Kamal Kumar Dutta & Anr vs Ruby General Hospital Ltd. & Ors

Brief facts which are necessary for disposal of these appeals are that an application under Sections 397 & 398 of the Companies Act, 1956 (hereinafter to be referred to as the Act ) was filed by Dr.Kamal Kumar Dutta and Dr. Binod Prasad Sinha alleging various acts and oppression and mis-management in the affairs of the company before the CLB. Ruby General Hospital Limited, a company was incorporated in the year 1991 by two non-resident Indian Doctors i.e. Dr.Kamal Kumar Dutta and Dr.Binod Prasad Sinha along with Indian enterprenuor, Shri Sajal Kumar Dutta, who is the younger brother of Dr.Kamal Kumar Dutta. The Company took up the project to establish a Hospital-cum-Advance Diagnostic facility at Calcutta. The cost of the project was about Rs.11 crore out of which the share capital would be Rs.9 crore and Rs.8 crore out of the said share capital would be by way of NRI participation. Therefore, 88.88% of the project was NRI shares and the balance by resident Indians. In the year 1991, the Department of Industrial Development, Government of India, Secretariat of Industrial Approval, ( for short SIA) approved the NRI investments in the said company.

The Hospital was inaugurated by the Chief Minister of West Bengal on 25.4.1995. Dr.Kamal Kumar Dutta contributed Rs.4.26 crore out of which equipments worth Rs.3.5 crore were brought from USA and Rs.1.23 crore was contributed by Sajal Kumar Dutta. The grievance of Dr.Kamal Kumar Dutta was that he was denied shares of the company for the equipments brought by him by his younger brother Sajal Kumar Dutta. Though the Reserve Bank of India granted permission to allot shares in favour of Dr.Dutta on 22.3.1997 but the same was withdrawn on 20.5.1998 at the instance of the company. The company filed a writ petition challenging the said approval by the Reserve Bank of India before the High Court of Calcutta. The High Court directed to give personal hearing to the parties and the Reserve Bank of India once again granted approval for allotment of shares in favour of Dr.Kamal Kumar Dutta. The said approval was again challenged by the company by filing a writ petition before the High Court. Then again some directions were not properly followed and another writ petition was filed by the company. In compliance to the directions issued by the High Court, the Reserve Bank of India after hearing the parties passed an order granting permission to allot shares to Dr.Dutta against supply of second hand medical equipment as capital contribution. Subsequently, a writ petition was filed by the company in 2004 before the High Court of Calcutta and the same is said to be still pending.

In fact, this Ruby General Hospital Limited was established in memory of late wife of Dr.Kamal Kumar Dutta. Since Dr.Dutta and Dr.Binod Prasad Sinha were both NRIs, the company was being looked after by Sajal Kumar Dutta. No problem arose for some time till the hospital was in a struggling stage. But it appears that soon after the hospital started showing the sign of prosperity, the chord of discord grew between the brothers and attempt was made by the younger brother to oust the elder brother by denying him his shares for the medical equipment worth Rs.3.5 crore supplied by him from USA. Thus, ultimately the appellants filed a petition under Sections 397 & 398 of the Act before the CLB. The stand of the company was that Dr.Kamal Kumar Dutta and Dr.Binod Prasad Sinha who alleged to have had 88.88% shares in the company discontinued themselves as Directors and refusal of the company to allot shares to them worth the value of second hand equipments was justified. The CLB heard the parties at length and passed a detailed order giving certain directions which will be referred to hereinafter. Aggrieved against that direction issued by the CLB on 29.10.1999 both the parties approached the High Court of Calcutta. The appeal filed by Sajal Dutta and the cross-appeal filed by Dr.K.K.Dutta were clubbed together and taken together by learned Company Judge for disposal.

