ORDER
S. Balasubramanian, Chairman
1. M/s. CRM Digital Synergies Pvt. Ltd. was incorporated on March 10, 2006, with the main object of taking over the business of a partnership firm (M/s. Digital Synergies) which was engaged in the business of BPO. The company has two shareholders, the petitioner holding 8,000 equity shares of Rs. 10 constituting 80 per cent, of the paid-up capital of the company and the second respondent holding the balance 2,000 shares constituting 20 per cent, shares. Both are the only directors of the company. The petitioner is the brother-in-law of the second respondent. The petitioner is an NRI residing in UK and the second respondent has been in control of the company. The only customer of the company is M/s. Core BPO. The petitioner had entered into an agreement to sell his shares to M/s. Core BPO. The second respondent had initiated proceedings under the Arbitration Act against the petitioner and she has also initiated proceedings against M/s. Core BPO. The petitioner filed the instant petition alleging that the second respondent has not convened a single board meeting after the incorporation of the company except the one in which she was authorised to operate the bank accounts singly and that she has failed to attend the board meeting convened by the second respondent, that she is guilty of financial mismanagement and siphoning off of funds and that the extraordinary general meeting requisitioned by the petitioner for the appointment of additional directors could not be considered as the second respondent did not allow the board meeting to be convened to consider the requisition. With these allegations, the petitioner sought for directions to hold the board meeting on a fixed date and to direct holding of the extraordinary general meeting and also for a declaration that all decisions taken by the second respondent without the authority of the board, as null and void.
2. When this petition was mentioned on June 19, 2007,1 directed both the parties to be present in person to attempt at an amicable settlement of the disputes and accordingly both the sides were represented on June 21, 2007, when it was agreed that an extraordinary general meeting could be held on June 28, 2007, to transact the businesses proposed by the petitioner by his notice dated May 9, 2007 and of those given by the second respondent by a letter dated June 21, 2007. The meeting was directed to be chaired by the Bench Officer. Accordingly, the extraordinary general meeting was held wherein all the proposals of the second respondent for direction to the petitioner to sell his shares to a third party as approved by the board and for winding up of the company were defeated and the proposals of the petitioner to appoint two directors were approved. After the extraordinary general meeting, the second respondent filed an application alleging that the petitioner had given effect to the resolutions without the approval of this Board and sought for consequential directions. Pending disposal of the applications, the pleadings were completed and the matter was heard on merits.
3. Shri Sarkar, senior advocate for the petitioner submitted: The petitioner is an NRI. The petitioner desired to set up a call centre in India with the experience that he had obtained abroad. Even though the second respondent was a teacher working in Rishikesh without any business experience, since she is the sister-in-law of the petitioner, he invited her to be a partner in the firm. Initially, a partnership firm with the petitioner, the second respondent and a third party was constituted. Thereafter, the third party retired from the partnership and the petitioner and the second respondent continued to be partners in the ratio of 80 : 20 by a partnership deed dated April 1, 2004. This partnership was at will which could be terminated by anyone at any time. In March, 2006, the firm was converted into the present company. In addition to Rs. 80,000 as share capital, the petitioner has funded the company substantially to the tune of over Rs. 4 crores by way of loans, while the second respondent has invested only a sum of Rs. 20,000. The second respondent could have never established on her own or started a BPO, especially the dialer which is a very important component of a BPO is located abroad and was provided by the petitioner. The petitioner bought the dialer abroad and allowed the company to use the same on lease. Except this dialer, there are no costly fixed assets in the company except computers.
4. He further submitted: Since the petitioner had full trust and confidence in the second respondent, he had given her a power of attorney to carry on the business of the company. Since, the petitioner found that she was paying heavy remuneration to her son who is a student and also to her husband without the consent of the petitioner and was also siphoning off of the funds of the company and had been mismanaging the affairs of the company, the petitioner desired to have an additional director on the board as the petitioner normally resides abroad. However, the second respondent, with a view to have sole control of the company did not allow board meetings to be held to consider the proposal. Even the extraordinary general meeting requisitioned by the petitioner could not be considered by the board. In terms of Article 37, the board has the power to appoint additional directors and such directors need not hold any qualification shares. Since there is a deadlock in the company, the only way by which the deadlock can be resolved is to appoint additional directors which is not acceptable to the second respondent as she does not want to share her powers. So far she has initiated six independent proceedings–3 against the petitioner in her own name and 3 against the Core BPO in the name of the company without any authority of the board. Invoking the provisions of Article 66 which provides for arbitration, she has filed application under Section 11 of the Arbitration and Conciliation Act against the petitioner. When she has relied on the articles to initiate arbitration proceeding, she should also be bound by the terms of other articles of the articles of association. In terms of Article 5, outsiders can be admitted as shareholders, in terms of Article 37 the board can appoint additional directors and in terms of article 19 it is the view of the majority shareholders that would prevail. Therefore, when the petitioner is taking steps in terms of these articles, the second respondent cannot object to the same.
