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Company Law Board
V. Shanmugasundaram vs Emerald Automobiles Ltd. And Ors. on 14 August, 2000
Equivalent citations: 2001 103 CompCas 1108 CLB
Bench: S Balasubramanian, K Balu


ORDER
K.K. Balu, Member

1. The petitioner together with consenting shareholders holding 14.02 per cent. of equity shares in Emerald Automobiles Limited (“the company”) have filed this petition under Sections 250 and 397 of the Companies Act, 1956 (“the Act”), alleging various acts of oppression in the affairs of the company and seeking, inter alia, the following reliefs :

(a) to set aside the allotment of impugned shares made by the company in favour of the third respondent and his associates at the board meeting held on June 12, 1995 ;

(b) to restrain the third respondent and his associates from exercising any voting right or receiving any dividend or other accretion in respect of the impugned shares ;

(c) to impose restrictions on transfer of the impugned shares under Section 250 ; and

(d) to declare that the annual general meeting held on September 26, 1996, is null and void.

2. The alleged acts of oppression relate to the following :

(i) conducting the business of the company without obtaining concurrence of the board or approval of the shareholders.

(ii) illegal allotment of the impugned shares in favour of the third respondent and his associates.

(iii) illegal inclusion of the third respondent as additional director of the board of directors of the company.

(iv) manipulation of minutes of the board of directors of the company to the detriment of the petitioner.

(v) exclusion of the petitioner from inspecting the books of account of the company.

(vi) illegal convening of the annual general meeting on September 26, 1996, without proper notice.

3. Mrs. Pushya Sitaraman, advocate for the petitioner, while initiating arguments submitted that the company originally incorporated as a private limited company in the year 1991 was subsequently converted into a public limited company in the year 1995. The company is presently engaged in the business of repair, maintenance and service of automobiles and authorised service stations for Maruti vehicles in Coimbatore. The second respondent, being the managing director has been lately running the company as a proprietorship concern without obtaining concurrence of the board or approval of the shareholders wherever required. According to the petitioner, the second respondent unilaterally allotted the impugned shares to the third respondent and his associates, being strangers without obtaining the consent of the company in the general meeting” under Section 81(1)(a), thereby increasing the paid-up capital from Rs. 6,95,000 to Rs. 13,19,000. The fresh issue of shares ought to have been made on a rights basis to the existing shareholders. The company has failed to ensure compliance with the statutory requirement. Thus, the allotment of impugned shares to the third respondent and his associates without passing the requisite resolution is not valid. Moreover, the third respondent was inducted into the board of directors of the company without holding any board meeting. The third respondent was neither co-opted by the board nor elected by the members. The minutes of the board meeting said to have been held on April 15, 1995, November 10, 1995, and on January 10, 1996, are found to be fabricated. No board meetings were held in any of the above dates. In this connection, Mrs. Pushya Sitaraman, invited our attention to the discrepancies contained in the notice for the various board meetings (annexures B-4, B-5 and B-6}. The minutes of the board meeting held on January 31, 1996 (annexure B-7), clearly indicate that the minutes of the previous meeting held in September, 1995, were adopted showing that the board meetings said to have been held on November 10, 1995 and January 10, 1996, were not held at all. Mrs. Pushya Sitaraman further submitted that the various letters (annexures R-1 to R-5) sent by the second respondent are either irrelevant or fabricated. The minutes of the board meeting held on June 12, 1995, (annexure R-8) do not present the true state of affairs. The board of directors while resolving at the board meeting held on January 13, 1997, to issue rights shares to the existing shareholders, the company had taken into account the impugned shares allotted in favour of the third respondent and his associates. The petitioner was prevented by the second and third respondent from inspecting the accounts of the company. The company failed to give 21 days notice for the annual general meeting held on September 26, 1996. At the annual general meeting, all members did not give consent to a shorter notice. However, on taking a majority vote, the annual general meeting’ was held without the required notice. Thus, the annual general meeting” held on

September 26, 1996, is not valid. It is in these circumstances, Mrs. Pushya Sitaraman sought for the reliefs made in the petition.

