Judgment:
1. In this order I am considering Company Petition No. 42 of 2004 filed by Smt Lilly Uppal under Sections 397, 398, 402,403 and 406 of the Companies Act, 1956 (hereinafter referred to as the "Act") against M/s Shiva Cemetech Pvt. Ltd. alleging dilution of the petitioner's shareholding and illegal induction of the relatives of R-2 on the Board of R-1 with an oblique motive to gain control of the business of the R-1 company and mismanaging the affairs of the company allegedly indulging in forgery and fabrication of statutory records and documents.
2. The undisputed facts of the case are: M/s Shiva Cemetech Pvt. Ltd. (R-1) was incorporated on 2.11.1995 having its registered office at 1091-92, Pipliwala Town, Opposite Gurudwara, Manimajra, UT, Chandigarh.
The authorized share capital of the company is Rs. 20,00,000/- divided into 20,000 equity shares of Rs. 100/- each. The main objects of the company are to produce, manufacture, mine, quarry, treat, process, refine, import, export, purchase, sell and to deal in all kinds of cement, cement products, etc.
3. Shri Ugen Bhutia, Counsel for the petitioner contended that petitioner was the promoter of the company and was one of its two first directors and thus initial subscriber to the Memorandum and was allotted 50% shares with as per the subscription in Articles of Association. He further pointed out that with the object to dilute the shareholding of the Petitioner, the R-2 illegally issued 12,300 shares to his relatives without following the procedure as mentioned in the Articles and also in total contravention of the Act, and in total contravention of Clause V Sub-clause 7 and 8 of Articles of Association of the R-I. The R-2 has nowhere in his reply denied the fact that such shares have been issued and the effect of the same has diluted the shareholding percentage of the Petitioner. The Respondent has without disputing the fact that the shares were not offered to the Petitioner, has sought to state that such an action of issuance of the shares to relatives of the R-2 was permissible as "the respondent is fully entitled to transfer the shares in favour of his relatives as per Clause 8 of the Articles of Association of the Company". My attention was drawn to the Articles of Association as under: 8. No transfer of shares shall be made or registered without the previous sanction of the directors, except when the transfer of the shares is made by any member of the company to another member or to member's wife or child or children or his heirs and the directors may decline to give such sanction without assigning any reason subject to Section 111 of the Act" and it was contended that the respondents have wrongly stated that they had right to issue such share. The said Clause nowhere mentions about any provision for fresh allotment and issue of fresh shares of the company. The said Sub-clause only mentions about the transfer of shares which a shareholder already possesses and which he may transfer to any other member or member's wife of child or children or his heirs. It was contended that even in a case of transfer the member is bound to inform the directors of such transfer being made. The Respondents have failed to show that such act of issuance of the shares to the Petitioner was done with the knowledge of the Petitioner. Reliance was placed on the decision of Pushpa Prbhudas Vora v. Vors Exclusive Tool (P) Ltd. (2000) 3 Comp LJ 271 (CLB); Ashok V. Doshi v. Doshi Time Industries Pvt. Ltd. (2000) 26 SCL 475 wherein in a family company carried on as a quasi-partnership with equal shareholding between two family groups, it was held that the act of one group in issuing more shares to its members to the exclusion of other group and appointment of additional directors without the knowledge or participation of the other group was an act of oppression. It was reiterated that firstly the present case is not a case of transfer but that of allotting and issuing new shares to the relatives of the R-2 which cannot be done as per Clause V(7) of the Articles of Association without any information to the petitioner whatsoever. It was pointed out that the R-2 has wrongly stated that he is eligible to transfer the shares to the remaining respondents in view of the Clause 8 of Article of Association. It was reiterated that firstly the said case is not of case of transfer of shares, secondly even if the said case was that of transfer of shares the R-2 did not have the adequate number of shares to be transferred to his relatives.
The Petitioner's allegation is of wrongly issuing of shares and not of mere transfer of shares.
