PRAFUL M PATEL Vs. WONDERWELD ELECTRODES P LTD

JUDGEMENT

(1.) THE main complaint of the petitioner in this petition filed under Section 397/398 of the Companies Act, 1956 ('the Act') in regard to the affairs of Wonderweld Electrodes (P.) Ltd. ('the Company') is that by clandestine preferential allotment of additional shares, the petitioner's group ('the petitioners') who was in majority has been reduced to minority. Accordingly, he has sought for cancellation of the allotment of those shares.

(2.) Shri Vidhya Shankar, the counsel, appearing for the petitioner submitted that this company was incorporated on 23-6-1988 to take over the business of an erstwhile partnership firm. In this partnership firm, there were three identifiable groups of partners. The proportion of profit-sharing was - petitioner's group 60 per cent, respondent's group 30 per cent and one Mr. Mahendra Manilal Patel 10 per cent. When the business of the partnership was taken over by the company, as provided in the memorandum of association of the company, shares were allotted to the three groups in the same proportion as that of profit-sharing in the partnership firm and, accordingly, the petitioner's group was allotted 60 per cent shares while the respondent's group 30 per cent shares and Mr. Mahendra Manilal Patel 10 per cent shares. Even though initially the petitioner's group had three directors on the Board of the company yet due to a demise of one from the petitioner's group and vacation of office by another, only one from the petitioner's group continued on the Board. However, the respondent's group continued to have majority directors. Even though there was no dispute between the partners for a long time, yet the company had, in the notice issued for the AGM scheduled on 5-9-1998 which was received from the auditor of the company by a fax on 1-9-1998, included an item for issue of right shares on the ground that for development of a business of the company, further funds were needed. One receipt of this fax from the auditor, the petitioner issued a fax message on 2-9-1998 (Exhibit P-8) seeking information as to in which Board Meeting the decision to convene the AGM was taken since the petitioner, being a director, had no knowledge of any Board Meeting in the absence of requisite notice. By another fax dated 4-9-1998 (Exhibit P-9) the petitioner requested the company not to proceed with the AGM. Instead of receiving a reply to the fax dated 4-9-1998, on the same date, the petitioner received a fax from the company stating that the petitioner had already vacated office as a director in terms of Section 283(1)(g) of the Act and, therefore, no notice for subsequent Board Meetings, had been given to him and also stating that the decision to hold the AGM was taken in the Board Meeting held on 28-8-1998. The petitioner issued a telegram on 4-9-1998 asking the company to defer holding of AGM to enable consultation with shareholders for issue of right shares. Similar fax was issued to the company on 5-9-1998. By a fax dated 7-9-1998, the petitioner, while objecting to the holding of AGM yet informed the company that the petitioner was interested in subscribing to the right shares and sought for a letter of offer in this regard (Exhibit P-14). One Mr. Rajendra R. Patel from the petitioner's group also wrote to the company vide his letter dated 8-9-1998 (Exhibit P-15) conveying his interest in subscribing to the right shares. By a letter dated 9-9-1998 the petitioner and Mr. Mahendra Patel sent postal orders to the company for meeting expenses in forwarding letters of offer for right shares, (Exhibit P-16). However the petitioner was surprised when the notice for the AGM was belatedly received by him addressed to his Surat address in which the words 'rights issue' had been substituted by the words 'further issue'. Later, the petitioners found that the company had filed a return of allotment on 18-9-1998 according to which all the 5,000 shares had been allotted to the respondent's group on 6-9-1998, thus, reducing the petitioner's group from 60 per cent shares to 30 per cent, while the holding of the respondent's group went up from 30 per cent to 65 per cent. Mr. Vidhya Shankar pointed out that when the petitioners had in writing evinced their interest in subscribing to the further shares, there was absolutely no justification in respondent's allotting further shares to themselves only. He further pointed out that neither the explanatory statement nor in the pleadings, any justification has been given for issue of further shares. Therefore, the issue was made only for the sole purpose of creating a new majority. He further pointed out that even though the company contended that the notice for all the meetings had been sent to the Surat address of the shareholders from the petitioner's group, the company was fully aware that the petitioner was stationed at Coimbatore while two members from the petitioner's group were residing abroad. Even otherwise, the company has not produced any evidence of having sent notices for either the Board Meetings or the General Body Meeting. He contended that the respondents have taken a stand that the petitioners had vacated the office on 20-6-1998 only with a view to ensure that he was not kept in the knowledge of the company's proposal to issue further shares. Even though according to the company, the petitioner vacated his office on 20-6-1998, yet the petitioner was never informed of the same and Form No. 32 was filed with ROC only on 4-9-1998, i.e., after the receipt of the petitioner's communication as indicated earlier. Therefore, he questioned the veracity of holding of the three meetings allegedly not attended by the petitioner. He also pointed out that while the proposal of issue of further shares was approved in the AGM held on 5-9-1998, the shares were allotted on the next date even though it was a Sunday and even without ascertaining whether the consideration towards these shares has been received. He also pointed out that even though the Bench had given directions to the respondent company to furnish the details of applications received for shares and also the date and mode of payment, the company has not yet furnished this information.

(3.) MR. Mihir J. Thakore, the senior advocate, appearing for the respondent-company submitted as follows :