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

Ramanujam had returned to Kerala, his native place, after resigning his job and as accountant in England in the year 1983. He was looking for an opportunity to work. Prathapan, also a native of Kerala, had been working in Muscat since long and was staying there alongwith his family. The mother of Prathapan, named Kalyani Kochuraman, was living in Kerala. Prathapan had two sons. According to Prathapan his sons were desirous of returning to India and settling down in their native place. Therefore, Prathapan wanted to set up some business in India in order to settle his sons. Since the parties are relations they were in touch with each other. Towards the middle of 1987 Ramanujam informed Prathapan that a hotel called Hotel Siddharth in a town called Chalakudy, was available for sale. The hotel building had ten rooms, besides a restaurant with a bar attached to it. The partners who were running the hotel were interested in selling it immediately. Ramanujam further informed Prathapan that the hotel was available for down payment of Rs. 6 lakhs (Rupees Six Lakhs). The purchaser, in addition, had to take upon a liability of about Rs. 18 lakhs (Rupees eighteen lakhs) which was standing on the hotel. Ramanujam offered to look after the business of the hotel till Prathapan decided to return to India. The parties decided to go ahead with the purchase of the hotel for which Prathapan agreed to send Rs. Five Lakhs. Ramanujam was to get a salary for the services to be rendered by him in looking after the business of the hotel. A company by the name of Dale and Carrington Investments Private Limited was incorporated on 4th November, 1986 for the hotel business. Ramanujam and his wife Draupathy were shown as the promoters of the company. On the request of Ramanujam, Prathapan sent a Bank Draft in the sum of Rs.5 lakhs (Rupees) Five Lakhs) favouring his mother Kalyani Kochuraman on 3rd March, 1987. The draft was sent in the name of the mother because Prathapan was an NRI and the company could not receive money directly from him. The device of money being first sent in the name of Prathapans mother and thereafter the mother transferring it to the company, was suggested by Ramanujam in his letter dated 25th February, 1987 to Prathapan. The Hotel was accordingly acquired by the company in March, 1987. A sum of Rs.6 lakhs (Rupees Six Lakhs) was required to be paid in cash to the vendors out of which Rs.5 lakhs (Rupees five lakhs) were received from Prathapan and a sum of Rs. 50,000/(Rupees Fifty Thousand) was invested by Muralidharan, brother of Prathapan. The rest of the amount came from other respondents. There was no financial contribution by Ramanujam. Initially Ramanujam and his wife Draupathy were the Directors of the company. However, in December, 1988 Draupathy was dropped as Director and in her place Muralidharan, brother of Prathapan and Suresh Babu, brother of Prathapans wife, were taken as Directors of the Company. 5000 (five thousand) equity shares worth Rupees five lakhs were allotted in the name of Smt. Kalyani Kochuraman, mother of Prathapan against the investment of Rupees Five Lakhs. These 5000 equity shares were subsequently transferred in the name of Prathan and his wife, 2500 (two thousand five hundred), each, subject to the transferees obtaining requisite permission of the Reserve Bank of India under the Foreign Exchange Regulation Act (FERA). The transfer of shares in the name of Prathapan and his wife Pushpa was duly recorded in the Register of Members maintained by the company. Thus Prathapan and his wife Pushpa became shareholders of the company to the extent of 2500 equity shares each.2. Initially the company was making losses. However, by about the yearthe company turned the corner. Copies of balance sheets of the company for a few years of its working have been placed on record by the appellant which show that till 31st March, 1992 there were no profits in the company. For the first time some profit was shown as on 31st March, 1993. Till 31st March, 1993, under the head Advance towards share capital pending allotment only a sum of Rs.3000/(Rupees Three Thousand) was shown whereas as on 31st March, 1994 under the said head, a balance of Rs.6,86,500/(Rupees six lakhs eighty six thousand five hundred only) was shown. We have mentioned this figure here because it will be relevant for the main controversy in this case.3. It is the case of Prathapan that he continued to provide finance to the company by sending money to Ramanujam from time to time. The details of some of such disbursements are asA sum of Rs.1,00,000 in March, 1989;(b) US$ 6300 in favour of Maruti Udyog Ltd. for allotment of a vehicle for the use of second appellant in November, 1991;(c) A sum of Rs.one lakh in February, 1994;(d) A deposit of Rs.one lakh with State Bank of India in the year 1996 to provide bank guarantee in favour of the sales tax authorities at Kerala;(e) A sum of Rs.Nine lakhs in January, 1996 for making remittance in favour of the Sales Tax Authorities.According to Prathapan he was to be issued shares of the company against these remittances while according to Ramanujam the remittances were on personal account in view of the close relationship between the parties. The fact remains that the remittances were to Ramanujam and not to the company.5. In the beginning the business of the company was carried on by Ramanujam with the assistance of Muralidharan, brother of Prathapan who was acting as Manager of the Company, while Ramanujam was the Chairman and Managing Director of the company. It is not denied that Ramanujam was regularly getting salary for working as Managing Director of the company. According to Prathapan he was kept completely in the dark about the affairs of the company throughout. He never received a penny towards dividend on the shares held by him in the company.6. Sometime