C.A.P.P. No.10 of 2008 (O&M) -1- IN THE HIGH COURT FOR THE STATES OF PUNJAB AND HARYANA AT CHANDIGARH C.A.P.P. No.10 of 2008 (O&M) Date of Decision: 17.04.2009 S. Sukhdeep Singh Jhikka .......Appellant Versus S. Ajit Singh Deogan and others .....Respondents Present: Mr. Anand Chhibbar & Mr. Pankaj Gupta, Advocates for the appellant. Mr. Sumeet Mahajan, Sr. Advocate with Mr. Sham Lal Bhalla, Advocate for respondent Nos.5 to 7. Mr. Sanjay Tangri, Advocate for respondent No.8. Mr. Vikas Bahl, Advocate. 2. C.M.A. No.14 of 2009 and C.M.A. No.135 of 2008 in C.A.P.P. No.16 of 2008 Sh. Vikas Sharma .........Appellant Versus S. Sukhdeep Singh Jhikka and others ......Respondents Present: Mr. Sanjay Tangri, Advocate for the applicant-appellant. Mr. Sumeet Mahajan, Sr. Advocate with Mr. Sham Lal Bhalla, Advocate. Mr. Anand Chhibbar and Mr. Pankaj Gupta, Advocates. Mr. Vikas Bahl, 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 -.- C.A.P.P. No.10 of 2008 (O&M) -2- K. KANNAN J. I. Disposition before CLB 1. The company appeal has been filed at the instance of M/s Sutlej Chit Fund and Financiers Private Limited, Jalandhar against the order passed by the learned Company Law Board (hereinafter referred to as 'CLB') dated 23.05.2008 in a petition filed by respondents No.1 to 6 complaining of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956. By the impugned order dated 23.05.2008, the CLB had directed the 7th respondent to set aside the increase of shareholding and allotment of 3000 additional shares and had further set aside the appointment of the 8th respondent Sh. Vikas Sharma as an Additional Director of the company. By its impugned order, the CLB had directed that the Board be reconstituted at the next Annual General Meeting to be held within one month from the date of receipt of the order. II. Background facts & the lis 2. Certain facts relating to the circumstances under which the petition came to be filed would require to be stated. The 7th respondent company had been incorporated as a Private Limited Company on 23.09.1965, having been promoted by the father of the appellant, S. Ajit Singh Jhikka and one S. Surain Singh. The company which began its principal business in chit fund transactions closed its operation after the coming into the force of Prize Chit and Money Circulation Scheme (Banning) Act of 1978 and the company started the business of hire purchase of vehicles. At its commencement, the Board of Directors consisted of 8 persons of whom S. Ajit Singh C.A.P.P. No.10 of 2008 (O&M) -3- Jhikka died on 26.05.2002, Sh. A.N. Gautam died on 26.05.2002, S. Atma Singh died in the year 1983, S. Amrao Singh died in the year 1984 and S. Parkash Singh also died in the same year. At its commencement, all the 8 persons held 250 shares each @ Rs.100/- per share. The appellant himself was inducted as Director of the company on 29.05.1992 and on 31.01.1996 became the Managing Director of the company. 3. The cause for complaint as acts constituting oppression and mismanagement was the increase in shareholding of the company from Rs.2 lacs to Rs.5 lacs divided into 5,000 equity shares at the alleged Extraordinary General Meeting held on 14.02.1996. The further complaint was that after the death of S. Atma Singh, who was one of the directors, his legal heirs namely Iqbal Singh Saini and Balbir Singh, who are respondents No.3 and 4 applied for transmission of 250 shares in their names claiming as sons of S. Atma Singh on 09.10.1999. The 2nd respondent-Jagbir Singh similarly had applied for transmission of 250 shares on 09.10.1999 claiming to be son of S. Amrao Singh, who was reported to have died in the year 1984. Respondent Nos.5 and 6 were reported to have applied for transmission of shares on 16.03.2000 in their favour claiming to be legal heirs of S. Parkash Singh, who had died in May, 1984. The 8th respondent was reported to have been inducted as Additional Director in the place of S. Ajit Singh Jhikka, who died in the year 2002. This induction was also the other point of contention by the respondents but the appellant would contend that such induction was a statutory necessity, for, the company could not have gone on with the affairs C.A.P.P. No.10 of 2008 (O&M) -4- with one person as director and it was mandatory to induct the new director. 