The main grievance of Dr.Dutta was denial of his shares for supply of medical equipments worth Rs.3.5 crore and consequential ousting from the chairman and directorship of the company which led to filing of a petition before the CLB in 1997.The appellants prayed before the CLB that necessary directions may be given to relieve the company from the mis-management of the respondents and to relieve the oppressive, harsh and unreasonable conduct of the respondents on the appellants and other members of the company and to stop such acts or conducts of the respondents which are prejudicial to the interest of the shareholders of the company and the public at large; to direct the respondents to comply with the statutory provisions of the Act to serve the notice of the Board of Directors meetings of the company and the meetings of the shareholders of the company on the appellants and other shareholders; the appellants should be involved in the effective management of the affairs of the company; to remove the Managing Director ( Sajal Dutta) from the company and to prohibit him from interfering with the effective management of the company; to quash the allotment and issue of the shares of the value of Rs.42,10,000/- allotted illegally and unlawfully by the respondents to corporate shareholders, to direct the respondents to restore the shares of the appellants which are shown as share application money by illegal and unlawful entries to direct the respondents for allotment of shares for the sum of Rs.3,05,53,290/- to the appellant No.1 being the value of the goods already supplied as the proposal has been duly approved by the Reserve Bank of India and to appoint an independent observer to attend the meetings of the Board of Directors and the meetings of the shareholders of the company. This was contested by the respondents by filing counter affidavit and the allegations were denied. It was alleged that all the notices of the meetings were given to the Board of Directors and the meetings were conducted whenever required according to law. It was alleged that in the meeting dated 19.4.1995 the appellant No.1 was present when the resolution was passed to raise the funds as he declined to give any fresh funds. This was denied by the appellant No.1 in the rejoinder filed before the CLB and it was pointed out that the minutes of the meeting dated 19.4.1995 were fabricated and manipulated to the advantage of the respondent for being appointed as Managing Director of the company so that he can succeed in his design of usurping the company. It was also alleged that the allotment of shares was bad. It was also pointed out that the resolution dated 19.4.1995 in which the appellant No.1 was alleged to be present, would indicate that the decision to convene the extraordinary general meeting and to pass a resolution under Section 81(1A) was considered and approved. But no details were furnished of such a decision. It was also alleged that the respondent No.2 using the old minutes to gain illegal and unlawful majority by hiding the contents of the resolution tried to justify his action. It was alleged that the answering respondent deliberately and knowingly did not annex the copies of such minutes of resolutions. It was specifically asserted that the respondents have withheld the copies of the resolutions passed on 12.3.1996, 17.2.1996, 19.4.1995, 9.2.1996 and 16.2.1996. In fact from the records it transpires that the main issue is with regard to the resolution passed on 19.4.1995, though according to Dr. Kamal Kumar Dutta, copies of the resolution were not supplied along with the counter affidavit. It was only the records were placed before the CLB during the course of proceedings. The main crux of the problem arose on account of the resolution passed by the Board of Directors on 19.4.1995. That resolution is crucial because in that resolution it was passed to raise funds and to issue and allot not exceeding 40 lacs equity share for Rs.10/- each at par to such persons or corporate bodies, banks, mutual funds or other financial institutions whether or not they are the existing shareholders of the company, and in such manner as may be decided by the Board. This resolution, according to the appellants, was totally fabricated though no such allegation was made before the CLB. But the core issue is whether this resolution was at all passed in that meeting or not because the whole trouble seems to have started from this and thereafter further resolutions have been passed in order to reduce the shareholding of the appellants and the whole design was to reduce the appellant No.1 to minority. In fact, the Reserve Bank of India has already granted permission to allot share to the appellant No.1 for the equipments supplied by him to the extent of Rs.3.5 crore and that permission was challenged by one way or the other so that the permission is not granted and the share to the extent of Rs.3.5 crore is denied to the appellant Dr.Kamal Kumar Dutta and he looses the majority thereby the younger brother Sajal Dutta who has made total investment of Rs.1.3 crore will get majority and oust the appellant No.1 from the chairmanship and reduce him to nothing. This was the core issue. The CLB after considering the matter found various omissions and commissions in conduct of the Board meetings and in a detailed order discussed the whole issue. The CLB discussed the memorandum and articles of association of the company to which the appellants and Sajal Kumar Dutta are the signatories. This document is of 1991. It was resolved that the hospital was to be established with the participation of the appellants and that imported equipments worth Rs.420 lakhs would be purchased from the foreign exchange provided by the NRI doctor. The cost of the project was indicated as Rs.1100 lakhs with Rs.900 lakhs as the authorized capital out of which Rs.800 lakhs would be by NRI participation. Under the heading 'foreign investment- financial collaborator', the name of the appellant is mentioned. It was mentioned that the appellant was the principal promoter and the other promoter being the respondent No.2- a resident Indian. Under 'Means of Finance' it is mentioned that NRI investment would be Rs.800 lakhs comprising of Rs.400 lakhs as equity and Rs.400 lakhs as preference shares. It was mentioned that from various records of the company and approval given by the SIA, it is apparently clear that the appellant is the chief principal promoter of the company. In this connection CLB discussed the notices of the Board of Directors meetings because all the issues arose from the resolutions passed by the Board of Directors. The CLB recorded that the notices issued at the local address in India cannot be considered to meet with the provisions of Article 121(b) of the Memorandum and Articles of Association. It was also observed that the notices in respect of appellant No.2 the address shown was "P.O.Hirapur, District Dhanbad, Bihar" and in respect of most of the meetings, the time gap of alleged date of posting and the meeting did not exceed 3 days excluding the dates of posting and the dates of the meetings. In respect of the appellant No.1 the notices were addressed to a local address notwithstanding the fact that the company itself has attached various documents indicating that the appellant No.1 used to stay in some hotel or guest house during his visit to Calcutta. It was observed that adequate time was not given and notices were not sent at the correct address. The CLB observed that the action of the company to have posted notices for the meetings to the local addresses of the NRI directors lacked in probity and fair play as the appellants being not only the first directors of the company but also substantial holders of the shares, they should have been given notices to their address in the USA. Accordingly, the CLB held that notices for the Board meetings cannot be deemed to have been given to the appellants. Ultimately the CLB held as follows :

