C.A.P.P. No.38 of 2007 (O&M) and -1- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH C.A.P.P. No.38 of 2007 (O&M) and C.M.A. No.80 of 2008 in C.P. No.44 of 2006 Date of decision: 06.02.2009 2. C.A.P.P. No.39 of 2007 (O&M) and C.M.A. No.81 of 2008 in C.P. No.45 of 2006 Zora Singh and others .............. Appellants Vs. Amrik Singh Hayer and others ............Respondents Present: Mr. M.L. Sarin, Sr. Advocate with Mr. Anand Chhibbar, Advocate. Mr. A.K. Chopra, Sr. Advocate with Ms. Roopa Pathania and Mr. Ashish Chopra, Advocate. Mr. Vivek Bhandari, Advocate. CORAM: HON'BLE MR. JUSTICE K. KANNAN 1. Whether Reporters of local papers may be allowed to see the judgment ? Yes 2. To be referred to the Reporters or not ? Yes 3. Whether the judgment should be reported in the Digest ?Yes -.- K.KANNAN, J. I. Disposition by Company Law Board. 1. The appeals under Section 10-F of the Companies Act have been brought by parties against of whom complaints of oppression and mismanagement were alleged and found by the Company Law Board as proved. 2. By a common order passed in C.P. No.44 of 2006 and C.P. C.A.P.P. No.38 of 2007 (O&M) and -2- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 No.45 of 2006, the Company Law Board upheld partially the claim of the petitioner-Amrik Singh Hayer who complained of oppression and mismanagement under Sections 397-399 of the Companies Act, 1956. It specifically found violations of statutory provisions relating to notice and Articles of Association that provided for pre-emptive rights. It held that the meetings held on 28.04.2006, 09.05.2006, 11.05.2006, 12.05.2006, 19.05.2006 and 20.05.2006 had not been properly convened and all the actions in the alleged meetings were in violation of the Articles of the Association and provisions of the Companies Act. It found that the purported act of increase of the authorised share capital from Rs. 1 crore to Rs.2.5 crores on 28.04.2006 and again from Rs.2.5 crores to Rs.3 crores on 11.05.2006 were illegal having been passed without notices to the petitioner, who was a substantial share-holder. By the impugned order, the Company Law Board restored the status quo as regards the share capital of the company. The removal of the petitioner and his son from Directorship and induction of other Directors were found as having been done in violation of the statutory provisions of Section 191 and 284 of the Companies Act and the purported removal itself constituted gross oppression. The induction of new Directors on 09.11.2005 was also found to be illegal and status quo ante was ordered to be restored. It found its own justification in the nature of orders that were made by references to Section 402 (e), 407 and 402 (a) about extraordinary powers of the Company Law Board and that the directions given by the Court and the findings made with regard to the alleged illegality of C.A.P.P. No.38 of 2007 (O&M) and -3- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 the meetings and the Resolutions, were in conformity with the powers of the Company Law Board vested under the relevant provisions enumerated above. II. The enumerated points of law by the appellant:- 3. The appeals have been filed under the relevant provisions of Section 10-F of the Companies Act on questions of law that were canvassed on the test of oppression and mismanagement as having rested on principles of equity and the petitioner who had committed fraud and attempted to resile from his express undertakings under the contract was not entitled to obtain any redressal from Court. The points of law urged for consideration had been set out elaborately in para 3 as follows:- “(i) Whether the Memorandum of Understanding dated 09.11.2005 which has been entered into by individuals can tantamount to be an agreement regarding the affairs of the Company? (ii) Whether a petition u/s. 397, 398 and 402 of the Companies Act, 1956 can be entertained by the Company Law Board (CLB) when there is an individual dispute of an agreement between two individuals and is not the concern of the affairs of the Company? (iii) Whether the CLB can opine and give findings on intricate and complicated questions of fact which can only be determined by a Civil Court by C.A.P.P. No.38 of 2007 (O&M) and -4- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 recording evidence and can not be adjudicated in a summary jurisdiction of the CLB whether or not the complete payment has been made as per MOU dated 09.11.2005 when majority shareholder, holding 75% shares, accepts the fact that he has received the same? (iv) Whether any subsequent acts pursuant to completion of the MOU dated 09.11.2005 when full payment has been made by the Appellants and received by the Respondents can tantamount to acts of oppression and mismanagement by the Appellants as alleged by Respondent No.1 when he is a stranger to the affairs of the company? (v) Whether a finding can be given by the CLB that an agreement between individuals can become unenforceable, even though it does not have jurisdiction in the matter which is clearly a domain of the Civil Court? (vi) Whether the refusal on part of minority shareholders to receive the balance sale consideration of shares on number of occasions can be attributed as an act of oppression and mis- management by the appellants? (vii) Whether the order dated 17.10.2007 passed by the Ld. CLB be sustained in view of wrong C.A.P.P. No.38 of 2007 (O&M) and -5- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 findings on the acts of oppression and mismanagement which is contrary to the facts and records of the case? (viii) Whether the commercial disputes be the subject matter of the petition under Section 397 and 398 of the Companies Act 1956? (ix) Whether a