4. Further, the Counsel for the petitioner argued that other than wrongly taking the said defence under Articles of Association Respondent has not denied the fact that there has been a dilution of the shares of the Petitioner. It was argued that the Respondents have failed to show that the issuance of the shares was unavoidable and was resorted to as an emergency measure with an object of saving the existence of the company. Reliance was placed on the decision in re: Gluco Series P. Ltd. (1987) 61 Comp Cas 227 (Cal) wherein it was held that it is not open to the Directors to issue and allot shares in a manner by which an existing majority of the shareholders are reduced to a minority, the Court must be satisfied beyond reasonable doubt that such issue was unavoidable and was resorted to as an emergency measure with an object of saving the existence of the company, the Court will not allow the existing balance of power in the company to be disturbed, if the issue of shares disturbs the existing majority of the shareholders and if it is not bona fide, it will amount to oppression and mismanagement and the Court will grant relief. It was contended that in the present case the Respondents have also failed to show that the said issuance of the shares was done in good faith. Further, reliance was placed on the decision in PIK Securities P. Ltd. v. United Western Bank P. Ltd. (2001) 4 Comp. LJ81 wherein it was held that increasing capital by making a further issue is a decision of managerial nature and, therefore, it belongs to the domain of directors and it should be exercised in absolute good faith in the interest of the company as a whole; use of this power for consolidating their own position by those in control and by creating a new majority is improper, in such a case a petition for prevention of oppression and mismanagement would be maintainable.
5. Shri Bhutia reiterated that the children and relatives of R-2 were illegally appointed as directors in the R-1. The Petitioner was not informed of the day to day business of the Respondent Company and was never informed about any of the Board Meetings; the R-2 illegally appointed his children and relatives as additional directors for gaining the control and management of the Respondent Company. My attention was drawn to the head-note in the decision in S. James Federick and Anr. v. Mrs. Minnie R. Federick and Ors. (2000) 1 Comp LJ 293 (CLB) which reads as - Oppression-additional directors-appointment of additional directors to disturb the parity in the constitution of the board of directors and to marginalize one of the groups is oppression. It was argued that R-2 has failed to show that appointment of his relatives and his kids as directors was either bonafide or in the interest of the company. Kshounish Chowdhary and Ors. v. Kero Rajendra monolithics Ltd. and Ors. (2002) 1 Comp LJ 552 (CLB) Appointment of additional directors to gain majority control of the board such appointment was, on the facts, neither bonafide nor in the interest of the company.
6. Further, it was contended that the Respondent has forged the signature of the Petitioner in a number of places. My attention was drawn to the annual statements of the year 2000 and 2001 filed with the Register of Companies, Jalandhar. It was pointed out that the said fact of forgery came to the knowledge of the Petitioner on the inspection of the records kept with the Registrar of Companies, Jalandhar. Drawing my attention to the fabrication of statutory records and documents, it was pointed out that the meetings of the company were not held properly and no notice of any meeting was received by the petitioner. In order to counter the said fact, U.P.C. receipts have been placed by the R-2 alongwith the reply on the records thus showing that the averment of the Petitioner is untrue. My attention was drawn to the UPCs and it was contended that the UPCs are manufactured documents, from a perusal of the said postal receipts it is evident that the said documents have been manufactured by the Respondent. It was contended that the Respondent has also annexed with the reply a postal receipt dated 17.11.2002. The said date on which the alleged notice was sent falls on a Sunday. Upon enquiry from the post office situated at Bus Stand Chandigarh, it was found that the said post office didn't open on Sunday. Thus this leaves no room of doubt that the said postal receipts that have been annexed with the reply of respondents have been fabricated. The respondents have maintained a stony silence in this regard. It was contended that there is no attendance sheet signed by the members/directors of the Respondent Company whereby the quorum for any meeting is being comprised. Thus any Board Resolution that may be passed is nonest in the eyes of law as the same is passed without any Quorum. Maharani Yogeshwari Kumari v. Lake Shore Palace Hotel (P) Ltd. and Ors. (1995) 3 Comp LJ 418 (Raj). Moreover, it was contended there cannot be one man meeting, the provisions relating to the quorum of a meeting a mandatory-meetings of a Board of the Directors not having the required quorum is nonest and void.