Similarly, with regard to the second appellant, Dr.Binod Prasad Sinha, it was also held that no proper notices were given. Therefore, he cannot be deemed to have vacated the Office of Director. The notice for the AGM convened on 30.12.1996 was issued wherein re-election of this appellant was an item in the agenda, wherein it was stated " to appoint directors in place of Dr.Binod Sinha and Dr.S.K.Ghosal who retire by rotation and being eligible offer themselves for re-appointment. The resolution passed in that meeting was that Dr.Binod Sinha retired by rotation is not being reappointed because of lack of active interest and the CLB recorded that such resolution was very doubtful and whether such a resolution was at all passed. The CLB also pointed out certain impropriety in recording the minutes.

So far as the vacation of the office by the appellant No.1 is concerned, it is mentioned that the appellant No.1 vacated the office on 24.2.1997. For that purpose, the provisions of Section 283 (1) (g) were invoked. The CLB after going through the records observed that the convening of the Board meeting on 3.3.1997 at 11 A.M. is very doubtful. It was on 3.3.1997 a letter was issued indicating that the appellant No.1 has vacated his office. The CLB after appreciating the evidence observed that the resolution dated 3.3.1997 cannot be sustained.

Our attention was invited to a decision In the case of Tea Brokers (P) Ltd. & Ors. v. Hemendra Prosad Barooah reported in (1998) 5 Comp. LJ 463( Cal.). In this case, after examination of facts, the winding up order was found to be justified, though the effect of such order meant loss to the respondent as one of his concern which was otherwise flourishing one and advantageous to him. However, the net result was that allotting additional shares to minority shareholders on the facts of the case was set aside.