5. In the notice for the extraordinary general meeting, the second respondent had proposed a resolution for winding up of the company and voted in support of the same. This proposal itself would show that she is not interested in the welfare of the company and therefore the question of her continuing with the company does not arise. However, the petitioner with a view to ensure smooth functioning of the company, proposed appointment of two directors which is also now opposed by the second respondent only with a view to perpetuate her sole control over the company. Further, the second respondent also proposed that the petitioner should be directed to sell his shares to an outsider as approved by the board. Thus, the second respondent does not want the petitioner to continue with the company, even though it was he who brought her into the business. It is true that the petitioner entered into an agreement with M/s. Core for sale of his shares but the agreement has not been acted upon. Even though, in terms of the agreement, the second respondent was to be removed as a director, yet, the petitioner did not move any resolution for her removal in the extraordinary general meeting. Since the sale agreement has not been acted upon, it has no bearing on the merits of this case. Therefore, the resolutions passed at the extraordinary general meeting should be allowed to be implemented for the smooth running of the company or in the alternative, the second respondent should be directed to sell her shares to the petitioner, and go out of the company on receipt of fair consideration for her shares.
6. Learned Counsel relied on the following cases:
(1) Bajrang Prasad Jalan v. Mahabir Prasad Jalan : Majority was directed to purchase the minority shareholders.
(2) Kamal Kumar Dutta v. Ruby General Hospital Ltd. [2006] 134 Comp Cas 678 (SC) : [2006] 7 SCC 613.
(3) Combust Technic P. Ltd. In re [1986] 60 Comp Cas 872 (Cal): Majority cannot be directed to sell their shares to the minority.
(4) Dale and Carrington Investment P. Ltd. v. P.K. Prathapan : A majority shareholder should not ordinarily be directed to sell his shares to the minority group of shareholders.
7. Shri Mookherjee, senior advocate, appearing for the second respondent submitted: In view of the strained relations between the parties, the only solution would be parting of ways. The second respondent should have the right to purchase the shares held by the petitioner for various reasons. The petitioner is an NRI residing in UK and does not have any business in India leave alone the BPO business. The company took over the business of the partnership in which the petitioner and the second respondent held 80 : 20 interest. In terms of the addendum to the partnership deed dated April 1, 2004, it was decided to convert the partnership into a company wherein it has been specifically provided that only the partners of the firm shall be the shareholders/directors. Even the memorandum of the company specifically states that the main object of the company was to take over the business of the partnership firm. Since the company came into being on the basis of the addendum, the terms of the same cannot vanish. Thus, the company is in the natureof a quasi-partnership where remuneration to working partners has been provided. The subscribers to the memorandum are these two partners. The efforts put in by the second respondent in nurturing and developing the business of the company is enormous. Since the petitioner lives abroad, the second respondent has managed the company single handedly. When the business was carried on by the partners, the BPO had only 24 seats. The second respondent negotiated for a new building with an area of 25000 sq. ft. on a 9 years lease and has increased the number of seats to over 300. The only customer of the company is M/s. Core. Even though, the petitioner claims that he brought in M/s. Core, yet, Core was already with the firm earlier and as a matter of fact the memorandum of understanding with Core was signed by the second respondent on behalf of the company. All the licences/approvals required to run the BPO had been taken by the second respondent. The only facility provided by the petitioner was a dialer leased out to the BPO which also he had clandestinely sold to M/s. Core in May, 2007, notwithstanding the fact that the company has paid over Rs. 30 lakhs to the petitioner as lease rental for the dialer. Having purchased the dialer from the petitioner, now the Core is complaining that the company has failed to provide the dialer and therefore the memorandum of understanding has to be re-negotiated. By selling the dialer, the petitioner has acted prejudicial to the interest of the company. In addition, by a letter dated December 22, 2006, the petitioner instructed the Citi Bank with which the company has an account, to block the account, on the ground that there had been fraudulent transactions. Because of this blocking of the bank account, many cheques issued by the second respondent came to be dishonoured and proceedings under Section 138 have also been initiated in some cases. The bills for vital services like