4. The incipient rift was when the 1st respondent, who was a non-resident Indian and settled in Canada for more than 25 years made a complaint to the Deputy Director of Company Affairs, Department of Company Law and Justice, Kanpur that the shareholding of the company had been illegally increased from 2,000 shares to 5,000 shares and pleading that his interest might be safeguarded. A copy of the complaint had also been sent to the Senior Superintendent of Police, Jalandhar. The company joined issues on the complaint given against it by its reply dated 21.01.2003 through its Managing Director denying all the allegations made in the complaint, pointing out, inter alia that the 1st respondent himself was a proclaimed offender in India and was avoiding the process of law for the last more than 20 years. As regards the contentions raised by the other persons, who are cited as respondents No.2 to 6 herein, the appellant would state that transmission of shares had been applied for as far back as on 09.10.1999 and 16.03.2000 and the persons who had the knowledge about the so-called illegalities of increase of the shareholding and the non-transmission of shares did nothing till the year August, 2005 when they filed a petition before the CLB. The main objections to the petition were that the petition was highly belated and not maintainable being barred by limitation. The induction of an Additional Director could not be termed to be an act of oppression since the company could not have been carried on with one Director. The increase in shareholding itself ought not to have a C.A.P.P. No.10 of 2008 (O&M) -5- cause for complaint since no serious prejudice has been caused by such increase. None of the petitioners had a locus standi to even file a petition since they are not the members of the company, their names having not been entered in the list of members and their status as legal heirs had not been established in the manner known to law and they lacked the locus standi to prosecute the petition. When the gravamen of the charge against the company was that the petitioner had been kept in the dark about the affairs of the company and they had no notice of any Annual General Meeting for several years, the petitioner had contended that they had come to know about several illegalities made soon in the year 2005. The appellant took the preliminary objections to the effect that the petition itself was not maintainable since it did not satisfy requirements of Section 399(1) (c) of the Companies Act and that if the application for transmission of shares had been filed after a period of more than 15 years with no proof of death or grant of probate as succession certificate, the remedy was to file a petition under Section 111 of the Act. The claim itself was hopelessly barred by limitation. III. The disposition of CLB 6. The CLB rejected the pleas made on behalf of the company through the appellant and observed that the company will be bound to transmit the shares to the respective legal heirs of the deceased shareholders without any further delay and also directed that the increase in shareholding and the allotment of additional 3000 shares was illegal, constituting a continuous act of oppression. C.A.P.P. No.10 of 2008 (O&M) -6- IV. Grounds of challenge 6. The appellant assails the order passed by the CLB on the following grounds:- (i) The shareholding of the company had been increased as far back as on 14.02.1996 and the petition filed more than 9 years on 04.08.2005 was hopelessly barred by limitation. (ii) The factum of increase of the shareholding was in the knowledge of the 1st respondent admittedly even as per the averments made in the complaint made on 20.10.2002 and the petitioners were guilty of inordinate delay and laches. (iii) The applications for transmission of shares by respondents No.2 to 6 had been filed on 09.10.1999 and 16.03.2000 respectively for deaths that had occurred between the years 1983 and 1984. Such applications for transmission of shares filed more than 15 to 16 years and that further the petition having been moved more than 6 years after their applications for transmission of shares were hopelessly time barred. Since as per Section 110 of the Companies Act, an application for registration of transfer of shares, if it is refused to be registered, a person aggrieved ought to have appealed to the CLB against such refusal to register the transfer or transmission within two months of the receipt of C.A.P.P. No.10 of 2008 (O&M) -7- notice of refusal or where no notice had been sent within four months from the date on which the instrument of transfer or the intimation of transmission as the case may be was delivered to the company. (iv) The increase of shares from 2000 to 5000 shares had been made after due notices to all the shareholders under postal cover on 19.01.1996 and the factum of increase had also been duly filed with the ROC. (v) Of the petitioners, only the 1st petitioner, who is the 1st