Single Technical Member of the Company Law Board can modify, terminate or amend the MOU between the shareholders for purchase of entire equity shares with the consent of 100% Shareholders with Third Party without obtaining the consent in terms of Section 402(e) of the Companies Act, 1956? (x) Whether a Shareholder who has received part payments of consideration for the sale of shares several times several times on behalf of other/all shareholders parties to the MOU can claim the relief under Section 397/398 of the Act when he is required to comply with the terms and conditions of the MOU? (xi) Whether the MOU where time is not the essence due to penalty clause and amendment clause provided therein and once penalty charged can be adjudged as an agreement where time is essence by the Company Law Board (sic)? C.A.P.P. No.38 of 2007 (O&M) and -6- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 (xii) Whether the doctrine of promissory estoppel can be invoked in the matters where one party has fulfilled the Contract and others also acted onthe same? (xiii) Whether an uncompleted/unaccepted Power of Attorney holder can file Petition u/s 397 & 398 and who opted to exit from being the member of a company in advance (whereas only a share holder can file the petition)? (xiv) Whether withdrawal of loan from Directors by putting fresh loan by third party in the company, return of share application money out of MOU is the payment to Company or payment under MOU (sic)? The enumerated questions are unwieldy and fall out of focus to the real controversies. The points that require to be addressed on the basis of arguments advanced by the counsel could be paraphrased broadly as under:- (a) Whether a memorandum of understanding (MOU) entered into by individual relating to an asset of a company to be said to be an agreement regarding the affairs of the company? (b) Whether CLB could pronounce on disputed questions of facts, pending adjudication of the same issue in a properly instituted civil suit? C.A.P.P. No.38 of 2007 (O&M) and -7- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 (c) Whether presumption of service of notices exist for certificate of posting to say that the petitioner had been duly informed about the various meetings of the Board of Directors and if actual notices had not been proved, could he be presumed to have constructive notice? (d) Whether the decision to remove and induct directors, increase the share capital without alleged proper notice amount to oppression and mismanagement. III. Relevant background facts:- (i) Relationship between parties:- 4. Before adverting to the points of law canvassed, it becomes essential to consider the case from certain facts. The admitted case is that the two Companies M/s Hayer Estates Pvt. Ltd and M/s Hayer and Hayer Estates Pvt. Ltd. was a closely held company from members of the family consisting of Ajmer Singh and Amrik Singh. Ajmer Singh and one Malkiat Singh had been married to two sisters namely Surjit Kaur and Gurmeet Kaur. Malkiat Singh had a sister by name Swaran Kaur who had been married to Amrik Singh. The possession of the holdings in the company were, Ajmer Singh had 75% shares and Amrik Singh had 25% shares. Both Ajmer Singh and Amrik Singh were Non-Resident Indians; the former was based in UK while the latter was based in USA. Malkiat Singh (who was the co- brother of Ajmer Singh and brother-in-law of Amrik Singh), however, was stationed in India and he was looking after the affairs of the C.A.P.P. No.38 of 2007 (O&M) and -8- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 family. (ii) Introduction of a third party to family in company affairs by a contemplation of sale of property of company:- 5. The company was really dealing in real estate and had obtained allotment of a large extent of land and building within the limits of Chandigarh city. The admitted case is that the Ajmer Singh, Amrik Singh wanted to dispose of the property of the company at profit and apprehending that the transactions might result in a huge incident of capital gain tax, decided to adopt a contrivance of sale of shares of the company to a person named, Zora Singh, who wanted to purchase the property. The decision to sell the property was hence dropped and transfer of shares was to take place in the following manner. Initially on 29.10.2005, a decision was taken at meeting of the Board of Directors under which the Company had authorised the Directors to nogotiate and settle the terms and conditions of transfer of the Company's land and building and that MOU was to be executed authorising Ajmer Singh, Amrik Singh and Malkiat Singh to act on behalf of the Company and further empowering Smt. Manjit Kaur w/o late S. Balbir Singh to receive consideration amount on behalf of Ajmer Singh in his absence. On the same day, they had further resolved to appoint Zora Singh as an Additional Director of the Company. The induction of Zora Singh was contemplated as a person in whose favour the Directors had decided to transfer the shareholding and invest with him the control and management of the Company. It, however, contained the condition that the transfer of shares itself would not be made in his favour until the full payment as mentioned C.A.P.P. No.38 of 2007 (O&M) and -9- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 in the MOU was made by him. However, when the MOU was executed on 09.11.2005, the reference to transfer the property had been dropped and the MOU signed by all the three Directors of the Company referred to transfer the total control and management of the companies. (iii) Essential terms of MOU:- 6. Pursuant to the resolution, the MOU was drawn up on 09.11.2005 when Ajmer Singh, Amrik Singh and Malkiat Singh jointly