IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 29.04.2011 CORAM: THE HONOURABLE MR.JUSTICE VINOD K.SHARMA Comp.Appeal Nos.3 and 5 2009 1. A.K.Khaja Ziaudeen 2. A.Roshana 3. A.K.Khaja Kamaludeem ... Appellants in C.A.No.3 of 2009 1. M/s. N.Mohamed Mian Rowther Company Private Limited, No.206, Pudukottai Road, Sembattu, Thiruchirapalli – 627 007 2. A.K.Khaja Nazeemudeen 3. V.Afrose 4. A.K.Kareema 5. M.A.Rasheed @ M.Abdul Rasheed 6. Mr.K.N.Abdul Khader Nihal ... Appellants in C.A.No.5 of 2009 vs. 1. M/s. N.Mohamed Mian Rowther Company Private Limited, No.206, Pudukottai Road, Sembattu, Thiruchirapalli – 627 007 2. A.K.Khaja Nazeemudeen 3. V.Afrose 4. A.K.Kareema 5. M.A.Rasheed @ M.Abdul Rasheed 6. Mr.K.N.Abdul Khader Nihal ... Respondents in C.A.No.3 of 2009 1. A.K.Khaja Ziaudeen 2. A.Roshana 3. A.K.Khaja Kamaludeen ... Respondents in C.A.No.5 of 2009 Prayer in C.A.No.3/2009: Petition is under Section 10-F of the Companies Act, 1956, to set aside the impugned order of the Company Law Board the order dated 24th December 2008 (received on 26th December 2008) of the Hon'ble Company Law Board, Chennai passed in C.P.No.47 of 2006 insofar as the order denied the reliefs sought by the appellants. https://hcservices.ecourts.gov.in/hcservices/ Prayer in C.A.No.5/2009: Petition is under Section 10-F of the Companies Act, 1956, to modify the order dated 24.12.2008 in C.P.No.47 of 2006 insofar as setting aside of the allotment of 200 shares viz. 190 shares in favour of the 2nd appellant herein and 10 shares in favour of the 6th appellant herein. For Petitioners : Mr.V.Ramakrishnan (in C.A.No.3 of 2009) : Mr.S.Raja Gopal (in C.A.No.5 of 2009) For Respondents : Mr.S.Raja Gopal (in C.A.No.3 of 2009) Mr.V.Ramakrishnan (in C.A.No.5 of 2009) C O M M O N O R D E R This judgment shall dispose off the Company Appeal No. 3 of 2009, titled as Mr.A.K.Khaja Ziaudeen and others vs. M/s. N.Mohamed Mian Rowther Company Private Limited and others and the company Appeal No.5 of 2009, titled as M/s. N.Mohamed Mian Rowther Company Private Limited vs. Mr.A.K.Khaja Ziaudeen and others, as in both the appeals, the challenge is to the order passed by the Company Law Board, Additional Principal Branch, Chennai in C.P.No.47 of 2006. For the sake of brevity, the facts are being taken from the Company Appeal No.3 of 2009. 2. The appellants in Company Appeal No.3 of 2009, are holding in excess of one-tenth of the issued share capital constituting one-tenth of the total number of members of N.Mohamed Mian Rowther Company Private Limited (hereinafter referred to as the 'Company'). The appellants, being aggrieved by the acts of oppression and mismanagement regards by the affairs of the company, invoked the jurisdiction of the Company Law Board under Sections 397 & 398 of the Companies Act, seeking the following reliefs: "a. to set aside the allotment of 200 equity shares made in favour of the second respondent (190 shares) and the sixth respondent (10 shares); b. to declare that the petitioners 1 & 2 continue to be directors of the company; c. to remove the respondents 2,4 & 5 as Directors of the Company; d. to appoint a Chartered Accountant to scrutinise the books of account of the Company, for determining the extent of misappropriation and diversion of funds at the https://hcservices.ecourts.gov.in/hcservices/ hands of the respondents; and e) to sur-charge the respondents on account of loss and damage caused to the Company." 3. The company was incorporated in August, 1944, by K.A.Khader, since deceased, who was the father of the petitioners 1 & 3 and respondents 2 & 4. 4. The main object of the company was to carry on business of dealers in hides and skins, tanners, leather manufacturers and dresses etc. The appellant no.2 is the wife of the appellant no.1. Whereas the third respondent is the wife of second respondent and 5th respondent is the son of the 4th respondent. The sixth respondent is the son of the respondents 2 & 3. It shows that company is a closely held family company. 5. The authorized share capital of the company is Rs.15,00,000/- (Rupees Fifteen Lakhs only) divided into 1500 shares of Rs.1000/- each. The undisputed issued, subscribed and paid up capital of the company is Rs.9,20,000/- (Rupees Nine Lakhs Twenty Thousand only) divided into 920 equity shares of Rs.1000/- each. The appellants hold 503 shares of 920 shares, while the respondent nos. 2 to 5 are collectively holding 385 shares. Whereas 32 shares are held in the names of the deceased members. Thus, the appellants hold more than 50% of the issued and paid up capital of the company. 6. Mr.A.K.Khaja Nazeemudeen was appointed as the Managing Director with substantial power of management in May, 2002 for a period of 5 years i.e. upto 20.05.2007. 