respondent herein, had 250 shares and Smt. Kailash Wati Gautam had 200 shares in her name. As such, the petition was filed by the persons and consent of shareholders to the extent of 450 shares, it was only 9% of the shareholding in the company and did not meet the statutory requirement of 1/10th of the shareholding to maintain a petition under Section 397 and 398 of the Companies Act. (vi) The reasoning of the CLB that Smt. Kailash Wati Gautam and the 1st petitioner, who constituted two out of fifteen shareholders met the alternative requirement of 1/10th of total number of shareholders but even such a finding was fallacious since there were only eight original shareholders and persons in whose favour the shares were yet to be transmitted could not be taken into consideration for the purpose C.A.P.P. No.10 of 2008 (O&M) -8- of meeting the requirements of Section 399 (1) (a) of the Act. (vii) Several observations of the CLB relating to alleged letting of the company premises at a very low rent was wholly without any basis and that such a letting had been made even prior to the appointment of the appellant as Director of the company in the year 1992. (viii) The order setting aside the appointment of 8th respondent as an Additional Director left the company with only one Director namely the appellant and as per the scheme of the Act as single Director cannot convene Annual General Meeting for reconstitution of the Board, there was thus an inherent self-contradiction in the order passed by the CLB where on the one hand, the appointment of Additional Director had been set aside and on the other, the single director had been mandated to hold the Annual General Meeting within one month for reconstitution of the Board. V. Questions of law raised 7. The order passed by the CLB on the basis of contentions raised by the appellant address the following questions of law:- (a) Whether the petition filed by respondent Nos.1 to 6 before the Ld. CLB is barred by limitation? (b) Whether the Ld. CLB can order transmission of C.A.P.P. No.10 of 2008 (O&M) -9- shares in a petition filed under Sections 397, 398 of the Act? (c) Whether the setting aside of increase in the share holding of the company on 14.02.1996 by the Ld. CLB is illegal and unsustainable? (d) Whether a single Director can legally convene and held an AGM? (e) Whether a single Director can constitute a Board or Director? (f) Whether there is an inherent contradiction in the directions given by the Ld. CLB which cannot be executed and complied with? (g) Whether the impugned order is wrong, illegal, arbitrary and can be sustained in light of the detailed facts and the submissions made in the appeal? VI. The response from contesting respondents (i) Increase in share capital and allotment of additional shares without notice is an instance of oppression 8. The contentions raised by the appellant are being resisted by the respondents with legal submissions with reference to pronouncements of the Hon'ble Supreme Court and High Courts on the issue. The objections have been: that, the increase in capital without adequate notice itself constitutes acts of oppression. To the said proposition, the reliance has been made on Malleswara Finance and Investments Co. P. Ltd. Vs. Company Law Board and Ors 1995 (82) Comp Cases 836, where a Bench of the Madras High Court held that allotment of additional shares with the only object of gaining C.A.P.P. No.10 of 2008 (O&M) -10- control of the company with no proof that the company required additional capital, amounted to oppression and mismanagement. The Division Bench held so by consideration of the fact that when no valid offer had been made even to the existing shareholders and the consequence of issue and allotment amounted to oppression and mismanagement and such issue was bound to be interfered with and set aside. Additional issues of shares were themselves to be considered in the factual context, said a decision of the Hon'ble Supreme Court in Dale & Carrington Invt. (P) Ltd. and another Vs. P.K. Prathapan and others (2005) 1 SCC 212. While adverting to a case of a private company, the Court observed that though Section 81 relating to allotment of additional shares was itself not applicable to private companies, there was still a fiduciary duty owed to issue shares for a proper purpose and the directors of the private company were expected to make a disclosure to shareholders in respect of issue of further shares. The non-applicability of Section 81 itself cast a heavier burden on the directors of the private limited company to see whether the shares were issued bona fide and for the benefit of the