ORDER
Balasubramanian, Chairman
1. The petitioner hereinabove holding 14.7 per cent shares in Manu Maharani Hotels Ltd. (the company) has filed this petition under section 397/398 combined with sections 111A and 409 of the Companies Act, 1956 (‘the Act’) challenging the transfer of shares by the promoters to outsiders.
2. The facts of the case are that the company was incorporated in 1988 by the family members of the petitioner with an authorised capital of Rs. 5 crores. There were 4 identifiable groups consisting of the petitioner and 3 of her sisters each group holding equal number of shares. In a meeting held on 16-3-1994, it was agreed that these 4 sisters, namely, the petitioner and the respondents 2 to 4 would jointly manage the affairs of the company and that in case any of them desired to sell their shares, the same would be offered to the other three in equal proportion and in case any one is not inclined to take the shares so offered, the same will be offered to the other two in equal proportion (Annexure R-2/2). An MOU was entered into on 4-5-1994 among the shareholders (Annexure R-3/4) wherein more or less the same terms in respect to transfer of shares were incorporated. In the meanwhile, the company had taken certain loans from financial institutions. On 8-5-1994, a management was entered into with one H.I. Hotels India P. Ltd. (Annexure R-2/4) by which later agreed to invest in the equity share capital of the company. In terms of this agreement, while H.I. Hotels India P. Limited were allotted certain shares, certain loans given by the IFCI as well as the promoters were also converted into equity shares. In this agreement, it was provided that the transfer of shares shall be limited to their own groups and in case shares are to be transferred outside the respective groups, the same should be offered to the other group. This agreement was terminated by an agreement dated 19-3-1996 (Annexure R-2/6) and it was agreed that all the shares held by H.I. Hotels India P. Ltd. would be transferred to parties designated by the promoters for a sum of Rs. 1.25 crores. These shares were later transferred to one Royal Garden Hotels and Resorts (P.) Ltd. Thus, the shareholding position was that the 4 sisters held 14.7 per cent each, Royal Garden 24.66 per cent and the financial institutions 16.19 per cent. The company had been incurring losses right from the beginning except that in 1997-98 and 1998-99, it earned profits. The cumulative losses was to the extent of Rs. 2.21 crores and the outstanding loans including interest accounted to over Rs. 6.5 crores. By a letter dated 17-10-1997, the 2nd and 3rd respondents informed the petitioner and the 4th respondent that an offer had been received from third party for purchase of the shares held by the family members at Rs. 14.50 per share and that the consideration for the shares would be paid within 2 months and that if the petitioner and the 4th respondent were interested, they could also avail the offer. It was also mentioned in that letter that in terms of the family agreement, the 2nd and 3rd respondent were willing to sell
their shares at this price to the petitioner and the 4th respondent and in case they were inclined to accept this offer, they should convey the same to the 2nd and 3rd respondents within 30 days from the date of the letter. The petitioner and the 4th respondent, by their letter dated 20-10-1997 conveyed their objection to the negotiation with a 3rd party and also indicated that there have been certain irregularities in the management of the affairs of the company and that they required more time to consider the offer after going through the books of account of the company. This letter was replied to on the same day by the 3rd respondent stating that in view of the financial crunch in the company, she has decided to part ways with the company. In this background, the petitioner has filed this petition alleging that in contravention of the family agreement, the 2nd to 4th respondents have sold their shares to a third party and as such the same should be declared as invalid and non est and that these shares should be offered to her. At the time of filing the petition, since she was not aware of the details of the outsiders who had purchased the shares, the company was directed to file full details of the parties to whom the shares were sold and also the consideration paid for the shares. On disclosure that the shares had been purchased by the nominees of one DS group at Rs. 11 per share, all these transferees were later added as respondents.