executed the document, along with Zora Singh which declared that all the Directors had decided to transfer the total control and management of the Company for sound and effective management of the Comapny and that the transfer would be done for a total consideration of Rs.1500.00 lacs (Rupees Fifteen crores) and that on the payment of 25% of the consideration, Zora Singh would be inducted on the Board of Directors to take care of all day-to-day activities, although he may not hold any shares of the company; 25% within three months of the execution of MOU and balance payment within six months or earlier of the execution of MOU. The MOU also specifies that on the expiry of three months from the date of execution of MOU, if the total payment was not made, then a compensation amount of Rs.7 lacs per month would have had to be paid additionally by Zora Singh to the first party. There are other terms in the MOU that do not require dilation. (iv) Induction of Zora Singh as a director of the company:- 7. The admitted fact is that Zora Singh was inducted as a C.A.P.P. No.38 of 2007 (O&M) and -10- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 Director in the meeting of the Company on 29.10.2005 even without transfer of shares in his favour. IV. The genesis of dispute:- 8. The Memorandum of Undertaking was executed under the terms of which the entire shareholding in the hands of Ajmer Singh and Amrik Singh were to be transferred to Zora Singh for a consideration of Rs.15 crores. All other issues have been denied. Even the date of execution of the MOU is denied by Zora Singh by pointing out that although a recital of the document on the first page is made as though it was 09.11.2005, the document had been signed on the last page by Zora Singh only on 10.11.2005. This, according to the appellant will have a bearing on the last date before when the amount was to be paid. 9. Ajmer Singh admits the payment of the entire sale consideration before the date stipulated under the MOU and this fact was denied by the respondent by stating that the payments alleged to have been made on various dates either to Ajmer Singh or Malkiat Singh purported to be on his behalf are not any payments in the eye of law, since he had not given any such authority for receipt on his behalf. It is also contended on behalf of the respondent that all the payments which were supposed to have been made by cash could not have been true and that they were falsely receipted by Ajmer Singh or Malkiat Singh to oust Amrik Singh from the company and join with Zora Singh to carry on with the affairs of Company. C.A.P.P. No.38 of 2007 (O&M) and -11- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 V. In the absence of agreement, payment to one of joint payees is payment to all:- 10. It must be pointed out that there is no specific mode of tender that the MOU envisages. The MOU also does not refer to any specific amounts as being individually payable to the first party under the documents, who are Ajmer Singh, Amrik Singh and Malkiat Singh. The document also does not stipulate that Amrik Singh could be paid only 75% of the total consideration being proportionate to the shareholding by him and that Amrik Singh shall be paid 25%. The document merely stipulates a composite payment and, therefore, so long as any one of the parties states that he has received the entire amount, the remedy of the person who is entitled to a fractional share shall be to proceed against the person who claims to have received the entire sale consideration. 11. One elementary aspect of the case cannot be missed. The contention of the learned Senior Counsel is that the whole amount has not been paid within the time stipulated and Zora Singh did not have the money to pay the entire 15 crores before the last date specified in the document. The MOU contained forfeiture clause and the non- payment of whole consideration would according to the learned counsel for the respondent, relieve the obligations of the first party to transfer the holding and the respondent had only the interest in the company in refusing the tender made after the due date, by which conduct, it would have become possible for Company to negotiate a better price elsewhere. 12. The attempt of the learned Senior Counsel for the C.A.P.P. No.38 of 2007 (O&M) and -12- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 respondent was to show that apart from the amount which was deposited to the credit of the Company by him after receipt of the amount from Zora Singh, no other amounts have been brought to the coffers of the Company. According to him, this would show that the contention by Ajmer Singh and the Malkiat Singh that they had received the whole of the consideration was false and there was no proof apart from the fabricated receipts that the money had given to the Company. VI. Shareholders have no direct ownership over the assets of the company:- 13. The fallacy in such a line of argument on the side of the respondent is that the MOU does not contemplate sale of the property of company. It is a fundemental percept that can suffer no dent is that the share-holders are distinct from the Company and the share-holders are not the owners of the property of the Company. Company and shareholders are distinct entities (Chiranjit Lal Chowdhary Vs. Union of India AIR 1951 SC 41). A shareholder that buys shares buys no interest in the property of the company which is a juristic person entirely distinct from the shareholder. The true position of a shareholder is that on buying shares as an investor, he becomes entitled to participate in the profits of the company in which he holds the shares if and when the company declares, subject to the Articles of Association, that the