IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.M.JOSEPH & THE HONOURABLE MR. JUSTICE M.L.JOSEPH FRANCIS MONDAY, THE 13TH JULY 2009 / 22ND ASHADHA 1931 Co.Appeal.No. 24 of 2006 ---------------------------------------------- (AGAINST THE ORDER IN C.A.NO.2/06 IN C.P.NO.15/04 OF THE COMPANY LAW BOARD, ADDL. PRL. BENCH, CHENNAI DATED 05.10.2006) ...................... APPELLANTS/RESPONDENTS 1 AND 2: ------------------------------------------------------ 1. M/S. VIDYA PRACHARANAM PVT. LTD., PRAYAR NORTH, PUTHUPPALLY, OCHIRA, KERALA. 2. K.RAMAN PILLAI, MANAGING DIRECTOR, VINAYAKA, T.C.4/268-1, KOWDIAR P.O., TRIVANDRUM-695 003. BY ADV. SRI.P.B.SAHASRANAMAN SRI.K.JAGADEESH SRI.T.S.HARIKUMAR RESPONDENT(S): COMPANY LAW BOARD AND APPLICANTS: ---------------------------------------------------------------------------------------- 1. THE COMPANY LAW BOARD (ADDITIONAL PRINCIPAL BENCH), 5TH FLOOR, SHASTRI BHAVAN, 26, HADDOWS ROAD, CHENNAI. 2. K.R.KIRAN, VRINDAVAN, KURAMPALA, PANDALAM, KERALA. 3. NAVEEN K.R., VRINDAVAN, KURAMPALA, PANDALAM, KERALA. ADV. SRI.JIJO PAUL FOR R2 & R3 THIS COMPANY APPEAL HAVING BEEN FINALLY HEARD ON 13/07/2009, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: APPENDIX IN COMPANY APPEAL NO.24 OF 2006 APPELLANTS' EXHIBITS: ANNEXURE A1 TRUE PHOTOCOPY OF THE ORDER IN C.P.NO.15 OF 2004 OF THE FIRST RESPONDENT, DATED 5.4.2006. RESPONDENTS' EXHIBITS: ANNEXURE R2(A): TRUE COPY OF THE EXTRACT OF ANNUAL RETURN MADE UPTO 28.6.1993 BY THE APPELLANT COMPANY BEFORE THE REGISTRAR OF COMPANIES. ANNEXURE R2(B): TRUE COPY OF THE ORDER DATED 27.9.2008 IN I.A.NO.2077/2008 IN O.S.NO.354/2008 OF THE COURT OF MUNSIFF, KAYAMKULAM. // True Copy // PS to Judge K. M. JOSEPH & M. L. JOSEPH FRANCIS, JJ. -------------------------------------------------- COM. APPEAL NO. 24 OF 2006 --------------------------------------------------- Dated this the 13th July, 2009 JUDGMENT K.M. Joseph, J. This is an Appeal filed against the order of the Company Law Board in C.A. No.2/06 in C.P. No.15/04 dated 05.10.2006. By the impugned order, the Company Law Board has, in proceedings instituted under Section 634A of the Companies Act (hereinafter referred to as the Act), directed as follows: “In the circumstances, the Company is hereby directed to allot 20 shares in favour of the first applicant and 10 shares to the second applicant within 30 days from the date of receipt of this order. The applicants shall pay the consideration for the shares within the next 30 days, thereafter upon which the Company will within fifteen days issue the share certificates to the petitioners. The Company is at liberty to take steps for securing return of 15 shares allotted in excess in favour of the first petitioner.” CO.A.NO.24/06 2 2. We heard the learned counsel for the appellants and also the learned counsel appearing on behalf of respondents 2 and 3. Four substantial questions of law are purported to be raised in this Appeal. They read as follows: “i) On the facts and the circumstances of the case, whether it is legal to issue an order under Sec.634-A of the Companies Act in violation and in contradiction to and out side the purview of an order issued under Section 402 of the Act ? ii) Whether it is legal to direct the appellant to issue unissued equity shares to a person who has not even proved to be an existing share holder enabling him to be entitled to get additional enhanced equity shares ? iii) Whether it is legal to direct a company in a petition under S.634-A to issue shares to any person so as to get advantage to him over the other share holders against the decision of the company with regard to the sharing of unissued equity shares ? iv) Whether the Company Law Board is justified in directing the appellants to issue 30 equity CO.A.NO.24/06 3 shares out of 38 equity shares to respondents 2 and 3 without ascertaining the nature and availability of those shares ?” 