in the year 1998 Prathapan is said to have come to India to consider acquiring another Hotel for expanding the business of the company. At that time he is said to have discovered certain startling facts about the company. The most important fact which is at the centre of the controversy in this case is that the companys authorised capital was increased from Rs.15 lakhs to Rs.25 lakhs and thereafter to Rs.35 lakhs without the knowledge of Prathapan, a principal shareholder of the company. Further in an alleged meeting of the Board of Directors of the company said to have been held on 24th October, 1994, chaired by Ramanujam, the Board of Directors of the company is said to have been informed about a sum of Rs.6,86,500/(Rupees Six lakhs eighty six thousand five thousand only) standing to the credit of Ramanajum in the books of the company. He made a proposal for allotment of shares in lieu of that amount in his favour. As per the case of Ramanujam the Board allotted 6,865 equity shares of Rs.100/each in the said meeting in his favour. According to Prathapan he was never made aware of the increase in authorised share capital of the Company and the alleged allotment of additional equity shares of the company in favour of Ramanujam. The alleged allotment reduces Prathapan, who was a majority shareholder in the company, to a minority shareholder in the company. Prathapan challenge this alleged allotment of shares in favour of Ramanujam by filing a Company Petition under Sections 397 and 398 of Companies Act before the Company Law Board in July, 1999. The main challenge in the Company Petition filed by Prathapan alongwith his wife aswas to the said alleged allotment of 6865 equity shares of Rs.100/each of the company. This was alleged to be an act of oppression on the part of Ramanujam who was managing the company. Prayer was made that the allotment of shares be set aside, and necessary correction be made in the Register of Members of the company. According to Prathapan Ramanujam did not contribute any money from his own resources for purposes of the company while all along he drew a handsome salary for working as the Managing Director. His maximum investment in the company could not be more than Rs.He committed fraud and breach of trust as a result of which Prathapan and his wife had been totally marginalised in the company. In fact, Muralidharan, brother of Prathapan was removed from the Board of Directors of the company on 1st October, 1994 while Suresh Babu,of Prathapan and brother of Pushpa, (Prathapans wife) was removed as Director on 30th September, 1996. Prathapan also alleged that Ramanujam siphoned off funds of the company for personal gains.7. The Company Law Board took the view that Ramanujam had committed an act of oppression by not only not informing him about issue of further share capital of the Company but also not offering him the further share capital which was being issued by the company. Having given a finding of oppression in favour of Prathapan the Company Law Board while considering relief, gave an option to Prathapan to sell his shares to Ramanujam. It was observed that a return of 12% per annum on the investment made by Prathapan would be fair in the facts of the case. Prathapan and his wife, who were petitioners in the company petition, were given liberty to sell their shares to Ramanujam at par value with 12% simple interest per year from the date of their investment.8. During the pendency of the company petition filed by Prathapan, a petition was filed before the Company Law Board for rectification of the Register of Members so as to delete the entries recording of transfer of shares in favour Prathapan and his wife. This was on the ground that they had failed to obtain permission of the Reserve Bank of India under the Foreign Exchange Regulation Act regarding transfer of shares in their favour.9. In the proceedings in the petition under Sections 397 and 398 of the Companies Act, locus standi of Prathapan and his wife to file the petition was challenged. This issue was decided by the Company Law Board against Ramanujam. The petition for rectification of Register of members was dismissed. However, Prathapan was aggrieved about the relief granted by the Company Law Board. Inspite of the finding on oppression being in his favour, he was asked to sell his shares and leave the company. Ramanujam was aggrieved of the finding of oppression against him and of the dismissal of the application for rectification of Register of Members. Both parties approached the High Court of Kerala against the judgment of the Company Law Board. The High Court maintained the judgment of the Company Law Board so far as the rejection of petition for rectification of Register of members was concerned. However, the High Court allowed the appeal filed by Prathapan which was directed mainly on the question of relief granted by the Company Law Board. The High Court took a serious view of the manner in which Ramanujam was managing the affairs of the company. The High Court held it to be an act of fraud on the part of Ramanujam in allotting 6865 equity shares of the company in his favour. The High Court further held that a perpetrator of fraud could not be allowed to take benefit of his own wrong. The High Court found that the observation of the Company Law Board that the appellants can sell their share at par value of the Managing Director, getting 12% interest on their investment, will not be justified but will only help the manipulator. The High Court ordered setting aside of the allotment of shares made in the Board Meetings held on 24th October, 1994 and 26th March, 1997, to Ramanujam, the Managing Director of the Company. The Share Register was ordered to be rectified accordingly. The present appeal by Ramanujam is directed against the judgment of the High Court.

Reasoning:
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