electricity, telephone bills, etc., could not be paid. In other words, the first petitioner had completely paralysed the working of the company. Thereafter, even though, he withdrew the said letter on December 29, 2006, yet, by a letter dated May 8, 2007, he asked M/s. Core to discharge all the obligations of the company directly by making payments to the vendors. Because of this, M/s. Core has stopped/withheld all payments to the company due to which the company is starved of funds. It is important to note that on May 1, 2007, the petitioner had entered into an agreement with M/s. Core to sell all his shares to M/s. Core and also to hand over the management of the company with the stipulation that the second respondent should be removed from the board. This agreement to sell has not been disclosed in the petition nor denied in the rejoinder. As a matter of fact, during the month of April, the second respondent had some inclination that the petitioner was trying to sell his shares and in spite of her repeated e-Mails to him, he never responded. If he had decided to leave the company, he should have offered the shares to the second respondent, who has been his partner and who is even now willing to purchase the shares of the petitioner on the same terms and conditions as in the agreement to sell.
8. Learned Counsel further submitted: The petitioner has alleged that the son and husband of the second respondent are being paid remuneration by the company without his approval. The practice of paying remuneration to these two was in vogue even when the business was being carried on by the partnership firm and the payment to these people was in the full knowledge of the petitioner and he never objected to the same. He has also alleged siphoning off of funds by the second respondent. It is on record that at the time of restoring the bank operation by his letter dated December 29, 2006, addressed to the Citi Bank, the petitioner himself had written to the bank “I have done my further investigation and found no fraudulent activity so far”. Thus, having found after investigation that there was no wrongful act on the part of the second respondent and having not so far raised any such issues in any correspondence with the second respondent, the petitioner has made this allegation, not in the petition but in the rejoinder, only to strengthen the petition. Even otherwise, the details of all the expenses incurred by the second respondent have been fully explained by the second respondent in her surrejoinder.
9. Learned Counsel further submitted: The petitioner tried to induct an outsider as a member by agreeing to sell his shares to M/s. Core. According to the petitioner, Article 15 permits transfer of shares to an outsider. Since as per the addendum to the partnership deed by which the firm was converted into the company stipulates that only the partners shall be the shareholders, unless both the partners agree, no third person can become a shareholder. In terms of Article 19, as relied on by the petitioner, a member who is acting against the interest of the company can be removed by the board by making a reference to the shareholders. Even to make such a reference, both the directors have to agree. In other words, there should be unanimous consent. Even the act of the petitioner to approve appointment of 2 directors with his majority shareholding, without the consent of the second respondent is against the terms of the addendum and that is why she has sought for nullifying the decision taken in the extraordinary general meeting. The petitioner has alleged that the second respondent proposed and voted in favour of winding up of the company and therefore she is not entitled for any equitable relief. The second respondent made the said proposal only in view of the prejudicial acts of the petitioner both against her as well as against the company. It is crystal clear that both the petitioner and M/s. Core have joined together and the petition itself appears to be by proxy on behalf of M/s. Core. Because they have joined hands together, to protect the interest of the company, the second respondent has not only filed an application under Section 11 but has also sought for directions against M/s. Core to discharge its obligations to the company. In a petition under Section 397/398, the Company Law Board is not bound by the articles as articles are subject to equitable considerations. Having filed this petition and seeking equitable relief, the petitioner cannot insist that the disputes should be decided in terms of the articles. Even in a petition for winding up, relief in terms of Section 397/398 can be sought. Copeland and Craddock Ltd., In re [1997] BCC 294, the petition was filed for winding up of the company on just and equitable grounds and an alternate prayer in terms of Section 459/461 of the Companies Act, 1985, seeking for a direction to direct one of the parties to sell their shares to the other side was also made. In World Wide Agencies P. Ltd. v. Mrs. Margaret T. Desor , it has been held that a joint petition for removal of oppression and mismanagement and winding up is maintainable.
