Case: V.S. Krishnan  Vs. M/S Westfort Hi-Tech Hosp. Ltd.

3) The facts in S.L.P. (C) No. 19882 of 2006 are sufficient to dispose of all these appeals. Shri V.S. Krishnan and five others, who filed Company Petition No. 63 of 2005 before the Company Law Board, Additional Principal Bench, Chennai under Sections 397 and 398 read with Sections 402, 403 and Schedule XI ofthe Companies Act, 1956 are the appellants (Petitioners in SLP (C) No. 19882 of 2006). For convenience, we shall refer the parties as arrayed in Company Petition No. 63/2005 on the file of the Company Law Board (in short "CLB").4) According to the petitioners, they were collectively holding in excess of 1/10th of the issued share capital of M/s Westfort Hi-Tech Hospital Limited (hereinafter referred to as "the Company"). Aggrieved on account of a series of purported acts of oppression and mismanagement in the affairs of the Company, namely, illegal (a) convening of the eleventh annual general meeting; (b) issuances of further shares on right basis; (c) exclusion of the petitioners from the office of directors; (d) election of respondents 16 to 24 as Directors; (e) transfer of shares; (f) breach of fiduciary duties by respondent Nos. 2 & 3 towards the Company as Directors; (g) manipulation of minutes of the meetings and other records; (h) statutory violations; (i) irregularities in relation to the Investigation Centre in the Hospital premises of the Company etc. invoked the provisions of Sections 397 and 398 ofthe Companies Act, 1956 (hereinafter referred to as "the Act") praying for the following reliefs:(i) to appoint an administrator for -(a) regulating the future affairs of the company;(b) leasing/licensing the area earmarked for the Investigation Centre; and(c) realizing the outstanding amounts due from respondent Nos. 2-4, 22 and 23 in respect of the Investigation Centre;(ii) to declare that the annual general meeting held on 29.09.2005 and the resolutions passed thereon are invalid;(iii) to declare that respondent Nos. 2-4 vacated the office as Directors under Section 283 of the Act;(iv) to declare that the further issue of shares is illegal and void;(v) to declare that the election of respondent Nos. 16-23 as Directors is invalid; and(vi) to declare that petitioner Nos. 1-4 and respondent No.14 shall be deemed to have been re-elected as Directors.In support of their above claims, they placed relevant materials and cited various instances alleged to have been committed by the second respondent, who is the Chairman of the first respondent-Company.5) Respondent Nos. 6-9 before the CLB supported the stand taken by the petitioners. Respondent No.14 also adopted the stand of the petitioners and further informed that he has already withdrawn the civil suit challenging the issue of shares and election of Directors at the eleventh annual general meeting of the Company.6) The case of respondent Nos. 1 & 2 are - Westfort Hi-Tech Hospital Ltd. constituted by the second respondent and his family members have been running the Hospital since 1989 independently, while the Company has been promoted in the year 1994 establishing a high speciality hospital by respondent Nos. 2 & 3 who are the promoter Directors. These respondents are permanent Directors and are not liable for retirement and cannot be removed from the Board as envisaged in Article 87. At each annual general meeting, one third of the remaining Directors are liable to retire by rotation. The alleged acts complained of in the petition do not, in any way, constitute oppression. It was pointed out that past and concluded acts complained of by the petitioners, do not fall within the purview of Section 397 of the Act. The Company, running a high speciality hospital, is making profits and if ordered to be wound up, the Company and its shareholders would seriously be prejudiced. There are no charges of financial irregularities in the affairs of the Company leveled against the respondents.7) The petitioners and respondent No.14 though continued to be Directors since the year 1998 hardly attended the Board meetings from time to time. When the petitioners were not elected by the members at the eleventh annual general meeting, they have come out with the petition with untenable allegations. Every Director other than respondent Nos. 2 & 3 is bound to retire one day or the other. Any grievance in the capacity as Director cannot be remedied under Section 397 of the Act. No relief under Section 397 would arise if the conduct complained of by the petitioner does not relate to his status as a shareholder. In addition, respondent Nos. 2 & 3 also furnished various details in support of their stand and pleaded for dismissal of the Company Petition.8) With the above pleadings and after elaborate arguments and framing the main issue namely, "whether the petitioners have made out a case under Sections 397 and 398 and are entitled