3. Shri Bhatia, the Advocate, appearing for the petitioner submitted that the company, even though a public company, is in fact a closely-held family company consisting of the families of 4 sisters. It has all along been the understanding between the sisters that the family control of the company should always be maintained. That is why in the meeting held on 16-3-1994 and in the MOU dated 4-5-1994, it was specifically recorded that there shall be pre-emptive right among the sisters in case any one desired to sell her shares. This understanding was also kept up by the 2nd and 3rd respondents when they offered their shares by a letter dated 17-10-1997. When the petitioner and the 4th respondent replied the letter on 20-10-1997, the 2nd and 3rd respondents had given up their idea of selling their shares. In a Board Meeting held on 6-11-1998 (Annexure-4), when again the 2nd and 3rd respondents once again expressed their desire to sell their shares, it was agreed that sometime would be given to the petitioner and 4th respondent to finalise the purchase of those shares. However, due to circumstances beyond the control of the petitioner, she could not proceed with the matter and it was agreed that time would be given to the petitioner up to May, 2000 to purchase these shares. However, to the surprise of the petitioner, she came across a letter written by the 3rd respondent to the staff of the hotel that 2nd, 3rd and 4th respondents had resigned as directors and that they had sold their shares to an outside group. Thus the respondent sisters had breached the family agreement by selling the shares without offering the same to the petitioner even though they had given her time upto May 2000 to purchase the shares. The sale of shares was made clandestinely only with a view to deprive the
petitioner of her right to purchase the shares, which has resulted in the company going out of the control of the family. The petitioner did not receive any notice for the meeting in which the transfer of shares was approved. According to him such sale of shares to an outsider in contravention of the earlier family agreement is oppressive to the petitioner and such should be declared as void. He further stated that the financial institution also, not withstanding the request of the petitioner not to permit the sale of shares to an outsider, have approved the transfer only because of the influence of the respondents. Further, the petitioner also came to know that 3 additional directors had been appointed without any notice to the petitioner and such appointment is not only against the provisions of the Articles but also oppressive to the petitioner in as much the control of the management has also gone out of the family. Further, the respondents who had purchased the shares have also shifted the registered office and the staff in the hotel have also been advised not to provide any information to the petitioner. Thus, the petitioner, even though a promoter, has completely been sidelined from the affairs of the company. He also pointed out that the manner in which the sale of shares has taken place in a secretive manner has created an apprehension in the mind of the petitioner that there could be some underhand dealing by which the 2nd to 4th respondents could have received higher price for the shares which could be denied to the petitioner. In this connection, he pointed out that while the 2nd and 3rd respondents had earlier issued a notice of sale for Rs. 14.50 per share when the company was incurring losses, they could have never sold their shares for Rs. 11 per share when the company has started making profits. Further when the price was reduced from Rs. 14,50 to Rs. 11 per share, these respondents should have given fresh notice to the petitioner as they had done earlier in terms of the MOU.
4. Referring to CA 64 of 2000, he pointed out that even though the CLB had directed in its order dated 27-3-2000 that the company should convene a Board Meeting and that the petitioner should be appraised of the details relating to the transfer of shares and change in the management, in the meeting held on 3-4-2000, the petitioner was not given any information and instead the presence of the petitioner was completely ignored. Thus, a promoter shareholder director has been completely kept in dark by the directors representing the new shareholders. He also pointed out that with a view to reduce the petitioner’s shareholding, the Board has decided to increase the authorized capital from Rs. 5 crores to Rs. 11 crores and has proposed to issue shares to themselves and also to outsiders which would be a grave act of oppression against the petitioner. Therefore, to protect the interest of the petitioner as well as the company, independent directors should be appointed by the Central Government in terms of section 408 of the Act. Referring to CA 187 of 2000, he pointed out that in spite of the directions given by this Board that notices for all Board Meetings should be given by registered post to the petitioner, the
company held a Meeting of the Board on 4-9-2000 without any intimation to the petitioner. The alleged notice for this meeting was received by the petitioner only on 15-9-2000. In this meeting, the Board had decided, inspite of protests by the petitioner, to allot further shares to the DS group on a preferential basis by which the percentage shareholding of the petitioner has come down. He submitted that the petitioner filed a civil suit before Delhi High Court after filing of the present petition and later on the suit has been withdrawn on the objection raised by the respondents that the petitioner cannot pursue two parallel proceedings. He also pointed out that the daughter of the petitioner being a shareholder in the company has independently filed a suit in Nainital Court regarding the affairs of the company and this suit cannot be attributed to the petitioner. Summing up his arguments, the learned counsel submitted that the various acts complained of by the petitioner clearly exhibit existence of all the ingredients of oppression and mismanagement in the affairs of the company. Referring to the decision of the CLB in K.N. Bhargava v. Trackparts of India Ltd. [2000] 2 CLJ 413, wherein the CLB had applied the principles of family companies even in a listed company in view of the facts of the case, he submitted that just because the company in the present case is a public company, the family nature of the company cannot be ignored and it is a fit case to pierce the corporate veil. On the same proposition, he relied on Hind Overseas Ltd. v. Raghunath Prasad Jhunjunwala [1916] 46 Comp. Cas. 91 and on Synchron Machine Tools (P.) Ltd v. U.M. Suresh Rao [1994] 79 Comp. Cas. 868 Kar. He pointed out that in Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton & Jute Mills Co. Ltd. AIR 1965 Guj. 96 the court has held that a resolution, even though legal and valid, yet could be oppressive and, therefore, the resolutions relating to transfer of shares and allotment of further shares resulting in the company going out of the family, should be declared as oppressive. Accordingly, he prayed that the sale of shares impugned in the petition should be set aside and that independent directors should be appointed on the Board of the company and an investigation be ordered and that all resolutions relating to transfer and allotment of shares be declared as null and void.