3. In order to appreciate the issues which arise for our consideration and decision, it is necessary to set out certain facts. The appellant Company had an authorised capital of 200 shares. The face value of the share is Rs.100/=. Of the same, 162 shares alone were issued. Thirtyone shares, according to the appellants, were not issued at all. Seven shares out of 200 had been issued. But, upon the death of the original share holder, there had been no transmission of his rights recognised by the Company and the shares continued to be reckoned in the name of the original share holder. Of the 162 shares, it is the case of the appellants that 17 shares had been issued in the name of Shri Kunjunnithan. Shri Kunjunnithan had three daughters and four sons. One Shri K.K. Krishna Pillai was the eldest son. Seventeen shares which stood in the name of Shri Kunjunnithan had been bequeathed by him in the name of Shri Krishna Pillai. It is stated that Shri Krishna Pillai CO.A.NO.24/06 4 transferred five shares out of seventeen in favour of his wife and thus he had twelve shares. It is the case of respondents 2 and 3 that Shri Krishna Pillai had transferred two shares in favour of the second respondent and one share in the name of the third respondent. Respondents 2 and 3 are the sons of Shri Krishna Pillai. Shri Krishna Pillai had also acquired another five shares from an existing share holder. In the meantime, there was a decision taken to increase the share capital by 1000 shares and raise Rs.1 Lakh. Thus, it was decided by the Company to issue 1000 shares having face value of Rs.100/=. The Company also decided to allot it to the existing share holders, in a particular proportion. Persons having one or two shares were to get ten times and persons having more than two shares were to get only at five times the number of shares they had. Complaining of non- implementation of the decision regarding the issue of 1000 shares as aforesaid, respondents 2 and 3 and their parents filed the Company Petition under Sections 397 and 398 against the CO.A.NO.24/06 5 Registrar of Companies and one Shri Raman Pillai as C.P.No.14/04. The order is produced as Annexure A1. The Company Law Board by its order dated 05.4.2006 proceeded to dispose of the same with the following directions: “(i) The Company shall issue further shares within twenty one days from receipt of this order in favour of the petitioners from and out of the unissued enhanced share capital in proportionate to their existing shareholding in accordance with the principles approved by the board of directors at the meeting held on 18.04.2003 subject to the following conditions:- a) Any further issue of shares in favour of the petitioners in terms of the order of the Bench shall be subject to the final outcome of the civil suit in O.S.No.233/2002 on the file of the Munsiff Court, Kayamkulam; b) The petitioners shall not sell or transfer any such additional shares, till the final termination of the proceedings in O.S.No.233/2002; c) Any benefit or accrual to the additional CO.A.NO.24/06 6 shares will be dealt with by the petitioners as per the final verdict, which may be made in O.S.No.233/2002. (ii) The shareholders, thereafter, are at liberty to carry on day-to-day affairs of the Company, including convening of the annual general meeting; election of the board of directors, and appointment of the Managing Director of the Company, in accordance with the articles of association of the Company. (iii) The Competent Authority will appoint the Manager of the School managed by the Company on appointment of the Managing Director of the Company in terms of this order.” 4. Apparently, the appellant Company purported to comply with Annexure A1 order in the following manner: It issued 85 shares in the name of the father of respondents 2 and 3, namely Shri Krishna Pillai. It issued 25 shares in the name of the mother of respondents 2 and 3 on the basis that she had five shares. This necessitated the C.A. No.2/2006 in the Company CO.A.NO.24/06 7 Petition. This was a petition filed under Section 634A of the Act which essentially provides for executing the order of the Company Law Board, treating it as a decree. It is in the exercise of the said power available to the Company Law Board that the impugned order has been passed. 