ORDER
S. Balasubramanian, Chairman
1. In this order we are considering two petitions, viz., C. P. No. 8 of 1998 (first petition) and C. P. No. 16 of 1998 (second petition) filed, under Sections of 397/398 and other related sections of the Companies Act, 1956 (“the Act”), in the matter of Cachar Native Stock Company Ltd. (“the company”). Since the cause of action in both the petitions has arisen on the same sets of facts, both the petitions were heard together and are being disposed of by this common order.
2. Before dealing with the allegations in these petitions, it is essential to sum up certain essential facts. This company was incorporated in 1876 under the provisions of the Indian Companies Act, 1860. Presently there seem to be three groups of shareholders in the company the Gupta group, the Tusnial group and other shareholders group. While the Gupta group and the Tusnial group are the petitioners in the first petition, they are the respondents in the second petition. Before the disputes started, there were three directors on the board of the company representing the Gupta and Tusnial groups. The capital of the company consists of 2,900 equity shares of different denominations with subscribed and paid up as indicated below :
Share
Rs.
(1)
(2)
1,800
equity shares
of Rs. 25
each-fully paid up
45,000
500
equity shares
of Rs. 30 each
fully paid up
15,000
227
equity shares
of Rs. 40 each
fully paid up
9,080
400
equity shares
of Rs. 50 each
called up and paid up Rs. 10 each
4,000
2,927
Total
73,080
27
Less forfeited shares
690
72,390
Add amount
received towards forfeited shares
515
2,900
Equity shares
and paid up
72,905
3. Even though as per the provisions of Section 89 of the Act the company
ought to have brought the voting rights in respect of all shares to a uni
formity within a year from the commencement of this section in 1956, yet
the same has not been done. Out of these 2,900 shares, 1,085 shares con
stituting 37.41 per cent. are inoperative as the shareholders are not trace
able and as such exercise of voting rights in respect of these shares is not
possible 4,000 shares of Rs. 50 each which are partly paid at Rs. 10 are held
by one Surma Valley Stock Limited (Surma). Surma was incorporated at
the initiative of the board of the company in 1929, and 4,000 shares in the
company were allotted to Surma in 1936, as partly paid at Rs. 10 each with
the stipulation that till the shares were fully paid, Surma would be enti
tled to one-fifth dividend and voting rights like any other shareholder in
accordance with Article 80 of table A. The issued, subscribed and paid up
capital of Surma is 7,027 equity shares of Rs. 10 each, of which the com
pany holds 2,000 shares and 3,400 shares are reportedly dormant due to
the whereabouts of the shareholders not being available. 816 shares are
reportedly owned by the Gupta/Tusnial groups. The Gupta group was con
trolling one B. C. Gupta and Sons Ltd., (BCGL) which holds 448 equity
shares in the company. By acquisition of majority shares in BCGL sometime in 1983, the Tusnial group is in a position to vote on 448 shares in the
company in addition to 93 shares held in their own names. 177 shares
held by the Gupta group were transferred to the Tusnial group sometime
in 1997, and when they were lodged with the company for registration,
the board of the company, in its meetings held on June 10, 1997, and
August 26, 1997, decided to place the matter before the annual general
body meeting convened on September 29, 1997, as item No. 8 for consid
eration. The Gupta group filed a suit in an Alipore court seeking certain
prayers in regard to the general body meeting. The court, by an order
dated September 25, 1997, directed that the resolution under item No. 8
was not to be taken and that the plaintiffs to the suit were not to be
restrained from participating in the proceedings of the annual general
meeting and casting their votes by poll. When an uncertified copy of the
order of the court was produced before the chairman of the meeting, he rejected the same on the grounds that no certified copy of the order had been produced and that the Alipore court had no jurisdiction in the matter. (Later, in August, 1998, the Alipore court dismissed the suit for want of jurisdiction). In the annual general meeting two directors from the Gupta and Tusnial groups who had sought re-election were not reelected and in their place two other directors from other shareholders group were elected as directors.
4. According to the petitioners in the first petition, they hold 820 shares of the paid up value of Rs. 23,425 constituting majority of the effective voting power in the company as many of the shareholders are untraceable and as such the shares held by them are dormant. With an ulterior motive, the respondents are perpetrating wrongful acts against the petitioners by refusing to register 177 shares transferred by petitioners Nos. 1 to 4 in favour of petitioners Nos. 11 to 18 and by declaring that petitioners Nos. 1 and 4 were not re-elected directors in the annual general meeting which was not properly conducted on September 29, 1997. According to the petitioners, these alleged wrongful acts by the respondents have prevented the majority shareholders from having a say in the management of the company. On the basis of these allegations the petitioners have sought various reliefs, inter alia, including directing the company to register the transfer of 177 shares as sought for, declaring that petitioners Nos. 1, 4 and 17 continue to be the directors of the company, declaring that the annual general meeting held on September 29, 1997, and various resolutions passed thereat as illegal and void, injuncting Surma from exercising any voting rights in respect of the shares held by it in the company.