The CLB has in minute detail discussed with regard to all the resolutions which we have already adverted to. No proper notice was served on the appellant No.1 who is a major shareholder of the company or to appellant No.2. If the Board meeting had been convened without proper service of notice on the appellants by the respondent No.2 then such Board meeting cannot be said to be valid. Mr.Nariman however tried to explain various meetings and their subsequent confirmation by next board meeting to show that once the resolution of the subsequent meeting has confirmed the resolution of earlier meetings then those minutes stand confirmed irrespective of the fact that the appellants had been served or not. We shall highlight some of the instances. We would show that how subtle attempt was made to show that several notices were given to the major shareholders of the company at their local address in India knowing fully well that both the appellants are NRIs. The outstanding feature is that the appellant No.2 ,Dr.Binod Prasad Sinha has been shown as an NRI but notice to him was sent at the address P.O. Hirapur, District. Dhanbad, Bihar and those notices have even been sent with very short interval. The meeting was convened on 13.4.1996 and the notice was sent on 8.4.1996. Likewise, another meeting was scheduled to be held on 5.9.1996 and the notice was sent on the very same day i.e. 5.9.1996, the date of meeting was 2.12.1996 and the notice was sent on 28.11.1996; the date of meeting was 12.3.1996 and the notice was sent on 8.3.1996. The meeting was to be held on 27.3.1996 but the notice was sent on 22.3.1996. Apart from this, it was known to the respondent- Sajal Dutta who is the brother of appellant No.1 that whenever his brother comes to Calcutta he does not stay in his house yet the notices were sent to Jodhpur Park, Calcutta. This shows lack of probity on the part of Respondent No.2 to somehow or the other oust his brother from the majority shareholding. Similarly, on the basis of such resolution, Dr.Binod Prasad Sinha, the appellant No.2 was ousted from the directorship under section 283 (1) (g) of the Act on the ground that he has not attended the meeting and he has no interest whatsoever. Similarly, the appellant No.1 was also ousted in the meeting which was held on 7.2.1996 when another meeting scheduled to be held on 16.2.1996 and it was within the knowledge of Sajal Dutta that his brother was likely to attend the meeting to be held on 16.2.1996. But suddenly the meeting was held on 7.2.1996 and the appellant No.1 was stripped off his chair as the Managing Director of the company. Hence, Sajal Dutta became the Managing Director in place of Dr.Kamal Kumar Dutta and the minutes of the said meeting dated 7.2.1996 were not brought forward in the meeting of 16.2.1996 in which Dr.K.K.Dutta was present. The IDBI nominee reported to have advised that the draft minutes of the meeting dated 7.2.1996 to be placed before the meeting dated 16.2.1996 which would correctly reflect Sajal Dutta as the Managing Director but it was not included in the meeting of 16.2.1996. However, Mr.Nariman tried to persuade us to show that there was some defect in drafting of minutes of the resolution and therefore, it was not reflected in the meeting dated 16.2.1996. It does not appeal to us. Be that as it may, when such an important decision was taken in the absence of the main promoter of the company to oust him from the Managing Directorship and to install Sajal Dutta in his place, it is the grossest act of oppression by the Board of Directors. Sometime after dispatching Dr.Dutta from the Managing Directorship most of the shares were cornered by the subsidiary companies of Sajal Dutta so as to acquire the management of the company and to alter material change in the management of the company. What can be more unfortunate than this ? When a material change is brought about in the management to the detriment of the interest of the main promoter it is squarely covered under section 398 (1)(b) of the Act. The company which is floated by the elder brother and which has been run by the younger brother in the absence of the elder brother the younger brother manages the whole company and that the Managing Director is totally ousted and shares are being cornered substantially so as to have full control of the company, is oppression being squarely covered by section 397 (1) (b) of the Act.