10. Learned Counsel further submitted: Since irreconcilable differences have arisen between the parties, taking into various acts of the petitioner which are prejudicial to the interest of the company, the petitioner should be directed to sell his shares to the second respondent on the same terms and conditions as per the agreement to sell between the petitioner and M/s. Core. It is on record that the second respondent has single handedly managed the affairs of the company and has been associated with the business from 2004 onwards after giving up her job in Rishikesh. Any direction to ask her to leave the company would prejudicially affect her as she would lose her remuneration and on her own she cannot start a similar business as it would be very expensive.
11. In rejoinder, Shri Sarkar submitted: In good faith and with utmost trust and confidence, the petitioner allowed the second respondent to carry on the business. However, in view of her uncooperative attitude, by a letter dated January 17, 2007, he cancelled all his power of attorney given in favour of the second respondent. Even though the second respondent communicated to the petitioner by an e-Mail on December 28, 2006, that all cheques would be signed jointly by her and the petitioner to which the petitioner also consented, the second respondent continued to operate the account singly. That is the reason why the second respondent desired to have a board meeting by a letter dated May 1, 2007, to which the second respondent did not respond. The second respondent was never interested in resolving the deadlock. Instead, she initiated arbitration proceedings in the first week of January 2007, against the petitioner who holds 80 per cent, shares in the company. Such a person can never seek any remedy in equity. Even in the agenda for the extraordinary general meeting, the petitioner did not propose the removal of the second respondent as a director even though with 80 per cent, shares, he could have done so. Only after the second respondent moved the High Court, the petitioner issued a notice for holding a board meeting and also an extraordinary general meeting and when the second respondent objected to the same, filed the present petition. It is to be noted that only after both the sides consented for holding the extraordinary general meeting, the second respondent issued a notice for consideration of the businesses proposed by her. Her conduct completely debars her from claiming any equitable relief especially when her desire is to keep the 80 per cent, shareholder completely out of the affairs of the company for all times to come. She does not want to have any checks and balances notwithstanding the fact that she holds only 20 per cent, shares in the company. Her claim that no third person could become a shareholder/director is not correct. As per the addendum, such a stipulation was to operate only at the time of incorporation of the company where after the articles would prevail. While Article 15 permits transfer of shares to outsiders, Article 37 specifically provides for appointment of outside directors even without holding qualification shares. It is on record that in the extraordinary general meeting, one of the proposals of the second respondent was that the petitioner should sell his shares to an outsider in terms of Article 19. This being the case, her contention that no outsider could become a shareholder has no basis.
12. Learned Counsel further submitted: Because of the close relationship, the petitioner has given enormous amount to the second respondent. She has also received enormous benefits from the company by way of remuneration not only to her but also to her son and husband. Having received such a huge financial benefit, she cannot now seek for the control of the company only on the ground that she has been in the management. Her stand would mean that a sleeping partner can never seek to participate in the affairs of the company. Therefore, the resolutions passed in the extraordinary general meeting appointing two directors should be allowed to be implemented so that the company is run in a democratic manner or in the alternative, direction should be given to the second respondent to sell her shares to the petitioner.
13. I have considered the pleadings and arguments of counsel. The main ground on which the petition has been filed is that as a 80 per cent, shareholder, the petitioner, has not been allowed to exercise his right to appoint additional directors to break the deadlock in the board of the company. In addition, certain other allegations have also been made; that no board meeting has been held, that no annual general meeting has been held, that auditors have not been validly appointed, that the family members of the second respondent have been paid exorbitant remuneration without the board’s approval, that the second respondent has removed the books of accounts and that the petitioner has been kept in the dark about the affairs of the company. Since the main allegation related to the deadlock situation, I directed holding of the extraordinary general meeting in which appointments of two directors were approved. These appointments have been challenged by the second respondent on the ground that the same is in violation of the addendum to the partnership deed by which the business of the partnership was taken over by the company. The question that has arisen is that whether the terms of the addendum would prevail or the terms of the articles. In law, the provisions of articles are in the nature of a contract among the shareholders and being a signatory to the memorandum and articles, the second respondent was fully aware of the provisions of the articles. If the intention contained in the addendum were to be continued even after the partnership was converted into the company, then, the provisions contained in the addendum should have been incorporated in the articles. I find from the articles that there is no reference to the addendum even to presume that it was the intention of the parties, notwithstanding specific provisions in the articles, to abide by/follow the provisions of the addendum. When there are two agreements entered into on different dates relating to a particular subject, unless the latter agreement makes a reference to the former agreement and provides that the latter is in addition to the former, the latter agreement would prevail. A ground for alleging oppression could be that there is a violation of the provisions of the articles affecting the proprietary rights of a shareholder. Every shareholder has the right to enforce the rights arising out of the articles and such rights have to be considered to be proprietary rights and the denial of such rights could be an act of oppression. Shri Mookherjee, advocated a proposition that the provisions of articles are subject to equitable consideration. Whether equitable consideration can be superimposed on proprietary rights would depend on the facts of a case. The same is examined hereinafter.