5. Learned counsel for the appellants would contend that the Company Law Board has acted illegally. He would submit that actually, respondents 2 and 3 were never holders of shares, 2 and 1 in number respectively. He would submit that the shares were alleged to be transferred by their father, who happened to be a Director of the Company in the year 1992. He points out that the names of respondents 2 and 3 have figured in the annual return only in 1993. He would further submit that a claim was also raised on the strength of a Settlement Deed of the year 1993. These make the claims clearly contradictory to one another. He would refer us to Section 108 of the Act, to contend that the transfer of shares of the Company must be to be recognised in law, accompanied by an CO.A.NO.24/06 8 instrument which is to be submitted to the Board of Directors of the Company and the Board of Directors has to take a decision in favour of the transfer and there was no such instrument. He would submit that the Company has complied with the direction in the order in the Company Petition. This is for the reason that, as in the records of the Company, as the father had 17 shares, he was given 85 shares and the mother had 5 shares alone and she was rightly given 25 shares on the basis of the proportion which was decided upon by the Board of Directors and, therefore, there is nothing to be implemented. It was further submitted that, at any rate, the Company Law Board acted illegally in directing the issue of thirty shares (20 + 10) from out of the unissued thirtyeight shares. He would point out that the Company Law Board was dealing with the issuance of shares from out of the 1000 shares. 6. Learned counsel appearing on behalf of respondents 2 and 3, on the other hand, submits that the contentions raised by the appellants are certainly not available to them. He would submit CO.A.NO.24/06 9 that what is filed by respondents 2 and 3 was in the form of an Execution Petition to execute the order passed by the Company Law Board. The said order has become final. He would also submit that in view of the fact that the father was entitled to only 70 (14 X 5) shares and he has been issued with 85 shares, namely 15 shares in excess they are agreeable to the Company issuing 15 shares from out of the 15 shares which their father would surrender and the 15 shares alone need be issued from out of 38 unissued shares. He would submit that they are only asking for execution of the order as per which they are legally entitled to get 30 shares. He would further point out that even in regard to the direction of the Company Law Board to issue 30 shares from out of the unissued 38 shares, the direction requires only a resolution of the Board of Directors and not other organ of the Company in exercise of its powers for complying with the decision of the Company Law Board. 7. A substantial question of law will arise from out of the CO.A.NO.24/06 10 pleadings. It is, therefore, necessary to consider the question whether the appellants have succeeded in canvassing the legality of the proceedings on the basis that respondents 2 and 3 are not share holders and are not entitled to the additional shares arising out of the decision to enhance the capital of the Company. We would think that having regard to the pleadings taken in Annexure A1 order, the correctness of which we are not called upon to pronounce upon, it may not be open to the appellants to contend that respondents 2 and 3 were not share holders of the Company in an extent of 2 and 1 shares respectively. A perusal of Annexure A1 order would show that respondents 2 and 3 were petitioners 3 and 4 therein. They filed a petition under Sections 397 and 398 of the Act. Apparently, the principal plank of their complaint was the non-implementation of the direction of the Board of Directors to issue the 1000 shares in a particular proportion which we have already adverted to. A perusal of the said order would make it clear that respondents 2 and 3 along with their parents had CO.A.NO.24/06 11 specifically set up the contention that Shri Krishna Pillai had transferred 2 and 1 shares respectively in favour of his two sons, namely respondents 2 and 3 in the present Appeal. There was absolutely no denial of the said case of respondents 2 and 3. The Company Law Board was persuaded to proceed on the basis apparently that respondents 2 and 3 in this Appeal were also entitled to be treated as share holders and, therefore, entitled to the enhanced share capital. It is this complaint of the petitioners therein including respondents 2 and 3 in this Appeal which came to be dealt with by the Company Law Board and the petition was disposed of with directions which we have already referred to. As already adverted to, this was responded to by the appellant Company by issuance of capital, as we have already adverted to. Necessarily, this has the following admitted consequences: The appellant Company has refused to issue any