THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Company Appeal No.5 of 2011 Date:12th September, 2011 Between: 1. G.V.Prathap Reddy & Ors. ….Appellants/Petitioners AND 1. G.V.P.R. Engineers Ltd., rep. by its Director Sri G.Siva Shankar Reddy & Ors. ….Respondents/Respondents *** THE HON’BLE SRI JUSTICE B.SESHASAYANA REDDY Company Appeal No.5 of 2011 JUDGMENT: This company appeal is directed against the order dated 09-02- 2011 passed in C.P.No.7 of 2002 on the file of the Company Law Board, Additional Principal Bench, Chennai. The unsuccessful petitioners in C.P.No.7 of 2002 are the appellants herein. They approached the Company Law Board under Sections 397 and 398 of the Companies Act, 1956 seeking the following reliefs:- “ In view of the facts set out above, the petitioners pray that this Hon’ble Bench in exercise of its powers under Section 397, 398 and 402 of the Companies Act, may be pleased to (a) set aside the allotment of 13,78,200 shares allotted on 09.3.2001 or on any other date in favour of the respondents 2 to 9. (b) To direct the second respondent to render true and proper accounts with all supporting documents regarding the money collected for and on behalf of the company. (c) To convene a meeting of the company and direct election of directors. (d) Appoint a chartered accountant to inspect the accounts. (e) Declare that the third respondent is not a fit and proper person to act as managing director of the company (f) To refund the share Application money of Rs.63,00,000/- paid by 3rd petitioner along with interest” 2. Background facts, in a nutshell, are:- 2(a) Appellant Nos.1 and 2 are husband and wife. Appellant No.3, 1st respondent, respondents 8 and 9 are private limited companies. The third appellant and the respondents 8 and 9 companies belong to the same family, i.e., G.Veera Reddy (2nd respondent). The appellants are holding 1, 49, 890 shares in the 1st respondent company. The shareholding of the petitioners in the 1st respondent company is as follows:- 1. Shri G.V.Prathap Reddy (1st appellant) 4,130 2. Smt. G.Laxmi Devi (2nd appellant) 10 3. Veerabhadra Minerals Pvt. Ltd (3rd appellant) 1,45,750 ________ 1, 49, 890 __________ The third respondent is the Managing Director of the 1st respondent-company. The family has been carrying on business in the name of Proprietary concerns, partnership concerns and limited companies in the filed of Granites and Construction since several years. The members of the family divided the business concerns among themselves by way of mutual arrangement. In the said mutual arrangement, the 1st appellant got sole exclusive control over M/s. Veerabhadra Minerals Pvt. Limited-3rd appellant and G.V.Prathap Reddy Engineers, a proprietary concern; and whereas the third respondent got sole and exclusive control over M/s. Shivashankar Granites Limited (8th respondent) and G.V.P.R. Engineers Limited (1st respondent). The mutual arrangement came to be reduced into writing on 02-7-2001. The document is styled as Memorandum of Understanding and the parties to the said document are 1st appellant and the 3rd respondent. The Board of Directors of the 1st respondent company as on 2-7-2001 were :- 1) G.Veera Reddy-2nd respondent 2) G.S.P.Veera Reddy-3rd respondent 3) G.V.Prathap Reddy-1st appellant; and 4) G.Shivashankar Reddy 2(b) In the extraordinary General Meeting held on 1.3.2001 the subscribed share capital of the 1st respondent company has been increased and in the meeting held on 9.3.2001, 13,78,200 shares have been allotted to respondents 2 to 9. According to the appellants, the meeting held on 9-3-2001 is not a valid one and the allotment of 13,78,200 shares of Rs.10/- on 9-3-2001 to the respondents 2 to 9 is not in accordance with the Articles of Association of the 1st respondent company and also not in accordance with the provisions of the Companies Act. Therefore, the appellants filed C.P.No.7 of 2002 complaining oppression and mismanagement of the affairs of the 1st respondent company by the 3rd respondent. For better understanding of the grievance of the appellants, I deem it appropriate to refer paras 8 to 11 of the affidavit filed in support of C.P.No.7 of 200s, which read as hereunder:- “8. The shares are said to have been allotted in the Board Meeting held on 09.03.2001. The petitioners one was Director of the company on that date and he was not served with any notice of the Board meeting. The resolutions passed in the said meeting are therefore void as the notice of the meeting was not given in terms of the Companies Act. Even if a Board meeting had been held it would be void as the Directors of the company were not served with any notice of the said meeting. The conduct very clearly discloses that the increase of share capital has been stage managed and invalid in law. 9. The petitioner No.3 (three) i.e., Veerabhadra Minerals Pvt. Ltd., has Rs.63,00,000/- (Rupees sixty three lakhs only) with the company as Share Application money. (Particulars of such as per ANNEXURE A-3) much before the date of illegal allotment of shares. Not taking share application money into account while allotting shares reveals that the intention of respondents to manage the company in such a way to make Majority share holders into Minority share holders. 