5. Shri Sarkar initiating the arguments on behalf of the company pointed out that this petition is not maintainable as the only allegation in the petition relates to transfer of shares. Since this company is a public company, there could be no restrictions on transfer of shares. He pointed out that as per section 111A of the Act, shares of a public company arc freely transferable and the respondent-company being a public company right from the day of its incorporation, it cannot even have any restrictions in the Articles regarding transfer of shares leave alone any private agreement among the shareholders. Further, he pointed out, that besides the families of the 4 sisters, there were other shareholders holding more than 40% shares in the company. Therefore, the question of the company being a family company does not arise. Further, in none of the agreements
referred to by the petitioner, the company was a party. He pointed out that in V.B. Rangaraj v. V.B. Gopalakrishnan (AIR 1992 SC 453), the court has held that private agreements contrary to the articles of association of a company are not binding either on the company or on the shareholders. In the present case, the articles of the company has not expressly put any restriction on transfer of shares and even if such restrictions are there, then the same would be in violation of the provisions of section 111A of the Act according to which the shares of a public company are freely transferable. The 2nd to 4lh respondents realizing the difficult financial situation of the company decided to exit from the company by selling their shares and this act cannot be termed as an act of oppression. Ref erring to Annexure ‘A’ to the reply of the company, he pointed out that, in June 1999, PICUP had issued a notice to the company threatening to invoke the provisions of Section 29 of State Finance Corporation Act due to non-payment of over Rs. 42 lakhs. Therefore, these respondents had no option but to find somebody who could not only clear the dues to the financial institutions but also increase the paid up share capital of the company. He pointed out that after the shares were purchased by the DS Group, they have invested more than Rs. 1 crore towards share capital and have also cleared substantial loans to the financial institutions. It is a fact that the sisters among themselves could not invest further funds and that is why first they entered into an agreement with H.I. Hotels and then later with Royal Gardens. Even assuming that the sisters were bound by the earlier agreement, yet, the offer made by the 2nd and 3rd respondents to sell their shares to the petitioner and the 4th respondent was not accepted by them and as a mailer of fact the 4th respondent herself decided to sell her shares to the DS Group because she could not mobilize funds either for purchase of the shares or for investing in the company. As far as the fair price for the share is concerned, he pointed out that even the financial institutions, finding that the price of Rs. 11 per share, being fair have agreed to sell the shares held by them to the DS Group at that price. He further pointed out that the relief sought that the transfer of shares should be declared as invalid, would be against the provisions of section 111 A. He further submitted no arrangement in violation of the provisions of the statute could be enforced and there could be no equity against the provisions of a statute. He pointed out that the allegations of the petitioner in the various applications are wrong and incorrect. In the Board Meeting convened on 3-4-2000, as per the directions of the CLB, the petitioner, instead of taking part in the discussions relating to the affairs of the company, was instead only complaining about the sale of shares and also about non-receipt of a notice for the meeting on 10-2-2000. In this meeting, decision was taken to allot shares on a preferential basis to the DS Group since money was needed for clearing outstanding to the financial institutions. Full details regarding the change management was furnished to her as per the directions of the CLB. As far as the Board Meeting on 4-9-2000 is concerned, notice for the meeting was sent to her