14. The petitioner has alleged that the second respondent is guilty of financial management and siphoning off of funds. In the petition, other than alleging about payment of remuneration to her son and her husband by the second respondent, no other allegation has been made. But in the rejoinder, he had given certain instances of alleged financial mismanagement/siphoning off of funds. I do not propose to take cognizance of these allegations for three reasons. One is that he blocked the bank account on the ground of suspicion of fraudulent activities, by a letter dated December 22, 2006. Thereafter, by another letter dated December 29, 2006, he withdrew the same on the ground that on investigation, he had found no fraudulent activities so far. Having taken a stand that there were no fraudulent activities as late as on December 29, 2006, he cannot now allege of fraudulent activities in the petition filed in May, 2007. Secondly, at no point of time the petitioner questioned the second respondent about the payment of remuneration to her relatives, especially when the second respondent has asserted that such payments were in vogue even in the firm and with the knowledge of the petitioner. This assertion by the second respondent has not been denied by the petitioner. Thirdly, the second respondent has satisfactorily explained in detail the nature of expenses alleged as siphoning off of funds.
15. As I have pointed out earlier, the main grievance of the petitioner relates to the composition of the board and any increase in the board would ensure majority for the petitioner on the board. While as a majority shareholder, he would be legitimately entitled to have a larger number of his representatives on the board especially when Article 37 permits the same, whether in the facts of the case, the same is justified is a question to be decided. In a company, which is in the nature of a quasi-partnership, in which only the two shareholders/partners are also directors, to appoint outsiders on the board, there should be some justification. The justification given by the petitioner varies from time to time. In the petition it is stated that since the petitioner did not allow joint signatures on the cheques with the petitioner, he decided to enlarge the board. In rejoinder, he has stated that since the second respondent had initiated proceedings against the petitioner and M/s. Core, enlargement of the board is necessary. During the hearing it was submitted that the appointment of additional directors is necessary to break/resolve the deadlock. An examination of the sequence of events would indicate that the enlargement of the board could lead to consequences which are completely against the interests of the second respondent or oppressive to her. It is on record that the petitioner sold the dialer in April/May 2007, without which, according to him, the second respondent could have never started the BPO. On May 1, 2007, he entered into an agreement to sell his shares to Core BPO. There are two important stipulations in the agreement. One is that there should be a board approval for the transfer of shares and the other is that the second respondent should be removed from the board. The former cannot go through unless the second respondent consents to the transfer as there are only two directors. By appointing even one additional director, the proposal could go through even if the second respondent objects to the same. Thus, even though Article 37 permits appointment of additional directors and that according to the petitioner such appointment would resolve the deadlock situation, the fact is that it would also facilitate getting board’s approval for the transfer of his shares to M/s. Core BPO. Further, in terms of Article 19, the board can refer the case of a member to the general body for his/her removal as a member on the allegation that the said member had acted against the interests of the company. The agreement with Core BPO stipulates that the second respondent should be removed from the board. By having additional directors on the board, the petitioner can have the matter of the second respondent referred to the general body and as the largest shareholder, he can approve her removal as a member in the general meeting. Thus, his exercising the rights under the articles to appoint additional directors would definitely be detrimental to the interests of the second respondent, who is a partner. It is to be noted that there was inaction on the part of the petitioner from January 2007 to May 2007, i.e., after the second respondent initiated arbitration proceedings and the letter of the petitioner dated May 1, 2007, calling for a board meeting, by which time he had entered into an agreement to sell his shares. Thus, it is quite probable that his desire to enlarge the board could be to ensure that the sale of shares is approved. As rightly pointed out by Shri Mookerjee, equitable considerations would overweight the rights under the articles if the exercise of the rights result in disastrous consequences against the partner in a quasi partnership. Shri Sarkar mentioned that the agreement to sell has not been acted upon and that the petitioner had not proposed the removal of the second respondent as a director, in the extraordinary general meeting. He did not however, indicate that the agreement to sell will not be acted upon in future or that the second respondent would not be removed later. After the extraordinary general meeting, the petitioner called for a board meeting to transact certain businesses. One was authorisation to operate bank accounts. The second respondent was not named as a signatory. By other businesses, the second respondent has been sought to be completely excluded from the management of the company notwithstanding the fact that she had been solely managing the affairs of the company right from its incorporation. Therefore, the second respondent is fully justified in seeking for a permanent injunction against the implementation of the extraordinary general meeting resolutions.