5. In respect of the first petition, separate replies have been filed by respondents Nos. 1, 5 and 7 to 10. According to these respondents, some of the petitioners are not shareholders of the company. According to them, the Tusnial group is trying to take control of the company by clandestine acquisition of shares in the company. The Tusnial group controls one Narsingpore Tea Company Private Limited (NTPL) with which the company was having business transactions right from 1976. The business transactions included, inter alia, sale of green tea to NTPL, purchase of stores/ machinery from NTPL. NTPL was also charging substantial unjustified finance commission/interest from the company for various transactions. Over a period of time the Tusnial group decided to gain control of the company and, therefore, started acquiring shares in the company. In addition to 93 shares acquired by them, they also acquired majority control of BGCL from the Gupta group in 1983, which holds 448 shares in the company. The Gupta group directors induced the board to induct Shri Brij Ratan Tusnial (petitioner No. 17) as a special director into the board, thus, ensuring that the Tusnial group had representation on the board. Further, the Gupta
group transferred 177 shares to the Tusnial group without following the provisions of Section 108 of the Act. The share transfer instruments do not indicate the consideration for the shares nor the date of execution and as such the same are invalid. If the registration of the transfer is approved, then, in view of a large percentage of shares being inoperative, the Tusnial group would have about 45 per cent. of the effective voting rights. According to the respondents, if the Tusnial group were to gain control of the company, they would be diverting the business of the company to their own group companies, thus, acting against the interests of the company. The board of directors, in its meeting, which was attended by petitioners Nos. 1 and 4 on June 10, 1997, kept the transfer of 177 shares in abeyance and decided to refer the same to the general body and in the board meeting held on August 26, 1997, in which they were again present, the agenda for the annual general meeting convened on September 29, 1997, was adopted in which item number 8 related to the transfer of shares. However, this item was dropped in the annual general meeting at the suggestion of petitioner No. 17. In the same annual general meeting respondents Nos. 7 and 8 were appointed in place of petitioners Nos. 1 and 4, as they were not re-elected. Therefore, these respondents have averred that there is no cause of action for the petitioners to file this petition.
6. In the second petition, the allegations are similar to what have been stated by the respondents in their reply to the first petition. On the basis of these allegations, the petitioners in the second petition have sought for various reliefs, inter alia, including a declaration that registration of transfer of 177 shares in favour of a single group is illegal and void, that none from the Tusnial/Gupta group would be entitled to be appointed as a director of the company, that none of the companies of the Tusnial group would have any dealings with the company, restraining both the groups from exercising their voting rights in any annual general meeting, etc.
7. Shri Mukherjee, advocate appearing for the Gupta and Tusnial groups initiating his arguments submitted that the company owns one tea estate which was financially as well as commercially assisted, for a long period by NTPL controlled by the Tusnial group and but for such support the company would have not survived for so long. He submitted that of the total voting power in the company, 37.41 per cent. comprising 1,085 shares are dormant. Further, Surma–respondent No. 9 which holds 4,000 partly paid equity shares can vote only to the extent of the paid up value in terms of Section 87 read with Article 56 of table “A”. He further submitted that the company has not complied with the provisions of Section 89 of the Act and as such the provision of Section 87 will apply. For this proposition he relied on Juvansinhji Balusinhji v. Balbhadrasinhji Indrasinhji [1962] 32 Comp Cas 1162 (Guj). According to him, of the paid up capital of Rs. 70,270 in Surma, Rs. 34,110 is dormant. Of the balance of
Rs. 36,160, the company holds Rs. 20,000 worth shares thus having larger voting rights of the effective voting rights. Therefore, the company is in a position to constitute and control the board of Surma and as such Surma is not entitled to vote in any meeting of the company in terms of Section 42 of the Act inasmuch as it is a subsidiary of the company. If Surma’s voting rights are restricted to the paid up value or is not allowed to vote, then in view of the large dormant shares, the petitioners would have majority voting power compared to the respondents and, therefore, to prevent the same from happening, the respondents are indulging in various prejudicial acts.
