ORDER
K.K. Balu, Member
1. The petitioners constituting more than one-tenth of the total members of Asal Malabar Beedi Depot Private Ltd. (“the company”) and holding 3.83 per cent. of the issued share capital have filed this petition under Section .397/398 of the Companies Act, 1956 (“the Act”) alleging acts of oppression and mismanagement in the affairs of the company.
2. The main act of oppression and mismanagement relates to the allotment of shares in favour of respondents Nos. 3 to 9 in exclusion of the petitioners.
3. Shri Arvind P. Datar, senior advocate appearing for the petitioners, while initiating his arguments has recapitulated the various dates and events in relation to the business carried on by the first petitioner and respondents Nos. 2 and 3, being brothers. The first petitioner was originally carrying on the business of manufacture and sale of beedies, as a sole proprietor. Thereafter, the first petitioner started a partnership firm in the name and style of M. K. Krishnan and Sons, with respondents Nos. 2 and 3 as equal partners. The first petitioner had also acquired the beedi business carried on by one Shri P. R. Ramaier in the name and style of Asal Malabar Beedi Depot, upon which a partnership deed dated July 17, 1972, was entered into with respondents Nos. 2 and 3, as equal partners. The firm M. K. Krishnan and Sons supplied beedies to Asal Malabar Beedi Depot. In the meanwhile, the first petitioner was also carrying on the business of manufacture of beedies under a sole proprietorship concern in Kerala, The first petitioner was constrained to leave in 1975-76, the partnership firm on account of the financial problems faced by him in his proprietary concern business in Kerala and to avoid any adverse impact on the partnership business. The first petitioner after settling the liabilities on account of the proprietorship concern, was readmitted into the partnership firm in the year 1991 by virtue of a partnership deed dated April 1, 1991, with equal shareholding in the partnership business. The business of the partnership firm was taken over by the company incorporated on October 15, 1992 and the first petitioner and respondents Nos. 2 and 3 are the subscribers to the memorandum of association subscribing to 100 shares by each of them. The company was incorporated on the premise of parity in shareholding and equal participation in its management. The business of the company continued to prosper. The first petitioner participated in its management and used to guide respondents Nos. 2 and 3 in carrying on the business of the company. However, respondents Nos. 2 and 3 began excluding the first petitioner from the management and affairs of the company and took advantage of the health problem faced by the first petitioner. In due course, no notices either for the board meetings or the annual general meetings were sent to the first petitioner and removed the first petitioner in December, 1977, from his office of director on the ground of his absence from three consecutive meetings of the board and immediately thereafter, allotted illegally the impugned shares in favour of respondents Nos. 3 to 9. When the first petitioner was again re-inducted to the board on April 1, 1998, he came to know of the allotment of the impugned shares. According to the petitioners, there were no reasons or circumstances necessitating the issue of additional shares, in exclusion of the petitioners. The respondents have not made out any necessity in the impugned allotment. The allotment is mala fide and to secure the ultimate purposes of the respondents. The additional shares were allotted in complete disregard of the principle of parity among the first petitioner and respondents Nos. 2 and 3. The allotment of shares to the members of the families of respondents Nos. 2 and 3 to the exclusion of the petitioners constitutes a clear act of oppression, thereby reducing the shareholding of the petitioners’ group from 33.5 per cent. to 3.83 per cent. The petitioners have been ousted from the participation in the affairs of the company and excluded from its management, which are acts of oppression and justify its winding up. Moreover, the respondents have not specifically denied in counter, the averments of acts of oppression and mismanagement made by the petitioners, in which case, the allegations of oppression and mismanagement made in the petition have got to be accepted. The plea of the respondents that the allotment was made in favour of respondents Nos. 3 to 9 to bring younger people for management is not justified in the absence of maintaining parity by such allotment in favour of younger members belonging to the first petitioner. In the circumstances, Shri Datar reiterated that the company should be directed to allot such number of additional shares to the members of the petitioners family so as to achieve parity of shareholding among the families of the first petitioner and respondents Nos. 2 and 3 and order payment of unpaid dividend to the petitioners for the past three years including dividend accruing to the shares due to be allotted to the petitioners’ family members.
4. Shri Datar, in support of his legal submissions relied upon the following decisions :
(i) Ms. Pushpa Prabhudas Vora v. Voras Exclusive Tools Private Ltd. [2000] 101 Comp Cas 300 (CLB); [2000] 3 Comp LJ 271, to show that in a family company, where there is parity in shareholding, any change in the shareholding, without mutual agreement, is an act of oppression.