company. Such additional issue of allotment, which had the effect of reducing the majority shareholders to minority must ordinarily be considered as acts of oppression against other shareholders. Thus, the Court said that the fiduciary capacity within which the directors had to act enjoined upon them a duty to act on behalf of the company with utmost good faith, utmost care and skill and due diligence and in the interest of the company. They also laid down with reference to Section 291 of the Companies Act that an individual Director had no C.A.P.P. No.10 of 2008 (O&M) -11- power to act individually unless by some resolution of the Board of Directors of the company specific power had been given therefor. The fiduciary duty of a Director was addressed by the Hon'ble Supreme Court in Sangramsinh P. Gaekwad Vs. Shantadevi P. Gaekwad (dead) LRs AIR 2005 SC 809, 2005 (1) RCR (Civil) 561; 2005 (11) SCC 314 that such a fiduciary duty would arise in exceptional situations when the directors took upon themselves the task of advising the shareholders. The Court said that once the issuance of additional shares is properly notified to all shareholders, approved in the meeting of directors as also in the general meeting to the notice of all, the shareholders cannot later be allowed to join issues on additional shares and the allotment to purchasers thereof merely because they have been among the directors of the company alleging the issue to be invalid unless it is shown to be fraudulent or oppressive. The Hon'ble Supreme Court laid with reference to its procedure to grant appropriate leave under Section 397 of the Companies Act in the following words:- “.......The jurisdiction of the Court to grant appropriate relief under Section 397 of the Companies Act indisputably is of wide amplitude. It is also beyond any controversy that the court while exercising its discretion is not bound by the terms contained in Section 402 of the Companies Act if in a particular fact situation a further relief or reliefs, as the court may deem fit and proper, is warranted. (See Bennet Coleman & Co. Vs. Union of India and other (1977) 47 Comp. Cases 92 and Syed C.A.P.P. No.10 of 2008 (O&M) -12- Mahomed Ali Vs. R. Sundaramurthy and others AIR 1958 Madras 587. But the same would not mean that Section 397 provides for a remedy for every act of omission or commission on the part of the Board of Directors. Reliefs must be granted having regard to the exigencies of the situation and the court must arrive at a conclusion upon analyzing the materials brought on records that the affairs of the company were such that it would be just and equitable to order winding up thereof and that the majority acting through the Board of Directors by reason of abusing their dominant position had oppressed the minority shareholders. The conduct, thus, complained of must be such so as to oppress a minority of the members including the petitioners vis-a-vis the shareholders which a fortiorari must be an act of the majority. Furthermore, the fact situation obtaining in the case must enable the court to invoke just and equitable rules even if a case has been made out for winding up for passing an order of winding of the company but such winding up order would be unfair to the minority members. The interest of the company vis-a-vis the shareholders must be uppermost in the mind of the court while granting a relief under the aforementioned provisions of the Companies Act, 1956.” (ii) Legal representatives could maintain the petition 9. The objection regarding the maintainability of the petition at C.A.P.P. No.10 of 2008 (O&M) -13- the instance of persons who were not shown as members is responded by the counsel for the respondents by reference to a judgment of the Hon'ble Supreme Court in M/s World Wide Agencies Pvt. Ltd. and another Vs. Margarat T. Desor and others 1990 (1) SCC 536 where the Hon'ble Supreme Court held that even legal representatives of a deceased member of the company could maintain petition under Section 397 and 398 of the Companies Act. They were referring to a situation where after death of a member whose name was still in the register of members, his legal representatives would be entitled to maintain a petition though they were not themselves registered as members. This construction was made possible with reference to Section 41 of the Companies Act where a member may be a holder of shares, but not vice versa. By the extension of the principle laid down, it could be easily seen that even the strength of shareholding necessary to maintain the petition must be reckoned with reference to persons, who have not themselves