IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE P.R.RAMAN & THE HONOURABLE MR. JUSTICE T.R.RAMACHANDRAN NAIR THURSDAY, THE 10TH JULY 2008 / 19TH ASHADHA 1930 Co.Appeal.No. 42 OF 2007() -------------------------- CP.25/2006 OF THE COMPANY LAW BOARD, ADDITIONAL PRINCIPAL BENCH, CHENNAI. APPELLANTS/PETITIONERS: 1. LATE HASHMUKH V.PATEL, REPRESENTED BY THE WIFE MRS.SAROJ HASHMUKH PATEL, 52, AMBADY CHAMBERS, KOCHI-682 016. 2. MR. PATEL V.JAYANTILAL, A.404, ADARSH GARDEN, 47TH CROSS, JAYANAGAR, 8TH BLOCK, BANGALORE-560 082. 3. MR.PATEL V.NATWARLAL, 522 SHIVAM, 4TH D CROSS, HRBR LAYOUT, 2ND BLOCK, KALYAN NAGAR, BANGALORE-560043. 4. MR. PATEL V.RAJESH, 8/1399, T.D. EAST ROAD, COCHIN-682 002. 5. MR. NARESH MAGANLAL DOSHI, 14-1272 A, JAY TOWER, C.P.UMMER ROAD, KOCHI-682 035. 6. MR. SATHISH M.DOSHI, JAY TOWER, 14-1272 A, C.P. UMMER ROAD, KOCHI-682 035. 7. MR. SHAILESH M.DOSHI, JAY TOWER, 14-1272 A, C.P. UMMER ROAD, KOCHI-682 035. 8. MR. JAYESH M.DOSHI, JAY TOWER, 14-1272 A, C.P. UMMER ROAD, KOCHI-682 035. BY ADV. SRI.A.M.SHAFFIQUE (SR.) SRI.E.K.NANDAKUMAR SRI.A.K.JAYASANKAR NAMBIAR SRI.ANIL D. NAIR CO.A. 42/2007 2 RESPONDENTS: RESPONDENTS: ------------------------- 1. KANTILAL PRANALAL PATEL, 30-626 B, WARRIAM ROAD, KRISHNA NIWAS, COCHIN, ERNAKULAM-682 016. 2. MITESH KANTILAL PATEL, 30-626 B, WARRIAM ROAD, KRISHNA NIWAS, COCHIN, ERNAKULAM-682 016. 3. BHARATH KANTILAL PATER, 30-626 B, WARRIAM ROAD, KRISHNA NIWAS, COCHIN, ERNAKULAM-682 016. 4. N.P. PATEL, WARRIAM ROAD, KRISHNA NIWAS, ERNAKULAM-682 016. 5. JAGRATH N.PATEL, WARRIAM ROAD, KRISHNA NIWAS, ERNAKULAM-682 016. 6. MANHAR J.SANGHARAJKA, G-390, PANAMPILLY NAGAR, ERNAKULAM-682 036. 7. MUKESH SHAH, B/46, EMPIRE ESTATE BUILDING, AUGUST KRANTI MARG, MUMBAI-400 036. 8. JITENDRA M.SHAH, 39-2520, SHREEJI KRUPA, DIWANS ROAD, ERNAKULAM-682 016. 9. PREMAL M.PATEL, WARRIAM ROAD, KRISHNA NIWAS, ERNAKULAM-682 016. 10. CHETNA B.PATEL, WARRIAM ROAD, KRISHNA NIWAS, ERNAKULAM-682 016. 11. B.P. PATEL, MADAVPURA, HUBLI, KARNATAKA. 12. VINOD B.PATEL, KRISHNAKRIPA, BEHIND SREENIDHI COMPLEX, NEAR ULLAL GENERAL HOSPITAL, ALAKE, MANGALORE-575 003. CO.A. 42/2007 3 13. KRISAHA BEN K.PATEL, 30-626 B, WARRIAM ROAD, KRISHNA NIWAS, ERNAKULAM-682 016. 14. PATEL CARS PRIVATE LIMITED, HAVING REGISTERED OFFICE AT PIONEER, TOWERS SUITE NO.205-206, 2ND FLOOR, MARINE DRIVE, COCHIN-682 031. BY ADV. SRI.PREMJIT NAGENDRAN SRI.SHAJI P.CHALY FOR R14 THIS COMPANY APPEAL HAVING BEEN FINALLY HEARD ON 4/6/2008, ALONG WITH COA NO. 43 OF 2007 & COA NO. 44 OF 2007 THE COURT ON 10.7.2008, DELIVERED THE FOLLOWING: CO.A. 42/2007 4 ORDER ON INTL. APPLN,. NO. 2820/2007 IN CO.A. 42/2007 // DISMISSED // 10.7. 2008. SD/-, P.R. RAMAN, JUDGE. SD/-, T.R. RAMACHANDRAN NAIR, (JUDGE) // TRUE COPY // P.S. TO JUDGE. KNC/- P.R. RAMAN & T.R. RAMACHANDRAN NAIR, JJ. = = = = = = = = = = = = = = = = = = COMPANY APPEAL NOS. 42, 43 & 44 OF 2007 = = = = = = = = = = = = = = = = = = = = = = DATED THIS, THE 10TH DAY OF JULY, 2008. J U D G M E N T Raman, J. While the appellants in Co.A. 42 are the petitioners in C.P. 25/2006 before the Company Law Board, Additional Principal Bench, Chennai, the appellants in Co.A.Nos. 43/2007 and 44/2007 are the respondents in the said petition. Since all these appeals arise out of the same judgment, we dispose of them by this common judgment. 2. The appellants in Co.A. 42/2007 are late Hashmukh V. Patel, represented by his wife Mrs. Saroj Hashmukh Patel and others. The appellants in Co.A. 43/2007 are K.P. Patel and others. In Co.A. 44/2007, the appellant is M/s. Patel cars Private Limited. 3. Petitioners in the company petition, alleging oppression and mismanagement in the affairs of the Company by co-share holders and invoking the provisions of Sections 397, 398 and 402 of the Companies Act, 1956, had approached the Company Law Board, collectively claiming 18% of the paid up capital of M/s. Patel Cars Private Limited (hereinafter referred to as "the Company"). They specifically sought for a declaration COA. NOS. 42, 43 & 44/2007 :2: that the allotment of 50,000 equity shares made on 4.7.2003 in favour of Respondent No.12, 1,80,000 equity shares made on 18.6.2004 (1,20,000 shares to Respondent No.13, 50,000 shares to Respondent No.12 and 10,000 shares to Respondent No.9) and the induction of Respondents 12 and 13 on the board of the Company are null and void. They also sought to reconstitute the board of the Company on the basis of proportional representation, to restore the board of directors of the Company as at 31.3.2001 and for other consequential reliefs. 