Case: M/S.Dale &amp; Carrington Invt.P.Ltd.  Vs. P.K. Prathapan

only at the time of institution of proceeding. In Jawahar Singh Bikram Singh vs. Sharda Talwar (1974) 44 Company Cases 552, a Division Bench of the Delhi High Court held that for the purposes of petition under Sections 397/398 it was only necessary that members who were already constructively before the court should continue to proceedings. It is a case in which the petitioner who had filed a petition died during the pendency of the petition. While filing the petition he had obtained consent of requisite number of shareholders of the company, among them his wife was also there. The Court further observed that since wife of the petitioner was already constructively a petitioner in the original proceedings, by virtue of her having given a consent in writing, she was entitled to be transposed as petitioner in place of her husband. 40. It is to be further noted that the entire scheme regarding purchase of shares in the name of mother of Prathapan was suggested by Ramanujam himself. He saw to it that the shares were transferred by the company in the name of Prathapan and his wife. The company has recorded the transfer and corrected its Register of Members in this behalf which, in fact, led Ramanujam to file a petition for rectification of the Register of Members as a counterblast to the petition filed by Prathapan under Sections 397/398 of the Companies Act. It is not open to Ramanujam now to raise the question of FERA violation, more particularly in view of his having recorded the transfer of shares in the name of Prathapan and his wife Pushpa in the records of the Company. This also answers the objection regarding locus standi of Prathapan and his wife to file the Sections 397/398 petition before the Company Law Board. Since they were registered as shareholders of the company on the date of filing of the petition and they held the requisite number of shares in the company, they could maintain the petition.41. We, therefore, find no merit in the contention that the petition under Sections 397/398 of the Companies Act, filed by the Prathapan and his wife before the Company Law Board was not maintainable. Issue 3 Scope of power of High Court in appeal under Section 10F of the Companies Act. 42. We have now to deal with the question of scope of appeal filed under Section 10(F) of the Companies Act by Prathapan in the High Court. 43. Section 10F refers to an appeal being filed on the question of law. The learned counsel for the appellant argued that the High Court could not disturb the findings of fact arrived at by the Company Law Board. It was further argued that the High Court has recorded its own finding on certain issues which the High Court could not go into and therefore the judgment of the High Court is liable to be set aside. We do not agree with the submission made by the learned counsel for the appellants. It is settled law that if a finding of fact is perverse and is based on no evidence, it can be set aside in appeal even though the appeal is permissible only on the question of law. The perversity of the finding itself becomes a question of law. In the present case we have demonstrated that the judgment of the Company Law Board was given in a very cursory and cavalier manner. The Board has not gone into real issues, which were germane for the decision of the controversy involved in the case. The High Court has rightly gone into the depth of the matter. As already stated the controversy in the case revolved around alleged allotment of additional shares in favour of Ramanujam and whether allotment of additional shares was an act of oppression on his part. On the issue of oppression of finding of the Company Law Board was in favour of Prathapan i.e. his impugned act was held to be an act of oppression. The said finding has been maintained by the High Court although it has given stronger reasons for the same. 44. We find no merit in the argument that the High Court exceeded its jurisdiction under Section 10F of the Companies Act while deciding the appeal. Issue 4: Relief 45. On the question of relief, the learned counsel for the parties referred to decisions in support of their respective stands. We do not consider it necessary to refer to these decisions because relief depends on facts of a particular case. We have seen the facts of the present case which to our mind are so manifestly against Ramanujam that two opinions are not possible on the aspect of relief. The only relief that has to be granted in the present case is to undo the advantage gained by Ramanujam through his manipulations and fraud. The allotment of all the additional shares in favour of Ramanujam has to be set aside. In our view, the High Court was fully justified in granting the relief of setting aside the impugned allotments of the additional shares in favour of Ramanujam. The approach of the Company Law Board was totally erroneous in as much as after having found that there was oppression on the part of Ramanujam, he was still allowed to take advantage of his own wrong in as much as he was given the option to buy Prathapans shares and that too not for a proper price. In our view the Company Law Board was wrong in allowing purchase of shares of Prathapan and wife by Ramanujam. Such an order amounts to rewarding the wrong doer and penalizing the oppressed party. In the circumstances of this case asking the oppressed to sell his shares to the oppressor not only fails to redress the wrong done to the oppressed, it also results in heavy monetary loss to him. The relief granted by the High Court was a proper relief in the facts of the case.