7. Shri Bhutia contended that perusal of the copy of the minutes of board meeting dated 01.12.1997 reveals that vide the said resolution Sher Jung Bahadur, R-3 was appointed as the director of the company with immediate effect. The presence of R-3 is not shown in the minutes book. Further, it is surprising that inspite of the R-3 not being present his signature appear on the minutes of the board meeting. Thus it has been brought to my notice that the appointment of R-3 as the director is void. Further, perusal of the copy of the minutes of board meeting dated 31.03.1998 revealed that vide point (vi) of the said minutes the petitioner was released from the authority to operate the bank account situated at State Bank of Patiala, Mani Majra, Chandigarh.
It was pointed out that the same was signed only by R-2 and the same is contrary to the resolution dated 31.03.1998 which states that any two of the three directors may operate the said account. This fact also shows that the copies of the minutes book and minutes of meetings are false and fabricated. It was pointed out that though the minutes book shows the presence of Petitioner at the board meeting dated 29.07.1998, surprisingly the minutes of board meeting didn't bear the signature of the Petitioner.
8. Further, responding to the allegation of the R-2 is that the Petitioner was not attending the meetings regularly as the result of which the R-2 called up a meeting dated 18.12.1999 wherein the said issue was discussed, it was contended that assuming but not admitting that the said documents filed by the R-2 to be true, the R-2 has shown the presence of Petitioner in each and every meeting since 01.09.96 to 18.12.1999. Thus the said documents are doctored and manufactured.
Further, my attention was drawn to the balance sheet filed before the Registrar of Companies and it was contended that the value of building has been depreciating drastically but on the other hand the value of the land has not been appreciated since 1997. It was argued that the same is being done with the malafide intention of siphoning the funds and disposing of the assets which include movable and immovable assets of the Respondent Company.
9. Further, reiterating the arguments on siphoning off funds of the Respondent Company, it was contended that the R-2 has illegally appointed Shiva Traders as its sole agent vide an alleged board meeting dated 31.03.1998, Shiva Traders is a unit owned by the R-2 himself.
10. Responding to the respondents' contentions on maintainability of the petition wherein it was pointed out that wrong address of the Respondent company was given in the Petition, it was contended that the said plea is baseless as it is stated that assuming but not admitting the said fact to be true, nevertheless the fact that the Respondents have been represented inspite of the said fact is enough proof that they have been served even on the said address. Further, it was pointed out that the allegation that the said Petition has been filed with personal vendetta is also baseless. As regards the contention that the Petition is barred by limitation, it was argued that the said plea of limitation does not stand as the act of oppression is a continuous act and as such the principle of limitation would not apply. Ashok Kumar Oswal and Anr. v. Panchsheel Textiles manufacturing & Trading Co. and Ors. (2002) Comp LJ 224 (CLB) Since the complaint of the Petitioner is that his group has been converted from a majority to a minority by the allotment of these shares, the same will have continuous and perpetual effect notwithstanding being a single act. It was contended that it is well settled that even a single act of allotment of shares could be considered to be an act of oppression within the meaning of Section 397 of the Companies Act, 1956. Further, in view of the continuous effect arising out of the allotment of shares, time limit to file a petition to challenge the same cannot be allowed. Reliance was placed on the judgment as delivered in the case of Tea Brokers (P) Ltd. v. Hemendra Prosad Barooah (1998) 5 Comp LJ 463 (Cal). Further, responding to the contentions that the Petitioner is not entitled to file the Petition as the Petition has been filed as a promoter of the Company and not as a member; the said petition has been filed in an improper format; the petitioner has suppressed material fact, it was argued that the Respondent has failed to state which facts have been suppressed by the Petitioner and all other allegations are also vague and unsubstantiated, the petitioner is also shareholder and her such capacity cannot be excluded only because she happens to be the promoter also.