4. The Company Law Board, by the impugned order, ordered that the Company shall register the transmission of shares of late Hashmukh V. Patel to his legal heirs who are petitioners 1 to 4 in the Company Petition and to rectify the register of members and in the event of the petitioners not subscribing to the additional shares already offered by the Company, after commencement of the then proceedings, within 30 days of receipt of the order, allot such unsubscribed shares in favour of the remaining shareholders in proportionate to their shareholding in the Company and within 30 days of receipt of the order, to reconstitute the board of directors, providing proportional representation to each of the families of late Hashmukh V. Patel, Naresh Mangalal Doshi, (5th petitioner) K.P. Patel COA. NOS. 42, 43 & 44/2007 :3: (Respondents 1 to 5,& 9 to 11 & 13) and Vinod B. Patel (Respondent No.12) on the basis of the existing shareholding, which shall appropriately be incorporated in the articles of association. It was also directed that the board of directors reconstituted in terms of the said order shall manage the day-to-day affairs of the Company as per the memorandum and articles of association of the Company. 5. The appellants in Co.A. 42/2007 seeks to quash the entire order of the Company Law Board including certain directions, some of which, in our opinion, are in their favour. So however, by seeking an interim relief, they limited their prayer for a stay of operation of direction No.2 in the order passed by the Company Law Board. This Court, as per order on I.A. 2820/2007 extended the time by three weeks from 23.11.2007 (already granted by the Company Law Board) for accepting the allotment of shares by the appellants in Co.A. 42/2007. The prayer made in Co.A. 43/2007 is to set aside the order of the Company Law Board to the extent to directs the Company to re-constitute its Board to include Respondent No.5 and the nominee of Respondents 1 to 4. Co.A. 44/2007 is filed by the Company as the sole appellant and the respondents are parties in the other two company appeals. The only relief claimed is against the direction issued COA. NOS. 42, 43 & 44/2007 :4: by the Company Law Board to reconstitute the Board including the 5th respondent and the nominee of Respondents 1 to 4. 6. From the pleadings and on the basis of the arguments by either side, we find that neither party has got any grievance as against the first relief granted by the Company Law Board in the matter of registering the transmission of shares of late Hashmukh V. Patel to his legal heirs and to issue share certificates in the name of petitioners 1 to 4. Among the directions issued by the Company law Board in its order under appeal, the appellants in C.A. 42/2007 are aggrieved by the second direction contained therein whereas the appellants in Co.A.43/2007 44/2007 are aggrieved by direction No.3. Of course, the appellants in Co.A. 42/2007 would also challenge certain findings made by the Company Law Board including the finding that there is no oppression and mismanagement, based on which some of the reliefs sought for were declined. 7. In order to appreciate the contentions between the parties, we may state the facts in brief, as follows: M/s. Patel Cars Private Limited was incorporated as a Public Limited Company on 10.6.1997 under the provisions of the Companies Act, 1956 and later on, it was converted into a Private Limited Company with effect COA. NOS. 42, 43 & 44/2007 :5: from 12.8.2001. C.P. 25/2006 was filed by the petitioners alleging oppression and mismanagement of the affairs of the Company. Among other things, the main acts of oppression and mismanagement pointed out are - allotment of 50,000 equity shares on 4.7.2003 to Vinod B. Patel who belongs to the majority group with the exclusion of minority shareholders, allotment of 1,80,000 equity shares on 18.6.2004 to the family members of the majority group with the exclusion of the minority shareholders and the non inclusion of a member of the family of late Hashmukh V. Patel on the Board of the Company, after his demise. According to the petitioners, all the above said allotments and change in the Board of Directors were made clandestinely, without the knowledge of any share-holders. Moreover, the allotments were made in violation of the equitable principles of giving opportunity to all shareholders to participate in the prospects of the Company and the allotments were made for cash at par to the detriment of the minority shareholders. According to the petitioners, most of the meetings of the Board of Directors and the General Meetings of shareholders were held with the exclusion of the minority shareholders and without giving any notice to them. The 5th petitioner, though was a Director on the Board, was not given any notice to the meetings of the COA. NOS. 42, 43 & 44/2007 :6: Board. The procedure adopted by the Company in the matter of issuance of shares were illegal and oppressive in nature. 