8. He submitted that when the shares were lodged for registration of transfers, the board of directors, with an ulterior motive decided not to register the transfers even though the transfers were among the petitioners. He submitted that if the transfer deeds were found incomplete then the board should have sent them back to the transferees for submission of complete transfer deeds. Instead, the board decided to refer the matter to the general body. According to Article 8 of the articles of association of the company, the matter of transfer of shares is to be placed before the general body only in case of refusal of transfer and at the instance of the transferor. In the present case, the board did not refuse the transfer and on its own decided to place the matter before the general body. The petitioner-directors were not present in the board meetings in which the decision for referring the matter to the general body was decided. Since the transfers were from the Gupta group to the Tusnial group who have been shareholders of the company right from 1971, the allegation that the Tusnial group were trying to take over the company is baseless. The contention that the company is to be managed by persons of Assam origin is also baseless inasmuch as the Tusnial group has been having extensive business interest in Assam for decades and as a matter of fact the company has extensively benefited from various financial assistance given by the Tusnial group. Originally, respondent No. 17 was invited to join as honorary special director of the company in order to facilitate the board with his valued services by a letter dated December 16, 1996 (annexure A-30). Later, in a board meeting held on September 30, 1996, his appointment as an additional director was approved. Therefore, the objection for transfer of shares on the ground that the Tusnial group was trying to take over the company is not correct as the shares were acquired by them purely in the interest of the company.
9. He further submitted that with a view to ensure that petitioners Nos. 1 and 4 were not re-elected as directors, in the annual general meeting held on September 29, 1997, the respondents did not allow poll to be taken even though the same was demanded by the authorised representative of the tenth petitioner-BGCL. In addition, even though there was a direction
by the Seventh Assistant District Judge, Alipore, that the petitioners should be allowed to cast their votes by poll, the request for poll was denied and it is alleged by the respondents that all the resolutions were considered by show of hands. In other words, the respondents did not care to abide by the directions given by a court. Since the orders of the court were not complied with, all the resolutions even if they had been passed as alleged by the respondents by show of hands, should be declared as null and void. In that meeting, the petitioners were not allowed to participate and all the resolutions of appointment of new directors and defeat of the petitioner-directors are all fabricated. He further submitted that new directors are alleged to have been appointed in place of the existing directors without following the provisions of Section 257 of the Act. Therefore, the appointment of respondents Nos. 7 and 8 is not in accordance with law and as sueh should be declared as invalid. Some of the petitioners wrote a letter to the company on October 4, 1997, pointing out various facts relating to the general body meeting that there were a large number of outsiders present in the meeting, that in spite of demand for election of the chairman of the meeting the same was not allowed, in view of the chaotic situation the chairman left the meeting followed by the petitioners and that no business was transacted in that meeting. However, later it transpired that resolutions relating to re-election of the petitioner directors were alleged to have been defeated and appointment of new directors were alleged to have been passed in that meeting. He also drew our attention to the affidavit dated February 10, 1999, filed by petitioner No. 14 in the first petition wherein there are allegations relating to the subsequent annual general meeting held on September 14, 1998, which should also be adjudicated by the Company Law Board as per the directions of the Gauhati High Court, vide its order dated September 19, 1998 (annexure RAA-3).
10. Summing up his arguments, Shri Mookherjee submitted that the only way by which corporate democracy could be ensured is to convene an extraordinary general meeting to elect directors as it is the right of the majority to manage the company. In case the respondents are not willing, then, the petitioners being in majority should be permitted to purchase the shares held by the respondents as held by the Company Law Board in Yashovardhan Saboo v. Groz-Beckert Saboo Ltd. [1995] 83 Comp Cas 371.
11. Shri Sarkar, senior advocate appearing for the Gupta/Tusnial group, submitted that the second petition has been filed only with the apprehension that the prayers in the first petition would be granted by the Company Law Board. According to him, the proceedings of the annual general meeting on September 29, 1997, should be declared as null and void inasmuch as there was a subsisting order from the court regarding the conduct of the meeting which was not abided by the chairman. For this
proposition, he relied on Century Flour Mills Ltd. v. S. Suppiah [1975] 45 Comp Cas 444 ; AIR 1975 Mad 270 [FB]. He submitted that, if the stand of the other side is that the non-election of the directors belonging to his clients group was in order, then they should not feel shy to establish the same in a general body meeting under the chairmanship of an independent chairman for election of directors, after identifying dormant shares. This, he submitted would mean that the disputes are decided in the domestic forum itself by the shareholders as the right to select directors is the prerogative of shareholders as decided in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 ; AIR 1986 SC 1670. He also submitted that in the general body meeting, Surma should not be allowed to vote as it is a subsidiary in terms of Section 42(3) of the Act even if it has already remitted the balance. According to him, even the remittance of the balance amount by Surma is invalid as the company has not made any call and that there is already an injunction by the Company Law Board against the company from increasing the paid-up capital of the company. Further, he stated that if the balance due is called up, it would be only for the purpose of altering the voting strength and not for any bona fide purpose. Alternatively, he submitted that his clients being in the majority are prepared to purchase the shares of other shareholders at the price indicated in page 17 of the second petition or at any other higher price as may be fixed by the Company Law Board or the Company Law Board should order both the groups to bid for the shares so that the highest bidder could purchase the shares of the other as held by the Company Law Board in a similar case earlier. Alternatively, he submitted that we should pass- an order similar to the one as Gluco Series Pvt. Ltd., In re [1987] 61 Comp Cas 227 (Cal).