16. However, in view of the stand of both the sides that due to irreconcilable differences, parting of ways is the only solution, I shall examine the issue as to who should go out of the company. According to Shri Sarkar, it is the majority who should have the control of the company and the majority cannot be directed to go out of the company especially when the second respondent had voted for winding up of the company and has initiated various proceedings against the petitioner and against the only customer M/s. Core. In a deadlock situation of closely held companies, there could be no standard yardstick to decide whenever majority or minority should continue in the company and the same would depend on the facts of the case. In Dale and Carrington Investment P. Ltd. v. P.K. Prathapan , the minority shareholder was managing the affairs of the company and by issue of further shares, he gained majority and by doing so, he perpetuated his control over the company. While holding that conversion of a majority into a minority was an act of oppression and setting aside the said allotment, the Supreme Court approved the observation of the Calcutta High Court in Tea Brokers P. Ltd. v. Hemendra Prasad Barooah [1998] 5 Comp LJ 463. “A majority shareholder should not ordinarily be directed to sell his shares to the minority group of shareholders, if by chance through fortuitous circumstances or otherwise, the minority group of shareholders comes into power and management of the company. Except in unusual circumstances, the majority group of shareholders, in my opinion, should never be ordered or directed to sell their shares to the minority shareholders. An order directing the majority group of shareholders to sell its shareholdings to the minority group of shareholders will not redress the wrong done to the majority group and will not give sufficient compensation or relief against the act of oppression and on the other hand may add to his suffering and grievance and cause him greater hardship. Such an order will not further the ends of justice and indeed the cause of justice may be defeated”. Thus, while laving down the general proposition that majority should not be directed to sell its shares to the minority, it is also provided that in unusual circumstances, it could be done. In Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad [2005] 123 Comp Cas 566, the Supreme Court referred to the decision of the Madras High Court in Shoe Specialities P. Ltd. v. Standard Distilleries and Breweries P. Ltd. [1997] 90 Comp Cas 1, wherein the Madras High Court had observed (page 635): “It is the interest of the company that is being considered and not the individual dispute between the petitioners and the respondents. If that be so, the interest of the company requires that the majority shareholders must have a say in the management”. This would indicate that the control of the company should be given to the one–whether minority or majority–under whose control the company would be benefited. In Combust Technic P. Ltd. In re [1986] 60 Comp Cas 872 (Cal), the facts are more or less similar to the present case except that the petition therein was filed by the minority shareholder. There were only two shareholders, the petitioner holding 14 shares and the second respondent 16 shares. Both of them were directors. Since the respondent therein did not attend a board meeting convened by the petitioner, in the adjourned board meeting, the petitioner co-opted another director and also issued 20 shares himself. Thus, he became majority on the board as well as in the shareholding. The respondents therein filed a suit to restrain the petitioner from giving effect to the resolutions passed in the impugned meeting. Thereafter, the petitioner filed the petition on the ground of deadlock in the affairs of the company and seeking for various reliefs inter alia for a direction to the respondent to sell her shares to the petitioner. Since the suit was pending, the High Court did not grant any relief sought for by the petitioner but appointed a special officer, while doing so, it also observed that “majority is a matter of arithmetic and in law she should not be directed by the court to sell her shares to the petitioner”. This observation of the High Court may not hold good now in view of the Supreme Court decision in Dale and Carrington Investment P. Ltd. v. P.K. Prathapan [2004] 122 Comp Cas 161 : [2005] 1 SCC 212, in which the Supreme Court has placed more stress on the interest of the company to decide as to who should go out. In Bajrang Prasad Jalan v. Mahabir Prasad