by registered post on 29-8-2000, as is evident from Annexure R-1/6, and the company cannot be held responsible for delay in postal transmission. In this Board Meeting, decision was taken to hold the AGM on 30-9-2000 and since the petitioner was liable for retirement by rotation, she was asked to indicate her willingness to be appointed as a director and the same was included in the agenda for the AGM even though no communication in this regard came from her. This itself, he contended, would show that the new directors had acted bona fide and in the interest of the petitioner. He pointed out that in the said AGM when the matter of her election came up, she voluntarily gave a letter that she wanted an honourable exit from the company and that she would sell her shareholding and relinquish her directorship amicably. In this connection, he referred to Annexure R-1 /2, a copy of the letter signed by the petitioner. In view of this letter, Shri Sarkar submitted that the AGM was adjourned insofar as the item relating to her re-election as a director was concerned. He pointed out that in spite of this letter given by her on 30-9-2000, in the hearing held on 4-10-2000, the counsel for the petitioner contended that the petitioner was forced to sign that letter and as such no cognizance of the same should be taken. This stand, the learned counsel pointed out, was an after thought. According to the learned counsel, in view of her earlier willingness to part with the shares and since her continuing as a member of the company would not be in the interest of the company due to her litigant attitude, the only order that could be passed in the petition is that she should be asked to sell her shares to DS Group at Rs. 11 per share being the price paid not only to the shares of 2nd to 4th respondents but also the price at which the financial institutions have also agreed to sell the shares held by them.
6. Shri Mookherjee appearing for the 2nd to 4th respondents pointed out that in the petition there are no allegations of mismanagement. Further, the petitioner herself was a party to the appointment of the 2nd respondent as the managing director and she also participated in the general body meeting for approval of the accounts for 1997-98. Even assuming that the sisters were bound by the earlier agreement, the petitioner did not respond to the offer made to her for selling the shares at Rs. 14.50 within the prescribed time and therefore as per the same agreement, the shares were sold to outsiders. Even assuming that there is a breach of agreement, he contended that since the same was in the interest of the company due to its precarious financial position, no act of oppression could be imputed to the sale of the shares. It is not that the petitioner was not aware of the efforts made by his clients to sell their shares as is evident from various letters at Pages 93,94,95 and 106 of the petition. He pointed out that even though the petitioner desired to purchase the shares of his clients, yet, she could not mobilize necessary funds. He contended that the petitioner cannot take the other shareholders for a ransom when she is unable to mobilize the funds to meet the financial difficulties of the company. In regard to the binding nature of a private agreement, she supplemented
the arguments of Shri Sarkar and also referred to Akbarali A. Kalvert v. Konkan Chemicals P. ! id. [1997] 88 Comp. Cas. 245 wherein the CLB has also held that private agreement in regard to purchase and sale of shares is not binding on the company. He further pointed out that even though the petitioner withdrew the civil suit in Delhi High Court on 7-7-2000 as per the undertaking given before the CLB, yet, her daughter filed a civil suit on 24-8-2000 in Nainital challenging the transfer of shares and thus the petitioner has not acted bona fide in pursuing this petition. He also pointed out that all the shares purchased by DS Group are now pledged with the financial institutions and as such no orders in respect of the shares could be passed by the CLB.
7. We have considered the pleadings and arguments of the counsel. At the time when the petition was filed, according to the petitioner, she was not aware of the identity of the persons to whom the respondent sisters had sold their shares and the price at which the shares were sold. Therefore, she prayed for a direction to the respondents to disclose the full details. Since she was a director, we directed that a Board Meeting be convened and full details regarding the change of ownership of the shares as well as change in the CLB be furnished to her in the Board Meeting. When these details were furnished to her, she made an application f or impleading the transferees of the shares and also the financial institutions which we allowed.