12. Shri Bhattacharjee, advocate appearing for the other shareholders group, submitted that when this, company was incorporated, only the local residents were to be admitted as members of the company. According to him, the name of the company itself would indicate that the company was to consist of only locals. The Tusnial group, which acquired the shares in the company does not belong to Assam and as such they cannot corner the shares of the company which would ultimately result in the control of the company going into the hands of outsiders. The Tusnial group was only acting as financiers to the company and over a period of time they decided to gain control of the company first by acquiring BGCL which has 448 shares in the company: Later on, with a view to consolidate their position, they acquired 177 shares, the registration of which was placed before the general body as decided in the board meetings held on June 10, 1997, and August 26, 1997; in which the first and the fourth petitioners were present as is evident from the copy of the attendance slips enclosed at annexures RA-1 and RA-3 with the affidavit dated
January 21, 1999, filed by Shri Buddhedeb Sen (respondent No. 5 in the first petition). However, this issue was not considered by the general body. He also submitted that at the time when the shares were allotted to Surma, the board of the company had decided in a meeting held on July 14, 1936, that its voting rights would be equal to any other shareholders in accordance with the then Article 60 of table “A”. Further, he also submitted that Surma has already remitted the balance of Rs. 40 per share, which the company has not been able to adjust against the capital in view of the injunction by the Company Law Board that the paid up capital should not be increased. He also submitted that Surma cannot be treated as a subsidiary of the company as the company does not hold 51 per cent. shares in Surma and, therefore, it would not be proper to deny Surma the full voting power on the ground that the shares are partly paid.
13. Shri Ganguly, senior advocate, supplementing the arguments of Shri Bhattacharjee stated that the petitioners themselves have two different versions of what happened in the general body meeting held on September 29, 1997. While, according to the version of some of the petitioners at annexure A-54 that no agenda item was considered, as per the version of petitioner No. 1 at annexure A-57, some of the agenda items were considered and passed by voice vote. Therefore, neither of these complaints merits any consideration as they are not consistent. He further submitted that the chairman of the meeting did not take cognizance of the Alipore court order since no certified copy of the same was produced and also on the ground that Alipore court had no jurisdiction in the matter. Referring to Kiran Singh v. Chaman Paswan [1955] SCR 117 he stated that any order passed by a court without jurisdiction is a nullity and as such the chairman of the meeting did not disobey any valid order of a court. He further submitted that giving control of the company to the Tusnial group would be completely against the interest of the company.
14. Shri Amit Ray, advocate for respondents Nos. 7 to 10 in the first petition, submitted that this petition is not maintainable inasmuch as no grounds for winding up of the company under just and equitable grounds have been put forth and established by the petitioners. He submitted that to move a petition under Sections 397 and 398, the petitioners should show that there have been continuous acts of oppression/ mismanagement. He further submitted that the Gupta group moved the Alipore court only with a view to prevent the general body from considering the transfer of shares as they were afraid that the general body might disapprove the registration of transfer in favour of the Tusnial group. He further submitted that the stand taken by the chairman of the general body meeting held on September 29, 1997, that the Alipore court has no jurisdiction has been upheld by that court by an order dated August 28, 1998.
15. We have considered the pleadings and arguments of the counsel. When C. P. No. 8 of 1998. was heard on March 31, 1998, we passed an order restraining the company from selling any tea privately and directed that all sales should be through auction. In the hearing held on June 23, 1998, this Bench gave a suggestion, in view of the composition of the board being the main issue in the petition, that the same could be decided in a general body meeting. Even though the counsel for the respondents desired some time to consult his clients, the respondents did not react later. On this day, we also restrained the company from taking any action to increase the paid-up capital of the company. Subsequently, the petitioners filed an application, C. A. No. 170 of 1998, seeking various prayers, inter alia, including the prayer for restraining the company from convening or holding any general body meeting of the company. When this application was heard at Calcutta with due notice to the respondents on August 24, 1998, none was present on behalf of the respondents and the Bench passed an ex parte order in the following terms : “heard the counsel for the applicant. In spite of notice given by the applicant to the other side, none is present from the other side. Since there are two petitions in respect of the same company wherein the issue as to who holds controlling shares in the company has been made the subject-matter, we are of the view that till the issue is decided, no annual general meeting of the company should be held. Accordingly, we direct that till the disposal of the two petitions pending before us, being C. P. No. 8 of 1998 and C. P. No. 16 of 1998, no annual general meeting will be convened or held. Copy of this order be served on all the parties”. Later, it transpired that this order was taken on an appeal to the Gauhati High Court in which an ex parte stay of the above order was granted by that court on September 11, 1998. In the meanwhile, the company had convened another general body meeting which was held on September 14, 1998. The Gupta group appealed against the stay order and the said High Court has ordered that this matter be considered by the Company Law Board.