4. A.K. Mylsamy, counsel for the respondents while refuting the acts of oppression alleged in the affairs of the company, has submitted that the managing director of the company is a well experienced person in the automobile industry who has been taking care of the day-to-day affairs of the company including mobilisation of the funds required to carry out the business. There were only 23 shareholders before the company became public. In spite of the best of efforts made by the managing director to raise the capital, all the members excepting the third respondent and another member expressed their inability to bring further funds. The company has been advising the members from time to time with regard to the company’s present activities and future expansion programme. The managing director used to send circular letters (annexures R-1 to R-5) to all the members requesting them to bring additional capital to expand the activities of the company. However, none of the members were willing to invest in the capital of the company, which forced the company to become a public limited company with effect from February, 1995, and approached the members of the public to invest in the capital of the company. In the board meeting held on April 15, 1995, it was deliberated and recorded that the rights offer at 1:3 basis was made to all the 23 members. But none of the members, save two were keen on taking up the rights offer. Thus, the rights offer was made to the existing members. Thereafter, the board of directors empowered the managing director to approach members of the public for investing in the capital of the company, in pursuance of which the company could collect 54 applications for subscribing to 62,400 shares which were placed before the board at its meeting held on June 12, 1995. When the company failed to elicit support from the members, then only the impugned shares were duly allotted in the board meeting held on June 12, 1995, in favour of 54 persons, including the third respondent and his associates. He further pointed out that 5,000 shares were allotted on June 12, 1995, in favour of Shri Gunasekaran, who has given consent by way of an affidavit to file the present company petition. In the circumstances, there is no necessity to pass any resolution in the general meeting, in accordance with Section 81(1)(a) of the Act. The third respondent was duly co-opted as director at the board meeting held on June 12, 1995. He was appointed as director at the annual general meeting of the company held on September 30, 1995. Shri Mylsamy reiterated that due notice was given for the board meetings to all the directors ; board meetings were duly held on April 15, 1995, November 10, 1995 and January 10, 1996, and minutes of the board meetings were recorded properly. He denied manipulation of the minutes of the board meeting. The petitioner was regularly attending the board meeting and he was furnished

every information sought by them. The accounts were circulated in advance by the company among the members of the board. The petitioner was never denied inspection of books of account of the company. According to Mr. Mylsamy, the annual general meeting was duly held on September 26, 1996, in the presence of the court receiver appointed by the court in OS No. 3662 of 1996 on the file of the District Munsiff, Coimbat-ore. The dividend declared at the annual general meeting was received by the petitioner. The petitioner and his brother were re-elected as directors in the said annual general meeting. The petitioner is, therefore, estopped from questioning the validity of the annual general meeting held on September 26, 1996, for want of valid notice as per Section 171, especially since no such plea was taken at the annual general meeting by the petitioner. The board of directors of the company at the meeting held on January 13, 1997, decided to issue 1:1 rights shares to the existing members. Accordingly, 1,31,900 shares were issued to the members. However, only 38,300 shares were subscribed and the balance 93,600 shares were not taken up by the existing members. Out of 93,600 shares, 4,400 shares were allotted to four persons who have subscribed to the same. There has been no infirmity or irregularity in respect of the allotment made both on June 12, 1995, and January 13, 1997. Shri Mylsamy has been categorical that the company is even now willing to allot shares to the petitioner according to his entitlement out of the unsubscribed 93,600 shares and that the impugned shares allotted to the third respondent and his associates cannot be set aside without impleading them as parties to the proceedings. Mr. Mylsamy has, therefore, sought for dismissal of the petition.

5. We have considered the pleadings and arguments of counsel for the petitioner as well as respondents.

6. Counsel for both the parties have attempted amicable settlement of the disputes. Accordingly, this Bench has suggested for transfer of the shares held by the petitioner-group in favour of the respondents group at par with interest at 12 per cent. after giving deduction to the dividend already received by the petitioner. In the alternative, the company should allot shares to the petitioner-group according to their entitlement from and out of the unsubscribed share capital made in the year 1997. However, the petitioner was not inclined to accept either of the suggestions made by this Bench and, therefore, we proceed with the petition.

(a) While it is the case of the petitioner that the allotment of the impugned shares in favour of the third respondent and his associates is in violation of Section 81(1)(a) of the Act, it is contended by the respondents that there has been no infirmity whatsoever in allotment of the impugned shares. According to the respondents, the company has offered the rights shares in favour of the existing members before allotment in favour of the third respondent and his associates, in which case, consent of the share-

holders, as contended by the petitioner is not required. In this connection, Section 81 assumes importance. Section 81 provides that, if the company increases the subscribed capital after one year of the first allotment of shares or after two years from the formation of the company, whichever is earlier, by allotment of further shares, the company will have to comply with the provisions of this section. Accordingly, the rights shares shall be offered to the existing equity shareholders in proportion to the capital paid-up on these shares. An offer has to be made by notice specifying the number of shares offered and the time within which it should be expected. Such time should not be less than 15 days. The notice should also contain that the offeree may renounce the whole or part of the offer in favour of any other person. After the time specified for acceptance or on renunciation, the board may dispose of the shares in any manner most beneficial to the company.

7. Notwithstanding the above, if the company at a general meeting passes (i) a special resolution authorising the board to allot shares to outsiders or (ii) an ordinary resolution to that effect is passed and the Central Government’s approval is obtained, the board may allot the shares to the outsiders.