Jalan AIR 1999 Cal 156 the petition was filed by a minority shareholder who had not taken any interest in the management as is evident from paragraph 101 of the said judgment. In paragraph 96, the court observed (page 178): “There cannot further be any doubt whatsoever that in all circumstances the minority or the oppressed has to sell or relinquish its shareholding as the main consideration is what would be for the benefit of the company”. The above decision is on the assumption that only the minority would be oppressed by the majority and the majority continuing in the company would be beneficial to the interest of the company. Again the stress is the interest of/beneficial to the company. I may also refer to Scottish Co-operative Wholesale Society Ltd. v. Meyer [1958] 3 All ER 66, 89 (HL); [1959] 29 Comp Cas 1, 33, which has been referred to as a hallmark decision in most of the subsequent decisions. “One of the most useful orders mentioned in the section–which will enable the court to do justice to the injured shareholders–is to order the oppressor to buy their shares at a fair price;…. Once the oppressor has bought the shares, the company can survive”.
17. From these cases, certain propositions emerge: The oppressor to purchase the shares of the oppressed, majority should normally have the right to purchase the minority and in unusual circumstances majority can be directed to sell the shares to the minority. In all these cases, it is the interest of the company that has been the basis of the decisions thereat. In the present case, it is an undisputed fact that the petitioner is in the majority holding 80 per cent, shares and has contributed substantial funds to the company in the form of loans of about Rs. 4 crores. But other than providing a dialer on lease, he did not participate in the affairs of the company. His actions from December, 2006 have been completely detrimental to the interests of the company. By a letter dated December 22, 2006, he blocked the operation of the bank accounts, the effect of which has been elaborately dealt with the reply of the second respondent. He sold the very important requirement of the company, viz., the dialer to M/s. Core BPO in April/May 2007, which, has thereafter, alleging that the company has not complied with the terms of agreement, sought for re-negotiation of the memorandum of understanding. Thereafter, he entered into an agreement to sell his shares to M/s. Core on May 1, 2007, with the provision that the second respondent would be removed from the board. Thereafter, by another letter, he authorised M/s. Core to discharge the liabilities of the company. The sequence of events would indicate that not only the petitioner is not interested in continuing with the company but, even before transferring his shares to M/s. Core, had practically handed over the financial management of the company to M/s. Core. Therefore, even assuming, as contended by Shri Sarkar that majority should have the right to purchase the minority, when such a majority has expressly indicated its desire to go out of the company by entering into an agreement to sell its shares and had also acted against the interests of the company, the question of the majority seeking to buy out the minority does not arise. No doubt, Shri Sarkar mentioned that the petitioner has not acted upon the agreement, but it is of no consequence as no commitment was given during the hearing or in the pleadings, that the same would not be acted upon in future. Compared to the conduct of the petitioner, it is evident from the proceeding, that the second respondent has tried to protect the interests of the company as well as her own by taking legal steps. While the proceeding against the petitioner was with the view to protect her interests/the company, the proceeding against M/s. Core was with the view to protect the interests of the company. Her contribution to the company is commendable. She increased the seats from 24 to over 330, got a building of over 25,000 sq. ft area on lease for the company at a reasonable rental, equipped the BPO with assets of over Rs. 1.5 crores, obtained all the licences/approvals for running the BPO, etc. In addition, she has also given loans, etc., of about Rs 1.2 crores accounting to 20 per cent, of the loans given by the petitioner. When a person asserts majority in view of the financial contribution and seeks control of the company on that ground alone, in equity, the contribution by the minority in the form of labour, efforts, etc., in building the business and successfully running the same, cannot be ignored.