16. Even though, the two main allegations in the first petition relate to transfer of shares and the proceedings in the general body meeting held on September 29, 1997, the real issue seems to be in regard to the control of the company. As far as the transfer of shares is concerned, a perusal of the minutes dated June 10, 1997, and August 26, 1997, shows that the board had not rejected the transfer but had only kept the matter in abeyance on June 10, 1997, and decided to obtain the views of the shareholders on August 26, 1997′. As rightly pointed out by Shri Mukherjee, the question of referring the matter to general body would arise in terms of Article 8 only when the board declines the transfer and the transferor desires the matter be considered by the general body. Article 8 reads “the directors may decline to register transfer of any share and shall not be bound to
give any reason for such refusal, provided that every case of such refusal may be reviewed by the shareholders in a general meeting at the instance of any transferor”. Even though the respondents have taken a plea that petitioners Nos. 1 and 4 being transferors were present in both the board meetings (the fact of which is denied by these directors) and as such they had given their consent for placing the matter before the general body, yet, we feel that, in view of Article 8 that such a reference to the general body would arise only when the board declines the request for registration of transfer. Anyway we are not going in detail inasmuch as it is the stand of the respondents that the transfer instruments were defective, which stand has not been rebutted by the petitioners. We have perused the photostat copies of the transfer instruments filed along with the second petition and find that the instruments are defective as they do not indicate the consideration for the shares nor the dates of execution. These are two essential requirements to make transfer instruments valid in terms of Section 108 of the Act. Only when instruments of transfer are in accordance with the law, the question of considering the registration of transfer would arise and, therefore, the prayer of the petitioners in the first petition that we should order registration of the transfer of shares cannot be granted. In the second petition, there are prayers that the respondents therein should be restrained from acquiring further shares or shares held by them in the company and that they should also be restrained from exercising any voting rights in the general body meetings of the company. These prayers appear to have emanated from the apprehensions of the other shareholders’ group that the Tusnial group might gain control of the company. These prayers have to be considered in terms of legal provisions. This company is a public company and provisions of Section 111A would apply, according to which the shares of a public company are freely transferable subject to certain restrictions as contained in the same section. Even though, arguments were advanced with reference to the word “native” appearing in the name of the company that the shares can be held only by the natives of Assam, we are unable to subscribe to this stand. This company was incorporated in 1886, and at that time, the word “native must have been with reference to natives of India and not Assam. Any way, in view of the present legal position, the shares of the company are freely transferable and, therefore, no blanket direction could be given that no one could acquire or dispose of the shares especially when this company is not a listed company and as such the provisions of the Substantial Acquisition of Shares and Take Over Regulations do not apply. Further, we also note that the Tusnials have been members of the company for a long time and they acquired the control of BCGL which holds 448 shares in the company, as far back as 1983, and that the company has been having financial and commercial dealings with the Tusnial group for
a long time. A member of the Tusnial group was also inducted into the board in 1996. These instances show that the Tusnials are not strangers to the company.
17. In regard to the proceedings in the general body on September 29, 1997, the allegations of the petitioners are that the same was not conducted in accordance with the court order, that poll as demanded was not allowed and that no business was transacted in that meeting. As regards the allegation that the court order was not followed in the conduct of the proceedings, we feel that the aggrieved petitioners should have approached the concerned court with this grievance, and we cannot deal with the same especially when the suit in which the court passed that order stands dismissed for want of jurisdiction. In regard to the actual proceedings of the meeting, we have, as exhibited in the petition itself at annexures A-54 and A-57, two versions of the petitioners as to what transpired in that meeting. Annexure A-54 is a letter written by four petitioners on October 4, 1997, to the company while annexure A-57 is a complaint lodged by petitioner No. 1 with the police. Both are dated October 4, 1997. While both these annexures record that outsiders were present in the meeting, in the first annexure it is stated that the chairman left the meeting without conducting any business due to disturbance. In the second annexure, it is stated that business relating to election of chairman, reading of directors’ report and auditors’ report, declaration of dividend, appointment of auditors, and re-election of respondent No. 4 as a director, etc., were transacted and that poll demanded by Shri Bhattacharjee in relation to these items was rejected by the chairman. The minutes of the meeting at annexure R-2 more or less reflect the contents of annexure A-57 relating to the transaction of business in that meeting. Therefore, we have to only consider as to whether the chairman of the meeting was right in rejecting the poll demanded by Shri Bhattacharjee and whether the appointment of respondents Nos. 7 and 8 as directors in place of the existing directors who were eligible for re-election was done in accordance with law.