(ii) S. T. Ganapathy Mudaliar v. S. G. Pandurangan [1999] 96 Comp Cas 919 (CLB), to show that family members having equal shareholding, additional issue of shares to one shareholder alone without any need for additional funds so as to give the shareholder undue advantage is invalid.
(iii) Satish Chandra Sanwalka v. Tinplate Dealers Association Pvt. Ltd. [2001] 107 Comp Cas 98 (CLB); [2001] 3 Comp LJ 284, to show that additional issue of shares to one of the two groups of shareholders in a private company is invalid. Directions issued to the respondents for resumption of parity in the shareholding.
(iv) Mrs. Senthamarai Munusamy v. Microparticle Engineers Pvt. Ltd. [2001] 105 Comp Cas 526 (CLB), to show that further issue of capital without generation of funds for the company which merely results in conversion of majority shareholders into minority constitutes an act of oppression.
(v) Puneet Gael v. Khelgaon Resorts Ltd. [2001] 2 Comp LJ 488 (CLB), to show that where there is a further issue of shares without any justification for the same, but only to convert the petitioner into a minority, the same constitutes a grave act of oppression.
5. Shri R. Murari, advocate appearing for the respondents, while refuting the charges made by the petitioners has reiterated that the business of the company was not on the principle of equal shareholding among the first petitioner and respondents Nos. 2 and 3. He pointed out that the alleged acts of oppression and mismanagement have been reported by the respondents since 1994-95. Nevertheless, the petitioners have preferred to file this petition only in the year 2001 and they are therefore guilty of laches. Though the first petitioner and respondents Nos. 2 and 3 were running the partnership business with equal shareholding and contributed 100 shares each at the time of incorporation of the company, there was no agreement for equal shareholding among the first petitioner and respondents Nos. 2 and 3. In this connection, he referred to the articles of association of the company which do not envisage such an equal shareholding among the parties. In this connection, Shri Murari relied on V. B. Rangaraj v. V. B. Gopalakrishnan [1992] 73 Comp Cas 201 (SC), to show that any private agreement between the shareholders for maintaining the parity of shareholding would have to be incorporated in the articles. Though the first petitioner was a partner in the partnership business run by the first petitioner and respondents Nos. 2 and 3, the first petitioner voluntarily retired from the partnership in the year 1975. Thereafter from 1975 till 1991, the second and third respondents made all the efforts in building up the business of the firm increasing the turnover from Rs. 1 lakh to Rs. 6 crores in the year 1991, during which time the proprietorship concern of the first petitioner was closed down. The first petitioner never contributed anything to the growth of the business of the firm or the company. After incorporation of the company in October, 1992, the business of the firm was transferred to the company and was efficiently carried on by the second and third respondents as whole-time directors. Though the first petitioner received salary from the company, he did not participate in the management of the company. The first respondent did not attend three consecutive board meetings held prior to November 8, 1997, in spite of the notices (anne-xures E, F and G) sent by the company and therefore ceased to be a director. At the request of the first petitioner, he was again reinducted on the board in April, 1998, but he was not attending the board meetings despite sending proper notices to him. Shri Murari referred to the notices sent to the first petitioner for the board meeting and also the postal receipts evidencing sending of the notices to the first petitioner for the board meetings in accordance with the provisions of Section 53 and accordingly they are deemed to have been sent to the first petitioner and it is for the petitioners to disprove the same. According to him, the first petitioner on reinduction into the board became aware of the further allotment of shares by the board in December, 1997 and January, 1999. The allotment of shares made in December, 1997 and in January, 1999 is challenged in the year 2001 and the delay has not been explained by the petitioners, in which case, no relief can be granted to them, in support of which Shri Murari relied on S. Ran-ganathan v. Shyamala Pictures and Hotels (P.) Ltd. [2001] 33 SCL 636 ; [2002] 108 Comp Cas 880 (CLB). Shri Murari justifying the allotment pointed out that the paid-up capital of the company is Rs. 30,000 and that the turnover is over Rs. 10 crores which necessitated the company to increase the paid-up capital in order to improve the business. As there was no agreement in regard to equal shareholding, there is no need for the respondents to offer the shares to the petitioners’ family. He further submitted that out of the turnover of Rs. 11 crore made by the company during the last financial year, Rs. 10 crore has gone to the partnership firm, wherein the first petitioner is also an equal partner and the remaining Rs. 1 crore has been spent for the business of the company. The first petitioner has already been enjoying in equal proportion the profits of the company. Shri Murari further pointed out that the first petitioner is now carrying on a rival business by sale of his own brand of beedies using the company’s premises and the amenities available at the company. In the circumstances, Shri Murari sought for dismissal of the petition.