18. In Nikhil Rubbers P. Ltd. In re [2002] 108 Comp Cas 438 (CLB) the wife-petitioner held 90 per cent, shares while the respondent-her husband held the balance 10 per cent, shares. When the Board found from the facts of the case, that the husband had solely developed and had been running the business successfully, and the wife had been acting against the interests of the company, this Board rejected the demand of the wife for control of the company on the ground of her being the majority and allowed the husband to purchase the shares of the wife-petitioner. While doing so, the Board also declared that for the purpose of valuation, the shareholding should be deemed to be equal. The entire order was based on equity. Shri Sarkar argued that a sleeping partner can always assert his rights of participation in the management. While I do agree to this proposition, yet, in the present case, by acting against the interests of the company and by expressly indicating his desire to go out of the company by entering into a sale agreement with M/s. Core, the petitioner has lost the said right. If the petitioner for some reason, decided to quit the company, he should have offered the shares to the second respondent and not to an outsider unless the second respondent had rejected the offer. Shri Sarkar contented that since the petitioner proposed a resolution for winding up of the company in the extraordinary general meeting, she cannot seek any equitable remedy. It is to be noted that she only sought for the approval of the general body for winding up of the company and did not initiate any legal proceeding in this regard either before or after the extraordinary general meeting. If she had done so, perhaps, then, the contention of Shri Sarkar would have required to be examined taking into consideration the cases cited by Shri Mookerjee. Therefore, I have no hesitation to come to a conclusion that it is the interest of the company, which is the paramount consideration in granting reliefs under Section 397/398 of the Act, that the second respondent, who has evinced interest in continuing with the company, unlike the petitioner, should have the right to purchase the shares held by the petitioner.
19. Even though the second respondent proposed a resolution in the extraordinary general meeting that the petitioner should be directed to sell his shares to an outsider, during the hearing, counsel for the second respondent submitted that his client is willing to purchase the shares held by the petitioner on the same terms and conditions as per the agreement to sell between the petitioner and the Core BPO. I find from that agreement that the petitioner had agreed to sell his shares at par and that M/s. Core had agreed to refund the loans given by the petitioner to the company. Since I am directing parting of ways, ignoring to provide for compensation for the financial contribution made by the petitioner would be inequitable to him. Therefore, the entire investment of the petitioner both in the form of share capital of Rs. 80,000 and loan of Rs. 480.80 lakhs (subject to verification) should be refunded by the second respondent with 5 per cent, interest per annum starting from the date of incorporation of the company till the date of payment. Since the sale agreement with M/s. Core stipulates payment of the amount within a period of 8 weeks, and since I am adding the element of interest, the second respondent should ensure that the payment as above is made within 90 days from the date of receipt of this order in one or more instalments.
20. In view of my directing the petitioner to sell his shares to the second respondent, the appointment of two directors approved in the extraordinary general meeting shall not be given effect to and if any decision had been taken by the reconstituted board, the same shall have no effect. However, the petitioner will continue as a director till the entire payment towards his shares and loans is paid to him. If any board meeting is held during the interregnum, the petitioner should be given seven days notice to enable him or his authorized representative to attend the meeting and no decision prejudicial to the interest of the petitioner shall be taken. On payment of full dues as above to the petitioner, he will cease to be a director and the second respondent would be at liberty to reconstitute the board. I further stipulate that at least for a period of two years from the date of full payment to the petitioner, the second respondent should continue to hold majority shares in the company as well as control of the company. This is with a view to ensure that the control and management of the company do not change hands after acquiring the company from one of the promoters of the company, viz., the petitioner. Even though, M/s. Core is not a party to the proceeding, it was represented by Ms. Priya Kumar, advocate on a complaint by the second respondent that M/s. Core, had not complied with certain directions given by this Board. She made a statement at the bar that M/s. Core BPO would fully co-operate and sort out all the issues with the person taking control of the company by the order of this Board. Now that the second respondent will be in control of the company by virtue of this order, M/s. Core should honour the statement made before this Board by its counsel. The second respondent will withdraw all the cases against the petitioner as well as against M/s. Core at the earliest and till then she shall not take any further steps to proceed with the same. Should for any reason, the second respondent does not pay the full amount due as per this order to the petitioner within the stipulated time, the right to purchase the interests of the second respondent in respect of her shares and the loans given by her in the company will automatically vest in the petitioner and he will be bound by the same terms and conditions as above.
21. The petition is disposed of in the above terms, vacating all the interim reorders and without any order as to costs.