ASHOK K. JAIN Vs. NAPROD LIFE SCIENCES P. LTD.

JUDGEMENT

(1.) M /s. Naprod Life Sciences P. Ltd. (the company "NAPL") is a family company with the first, second and third petitioners (collectively referred to as UKJ group) and the fourth respondent (referred to as BKJ group) who are real brothers. Along with their respective family members, each of the brother's group held 25 per cent shares in the company. The family also controls another company, namely, Neon Laboratories Ltd. (NLL). In this company also the shareholding is similar to that of in NAPL. Thus in both the companies, UKJ group was in majority controlling about 75 per cent shares. In NAPL, BKJ group has issued and allotted further shares to its own group by which the shareholding of UKJ group has come down to about 36 per cent while that of BKJ group has gone up to about 64 per cent UKJ group has challenged this allotment as oppressive. In addition, they have also alleged that even though the first petitioner is a director of NAPL, no notice is being given to him for board meetings and without notice to him the name of the company has been changed, that the registered office of the company has been shifted and that the annual accounts have been approved. It is also alleged that none from UKJ group has been given notices for the general meetings of the company nor any of them given dividend declared by the company. With these allegations various reliefs, more particularly for setting aside the impugned allotment, have been sought. In response to these allegation, the stand of BKJ group is that the parties had entered into a memorandum of family settlement (MFS) on August 27, 2005, by which, as a measure of division of the businesses, NAPL had come to the control of BKJ group while NLL went to the control of UKJ group and therefore, UKJ group has no say in the affairs of NAPL. According to UKJ group, there was no MFS but the same was only a list of assets and liabilities and there was no division of the businesses.

(2.) SHRI Sundram, senior advocate appearing for the petitioners submitted : The company is a family company incorporated by the second and third petitioners who were also the first directors of the company. The fourth respondent is the eldest of the four brothers. The business of the company is to manufacture sell, buy, import and export all types of pharmaceutical drugs, medicines including injections, tablets and capsules. There were four directors, three from BKJ group and the first petitioner from the UKJ group. The family has another company by the name Neon Laboratories Ltd. (NLL) in which all the four brothers along with their family members held more or less equal percentage of shares. This company carries on the business of manufacturing, marketing and trading of pharmaceuticals. In this company UKJ group has four directors and the second respondent from BKJ group. Thus, both the companies were being jointly managed by the four brothers. However, after the demise of their mother, disputes and differences had arisen among the brothers more particularly between the UKJ group consisting of three brothers on the one hand and the fourth respondent on the other hand as the fourth respondent was giving his son -the second respondent -more importance in running the affairs of the company. Therefore, attempts were made to amicably settle the disputes between the petitioners and the fourth respondent with the assistance of mediators. However, this attempt did not succeed due to the unreasonable stand of the fourth respondent. Thereafter, BKJ group started taking various decisions without the consent and knowledge of the petitioners, more particularly of the first petitioner who is a director in the company. The company changed its name, its registered office was shifted, annual accounts were approved all without notices to the petitioners who held over 74 per cent shares in the company. For the extraordinary general meeting allegedly held on November 27, 2006, for passing a special resolution to change the name of the company from Neon Antibiotics Ltd. to Naprod Life Sciences P. Ltd., even though the petitioners collectively held about 74 per cent shares, notices for this meeting were not given to them. The company allegedly held an annual general meeting on October 26, 2006, for approval of the annual accounts but the petitioners were not given any notice. Even though a final dividend of Rs. 1.15 per share, was allegedly declared in the annual general meeting, the petitioners did not receive any dividend. Further, the second respondent along with the fourth respondent has incorporated a new company in the name of Naprod Pharmaceuticals P. Ltd., which is doing competing business with that of the company. The respondents have also changed the registered office of the company without notice to the petitioners. Even though the first petitioner is a director of the company, no notice for any board meeting has been received by him. In view of the various illegal and oppressive acts on the part of the respondents, the petitioners requisitioned an extraordinary general meeting by a notice dated November 27, 2006, to increase the number of directors on the board by eight directors. This was done to have proportional representation for the petitioners on the board as the petitioners had only one director as against three from BKJ group. Since the board of directors of the company did not convene the extraordinary general meeting, the requisitionists themselves issued a notice on January 12, 2007, convening the extraordinary general meeting on February 3, 2007. Accordingly, the said meeting was held and eight directors as proposed were appointed. None from BKJ group attended the said extraordinary general meeting. Instead of attending the meeting, the second respondent wrote a letter dated March 10, 2007, to all the new directors alleging that their appointments were illegal as in terms of an alleged memorandum of understanding dated August 27, 2005, the company had come to the complete control of the fourth respondent. Sometime during the third week of March 2007, the petitioners came to know, from Form No. 2 filed with the Registrar of Companies by the respondents on March 7, 2007, that the respondents had allotted 15,20,000 equity shares to the respondents on February 1, 2007. It is to be noted that the petitioners had already issued a notice on January 12, 2007, for convening an extraordinary general meeting on February 3, 2007 and just a few days prior to the extraordinary general meeting, the respondents had allegedly allotted shares to themselves, thus, increasing their shareholding from 26 per cent to about 63 per cent. By allotting 15,20,000 shares which is more than the then existing subscribed and paid -up shares of 15,00,000 the respondents who held only 26 per cent shares have increased their shareholding to over 63 per cent. Even the allotment allegedly made on February 1, 2007, is doubtful as the respondents had not made any reference to the said allotment in the suit filed by them on March 12, 2007. As a matter of fact, in paragraph 5 of the plaint, it has been mentioned that the subscribed and paid -up capital of the company was Rs. 1.5 crores consisting of 15,00,000 shares of Rs. 10 fully paid -up. Thus, the factum of allotment is not only dubious but is also suspicious. Further, the company did not receive any consideration in cash. All the shares had been allotted against loans standing in the name of the allottee respondents. Further, there is nothing on record to show that any offer was made in writing to any of the respondents to subscribe to the shares. By allotting the impugned shares to the respondents exclusively, they have hijacked the company in total exclusion of the petitioners. Since the company is a closely held family company, if at all the company needed funds, proportionate shares should have been offered to all the shareholders but it was not done only with a view to perpetuate the control of the company by the respondents.