18. In regard to the demand of poll by Shri Bhattacharjee the same is recorded in the minutes itself and as such is not in dispute. Whether he represented BGCL which holds requisite percentage of shares to demand poll, is a question to be decided. As per the minutes of the meeting, the company had received a letter from BGCL dated September 2, 1997, authorising one of the five persons named therein to represent BCGL in the annual general meeting and Bhattacharjee’s name was not included in that list and as such the chairman rightly rejected the demand for poll made by him. According to the petitioners, BCGL had sent another resolution dated September 27, 1997 (annexure A-52), authorising Shri Bhattacharjee or in his absence Shri B. R. Tusnial to represent the company in
the annual general meeting and as such his demand for poll should have been accepted by the chairman. However, the petitioners have not indicated when this resolution was delivered to the company. In the reply nothing has been mentioned regarding the receipt or non-receipt of annexure A-52 by the company. Shri Mookherjee submitted that if the company had not received the resolution, then, they should not have allowed Bhattacharjee to participate in the proceedings itself and the very fact that they have allowed him to participate in the meeting shows that the company was aware that Shri Bhattacharjee was the nominee of BCGL. We find substance in the submission of Shri Mookherjee especially when we find from annexure RA-5 (in affidavit dated January 21, 1999, by Shri Buddhadeb Sen) which is a photostat copy of the attendance slip of the annual general meeting that at serial five Shri Bhattacharjee has signed the same as “for B. C. Gupta and Sons Ltd.”. Therefore, when the board allowed him to attend the annual general meeting they must have been aware that he was representing BCGL. If so, then, his representing BCGL must have been only on the authority of the resolution of BCGL dated September 27, 1997, which must have been received by the company, as without such authority, the board would not have allowed him to participate in the proceedings. As per Section 179 of the Act, when a poll is demanded by persons fulfilling the requirements of that section, then the chairman is bound to order poll on the resolutions on which poll is demanded. As per the minutes of the meeting on September 29, 1997, Shri Bhattacharjee demanded poll when the election of directors was proposed which the chairman declined. Therefore, all business relating to the election of directors by show of hands has to be declared as invalid.
19. The next is regarding the appointment of respondents Nos. 7 and 8 as directors. Section 257 of the Act prescribes a procedure to be followed in appointment of directors other than those retiring by rotation. As per Sub-section (1) of this section, a notice in writing signifying one’s candidature for directorship is to be lodged with the company fourteen days before the general body meeting together with a sum of Rs. 500. Sub-section (1A) provides that the company is to serve on all members individual notices seven days before the meeting informing the members of the candidature or publish the same in two newspapers circulating in the place where the registered office of the company is located. Respondents Nos. 7 and 8 were not retiring directors. Therefore, the procedure relating to circulation of their candidature should have been followed. There is nothing on record to show that this procedure was followed. Further, it appears to us that the resolutions relating to their election has not been properly carried through. Normally, there should be individual resolution relating to rejection of election of a retiring director and a separate resolution for election of a new director in that place after following the procedure as per Section 257. In
the annual general meeting held on September 29, 1997, the resolution passed in respect of election of respondent No. 7 reads as follows : “resolved that Shri Subhas Mohan Dev elected director of the company by a thumping majority votes in place of the contestant Smt, Amita Gupta who retired from the directorship of the company by rotation and sought for re-election”. The similar is the position with regard to the election of respondent No. 8 also. Normally, the resolutions proposed in the notice for the annual general meeting are placed before the general body and its decision is recorded in the minutes. The resolution proposed in the notice in regard to Smt. Namita Gupta was “to appoint a director in the place of Smt. Namita Gupta who retires by rotation and being eligible, seeks reappointment”. The minutes of the meeting do not record anything about this resolution. Even otherwise, since the provisions of Section 257 have not been followed in the election of respondents Nos. 7 and 8 their appointments have to be declared as invalid. Anyway this issue has become irrelevant as we have already found that all business relating to election of directors is invalid due to rejection of the demand for poll.
20. Thus, we find that the proceedings in the annual general meeting relating to the appointment of directors will have to be declared as invalid on account of the denial of the demand for poll and non-observance of the provisions of Section 257 in the election of respondents Nos. 7 and 8 in the first petition as directors. However, we do not propose to do so as such a declaration is not going to bring in a permanent solution to the disputes between the parties as even the next annual general meeting of the company on September 14, 1998, was a subject-matter of litigation.