7. The appellant no.1, Mrs.Sadhuna Bi (mother since deceased) and the respondent no.3 were appointed as Directors. Whereas the appellant no.1 was designated as whole time Director of the Company. The respondent no.2 claimed that 190 shares were allotted to him and 10 shares in favour of his son, at the extraordinary general meeting said to have been held on 15.03.2006, after serving notice under certificate of posting. The appellants assured that the notice was neither received by them nor any meeting was held for allotting the impugned shares. The notice dated 17.02.2006, which was said to have been issued for holding extraordinary general meeting as also the minutes of the meeting dated 15.03.2006, placed on record by the respondents before the Company Law Board, is silent about the requirement of funds by the company necessitating allotment of the disputed shares. 8. The stand of the appellants before the Company Law Board was that the statements in the notice of the extraordinary general meeting, that none of the Directors is interested in purchasing the shares and in resolution, is totally false. The minutes of the https://hcservices.ecourts.gov.in/hcservices/ meeting also do not disclose any reasons for not offering shares to all the shareholders, including the appellants. Respondents 2 to 5 only participated in the meeting, wherein, 200 shares were allotted to the respondent no.2 and his son. 9. It was noticed by the Company Law Board that prior to this, all notices of the previous meetings were sent by the respondent no.2 through registered post with acknowledgment due. The Company Law Board also noticed that by virtue of Clause 4 of the Articles of Association, the shares are under control of the Directors, who are empowered to dispose off the same, in favour of any person, as deem fit and proper. 10. The case of the appellants before the Company Law Board was that by allotment of 200 shares in favour of respondent no.2 and his son, the majority of the appellants was converted into minority. 11. The Company Law Board also noticed that the search report disclosed that in the register, maintained in the office of the Registrar of Companies, Chennai, there is no mention of allotment of these shares. The record with the Registrar of Companies shows that there are ten shareholders holding only 920 shares. 12. The case of the appellants before the Company Law Board was that it was the first time in July, 2006, that the subscribed share was shown to be 1120 shares held by 11 members, which was questioned vide communication dated 22.07.2006. In the Board meeting held on 04.08.2006, the allotment of shares was regularized, which was claimed to be not permissible in law, as any allotment made to gain control was not permissible, in view of the law laid down by the Hon'ble Supreme Court in the case of Dale and Carrington Investments (P) Ltd vs. P.K.Prathapan, 2005 (1) SCC 212. 13. The allotment of shares in favour of respondent no.2 and his son, therefore, was said to be not only illegal, but also oppressive to the appellants. 14. The stand of the respondents that appellants 1 & 2 ceased to be the Directors with effect from 20.05.2005, was said to be totally false on the ground that; i) a series of correspondence sent by the respondent no.2 upto 26.07.2006, showed them as Directors, (ii) Even in the notice of annual general meeting dated 16.11.2005, the appellant no.1 was shown as whole time Director of the company, (iii) The remuneration was also paid as Directors in pursuance to the approval given at the annual general meetings held on 30.10.2003, 09.09.2004 and 10.12.2005. https://hcservices.ecourts.gov.in/hcservices/ 15. The inspection of records of the Registrar of Companies in April and August 2006, also disclosed that the appellant nos. 1 & 2 were shown to be the Directors of the Company. 16. It was also the case of the appellants that the agenda for the 59th annual general meeting for the year ended 31.03.2005, held on 10.12.2005 did not contain any proposal regarding appointment of Directors, therefore, it was claimed that action of respondent no.2 in removing the appellants 1 & 2 as Directors of the company to be oppressive, especially when the company is closely held family company. 17. The stand of the appellants before the Company Law Board was that the respondent no.2 had interpolated the Board minutes dated 29.07.2005, by making the respondent nos. 4 & 5 as Directors to gain illegal majority on the Board of the Company. Their appointment was also not supported by Form No.32. 18. The challenge was also on the ground that respondents 4 & 5 were appointed by means of a single resolution, as Directors of the company, which was invalid under law. It was also pleaded by the appellants before the Company Law Board that the respondents indulged in acts of oppression and mismanagement, as they started running business in partnership firm, by taking a portion of the company's land on lease to compete with the company. Thus, they were acting contrary to the interest of the company. Prayer was also made for appointment of interim administrator to take charge of affairs of the company. 