10. Mr.G.V.Veera Reddy (3rd respondent) has appointed as Managing Director without proper Board Meeting with effect from 02.7.2001 (True extract copy of Form No.32, as per ANNEXURE A-4) whereas he signed as a Managing Director while filing Form No.2 on 10.04.2001 for first allotment of shares (True extract copy of Form-2 as per ANNEXURE A-5). It shows the nature of 3rd respondent for violation of the provisions under the Companies Act. The second respondent is in a fiduciary capacity and the illegal allotment of shares is contrary to his fiduciary capacity. 11. The petitioners are not now represented in the affairs of the company. The third respondent who is in the helm of the affairs of the company is not protecting the interest of the all the shareholders. The very conduct of the third respondent in being secretive regarding the affairs of the company and in relying on the paper meetings to make a purported compliance of the provisions of the Companies Act would demonstrate his evil designs of easing out the petitioners, in the long run. The third respondent has thus exhibited lack of fair play and probity in the conduct of the affairs of the company. The result of the above events is that the petitioners have lost confidence on the respondents. The conduct of the respondents is harsh, burdensome and wrongful. The facts would justify the winding up of the company on a just and equitable clause. Such a course would not be beneficial to the interest of the petitioners and the company. The petitioners have not been able to access to the records of the company and the petitioners have been kept in dark.” 3. The 1st respondent filed counter before the Company Law Board resisting the relief sought for by the appellants. It is pleaded in the counter that the third appellant as well as respondents, 1, 8 and 9 companies/proprietary concerns have been floated by one and the same family and all the companies are controlled and managed by the 3rd respondent being the eldest son of the 2nd respondent. The 2nd respondent, his wife, sons and brothers-in-law are shareholders of the 3rd appellant company. There was an oral arrangement between the family members and as per the said arrangement, the 3rd appellant company and the proprietary concern of M/s. G.V.Prathap Reddy (Engineers and Contractors) came under the exclusive control of the 1st appellant leaving the other companies under the exclusive control of 2nd and 3rd respondents. To increase the subscribed capital of the 1st respondent company, an extraordinary general meeting was held on 01-3-2011 and a special resolution under Section 81(1A) of the Companies Act, came to be passed. In pursuance of the said resolution, the subscribed capital of the 1st respondent company came to be increased by issuing 13, 78, 200 equity shares of Rs.10/- each. Since the 1st respondent company was looked after by the 3rd respondent, the increased subscribed share capital shares came to be allotted to the members of his family with the knowledge of the appellants on 9-3-2001. The appellants attended the Board meeting as well as the General meeting. The allotment of shares is neither oppressive nor there is any mismanagement since the shareholders have decided to increase the issued and subscribed capital of the 1st respondent company. The shares of the 3rd appellant came to be transferred to G.Veera Redy-2nd respondent as per the Transfer form submitted to the company, which came into effect on 30-11-2001. The 1st appellant is no more the Director on the Board of the 1st respondent company. The 1st respondent company has passed a special resolution under Section 81(1A) of the Companies Act on 9-3- 2001 and filed the copy of the resolution with Registrar of Companies, pursuant to Section 192 of the Companies Act. The 3rd appellant never advanced any money towards the shares in the 1st respondent company. However, the third appellant used to advance unsecured loans from time to time to the 1st respondent company and the said amounts have been shown as loans and advances in the balance sheet of the 1st respondent company. The loan amounts are adjusted against the amounts receivable from other concerns that are managed by the 1st appellant as per the oral understanding. The petition filed by the appellants is liable to be dismissed in limini as the holding of the appellants in the 1st respondent company is less than 1/10th of the issued share capital. 