8. The main grievances of the petitioner are that the respondent sisters had sold their shares to an outsider group in contravention of the MOD, that new directors had been appointed without notice to her, that further shares had been issued to the new shareholders and that she had been sidelined from the management of the affairs of the company. The learned counsel urged that these acts, in a family company, are grave acts of oppression meriting grant of the reliefs sought for. We agree that even though the company is a public company with 40 per cent shares held by non family members, in view of the fact that the company was started as a family company and that the family members hold 60 per cent shares in the company, appropriate reliefs as in case of a closely held family company could be granted as was done by this Board in Trackparts India Ltd.’s case (supra) provided the acts of oppression are established. In relation to the allegation in respect of sale of shares by the respondent sisters, it is to be noted that the Articles of the company do not contain any provision relating to pre-emption rights. As a matter of fact, as per the provisions of article 30, the company could not even refuse registration of transfer of shares except on certain grounds as specified in that article, since the articles of a company govern the relationship between the company and the shareholders on the one hand and the shareholders inter se on the other hand, unless there are restrictions in the matter of transfer of shares, a shareholder cannot rely on a private agreement between the parties in regard to the same. This proposition has been laid down in V.B. Rangaraj’s case (supra) by the Supreme Court. In that case,
the company was a closely held family company consisting of families of two brothers and even in such a closely held company, the Apex Court has held that private agreement not being a part of the articles cannot bind the company. Therefore, sale of shares without offering the same to the petitioner cannot be considered to be an act of oppression. An act to be construed as oppressive, has to be either burdensome or wrongful or it should involve an element of lack of probity and fair dealing to a member in matters of his/her propriety right as a shareholder. Such right could be either by virtue of the provisions of the Act or the articles and in some cases could be imputed on equitable grounds. Since the company is a public limited company, as per section 111A which is applicable to the company, there could be no fetters on the right of a shareholder to transfer his/her shares. Thus, no statutory right has been conferred on the petitioner to claim the shares for herself. In the same way, in the absence of any provisions in the articles giving a pre-emptive right to a shareholder, no right has been vested in the petitioner to seek transfer of the shares held by the respondent sisters. (This is not withstanding the legal position that a public company cannot have any provision giving pre-emptive rights to its members). If we consider the right on equitable grounds, it is on record that, in terms of the articles, when the 2nd and 3rd respondents decided to sell their shares, they offered the same to the petitioner and the 4th respondent, which offer, whatever may be the reasons, was not accepted by the petitioner and the 4th respondent at that time. When the 2nd and 3rd respondents actually sold the snares, even the 4th respondent joined hands with them and sold her shares also. The learned counsel for the petitioner urged that when the price was reduced to Rs. 11, then a further offer should have been made, the failure of which is a breach of the MOU. May be there is some substance in this submission, but, when the petitioner had the knowledge of the proposal of sale, about which she complained to the financial institutions, she herself should have approached the other sisters to acquire the shares, which she did not do. Any way, as we have observed earlier, a shareholder cannot invoke the provisions of section 397 to enforce a right arising out of a private agreement as held by this Board in Konkan Chemicals P. Ltd-‘s case (supra) as also in M.M. Dua v. Indian Dairy & Allied Services P. Ltd. [ 1996] 86 Comp. Cas. 657. When we talk of oppression, such alleged act of oppression should be a motivated one with a view to marginalize a shareholder in the affairs of a company. In the present case, as is evident from the material placed before us by the respondent sisters and the company that the company was in great financial difficulties not only at the time when the shares were sold but also right from the time of incorporation. The financial difficulties promoted all the four sisters to invite the financial institutions as well as initially H. I. Hotels and later Royal Gardens to become share holders by for additional funds. The stand of the respondent sisters has been that they were not in a position to induct further funds into the company and to ensure that the interests of the
company were protected, they parted with their shares to DS Group which had the financial resources to tide over the financial difficulties of the company. We find substance in the stand of the respondent sisters as is evident from the fact that after the DS Group became the shareholder of the company, they have not only pumped in additional share capital, they have also cleared substantial loans outstanding. We also note that, as pointed out by Shri Mookherjee that the petitioner was in the knowledge of the efforts of the respondent sisters to find a buyer to sell their shares and at no time, the petitioner came forward to acquire the shares by establishing her financial strength. Thus, neither in law or in facts or inequity, the petitioner has established that by selling their shares in breach of the MOU, the respondent sisters had acted in a manner oppressive to the petitioner. Taking into consideration this aspect and also the fact that the DS Group having acquired the shares have also brought in substantial funds in the company, we do not find any justification to declare the transfer of shares as invalid. The petitioner also has raised some doubts about the genuineness of the consideration of Rs. 11 per share. She apprehends that there could be some underhand deal in fixing the price at Rs. 11. In the absence of any material to substantiate this allegation and also taking into consideration that the financial institutions whose permission was needed to transfer the shares have not questioned this consideration of Rs. 11 per share, we are not examining this allegation in detail.