11. Shri Punish Arora, Counsel for the respondents contended that the petitioner has participated till 1998 in the Board Meeting and after that she had wilfully started absenting herself from the Board meetings. The respondent company had, however, informed her from time to time regarding Board meetings/AGMS. The respondents have furnished all the reports, annual returns, audited balance sheet to the Registrar of Companies from time to time. Clause 4 of the Articles of Association of the respondent company clearly stipulated the Rights of the directors to increase/reduce/sub divide or to repay the authorized share capital of the company in accordance with Section 95 of the Act and subject to Section 106 of the Act to vary such rights as may be determined in accordance with the regulation of the company. Consent of petitioner for inductment of R-3 as director was duly taken. The petitioner had appended her signature on the resolution dated 1.12.1997 vide which R-3 was inducted as a shareholder and director of the company w.e.f 1.12.1997. The resolution dated 29.7.1998 passed by the Board of Director clearly stipulated that "it was unanimously decided to issue further capital for the smooth functioning of the company." The shares were first offered to the existing shareholders and with their consent 12300 shares were allotted to the persons mentioned in the resolution dated 29.7.1998.
12. My attention was drawn to the unclean hands of the petitioner and it was contended that the husband of the petitioner was running a parallel business and after his death now the petitioner is running the same business, and this fact was not disclosed by the petitioner knowingly in her petition also. This fact has been admitted by the petitioner in replication dated 22.1.2007 that her husband was running Himalaya Cement Corporation established in 1994. After his death in Feb 2005 proprietorship was transferred in favour of the petitioner. It was contended that she further misled the Hon'ble Court by stating that the affairs were managed by her son. Further, vide resolution dated 15.3.1996 the petitioner was authorized to put her signature on the cheques and other documents in the capacity of Director. One cheque No.437327 was lost and accordingly a letter was written to the bank on 24.12.1998 requesting the bank to stop payment. On 6.5.1999 the Bank had intimated respondent company that the said cheque was presented by Mr. Madhu Sudan Gupta for Rs. 4,35,000/- but the Bank had refused to honour the cheque. Mr. Madhu Sudan Gupta was working with Himalaya Cement Corporation. On 15.6.1999 Mr. Madhu Sudan Gutpa had filed Criminal Complaint under Section 138 of Negotiable Instrument Act. The petitioner was also impleaded in the array of the accused parties but later on compromise had taken place between the complainant and the petitioner was deleted from the array of the accused parties. It was pointed out that the learned JMIC vide judgment dated 8.2.2007 had clearly held that the cheque was given to the complainant by the petitioner with the intention to cause wilful loss to the respondent company.
13. Further, it was argued that the petition is time barred, the allegations regarding the dilution of the share capital relate to 1998 whereas the petition was filed after a lapse of more than 6 years i.e.
in 2004. Furthermore, the petition was filed with the malafide intention and ulterior motives. It was contended that in Shanti Parsad Jain v. Kalinga Tubes, Kalinga Tubes Ltd. v. Shanti Parsad Jain (1964) 1 CLJ 117 it was held that complaining member must show that he/she is suffering from oppression in capacity as member and not in any other capacity. In the present case the main grievance of the petitioner is that being original promoter she was denied her genuine rights. It was argued that in case of lack of confidence between one Section of members and other Section in matter of policy or administration court will not allow these special remedies to become vexatious source of litigation and minor acts of mismanagement. It was contended that non-holding of meeting of Board of Directors may affect the rights of the petitioner as director but rights as a minority shareholder would not be affected. (1984) 55 Comp. cases 702 Delhi. It was pointed out that the main allegation of the petitioner that her shareholding was diluted by the R-2 by way of inducting R-3 to 8 as shareholders/Directors of the company is not tenable. It was contended that it was clearly held in (1964) 3 ALL ER 628 that increasing the voting rights of the shares held by the management where there is nothing against the present management and where it can be said it would be beneficial to maintain the present management, any attempt to increase the voting right of shares held by the present management cannot be construed as on act of oppression.