Apart from this, one of the most important features which has weighed with us is that Dr.Kamal Kumar Dutta brought second hand equipments, those were cleared by the Customs and permission was granted by the RBI. The hospital started with those second hand equipments and for almost one year no grievance was made and the hospital was running successfully with these equipments. On 22.3.1997 the RBI granted permission for allotment of 30,55,329 equity shares of Rs.10/- each to the appellant No.1 against supply of second hand medical equipments on repatriation basis. But Respondent No.2 without permission of the Board of Directors filed an application with the RBI seeking withdrawal of the permission granted for allotment of 30,55,329 equity shares to appellant No.1. The RBI on 2.6.1997 withdrew the permission granted for allotment of 30,55,329 equity shares to the appellant No.1. The respondent No.2 presented Directors report in the Annual General Meeting along with audited balance sheet for the year ended 31.3.1997 wherein capitalization of second hand medical equipments supplied by the appellant No.1 was reversed. Then the appellants filed application under sections 397 & 398 of the Act before the CLB. The CLB directed the respondent company to amend audited balance sheet as at 31.3.1998 and restore capitalization of second hand medical equipments supplied by the appellant No.1 which was reversed by the respondent No.2. The RBI restored the approval for allotment of 30,55,329 equity shares to the appellant No.1 on 6.3.1999 and directed the company to issue 30,55,329 equity shares of Rs.10/- each under section 19 (1) (d) of FERA, 1973 on non-repatriation basis against import of second hand medical equipments. This was not enough. This matter was taken up by the respondent No.1/2 by filing a writ petition being W.P.No.525 of 1999 challenging the order of the RBI dated 6.3.1999 in Calcutta High Court. The Calcutta High Court directed the General Manager, RBI to hear the parties afresh and pass appropriate order. In compliance with that order, the Executive Director, RBI, Mumbai heard the matter and passed an order on 10.8.1999 confirming their earlier order. Then too the respondent No.1/2 did not feel satisfied and again respondent company filed a second writ petition being WP No.1977 of 1999 on 30.8.1999 before the Calcutta High Court. Pursuant to the direction given by the High Court in the aforesaid writ petition, the General Manager, RBI Calcutta heard both the parties and passed an order reaffirming the earlier order of the RBI. Then too the respondents did not feel satisfied and filed a third writ petition on 7.5.2004. No stay order was passed by the High Court. The subtle attempt on the part of the respondent No.2 was only to somehow oust the appellant No.1 of his majority by nullifying the order passed by the RBI so that the shareholding of the appellant is reduced otherwise against the equipments supplied by the appellant No.1 to the tune of Rs.3.5 crore, he will have the majority in the shareholding of the company. Therefore, this persistent effort was made by the respondents by filing one after another writ petition before the High Court to somehow reduce the shareholding of the appellant No.1. These attempts speak volumes in the subtle design on the part of the respondent No.2 to somehow see that the holding of the appellant No.1 is reduced and the management is passed on to his hands by outstripping the appellant No.1 from the office of the Managing Director by purchasing majority of shareholding pursuant to the resolution passed on 19.4.1995 , he wanted to control the entire company. The filing of repeated writ petitions in Calcutta High Court at the expense of the company adversely affected the interest of the company. If this is not the oppression of the member under section 397 and bringing material change in the management under section 398 then what could be the better case than this. We fail to understand the view taken by the learned Single Judge of the High Court directing the appellants to file suit for redressal of all grievances, we cannot sustain this order. We are of opinion that the view taken by the Calcutta High Court cannot be sustained. We are satisfied that this is the case of oppression of the member as well as would amount to bringing about material change in the management of the company.

In the light of the cases bearing on the subject we have to examine whether the petition filed by Dr.Kamal Kumar Dutta would justify the order passed by the CLB or not. Therefore, in order to find out whether a case of oppression in the interest of the members is made out or not. As already pointed out, oppression depends on the facts of each case.

Therefore, the upshot of the above discussions is that the Directors are in a position of a trust. They must confirm to the probity and their conduct should be above suspicion.

Since the issue of granting of equity shares against the medical equipments supplied by the appellant No.1 to the tune of Rs.3.5 crore is pending before the Calcutta High Court in a writ petition, therefore the CLB has not passed any final order but passed a limited order as mentioned above. However, we have examined the matter in detail and we are satisfied that there is full proof case of oppression. But at the same time we do not feel inclined to pass an order for winding up of the company because it will not be in the interest of the company nor to the interest of the parties. Therefore, we allow the appeals and set aside the impugned order dated 31.3.2005 passed by the learned Single Judge of the High Court and pass limited direction that all the resolutions which have been passed by the Board of Directors, or in the Annual General Meeting or Extraordinary General Meeting with regard to the raising of funds of Rs.40 lakhs in the meeting of 19.4.1995 and the meeting dated 16.2.1996 whereby the appellant No.1 was stripped off of his powers as Managing Director, the resolution by which Dr.Binod Prasad Sinha was removed from the office of Director and other resolutions by which the shares were allotted to the subsidiary company of Sajal Dutta or other persons are bad and we restore the position ante 19.4.1995 and direct that let a fresh meeting be convened and proper decision be taken in the matter in the interest of the company. We confirm the order and direction of the CLB.

Let a Board meeting be convened with 21 days notice to all the Directors by registered post at their NRI address in India as well as USA. The meeting shall be chaired by Dr. Kamal Kumar Dutta, Managing Director. In case any of the NRI Directors is unable to attend the meeting, he will have a right to make nomination. We again make it clear that all the resolutions are set aside with regard to raising of funds dated 19.4.1995, removal of Dr. Binod Prasad Sinha from Board of Director, outstripping of Dr.Kamal Kumar Dutta from the Managing Directorship, allotment of shares to Sajal Dutta's companies & to others and all other resolutions which adversely affect Dr.Kamal Kumar Dutta and Dr. Binod Prasad Sinha. Let a fresh meeting of the Board of Directors be convened with Dr. K.K. Dutta as Managing Director and proper resolution be passed in the interest of the company in accordance with law. No order as to costs.