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]A doubt has been cast about whether the alleged meetings in which additional equity shares were allotted to Ramanujam were held att is the Balance Sheet for the year ending 31st March, 1994 which for the first time shows an advance of Rs.6,86,500/towards share capital pending allotment. Nothing has been placed on record to show that during the financial yeari.e. 1st April, 1993 to 31st March, 1994 suddenly need had arisen for a substantial investment. The company was running a hotel, the property whereof was owned by the company. No particular reason for making a major investment has been shown. Nothing has been shown as to how the amount of Rs.6,86,500/was utilized. It appears that Ramanujam who was managing the affairs of the company single handedly, realized that the company had turned around and the Hotel property had appreciated in terms of its market value. He started working on a strategy to get controlling shares in the company. It was in furtherance of this objective that Ramanujam managed to show the entry regarding advance against shares in the Balance Sheet as on 31st March, 1994. For this amount, he allotted equity shares to himself to gain control of the company. In these facts it is difficult for us to appreciate that the additional funds were required by the company. In our view the finding of the High Court that no funds were needed by the company is fully justified. The only purpose was to allot additional shares in the company to himself to gain control of the company and to achieve this objective, the books of the company appear to have been manipulated. The High Court was right in holding that the entire manipulation of records of the company by Ramanujam was an act of fraud on hisagents of the company they must act within the scope of their authority and must disclose that they are acting on behalf of the company. The fiduciary capacity within which the Directors have to act enjoins upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disclose to the shareholders regarding all important matters relating to the company. It follows that in the matter of issue of additional share, the directors owe a fiduciary duty to issue shares for a proper purpose. This duty is owned by them to the shareholders of the company. Therefore, even though Section 81 of the Companies Act which contains certain requirements in the matter of issue of further share capital by a company does not apply to private limited companies, the directors in a private limited company are expected to make a disclosure to the shareholders of such a company when further shares are being issued. This requirement flows from their duty to act in good faith and make full disclosure to the shareholders regarding affairs of a company. The acts of directors in a private limited company are required to be tested on a much finer scale in order to rule out any misuse of power for personal gains or ulterior motives.of Section 81 of the Companies Act in case of private limited companies casts a heavier burden on its directors. Private limited companies are normally closely held i.e. the share capital is held within members of a family or within a close knit group of friends. This brings in considerations akin to those applied in cases of partnership where the partners owe a duty to act with utmost good faith towards each other.of Section 81 of the Act to private companies does not mean that the directors have absolute freedom in the matter of management of affairs of the company.17. In the present case Article 4(iii) of the Articles of Association prohibits any invitation to the public for subscription of shares or debentures of the company. The intention from this appears to be that the share capital of the company remains within a close knit group. Therefore, if the directors fail to act in the manner prescribed above they can in the sense indicated by us earlier be held liable for breach of trust for misapplying funds of the company and for misappropriating itsour view, this argument has no merit because the facts of the case do not support, the argument. Firstly, the Articles of Association require such decisions regarding issue of further share capital to be taken in a meeting of the Board of Directors and we have found that the alleged meeting of the Board of Directors in which the additional shares are purported to have been issued in favour of Ramanujam was sham. Secondly, assuming for the sake of argument that meeting of Board of Directors did take place the manner in which the shares were issued in favour of Ramanujam without informing other shareholders about it and without offering them to any other shareholder, the action was totally mala fide and the sole object of Ramanujam in this was to gain control of the company by becoming a majority shareholder. This was clearly an act of oppression on the part of Ramanujam