8. On the other hand, the contention of the respondents were as follows: The Company was granted dealership in Honda Ceil Cars in the year 1997 and established its show room in Kochi. The Company needed funds for its business from time to time and therefore, it allotted shares after incorporation and as per the first two allotments made on 3.8.1998 and 10.12.1998, the family of Hashmukh V. Patel was allotted 3,70,000 shares and the family of Naresh Maganlal Doshi was allotted 1,00,000 shares out of 9,15,000 shares. The Company was not working satisfactorily due to the teething problems in the formative years because of huge capital investments and credit facilities availed and incurred loss during the year ending March, 1999 as also in the succeeding year ending in March, 2000 as a result of which 40% of the capital was eroded. It was pointed out that the respondents in the Company Petition had already held 71.75% of the shares in the Company as on 31.3.1998 and by further allotment they presently held 88.28%. The shares of Manhar J. Sangharjka and Mukesh Shah were transferred to Kantilal Pranalal Patel and others who are respondents in the company petition on 21.5.2001 pursuant to the Board's approval held on COA. NOS. 42, 43 & 44/2007 :7: 21.5.2001 in which late Hasmukh V. Patel and Naresh Maganlal Doshi were present in their capacity as Directors. Since the company was making losses, Bankers were not ready to finance it and except Patel family there was none to extend financial support to the company. The loan provided by K.P. Patel Group of Companies was an Interest Free Loan for about 50 lakhs and during that time, three Directors - Mr. Jitendra M. Shah, Mr. Mukesh M. Shah and Mr. Chandrakant N. Sangani wanted to resign from the Company because of the continuous losses made and offered their shares for sale to the other existing shareholders. None other than Patel Family came forward to purchase the same and at that time it was a public limited company and shares were freely transferable and transfer of shares was approved at the meeting of the Board of Directors held on 21.5.2001 where all the directors were present. By that transfer, shareholding of K.P. Patel family went up to 71% of the paid up capital and they provided their personal guarantees to the Bank and financial institutions apart from providing requisite securities. In these situation, the Board in their meeting held on 21.5.2001 decided to convert the Company into a Private Limited Company. For more than five years the petitioners had not raised any objection regarding the transfer of those shares. They COA. NOS. 42, 43 & 44/2007 :8: denied that there was any understanding or arrangement between the subscribers of the Company that the shareholders would be classified into groups and that the composition of the Board would be one directorship for every 1,20,000 shares held. They also denied that there was any requisition by petitioners 1 to 4, for transmission of the shares in the name of late Hasmukh v. Patel in their favour whereas a requisition was received to appoint one among them as a director. Due to the non-availability of funds in the Company for construction of Mangalore Show room, they approached Kotak Mahindra Bank who insisted for personal guarantees of the chairman and managing director. It was then that the Company opened an account with that Bank and they took over the facilities enjoyed by the company with the Bank of India on condition that the company increase the paid up capital at least by 25 lakhs, landed properties belonging to the Patel group worth Rs. 7 to 8 crores should be pledged failing which the Company must arrange margin money of 30% of the working capital and term loan. The matter was discussed in the Board meeting but none of the directors were ready to invest any more funds. Mr. Vinod B Patel offered to invest in the Company and accordingly, the Company decided to increase the paid up capital by allotting 1,00,000 equity shares of Rs. 10/- each to him and COA. NOS. 42, 43 & 44/2007 :9: inducted him as a Director. The wife of Kantilal Pranalal Patel had also agreed to invest in the Company for increasing the share capital who was alloted 1,20,000 equity shares of Rs. 10/- each and inducted as a Director. Though these matters were discussed in the Board Meeting and the Extra- ordinary General meeting nobody raised any objection. Late Hasmukh V Patel and Naresh Maganlal Doshi were also present in that meeting. The allegation of manipulation of minutes books, books of accounts etc. was denied and pointed out that so long as the names of the legal heirs of late Hasmukh V. Patel were not entered in the registry of