C. L. B. has come to the conclusion that there was always an agreement of equal shareholding. This, according to Mr. Dwarkadas is contrary to the pleadings of the respondents where it is pleaded that the agreement have been implemented in January, 1996. It is submitted that the C. L. B. ought to have considered these events in order to discern the intention of the parties. These events are intrinsic evidence that there was no evidence of agreement/understanding as construed by the C. L. B. . In the present case there is said to be only an oral agreement. Therefore, it has to be tested by the conduct of the parties. The two Additional Directors from Group A not having been made permanent the C. L. B. wrongly came to the conclusion that there must have been 7 Directors. If that had been so, according to Mr. Dwarkadas, then these Directors would have acted as such. There is no resolution to the effect that these Directors were ever made permanent. There is no amendment to the Articles of Association. There is no challenge to the resolutions passed on 30th September, 1997. Now even the minutes of the meeting could not be permitted to be challenged. It is submitted that the petitioners had to succeed on the basis of the pleadings in the petition and not on the basis of the affidavits filed subsequently. It is submitted that the C. L. B. has wrongly come to the conclusion that the Resolutions purported to have been passed at the AGM in September 1996 must not have been passed. It is submitted that C. L. B. has wrongly applied the provisions of Article 25 to come to the conclusion that there ought to have been a Resolution. Mr. Dwarkadas has laid considerable stress on the fact that Group A having invited the findings from the High Court in the winding up petition, the petition under section 397 was not maintainable. It is submitted that the pleadings were identical. These facts are noticed also by the C. L. B. . The Company petition having been dismissed the C. L. B. could not have held that Group A has been oppressed. Acts of oppression have to be continuous leading to a conclusion that it would be just and equitable to wind up the Company. Since the High Court had already held that it would not be just and equitable to wind up the Company the C. L. B. could not have come to a contrary conclusion.;