19. Other allegations against the respondents were that the respondent no.2 was withdrawing huge amounts from the company and collecting cash from the customers, to misappropriate for his own personal use. Thus, allegations of misappropriation were also levelled. 20. There is no necessity to mention in details pleaded regarding misappropriation, as the learned counsel for the appellants did not correctly press this ground at the time of argument, as the remedy with the appellants is somewhere else, as held by the Company Law Board. 21. On pleading and contentions noted above, the reliefs noted above were prayed, before the Company Law Board. 22. The petition was opposed by the respondents by stating that allotment of shares was made at the extraordinary general meeting held on 15.03.2006 in accordance with law with full knowledge of the appellants. The company had, on 18.04.2004, increased shareholding and allotted equity shares in favour of the petitioners with a clean understanding, that in the next allotment, the respondents would be allotted 200 shares. https://hcservices.ecourts.gov.in/hcservices/ 23. It was also the stand of the respondents that the Income Tax Department raided the business premises of the company in March, 2006, in pursuance to direction in the writ petition, filed by the appellant no.3, therefore, it was stated that the appellants had not come to the Company Law Board with clean hands. Allegations of fabrication of various books of account was also levelled against the appellants, on account of which, the respondents have filed civil and criminal cases against the illegal activities of the appellants, which also resulted in resignation of the Manager and the Assistant Manager. 24. The Income Tax Department have assessed the company after consideration and on verification of the account etc. The allegations of misappropriation were denied. 25. The stand was also taken that respondent nos. 4 & 5 were duly appointed as Directors in strict compliance with the law. The stand of the respondents was that they had no intention to alienate or sell the fixed assets or shift the machinery belonging to the company to the leased premises of Premier Leathers". The stand was also taken that the company was more than 60 years old, where 130 employees were working. The appellant no.3 had filed a winding up petition in this Court, which was withdrawn subsequently in 2000. Thus, it was claimed that the appellant no.3 is not acting in the interest of the company. 26. The stand taken by the respondents was that the company owned 15 acres of land, which could be divided between the contesting parties in proportion to their share holding or in the alternative, the respondents were willing to pay a sum of Rs.3.05 Crores as consolidated amount to the appellants, without going into the questions of shareholding of the parties. The appellants offered to sell their shares for a consideration of Rs.77,922/- (Rupees Seventy Seven Thousand Nine Hundred Twenty Two only) per share, which was not accepted by the respondents. 27. On consideration of the pleadings and respective contentions of the parties, the learned Company Law Board set aside allotment of 200 shares made in favour of the respondent nos.2 and 6, by recording as under: "The existing acrimony, mistrust and lack of confidence among the brothers are not to be lost sight of, while weighing the merits of the claim and counter claim in relation to the impugned allotment of shares made at the extraordinary general meeting of 15.03.2006 in favour of the second respondent and is son, to the exclusion of other family members of (late) K.A.Khader. The second respondent chose to send notice of the 58th and the 59 annual general meetings to the petitioners 1 & 2 by https://hcservices.ecourts.gov.in/hcservices/ registered post with acknowledgment due, whereas there has been no reason adduced for having purportedly sent the notice of extraordinary general meeting of Company convened on 15.03.2006 to the petitioners under certificate of posting, wherein the disputed shares, came to be allotted in favour of the respondents 2 & 6. The need for further issue of shares or benefits derived by the Company or infusion of funds by the allottees is not borne out by any material on record before the Bench. The majority status of the petitioners came to be adversely tilted on account of exclusive allotment in favour of the respondents and thereby there is no doubt that the latter gained material benefit out of such discriminatory