14. As regards the petitioner's allegation in her additional affidavit that the R-2 has forged her signature on the annual return for the year 2000 and 2001 filed with R-9 it was pointed out that the R-2 had no necessity to do so. The signatures were in the annual return for 2000 the name of the petitioner was written in front of R-3 whereas in the annual Return for 2001 the signatures are of R-2 & 3 only. Thus there is no question of forgery. There was no necessity to forge the signature of the petitioner as there was a resolution dated 31.3.1998 that any two directors will sign the annual return and more so the petitioner herself was not attending the office after 1998.
15. Further, it was contended that the company was facing financial crunch before the issuance of shares and to cope up with the situation the shares were issued after offering the shares to the existing shareholders. Before issuance of the shares the unsecured loan was Rs. 5,75,680 and Sundry Creditors were Rs. 2,84,469.75 and the closing stock on 31.3.1997 were Rs. 1,57,249.60. After issuance of shares the figures raised to Reserve Surplus at Rs. 6276/- and current liability remained at Rs. 19,800/- only and sundry Creditors were at Rs. 1,11,235.24 and closing stock was raised to Rs. 3,10,000.66. Sundry debtors were also increased to 4,10,116.59 in comparison to Rs. 8000/- in the year 1997 which clearly shows that the shares were allotted for the financial benefit of the company and the money received was used for business promotion and for the improvement of financial position.
In the year 2001 the closing stock increased to Rs. 28,12,137.62.
16. It was pointed by the Counsel for the respondents that the petitioner was very much present when the compromise took placed on 8.9.2005 between the owner of the land on which the company is situated and the shareholders of the company. However, the respondents are not averse to allot the shares to the petitioner in case she is ready to pay the price of the shares decided by the Board of director of the company with the approval of the shareholders of the company, the petitioner was not able to get the shares in 1998 because she was not ready to pay the price of the shares.
17. I have considered the pleadings and arguments of the parties. The petitioner's case is that since incorporation no regular meetings/Annual General Meetings or otherwise have been called or held by R-2, the petitioner was never informed in any manner whatsoever in this regard, the R-2 has not kept proper accounts throughout the period of two years preceding the filing of this petition, he has failed to furnish audited balance sheet and profit & loss account, trading account, information about issuance of equity shares and annual returns of the company to the concerned authorities, till date annual returns of 1998, 1999 and 2000 have not been filed with the Registrar of Companies, the petitioner has no information whether the returns of the year after 2000 have been filed or not, the company is running in most arbitrary manner as there has been change in the Board of directors, the R-2 has inducted R-3 to 8 (his entire family) as shareholders/Director and also allotted shares to them without calling any meeting whatsoever, the petitioner being the original promoter is denied her genuine rights and has been reduced to minority. The Respondents' case is that the petition is barred by limitation as the alleged acts of oppression and mismanagement pertain to the year 1998 whereas the petition has been filed after a lapse of more than 6 years in 2004; the petitioner herself has withdrawn from participation in the affairs of the company, has not attended any Board meeting/AGM after 1998 despite notices issued; The petitioner has not come with clean hands, there has been no reply with regard to a cheque for an amount of Rs. 4,35,000 presented by Mr. Madhu Sudhan Gupta working with the petitioner's husband firm namely Himalaya Cement Corporation, the cheuqe was said to be lost by the R-1 company, but it was presented by a person connected with the petitioner's husband firm, it got dishonoured and with respect to which criminal complaint under Section 138 of the Negotiable Instrument Act was instituted; the petitioner herself has chosen not to pay for the subsequent allotment of shares, even now the Respondents are not averse to allot the shares to the petitioner in case she is ready to pay the price of shares and that this petition has been filed in the capacity of being original promoter and not as a shareholder and there is no case of oppression or mismanagement made out in that capacity.