3. The appellants filed rejoinder to the counter affidavit filed on behalf of the 1st respondent. It is stated in the rejoinder that induction of Mr.G.Siva Shankar Reddy as director of the 1st respondent Company is ultra vires the provisions of the Act. Mr.G.Siva Shankar Reddy is not authorised to file counter-affidavit on behalf of the 1st respondent Company. The Managing Director of the 3rd appellant Company had not signed the transfer deeds supposed to have been given, in which case, the 3rd appellant continues to hold 1,45,750 shares. The transfer of share application money to inter corporate loan without allotting the shares is ultra vires the articles of association of the 1st respondent company. The amount of Rs.10,00,000/- shown as inter corporate loan in the balance sheet for the year 1999-2000 has not been reflected in the balance sheets of the subsequent years. 4. The Company Law Board, on considering the material brought on record and on hearing the parties, proceeded to dismiss the petition, by order, dated 12.02.2004 on the ground that the 3rd respondent got full and complete control over the 1st respondent Company as per the family arrangement and the same has been evidenced by a Memorandum of Understanding dated 2-7-2001. For better appreciation, I may refer the relevant portion of the order, dated 12.02.2004, which reads as hereunder: “3. During the arguments the learned Counsel for the respondents submitted that there was a memorandum of understanding among the family members dated 2nd July, 2001 by which the third respondent was to have sole and exclusive control of the Company. However, no copy of the said memorandum was filed. On our directions, the memorandum has been filed and the existence of the memorandum has also been confirmed by the petitioner by an affidavit filed on 12.02.2004 stating that “the petitioner No.1 is in agreement with all the terms and conditions specified in the MOU attached to the affidavit”. According to this MOU the third respondent is to have full and complete control of the Company and if it is so the petitioners cannot complain of issue of further shares to the respondents group. If the petitioners are aggrieved of non- fulfilment of terms of the MOU by the respondents, they have to take appropriate action in civil proceedings. Accordingly, the petition is dismissed. While doing so, we also note that this vital document should have been disclosed both by the petitioners in their petition and the respondents in their reply which they failed to do.” 5. The appellants assailed the order, dated 12.02.2004, passed by the Company Law Board by filing Company Appeal No.6 of 2005. The said Appeal came to be allowed remanding the matter to the Company Law Board for fresh consideration, by order dated 26.10.2005. Relevant portion of the order needs to be noted and it is thus: “A copy of the memorandum of understanding sought to be relied upon by the respondents has been placed before this Court. A perusal of the said document shows that there appears to be sharing of assets in between the parties to the said document. While the first party of the document was given sole and exclusive control over M/s.Siva Shankar Granites Private Limited and G.V.P.R. Engineers Limited, the second party of the document was given sole and exclusive control over M/s.Veera Bhadra Minerals Private Limited and G.V.Pratap Reddy Engineers and Contractors. It was also understood that the other party shall take all over conceivable measures to facilitate the control by the former as understood in the memorandum. The expression used, inter alia, in the document that the party shall have sole and exclusive control over the concern has been relied upon. The Company Law Board was presumably of the perception that when once the control was given to the third respondent, the appellants herein could not complain of issue of further shares to the respondents group. It has not been sought to be elucidated what exactly the meaning of full and complete control which again depends upon the interpretation of the terms of the memorandum of understanding as discussed hereinabove. Both parties have not led any evidence during the course of enquiry, either with reference to the points incorporated in the memorandum of understanding or in regard to the interpretation of the terms of the document, enabling one to take a legitimate conclusion that it was a case of rights given to one party qua the other to act in a particular manner. All this is not germane when once we consider the said stand qua the stand taken by the respondents in the counter, inter alia therein. An oral understanding has been specifically set up by the parties according to which the control has been given. There has been no reference whatsoever about the memorandum of understanding sought