allotment. By virtue of clause 4 of the articles of association of the Company, the shares are under the control of directors of the Company. The respondents 2 to 5, being directors are bound to act with utmost good faith, utmost care and skill and due diligence and in the interest of the Company, while issuing additional shares and the motive for the allotment should not be mala fide to gain control of the Company, as held in Dale and Carrington Investments (P) Limited vs. P.K.Prathapan (supra). The jurisdiction put forth by the respondents that the Company allotted shares in favour of the petitioners in April 2004 with the understanding that the respondents would be allotted 200 shares at the next allotment, not being supported by any material is devoid of any merit. I may point out that further shares are by and large issued for augmentation of funds for the Company or towards compliance with statutory requirements or stipulations of bank and financial institutions, none of which is found satisfied in the case on hand before me. It is, therefore, beyond doubt that the disputed allotment was neither bonafide nor was in the interest of Company nor was a proper and legal procedure followed to make the allotment in favour of the respondents 2 & 6. The motive for the impugned allotment was to gain control of the Company by the respondents, which is impermissible under law." 28. As regard to the prayer of the appellants that appellant nos. 1 & 2 continued to be the Directors of the company, though finding was recorded in favour of the appellants, but the learned Company Law Board did not grant any relief by recording as under: "It is well settled that any grievance on account of removal of Director in a family company run on quasi- partnership principles is amenable to the jurisdiction of the CLB. The petitioners 1 & 2 are said to have vacated the office of director with effect from May 2005, yet they have been treated as directors of the company even https://hcservices.ecourts.gov.in/hcservices/ as late as in July 2006, as borne out by the correspondence, including the notice of the 59th annual general meeting, emanated from the second respondent, in this behalf and position of the first petition as whole time director of the Company has been acknowledged by the second respondent by approving the remuneration of the first petitioner at the 59th annual general meeting held on 10.12.2005. The company being a small family company, the respondents ought to have ensured the continued participation of the representatives from the petitioners' group in the management of of the Company. At the same time, it is quite impracticable to leave the management of the Company to be controlled jointly by these brother directors, in view of the unreconcilable differences, pursuance to a number of police complaints, one of which got initiated during the course of the present proceedings and it would be futile to restore directorship of the petitioners 1 & 2, notwithstanding the merits of the claim of either parties advanced on account of the imbalanced constitution of the Board, which I propose to appropriately deal with, ensuring the paramount interest of the Company and the ultimate relief which may be warranted to bring to an end the whole of controversies involved in the company petition." The relief claimed under Clause d & e, referred to above, was declined by the learned Company Law Board for lack of particulars and that the allegations remain unsubstantiated. The learned Company Law Board held that no relief can be granted on mere suspicion and surmises. 29. The learned Company Law Board took note of the undertaking, given by the respondents, with regard to safeguarding fixed assets of the company. The relief claimed under clause b & C was not granted for the reason that the Company Law Board permitted one group to buy out others, by recording as under: "There is indisputably no meeting point between the brother-shareholders and the only consensus that could emerge between the warring groups is to part ways over which also there is a sea of differences and thereby the Company's interest is at stake. While the petitioners, being majority shareholders, by virtue of the legal proposition laid down in Dale and Carrington Investments (P) Limited vs. P.K.Prathapan (supra) that majority shareholders should not be directed to sell their shares to the minority shares, are harping upon the first right to buy the shares of the respondents, rejecting the proposal of the opposite parties for division of the assets of the Company on the ground of non-feasibility of any such division of the assets, the respondents are equally staking their claim over the shares of the https://hcservices.ecourts.gov.in/hcservices/ respondents at a fair value. It may be observed that the