for the reliefs claimed in the Company Petition", the CLB, on 5.7.2006 passed the followingIt is hereby declared that -(a) further issue of shares impugned in the Company petition is illegal and void;(b) the election of respondent Nos. 16 to 23 as Directors is set aside;(c) the retiring directors namely, petitioner Nos. 1-4 and the respondent Nos. 5 & 14 shall be deemed to have been automatically re-appointed as Directors at the eleventh annual general meeting and shall continue till the date of the twelfth annual general meeting for the year 2006; and(d) the transfer of shares by Purushottaman in favour of respondent Nos. 16 to 21 and others is invalid. However, Purushottaman is free to transfer his shares in accordance with the law.(II) The Company will convene and hold the twelfth annual general meeting in accordance with law to transact, inter alia, the following business:(a) consideration of accounts, balance sheet and the reports of the board of directors and auditors for the year 2005-2006;(b) appointment of directors in the place of those retiring and in the existing vacancies;(c) appointment of and the fixing of the remuneration of, the auditors; and(d) further issue of shares.(III) The petitioners as well as the respondent Nos. 2 to 15 are at liberty with a view to meet the financial requirements, if any, for running the hospital, to contribute any amount by way of unsecured loans carrying interest at the prevailing bank rate to be repaid from and out of the future share application money which may be subscribed by the members, on approving the resolution for further issue of shares at the twelfth annual general meeting.(IV) Honble Mr. Justice K. John Mathew (Retd.) Ernakulam will preside over the twelfth annual general meeting of the Company, in terms of this order. He is at liberty to take the services of any practicing Company Secretary of his choice, in discharge of this present assignment. The remuneration of the Chairman and the Practicing Company Secretary fixed in consultation with the Company shall be borne by the latter.(V) The Chairman will decide the entire modalities of convening holding and conducting of the twelfth annual general meeting in consultation with the company.(VI) The Board of Directors of the Company shall carry on its business strictly in accordance with the articles and initiate such action in respect of the Investigation Centre, as may be deemed necessary.(VII) The Chairman of the meeting will forward a report on the proceedings of the twelfth annual general meeting within a week from the conclusion of the twelfth annual general meeting of the company.With the above directions, the company petition stands disposed of. No order as toby the above order, respondents 1 & 2 i.e., M/s Westfort Hi-Tech Hospital Ltd. and its Chairman, K. Mohandas filed Company Appeal No. 14 of 2006 before the High Court of Kerala. By the impugned judgment, the Division Bench of the High Court, after taking note of pleadings of both the parties, rival contentions and materials placed before it, partially allowed the appeals and partially set aside the order of the Company Law Board. The operative portion of the impugned order of the High Court reads ashold that the general body meeting was held with valid notice. Issuance of right shares needs no interference and Company Law Board went wrong in setting aside the issue of duplicate shares to Purushothaman and subsequent transfer of his shares. We also hold that re-appointment of the retired directors after the date fixed for annual general body meeting is not correct and that part of the decision is set aside. But, we hold that CLB is right in setting aside the election of eight directors (though for other reasons - mainly for technical irregularity) and special resolution under Section 81(1A) to issue shares to the public. We order that Petitioners and other NRI shareholders shall be given one months time from today to accept the rights shares offered and it is for them to accept the offer or not. As offered by the counsel appearing for the Company and Chairman, NRI Directors also will be re-appointed to the Board in proportion to their share holdings as on the date of next annual general meting to be conducted after the expiry of 30 days from today. Company Law Board directed that next annual general body meeting shall be held on 30.9.2006. It is stated that it was not conducted due to pendency of the case. Therefore, it shall be positively conducted on or before 30.12.2006. In conducting the 12th annual general body meeting, procedure suggested by the Company Law Board shall be complied with and directions in paragraph 7 II, IV, V, VI and VII are not interfered with. Till next general body meeting is held, no policy decision shall be taken by thethe above order of the High Court, these appeals have been filed before this Court by way of special leave.