to be relied upon by the parties before the Company Law Board. Further more, in the counter it has been mentioned that as per the oral understanding and in order to enable the first respondent-company to increase its subscribed capital, an extra-ordinary General Body meeting was called for on 01.03.2001, in which a special resolution under Section-81(1A) of the Companies Act was passed. No evidence in support thereof has been placed before the forum below. The respondents further alleged in the counter that the appellants herein/petitioners were present and it was within their knowledge. These facts, shall, have to be proved. The absence of any such evidence and the consequences whereof needs no emphasis in this appeal. Except observing that according to the memorandum of understanding, the third respondent had full and complete control of the company, the Company Law Board did not consider these aspects more particularly, the specific case set forth by the respondents, inter alia, in the counter. When an act of oppression is complained of, while disposing the application, a finding which is required under law to be given is either upholding it or rejecting it, from which eventually the result will follow. In that view of the matter, the order of the Company Law Board, which is bereft of any reasons having been passed without considering the respective pleas of the parties in proper perspective, cannot in my considered view be upheld. For the above reasons, the matter is to be remitted to the Company Law Board for fresh consideration for passing appropriate orders after affording opportunity to both the parties. In the result, the Company Appeal is allowed and the impugned order is set- aside, and the matter is remitted to the Company Law Board for fresh consideration in the light of the observations made, inter alia, in the order of this Court. Under the circumstances, there shall be no separate order as to costs.” 6. The appellants filed Latter Patent Appeal No.2 of 2006, assailing the order, dated 26.10.2005, passed in Company Appeal No.6 of 2005 and the said appeal ended in dismissal on 19.06.2006. The appellants made unsuccessful attempts by filing Special Leave Petition before the Supreme Court and the said SLP ended in dismissal on 15.01.2007. 7. The Company Law Board, on remand of the matter, heard the parties afresh on the following issues: 1) Whether the petition is maintainable u/s.399 of the Act, for having not fulfilled the criteria u/s.399 of the Act? 2) Whether there has been a sharing of assets between the petitioners and respondents? 3) Whether the petitioners had knowledge about the allotment of 13,78,200 shares to the respondents? 4) Whether the petitioners have made out the case of oppression and mismanagement as provided u/s.397 & 398 of the Act? 5) To what reliefs and costs. The Company Law Board, on considering the material brought on record and on hearing the parties, came to the conclusion that the appellants do not possess 1/10th of the paid up capital of the 1st respondent Company to maintain the application under Section 399 of the Act and therefore, the petition is liable to be dismissed. A further finding has been recorded that the appellants acted upon the family arrangement which has been reduced into writing as Memorandum of Understanding, dated 02.07.2001. Under the said family arrangement, the 3rd respondent took over the management of the 1st respondent Company and therefore, the appellants cannot be permitted to complain of their oppression by the 3rd respondent. With the above observation, the Company Law Board dismissed the petition, by order dated 09.02.2011. For better appreciation, I may refer para.11 of the order passed by the Company Law Board, which reads as hereunder: “11. Certain logical conclusions emerge from the above discussions. The existence of MoU dated 02.07.2001 has been confirmed. The MoU has been acted upon as evident from the admissions of the first petitioner and other evidence placed on record. As per the affidavit filed by the petitioners before this Bench, the petitioners are in full agreement with the terms and conditions detailed in the MoU. If that is so, petitioner is bound by the terms of the MoU which sets out the right of the parties, inter alia in respect of R1 company. The first petitioner has by his own conduct admitted the rights of the parties determined under the terms of MoU. As per the MoU the third respondent will have full and complete control of R1 Company. The legitimate conclusion that can be drawn is that the acts of allotment of the impugned shares to the respondents’ family and acts connected therewith were duly performed as a prelude to the written MoU. The allotment was made after passing a special resolution u/s.81(1A) (Pg.141 of Petitioners typed set of papers). Since full and complete