8. A careful perusal of the available records show that the company by means of letters (annexures R-l to R-5, has been advising its members with regard to the present and proposed activities of the company as well as the funds requirement to meet the expansion programme. The letter dated February 25, 1995 (annexure R-6), addressed to the members of the company reads as under :

“Kindly refer to our letter dated December 30, 1994. Now the company is converted into a public limited company for accommodating more investors. You, being an existing” shareholder of the company, are being offered the opportunity to invest three times your existing holding in the company. If you are not accepting the offer on or before March 25, 1995, we shall offer the shares to other willing investors in order to bring up the paid-up capital to at least Rs. 25,00,000.”

9. It is abundantly clear that the company has made an offer to the existing shareholders to invest towards the rights shares. The contention of the petitioner that this letter of offer dated February 25, 1995 (annexure R-6) has not been sent by the company is not acceptable, especially when the other letters, namely, annexures R-l to R-5 have not been disputed and the letter dated December 30, 1994 (annexure R-3), is referred to in the let ter of offer of the company (annexure R-6). Moreover, copy of the extract from the minutes book of the proceedings of the board meeting held on April 15, 1995 (annexure R-7), shows that the rights offer was made to all the existing 23 members as per annexure R-6. It also shows that excepting two of the members, the remaining members have not accepted the offer. In the circumstances, the managing director was empowered to approach

the members of the public on a private placement basis and obtain necessary applications. The plea of the petitioner that no board meeting was held on April 15, 1995, is not convincing. It is further observed that the impugned shares were allotted in the board meeting held on June 12, 1995, in favour of, among others, the third respondent and his associates. Shri Gunasekaran, one of the consenting shareholders was also allotted 5,000 shares. Admittedly, the petitioner was present at the board meeting held on June 12, 1995. According to the petitioner, he had objected to allotment of the impugned shares. However, his objections were not recorded in the minutes. The minutes do not indicate particulars of the reasons for his objections in allotment of the impugned shares. In this connection, the letter dated January 20, 1996, of the petitioner addressed to the company (annexure B-8) and more particularly the following paragraph assume importance :

“In all the board meetings you have not accepted any suggestions given by the other directors and you are proceeding” in your own way.”

10. I am giving below the list of such decisions which you have forced on the board and thereby on the company.

“(1) conversion of the company as a public limited company ;

(2) heavy investments in all the equipment which have been installed at present and the bank borrowings for the same.

(3) taking up the additional workshop premises and spending on the same.

(4) bringing in Mr. O. Somasundaram as a director by getting heavy amount as share capital from him.”

11. It is beyond doubt that the third respondent had contributed to the subscribed share capital heavily and this was done at the board meeting of the company, though this was forced upon the board. Considering these various aspects, we do not hesitate to come to the conclusion that the impugned shares were duly allotted in the board meeting held on June 12, 1995, after offering the shares to the existing members.

(b) The minutes of the board meeting (annexure R-8) on election of additional directors reads as under :

“Election of addi- : tional directors

Resolved that Mr.
O. Somasundaram was unanimously co-opted as the additional director to hold
office till the ensuing annual general meeting.

The M. D. was requested to file
necessary form with the R.O.C.”

12. It is abundantly clear that the third respondent was unanimously co-opted as the additional director at the board meeting held on June 12, 1995, and that the petitioner was admittedly present at the board meeting. Therefore, the plea of the petitioner has to fail.

(c) It is also evident from the report filed by the Commissioner in O. S. No. 36 of 1996 (annexure B-3), that the annual general meeting was held on September 26, 1996. The petitioner was present at the meeting raising quite a few issues with regard to non-compliance of Section 81 of the Act before allotting the impugned shares and the accounts relating to the year 1994-95. A close scrutiny of annexure B-3 reveals that the petitioner has not raised any objection with regard to the duration of notice required to be given before convening the annual general meeting. The plea that the annual general meeting was convened without the requisite notice of 21 days is found to be an afterthought. Moreover, the petitioner having taken part in the proceedings of the annual general meeting” and having acted upon such proceedings by accepting the dividend declared in the annual general meeting and also having accepted the directorship on election by the members in the annual general meeting is estopped from questioning the validity of the annual general meeting for want of the requisite notice.

(d) The other plea of the petitioner with regard to non-preparation of the minutes of the board meetings and preventing the petitioner from scrutinising the accounts of the company are not germane to the issue and do not in any way amount to acts of oppression in the affairs of the company. The petitioner is entitled to enforce his right in this behalf, if so advised, in accordance with the provisions of the Act. ‘

13. Having come to the conclusion that there is no infirmity in (a) allotment of the impugned shares; (b) in co-option of the third respondent as director ; and (c) proceedings of the annual general meeting held on September 26, 1996, we are of the view that the petitioner is not entitled to seek any remedy under Section 397 of the Act. Accordingly, the petition is dismissed.

14. No order as to cost.


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