Court's reasoning:
From the above decisions, it is clear that oppression would be made out:(a) Where the conduct is harsh, burdensome and wrong.(b) Where the conduct is mala fide and is for a collateral purpose where although the ultimate objective may be in the interest of the company, the immediate purpose would result in an advantage for some shareholders vis-à-vis the others.(c) The action is against probity and good conduct.(d) The oppressive act complained of may be fully permissible under law but may yet be oppressive and, therefore, the test as to whether an action is oppressive or not is not based on whether it is legally permissible or not since even if legally permissible, if the action is otherwise against probity, good conduct or is burdensome, harsh or wrong or is mala fide or for a collateral purpose, it would amount to oppression under Sections 397 and 398.(e) Once conduct is found to be oppressive under Sections 397 and 398, the discretionary power given to the Company Law Board under Section 402 to set right, remedy or put an end to such oppression is very wide.(f) As to what are facts which would give rise to or constitute oppression is basically a question of fact and, therefore, whether an act is oppressive or not is fundamentally/basically a question ofmaterials placed and discussed before the CLB show that there was full disclosure of retirement of one-third directors and election to that place are in accordance with the Act and Articles of Association and theory of legitimate expectation has no application. It was also highlighted before the CLB as well as the High Court that out of eight directors elected, six were not related to Chairman. It was asserted that Chairman and his family stood personal guarantee to Rs.21.99 crores whereas NRI directors have not stood personal guarantee for any loan. Though CLB has observed that the principle of legitimate expectation is applicable in the case of the petitioners, in the light of the materials placed and the stand taken by the contesting respondents, we are of the view that the claim legitimate expectation cannot be extended to and there is no specific promise that the petitioners would be given directorship permanently. Even otherwise, the same cannot be accepted in view of the mandate of the statute that 1/3rd of the directors have to retire in a year by rotation. Accordingly, we accept the conclusion arrived at by the High Court and reject the decision of the CLB on thisis clear from the materials placed, the said Board Meeting was attended by the first petitioner. Though on the basis of the said information/knowledge it cannot be construed that the same would satisfy the mandate of Section 172 read with Section 53 (1) and (2) of the Act, the fact that a decision was taken in the Board Meeting held on 24.08.2005 that next AGM is to be held on 29.09.2005 at 11.00 AM at Casino Hotel, Trichur cannot be ignored. In addition to the same, as said earlier, respondent No.14 and 6 to 9 who are supposed to be netrual directors participated in the AGM held on 29.09.2005. It is not the case of the respondent Nos. 1 and 2 or even the petitioners that notice was dispensed with in respect of the AGM held on 29.09.2005. On the other hand, the respondents have produced certificates of posting to establish the service of notice on the directors and other shareholders. It is also demonstrated that those notices were given under certificate of posting as provided under Section 53 (1) and (2) and evidence for the same were also produced. As pointed out earlier, the first petitioner, being a party to the Board Meeting wherein date, place and agenda of the AGM were fixed, cannot make a complaint along with his supporters that they did not receive notice of the meeting. The materials placed clearly show that NRI directors participated in the meeting and respondent No.14 who was acting along with the appellants had also participated. Section 172 as well as Section 53 emphasized "giving notice". We have already adverted to how notice should be given for AGM as per Section 172 (2) and Section 53 (1) and (2) of the Act. In view of the fact that the company has placed materials to substantiate that notices, in terms of the above provisions, were given, as rightly pointed out by learned senior counsel for the contesting respondents, statutory presumption under Section 53 will apply though the said act is rebuttable. In view of the fact that there are materials to show that notices were sent, the burden is on the addressee to rebut the statutory presumption. The High Court, on verification of those materials, has concluded that "postal receipt with post office seal was produced to show that notice was sent to all shareholders by certificate of posting in the correct address as per the report". Sub-section (2) of Section 53 makes it clear that after expiry of 48 hours a notice duly addressed and stamped and sent under certificate of posting is deemed to have been dulyIt is true that the CLB has found that only 40 out of 300 shareholders attended the meeting. Based on the same, the CLB accepted the case of the petitioners and found that the AGM held on 29.09.2005 was defective. Before the CLB as well as the High Court, it was demonstrated by the contesting