registered as members but holders of shares as legal heirs of deceased members. (iii) Allotment of additional shares without notice is bad in law 10. While adverting to the objection taken by the appellant regarding the finding of the CLB that the increase of shares made without proper notice was invalid, learned counsel for the respondent refers to a decision of the Calcutta High Court in Jadabpore Tea Co. Ltd. Vs. Bengal Dooars National Tea Co. Ltd. 1984 (55) Comp Cases 160 that allotment of additional shares in order to reduce the majority shareholders to minority would be void for mismanagement and the notice without adequate details as to allotment would become C.A.P.P. No.10 of 2008 (O&M) -14- null and void. The Bench held that where the allotment of shares might tilt the balance of the shareholding and might transform major bulk of shareholders into a minority group of shareholders, the particulars of allottees or the manner of their allotment should also be indicated necessarily, because, in the existing climate of erosion of the intrinsic sense of fairness, it is necessary to insist on certain procedural safeguards to ensure fairplay in action in corporate management. The adjudication regarding the fraudulent conduct of some directors that could give right to an action was dealt with by the Hon'ble Supreme Court in United India Insurance Company Ltd. Vs. Rajendra Singh and others 2000 (87) A.I.R. (SC) 1165 and Gram Panchayat of Village Naulakha Vs. Ujagar Singh and others (2000) 7 SCC 543. Though these were not rendered in the context of dealing with the provisions of the Companies Act, they were cited as general propositions of law that “fraud and justice never dwell together” and it was erroneous to state that the Tribunal and the High Court has no jurisdiction to set aside an award on the ground of fraud disclosed later on. The effect of the decisions was that no specific action to set aside fraud be made but when a fraudulent transaction is shown in defence by any party, other party affected by such fraudulent conduct could point out to such fraud and avoid the same even in collateral proceedings. VII. Consideration of the rival contentions (i) Presumption regarding service not available when receipt of notice is denied by the addressee 12. Adverting to the defence taken by the appellant that the notices of meetings had been issued to the members under certificate C.A.P.P. No.10 of 2008 (O&M) -15- of posting, learned counsel for the respondents refers to the decision of this Court in Bhankerpur Simbhaoli Beverages P. Ltd. and another Vs. Sarabhjit Singh and others 1996 (86) Comp Cases 842 that Section 53 of the Companies Act contemplates the mode of services of notices or documents under certificate of posting or by registered post but the presumption to be drawn under Section 53 is never absolute but rebuttable. The Court under particular facts and circumstances could even refuse to draw a presumption. I had an occasion to consider the presumption that could arise to certificate of posting and of registered letter in the decision rendered in Zora Singh and others v Amrik Singh Hayer and others in C.A.P.P 38 of 2007 and connected cases decided on 06.02.2009. Raising of presumption itslef does not amount to proof. The result of a mandatory requirement for raising a presumption cast on the court, as under Section 53(2) of the Companies Act, is that the burden of proof is placed on the person against whom the presumption operates for disproving it. It is only if such a person is unable to discharge the burden that the court will act on the presumed fact. If the addresse states that he was never served with notice, still the person who is alleged to have sent the notice cannot use the presumption to his advantage without undertaking the burden of proving the actual service. I reject the contention of the appellants that notices of meetings were sent to the respondents 1 and 7, whose names continued as members of the company. (ii) Maintainability of petition by the legal representatives, even though not shown as members in the register of members of the company 13. On the maintainability of the petition itself, I have no doubt C.A.P.P. No.10 of 2008 (O&M) -16- in my mind that the contention of appellant that only two of the members who held between themselves 450 shares constituted less than 10% of the total holding or less than 1/10th of the total number of members is not a sound argument if it is considered that even legal heirs of the shareholders as holders of the shares could maintain petition. The decisions referred to by learned counsel for the respondents