members of the Company, they were not entitled to any notice. The company is not a family company and the claim for directorship based on proportional representation was also denied, especially in the absence of any explicit clause in the Article of Association in that regard. During the pendency of the matter before the Company Law Board, the board authorised a further issue of 7,22,500 shares of Rs. 10 at a premium of Rs. 30 thereby increasing of the paid up capital of the company by Rs. 72,25,000, to which the petitioners had no objection. But when the board decided to issue new shares in the ratio of 1 share for every 2 held by the shareholder, petitioners objected before the Company Law Board; but the Company Law Board COA. NOS. 42, 43 & 44/2007 :10: permitted issue of shares on condition that shares to be allotted to petitioners should not be allotted to anyone else but be kept in reserve. An extra ordinary General Body Meeting was held as permitted by the Company Law Board; but it stayed implementation of any decision taken therein. 9. After referring to the respective pleadings of the parties and after referring to the materials placed on record, the Company Law Board entered a finding that the entire sequence of events would show that the impugned allotments are in the interest and benefit of the Company and therefore, the resultant reduction in percentage of shareholding of the petitioners, in the facts of the present case, cannot constitute an act of oppression, more so in view of the acquisance on the part of late Hashmukh v. Patel and the fifth petitioner. The issue of additional shares is found to be for the financial needs of the Company and therefore, even when the respondents group is incidentally benefited, the petitioners group cannot complain of oppression. Furthermore, petitioners are already holding in excess of 75% of the capital and the Company is already in control of the respondents group. There is no material to show that the action of the respondents in having allotted the impugned shares in exercise of their power under Article 5 suffered from COA. NOS. 42, 43 & 44/2007 :11: lack of probity and fair play and they acted in a malafide manner. The various allotments of shares in favour of Respondents 9,12 and 13 not being oppressive, there is no need to direct them to transfer such shares in favour of the petitioners. The proposal mooted during the pendency of this proceedings, for raising the capital from Rs. 148 lakh to Rs. 223 lakh, and issue of additional shares in the interest of the Company falling within the domain of the collective wisdom of the shareholders/board of directors, does not warrant any interference and it is left to the petitioners to subscribe towards additional shares as offered. 10. The transfer of 1,20,000 shares belonging to the 6th respondent in favour of the first respondent and the contention that it is oppressive was considered with reference to Clause 23(e) of the articles of association of the Company. It was held that since the shares belonging to the 6th respondent are admittedly transferred to the first respondent who is already a member of the Company Article 23(e) is not attracted and therefore, need not be adhered to before effecting transfer by the 6th respondent in favour of the first respondent. Even if the argument of the petitioners are to be accepted, it is on record that the sixth respondent by his communication dated 29.9.2005 is found to have intimated the board of directors of the COA. NOS. 42, 43 & 44/2007 :12: Company of his intention to sell the shares held in his name with a request to inform him the members willing to purchase the shares at a reasonable price that may be fixed by the board. At the board meeting held on 3.10.2005 as borne out by the minutes, none of the members of the board present was keen in buying the shares offered by the 6th respondent upon which the board nominated the first respondent to purchase 1,20,000 shares from the 6th respondent at a mutually agreed price, which shall not be less than Rs.5/- per share. The board in its wisdom and in exercise of the powers vested in clause 23(e), selected the first respondent to acquire the shares of the 6th respondent. The contention of the petitioners that no intimation was ever sent to any one of the members before the transfer of impugned shares in favour of the 6th respondent is misconceived. The transfer of 1,20,000 shares by the 6th respondent to the first respondent was approved on 24.10.2005 in terms of the board minutes, wherein it was found that the 6th respondent approached all the directors for purchase of his shares and only the first respondent came forward to acquire the same. The copy of the communication dated 3.11.2005 of the 6th respondent addressed to the board of directors, which has not been disputed by the petitioners also supports this. The cumulative effect of these events COA. NOS. 42, 43 & 44/2007 :13: supported by documentary proof establishes the fulfilment of requirements of Clause 23(e) of the articles of association of the Company, even if it were applicable. 