towards the other shareholder who has been reduced to a minority shareholder as a result of this act. Such allotments of shares have to be set aside.19. On the role of Directors, the law is wella petition filed under Sections 397 and 398 of the Companies Act, 1956, acts of Khaund were found to be by way of oppression and mismanagement within the meaning of Sections 397 and 398 of the Companies Act. Allotment of 100 equity shares by the company to Khaund at a meeting of the Board of Directors said to have been held on 14th January, 1971 and held to be illegal. The Board of Directors of the company was superseded and a special officer was appointed to carry on management of the company with the advice of Barooah, Khaund and a representative of labour union. There were several other directions issued by the court which are not necessary to be mentioned here. The Division Bench considered in detail the relevant legal position. Without using the phrase proper purpose doctrine the principle enunciated therein, was applied.Further, it was held that if a member who holds the majority of shares in a company is reduced to the position of minority shareholder in the company by an act of the company or by its Board of Directors malafide, the said act must ordinarily be considered to be an act of oppression to the said member. The member who holds the majority of shares in the company is entitled by virtue of his majority to control, manage and run the affairs of the company. This is a benefit or advantage which the member enjoys and is entitled to enjoy in accordance with the provisions of company law in the matter of administration of the affairs of the company by electing his own men to the Board of Directors of theof right to issue shares to one director may technically be there, but the question whether the right has been exercised bona fide and in the interests of the company has to be considered in facts of each case and if it is found that it is not, so, such allotment is liable to be set aside.In the present case we are concerned with the propriety of issue of additional share capital by the Managing Director in his own favour. The facts of the case do not pose any difficulty particularly for the reason that the Managing Director has neither placed on record anything to justify issue of further share capital nor it has been shown that proper procedure was followed in allotting the additional share capital. Conclusion is inevitable that neither the allotment of additional shares in favour of Ramanujam was bonafide nor it was in the interest of the company nor a proper and legal procedure was followed to make the allotment. The motive for the allotment was malafide, the only motive being to gain control of the company. Therefore, in our view, the entire allotment of shares to Ramanujam has to be set aside.37. Even the Company Law Board found that the allotment of additional shares by Ramanujam to himself was an act of oppression on his part. The Company Law Board drew this conclusion solely for the reason that no offer had been made to the majority shareholders regarding issue of further share capital. The High Court accepted the finding of oppression. However, it placed it on a much broader base by taking into consideration various other factors. The High Courts finding is based on a much stronger footing. In fact, the High Court has gone on to conclude that Ramanujam has played a fraud on the minority shareholders by manipulating the allotment of shares in his favour. We find no reason to differ with the finding of the Highis not open to Ramanujam now to raise the question of FERA violation, more particularly in view of his having recorded the transfer of shares in the name of Prathapan and his wife Pushpa in the records of the Company. This also answers the objection regarding locus standi of Prathapan and his wife to file the Sections 397/398 petition before the Company Law Board. Since they were registered as shareholders of the company on the date of filing of the petition and they held the requisite number of shares in the company, they could maintain the petition.41. We, therefore, find no merit in the contention that the petition under Sections 397/398 of the Companies Act, filed by the Prathapan and his wife before the Company Law Board was notlearned counsel for the appellant argued that the High Court could not disturb the findings of fact arrived at by the Company Law Board. It was further argued that the High Court has recorded its own finding on certain issues which the High Court could not go into and therefore the judgment of the High Court is liable to be setlearned counsel for the appellant argued that the High Court could not disturb the findings of fact arrived at by the Company Law Board. It was further argued that the High Court has recorded its own finding on certain issues which the High Court could not go into and therefore the judgment of the High Court is liable to be setlearned counsel for the appellant argued that the High Court could not disturb the findings of fact arrived at by the Company Law Board. It was further argued that the High Court has recorded its own finding on certain issues which the High Court could not go into and therefore the judgment of the High Court is liable to be set