9. As far as the allegation relating to the allotment of further shares is concerned, we find some substance in this allegation. The company is a public limited company and any further issue of shares has to be in accordance with section 81 of the Act, according to which whenever further shares are issued, the same should he offered proportionately to the existing shareholders, the only exception being that the general body through a special resolution, in terms of section 8f(l A) can authorise the Board to allot shares otherwise. In the present case, the Board itself in a Board Meeting held on 3-4-2000 decided to allot 20 lakh shares of Rs. 10 each on a preferential basis to DS Group without the approval from the general body. The justification for doing so as is evident from the minutes was that the company had to clear outstanding dues as well as mobilize funds for renovation of the hotel. Even though the decision of the Board was for a bona fide purpose and in the interest of the company, since it is a public company, however bona fide may be the reason for issue of shares on preferential basis, the statutory provisions should have been complied with. Non-compliance with the provisions of the statute by which a shareholder’s rights have been affected is an act of oppression, more so in the present case, wherein the petitioner is a promoter shareholder of the company. Since the petitioner is a promoter shareholder/ director of the company, at least she should have been offered proportionate entitlement. Since the funds brought in, in respect of the new shares, have been utilised for the benefit of the company, we do not
propose to cancel the allotment but only stipulate that the petitioner should be offered such a number of shares that would bring her holding in the company to 14.7 per cent. The offer should be made within 1 month from the receipt of this order and the petitioner is at liberty to accept this offer within 3 months from the date of receipt of this offer by remitting the necessary consideration. We further stipulate that as and when further shares are issued, she should be offered proportionate shares.
10. In so far as the induction of new directors is concerned, three directors were appointed in a Board meeting on 10-2-2000. According to the petitioner she did not receive the notice for this meeting and she raised this point in the Board meeting held on 3-4-2000 which was held in pursuance to our direction. It is reported by the observer appointed by us, that a copy of the receipt of the registered post sent to the petitioner on 24-1-2000 for the meeting on 10-2-2000 was placed before the meeting. If it is so, the petitioner cannot complain of the non-receipt of the notice. Since article 89 empowers the Board to appoint additional directors, we do not find that appointment of additional directors by the incoming shareholders is an act of oppression.
11. As regards the directorship of the petitioner, she was liable for retirement by rotation in the last AGM and her re-election has been deferred to be considered in the adjourned AGM. Since she has been a promoter director in the company and the only family member left out as a shareholder in the company, we consider it necessary to protect her interests in the management. Accordingly we direct that as long as the petitioner holds 14.7 per cent shares in the company, she will continue to be a director not liable to retire by rotation. Since with the issue of further shares, her percentage holding as of date has come down below 14.7 per cent, which percentage will be restored if she accepts further shares to be offered to her in terms of our direction in para 9 above, her directorship will continue till the period of offer expires and in case she docs not accept the offer within the said period, our direction in this regard will not survive after that period. As long as she is a director, notices for the Board Meetings should be sent to her along with the agenda by registered post with 7 days clear notice.
12. Notwithstanding the above directions, in view of the DS Group having become a substantial majority, with the view to prevent any allegation of oppression in future, we also give the option to the petitioner to part ways with the company by selling the shares held by her group either to the DS Group or to its nominees either at Rs. 11 per share or at the price that she may like to negotiate with the DS Group. Once the petitioner exercises the option to part ways with the company at a mutually agreed price, then, the DS Group is bound to purchase the shares at the price agreed upon.
13. With the above directions/observations, we dispose of this petition with no orders as to cost.