(3.) SHRI Sarkar, senior advocate, appearing for the petitioners submitted : The claim of the respondents that the company was to go to them in terms of the MFS is wrong and baseless. The alleged MFS is nothing but a list of assets and properties owned by the four brothers to be given to the mediators for settling the disputes among the brothers by division. On the strength of this MFS, the respondents could not have allotted the impugned shares. The alleged MFS is dated August 27, 2005 and all the loans against which the impugned shares were allotted came into the company as early as in December, 2005. If as per the MFS, the company was to go to the respondents, then, they could have allotted the impugned shares against the loan as early as in December, 2005 and they need not have waited till February, 2007. They did not allot the shares in December, 2005 only because the MFS was under dispute. In paragraph 50 of the surrejoinder, the respondents themselves have admitted that the petitioners were not acting in implementation of the MFS and that further meetings were held till December, 2006 along with the mediators and that the petitioners insisted on resiling from the memorandum of family settlement (MFS). These averments by the respondents would categorically establish that the MFS was not under implementation. This being the case, the respondents could not have taken the law into their own hands to allot further shares and thus convert the majority into a minority. Only when the petitioners issued a notice for appointment of directors, with a view to hijack the company through shareholding, the respondents had allotted the impugned shares. In the suit before the Bombay High Court, the respondents have sought for a declaration that the MFS dated August 27, 2005, is valid, subsisting, binding and effective. Till such time the court makes such a declaration, the respondents cannot and could not have taken any action on the excuse of implementation of the MFS. No one can implement a disputed MFS without a legal sanction. When the respondents could not have enforced the MFS as petitioners before the Company Law Board, they cannot take the MFS as a defence. It is to be noted that board minutes in which the shares were allegedly allotted do not indicate the need for funds. Further, if the shares were being allotted on the basis of the MFS, the first petitioner could have been issued a notice for the meeting and the shares could have been allotted with his consent. This the respondents did not do so only because they knew that MFS no longer survived.