21. Shri Amit Ray, advocate, pleaded that the petitioners in the first petition have not put forth and established grounds for winding up of the company on just and equitable grounds. The main grievance of the petitioners in the first petition is that they were denied their statutory right to elect the directors by denying their demand for poll, which, we have found as justified. When the shareholders’ right of election of directors is denied it is definitely an act of oppression and if the petitioners are in majority as claimed by them, then such denial would be a ground for winding up of the company under just and equitable grounds. Therefore, we do not agree with learned counsel that there is no cause of action to file this petition under Section 397/398 of the Act.
22. The next issue is about the relief to be granted. Since the entire dispute revolves around the composition of the board of directors, we are of the view that the same should be decided in the domestic forum itself. It is all the more necessary because while the identity, strength and shareholdings of the Gupta and Tusnial groups are established, the same is not the case with the other shareholders group, i.e., whether they are all together and support each other. This doubt arises from the second petition which was
initially filed on September 29, 1997, with over 40 petitioners. Later on, through an application dated March 19, 1998, amendments were sought for incorporating four new petitioners and deleting the names of 27 petitioners on the ground that proof of shareholdings of these erstwhile petitioners could not be arranged as they were scattered in different parts of Assam, West Bengal, etc. Accordingly, a revised petition was filed with 19 petitioners. This gives us an impression that all other shareholders are not together to claim themselves to be a unified group opposing the Gupta/ Tusnial groups. While in annexure RA-7, full details of the shares held by the Gupta and Tusnial groups have been furnished the same is not furnished in respect of the other shareholders including those who are parties to these proceedings before us. According to this annexure of the issued capital of the company, the Gupta/Tusnial groups hold 25.76 per cent. and the other shareholders hold 25.83 per cent. Inoperative shares constitute 50.45 per cent. and the uncalled capital, that is, on the shares held by Surma, constitutes 17.96 per cent. Therefore, the question of the majority purchasing the minority or bidding for the shares as suggested by Shri Sarkar does not arise till the group constituting the other shareholders group is identified and the fact as to which group constitute the majority is established.
23. In Section 397/398 proceedings, while the mandate of law is that any order passed by us should bring to an end the matters complained of, it is on record that the last two annual general meetings of the company have been subjected to legal proceedings. While the legal proceedings relating to the annual general meeting held on September 29, 1997, have been indicated earlier, the next annual general meeting also was subjected to litigation. When we passed an ex parte order on August 24, 1998, that no general body meeting of the company should be convened or held, our order was taken on appeal and an ex parte stay order was obtained on September 11, 1998. By the time an application was moved for vacating the stay, the annual general meeting had been held on September 14, 1998. In this connection we may also point out that we had not only restrained the company from holding any general body, we had also restrained the convening of the same. We passed that order on August 24, 1998, and according to the company, notices convening the meeting were issued on September 29, 1998 (annexure RAA-1). Our order dated August 24, 1998, was stayed only on September 11, 1998, and till then our order was in force. We are not aware as to when a copy of our order dated August 24, 1998, was received by the company. If it had received the order by September 29, 1998, when it issued the notices convening the annual general meeting, then we have to hold that by convening the annual general meeting in spite of our restraint order, the board of directors had acted in violation of our order and that the annual general meeting thus convened was invalid.
It is not unlikely that future general body meetings also would be subjected to unnecessary litigation in view of the strained relation between the parties. Such unnecessary litigation would only affect the interest of the company as well as the shareholders. The only way by which the interest of the company and its shareholders could be protected is that the company should be managed by democratically elected representatives of the shareholders.
24. Under these circumstances, taking into consideration that it is the prerogative of the shareholders to elect the directors and that the strength of each group is to be tested on the floor of the general body, we consider it appropriate that the board of directors of the company should convene an extraordinary general meeting of the company to elect directors. Accordingly, we direct the board of directors of the company to convene a general body meeting latest by September 30, 1999. Individual notices should be given to all the shareholders as per the register of members and a copy of the notice should also be published in an English as well as in a vernacular daily newspaper in circulation in Assam. The provisions of Section 257 will apply in the election of directors. The voting rights will be in accordance with the provisions of Section 87 of the Act. This meeting will be presided over by a nominee to be appointed by us. For this purpose, as soon as the date of the extraordinary general meeting is fixed, the company will make an application before us for appointment of the chairman of the meeting and giving suitable directions on the conduct of the meeting.