share in favour of respondents 2 and 3 on the basis of the decision of the Board of Directors. Instead, the appellant Company has only CO.A.NO.24/06 12 recognised Shri Krishna Pillai as the holder of the entire 17 shares. Shri Krishna Pillai, going by the case of the respondents which apparently was accepted by Annexure A1 order, could be treated as holder of 14 shares alone and 2 shares must be treated as being held by the second respondent and 1 share must be treated as held by the third respondent in this Appeal. It is apparently treating Shri Krishna Pillai as entitled to 17 shares that the appellant Company proceeded to issue 85 shares in favour of Shri Krishna Pillai. Had the appellant Company instead treated Shri Krishna Pillai as the holder of 14 shares alone, he would have been issued with 70 shares and respondents 2 and 3 would have been issued with 30 shares as they were having two shares and one share each and applying the multiplier of two, they would have been entitled to 20 and 10 shares respectively. It is this result which is sought to be achieved by the Company Law Board by issuing the direction. We have already seen that the original order which has ultimately culminated in the order passed in this case was passed on the basis CO.A.NO.24/06 13 that there was a transfer in favour of respondents 2 and 3. 8. Now, let us examine the contentions taken by the appellants even in this proceedings. We were handed over a copy of the Objection. The appellants would say that there was no challenge to paragraphs 1 to 5 of the application. In paragraph 5 of the application, the respondents had elaborately set out the facts which, inter alia, included the allegation that the second respondent is holding two shares of the Company and he is entitled to 20 or 22 shares and the second respondent held one share in the Company and he was entitled to 10 shares of the Company. Paragraphs 5 and 6 of the Objection read as follows: “5. The averments contained in para No.4 is not fully correct and does not reveal the real facts. It is admitted fact in the original application, CP.No.15/2004 itself that there is only 110 equity shares withheld unissued. Their prayer was to issue the unissued shares in the original applicants 1 and 2. Due to oversight and since all the applicants hails from the very same family the share was issued CO.A.NO.24/06 14 to them erroneously. There is no unissued share also remains. This fact is well aware to the petitioners or rather the persons behind the present application. So, either they have to adjust among themselves or else to return the surplus shares issued to their parents. The first petitioner is holding only 14 shares, 2nd petitioner is holding 5 shares purchased by her. Out of the 17 shares originally held by late Kunjunnithan 2 shares was transferred to the 1st petitioner herein and 1 share was transferred to the 2nd petitioner. Hence they together entitled to 110 shares. The Hon'ble Bench directed to issue the said unissued 110 shares to the applicants in proportionate to their holding. The first respondent erroneously issued 85 shares (17 x 5) to first petitioner and 25 (5x5) shares to the 2nd petitioner. Thus, a total of 110 shares was issued to the 1st and 2nd petitioners alone. In fact the first petitioner was entitled to in proportion of 14 shares held by him, i.e. 14x5=70. Hence 15 shares in excess was allotted to him. Now the present petitioners are entitled to 2x5=10 and 1x5=5, a total of 15 shares which is held by the 1st petitioner CO.A.NO.24/06 15 in excess. 6. The statement in para No.5 of the application is not correct and denied. The fact narrated in that para is against the averment in the other paragraphs. It is also very clear that though the authorised capital of the company was 200 equity shares of Rs.100/= each from the very inception itself, the paid up capital was only 162 shares of 100 each. The remaining 38 shares was not so far issued and the enhanced share capital is 1000 shares of Rs.100/= each as seen from the earlier paras of the application itself. Their entitlement stated in the para is also not correct. The petitioners together held 14+5+3 shares and the total unissued shares is 110. So they are entitled to 5 shares each according to their holdings (110/22=5). Though technically their submission of non-compliance was correct, there is factually no force in