respondents that in previous AGM also number of attendance was below 35. In the 9th AGM, the persons attended were 32 and 10th AGM, it was 35. In this regard, it is relevant to refer in the order in I.A. 4727 of 2005 in O.S. 942 of 2005 which is a suit filed by respondent No.14. The Civil Court, based on the documents produced, has concluded that proper notice was served on the shareholders with regard to AGM held on 29.09.2005. The person who filed the said suit had prayed for injunction against conducting AGM, participated in the AGM and in fact he applied for re-election. Though the shareholders voted against him and other NRI directors, the information support stand of the respondents 1 and 2. The High Court has rightly concluded that AGM held on 29.09.2005 was legal and acceptable and we agree with the same.20) It is pointed out that the CLB set aside the election of respondent Nos. 16 to 23 as directors only on the ground that there is no valid notice. The discussion in the earlier paragraphs proves that this finding is not acceptable. The High Court verified the notice dated 24.08.2005 sent for AGM dated 29.09.2005 wherein the names of the retiring directors were subsequently mentioned. It was also demonstrated before the CLB and the High Court that proper advertisement in the Indian Express and Deepika were given in terms of Section 157(1)A of the Act. Though the CLB has not accepted the same, the High Court has rightly found that the same was in compliance with the statutory provisions. There is no error or illegality in the said finding of the Highthe High Court found that appointment of 8 directors without a "specific agenda" is irregular due to technical reason and that as per the agenda only 6 directors can be elected. We agree with the saidCLB has concluded that without a "special resolution" by 2/3rd majority shareholders cannot be offered to outsiders. Inasmuch as the above said conclusion is in terms of the statutory provisions, the High Court has rightly approved the same and we are also in agreement with the said conclusion. In this respect, it is useful to refer to the decision of this Court in Needle Industries (India) Ltd. vs. Needle Industries Newey (India) Holding Ltd. (supra). It was held that directors have absolute powers to issue right share provided they are acting under goodis relevant to mention that the same Board approved the said action when the first petitioner also attended the meeting. On the other hand, the CLB set aside the issue of duplicate shares to Purshottaman. It was pointed out before the High Court that the said decision was not challenged in the petition by any of the petitioners and the decision was taken by the Board of Directors to issue duplicate shares in place of lost shares. As said earlier, transferring the shares of Purshottaman was approved in the same Board Meeting wherein the first petitioner attended. It is also brought to the notice of the Court that duplicate shares were issued on receipt of indemnity bond as provided under Section 84(2). In those circumstances, the High Court has concluded that indemnity bond and documents produced would show that share transfer was also effected validly. Further the decision to issue duplicate shares to Purshottaman and transfer of the same were not challenged in the company petition. In view of the same, we agree with the ultimate decision arrived by the High Court.24) Coming to the allegation as to acts of mis-management particularly regarding the arrangement with special investigating centre, it was proved that the agreement with the special investigating centre was made when the petitioners 1 to 4 as well as their supporting NRI directors were in the Board and in active management. However, the High Court has directed the company auditor to go through the agreement with the special investigating centre and also the accounts and submit a report and thereafter, the same should be placed before the Board for appropriate action. The said direction is reasonable and acceptable.25) As rightly pointed out that CLB missed a most basic principle of Section 397, namely, that mere unfairness does not constitute oppression. When the petitioners were given the right to subscribe to the rights issue along with all others in the same proportion, no prejudice, whatsoever, could have been caused to them. It is not in dispute even by the petitioners that the need for more funds was an admitted position. In Needle Industries (supra) this Court has pointed out if there is a need for funds the fact that the directors have incidentally enriched themselves would not entail a court to set aside the issue of shares. In fact, no unfair prejudice has been caused to the petitioners. The CLB failed to take note of all these vital aspects and relied on irrelevant materials. Apart from these, it is pointed out that the company having turned the corner and doing well, it would be fair exercise of discretion by this Court not to interfere with the High Court judgment.26) In the light of the above discussion, we are of the view that the impugned judgment of the High Court is fair to both sides and safeguards the interest of the directors and shareholders; hence there is no valid ground to interfere under Article 136 of the Constitution of