Supreme Court while laying down the general proposition that majority should not be directed to sell its shares to the minority, it is also provided, approving the observations of the Calcutta High Court in Tea Brokers Private Limited vs. Hemendra Prasad Barooah (1998) 5 COM LJ 463 that in unusual circumstances, majority could be directed to sell its shares to the minority. An order directing one group of shareholders to sell their shares to the other would depend upon the facts of each case, but uniformly in the best interest of the Company. In the present case, the charges levelled by the respondents that the Company suffered losses under the management of the third petitioner which remain repudiated would show the amount of interest bestowed by the third petitioner towards the Company. It is the third petition who was responsible for the raid conducted in the business premises of the Company by the Income Tax Authorities, which ultimately brought out the personal expenditure incurred for the benefit of the petitioners 1 & 3 on one hand and the respondents on the other hand. It is also on record that the third petitioner had initiated action for winding up of the Company which however subsequently came to be withdrawn by him. The petitioners 1 & 3 never remained united, but changed sides joining hands with the second respondent, as brought out by the civil suit and police complaint filed by the first petitioner and the second respondent against the third petitioner, which do not infuse any confidence that the petitioners 1 & 3 will unitedly take forward the Company, thereby safeguarding its interest. In these circumstance, I am of the considered view that the petitioners though constitute the majority shareholders need not be offered in the paramount interest of the Company, the first right to purchase the shares of the respondents. Accordingly, it will be most equitable to permit each group to make offers to purchase the shares of the other group. Towards this end, the petitioners' group as well as the respondents' group will submit their offers in closed covers by 27.02.2009, indicating the price per share which they are willing to offer. The group which quotes the higher price shall purchase the shares of the other group at that price and the consideration shall be paid within two months. If for any reason, the group quoting the higher price fails to purchase the shares of the other group within two months, the other group will have the right to purchase the shares of the defaulting group within the next two months at the price quoted by the other group. The impugned allotment of shares in favour of the the second respondent (190) shares and the sixth https://hcservices.ecourts.gov.in/hcservices/ respondent (10 shares) having been found to be contrary to law as well as oppressive is set aside. With these directions, the company petition and the connected application are disposed of, reserving the right to pass consequential order on 27.02.2009 at 2.30 PM, when both the groups will present the offers quoting their price per share in closed covers. In view of this, the interim order dated 14.12.2006 shall continue to be in force till the entire process of the exit of one of the groups from the Company, in terms of the aforesaid directions, is duly completed and till such time the committee of directors shall carry on the day to day management of the Company and ensure necessary statutory compliances, while the remaining interim orders stand appropriately modified. No order as to costs. Ordered accordingly." 30. Learned counsel for the appellants vehemently contended that the impugned part of order, passed by the Company Law Board, in declining the relief to the appellants in spite of holding that the appellant nos. 1 & 2 continue to be the Directors of the Company, cannot be sustained in law, as it goes contrary to the finding, recorded in favour of appellants by the Company Law Board, holding the stand of the respondents that appellants 1 & 2, had vacated the office of Directors with effect from May, 2005, was not acceptable, as they were treated as Directors as back as July, 2006, which stood proved from the correspondence, as well as notice of 59th Annual General Meeting. 31. There is force in this contention of the learned counsel for the appellants, as there is no material on record whatsoever, showing that the appellant nos. 1 & 2 had ceased to be the Directors of the company. 32. It was also the contention of the learned counsel for the appellants that in view of the proved facts, that the removal of appellant nos.1 & 2 was not justified, there was no justification with the learned Company Law Board to refuse the prayer of removal of respondent nos. 2,4 and 5 as Directors of the Company. 33. Mr.S.Rajagopal, learned counsel appearing on