11. Petitioners sought for a declaration that the appointment of Respondents 12 and 13 as directors is null and void. The Company Law Board found that the relevant clause (clause 39) of the articles of association of the Company would indicate that the number of directors shall unless otherwise determined by the Company in general meeting be not less than two and not more than twelve. The directors need not hold any qualification share as per clause 40(e). The minutes of the board meeting dated 4.7.2003 shows that Respondent No.12 was appointed as additional director of the Company to look after the show room at Mangalore. At the sixth annual general meeting of the members of the Company held on 30.9.2003 the 12th respondent came to be appointed as director of the Company. The compliance certificate dated 10.12.2004 confirms sending of proper notice to the directors for the board meeting held on 4.7.2003 and due notice to the members of the Company for the annual general meeting for the year ended 31.3.2003 held on 30.9.2003. The directors' report dated 20.12.2004 for the year ended 31.3.2004 speaks COA. NOS. 42, 43 & 44/2007 :14: of appointment of the 12th respondent as additional director at the board meeting and the subsequent approval of the members for his appointment as director at the annual general meeting held on 30.9.2003. His appointment as additional director on 4.7.2003 is found reflected in Form No.32 dated 5.7.2003 filed with the Registrar. Hence the appointment of the 12th respondent as additional director as well as director took place prior to the death of Hashmukh V. Patel. who never made any grievances on this account, as per the records. It was observed from the minutes of the board meeting held on 18.6.2004 that the financial institutions from which the Company has availed credit facilities asked for personal guarantee of the directors and that none of the existing directors was able to provide personal guarantee, which necessitated the increase of number of directors in the board. Consequently, the 13th respondent who gave consent to join the board was appointed as additional director. This also was prior to the death of Hashmukh V. Patel. The minutes of the Board meeting dated 18.6.2004 were confirmed at the board meeting held on 16.7.2004 wherein Hashmukh V. Patel and the 5th petitioner were present. No objection was found to have been taken by them on the appointment of Respondent No. 13 as director. The directors report for the year ended 31.3.2005 discloses the COA. NOS. 42, 43 & 44/2007 :15: appointment of Respondent No.13 as additional director and the proposal for her appointment as director at the annual general meeting. Respondent NO.13 was appointed as the director of the company at the eighth annual general meeting held on 30.9.2005. The compliance certificate dated 29.8.2005 indicates that the notice of the board meeting of 18.6.2004 was properly sent to the directors of the Company and the proceedings were properly recorded duly signed and entered in the minutes book maintained for the purpose. Form 32 dated 18.6.2004 filed with the Registrar also shows that Respondent No.13 was appointed as additional director by the board on 18.6.2004. On the basis of the above facts, it was concluded that it is not open to petitioners 1 to 4 who are legal representatives of Hashmukh V. Patel or the 5th petitioner to question the appointment of Respondents 12 and 13, which is found to be in the interest and for the benefit of the Company. 12. The Company Law Board then considered the claim of the petitioners for joint management of the affairs of the Company. In that regard, clause 41(1) of the Articles of association of the Company was referred to which is as follows: "The first Directors of the Company will continue unless they resign from the Board COA. NOS. 42, 43 & 44/2007 :16: or are disqualified to act as Directors under the provisions of the Companies Act and are non-retiring Directors..." . According to the Company Law Board, this is a clear departure from Article 106 which was in force, when the Company remained to be a limited company prior to its conversion as a private limited company. Petitioner, in spite of their reservation, had not challenged the transfer of shares effected by Respondents 7 and 8 in favour of Respondents 9 to 11. Their grievances on account