control of R1 company by the third respondent had been the agenda, it can be reasonably concluded that the petitioner had given his consent to the allotment of shares and that the EGM on 01.03.2001 and the Board meeting on 09.03.2001 were duly held. Had there been a disagreement on this, the MoU ought not to have been signed on 02.07.2001, or rather there could have been a mention about it in the MoU. But there is no such mention in it. The contention of the learned counsel for the petitioner that the further allotment of shares were not for the capital needs of the company, but only to reduce the shareholding of the petitioner is not tenable in the facts and circumstances of the case. The further contention that the petitioners were not offered shares in the further allotment is also not tenable.” Hence, this Company Appeal by the appellants/petitioners. 8. Heard Sri S.Ravi, learned Senior Counsel appearing for the appellants/petitioners and Sri A.Purusthom Reddy, learned counsel appearing for the respondents/respondents. 9. Sri S.Ravi, learned senior counsel appearing for the appellants/petitioners submits that there is no resolution by the extra ordinary General Meeting of the shareholders to increase the subscribed capital of the 1st respondent Company and therefore, any allotment of shares to the respondents 2 to 9 has no validity. A further submission has been made that the 3rd appellant never transferred its shares and the alleged transfer of shares pressed into service by the 3rd respondent has not been substantiated by any material, in which case, the order impugned in the appeal is liable to be set aside. A further submission has been made that the respondents have not placed on record any material to prove the Memorandum of Understanding, dated 02.07.2001. The Company Law Board has not appreciated the material brought on record in right perspective and adjudicated the issues on mere surmises and conjectures. 10. Learned counsel appearing for the respondents submits that the 1st appellant himself pleaded in the suit being O.S.No.22 of 2003 on the file of the Principal District Judge, Ongole, Prakasam District, about the division of family businesses among the members of the family and reducing the family arrangement in the form of Memorandum of Understanding, dated 02.07.2001, in which case, it is impermissible for the appellants to contend that they still have a say in the affairs of the 1st respondent Company. The learned counsel would also contend that the Company Law Board has taken on record the admission made by the 1st appellant and the 3rd respondent with regard to the Memorandum of Understanding, dated 02.07.2001 during the course of hearing of the petition. Since the findings recorded by the Company Law Board are based on the documents produced by the parties, and affidavits placed on record, they do not suffer from any infirmity or illegality warranting admission of this Company Appeal. 11. Under Section 10 of the Act, an appeal against the orders of the Company Law Board is maintainable on any question of law arising out of such order. The intention of law makers under Section 10 of the Act is to permit an appeal only on the question of law and not otherwise. – vide the decision of the Supreme Court in C.Srihari Rao v. Sri Ramdas Motor Transport Ltd. & Ors. (1999 Company Cas 685). 12. The appellants/petitioners approached the Company Law Board by moving a petition under Sections 397 and 398 of the Act complaining oppression and mismanagement of the affairs of the 1st respondent Company by the 3rd respondent. Incidentally, they questioned the increase of the issued share capital of the 1st respondent company and allotment of 13,78,200 shares to the respondents 2 to 9. 13. To maintain an application under Sections 397 and 398 of the Act, pre-requisite condition is that the appellants must possess not less than 1/10th of the issued share capital of the Company. In the family arrangement, the business concerns of the family, either as private limited company or proprietary concerns, have been shared among the family members. The 3rd respondent is the 1st party and the 1st appellant is the second party to the Memorandum of Understanding dated 02-7-2001. The 1st party has been given sole and exclusive control over M/s. Siva Shankar Granites Private. Limited and G.V.P.R. Engineers Limited and whereas the 2nd party has been given exclusive control over M/s.Veera Bhadra Minerals Private Limited and G.V.Pratap Reddy Engineers and Contractors, a proprietary concern. It is specifically indicated in the Memorandum of Understanding that each party shall take every conceivable measure to facilitate the other party to have control over their respective concerns. Indeed pursuant to the family arrangement reflected in the Memorandum of Understanding, the 1st appellant