profits or any portion thereof should be distributed by way of dividents among the shareholders. He has undoubtedly a further right to participate in the property of the company which would be left over after winding up but not the assets C.A.P.P. No.38 of 2007 (O&M) and -13- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 as a whole (Bach F. Gugdar Vs. CIT AIR 1953 SC 74, (1955) 25 Comp Cas 1). The ownership in the property is only with the Company and the MOU itself does not contemplate the sale of the property by the Company to Zora Singh. The MOU contemplates transfer of shares and the management of the Company. Consequently, the ownership in the property was to reside in the Company itself and it was only the management of the Company that could have gone to the hands of Zora Singh on the transfers of shares. Again, the contention that the shares had been transferred in violation of the Articles of Association that provided for rights of pre-emption is meaningless because if the only two shareholders of the Company had decided to transfer the entire shareholding to a third party, the right of pre-emption does not reside with any one party. If only the transaction had contemplated the transfer of shares of Ajmer Singh only and Amrik Singh had not contemplated joining him, it could have protected his right of pre-emption by seeking for the shares of Ajmer Singh to be transferred to him. The right of pre-emption itself is a weak right and the person who has offered to sell his shareholding cannot himself contend that there existed right of pre-emption in his favour. The finding rendered on this aspect by the Company Law Board is untenable and I have no hesitation in finding that it is bound to be set aside. VII. Effect of institution of civil suit for specific performance:- 14. The problem arises also by the wrong perception of Zora Singh that since the major shareholder had admitted the receipt of the C.A.P.P. No.38 of 2007 (O&M) and -14- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 entire consideration, he was entitlted to assume the MOU as having come to full operation and that Amrik Singh had ceased to be a share- holder. While the alleged receipt of the entire consideration by Ajmer Singh could constitute an admission against him for his liability to transfer 75% of the shares in favour of Zora Singh, it cannot constitute valid discharge and enable the Zora Singh to assume that he has obtained the entire transfer of shares in his favour. Transfer of shares are required under the Companies Act to follow a particular procedure and so long as the requirements of law for transfer of shares of Amrik Singh has not been carried out, Zora Singh cannot assume that his shares are also deemed to have been transferred to him. 15. Indeed the Suit filed by Zora Singh subsequent to the initiation of proceedings before the Company Law Board for Specific Performance for transfer of shares constitute an admission that Amrik Singh continues to be a 25% shareholer. While he may have appropriate remedy through a Civil Court, he is not entitled to contend that the continuation of the proceedings before the Company Law Board itself has become untenable by the pendency of a civil suit. Such an argument made by the learned Senior Counsel on behalf of the appellants is not tenable in the eye of law for, a person who is complained of as having caused oppression and mismanagement cannot oust the jurisdiction of the Company Law Board by subsequently instituting a civil suit. Before the Civil Court, the relevant issue could be whether the plaintiff had performed his part of the contract and the non-execution of transfer of shares by Amrik C.A.P.P. No.38 of 2007 (O&M) and -15- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 Singh was justfied or not. So long as Amrik Singh continues to be a shareholder, all the trappings of the Companies Act relating to the rights of such shareholders by entitlement to statutory notices and his own entitlement to participate in the proceedings of the Board cannot be ousted. VIII. Proof of service of statutory notices by certificate of posting-weak evidentiary value:- 16. Several meetings of Board under which new persons had been inducted into the Board, removal of Amrik Singh and his son from the Board, increase of share capital of the company have all serious consequences relating to the administration of the Comapny and its functions. The Company Law Board has found that no proof had been adduced for the services of notices to Amrik Singh or his son for the requirements of law for convening of special meetings or other meetings. The learned Senior Counsel for the Appellats points out to certificates of posting as affording sufficient proof of his acts. According to him, the observation of the Company Law Board that there had been no proof of desptach of notices was clearly erroneous and against the documentary evidence tendered before it. Even otherwise, according to him, Section 53 of the Companies Act the notices sent through certificate of posting to the addressees at the correct address shall be presumed to have been delivered to that an addressee. Section 53 of the Companies Act reads as under:- "Section 53.Service of documents on members by company.- (1) A document may be served by a company on any member thereof either personally, or by sending it by post to him to his registered address, or if he has no registered address in India, to the address, if any, within C.A.P.P. No.38 of 2007 (O&M) and -16- C.M.A. No.80 of 2008 in C.P. No.44 of 2006 India supplied by him to the company for the giving of notices to him. (2) Where a document is sent by post,- (a) service thereof shall be deemed to be effected by properly addressing,