25. Before parting with this order we have to also deal with the controversy about the status of Surma as to whether it is a subsidiary and whether it can exercise full voting rights in respect of the partly paid shares as the same which constitutes about 17 per cent. of the paid-up capital will have significant effect at the time of voting in the proposed extraordinary general meeting. It is on record that, of the issued, subscribed paid-up capital of 7,027 shares of Rs. 10 each in Surma, the company holds 2,000 shares. The contention of Shri Mookherjee is that 3,411 shares are dormant and as such the company has effective majority voting rights in Surma and it is in a position to control the composition of the board of Surma. Therefore, he submitted that Surma should be treated as a subsidiary of the company and if it is so done, then, Surma cannot vote in the meetings of the company by virtue of Section 42(3) of the Act. Even otherwise, he contended that Surma can vote only to the extent of the paid-up capital by virtue of Section 87 read with Section 89 of the Act. We are not in a position to accept the contention of learned counsel that since the company holds the majority of the effective voting rights in Surma the latter should be treated as a subsidiary. Section 4(1)(a) of the act stipulates that if a company controls the composition of
the board of directors of another company, then the other company is a subsidiary of the former. Section 4(1)(b)(i) provides that if a company holds more than half of the voting rights or more than half of the nominal value of the equity shares of another company, then it is a subsidiary of the former. Admittedly, the company does not hold more than half the nominal equity capital or more than half of the voting rights in Surma. Section 4 does not talk of any effective voting rights. In regard to the control over the composition of the board of directors, the Act itself provides the circumstances in Sub-section (2) under which a company could be deemed to control the composition of the board of another company. None of the circumstances in that sub-section is satisfied in the present case to treat Surma as a subsidiary of the company and as such there is no scope to injunct Surma from voting on the shares held by it in the company in any general meeting of the company.
26. Having held that Surma can vote, the issue is to the extent of its voting rights. According to the company, Surma can vote like any other shareholder in view of the. board resolution of the company on July 14, 1936 (annexure R-3), when the shares were allotted to Surma. Further the company also contends that Surma has already remitted the balance amount to the company and as such it can exercise full voting rights. On the other hand the contention of the other side is that Surma can vote only to the extent of the paid-up value and that the paid-up capital of the company should not be increased by accepting the money remitted by Surma, as it would alter the voting strength in the company. Admittedly, as of today, the shares held by Surma are partly paid and, therefore, in terms of Section 87(1)(b), the voting rights have to be restricted only to the extent of its share in the paid-up capital of the company. While the resolution of the board dated July 14, 1936, might have been in accordance with the then prevailing law, yet now the provisions of Section 87 will have to apply, especially when Section 89 makes it mandatory for the then existing shares with disproportionate voting rights being brought in line with the provisions of Section 87 within a year from 1956, when these sections were brought into effect. Just because the company has not complied with the provisions of Section 89 within the prescribed time limit, it does not mean that the provisions of Section 87(1)(b) are not applicable. It is worthwhile referring to Juvansinhji Balusinhji v. Balbhadrasinhji Indrasinhji [1962] 32 Comp Cas 1162 (Guj) wherein the Gujarat High Court, after examining the provisions of Sections 87, 88 and 89 read with Section 9 of the Act, came to the conclusion that “the period of one year expired on April 1, 1957, and each member of the company was, therefore, from and after that date, not entitled to exercise the voting rights in respect of the shares held by him in accordance with the old articles of association but was bound to exercise voting rights in proportion to his share of the paid-up capital of the
company”. Therefore, as long as the shares remain partly paid, the voting rights will be restricted to that extent and all shares will have voting rights only in proportion to the total paid-up capital of the company. Now it is claimed by the company that Surma has remitted the balance of the unpaid capital to the company and as such Surma should be entitled to full voting rights. It has not been made clear to us as to when Surma remitted the amount as there is no averment to this effect in the reply to the first petition. On June 23, 1998, we passed an order restraining the company from increasing the paid-up capital of the company and, therefore, it if had made any call after that order, then the same is in violation of our order. If Surma had remitted the amount on its own, the issue is whether the company could appropriate the same against the unpaid capital before the proposed extraordinary general meeting. It is necessary to note that the paid-up capital of the company has remained unchanged right from 1936, i.e., for over 60 years. A company increases its capital in case of financial needs or for any bona fide purposes. If it were to increase the capital with a view either to increase the holding of one group or to reduce the holding of another group, then such increase is always considered to be an act of oppression. In the present case, there is nothing on record to show that the company is in need of funds or that it requires to increase the capital for any business purposes. The only reason seems to be to alter the present voting position in the company, which we feel should not be done especially when the paid-up capital has remained unchanged for so long. Therefore, we also direct that the existing paid-up capital should not be increased till the extraordinary general meeting as ordered by us is held.
27. Both the petitions are disposed of in the above terms reserving the right to appoint the chairman of the proposed annual general meeting. All subsisting interim orders will continue till the extraordinary general meeting as directed is held and directors are elected. No order as to costs.