6. Shri Datar, in his reply, contended that the plea of competing business of the first petitioner cannot be raised at this stage without proper pleadings in this behalf. The respondents have not made out any case for allotment of additional shares. He pointed out that with paid-up capital of Rs. 30,000, the company could have a turnover to the tune of Rs. 11 crores in which case, according to Shri Datar, there is no necessity to increase the paid-up capital. He invited our attention to the fact that the first petitioner was removed in ‘ December, 1997, and the impugned shares were allotted immediately in December, 1997, in exclusion of the petitioners, without any justification. This, according to Shri Datar, is with mala fide intention. He reiterated that though there is no written agreement regarding equal shareholding, there has been a tacit family arrangement as borne out by the partnership deeds entered into between the first petitioner and respondents Nos. 2 and 3 from time to time and the conduct of the parties by subscribing to 100 shares each at the incorporation of the company. He, therefore, reiterated that the petitioners must be allotted additional shares so as to have equal shareholding with respondents Nos. 2 and 3.
7. We have considered the pleadings and arguments of counsel.
8. The facts not in dispute are that the first petitioner and respondents Nos. 2 and 3, being brothers were carrying on the business in beedies as equal partners since the year 1972. Subsequently in the year 1975, the first petitioner retired from the partnership on account of his personal impediments. However, the first petitioner was readmitted into the partnership in the year 1991 with equal shareholding, by which time, the partnership had achieved a turnover in the range of Rs. 6 crores. Thereafter, the business of the partnership was taken over by the company in the year 1992 and the first petitioner as well as respondents Nos. 2 and 3 were subscribers to the memorandum of association subscribing to 100 shares by each of them. The first petitioner and respondents Nos. 2 and 3 became directors of the company. Some time in December, 1997, the first petitioner ceased to be a director on the ground of his absence from three consecutive meetings of the board, but subsequently he was reinducted on the board. The company allotted 1,700 shares on December 3, 1997, in favour of respondents Nos. 3 to 6 and 400 shares on January 6, 1999, to respondents Nos. 7 to 9, as per the report dated November 7, 2001, of the Regional Director. However, the petitioners were excluded. At this juncture, Shri Murari’s oral assertions assume importance. According to him, the profits earned by the company after meeting the expenses are going to the partnership firm, which are shared by the partners, namely, the first petitioner and respondents Nos. 2 and 3 in equal proportion. From these undisputed facts and circumstances, in our view, there is a tacit arrangement among the first petitioner and respondents Nos. 2 and 3 to share the profits out of the beedi business among themselves equally. This arrangement has been in practice ever since 1972 and even after formation of the company, the profits of which are taken equally by the partners of the partnership. We are, therefore, constrained to apply the principles of quasi-partnership and legitimate expectations in the present case. In such a family company, any disturbance in the
long held shareholding would amount to an act of oppression. The feeble plea of the respondents justifying allotment of the impugned shares that the paid-up capital of Rs. 30,000 was required to be increased on account of voluminous turnover is not convincing. The respondents, in our view, ought to have allotted shares in favour of the first petitioner’s family in parity with the respondents’ family, which they have failed. We do not find any justification to exclude the petitioners when new shares were allotted. The respondents have not acted fairly but in a manner oppressive to the interests of the petitioners. However, we do not propose to set aside the impugned allotments in view of the fact that the allotment money has been utilized for the business of the company. We propose to restore parity among the three groups. Therefore, out of 2,100 shares newly allotted, the petitioners’ group should be entitled to 33.33 per cent. of the shares, which works out to roughly 700 shares. In case the petitioners are willing to acquire these shares respondents Nos. 3 to 9 should transfer to the petitioners these 700 shares at the consideration paid by the respondents when they were allotted shares by the company. The option to get the shares transferred should be exercised before April 30, 2002, by a notice to the company, together with a demand draft for the amount of consideration for these shares. Once the notice is received by the company along with the consideration as above, the company will arrange for getting the transfers effected by respondents Nos. 3 to 9 within 15 days thereafter and register the transfers within further ten days. Identification of 700 shares to be transferred to the petitioners out of 2,100 shares allotted to respondents Nos, 3 to 9 shall be the responsibility of the company.
9. With the above directions, we dispose of the petition without any order as to costs.