their demands and hence the further averments in para 6 of the application is also denied. The letter, notices, and reply notices are very clearly establish the contentions of the respondents.” CO.A.NO.24/06 16 9. Thus, the appellant Company has, both in the original proceedings and in the execution proceedings, proceeded as if respondents 2 and 3 are share holders and the original share holding of Shri Krishna Pillai (17) must be treated as split up into 14+2+1 (17). The appellant Company proceeded on the basis that Shri Krishna Pillai was entitled to 70 shares and this is on the basis that Shri Krishna Pillai was to be treated as the holder of 14 shares. Thus, far from impeaching the title of respondents 2 and 3 as share holders, the Company Law Board has proceeded as if respondents 2 and 3 are share holders of the Company. They harp upon a mistake in allotting shares to Shri Krishna Pillai in excess of what he was entitled to. Thus, in fact, the Company would say that the shares have been allotted to Shri Krishna Pillai in excess of what he was entitled to. In such circumstances, we are of the firm view that the appellants cannot be permitted to raise the contention that respondents 2 and 3 are not entitled to be treated as share holders of the Company or claim part of the shares which are CO.A.NO.24/06 17 vouch-safed for them as per the decision of the Board of Directors which decision in turn was directed to be implemented by the Company Law Board by Annexure A1 order. 10. Learned counsel for the appellants would then contend that the direction to issue 30 shares from out of the unissued share capital is insupportable. It may be true that the Company Law Board when it issued direction in the Company Petition, was concerned with the issuance of shares arising from its decision to increase share capital by issuance of 1000 shares. But, there is no gainsaying the fact that going by Annexure A1 decision and the pleadings of the appellant Company even in the execution which we have adverted to, that respondents 2 and 3 have not been given their shares in terms of the original order which is to be treated as a decree. In regard to the issuance of 30 shares from within the unissued 38 shares, there is not much dispute at the Bar that for issuing any share from out of the unissued share capital, the formal legal requirement is only the decision of the Board of Directors. CO.A.NO.24/06 18 On the one hand, respondents 2 and 3 are entitled to the fruits of Annexure A1 decree. On the other hand, it may involve issuance of shares from out of the 38 unissued shares. No doubt, learned counsel for the appellants would contend that if any share has to be issued from out of the 38 unissued shares, it may impinge on the rights of the other share holders. But, we must consider the fact that the appellants and the Registrar of Companies were parties in the Company Petition culminating in Annexure A1 order. The result of Annexure A1, as already been set out by us, is that there cannot be any denial of the shares which the respondents 2 and 3 are entitled to. What may be necessary is the formality of the Board of Directors issuing shares to comply with Annexure A1 order. In view of the fact that the Company is bound by Annexure A1 order, to act in accordance with its own resolution, we see no reason why we should accept the contention of the appellants on the basis that the direction is to issue shares from out of the unissued 38 shares. However, we note that the learned counsel for CO.A.NO.24/06 19 the second respondent is agreeable to 15 out of 30 shares directed to be issued, being issued only from the 15 shares held by Shri Krishna Pillai in excess of what he was entitled to and upon his surrendering 15 shares to the Company. In the light of this, we find no merit in the contentions of the appellants as against the order which is impugned before us and the Appeal is liable to be dismissed. 11. In the light of the stand taken by respondents 2 and 3, we direct that the appellant Company need issue only fifteen shares from out of the thirtyeight unissued shares and the balance fifteen shares have to be issued to respondents 2 and 3 only upon Shri Krishna Pillai surrendering the fifteen shares to the Company. Subject to the above, the Appeal fails and it is dismissed. Sd/= K.M. JOSEPH, JUDGE Sd/= M. L. JOSEPH FRANCIS, JUDGE kbk. CO.A.NO.24/06 20