18. Considering the facts and circumstances of this case, I find that the petitioner has failed to meet most of the contentions made by the respondents. The respondents have correctly contended that this petition has been made in the capacity of an original promoter director and not as a shareholder. The Respondents' contention is found to be correct. Further, the respondents' contention regarding the petition being barred by limitation is also tenable. It is a settled position that this quasi judicial authority conducts its proceedings in accordance with the provisions of Section 10E of the Act. The Company Law Board is guided by the Principle of natural justice. Equity does not fix a specific time limit but considers a circumstance of each case in determining whether there has been such delay as to amount to laches. The doctrine of laches is based on equitable consideration and depends upon general principle of justice and fair play. To do laches delay should be such that it could be said that the petitioner is not entitled to relief on account of gross negligence or inaction or for want of bona fide imputable to him or that he has given up (waived) his right by acquiescence or by his conduct or negligence. In the present case I find that there has been inaction, though no negligence or want of bona fides which could be imputed to the petitioner. There is no presumption that delay in approaching the Company Law Board has been deliberate. Further, it has been rightly contended by the Counsel for the petitioner that alleged share allotment made by the R-2 without following the proper procedure, wrongfully resorting to Articles of Association which has resulted into depriving the petitioner of her rights such deprivation amounts to continuous act of oppression. But in the present case there has been inaction amounting to laches. As regards the respondents' allegation of unclean hands it is noted that the petitioner has not given any reply to the missing cheque of Rs. 4,35,000, dishonouring of which has resulted in criminal complaint already instituted under Section 138 of the Negotiable Instrument Act, as to how the cheque signed by the petitioner from the Company's account could reach the hands of a person connection with her late husband's concern namely Himalaya Cement Corporation. I agree that it is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Section 397/398. In Sri Kanta Datta Narasimharaja Wadiyar v.Venkateshwar Real Estates Private Ltd. (1991) 3 Comp. LJ 336 (Karn) : (1991)72 Comp Cas 211 (Karn), it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petition would constitute a gross abuse of the process of Court, and the petitioner is not entitled for any relief under Sections 397 and 398. It also held that the conduct of the parties in other proceedings could also be taken into consideration. However, it was held that the conduct of the petitioner before filing of the petition may not be a relevant factor. Regarding the principle of equity in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd. 44 CC 390 the Division Bench of Delhi High Court has held that while exercising equity jurisdiction, which clothes the Court with discretionary powers "...the discretion cannot be exercised arbitrarily or according to one's own will or whim. It has to be regulated by law, allay its rigour advance the remedy and to relieve against abuse. The court, therefore, exercising equity jurisdiction, cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands...." From this instance of cheque No.437327 given by the Respondents it becomes clear that the petitioner has not come with clean hands.
19. There have been allegations and counter allegations in this petition. However, I have the view of the totality of the circumstances of this case wherein the respondents are willing to allot further shares to the petitioner or to buy her shareholding with a view to brining to an end the matters complained of. I notice that the respondents have not been able to controvert the other contentions of the petitioner with respect to allotment of shares made in contravention of Articles of Association and the provisions of the Act.
The onus of proving service of notices for such Board meeting having been held for allotment of shares as well as Board Meeting/AGM held for appointment of other directors is on the respondents which they had to discharge. It is also noticed that the respondent company has not been filing the various returns with the Registrar of Companies on time. It is true that mere irregularity does not per se amount to oppression mismanagement but it does point out to the state of affairs in the respondent company. However, the petitioner has not been able to substantiate her contentions regarding siphoning of funds and mismanagement in the maintaining of proper accounts of the respondent company. Keeping in view the fact that the petitioner has not participated in the affairs of the company practically after 1998 and her willingness to go out of the company on purchase of her shareholding by the respondents, to end the matter complained of and to regulate the conduct of the company's affairs in future I hereby direct the respondents to purchase the shareholding of the petitioner after getting a fair valuation of her shares got done through an independent valuer within 2 months of receipt of this order.
20. Since the petitioner is granted her prayer to go out of the company at a reasonable value to be received by her for her shareholding the alleged illegal allotment of shares and appointment of directors on the Board of the respondent company are not being held null and void.
21. The petition is disposed of in the above terms. All interim orders stand vacated. All CAs stand disposed of. No order as to cost.